Monday, January 31, 2011

FAQ IRS Collections-First in a Series: What are the different ways that I can resolve unpaid taxes? Answer #5

5) Innocent Spouse and Statute Expiration

Innocent Spouse is a very complicated solution to tax liabilities. Innocent Spouse relief is for Jointly filed income tax returns only. Many spouses believe that the unpaid tax liability on a Jointly filed tax return, because the income was solely or predominantly earned by the other spouse, is the responsibility of the earning spouse. This is NOT the case, especially when more than one year is involved. If the Innocent Spouse benefited from the income, signed the tax return without provable duress, the tax liability is a “joint and several liability” meaning that both spouses are equally liable for the tax shown on the return. However, if the tax liability is the result of an audit assessment and the basis of the audit assessment, unreported income or erroneous expenses, was unknown to the Innocent Spouse, then there may be a basis for an Innocent Spouse Claim. Generally, Innocent Spouse relief is for spouses who are divorced or separated for a long period of time and the Innocent Spouse must not have benefited beyond normal living expenses from the non-requesting spouse’s ill-gotten gains.

Statute Expiration on the collection of unpaid taxes is 10 years from the “assessment date.” The assessment date is a specific date that is approximately four to six weeks after the tax return is filed, or after an audit is completed. (The assessment date can be easily found on a Federal Tax Lien or you can ask the IRS.) However, this 10 years can be extended to as many as 16 years by the taxpayer signing a waiver, filing bankruptcy, submitting an Offer in Compromise, or being out of the country for more than six months at a time. If you believe that the statute of limitations may be approaching, and your tax liability is close to being 10 years old, it is imperative that you contact a trained tax professional to determine the exact statute expiration date. An upcoming statute expiration date can be used to the advantage of a taxpayer, but must be handled very carefully.

Sunday, January 30, 2011

FAQ IRS Collections-First in a Series: What are the different ways that I can resolve unpaid taxes? Answer #4

4) Bankruptcy

Bankruptcy (BK) is a very complicated solution to tax liabilities, but is being used more frequently due to the complications and length of time of the Offer in Compromise program or a lengthy Monthly Installment Agreement. It is highly recommended that Bankruptcy be used only with the guidance of professionals in Bankruptcy and tax dischargeability. Chapter 7 Bankruptcy can be used to eliminate income taxes that are over three years old, computed from the due date or extended due date of the return, and the tax must have been assessed for more than 240 days prior to BK filing. In addition, the return(s) must have been filed for more than two years prior to BK filing, there can be no fraud indicated and the return(s) must have been filed by the taxpayer, not by the IRS. A Chapter 7 Bankruptcy cannot be used to eliminate a payroll tax liability if the taxes were accrued within the last three years. However, if the payroll tax liability is over three years old, Bankruptcy can be used to eliminate the employer portion of the FICA/Social Security/Medicare taxes and the penalties and interest, but not the trust fund or withheld income and FICA/Social Security/Medicare taxes. A Chapter 13 or Chapter 11 Bankruptcy is basically a three to five year payment plan under the protection of the Bankruptcy Court that stops IRS enforcement and suspends the running of penalties and interest. The Chapter 13 or 11 can be used for income or payroll taxes. Again, if Bankruptcy is contemplated, it is recommended that you retain the services of a Bankruptcy attorney and possibly a licensed tax professional knowledgeable in Bankruptcy discharge criteria.

Saturday, January 29, 2011

FAQ IRS Collections-First in a Series: What are the different ways that I can resolve unpaid taxes? Answer #3

3) Offer in Compromise (OIC)

Offer in Compromise (OIC) is the most misunderstood solution to tax liabilities. An OIC can be based on Doubt as to Collectibility and/or Doubt as to Liability. (A Doubt as to Liability Offer is possible where there is a genuine question as to the validity of the tax liability. A Doubt as to Liability OIC is very technical and should only be pursued by a licensed tax professional. Therefore, this web site will only address the Doubt as to Collectibilty Offer.) The Doubt as to Collectibility OIC is based on acceptance of the validity of the liability, but an inability to pay the entire amount. Generally the OIC is a lump sum settlement for an amount LESS than the actual amount owed and is for taxpayers that cannot pay their entire liability in the next 10 to 15 years. The Offer is based on equity in assets plus monthly disposable income (the excess of monthly income over allowable expenses) multiplied by 48 or 60 months. If you have the ability to borrow the entire amount you owe, you probably will NOT qualify for an OIC. Or, if you have the ability to borrow a large portion of the liability and pay off the balance due in monthly payments, you may not qualify for an OIC. In addition, an OIC takes anywhere from six months to two or three years to get through the IRS system. The IRS will not admit it, but they look for any reason to “reject” or “return” Offers. As many as 90% of all Offers submitted to the IRS are rejected or returned. Some of the most common reasons for rejection or return of Offers are due to the Offer being frivolous, lack of proper documentation, not paying current taxes via proper Withholding or Quarterly Estimated Tax Payments, accruing additional liabilities during the pendency of the Offer, or not responding timely to IRS requests for additional information. In addition, for five years after the Offer is accepted, the taxpayer must file and pay ALL taxes on time. If not, the Offer will be rescinded and all of the liabilities plus penalties and interest are reinstated.
There is also a rarely used special Offer in Compromise for taxpayers in significant hardship situations. This is an ETA (Effective Tax Administration) OIC. The ETA OIC is for people who actually have the ability in equity or income to fully pay their entire liability. However, in doing so they would be unable to pay for future special necessary living expenses and therefore require the equity in assets and income to pay for special needs in the future. This author has seen very few successful ETA OICs and all of them have been for persons with serious long-term medical needs. There are no specific guidelines or criteria for the ETA Offer other than proving with documented evidence that equity and income are needed for unique, exceptional special needs.

Friday, January 28, 2011

FAQ IRS Collections-First in a Series: What are the different ways that I can resolve unpaid taxes? Answer #2

2) Monthly Installment Agreements:

Monthly Installment Agreements (IA) require equal monthly payments due on the same day every month. If you can make payments to the IRS, start making them as soon as possible, even before you negotiate a formal Installment Agreement. Making monthly payment BEFORE a formal Installment Agreement shows good faith. In fact, it is a very positive sign if the tax collector sees that you have made a few payments in advance of negotiations. Formal Monthly Installment Agreements must be negotiated with the IRS and are based upon your monthly income versus your monthly expenses, and can last for anywhere from a few months up to 16 years. Penalties and interest continue to accrue during the term of the Installment Agreement until the liabilities are paid in full. If you owe the IRS $25,000 or less and can pay off your liability within five years, it is relatively easy to negotiate an Installment Agreement directly with the IRS. In negotiating an Installment Agreement with the IRS you should try to make sure that the IRS will NOT file a Lien, although for amounts over $25,000 or agreements for more than five years, a Lien may be unavoidable. (The Federal Tax Lien is discussed later.) However, in addition, you must not accrue any additional liabilities during your Installment Agreement term. If you do, your Installment Agreement will be defaulted. A second Installment Agreement is possible, but can be much more difficult to obtain. Further, if you must miss a monthly payment due to unforeseen temporary circumstances while under an Installment Agreement, call the IRS before the due date of the payment. The IRS will normally allow you to skip one payment if your reason for doing so is legitimate. Installment Agreements for liabilities larger than $25,000 are definitely possible, but require complete financial disclosure and will probably include the filing of a Federal Tax Lien by the IRS. (The IRS also has a rarely used “Installment Agreement on Specified Balance Due Account” (IASBDA). The IRS uses the IASBDA when it is their best interest and when they think they can collect more money than via an Offer in Compromise. It is used on taxpayers who do NOT have the ability to submit an Offer in Compromise, but can make monthly payments. The downside is that the IASBDA will last the length of the Statute of Limitations PLUS an additional SIX YEARS. This can be as long as 10 to 15 years! In addition, at any time during the agreement the IRS can re-evaluate the taxpayer’s ability to pay and increase the amount of the monthly payment based on increased income. A taxpayer should think long and hard before entering into this type of long term Installment Agreement in lieu of an OIC.

Thursday, January 27, 2011

FAQ IRS Collections-First in a Series: What are the different ways that I can resolve unpaid taxes? Answer #1

1) Short-term 30 to 90 day extensions of time to pay

Short-term 30 to 90 day extensions of time to pay can be granted by the IRS by phone. However, do not necessarily call immediately upon receiving your FIRST notice or letter. The IRS sends a series of notices, and calling the IRS after the first notice can literally accelerate the collection/enforcement process. (See question three below for the series of IRS notices.) Waiting to receive the full series of notices and calling only after the Certified Mailed notice could get you as much as three to six months before you request a short-term extension. However, if the Certified notice has been sent and you ask for a short-term extension, but do pay by the extension date, the IRS can not levy banks, wages, etc. Therefore, do NOT make ANY commitments that you cannot keep! If you cannot keep ANY commitment to the IRS by a given deadline date, call the IRS BEFORE the commitment date with an alternative plan. Perhaps you can send a partial payment and the balance in another 30 days. You must keep in mind that penalties and interest continue to accrue until the taxes are paid in full.