Posted by Dean Alexander on Wed, Sep 01, 2010
If you have an IRS tax problem you have one of three tax reliefs, first is an installment agreement, the second is currently not collectible status and the last and possibly the best is offer in compromise.
Like everything else in life, good does not come in cheap. Some estimate that only 13% of the offers are accepted by the IRS. We will venture and put this anemic result under three reasons:
First reason is reluctance from the IRS itself. The IRS acts as though this money that pays for the program (or the money forgiven) is paid for by the flesh of its employees. We have seen offers killed by the IRS even though the amount was agreed upon just because the taxpayer did not file a 1099 some years past; some excuse for rejecting an offer in compromise!
Second reason should be attributed to those who prepare the offers and counsel the taxpayers. Some of the preparers such as CPAs, tax attorneys or enrolled agents do not take the time to think the offer through and do the proper calculations.
One of the reasons tax practitioners submit offers that are constantly rejected is an erroneous commitment to their clients that they qualify for an offer in compromise when they should have been told that they do not qualify in the beginning. Practitioners submit offers to summarily dispose of their obligation to the client knowing that the offer will be rejected or worse yet having no idea if that offer is good or not.
The third reason rests with the taxpayer themselves. When people have a tax debt to the IRS, or owe back taxes, the first impulse is to shrink and hide everything. This may sound intuitive but in fact this may cause them not to qualify and thus they are denied tax relief that was within their reach.
We know that to qualify for an offer in compromise we look at both your assets (what you own) less any loans on those assets. If you have a house worth $100,000 and the loan is $101,000, you are upside down on the house and you own nothing and the IRS will treat you as such. So, if they look for assets you have got none.
The other things that the IRS looks at are income and expenses. If your income is less than expenses (the expenses that the IRS allows you to claim) you have no ability to pay. Thus if you have no assets and you have no extra money from your income, you are a good candidate for an offer in compromise.
The emphasis that we would like to make here is on the expenses and how taxpayers approach it. Taxpayers, in general, believe that the poorer they look the better off they are in handling their tax settlement with the IRS. This is generally true most of the time but not all the time.
Let us give an example. Sometimes a taxpayer prefers to drive a beat up car to show the IRS how destitute they are when in fact they are better off if they had a new car! Strange as it may sound, it may be the only way that will allow an offer in compromise to be accepted.
Let us assume that a taxpayer has an IRS debt of $15,000. Let us also assume that the taxpayer makes $3,000 a month and has no car payment but drives a 1985 beat up Dodge that breaks down every day.
Let us also assume that when we added the expenses for the taxpayer the total came out to be $2,700. If we submit the offer in compromise like this the IRS will reject it and will say that he can pay $300 a month against his IRS debt of $15,000. They have 10 years to collect $300 per month. So they know they can collect from him up to $30,000 in those 10 years.
Now let us assume that the taxpayer wanted to go in style and buys himself a brand new Toyota with a payment of $350 a month. That puts the taxpayer in front of the IRS with a negative cash flow of $50 and hence allows him to qualify for an offer in compromise which means he will pay some dollar amount that could be as little as say $100 (can be anything but zero) to settle his back taxes of $15,000.
In summary, sometimes you are better off if you live your life naturally even though you are getting ready to submit an offer in compromise. Machination may adversely hurt taxpayer in settling their IRS debt.
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 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, 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 Wed, Jul 28, 2010
Payroll taxes is the worst tax debt you can owe to the IRS. Your tax problem is magnified by the fact that payroll taxes are not personal taxes or even corporate taxes that you or the corporation pay out of pocket to finance public policies. They are taxes taken from others and given to you to deliver to the IRS. I guess that is why they call them “trust fund.” For some reason those payroll taxes were not delivered. At the end of the year, your employees will file their personal income tax and send the W-2’s along with them and they will request the refund. The IRS will have to pay them their refund even if they never received the money from you. You get the picture. That will make them mad, of course. Did you intend to willfully choose to ignore the tax law and to incur tax debts to IRS? Most likely not. You just got caught in a cash flow problem threat which became an IRS tax problem. Does the IRS care that you did not mean to use the trust fund? Probably not.
The IRS will deal, most likely, harshly with you if that tax debt ever became excessive. They will hold you personally liable for the tax debt. Your company tax problem is not only a proprietorship or a corporate tax problem but also became an individual tax problem. The tax problem has mushroomed into tax problems.
The IRS will issue a bank levy your account as they will the corporate account. They will garnish your wages if you become an employee of someone else and still owe those back taxes. The bank levy and the wage garnishment are not the only manifestation of IRS anger. They may attach among other tax penalties hefty civil penalties. Is their a tax resolution to this tax problem? The answer is like anything in life, there is always a solution hanging out there; tax problem or no tax problem.
The proposed IRS settlement will be one of the traditional tax resolutions we have enumerated previously such as Installment agreement (IA), Offer in Compromise (OIC) or to be declared Currently Not collectible (CNC) by the IRS. After you obtain tax representation the question will be: which flavor would a CPA, a tax attorney or an enrolled agent propose as a tax relief? The tax relief will depend on your financial situation. The worse it is the better the tax resolution to your tax problem it will be.
The best tax settlement to your IRS debt probably will be a minimum amount of an Offer in Compromise, if you qualify. This will be an ideal tax help or tax relief for your IRS debt. The worst tax resolution is payment of the full amount of IRS debt which will include the penalty and interest. This solution is an Installment Agreement. Obviously, your CPA or your tax attorney will prefer to provide a better tax relief but they may have no choice because of your financial situation. You may have to accept this tax solution as the best tax help available at that time. Certainly such an IRS settlement can be renegotiated if your situation changes in the future.
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, 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.