Articles Posted in Tax Debts

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.

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Under the newly enacted legislation, the Fixing America’s Surface Transportation Act,  a provision was included that allows the IRS to outsource the collection of tax debts under some circumstances to private debt collection firms. Anyone who has dealt with a private debt collection firm can understand why I think this is a bad idea, manly because such firms sole goal is to collect money, and other circumstances (loss of job, age, sickness, etc.) could be at play and discretion is required. Even the IRS’s own taxpayer advocate was against the idea of using private collection companies. You can read her letter here.

The use of private collection companies will follow a procedure of where they will typically contact the taxpayer by mail and try to establish a payment plan. From my experience, most people being pressured with a collection company will agree to a much higher monthly payment than what they can afford. These plans will then default due to missed payments and then its back to the collection firm to handle once again. Hopefully, the IRS limits the use of this collection tactic so as to not harm the public from over zealous tax collectors, and collects a fair amount through thoughtful collection means.

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Starting January 1, 2016, the Internal Revenue Service will be given the power under new legislation to deny, rescind, or limit a passport of anyone who owes the IRS more than $50,000. This threshold amount includes both taxes, interest and penalties. From a practical perspective, this threshold dollar amount is not  difficult to amass for the average self-employed taxpayer who can have tax rates close to 50% once social security taxes are factored in, or individuals with significant income. From my perspective, if the law was limited to criminal matters, it would make more sense.

The good news, is that the IRS will not rescind or hinder the ability of an individual to have a passport where 1) that individual has entered into an installment agreement with the IRS to pay the back taxes, 2) for humanitarian reasons, or 3) if the taxpayer is contesting the tax liability in Court or an administrative proceeding.  This new legislation will be under section 7345 of the tax code, called “Revocation or Denial of Passport in Case of Certain Tax Delinquencies.”

While different from New York States revocation of a taxpayers drivers license if they owe NYS taxes, it is very troubling nonetheless in that it restricts the ability to travel (or in NY’s case simply drive) which can directly impact a persons ability to generate income to pay for their tax obligation. I doubt this legislation will cause delinquent tax collections to rise dramatically, and may have the unfortunate impact of hurting taxpayers who are already hurting economically.

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When it comes to taxes, most Americans are looking for any and every way possible to avoid handing over their hard-earned dollars to Uncle Sam. While failing to file or pay one’s taxes is not an advisable means of accomplishing this goal; there are legitimate ways that one can deduct both personal and, if applicable, business expenses to reduce tax liabilities.

When it comes to personal tax deductions, there are certain deductions that anyone who qualifies can take advantage of. These include school supply expenses for teachers, alimony payments and interest on student loans. Additionally, self-employed individuals who contribute to their own retirement plan and pay their own health insurance can deduct these expenses.

In some cases, it makes financial sense for an individual to use a Schedule A tax form and itemize deductions. Such deductions may relate to medical expenses, gifts and donations as well as taxes paid on real estate, personal property and mortgage interest. When it comes to both standard and itemized personal deductions, it’s important to understand and abide by the Internal Revenue Service’s restrictions and rules.

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While there’s no way for an individual to completely avoid paying taxes, there are ways to cut and reduce the amount of taxes an individual owes. By being proactive and engaging in tax planning, an individual can often reduce his or her tax liabilities substantially. It’s important to note, however, that there are creative strategies that can be employed to reduce the amount of taxes one pays and then there are those that are questionable or outright illegal.

Simply failing to file and/or pay one’s taxes is never a good idea. Not only is an individual likely to accrue costly fees and penalties, but he or she may also face criminal charges related to tax evasion. Additionally, it’s never a good idea to file or submit tax-related documents that contain false or doctored figures. Again, an individual who under- reports the amount of income or overestimates deductions will incur costly fines and penalties and may face charges of tax fraud.

In cases where an individual learns that he or she is being investigated or audited by the Internal Revenue Service, it’s wise to contact an attorney. It’s especially important to retain a strong legal advocate and representative if an individual is concerned that an IRS audit or investigation may result in the discovery of questionable or illegal tax-avoidance activities.

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