IRS Problems and Tax Help: Tax Lien or Property Seizure

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.

Tax Relief in Back Taxes

We always argue that not filing your taxes is bad and filing is good and smart, period. There are many benefits for filing all your unfiled returns and embarking on an action to resolve your IRS tax problem.

Any tax resolution or IRS tax settlement must start with filing your taxes. The IRS will not listen and will not play unless we file the back taxes. No Installment Agreement is granted. No offer in compromise or a reprieve in the Currently-Not- Collectible status will be considered unless your are in compliance. And what is compliance? It is filing all the unfiled taxes.

Many a times we are handling a wage garnishment case and about to close a deal with the IRS on the other line and lo and behold, here an unfiled tax year is found. The whole thing is dead in its track and the solution to your tax problem is delayed. Now we have to gather the data and prepare the unfiled returns while they continue to garnish and leave you with nothing to live on.  So, is it a good idea to file? You bet.

Filing is good because it puts you on the good side of the IRS.  You also may avoid a possible legal trouble. Many people have managed to recover refunds in the 11^th hour that would have otherwise lost to the statute of limitation for refunds.

Also remember that if you owe back taxes to the IRS, the statute of limitation for collecting your IRS tax debt is ten years. Those ten years do not start unless you file and the tax is assessed. If you file you may benefit of the collection statute of limitation and get lucky and get away with the IRS tax debt. Another benefit is that tax audit will be, limited to three years if you up-to-date on filing. Filing is good.

Many people dread to file because they are afraid to unleash the wrath of the IRS for the tax debt that they may owe. If you have a competent CPA, tax attorney or enrolled agent, you may be surprised that your situation may be much better than you think.  Seek a competent IRS tax help and start the tax relief process.

Do you have a story that supports this? Please share with us.

Which Tax Resolution Will Be Your Best Tax Relief?

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.

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.

Tax Help: Identity Theft, Cancellation of Debt, and Seizures (2 of 3)

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.

Tax Help: Identity Theft, Cancellation of Debt, and Seizures (1 of 3)

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.

IRS Tax Debt Collection Attempts - Is it a Levy or Property Seizure?

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.

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.