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

Self Employed? Pay your estimated taxes monthly

plowing-fieldThe Robert Burns poem To a Mouse, written in 1786, is an apology.  The story has it that Mr. Burns upended a mouse’s home while plowing a field and felt bad about it.  To make amends, he wrote a poem, the most famous portion of which reads:

But little Mouse, you are not alone,
In proving foresight may be vain:
The best laid schemes of mice and men
Go often askew,
And leave us nothing but grief and pain,

John Steinbeck, the author of the 1937 Novel….Of Mice and Men, borrowed from Burns’ poem when he titled the book, and this may be the reason we think of “Mice and Men” when our own grand plans go awry.

Every time I meet a self-employed client with tax debt,  grand plans are part of the discussion.  But the road to success is difficult, and grand plans get sidetracked by things like taxes.  Many people who are self-employed don’t withhold enough, and the IRS does it’s best to leave nothing but “grief and pan” when this happens.

It files incorrect tax returns, assesses penalties, and uses these to levy bank accounts and assets.

Everyone who goes into business for themselves has the intention to follow the law and make it work.  The plan is to make money, pay business expenses, quarterlies, and live a comfortable life.

But…running a small business is hard thing to do, and even the best laid plans…”go often askew”.

Contract’s are broken, clients don’t pay on time, competition grows like a weed, and the un-foreseen is around every corner.

The IRS makes it worse in it’s never ending quest to enforce the Government’s agenda of re-distribution.

The best solution short of winning the lottery, may be to stop making quarterly payments altogether.

No, don’t become a tax “protestor”,  just start paying monthly instead.

It’s too hard and there are too many twists and turns for most small businesses to hold onto the tax funds for an entire quarter.

Paying each month turns the tax bill into a bill just like any other.  It saves you from needing a separate account, and it eliminates the desire to use the funds for every emergency that pops up.

You can send the payment to the same address you would have sent your quarterly payments.  Write your social security on the check (assuming you are using your social as your ID for the business) and include “estimated 2016 liability” in the memo.

 

michael-anderson-tax-lawyer-mesaazWritten 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

 

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.

 

I haven’t filed my tax return for 2012 yet, am I going to get an IRS penalty?

IRS Penalty For Unfiled Tax ReturnIf you haven’t filed a 2012 return yet and you didn’t ask for an extension to file, you need to file it as soon as possible.  The IRS gets to add interest and penalty to your debt for each month un-filed and for each month unpaid and it adds up fast.

The penalty for filing a late tax return is about 5% of the amount of unpaid tax you owe for each month or part of the month that the return is late.  The amount is capped at 25% of the amount owed.  For example,  if the debt is $15,000, the first penalty for the month is about $750.00.

There is also the failure to pay penalty that equals one-half of one percent of the amount of unpaid tax.  This penalty is capped as well at 25% of the tax due.

Many of my clients are shocked when they file several years of late tax returns and find that for many of the years, the debt is almost double the net tax.  Interest is accruing on the net tax and interest is accruing on the penalties which will total 50% of the net tax at some point.

Filing an extension to file doesn’t solve the requirement to pay the tax.  The extension only allows more time to file the return, not to pay it, and if you file it after the extension date, the late filing penalty kicks in anyway.  There is no extension to pay the tax.

Many people we meet haven’t filed for several years.  The first step we take is to determine which years to file and to get those years filed.  Once we know the amount including the penalty and interest, we are able to determine the best legal option and than we can negotiate with the IRS or take some other legal avenue.  Depending on the situation, we may be able to arrange a reasonable payment plan, get penalties eliminated, negotiate a formal settlement via the IRS Offer in Compromise or even use bankruptcy to deal with the debt at some point.

The most common option we see is when we are able to challenge the incorrect Substitute Return the IRS has created with a correct return and substantially reduce the debt.  Just this week we finalized some returns that will change the tax debt for a client from about $150,000.00 to about $50,000.00, a savings of $100,000.00

We are here to help with your tax problems whether you are late in filing, late in paying, the IRS is sending threatening letters or you are being audited.  We help our clients make and implement plans that result in freedom from IRS problems.

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

Tax Debt – Why can’t I pay the original balance and receive a waiver of the penalty and interest?

Tax Debt versus penalty and interest

A common  question my clients ask is “why won’t the IRS just accept a check for the original tax amount and waive all the penalty and interest”.Problems-with-Hiring-a-Third-Party-Software-Selection-Consultant1-425x241

This question makes alot of sense and in the real world most creditors will consider making a deal that pays the original balance and waives interest.  In the current economic situation many would be happy

to the original amount back.

But..this is the IRS’ world we are talking about.  So some things you need to understand:

Tax, penalties and interest are all the same to the IRS

The IRS considers the tax, penalty and interest to be all the same once assessed.  It is all principal debt at that moment.

Settling tax debt with the IRS isn’t “horsetrading”

The Free Dictionary defines “horsetrading” as “negotiation characterized by hard bargaining and shrewd exchange”

This type of negotiation works well when discussing a credit card debt, or the price of a car, but at the outset of the discussion with the IRS there is no bargaining.  The process is not informal.

The formal process is called an “offer in compromise“.  In an offer in compromise, rules are followed and at least in theory if the taxpayer fits into and follows those rules, the IRS has to settle the debt…formally.

IRS penalty reduction has it’s own set of rules

If the taxpayer wants to challenge the penalty and try to strip it from the overall debt outside of the offer in compromise process, there is another legal process typically called “penalty abatement”.

This process is administrative and the IRS can forgive penalties that have already been assessed if the taxpayer meets certain formal criteria as well.

No horsetrading at the outset here either.

Bankruptcy must be seriously considered in most cases

From a financial standpoint and because of the formality that exists in relation to trying to “settle” the debt, bankruptcy is often the best long term solution for those with serious tax debt.  If a taxpayer has serious tax debt, bankruptcy has to be considered.

Penalty abatement request – how to and what you can do if it is rejected

Penalty Abatement – Reducing IRS Penalty

The key point in relation to penalty abatement requests and the IRS is that if you don’t ask you won’t get.  The following is a short review of the “asking” process.

If an IRS penalty is sent to you via the IRS mailed notice system, it is wise to start the penalty abatement process by mail.

When you get the tax bill in the mail that shows the penalties, write back to the address on the notice and ask for an abatement of the penalty. You can write a letter or use the IRS form 843. Attach to the letter or to the form the bill you recieved. You should also attach any copies of documents that back up your claims. If you do not provide proof, the request will likely fall on very deaf ears.

Paying the underlying part of the tax with the abatement letter and attached bill is also wise, if at all possible. Be certain to write on the check that the payment is for the tax debt only…not the penalty. If you pay the tax the interest on the underlying tax stops.

Keep copies of any letters or documents sent to the IRS and ideally send everything by certified mail. The IRS will often “lose” your letter and it’s attached documentation. Send the whole packet again if you get another bill before you receive confirmation of the receipt of your penalty abatement request.

If the penalty is added as the result of an audit, ask the auditor or a manager to abate them before you agree to the auditors report. If they won’t, than ask the appeals office to drop them.

If the IRS rejects the request, they should send a notice. (They often do not..no matter how great the story) When you get the rejection notice you can do one of the following:

File an Appeal.

This is simply a letter sent to the IRS. This appeal will be handled all by mail or phone and there won’t be any in person meeting.

Request a transfer of your file.

Ask that your filed be transferred to the local office. When that happens, ask for a meeting with the revenue officer – convince the officer of your plight.

Pay and claim a refund.

You can always pay the penalty, file a form 843 or claim for refund and request for abatement. You can either attach a letter to explain or try to explain it on the form. Remember certified mail.

If your Form 843 claim is rejected, you can sue in a U.S. District Court or the court of claims. Penalties are not usually large enough to justify the cost of this.

Offer in Compromise

An Offer in Compromise is a formal procedure that can be used to negotiate or eliminate any tax, including penalties. There are some rules and these need to be carefully reviewed before filing.

Bankruptcy

In many circumstances, IRS penalties are dischargable in chapter 7 and chapter 13 bankruptcy. Get some good advice of course before heading down this path.

IRS penalty abatement and “reasonable cause” – what does that mean?

“Reasonable Cause”…could there be a more vague phrase? It makes sense than that this is the standard used by the IRS to determine whether a penalty should be forgiven or “abated”. It leaves some wiggle room.

Ridding yourself of an IRS penalty is all about this vague “reasonable cause” standard and the taxpayer has to be able to show “reasonable cause” in order to have the penalty wiped away.

So what is it? In essence it is any excuse that the IRS will accept.

The Internal Revenue Manual states: Any sound reason advanced by a taxpayer as the cause for delay in filing a return, making deposits…or paying tax when due will be carefully analyzed…

Some examples of reasonable cause that the IRS strongly considers:

  • The death or serious illness of the taxpayer or the immediate family.
  • Unavoidable absence of the taxpayer
  • Taxpayer unable to determine amount of the deposit of tax due for reasons beyond the taxpayer’s control
  • Destruction by fire or other casualty of the taxpayer’s place of business or records.
  • Lack of funds when a taxpayer can demonstrate the lack of funds occurred despite the exercise of ordinary business care and prudence

Other explanations are considered and almost any excuse can be provided. Many taxpayers simply argue that he or she exercised ordinary business care and prudence but was nevertheless unable to comply within the prescribed time.

It is always wise to submit the penalty abatement request based on one of the items listed above if possible. There are many other excuses that have been provided to the IRS that have succeeded like:

  • If the tax had been paid on time the taxpayer would have suffered an undue hardship. This means that, had you paid the tax on time, you would not have been able to put food on the table or been taken care of medically. Proof is important here.
  • Reliance on a tax professional that led you down the wrong path. If your’e accountant caused the problem by giving you bad advice or filing the wrong form for instance.
  • Employer submitted the wrong 1099 or w-2 form.
  • The IRS wouldn’t help you figure it out when you asked.

What are the most common IRS penalties and how do I get rid of them?

suspiciousIRS Penalties are a fact of life unfortunately.  They are a revenue “stream” for the IRS and not one that it will give up easily.

When the IRS sends you a bill from the negative results of an audit, it will add a penalty or two to the bill. Interest is also conveniently attached to the underlying new debt and the penalty as well.

These penalties were originally designed to be a punishment. A punishment meant to deter bad conduct. They are now a dependable source of income for our ever expanding government. Many tax experts consider the billions a year assessed as penalties to just be a tax and not a real deterrent.

Let’s look at some of these penalties just to give you an idea what you are facing.

Failure to Pay Penalty

The IRS gets to tack on ¼% to 1% each month of the amount you didn’t pay on time, ½% to start and drops to ¼% once you arrange a payment plan. If you fail to pay and a notice of intent to levy is issued – the penalty can be raised to 1%. It is imposed monthly.

Failure to File Timely Penalty

If you filed the return late – the penalty is 5% per month on the balance due up to 25% of the total debt. This penalty tops out if 5 months and 1 day after the return was originally due you still have filed the tax return. If you file but no debt is owed – there is no penalty. Some non income tax/personal returns have other rates.

Accuracy Penalty

The IRS gets to stick an additional 20% penalty to the tax bill if the IRS auditor decides that you understated your tax liability. This is very common.

Fraud Penalty

If the IRS decides that you omitted income on purpose i.e with fraudulent intent it can add a fraud penalty. This is a big one – 75% of the underreported amount.

Also if it decides that you fraudulently failed to file tax returns, it can penalize you 15% for every month you didn’t file for five months. This one is relatively rare.

The good news – if there is some to be found….

The IRS can remove a penalty if the taxpayer can prove that the failure to comply was due to some “reasonable cause”.

You can make the reasonable cause argument before the penalty is imposed or after it is imposed. If accepted, the penalty be removed or never added in the first place.

Penalties can be reduced in an offer in compromise, discharged in a bankruptcy or eliminated via the statute of limitations period as well.