Posted by Dean Alexander on Wed, Jul 28, 2010
Payroll taxes is the worst tax debt you can owe to the IRS. Your tax problem is magnified by the fact that payroll taxes are not personal taxes or even corporate taxes that you or the corporation pay out of pocket to finance public policies. They are taxes taken from others and given to you to deliver to the IRS. I guess that is why they call them “trust fund.” For some reason those payroll taxes were not delivered. At the end of the year, your employees will file their personal income tax and send the W-2’s along with them and they will request the refund. The IRS will have to pay them their refund even if they never received the money from you. You get the picture. That will make them mad, of course. Did you intend to willfully choose to ignore the tax law and to incur tax debts to IRS? Most likely not. You just got caught in a cash flow problem threat which became an IRS tax problem. Does the IRS care that you did not mean to use the trust fund? Probably not.
The IRS will deal, most likely, harshly with you if that tax debt ever became excessive. They will hold you personally liable for the tax debt. Your company tax problem is not only a proprietorship or a corporate tax problem but also became an individual tax problem. The tax problem has mushroomed into tax problems.
The IRS will issue a bank levy your account as they will the corporate account. They will garnish your wages if you become an employee of someone else and still owe those back taxes. The bank levy and the wage garnishment are not the only manifestation of IRS anger. They may attach among other tax penalties hefty civil penalties. Is their a tax resolution to this tax problem? The answer is like anything in life, there is always a solution hanging out there; tax problem or no tax problem.
The proposed IRS settlement will be one of the traditional tax resolutions we have enumerated previously such as Installment agreement (IA), Offer in Compromise (OIC) or to be declared Currently Not collectible (CNC) by the IRS. After you obtain tax representation the question will be: which flavor would a CPA, a tax attorney or an enrolled agent propose as a tax relief? The tax relief will depend on your financial situation. The worse it is the better the tax resolution to your tax problem it will be.
The best tax settlement to your IRS debt probably will be a minimum amount of an Offer in Compromise, if you qualify. This will be an ideal tax help or tax relief for your IRS debt. The worst tax resolution is payment of the full amount of IRS debt which will include the penalty and interest. This solution is an Installment Agreement. Obviously, your CPA or your tax attorney will prefer to provide a better tax relief but they may have no choice because of your financial situation. You may have to accept this tax solution as the best tax help available at that time. Certainly such an IRS settlement can be renegotiated if your situation changes in the future.
Posted by Dean Alexander on Mon, Jul 26, 2010
Many taxpayers seek tax resolution services only after things go so bad. The IRS threatens you with wage garnishment or a bank levy or may have filed a tax lien against you. Now what will you do? An immediate call to your CPA or your tax lawyer to handle your tax problems to get IRS representation? Most likely this will be your first call to action.
Your CPA, IRS lawyer or enrolled agent will collect financial data from you. The priority is to remove the bank levy or the wage garnishment. Sometimes they cannot begin to negotiate any tax debt relief unless you are in compliance. Compliance for IRS tax settlement purposes means filing all your back taxes.
Assuming you have filed all your previous tax returns and now we know all your back taxes which with interest and penalties make up your tax debt. It is now time to search for a negotiated IRS tax settlement to get rid of this nagging IRS problem. We spoke in previous blogs about how to remove bank levies and wage garnishment through either an installment agreement or an offer in compromise which may provide your tax help that you are looking for when seeking IRS representation.
We want this time to talk about currently not collectible status as a way of settling IRS debt. For starters we want to state that both currently not collectible status and offer in compromise are available to people who owe back taxes to the IRS; qualifying for one most likely allows you to qualify for the other.
If you qualify for one as a tax resolution, you probably qualify for the other except when you have net assets. If you have no income to pay your tax debts and you do have assets the best alternative to settle your IRS problem is currently not collectible and not offer in compromise. Please consult your CPA, tax attorney or other tax professionals to discuss in further detail.
Posted by Dean Alexander on Fri, Jul 23, 2010
We discussed in the last blog of 3 possible tax settlement options available to settle IRS debt to prevent or remove wage garnishment, or bank levy. Tax lien will be a subject of its own in subsequent blogs. We mentioned three alternatives, installment agreement, offer in compromise and being declared currently-not collectible by the IRS.
We saw that installment agreement meant that we will pay all IRS taxes including interest and penalty but instead of a lump sum settlement, we will do it over certain period. We also said that we the tax relief that we will get for our back taxes will be shaped by our financial situation; assets and liabilities on one hand and income and expenses on the other.
Your CPA or tax lawyer has to calculate both the amount of income in excess of your expenses and the net worth to decide the best tax help for your tax problem he or she should recommend. Generally, if you have assets to pay in full your total tax debt or if your monthly income is more than your monthly expenses in such a way that it is enough to pay your tax debt over the statute of limitation, you are not eligible for an offer in compromise but you may be eligible for an installment agreement and possibly the currently not collectible status.
In the last blog we gave an example of how would an installment agreement be the only option to pay your back taxes and solve your tax problem. Now it is time to talk about offer in compromise as an IRS tax relief solution to your tax debt. Let us assume that your tax debt is $10,000 and you have no assets whatsoever. Let us assume that your monthly income is $1,000 and your monthly expenses are $1,100. In this case you have no assets and no residual income to payoff your tax debt. You are a perfect candidate for offer in compromise or currently not collectible.
The question then, should we try to declare you as currently not collectible or seek tax relief in an offer in compromise? We will discuss the difference between both alternatives as a way to resolve your IRS problems.
Posted by Dean Alexander on Wed, Jul 21, 2010
If you have a tax problem or tax problems such as a bank levy, or wage garnishment and you are seeking tax relief for your tax debt, the tax help a CPA, an IRS Tax Attorney or an enrolled agent will offer you has to be one of three:
a. Installment Agreement
b. Offer In Compromise
c. Currently not Collectible
IRS Installment Agreement:
Basically, an installment agreement means that your tax debt settlement offered you no reprieve on the amount you owe. You will pay the full amount of the IRS debt. The only tax debt relief you have is making periodic payments of the full tax debt amount. The tax resolution for this tax debt will not stop the accrual of interest and penalty.
The question is, why would a rational human being choose an Installment Agreement over, say an Offer in Compromise or Currently-Not-Collectible status? The short answer is: typically your financial situation dictates the agreement that will ultimately shape the tax resolution of your case.
Generally speaking, if you have a lot of net assets and your income is much more than your expenses, your chance of reducing IRS debt is lower. Net assets are defined as your assets minus your liabilities. If you own a house that is worth $120,000 and your loan is $80,000, your net asset in this case is $40,000. Any IRS tax resolution must account for this fact. For example, if your tax debt is $10,000, the IRS will insist that you pay the full tax debt because they can collect that much from you. The only tax relief in this case is to schedule the payments over several years and you must understand that in your search for professional tax help.
The other factor when you seek tax debt settlement is the income and expenses as we said above. Let us say that you have no home and you own nothing in this life and your tax debt is $10,000 as in the case above. Let us assume further that your monthly income is $5,000 and your expenses according to IRS national and local standards are $4,500. If this is the case, the IRS will not reduce your tax debt and the only tax resolution for your tax problem is an Installment Agreement.
If you have a wage garnishment or bank levy, the IRS will not embark on levy release or removals of your wage garnishment unless you strike some sort of a tax debt settlement be it an Installment Agreement, Offer In Compromise or be declared as Currently Not Collectible. As a side note you must bear in mind that your CPA or your tax attorney must prepare all your unfiled taxes.
Discussion of the rest of tax resolution options will be continued on the next blog.
Posted by Dean Alexander on Mon, Jul 19, 2010
The simplest argument for filing taxes in time is that it is the law. You must comply with the law. If you are not a tax protestor, and we hope that you are not (tax protestors usually end up on the wrong side of the bed) then you have no qualms with the legality of filing.
There are many benefits of filing in time besides being in compliance with the law. The most obvious benefit is getting your refund. If you are entitled to a refund and you don’t file, you may lose your refund because you are barred by the statute of limitations when you eventually file. We have seen people losing $7,000 or more of money in some cases that were coming to them and when they filed late they got nothing. Never mind that the IRS will ask you to pay the tax debt even if you don’t file. You guessed it. They file for you and now you owe back taxes (more on that later.)
One of the benefits of filing is that you may be able to wait out the IRS on you tax debt. The law states that the collection statute of limitation is 10 years. If for example you owe taxes and disappeared from the radar of the IRS for ten years, the IRS may have lost the amount of tax you owed forever. In this case you have got yourself a nice tax settlement.
One of the disadvantage of not filing your taxes is that the IRS will file on your behalf. IRS calls that SFR or substitute for return. Needless to say, in preparing your unfiled taxes, the IRS will not look after your best interests. The IRS will assume the worst against you. They will do a return for you as married filing separate even if you are single because filing separately causes you a tax liability higher than the latter. In an SFR, you will not get any deductions for your expenses.
For example, if you sell a house, the tile company will give you a 1099 for the proceeds and sends the IRS a copy of this 1099. The IRS records the total sale price as your income even if you were upside down on the house and they will not record the cost of the house. That is why we have many clients who come to us for $70,000 or even $100,000 of tax liability because of the sale of their residence when in fact they lost money. Unless you file, the tax liability remains on the book. The IRS had one of our clients owing over $250,000 in 2003 because of this exact issue. Guess how much he would have owed? Zero.
Because the amount of taxes owed is usually high you may even have a revenue officer appointed. When you have a revenue officer, that spells bad news. And to make things worse, we do charge more for revenue officers. So, that is another reason that you should file your taxes earlier.
Audits is another reason. If you don’t file, the IRS can select any return regardless how old it is for an audit. On the other hand if file in time and you happen to have a year in the past that you made a lot of income and you think if you get audited on that year you will pay a lot of money, this year cannot be audited after three years. So, here you may have gotten away with murder.
We have seen other benefits to filing your taxes in time that particularly come in handy when you have a bank levy or wage garnishment or even when you want to do an installment agreement or an offer in compromise. If you have unfiled returns, there will been no tax settlement for your tax debt unless you are in compliance. Tax compliance in this instance means filing all your back taxes. If have not filed, that may delay the process of IRS negotiation when you need it most.
Finally the IRS may even look sympethatic on your case if you have been filing on time.
Posted by Dean Alexander on Fri, Jul 16, 2010
The IRS is preparing to provide help to people with tax problems related to the oil spill in the Gulf of Mexico. BP is beginning to issue payments as compensation for lost wages or income, property damage, or physical injury. People receiving these payments may have questions as to whether these payments are subject to taxes or not. If you are benefiting from any of these payments, it might be a good time to foresee any future tax issues. The IRS has announced a Special Assistance Day on Saturday, July 17th from 9 a.m. to 2 p.m. local time at the following Centers in seven different cities:
1110 Montlimar Drive, Mobile, Alabama
651-F West 14th St., Panama City, Florida
7180 9th Ave. North, Pensacola, Florida
2600 Citiplace Centre, Baton Rouge, La.
423 Lafayette St., Houma, La.
1555 Poydras St., New Orleans, La.
11309 Old Highway 49, Gulfport, Miss.
It is good to know that the IRS is willing to provide help to those who are already experiencing a very difficult situation. At the Centers you will have the opportunity to work with IRS employees to provide tax help and resolve any tax issues you may have related to the oil spill. You will be able to ask questions about your specific tax situation and possibly have faster tax resolution to your tax problem. The IRS has also opened a toll-free line for people with tax problems due to the situation in the Gulf: 866-562-5227. You can call this number on weekdays from 7 a.m. to 10 p.m. and also on Saturday, July 17th from 9 to 2 CT.
If you have or anticipate a difficult tax problem related to the Gulf disaster and you need tax help, don’t hesitate to take advantage of these opportunities to resolve or foresee any tax issues. It is better to take care of things before they become more complicated.
Basically, it is anticipated the tax problems will evolve around three issues:
1. Property damage tax issues
2. Payments in lieu of lost wages
3. Payments for sufferings
First if you get compensated for the property damage you incurred the tax problem that you may be facing is the following question: do I recognize gain or loss on payments of damage? The answer depends on what is called the tax basis in the property. For starters think of tax basis as the cost of the property. If you are compensated more than your cost then you have a taxable income.
Now let us instead of saying cost we use the term “basis” The term tax basis means simply modified cost. If you benefited from having the property and depreciated the property then the IRS will not use the cost but the cost minus the depreciation that you took in prior years and that is what they call basis.
The second issue that inevitably will come about as a result to the spill in the Gulf is compensation for lost income. This compensation is taxable because it is considered as wages that would have been taxable in way had it been earned without the Gulf spill.
Third type of compensation which we may encounter and you may need tax help on is the compensation damage as a result to some physical damage or mental anguish. This type is not taxable compensation.
Posted by Dean Alexander on Wed, Jul 14, 2010
This time we want to discuss Taxpayer Advocate Report to Congress regarding IRS Collection Practices. The Watchdog expressed concern about the IRS collection procedures for IRS debt when it inflicts “unnecessary or disproportionate harm” on taxpayers. Not only does the practice hurt the taxpayer but it affects negatively the money that the IRS collects for back taxes. IRS believes that the more aggressive they enforce collection actions against taxpayers such as tax liens and levies, the more money they collect for back taxes or tax debt.
The reality however points to the opposite results. The Taxpayer Advocate believes that the “data don’t bear that out.” The increased tax collection mobilization brought opposite results. The report to congress states that since 1999 the IRS increased tax lien filings almost five times (475%) and increased tax levies whether a bank levy or wage garnishment by 600% (six times.) With this massive attack, one would expect that they IRS is doing now a great collection job. The numbers point that collection dollars (adjusted for inflation) went down by 7% over that period.
So we previously said that tax liens, bank levies, wage garnishments or other levies did not help the IRS but actually hurt them as the Advocate suggested. It also inflicts considerable damage on the taxpayers who have tax debts or back taxes. They say that when the lien is filed you immediately lose 100 points on your credit score. If you were begging to recover and you built your credit score to 700 now they put you back at 600 and if you are at 600 and on your way to have access to the financial system and possibly the American dream, they put you back at 500.
Employers, credit card companies, renters, mortgage companies and even insurance companies check your credit. They practically shut you off from any decent opportunities. The questions is, "For what?" What is the IRS gaining by this? In many instances, they are gaining nothing. It is sadly funny when I hold a conference with an officer of the IRS to negotiate an Installment Agreement, and after we successfully accomplish the agreement, the officer gives me the recital that of course, “Now that we have put them on Installment Agreement, we will file a lien against them.”
When this first happened I was shocked and I reasoned, “Before the agreement my client had no tax lien, now we do the agreement and we get hit by a tax lien?” I felt something is wrong. But soon I got trained by the system and when I do an installment agreement, I respond with all diginity and pride in my knowledge, “Yes sir, but of course, sir.” Thus we have learned to expect anamolies.
If we as tax practioners fail to voice our opinion, at least Congress, now based on people's complaints, is watching the problem. The problem is that The Advocate reported that although the IRS has been advised of the consequences of their actions, it is reported that they are underutilizing offer in compromise. As the Taxpayer Advocate puts it, the acceptance of Offer in Compromise is at an all time low. The IRS has filed one million tax liens against taxpayers. To put it in perspective, there are countries in this world whose population is one million people. So in this case such country would be one under siege. Remarkable? Perhaps next time we can propose some solutions along with Taxpayer Advocate's proposed ones.
Posted by Dean Alexander on Mon, Jul 12, 2010
Taxpayer Advocate continues to report IRS problems and IRS collection practices. National Taxpayer Advocate Nina E. Olson released a few days ago (we appreciate her work on behalf of taxpayers who have IRS tax problems) a report to congress. It addresses three main concerns:
1. Taxpayer Services: To show how the service is degrading the IRS after answering 87% of taxpayer's calls to IRS in 2004 now it is down to 57%. The IRS is taking on more of the social program such as Economic Stimulus payments, First Time Homebuyer Credit, Making Work Pay Credit and now the anticipated Health Care program. The IRS plans to increase funding for Collections activites by about 17% from 2004 while dereased spending on taxpayer service by 7%. Does that explain why almost half the calls to the IRS are not answered?
2. Reporting 1099 Requirement: This is a huge, huge problem and we would speculate that it may be practically unenforceable. This 1099 provision applies to businesses, non profit organizations and even government entites. Basically they are trying to tell us if you do business with anyone and you pay them over $600 a year, then you must report them to the IRS. This requires that as a small business owner, you must keep track of everyone you do business with during the year, tally up how much you pay them, and then report them by giving them 1099 at the end of the year.
Taxpayer’s Advocate estimates that about 40 million busineses are affected by this. Assuming that every business deals with 25 people a year, the IRS must receive 1 billion extra pieces of paper to deal with in addition to the burden they have. Common sense says that you should answer first the calls that you get before adding 1 billion 1099's to add to your fights. In addition, imagine the burden placed on each small business owner. If they don’t comply, they incur another penalty, another IRS notice, another collection action and another Revenue Officer that knocks on your door because now you owe tax debt to the IRS just because you did not participate in the massive paper Leviathan.
The third emphasized by Taxpayer advocate is the IRS Collection Practice which we will address in the next blog....
Posted by Dean Alexander on Sat, Jul 10, 2010
You know those ads that say, “...settle with the IRS a few cents on the dollar...” ?
Whether you qualify or not, what's the deal? Let's start by looking on the menu of IRS negotiation options available if you owe back taxes to the IRS. You may have to negotiate an Installment Agreement with IRS to pay your tax debt. This means you acknowledge that you will pay the full amount but on monthly installments. What's the benefit of that?
Basically you are asking the IRS to give you time. Penalties and interest continue to accrue but they will not take collection actions against you as long you pay.
Better yet, you may be able to make an offer to the IRS. I am sure you have heard tax resolution companies advertise “settle for a few cents on the dollar.” On further investigation, you may discover you are not one of the lucky ones that take advantage of this tax settlement, which the IRS calls Offer In Compromise. So, again, what's the deal? Is there a method to the madness? Yes, there is. Let's start by saying that tax resolution companies should have said “ Few cents on the dollar if you qualify.” The key addition that should be inserted to this commercial is “if you qualify.” Offer in compromise is a conditioned gift. It is a gift for those whose financial positions afford them the opportunity to benefit.
There are two broad strokes we need to be aware of when we are dealing with the IRS to settle our tax debt through an offer in compromise. The first stroke is income and expenses, the second is assets and liabilities. These two hurdles are the ones taxpayers must overcome in order to negotiate a successful offer in compromise tax resolution. Basically, the IRS sees the difference between income and expenses and that will define what you have left to pay the IRS from your cash flow.
In calculating expenses, the IRS goes by what they call expense standards. They use what they call local standards and National Standards. The standards are the maximum expenses that they will allow. To explain the importance of those standards from the IRS point of view, let us assume that two taxpayers who are unrelated, Kathy and John, both owe $10,000 of back taxes to the IRS. John is a Dr and makes $15,000 a month. His mortgage is $13,000 and his Mercedes payment is $1,500. So after the house and the car payment he has 500 to pay IRS assuming he does not have any other expenses and he is entitled to no other benefits (realistically, there are other expenses that can be deducted but for the purpose of this exercise we assume no additional expenses. In this case John can make an installment agreement for 500/mo.
Kathy makes $2000 per month. Her Rent is 1,000 and car and other expenses $500 a month. According to the IRS and absent the expense standards, she should pay 500/mo as an for an Installment Agreement to settle her back taxes.
So we have John making $15,000 a month and paying the IRS $500/mo to settle his IRS debt and Kathy paying $500 a month and is making only 2,000 a month. Obviously you see the disparity or the injustice if you will. That is why the IRS has those expense standards. Under those standards the doctor and Kathy will be allowed the same housing expense. So if the doctor pays $13,000 per month for mortgage, the IRS will only allow him say $1,500 for mortgage and the same for Kathy. The rest goes to IRS to pay the tax debt.
We go back to Offer in Compromise. As we said there are two factors for a successful OIC. The first factor cash flow: cash flow boils down to the fact that the difference between income and expense is small enough to allow you to pay less than amount owed. The second track is added to the first and modifies it as follows: What is left of monthly income and expenses every month plus what you have of assets is less than amount owed. That is the crux of the audit. Remember that the statute of limitation has a bearing on the calculation. When we talk about assets we are talking about net assets. Net assets means the difference between what you own and what you owe.
Posted by Dean Alexander on Tue, Jul 06, 2010
We continue to explain the Taxpayer Advocate's findings with regards to the difficulties that US taxpayers encounter in dealing with the IRS. In the previous two blogs we discussed the issue of tax-related identity theft and cancellation of debt. We found that identity theft can cause the IRS to take actions against an innocent, oblivious taxpayer such as wage garnishment or bank levies. We found out that the IRS system as it exists does not have the mechanisms to accommodate the innocent party. The system as it exists will assume that you are guilty until you can prove that you are innocent by refuting that the 1099 income that you received was a bogus one.
We also discussed cancellation of debt income considered by the Taxpayer Advocate to be the second worst harm that inflicts a great deal of injustice upon people who are suffering financial difficulty. Basically, and as an example, if a taxpayer suffered mortgage foreclosure that cause him or her to lose their home, they will not only be devastated by the incident but may have to be subject to IRS actions because the bank reports them to the IRS claiming in essence that they made money by losing their house because the bank forgave the debt owed to them. And according to IRS rules, the forgivenss of debt is a taxable event. Luckily now this injustice can be addressed.
Property Seizure, Levies, Installment Agreement Allowable Living Expense Standards
This time we want to explain the hardships visited upon people when they are subjected to aggressive techniques such as seizing property that they may be in desperate need to have or others such as bank levies. I spoke to a person who was getting kidney dialysis and was in such distress over the seizure of his automobile that he was using going back and forth for his dialysis. It did not matter to the IRS that the person's car they took may have only a few years to live.
The Taxpayer Advocate is arguing that the IRS uses these collection avenues more readily than they should. The advocate wants the IRS to give the taxpayer more time or possibly resort to other methods before instituting a seizure. We remove tax garnishment for clients whose salary is $50,000 a year and the IRS leaves them with $300 a month to live on before our intervention. What makes that matter worse is when the taxpayer had fullfiled all the required documents needed to negotiate an installment agreement to remove the levy, a revenue officer refuses to return the call. We have made eight communication attempts to reach a revenue officer who holds the fate of a lady in her hand. Meanwhile the levy continues with the $300. So many times the taxpayer is in compliance but a Revenue Officer or collection people are so overwhelmed that they don’t return the calls. We had to interfere at higher levels to get their attention.
The case of an installment agreement is another thorn in the side of taxpayers. The IRS has their own definition of allowable expenses based either on national or local standards. They toss many expenses that taxpayers are obigated to pay. So, the definition of taxpayer’s ability to pay is disconnected from reality. If they see you can afford $1,500, that will be the amount they want you to pay as installment agreement. Nevermind that you cannot because you have a contractual obligation. The rationale they have is that you can default on your obligation to others but not on the IRS obligation. It is a distasteful argument. It is therefore the Taxpayer Advocate may be arguing for a partial payment Installment Agreement in the near future.