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

IRS Collection Statute Expiration Date – Why do we talk about it so much?

wallpaper-clock-detail-in-london-streetThe very first thing I do when a person with a large tax debt balance hires me, is to calculate the IRS Collection Statute Expiration Date or CSED for short.

I calculate the clock.

Why do I care so much about this bit of information and write about it all the time?  I mean come – on….blah blah blah – clocks are boring.

If you read this blog, I understand what you are feeling.  Lots of talk about clocks and time.  REALLY BOOORING.

BUT…If you have a tax debt that has been lurking around awhile – these articles about the CSED should be interesting and for some of you, actually exciting…old clocks and all.

Let me explain by category…once again.

CSED and Offer in Compromise

An IRS offer in compromise is as it sounds.  It’s a formal process that allows you to try to make a deal with the IRS and settle the tax debt.  There are two primary reasons why the CSED makes a difference in relation to the IRS offer in compromise.

Number 1 – The CSED Determines Whether You Will Qualify

Can you read that aloud again so that all can hear.

I mean really…what’s more important than “whether you will qualify”.

So…it goes like this; The IRS gets to determine how much money you need each month to survive.  It starts with these things called IRS Standards or IRS National Standards and works it’s way up from there, deciding whether to add to the budget with your claims about child support, and tuition and 401k loans and credit card payments etc. etc.

It then looks at your income.  What it has been, what it is, what it will be, and makes a decision about what it thinks you income will be.

It then subtracts one from the other and comes up with a number.

It takes that number and MULTIPLIES IT BY THE CSED.   Example:  Number = $500.00 and CSED = 100.  or $50000.00

The IRS then calculates your asset value.  Example:  $50000.00.

The two are added and called the “reasonable collection potential” or RCP.  The RCP is compared to the debt amount. Example: Debt Amount –  $75000.00

RCP – $100,000.00

DEBT – $75,000.00

The offer in Compromise fails because the RCP is greater than the Debt.  BUT what if the CSED were only 20 months.  Would the RCP have been less than the debt?  Yes.

Number 2 – The CSED Tells you whether you should bother with the OIC

Once you understand how offers in compromise are calculated and what the CSED is and WHY IT’S SO IMPORTANT…you begin to see that sometimes you can just be wasting your time.  Pun intended.

Example – Waiting out the clock

Mr. Wonderful owes the IRS a big bucket of money.  He owns a home that has $150,000.00 in “quick-sale” equity, but he can’t borrow against it because he has bad credit, primarily due to the IRS’ lien but also because he buys too many suits and steak dinners on credit.  

The IRS wants to get paid, but realizes he can’t borrow against the home.  So, it agrees to put him in a partial pay payment plan, or a plan that doesn’t pay the entire debt off before the CSED is over.  It does this because it agrees he can’t afford to pay more than that every month.  

There are 4 years left on the CSED and he is paying the IRS $100.00 per month.  If everything stays the same, he will have paid the IRS $4800.00 over the next 4 years and his home will have increased in value. IF he files an offer in compromise, the offer amount will have to include the quick-sale value of his home and the CSED will stop running while he is in the offer.  

When he comes out the other end and is unsuccessful…the CSED will be waiting where it was left.  Mr. Wonderful chooses to stay in the payment plan.  Not Dumb. 

CSED and BANKRUPTCY

Much of what was written above applies here as well.  I won’t simply repeat it…thank goodness right?

But…be aware that the CSED matters in other ways as well when it comes to bankruptcy. The most important way it matters is in it’s calculation.  No…not in calculating the bankruptcy, but in calculating the CSED.  Why?  Because the CSED stops running when you are in bankruptcy.  Sometimes over a 10 year period people file for bankruptcy more than once.

So…sometimes people call me and say…”hey mike, I have this really old income tax debt and the IRS just levied my account.  I read about this CSED thing and I don’t understand why they are still collecting on me”.  My response…”have you ever filed for bankruptcy?”

The bankruptcy is the stickler.  What if a chapter 7 bankruptcy was open for 2 years?  Understanding the CSED is important.

CSED and PAYMENT PLANS

There are several areas where the CSED and the calculation of an IRS payment plan intersect, but the most common way is when a person owes the IRS less than $50,000.00 and wants to avoid filing a 433 financial statement.  IF the CSED has 72 months or more left on it, the IRS will usually agree to simply divide the debt by 72 months and put that person into a “streamlined” payment and IF no lien notices have yet been filed it won’t file them.

Great huh?

But what if the CSED only has 40 months remaining.  Will the IRS still allow the payment over 72 months?  No.  It should allow it over 40 months.

What if the debt is $50,000.00 even.  Over 40 months that’s $1250.00 per month.  Over 72 months – 695.00.  Which would you prefer?

In a strange way, higher income earners with less than $50,000.00 in tax debt want the CSED to be longer…usually.

We hinted at another example above.  The Partial Pay scenario and Mr. Wonderful.

To re-state it a bit.

In certain circumstances – the CSED can really hurt.  Even if the payment plan you negotiate with the IRS is “small”.  If the CSED is large, you run a much greater risk of problems. TIME isn’t your friend.

Example – Partial Pay vs. Chapter 7 Bankruptcy

Ms. Nositall owes the IRS $30,000.00 as a result of some unpaid taxes on a cashed out retirement plan.  She has long since spent the money and has taken a job making $25.00 per hour.  She isn’t a good offer candidate based on the RCP, but she has been able to convince the IRS to put her into a monthly payment of $395.00 per month.  It’ painful, but better than a wage garnishment.  THE PROBLEM is that she has 6 years remaining on the CSED and she plans on making more money at this job in the coming year and beyond. She is also struggling to pay some credit card debt.  She speaks to her attorney and learns that when the IRS sees the higher income (new w-2 or tax return) it will want to re-negotiate the payment plan and bump it up quite a bit.  She qualifies now to file a bankruptcy, and the entire tax debt qualifies to be discharged along with her credit card debt.  Her choice: Bankruptcy.  

Clocks are important and sometimes interesting.  They keep track of time… and if you have a large tax debt, time is of the essence.

Unfiled Tax Returns? Six things you need to know

numbers6If you have unfiled tax returns and the IRS is looking for them as they always do, you should know a few things:

1.  The IRS has income and other information about you.  You can get the info from them.

The IRS maintains a record of w-2 forms, 1099s, mortgage interest and other items that are legally required to be reported by employers and others on your behalf. If you haven’t filed in quite a while, you will probably need to ask the IRS for your “income history” for each year that is un-filed to help you in recreating your income and deduction numbers.  You shouldn’t just rely on the IRS’ documents alone to re-create your history however.

2.  The IRS typically requires the last six years’ returns be filed to be considered “compliant”….but,

IRS Policy Statement 5-133 and the Internal Revenue Manual at 4.12.1.3, tell the IRS to consider you to be “in the system” for purposes of working with you if the last 6 years have been filed. However, that doesn’t mean that the IRS will only ask for the last 6 years of returns.  It may ask for returns that are older than 6 years.  You need to talk to an experienced tax resolution attorney before deciding which returns should be completed and which should be filed.

3.  Sometimes it makes sense to leave the IRS’ Substitute Tax Return in place and not do your own tax return.

If you don’t file a tax return for a while, the IRS will do it for you.  It will do it wrong because it will only treat you as single and take no itemized deductions.  This often results in really large debts as well.  BUT…the IRS only has 10 years to collect a tax debt and even though it doesn’t have to respect this 10-year rule if you didn’t file the return, it usually will.  So, if several years have passed since the IRS did the incorrect return and if your correct return will still leave a substantial debt, it may not be wise to file it in an effort to replace the IRS’ Substitute Return.  Again, talk to an experienced tax resolution attorney about this.

4.  Before filing the returns it is wise to determine how you are going to deal with the debt.

There are several options for most people.  You may be able to settle it for a fraction in an IRS Offer in Compromise, pay a small amount or nothing in an IRS payment plan or non-collectible status, or you may be able to use the Payment Plan or Non-Collectible Status help you to get to bankruptcy and possibly wipe out most or all of the debt. If you cannot pay the debt in full in a reasonable amount of time, then bending over backward to get the returns just right especially if there are complicated expenses and deductions that must be estimated may be a waste of time. In fact, in some circumstances the higher the debt the better…again talk to an experienced attorney about why I say that.

5.  In certain circumstances, the returns need to be filed very quickly

There are several common situations that mean you should get the returns done and with the advice of legal counsel get the returns filed….asap.

The IRS is getting ready to file a Substitute Tax Return

If the IRS is getting ready to file a Substitute Return and you know two things, one, that the debt will be high whether they file it or you do, and two, you may be a bankruptcy candidate down the road…you need to beat the IRS to the punch.  Walking it into the local IRS office and getting a copy stamped isn’t a bad idea.  The reason, if they beat you to it, the principal debt may not ever be dischargeable in bankruptcy.

The IRS is garnishing your wage or levying your bank account

Missing tax returns will create a situation in which the IRS can simply ignore your request to resolve the collection activity.

3 years are about to pass since the date the return was due to be filed and you expect a refund

If you file the return 3 years and 1 minute late, the refund you were owed is legally confiscated by the IRS and isn’t applied to your other debt.

6.  Having someone with an experienced set of eyes review your tax return history is usually a wise investment

It’s important to have someone who deals with the IRS all the time, review the situation.

Written 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 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

5 reasons not to file a perfectly good IRS Offer in Compromise

From Point A To Point BThe IRS Offer in Compromise program, the one you hear about on radio and TV…really exists.  It actually works too.  Many people settle tax debts both large and small with the IRS every year.  But…it isn’t for everyone.  In fact, most Offers in Compromise filed with the IRS are rejected for a number of reasons.  You can read more about that here.

Just as important…many who qualify for an Offer in Compromise choose not to file one.

Strange I know… but it happens all the time.

Here are the 5 most common reasons it does.

Tax and other debt

If you have old tax debt and much of it is “dischargeable” in bankruptcy AND you have other debt that needs to be dealt with in bankruptcy, then an Offer in Compromise may be a waste of time and money.

This isn’t true in every case, and there are reasons why people who have tax and other debt can’t use bankruptcy without some negative side-effects, but it is usually the case that bankruptcy makes more sense.

Not a great candidate for an offer in compromise but a good candidate for a bankruptcy

What if a taxpayer had a large tax debt as a result of under-withholding for several years and the total tax debt is $150,000.00.  The IRS is threatening collection.  He can’t pay it in full over the time left in the statute of limitations for collection and his best offer in compromise number would be $25,000.00.  Assume as well that he would qualify for a bankruptcy and that the bankruptcy would discharge his entire tax obligation.

He doesn’t have access to the $25,000.00.

A bankruptcy may make more sense.

Difficulty remaining in “compliance”

In order for an Offer in Compromise to work permanently, the taxpayer has to remain in absolute compliance with the tax code for a 5 year period after acceptance of the Offer. If a tax return is late or if a new debt is incurred, the offer is revoked and the complete amount of debt with it’s new interest becomes collectible once again.

One of the lesser known aspects of an Offer in Compromise is that in order to be ‘permanently’ accepted, the taxpayer must remain in complete compliance with the tax code for a period of 5 years after the offer was accepted. Failure to do so, by not filing returns or by creating a new liability, means that the offer is undone, and the complete amount that was settled comes back into play.

If a taxpayer is going to have a hard time remaining in compliance, then another option may make more sense.

Previously filed and rejected Offers in Compromise

Many people think that filing an offer in compromise is just filling out some paperwork.  In very simple cases, it can be not much more complex than that.  But in most cases, a story has to be told; a factual story that will convince the IRS to agree to the proposed settlement.  The filer has to understand all of the rules and exceptions to the rules as well. Failure to tell the story properly and/or failure to know the rules and their exceptions will usually end up in a rejection.

Most Offers in Compromise are rejected and the belief that filing an offer is just filling out some documents and crossing fingers… is the primary reason why.

A common example we see is the taxpayer that has been filling out a financial statement and sending it with a 656 form over and over again.  Each time the offer is rejected and the statute of limitations on collection is extended.

But also each time an Offer is filed the IRS sees that filing adds to the bad faith the IRS already sees in the taxpayer.  When the newest Offer is filed the IRS won’t take it seriously.

Statute of Limitations on collection isn’t far away  

Imagine that you filed a return on April 15, 2005.  If no tolling of the statute has occurred as a result of a bankruptcy filing, a previous offer in compromise, or certain appeals/litigation, the IRS’ 10 years to collect the debt is about to run out.

Imagine as well that the $150,000.00 dollar debt that has accrued with penalty and interest would likely settle via offer in compromise for $25,000.00.

Sounds great right?

Imagine as well, that the IRS would agree to a $750.00 payment each month toward the debt or that you were already in that payment plan.

Would you file the offer in compromise?  I would advise you not to.

Why?  You have about 8 months before the statute of limitations on collection kills the debt owed to the IRS.  A payment plan at $750.00 for 8 months ends up being a lot less than $25,000.00.  The offer in compromise would extend the collection statute and if it didn’t work out the taxpayer would be at square one, and there won’t be any 5-year look back issue mentioned above.