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Negotiating with the IRS When You Owe Over $100,000

Understanding the IRS’s perspective is key when negotiating a tax debt exceeding $100,000. Using the Reasonable Collection Potential (RCP) formula, they evaluate your ability to pay. Centering your strategy on this formula improves your chances of a favorable resolution.

WHAT IS THE RCP?

The RCP measures how much the IRS believes it can collect from you based on:

  • Net Equity in Assets: Includes cash, real estate, vehicles, and other valuables.
  • Future Income: Disposable income after allowable expenses.

This calculation determines your eligibility for programs like an Offer in Compromise (OIC) or an Installment Agreement.

Preparing for Negotiation

  1. Calculate Your Assets and Equity
    Review all assets and liabilities. Subtract secured debts to find net equity.
  • Quick Sale Discount: The IRS applies a 20% discount to hard assets (e.g., real estate, vehicles) to reflect distressed sale values. Liquid assets like cash are valued at the full amount.
  1. Assess Income and Expenses
    Determine your monthly disposable income. The IRS uses strict guidelines (Collection Financial Standards) for allowable expenses like housing and food.
  • Tip: If your actual expenses exceed these limits, be prepared to justify them with documentation.
  1. Lower Your RCP
  • Document Hardships: Highlight expenses like medical bills or dependent care.
  • Non-Liquid Assets: Show why selling certain assets would create hardship.
  • Maximize Allowable Expenses: Claim every permissible expense under IRS standards.

Applying RCP to Resolution Options

  • Offer in Compromise (OIC): The IRS won’t accept offers below your RCP. Pursuing an offer if your RCP shows you can full-pay wastes time and money.
  • Installment Agreements: Monthly payments depend on your disposable income. Lower RCP means smaller payments.
  • Currently Not Collectible (CNC): If you can’t pay, the IRS may temporarily halt collection efforts.

Final Tips

  • Provide Accurate Documentation: Support claims with bank statements, bills, and pay stubs.
  • Be Transparent: Misleading information can damage your credibility.
  • Seek Professional Help: Tax professionals can navigate RCP nuances and build a strong case.

Conclusion

Focusing on the RCP formula is essential when resolving tax debts over $100,000. By understanding how the IRS evaluates your financial situation, you can strategically reduce your liability and work toward a resolution. With preparation and guidance, you can regain control of your tax debt.

How a Collection Due Process (CDP) Hearing Works

If you’ve received a Final Notice of Intent to Levy or a Notice of Federal Tax Lien, you may have the right to request a Collection Due Process (CDP) hearing. This formal process allows you to challenge the IRS’s proposed collection actions and explore alternatives to resolve your tax debt. Here’s how a CDP works and how to use it to your advantage.


What is a CDP Hearing?

A CDP hearing allows you to dispute IRS collection actions like levies or liens. Filing for a hearing temporarily halts these actions while the IRS Office of Appeals reviews your case.

You must file your request within 30 days of the notice date using Form 12153. Missing this deadline limits your options, though you may still request an Equivalent Hearing, which provides less protection.


The CDP Process in a Nutshell

1. File Form 12153

Submit Form 12153 to the address on your notice. Indicate what you want to discuss, such as disputing the debt, requesting a payment plan, or arguing financial hardship. Be specific, as this will guide your hearing.


2. IRS Halts Collection Actions Temporarily

Once your request is received, the IRS pauses levies, garnishments, and liens. This gives you time to resolve the issue without immediate financial pressure. However, the downside is that the statute of limitations on collections (typically 10 years) is paused during the CDP process, giving the IRS more time to collect.


3. Work with the Office of Appeals

An impartial Settlement Officer will handle your case. The hearing can occur over the phone, virtually, or in person. During the hearing, you can:

  • Propose a payment plan to pay over time.
  • Request an Offer in Compromise (OIC) to settle for less than what is owed.
  • If you face financial hardship, ask for Currently Not Collectible (CNC) status.
  • Dispute the validity of the debt if it was miscalculated.

4. Settlement Officer Issues a Decision

After the hearing, the Settlement Officer issues a determination letter summarizing their decision. If you disagree, you have 30 days to petition the decision in Tax Court.


Why is a CDP Hearing Important?

A CDP hearing lets you avoid aggressive collection actions and negotiate a resolution. Even if you don’t dispute the debt, it’s a chance to explore manageable alternatives, such as installment agreements or CNC status.


Tips for a Successful CDP Hearing

  • Act Fast: File Form 12153 within 30 days to maximize your rights.
  • Be Prepared: Gather financial records or evidence to support your case.
  • Negotiate: Be open to solutions that work for both you and the IRS.

A CDP hearing is your chance to hit the pause button on the IRS’s collection machine and take control of the situation. By knowing the rules and acting fast, you can turn a tax nightmare into an opportunity to negotiate on your terms—and maybe even sleep a little better at night.

How to Avoid a Levy When the IRS Final Notice Letter 11 Shows Up

Receiving an IRS Final Notice of Intent to Levy (Letter 11) can be alarming. This letter indicates that the IRS plans to seize your assets—like bank accounts, wages, or even property—to satisfy a tax debt. But don’t panic! You have options to protect yourself and avoid a levy if you act quickly and strategically. Here’s what you need to know.


What is IRS Letter 11?

The IRS sends Letter 11 when previous collection efforts, like reminders or notices, have not resolved your tax debt. It’s your final warning that the IRS intends to levy your assets. However, the IRS cannot take action immediately. Letter 11 gives you 30 days to respond before the levy process begins. This window is your opportunity to take action and avoid enforcement.


Steps to Avoid a Levy

1. Understand Your Rights

One of your most important rights is the ability to request a Collection Due Process (CDP) hearing. This stops the levy process temporarily while the IRS reviews your case. To request a hearing, complete and submit Form 12153 (Request for a Collection Due Process or Equivalent Hearing) within the 30-day window.

A CDP hearing gives you a chance to propose alternatives, like an Installment Agreement, Offer in Compromise, or Currently Not Collectible (CNC) status, and dispute the levy if you believe it is improper.


2. Pay the Balance or Set Up a Payment Plan

Paying the entire balance immediately will stop the levy process if you can afford it. If that’s impossible, consider requesting an Installment Agreement to pay your debt monthly. You can apply online, by phone, or through Form 9465.

Once the IRS approves your payment plan, the levy will not proceed if you make your payments on time.


3. Explore an Offer in Compromise (OIC)

An Offer in Compromise lets you settle your tax debt for less than the full amount owed if you can prove paying the full amount would cause financial hardship. Use the IRS Offer in Compromise Pre-Qualifier Tool to see if you might qualify. Submitting an OIC also stops levy actions while your application is reviewed.


4. Prove Financial Hardship (CNC Status)

If you’re experiencing significant financial hardship, you can request to be placed in Currently Not Collectible (CNC) status. This pauses collection efforts, including levies, until your financial situation improves. You’ll need to provide detailed financial information, such as Form 433-A or Form 433-F, to support your claim.


Act Quickly

The most critical factor in avoiding a levy is acting within the 30-day window after receiving Letter 11. Ignoring the notice will almost certainly result in the IRS moving forward with its levy.


Get Professional Help

Let’s be real—dealing with the IRS isn’t like fixing a leaky faucet. If you don’t know what you’re doing, you could end up in a financial mess that makes the levy look like the least of your worries. This isn’t the time to Google your way out of trouble or hope the IRS forgets about you (spoiler: they won’t). A tax pro can help you cut through the red tape, talk to the IRS so you don’t have to, and maybe even save you a ton of money. Consider it like hiring a lawyer in a courtroom—you could represent yourself, but why would you?

Latest Tax News: What You Need to Know for 2025

The IRS is at the center of several important updates that could impact taxpayers and businesses in the coming months. Here’s a breakdown of the most relevant news to keep on your radar:

1. Tax Season Deadlines Are Approaching

As we gear up for the 2024 tax filing season, it’s time to get your paperwork in order. While the IRS has not announced the exact date it will start accepting tax returns, it’s typically mid-to-late January. If you make estimated tax payments, remember the fourth-quarter deadline is January 15, 2025, and the final deadline for filing your 2024 tax return or requesting an extension is April 15, 2025.

The IRS recommends filing electronically and selecting direct deposit for a faster refund. Early preparation will help ensure you’re ready to tackle tax season head-on.

2. Unclaimed Stimulus Payments Are on Their Way

The IRS is issuing automatic payments of up to $1,400 to over a million taxpayers who didn’t claim the Recovery Rebate Credit on their 2021 returns. These payments are part of efforts to ensure individuals who missed out on stimulus payments during the pandemic still receive the financial help they’re entitled to.

If you qualify, you don’t need to take any action—payments will be directly deposited or sent via check by the end of January 2025. If you think you might be eligible, keep an eye on your mail or bank account.

3. Proposed Tax Policy Changes Could Shake Things Up

The recent election has sparked discussions about potential tax reforms. Proposals include making the 2017 tax cuts permanent, reducing the corporate tax rate to 15% for some businesses, increasing the child tax credit, and cutting certain green-energy tax breaks. While these changes are far from finalized, they could significantly impact individual taxpayers and businesses.

4. IRS Intensifies Focus on Cryptocurrency

The IRS has obtained information on thousands of cryptocurrency accounts through summonses to exchanges and other enforcement actions. Reporting these transactions correctly is crucial if you’ve been active in trading, selling, or receiving crypto as payment. The cryptocurrency question on Form 1040 is a high-priority item for the IRS, and answering “No” when the correct answer is “Yes” can lead to serious consequences, including penalties for filing a false return.

New reporting rules for brokers will take effect next year, requiring them to disclose crypto sales to the IRS, with even more detailed requirements coming in 2026. As crypto is treated as property for tax purposes, gains or losses are subject to capital gains tax. Accurate reporting is more important than ever to avoid audits or enforcement actions.


What Does This Mean for You? Staying informed about IRS developments can help you avoid surprises and take advantage of opportunities, such as the unclaimed Recovery Rebate Credit. Whether you’re a taxpayer preparing for filing season or a crypto investor navigating new rules, keeping up with the latest tax news is essential.

 

Debt Discharged, Taxes Owed: Why Canceled Debt Can Create Tax Liabilities

Debt forgiveness can feel like a relief but often comes with an unexpected tax bill. The IRS treats canceled debt as taxable income, which means you may owe taxes on the forgiven amount. Understanding how this works can help you avoid surprises at tax time if you’ve had debt forgiven.

What Is Canceled Debt?

Canceled debt occurs when a lender forgives or discharges part or all of your loan. This can happen with credit card settlements, foreclosures, loan modifications, or student loan forgiveness. The forgiven amount is considered taxable income unless it qualifies for an exception. Lenders issue Form 1099-C to report the canceled amount to the IRS, and you must include it on your tax return.

Why Is It Taxable?

Debt isn’t taxed when you borrow it because you must repay it. However, when the obligation is erased, the forgiven amount is treated as income since it provides a financial benefit.

Exceptions to Taxable Debt

Not all canceled debt is taxable. Key exceptions include:

  • Insolvency: If your total debts exceed your assets when the debt is canceled, you may exclude some or all of it from income.
  • Bankruptcy: Debt discharged through bankruptcy isn’t taxable.
  • Qualified Principal Residence Indebtedness: Forgiven mortgage debt on a primary residence may be excluded under specific rules.
  • Certain Student Loans: Forgiveness under specific programs, such as public service, is tax-free.

How to Handle Canceled Debt

  1. Check for Exclusions: If an exception applies, such as insolvency or bankruptcy, the canceled debt might not be taxable.
  2. File Form 982: Use this form to claim exclusions and reduce taxable income.
  3. Plan for Taxes: If the canceled debt is taxable, prepare for the potential tax bill to avoid penalties.
  4. Seek Professional Advice: A tax professional can help navigate the rules and exclusions.

Conclusion

Canceled debt may ease financial stress but can create unexpected tax liabilities. If you’ve received a Form 1099-C, don’t ignore it. Understand your options, check for exclusions, and plan accordingly to stay compliant with the IRS and avoid penalties.

How Divorce Settlements Can Trigger IRS Collection Issues

Divorce can be a challenging process, but for many, the financial aftermath can be just as difficult—especially when it comes to dealing with the IRS. Divorce settlements often involve splitting assets, debts, and obligations, which can lead to unexpected tax consequences. These issues sometimes escalate into IRS collection actions, leaving one or both spouses financially vulnerable. Understanding how divorce settlements can trigger IRS collection issues is key to avoiding problems and protecting your financial future.

Joint Tax Liabilities

When couples file joint tax returns, both spouses are jointly and severally liable for any tax debts owed, regardless of who earned the income or caused the liability. Divorce doesn’t erase this responsibility. If the IRS determines there’s unpaid tax from a previous joint return, they can pursue either spouse for the full amount—even if the divorce decree specifies that one party is responsible.

This often creates complications when one spouse fails to honor the divorce agreement, leaving the other on the hook. The divorce settlement terms don’t bind the IRS, so they’ll pursue collection from whoever they can, including garnishing wages or levying bank accounts.

Transfer of Assets and Taxable Events

Divorce settlements often divide marital assets, such as homes, retirement accounts, and businesses. While some transfers are tax-free under IRS rules, others can trigger taxable events. For example:

  • Retirement Accounts: If a retirement account is split without following proper procedures, such as a Qualified Domestic Relations Order (QDRO), it could result in early withdrawal penalties and taxes.
  • Property Transfers: The sale of jointly owned property may lead to capital gains taxes, especially if the home doesn’t qualify for the full primary residence exclusion.

If these taxes go unpaid, the IRS may initiate collection actions against one or both parties.

Alimony vs. Child Support

Alimony payments used to be tax-deductible for the payer and taxable for the recipient. However, for divorce agreements finalized after 2018, this is no longer the case. This shift has confused and, in some cases, errors in reporting alimony, leading to IRS audits or collection issues. While not taxable, child support can also complicate matters if payments are misclassified or missed.

How to Protect Yourself

  1. Seek Tax Advice During Divorce
    Work with a tax professional during the divorce process to understand the tax implications of your settlement. Proper planning can prevent surprise liabilities.
  2. Request Innocent Spouse Relief
    If your ex-spouse’s actions caused the tax debt and you were unaware, you may qualify for Innocent Spouse Relief, which can remove your responsibility for certain liabilities.
  3. Ensure Tax Liabilities Are Paid
    If your divorce settlement includes provisions for paying back taxes, ensure they are resolved before finalizing the divorce.
  4. Monitor IRS Correspondence
    After a divorce, watch any IRS notices regarding prior tax years. Addressing issues early can prevent enforcement actions like liens or levies.

Conclusion

Divorce settlements can create complex financial and tax issues that lead to IRS collection actions. Understanding potential risks, planning ahead, and seeking professional advice can minimize the likelihood of being blindsided by tax liabilities and ensure a smoother financial transition post-divorce.

Proactive Profit Management: A Solution to Late Payroll Tax Deposits

Falling behind on payroll tax deposits stems from inadequate profitability, not neglect. When cash flow is tight, business owners may prioritize immediate expenses over payroll taxes, hoping things will improve. However, the IRS doesn’t see it that way. Failing to deposit payroll taxes can result in severe penalties, business closure, and even personal liability. Improving profitability is essential to avoid this, and the best approach is proactive profit management.

Where to Start: Fixing Profitability

  1. Raise Prices Regularly
    One simplest and most effective way to boost profitability is to raise your prices. Many small business owners fear losing customers by increasing rates, but regularly adjusting your pricing—especially to account for inflation—ensures you’re not leaving money on the table. Evaluate your pricing annually, and be transparent with your customers about the value you’re providing.
  2. Cut Unnecessary Expenses
    Review your operating expenses to identify waste. Are you paying for software subscriptions you no longer use? Can you renegotiate vendor contracts or lease terms? Minor cuts in unnecessary spending can add up, freeing cash for critical obligations like payroll taxes.
  3. Focus on High-Margin Products or Services
    Not all revenue is created equal. Analyze your offerings and focus on those with the highest profit margins. Consider scaling back on low-margin products or services that drain resources without contributing significantly to your bottom line.
  4. Implement Profit-First Accounting
    Adopt a “profit-first” approach to your finances. Set aside a portion of revenue for key obligations—like payroll taxes—before paying operating expenses. This ensures that taxes are always prioritized and helps you avoid the temptation to reallocate funds.
  5. Streamline Operations
    Look for ways to improve efficiency within your business. Automate repetitive tasks, invest in technology that reduces labor costs, or optimize workflows to increase productivity without adding expenses.
  6. Upsell to Existing Customers
    Increasing revenue doesn’t always require finding new customers. Upselling or cross-selling to your existing customer base can boost sales with minimal marketing costs. For example, offer premium options or bundle products and services for higher value.
  7. Track and Adjust Regularly
    Profit management isn’t a one-time task—it’s an ongoing process. Review your financial statements monthly to monitor performance, track trends, and adjust as needed. This helps you stay ahead of cash flow issues and ensure consistent profitability.

Preventing Payroll Tax Issues

By improving profitability, you can avoid the vicious cycle of falling behind on payroll taxes and incurring penalties. The IRS takes unpaid payroll taxes seriously, and penalties can quickly spiral out of control. Proactive profit management ensures you have the resources to meet tax obligations on time and protects your business from IRS enforcement actions like levies, liens, or the Trust Fund Recovery Penalty.

Conclusion

Fixing profitability starts with raising prices, cutting waste, and focusing on high-margin activities. These steps, consistent tracking, and a profit-first mindset can help you avoid financial challenges. By taking control of your profitability, you can avoid the stress of late payroll tax deposits and keep your business on solid financial ground.

Boost Your Profitability to Solve Payroll Tax Issues for Good

Some business owners “borrow” from payroll tax deposits when cash flow gets tight, hoping for a turnaround. But this is a dangerous gamble. Payroll taxes aren’t optional—they’re trust fund taxes. Failing to deposit them is viewed as theft by the IRS, and the consequences are severe.

The Danger of Skipping Payroll Taxes

If payroll tax deposits aren’t made, penalties and interest escalate quickly. The IRS can seize assets, levy bank accounts, and even shut down your business. Worse, they can hold you personally liable through the Trust Fund Recovery Penalty, putting your personal finances—bank accounts, home, and future income—on the line. Bankruptcy won’t erase trust fund debt, leaving you struggling long after your business is gone.

The Real Problem: Profitability

Most payroll tax issues stem from poor profitability, not neglect. When profits are tight, owners often prioritize other bills, hoping for better times. But hope isn’t a strategy. Addressing profitability is the only way to ensure payroll taxes are paid on time.

How to Fix the Problem

  1. Understand Your Finances
    Review your cash flow, cut unnecessary expenses, and find operational efficiencies.
  2. Increase Revenue
    Focus on upselling, marketing, and exploring new markets to improve sales.
  3. Seek Professional Advice
    Work with a financial advisor or accountant to create a plan to stabilize your business and prioritize taxes.
  4. Contact the IRS
    Contact the IRS for options like Installment Agreements or Offers in Compromise if you’re behind.

Don’t Let Payroll Taxes Close Your Doors

Payroll tax debt can destroy your business and haunt you personally. Prioritize profitability, take control of your finances, and act now to prevent the IRS from taking drastic action. With the right steps, you can solve payroll tax issues for good and secure your business’s future.

Who Claims the Child? The IRS Does Not Care About Your Decree

The IRS uses specific guidelines based on custody arrangements to determine who can claim a child as a dependent for tax purposes. One key factor that often arises in disputes is where the child spent the majority of nights during the tax year. Understanding these rules is essential for family law attorneys advising clients in divorce and custody cases.

The Majority-of-Nights Rule

The IRS considers the custodial parent as the one who can claim the child as a dependent. The custodial parent is the parent with whom the child spent more than half the nights (183 nights or more) during the calendar year. This rule applies regardless of what a divorce decree or custody agreement may specify.

Here are the basics of how the IRS calculates this:

  • Counting Nights: A night is one in which the child sleeps at a parent’s residence, even if the child is temporarily absent due to special circumstances, like illness, school trips, or summer camp.
  • Shared Time: If the child spends an equal number of nights with both parents, the IRS will turn to tie-breaker rules, prioritizing the parent with the higher adjusted gross income (AGI).

Exceptions to the Rule

Sometimes, the noncustodial parent may claim the child as a dependent. For this to happen, the following conditions must be met:

  1. Custodial Parent Releases Claim: The custodial parent must sign IRS Form 8332, releasing their claim to the dependent.
  2. Form Submission: The noncustodial parent must attach Form 8332 to their tax return to claim the child.

Without this signed form, the IRS will default to the custodial parent’s claim, even if the divorce decree assigns dependency to the noncustodial parent.

Common Issues

  • Mistakes in Counting Nights: Parents may miscount the number of nights a child spent with them, leading to duplicate claims. This often triggers an IRS audit or denial of both parents’ claims.
  • Confusion with Decrees: Many parents assume that the terms of a divorce decree are binding on the IRS. However, the IRS follows its own rules, which can override the decree unless Form 8332 is properly executed.

Tips for Family Law Attorneys

  1. Keep Accurate Records: Encourage clients to maintain a calendar or log of where the child spent each night. This is especially important for parents with shared custody arrangements.
  2. Address IRS Forms in Agreements: Include provisions in divorce decrees about who will claim the child and ensure the custodial parent agrees to sign Form 8332 if the noncustodial parent is to claim the dependent.
  3. Explain Tie-Breaker Rules: Educate clients about how the IRS resolves disputes if custody is evenly split.

Family law attorneys can help clients avoid confusion, missed tax benefits, and potential IRS audits by emphasizing the importance of the majority-of-nights rule. Proper planning and record-keeping are key to navigating these rules successfully.

It’s Time to Simplify the Tax Code

The U.S. tax code has become a maze of regulations that overwhelms taxpayers and consumes billions of hours annually. The National Taxpayers Union Foundation estimates Americans spend 6.5 billion hours on tax compliance, costing over $280 billion per year. Simplifying the code isn’t just about saving time—it’s about ensuring fairness and restoring trust in the system.

The Challenges of a Complex Tax Code

The tax code’s complexity disproportionately affects those with fewer resources. While the wealthy and corporations can afford accountants to minimize taxes, middle- and low-income taxpayers often struggle. Programs like the Earned Income Tax Credit (EITC), meant to help low-income individuals, are so complicated that millions miss out entirely. Simplification would level the playing field and reduce errors.

Taxable income calculations add further frustration. Determining how much Social Security is taxable involves multi-step formulas comparing adjusted gross income (AGI), nontaxable interest, and half of benefits against thresholds based on filing status. These rules confuse taxpayers and lead to errors. Simplifying such provisions would ease the burden.


How Simplification Can Be Achieved

  • Consolidate Deductions and Credits
    To simplify eligibility and reduce confusion, similar benefits, such as tuition expenses, student loan interest, and education credits, can be combined into one “Education Expense Deduction.”
  • Expand Pre-Filled Tax Returns
    The IRS could pre-fill returns for taxpayers with straightforward situations, like W-2 earners, using existing records. Filing would then be as simple as reviewing and submitting.
  • Eliminate Corporate Income Taxes
    Corporate taxes are passed on to consumers through higher prices, employees through lower wages, and shareholders through reduced returns. Eliminating them would remove this hidden tax, address the double taxation problem on corporate earnings, and encourage reinvestment in growth and innovation, keeping business investment strong.
  • Eliminate Special Capital Gains Tax Rates
    Replace reduced rates for long-term gains with an inflation-adjusted basis for long-term assets. For example, a $10,000 stock bought 20 years ago that has doubled with inflation would have an adjusted basis of $20,000, taxing only real gains. This would ensure fairness while simplifying the system.
  • Automate Tax Benefits
    Automatically applying credits like the Child Tax Credit using IRS records would reduce errors and ensure eligible taxpayers don’t miss out.

A Path Forward

The tax code has grown increasingly complex over time, piling on burdens for taxpayers. The last significant simplification came with the Tax Reform Act of 1986. Now is the time for another overhaul. By consolidating deductions, automating benefits, eliminating corporate taxes, and reforming capital gains taxation, we can save millions of hours and restore simplicity to the system.