Posted by Dean Alexander on Mon, Sep 06, 2010
Everyone must file their taxes. We always say if you prepared your tax and don’t have the money to pay your tax debt file your tax return anyway. There are many benefits of filing your tax return in time. The least of those benefits is avoiding a tax penalty of non filing. There are other benefits such as taking advantage of collection statute of limitation and limiting the time open for a tax audit. Finally, you will avoid non filing criminal charges (Wesley Snipes is the latest famous victim.)
When you file the tax return whether you paid or not, the IRS makes the tax assessment. If you have the check along with the tax return that will be the end of the process if all the tax numbers are correct. If you did not pay, the IRS will send you a bill including non payment penalty (different from the non filing penalty which you managed to avoid by filing the return in time.)
Even if you don’t file the tax for a few years, the IRS will first ask you to file the unfiled returns. When they get tired of you, they will file one for you in the end. This is called substitute for return (SFR). Filing an SFR by the IRS is almost always detrimental to the taxpayer. For one, they treat you as married filing separate as far as the tax bracket that you fall under. This is the highest rate you can be subjected to. Additionally, they don’t take your expenses into consideration if you have any.
Once the tax is assessed and the demand for payment is made to no avail, the IRS starts to take collection actions against you such as filing tax liens as well tax levies eventually taking possession of your property.
A tax lien against your property does not mean that the IRS is taking your property; it means that the IRS is asserting its claim on such property. If you sell this property the IRS will take its cut first. Taking the property can only be made by tax levies or property seizure. The IRS has to wait only thirty days after filing the tax lien to take possession of the property.
Typically taking your physical assets is called property seizure. Taking your money from the bank is called a bank levy. Wage garnishment is called wage levy. By the way, the IRS does not have to go to court to levy your property.
How to avoid a tax levy on your property
The simplest answer is that you should take IRS notices seriously and respond to them. Easier said than done? Not quiet. Responding to IRS notices can help you dramatically if you know what you are doing. For example if you receive a threatening notice and you tell them that you don’t have money and indeed you turned out to be telling them the truth, the IRS may exercise some forbearance. They may stop levying action but may file a tax lien nevertheless.
Alternatively you may negotiate an installment agreement or an offer in compromise with a possibility of being declared as currently not collectible. Once you strike any of these agreements, the IRS will stop attacking you and you will keep your property, of course still subject to the tax lien. The IRS automatically files a tax lien when you owe more them twenty five thousand dollars or more of back taxes. Less than that may depend on who you are talking to at the IRS.
In summary, a tax lien is a mere claim on your property while you still have the possession of the property. Only if the IRS excites a tax seizure or tax levy will you lose your property.
Posted by Dean Alexander on Fri, Aug 27, 2010
Whether you have an IRS problem or not, you may get a notice from the IRS. The notice may be of no consequences such as correcting a $50 error on a tax return you have just filed. Sometimes the notices take gradual serious tones such a tax debt collection notice, a 90 day letter (no one likes this letter because it means you have to go to court to redress the harm of the 90 day letter) or now we have the punitive and ever frowning letters of Intent to Levy or a notice of Tax Levy or the ultimate nuclear notice of property seizure.
What should you do if you get an IRS notice?
The IRS publishes frequent tips about different subjects. On IRS notices here is what the IRS suggests:
1) The first thing they tell is don’t panic; yet these are the IRS words.
2) The notice will tell you about a specific issue such as correcting an amount. If you agree with the correction then ignore the notice and that will be the end of the story. If you disagree with the corrections then you must take actions. You may write the IRS at the address specified in the letter or you may call them if you think you need some urgency.
Under this category we may add CP 2000.
This form (CP 2000) is a form of income underreporting. You may have forgotten to enter a W-2 or a 1099 on your tax return. If you agree, just sign the CP 2000 and send it to the IRS. If you disagree, say so and you may be able to provide an evidence of the basis of the disagreement.
2) If you receive a serious notice of intent to levy, you must act quickly, otherwise they will either do a bank levy or wage garnishment or even levy of your accounts receivable with some embarrassing consequences with those who you do business with you. Usually a bank levy or garnishment is a statement by the IRS to come and do something about your delinquency. You need to file all your returns and then negotiate an IRS settlement.
3) Sometimes the notice ask you to file a missing return. Your response will be just to do that. File the late unfiled returns. If you don’t, the IRS may ultimately file a substitute for return for you with the adverse consequences. Every time the IRS files a substitute for return for you (SFR) you can bet that you are worse off. They will enter only the income without regards to any deductions that you may have. Additionally, you will be categorized as married filing separate which is the worst tax category you can be in.
So do not trash IRS notices. Respond yourself or have your CPA, tax attorney or your enrolled agent respond to them. Take action. Seek IRS tax help. You may be eligible for an Offer in compromise, Installment Agreement or Currently-Not-Collectible Status. Get tax relief and peace of mind. For more information on this subject see publication 594 (The IRS Collection Process).
Posted by Dean Alexander on Mon, Aug 02, 2010
If nothing dramatic takes place in the case of the famous actor Wesley Snipes, he will probably be headed to jail. The tax problem of Snipes is not unfiled tax returns. Snipes did not file three years of tax returns. The estimated tax that he owed was close to $3 million. Although the amount of back taxes that Snipes owed is rather large, we contend that his tax problem may have had a better outcome if his CPA or tax attorney interfered early on to save him from himself.
We have clients who come to us with as many as 10 years of unfiled returns. Yet, the IRS (which is not always guaranteed) does not press criminal charges against them. Granted, it is harder to reach an IRS tax settlement if you have not filed, but still, it is done everyday.
What then made Snipes IRS tax problem different? First off, the IRS uses celebrities to publicize its massive powers to go after people who owe back taxes to the IRS. Snipes is a big boy with a large tax debt. That leads us to the next point which is the size of his tax debt. Although alone may have not caused the IRS to press criminal charges, it is still a rather a large tax debt that generates its own dynamics.
The most important factor that contributed to the exacerbation of that IRS problem, however was not the size of the tax debt, or the fact that he was a celebrity. Willy Nelson was as big a celebrity as Snipes and his tax debt was larger, possibly several times the tax debt owed by Snipes.
The crucial tax blunder that Snipes committed was his challenge of the IRS on the legality of taxation. He became a tax protestor. As such he was exposed to the full wrath of the IRS and was hit with all the collection arsons the IRS has culminating in his criminal indictment and then into sentencing him to three years in prison.
Snipes could just as easily have paid his tax with one check or even negotiated an Installment agreement (most likely he would not have qualified for an Offer in Compromise; certainly not the Currently Not Collectible status.) In my opinion what he did was foolish and misguided but on the other hand he is unwarrantedly harshly dealt with. I understand that he offered to pay his tax debt. Three years in prison for some one who wants to pay for his mistake?
Lesson learned is that never take on a battle you cannot win. Tax protestors in our experience always lose. Don’t compound your tax problem. Instead seek tax relief and file all your unfiled tax returns. Your CPA or tax attorney may come in handy if you engage them early on.
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 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 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 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.