Articles Posted in Tax Problems

It has been become very common to hear news about occurrences of confidential information being stolen and used to steal a persons money by taking over the identity of that person. Most often the start of that process begins when sensitive data is stolen by a data breach. There are many forms of identity theft. For tax purposes, this occurs when a person or entity obtains your social security number (SSN), and uses that SSN number to file a tax return to claim a fraudulent refund claim. Unfortunately, this has been happening on a regular basis with both the IRS and state taxing authorities.

You may not know that your identity has been stolen for many months after the tax return is filed, and often you only find out when you attempt to file your real return and are told by the IRS that a return was already filed or the income tax return that was filed looks suspicious.

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The thieves are very clever. In the past, they would setup fake bank accounts to receive the  refund monies. As they have become more sophisticated they often use your real bank account information, and  then they contact you acting that they are from the IRS and telling you that they made a mistake, and to return the money (to a fake account). The phone calls from the thieves are very authentic, so many people are falling victim to this scam.

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.

From my experience, the IRS does make a strong effort to notify taxpayers when issues exist with their tax account. Most of the IRS notices are standardized forms that can range from you having unreported income to having a refund on your tax return that is different than what your tax return states. The IRS is very good about using the mail to notify taxpayers, so do not be fooled if a person calls you on the phone and acts like they are from the IRS. This is likley a person just trying to impersonate the IRS to steal your money. However, if you receive such a call, remain polite but do not give out any personal information. Since the IRS uses mail and a primary method to reach taxpayers, it is important to keep your address with them current.

a1-300x300Your response to the IRS issue contained in the notice needs to be tailored to the issues involved. Often, I find that you have to clear and concise when responding to IRS notices to make any progress in resolving the issue. If the notice relates to an unfiled tax return, the IRS notice will ask for a copy of the tax return filed, or why it was not filed (this could be because you had to  little income to cause a filing requirement). If you have many years of unfiled tax returns, its a good idea to hire a tax attorney to help file the tax returns and reduce the tax penalties.

If you ignore this request related to unfiled tax returns, the IRS will prepare a substitute tax return, using information that they receive from third parties (banks, employer W2 forms, etc.) to prepare the tax return for you. In some ways that may seem ideal, but this return the IRS will not allow a married filing jointly form of filing, or take into account any itemized deductions. Therefore, your tax bill will be higher than if you prepared and filed your own tax return.

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.

With the recent Equifax Credit Bureau identity theft event, and many prior episodes of personal identifying information being stolen (Yahoo, etc) that appears to happening all the time now, I thought an article would be helpful on how your tax returns are affected by such events, and concrete steps you can take to protect yourself (and your parents if they are elderly).

From my experience as a CPA and Tax Attorney, if you think you are completely protected from identity theft issues by hiring a credit monitoring company, you are partially incorrect. The value of these companies is that they alert you if someone has stolen your identity and used (or try to use) this information to obtain credit. The problem is that often that the notification of this is after the crime has occurred, and you still have to deal with the clean-up. You may be better off pulling your own credit report every four months (from the three free ones you get every year) and doing this work along with a credit monitoring company just to make sure its done correctly. This is also a good way to make sure that your credit information is generally correct, and you can dispute any incorrect items through the credit companies.

Tax-HelpFrom a tax perspective, the “bad guys” are using your social security number and other identifying information  to get tax refunds. They do this by filing false income tax returns with your information, and typically having the refund directly deposited into a foreign bank account they control. When this happens (per the IRS 14,000 times it was done in 2016), you typically only find out when you file your legitimate income tax return, and are told by the IRS that a tax return has already been filed, and a refund already issued. The IRS will not go after you for the false refund, but this creates a huge mess that you will be dealing with for 1-2 years. Well, the question is, how do you avoid such a mess? The IRS has a program where you can request a PIN that they would send you, and you would use when you file your income tax returns. The “bad guys” would not have this PIN, so they would be blocked from filing a false tax return. As with most IRS related matters it is not easy to get a PIN (hopefully this will change someday). To obtain a PIN, you need to file Form 14039 (Identity theft Affidavit) with the IRS, and request one. When you file this form, the IRS will also mark your account as having a higher risk of fraud, and keep an eye on it for you. In addition, you should also obtain and examine your IRS tax account transcripts and review the activity for filed tax returns and refunds. I would take this step every six months. Therefore, with the PIN filing method, and reviewing your account at the IRS twice a year, you should feel confident that you have this issue under control with them.

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On a regular basis (perhaps 4-5 times a month) a panicked person calls my office and explains that the IRS just called them and if they do not send them money that day, that they will be arrested and charged with a tax crime. In most cases the caller did not think they had a tax problem before the call.

In some cases, they do have a tax issue (such as unpaid taxes and a IRS tax lien was filed).  As most callers realize after I tell them it is just a scam and the IRS never calls and requests money that day. The IRS does have collection personnel, that are called Revenue Officers, but they never make such threats. They do visit taxpayers at their homes, and send letters. Obviously, if that happens you would want to get legal assistance if the debt is large (over $10,000). Do not be scammed by the fake IRS Revenue Officers. Since the scam has been going on for a few years, it must obviously be successful. If you are scammed contact the IRS and NY AG office. Since it seems like the elderly are the most frequent victims it would be a good idea for their family to have a conversation with their elder family member and explain that frauds like this happen, and they should call you before they send the caller any money.

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Often clients meet with us and they are suffering from a tax mess. The IRS (or NYS Tax Dept.) is pursuing them and they have often fallen behind in preparing tax returns or making tax payments. One aspect of a tax attorney’s job is to help figure out the mess and assist people with their tax problems. To that end goal, its important for potential clients to bring a summary of their tax problem. This could include information of the tax return years not filed, general approximate amount of the tax liability, and the type of taxes owed (income, sales tax, payroll tax). Along with this information, bring any letters you received from the IRS or NYS Tax Department. The value of the tax letters is that it states the amount of the tax debt, who it’s owed to, the tax years and type of tax owed. Most clients do not understand these letters, so bring them to the meeting and we can quickly gather that information. Its also helpful to have an idea of the value of your assets and the amount of debts you have. Estimates are fine, but this information helps us decide the best resolution of your tax case (i.e. a tax payment plan or an offer in compromise). On the flip side, it would not be helpful at the first meeting to bring boxes of information since we do not need all that details at this point. The overall key is to spend a few hours before the meeting to organize yourself and this will pay dividends at the meeting.

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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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It is easy to think the IRS is not an easy organization to deal with. From my experience, that is true most of the time. One aspect of their collection efforts where they do show kindness is when they view a taxpayer as currently non-collectible. What this means is that even though the taxpayer owes money they are unable to pay off the tax debt based on the taxpayers current income and expenses. From my experience, a taxpayer who makes less than $50,000 a year and has court ordered payment (such as past debts, child support) often falls within this category. The tax debt still accrues interest. However, the delay buys time to submit an offer in compromise to resolve the tax problem.

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We are all human and therefore prone to making the occasional mistake or two. This includes financial errors concerning one’s personal or business expenditures as well as tax-related faux pas. This is something that even the Internal Revenue Service acknowledges and seems to understand. However, depending on the type of mistake, the agency’s response may not seem very forgiving.

The IRS lists the following tax-related mistakes as being among the most commonly made by taxpayers.

  • Failing to provide or making errors when entering Social Security numbers
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