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.
Posted by Dean Alexander on Wed, Jun 30, 2010
This is the second blog relating to a news release about the Taxpayer Advocates diagnosis of the most urgent problems that the IRS must face to regress the harm inflicted upon taxpayers. In the first blog we wrote about Identity Theft. We saw how the theft may cause income to be incorrectly attached to you and cause the IRS to move against you despite your pleas. They may end up enforcing wage garnishment or a bank levy against you. Even though you may be in constant contact with them. That is an issue that is picked up by the Taxpayer Advocate and was reported to Congress.
Cancellation of Debt
The second issue they stressed is cancellation of debt. The cancellation of debt issue comes into place when you default on your car payment, credit card payments, or default on a mortgage. In this instance the debtor writes the debt off and in return sends you a 1099 for debt cancellation.
What does a 1099 debt cancellation mean? In essence the lender is telling you, by sending a 1099, that you owed this amount and now you don't owe it as though we saved you that much or paid on your behalf that much and therefore you are considered to have earned that amount. Why do they do that? Maybe the IRS forced them to do. Why would the IRS force the lender to give you a 1099 debt cancellation? Mechanically speaking, the IRS may be right. This how they add and multiply it. They rationalize that if the lender forgives your debt he is going to claim the loss as bad debt. With the lender claiming the loss as bad debt, the lender pays less tax and the IRS collects less money.
The IRS is smart of course; they whisper in the ear of the bank: "Mr. Lender there is a way to help us out. Do you Mr. Lender remember how much debt you forgave that guy?" The lenders take everything Uncle Sam says seriously. Otherwise they are in trouble. So the lender turns around to the guy who is down and out, apologizes (wishful thinking) and hands the poor guy his 1099 income. Way in the back the IRS is watching and smirking. The poor guy is coming now to the IRS with a 1099 income for the amount of debt cancellation and ready of course to pay the tax. Uncle Sam is very happy. Uncle Sam lost money with the lender but recovered it from the down and out guy. Sounds fair. Or is it?
Adding and dividing and multiplication may say it is fair. Let us look at the issue realistically. The poor guy just got kicked out of his house after he defaulted on his mortgage. The lender foreclosed on the house. Now the guy is trying to pick up the pieces. The bank sends him a gift of 1099 for the cancellation of debt, now he just got out of the house trying to cram his children in a small apartment and pick up the pieces. "Thank God we have a place to stay." He is now counting his blessings. But not so fast mister, Uncle Sam is ready to garnish your wages. You must pay or else. That is the better reality that trumps the addition, division and multiplication. This is the injustice that the Taxpayer Advocacy is talking about.
To avoid a bank levy, garnishment or any collection actions there is a form 982 that you need to file to address the debt cancellation and which will enable you in the end to avoid considering debt cancellation as income and thus avoiding IRS collections actions.