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 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, 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.
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, Nov 19, 2009
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.