Blog - Page 13 of 14 - Tax Rep Gainesville, FL

Pay Pennies for Dollars Owed?

You see ads on TV about the IRS accepting “pennies on the dollar” to clear a backlog of tax debts. It seems an easy answer to a big problem. But, “too good to be true, usually not true.”

Bad News on Offers-in-Compromise

IRS rejects 60% of compromise offers it gets, per the 2018 IRS Data Book. This makes sense. After all, why would an agency with more collection powers than Herod be willing to forgive debt? IRS agents certainly don’t win awards for giving away money!

Good News on Offers-in-Compromise

The IRS does accept 40% of the Offers-in-Compromise. These are offers that they decided were in the Government’s best interest to accept. Meaning, that they ran the numbers and decided this was the max they could expect to collect from the taxpayer.

So, how do you tilt the pinball machine to make it more likely to be in the 40% accepted? It starts with running your numbers on potential future earnings with the same formula that the IRS uses. This is called the “Reasonable Collection Potential” formula which calculates your disposable income on a monthly basis. Whatever this amount is times the number of months left before the Statute of Limitations nulls the debt is where the IRS is going to start. To make it into the acceptance column, you must make it a better deal than just sticking with the status quo.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com

Can IRS Tag Your Boss, Friends, and Neighbors?

Can the IRS contact your friends, neighbors, and employer? This is the government, of course they can. But the tax law does require them to give you reasonable notice. So when should you worry about this taking place, and what does ‘reasonable’ mean?

The Ninth Circuit of the Court of Appeals recently ruled that it cannot be a generalized statement referring to third parties in the whole. Instead it must be a written notice that they plan to contact a specifically named party. The Court’s reasoning was that these contacts could be very detrimental to the taxpayer. First, the contact alone was an exception to the rule that your tax information was completely confidential. Secondly there was a possible or even probable negative impact on the taxpayer’s reputation that the IRS was making inquiries.

This is great news for people in California and Arizona who are in the Ninth Circuit’s area. But, what about us in Florida? It also looks like good news for us. The IRS is adopting changes that will give everybody reasonable notice. While the IRS policy book (aka Internal Revenue Manual) still reflects their old policy of only providing a general notice in Publication 1 – Your Rights as a Taxpayer, which they mail out in all audits. There was a new memorandum issued last July with an effective date of 8/15/19. It requires IRS employees to provide written notice of who they intend to contact at least 45 days in advance.

This is a much-needed change. It allows you the option to provide the necessary documents so that the IRS does not need to contact your friends, customers, or employer.

Get an IRS Tax Lien Released

Whenever you owe the IRS on a tax debt, there is an automatic statutory lien created by law. The problem for other creditors is that they won’t know about this claim on your property. The answer to that problem is the Notice of Federal Tax Lien which is filed in a courthouse near to the taxpayer’s residence. The big question for anybody receiving one of these notices is “how do I get rid of it?”

There are various ways to get an IRS to release a lien on your property.

Pay the debt in full – not a great answer if you don’t have the cash
Discharge of property – the IRS releases a specific property from its general lien on all assets of the debtor
Subordination – the IRS allows other creditors to move ahead of their claim on a specific property
Withdrawal – the IRS releases the lien even though the debt is still owed.

Payment in Full

Of course, this is the IRS preferred reason for issuing a Certificate of Release of Federal Tax Lien. The IRS has an automated system that should issue this certificate within 30 days of receiving final payment or the discharge of the debt due to the Statute of Limitations running out.

Discharge of property

Sometimes it is in the best interest of the government to release the lien against a specific property. The IRS guidelines allow them to do this when the value of remaining property under lien is at least 2 times the taxpayers debt. Other reasons include an agreement to hold the proceeds of any sale in trust for the United States.

Subordination

This is another one of those things that require the situation to be in “the best interest of the government. This is generally what happens when the IRS wants the sale to go through, but other creditors will block it unless they get their cut first.

Withdrawal

The IRS can withdraw their public Notice of Federal Tax Lien. This usually happens when the TP enters a Payment Plan that will allow the government to receive full payment in 60 months or less. There is a Fresh Start program that allow some people with tax debts of $25,000 or less to qualify for withdrawal.

The IRS Notice of Federal Tax Lien has some large repercussions that will incentive you to get a release. The biggest one is usually the impact on your credit rating. The second one is the hassle of having to deal with yet another creditor when selling a property. When in doubt as to your qualifications for one of the above outs, it’s one of those things where there is no downside to asking.

How to Handle Tax Debt When You’re Broke

There are three basic options that you can use in dealing with the IRS Collections Division:

Payment Plans – You agree to make regular payments against your debt and the IRS agrees to not bug you too much.
Offer-in-Compromise – You make an offer to clear the debt for less than the face value of the amount owed.
Uncollectable Status – You show that your financial situation is such that you can’t make any immediate payments.

Payment Plans

There are several forms of automatically approved plans. If you qualify, all you do is fill out a form on the IRS website and start making payments – no fuss, no bother. Not everybody can fit under one of these automatic plans and as a result they will have to submit financial information to the IRS and negotiate a payment amount.

Offer-in-Compromise

This is the pennies on the dollar approach that you hear about on TV ads. What the ads don’t mention is that the IRS has no incentive to accept such an offer. Afterall, they have better legal tools to collect from debtors than private industry and they can afford to wait too see what the taxpayer might earn in the future. The fact of the matter is that the majority of offers are rejected by the IRS.

The IRS does except some offers – those that it determines are in its best interest. They do this using a formula approach that looks at the taxpayer’s current assets and potential future income. If the offer is more than the formula result, it is likely to be accepted provided the taxpayer has filed all tax returns that are due.

Uncollectable Status

The IRS does not want to waste their time if the situation is such that no amount of investigative work coupled with browbeating and threats of levy will result in cash collected. Once they determine that a taxpayer fits into that category, they mark the case as uncollectible and plan to revisit the situation every couple of years. This is great news for the taxpayer in that the IRS leaves them alone for a while and the 10-year Statute of Limitations continues to run.

What to do if you can’t pay the Taxes

If you can qualify for one of the Automatic Payment Plans and can live with the payment amount, then this is obviously your best option. The IRS leaves you alone as long as the payments are being made.

The road on the all the other options is a lot harder and you should consider professional help. You will have to submit detailed financial information about what you own and your income and living costs to the IRS. Included in this package of financial information are bank statements and other documents to substantiate your financial position. The IRS will then run your numbers through their formula and determine the amount of money that is the “Reasonable Collection Potential” to evaluate how much you can pay.

The Reasonable Collection Potential formula is not a secret. There is software available that allows a practitioner like me to run the numbers and calculate the amount that the IRS is likely to consider reasonable in advance. Once we know this amount, we can develop a strategy to decide which is the best option to consider – payment plan, offer-in-compromise, or uncollectible status.

Does Bankruptcy Void Tax Debts?

Bankruptcy allows a debtor to get a fresh start by ‘discharging’ some of their debts including those owed to the IRS. But there are lots of exceptions. Here are some of the general rules for you to discuss with your attorney if this is a path you are considering:

100% penalties (trust funds) assessed on a responsible party for failure to pay the payroll taxes of a business are not dischargeable.
Tax debts due to income tax returns are dischargeable provided that the due date of the return was at least 3 years before the bankruptcy filing date and the return was actually filed at least 2 years ago. Tax fraud negates this rule as does a conviction for tax evasion.
Tax liens filed against property that were filed prior to the bankruptcy petition date remain in place and are enforceable.
The Statute of Limitations is automatically tolled (put on hold) for the period of the bankruptcy estate plus 6 months.
The IRS is not allowed to continue collection processes while the bankruptcy estate is in existence.

There was recent good news for people in the 11^th Circuit of the Court of Appeals which includes Florida. The court held that income tax returns that were filed late are still eligible for discharge provided they were filed at least 2 years ago. The 1^st Circuit in Massachusetts holds a contrary position that any late filed returns are never dischargeable. Too bad for the people in the Northeast.

Filing an Offer-in-Compromise? Timing is Critical

The best time to file an Offer-in-Compromise is when you have all your ducks in a row. Failure to get this right usually results in the Offer being rejected and all your work will be for naught.

Here are the steps I follow:

Get the IRS Tax Transcripts showing the dates filed and amounts owed and the date that the Statute of Limitations
Get any past due tax returns filed and current year estimated tax payments up to date. The IRS will automatically reject any offers when the taxpayer is not in compliance.
Gaither all the client information regarding financial assets and their expectations for future earnings.
Prepare the IRS Form 433 which is used to report the financial information to the IRS.
Calculate the Reasonable Collection Potential (also known as RCP) using the IRS
Recommend changes that might make reduce the RCP result. For example, the IRS treats life insurance premiums as an allowable expense. If the client does not have life insurance, then we get them signed up and paying those premiums.
Once the client makes the recommend changes, we must wait long enough so that the new payments will show on three months of bank statements.

Once we have the three months of bank statements, we can finish up the Offer-in-Compromise and include all the documentation that is needed to support our position. Typically, this is close to a 5-month proposition to get an offer completed. Not being in compliance, not including the documentation to support your position, or making the offer for an amount that is less than the RCP formula is a guarantee that the offer will be rejected.

How IRS Levies Work

I represent taxpayers in Gainesville and the state of Florida who have tax issues with the IRS.

The IRS Tax Levy is the method used to actually seize a taxpayer’s assets in order to collect on a tax debt. These levies happen when the taxpayer ignores the IRS about the debt, or there is a breakdown in the negotiations between the two parties. The Levy is the IRS’s hammer and they know how to use it.

The process is straight forward and happens after the IRS has sent various notices trying to collect on the debt. The process itself is as follows:

The IRS issues a Notice of Intent to Levy – you have 30 days to respond and either request a Collection Due Process hearing or negotiate some other deal such as a Payment Plan.
The IRS will next issues a Notice of Levy to any third party who is holding the taxpayer’s assets such as banks, IRA trustees, employers and customers in the case of contractors.
Banks will hold the money in your account at the time of levy for 21 days before sending it to the IRS. This means that it still might be possible to work out a deal and get the levy released before the money is sent to the IRS.
Employers will receive a “Continuing Levy” for wages and commissions which stays in place until it is released by the IRS. This type of levy is designed to hurt and drive the taxpayer back to the bargaining table.

What should you do if you have a received a Notice of Intent to Levy?

The time for inaction is over. You need to contact the IRS and make some sort of arrangement with the IRS or request the Collection Due Process hearing. Hiring an attorney, CPA, or enrolled agent who specialize in these procedures is probably your best plan of action.

Bankruptcy Judge OKs IRS Pension Levy

During bankruptcies, an automatic stay prohibits creditors from taking collection actions while proceedings are ongoing. But a Wisconsin couple recently found that the stay was not an absolute thing. Enter the IRS.

In Pansier v. U.S., 2019 PTC 494 (E.D. Wis. 2019) a district court affirmed a bankruptcy court’s decision to lift the automatic stay. This lift let the IRS levy the debtor’s pension even though the bankruptcy case was still in motion. The reasoning from the bankruptcy court: The pension was exempt from regular creditors and was therefore still available to the IRS outside of the bankruptcy.

Take-away: The IRS has far more collection power than most creditors!

If you or someone you know has received a Notice of Intent to Levy or has some other federal or Florida state tax problem, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.

Yes Dad, IRS CAN Levy Pensions

A common belief is that pensions, IRAs, and 401Ks are safe from all creditors. When it comes to the IRS—don’t kid yourself. The IRS CAN levy pensions. While it can’t force you to liquidate such accounts, it can levy any proceeds from them. Here are three ways to shelter your retirement funds:

Go with a Payment Plan

The easiest (proactive) way to protect your pension, IRA, or 401K when you the IRS is to sign up for an IRS installment agreement so the IRS does not issue the levy in the first place. This is what most people do, and the long-term monthly bite may not be too painful— but it’s not the only option.

Negotiate with the IRS

A more attractive, more complex alternative is to make an Offer-in-Compromise (OIC) to clear your tax debt for less than you owe. Despite what you may have heard, the IRS does not ‘nonchalantly’ clear tax debts for ‘just pennies on the dollar’ but the agency will accept an offer that represents their best bet to collect from you, based on a formula that takes into account your current assets and future earnings potential.

Lump-Sum Out for Fixed Income Retirees

Retired people living on a fixed income typically have little chance of ever paying off their tax debts in full. The IRS is often willing to take a smaller lump sum payment in these cases in order to get the debt off the books.

If you or someone you know has received a Notice of Intent to Levy or has some other federal or Florida state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.

How (Not!) to Make a Gift of your Refund to the IRS

The majority of taxpayers get a refund after filing their 1040. Late filing by these people is not normally a problem since all the penalties are based on the amount of tax due. But, filing too late can be costly.

When you file a 1040 requesting a refund you can think of it as having two different functions.

Function 1 is your report to the IRS to self-assess your total tax liability.
Function 2 is to file an administrative claim for a refund on the overpayment.

If you file your tax return more than 3 years after its original due date, you will lose the right to claim the excess. This is because the claim is only good for tax payments made within the three years prior to the claim itself.

This recently happened to some taxpayers in Wisconsin who filed their 1040 more than three years after the due date and lost their right to claim a $7,000 plus refund. The Golden Rule here is “FILE THE BLOODY RETURN WHEN IT’S DUE”. These things simply do not age well.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.