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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An offer in compromise is an agreement between you and the IRS where the IRS agrees to accept less than the total amount you owe. The process can take a long time and certainly requires a lot of organization and patience, and will require you to provide a lot of personal and financial information to the IRS. Negotiating with the IRS is not like negotiating with any other unsecured lender. There isn’t much dickering back and forth. There is a formula that the IRS uses that determines that amount they are allowed to accept. This formula is based on your gross monthly income, allowable living expenses and the net realizable equity you have in the assets you own. Typically, determining your gross monthly income is pretty straightforward, but there can be some challenges if you are self-employed or your income varies from month-to-month. The IRS has limits on the monthly expenses it will allow based on national standards for expenses like household living expenses, medical expenses, and transportation costs. Most of the time the allowable expense is much lower than the actual monthly expense. Finally, the IRS will look into the assets you own and your ability to use the equity to pay this debt. The IRS will use these numbers to calculate the amount they will be willing to accept for an offer in compromise. If you are interested in working through this calculation, you can check out Form 656-B from the IRS to walk through the process of calculating your offer amount. One important thing to note when filing an offer in compromise is that during the time the offer is being investigated the statute of limitations for collections is tolled – meaning it stops running. If your offer is accepted and paid properly then it doesn’t matter because your debt is clear. However, if your offer is not accepted then that can lengthen the collection period by a significant time as it can take over one year to complete the offer in compromise process.
Owing the IRS is scary. It’s also stressful. They are quick to send out collection letters and notices constantly reminding you of the growing balance that you owe. If you don’t owe the IRS, don’t assume that someone did something bad or illegal and that’s why they owe back taxes. Often, good, law abiding people end up in a bad situation that results in a large tax debt. This can come up if a lender writes off a large chunk of the debt you owe or because you have a lot of medical bills you decide to take a distribution from your retirement account and you don’t withhold the proper amount for the tax you owe.
No matter what your reason for owing these back taxes or how many years you owe, you can have some hope that there are ways for you to resolve this tax debt. But what happens if you choose the ostrich defense and put your head in the sand hoping it will go away without your input? Only the worst possible outcome: the debt continues to grow and more penalties and interest accrue and the IRS becomes more aggressive with their collection tactics leading to liens on your property and garnishment of your paycheck.
So what can you do? The good news is that when you are dealing with the IRS you have a number of options available to you. The first step in resolving any tax issue is becoming current with the IRS. That means that you must file all of your outstanding tax returns for the past seven years. If there are returns that have not been filed the IRS is not going to work with you to resolve your case. When filing these returns (especially when there is threat of a garnishment or levy) I recommend filing them in person at your local IRS office. Take an extra copy with you so the IRS employee you meet with can stamp your copy as received. That way you have proof of the filing of the return in the event you have to get on the telephone to try to resolve a wage levy before the return is completely processed. You also have to be current with your tax withholding. This may be as simple as correcting your Form W4 with your employer to make sure you have the proper number of deductions from your paycheck. But, if you are self-employed you will have to make sure you are making your quarterly tax deposits to be current.
Once you are current, you have a few options to resolve your tax problems. On this episode of the podcast we will introduce:
- The Offer in Compromise
- The Installment Agreement
- Noncollectable Status
We also discussed the process of an offer in compromise and the forms you will need:
I also introduced the book, Stand Up to the IRS, through my Amazon affiliate link, for you to review if you are interested in resolving your tax problems yourself.
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Question:Should I go ahead and file my tax return even though I am unable to pay or should I wait until I can pay for my tax in full to pay for it? I guess I could file for an extension now and pay in October, right?
Answer: You should file your 2009 income tax return no later than April 15, 2010 unless you intend to file an extension. However, if you are going to owe the IRS you should pay the tax due by April 15, 2010 even if you plan on filing an extension. The extension simply grants you more time to prepare the return, but not more time to pay the tax due. If you wait to pay the taxes until you file your return, you will have to pay penalties and interest. If you are in the situation where no matter when you file your tax return you will not be able to afford to pay the tax, you should go ahead and file the return. This will at least save you the failure to file or late filing penalties that the IRS assesses for non-filed and late-filed tax returns. From this point you can begin to negotiate with the IRS about your tax liability and how you are going to pay that.
Question: I have filed an offer in compromise and want to know what the average time is for the IRS to approve my offer in compromise and finalize the process.
Answer: I’m glad that you have filed your offer in compromise and taken the first step towards resolving your tax problems with the IRS. The time for an offer in compromise to be resolved varies from case to case, but is generally a pretty long process. The typical offer in compromise takes about 9 months to complete. This includes the time it is being examined and potentially an appeal should your offer in compromise not be accepted the first go around.
Usually, after you file your offer in compromise it will take about a month for the IRS to send you a letter that states the IRS has received your offer in compromise and is going to be assigned to an offer examiner for review. About 30 days after that you will receive a letter from the offer examiner requesting more information or clarification on the information that you sent the first time. After that, the time will depend on the complexity of the issues in your case and whether you are asking the IRS to depart from any standard expenses or to overlook any assets to grant your offer in compromise.
Sometimes having the extra time comes in handy when you are having to wait on documents from a bank or mortgage company to send to the IRS, but on the other hand it can be kind of frustrating when you are just really ready to get the case over.
While there is no real time table in place for the review of your offer in compromise a law that went into effect in 2006 requires the IRS to finalize the review of your offer in compromise within two years of your filing the offer in compromise or the offer is automatically accepted. While many cases take a long time (well over a year) to complete, I have never had get accepted because the two years passed.
There are several statues of limitations when it comes to how long the IRS has to collect tax debt from you. The first statute of limitations you have to worry about is the time the IRS has to go back and examine (or audit) your income tax return. The IRS has three years from when your tax is assessed to audit your return. That means, if you filed your 2008 tax returns on time, before April 15, 2009, the IRS will assess your taxes on April 15, 2009 and they have until April 15, 2012 to audit that return. If they do not audit your 2008 return by that time then you don’t have to worry about them coming after you for that period.
The second, and probably the most important statute of limitations to you, is how long the IRS has to collect the tax from you. The IRS has 10 years to collect your income taxes. If they do not collect the income taxes from you within ten years from the date your taxes are assessed, then your tax debt – no matter how much – will be forgiven. The key to this statute of limitations, however, is when your taxes are assessed. Your taxes are assessed shortly after your tax return is filed. If you file before April 15 each year, your taxes will be assessed on April 15 since that is the due date. If you file your income tax returns late, however, your date of assessment will be after you file the return.
The clock will start to run on how long the IRS has to collect that tax as soon as the tax is assessed. So approximately 10 years after you file your income tax return your IRS tax debt will be discharged.
While this sounds great, especially if it has been 9.5 years since you filed your income tax returns that you owe for, there are some things that can lengthen your statute of limitations to give the IRS more time to collect from you:
- If you filed a fraudulent return. The IRS can come after you from now until eternity if you have filed a fraudulent return. Not only do you have to worry about owing the IRS money for your tax debt in this situation, but you may have to worry about some jail time as well. Do not do this!
- Filing an Offer in Compromise, Bankruptcy, or Collection Due Process Hearing Request: Any time collections are stopped for one of these reasons the statute of limitations for collection of your income tax debt is also paused. So if it takes 9 months for your offer in compromise to be considered and denied, then your ten years will have another 9 months added on to the end. This is also true when you have filed for bankruptcy or for a collection due process request with the IRS.
So, to wrap up this post, I want to give you a quick tip for success with your tax problems. Always file your income tax returns on time. Not only will you reduce the penalties that you might rack up if you owe the IRS more than you can afford to pay, but you can also get the clock started on your collection statute of limitations.
I also want to point out that there is separate statute of limitations for collection for each tax year that you file. That means that your statute of limitations for your 2007 return will be separate for the statute of limitations for your 2008 return. Also, if you owe for your return and you are audited and the IRS assesses additional tax against you, that additional assessment for the same period will have a different statute expiration date – which as you know from the opening paragraph to this blog post could be up to three years later.
When you are filing an offer in compromise with the IRS you have to give the IRS a lot of financial information and proof. They want to see the last three months of bank statements, pay stubs, utility bills, investment account statements, medical bills and more. You can almost picture the offer in compromise program as wanting the same type of information as if you were being audited and had to prove why you claimed certain deductions on your income tax return.
All of this financial information has to be provided at the beginning of the filing of the offer in compromise and is usually required to be updated during the offer in compromise process (perhaps even several times) because of the length of time it takes to for the offer in compromise to be examined.
Now, if you are setting up a monthly payment plan (or installment agreement as the IRS calls it) you may or may not be required to provide financial information and bank statements. If you owe the IRS less than $10,000 and you can pay it off in 36 months, the IRS will automatically set up an installment agreement for you.
The next scenario is if you owe the IRS less than $25,000. When you owe less than $25,000 you do not necessarily have to provide financial information and bank statements as long as the total tax, penalties and interest will be paid off during the statute of limitations for collection. Many times the IRS will ask you what you want to pay and then they will tell you if that will pay off the debt or not. If it will they will then set up your installment agreement. If your offer will not pay off the tax in time, the IRS will tell you what the minimum payment will have to be. If you cannot afford that payment you will have to provide financial information to the IRS.
If, however, you cannot afford the payment that the IRS must receive to pay off the debt in 36 months or less (if you owe less than $10,000) or if you cannot pay off the tax before the end of the statute of limitations (if you owe less than $25,000) then you would have to provide all of the financial information to prove that you do not have that much disposable income every month and need a lower payment amount for your installment agreement.
When you owe the IRS more than $25,000, you must provide financial information to the IRS and your monthly payment will be what the difference in your income and allowable monthly expenses is.
I received this question recently from this site:
Need to decide which to file first bankruptcy or OIC. Have outstanding medical
bills of approx 12,000 and credit card debit of approx 19,000 plus IRS of
$80,000. IRS debt is old and they have filed liens, current status collectible.
Heart surgery in 2007 and am disabled. Only income alimony, no assets.
The question that I hear you asking is whether to file bankruptcy or your IRS offer in compromise first – not should you either file bankruptcy or an offer in compromise. The IRS debt can not be collected while you are in bankruptcy so you do not have to worry about the IRS levying your disability income or bank accounts while you go through bankruptcy. If you have definitely decided that you are going to file bankruptcy, then in most circumstances, I would recommend that you file bankruptcy before you file your offer in compromise with the IRS because some of your tax liability MAY be dischargeable in bankruptcy. It is possible that all of your tax liability could be discharged; and, it is possible that none of your tax liability can be discharged. It depends on the type of tax and when that tax was assessed. You should check with your bankruptcy attorney to determine which periods and what amounts may be dischargeable. Then, after your bankruptcy is discharged, you will know exactly what tax liability remains and what you should include in your offer in compromise with the IRS.
Recently I read about a divorce matter where the couple had a large amount of IRS tax debt jointly, but in the divorce agreement, one of the parties (the husband, let’s assume) agreed to take on all of the tax debt and hold the wife harmless. You know what happened next, don’t you. Husband did not take care of the taxes as he promised and now the IRS has come knocking on the wife’s door. Is she protected? Should she just show them her divorce decree? Will that make the IRS turn around, leave her alone and start to collect from her ex-husband?
Because the taxes were filed jointly and because the IRS is a federal agency, they are not bound by the state family court order. So husband and wife are still both jointly and severally liable for the entire tax debt. The IRS won’t even split it up and say you are in charge of half and your husband is responsible for the other half.
While that doesn’t seem fair, the wife does have some recourse against the husband – just not through the IRS and she is not relieved from paying the IRS. In South Carolina (and I assume this applies in all other states) the wife would take her ex-husband back to family court for his breach of the court order. This is called contempt and here in South Carolina, husband could be penalized with a jail term, by paying a fine or by being ordered to complete community service.
Before the wife can hold husband in contempt, she would generally have to show a financial loss. That means she would have to come out of pocket with some money. Depending on her financial situation, wife may qualify for an offer in compromise where she gets the IRS to agree to accept some amount less than what she owes them for full settlement.
I received a letter in the mail recently from the IRS stating that I owe taxes, penalties and interest of over $20,000. I don’t have that kind of money. What can I do? Will I go to jail?
I’m sorry that you find yourself in this situation, but to ease your mind, you do not have to worry about going to jail. Just owing the IRS money is not a criminal offense. However, you do need to be working on a way to pay the tax, penalties and interest and be proactive before the IRS begins to take collection action against you such as a wage garnishment or bank account levy. You mention that you do not have the money to pay your tax so you may qualify for an offer in compromise. An offer in compromise is a program with the IRS where you offer to pay a portion of your future discretionary income along with the equity you have in any assets you own as a full settlement of your tax liability. That means that you may qualify to pay much less than you actually owe. This is determined on a case-by-case basis and it does not matter how much you owe.
When we spoke to a recent client about their case, I thought we were clear that all returns had been filed, but the client just owed the IRS money for a few years. They had just been informed by their employer that an IRS wage garnishment or levy was about to start on their wages unless they could get it released before the next payroll (about 5 days away). Because we thought everything was good and because the client didn’t owe an extraordinary sum (less than $10,000), I thought this was going to be a quick, easy representation. Upon calling the IRS to negotiate the release of the levy, I was informed that there were, in fact, outstanding tax returns that must be filed.
Before the IRS will negotiate with you whether it is to negotiate the release of a wage garnishment or to ask them to accept an offer in compromise, you must have at least the last six years tax returns filed. If you do not, the IRS will not begin to negotiate with you.
I always urge my clients to go ahead and file their tax returns on time every year whether they can afford to pay the tax or not. Why? For two main reasons. First, by filing you immediately avoid the failure to file penalty that the IRS assesses. This can add up quickly. The failure to file penalty is 5% of the tax owed per month up to a maximum of 25%. Yuck! Second, by filing, you begin the statute of limitations clock running for how long the IRS to collect the tax that you owe. If you never file the clock never starts and you are stuck with the IRS for the rest of your life or until you finally pay off the tax, penalties and interest.
If you have a wage garnishment or just found out that the IRS has levied your pay at work, you can get that levy released. I have written a short manual, Emergency Tactics to Stop the IRS From Taking Your Paycheck, that gets to the point pretty quickly and teaches the same techniques that tax lawyers are paid thousands to do to get wage levies and garnishments released from the IRS every day. Check it out if you would like to get some more information about release of a levy prior to consulting with a tax lawyer or CPA or if you would like to take matters into your own hands and keep them in-house.