FREE Tax Articles
Offers in Compromise
What is an Offer in Compromise?
An Offer in Compromise (based on lack of collection potential) is probably the single most effective way anyone can successfully resolve a big tax bill. It should be no surprise that the IRS is willing to compromise back taxes. Estimates are that more than 10 million Americans owe up to $200 billion in back taxes, and that's only the part the IRS knows about. The total does not include the underground economy, where billions more flow unnoticed and untaxed.
For decades, the agency has had the statutory authority to settle any tax debt for less than full payment, but the authority was seldom used. In February 1992, this offer in compromise program woke from a deep coma and became a real, honest-to-goodness alternative for settling tax debts. In short, the IRS got serious about cleaning up its accounts receivable; it advertised a new willingness to take less than one hundred cents on the dollar. The 1998 tax reform act broadened the IRS’ authority as well with a mild offer-friendly provision.
Still, even today, the program is nowhere near the Filene's Basement of tax collection. The IRS' goal is to consider giving you a fresh start by accepting an offer, but only after it has squeezed out the last dollar it can get from you now or in the near future. Only about 25% of offers are accepted these days.
How We Can Help
We can advise on whether an offer in compromise has a realistic chance of solving your back tax problem. Since it’s a “fresh start” if accepted, the offer is often the BEST alternative. We can help evaluate what you should offer for you two “baskets” of assets: (1) your current assets and (2) your “future income potential” (the money you might expect to pay the IRS in the future from your income). We can also put the best light on past defaults, and help argue your position based on age, health, family situation, and earning potential. This is done using IRS forms, which can be somewhat complicated to complete in the best, most accurate way.
Businesses can also make offers. For these, we can evaluate whether the business should make an offer, and how the owner’s individual assets may figure into the equation (this happens if the business owed payroll taxes). We can advise on appealing rejected offers, and how the entire offer mechanism fits into your overall plan to resolve your back taxes, once and for all.
Federal Tax Penalties
Over the past 20 years, Congress has asked the IRS to preside over a virtual explosion in penalties - more than 150 different types and counting. Sometimes it seems there is a penalty for everything, whether you are right or wrong, whether you look left or right, up or down.
Tip: In fiscal 2008, the IRS assessed penalties 44 million times for $7.28 billion in value. It abated only 1.4 million penalties for $1.6 billion. These numbers, especially on assessment side, are huge increases from prior years.
The most common types of penalties for individuals are “failure to file” a tax return, failure to pay a tax, dishonored check, and estimated tax penalties. Individuals can also incur penalties in a tax audit, typically for “negligence” or “substantial understatement of tax” found by IRS to be due. For businesses, the most common penalties are failure to deposit (payroll tax), late filing, and late payment.
How to Avoid or Abate These Penalties
To avoid or overturn these penalties, you must have facts and proof at your command, showing "reasonable cause," "ordinary business care and prudence," or similar standard. The IRS approach must be consistent, accurate, impartial, and correct, with adequate opportunity for you to be heard. In fact, if you present anything resembling reasonable cause to the agent, he or she is required to advise you of the reasonable cause provisions even if you don't know about them. For all of these penalties, your reasonable cause or other explanation will be examined quite closely. The IRS will ask many questions, including these (all drawn from the Internal Revenue Manual):
Does your reason truly address the penalty imposed?
Do the dates and explanations clearly correspond to the events on which the penalties are based?
Is this the first time the penalty has been imposed, or are you a repeater?
What is the length of time between the reasonable cause events and your repair of the problem?
If you took too long, and failed to try to correct the problem, you may lose your reasonable cause.
Could you have anticipated the events that caused your noncompliance? Were these events truly beyond your control?
Fighting these Penalties on the Front Lines and
How We Can Help
The tax laws and IRS procedures fortunately give you many ways to fight these penalties. We can help in advising you on whether, and how, to fight. Should you request non-assertion up front? Should you request abatement after the penalty is imposed? What about penalty appeals? Can you fight a penalty in Bankruptcy?
We will discuss the facts thoroughly with you and advise on all possible ways to fight the penalties. Since IRS penalties are difficult to abate, if your case is not likely to succeed, we will tell you that up front. But if you have facts that make an abatement attempt worthwhile, we will help with that effort or make it on your behalf. In the meantime, while the penalty appeal is ongoing, we can advise on how penalties fit into your entire tax matter.
Statutes of Limitations: Deadlines
When the IRS Comes After You
The IRS can’t collect taxes forever. It has deadlines too. Knowing these deadlines can help you manage your back tax problem.
The tax laws are full of statutes of limitation. Like mines in a minefield, they are traps for the unwary, and every day, people lose rights and money because they are not aware of statutes of limitation.
Some of these periods of limitation also work against the IRS and in your favor. The most common of these are the “three-year rule,” the “six-year rule,” and the “ten-year rule.”
The IRS normally has three years from the time you file a tax return to assess or propose more taxes. That rule is extended to six years if they determine that you have omitted more than 25% of your gross income. (There is an unlimited period to assess taxes if the IRS proves civil fraud.) The ten-year rule is a collection rule: the IRS has ten years from the time they assess a tax (i.e., send you a bill) to collect that tax.
Of course, taxpayers can extend those periods in many ways and for many reasons. Some are: voluntary waiver, filing a lawsuit (for or against you), filing other administrative claims with the IRS.
How We Can Help
We can advise on whether the period of limitations on your back taxes is close to expiration, when it will expire, and how these considerations are part of an overall strategy of dealing with you back taxes. For example, if you believe the period for collection is now short, and it turns out to be longer than you thought, that fact might influence whether you may make an offer in compromise. It can also impact on whether your taxes are dischargeable in bankruptcy.
The interplay of periods of limitation, offers, installment agreements, bankruptcy, liens and lien priorities are very complex. Each one aspect may influence the others. We can help with this analysis and help make recommendations on the best ways to resolve your back tax issues.
Tax Audits and Appeals
One of the most unnerving letters you can receive is the envelope with the return address "Internal Revenue Service" and the government stamp. Inside is a letter that begins innocently enough, "Dear Taxpayer." Then it hits: you have lost the audit lottery. You are one of the unlucky (roughly) 1 percent of individuals or 3 percent of businesses whose tax return will now be examined. (Despite these low percentages, they amount to more than one million audits per year.)
In fiscal 2008, over 250 million returns of all types were filed. More than 197 million were income tax returns. Of these, the IRS audited only slightly over 0.8 percent. The mathematical chances of an audit were less than 1 percent if you made between $25,000-$50,000. On the other hand, if you made more than $100,000, or had less than $25,000 on your Schedule C, your chances of audit were over 1 percent.
How do people react? There is a range, from, "Oh my gosh-get my toothbrush, kiss the kids, I am going to jail," to, "Oh no, not again," to, "Those so and so's-into the trash you go." Probably the more useful reaction would be, "What's this all about? What type of audit is this?" WHY ME? Why are you the lucky one? In most cases, it goes back to the return you filed.
The IRS selects returns for audit for many reasons, but the fact of an audit is truly nothing to fear (unless you have something to hide). It’s simply an inquiry by your government about your report on your taxes. Still, the fear factor is there, always hyped by the media. Most audits are routine, “correspondence” audits where you just write to the IRS on an issue and the matter is resolved. Others, like the “office audit” or “field audit” are more complex.
You have certain rights when you are audited. Among these are the right to fair treatment and full information. The revenue agent works steadily and methodically. He or she often prepares a list of documents to examine.
You have a substantial number of rights in these audits. You have plenty of time to convince the auditor of you position. If you can’t agree, you can appeal within the IRS to the “Office of Appeals,” an office whose job description includes “settle if possible.” If you can’t agree there, you can of course go to court. And if you don’t go to court, often you can request “audit reconsideration” if you discover new evidence later on. These audit rights apply to the tax and any penalties the IRS asserts.
How We Can Help
Working through an audit can be daunting. Many taxpayers “go it alone,” sometimes with good results, sometimes not. You don’t absolutely need professional help in dealing with a tax audit, but often such help can save you dollars, time, and tears.
We can analyze the fact and legal issues quickly, and let you know within a short time what your chances of success might be. Often these matters involve evidence gathering (“substantiation”). If you have it, fine. But what if you don’t? Often there are substitutes. We can help guide you to finding that substitute evidence and presenting it effectively to the IRS. We can also help you avoid traps.
The Federal Tax Lien
The federal tax lien is nothing more than a legal charge or encumbrance on a taxpayer's property to secure the eventual payment of the tax debt. In this sense it is similar to a mortgage on your house or a lien on your car. You can think of the tax lien as a legal ball and chain that attaches to each piece of property you own. The more you owe, the heavier the ball and chain.
The federal tax lien does not usually cause problems until the IRS files public notice of it. But once filed, that notice can damage your credit, cause embarrassment, endanger your business or personal relations, and hamper your efforts to sell property. The IRS is fully aware of this impact. In fiscal 2008, it filed over 768,000 notices of tax lien, up more than 200,000 from 2005 levels. Agents know the tax lien filing is a big club they carry around and use often. If the tax you owe is large enough, and if you pay slowly enough, the IRS will almost always file a Notice of Federal Tax Lien to "protect the revenue." Translation: The agency will file the notice to make sure you do not sell property out from under its claim.
Once the IRS files notice of the lien, generally there is little you can do with your properties unless you get the IRS' input and consent.
By law, the tax lien attaches to everything you own: all of your right, title, and interest in every piece of property, wherever located throughout the world. As to real estate, however, the lien must be filed in the county whrer the real estate is located in order to beat the claims of other creditors.
Overcoming the Federal Tax Lien
The law allows a number of ways to deal with the tax lien. Among these are: release of the lien, discharging specific property from the lien, posting a bond to secure release, subordination of the lien, withdrawal of the lien, and substitution of sale proceeds for the property being sold. Each of these has specific requirements, and each is tailored to your specific fact circumstances.
How We Can Help
We can advise on the best course of action to deal with the lien and make that advice part of your overall plan of action for the tax debt. If you are making an offer in compromise, lien release or discharge of property from the lien is a part of this. If you are refinancing, a discharge, release, or subordination may be the answer. Give us a call, or email through the website, to ask if we can help in your particular circumstances.
Your Worst Nightmare: Personal
Liability for Corporate Payroll Taxes
(The Trust Fund Recovery Penalty)
Statistics show that most of America is small business, not big business. That's the entrepreneurial spirit in action. In whatever form, getting those ventures off the ground is often difficult. And, because the tax laws make you, the employer, responsible for withholding taxes, those withheld taxes are sometimes a tempting source of cash for business operations. Many business people succumb to that temptation every year, using money that is not their own to pay their corporation's bills.
Employers really work for Uncle Sam, collecting the IRS' taxes through the withholding system. (States with income tax laws also impose wage withholding.) By law, employers make three kinds of payments to the IRS after each payday. The check (or electronic transfer) they send covers (1) the income tax withheld from your paycheck, (2) the Social Security and Medicare tax also withheld, and (3) the employer's matching Social Security/Medicare payment. The first two items - the withheld portions - are known as the "trust fund" part of the tax because a special statute imposes a trust on those withheld funds until the employer pays them to the IRS. The money doesn't have to be put in a separate bank account, but it's automatically deemed "in trust" from the instant your employer withholds it from your pay. In a perfect world, the money is there.
But the world is far from perfect. If the employer just doesn't pay, or decides to pocket that money, employees get full credit on their taxes, but the IRS is still short the money. So it uses a special weapon thousands of times each year, the Trust Fund Recovery Penalty.
This penalty makes the people who were responsible for the nonpayment personally liable for 100 percent of the money that was withheld but not paid over to the IRS, that is, 100 percent of the unpaid income withheld and Social Security/Medicare tax. (The penalty does not apply to the employer's share of Social Security/Medicare.)
Of course, the corporation is also liable, and the IRS goes after that primary payor first. But the Trust Fund Recovery Penalty makes the responsible persons "guarantee" the corporation's payment, at least in part. This penalty is a debt that can follow you for at least ten years, or the rest of your life, whichever comes first. The limited liability you personally enjoy from most corporate debts does not apply against this federal law. On top of that, you cannot discharge this penalty by filing personal bankruptcy, as you can with most personal debts.
This Trust Fund Recovery Penalty can be a major tragedy for the businessperson. Most business owners want to stay in business and prosper, but when money gets too tight, many take a chance by paying the squeaky wheels. The IRS is like a hibernating bear in these payroll tax cases. It wakes up late, sometimes years after the first default, but it also wakes up very hungry and aggressive. On top of that, the longer the default goes on, the easier it is to continue and the harder it is to feel that you can ever catch up.
But you can fight the imposition of this “penalty” (it’s really just a substitute for part of the tax the corporation did not pay) in several ways.The law allows you to do this, even before the IRS officially imposes it. The law in this field is very extensive, mostly through cases tried in the courts. You can argue that you were not truly responsible, that some other person was, that you did not know, and a range of other defenses that are technical in nature but that work if you prove them.
How We Can Help
We can help you decide if you have a defense to liability, and for which corporate quarters. If you do, is this the time to assert it? Probably, but not always. How does that defense figure into your overall plans for the company? Is a corporate bankruptcy inevitable? Should you consider borrowing personally to pay the trust fund or the entire tax, until a large contract or order comes in? Is the statute of limitations close to expiring on some of the periods involved?
These and dozens of other questions and considerations will inform your plan of action when the IRS comes knocking for those trust fund taxes. Because the law allows many defenses to this liability, it’s best to be well-informed about all of your options before simply giving in or giving up. You have options; it’s best to know all of them in advance.
The Bankruptcy Alternative
Can bankruptcy solve your tax problem? Yes, it is possible, even under the new law that became effective October 17, 2005. But there are more myths, errors, and misconceptions about managing taxes through bankruptcy than there are politicians making election-year promises to lower your taxes. Bankruptcy, especially when used for tax relief, is a detailed and complex subject. You need an experienced lawyer to advise you whether, when, and how to file a bankruptcy petition.
This caution is especially true in using bankruptcy to discharge or settle tax debts. Many people use “Chapter 7” of the Bankruptcy Code to discharge debts, including some tax debts. (You can also challenge the accuracy of some tax debts through a bankruptcy.) Among the most important are income taxes. The new rules that went into effect on October 17, 2005, are extremely important for many reasons. However, the key feature, “means testing,” applies only in cases that involve “primarily” consumer debt. Current law says tax debts are not “consumer” debts. “Primarily” has yet to be clearly defined, though most practitioners believe this likely means “more than 50%.”
So your bankruptcy case may or may not be considered under the new rules in terms of discharge.
If it is not, you will obtain a Chapter 7 discharge, including a discharge of taxes that meet certain rules. If you must use the new rules, you could be thrown into a “Chapter 13” or a “Chapter 11” type case. Unlike Chapter 7, these are not liquidations but rehabilitations, requiring a “plan of reorganization,” a technical term for a settlement proposal.
How We Can Help
We can analyze your tax collection alternatives, including bankruptcy. Do you need an offer in compromise? Installment agreement? Do you want to try those first, then consider bankruptcy if they don’t work? How would a bankruptcy fit into your overall financial plans and reputation? We will work with you, gather the facts, and within a short time (usually 1-2 hours) have a realistic, workable game plan to deal with your back tax problem, once and for all.
Divorce and Separation
And The Third Partner, The IRS
With half of all marriages ending in divorce and many divorcing couples owing back taxes, it's no wonder the IRS is the "third partner" in many divorces. Divorce taxation is a field of study in itself. Divorce lawyers routinely (though not always) plan for the tax issues in their cases and take advantage of the breaks the Internal Revenue Code gives divorcing couples. People bargain over many tax-related items in a divorce: who gets the house, who gets the insurance and retirement accounts, how much alimony and child support are to be paid. The Internal Revenue Code has rules covering each of these issues.
But while those helpful rules may smooth the way toward understanding the tax results of property transfers incident to divorce and separation, they have no effect on what happens when taxes have to be collected. For instance, special rules allow couples to agree on alimony and child support so these items are deductible by one spouse and reportable as gross income by the other. The Code also allows very liberal transfers of property, such as of homes or retirement accounts, without any current tax. But these rules do not bind the Collection Division when it goes out to collect delinquent taxes. Divorcing couples, and unfortunately sometimes their professional advisers, often overlook many tax traps in the often rocky road to a divorce or separation.
For example, suppose a couple divorces and the wife gets the house. By now, the house has a mortgage but also equity. The couple owes joint taxes because of the husband’s problems. If the divorce occurs, the wife’s new ownership of the house is at risk for all the taxes, because she signed the joint returns. Will the IRS sell that house? Maybe, maybe not. But the house is at risk. And, because of the divorce, now it is no longer owned as “tenancy by the entireties,” a form of property ownership that often protects non-delinquent spouses in this very type of situation.
The Innocent Spouse rules also come into play in some divorces. There is widespread misunderstanding of these rules. They do not generally apply unless the IRS has actually examined you tax return and proposed more taxes. If you filed a joint return with your spouse, but the reported tax is unpaid, these rules generally won’t help. But some spouses can take advantage of “equitable” rules that allow for some relief if the IRS agrees.
How We Can Help
Property transfers with built-in taxes, exposure of valuable assets to the IRS, potential “innocent spouse” relief – all of these are very technical matters that require knowledge of the tax laws, regulations, IRS internal guidance, and court cases. We can advise on how to manage you back taxes in the context of a divorce by identifying your goals and analyzing how to achieve them in the face of both the other spouse and the “third partner,” the IRS.
The Installment Agreement
A big IRS bill can be unnerving at best, paralyzing at worst. Sometimes you ask the ultimate question: "How am I ever going to pay this?" That's what the installment agreement is for. The IRS has long had the legal authority to allow past-due taxes to be paid in installments. With one exception, the installment agreement is not a legal right you can enforce, but the Service can and does grant these agreements, millions every year.
The installment concept seems helpful on the surface; your tax bill is too big to swallow all at once, so you pay in digestible chunks. And in fact, most parts of an installment agreement are negotiable: the time period, the amount per month, the date of payment. Its biggest advantage is to allow you breathing room to pay a bill you cannot pay in full right away.
But there are many drawbacks, including the continued accrual of interest and possibly penalties. The IRS may also file a notice of federal tax lien. And, the period of limitations on collection may be extended
How We Can Help
We can advise you on whether an installment agreement is a realistic alternative to resolve your past due taxes, or whether others should also be considered, such as offer in compromise, “currently not collectible” status, bankruptcy, or others. We can help you apply for the best type of installment agreement for your circumstances, and the best amount. This can often be difficult simply because the IRS’ view of how much you can pay, per month, can be (and normally is) VERY different from yours. Skillful negotiation is the key to obtaining the best result.
We can help smooth your way through the entire process. We know what the IRS is looking for when it requests financial information and financial statements to support an installment agreement request, whether for your business or your personal taxes. We know where you can negotiate, and where such negotiation would be fruitless. With assistance, the result is often far better than if you go through the process alone.
IRS Levies and Seizures
Can They Really Do That?
In fiscal 2008, the IRS issued over 2.6 million levies and made 610 additional property seizures. The levy activity is a threefold increase from fiscal 2001 and a 30% increase from 2003.
A levy is simply the act of seizing your property to pay a back tax. It should not be confused with its collection cousin, the federal tax lien. When you fail to pay a tax for the IRS has billed you, a “lien” (a legal charge on property), arises by law to secure payment. This notice of lien is not a levy; it seizes nothing. It merely encumbers your property.
The levy is the actual seizure. In fact, the IRS does not even have to file a notice of lien before seizing your property. Legally all it must do is bill you for the taxes, demand payment (by a “final notice”), and wait thirty days.
The IRS levy comes in three main varieties (there are others). The first is a wage levy, which captures most of your paycheck, the commissions you've earned, and just about any other compensation due to you. The second is a nonwage levy, a one-time seizure of specific property such as your home, car, real estate, bank account, or insurance policy. The third type, rarely used, is a jeopardy or termination levy, a hurry-up version of the nonwage levy. Reserved mostly for gambling, drug, and money laundering cases, the jeopardy or termination levy is almost instantaneous. In fact, sometimes IRS officials will authorize revenue officers, by telephone, to make these levies.
This levy power stands a world apart from a private creditor's rights to collect money. Normal creditors are subject to dozens of state and federal laws that regulate and restrict their right to dun you by telephone, write you nasty letters, and otherwise take steps to collect their money. And, if they want to seize your assets, they normally (but not always) have to sue.
Because the levy is so powerful, the IRS is normally restrained it its use. In almost every case, you get plenty of warning before a levy hits. Like an oncoming freight train, you can see it and hear it, often in time to get out of the way. You may get one or more bills, or post-bill reminders and other notices. The IRS does not want to seize your wages, your car, or your other property. What the IRS really wants is your attention and commitment to face up to your tax problem and deal with it. "Dealing" with a tax debt means liquidating assets, filing an offer in compromise, making an installment agreement, borrowing money, or crafting other solutions.
Almost nothing is beyond the reach of the levy. Bank accounts, wages, commissions, accounts receivable, stocks, bonds, the cash value of insurance policies, jewelry, even homes can be seized and sold by the IRS. The law excepts only eleven narrow categories of property from the levy power.
Of course, the IRS goes for the low-hanging fruit first: bank accounts, cars, stocks, bonds, and wages. Its second set of targets consists of items such as insurance policies and accounts receivable. Third, the agency really hits home: it can seize your retirement accounts and your home (with some restrictions).
The 1998 tax reform act created important new rights for you, the taxpayer, to defend against IRS levies before they are served. Often this right to a “collection due process hearing” can mean the difference between calm, rational consideration of your best course to resolve or settle your past tax debt, and total panic. But just as often, people forfeit these rights.
How We Can Help
All is not lost when the IRS levies, or even before it does. We can help you sort out the best strategy to resolve you past due taxes, possibly avert that damaging levy, or deal with it afterward. We will help you understand all your rights – and you have many – while you can still assert them.
If the levy threat is imminent, we can help with an appeal to the Taxpayer Advocate office. Their job is to intervene to prevent “undue hardship” – on you.
All of these many rights can easily be lost if you don’t act timely. We can help you devise a strategy to resolve your entire tax problem while dealing with levy threats along the way.
Foreign Bank Account Reports
DEADLINE: August 31, 2011 (see below).
Did you know that if you have more than $10,000 in a non-US bank (or other financial institution), you must report that - every year - to the Treasury? Before 2009, most people would have said "Who? What?" But that reporting requirement has been in the law for over 20 years, part of the Bank Secrecy Act. People work up suddenly in 2008 when the IRS won a big case against UBS, the huge Swiss financial firm, requiring UBS to disgorge all of its US "secret" bank account holders - some 50,000 of them! UBS and the IRS eventually settled - on about 4000 names.
But in the meantime, the IRS launched a "voluntary disclosure program" to entice offshore account holders to surface, pay their back taxes, a stiff tax penalty, and an even stiffer penalty for failing to file the "Foreign Bank Account Report." The maximum penalty for willful failure to file an FBAR is the higher of 50% of the account balance, or $100,000 - for EVERY year of non-compliance going back 6 years.
Over 15,000 people came forward in the 2009 program. The IRS is now processing their cases. Others hid their heads. Still others never learned of the program and only now, after it ended in October, 2009, have they learned they missed the boat.
The IRS now has a similar program for 2011, with an August 31, 2011 deadline. The penalties are somewhat higher, but IRS believes it can bring more non-compliant offshore account holders back into the tax system.
How We Can Help
We can review your exposure to the onerous FBAR penalty structure, counsel on the risks of disclosing, and of failing to disclose, your offshore accounts (and other assets), and help you make an informed decision on what to do. Remember that "no action" is itself a decision. The IRS is out there, trying to find all of these secret accounts. Chances are, the agency will not stop until it learns of them all.