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.

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.

When a taxpayer asks the IRS to eliminate their tax debt through an offer in compromise, the IRS will look at the persons assets and past income to determine if there is a likely chance that the taxpayer will be able to pay back the total tax owed. In some cases, if the taxpayers income history has been variable, the IRS will want to get a portion of the future income above certain thresholds. This is known as a future income offset agreement. It is not a typical request but it is sometimes part of the settlement with the IRS. The good news is that this may cause the deal to be accepted by the IRS, so it is worth considering.

a9-300x300While this arrangement has certain complexities, the overall idea is that the taxpayer may be able to afford more in the future than what they show they can afford today (on a form 433(OIC), and within certain limits, that they can pay more than the total amount offered if it was paid overtime. While this money is not a certain guaranteed payment to the IRS, it may cause them to be willing to accept the deal with the hope that in the future they may get more. From my experience, the IRS will only look to the next few years, so it would not be the case that five years from now they are still trying to get money from you.

The taxpayer is looking to make a deal to settle their tax debt, so often these additional monies being paid to the IRS is workable to most people. As an example of this concept, say a person owes $100,000 in back taxes (including interest and penalties). They may be currently working and making $60,000 a year from their wages. They have a 401(k) retirement plan that is worth $20,000, but that after taxes are paid they will net about $11,000. It is clear that will not be able to pay back the whole $100,000 owed since the $60,000 in wages only covers normal living expenses. Say the person offer the value of their retirement account of $11,000 plus an additional $4,000, for a total offer of $15,000. It may be that the IRS accepts such an offer if it was made by someone in their sixties, but they would not if the person was forty years old. In the case of the forty year old, the IRS may accept the lump-sum of the $15,000 and then ask for twenty percent of the monies earned for the next three years greater than the wages of $60,000 a year. If the person makes, for instance, $80,000 for the next three years, the IRS would receive the initial $15,000 plus $12,000 ($80,000-$60,000 times 20%), or $27,000, in total.

If you own foreign assets, then you have certain US income tax filing rules that you must follow if the account balance in the account exceeds $10,000 (for instance the FinCen Form 114). The IRS filing requirement for foreign assets require that you disclose substantial foreign assets, and almost always include the income from the foreign asset in your US tax return. Once the account balance is over $10,000 USD, than you also need to review the rules and see if you need to file any other tax forms, such as the Form 8938 as part of your Form 1040 series tax return.

a7-300x300These rules are complex, so there are many taxpayer’s that never knew about these tax filing requirements, since they were not informed by the banks that held the asset, or their accountants. For these people, the IRS has a program that is helpful since it allows you to get back into compliance, avoid the penalties for late filing, and pay the correct taxes owed. The program is generally known as the IRS Streamlined Offshore Voluntary Disclosure Program (OVDP). It has one set of rules if you are a US resident, and another set of rules if you are not a tax resident of the United States. Filing under theses program has many complexities, so your submission has to be well thought out to get the maximum benefit. To complete the submission under this program, you need to disclose the last six years of balances of assets you owed overseas, and the last three years of income earned by filing a Form 1040X and FinCen 114. In general, the reduced penalty under this program is 5% of the asset balance, plus the taxes owed plus interest, for US residents, and a lessor penalty if you are a nonresident taxpayer.

The penalties you avoid by filing under these programs are very substantial, so it is worth investigating if these programs are a good fit for your circumstances. In certain cases, the failure to file certain foreign asset or income tax forms (such as Forms 8938, 5471, 5472, 3520, 3520-A) can result in a $10,000 civil penalty, up to 50% of the account balance per year for not filing the correct form. The IRS tends to be very harsh with penalties for foreign asset issues, so paying the 5% penalty (in most US resident cases) is often the wise choice for the relative certainty that it provides. The criminal penalties related to tax evasion, and filing a false return, typically would not be avoid by filing under the streamlined voluntary disclosure program since this program is for taxpayers who made an honest mistake, and not taxpayers who motive tax evasion.

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.

 

 

As you may have noticed, almost everything is being done online now.  From shopping to researching, communicating to anyone in the world – everything is going through the world wide web.  Now, even filing your taxes can also be done online through the E-file system!

We all know that the main idea behind doing things online or electronically is the accessibility and the convenience it brings to us. However, it also brings security risks if not done properly. If we are to apply this thought with filing income taxes, it means critical information is being made potentially public so we need to take steps to make sure the process is secure.  E-file systems brings convenience as the entire process is faster than paper filing which means you will save precious time. When E-file returns are processed with secure services (like tax professional use), it can also provide that security you need.  It saves you time with the entire process including obtaining the refund (if applicable) faster compared to manually paper filing.  Since you will be entering the information online, it means less errors since the e-file system checks your information with its database.  In terms of security, although some might feel that doing processes online is unsecure, for tax filing it is the other way around if done correctly.  More risk in terms of security is involved with the manual process as the papers or documents you mail the IRS can get lost in the mail and your personal information can be seen by anyone.

a9-300x300Another benefit of E-file is that you get to know if IRS the has received the income tax return as you will get a confirmation of both receipt of filing and the start of processing.  If IRS has not accepted the return you filed, then you will be notified within 24 hours with instructions on how to correct the return  so you can redo and refile your return. Last but not the least benefit to E-file is that it is environmentally-friendly – since it avoids all the paper involved with a paper filed return.

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.

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