Tax Problems: The Anatomy of Tax Resolution

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.

Offer in Compromise, Installment Agreement or Not Collectible?

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.

Back Taxes: The Case Against Not Filing

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.

IRS Levy, Tax Liens, and Wage Garnishments....Are They Overdoing It?

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.

Tax Help: Identity Theft, Cancellation of Debt, and Seizures (3 of 3)

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.

Tax Help: Identity Theft, Cancellation of Debt, and Seizures (1 of 3)

Taxpayer Advocate is the organization which monitors the IRS and the reported areas of significant hardships placed on the taxpayer by the IRS. Among those areas are identity theft, cancellation of debt income and the five areas of IRS collection policies - levies, allowable living expense standards, installment agreements, offer in compromise, and early intervention techniques including the quick resort to property seizures of taxpayer's assets.

Tax-Related Identity Theft

The advocates identified in its 2007 report to Congress that tax related identity theft as one of the most serious problems facing United States taxpayers. Identity theft can create a tax liability to an innocent taxpayer. 

Here's an example...

John steals the identity of Jane in 2008. John wins $100,000 gambling and does not report the income. The 1099 is issued by the casino to poor Jane who was minding her business and has no idea about the marathon she will have to run. 

Poor Jane gets a CP 2000 - Notice of under reporting of income. The tax bill is a modest $30,000. Jane calls the IRS and every time she talks to an officer they tell her that the IRS has the evidence issued by the casino (the 1099). She runs to the casino and tells them that they sent the 1099 to the wrong person.

The casino sends her evidence that she was playing on such and such dates in 2008. She sends the casino counter evidence that she was in the hospital. The casino people now are convinced that she is an innocent person. The next day she receives a notice from the IRS of their intention to levy. She calls the IRS again but they ask her: Where is the corrected 1099 from the casino to prove it was not you? She pleads with them but to no avail. They further threaten her with a garnishment on her wages.

She calls back the casino. They told her the case is referred to their security department. They ask her if she filed the incident with the police and the attorney general. She runs to the police and files a case. She goes back to the casino with the case number and requests a form to file with the attorney general of the state (The levy deadline is approaching). She calls the IRS with the case number the police gave her. They thank her for the effort but said there was nothing they can do. They have the infamous 1099. She realizes that they are about to levy her bank. She runs to the bank before they levy her money. She had just deposited her paycheck of $1,500 to pay her rent. To her dismay they beat her to her money. The bank recites the usual 21 days of holding her money. At first she is comforted but after 21 days the money is evaporated and the IRS gets it. It was too late. To make matters worse she also is slapped with a tax lien. 

Jane is still battling the system to resolve her tax problem. She does not have money to hire a CPA or an attorney. As you see from the story above the IRS system is not equipped to deal with Jane's tax problem in an expedient manner in order to alleviate the burden on her. The presumption is that she's guilty until proven innocent. The taxpayer has to navigate many sources of evidence and documentation that would otherwise be unnecessary if the IRS has a system in place to deal with it. Now the IRS based on recommendations is considering establishing a central unit that deals with these problems that invariably require an engagement of a tax professional such as a CPAs, enrolled agents or attorneys. Let us hope they can succeed.

IRS Tax Debt Collection Attempts - Is it a Levy or Property Seizure?

Generally speaking, an IRS tax levy such as a bank levy, garnishment, or an accounts receivable levy (taking the tax debt amount from other people who owe you.), all end up in the IRS by a check.  So, a levy or garnishment is an IRS collection action in which they get a check in the amount they determine from either your bank or from your employer.  The IRS uses Form 686, Intent to Levy Notice, to initiate the process.

IRS property seizure is something bulky the IRS will get in its collection efforts to satisfy a tax debt.  They will get a clunker, a boat, a piece of land, or any other type of asset they can take, and eventually auction it off to collect for back taxes. Again, Form 686 is used.  Example of serving this notice: IRS embarks on seizing property in an effort to collect on back taxes owed, such as a car which is parking in a commercial parking lot. The IRS will, once again, use Form 686 to deliver to the attendant. The IRS will give the attendant Form 686-A, Notice of Levy and demand the car be turned over.  Amazing power?  No court order is needed, no nothing.

IRS Authority to Levy, Issue Garnishment, or Attempt Property Seizure

Does the IRS have the authority to execute a levy, garnishment, or property seizure? 

They sure do. The Internal Revenue Code (IRC) authorizes a levy as a means to collect delinquent taxes (IRC 6331). It is permitted for any property, or rights to property, that belong to you.

Required IRS Notices for Levy

IRS must deliver the following notices:

1. Notice and Demand for Payment for Tax Debt

2. Notice of Intent to Levy

3. Taxpayers Right to a Collection Due Process Hearing (CDP hearing)

Can You Appeal an IRS Intent to Levy?

Yes, there are two ways:

1. You may request a Collection Due Process (CDP) hearing by filing Form 12153 no later than 30 days from the time you receive the levy notice.  The Office of Appeal will issue a determination as to whether the levy was issued correctly or not.  If you don't like the decision of the appeal, you can go to United States Tax Court within 30 days after that.

2. You can also appeal a federal levy or garnishment under Collection Appeal Program (CAP) regardless of the taxpayer's ability to appeal under The Collection Due Process (Such as missing the initial 30 day deadline required for the CDP).  CAP is independent from the collection function. It gives administrative relief to taxpayer.  It is a chance for an administrative review. Quick cautionary note on this point: Unlike the CDP, a CAP cannot be challenged nor can the amount of the tax liability.  You cannot proceed under CAP to Tax Court.