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 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 Wed, Oct 07, 2009
There are countless types of tax problems that a taxpayer can possibly encounter during their lifetime. Some of these people are fortunate enough to not face them while other people deal with tax problems that ultimately control how they live. I'd like to discuss the latter taxpayers.
Those with tax problems can logically be classified as one of two types of people. The two classifications are:
- "Know-er"
- "Didn't Know-er"
I will explain who a "Know-er" is, which should give you an idea of who a "Didn't Know-er" is until I come back and discuss, but first want to note that as you read about the "Know-er", do not believe that one classification is better than the other. Both types believed that they made the correct and logical decisions that were necessary at certain points in their lives.
"Know-er"
Who's A "Know-er"
The "know-er" is a taxpayer who owes federal or state taxes because they did not file their tax returns in prior years. These people did not have bad intentions by any means whatsoever; what happened was their snowball became an avalanche.
Common Way A "Know-er" Ends Up With a Tax Problem
In 2005 Brian was an owner/operator of an 18-wheeler. Many companies contracted him to transport their goods throughout the southern United States. At the end of the year, each company (let's say 3 of them) mailed him a 1099. This means that Brian is responsible for paying taxes on that amount because no taxes were taken out by the company at any point during the year.
Brian knows that because he gets a 1099, he is considered a self-employed person. He knows he can make more money, which means he pays higher taxes, and also is aware that he can deduct a large amount of expenses he incurred while driving his 18-wheeler. All he needs to do is figure out how much he spent during the year. Brian believes that the best way to do that is order the last 12 months of bank statements and spend a Saturday and Sunday coming up with the numbers. He's estimated that it will take him a good 7 - 10 hours to do.
Let's fast forward this example and assume Brian was busy every weekend because a new company wanted him to travel on Saturdays and Sundays. It's now the end of 2006 and it's tax time again. Brian believes that before he can do 2006 tax returns, he needs to file 2005. It's gonna take 7 - 10 hours for 2005 and probably the same amount of time at the least to get the expenses for 2006. The vicious cycle has begun...
Brian's tax problem has now taken a life of its own.
Why Is A "Know-er" Called A "Know-er"
You read the example. Great. Now you may be thinking to yourself, "I see the example is a realistic one but how does that relate to this category?" Let's address that.
Brian did not file his 2005 tax return and there is an even greater chance he doesn't file his 2006 taxes as well. The IRS has not contacted him for any reason during those years but he just received an IRS letter asking him to pay a tax debt they have determined for him before they take actions to collect like a tax lien or a bank levy. Although initially shocked when reading the letter, he knew it would come soon enough. In fact, Brian knew from the start if he didn't pay his taxes he wasn't going to go unnoticed forever.
And that is what a "Know-er" is
If there are some out there who would like me to elaborate on who a "Didn't Know-er" is just let me know and it'll be up in no time. In fact, if you have any questions or comments about tax relief or tax debt don't hesitate to post to the blog.