Can They Really Reduce My Tax Debt?

Can They Really Reduce My Tax Debt?

Harry Jones has not filed his federal tax return since 1999. When he finally got around to filing in 2007, his tax debt with penalties and interest was over $100,000. He called one of those late night TV tax relief companies who promised to reduce his debt “up to 90%.” Is this possible? The good news is that it may be possible. However, the likelihood of reducing the debt by even 1% is very slim. Theoretically it is possible that the moon will collide with the earth on Thursday. The likelihood is nil. It is the same thing with tax debt.

What does it take to reduce tax debt? The IRS will consider reducing your tax debt if they feel that the reduction is in the best interest of the government and if they determine that your offer is the best they can get from you within the timeframe they have to collect your tax debt.

Let’s get more specific and complicated. Harry owes $100,000 from nine years of tax returns that he just had filed. He certainly does not have that kind of money and will never have it. A single man with no children, Harry works as a bus driver for the city and makes only $45,000 a year. After expenses he has little left. He figures he can pay $10,000 by borrowing from relatives and cashing in a small retirement account. Will the IRS accept this?

The first step in the analysis involves something the IRS calls the CSED – the collection statutory expiration date. Since Harry just filed the returns, the IRS has a very long time to collect this debt, approximately ten years (120 months) under federal tax law. The IRS is going to look at Harry’s income and expenses to see if there is anything left over from Harry’s monthly pay that the IRS can take. In this case, Harry takes home $3,200 a month after payroll taxes. The IRS determines that his allowable expenses are $2,800 a month including the usual stuff, rent, utilities, gas, car payment, etc. This leaves $400 a month left ($3,200 – $2,800). The IRS will conclude that Harry can pay $400 a month for the next 120 months for a total of $48,000. Why would the IRS accept Harry’s meager offer of $10,000 when they know they can get almost five times that by waiting? The answer – they won’t.

Harry also had to report his assets and liabilities – what he owned and how much he owed. Turns out Harry owns a house worth $235,000 but only owes $100,000 on it. The IRS will use certain formulas to determine that the house can be used to pay off part or all of the tax debt. Add the equity in the home to the $48,000 that Harry can pay from his salary every month and the IRS will conclude, rightfully so, that Harry can fully pay the tax debt over time. The IRS will then notify Harry that his offer of $10,000 is rejected and that he should immediately start making $400 payments while arranging for an equity loan on his house. As if the above was not a gloomy enough picture, Harry bought a car three years ago and is making payments of $455 a month. He has two years of payments left on the five year loan. This means that in 24 months Harry’s ability to pay the IRS will increase by $455 a month. This is referred to as ‘future income’ and the IRS will want it.

The important thing to note in trying to answer the question in the title to this article is this: The IRS will only reduce your tax debt if they determine that the reduction is the best they can do within the CSED. The IRS uses precise calculations to determine how much you can pay and cannot vary from those numbers. The tax relief companies lure you into thinking they can “negotiate” with the IRS on your behalf to reduce the debt. Hogwash. Ninety percent reduction in your debt – maybe if you are living in a tunnel below the freeway with only $37 to your name. Then the IRS may accept the $37!

Be careful when using the services of any company that promises a reduction in your tax liability or the elimination of interest and penalties. These reductions are rare and only arise if the IRS determines that the government cannot do better.

Arthur Weiss, Esquire
Law Office of Arthur Weiss, P.C.
2135 Grant Rd.
Tucson, AZ 85719
520-319-1124
https://artweisslaw.com

Good News and Bad News About Your Back Taxes

Good News and Bad News About Your Back Taxes

There is some good news and bad news here. The good news is that you are not alone. You are in the company of thousands of Americans who have, for whatever reason, failed to file returns for multiple years. The IRS refers to these taxpayers as chronic non-filers. The IRS knows that if you fail to file for the past few years, you are more likely not to file in the future, fearing retribution from an angry horde of revenue officers. You need not worry. The IRS wants you to file the past returns and to timely file your future returns. No one is angry and no one is pounding on your door looking to take your house away from you.

Step One –
Figure out what years you are missing, those years for which you have not filed. A simple call to the IRS will get you the answer. Most people are afraid of calling the IRS for fear that it will “wake them up” and they will now know you have not filed. Believe me, they already know. Call 1 800-829-1040. You will have to wait awhile, but hold on, the end result will be worth it. When the operator comes on the line let them know that you need to find out what years are open in your account. You will need to give them basic identification data, but once they have adequately identified you they will answer your question – you have not filed for 2002 through 2006.

Step Two
In order to complete the tax returns you will have to reconstruct your income and expenses for those years. The IRS can help you with some of the information you will need if you ask. When talking to the IRS representative ask her or him to mail (or fax if you have a fax machine nearby) to you the “wage and income transcripts” for the years that you have not filed. Caution – if you go back further than seven years, they will not be able to get you information back that far as it has been removed from the active system. They will, however, let you know how to obtain that information.

Step Three
Now that you have your income information, you need to assemble your deductions. There is some good news here. The biggest decision on the tax return is whether to use the standard deduction or whether to itemize. For most taxpayers, that decision will hinge upon whether you own your personal residence or not. If you own your house then the mortgage interest that you paid will be a tax deduction and will likely lead to your itemizing your deductions. Fortunately the amount of interest that you paid in that year will be reflected in the wage and income statement you received from the IRS. So really, unless you have some complications, the vast majority of the information you will need to file will be in the transcripts you receive from the IRS. Of course you will also need information (name, date of birth, social security number) about your spouse and children, if any.

Step Four
Once you have the wage and income transcripts you should prepare to either do the tax returns yourself or hire a local accountant to do so. If you wish to do them yourself, you can download old forms from the IRS website and fill them in by hand, or you can go to websites of commercial tax preparation software, like Turbo Tax, and purchase their software for only the years that you need.

Step Five
If you choose to have an accountant (does not need to be a CPA) do your returns then gather the transcripts and any other pertinent information and make an appointment. If you choose to do it yourself, then set aside one evening to do nothing but tax returns. This is tough, but it needs to be done. If you have no experience in preparing tax returns then ask a knowledgeable friend to help. Once you have done two of the years you will catch on and the remaining years will not be so difficult.

Believe it or not, you can actually call the IRS for help! Just dial the same number as above and ask them for assistance. You will get it and it will be fair and balanced.

Step Six
Once the forms are prepared make sure you sign them and prepare them for mailing to the IRS. If you need the mailing address you should refer to the IRS website or call. If you owe money on any of the returns you should try to pay it when you file the return. It is vital, though, that you DO NOT DELAY mailing the return if you do not have the money to pay the amount owed. Either pay what you can or, if you can pay nothing, simply send in the return.

Step Seven
In a few weeks or months the IRS will send you a letter telling you that you filed these returns late and that you owe penalties and maybe some interest. In an ideal world you would pay these amounts and move on with your life. However, if you cannot afford to pay the penalties and interest or if you could not pay the original debt on the tax return, you will have to make arrangements to pay over time – an installment agreement. In some cases, the amount owed for all of the years (including penalties and interest) is far beyond your ability to pay the full amount. For example, if you owe $75,000 and your salary is $37,500 and you have two children, a mortgage and medical expenses, you may want to consider making an offer in compromise to the IRS for an amount less than what you owe.

CAUTION: If you are SERIOUSLY in debt and the amount far outweighs your ability to pay, you will be tempted to call one of those tax relief companies that advertise on TV or on the internet. Do not do so. If you need professional help, go to a tax accountant or tax attorney licensed to practice in your state. They will have the experience to guide you and the cost will be far less. Also, you will have the state bar or accountancy board to complain to if you are not happy with their services.

If you have followed all of the steps above, your tax filings are now current and you are either fully paid up, making monthly payments or are trying to negotiate a lower amount to pay. Either way, you can now sleep at night and stop worrying about what might happen. You are in control and the matter is on its way to resolution. It isn’t easy, but in the end you will be glad you did it. Good luck.

Arthur Weiss, Esquire
Law Office of Arthur Weiss, P.C.
2135 Grant Rd.
Tucson, AZ 85719
520-319-1124
https://artweisslaw.com

Tax Levy Information

Tax Levy Information

Federal Tax Levy
For taxpayers in serious debt to the IRS, the most feared weapon in the IRS arsenal is the tax levy. Using the powers granted to it in the Internal Revenue Code, the IRS can levy upon wages, bank accounts, social security payments, accounts receivables, insurance proceeds, real property, and, in some cases, a personal residence. Under Title 26, Section 6331 of the Internal Revenue Code the Internal Revenue Service can “levy upon all property and rights to property” of a taxpayer who owes taxes to the Federal government. The IRS can levy upon assets that are in the possession of the taxpayer , called a seizure, or it can levy upon assets in the possession of a third party, a bank, a brokerage house, etc. All future statutory references will be to the Internal Revenue Code unless noted otherwise.

Procedural Requirements of a Tax Levy
The Fifth Amendment of the Constitution forbids the government (whether state or federal) from taking an individual’s property without due process of law. This applies to an IRS levy as well. To comply with the US Constitution, the IRS must provide the taxpayer notice of the coming levy and an opportunity to be heard. (Section 6330) Under §6330(a)(2) the IRS must send to the taxpayer a notice via either personal hand delivery, through certified mail or left at his or her usual place of business. The notice must arrive at least thirty days prior to the levy taking place. The “Notice of Intent to Levy” must include “in simple and nontechnical terms the right of a person to request a hearing during the 30 day period” before the levy will be effective. This hearing is referred to in IRS correspondence as the “Collection Due Process” or CDP hearing. The notice will include the IRS Form 12153 which the taxpayer can fill out and mail in to request a hearing. A taxpayer is entitled to one CDP hearing for each tax period (tax year) to which the levy applies. The hearing must be before a neutral, impartial hearing officer “who has had no prior experience with the respect to the unpaid tax…” §6330(b)(3).

At the hearing the taxpayer may raise challenges to the collection actions, may seek innocent spouse relief, and may present alternative collection actions such as installment agreements or an offer in compromise. Under certain circumstances the tax debtor may challenge the underlying tax liability.
If the taxpayer is unhappy with the decision at the CDP hearing she may appeal the decision to the US Tax Court or federal district court.

Post procedural matters
If none of the above procedures effectively stops the levy then the IRS can proceed to take the property of the taxpayer. While the IRS can take just about any of his property, there are limits. Section 6334 imposes limits on what the IRS can and cannot levy. Unfortunately for the tax debtor, the list of property exempt from levy is short and will probably not apply to the average taxpayer. Once the IRS has the “green light” to levy, it can then demand that employers send a portion of the wages to the IRS. It can order the bank to send the proceeds in bank accounts to the IRS. Social security proceeds and state and federal tax refunds can be levied easily.

Levy upon a personal residence
Under §6334(e) a levy is allowed on principal residences under certain circumstances. In order to take a principal residence the IRS must go to court and seek the permission of a federal magistrate to levy a house in which the taxpayer lives. However, under no circumstances can the IRS levy on a personal residence if the total amount owed is equal to or less than $5000. §6334(a)(13).

Garnishment of Wages
The IRS can demand of an employer that a portion of the wages of a tax debtor be sent directly to the IRS. Section 6334 does allow for an exempt amount that must remain outside of the levy, however that amount is very small, leaving the taxpayer with hardly enough to satisfy her regular living expenses. A levy or garnishment upon wages is considered to be a continuous levy, i.e. it needs to be enacted only once and will be applicable to future wages until either released by the IRS under §6343 or the debt is fully paid. So as future wages are earned, no additional levy action is necessary by the IRS to take a large portion from them. Distinguish this from a bank account levy. Once the money in the bank account has been sent by the bank to the IRS, any future deposits can only be reached with additional levy action by the IRS.

Effect of an offer in compromise on an IRS levy
Under federal tax regulation §301-7122-1(g)(1) – “The IRS will not levy against the property or rights to property of a taxpayer who submits an offer to compromise… during the period the offer is pending, for 30 days immediately following the rejection of the offer and for any period when a timely filed appeal from the rejection is being considered by Appeals.”
Once the IRS decides that your offer is process-able, that it includes all the paperwork and forms properly filled out, then it must stop levy actions under §6331. However, if the offer is missing documents or forms, the IRS can return it to the debtor as un-processable and can then levy or garnish her property.

Arthur Weiss, Esquire
Law Office of Arthur Weiss, P.C.
2135 Grant Rd.
Tucson, AZ 85719
520-319-1124
https://artweisslaw.com

Beware of Tax Relief Scams

Beware of Tax Relief Scams

They appear on late night television and on the internet promising to reduce your tax debt, stop garnishments, remove tax liens and settle your debt for pennies on the dollar. Oh, if only it were true. Pay a company a few thousand dollars and voila, your tax debt is reduced from $100,000 to $5,000. How’s that for a great return on investment!

Here is how the scam works: One day you receive a letter from the Internal Revenue Service indicating that you owe $50,000 to the IRS. It turns out that in 1999 and 2000 you failed to file a tax return and now with penalties and interest you owe them this money. Your first impulse is to panic as you have never owed anyone this much money and on the salary you make it will take the rest of your life to repay this money. You decide to ignore this letter and hope the IRS will go away until next month when you receive a second letter, and then a month later a third. Finally, six months later, you receive a certified letter from your bank and your employer – the IRS is going to take what little money you have in your bank account and they are also going to garnish a large part of your wages. By now you are losing sleep and are considering moving to Bolivia. Good idea.

Then lying awake at three o’clock one morning the face of an angry female attorney appears on your screen telling you she will fight the IRS for you and that she will win! She promises to reduce your debt and stop the IRS from taking your stuff! All you need to do is call the following toll free number and, by the way, have your credit card ready! Step one of the scam is complete. You are in debt, you are losing sleep and you have her number.

Step two begins with a simple telephone call to someone called a tax advisor – in reality a commissioned salesperson. What you do not know is that this salesperson has financial problems of his own and that the only way he can pay them is to get your credit card number and sell you their bogus services. The salesperson will discuss your situation with you, not to determine how best to help you, but to figure out how much you would be willing to pay and how much he can put on your credit card. It will be a large figure.

He will be very positive about their ability to reduce your debt and stop the garnishment. He will repeat that your $50,000 debt can easily be settled for $3,000 given your financial situation, and it will only cost you $5,000. And the levy on your bank account, will never happen! So you give them your credit card number, they charge you five grand and you go to sleep that night feeling much better. After all, a total cost of eight grand is better than $50,000. Step two of the scam is complete.

Step three – your tax advisor (who yesterday was stocking shelves in Home Depot) asks you to send him dozens of documents, bank statements, car loan paperwork, your lease or mortgage, everything. It takes a few weeks but you get it together and mail it to them. A month goes by and you hear nothing so you call. Unfortunately your tax advisor is not in at the moment but will return your call. A few weeks goes by, nothing. You call again. Your tax advisor is no longer working there and your account has been transferred to tax advisor #2 who will return your call. A few weeks goes by, nothing. You call again and finally get to speak to someone. They tell you that they are new to your case and that they will need the following documents to effectively evaluate your situation. It takes a week or so, but you finally get them into the mail. A month goes by and you call to find out what is going on only to be told that your tax advisor is on vacation and will get back with you when he returns. Another month goes by – nothing. By now it has been almost six months since you hired this firm to help you. The IRS has since taken all the money in your bank account and your wages have been garnished every week leaving you with nothing.

Finally your advisor calls you – “We have evaluated your case and have determined that there is nothing we can do to help you. You do not qualify for an offer in compromise as you have a regular job and can pay the full amount. You should call the IRS and arrange for an installment agreement. We will do so for you, buy it will cost an additional $2,000. If you do not wish for us to do so, we will return your documents to you, thank you for your business.”

In the past six months your debt has grown with interest to $55,000, you are out $5,000 to the tax relief company and your situation is far worse than it was when you began. Of course you ask for your money back from the company that scammed you only to be told “It is not our policy.” “I’ll sue!” you bellow into the phone, but by then they are gone. You will never see your five thousand again. The scam is complete.

Arthur Weiss, Esquire
Law Office of Arthur Weiss, P.C.
2135 Grant Rd.
Tucson, AZ 85719
520-319-1124
https://artweisslaw.com

Reasonable Collection Potential

Reasonable Collection Potential

Thousands of taxpayers owe the IRS far more in back taxes than they can possibly pay in their lifetimes. If you are one of these people, take some comfort that you are not alone. The IRS knows that most, if not all, of these taxpayers will stop filing returns and stop paying even current taxes, hoping that somehow the IRS will not find them or never pursue them. When the certified mail from the IRS arrives, they put them into a drawer, pretending that the problem just doesn’t exist. Unfortunately it does exist, it isn’t going away and it needs to be confronted before it grows into an even bigger problem.

One of the possible approaches to resolving this long standing situation is to offer the IRS a lower amount to completely settle the tax debt, an offer in compromise. You have seen on TV (and I am sure been tempted to call) tax relief hucksters promising to reduce your tax debt by up to 90%! Who could resist that? It depends upon two concepts which require extensive explanation. The first concept is called “economic hardship” and the second is “reasonable collection potential (RCP).” This article will cover the latter term – RCP.

If you are contemplating making an offer to the IRS to settle your tax debt, you will need to compute the RCP because if you make an offer that is LESS than RCP it will be declined (unless you can demonstrate “economic hardship”). Simple example – you owe $100,000 in back taxes. You do not compute RCP but simply make an offer of $15,000 to settle the debt. The IRS computes your RCP (from the documents that you must send with the offer) and it is $45,000. Your offer will be declined and you will be asked to raise your offer above the $45,000 RCP threshold. Of course $45,000 is much higher than you can possibly afford and you cannot raise your offer to that amount. You have now wasted money and time in getting your problem resolved. Had you computed your own RCP, you would have determined that an offer of $15,000 would be useless.

So how does the IRS (and you) compute RCP? Simple – discretionary income, both present and in the future, plus the quick sale value of the net equity in your assets. A mouthful to be sure, let’s break it down into English.

STEP 1 – Compute Discretionary income
Presuming that you have some income, let’s start there. You and your spouse work for a living, and each week you both receive your paychecks. That’s it, no other income. The IRS knows that you will need this income to pay your mortgage, car loan, insurance, taxes, food, medical expenses, child support, alimony, gas, electric bill, telephone, etc. The list seems endless. The IRS will add up your allowable expenses (forget that $2000 monthly expense for movies and theater and your son’s astronomical tuition at private school) and subtract them from your income. What remains after this simple mathematical operation is your discretionary income. In the case of Harry and Sally, (after they met, got married and failed to pay their taxes) their combined income was $5,000 a month and they had allowable expenses of $4,000 a month. Discretionary income – $1,000 a month.
The IRS will now look at how much longer it can pursue them for this debt under the law. You should understand that the IRS is limited in the amount of time that it can try to collect your tax debt. The IRS calls this the Collection Statutory Expiration Date, (CSED) we mortals call it the statutory limitations period. The good news is that after that date, the IRS cannot touch you for these back taxes. The bad news is that it is a pretty long time. The IRS will check how many more months remain that they can chase you and possibly levy your stuff. In Harry and Sally’s case, the IRS had 75 months remaining – a little over six years. The IRS will then take the $1000 in discretionary income and multiply it by the 75 months remaining in the CSED to come up with $75,000. Pretty simple math so far.
The calculation above only considers past and current income, it does not consider future income. If during the next 75 months Harry and Sally will receive more income, the IRS will factor that in as well! It seems that Harry’s car note of $500 per month will be fully paid off in 25 months. Presumably this means that in 25 months from now, Harry and Sally’s combined income will increase by $500 per month. At that time there will be 50 months remaining in the CSED (75 – 25 = 50, get it?). The IRS will multiply that 50 times the $500 and come up with $25,000 which they will add to the RCP. Total RCP is now $100,000.
Any other future income from inheritances, insurance payouts, trust payouts, etc, will likewise be factored into the IRS’ calculation. Since Harry and Sally had no other future income expected, the first half of their RCP calculation is $100,000.

STEP 2 – Compute the Net Equity in Your Assets
The second half involves a look at their net assets, what they own minus what they owe against it. For most of us, this is basically our house. The IRS uses the concept of “quick sale value” (QSV) to factor in your house. Take the fair market value of your home and multiply it by .8 or eighty percent. If Harry’s home is worth $400,000 then the QSV is $320,000. Subtract from $320,000 mortgage of $300,000 and you come up with $20,000. Presuming that their home is the only real thing of value they have, the total net equity in assets will be $20,000.
The final step in computing the RCP is to add the $100,000 from Step 1 to the $20,000 from step 2 and voila – $120,000.
The only question now is – How much do Harry and Sally owe? If they owe a million dollars then they can make the IRS an offer of $120,001.00 and have a chance of success. If they offer $119,999, the IRS will decline the offer and ask them to raise it above their RCP.
I hope you made it this far because what comes next is vitally important! The IRS knows that when you make an offer to resolve your tax debt, the chances are that you will not be able to pay your offer in a lump sum, but will have to make payments over time. The IRS Offer in Compromise program permits that and offers three payment options – (1) lump sum payment (2) short term payments not to exceed 24 month and (3) long term payments over the statutory collection period. Your RCP will be determined by which of the three payment options you choose. The scenario above is for those of you who wish to make long term payments. If you choose one of the other options, the RCP will be less! In other words, the longer you drag out your payment schedule the more you will have to offer. Makes sense doesn’t it? If you can give the IRS the full amount NOW then they will be willing to take less.

What if I do not own a house and my furniture is old, I have no jewelry and my car is a 1992 Honda Civic worth $300 on a good day? If this describes your situation then the second part of the calculation will be zero. What if my allowable expenses really and truly exceed my income? If this describes you then the first part of the equation will be zero. What if I have no assets, my income does not cover all my expenses and I owe the IRS a lot of money? At that point you can ask the IRS to declare your debt uncollectible. You will have to fill out some forms, but you may succeed in convincing the IRS that you will never have the wherewithal to pay the debt within the time they have to collect it. You should be aware that even in uncollectible status, the interest and penalties will continue to accrue.

If you truly are in dire straits with negative income and no assets to speak of, you might consider an offer in compromise for a small amount that you might be able to borrow from a relative or credit card. If the IRS accepts your rather small offer, you can then borrow the money, pay over time and eliminate the debt.

Arthur Weiss, Esquire
Law Office of Arthur Weiss, P.C.
2135 Grant Rd.
Tucson, AZ 85719
520-319-1124
https://artweisslaw.com