Tax Problem Toolkit Podcast
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The IRS uses a lot of fear and intimidation when dealing with tax payers who owe them money. It is their goal to get you to pay as much as possible. They are not looking out for your best interest and you shouldn’t expect them to try to give you any tips that are going to help you owe less or get out of some penalties and interest.
I have spent the last several years helping clients resolve their tax problems with the Internal Revenue Service. I have worked with hundreds of people who have owed the IRS thousands of dollars to work with them to assist them in successfully resolving their cases. We have handled cases involving offers in compromise, getting wage garnishments and tax levies released, getting money back from the IRS after they levied a bank account, innocent spouse relief, penalty abatements and audit reconsiderations.
If you have questions about IRS collections and how to resolve your tax problems, I invite you to subscribe to the Tax Problem Toolkit podcast where you will be equipped to work on resolving your tax problems yourself. Feel free to send your questions to firstname.lastname@example.org where they may be answered on an upcoming issue of the Tax Problem Toolkit Podcast.
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Not only are your tax problems with the IRS stressful, but they can impact multiple areas of your financial life. When you owe the IRS there is a “silent” tax lien that automatically attaches to a taxpayer when the IRS has assessed the tax against you, notified you of the tax that you owe and you have failed to pay it. It is referred to as “silent” because there isn’t a form that is filed anywhere, it just happens by operation of law. The lien protects the government’s interest in all your property, including real estate, personal property and financial assets. A lien is different from a levy because a levy is where the IRS physically takes your property (by wage garnishment, taking all of the money from your bank account, or selling your property).
The typical threshold for the filing of a formal Notice of Federal Tax Lien is at $10,000.00 owed in taxes, but depending on the circumstances, it could be filed when you owe less than that. A Notice of Federal Tax Lien is filed in the register of deed’s office for the county where the taxpayer lives. That means your tax debt has now become a public record and this will also be included in your credit report so your credit score will drop having a negative impact on your ability to borrow.
The Notice of Federal Tax Lien has an automatic release provision built into it so that when the date listed on the form has passed usually ten years from the date of assessment of the tax, the lien is automatically released. But, what if you have gone through the offer in compromise process and settled your tax debt, or you have been making monthly payments for a few years and were able to pay off your tax debt?
Since you paid off your tax debt prior to the automatic release date on the lien, the IRS will issue a release of the tax lien that is also filed with the register of deeds and becomes a public record. That’s great that the tax debt is now gone, but the big problem is that it doesn’t come off of your credit report automatically. While they notify the county, the IRS does not notify the credit bureaus.
Here’s what you do. Head over to IRS.gov and download Form 12277. There is a link in the show notes at 6minutelegal.com/tpt006. Begin completing the form. The first eight questions will be your name and contact information. Question 9 will begin asking for specific information about the lien that has been filed. You will need a copy of the lien that has been filed so you can refer to the lien number and date and location of filing. Question 10 will ask the current status of the lien. If you have received a notice of release of federal tax lien, you can check the released box. If you haven’t you should check “open” or “unknown.” Since you have already paid your tax in full, the issuance of a release should be automatic by the IRS, but often it is not. In box 11, I would suggest checking the last box for “in the best interest of the tax payer and the government.” And, in box 12, you can detail the reason for your request which is essentially that your tax debt has been paid in full and you desire to have the lien withdrawn. You can also refer to the IRS Fresh Start Program that authorizes the filing of a lien release when the tax has been paid in full. Finally, you will sign and date Form 12277 at the bottom.
I hear you saying, “That is the formal request to the IRS to release the lien, but what about your credit?“ Paragraph 4 of the instructions for this form state, “At your request, we will notify other interested parties of the withdrawal notice. Your request must be in writing and provide the names and addresses of the credit reporting agencies, financial institutions, and/or creditors that you want notified.” So, along with your request, you should mail a separate letter to the IRS with this request:
Sample Addendum to IRS Form 12277
(YOUR SOCIAL SECURITY NUMBER)
(ADDENDUM TO FORM 12277)
Pursuant to your instructions, I hereby request withdrawal of all Federal Tax Liens against me. Please notify the following agencies of the withdrawal:
P.O. Box 9595
Allen, TX 75013
PO Box 740241
Atlanta, GA 30374-0241
PO Box 1000
Chester, PA 19022
Now, when the IRS withdraws the lien, they will automatically notify the credit bureaus of this withdrawal as well. I have heard of credit scores being increased by over 100 points by the removal of a lien.
Forms we discussed:
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Let’s continue this conversation in the comment section below. What questions do you have about dealing with IRS collections?
The IRS released a list of the five reasons you should consider e-filing your 2013 tax return. Here are the tips:
1. Accurate and complete. The software walks you through the steps of preparing the return and handles all of the math work for you so you know you will complete all of your return and that the math will be correct.
2. Safe and secure. IRS e-file meets uses the best encryption technology and has safely and securely processed more than 1.2 billion e-filed individual tax returns.
3. Faster refunds. E-filing usually delivers your refund faster since the software detects and helps you correct most mistakes, the IRS has an easier time processing these returns and sending out the refunds. Not to mention all of the time you save by avoiding the post office and mailing the return and save the money you would spend for certified mail (the preferred way of communicating with the IRS).
4. Payment options. If you are going to owe taxes you have multiple options for how you pay your taxes. If you file your return early, you can set up payments so that you pay your tax in payments (as long as it is full paid by April 15th). You can also choose the payment method.
5. E-file’s easy. You may qualify to use the IRS “freefile” software where you can e-file your return for free. There are other tax assistance programs that you may qualify for a free e-filing as well. And of course, the commercial tax preparation software makes e-filing your return easy.
What about old, past due returns?
If you have not filed an old return, then you will not be able to e-file at this time. You must file a paper copy of your return. Rather than mailing this return to the IRS, you should hand deliver it to your local IRS office and ask for a receipt for accepting the return. Processing returns can take up to or longer than eight weeks. By getting those filing receipts you will have proof of filing you can show to a revenue officer in the event you must begin negotiating with the IRS before the returns are processed and available to all IRS personnel.
There are three main types of offers in compromise that you can submit to the IRS. The most common is the offer in compromise based on doubt as to collectability. By filing this type of offer in compromise with the IRS you are telling them that you agree that you are liable for the taxes, interest and penalties that have accrued against you, but you can’t afford to pay them. Since you cannot afford to pay the taxes in full you are requesting that the IRS take a reduced amount for this. No doubt you have seen the late night television commercials stating that they can help you settle your taxes for “pennies on the dollar.” They make it sound so easy. So automatic. My friends, it is not always that easy or automatic. It all depends on your individual financial situation at the time you file your offer in compromise. (more…)
There are few things scarier than getting a notice from the IRS about your taxes. They are so impersonal and all seem to threaten to take your stuff or garnish your wages. Today, we talk about how to identify when you are dealing with the IRS automated collection service (ACS) and what that means. (more…)
There are a few common ways of resolving your IRS tax debt. The most popular are the offer in compromise and the installment agreement. But, there is an uncommon way that many people believe doesn’t exist: bankruptcy. Most people have bought into the myth that bankruptcy filings cannot help with tax problems. I have even run into some bankruptcy lawyers who believe the same thing. That couldn’t be further from the truth. Bankruptcy can eliminate income taxes and non-trust fund related taxes. You can look at it like this – if you are holding the tax and supposed to pay it on behalf of someone else (e.g. the trust fund portion of payroll taxes or sales tax) then you cannot bankrupt it. (more…)
Contrary to what collectors at the IRS may tell you, there is a hardship status available to you known as currently not collectible. Essentially, this means that the IRS agrees that you are financially unable to pay your tax debt at this time without it becoming a financial or economic hardship for you and they agree to forbear collections activity on your account. (more…)
Welcome to Episode 1 of the Tax Problem Toolkit podcast. I wanted to take this few minutes to share with you a little of my vision for this podcast and what you can expect over the coming weeks. (more…)
We received a question recently:
My parents own a home that I have been living in, and they have expressed an interest in giving it to me. They do not want me to purchase the home from them, but they are concerned there may some tax implications. I thought if a parent gives property to a child there are no taxes. Is that true? The home has been appraised as is worth $90,000.
You did not mention whether there was a mortgage on the house. When dealing with gift tax issues, the key to remember is that the equity of the property being gifted is what is subject to tax. So, if your home is worth $90,000 and there is no mortgage, you have to examine this question for a gift of $90,000. If there is a $50,000 mortgage associated with the property, then you will examine this question with a gift of $40,000.
First, I am not aware of any special gift tax rules for transfers from parents to children. Your state or county may not charge a deed recording fee or sales tax for transfers between family members, but the IRS will be interested in all transactions.
Every person has the legal right to make gifts up to a certain amount $14,000 in 2015 without any gift tax effect. This is per person, so you can gift $14,000 to person 1, another $14,000 to person 2, and so on. In your case, your parents can each give you $14,000 per year with no tax effects so you could effectively receive $28,000 per year.
If you exceed this annual exclusion amount, that does not necessarily mean your parents will owe any tax. Each person has a single lifetime exemption amount that they can pass free of tax, though you do need to file a gift tax return to acknowledge that you’re using up some of that lifetime exemption. This year, the exemption amount is $5,250,000.
I would certainly recommend that you confirm your plans with your tax adviser first.
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Tax problems are sometimes the outward symptom of some other financial issue. Perhaps, the business entered into a bad deal and got cheated out of money they were due by an unscrupulous supplier and you weren’t able to keep your taxes current because you had to pay your employees or other expenses just to keep the business going and the IRS seemed like a creditor that could wait because things weren’t urgent. Or perhaps you lost your job and had to live on your IRA for a year before you were able to find any work. Maybe you changed your W-4 with your employer so you would have a little extra money in your paycheck to buy Christmas presents for your children and forgot to change it back after the holidays and now you haven’t had any money withheld for your income taxes.
Any way you look at it, your initial problem turned into another headache because of the additional taxes that it caused you to owe.
So where do you turn from here? Should you wait until you get back on your feet? If there is one thing I know of entrepreneurs is that they believe they can fix any situation. No matter where the business is now, a little more time, a little more money, just one more deal and the business will be turned around. Or maybe you are looking for a new job, but the recruiter suggests that it won’t be available for another 9 months or so.
If you find yourself in this situation, now is the time to handle your IRS problem. This blog outlines several of the means available to resolve your tax issues (offers in compromise, installment agreements, currently non-collectible, etc.). All of the methods for dealing with your tax debt are functions of your current income, allowable living expenses, and the net realizable equity in your assets. That means, while things are bleak for you financially, you are in a better position to negotiate a reasonable settlement of your tax problem with the IRS. If you wait until you are back on your feet and financially stable to negotiate with the IRS, you will face much stiffer resistance and much higher settlement offers. You may even earn yourself out of several of the more reasonable resolution possibilities.
Not everyone qualifies for an offer in compromise. Sometimes the amount the IRS is willing to accept is just not low enough to make sense in going through the process. In that case you can look into requesting an installment agreement or to be placed in currently not collectible status. An installment agreement is simply a monthly payment plan. While you pay each month interest continues to accrue. The amount of the payment plan is based on your monthly income and expenses; however, if you owe less than $50,000.00 and can full pay your debt in six years the IRS can allow you to pay what is called a streamlined installment agreement without the need for providing all of the necessary financial information that would be required otherwise.
You may not have enough money to make even a small monthly payment. If that is the case, currently not collectible may be your best option. In that case the IRS agrees not to take active collection measures against you for a period of time to allow you to get back on your feet. The statute of limitations period continues to run and there is no requirement for you to make any payment to the IRS. Of course, the interest is still accruing as well.