IRS Problems and Subsequent IRS Notices

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).

Offer in Compromise, Installment Agreement or Not Collectible?

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.

Back Taxes: The Case Against Not Filing

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.

Offer in Compromise or Uncollectible

Offer in Compromise (OIC) is the best thing since sliced bread. You owe $100,000 in tax debt to IRS. You make an offer for the debt settlement of $1,000 or even less and they accept it. How good is that?

Does it happen all the time? Not by far. Most offer in compromise applications are rejected. Who wins and who loses is what we want to talk about?

In any IRS negotiations, the outcome must be one of three, either an installment agreement, uncollectible status, currently not collectible (CNC) as the IRS calls it or an offer in compromise. In my opinion offer in compromise is superior to all when a taxpayer has the ability to choose either the OIC or the CNC.

Although, unlike the offer in compromise, uncollectible status requires you to pay zero, I still contend that the offer in compromise is superior to the non collectible status.

We frequently choose to seek an offer in compromise for our clients rather than the non collectible status, even when both are available to the client. Why would any one in his right mind choose to pay money for an offer in compromise when he or she could get away with zero? 

There are two main important reasons for that. The first is the penalty and interest. The second is that the uncollectible status can be an apparition which may be resurrected to torment you in the future. The key thing to understand about the currently not collectible is the word currently. It means although we, the IRS, cannot collect form you now, we have not forgot that you owe us money. 

The minute the IRS sees that you have a raise or some money is coming your way, they will summon the spooky ghost to knock on your door and demand everything; all prior taxes that you owed and then some. And then some? Yes and then some.  The IRS wants you to pay the tax debt, all the tax debt and the interest and the penalty thereon. My friends, the IRS computer has been ticking all along when they declared you CNC. They did not attack you but their computer is preparing for a day of reckoning.

Now, let me ask you a simple question: you have a tax problem of $100,000 and you have the option of paying $1,000 in an offer in compromise that will put the tax debt to rest once and for all. $1,000 will erase your name from among those who have an IRS problem for eternity. On the other hand, you can pay zero now as uncollectible but have Big Brother watching you for years to come, waiting to take your wallet. Big Brother smells the scent of money and he's coming your way, again. Need I tell how to cast your vote? Ok, take the offer in compromise, my friends and then dissolve your tax problems in the ether.

Offer in Compromise - 80% Rejected by IRS

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

Back Taxes - Unfiled Returns Versus Filing Taxes

We all know that with filing our taxes we will have to pay if we fall short on the payment of tax liability. In our minds it is usually a negative experience. Many people delay filing their taxes because they know they will have tax debt to IRS, ultimately incurring back taxes.

But the question is: Is this the smartest move? I would argue it is not.

Let us look at the advantages and disadvantages of filing late returns versus not filing taxes at all.

Let us see if there are any advantages of filing returns in time. 

1. The intuitive thing is that you are complying with the law and avoiding negative consequences that can be serious, like being accused of fraud. So in that sense, filing may only bring one thing, peace of mind. To many, that may be enough.

2. Sometimes people have unfiled returns so as not to owe taxes but they did not get around to doing it as time goes by. The greatest harm is when they are due a refund that they will not be able to collect because they are barred by the refund statute of limitation. I have seen people lose thousands of dollars in one year because they neglected to file. Ask yourself this:

How long does it take to collect the information and prepare the tax return. Eight hours?

Is working eight hours worth losing three, four and even as much as five thousand dollars?!?!

How many times can you make five thousand dollars in one day? It is a crime not to file if you're entitled to a refund. Always remember that you will make two or three thousand dollars in the few hours that it will take to prepare the return if that is the amount of refund you will get.

3. Protecting the collection statute of limitation. If you filed the tax return and the IRS did not audit you, they can no longer audit your return after three years. Also, if you filed and you owe taxes $10,000 or even $100,000 and for some reason the IRS could not collect the tax debt, then you may have just avoided paying a tax owed to Uncle Sam.

4. Sometimes your CPA, your tax attorney or tax professional will be racing against time to file the unfilled tax returns in order to negotiate an agreement such as Installment Agreement, Uncollectible Status, and Offer in Compromise or remove a tax levy or garnishment that is crucial to remove quickly. Had the filing been done previously, the thrust of the effort now on the negotiation. By not filing the returns, sometimes you may have to wait more than three months before the IRS posts those late returns.

5. IRS employees may be more lenient when you negotiate if all taxes are filed.

6. Finally, If you don't file, the IRS may file taxes on your behalf. They call them substitute for returns or SFR. You are always worse off, when IRS prepares your taxes. For example, if you sold carpet for $100,000 and they discover that, your income in their books is $100,000 never mind that you paid $80,000 to buy the carpet. They are not going to volunteer to acknowledge your expenses.  The hammer is falling and falling hard. Claim your deduction, Mr. (or Mrs. to be politically correct)

Now, let us look at the benefit of not filing the tax returns.

The one obvious benefit is that you don't hear from them as long as they don't discover you. For how long do you have to hide from them? Forever!!

Remember what we said when you file? Do you remember that we said you only have to hide 10 years?

Let us see what are they going to do if filed the tax returns and what also let us take a look at what they will do if you don't file and you don't have money in either case. Has anyone told you about the blood from the turnip?

If you don't have it, you simply don't have it. More over they may willing even to forgive the debt if prepared properly if you had filed the return.

But if you don't file, have money or not have it, they may send you to the slammer. This is just an example.

File. Would you? There is a solution for everyone.

IRS Tax Help News

WASHINGTON - Individuals e-filed a record 95 million federal income tax returns during 2009, up almost 6 percent from last year's total of nearly 90 million. About two out of three taxpayers e-filed this year; out of the 141 million returns filed so far this year, over 67 percent were e-filed, compared to 59 percent last year.

Each year, more taxpayers chose to e-file their tax returns. While the total number of tax returns has increased 10 percent during the past decade, the number filed electronically has increased by 168 percent. Taxpayers who e-file from a home computer continue to be an increasingly significant segment of those who e-file.

 

Year   Filed	Total Returns	e-Filed  Returns	Percent e-filed
2000	128,430,000	35,412,000	27.57%
2001	130,965,000	40,244,000	30.73%
2002	131,728,000	46,892,000	35.60%
2003	131,557,000	52,944,000	40.24%
2004	132,200,000	61,507,000	46.53%
2005	133,933,000	68,476,000	51.13%
2006	136,071,000	73,255,000	53.84%
2007	140,188,000	79,979,000	57.05%
2008	153,650,000	89,853,000	58.48%
2009	141,376,000	94,980,000	67.18%

Home Computer e-Filers

This year, for the first time, more than a third of e-filers are filing their returns themselves from a home computer. More than 32 million returns were e-filed from home computers, up almost 20 percent from last year's record of 27 million. People filing from their home computers account for about 34 percent of all e-filed returns from individuals.

Direct Deposit Refunds

Almost 73 million refunds were electronically deposited into taxpayer's accounts, saving the government mailing costs and saving taxpayers a trip to the bank. More importantly, these taxpayers received their refunds at least a week sooner than those receiving a paper check.

These direct deposit refunds accounted for 66 percent of all refunds, up from 62 percent of refunds last year. Overall, the IRS issued 110 million refunds, averaging $2,753 per refund; direct deposit refunds averaged $2,997 per refund.

Free File

More than 3 million taxpayers filed their tax returns for free through the IRS Free File program. This year for the first time, taxpayers could also file directly to the IRS by completing a Form 1040 on IRS.gov; 273,000 taxpayers used this new way to file.

 

2009 FILING SEASON STATISTICS
Cumulative through the weeks ending 10/17/08 and 10/16/09
Individual Income Tax Returns	2008		2009		% Change
Total Receipts	153,650,000		141,376,000		-8.0%
Total Processed	152,759,000		140,718,000		-7.9%
E-filing Receipts:
TOTAL	89,853,000		94,980,000		5.7%
Tax Professionals	62,932,000		62,786,000		-0.23%
Self-prepared	26,921,000		32,193,000		19.6%
Web Usage:
Visits to IRS.gov	323,463,010		266,631,821		-17.57%
Total Refunds:
Number	106,200,000		110,071,000		3.6%
Amount	$251.827	Billion	$303.069	Billion	20.3%
Average refund	$2,371		$2,753		16.1%
Direct Deposit Refunds:
Number	66,240,000		72,717,000		9.8%
Amount	$179.708	Billion	$217.915	Billion	21.3%
Average refund	$2,713		$2,997		10.5%

IRS Tax Problems Can Go From Snowball To Avalanche

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:

1. "Know-er"
2. "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.