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.

Typically, when you owe a creditor, such as a credit card company, and you have an unpaid balance they would have to go to court and get a judgement against you before they could take steps to take your assets to pay the unpaid balance. Unfortunately, this same legal mechanism is not in place for tax debts owed to the IRS and the States. A tax lexy is a tax collection tool available to the IRS and the States where there is an unpaid tax balance owed, but it does not require court intervention. Technically, a tax levy is a seizure of your assets to pay back taxes owed. The tax levy is difference from a tax lien (or tax warrant), which does not require the taking the assets, but is a lien against your property (for instance your home), similar to how a bank would have mortgage against your property for the balance you owe to the bank. However, a tax lien will affect your FICO score in a very substantial negative way, so it is not harmless.

a1-300x300Before your assets can be seized by the IRS, typically you have been given a fair amount of warning that a tax issue exists. The first step is that the IRS will assess the taxes, either from a tax return you filed, or if you did not file a tax return they would prepare a substitute tax return for you. They will then send you a tax bill and demand payment. They will usually send out three bills, over a 90 day time period. If that tax bill is not paid, your account will go into collections and they will issue a CP504 letter (notice of intent to levy). Even at this stage, the IRS is not levying your assets. If the CP504 letter is not responded to, then they issue a CP90 Notice, that is also known as a Notice of Levy. If that demand letter is not responded to, they have a right to levy and take your assets.

The assets that the IRS and States most likley to levy are wages, bank accounts, physical assets, social security, accounts receivable, and vehicles. From a collection perspective, the IRS will use the levy mechanism that will produce the quickest and easiest method to get your assets to pay off the tax debt. For wage garnishments, they would notify your employer of the tax debt, and under the law in most cases can receive a substantial amount of your salary, often leaving the taxpayer with not enough money to pay their bills.   For bank levies, the IRS contacts your financial institution and tell them to put a 21 day hold on your account. The hope is that during those 21 days an alternate payment mechanism can be worked out with the IRS, such as a payment plan. If that does not happen, at the end of the 21 days they take the assets in the  account to pay the balance owed. For assets seizures (cars, motorcycles, boats) the IRS can just seize them and sell the asset to pay down the debt.

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.

The IRS appeals function has the mission of attempting to resolve tax disputes between taxpayers and the IRS by negotiated settlement discussions rather than litigation. Since tax litigation is very expensive, the IRS appeals process is a very useful tool to help resolve tax disputes. Today, in our society, using means other than litigation has caught on in the form of mediation and arbitration.

The ability to utilize the IRS appeals function, as demonstrated by Facebook’s failed attempt to gain access to the appeals group and ended up going to court just to have the right to go to IRS appeals, can sometimes be a tricky process. I have used the IRS appeals process many times to try to avoid tax liens, for collection and exam issues, and penalty abatement cases. If you desire, the appeal can be heard in person, or over the phone.

a8-300x301-299x300Fast Track Mediation is geared mostly to the small business and self employed taxpayers that are disputing tax assessments as a result of an income tax audit, the imposition of a trust fund recovery penalty (for unpaid payroll taxes), offers in compromise settlements, or IRS collection actions where a Revenue Officer is involved. The trained mediator (who does not force either party to accept his or her decision), listens to both sides to understand the tax issues involved and try’s to formulate a solution that both parties can accept. This process is usually complete in about 30 to 40 days. The mediation process is started when the IRS and the taxpayer both sign a Form 13369, for the case to transferred to the mediation group. With the form, you also provide a written explanation of your position, with legal support (tax law, court cases), that supports your position. The mediator reviews all the evidence, speaks to each party, and then renders a decision.

I often receive phone calls from prospective clients who have not filed their income tax returns for many years. The typical range of unfiled income tax returns is about the last 5-7 years, but some cases it dates back to the mid 1990’s. Since I can barely remember what I did in the 1990’s, I am glad to tell you that the IRS and many states do not require you to file all the income tax returns that are due when you are trying to catch up on late filed returns. This is very good news since when you do not file a tax return, the statute of limitations never expires. a9-300x150

Typically, when I call the IRS, I negotiate with them and get them to agree to accept the last six years of filings to bring the client current with their tax filings. For New York State Tax Department, we can sometimes have them accept the last three years to become current. In some cases, New York State also forgives the penalties, so you just pay the taxes and interest under the New York State Voluntary disclosure program . This concept of forgiving the penalties, which can be as high as 50% of the tax balance, is something the Internal Revenue Service should consider, in my opinion, since it creates a huge amount of work for them to track down and collect the penalties and can result in hardship to the taxpayer.

The amount of taxes owed related to the unfiled tax returns can vary widely depending on whether the taxpayer was self employed or a wage earner. If the taxpayer was a wage earner, it also matters whether their wage allowances were close to what they needed to be. If a taxpayer was self employed, they will incur the normal income taxes, which are roughly 25% for the IRS, and 10% for NYS, as well as an additional 15% for social security taxes. Therefore, the total taxes can be about 40% on the income earned.  For a wage earner (a person who receives a W-2), if their withholdings were fairly reasonable, there should not be a huge tax bill since the taxes were paid during the tax year in question. Once the tax amount is computed, and penalties negotiated downward, the remaining tax debt can be paid off either through an installment agreement or offer in compromise. Typically, the terms of the payment plan can be three to eight years.

 

 

 

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If you disagree with how much the IRS says you owe as a result of an tax audit, there is a process to correct the problem. The procedure is known as an audit reconsideration and is allowed when:

  1. You or your representative did not appear at the audit to provide your information that would support the items on your income tax return. This could be the result of you moving, and you did not get notice that an income tax audit was occurring. This is also the case, if you simply decided that you would not attend the audit (for instance, you were scared or intimidated)
  2. You have additional documentation that was not available when the “original” audit was conducted. This often happens since gathering the items needed for an audit (bank records, receipts, etc), takes time to gather and organize, and perhaps that was not done in time for the audit meeting

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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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.

a1-300x300A recent Internal Revenue Service Office of Chief Counsel memorandum (CCA 201725026) provides guidance on whether the IRS can charge interest on court ordered restitution payments related to Title 18 criminal tax cases. As background, typically when a court orders restitution in a criminal tax case, it is often for an amount equal to the taxes not paid by the defendant due to their conduct. Before Congressional FETI ACT of 2010, the restitution was not viewed as a “tax” under the income tax rules. This act changed that.

The three main issues addressed in this memorandum are:

  1. Whether the court-ordered restitution incurs interest under Title 26 (Internal Revenue Code)

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Many new clients call us in a panic when they receive a letter from the IRS that their income tax return has been selected for an audit. In most cases the client knows that they overstated their tax deductions, or less likely did not report all of their income. In either case,  being caught is not a pleasant result. When the IRS audits an income tax return for deductions, it focuses on whether you have a receipt. From the basic perspective, the IRS is looking for a stack of receipts that add up to the tax deduction taken on the income tax return.

A lot of clients think that a bank statement or credit card statement is a receipt. This is not correct, since a bank statement or credit card bill only shows that the expense was paid, but not the details of the item purchased in order to verify it is a business deduction. Therefore, its important to save the actual receipts to get the tax deduction you are entitled to.

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