Posted by Dean Alexander on Wed, Aug 18, 2010
It is not a secret that the IRS can seize your property if you owe back taxes. But people always ask a question with regards to their primary residence. Can the IRS levy my house? The short answer is, yes. The question that must follow quickly is, but why?
Let us just speak of some details about seizures of your residence and then answer the “but why.” To begin with, the IRS cannot take your house if your tax debt is less than $5,000. Furthermore the IRS cannot summarily levy your house without a court order. You know that the IRS has such a massive power (they ought not) that they can issue a bank levy or wage garnishment; especially a bank levy without a court order. This is not the case with regards to your personal residence. They have to take permission from the court.
Now we come to the question of why would the IRS seize your personal residence? We should ask the question in a better way; why would anyone let his tax problem fester so long that the IRS seizes his or her property? If you have good tax representation all along this should not have happened. If you have a good CPA or a tax attorney, you should have been responding to the different circumstances and your tax settlement should have reflected your situation no matter what that situation was. This is true across the board except in criminal cases.
Let us now discuss what we are saying: we are saying that a tax problem should not have advanced so badly that it causes you to lose your house. Tax relief should have come way earlier. We would like to make a statement that we will defend as we progress in this blog. The statement is (please try to remember this all the time) you cannot have a tax problem without a tax solution. Every IRS problem has a solution. Here are the examples:
Mr. Destitute owns a home fully paid for but no cash to pay for his back taxes of $200,000. Do we have a solution? The answer is yes. The solution is possibly Currently-Not-Collectible.
Mr. Destitute number 2 owns a house. His mortgage equals the fair market value of the house (no equity) and no cash flow to mention to pay his tax debt of $200,000. There is a solution which may be either an Offer in Compromise or Currently Not Collectible.
Now Mr. or Mrs. Destitute are no longer Destitute and they are making good money every month and have a house paid for. Again we have a solution for this lady or the gentleman as well. It is an Installment Agreement.
So, as you see there is a solution for your tax problem if you have asset (house paid) for and no money such as Currently Not collectible. There is another solution for your IRS problem if you have no equity and no monthly income which may be an Offer in Compromise or Currently Not collectible. Finally if you have assets and you have money there is always the good old Installment Agreement.
The only exception that bars you from tax relief may be a criminal case where no Offer in compromise, no Currently Not collectible status or Installment Agreement is available to you.
Posted by Dean Alexander on Wed, Aug 04, 2010
It may be advisable before you start submitting your data to an IRS Agent in an IRS audit to know taxpayer's rights:
1) You are entitled to IRS representation. You can have a CPA, a tax attorney or an IRS enrolled agent to represent you in your tax audit. If it is an individual tax audit, you do not have to face the IRS auditors and answer their questions. It is your right. Your CPA or representative can answer on your behalf after interviewing you. If you are a business entity, you can avoid the personal interview but the agent has the right to tour the place.
Touring your place of business is significant.
The IRS Auditor is sniffing and observing. He looks at your inventory; he sees how many people you have and so on. This observation can help him determine the level of activity and perhaps the level of income and the type of expenses he will expect to see in your financial statements. Obtaining tax help in this regard will be a good idea. A competent CPA is valuable IRS help in this regard.
It must be said that that IRS representation is not absolute right. If your tax attorney, CPA or enrolled agent unnecessarily delay dispensing of the information requested to conduct an IRS audit, the IRS has the right to contact you directly. The auditor must however, obtain his group manager’s approval before he takes this step.
2) IRS audit should not be more than once for the same tax year. They should not look at the books several times. They can handle the same year relating to an assessment of some tax problem such as assessment of additional tax deficiency, correcting mathematical errors or a claim of refund by the taxpayer. Taxpayer should not be audited on the same item more than once if the audited items did not result in any adjustment against taxpayer.
3) You also have the right to obtain taxpayer information about you in the IRS records under Freedom of Information Act. The IRS may have the right to withhold some information that it deems exempt from FOIA but generally you are entitled to see your records and identify any tax problems you may be facing or may be brewing. This right also applies to any IRS settlements relating to tax collections.
4) Taxpayer in a tax audit is entitled to an explanation of the tax audit process including tax audit appeal. Typically the agent will hand you a brochure explaining the taxpayer's rights and the tax audit process.
5) Finally, the taxpayer is entitled to what is called Taxpayer Assistance Order (TAO). This order is issued by the Taxpayer Advocate. Many times the issues that you cannot resolve through the normal channels can be resolved by the Taxpayer Advocate. The Advocate knows how to navigate the IRS and can solve the IRS tax problems faster and perhaps more equitably.
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, Jun 28, 2010
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.
Posted by Dean Alexander on Thu, Dec 10, 2009
Let us start by defining what an offer is. An offer is one of three solutions, no fourth (unless you pay the full amount of debt in cash.) If you have a tax problem with the IRS, you will end up doing either an installment agreement, seek to be declared uncollectible or non-collectible classification as sometimes they refer to it, or make an offer in compromise.
Offer in compromise is then one of IRS debt settlement solutions whereby we offer IRS an amount less than what you owe. The question is how much and how do we determine that? In general, you must think as follows: The IRS will not accept any amount less than they can grab from you. IRS is not in the business of charity. I have seen IRS seizure of cars of people who are on social security and have kidney failure!! Ruthless? In this instant, yes. Is there a way to avoid this? Of course, and that is another animal unto its own.
So, we offer the IRS what they think they can take. If we have $500 that they see in our bank we must offer them that plus any thing else that they see we have equity in. To calculate the equity, we will only offer them 80% of the fair market value of the assets that we are reporting minus liability on it.
Here's an example:
John is unemployed with no income and owes the IRS $150,000. He has $750 in the bank. He owns his house with a fair market value of $100,000. The loan on the house is $75,000. His equity on the house according to this calculation is $25,000 (value of $100,000 minus $25,000 loan.) So, at first glance one may think that we should offer IRS $25,000 for the equity in the house and 700 for what we have in the bank for a total of $25,700. Correct? If you have done that, I have a water front property in Arizona, as they say to sell you. If we were to do that offer we will make an offer on the $150,000 IRS problem for only $5,700.
How did we figure the $5,700? Remember that I said that we will offer IRS only 80% of the fair market value of the house. Since the fair market value of that house was 100,000. 80% of this amount is $80,000. Since we don't own the house outright and that the bank owns $75,000 in that house (the mortgage amount), what is left really is 5,000 after the bank gets his cut and title company when well the house. Add $700 which is in the bank to the offer of $5,000, that brings the offer to settle amount owed to IRS for back taxes to $5,700.
Notice in the example above that I said that John is unemployed. I did that not make an assumption that the IRS feels sorry for unemployed folks and thus accepts lower offer in compromise just for that, but the purpose was to say that he has no income that the IRS takes a stab at, either voluntarily or via income and wage garnishment.
So, now we are ready to give John some monthly income to make the picture more realistic. Let us say that John makes $5,000 per month and his expenses are $4,900 a month. That means he has $100 to spare every month. Does the IRS look for an amount as little as $100 per month. You bet. You will be surprised to know that the $100 a month could be worth $12,000 of debt owed to IRS, more of explanation to come later. Let us assume that the collection statute of limitation is still available in full to the IRS (10 years in which the IRS can chase the takes payer.)
In this case the IRS looks at the $100 as I stated above to be worth $12,000. How is that? $100 of monthly surplus means $1,200 a year. Since the IRS can take this amount via wage garnishment or by a negotiated settlement for 10 years then you are looking at $12,000. In this instance, John who has owes IRS 150,000 for back taxes and has a house worth $100,000 and $700 in the bank, we can offer the IRS the following:
Amount from house equity as we explained $5,000
Amount from $100 monthly surplus that we must offer 12,000
Amount we currently have in the bank 700
The total for the offer then must be $17,700
To summarize, our offer now is composed of amount of income over expenses and the net assets.
More to come on following blogs
Posted by Dean Alexander on Thu, Oct 08, 2009
The IRS examines (audits) tax returns to verify that the tax reported on that return is correct. Almost everyone cringes when the word "audit" is introduced in conversation, formal or not. Although I am classified as the latters I just mentioned, selecting a return for examination does not always suggest that the taxpayer made an error or was dishonest. In fact, some examinations result in a refund to the taxpayer or acceptance of the return without change.
The overwhelming majority of people file returns and make payments timely and accurately. As such, they have a right to expect fair and efficient tax administration from the IRS, including verification that taxes are correctly reported and paid. Below describes some fundamental rights taxpayers have when dealing with the IRS. We'll move to the "meat & potatoes" afterwards.
Taxpayer Rights
The IRS trains its employees to explain and protect taxpayers' rights throughout their contacts with taxpayers. These rights include:
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A right to professional and courteous treatment by IRS employees.
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A right to privacy and confidentiality about tax matters.
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A right to know why the IRS is asking for information, how the IRS will use it and what will happen if the requested information is not provided.
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A right to representation, by oneself or an authorized representative.
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A right to appeal disagreements, both within the IRS and before the courts.
The purpose of throwing the above points in this article before discussing anything else is because many of you reading this are currently dealing with a tax problem or debt and may even have been selected by the IRS for examination. These points also serve as key things to remember when dealing with the IRS.
Should you decide to discuss your tax issue directly with the IRS, no matter how intimidated you get and regardless of how difficult it is to produce documentation their requesting, ultimately, the system is built on ethical grounds. Of the hundreds of publications the IRS have, those bullets can be found in the first publication. Publication 1: Your Rights as A Taxpayer.
Before ending the article, as the title states, below is how the IRS selects tax returns to audit.
How Returns Are Selected for Examination
The IRS selects returns using a variety of methods, including:
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Potential participants in abusive tax avoidance transactions - Some returns are selected based on information obtained by the IRS through efforts to identify promoters and participants of abusive tax avoidance transactions. Examples include information received from "John Doe" summonses issued to credit card companies and businesses and participant lists from promoters ordered by the courts to be turned over to the IRS.
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Computer Scoring - Some returns are selected for examination on the basis of computer scoring. Computer programs give each return numeric "scores". The Discriminant Function System (DIF) score rates the potential for change, based on past IRS experience with similar returns. The Unreported Income DIF (UIDIF) score rates the return for the potential of unreported income. IRS personnel screen the highest-scoring returns, selecting some for audit and identifying the items on these returns that are most likely to need review.
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Large Corporations - The IRS examines many large corporate returns annually.
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Information Matching - Some returns are examined because payer reports, such as Forms W-2 from employers or Form 1099 interest statements from banks, do not match the income reported on the tax return.
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Related Examinations - Returns may be selected for audit when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for examination.
Other - Area offices may identify returns for examination in connection with local compliance