Wednesday, October 8, 2008

Paying the IRS Voluntary?

Last week we discussed whether or not filing your taxes was voluntary. This week we will discuss whether or not paying your taxes is voluntary.

Some argue that they are not required to pay federal taxes because the payment of federal taxes is voluntary. Proponents of this position argue that our system of taxation is based upon voluntary assessment and payment. They frequently claim that there is no provision in the Internal Revenue Code or any other federal statute that requires them to pay or makes them liable for income taxes, and they demand that the IRS show them the law that imposes tax on their income. The stance that is taken is that until the IRS can prove to these taxpayers’ satisfaction, which is effectively impossible because they never will be satisfied, the existence and applicability of the income tax laws, they will not report or pay income taxes. These taxpayers reflexively dismiss any attempt by the IRS to identify the laws, thereby continuing the cycle. The IRS has issued Revenue Ruling 2007-20, 2007-14 I.R.B. 863, discussing this frivolous position at length and warning taxpayers of the consequences of asserting it.

The Law: The requirement to pay taxes is not voluntary and is clearly set forth in section 1 of the Internal Revenue Code, which imposes a tax on the taxable income of individuals, estates, and trusts as determined by the tables set forth in that section. (Section 11 imposes a tax on the taxable income of corporations.)Furthermore, the obligation to pay tax is described in section 6151, which requires taxpayers to submit payment with their tax returns. Failure to pay taxes could subject the noncomplying individual to criminal penalties, including fines and imprisonment, as well as civil penalties. We have discussed before the troubles of major celebrities like Helio Castroneves and Wesley Snipes. There are many cases that could be cited, but they all end the same, and that’s on the IRS’ side! Again, please don’t wait around to file your returns or get into a resolution with the IRS; the IRS isn’t waiting for you anymore!

Stimulus Package

This year, the federal government rolled out a stimulus package to U.S. taxpayers that filed a 2007 return and met the standard requirements.

You are eligible for a stimulus package if:

  • You file your tax return prior to October 15, 2008.
  • You or your family has at least $3,000 in qualifying income from, or in combination with, Social Security benefits, Veterans Affairs benefits, Railroad Retirement benefits and earned income. Supplemental Security Income (SSI) does not count as qualifying income for the stimulus payment.
  • You and any family members listed on your tax return have valid Social Security numbers.
  • You are not a dependent, or eligible to be a dependent, on someone else’s federal tax return. (The same must be true of any family members claimed on your return.)

There are many people who have filed expecting their refund but are yet to receive their check. I have dealt with many clients who were expecting a check, but instead received a bill from the IRS. The IRS seems to have been able to use the ‘stimulus package’ as a way to get people who haven’t file in YEARS to file. The IRS then takes the stimulus money and applies it to your outstanding debt that you didn’t even know about. We talked before about “SFRs” from the IRS and how they will assess you a tax debt.

So, have you filed and never received your stimulus package? Guess what, you probably have an outstanding tax debt. There are tax professionals available to help you research your tax history and find out exactly what the IRS is stating!

"Dancing with the IRS"

Last week, Helio Castroneves, two-time Indianapolis 500 winner and TV’s "Dancing with the Stars" champion, was indicted on tax evasion charges. This is the 2nd major celebrity this year to be indicted on tax charges with the IRS.

On Thursday, a grand jury indicted Castroneves on charges of conspiracy and six counts of tax evasion for purposely failing to report to the IRS about $5.5 million in income between 1999 and 2004, according to court documents. Each count carries a maximum five-year prison sentence.

I have stated many times before that NOW is the time to get your tax situation fixed; don’t allow the IRS to decide your fate. The IRS itself is saying it's going to ramp up collections and crack down on “tax shelters”.

"This case sends a clear message that the IRS is committed to vigorously enforcing the tax laws and stopping offshore tax evasion," IRS commissioner Doug Shulman said.

Again, do not wait for the IRS to step in, you MUST get into compliance and remove yourself from active collections by getting into a resolution! Why would you want to sit on the IRS collections radar?

Friday, October 3, 2008

Taxes a Voluntary Program?

I have come across a number of clients who are actually unaware that filing your tax returns is required. They have the misconception that taxes are a “voluntary program”. Unfortunately, they are very wrong, and can find themselves in major trouble. To clear up any confusion that you may have about filing your taxes, it is a criminal offense not to file, punishable for up to 1 year for each year unfiled. In addition, un-filed tax returns quickly create quite a debt due to penalties and interests charged by the IRS.

Proponents of the U.S. tax system point to the fact that the IRS itself tells taxpayers in the Form 1040 instruction book that the tax system is voluntary. Additionally, the Supreme Court’s opinion in Flora v. United States, 362 U.S. 145, 176 (1960), is often quoted for the proposition that "[o]ur system of taxation is based upon voluntary assessment and payment, not upon distraint."

The word “voluntary,” as used in Flora and in IRS publications, refers to the IRS system of allowing taxpayers initially to determine the correct amount of tax and complete the appropriate returns, rather than have the government determine tax for them from the outset. The requirement to file an income tax return is not voluntary and is clearly set forth in sections 6011(a), 6012(a), et seq., and 6072(a).

See also Treas. Reg. § 1.6011‑1(a) of the IRM.In August 2005, the Justice Department announced that Royal Lamarr Hardy was sentenced to a 156-month prison term for, among other things, selling a tax evasion scheme called the “Reliance Defense” that incorrectly asserted the income tax laws were voluntary (i.e., the laws imposed no legal obligation to pay tax or file a return). Hardy was also ordered to pay costs of prosecution in the amount of $59,267.88, and restitution to the IRS for $197,555. See 2005 TNT 169-12 (Aug. 31, 2005). In August 2007, a federal court in New York permanently barred Robert L. Schulz of Queensbury, N.Y., and his organizations, We the People Congress and We the People Foundation, from promoting a tax scheme that helped employers and employees improperly stop tax withholding from wages on the false premise that federal income taxation is voluntary. The court concluded that the First Amendment did not protect the two organizations that operate the website, or their founder, because the site incited criminal conduct. The court also ordered that the web site that sold the materials stating that individuals can legally stop paying taxes be shut. See http://www.usdoj/tax/txdv07214.htm, and

Any taxpayer who has received more than a set standard of gross income is required to file a tax return. Even if you have been a “tax protestor” before and now realize that you must file, find some professional assistance to ensure that your returns are done accurately and promptly before it is too late. It is always better to be proactive, rather than reactive, with the IRS!

Wednesday, October 1, 2008

Civil Trust Fund Taxes

I have mentioned Civil Trust Penalties and payroll taxes (941’s) numerous times here on Ask the Tax Wizard. Today I want to dig in deeper and discuss who can be held responsible for these taxes, and how the process works when considering individuals. Below, I’ve included some helpful information regarding this topic from the IRS website. For further information, you will also find this resource helpful.

First of all, it may be helpful to know exactly what a trust fund tax is. To put it simply, it is money withheld from an employee's wages (income tax, social security, and Medicare taxes) by an employer and held in trust until paid to the Treasury.When you pay your employees, you do not pay them all the money they earned. As their employer, you have the added responsibility of withholding taxes from their paychecks. The income tax and employees' share of FICA (social security and Medicare) that you withhold from your employees' paychecks are part of their wages you pay to the Treasury instead of to your employees. Your employees trust that you pay the withholding to the Treasury by making Federal Tax Deposits. That is why they are called trust fund taxes. Employment tax deposits are an expense that should be paid immediately. Postponing paying them is not the same as making a late payment on your phone bill or to a supplier. Congress has established large penalties for delays in turning over your employment taxes to the Treasury. The longer it takes to pay that money, the more it will cost you.If you are unable to make your Federal Tax Deposits for your payroll taxes, the IRS will access what is known as the Trust Fund Recovery Penalty (TFRP). The TFRP may apply to you if these unpaid trust fund taxes cannot be immediately collected from the business. The business does not have to have stopped operating in order for the TFRP to be assessed.The TFRP may be assessed against any person who:

  • is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and
  • willfully fails to collect or pay them.

A responsible person is a person or group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes. This person may be:
an officer or an employee of a corporation,

  • a member or employee of a partnership,
  • a corporate director or shareholder,
  • a member of a board of trustees of a nonprofit organization,
  • another person with authority and control over funds to direct their disbursement, or
  • another corporation.

For willfulness to exist, the responsible person:

  • must have been, or should have been, aware of the outstanding taxes and
  • either intentionally disregarded the law or was plainly indifferent to its requirements (no evil intent or bad motive is required).

Using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness. You will be summons to complete an interview in order to determine the full scope of your duties and responsibilities. Responsibility is based on whether an individual exercised independent judgment with respect to the financial affairs of the business. An employee is not a responsible person if the employee's function was solely to pay the bills as directed by a superior, rather than to determine which creditors would or would not be paid. Once the IRS assesses the penalty, they can take collection action against your personal assets. For instance, we can file a federal tax lien or take levy or seizure action. When you fall behind on your payroll taxes your best options are to contact professional help in order to reach a resolution with the IRS.

The 700 Billion Dollar Bailout and Business Taxes:

As we found out on Monday, the “Bailout” plan was rejected by the House of Representatives. This in turn caused the stock market to plummet. The rejection of this plan could create very serious tax problems for business clients and their taxes. Whether you were in favor of the plan or against it, not being able to borrow money from banks can create 941 or payroll tax issues for companies.

There are many companies in today’s market that borrow from banks to pay their payroll, and to meet other needs, while waiting to receive payments from their accounts receivable. If companies aren’t able to borrow from their banks, they run the risk of not being able to make their withholding tax deposits. The highest collections within the IRS come from payroll taxes. This is due to the fact that the IRS views this as stealing from your employees, and the IRS itself. Typically, you will be assigned a Revenue Officer “RO” like we have discussed in previous blogs. The RO’s can actually asset the tax debt to individuals and force the company to close down if you get behind on your payroll taxes. Obviously closing down a business can only hurt the economy even more via lost jobs and revenue to the IRS. Don’t wait until it’s too late to get into a resolution on your tax debt, hire a professional that can negotiate a fare resolution with the IRS.

Thursday, September 25, 2008

Offer in Compromise: Effective Tax Administration

One of three types of Offer in Compromises (OIC) that we will discuss in the coming weeks is what is known as an ETA (Effective Tax Administration) OIC. Like I have stated many times before on this blog, getting an OIC is the most popular request from clients and looks the most attractive to U.S. taxpayers. When trying to apply for an ETA OIC there are 3 conditions that must exist for you to be a candidate:

  1. You agree that you genuinely owe the tax debt.
  2. The tax liability equals, or is less than, the taxpayer's reasonable collection potential (RCP) which is: Net equity, plus future income potential.
  3. Exceptional circumstances exist, such as the collection of the tax would create an economic hardship, or there is compelling public policy or equity considerations that provide sufficient basis for compromise.

Let’s break this down a little more. When applying for ETA OIC, you have to fully agree you owe the tax debt. I typically deal with clients who don’t believe they owe as much as the IRS says and want an offer because of this. The risk you run when submitting this type of offer is: If your offer is declined, you have accepted that you owe every penny of the assessed tax debt. The second part of this OIC is that you must actually have the capability to pay the tax debt via equity in your home, or liquidating a 401K or IRA plan. This is unusual when dealing with the IRS because typically the IRS is going to want to collect on your tax debt in full if you have the capability. The biggest factor in submitting for an ETA officer is the exceptional circumstances; typically these offers are reserved for people that when collecting on the debt, the IRS would create a Public Relations nightmare to be dealt with.

As an example: A 75 year old couple owes $150,000 in tax debt, the couple has assets that could fully pay the debt via equity on a home, but borrowing against the home would put the couple at risk of losing their home. In this situation the IRS would consider selling to keep from forcing grandma/grandpa out into the streets and would avoid a public relations nightmare that would otherwise be created! A very small amount of these offers are accepted, and only Enrolled Agents or someone with a deep knowledge of the IRM is going to be able to help get yours approved!

Wednesday, September 24, 2008

Deferral Programs

There are 3 types of deferral programs available to U.S. taxpayers: Currently Not Collectable (CNC or Status 53), negotiated 30 to 120 extensions to full pay, and negotiated 12 month lifestyle adjustment installment agreements (IA).

The most common deferral that is used is CNC status. CNC status is essentially stating that it unlawful for the IRS to enforce collections or force a taxpayer to repay their tax debt at this time due to there current financial situation. When you are applying for CNC status with the IRS what you must show to the IRS is that the income you are currently bringing into your household is less than your current bills.

What normally eliminates CNC status for taxpayers is that their expenses exceed the national living standard the IRS will give you credit for. Another question that I am commonly asked is if CNC status will last forever; CNC status typically can protect you from 18-24 months from the IRS. The IRS will evaluate your income level on your tax returns to determine if your income level has increased enough that you would not be able to make some type of payment to the IRS. When placed into CNC status, the IRS will place a “lock code” on an income level and once you exceed that mark you will automatically be removed from CNC and open again to IRS collections. Hiring an Enrolled Agent to help you negotiate your CNC status can benefit you by getting your “lock code” placed at a higher income level, so that you are not removed from status 53.

So what happens to those who can’t currently get into CNC status but also can’t afford a payment to the IRS? I have dealt with many clients who are making a terrific income but are still living paycheck to paycheck, and state they cannot afford to make any payments to the IRS. Normally, with these clients, after some financial investigation, you find that they typically have house payments/utilities that greatly exceed the normal standard. Sometimes, this is because of getting a bad house loan or just making bad financial decisions. An Enrolled Agent can help you in this situation by helping you negotiate what is known as a lifestyle adjustment. When trying to negotiate a lifestyle adjustment what you are trying to do is get the IRS to accept your current bills and expenses.

The IRS sometimes will accept your actual expenses for one year to give you time to either sell, move, or adjust your expenses down to an “acceptable” level with the IRS. If you do get a lifestyle adjustment with the IRS your best situation is going to be to find a way to full pay your tax liability, or ensure that you have made the necessary moves to get within the standards. This is important because the IRS is going to ask for a monthly payment of your entire MDI calculated back to the national standards. For example, if you are making $5000 a month and your current expenses are $4800, then for one year your payment would be $200 a month. But, after your one year adjustment if you are still making the same income, the IRS will now only give you credit for $3000 in expenses and request a payment for $2000 a month.
When trying to determine if getting some type of deferral program is going to be in your best interest consulting with a professional who knows your rights and the IRM.

Penalty Abatement

A common request I have from my clients is to prevent them from being responsible for the penalties and interest charged by the IRS. Along with getting an OIC, your chances of getting penalties removed from your IRS debt are slim to none. Penalties exist for a reason. The IRS enforces penalties and interest in hopes that you as a taxpayer will be encouraged to comply with the expectations of the Internal Revenue Code. For most taxpayers, voluntary compliance consists of preparing an accurate return, filing it timely, and paying any tax due. When you make genuine efforts to fulfill these obligations, you are being compliant in the eyes of the IRS. Most penalties apply to behavior that fails to meet any or all of these obligations.
The IRS will evaluate certain criteria when considering Penalty Abatement. The IRS may remove (abate) your penalty(s) for any of the following reasons:
  • Reasonable Cause: This is relief that is generally granted when a taxpayer exercises ordinary business care and prudence in determining their tax obligation, but is unable to comply with those obligations due to circumstance beyond their control.
  • Statutory Exceptions: The tax law provides for specific exceptions.
  • Administrative Waiver: This may occur as result of a formal government directive providing penalty relief because of a natural disaster or catastrophic event.

There are 5 reasonable cause criteria that the IRS will consider:

  • Death (spouse, siblings, parents, grandparents, children)
  • Serious illness
  • Unavoidable Absence
  • Inability to obtain records
  • Reliance on written advice from the IRS or advice from a tax professional

When you are trying to submit for Penalty Abatement you will have to prepare an Appeals Request with the IRS. Contacting a company that knows the IRM, and what your options are, is the best way to present your appeal to the IRS. This will also greatly increase your chances of success. I normally recommend that my clients use the Penalty Self-help tool on the IRS website to determine if applying for Penalty Abatement is a possibility.

Friday, September 19, 2008

Tax Expiration Programs

In an earlier blog, we discussed the 21 resolutions available to U.S. Taxpayers. In this blog, I would like to talk about two of those options, specifically the Tax Expiration Programs. One of the most important variables considered when looking into a resolution for your tax debt is your Statue of Limitations, or CSED. The IRS has 10 years to collect on a debt. If you don’t file your 2005 tax return, for example, until 2008, then the IRS has until 2018 to collect that debt in full. There are, however, ways to extend your CSED, such as filing for bankruptcy or submitting an OIC.

When a client files for bankruptcy, the CSED on their tax debt is extended for the entire length of time that they are “bankrupt”, plus 30 days. In the previous blog, I went over an OIC, or Offer in Compromise. This option can actually hurt you when trying to settle. When you submit for an OIC, you extend your CSED for the amount of time it takes for it to either be accepted or rejected. In addition, 30 days are added. In this situation, the IRS has 2 years to make a decision on your offer. The CSED can also work in your favor. The IRS will realize that your tax debt is close to expiring, which will increase your chances of reaching a settlement more quickly. The IRS would rather receive some sort of payment, rather than nothing at all. This is especially true if they have been trying to collect for the 10 year period. Discovering your “actual” CSED with the IRS can be tricky because the IRS will sometimes extend your Statue of Limitations without your knowledge. Viewing your account transcript can be complex, and having a professional look over it for you can be helpful!

The other Tax Expiration Program I want to discuss relates to business clients and defunct, or closing your business. Closing your business is sometimes an option used to help eliminate, or greatly reduce, debt owed to the IRS. When your company gets behind on 941 taxes with the IRS, you are typically going to have a Revenue Officer knocking on your door to collect the debt. This is because the IRS looks at unpaid 941 taxes as stealing. This is considered stealing because your employees trust that the money taken from their paychecks is going to the IRS.

I deal with clients regularly who have gotten behind on their taxes. Unfortunately, because of the direction in which their businesses are headed, they find themselves unable to get current with the IRS. One option that is available to these folks, in order to reduce their debt, is to close their business. The RO may then assess a “civil trust fund penalty”. A civil trust penalty typically will reduce the debt down to 60% of the balance and then you can work towards a resolution from there. The other option available to businesses is to close the business and then allow any assets to cover the tax debt. I have dealt with clients before who got behind on their business income taxes. Their decision was to close the business, sell any assets, and then re-start the business under a new name, in hopes that a fresh start will bring success. This might sound like a tough option, but getting rid of the penalties and interest the IRS charges will save you thousands, if not more! Dealing with your RO, and dealing with a Civil Trust Fund Interview, can be overwhelming and confusing; I would seek help from someone who knows your rights with the IRS!

Wednesday, September 17, 2008

“I Want an Offer in Compromise.”

The most popular resolution that you’ll hear about is the “Offer in Compromise”, or an OIC. You always see advertisements on late night T.V. claiming that companies settled IRS tax debt for “pennies on the dollar.” Every U.S. taxpayer would like to get an OIC when needed, but what are your chances of qualifying for this option? Of the 3 million taxpayers that had an outstanding tax debt in 2007, less than 10% of those individuals/businesses were even a candidate to submit for an offer. There are many companies in the tax resolution industry that will submit an OIC for you knowing that you won’t even be a candidate, and have NO chance at getting approved. This has gotten so bad with companies that even the IRS has begun to warn taxpayers about these companies, known as “Offer Mills”.

There are many variables that need to be considered when trying to determine if you are an OIC candidate. Some of the main things you need to consider are:
1) The age of the tax debt. Remember, the IRS has 10 years to collect on a tax debt. The best way to understand the IRS view on this is to pretend someone owes you $2000. Would you accept a $200 settlement the next day, and call it even, or ask them to make continual payments?
2) You must also consider your assets. Some of the assets the IRS is going to want know about is real estate property, vehicles, boats, and any other asset that could be borrowed against, or is considered a “recreation vehicle”. When considering submitting an OIC, the IRS is going to force you to go through a COMPLETE financial investigation, and they aren’t going to settle if you have the ability to borrow, or even sell, an asset to full pay your tax debt.
3) Another common variable that throws the OIC out for taxpayers is your income, or future income potential. A lot of taxpayers say they can’t afford to pay the IRS due to their current financial situation and are struggling to “stay above water”, so to speak, with their bills. After further investigation you discover they have a $4,000 house payment…Like we have discussed before, the IRS is only going to give you credit for certain living standards on items such as house payments, car payments, utilities, and other living expenses. The IRS is also going to look at your level of education and future income potential. For example, if someone is a doctor and has the ability to earn large amounts of money but they are working at a job making minimum wage, the IRS will not settle. Basically, the IRS considers your income potential and will not settle knowing your income could increase considerably within future months.

The variables listed above are just a few of what the IRS will look at to determine if you are a candidate for an OIC. The lesson that should be learned from this is that you may run into companies that will promise to settle your debt without a complete financial analysis. These promises are simply untrue. There are, however, honest companies that will assist you in determining whether or not you qualify for an OIC. This will lead you to a genuine resolution with the IRS.

The "Tax Pre-nup"

I’m sure everyone is familiar with what a pre-nuptial agreement is; you hear about celebrities and theirs all the time. Its purpose is to protect your wealth and assets when you marry, just in case that marriage ends in divorce. But, have you considered what happens if you marry a person with a tax debt? Is there a way to protect yourself from your partner’s debt, even when you share a last name?

Typically, when you get married, people begin filling their tax returns under the status of “married filing jointly”. Doing so does provide you with a tax break, but when your spouse has an outstanding tax debt, filing jointly can actually attach you to any debt that exists, even debt accumulated prior to your marriage.

I have recently been helping a client who owed an IRS tax debt prior to his marriage in 2007. The couple filed their tax returns jointly in the year 2007, which then attached his spouse to over $50,000 in tax debt. Unfortunately, this is a debt she was completely unaware of…The client’s spouse is now being threatened with wage garnishments and their joint bank account is being levied. Imagine the stress that would place on a marriage…

The best way to avoid getting yourself attached to your spouse’s previous IRS debt is to continue to file separately under the status of “married filing separate”. Even if it’s too late and you have already filed jointly there is still an option for you. If you have read our previous blogs, we have been discussing the 21 options available to you as a U.S. Taxpayer. One of those resolutions is “Innocent, or Injured, Spouse Relief”. Innocent Spouse Relief is your best shot at getting yourself un-attached from the tax debt. This, however, can be an extremely complex process. An Enrolled Agent would be able to assist you in this matter, and aid you in your dealings with the IRS. Hopefully, this is a situation you will never be faced with, but just in case, there are options meant to protect you.

Wednesday, September 10, 2008

The “Easy” Payment Plan

In the previous blog, I talked about the 21 resolutions available to a U.S. taxpayer. The resolution that the IRS offers most often is a payment plan, or Installment Agreement (IA). In the past, the IRS would offer a taxpayer a 60 month payment term to pay off their tax debt, but the IRS is changing their policies on this.

It used to be that a taxpayer could get into an “IA” without going through a full financial analysis with the IRS, and disclosing all of their assets, incomes, and available lines of credit. The collection agents at the IRS have begun a process of requesting a 433-F from everyone requesting to be placed into an “IA”. By doing this, the IRS can explore every option that you have available when it comes to paying off your debt in full immediately, even if via credit cards or an equity loan.

There are two things you must remember when dealing with the IRS collections department. The first is that it is their job to collect, and to collect quickly. Secondly, the IRS believes they are more important than ANY other creditor, so they will be happy to put you in debt to someone else, as long as you’re not in debt to them. Having a taxpayer submit a 433-F also allows the IRS to see your income and your expenses. They will give you the “national standard” for your available Monthly Disposable Income (MDI).

When the IRS discovers your “MDI”, they will request that the entire amount become your monthly payment.

So, what should you do now that the IRS is making you negotiate to even get a payment plan? Your best option is to hire a Professional Negotiator within the IRS. As I have covered before, there are former IRS agents who are now Enrolled Agents and know what your rights are within the IRM. These professionals can get you into the BEST possible resolution, for you, within the tax law.

Tuesday, September 9, 2008

Your Real Options….

In previous blogs, I have mentioned that a U.S. taxpayer has 21 resolution options within the IRS tax law. The 21 resolutions can be broken down into 5 major categories (I will cover the different categories in further detail in future blogs). Most of the time, these resolutions can be combined to resolve your tax debt. Therefore, you will want to consult a professional when evaluating all of these options. Some of these areas are extremely technical, and the IRM (Internal Revenue Manuel) is extremely strict on the rules and regulations for many of these options. Below you will find the 21 resolutions listed under each specific category. Again, we will touch on these more in depth within upcoming blogs.

Tax Abatement Programs
1. Offer-in-Compromise: Doubt as to Liability
2. Offer-in-Compromise: Doubt as to Collectability
3. Offer-in Compromise: Effective Tax Administration
4. The Partial Pay Installment Agreement (this was an “OIC” in the past)
5. Innocent or Injured Spouse Relief
6. Amended Tax Returns to Reduce Liability
7. Audit Response/Taxpayer Advocate Response
8. Civil Trust Fund Penalty Negotiation
9. Collection Appeals Program
10. Collection Due Process Appea
l11. Audit Reconsideration

Affordable Payment Plans
12. 60 Month Payment Terms
13. Ability to pay Payment Terms
14. Use of Net Realizable Equity to pay-down liability- lien subordination, etc.

Deferral programs
15. Currently Not Collectible Status (CNC-Status 53)
16. Negotiated 30 to 120 day extension to Full Pay
17. Negotiated 12 month payment plan for the lifestyle adjustment, conditional IAs.

Penalty Abatement programs
18. Penalty Abatement request for reasonable cause
19. Penalty Abatement request for IRS error

Tax Expiration Programs
20. Statute of Limitations
21. Defunct Business

Survey Says...

Last week, on Ask the Tax Wizard, we had a poll asking the question: Which action would bring the worst punishment from the IRS? The choices were: a) Not filing your tax return, b) Defaulting on a current agreement, c) Owing the IRS money, and d) Not withholding enough taxes, or making estimated tax payments.

Once the poll ended, most of you thought the answer was “not filing your tax returns”, and that answer is Correct! Although none of the above mentioned are considered okay, unfiled taxes will get you in some serious trouble. The funny thing about the IRS is that it is not a crime to owe the IRS money; this is just a civil offense. However, not filing your tax return is actually a criminal offense, and is punishable with up to one year in prison for each unfiled year. So, you could owe the IRS millions of dollars and only have to worry about levies, liens, and/or property seizure, but you would still maintain your freedom.

A good example of this is Wesley Snipes. Despite the fact that he owes the IRS millions, he was sentenced to 3 years in prison for “willfully” avoiding filing a tax return. As we have covered before, filing your return can be complex (So, you need to file your tax returns, but complicated will filing be?) so seek help in preparing your return! If you find yourself with unfiled tax returns, don’t wait around, there is help just waiting for you.

Tuesday, September 2, 2008

How much will the IRS take from you?

The most common mistake I see taxpayers make is to ignore the letters the IRS sends them. The IRS follows a “letter cycle”, giving you multiple chances to pay what you owe, before they move on to levying your wages or bank account. A wage/bank levy can cause real damage, hindering your ability to pay your bills or maintain your lifestyle. If you are a w-2 employee, (meaning your employer withholds money from your paychecks) then the IRS can levy 85% of your income. If you are a contractor, or considered self employed, the IRS can garnish 100% of your income! The IRS can actually contact the people who pay you and require them to send any money currently owed to you directly to them.

Let’s briefly discuss the types of levies that exist. There are 2 that the IRS can attach to your wages. The first is a 668 (a), which is a ONE-TIME levy on your wages from your 1099 income. Therefore, once your company/employer sends the money owed, you should be able to resume earning your income. There is also a 668 (w), which is a continuous levy that remains until the debt is completely satisfied. Recently, I dealt with a client who was self-employed. The ACS (Automated Collection Division) within the IRS mistakenly sent a 668 (w) to his vendor. By law, his contractor was forced to send all his income for WEEKS to the IRS, not realizing that it was the IRS who had made a huge mistake and levied him as if he was a wage earner, instead of a self employed individual.

Okay, so you didn’t respond to the letters sent to you by the IRS threatening to levy your wages/accounts and now it’s been done. What are your options? The most difficult thing I deal with is getting the IRS to release a wage garnishment once the IRS sinks its teeth into someone’s wages. In this case, you will need the assistance of an “Enrolled Agent”. If you hire an “Enrolled Agent” to help you deal with this situation, they will be able to act quickly and request that the IRS release the levy if it is creating a hardship. The “Enrolled Agent” will also be able to assist you in reaching some type of formal resolution with the IRS. Otherwise, you would remain in active collections with them. A professional who deals with the IRS collections divisions on a regular basis will be able to assist you in getting into one of 21 resolutions available to a U.S. taxpayer, but we will cover these more in depth in upcoming blogs!

Do you owe more than $100,000 to the IRS?

To the average individual owing $100,000, or more, to the IRS seems like a pretty big deal and it is. When individuals or businesses get this far in debt to the IRS they are often in danger of being assigned a Revenue Officer, or being referred to one of two High Liability Units within the IRS. The time to act, when faced with this situation, is NOW! One thing you must understand about being assigned a Revenue Officer, or “RO”, and being assigned to a High Liability Unit is that their only purpose within the IRS is to collect what you owe, and to do it quickly.

Most “RO’s” that I deal with are quick to levy bank accounts and wages first, and then ask questions later. Typically, the Revenue Officer you are assigned to will come to your home or business and leave a list of demands, as well as financial documents they need to see. They do this because they are looking for ANY possible way to collect the debt from you.

There are 2 High Liability Units, one located in Holtsville, New York, the other in Buffalo. Although this group won’t come to you home or business to collect the debt, they work via phone and will levy every possible asset at their disposal in order to do so. You can also count on having a lien filed against you, which will be done using your social security number at the local court house in the amount of the owed debt. These Revenue Officers also have the option of turning the lien into a judgment against you, which makes the tax debt permanent until the debt is paid in full.

So, now that you know what an RO can do, what can YOU do if you find yourself in this situation? The best advice I can give you is to hire a professional who knows the law, your rights, and the best ways to manage your relationship with a Revenue Officer.

Tuesday, August 26, 2008

So, you know you need to file your tax returns, but how complicated will filing be?

Let's keep it simple. In order to accurately complete your tax returns, you first need to be aware that there are different forms you must use. These forms, in the tax world, are known as "Schedules", and there are a few to choose from. For example, you would choose a "Schedule A" to deduct your mortgage interest or medical expenses. A "Schedule D" should be used to list your stock transactions. For many, even this information can be confusing. I have a colleague who was an IRS Revenue Agent (or auditor) and his opinion is that individuals should not try to complete their returns on their own. The same mistakes tend to be made time and time again. In my experience, people neglect to include invalid dependants, forget to include IRA/401K distribution, or even omit their 1099-misc income or business income. How can you make sure you avoid common errors such as these? My suggestion would be to have a professional complete your return. It may cost more to let someone else take over, but the peace of mind that you will gain, knowing it will be correct and complete, will make it worth it.

Now, I have dealt with clients who begin the tax return process assuming it is as easy as plugging the information into a tax program, but they often discover that's not the case. There are "details" that are unknown that can end up costing you significantly in the end. For example, a day trader, who buys and sells stocks on a regular basis, may not be aware that if he/she doesn't enter their purchase price on the "Schedule D" of the stocks they sell, then the IRS will count the entire amount as income for them, which in turn will greatly increase their taxable income for the year, and create a higher tax bill. In another example we'll use a rental property owner. Let's say you own three rental properties that you have made income from during the year, then in July one of your tenants decides to purchase your home. What Schedules will you need? In this situation, you would have to use a "Schedule E" for your rental property income, and then also a "Schedule D" for capitals gain income/loss.

Needless to say, different situations require their own unique filing process. For most people, filling out a tax return, and doing it right, can be extremely complex. It typically requires a lot more personal attention than computer software can provide. My point is this, seek professional help for your tax returns and I promise, you will at least save the money you would spend on Tylenol for your migraine...

Monday, August 25, 2008


Welcome to the "Ask the Tax Wizard" blog. I have decided to start this blog to help dispel some of the common misconceptions that are existing regarding the IRS, as well as to educate people about tax issues. Some of the topics I plan to cover over the next few months are: the Offer in Compromise (settlement), the Negotiated Installment Agreement, punishment for not filing, and many other topics. Be sure to check out the word links for further definitions on common terms, or feel free to ask any questions directly on the site. I hope you will visit often and register for our RSS feed so that I can help you learn what your REAL options are with the IRS.