Category Archives: Tax Debt Help

Two Simple Questions

The moment a tax issue is brought to your attention, you begin to notice the television ads. And if you’ve had a state or federal tax lien, you definitely have received phone calls with offers to help you resolve your tax debt situation.

What’s important to note is that you can tell a lot about a company and their ability to represent you by asking these two simple questions during that first call:

Question 1: Are you yourself licensed to practice before the IRS?

If you are talking to a company about your tax liability and their representative is diagnosing your situation and describing what they’ll do to help you, wouldn’t you think they would have the proper credentials to negotiate your liability themselves? Unfortunately, the majority of the individuals you speak with are unlicensed, commission based salespersons. Think of it like this: would you get a medical diagnosis from anyone other than a licensed medical practitioner? Probably not. Keep in mind that the consultants at 20/20 Tax Resolution are licensed Enrolled Agents, so you know the advice you are receiving on that initial phone call is correct.

Question 2: Does it cost money to evaluate my case? 

Many companies that advertise on television are paying you for information when you respond to their ad. This means they need to recoup that money whether you hire them or not. There are some companies that charge a large fee just to speak with a consultant. In many cases, you end up paying an unlicensed salesperson to simply tell you what they can do for you – which may or may not be accurate information. Remember, all initial consultations at 20/20 Tax Resolution are completed free of charge.

We understand that the world of tax resolution can be incredibly confusing, but if you’d like to hire a tax resolution company you can easily weed out many by asking these upfront questions. At the end of the day, if they aren’t licensed and it costs money to speak to them, think twice about proceeding.

 

Stop the Leak and Resolve Your Tax Debt


If you are a business owner or an individual with tax debt, there are many thoughts running through your head. What will the Taxing Authority do if I don’t pay this back? Should I file my return with a balance due? Will my receivables pay me in time for payroll? Should I pay this year’s taxes or last year’s balance? And that’s just the beginning.

Take a step back and imagine you are in a rowboat in the middle of a lake and the hull springs a leak. Water is flowing in and panic begins
to ensue. Fortunately you have a bucket and a repair kit to stop the leak. The following question then presents itself: should you begin to bail water with the bucket or try to plug the leak with the tools in your kit? What is obvious to most people is that the leak needs to stop before you begin bailing out the water. Unfortunately, when you think of this situation in terms of resolving a tax debt, people tend to reach for their bucket first.Stop the leak

Now, think of the water as your tax debt. Each month, more and more debt accrues, and with it accrues penalties and interest. However, you also have received tax bills from last year showing an amount due, along with scary language about levies or garnishments if that bill is not paid within a certain time frame. While the temptation would be to pay the bill with the unnerving language, don’t. Instead, concentrate on the leak – your current taxes. Without paying your current tax obligation, the Taxing Authorities will not entertain any sort of payment plan when it comes to your back tax liability. Also, with the penalties and interest that accrue with the new liability, it will be very difficult to catch up.

The moral of the story? Once you’ve stopped the leak in the boat and your taxes are current, then you can focus your attention on your back taxes and start bailing water.

Can Bankruptcy Resolve my Tax Liability?

Perhaps you have heard the many TV or radio ads promising that bankruptcy can eliminate your tax debts. However, wiping out your tax debt in bankruptcy is not nearly as simple or easy as the advertisements might suggest — in fact, most tax debts are not eliminated in such cases. If you file a bankruptcy under Chapter 7, you may still have to pay the tax debt even after your bankruptcy is successfully discharged. In a Chapter 13 bankruptcy the tax debt will be fully paid through a debt repayment plan.

Any tax liens filed before a Chapter 7 bankruptcy is initiated will remain attached to all real estate and personal property owned by the taxpayer. Generally speaking, the taxpayer must pay the value of the tax lien in order to get a release of the lien. However, the IRS cannot levy your wages or bank account to satisfy a tax lien that was filed prior to the bankruptcy. Also, while your bankruptcy is pending, the IRS is forbidden from levying your bank accounts or seizing your property.

TAX DEBTS THAT CAN BE DISCHARGED IN BANKRUPTCY

There are very specific rules that must be followed in order for a tax debt to be eliminated in bankruptcy and they are as follows:

  • Generally income taxes are the only type of tax debt that can be discharged in bankruptcy.
  • The tax debt must originate from a tax return that was due at least three years before the bankruptcy petition is filed.
  • The actual tax return must be filed at least two years before filing for bankruptcy.
  • The taxing authority must assess the tax debt 240 days (approximately 8 months) before the bankruptcy petition is filed. Moreover, this time limit can be extended if the taxpayer submitted an offer in compromise with the taxing authority or the taxpayer had a previously filed bankruptcy.
  • The tax return cannot be deemed fraudulent or frivolous by the taxing authority. The taxpayer also cannot be held guilty of intentional act of evading tax laws.
TAX DEBTS THAT ARE NOT DISCHARGEABLE IN BANKRUPTCY:
  • Taxes that a third party is required to pay or withhold are not dischargeable in bankruptcy. This is often called “trust-fund” taxes because the taxing authority trusts the taxpayer to collect the tax from a third party and pay it to them. Trust fund taxes include the taxes withheld from an employee’s check. This category also includes sales and use taxes because the taxpayer is required to charge sales tax to their customers and pay said amounts to the taxing authority.
  • Property taxes payable within one year of the bankruptcy petition being filed, cannot be discharged in bankruptcy.

It is the rare case that bankruptcy will wipe out an entire tax liability. However, even if you have the rare bankruptcy case, any tax liens file by the IRS prior to the bankruptcy will survive after the bankruptcy and will continue to impact your property interests. If you wanted to sell your house after your bankruptcy, the tax lien would have to be satisfied in the order of its legal priority, even though your Chapter 7 bankruptcy was successfully discharged. Bankruptcy is not generally a lasting and permanent resolution to your tax liability.

Final Notice, Notice of Intent to Levy

For some taxpayers the regular notices the IRS sends out about a balance due serve merely as a reminder or even nuisance about an unpaid tax. And there are other taxpayers that interpret even the tamest IRS collection notice as a threat of enforcement. In fact, both interpretations of the IRS collection notices probably have some truth. What is important is to know which letters are the most important and why.

In this piece I want to highlight what I believe to be the most important letter in the IRS collection process, Letter 1058. This letter is titled very specifically Final Notice, Notice of Intent to levy and Notice of Your Right to a Hearing. The exact same message and rights can be presented as an LT 11, CP 297 and CP 90.

I refer to the Letter 1058 (as well as the above-referenced notices) as the Final Notice. The Final Notice is a critical step in the collection process because it presents for the first the IRS’ right to take enforcement action such as the levying or accounts.

The Final Notice offers a taxpayer 30 days to file a Request for Collection Due Process or Equivalent Hearing (CDP), Form 12153. That appeal gives the opportunity to discuss collection alternatives with the Appeals Division of the IRS. If a taxpayer or its representative fails to file an appeal the IRS will have the right to take enforcement 45 days from the date of the letter. The 45 days allows additional time for the mailing of an appeal executed timely on the 30th day.

Despite the upside that may come from filing the appeal mentioned above it may not necessarily be the most appropriate action. The filing of an appeal in response to a 1058 will stay certain statutes of limitation relating to bankruptcy and collection. Furthermore, it could create a situation in which a business taxpayer is even more vulnerable to enforcement like in the case of a Disqualified Employment Tax Levy. And finally, the filing of an appeal may simply delay a case that could be resolved another way as it winds it way through the appeals process.

Above all Letter 1058 or the like cannot be ignored. If a taxpayer or its representative receives this letter it is important to immediately consider where the case stands. Thought should be given to the pros and cons of filing an appeal and contact should be made with the collection representative that issued the letter.

How do I split my IRS refund?

In April 2014, the Internal Revenue Service issued over 57 million taxpayers a refund via direct deposit at an average of $2,980 per check. Getting money back from the IRS is easier and faster than ever if you provide your bank account information when e-filing or when filing your paper income tax return.

Many taxpayers are unaware of another simple feature available to them regarding their tax refunds; splitting. The IRS will allow you to split your refund into multiple bank accounts. This provides you flexibility to allocate a portion of your refund into your checking account and the remainder into your savings account. Moreover, you can use a portion of your refund to purchase U.S. Series I Savings Bond. These bonds can be for your or other individuals (children, grandchildren) but the total amount of bonds purchased cannot exceed $5,000.

In order to request a split of your refund, complete and attach IRS Form 8888 with your e-filed or paper income tax return. Make sure to include your name, social security number, bank account and routing numbers along with your account type. Next, allocate the exact amounts for each account and designate if you seek to purchase a savings bond. Finally, it is important to review your form for accuracy to avoid any delay.

Funds can be divided in any amount up to and amongst three different bank accounts (within the U.S.). This includes your own account, your spouse’s account or a joint account. Further, taxpayers who file IRS Forms 1040, 1040A, 1040EZ, 1040NR, 1040NR-EZ, 1040-SS, or 1040-PR are all eligible to file Form 8888. It is advised that you contact your bank first to ensure your direct deposit will be accepted.

Also make note of some restrictions. Your refund cannot be divided between a paper check and direct deposit. On Form 8888 you can choose it be issued either via direct deposit or paper check. In addition, refunds from a prior year return cannot be directly deposited nor split.   Finally, if you are simply seeking to have your refund be issued to only one account, Form 8888 is not necessary. This can be requested directly on your income tax return.

With the flexibility to manage your finances more efficiently, filing IRS Form 8888 can help ensure your income tax refund is directed securely to where you need it.

In April 2014, the Internal Revenue Service issued over 57 million taxpayers a refund via direct deposit at an average of $2,980 per check. Getting money back from the IRS is easier and faster than ever if you provide your bank account information when e-filing or when filing your paper income tax return.

Many taxpayers are unaware of another simple feature available to them regarding their tax refunds; splitting. The IRS will allow you to split your refund into multiple bank accounts. This provides you flexibility to allocate a portion of your refund into your checking account and the remainder into your savings account. Moreover, you can use a portion of your refund to purchase U.S. Series I Savings Bond. These bonds can be for your or other individuals (children, grandchildren) but the total amount of bonds purchased cannot exceed $5,000.

In order to request a split of your refund, complete and attach IRS Form 8888 with your e-filed or paper income tax return. Make sure to include your name, social security number, bank account and routing numbers along with your account type. Next, allocate the exact amounts for each account and designate if you seek to purchase a savings bond. Finally, it is important to review your form for accuracy to avoid any delay.

Funds can be divided in any amount up to and amongst three different bank accounts (within the U.S.). This includes your own account, your spouse’s account or a joint account. Further, taxpayers who file IRS Forms 1040, 1040A, 1040EZ, 1040NR, 1040NR-EZ, 1040-SS, or 1040-PR are all eligible to file Form 8888. It is advised that you contact your bank first to ensure your direct deposit will be accepted.

Also make note of some restrictions. Your refund cannot be divided between a paper check and direct deposit. On Form 8888 you can choose it be issued either via direct deposit or paper check. In addition, refunds from a prior year return cannot be directly deposited nor split.   Finally, if you are simply seeking to have your refund be issued to only one account, Form 8888 is not necessary. This can be requested directly on your income tax return.

With the flexibility to manage your finances more efficiently, filing IRS Form 8888 can help ensure your income tax refund is directed securely to where you need it.

Can I Receive a Tax Refund?

You may be wondering whether or not you can receive a tax refund if you are currently making payments under an Installment Agreement or Payment Plan for a prior year’s federal taxes.

The short answer is simply, no.

All taxpayers are entitled to make a claim for a refund of overpaid taxes within the prior three years. However, in instances where there is a past balance, the IRS will confiscate any refund due and apply it towards a taxpayer’s oldest liability period before remitting any excess portion of the overpayment back to the taxpayer.  Even in cases where a taxpayer has entered into a formal payment arrangement, the IRS will offset any refund due and apply it towards the liability. The federal government will pursue all available options to ensure that it is paid for any delinquencies as expeditiously as possible.  The same holds true for many other types of federal debt the most common being delinquent student loan debt.

This is also why the Internal Revenue Service issues tax liens and assesses interest and penalties.  These are all mechanisms the IRS utilizes to ensure repayment of a tax and encourage “voluntary compliance” amongst taxpayers.  When the IRS grants payment arrangements they take into consideration all allowable household expenses and net that amount against the gross household income. Any excess income, beyond the amounts that are considered necessary living expenditures, the IRS expects to be remitted in the form of structured monthly payments.  One of those expenses being considered is income tax withholding.  If income taxes were taken into consideration as a qualified monthly expense, but there is in fact excess withholding, the IRS would assume that that amount should have been reduced when formulating the initial installment agreement terms anyway. Therefore, the IRS will confiscate the excess withholding in the form of a tax refund offset.

The best method for avoiding this pitfall is to seek the counsel of a qualified tax professional shortly after accruing a tax liability with the Internal Revenue Service.  This is especially crucial in instances where a taxpayer may have received or is due a large federal tax refund.  Careful tax planning in the current year can ensure that tax debtors minimize or altogether eliminate a tax refund that would ultimately be confiscated the following year.

For wage earners (those that receive a form W-2 at the end of the year) this can be as simple as adjusting the exemptions reported to their employer on form W-4.  All taxpayers are allowed to claim up to nine exemptions without providing any proof that they qualify.  This will severely reduce the amount of income tax withholding that an employer deducts from each paycheck and ultimately any refund due at the end of the tax year.  For self-employed individuals, taking a little extra time each week to maintain careful bookkeeping records will allow them the ability to consistently track current year tax obligations so that they aren’t in danger of over or under paying when making estimated tax deposits.

You Have Unpaid Sales Tax. Now What?

If you are a business required to collect sales tax on goods or services from your customers, you are also then required to report and pay sales tax to the department of revenue or state comptroller’s office in your state. Tax rates and reporting methods vary by state. For more detailed information on rates and reporting you should consult your corresponding state department.

What is common among states that require sales tax reporting and payment is that non-payment is detrimental to your business. Sales tax is considered a trust fund tax. Simply stated, your business is the “middle man” between your customers and the state. States generate revenue from the payment of sales tax and when it is collected from a business and not forwarded accordingly, the state will move aggressively to recuperate this revenue.

Penalty and interest that is charged on non-paid balances can be between 5%-50% of the balance due. The sales tax license that allows your business to operate is at risk of revocation and therefore, your business is at risk of closure due to unpaid sales tax. Not only that, but the state taxing authorities can assess the liability to parties deemed responsible for not filing and paying. Therefore, even though the tax owed is a business liability, individuals responsible for reporting and paying tax can also be held liable for the tax debt.

Even if the business closes, the tax is still owed. Typically, sales tax is not dischargeable in bankruptcy. The amount owed will be assessed to the individual or individuals found responsible. Tax liens or warrants will be filed in the business and individual names.

The first thing to do is to immediately stop accrual of tax liability. That is, file and full pay current sales tax immediately. If your business has used funds collected from sales tax to assist in cash flow, immediate adjustments must be made in order to pay current liabilities. Secondly, if any sales tax returns have not yet been filed, it is imperative that they are filed right away, even if you cannot pay them. Next, begin making voluntary payments toward the past due taxes. These efforts show good faith and make negotiating payment terms much easier and could very well save the life or your business.

What is the Taxpayer Advocate Service?

The Office of the Taxpayer Advocate, more commonly referred to, as the Taxpayer Advocate Service is an autonomous organization within the Internal Revenue Service.  The office was originally created under the Taxpayer Bill of Rights, an act of the United States Congress, which went into law on July 30, 1996.  Further, the office replaced the previous Office of the Ombudsman within the IRS.  As a result, the Taxpayer Advocate Service is there to help taxpayers experiencing an economic hardship or to help resolve systematic or procedural problems within the Internal Revenue Service.

If a taxpayer is unable to provide financially for themselves or their family because
of an action and/or inaction by the Internal Revenue Service, then the taxpayer can file a Form 911 requesting intervention by the Taxpayer Advocate Service.  However, just because Form 911 is filed and the Taxpayer Advocate Service intervenes, it does not mean that the situation will be resolved in the taxpayer’s requested manner.  The Taxpayer Advocate Service still has rules to follow and the taxpayer still has specific tasks that must be completed in order to come to an amicable resolution.

Currently, the Office of the Taxpayer Advocate employs approximately 2,000 employees, of which 1,400 are Case Advocates.  Case Advocates do the hands on work and assist taxpayers in resolving their issues with the Internal Revenue Service.  Additionally, within the Taxpayer Advocate Service is the Low IncomTaxpayer Adocates Service Logoe Taxpayer Clinics (LITCs) who represent low-income individuals in disputes with the Internal Revenue Service, including audits, appeals, collection matters, etc.

Additionally, the Taxpayer Advocate Service identifies problems that exist within the IRS and proposes appropriate changes.  Most recently the Internal Revenue Service has adopted an updated Taxpayer Bill or Rights, which was proposed by the National Taxpayer Advocate and it offers a plain and comprehensive explanation of taxpayers’ basic rights.

If you find yourself at an impasse while dealing with the IRS or find yourself running into the same procedural issue over and over, the Taxpayer Advocate Service is where you can turn for help.

How to File for an Extension

If you find that April 15th is quickly approaching and you have not started preparing your tax return, you can get yourself some more time by filing an extension. The good news is that there is no penalty for filing an extension. The bad news is that if you owe taxes, you must pay what you owe by April 15th. Filing an extension will give you until October 15th to file your return. It may be fast and easy, but your application for an extension must be postmarked by April 15th.

When filing for an extension, there are three different ways that you can go about the process. However, in each case, you must complete IRS form 4868 – Application for Automatic Extension of Time To File U.S. Individual Income Tax Return:

  • Mail: Complete form 4868 and mail it to the IRS Service Center for your state. Please note that it must be post marked no later than April 15th.
  • Online: You can file this form electronically through the IRS website using “free file” or using a third party website that offers this service.
  • Payment: If you have an estimated tax payment due, you can pay the estimated tax due via Credit/Debit card or Electronic Federal Tax Payment System (EFTPS) and file the form by mail or online.

Regardless of which path you choose when it comes to filing for an extension, always be sure to keep a copy of the confirmation for your records.

Keep in mind that an extension to file is not an extension to pay — if you owe taxes on April 15th and fail to pay those taxes, you will be subject to ‘failure to pay’ penalties. And to avoid these penalties, make sure you pay what is owed by April 15th.

What is a Penalty Abatement and What Can be Abated?

What is a penalty?

For starters, it’s important to understand what a penalty is. A penalty is essentially a fee assessed to a taxpayer to punish the taxpayer for failing to meet certain requirements in its tax obligations. The most common penalties relate to not filing a tax return on time or within the extended time, and not paying the tax due on time. There is generally not an extension to pay, only to file.   Taxing Authorities will also add interest to a tax liability. This interest will accrue on the total liability; including the principal, penalties and previous interest.

What is a penalty abatement?

A penalty abatement is the release of penalties filed for what the IRS calls “reasonable cause,” which is essentially a good excuse for failing to meet a given obligation. A penalty abatement request can be submitted after a penalty has been assessed, and is generally most successful when using the proper forms and supporting documentation in addition to a well-researched brief containing case-law and statute interpretations supporting the argument that the taxpayer has “reasonable cause.” If a penalty abatement request is filed after the penalties have already been paid, this effectively becomes a penalty refund request, and follows the same rules but the IRS will generally not issue refunds more than three years after the penalty has been paid.

What can be abated using this process?

If the Taxing Authority agrees that the taxpayer had reasonable cause for not meeting its obligations, a penalty abatement will be authorized, and the tax liability will be adjusted, or a refund check will be issued if there is no liability. In addition to the penalties that can be abated, any interest that accrues on the penalties (but none that accrues on the principal) will be abated as well. This can often result in drastic reductions in the liability owed. While the IRS does not typically abate interest (except interest on abated penalties), a taxpayer can submit Form 843 and request an abatement of interest in instances of unreasonable error or delay in performing a managerial or ministerial act by the IRS.

What if I have paid some or all of the penalties already?

If you have been in an installment agreement or otherwise been paying towards your liability, you have probably noticed that a sizeable portion of your payments have been applied to penalties and interest instead of the principal, and you may be worried that only the remaining penalties are eligible to be abated. This is actually not the case. If a penalty is abated, the whole value of that penalty is waived from the liability, and the amounts previously applied to the penalty are re-applied to either interest or principal. Even more, if a penalty has been fully paid off before being abated, those payments will go fully towards the principal on that period first, then to any other periods of liability, or refunded if no other periods of liability exist.