Collection due process appeals: Stop the IRS collection machinery, negotiate one on one

Posted on April 11, 2010
Filed Under Appeals - collection actions, Automated Collection Service, IRS Appeals, Offer in compromise, Revenue Officers, Tax Court | Leave a Comment

If you owe the IRS back taxes, it is not always enough to just be “right” when negotiating with the government.

You need to be right, but you also need to be in the right place and working with the right IRS person.  This increases the likelihood of a fair and impartial review of your case.

Getting to the right place with the right person is accomplished by requesting an IRS collection due process appeal.

The benefits of collection due process appeals are significant and should be considered in every IRS collection case.  Here they are:

1)     An IRS collection due process appeal places the resolution of your case in the hands of an IRS appeals officer, not a collections representative.

2)     IRS appeals officers are trained to settle cases; IRS collection representatives are trained to enforce collection laws. Settle your case with a settlement officer.

3)     You could have a have a face to face, personal meeting with an IRS appeals officer in your city to resolve your case.  This is a much preferred alternative to negotiating with the impersonal and distant IRS Automated Collection System, where every time you call you will talk to somebody different and never have a meeting.

4)     Collection due process appeals protects your assets while you negotiate a solution.  In most cases, the filing of the appeal stops the IRS from collecting until it is resolved.  This evens the playing field and protects your assets while you negotiate.

5)     If you cannot reach a resolution with IRS appeals, you have the right to have a Tax Court judge decide your case after the appeal is closed.  This is not available if you negotiate with the IRS through normal collection channels (i.e., ACS, Revenue Officer).

If you are considering an offer in compromise, know that a collection due process appeal is the only way to have anyone outside the IRS review the offer if it is denied.

You are eligible for a collection due process appeals if you have received an IRS Final Notice of Intent to Levy.  Your appeal request should be filed within 30 days from when the IRS sends you the notice of intent to levy.  If more than 30 days has lapsed since the IRS sent you the notice of intent to levy, the IRS will still allow you additional time – up to one year – to file your appeal and be heard, but you will not be able to take your case to Tax Court if you disagree with appeals.

Take the IRS collection machinery down to a one on one, personalized level. Collection due process appeals do that, and in most cases allow you to negotiate without the risk of enforced collection.

Filing Chapter 7 bankruptcy on the IRS? A step by step guide to getting it done

Posted on April 4, 2010
Filed Under Bankruptcy - Chapter 13, Bankruptcy - Chapter 7, Bankruptcy and the IRS, IRS Collection Problems | Leave a Comment

Chapter 7 bankruptcy is a powerful tool when facing the IRS – it can eliminate an entire tax liability if properly done. 

To help with your understanding of how a Chapter 7 bankruptcy can help you end an IRS problem, here is a step by step guide.  Hopefully, it will make the process a  little less intimidating.

Step 1.     Have you filed a tax return? If you have not filed a return, or if the IRS filed a an estimated return for you (substite for return), you are not eligible for a Chapter 7 tax discharge.  An original return must first be on record with the IRS. 

Step 2.    If you have filed a return, how long has it been?  Bankruptcy law requires that two years pass between when you filed your return and start your bankruptcy to discharge taxes.

Step 3.    When were your tax returns required to be filed with the IRS?  Bankruptcy law also requires that three years pass from the due date of the return, including extensions, and the start of your bankruptcy.

Step 4.    Have you done anything to extend the timing rules of Steps 2 and 3?  Be careful in making a move that will cause you to wait longer to qualify for filing bankruptcy on the IRS.  If you were involved in a timely filed collection due process hearing with the IRS, the rules of Steps 2 and 3 stood still while the collection appeal was pending.  The clock also stopped ticking if you filed an offer in compromise within 240 days of the IRS putting the money you owe on their books.  If you were in a Chapter 13 bankruptcy and now want to file a Chapter 7, the tax discharge timing rules were tolled while you were in the Chapter 13.

Step 5.     Are the taxes you owe from an audit?  In addition to the timing rules of Steps 2 and 3, you have to wait 240 days after the IRS puts the money you owe on its books.  For practical purposes, this usually applies in audit scenarios when there is a later assessment after you have filed your return.          

Step 6.    What kind of taxes do you owe?  If you make it through Steps 1-5 and owe income taxes, you are on the right path.   But if you had a business and owe employment taxes from IRS Form 941, Chapter 7 will only provide you partial relief.  Here’s why:  The employment taxes you deducted from your employees’ paychecks for their social security and medicare cannot be discharged in a Chapter 7 bankruptcy.  However, your  employer contributions to social security and medicare can be discharged in bankruptcy. 

Step 7.    Do you have  any money left over after paying your bills each month?  Chapter 7 bankruptcy is primarily for those that cannot afford to repay their debts – that is, they have no money left over every month after paying reasonable living expenses.  But note this:  Bankruptcy law uses real budgets to arrive a cash flow, not IRS standardized guidelines.  It does not matter that the IRS thinks you have cash flow.  If your living expenses are reasonable and you have nothing left over every month, you should qualify for Chapter 7.    

Step 8.    How much have earned in the six months prior to filing the bankruptcy?  Bankruptcy law has what is known as “means testing.”  Means testing makes a presumption that you do not qualify for Chapter 7 if you made too much money in the six months prior to filing  the case.  But even if you did make too much money, means testing can go from “fail” to “pass” by claiming certain living expenses off your income.  If your income varies, the means testing factor can eliminated by waiting to file after a few slow months.

Step 9.     Do you have any assets with substantial equity?  Chapter 7 is a liquidating bankruptcy.  If you have an asset that could be sold and would result in money to pay your creditors, you could lose that asset in return for the tax discharge.  But this is rare.  Federal and state law provides for what is known as “exemptions” to enable you to keep your property – even valuable assets with equity.  Remember this:  Exemptions shield equity.  Exemptions are why most people keep everything in bankruptcy. 

Example of assets, equity and exemptions:  If you have a car loan, and the amount owed is equal to or greater than what the vehicle is worth, you have no equity -you keep the car.  If there is some equity – meaning it is worth more than you owe, then the federal or state exemption laws could still protect the equity, and you would keep the property.  The same applies to your house.  In Ohio, a house owned by husband and wife would have up to $40,400 of equity protected.  Qualified retirement accounts are not subject to the liquidating powers of a bankruptcy court – you keep the accounts.

Step 10.    Should you consider the benefits of a Chapter 13 if you do not qualify for Chapter 7?  If you do not qualify for a Chapter 7 – maybe too much cash flow - then a Chapter 13 repayment plan could be a better option for you.  Chapter 13 has significant benefits for those with cash flow:  It can stop the accruals of interest and penalties the IRS charges.  At the same, Chapter 13 can lower the amount you have to repay on older income tax debts.  Although loss of assets in Chapter 7 is rare, Chapter 13 also has the added benefit of preventing asset liquidation (it is a repayment plan, not a liquidation, so you keep all of your assets).   Chapter 13 is also a good alternative to an IRS installment agreement.  It can also reorganize and reduce the payment of other debt you may have, like credit cards.

Understanding how to file bankruptcy on the IRS can appear to be overwhelming, but it does not have be with proper planning.  Taking it one step at at time and carefully analyzing the pros and cons is key to a sucessful outcome.

IRS allowances: Expenses you may not need to verify in settling your tax debt

Posted on March 21, 2010
Filed Under Collection Financial Standards, Currently Not Collectible, Form 433A, Installment agreements, Offer in compromise | Leave a Comment

When negotiating a resolution to a tax problem, expect the IRS to ask for verification of your living expenses.  After verification, the IRS will likely match the amount you spend to their tables of allowances.

The IRS wants to know how much you can repay them – and the government relies on their standard expense allowances to help them calculate it.

But there are three expenses that the IRS should allow you under their guidelines with no verification required.

And because verification is rarely necesary for these expenses, the IRS will allow the expenses according to their guidelines - even if you spend less.  This can provide a welcome cushion to your budget in negotiations with IRS over what you can pay.

Here are the three expenses the IRS should allow you without verification:

1.     Food, clothing and household supplies will be allowed by the IRS – without verification – based on how many are in your household.  The IRS is currently allowing $1,371.00 monthly for food and clothing for a family of four. Take a look at the IRS tables to see how you compare here.

2.     Out of pocket medical expenses are allowed in the amount of $60.00 per month, per person in your household.  A family of four should automatically be allowed $240.00 in monthly medical expenses, even if less is spent.  If you are 65 and over, the IRS will allow $144.00 per month -no verification required.  If you spend more, and you can verify it, the IRS should allow it.

3.     Car operating expenses are allowed by the IRS based on the city or region you live in.  For example, if you live in Detroit, the IRS will allow  $588.00 monthly for gas, insurance and maintenance for two cars in a household.  See what the IRS will automatically allow you for driving your car here.

These allowances are used by the IRS in determining how much is paid in installment agreements, the settlement value of an offer in compromise, and whether collecting from you would pose a hardship.  Most every IRS collection case involves navigating the government’s standard expense allowances. As IRS collection cases turn on these guidelines, understanding and maximizing them is essential to sucess.

Spouse forged your signature on a tax return? What are your rights?

Posted on March 14, 2010
Filed Under Innocent spouse | Leave a Comment

Your name is signed on a joint tax return, but the signature is not yours.  Your spouse signed your name, but did you agree to it?

This becomes a problem if there are taxes owed on the return from your spouse, and the IRS starts coming after you for it.   That can be a big surprise if you were in the dark to the filing.

Whether you are ultimately responsible for the taxes depends on the facts and circumstances of your filing history with your spouse.

Procedurally, unauthorized signature cases are not handled under the IRS innocent spouse rules.  Rather, the goal is to convince the IRS to adjust the return filing status from joint to separate, and remove you from a return you did not agree to.

The IRS examination of your claim will focus on whether you authorized your spouse to sign your name on the return.  Authorization does not have to be direct, i.e., “Yes, you can sign my name.” Rather, it can be implied by your actions and whether your tacitly consented to the signing of your name and the filing.  This is known as the “tacit consent” rule.

The tacit consent rule can bind you to a joint return that you did not sign if you have a history of filing with your spouse and you did not file separate returns on your own.  Your signature is authorized by implication, that is, there is “tacit consent” to it by the history of consenting to joint returns in the past.

Here is a good example of tacit consent.  In the Tax Court case of Ashworth v. Commissioner, TC Memo 1990-423, Pamela Ashworth filed joint returns with her husband during their marriage from 1976 – 1981.  The 1982 return was also filed jointly, but was audited and a balance due was found.  Pamela claimed that she never signed the return and that the signature was not authorized by her.

The Tax Court found that that Pamela’s ongoing consent to the filing of joint returns (1976-1981) and her failure to file any separate returns created a pattern of consent to the joint filing in 1982.

In other words, it is not a forgery if tacit consent is found.

Bottom line:  The determination of a joint filing depends on the intentions of the parties, not the presence or absence of their signatures.

In these cases, the knee-jerk reaction of the IRS is to presume the intent of a husband and wife is to file jointly when that is what has always been done.  I have successfully defended joint filings for clients whose signatures were forged, but the best results comes with a history of separate filings.

Defaulted on your IRS installment agreement? Where do you turn now?

Posted on March 7, 2010
Filed Under Automated Collection Service, IRS Collection Problems, IRS Levies, Installment agreements | Leave a Comment

You promised the IRS a monthly payment that your budget could no longer bear.  Or you tried so hard to repay your back taxes that you fall behind on this year’s return.  Your intentions are good, but this has caused your IRS installment agreement to default.  Where do you turn next?

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.

Tax liens on real estate: Filed where I live or where my property is located?

Posted on February 28, 2010
Filed Under Tax liens | Leave a Comment

Here is a situation from a reader showing why location counts when it comes to Federal tax lien filings:  

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.

5 Things You Should Know About the IRS

Posted on February 22, 2010
Filed Under Bankruptcy and the IRS, IRS Levies, IRS Seizures, Offer in compromise, Retirement accounts and the IRS, Revenue Officers, Statute of limitations on collections | Leave a Comment

As a member of the Cincinnati Bar Association, it was exciting to see my article about solutions to today’s IRS collection problems as the cover story in March’s monthly bar journal.   

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.

Knock, knock – the IRS is at my door – how should I handle it?

Posted on February 14, 2010
Filed Under Form 433A, Form 433B, IRS Collection Problems, IRS Financial Statements, Revenue Officers | Leave a Comment

I received a call this week from a small businessman in Cincinnati who had an IRS Revenue Officer sitting in his living room.  Technically, he did not have to let the Revenue Officer in his house, but he did.  I am glad he called me. 

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.

IRS problems and have credit card debt? Tips for handling both

Posted on February 8, 2010
Filed Under Bankruptcy - Chapter 13, Bankruptcy - Chapter 7, Bankruptcy and the IRS, IRS Collection Letters, IRS Levies | Leave a Comment

I received a call today from an enrolled agent for my help with a client who was having problems not only with the IRS, but credit cards as well.  As usual, my enrolled agent friend got it right – bankruptcy was likely on the horizon for us to take care of both problems simultaneously.

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.

IRS statute of limitations on collection: Be careful, these actions will extend it.

Posted on February 2, 2010
Filed Under Bankruptcy and the IRS, Innocent spouse, Offer in compromise, Statute of limitations on collections | Leave a Comment

Tax problems do come to an end – the IRS has 10 years to collect a tax debt.  

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.

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