IRS Debt Do's & Don'ts Archives

IRS ‘Math Fix’ Goes Too Far

One of the current problems at the IRS as pointed out by Tax Advocate Service’s 2018 Annual Report to Congress was the blurring of the lines of when has a tax return been audited vs. a math error correction. This is an important distinction. An audit comes with the right for judicial review plus numerous notifications while a math correction is an automatic assessment that just happens with only one letter.

There are 17 types of errors that the IRS considers to be math errors. Some of them have nothing to do with math and are errors in reporting ID numbers such as claiming a dependent and mistyping their social security number. The result is the disallowance of deductions and credits without the taxpayer having access to the processes that an audit would have allowed. Worse, the return is still eligible for additional assessments giving the IRS a second bite at the apple.

Allowing the IRS the ability to correct an obvious math error is a benefit for both the government and the taxpayer. It’s an efficient fix. But they are taking it way too far when they start making adjustments because some ID number does not match. Disallowing deductions for a child because the social security numbers do not match is not a math error. Maybe the deductions should be disallowed, but shortchanging the taxpayer’s rights for judicial review is not the right approach.

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.

Three Ways to Deal with IRS Debt

You owe the IRS a lot of money. What can you do to get your life back on track? Basically, it comes down one of three options:

Convince the IRS that you are not in a position to pay
Make a deal to make monthly payments over a period of time
Make an Offer-in-Compromise in that the IRS will take some smaller amount and write off the debt balance.

Figuring out which of these three doors is the best option for you depends on your situation as defined by an IRS formula called the Reasonable Collection Potential or RCP. The RCP takes your monthly income and offsets that with “allowable” expenses to determine your disposable income (i.e., what you could pay the IRS monthly). This is the base line amount for negotiations with the IRS.

If your RCP is zero, then the IRS will check a box on your file as “Uncollectable” and go away for 18 to 24 months. They will revisit the case every couple of years until the Statute of Limitations expires at which time, they will write-off the balance.

If your RCP is a positive number, all is not lost. You can to some extent arrange your financial affairs so as to minimize the RCP calculation. Making these payments regularly usually means that the IRS will leave you alone until the Statute of Limitations date gets close. If a final check of your records does not show anything stupid like the purchase of Leer Jet, then they will likely write-off the balance.

Finally, there is the Offer-in-Compromise that is so famously shown on TV as “I only paid pennies on the dollar”. Frankly, that is hooey. Why would the organization with the most collection powers in the world just let someone go? The answer is that they don’t. Fully 80% of Offers are rejected by the IRS. The 20% that are accepted only happen because the taxpayer was able to demonstrate that this was the best deal that the IRS could expect to make.

There is a fourth option that makes sense in some cases – filing bankruptcy. The rules are a little complicated and you need to consider this with an experienced attorney who specializes in bankruptcy.

There are ways to navigate out of this mess. It takes a considerable amount of work to evaluate which is the best route to take.

“I Avoid IRS Hassles By Not Filing!”

Non-filers — folks who habitually decline to file Federal tax returns— fall into two broad categories:

Those who have significant income withheld by an employer, and figure they don’t have to file because the IRS will probably owe them.
Those that hope to fly under the radar for their entire lives.

The first group is actually kind of common. After all, maybe they will get around to getting caught up next month or next year. No big hurry, the IRS owes them. Right?

Wrong: The IRS seems to ignore them. In actuality, IRS computers have compiled all the W-2s and 1099s and calculated that the government is getting a free loan! But it can get even better for the Government! The statute of limitations will run 3 years after the due date of the return and the taxpayers will no longer be able to claim their refund.

Yea, free money for the government.

What about the second group, those guys that are flying so low that nary a ping hits the IRS monitors? If you live in a lean-to in the wilderness as a hunter-gather all your life, that will work. But for the rest of us, forget it. The IRS is getting better every year at searching through public databases looking for information on people making money and then checking their database of returns filed. It’s just not hard to see this software continuing to improve its ability to crawl through websites and matching information found with returns filed.

Bottom line – Getting by as a non-filer for your entire life is just not likely to work. Filing returns can be stressful for some, but it doesn’t hold a candle to the problems of dealing with IRS Collections people knocking on your door.

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.

Make Hay During IRS Pay Vacation

In response to the coronavirus pandemic, the IRS announced March 25 it was suspending most collection efforts including the requirement to make monthly payments on installment plans (You’ll need to contact your bank to suspend the payments through July. A phone call should do it). Further, no automated levies and liens will be initiated until July 15. The IRS will also stop telling the State Department to suspend delinquent taxpayers’ passports.

This post is for those of us who have been paying (or plan to pay) our IRS tax debts, and coronavirus has messed-up our finances. So, should we just chill — take the payment vacation, and watch Netflix?

(If you can’t pay or chip away at your tax debt in the foreseeable future, read about how to obtain uncollectable status.)

If You Must, Defer Your Payments

So. If you are truly strapped, with no light in sight yet, taking the payment vacation may be the lifeline you need to put food on the table! Just remember that the debt hasn’t gone away, it’s just dozing and July 15 is right around the (ahem) coroner. So, be ready to start paying again, AND, act now to renegotiate your payment amount or cut your tax debt.

Act During IRS Pause to Renegotiate Payment Plan or Prepare a Pay-Less Compromise Offer

If you have a large or unresolved tax debt or run a business affected by the nationwide shutdown, you must get cracking on a recovery plan. One opportunity is to renegotiate your IRS Payment Plan. After all — if your business is hurting, even future cash flow may not support your current payment plan. You’ll have to submit a new Form 433-a to document your Post-COVID-19 financial reality.

Learn Your Reasonable Collection Potential

IRS uses Form 433 to gather future-income data from delinquent taxpayers. The data is used in a formula that yields a Reasonable Collection Potential (RCP) —a future-earnings dollar value the tax agency expects it can collect.

As a tax representative, I employ the same RCP formula with proprietary software so my clients can know in advance what the IRS expects to collect, based on the latest form 433 data. This can help you, as noted above, to establish or renegotiate a payment plan; or if feasible, to save major money by offering to settle your IRS tax debt for less than you owe.

IRs Accepts 40% of Compromise Offers

IRS calls such gambits ‘Offers-in-Compromise’ (OIC) and in 2018 rejected 60% of these offers. The key to landing in the 40% of accepted OICs is an offer close to your RCP. There are other factors, including timing. Which brings us back to the value of filling out or updating your form 433 and determining your RCP now.

Wait, It gets even better!

Tweak Your Reasonable Collection Potential

Now, while you have the time, during this pause in IRS collections activity, you can actually Change (Lower) Your IRS Collection Potential, to save even more money by taking certain steps. My linked article has more details.

Have a Pending Compromise Offer? Modify It, As Needed, by July 15

Do you have a pending Offer-in-Compromise? You now have until July 15^th to modify the offer and document changes the coronavirus shutdown is having on your business. Also, any payments that were due with the offer are suspended until July 15.

If you or someone you know needs help with an IRS or state tax issue, please feel free to contact me at either (352) 317-5692 or via email.

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.

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.