IRS Mind

Reviewing legalbitstream.com, a comprehensive tax law database

2009-06-19T11:34:00.002-04:00

So, Jim sent me an email earlier this morning to share that he and Tal had found a Tax Law and IRS Material database called Legal bitstream. This site has some value and some opportunity for improvement. Before we get into that, here is a brief description of Legal bitstream.

The site is owned and operated by Mayfield Publishing Company, located in Houston, TX, and has been live since 2003. It offers the ability to search all Tax cases from 1990 to the present. Also, you have the option of searching various IRS materials, including revenue rulings, executive orders, and Treasury decisions. The IRS materials date back to 1954, depending on the type of materials. In addition to those two database search capabilities, Legal bitstream provides links to government pages such as the Internal Revenue Code and IRS Forms & Publications.

Value

A comprehensive one-stop shop for tax law and IRS-related information
The ability to search all of these documents for particular keywords and phrases
It's Free!

Opportunity for Improvement

The search feature needs some work. Search results include any documents that contains your keyword phrase. This means that it could be mentioned one time, way down near the bottom, as a part of the case description, while you were looking for cases that have that phrase as part of the subject (perhaps the plaintiff or defendant). Being able to search the subject and not the detailed description could help users find information much quicker.

Think about when you do a book search in a library database. It gives you the option of isolating your search among book titles, authors, publishers, or descriptions. If you don't choose any of those options, you can still search among all of those segments simultaneously. Having the same functionality on this site would be extremely powerful and would add so much value to what's already there.

Additionally, search is the only way to find information. There is no browse feature. So, you better know what you're looking for ahead of time.

Give Legal bitstream a shot. On the About Us page, they remind you that the site is free to use...for now. They are still deciding if and when this will be a fee based site.

IRS Debt...Avoiding the headaches

2009-06-17T11:30:00.002-04:00

I currently manage a client base that typically owes the IRS in excess of $10,000 and one of the most common issues that I run into when trying to explain what options my clients have in resolving their tax debt is getting them to understand that they may have to adjust their lifestyle in order to obtain a successful resolution.

So what does "adjusting their lifestyle" mean? It means that when you owe the IRS, especially if you owe in excess of $25,000, you more than likely are going to have to give up some luxuries or some expenses that you have grown accustom to.

You see, the IRS is not a creditor and they are not a bank. Your debt with them is more serious and carries more consequences than any debt that you may owe, including credit cards and mortgage payments.

I often hear my clients complain that they cannot afford what the IRS is trying to make them pay per month, however what they often fail to understand is that the IRS is not going to allow you to have an extravagant lifestyle when you owe them money.

Now, that is not to say that most of my clients live an extravagant lifestyle, however the way the IRS views this, especially if you owe for multiple years and well in excess of $25,000, you would not have been able to afford the lifestyle that you are/were living had you actually paid the taxes you owed.

This is especially a problem for my clients who were from the mortgage or financial services industries. They once made enormous salaries, and in the process, also incurred enormous expenses, such as large car payments, huge mortgage payments and increased their debt load on their credit cards. Well, now their income is drastically less, however they still have the large expenses that they acquired during their booming years and to top if off, now the IRS is enforcing collection against them.

The problem is that the clients, are spending every nickel they have to pay the $900 a month car payment, the $4500 a month mortgage payment and their $750 a month credit card bills, but they are still not paying the IRS. They, then don't understand why the IRS wants them to pay $1200 a month, when from their perspective they are broke. In actuality, yes, they are broke, but from the IRS's perspective they can afford to make a payment. Why, because they are living above their means and the IRS isn't going to allow them to live in excess of their means when there is a balance owed to them.

First, the IRS isn't going to allow the credit card payment at all. That means the client can pay at least $750 per month to the IRS. Next the IRS isn't going to allow the entire car payment nor the entire mortgage payment either. The IRS will allow up to $489 for a car payment and the housing and utility standards for the clients area will determine the monthly total that they will allow. Any amount in excess of the allowable living standards, the IRS will construe as disposable income and will want it as part of an installment agreement.

In short, do yourself a favor... if you owe the IRS, take a good look at your expenses that you are paying on a monthly basis and ask yourself...."if someone owed me money, would I allow them to pay this expense before they paid me?"

Have an Offshore Account- It is Official- the IRS will be geared to chase you...

2009-06-11T08:17:00.004-04:00

It is official...the IRS has asked the US Senate for over $128 million to hire 800 new IRS Agents to track down high income Americans who hide their assets overseas.

According to Treasury Secretary Timothy Geithner:

"A total of $332 million would be devoted to new Internal Revenue Service (IRS) enforcement efforts, including $128.1 million to add nearly 800 new IRS employees to combat offshore tax evasion and improve compliance with U.S. international tax laws by businesses and high-income individuals. Another $130 million would go to bolster the security of the IRS information technology, improve the efficiency of its business systems and upgrade its fraud detection capabilities."

The IRS appears, at least politically, serious about chasing down clandestine foreign bank accounts. Whether this will bear any fruit remains to be seen.

The deadline for filing the Treasury Form TD F 90-22.1 is June 30th. Miss the deadline or past deadlines and the IRS promises it will use its resources to find you and enforce penalties for non-compliance.

IRS Levy, Certified Letters, Wage Garnishment...Don't wait

2009-06-03T11:55:00.007-04:00

It's that time of the year for the IRS to being stepping up their enforcement. So, what does that mean? It means liens and levies...lots of them.

So what do you do if you receive a notice of intent to levy?
Well, first don't wait and do nothing, because they are coming and they are not going to wait on you. You need to be proactive and do several things.

1. Make sure all of your tax returns are filed, at least for the past 6 years. Why, you ask? Because the IRS is going to require them before they stop any enforced collection or release any type of levy.

If all of your returns are not filed, then find a tax preparer who can file outstanding returns and one who will verify your income against IRS records to ensure they are properly prepared. Make sure that they also date stamp your returns to ensure IRS compliance is met.

2. Determine the total amount that you owe for all years, not just the years that are listed on the levy notice if you know you owe for more years. This will be important to getting your levy released or to prevent the levy before it happens.

Why is this important? Because the IRS is going to require that you resolve all of your outstanding tax issues at once before they are going to release or stop any levies.

The total amount of taxes owed for all years combined will help determine what options are available to you to resolve your tax debts. The rest is determined by your current financial situation.

If your liability is less then $25,000 in total for all years, then the simplest and easiest resolution to obtain to prevent or release any levies is what is know as a "Streamlined Installment Agreement".

This will allow you to pay of your entire liability at a set payment per month over a 60 month period. As long as you make that payment then the IRS will simply leave you alone.

If you owe over $25,000 or if you cannot afford to make the streamlined payment amount then be prepared to go through a full financial investigation. This investigation will compare your current household income and expenses to what the IRS will allow as necessary living expenses for the area in which you live in. There are expenses that the IRS allows and there are expenses that the IRS does not allow, such as credit card payments.

So if you owe less than $25,000 and the only reason you cannot afford the streamlined amount is due to a monthly credit card payment, do yourself a favor, save yourself some time and headaches by forgetting about the credit card payment and agree to the streamlined payment, because the IRS isn't going to allow the payment anyway if you decide to go through the full financial disclosure, and they will then want at least the amount of that payment as a monthly payment to them and potentially more.

If you don't feel you understand the information that the IRS is requesting from you or you don't understand the documents and forms they are sending to you, then seek professional help.

In General, you should seek professional help anytime you owe in excess of $25,000, as it substantially more difficult to get into resolution with the IRS when you are in excess of $25,000.

Don't seek someone who is going to promise you a "settlement" as there is a 99% change that it will never happen. They know it, and you shouldn't fall for it. Find someone or a firm that will be brutally honest with you and tell you exactly what can be done, rather than giving you false promises that will never come true.

Wage Garnishment? Wage Levy?...Here's what to do

2009-05-20T11:49:00.006-04:00

Do you have or are you about to receive a wage garnishment, otherwise known as a levy?...Here's what to do.

If your employer has already received the notice of the levy, IRS form 668W, or 668A, then your next paycheck will be drastically affected by the levy. If you are a W-2 employee, the IRS can levy you for up to 85% of your gross income. If you are self employed and receive 1099 (or "independent contractor") income then the IRS can levy you for up to 100% of your income.

This is obviously going to affect your ability to pay your normal household bills. In order for the levy to stop, you have to secure a release of levy from the IRS.

Here's how....

First, you are going to have to make sure that you are compliant with all of your tax return filings. Meaning, you at minimum, are going to have to make sure that you have filed all returns from 2002 through 2008. If you are missing any of those tax returns, the IRS is not going to even consider releasing the levy, i.e. until you have met the IRS's policy of compliance. So, get your returns prepared and get them done quickly and accurately. HINT: you will want to make sure the income on the returns match up to your IRS Wage and Income Transcripts or IRP files for each tax year.

Next, you will need a resolution for your liability. Meaning, that you will have to secure with the IRS either an Installment Agreement, a Currently Not Collectible status, or submit an Offer In Compromise. Once the resolution is established and agreed to by the IRS, you will need to then have the IRS fax a Release of Levy to your payroll department.

Once the Release of Levy is received by your payroll department, your next paycheck will not be affected by the levy. Now, some levy releases are full releases and some are partial releases. It will all depend on your individual circumstances, total liability, history of compliance and the type of resolution secured.

The best way to keep a levy from happening is to resolve your tax issues prior to the levy being issued. The IRS will send notice's to you of their intent to levy prior to the issuance of the levy. This preview comes in the form of certified mail, notice CP504 Notice of Intent to Levy. If you receive this letter, you have a limited amount of time before the IRS starts to issue levies to your employer, your bank, or your accounts receivable. Don't wait, get your situation resolved immediately or risk losing all or the majority of your income!

IRS Tax Debt and Collection: What Are My Options?

2009-05-15T17:53:00.002-04:00

Just a refresher for all who want a concise summary of the options that are used most of the time to resolve tax debt and IRS collection issues.

Owing the IRS money can be overwhelming, especially with threats of liens and levies hanging over your head. You know you should take action and get your situation under control, but what can you do? You don’t have the money to pay the balance in full, but ignoring the IRS is not an option.

Fortunately, there are several resolution options available to tax payers, and the right one for you will depend upon your current financial situation. Please note that the options below do not argue the validity of the tax liability, but are agreements with the IRS to help resolve the tax debt you owe. Although full paying the liability is often the best option (and cheapest), most people are not able to acquire the funds necessary to do so. If you are one of these people, one of the following options might work for you.

*Installment Agreements
*Streamlined Installment Agreement
*Installment Agreement based on ability to pay
*Lifestyle Adjustment Installment Agreement
*Partial Pay Installment Agreement
*Currently Non-Collectible
*Offer in Compromise
*Other options

It is important to note that each of the agreements above will require past, present and future compliance. Generally, this means that you must file at least the past 6 years tax returns, the current year’s tax return, and you must file and pay all future years’ taxes. Failure to do so will cause you to default any agreement that you have with the IRS. Also, it is important to know that interest will continue to accrue until the balance is paid in full, but will accrue at a lesser rate once an agreement is set up.

Installment Agreements- Monthly Payment Plan

An installment agreement is the most common resolution used by taxpayers who owe money to the IRS but cannot afford to full pay. Basically, an installment agreement is a monthly payment plan to pay off the balance due. There are many different types of installment agreements as listed below.

Streamlined-Installment Agreement:

A streamlined installment agreement is a five-year payment plan for those who owe less than $25,000 to the IRS. In order to qualify for this type of agreement, the taxpayer must meet the following criteria:
*File all tax returns for the current year and at least the past 6 years
*Provide employer name, bank name, and date of birth to the IRS
*The collection statute does not expire within 5 years
*The assessed balance is below $25,000
*The taxpayer can afford the required monthly payment amount, which is equal
to the total liability divided by 50 months (Ex: $24,000/50= $480 per month).

Ability to Pay Installment Agreement

For taxpayers who cannot afford to pay the streamlined installment amount, the IRS will consider setting up an installment agreement based on the individual’s current financial situation or their “ability to pay”. The IRS will look at an individual’s monthly income and expenses to determine the amount of money left over each month. This “leftover” amount is known as monthly disposable income. Generally, the amount of monthly disposable income will be the amount of your monthly payment.

This type of agreement will require a completed and signed IRS Collection Information Statement, Form 433-A or Form 433-F (depending on your situation) and all accompanying documents. The IRS will use these documents to verify the monthly payment amount. Please note that the IRS will only allow necessary living expenses and the amounts allowed as necessary may be limited by local and national allowable living expense standards. In order to qualify for this agreement, the taxpayer must meet the following criteria:
*Satisfy to the IRS that you do not have assets to pay the liability in full
*File all tax returns for the current year and at least the past 6 years
*File and pay all future taxes
*Ensure that your payment is received by the IRS timely each month
*Submit all requested IRS forms and financial documentation.
*The liability will be paid in full before the collection statute expires

Please note that the IRS will generally file a tax lien on you if you enter into an installment agreement on any ability to pay installment agreement. In some instances if your liability is below $25,000, the IRS will not file a tax lien. In any event, you should expect a tax lien on any ability to pay installment agreements.

Lifestyle Adjustment
Occasionally taxpayers might qualify for a specific resolution known as a Lifestyle Adjustment Installment agreement. Many taxpayers find that their necessary living expenses are above the local and national standards but are unable to pay the required amount due to other financial obligations, such as a high mortgage or car payment. The IRS will consider allowing the taxpayer to make monthly payments based on his/her actual expenses for 12-months to give the taxpayer time to adjust their lifestyle (ex: refinance a home or find a car with a lower car payment) to reduce their monthly expenses to the level of the local or national standards. Then, the monthly payment amount will increase to the amount of the monthly disposable income based on the local and national living expense standards. The requirements for this type of agreement are listed below:
*Satisfy to the IRS that you do not have assets to pay the liability in full
*File all tax returns for the current year and at least the past 6 years
*File and pay all future taxes
*Ensure that your payment is received on time each month
*Submit all requested IRS forms and financial documentation
*The liability will be paid before the collection statute expires
*Pay a lower payment for one year and then increase payment amount

Please note that the IRS will generally file a tax lien on you if you enter into this type of installment agreement.

Partial Pay Installment Agreement

A partial pay installment agreement follows essentially the same process as a regular installment agreement but will not allow the taxpayer to pay the total liability over the life of the collection statute. For example, if you owe the IRS $50,000 and the collection statute is 36 months away and your monthly disposable income is $300, you will not have the chance to pay off the total liability before the collection statute expires (i.e. you will pay only 36 months @$300, or $10,800- a “partial” amount of your total liability before the liability expires due to statute).

This type of agreement is similar to an Offer in Compromise, but does not require a down payment nor does it extend the collection statute.

Please note that the IRS will review this type of agreement every two years to make sure that the taxpayer’s financial situation has not improved. The IRS will also file a lien if this agreement is accepted.

Requirements of a Partial Pay Installment Agreement:
*Satisfy to the IRS that you do not have assets to pay the liability in full
*File all tax returns for the current year and at least the past 6 years
*File and pay all future taxes
*Ensure that your payment is received on time each month
*Submit all requested IRS forms and financial documentation
*The liability will be paid before the collection statute expires

Currently Non-Collectible (“CNC”)

If your current financial situation does not allow you to reasonably make monthly payments and you do not have any assets to borrow against and pay the liability in full, the IRS will place you into a currently non-collectible status. While you are in this status, you are not required to make monthly payments towards your tax liability and the IRS will stop most collection activity, such as levies. This type of agreement will require a completed and signed IRS Collection Information Statement, Form 433-A or Form 433-B and all accompanying documents to verify that you cannot afford to make monthly payments.

Also, this is a last resort for the IRS. Consequently they will want you to use any assets available to pay down your debt first. If you cannot afford to make monthly payments but do have equity in your home or an investment or retirement account, they will want you to use the available funds to pay your liability before considering placing you in CNC.

The IRS will file a lien and will review your situation every year to make sure your financial situation hasn’t improved.

CNC Qualifications & Requirements:
*Negative monthly disposable income after necessary living expenses are paid
*Satisfy to the IRS that you do not or have liquidated all assets to full or partially pay the liability
*File all tax returns for the current year and at least the past 6 years
*Submit all requested IRS forms and financial documentation.

Offer In Compromise- the “settlement”

Occasionally, the IRS may consider settling the debt for less than the actual amount owed. This agreement, known as an Offer in Compromise, is extremely difficult to achieve and has strict guidelines that must be met in order to be considered. The IRS will only accept an Offer in Compromise if they conclude that the taxpayer will never be able to pay the total amount of the tax liability over the life of the collection statute or if they determine that collecting the tax would be unfair or inequitable.

The IRS will look at your reasonable collection potential (“RCP standard”) to determine whether or not they would have the ability to collect the total amount of the tax over the life of the statute. If they determine that your reasonable collection potential is less than the total amount of the liability, the IRS may settle your tax debt. Your reasonable collection potential can be calculated by multiplying your monthly disposable income by months remaining on the collection statute of limitations. An Offer in Compromise (a short-term cash offer) is calculated by multiplying your MDI by 48 months and adding that number to the amount of the net equity you have in your assets. If this amount is less than the liability, this becomes your “offer amount.”

Example:

A taxpayer who owes $100,000 to the IRS and has $500 in a checking account and $30,000 net equity in their home. Their MDI is $55 per month. The Offer Amount would be (note that the client will meet the prerequisite RCP standard):

$500 + $30,000 + ($55*48) = $33,140

This will involve a full financial investigation of income, assets, and expenses and can take anywhere from 6 months to two years to be reviewed by the IRS.

The IRS will also take your age, health, education and employment history into consideration. If you're 80 years old, for example, and are living on a fixed income and cannot afford payments to absolve the debt, the IRS may consider settling your debt as you do not have the means to pay the amount over the life of the collection statute. If you're 30 with a career ahead of you, it's presumable that in the coming years your financial situation may improve and your reasonable collection potential will increase. The IRS will generally not accept an Offer in Compromise if they believe you will have the ability to pay in the future.

OIC Qualifications & Requirements:
1. Satisfy to the IRS that you do not have equity in assets to pay the liability in full
2. Ensure that your Offer in Compromise meets the Reasonable Collection
Potential Standard
3. Establish that you have not dissolved or dissipated any assets that could have been used to pay the tax (the “dissolution period” starts when your tax is assessed or should be been assessed, whichever is earlier)
4. File current year’s tax return and all past due returns
5. File timely and pay all taxes for the next 5 years
6. Agree to give your tax refund for the current year to the IRS
7. Complete IRS form 656, 433-A, and submit to IRS will all attachments

An IRS Levy

2009-05-15T16:22:00.001-04:00

A levy is a legal seizure of your property to satisfy a tax debt. If you do not pay your taxes (or make arrangements to settle your debt), the IRS may seize and sell any type of real or personal property that you own or have an interest in. The IRS could levy your wages, you bank accounts, and in some extreme, rare cases could even seize property you own, such as your home.
The IRS generally only levies a taxpayer after other attempts to collect the tax have failed. If you are currently under levy, you have probably received several notices from the IRS informing you that you have a balance due and requesting payment. If you are not yet under levy, you should make an attempt to resolve your tax liability as soon as possible in order to prevent this type of collection activity from occurring.
The two most common types of levies are bank levies and wage levies.

A wage levy involves the IRS telling your employer to hold part of your pay and send it to them instead. The amount taken varies by case but, in most cases, leaves you with minimal income in order to meet your basic living expenses. When the IRS sends notice to your employer, they are required by law to comply. This type of levy will remain in place until an agreement is reached.

A bank levy, as the name suggests, is a seizure of money from an actual bank account. Like the wage levy, the IRS contacts your bank to inform them of the levy and the amount. This will freeze only the amount in you account at the time the bank receives the levy. Any funds deposited after your account has been levied will not be affected. After the bank receives the notice, the funds are frozen for 21 days before actually sent to the IRS by the bank. In this time the taxpayer can make arrangements to pay their tax debt, it may be possible to release the levy if this process is completed and appoved by the IRS before the 21 day period expires After the 21 days the money is gone and, generally, will not be returned.

The only effective way to avoid or release a levy is to get into an agreement with the IRS.

Paying the IRS

2009-05-13T14:55:00.003-04:00

Just thought this was funny and in most cases this is what most tax resolutions are about.

Get a Form 1099-C this year? Here is some help....

2009-05-05T13:56:00.005-04:00

If you have lost a home in foreclosure or have been unable to pay your debts, you most likely have received a Form 1099-C from the lending institution. The Form 1099-C, Cancellation of Debt,is reported by the lending institution when it has to "write-off" a debt that you owe them. This amount must be reported on your tax return and could, under certain circumstances, be taxable income.

Given the number of Forms 1099-C issued in 2007 and forecasted for the future and the number of foreclosures (approx. 2 million Forms 1099-C for 2007) in 2008, there will be many American taxpayers in the post-foreclosure dilemma: potential tax debt from debt forgiveness.

Fortunately, the IRS has responded with information to those affected by the confusing process of whether debt forgiveness, i.e. Form 1099-C cancellation of debt reporting, is taxable. The IRS has actually developed an updated publication for those inflicted by the recent foreclosure pandemic. Even better, the IRS has explained it in laymen's terms in a recent Phone Forum. This transcript (has it in audio also) explains most of the confusion around debt forgiveness and taxes.

IRS needs more IRS Agents

2009-05-05T13:41:00.002-04:00

It appears that more IRS agents are the key to the Obama Administration's tax strategy. Last week, the IRS announced that they are hiring more Revenue Agents.

Revenue Agents will also be needed for the IRS strategy on eliminating tax havens. In fact, according to the Obama Administration, elimination of tax haven abuses will require 800 additional Revenue Agents.

More Revenue Agents...more audits...

Don't have last year's Form W-2? Here's what to do:

2009-03-26T12:38:00.007-04:00

Okay, so you haven't filed last year's return or you have several years of unfiled returns and you have finally decided to get them filed. However, you don't have your Forms W-2 and/or Forms 1099. Don't despair, you can request them from the IRS.

The IRS keeps a database of your reported income information. These are called your IRP files, which stands for Income Reported from Payee. The IRS keeps this information for each individual tax year for all taxpayers who had reported income.

Each IRP file will list all of your income sources for that year, whether it is Form W-2 income, Form 1099 income, mortgage interest, retirement account distributions, stock transactions and even student loan interest and tuition payments. The IRS will have all of it!

There is one catch though. If you had W-2 income and had state tax withholdings, your IRP will not tell you what your state tax withholding amounts are. The IRS does not keep track of that information and unfortunately most states that have a state income tax do not keep track of it either. So you might have to go back to your employer you worked for that year and request a copy of your Form W-2 from them.

The few states that keep an IRP database like the IRS are...
1. California
2. Minnesota
3. Michigan
4. Louisiana
5. Georgia
6. New York
7. West Virginia
8. Pennsylvania
9. Maryland
10. Delaware

Can I get my penalties abated or removed?

2009-03-11T17:10:00.002-04:00

That is one of the most common questions that I receive from my clients and there is no simple answer for it. The only answer is...it depends! So what does it depend on?

It depends on the what penalties are assessed and it depends on reasonable cause. Certain penalties are assessed by the examination function of the IRS (think audit and Revenue Agent) and other penalties are assessed by the collections function (think levies, liens and Revenue Officer), however it mainly depends on your reasonable cause.

Reasonable Cause is an event or circumstance beyond your control that prevented you from being able to comply with tax law. Meaning the cause prevented you from either being able to file the return, file it correctly and accurately, prevent you from paying the tax owed, or a combination of any of those types of events. Some examples of reasonable cause are the following.

Medical condition (includes addictions) that does not allow you to file/pay your taxes (needs to also impair the client’s ability to maintain other aspects of their life: e.g. personal finances, ability to work, ability to obtain professional advice, etc.)
Documentation includes: medical notes from physicians, medical bills, other financial bills/bankruptcy, disability claims (SSA), lack of income, lack of employment, etc.
A reliance on a tax professional or other professional for your tax preparation, tax deposits, and tax filings (includes incorrect advice if the client can show the advice received, e.g. in writing).
Documentation includes: Engagement Agreement with the professional, lawsuits filed against the professional, if the professional was an employee- documentation on the dismissal of the employee and analysis of reasons for dismissal that relate to tax non-compliance, etc.
An Act of God occurred that caused a hardship that did not allow the client to comply: e.g. Fire, flood, hurricane, tornado, etc. (needs to also impair the client’s ability to maintain other aspects of their life: e.g. personal finances, ability to work)
Documentation includes: evidence of the disaster, insurance claims, description of property/records lost, etc.
Loss or theft of records that were outside of the client’s control, e.g. papers destroyed by employee, etc.
Documentation includes: police reports, employee dismissal documentation, etc.
The client was a victim of a crime, e.g. embezzlement
Documentation includes: police reports, insurance claims, etc.
The IRS makes an error and the client relies on the information provided, e.g. they inform the client (and there is proof of the advice- preferably in writing) that an item is non-taxable and it is taxable.
Documentation includes: IRS person that the advice was received (including badge ID #), written advice received by the IRS

The IRS will review all the facts and circumstances in considering abatement of penalties. This includes:

• The taxpayer’s reason for the delinquency or error,
• The taxpayer’s previous history of compliance,
• The length of time between the taxpayer’s reason cited for noncompliance and the taxpayer's subsequent compliance, and
• Whether the circumstances were beyond the taxpayer’s control, e.g. reasonable cause

Proving “reasonable cause"however is not always enough.

For example:
• The accuracy-related penalty (e.g. negligence): The taxpayer must also prove that he acted in good faith.
• The failure to file and failure to pay penalties: The taxpayer must also show that the failure was not due to willful neglect

So when asking if the penalties can be abated, you need to ask yourself this first. Do I have reasonable cause!

Does the IRS want you to take a loan from them?

2009-03-11T16:12:00.007-04:00

IRS Interest Rates at an all time low- 4%

Effective 4/1/2009, the IRS will charge the lowest interest rate that it has ever charged since the inception of the 1954 tax code: 4%. It has only been this low on one other occasion: the 10/1/03 through 3/31/04. The previous quarter interest rate was 5%.

Is this the kindler, gentler IRS? Is this another government bailout program by charging lower interest rates on tax debt to stimulate the economy?

Hardly, the IRS is just following the rules for determining the interest rates. The rate is the federal short term rate plus three % and is compounded daily.

That means when interest rates are low, even the IRS cannot charge you a larger amount. However, the normal failure to pay penalty rate is still one-half percent per month on taxpayers not in an agreement with the IRS (then it is one-quarter of a percent) and not in IRS Collection Enforcement (then it is 1% per month while in enforcement).

You Have Mail...IRS Certified

2009-03-05T07:55:00.005-05:00

If you have received certified mail from the IRS, you more than likely owe taxes and the IRS is about to begin enforcing collection of those taxes. You also more than likely have received other IRS letters that were not certified regarding your tax liability.

What most people do not understand is that the IRS letter cycle is their warning system and they are trying to warn you that you need to resolve your tax issue or they will begin enforcement of that liability through liens and Levies. And the letters that they send just before they begin issuing liens and Levies come certified.

Why? Because the IRS is required to by law. DO NOT think that by not going to the post office to sign and receive your certified mail is going to stop them from enforcing collection of your past due taxes. That is irrelevant. The fact that they sent the notice via certified mail fulfills their judicial obligation before they can begin levying your assets, such as your wages and bank accounts.

Here is how the IRS letter cycle normally works when you owe taxes.

First Letter- Notice of Balance Due (Letter code CP14 or CP11, you can find these codes normally in the top right corner or bottom right corner of the notice) This notifies you that they are attempting to collect past due taxes.

Second Letter- 1st Payment Notice (CP501)- "You need to pay your balance". If you owe for multiple years the IRS can skip this notice and move to the third letter

Third Letter- 2nd Payment Notice (CP503)- "You need to pay your balance immediately"

Fourth Letter/Certified Mail-Notice of Intent to Levy (CP504) "If you do not pay your balance, enforced collection will begin"

Fifth Letter/Certified Mail*- Final Notice of Intent to Levy and Your rights to a Hearing (CP90, CP91, CP92, CP242, L1058, L11, L1085) "A Levy is Imminent"
*if no CP504 issued

The above list is just a fraction of all the notices and correspondence that the IRS issues for every possible tax issue and it is not exhaustive, however that is the normal collection notice cycle.

The point is this. If you have received certified mail from the IRS, you have a limited amount of time to react before they begin to levy your assets. This means you need to react now and be proactive in resolving your tax situation. Obviously it would be in your best interest to be proactive from the first letter you receive to give you and/or your representative the most amount of time to resolve the issue since dealing with the IRS on any tax issue is time consuming and time is of the essence.

If you do not understand any notice or letter that the IRS has sent you, then seek an expert Tax Professional to help you.

My Bank Account is Frozen!

2009-02-24T09:45:00.003-05:00

"My bank account is frozen!!!!" . I hear this often when talking to clients who have liabilities owed to the IRS and have failed to resolve the issue. This is why it is best to be proactive in resolving any tax issue, especially when there is a balance due or an amount owed. If you do not then the IRS will eventually begin to enforce collection through wage levies and/or bank account levies.

So what is a Bank Levy?

A bank levy is a seizure of the funds in your bank account on the day that the bank receives a levy notice from the IRS. More specifically, the bank must do the following as stated in the Internal Revenue Manual

1.The bank must send the amount in the taxpayer's accounts. However, it must send no more than the amount shown on the notice of levy.

2.The notice of levy only reaches the amount on deposit when the levy is received. Money deposited later is not surrendered, including deposits during the holding period. Another levy must be served to reach this money. Also, the levy only reaches deposits that have cleared and are available for the taxpayer to withdraw.

3.Levy proceeds must not be reduced by any fee charged by the bank for processing the levy.

What is the holding period?

1.A bank must wait 21 calendar days after a levy is served before sending payment. Then, on the next business day, it must turn over the taxpayer's money. The depositor(s) can waive this waiting period. The bank will not send money that is subject to attachment or execution under judicial process. "Bank" includes credit unions, savings and loan associations, trust companies, and others described in IRC 408(n) and Treas. Reg. §301.6332–3(b).

2.During the holding period, a levy might be released, or the amount owed could decrease.
Note:
If the bank receives no release, it must send the payment after the holding period. No additional notice is required

How do you get a bank levy released?

First, it is very difficult to get a bank levy released. Once the IRS has it's claws on guaranteed revenue they are very reluctant to release those funds. However, they will release a levy under the following conditions and a release of levy notice (form 668–D, Release of Levy/Release of Property from Levy) must be issued to the Bank.

1. The liability is satisfied by full payment, i.e., is no longer owed.
2. The statutory collection period has run out (see CSED)
3. The release will facilitate collection of the amount that is owed.
4. The levy is creating an economic hardship, i.e., the levy will cause the individual to be unable to pay their necessary living expenses
5. The taxpayer makes an installment agreement, unless the agreement allows for the levy

In essence, there must be a resolution made with the IRS in order to have the levy released. The IRS may also require that all outstanding returns be filed prior to releasing a levy too.

So what should you do if your bank account has been levied or you have an outstanding tax liability?

Contact a Tax Professional who can help you!

I can help you...Professional IRS Representation

2009-02-14T11:06:00.011-05:00

"I can help you" ought to be the first thing that any Tax Professional should be thinking or saying when speaking to a prospective client. All too often however, it seems that they are thinking "how much money can I get them to pay me!"

You see, I work in the Tax Resolution industry. I spend hours every day talking to prospective clients about:

Their tax problems
Discovering the amount of back taxes that they owe
How they incurred the tax
What years that they have not filed tax returns for, and
What subsequently needs to be done to help them.

I also spend an abundant amount of time with these prospective clients explaining why certain resolution options (mainly the Offer In Compromise settlement program) are not in their best interest. The reason: because some other Tax Professional promised them it could be done or the prospective client believes that it is the only reason they would need Professional IRS Representation.

So this poses 2 questions:

1) Why would a Tax Professional promise a resolution that is not in the clients best interest?
2) What are the benefits of Professional IRS Representation beyond a settlement?

The first question is an easy one to answer...."how much money can I get them to pay me?". That is all they are concerned with. The supposed Tax Professional is only telling the perspective client what they want to hear in order to gain their business and charge the client fees. What they should be doing, however, is telling the prospect what they need to hear. And, yes, it is as simple as that.

Obviously everyone wants to reduce their tax, and everyone with a back tax debt wants a settlement. So what is the easiest way to convince a prospect that their firm is the one who should handle the prospects case? Tell the prospect what they want to hear and promise them a settlement. I could go over all the rules, regulations and requirements of an Offer In Compromise, but you can find that information in some of our other posts.

The easiest way to think about it though is this...if it sounds to good to be true, it usually is. Remember, no one gets a free lunch, especially with taxes. So don't let your emotions get the best of you. Make sure your tax professional is telling you what you need to hear and think to yourself, are they looking out for my best interest or their own?

Now for the second question...what are the benefits of Professional Tax Representation? This is a little harder to define, but it is very much like asking, what are the benefits of having a Lawyer? With a court issue, there is nothing that a lawyer can do that you technically cannot do yourself, however it is often in your best interest to have representation. Why, because the lawyer knows the processes, procedures, and most importantly they know the law. So they know what should be said, what shouldn't and what needs to be done to resolve the court case. Dealing with the IRS is much the same way.

There is nothing technically that a Power of Attorney can do for you that you cannot do yourself, however just like any court issue, it is almost always in your best interest to have representation. The biggest difference between the two is that when dealing with the IRS, you are guilty until proven innocent. The burden of proof is always on the taxpayer, regardless of the issue or even if it is a result of an IRS mistake. A professional tax representative will know the processes and procedures in order to obtain a resolution to your problem. They know the tax code, what the IRS will accept, and what they will not. A professional tax representative will also understand how the IRS operates, what units of the IRS are handling your case and will understand the most efficient steps to providing information to them, as well has the best path to take in obtaining a resolution for your issue.

When considering whether to use Professional Representation consider how much you really know and understand about the IRS. Do you know what 4 divisions the IRS is divided into? Do you know what the function of each of those divisions are? Do you know what units are within those divisions? Do you know what an IRS Processing Center is? Do you know the difference between a Revenue Officer and a Revenue Agent? Can you tell by the letter you have received from the IRS, the crux of your issue? If you don't know the answer these questions, you should like seek Professional Tax Representation.

Think about it this way. If your car breaks down, you are more than likely going to take it to a mechanic to repair or at least seek their advice on the issue. A good mechanic is going to thoroughly review the problem and analyze the best way to repair the problem. They are going to tell you what you need to hear, not what you want to hear. A good mechanic is going to say "I can help you" and will explain what needs to be done to repair the vehicle. They are not going to try and sell you tires, when that is not what you need to fix your problem. A good Professional Tax Representative will do the same.

The IRS audit is over...or is it? The IRS Appeals Process

2009-01-27T14:39:00.009-05:00

Last year, the IRS audited just under 1.4 million individual taxpayers with an average tax debt bill ranging from over $20,000 per year for Field audits and almost $9,000 for mail audits. Interestingly, most individuals who are audited never contest the results. In fact, 97.4% agree or default to the IRS findings (For 2007- 40,637 audits were not agreed out of 1.55 million total IRS audits). For computer generated earned income tax credit audits, over 61% do not reply and are accessed the tax, interest and penalties imposed by the IRS. The IRS makes errors (especially last year to manage the stimulus payments) and is pre-disposed to protecting the Government's interests. Hence, you should review and question their findings just as much as you would question any legal judgement against you.

However, taxpayers generally do not question IRS audits and elevating IRS decisions. There are several main reasons why individuals do not contest audits:

1. They are afraid of the IRS and what could happen if they contact them
2. The IRS is correct in their findings
3. They do not know how to respond to the audit
4. They do not know how to Appeal an IRS tax examiner/agent findings

Understanding the audit process is essential to knowing how to reply to the IRS in an audit and how to request an Appeal of your findings. Remember this- the IRS auditor's findings are not final. You can appeal these findings within the IRS or in the Court system if you are timely with your Appeal.

If you do not agree to the IRS audit findings, here is the process you should follow (it is in chronological order and as you progress to the end- it gets more expensive and prohibitive):

1. Protest the findings directly with the IRS auditor (can be called an Agent, Tax Examiner, Compliance Officer, Office Auditor, etc.) with a written protest. Discuss in this protest: the facts, the law and your analysis and conclusion of the law as it pertains to your audit. Most audits have factual disputes (i.e. "I do not have any documents to prove my deductions!"), so make sure that you having a compelling argument and have reconstructed your records, if needed.

2. If the auditor does not agree and proposes a final adjustment (the IRS puts this in a Form 4549 or a Form 1902-B and explains the adjustment in the Form 886-A), ask to have a managerial conference with auditor's immediate supervisor. YOU MUST REQUEST THIS BEFORE THE EXAMINER ISSUES A "30-DAY" LETTER. After the issuance of the 30-Day letter (usually IRS Letter 525), then you usually have no other recourse other than to go to the next step.

3. The 30-day Letter is a formal notice to appeal WITHIN the IRS with one of their Appeals Officers ("AO"). DO NOT MISS THE 30-DAY WINDOW TO APPEAL WITHIN THE IRS! The IRS will usually not let you back into an internal IRS appeals hearing. Appealing your audit within to an IRS AO is a very cost effective method. Also, it provides an opportunity to use "hazards of litigation" factors in resolving your audit. These factors consider the many nuisances of the IRS having to "take you to Court" to respond to your contest to their audit findings.

4. If you miss the 30-day letter or you intentionally let it expire, you will another mode of appeal. However, this appeal is not cost efficient, nor is it usually successful. The last appeal is to the United States Tax Court ("USTC"). You must petition the USTC within 90-days of the dated Statutory Notice of Deficiency (i.e. the "90-day" letter- usually IRS Letter 3219). In very few instances, you may be able to get the IRS to rescind the 90-day letter issuance after it has been issued but the 90 days has not expired and "back-up" the audit to an IRS internal appeal (i.e. the 30-day letter process).

5. If you miss the 90-day letter, you will be assessed the tax and IRS Collection Activity will ensue. The recourse you now have is one of three methods: #1 - pay the tax, file a claim for refund with the IRS, have the refund denied by the IRS (or allow 6 months to expire) and sue the IRS in US District Court or Court of Claims; or #2 - beg the IRS for Audit Reconsideration- i.e. reopen the audit (by the way the IRS rarely allows a "do-over" for an audit unless it is an under-reporter audit that is not responded to timely and the tax is assessed); #3 - file an Offer in Compromise- Doubt as to Liability (Form 656-L)- this is also a rarity in that the IRS has already considered the facts, law and audit findings and has made a decision to assess the tax.

If you snooze- you lose...

The end of the audit is not the end of your rights. The auditor's findings are not final until you agree or you have exhausted your appeal rights- internally within the IRS and through the Courts. But as the old saying goes- "if you snooze, you lose"- in tax audits, this translates into: if you miss your appeals deadline- you will move farther down the process and it will be more painful and costly as it progresses.

Need a copy of your tax return- Form 4506 or use two other faster methods

2009-01-26T14:52:00.003-05:00

You need a copy of your tax return for many things:

1. Obtaining a bank loan
2. Applying for Financial Aid
3. In divorce or support proceedings
4. To prepare your current year's tax return
5. Prove your income allocations to your State
6. To prepare for an IRS audit

However, you may have already disposed of it. If you need an copy, the most expeditious way is to request a copy from the person who prepared the return.

A second method is to call the IRS or go to one its Taxpayer Service Locations and ask for a "Return Transcript." A return transcript is digital printout of most items on your return. However, it is available only for the past three years.

The last method, and slowest of them all, is to request a copy via a Form 4506. This process takes about 2 months. If the return is over 3 years old, you may never retreive it as the IRS may have destroyed it.

Refund Anticipation Loans- The IRS really hates this program

2009-01-25T23:11:00.003-05:00

The Refund Anticipation Loan or "RAL" is advertised as a quick way to get some money in your pocket in "anticipation" of your federal tax refund. However, the IRS hates these programs, and it appears rightfully so.

It appears the IRS has been able to make some "end-around" progress to the RALs by limiting tax preparers and those utilizing tax return information for uses other then what is directly authorized by tax clients. Normally, when you go to a tax preparer to file your tax return, you do not expect them to utiize your information for means other than the preparation of your tax return. In the past, transfer of tax return information to a third party processor of the RAL was done transparent to the taxpayer. No more- section 7216 requires that the preparer obtain consent of the use of tax return information (i.e. the tax refund for a RAL).

More to come on this new provision. Clearly, it will be thorn in the side of RAL providers and for anyone who can use this information for other then its intended uses.

IRS Relief Forthcoming- many think so...

2009-01-25T22:33:00.003-05:00

Many news organizations are reporting on IRS Commissioner Doug Shulman's promise of a kindler, gentler IRS. Shulman's phone press conference and press release dictate new measures that the IRS is taking to relieve your tax debt pain. The IRS National Taxpayer Advocate also urged relief to those facing distressing times. And they both have the eyes of the press.

Here are some of these reports:

The Augusta, GA Chronicle

The Kankakee, IL Daily Journal

Smartmoney.com

The Dunkirk, NY Observer

The Hartford, CT Courant

The Baltimore, MD Sun

NPR's Marketplace

The Flint, MI Journal

The IRS is also promoting filing your tax return early to recieve your refund or to recover your stimulus payment for last year as a means to achieve financial relief.

It goes without saying, these are hard times. They are also hard times for the government also. In fact, the government debt is at a all time high. Do you catch the contradiction here? Major media outlets are reporting the IRS phone conferences and press releases as if they were fact. Beware of the wolf in sheeps clothing, as the wolf still needs to feed his belly- now more than ever...

Innocent Spouse Relief- Is that for me??

2009-01-22T14:21:00.007-05:00

Unfortunately, marriage sometimes ends in divorce. In fact, in the United States, it occurs about 40-50% of the time. To make matters worse, sometimes tax problems occur after a divorce or separation is finalized. Many times, emotional divorce situations fail to consider the post-divorce tax implications. However, all is not lost, for there is relief in what is referred to as "innocent spouse" relief.

Here is an example of a typical fact situation of a tax problem that arises in marriage but surfaces after divorce:

In year 2001-2003, John and Jane Doe file a joint tax return. John is self-employed and Jane stays at home with their two children. John reports income of $100,000 in each year and pays the associated tax with the timely filed return. Jane, who does not handle the finances or the taxes of the home, signs the tax return that John brings home from their accountant on April 14th of each year. On June 30th, 2004, John and Jane get a divorce. On September 30th, John and Jane receive a letter from the IRS that states that they owe an additional $10,000 in tax for the errors made on the 2001-2003 tax years for not reporting $12,000 in income in each year.

The income that was not reported relates to John’s business in which he failed to report all income on their tax return. The audit ensued and their joint liability was assessed. John receives the notice and does nothing about it. Jane is unaware of the return audit, the assessment, or any ensuing collection on the liability. The $10,000 in tax liability by June, 2005, grows, with penalties and interest, to $22,000.

Jane has returned to work in 2004 and files a return for 2004 and the IRS takes her $3,000 refund due to the unpaid joint liability. Also, the IRS is now sending her threatening notices to levy her wages and bank accounts for the unpaid balance of $19,000. Jane wonders if there is anything she can do about this tax problem.
Jane is in despair, but what she may or may not know is that she may qualify for relief as an “innocent spouse.”

There are three types of Innocent Spouse relief:

• Traditional innocent relief- your spouse did something wrong on your return and you are potential not liable
• Separation of Liability- the understatement of tax allocated to you is generally the amount for which you are responsible
• Equitable Relief- taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement or underpayment of tax

The requirements are generally the following:

1. Must file the form 8857 no later than 2 years after collection starts
2. Must file a joint return
3. Understatement of return due to error by the non-requesting spouse
4. At the time of the signing the return, did not know of understatement (and prove this)
5. It is inequitable to hold the requesting person who did not know of the error (understatement) liable for the additional tax

What are your chances of obtaining the relief (assuming you meet the pre-requisites above)- here are the factors for and against relief:

Factors for Relief
1. Your marital status is divorced or separated (in fact, for Separation of Liability, it is required for at least the past 12 months)
2. Requesting spouse will suffer a hardship due to the error
3. The requesting spouse has suffered abuse
4. In a divorce decree or separate legal arrangement, the non-requesting spouse is obligated to pay the liability (it is helpful if the decree states why they are liable- i.e. it was their error that was not known to the requesting spouse)

Factors Against Relief
1. The understatement is attributable to an error made by the requesting spouse
2. The requesting spouse had knowledge or a reason to know of the omission or error
3. The requesting spouse received significant benefit from the income that was understated
4. In a divorce decree or separate legal arrangement, the requesting spouse is obligated to pay the liability

Clearly, Jane has a good case for relief. She should file a Form 8857 with the IRS within the 2 year window from when the IRS starts collecting (absent the two year window, she will have an uphill battle to fight to have the IRS consider the innocent spouse relief). Jane will have to build her case knowing that the IRS will ask her former spouse about what she is allegating against him (he will be asked for his side of the story!). The biggest factor for Jane is whether she knew of the understatement or had benefit from it. Jane should center on this argument.

Divorce is painful. Taxes from a past relationship can make it more painful. Exploring your options for innocent spouse may be your best option to finally get that part of your life behind you.

New 2008 IRS Enforcement Statistics- Surprise- less enforcement?

2009-01-18T22:48:00.004-05:00

The IRS data on its 2008 enforcement results are mixed. If you owe, there was more enforcement with less results- if you were worried about an audit- good news- less enforcement and less results. Most of the IRS enforcement falloff was due to the agencies emergency management of the 2008 stimulus payments. Many IRS personnel were taken off of front line enforcement positions in order to service questions on the stimulus payments.

Here are some FY 2008 (the IRS fiscal year ends the the government's fiscal year ending- September 30th) IRS Enforcement Data highlights:

1. IRS audit revenue and collection reduced- Audit enforcement revenue decreased from $23.8 billion to $20.6 billion; and Collection enforcement revenue decreased slightly from $31.8 billion to $31.1 billion
2. The number of IRS Revenue Officers (Collection personnel) decreased from 5,662 to 5,492.
3. The number of IRS Revenue Agents (Field audit personnel) decreased from 12,816 to 12,599. Also, similar drops in IRS Special Agents- i.e. criminal investigators - dropped also- there are only 2,631 remaining
4. The IRS had increased all of these positions in the two years prior
5. The IRS Information Document matching (IRP program and Automated Underreporter Unit - i.e. CP 2000 letters) had a major increase in enforcement- from $3.9 billion to $4.7 billion
6. If your income was between $200,000 and $1 million- your chance of audit substantially increased- to the extent that almost 3% of these returns filed are now being examined by the IRS by Field agents or by correspondence examiners
7. Levies dropped by 30%- after 7 straight years of dramatic increases in this IRS enforcement area
8. However, IRS tax liens increased by 12%- so the IRS makes sure that the tax debt does not get outside of its ability to collect in the future.

It appears that the IRS' management of the stimulus payments had an impact on the enforcement results- especially in the area of levies. The IRS used many of its Automated Collection System personnel ("ACS") to answer taxpayer phones for the stimulus payment questions from February to October- thus- effecting their results.

But do not despair- enforcement will be back- no stimulus payments (yet?) for 2009- hence, you better resolve your problem, if you have one, before the IRS enforces it on you.

If The IRS Wants To Be Kinder & Gentler, It Actually Needs To Try

2009-01-18T14:36:00.007-05:00

Two weeks ago, the IRS announced that it will be “kinder” and “gentler” to those who have been affected by the dipping economy. Among the claimed IRS concessions are:

1. Levy relief for those in hardship ((the IRS procedures for what is a hardship has not changed since October 26, 2007- see IRM 5.19.4.4.10, paragraph 4.J))
2. Increased access to an Offer in Compromise considering the loss of equity (see IRM 5.8.5.4.11 which remains unchanged since the last IRS modification on 9-23-2008) from devalued home values (an OIC is known as “a settlement on your tax debt”)
3. Solution options for missed OIC payments for those who cannot make payments on already accepted OICs (link to IRM on 24 months of payment)
4. Added flexibility for those who have missed on back payments on balances owed. (i.e. Installment Agreements) (again, the latest IRS procedure change in this area was on September 23rd, 2008- no procedure was changed to reflect the January 6, 2009 IRS relief proclamation)

To the untrained eye, this may seem like relief. However, when you take a closer look, this “relief” is simply the usual rules packaged in a more appetizing way. This can be seen by taking a closer look at long standing IRS practices, especially in the very 4 areas mentioned above.

Levy Relief for Hardship
The “new” rule stated has always been the rule and there does not appear to be any change to this rule to signal increased relief. For example, the IRS does not appear to be any more flexible on allowable living expenses in determining your ability to pay. In fact, the IRS Taxpayer Advocate Office (“TAO”) continually criticizes the IRS for not being flexible with these standards.

Americans are seeing housing costs skyrocket due to escalation of ARM loans and vehicle operating costs escalating from rising fuel costs (in fact, the IRS has raised its own standard mileage rates but not the allowable expense for operating a vehicle- this has not changed since March 1, 2008- the IRS is set to redesign these standards on March 1, 2009). However, the IRS will not take these “actual costs” into account (see Page 435 of the 2007 TAO Study). Even more interesting is that, in many cases, using the actual costs will cause the taxpayer to be uncollectible (see page 442 of the same report that states that the IRS put more amounts into a non-collectible status than all amounts collected from Installment Agreements and Offers combined).

Does this sound like relief to you?

Increased Access to the OIC
The 2006 law changes and recent IRS data show (see Page 27 of the 2009 TAO recommendation to Congress) that the IRS is institutionally restricting access to the OIC, despite the IRS’ new assertion that it will allow greater access.

Offers are a complex computation of assets and liability/expenses. The expenses allowed are held to allowable standards set by the IRS, as stated above. The IRS also considers: whether the taxpayer’s financial circumstances are temporary - i.e. the taxpayer has a history of producing income, or is in a business that is in a downturn, or is “under-employed” in some manner. If the financial hardship is show to be “temporary”, then these individuals will have higher offer in compromise amounts than they can afford. This is why an unemployed doctor will never receive an OIC. Do not take my word for it; statistics show that 1/3rd of rejected OICs end up in currently non-collectible status--the taxpayer is so broke he can’t currently pay at all! The fact is: the IRS institutionally restricts access to the OIC.

Does this sound like relief to you?

Allow clients flexible terms in defaulted OICs that were previously accepted.

This one is nice in theory, but how many will this reach? In 2008, only 10,667 offers were accepted. To put this in perspective, there are almost 10 million taxpayers that the IRS is pursuing collections on. Also, in this concession, the IRS is referring to the 24-month periodic payment OIC. But this type of offer in compromise is rarely used. So, this provision appears to have little or no relief to the masses.

Does this sound like relief to you?

Added flexibility for those who have missed on back payments on balances owed.

This policy is already in effect. If you are in a payment agreement, the IRS will allow you to miss one payment or be late on one payment annually and you will not default your agreement. But if you, in combination, miss more than one payment or are late on a payment, you enter into default. The IRS sends you a certified letter, a CP 523, that states that you have defaulted and that you have 30 days to contact the IRS or be subject to immediately levy. At that point, the IRS has two choices: ask for new financials to setup a new payment plan or restore the prior installment agreement. Thus, missing payments will just afford you the opportunity to renegotiate under the existing IRS procedures or restore your previous agreement. The conclusion: maybe you pay more, maybe you pay less, or maybe you pay the same. However, relief will not be automatic as a result of missing a payment. This is not a policy or procedure change with the IRS and unless your financial situation changes relative to what the IRS allows, your payments will be the same.

Does this sound like relief to you?

The reality is this: the IRS is a collection agency. The IRS Christmas levy reprieve is not a permanent measure.. In fact, the IRS did not change its Internal Revenue Manual, its “bible” on its enforcement procedures, to accommodate these recent “policy” changes. Because IRS procedure has not changed, the institutional “relief” that the IRS is professing will not be as easy as it sounds. It will still require you to go through the old traditional IRS standards for payment. The IRS press release and many news articles seem to imply that it will be easier to get relief, but the history of IRS enforcement does not reflect the IRS to be “kindler and gentler.”

Breakdown of People who have tax problems in the U.S.

2008-12-31T12:37:00.004-05:00

Want to know if you are the only person having a problem with your taxes? Chances are great that many others have a similar problem.

Here is the data:

Tax Return Filings:

Tax returns are filed for income, employment, corporate, partnership, estate and gift taxes. Individual income taxes represent 51% of the taxes paid to the IRS. Employment taxes (i.e. your Social Security taxes withheld and paid by your employer) represent 31.6% of the taxes paid to the IRS.

235 million tax returns were filed in 2007- of which 138 million were individual income tax returns

9.5% owe a balance after filing (Forms 1040 only- 1.31 million)

Unfiled Tax Returns:

There are many conflicting sources of data on how many tax returns go unfiled each year. In short, this is one major measurement of "voluntary compliance": filing and self reporting your tax liability. However, this data differs somewhat from the data that the IRS is pursuing on "non-filers." The IRS investigation of non-filers are called Taxpayer Delinquency Investigations or "TDI"s.

According to the IRS "Tax Gap" study- these unfiled returns Accounts for $25 billion in lost revenue (2001 study)

Also, the IRS is aware of 10.5 % of GDP is in “Shadow Economy”- i.e. unreported and outside the system. This equates to a 14% non-compliance rate- i.e. 86% voluntary compliance.

Taxpayer Delinquency Investigations (TDIs) are opened for non-response to a notice to file letter.

2007 IRS TDI data shows that there was 6.5 million TDIs being worked by IRS- these are investigations by the IRS into unfiled tax returns. In 2007, there were 2.6 million new TDIs (2.4 million new in 2006). TDI assessments for 2007 amounted to and additional $30.3 billion in taxes ($4 billion it was actually collected). Hence, $26.3 billion of the TDI assessments went into IRS collection enforcement.

The IRS can also file a return for you: i.e. a Substitute for Return (“SFR”). The IRS can complete a SFR based on your wage and income information that it has on file your SSN - Forms W-2 and 1099.

In 2007, the IRS filed 1.36 million SFRs (this represents 1% of all “filed” individual returns as the IRS considers an SFR as a "filed" return for compliance purposes). The IRS total assessments for SFRs in 2006 amounted to $10.9 billion.

IRS Audits:

IRS Examinations are conducted by Field Agents (Revenue Agents) or by mail (Correspondence Examiners). Revenue Agents require face to face representation and they exam the taxpayer’s assets, equities and lifestyle to determine if a tax return is subject to adjustment/other enforcement. Correspondence audits are generally limited to 2-3 issues on a return or discrepancies with IRS wage and income transcripts (CP 2000s). These audits are far more common (83%). Rule of thumb: if you are being examined by a Revenue Agent- seek professional assistance immediately- Revenue Agents do not examine tax returns- they examine TAXPAYERS- i.e. their lifestyle/assets/income/wealth matches their tax returns (in 2007, the average field audit assessed over $77,000 in additional taxes! - over $20,000 in added assessed taxes for individuals). So I will provide you the data on the correspondence exams:

Here is the data on Correspondence Exams:

Number of IRS Examinations on individuals(2007): 1.38 million

Percentage of IRS Individual income tax Examinations that are Correspondence Exams: 83% (2007) or 1.1 million (1 out of every 118 returns are examined by correspondence)
Average Correspondence Audit adjustment is almost $9,000 in additional taxes per year examined

Under-reporter Audits:
CP 2000 Audits in 2007: 3.4 million (2.53% of all individual filed returns)
CP 2000 assessments in 2006: $4.1 billion

None of this data includes the over 3.8 million people who annually have errors on their tax returns that they have to reconcile with the IRS.

IRS Collection Activity:

This is where most people have issues with the IRS- they owe the IRS back tax debt. IRS collects on unpaid tax balances via Taxpayer Delinquency Accounts (“TDAs”). TDAs are active IRS inquiries into payment of delinquent tax liabilities owed. The IRS can collect these amounts with its available computerized methods (the “Automated Collection System” or “ACS”) or by Revenue Officers (“RO”s). Data on the people who owe are as follows:

Amount of uncollected taxes in IRS Inventory: $290 billion (2007)
$47 billion is in the IRS “queue” for collection enforcement
866,777 taxpayers awaiting Enforcement (the IRS may or may not go after these people depending on their resources)

Taxpayer Delinquency Accounts Data:
New TDAs in 2007: 7.15 million
Active TDAs on 9/30/07: 8.24 million
Balance owed of TDAs on 9/30/07: $83.5 billion
Percentage of IRS TDA closures that are full-payment of tax liability: 27%
Average account balance owed: $10,133 per the TDA data (however 87% of individuals owe less than $10,000 according to the IRS)

So, you are not alone: you are one of 6.5 million that the IRS is chasing for an unfiled tax return, one of 3.8 million the IRS is chasing for a return error, one of 4.8 million that have an audit ongoing with the IRS, or one of 7.15 million that have a pending collection issue with the IRS. That is over 23 million tax problems in 2007.

Need some help? If you feel comfortable contacting the IRS yourself- do so. If you have a complex problem that you need to solve, hire a competent tax professional who has experience in resolving your issues. More to come in future blogs.

Tax Resolution Companies- watch out for them....

2008-12-30T09:27:00.004-05:00

You hear it on late night TV, early in the AM while you getting ready for work, and in the mail (or spammed e-mail!)- these tax resolution companies that are offering "pennies on the dollar" or to "settle" your tax debt. Caveat emptor.

Resolving your tax debt is a complex matter. These deceptive companies are trying to sell you an "Offer in Compromise." Offers involve a complex set of facts and analysis: from looking at what caused the liability to a detailed analysis of your past, present and future assets and income. This requires a tax professional who has some experience in what will and will not work.

These companies are now starting to come under fire. CNBC is on to them and reporting about their longshot deception. CNBC reports that these firms currently constitute the biggest tax fraud scam in the U.S. The popular radio consumer advocate, Clark Howard, warns everyone about these companies.

Still you see them pedaling their deception in web press releases designed to increase their legitamacy. Also, they have web sites littered with "testimonials" about people who have been successful in utilizing their company to reduce their debt.

Believe me, the chances of a "settlement" are very remote. Also, they may not be the best resolution option. The lure of getting rid of your liability and a deceptive person on the end of a phone/in person conversation persuade you that there is hope. There is hope- just not the kind that these companies are offering. The hope is the realistic solution to resolve your debt. The IRS operates in a business type manner as a collection agency- this means that they can work with you if you know and understand the rules. These companies pedal fear of the IRS and opportunity for a "free lunch."

The truth is this:

1. Your tax debt is a serious matter that needs to be resolved
2. Living your life "out of the system" does not cleanse the conscience
3. Looking over your shoulder is not a way to live- the truth will set you free
4. The IRS is a Collection Agency with great collection powers
5. You have options- you just need to know them and what to expect

The tax "resolution" companies will highlight #1 above with "fear" and offer you deceptive ways around #2 - #5. Don't fall for it. Caveat emptor.