First, it is important to know that the IRS must send you a notice of default before it can end your installment agreement and start collecting again.  This notice is titled “Notice of Intent to Levy!!! You Defaulted on Your Installment Agreement.”  If you are unsure if you have received this notice, take a look at it here.  With this notice comes very important rights.

After the IRS sends the notice of default, you have 30 days to file an appeal to renegotiate the installment agreement.  

Here is the important part:  If you file the appeal timely, the IRS cannot take any collection action or enforce the default until your appeal hearing is completed.   This is mandated by law  – Internal Revenue Code 6159(b)(5) - and by the Internal Revenue Manual (IRM 5.14.11.9).

Renegotiating installment agreements in IRS appeals protects your wages, bank accounts and assets from IRS collection action while a new plan of resolution is negotiated.   There, you can provide updated financial information – without any threat of levy – to solve the default.  You will also have the benefit of having one person being responsible for your case – an IRS appeals officer – rather than the chance of dealing with multiple personalities in the IRS Automated Collection Service.

If you are unable to repay your IRS debt, other options available to you include offer in compromise, bankruptcy or being placed in IRS uncollectible status.  If you owe under $25,000, the IRS has simple streamlined installment agreement process – learn more about that at my prior post here.

Defaulted installment agreements reflect the reality of our economy.  But you can keep the IRS at bay if you have defaulted and get your life back on track.

The IRS has filed a tax lien against me where I live in Hamilton County, Ohio.  But I own real estate in North Carolina, and there are no tax liens filed against me there.  Does the IRS have to file a lien in the county where I live or where I own property for it be effective?

A federal tax lien is only effective against your property if it is filed in the proper place.  

If you own real estate, the IRS must file their Federal tax lien in the county where the real estate is located.  If the IRS files a lien in the correct county – where the rental property is located - that lien encumbers the property in a manner similar to your mortgage.  

Your place of residence is irrelevant to the effectiveness of a tax lien against real estate.

In your situation, the IRS filed their lien where you live, not where the real estate is located.  This means that if you have $50,000 of equity in the property, you can sell or refinance it without the direct interferenc of the lien.  The IRS is not secured on the property as the lien is filed in the wrong county.

The IRS may not know you have the property.  Depending on where you are in the collection process, it is possible they only know where you live.  That likely explains why the lien is filed in the wrong place.

I do recommend caution in how you use the property and any equity. 

The IRS may consider accessing and spending the equity to sources other than the government to be a case of dissipating assets.  A dissipated asset is one that has been sold, transferred or spent in a way that is detrimental to paying the IRS.  It depends on the facts and circumstances – for example, using the equity to pay reasonable living expenses is different than giving it to a friend to hold.  In an offer in compromise, the IRS can include dissipated equity - money you no longer have – in the settlement.     

The filing of a tax lien in the wrong county can be to your benefit.  But it is important to handle the situation properly so as not to give the IRS a claim of dissipating assets.

Here is a brief overview of the article - 5 Things You Should Know About the IRS:

(1)     The offer in compromise program is not as advertised on television.

(2)     IRS seizures of houses, personal belongings and business property are rare.

(3)     Retirement accounts are not protected from IRS collection actions.

(4)     The IRS has limits on the amount of time it has to collect a tax debt.

(5)     Bankruptcy is a powerful too that is capable of elminating taxes.  

These factors are essential to anyone with IRS problems – know the difference between what you hear and what is reality.  Feel free to reference the full article to learn more.  

With increased staffing of high-level Revenue Officers by 30% and levy actions hitting 15 year highs, the 5 Things You Should Know About the IRS can help you navigate a fresh start.

My client handled the situation correctly – professional, courteous and honest.  This was the Revenue Officer’s first impression – and when your head is in the mouth of the bear, it is important to say nice bear. 

A polite “I will get answers to your questions and help you do your job, but I would like to consult an atttorney first” is a good way to handle these uncomfortable situations.

When the Revenue Officer started asking financial questions – where do you bank? who owes you money? how much can you pay the IRS back every month? – my client stopped and called me.  The desire to please the Revenue Officer conflicted with an inner message of caution.

An IRS Revenue Officer needs your  financial information and is entitled to it.  And asking for it on the spot is the best way for them to get it without delay.  But disclosure on the spot – off the top of your head - can result in providing information that is both incorrect and harmful to your case.  Presenting your financial information in the best light possible is too important not to take time to think it through and do it right without pressure.

I knew the Revenue Officer in this case, and spoke to him on the phone while he was at my client’s house.  Later that day, I provided him a power of attorney authorizing my representation.  I requested and was granted 14 days to provide the financial information he was seeking. 

Incidentally, my client had a large account receivable at the time of the Revenue Officer’s visit.  The time permitted us to prepare an accurate financial statement, but also allowed my client to legitimately collect the receivable first and solve his discomfort with disclosing the source of payment.

Handle unannounced IRS visits with respect, but always keep in mind your rights to representation before disclosure.

Two basic rules on owing the IRS and credit cards:

The credit cards are usually firing blanks but make you believe they have a cannon. 

The IRS, on the other hand, has a cannon. 

Like many things in life, how the IRS and credit card companies appear to you bears little resemblance to their reality.

CREDIT CARDS

Every month, credit card companies send a statement for payment – along with all of the interest charges.  If you do not make the monthly payment, the dunning letters and telephone calls start.  Your account is sent out to a debt collector, and the phone rings.  Nerve-wracking. 

The immediate pressure credit card companies put on you for payment can result in them getting more attention than the IRS.  It should be the other way around.

Here is the important part to know:  The credit card companies have to file a lawsuit against you in court to be able to take your wages or bank accounts.   This not something that they do readily or even all the time.   

Remember this:  Until you hear from a lawyer who has filed a court action against you, you are under no risk of losing your wages or property from a credit card debt.  And most cases simply go the route of debt collectors without court action – attempting to collect by pressure.

COMPARE TO THE IRS

The IRS is usually less aggressive than credit cards at the outset.  The IRS will send you several collection notices after your tax return is filed, then stop.  After that, you may receive mail from them only once a year (an annual statement of your account).  

Unless you are on an installment agreement, the IRS does not stay in front of you with monthly statements like the credit cards.  And the IRS rarely makes outbound phone calls seeking payment.  But the IRS can be a sleeping giant.    

Those few collection notices the IRS sends you at the outset of your case can allow the IRS to immediately start levying on your wages and bank accounts.  No calls asking for payment, no monthly bills in the mail, no wondering about lawsuits like the credit cards  - just a simple letter - the Final Notice of Intent to Levy.  

After the IRS letter stream ends, you can get a wage or bank levy without any further notice. 

It may seem like the IRS is trailing behind the credit cards, but they are actually ahead of the game, and should be at the head of the line.  It can be deceiving.  And the stakes are high.

As I have written in prior posts, the IRS can be slowed down by appealing the Final Notice of Intent to Levy.  If you are interested in learing about the stream of IRS collection letters, see my post ”What do all of these IRS collection letters mean?”  For more on how bankruptcy can eliminate or reorganize IRS and credit card problems, read more here about Chapter 7 and Chapter 13.

But be careful:  The time the IRS has to collect can be unknowingly extended by you. 

The decisions you make in attempting to resolve your tax problem can impact when it ends.  As your collection statute gets closer to expiring, carefully think through the benefits of taking any of the following actions that will extend it: 

(1)     Offer in compromise.  The filing of an offer in compromise will extend the statute of limitations on collection by the time it is pending plus 30 days.  The IRS can take six to twelve months to investigate an offer in compromise, and if it is accepted, the IRS will allow you up to two years to pay the settlement amount. Submitting an offer is not always in your best interest. 

(2)     Collection due process appeal.   Timely responding to an IRS Final Notice of Intent to Levy – known as a collection due process hearing  – will extend the time the IRS has to collect while your hearing is pending. 

A really good strategy:   A late-filed collection due process appeal – defined as filed within one year of the date of the Final Notice -  does not extend the collection statute but does entitle you to an appeals “equivalent” hearing.  See IRC 6330(e), IRM 5.1.9.3.6 and Treas. Reg. § 301.6330–1(g)(3), ex.1.

(3)     Bankruptcy.  Bankruptcy extends the statute of limitations on collection by the time you were in bankruptcy plus six months.  If you filed bankruptcy but did not eliminate all of your tax liabilities, the IRS will have more time to collect the non-discharged taxes from you.  See IRC 6503(h) and IRM 5.9.4.2.

(4)     Innocent spouse relief.  The collection period is suspended from the filing of the request for innocent spouse relief until the 90 day period for petitioning the Tax Court expires.  If a Tax Court petition is filed on an IRS denial, time is tolled until the Tax Court decision becomes final, plus 60 days.  See IRC 6015(e) and IRM 25.15.1.8.

(5)     Taxpayer Assistance Order (911).  If communications breakdown to the point of needing a Taxpayer Assistance Order to stop the IRS, the filing of Form 911 will suspend the statute of limitations on collection while your case is pending for review.  See IRC 7811(d) and IRM 13.1.14

(6)     Installment agreements.  If the IRS refuses or defaults an installment agreement, you have the right to appeal that decision.  If you do, the collection timeframe is extended during the appeal.  See IRC 6331(k)(2)(d).

The IRS gets more time because these actions prevent them from collecting from you.  What the IRS gives you – no enforced collection activity – they get back.  Before proceeding, always make sure the potential for success (i.e., high chance of offer acceptance) is greater than the risk of extending the collection timeframe and making your problem linger.

Mr. Levy – I hope you can help me.  I owe back taxes and filed a Chapter 13 to repay the IRS.  The Chapter 13 was dismissed because I could not keep up with the payments.  Now I would like to file a Chapter 7 to eliminate what I did not pay.  My attorney mentioned something about a stopwatch while I was in the Chapter 13.   What is this all about?

You are correct in recognizing that eliminating taxes in bankruptcy is all about timing - keeping an eye on the “stopwatch.”  You are referring to the requirement that taxes can be discharged in bankruptcy only if your return was due to be filed at least three years before your bankruptcy started and was actually filed at least two years before your bankruptcy. 

But if you file a bankruptcy before these timing rules are met (like you apparently did with your Chapter 13), does the “discharge clock” keep ticking?  Are taxes that were not eligible for a tax discharge when you entered the Chapter 13 now eligible when you come out of it and want to file a Chapter 7?  Was time on your side? 

The U.S. Supreme Court resolved this issue in 2002 in the case of Young v. U.S., 535 U.S. 43.  In that case, Cornelius and Suzanne Young filed a Chapter 13 bankruptcy to try to repay their debts, including $13,000 to the IRS.  The Chapter 13 was filed before the tax discharge timing rules were met. 

Unable to make their bankruptcy payments, the Youngs dismissed their Chapter 13 and filed a Chapter 7 instead.  By the time the Youngs had filed their Chapter 7, the taxes had aged to the point of being old enough for a discharge under the bankruptcy tax timing rules.  

The IRS argued that the bankruptcy discharge rules were “tolled” during the Young’s Chapter 13.   The government also argued that since it was prevented from collecting during the Chapter 13, the tax discharge stopwatch should be treated the same way – tolled.

The court agreed with the IRS, recognizing that any other ruling would create a loophole for taxpayers - filing a Chapter 13, getting time on the discharge rules without any risk of collection, and then filing a Chapter 7 when the time was right.   

The prior Chapter 13 never happened for purposes of bankruptcy discharge timing rules.

In 2005, Congress codified the Supreme Court’s ruling in Young  – see Bankruptcy Code 507(a)(8)(a)(i) - and added an additional 90 days to the tolling period.   

Summary:  If you filed a Chapter 13 too early to eliminate your taxes, had it dismissed and now want to try a Chapter 7, ou cannot add in the time the Chapter 13 was pending to your tax discharge calculations.

Here are five pointers to lower the value of your offer in compromise: 

(1)      Make sure you claim property the IRS cannot take from you as “exempt” on your IRS financial statement (Form 433A).  Exempt assets that the IRS cannot take includes everyday belongings in your house (Internal Revenue Code 6334(a)(1)).  It also includes certain tools from your business.  The value of these assets should not be included in the value of what you offer the IRS.   

(2)     Use the possibility of bankruptcy as leaverage.   Internal Revenue Manual 5.8.5.6(5) allows the IRS to consider the impact of a possible bankruptcy on the value of a compromise.  If your taxes are eligible to be discharged in bankruptcy, the IRS could get nothing if you chose that route over an offer in compromise.  Make sure you know how to use that leaverage to get an offer in compromise and avoid bankruptcy. 

(3)     Know how to properly utilize IRS living expense guidelines.  For example, if you car is over  six years old or has over 75,000 miles, the IRS can allow a $200 monthly replacement cost.  See Internal Revenue Manual 5.8.5.6.3.  Make sure you know the IRS guidelines in an offer in compromise and how to maximize the amount the IRS will allow you. 

(4)     Understand how to properly reduce the value of your property to quick sale value.  Start with what it would sell for at resale – that is fair market value.  IRS guidelines permit you to reduce fair market value by 20% to arrive a quick sale value.  If your house is worth $100,000, this can save you $20,000 ($100,000 x 20% reduction).  Make sure you take the “quick sale value” reduction on your property, including houses and cars. 

(5)     You may have income that the IRS cannot take.  If you do, request that it be excluded from offer calculations.  The IRS cannot seize workers compensation, unemployment benefits, supplemental social security for the disabled, blind or aged and service-connected disability benefits (Veterans).  If they cannot levy it, then it should not be considered as an income source.      

There are many factors that play a part in a offer in compromise negotiation.   The more knowledge you have about the IRS settlement process, the better.

Adding to the dilemma is an IRS request during the trust fund investigation for a personal financial statement (Form 433A) detailing your assets, income and living expenses.

If the IRS makes a request for a personal financial statement during a trust fund investigation, two questions must be answered:  (1) Is the IRS entitled to know your finances before its investigation is complete? and (2) How can an early disclosure of personal financial information help in defense of a trust fund assessment?

First, there is no legal requirement that the IRS is entitled to financial information from you during the trust fund investigation.  The Revenue Officer assigned to your case is making the request for financial disclosure BEFORE final assessment of the trust fund taxes against you.   Personal liability is still in the fact-finding phase.  

Unless there are other assessments against you already, the IRS has no ability to force a financial disclosure as part of a trust fund investigation.   Disclosing financials to the IRS in this manner is providing collection information before there is even a balance due.

Saying “no” to such a request must be done with balance:  respect as to an IRS investigation yet properly raising and protecting your rights as a taxpayer.

Sometimes, however, disclosing the financial information early can help resolve the trust fund investigation in your favor.   If your financials shows that the IRS could never collect from you if you were held personally liable for the employment taxes, the IRS has discretion to not assess the trust fund recovery penalty against you.

Internal Revenue Manual 5.7.5.3.1, Nonassertion Based on Collectibility, provides that “After reviewing and verifying the financial information, if the present and future collection potential is minimal, do not recommend assertion of the TFRP.”

It is not guaranteed that every Revenue Officer will drop a trust fund assessment due to uncollectability.  It is important to know your Revenue Officer if collectability is a defense to the trust fund recovery penalty.   Collectability is a valid consideration in investigations of the trust fund recovery penalty – know when to let the cat out of the bag.

You have rights to defend the filing of a lien, and prevent the issuance of a levy.  To be able to assert your rights and protect your property, it is important to  understand and recognize the tools the IRS uses.

Here is what you need to know about the IRS tax lien and IRS tax levy:

IRS TAX LIEN

An IRS tax lien protects and secures the IRS’s rights to your property.  The lien attaches to property you own when it is filed, and property you purchase later.  A Federal tax lien most commonly impacts real estate.

If you own a house, and the IRS files a tax lien against you, the lien would give the IRS an interest your home similar to that of your mortgage company.

Example:  Your house is worth $100,000, and you have a mortgage of $75,000 on it.   There is $25,000 of equity in your house.  Before the IRS filed its tax lien, that equity would be yours.  Now that the lien has been filed, the equity belongs to the IRS.   If you want to sell your house, the IRS gets your equity at closing, not you.

The IRS usually files its Federal tax lien with county recorder or clerk of courts in the county where you residethe property is located.   For the tax lien to affect real estate, it must be filed in the county where the property is located.  It would then encumber all of your real estate in that county.  A federal tax lien does not name the property it attaches to – it automatically encumbers all your real estate in the county it is filed and all of your other personal property.

If the IRS files a lien against you, you have a 30 day window to file an adminsitrative appeal to request reconsideration of the filing.  This is called a collection due process appeal.

The lien expires when the IRS statute of limitations on collection expires – in most cases, 10 years.

IRS TAX LEVY

The purpose of an IRS levy is to take your property.  An IRS levy is the same as a seizure, or garnishment.  The IRS can levy on your wages, bank accounts, subcontractor pay, accounts receivable, even retirement accounts.  The IRS can seize your house, car or your business equipment (although those are rare).   For most people, it is the levy, not the lien, that hurts.

There are only a few things the IRS cannot levy  – these “exemptions” are listed in Internal Revenue Code 6334.   The exemptions you can claim include the right to keep unemployment benefits, workers compensation, most household goods and some tools of your trade from the IRS.

Before the IRS can levy on your property, they must first send you a Final Notice of Intent to Levy.  This is your notice of that the IRS intends to start enforcement against you.  After you receive the Final Notice of Intent to Levy, you have 30 days to file an appeal of the proposed IRS collection action. If you file the appeal, the IRS is prevented from taking action until your hearing is completed.  The purpose of the hearing is to reach a resoluton to levy action before it occurs – offer in compromise, installment agreement, uncollectible, for example.

The IRS does not need to file a Federal tax lien as a prerequisite to levying your wages, bank accounts, etc. - just the Final Notice of Intent to Levy.

In the rare cases of seizure of a house, the IRS must get court approval first.  To do this, the Department of Justice will usually file a lawsuit against you in Federal District Court seeking approval to foreclose and take your house.  Again, this is not a preference of the government.

The Federal tax lien and tax levy gives the IRS different rights against you – the lien as to security in your property, the levy to take it.  Together or apart, the lien and levy are powerful tools for the IRS.