Articles Posted in Tax Debts

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If you owe the IRS back unpaid taxes, chances are that you are feeling scared and powerless. But the good news is that even if you are partially in the wrong, you still have rights thanks to The IRS Restructuring and Reform Bill of 1998 and the more recently adopted Taxpayer Bill of Rights.

Under these policies, the IRS has to fully communicate with taxpayers and afford them “due process” rights before pulling one of the many levers it has to make a taxpayer’s life miserable. Understanding your rights can make all of the difference when dealing with the IRS and back taxes.

Your right to be informed. The IRS has a duty to explain exactly what you need to do in order to comply with the tax laws. You also have a right to have all decisions made about your tax account explained to you in terms that you understand. However, you can’t just ignore the IRS’s attempts to inform you.

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Denial, avoidance and procrastination are all activities in which an individual may engage when faced with something that he or she would rather not deal with or do. However, such coping tactics are almost always sure to backfire and make an unpleasant or difficult situation even worse. This is especially true in cases where an individual receives communication from the Internal Revenue Service.

Anyone who opens their mailbox and sees a letter from the IRS is likely to panic. Whether an individual chooses to throw the sealed envelope away or simply disregard its message, ignoring the IRS can end up costing an individual hundreds to thousands of dollars in fines and, in some cases, a whole lot more.

Annually, the IRS claims to send “millions of notices and letters to taxpayers for a variety of reasons,” some of which may be minor or even positive in nature. Even in cases where an individual knows that he or she failed to file or pay taxes or expects bad news, it’s important toopen an IRS letter or notice as soon as possible and to contact the agency with any questions. This is especially true in cases where an individual believes that the IRS erred and an individual plans to dispute the issue in question.

IRS has the responsibility to ensure that citizens pay their yearly taxes on time failing which the bureau has the authority to penalize and even imprison the defaulters. IRS tax debt relief is the process of debt reduction by enabling those who are under heavy tax debts. This does not mean that the tax defaulter is wiped clean of all his liabilities. It is just a means of helping the defaulter to pay all his debts in a convenient manner. a9-300x300IRS is forced to work out a solution with each tax payer to recover the pending amount from him based on the payer’s financial condition. In order to facilitate effective tax collection, IRS offers various tax relief programs to defaulted taxpayers. IRS offers these various tax relief programs to help defaulters in different ways and resolve their tax liabilities without having to resort to hard measures. Some of the common IRS tax relief programs are Offer in Compromise, Installment Agreement, and Currently not Collectible status.

IRS also offers income tax relief to payers affected by disasters. The law permits IRS to provide extended time to disaster affected tax payers to perform activities like filing returns and paying taxes when the original and extended due date falls within the disaster period.

There are many qualified and experienced attorneys who can liaison between the IRS and the tax payer to make the process of IRS tax debt relief easy. If you owe taxes or have any kind of tax problems, it is always advisable to go to an expert who can guide you through the system and negotiate with the IRS for the best deal.

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

In most cases, the amount owed to the IRS (“IRS Debt”)  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.

Once you owe taxes to the IRS, they have very specific criteria of what expenses they will allow over the long term when they determine how much they will ask you to pay back per month to repay the debt. To understand the process the IRS uses, it is important to realize they are trying to collect as mush as possible from you, and it does not always matter how much you can afford to pay. From the taxpayers perspective, the goal is to reach a payment plan that from a monetary perspective allows you to live your life in a reasonable manner, and pay down the debt as quickly as possible without incurring unbearable stress.

Tax-HelpOverall, the starting point to determine the amount of your monthly income you can pay each month is determined by the IRS by having you complete either a 433-A, 433-B or 433-F form. These forms are used by individual and business taxpayers. Completing these forms can be very tricky since the IRS does not explain their use in a clear fashion, and often if you just fill them out in good faith you will end up paying them a lot more per month than you can afford. When this happens, most people stop paying their current taxes correctly and the tax issue snowballs into a complete mess.

The IRS national standards for food, and misc. expenses, such as clothing are consistent across the country so that presents a practical problem if you live in an area of the country where the living expenses are high (for instance the metro NY area). There has also established national standards for vehicle expenses, out of pocket health care, and housing. For housing expenses, the IRS does refine the calculation to the state and county level, but in many cases that amount is less than the average person spends for housing. Since it is not easy in most cases to change your housing costs, this is an issue that is not easy to solve. If your costs are within the standard amount, the IRS will not question the expenses so you do not need to prove you paid it.

It appears that the credit bureaus may be changing their policies and removing tax liens from credit reports. Often, when a person has a tax issue that is greater than $50,000 (for their federal taxes), the IRS will insist on filing a notice of tax lien in the county that you reside. Having a tax lien on your credit report has a substantial negative impact on your FICO score, so it is great news that it may not be a factor considered by banks in the future. Just to be clear, this change does not impact that you actually have a lien, or that the IRS files a notice of the lien, it only impacts your credit score and credit report.

a8-300x301-299x300As background, the tax lien is public notice that the Internal Revenue Service has a lien against your real and personal property. There are a few methods to remove the lien. The most obvious is to pay the debt owed. Once you full pay the debt, the IRS typically removes the federal tax lien notice in 30 days from the date you paid off the debt.

When you are not in the position to full pay the debt, there are other methods to deal with the tax lien notice. The first is a federal tax lien discharge which removes the tax lien from a specific piece of property. For instance, say you have a piece of real property that is encumbered by a federal tax lien. You may ask the IRS to discharge that lien so you can transfer the property to another party, as part of a sale of that property. It can happen in instances where you have no equity in the property, but it best to get rid of the property since it costs to much to keep. The other method is to ask the IRS to subordinate the lien. The IRS lien subordination does not take the lien off the property, but it does lower its standing in line, so a superior bank loan can be ahead of the lien. This is useful since banks will insist on being first in line for the equity in the property in cases where they lend you money. Lastly, (but not least) is a withdrawal of the federal tax lien. The method may be somewhat moot now that tax liens may be falling off credit reports. This method requires asking the IRS to withdraw the notice of federal tax lien even though the debt was not paid. Often the IRS would agree to this once the tax debt amount went below $25,000 (if you already had a payment plan). This method was a result of the 2011 IRS Fresh Start initiative, and has proven to be very useful. Another variety of the same type of technique, would be when you never had a payment plan before, all your tax returns were filed, and your tax debt in total is less than $50,000. In this case, you would also need to be paying the IRS under  direct debit payment plan, and never had a payment plan before. If you meet all these requirements the IRS would typically not insist on having a tax lien filed.

 

 

A question I often get from clients with a tax debt is how long does the IRS have to collect the taxes I owe?

There is a statute of limitations on collection of taxes, and it is generally 10 years. Once that time expires, you are free from the remaining unpaid tax debt and the IRS cannot collect from you unless they go to court and create a tax judgement which is rare.

a3-300x150When I say generally they have 10 years to collect, there are a few issues on when the time clock starts, and what can cause the clock to temporally stop. The 10-year time window begins when the tax debt is calculated and billed by the IRS. This would normally be when you file a tax return, or the tax audit is finished. For example, if you do not file a tax return for the 2010 tax year, you would not be free and clear in 2020, but rather 10 years from the date the tax bill for 2010 is generated after you file the tax return, or the IRS files a return for you. With a tax audit, unless it is an agreed upon case, the IRS will propose an adjustment and then you have a right to appeal or petition tax court. Once all the legal process is complete, then the tax debt becomes official and the 10 year collection statute starts.

Over the years I have received many calls from surprised taxpayers that their debts written off, whether it be from home loan or credit card debt, created income that needed to be reported on the tax returns as taxable income. The basic theory for all taxation, is that if you are wealthier,  then there is a good chance you need to pay taxes on that wealth.

a5-300x150When a person borrows money and buys an asset (for a car or home, for example), they typically do not think if they do not repay that loan that it creates income, but under the tax rules it may. As an example, say you borrow $20,000 from the bank and buy a car. You run into bad luck,  stop paying the loan, and the car loan defaults and they take the car. After selling the cat, say you still owe $5000 on the loan after the car is sold. If they write-off the $5,000 it can create income since you received $20,000 and paid back $15,000, so you are $5,000 richer and that $5,000 of wealth is subject to tax. The tax form that you would receive in these cases is a form 1099-C, Cancellation of debt.

There are a few exceptions to this rule, for instance, if you are in bankruptcy or insolvent (assets less than liabilities) when the debt is written off. If either of these exceptions are your case, then the write-off of the tax debt would not be taxable. The lender also needs to be a commercial lender and not a family member or friend. If you fail to pay the family member or friend, then the write-off would be viewed as a gift from them to you. The other main exception is if you merely guarantee  debt, by co-signing, then if the main borrow defaults typically you did not become wealthier and you would not have to pay tax on that transaction. The last major exception is if under the terms of the loan, the only recourse of the lender has is to take back the property to satisfy the debt. They call this non-recourse debt, and a write down of non recourse debt is typically not taxable.

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Tax issues surround our daily lives, whether it is tax on your income or sales taxes you owe for your business. However, there are times in your life, whether its a sickness, divorce, death in the family, business problems, or just being busy,  that you overlook that there are income or sales taxes to pay. Therefore, it is always good to look back and try to determine if there are tax issues in your past that needs to be resolved now by creating a tax payment plan or filing an offer in compromise. Whatever the issue, a tax debt is never eliminated quickly. For instance, New York State typically has 20 years to collect on taxes that you owe to them. When a tax debt increases with time (due to penalties and interest for not paying on time), your financial well being only worsens and the tax problem only becomes more difficult to resolve. Its best to act quickly and to monitor your tax health. In general terns, the Internal Revenue Service has 10 years to collect the tax once they make an assessment, so this is both a Federal and State tax law issue.

The Issue of Unpaid Taxes and example of lack of contact

At my office about five times a year, I receive a call from a person who use to live in New York State, and then moved out of state many years ago. They call and tell me that there bank account was frozen by New York State, and the monies taken for unpaid taxes. Often, there taxes can relate to tax years ten to eighteen years ago, and involve a business tax debt (often sales taxes). The enforcement arm (i.e. collections department) of the New York State Tax Department does not spend time trying to contact the errant taxpayer, they just take the asset to satisfy the tax debt, so it comes as a surprise (emotional and financial) to the taxpayer that they have an issue. For these people, while they were troubled that their business failed, and leave the state, it only becomes worse to ignore the unpaid taxes since with penalty and interest I have seen tax debts of $20,000 grow to a few hundred thousand dollars. Therefore, it is important to stay in touch with the tax authorities, and provide them with current mailing addresses, so you are not blind sighted by a tax levy (where they take your assets). For the person who simply does not know if they have a tax issue lurking in there past, they can always call the state that they resided in, or the IRS, and ask if they owe any taxes, and also review there own credit report to see if that shows any tax debts.

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There are major differences in the way that the NY Tax Department and the IRS view a tax debt.

The NYS Tax Department, especially with unpaid sales tax, views the unpaid taxes as money that needs to be paid to them. They are less willing than the IRS to understand that a taxpayer will not be able to pay them back all the taxes, interest (in the 7.5% to 14.5% range) and penalties they owe. They want to be paid back in up to five years through a payment plan, even though legally they have twenty years to collect. When such a payment plan becomes impracticable since the monthly payments are not affordable, an offer in compromise may then be the best solution since I find that the offer in compromise group is willing to work out a fair deal to resolve the tax issue.

The IRS, on the other hand, is more flexible than NYS Tax Department since if you can prove to them that you only have enough income to pay basic living expenses (rent, food, transportation, etc),  they will allow the tax debt payment be differed until your income rises to a level where you can pay toward your tax debt and also pay basic living expenses. The IRS calls this “status” currently non-collectible, and it helpful even though interest (usually about 3-4%) is charged on the unpaid debt, since this status allows for a normal lifestyle and allows for greater planning to take place to resolve the tax debt through an offer in compromise. I have also found that the IRS allows for more flexible payment plan arrangements, such as tax payment plans that  take into account seasonal income issues (contractors, etc in the winter), and modified payment plan where for some period of time (six month, one-year, etc.) the payment is lower to allow the taxpayer to adjust their living expenses to enable them to make the payments. Lately, NYS Tax Department is less willing to entertain the modified payment approach.