Articles Posted in Back Taxes

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Tax Relief: If you owe the IRS taxes and presently are unable to make a payment in full to satisfy the debt and you have either assets or regular income to make good on your debt, you may very well be able to arrange an installment agreement of some form with the IRS. This page discusses the various types of tax relief installment agreements can provide and the conditions under which you may be qualified to obtain this form of IRS relief.

There are 3 main steps to set up an IRS installment agreement, each with its own special considerations:

Step 1: Before you can establish an IRS installment agreement:  First, file all your past tax returns

Due to a law passed by the United States Congress in 2015, the Internal Revenue Service must hire third party tax debt collection firms when they have unpaid taxpayer tax accounts that are not being worked on by the IRS collection group. These private collection companies are hired to either create tax payment plan with the taxpayer, or to gather financial information of the taxpayer to assist with collection activities (levies, liens, etc.). The payment plan through a private vendor would be similar to the payment plans that the IRS enters into, and as such would either be tailored to the financial issues facing the taxpayer, or be a payment that is spread over a certain term, such as a sixty or eighty four months’ time period.

IRS-building-300x200The inactive tax accounts subject to these rules include taxpayer accounts that have 1) been removed from active IRS collection inventory (for instance, they cannot locate the taxpayer), 2) where there is no IRS employee assigned to the collection case, or 3) at least one year has passed since the IRS collection group obtained the case, and it was not assigned to a revenue officer or other field collection person (for cases over $250,000).

If you have filed an offer in compromise, or some other collection alternative, your account will not be transferred to a third-party collection firm. Therefore, innocent spouse claims, deceased taxpayers’ debts, or cases that are being litigated or part of an exam, will be excluded from these rules, and only be subject to the normal IRS collection rules.

It is always better to file your tax returns, even though you can not pay the taxes owed since it lowers the failure to file penalty which can amount to about 25% fine. If the IRS owes you money, you will not receive the refund unless you file a tax return. If you do not file in three years from the tax filing date, your anticipated refund will be lost forever.

If you owe tax, the IRS will file a substitute tax return, at the highest tax rate possible. They will then take steps to collect the tax debt, even though it might be the wrong amount. The IRS often shares these calculations with the state tax authorities, and they charge a tax bill as well. The states also have the power to revoke drivers licenses for not paying your taxes, thus the penalties can be very harsh.

a5-300x300The penalties for not filing and not paying on time accrue until the tax is paid. There are limits, such as 25% of the tax owed for not filing on time at a rate of 5% a month, but overall the quicker you pay the taxes, the lower the tax penalties will be. Therefore, it best to reduce the tax penalties to avoid paying thousands more in taxes than what you would have owed.

Usually, the most panicked and upset clients call me and when they have not filed their tax returns in many many years, and are extremely worried that by this inaction they will be arrested, or worse thrown in prison. Occasionally, clients are audited for non-tax problems ( for example workman’s payment insurance, highway permits) by the IRS or State of New York, and the auditor makes the discovery that the taxpayer has not filed their income tax returns in a long time. This “great” discovery causes a lot of angst to the taxpayer, but usually the IRS and the States are not quick to press charges if the tax returns are filed quickly (see list below of action steps needed). Typically, you only have a criminal tax problem is you intentionally do not pay the right amount of taxes, so usually they issue is manageable. Therefore, non filing typically does not cause the same level of problems are actively avoiding paying taxes, and your almost never going to jail.  Please keep in mind, in New York State it is actually a felony to not file your income tax returns for at least three years in a row where you owe taxes for each of those years. It is not often that NYS Tax uses this law to charge a taxpayer with a crime, but I have seen it applied in hundreds of cases, so it is not overly rare that they do.

a7-300x300The IRS and NYS tax auditors normally take the approach of creating their own estimated version of the income tax return you failed to file (called a substitute tax return), and charging the taxes owed based upon their computation based on limited information. Please keep in mind they have no incentive to lower your tax bill, so their work is suspect. The crucial point is that the substitute tax returns tends to overstate the tax debt amount, since they give you no deductions and use  the highest possible tax rate. As they say, you never get something good for nothing.

The very long standing IRS’s voluntary disclosure policy applies to a taxpayer who: 1) Informs the IRS or NYS that they failed to file a tax return, 2) You make the disclosure prior to being notified by the tax authorities, or before you are under criminal investigation for failing to pay the right amount of taxes, 3) File the correct income tax come returns, and cooperate with the tax authorities (NYS and IRS) in ascertaining their correct income tax liability, and 4) Make full payment of the amount of the sales or income taxes due, or if are unable to make payment in full, to create a monthly tax payment plan for the tax balance owed.

In the event that you are in tough financial times that makes it difficult to pay your tax obligations, and this fact can be verified to the IRS that collecting from you will generate a monetary hardship, the IRS will place your tax account with them into a noncollectable position known by the IRS as conditionally “currently not collectible”. This status could be granted to both people and business corporations. Generally, this classification will be reexamined in one to two years to see if your finances have changed and you are collectable. Through the entire time that your accounts is deemed noncollectable, the IRS will not levy you or ask for payments. Most states do not follow this same rule, unfortunately.

a10-300x300In nearly all taxpayer situations, the IRS collects economic information of your noncollectable position simply by causing the taxpayer two complete comprehensive forms, which are forms 433-A, 433-B, and 433-F, that are used to verify your income and assets and your financial ability to pay your back taxes. These forms are actually challenging to complete properly since you wish to provide correct information used by the Internal Revenue Service to factor your ability to pay, while also making sure the payment plan is not to high in amount and you default it.  The factors the IRS considers is s persons age group, education level, their employment position, the cost of residing in the region of the country the taxpayer lives, medical problems, to name a small number of items they review. The IRS income uses countrywide and regional standards, consequently deviations from the standardized amounts have to be validated for every case.

The IRS defines financial hardship in perhaps a means that you’ll would not. If you don’t have any belongings, as well as your income is actually simply only plenty enough to cover your simple bills there is usually an excellent chance the IRS wouldn’t normally view your income as being a good levy source to focus on and you’d be deemed currently not really collectible “CNC”. For those who have belongings, or middle/high income, this will be more challenging to prove this position although having possessions or retirement assets may not result in not obtaining this status.  However, if the IRS recognizes you to be noncollectable, and you incur a fresh taxes debt, they will start collection activity again.

What you need to prepare for our first meeting really depends on your circumstances, but at the very least you should gather enough information, so you can answer help us answer these two questions. First , which tax return periods have not been filed (a range or estimate is fine), and do you have a general idea of what you owe and to whom?

a5-300x300The reason I need to have information to answer these two answers, and also as a way for you to come to grips with the issue and understand the problem that needs to be solved, is that the amount of tax debt you owe is very important (as I will explain later), and to who you owe it to drives the choices we have to offer to solve the tax issue. The reason the later question needs to be answered is that the various taxing authorities have different rules that they follow when deciding on how to handle a tax matter. For instance the IRS and NYS Tax Dept. have very different rules regarding establishing a payment plan, or filing an offer in compromiser. The amount owed is important, since a payment plan can be set up quickly (1-2 months), versus a offer in compromise settlement takes much longer (5-9 months). The solution required also depends on how old the tax debt is, and your finances. Overall, these issues are not easy, and that’s why we offer a free consultation so you get to know me, and also get some information related to how we would attack the issue.

Below is a list of some basic paperwork to collect before the meeting. Please be aware that we do not need all the letters you received, so a sample is fine since the IRS and NYS tax tends to send out many duplicate items over time. Here is the list.

It is always a good idea to understand how a tax debt may be relieved, and what options are available for you.

In most cases, the amount owed to the IRS is a money issue, and does not cross the line to being a criminal matter of being charged with tax evasion. The IRS will charge interest and penalties on the tax debt, so its critical to try to resolve the issue, through a settlement or quickly paying the debt, before the amount increases beyond your control. The IRS debt is special and should be thought of as having more issues than other debts since the IRS can take money from you bank account, or take your wages when you owe them, and they can do all of this without your permission.

a9-300x300The IRS trains their collection people well, so once they get assigned to your case there will be a lot of work to resolve the matter and they will make your life unpleasant. They will send a ton of notices, and even come to your home to interview you. Its best to be polite, but do not give them any detailed information and tell them you need to hire a tax attorney to resolve the issue. They will request financial information in the Form 433-A, which is for individuals, or the Form 433-B, which is the form for businesses. Along with these forms that will require the last six months of your bank statements, and information to verify your income and expenses, such as copies of bills, mortgage payments, pay stubs etc.

When a taxpayer can not pay the IRS a lump sum payoff for their tax debt, they need to create a payment plan with the IRS. There are a number of options to consider when the payment plan is established. Obviously, it is almost always best to create the lowest monthly payment plan amount as possible and then pay more to get the balance down quickly, but not be at risk of defaulting the payment plan if money is tight. Therefore, there a number of factors to consider to get the correct balance of paying down the debt quickly, and not having a future issue. As with other payment plans that you might establish with a creditor, the amount you will pay will depend on the amount you owe, the amount you can afford to pay, and what assets and income you have.

a10-300x300As an overview, the IRS has many programs that allow for payments of taxes over time. The payment plans are within the discretion of the IRS, which means they decide the amount per month they will accept. Often it takes a lot of hard work to get the IRS to agree on an affordable number. The IRS does not give much flexibility with the monthly payment being late once the payment plan is established. In some rare instances, the payments can fluctuate if the person or business has seasonal income, or income on a non-recurring basis, such a lawyer who gets paid on contingency basis.

There are three common ways that you can make payments under the payment plan.

When you have a federal income tax refund, that refund may in some cases be used to pay other unpaid debts. The United States Treasury Offset Program contains the tax rules of how and when your refund will be used against a debt. The Treasury Offset Program can use a portion or all of your income tax refund to pay against your state or federal debt, and the program is administered by the Treasury Bureau of the Fiscal Service.

Tax-HelpThe types of debts that the tax refund can be used to offset are numerous. The types of tax debts include 1) federal tax debts (income taxes, trust fund recovery penalties, etc), 2) Federal agency debts such as federal student loans that are outstanding (not in payment plan status), 3) unpaid spousal or child support that were crated by court order, 4) unpaid State tax obligations (income and payroll taxes), 5) State unemployment debts, and 6) unpaid shared responsibility payments for health insurance.

The IRS will notify an affected taxpayer by mail when they are using the refund to pay a certain debt listed above, and the State has a similar program. The notice will tell you the refund that you would have received, and the amount of that refund that is being used to pay the debt. The notice will provide which agency (state or federal) that is administering the debt, and also provide their contact information in case the debt amount is incorrect or not yours. It is important to only contact the IRS if the debt relates to a debt related to them, in other cases you need to contact the agency that is administering the debt. When you are disputing the debt, it is very important to keep copies of the dispute letters that you send them, and follow up each letter with a phone call to make sure your request is being acted upon.

If a taxpayer does not file an income tax return (IRS calls them non-filers), and the IRS deems that a tax return is due to be filed, the IRS will use the information it receives from third parties (employers, brokerage firms, mortgage lenders) and filed W/2 forms, Form 1099, Form 1098, and other similar income reporting forms, to prepare the missing tax return. The tax return is prepared by the substitute return group at the IRS, which is connected to the audit group. The tax return is called by the IRS a Substitute For Return (SFR).

tax-planning-300x263When the IRS prepares your tax return, they use the highest tax rate and do not include any tax credits you are entitled to. Therefore, the tax computed is higher than what it would have been if you prepared the tax return in most cases. They also treat married people as married filing separately, which also causes the tax rates to increase. They also exclude dependents, which causes a higher tax bill. 

When you don’t file an income tax return, there is no statute of limitations of when you or the IRS can file a tax return, or audit you. The typical rule is that the IRS can audit you for the last three years once you file a tax return, unless they find your income was materially under reported on a filed tax return and they can go back for the last six years. The IRS however, under the Internal Revenue Manual sections 412.1.3, says in general they will only prepare substitute income tax returns for the last six years. The six-year rule also agrees with the IRS policy for non-criminal cases of only looking for taxpayers to file for the last six years if they did not file for a longer period of time.

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