IRS Debt? 7 reasons bankruptcy is often used to deal with it

idea_lightbulb_cartoon2-thumb-375x491-53213IRS Debt and Bankruptcy

No one likes bankruptcy, except bankruptcy attorneys.  For most Americans, it remains a very negative process.  In fact…many of our clients refuse to even consider bankruptcy during a first meeting.  I don’t blame them.  It is interesting however, how many of those who are initially so opposed, change their minds once they see the potential benefits.

Why is bankruptcy such a mind changer?  Some quick background:

The Bankruptcy Code, which is updated occasionally by Congress, reflects our Nation’s desire to provide a fresh start for debtors. The Code attempts to create a system that forces those that can afford to pay their debt out, and allows those that can’t…in.

This balancing process between “who should and who shouldn’t” is applied to tax as well. Certain types of tax are considered so important by society that the bankruptcy code doesn’t allow for them to be wiped away (discharged). “Trust fund” taxes like taxes that are withheld from an employee paycheck to be forwarded to the government by the employer, are a common example.

Income taxes don’t warrant the same concern, and therefore the bankruptcy code provides for their discharge in specific circumstances. Those circumstances are as follows:

  • The tax return had to be filed more than two years before the bankruptcy filing.
  • The tax return had to be due for filing more than three years before the bankruptcy filing.
  • The tax debt had to have been “assessed” or entered into the IRS record as a debt, more than 240 days before the bankruptcy filing
  • The taxpayer didn’t file a fraudulent return.
  • The taxpayer didn’t engage in tax fraud more generally or engage in tax evasion.

These dates are found in the Bankruptcy Code sections 507(a)(8)(A)(i), 523 (a)(1)(B) and 507(a)(8)(A)(ii).Of course you realized while reading this list that nothing is ever that simple, and for a number of reasons you are right.

  • The first reason is that in an effort to be fair to the debt collectors at the IRS, the Bankruptcy Code requires that the clock stop ticking in certain circumstances. Circumstances like time spent in a previous bankruptcy, collection due process appeal, or offer in compromise.  It is not always easy to calculate these time periods as a result. Also, the taxpayer has to wait for these time periods to pass. In the meantime, the IRS is aggressively looking for money.

So if the date calculations are complex, and the tax lien can negate many benefits of the discharge…why such a mind changer?The primary reasons:

1.  The Bankruptcy Code controls the Tax Code

If the taxpayer meets the various bankruptcy qualification criteria and the tax debt meets the requirements for discharge, the IRS has little say in the matter. This isn’t a subjective decision on it’s part. It has to do what is told. If it doesn’t i.e. it tries to collect the debt when it wasn’t supposed to, the taxpayer can sue. This is as opposed to trying to deal with the IRS directly in an offer/installment/other situation where the IRS is the decider of facts and the applier of the law.

2.  Bankruptcy can be a “one-stop” shop

Many people with serious tax debt have other serious debt as well. If planned well, bankruptcy can deal with all of the problems at one time and some that many don’t realize were “fixable”. Not only can income tax and consumer debt be dealt with, but cars can be “crammed down” to market value, homes saved, and assets protected. All legal options provided by the tax code, deal with the tax debt only.

3.  The lowest debt settlement program is the no asset chapter 7 bankruptcy

Where the bankruptcy trustee in a chapter 7 bankruptcy is unable to collect any assets for liquidation and distribution to creditors, which is a common occurrence, the IRS will get nothing as well. This amount is always less than the settlement amount in an offer in compromise.

4.  Offers in Compromise don’t work for many

The vast majority of offers in compromise filed in the U.S. fail. There are a number of reasons. Some of them are:

a.  Legal standards do exist that govern how the IRS should view the offer to compromise the debt, but they are…a bit loose. Loose enough that the IRS is able to inject a great amount of subjectivity into the process. Bankruptcy on the other hand, creates quantifiable results based on objective criteria. Offer in compromise results are all over the place.

b.  These legal standards have a lot to do with what the IRS thinks you can afford to pay toward the debt over time. The starting point for household budgets is very low and is usually much lower than the taxpayer’s actual budget. The IRS doesn’t have to consider certain budget items at all, like consumer debt payments and savings plans. This usually results in a large discrepancy between what the IRS thinks the taxpayer can afford and what the taxpayer thinks he can afford.

c.  Failure is costly. Most need legal representation and that costs money. Most/all of which doesn’t get refunded when the offer fails. Most have to pay some large amount to file the offer (20% of cash offer amount, or monthly payments based on the offer amount) which isn’t refundable when the offer fails. The debt continues to grow in the background thanks to interest, and when the offer fails all the new debt is waiting with hat in hand and even a smile.

5.  High income taxpayers don’t always have to “qualify” for a chapter 7 bankruptcy

There is an exception in the bankruptcy code to the requirement that all who file chapter 7 bankruptcy must pass a test of ability to pay debt. Where the majority of the debt is tax debt, this rule doesn’t always apply. As a result, many who wouldn’t be able to even hope for an offer in compromise, are able to use bankruptcy to discharge the debt.

6.  Many with serious tax debt don’t have large assets

Most taxpayers with serious tax debt, will see the IRS record a Notice of Federal Tax Lien. As mentioned above, that lien attaches to all assets. When the bankruptcy is filed and the underlying debt is discharged, the tax lien remains and is in essence a secured debt. It’s value is based on the value of the assets on the date of the bankruptcy filing. If the taxpayer owned a home that was “underwater”, a car with $5000.00 in equity and some furniture, the lien is almost worthless and the IRS will often remove it.

7.  Chapter 13 bankruptcy is often a “cheaper” solution then an installment agreement.

The taxpayer may not be a good offer in compromise candidate, and may not be a good chapter 7 candidate because the tax debt is not the greatest part of the overall debt or for another reason. The taxpayer is left with two options: An installment agreement to pay the tax over time and wait out the statute of limitations period, or a chapter 13 bankruptcy.

The installment agreement amount is often much higher than the taxpayer would like. The chapter 13 bankruptcy payment on the other hand, can be based on friendlier budget criteria. In many cases the taxpayer can deal with all of his debt with a smaller monthly payment than the IRS was requiring to deal with the tax debt alone.

5 Commonly Used Ways To Deal With IRS Debt

Faced with large tax debt and feeling hopeless? Take heart…if you are willing to create a “strategy” and combine it with some hard work and patience, there may be a real solution. The following are the most 5 common methods people use to deal with tax debt.

1. Use the IRS Statute of Limitations to Your Advantage

Congress limited the time the IRS has to figure out how to get paid.  26 U.S.C Section 6502 provides this limit and as a result, the IRS has ten years to get the debt collected. Many people with IRS debt buy the time necessary to get to the 10-year period by negotiating an installment agreement or non-collectible status placement.

An example:

Imagine a tax debt of $120,000.00 and that the IRS has let 7 years pass without fully attempting to collect the debt, but they are now at the doorstep. The debt has grown to $200,000.00 with penalty and interest over time, but the taxpayer can only afford to pay $100.00 per month toward the balance. If the taxpayer were able to negotiate such a payment, only $3600.00 of the $200,000.00 would be paid before the debt disappeared.

The above scenario happens more often than you would think. However, there are things people do that stop the ten-year clock from running. Filing an offer in compromise, a bankruptcy, a collection due process appeal, or anything else that stops the IRS’ ability to collect also stops the statute of limitations clock from ticking. It isn’t always advisable to do anything other than to negotiate the payment plan or non-collectible status as a result.

2. Challenge the Tax Debt

What about a situation where the IRS assessed a debt against you that you know isn’t correct.

Usually, this is the result of an audit “gone bad” or the creation of a tax return by the IRS, because you didn’t file it yourself.

Audit Appeal

IRS Audits that go badly can be appealed. If done right, they can be appealed to the US tax court. If your audit result is wrong, you have a limited amount of time to bring the appeal, so call someone now.

Substitute Tax Return Appeal

Tax returns filed by the IRS come with appeal rights as well. Most people don’t respond in time and lose them, however. Thankfully, the assessment of the tax from the incorrect return can be challenged using the IRS audit reconsideration process.

Challenge Trust Fund Recovery Assessment

There are other things the IRS does to assess tax debt that can result in an incorrect debt amount, like the assessment of the trust fund recovery penalty against a responsible party.

Where the business has withheld the employee portion of the payroll tax but didn’t send it in, the IRS stick the amount on you personally as a penalty if you are the “responsible” party.

There are defenses to this, however, and the assessment of the debt can be challenged as a result.

Innocent Spouse Relief

Sometimes the tax is correct but it just isn’t fair that the spouse should be stuck with it. The law provides the ability to challenge the debt based on some theories about innocent spouses.

3. File an IRS Offer in Compromise

26 U.S.C Section 7122 provides the basis for the settlement or one-time reduction of the tax debt. In essence, you would be making an offer to compromise and settle the back tax liability. But this isn’t horse-trading.  The amount that the law requires the IRS to settle for is based on objective criteria. The criteria is called the IRS reasonable collection potential or the RCP.

In theory, the RCP is the amount that the IRS could collect from you before the statute of limitations period on collection runs out.

The vast majority of offers filed in the last several years fail primarily because the RCP calculation is rigged a bit in the IRS’ favor. The IRS is allowed to use as a starting point for calculation purposes, a budget that is based on averages they have created.

For instance, they may have pre-determined that a family of four only needs $1650.00 per month to pay for all housing and utilities expenses. That family may be actually spending $2100.00 per month. If in the end, the IRS were able to use the $1650.00 figure to determine the RCP, then the amount of extra income per their calculation would be at least $450.00 per month.

If the statute of limitations period remaining on collections is 8 years than the RCP, just based on this number could be as high as $43,200.00

Typically, the IRS must use a smaller multiplier than the statute period, but even then, you can see how quickly the RCP can grow.

Successful Offers in Compromise, require much thought and planning as a result. They shouldn’t be entered into lightly.

4. Bankruptcy

Bankruptcy and its relation to tax debt are misunderstood. Many people including many attorneys believe that bankruptcy can’t resolve income tax debt. Nothing could be further from the truth.

In fact, the treatment of the tax debt is not up to the IRS. The Bankruptcy Code governs the treatment of the debt. The Bankruptcy Code says that income tax and certain other tax debts can be wiped away in bankruptcy, if it meets certain date requirements and the taxpayer didn’t cheat.

Sometimes the date requirements haven’t been met yet and we guide our clients in negotiating a payment plan or non-collectible status to help them avoid collection activity while they wait for those dates to arrive.

5. Penalty Abatement

As a taxpayer, you have the right to request the cancellation of any IRS penalty. There are more than 140 penalty provisions and they all have a good faith exception.

If you have been penalized for something like a failure to pay the tax on time, but you acted in good faith and there exists some reasonable basis for the failure, then the penalty can be removed along with interest on it. This removal often makes it easier for you to deal with the underlying debt.

 

Written By:

Michael S. Anderson, Attorney
2158 N. Gilbert Rd. Ste 101
Mesa, Arizona 85203

Phone: (480) 507-5985
Fax: (480) 507-5988
Email: [email protected]
Website: www.taxlawyeraz.com

Struggling in IRS Payment Plan? Chapter 13 Bankruptcy May Be the Solution

Many of our clients have large IRS debt and some don’t qualify well to settle their debt in an IRS offer in compromise.  The truth is…most people with tax debt don’t. (Read more about IRS Offers in Compromise and how they work)

If the debt is correct and they don’t qualify to settle the debt in an IRS Offer in Compromise, where does that leave them?

They usually end up in a payment plan either based on time, or in one that uses their actual income, but an un-friendly budget that is partially created by the IRS itself.

The common problem with both of these outcomes is that the client is in a payment plan that is just too big.

The payment doesn’t take into account their other consumer debt, the actual cost of their home, cars, and a great many other expenses.

The client is forced to downsize their budget dramatically and often unrealistically…. causing lots of stress and other significant issues.

For that client, the one stuck in a payment plan with the IRS that doesn’t take into account all of their budget items including other debt…a chapter 13 bankruptcy will often make sense.

In a chapter 13 bankruptcy, the law allows a few things that can make the situation easier and more realistic than a payment plan based on the IRS’ budget.

A chapter 13 bankruptcy, can also allow you the following:

  • Use your actual, reasonable mortgage payment and home related expenses as a budget item
  • Use your actual, reasonable car loan payment as a budget item
  • Use some expenses related to entertainment and miscellaneous items as budget items
  • Ignore your social security related income..as income
  • Treat some or all of your tax debt as dischargeable
  • Treat all of your IRS penalty as dis-chargeable
  • Treat your other consumer and budget related debt as dis-chargeable
  • Cram down the interest rate you are paying on your car
  • Cram down the principal debt on your car where the loan is 2.5 years old and the car is upside down
  • Sometimes pay just a fraction of the debt that is owed on taxes, consumer, and business debt
  • Stop foreclosure and repossession
  • Force all collection activity to stop
  • Force the IRS into a payment plan on new tax debt that takes into account all of the above
  • Protect your assets
  • Resolve all debts either by discharge or payment within 60 months except non-dischargeable/non-priority tax debt.

If you are in a payment plan with the IRS and are finding it difficult….this list may sound pretty good.

But…before you meet with me about it, you need to understand that there are things that make a chapter 13 difficult and sometimes impossible as well.

PAYING WHAT’S REQUIRED TO BE PAID

In a Chapter 13 Bankruptcy, you must be able to make a payment that’s large enough to pay certain items like:

  • Priority Tax Debts – tax debts that are too new to be treated as dischargeable
  • Priority Child Support and Spousal Maintenance arrears – if you are behind on either the arrearage is paid through the plan
  • Car Loans with Interest
  • Attorney Fee and Chapter 13 Trustee Fee
  • An amount to general unsecured debt that equals the value of your non-exempt assets
  • Home Mortgage and HOA Arrears
  • An amount to general unsecured debt that satisfies the means test results

For most people with large tax debt and an inability to use an offer in compromise, this list though difficult at first glance, is typically doable and it will leave them with much more money in their living expense budget than the IRS payment plan did.  (We wouldn’t let you file a Chapter 13 Bankruptcy unless that were true)

LACK OF A STEADY INCOME

A lack of a steady income is a chapter 13 killer.  It doesn’t matter where that income comes from…it it’s going to be regular and steady, the odds of a successful chapter 13 bankruptcy go up.  If income is going to drop dramatically during the plan….or go up dramatically during the plan…the plan may not make sense and if filed will probably fail.

LATE TAX RETURN FILINGS

The last 4 years returns have to be filed in a Chapter 13 Bankruptcy.  If they aren’t, the case will be dismissed.  For our tax debt clients, this is sometimes a problem.  But there are good reasons why filing the returns are helpful besides keeping your plan alive.  We need to know whether you owe the IRS or not before filing and how much.

YOUR DEBTS CAN’T BE TOO HIGH

You can’t use chapter 13 Bankruptcy if your debts are too high.  The vast majority of people don’t have debt that comes anywhere close to these debt limits…but a few do.

Sometimes we use a chapter 7 first to get a client’s debt within the limits… and then we use the Chapter 13 to get those benefits.

IT’S A BUSINESS

A business can’t use a chapter 13 bankruptcy.  The owner of a business can, a sole proprietor can, but not the business itself.

Many business owners file chapter 13 and use it to deal with debts it shares with the business while leaving the business liable for the debt.

A sole proprietor is the business. There isn’t a separate entity that will continue to owe the debt.

A CHAPTER 7 MIGHT MAKE MORE SENSE THAN A CHAPTER 13 BANKRUPTCY AND AN IRS PAYMENT PLAN

What if you qualify to file a chapter 7 bankruptcy instead of a 13.  What if you pass the means test or the greatest portion of all your debt is tax debt (or other non-consumer debt).  A chapter 7 bankruptcy may make more sense.   It may allow you to get rid of other debt and some or all of your tax debt.  Even if not all of your tax debt were wiped away…enough may be wiped away that you could re-negotiate a payment plan with the IRS that is much friendlier to your budget.

Why did the IRS terminate my installment plan?

images-thumb-375x534-61823Just because you are in an IRS Installment Plan with the IRS doesn’t mean that your work is done.  One of the common questions I get is “why did the IRS terminate my installment plan?”.

The following are the most common reasons why this happens.

Your Income Changed

When you file a tax return the IRS reviews it to determine whether you income has changed i.e. increase.  If they see this and you are in a partial pay installment plan or a plan based on your income and budget, they will send you a letter indicating that the plan will end unless you provide updated financial information.  Unless your payment plan is guaranteed or streamlined, the IRS will request new financials when it sees the increase in income.

You Didn’t File a Return

Installment plans are contingent on compliance.  If you late file a future tax return….it will send you a notice of intent to terminate your agreement and send you back to collection.  You will have to file any missing returns, and negotiate a new plan.

You Didn’t Pay a Future Debt

If you file a subsequent return on time and it has a balance due but you don’t pay it, the IRS will do the same thing as if you didn’t file the return on time.  It will send a notice terminating the agreement and force you to re-supply your financials.

You are in a Partial Pay Installment Agreement

Many people with tax debt are either in non-collectible status arrangement or they are in a partial payment installment agreement with the IRS.  In a partial payment agreement, you aren’t paying enough to the IRS to pay the debt owed before the 10 year clock on collection runs out.  (IRS Statute of Limitations on Collection)  This type of arrangement is allowed but the law requires that the IRS review the arrangement every two years.

An Example

You owe the IRS $75,000, and have convinced them to accept $100.00 per month toward it.  The Statute of Limitations period has 4 years or 48 months remaining to collect the debt of the 10 year total time-frame it has to do so.  6 years have elapsed.  2 years into that 4 year remaining period, the IRS should send you a letter asking you to supply updated financial information.

Late Payment

If you make a late payment, the IRS will typically warn you, but if not caught up, it will sever the installment agreement and you will have to re-negotiate it.

Avoiding problems

Contact the IRS as soon as you are having one of the problems above.  If you are having trouble, don’t ignore the situation.  Call the IRS and ask for a month off. Review any changes in your financial situation and re-think whether some other option may now make more sense like Non-Collectible Status, a Lower Installment Agreement, Bankruptcy, or an Offer in Compromise.

 

Written By:

michael-anderson-tax-lawyer-mesa-azAnderson Tax Law
2158 N. Gilbert Rd. Ste 101
Mesa, Arizona 85203

Phone: (480) 507-5985
Fax: (480) 507-5988
Email: [email protected]
Website: https://taxlawyeraz.com

 

No the IRS Fresh Start Program Doesn’t Include Penalty Abatement – Sorry

fresh_startAlmost every person who contacts me asks about getting rid of IRS penalties.  There are two reasons I think this happens:

1.  Many Americans believe in paying debt and see tax as a debt.  But they regard penalties as just unwarranted punishment.

2.  Many people have been falsely led to believe the IRS’s Fresh Start Program allows for some new, magical way to reduce or eliminate IRS penalties.

As for the second reason, I blame the tax resolution “experts” who use the veiled promise of penalty relief to take advantage of people who aren’t sleeping well and are desperate to hear good news.  These “experts” will use a subtle tongue slip to take money.   There is no such thing as IRS penalty relief under the IRS Fresh Start Program.

Unfortunately, penalty abatement almost never happens the way that it is portrayed.  You must still qualify for penalty relief using one of the legal remedies that existed before the Fresh Start program existed as follows:

Bankruptcy

Even though I have helped hundreds of people with tax debt problems use the bankruptcy code to find relief, I consider it to be a last resort.  For certain people with IRS penalties bankruptcy can provide penalty relief. Most penalties that meet the date requirements for tax debt discharge will be discharged in a chapter 7 bankruptcy.  In a chapter 13 bankruptcy almost all penalties are treated as dischargeable no matter the age.

Don’t run out and file a bankruptcy though.  Alot of thought and planning has to go into a decision to file a bankruptcy case.

First Time Penalty Abatement

The IRS will usually give a first time offender a free pass and waive a late filing or late payment penalty.  In order to get this abatement though, you have to be in current compliance with tax return filings, making any estimated tax payments, have no penalties assessed during the previous 3 year period, meaning paid and filed on time.

First time penalty abatement doesn’t apply to the failure to pay taxes through the Electronic Federal Tax Payment System, or to one-time filing for gift or state tax returns.

Reasonable Cause

Reasonable Cause.  You will hear this phrase being thrown around alot by tax professionals but if you think about it…the phrase is reasonably meaningless.  The IRS determines what is reasonable or not and even though it tries to treat these requests uniformly, it doesn’t.

Generally, the IRS considers reasonable cause to be when you have done everything else right but despite those efforts you weren’t able to comply.  Most people have failure to file and failure to pay penalties so the argument usually revolves around why you were late and/or broke.

Serious illnesses, death in the family, caught in a hurricane, and things like this are often the best arguments to make but really just about any argument can be posed if it is based on reality and and the situation was really beyond your control.

The IRS will also look at and should grant penalty abatement requests based on the law.  If for instance you can prove you mailed your return on time, or if there was a government slowdown etc.  than the law sometimes orders the IRS to remove the penalty.

Administration Based Abatement

The IRS will often change the way it is doing something and it will realize that changing the process may confuse some people.  When this happens there is usually some kind of administrative waiver that it put in place to forgive penalties out the outset for a certain period of time.

IRS Makes an Error

The IRS messes up all the time.  They apply penalties when they shouldn’t, lose returns, misplace payments, fail to make notes etc. etc. etc.

They will remove penalties or they should…if the penalty was based on the IRS’ error and you can prove it.

IRS Offer in Compromise

Much like a bankruptcy a successful offer in compromise will reduce IRS debt.  This includes the debt that has accrued as a result of penalty.

NO FRESH START BUT…..

There isn’t such a thing as IRS Fresh Start Penalty Relief…sorry.  Don’t believe people who try and tell you there is.  But there are ways to eliminate penalties in certain circumstances and sometimes with the right help.

 

What is the IRS Fresh Start Program?

download (4)The IRS Fresh Start program was created a few years ago.  It’s claim at the time was that “struggling” taxpayers needed some help so it changed some of the ways it did business with taxpayers.  The changes were done in three areas.  IRS Liens, IRS Installment Agreements and IRS Offers in Compromise.

It is debatable whether or not these changes have actually made the process of dealing with the IRS much easier, but if you owe the IRS money or have an IRS Lien, you should be aware of them.

IRS Lien and the Fresh Start Program

The IRS increased the threshold for filing a tax lien notice from $5000.00 to $10,000.00.

This wasn’t a large jump in amount.  In my opinion, it should have been at least a $25,000.00 limit.  I think that the IRS debated this issue as it did change it’s policy regarding the withdrawal of liens and used $50,000.00 as the thresh-hold amount.

Withdrawal of Notice of Tax Lien

Individuals

As mentioned, the IRS also changed it’s policy toward the withdrawal of a notice of lien when it added the ability for individuals, businesses with income tax debt, or entities that have gone out of business to request the withdrawal of a lien notice under circumstances.

The requirements for individuals to get the lien notice withdrawn are:

1.  The assessed balance must be $25000.00 or less;

2.  There must be full compliance, meaning un-filed returns;

3.  3 consecutive direct debit payments have to have been made and all the payments must be made by direct debit.

4.  You can’t have had a previously lien withdrawal for the same tax (unless lien was improperly filed);

5.  You can’t have defaulted on your current or any previous direct installment agreement.

6.  And the debt must be paid in full within 60 months or before the CSED Expires, whichever time is shorter.

Small Business

Small Businesses can qualify in much the same way, but only have 24 months to pay.

IRS Installment Agreement and the Fresh Start Program

If the assessed debt is $50,000 or less, the IRS now allows you to set an installment agreement without providing full financial information.  The debt is spread out of 6 years (used to be 5) or the length of time left in the CSED.  (Collection Statute Expiration Date)

In theory, this is a big deal.  People with higher incomes that are going to have large installment payments if the financial information is provided, can now avoid the large payments by paying the assessed balance down to the $50,000 threshold and setting one of these up.  They are relatively easy to set up and I have posted elsewhere instructions about how to do it.

The IRS’ generally won’t record an IRS notice of lien if one of these types of arrangements are set if it hasn’t filed one already.

If the assessed balance is less than $25,000.00 no financial information is necessary to set the payment plan up, and as mentioned above, if you are able to meet those lien notice withdrawal criteria that is an added bonus.

If a business is operating and it owes payroll taxes, the business may be able to take advantage of the “fresh start” program in relation to installment agreement if:

1.  The debt is $25,000 or less at the time of the agreement

2.  The payment plan is 24 months or less

3.  The payment is made by direct debit if the amount is between $10,000 and $25,000

4.  The taxpayer/business must be in compliance in all filing and payment requirements

Two benefits to this are:

1.  No financial statement is required.  This is great because it can be a real burden on a small business to put this together.

2.  No trust fund penalty is assessed against the owner for the trust fund portion of the payroll tax.  At least it isn’t supposed to be.

IRS Offer in Compromise and the Fresh Start Program

The OIC program allows qualified taxpayers to negotiate a settlement for an amount that is less than the tax owed. An OIC agreement won’t be accepted by the IRS if it believes that the outstanding liability can be paid in full in a lump sum or via a payment arrangement. The IRS reviews the taxpayers’ income, potential income, past income, expenses, assets, past assets and liabilities very closely to make a determination about the ability to pay.

Most people fail the above part of the test because they rely on the IRS’ pre-qualifier, or some bad advice and don’t fully understand as a result that the IRS won’t agree to settle if  it believes that the debt can be paid in full before the CSED ends.

But the IRS did make a big change for people who can’t pay the tax debt in full before the CSED ends, when it altered the way it multiplied excess income under the Fresh Start program.

Previously the IRS would multiply excess income when it was calculating how much you could afford to pay by 60 and 48.  60 if the offer amount was to paid over time, and 48 if the offer was a cash offer.

Under the Fresh Start program, these multipliers are 24 and 12.

Now a person with no assets and $1000.00 in excess income will pay $12000 instead of $48,000 toward the debt and $24,000 instead of $60,000 if the settlement is going to be paid over time.

This is probably the most important overall change made to tax collection by the Fresh Start program but specifically in the offer compromise area.  It roughly doubled the numbers of offers that are being accepted from about 20% to about 40%.

The offer in compromise program was affected in other ways as well.  The second best thing it did was to change the allowable expenses category to include more things like:

  • 200.00 per month for car allowance on older cars
  • Student loan payments
  • Some credit card payments
  • A portion of payments made to state and local tax authorities

IRS Penalty Abatement and the Fresh Start Program

If an offer is accepted it settles the debt and the penalty entirely, so in that sense I suppose you could argue that the penalty abatement under the fresh start program exists… but in reality this isn’t a “fresh start” program for IRS penalties.  Don’t let the salespeople fool you.

When looking for penalty relief, you have to go through the same process that has already been in place for a long time.

 

Large IRS Payment Plan vs Chapter 13 Bankruptcy – Which is Better?

n4-owr-xLarge IRS Payment Plan vs Chapter 13 Bankruptcy – Which is Better?

Combine a large IRS debt, a lengthy IRS statute of limitations period (CSED), and a “good” income, and you may have a recipe for a large monthly IRS payment plan.  Many people are living this “recipe” and as a result are paying thousands of dollars each month to the IRS and will continue to do so until the CSED ends, or their situation changes.

On the bright side, the payment plan keeps the IRS collection machine at arm’s length while the CSED continues to run, but on the dark side, the debt remains and continues to grow tremendously as a result of penalty and interest.  The debt can double every 5 years.

Meanwhile, the person in the large payment plan keeps his or her head down and struggles to pay the bill each month while feeding a family.

It feels hopeless for many people in this situation of course.  They usually aren’t good Offer in Compromise candidates,  they may not be good chapter 7 bankruptcy candidates, and in the long run they feel like there isn’t anywhere to turn.

But…there may be.  Chapter 13 Bankruptcy.

What follows is a list of the most common reasons someone stuck in a high monthly IRS payment plan may want to look more closely at a chapter 13 bankruptcy.

1.  The budget used to determine monthly payment is typically higher in a chapter 13 bankruptcy than in an IRS payment plan

This is a good thing and important to understand.  Specifically, when the IRS is negotiating with you about how much you can afford to pay each month on the debt,  it is allowed to use a standardized budget as a starting point.  You can find it here.  For most higher income earners, that budget is nothing like their actual budget.

The Chapter 13 Bankruptcy Judge is going to use a similar budget in determining how much you can pay overall, but there are certain things about how that budget is calculated vs. the IRS’ standard budget that make it more friendly.  Here are a few.

a.  Priority tax debt is considered a “budget item”

The tax debt you owe may be relatively new.  If it is it may fit into what is called the “priority” debt category.  This means that when the Chapter 13 Judge is determining how much you can afford to pay each month, he or she will use 1/60th of that priority debt as a monthly budget item.

b.   401k Loan is considered a “budget item”

The IRS isn’t going to consider your 401k or your 401k loan as monthly budget items.  The Bankruptcy Judge in a Chapter 13 will consider the 401k loan payment a budget item in determining how much you can afford to pay.

c.   Children’s School Activities

The IRS doesn’t have to consider these costs in your monthly budget.  They Judge typically will.

d.  Baby Supplies

Babies are expensive.  The IRS doesn’t typically care.  The chapter 13 Judge should consider diapers and other out of the ordinary expenses related to your baby as a monthly budget item in determining how much you can pay.

e.   Social Security Income

Social Security is income to the IRS.  In a chapter 13 bankruptcy it isn’t counted as income.

2.  Penalty and Interest Stop Accruing

Chapter 13 bankruptcy stops the IRS’ penalty and interest accrual on most tax debts.  In an IRS payment plan the penalty and interest continue to accrue to their fullest extent and add lots of debt to your overall debt load.

3.  Penalty, Interest, and the Underlying Debt can be Reduced or Eliminated

In a chapter 13 bankruptcy, tax penalties that exist on the date of filing are treated as “dischargeable” debt like credit cards and medical bills.  Depending on how the payment plan ends up being structured the IRS may end up receiving little or nothing on that penalty by the end of the plan.

Certain tax debts are treated the same way.  Read more about that here.  If the tax debt is non-trust fund and certain other factors exist, bankruptcy law will treat it as “dischargeable” again like a credit card or medical bill.  Depending on how the plan is structured, the IRS may receive little or nothing on the debt by the time the plan ends.

In an IRS payment plan you are going to continue to pay the debt off, until the 10 year period (CSED) runs out.

4.  Property is Safe in a Chapter 13 Bankruptcy

A chapter 13 bankruptcy isn’t a liquidation bankruptcy like a chapter 7 bankruptcy.  No one seizes your assets, income, or bank accounts…including the IRS.  Bankruptcy law places an automatic stay in front of the IRS and while the case is opened the IRS’ hands are tied.

5.  Entire Debt Situation is solved

The IRS payment plan only solves the IRS debt collection situation.  It doesn’t deal with other debts, and it’s budget doesn’t treat most other debt payments as budget items.

Depending on your circumstances however, a chapter 13 bankruptcy can do the following:

a.  Treat your credit card debt medical bill debt,  business debt, 2nd mortgage debt, and even possibly your student loan debt as dischargeable and eliminate it or reduce it.

b.  Catch up any arrears on a home.

c.  Save a car from repossession.

d.  Cram the car loan down to the value of the car.

e.  Cram the interest rate on the car loan down.

f.   Provide an avenue for re-paying past due child support

g.  Stop collection activity from other creditors

 

In many cases, a Chapter 13 bankruptcy will be a far better situation from a debt and monthly payment situation, than a high IRS payment plan.  It must at least be considered as a long term option.

Negotiating a streamlined payment plan with the IRS on your own

success-thumb-375x249-55717          Most payment plans arranged with the IRS are “streamlined” plans.   An IRS streamlined payment plan is one that allows the taxpayer up to 72 months to pay the debt if the original debt assessed is less than $50,000.00, all returns have been filed, and the taxpayer agrees to allow the IRS to withhold the payment from a checking account each month.
          For taxpayers who can’t afford to pay the balance over 72 months, or that don’t have 72 months remaining in the IRS statute of limitations period, the negotiation of a payment plan may get a bit harder.  The problem is that thousands of people each year who qualify for a streamlined plan and who can afford to make the streamlined plan payment, give TV or radio tax debt companies thousands of dollars to set them up.  For most people a streamlined payment plan can be done without paying for help at all.

Here are the steps you need to take if you want to try to set up a streamlined payment plan yourself:

Step 1 – Make sure you actually owe the money.

          It is possible that the IRS has filed substitute return(s) that are incorrect, or that the IRS statute of limitations on collection is about to run out on a particular year, or that the IRS has miscalculated the debt, penalties or interest, or the audit determination the IRS gave you is just wrong and is appealable.  You don’t want to arrange a payment plan if you can avoid it, until you are certain that the debt is correct.

Step 2 – If the debt is correct…how much is it?

          You need to have an overall debt that is less than $50,000.00 “assessed”.  The IRS doesn’t consider the accruals of penalty and interest after the original assessment date as part of the “assessed” balance for purposes of a streamlined agreement.  On the date the IRS reviews your return and enters the debt into the books it also adds any penalty and interest owed as of that day.  That amount is the “assessed” balance.  Penalty and interest that accrue after the assessment date aren’t.  The IRS will tell you what it shows the assessed balance is and you can order IRS account transcripts to review the original amount and the penalty and interest originally tacked on to verify it.
          So..if the overall debt is $66,000.00, the assessed amount amount may only be $53,000.00.  If so, than you may be able to pay $3000.00 in order to get the assessed balance to $50,000.00 and pay $66,000.00 over 72 months from your bank account.   Find out what the assessed balance is, make sure it is $50,000.00 or less.

Step 3 –  Make sure that you can afford the payment.

          Look realistically at your income and your budget.  Break them down on average per month.  Include every possibly item you spend money on.  Make sure that you can afford the payment plan you are going to set up with the IRS.  Take into account a bit of interest on the debt as well.
          If you find that you can’t afford the payment, you probably need to stop here and call to ask about other options.  But if it is clear that the payment of all the debt with interest is doable,  move ahead.

Step 4 – Make sure you have 72 months remaining in the statute of limitations period

          If you have 3 debts from 3 different years and one of them only has 1 year remaining on the statute period, this won’t work very well unless the overall payment total will pay that year off within the time remaining on it’s statute period.
An example:
Year 1 total: $10,000.00
Year 2 total: $10,000.00
Year 3 total: $20,000.00
Year 1 statute period remaining:  12 months
Years 2 and 3 statute periods remaining: 80 months
          The total debt is $40,000.00.  This amount divided by 72 is $555.55 per month.  $555.55 over 12 months is only $6666.60, or less than the Year 1 total debt.  In this scenario the payment would have to be greater than the $555.55 per month in order to ensure Year 1 was paid within 12 months.

Step 5 – Call the IRS

          I know…this is the last thing you wanted to hear.  But the reason I suggest this is that when you just submit a 9465-FS form  and request a streamlined plan in writing first, IF it is denied because the numbers aren’t right, AND you are subject to collection, the IRS may garnish your wages or levy your accounts before you know what has hit you.
          It is typically better as a result, to review the assessed balances with the IRS, the totals, the payment plan numbers, statute periods, mailing addresses etc. before filling out the 9465 fs form just to add a bit of assurance that you got it right and that your request when sent in, won’t be rejected.

Step 6 – Getting Help

          If you are going to have an attorney help you with this, make sure that you don’t pay more than you should.   The attorney should be able to determine whether you qualify for a streamlined plan within a few hours and finalize and follow up to ensure it is in place within a few more.  Don’t pay a large amount for streamlined payment plan help when you can certainly figure this out on your own.

Tax Debt as a result of IRS Audit? Do I have options?

samp01The result of an IRS audit is often a balance due.  We are often asked several questions at the end of an Audit as a result.  Questions like:

  • Will the IRS accept an amount less than what I owe and forgive the balance?
  • Will the IRS agree to a payment plan?
  • Will the IRS place a lien on my property if I am in a payment plan?
  • Can I use Bankruptcy to get rid of the debt?

Shortly after the audit related debt is placed in the IRS’ books it will start shooting letters to you.  “Balance Due” letters and “Final Notice” letters will issue over a period of several weeks.  You’ll receive a letter at the end of the string of letters called a “Final Notice of Intent to Levy”.  This letter is important because it provides you the ability to challenge collection action by the IRS and request an alternative solution IF you properly reply to it within 30 days of it’s mailing date.  The time between the assessment of the new debt and the date you get to discuss alternative solutions with the IRS usually provides enough time to analyze and plan your case.

Back to the common questions above:

Will the IRS accept an amount less than what I owe and forgive the balance?

The IRS will settle the debt IF you can prove that your “reasonable collection potential” (RCP) is less than the amount of the debt during an Offer in Compromise proceeding.  Proving your RCP isn’t done by discussing your situation with the IRS.  It is based on a formula.  The formula is simple in theory, but the majority of people who try and prove that their RCP is low enough to require settlement of the debt…fail.

They fail for all sorts of reasons, but primarily because the filers aren’t great candidates.  Or in other words, the RCP is high enough that the IRS believes it can collect all of the debt before the statute of limitations on collections runs out.

No matter what the IRS Offer in Compromise calculator you are seeing online says about your RCP, be skeptical, and get a second opinion from someone experienced with the process.

If you are a good candidate for an Offer in Compromise, then the answer to the question is yes, the IRS will likely settle the debt for less than what is owed and forgive the rest.

Will the IRS agree to a payment plan?

Yes in almost every case.  There are several types of payment plans and which type you request and end up getting will depend on the amount of the debt, the time left in the statute of limitations period, your income, your budget, the budget the IRS believes you should have and your assets.

The most common type of payment plan(s) we see are streamlined plans.  The debt in these types of plans are less than 50000.00 and the taxpayer can afford to pay the balance over 72 months.  These types of plan allow the taxpayer to avoid submitting a full financial statement and if done properly can even prevent the filing of an IRS lien.

If the taxpayer can’t afford to pay the debt over 72 months or if the debt is greater than 50000.00, than the solution becomes a bit more complex and the factors mentioned above become very important in determining how much a payment plan will be.

In some situations it is possible to convince the IRS to take very small amounts each month or even nothing each month even if the debt is very high.

Will the IRS place a lien on my property if I am in a payment plan?

If the debt is less than 25000.00 and you enter into a certain type of payment plan, the IRS won’t record a lien notice.  If they already have they will release it and even withdraw it from your credit report if you follow certain steps.

If the debt is less than 50000.00 and no lien notice has been recorded AND you enter into a streamlined payment plan that allows the IRS to take the payment from your bank or pay, the IRS won’t (or shouldn’t) file the notice of lien.

If the debt is above 50000.00 or one of the above two situations don’t apply, bets are off.  You can expect the lien and will have to formally request that the lien notice not be filed and have a very good reason why it shouldn’t be.

A successful Offer in Compromise will result in a lien release as will an eventual bankruptcy where the debt is paid or discharged and there are few assets for the lien to remain attached to.

Life after an IRS audit involves dealing with the IRS Collection Division.   In audits that result in money owed,  it is recommended to be pro-active and to understand the next step that awaits you – IRS collections.  There is no substitute for preparation.

Can I use bankruptcy to get rid of the tax debt?

A very strong…”it depends” applies here.  Bankruptcy will discharge an obligation to pay income tax debt, penalty on income tax debt and interest on penalty and income tax debt.  It will also discharge the obligation on certain other types of tax debt…but two things have to be true:

1.  The tax debt has to meet the criteria for discharge both date criteria and other criteria.  (Learn More)

2.  You need to be a good candidate for bankruptcy.

If you have new debt which is the result of an audit, the debt won’t be dischargeable in bankruptcy from a date standpoint for at least 3/4 of a year depending on how old the tax year is.  It may be 3+ years before it is dischargeable in bankruptcy from a debt standpoint.

We have many clients who use bankruptcy to deal with tax debt but these types of cases require real analysis, comparison to other options and usually some time spent in a payment plan before bankruptcy ends up making sense.

Review

I am in IRS Not Collectible Status, will it resolve my tax debt?

No, IRS Not Collectible Status (NCS) does not resolve the liability – by itself.

Some explanation:

IRS Currently Not Collectible Status

Contact Our Experienced Mesa Arizona IRS Attorney To Help Resolve Your Tax DebtThere are several ways to deal with IRS debt.  The most common are the Offer in Compromise, Bankruptcy, Payment Plans of various types, and Placement in Non-Collectible Status.

IRS NCS is a “designation” the IRS will place in it’s system that stops enforced collection.  It is used because you are able to prove to the IRS that your expenses are as much as or exceed your “allowable” expenses, and there is no available asset equity.

If you are placed in NCS, the penalty (if not fully applied) and interest continue to grow.  If your income improves, the IRS will see the improved income and pull you out of the Status and demand a new disclosure of your income, budget and assets to see if your ability to pay toward the debt has improved.  The IRS typically reviews your financial situation after each year.

Why IRS Not Collectible Status doesn’t get rid of debt all by itself

NCS has nothing to do with the debt.  It ‘s only “ability” is to stop IRS collection activity until your situation improves.

However, many people use it in combination with other legal options to reduce or “resolve” the liability.

The two most common legal options used in combination with the Non Collectible Status are:

1.  IRS Statute of Limitations on collection

The IRS has 10 years to collect tax debt from the date it is created or “assessed”.  This 10 year period can be extended by the period of time you are doing something that prevents the IRS from collecting, like filing a bankruptcy or an Offer in Compromise.

If the Statute Period runs out the debt goes away unless the IRS has reduced the debt to a Judgement (which is unusual)

Many people have serious tax debt and have just a few years left before the Statute Period runs out.  They are also good candidates to be placed on NCS.  In these situations, it usually makes sense to use the it with any eye toward the Statute Period to eliminate the Tax Debt.

2.  Bankruptcy

If you are a candidate for NCS and can convince the IRS to place you there…and if the Statute of Limitations Period is a several years away..Bankruptcy may be an option.  Part of the difficulty in qualifying for a Bankruptcy is making sure that certain time periods have elapsed between assessment and the date the Bankruptcy is filed.

These Bankruptcy time periods are stopped or “tolled” as well when you do things that stop the IRS from collecting.

The NCS doesn’t stop any of these Bankruptcy time periods from running.  It can be used as a result to stop collection activity while the tax debt continues to “become dischargeable”.

Video: Attorney For Tax Michael Anderson
Explains IRS Not Collectable Status

Conclusion

Whether you should use NCS as opposed to Bankruptcy or an Offer in Compromise or whether you should use it in conjunction with the IRS Statute of Limitations on Collection or Bankruptcy are questions that will require a careful review of the facts and your goals in order to reach an answer.

Michael Anderson, Tax Lawyer In ArizonaWritten By:

Anderson Tax Law
2158 N. Gilbert Rd. Ste 101
Mesa, Arizona 85203

Phone: (480) 507-5985
Fax: (480) 507-5988
Email: [email protected]
Website: https://taxlawyeraz.com