IRS Tax Problem Help

Click on the above video to find out what my clients have to say

In today’s post I am going to discuss an appeal I recently had with the IRS for one of my clients.

My client is a professional architect.  He had timely filed and paid his taxes for most of his adult life.  In 2007 he lost his job.  When my client filed his 2006 income tax return he owed additional income tax, but since he lost his job he did not have the funds to pay the taxes.  For the next 14 months his income composed of unemployment income and some contract jobs he was able to obtain.  The combination of his unemployment payments and contract work was substantially less than what he used to earn.

My client was divorced and had 4 children for which he was paying child support.  Without his regular income he was not able to keep up with his monthly child support, so he was behind in child support and income tax.

Finally the IRS issued a Final Notice of Intent to Levy and Notice of Your Right to a Hearing (Letter 1058).  Once we received that letter we filed a timely appeal to stop the IRS from filing a levy against his bank account or his income.  In the appeal I requested a face-to-face appeal in the Houston appeals office.  My experience has been that face-to-face appeals are more successful than appeals done as a phone conference.

Once the appeal was assigned to the appeals officer we had to gather financial information for presentation to the appeals officer.  We had to show what assets he had, such as autos, real estate, bank accounts, and investments.  The only assets my client had were a small balance in his checking account and an old car with a large debt. 

We also had to give information about his monthly income and expenses.  His unemployment had played out and he was earning a small amount of contract income.  His monthly living expenses were larger than his monthly income.  I submitted the financial information timely to the appeals officer and waited for our face-to-face appeal.

In an appeal, the appeals officer started off with some legal issues, such as stating the IRS appeal’s mission statement, stating the tax period and amount due, and determining if the appeal was timely filed, etc.  Then we got to the facts of the case.  The appeals officer told me she had reviewed the financial documents I had submitted and asked me what I thought should be done in this case.

I told her I believed my client should be set up as currently not collectable.  If you saw my post on April 30, 2009, you will remember I discussed the 6 main options available if you owe the IRS.  The third item was currently not collectable.  If the money you are making is just enough to pay your basic living expenses (based upon the IRS standards) and your current year taxes, the IRS will set you up as “Currently Not Collectable”.  This is not a miracle!  The taxes do not go away, and penalties and interest continue to accrue.  However, if you truly cannot make payments, this gets the IRS off your back, and lets you go on with your life.  The IRS will periodically request updated financial information to determine is you should stay in Currently Not Collectable status.

The Appeals officer agreed with me that the best option in this case was to set the taxpayer up as currently not collectable.  The IRS is not going to ask my client to make any payments while he is set up as currently not collectable, however, he must timely file and pay future taxes in order to stay set up as currently not collectable.

The main lesson here is to make sure the IRS has a current address for you.  This makes sure you receive all mail from the IRS.  Many of my clients are afraid to receive or open mail from the IRS.  As a taxpayer you have rights, but it is up to you to use your rights and if you do not open the mail from the IRS, you may miss making a timely filing to protect your rights.

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The first question some clients ask is “What are these penalties and interest on my IRS bill?  That is a good question; let’s take a look.

Most of the clients that come to me either have income tax returns that have not been filed or they filed them after the due date of the return.  Returns that are filed after the due date are assessed a late filing penalty, if tax is owed on the return.  This is simply a penalty for filing a return late.  The penalty is 5% for any part of a month, even one day, when a return is filed after the due date.  It doesn’t matter if the return is one-day late or 30 days late, the penalty is 5% of the tax owed.  The penalty continues to accrue for each month or part of a month late until it is 5 months late.  The late filing penalty stops after it reaches 25%.

There is also a penalty for paying the tax after the due date, not including extensions.  If your return is due on April 15^th and you mail it in but do not send in the taxes due or get an extension but do not send in the taxes due, you will owe a late payment penalty starting on April 16^th.  The late payment penalty is 6% per year.  This penalty stops after 50 months, because the late payment penalty stops after it reaches 25%.

On top of these two penalties the IRS also charges interest.  The interest varies over time.  Presently the interest is at the rate of 4%.  This interest is compounded daily.  I am often asked, “If I get an installment agreement will the penalty and interest stop?”  The simple answer is no!  If you have a car loan or a mortgage on your home, you know interest accrues each month.

If you have an unfilled return and there is a refund, there is no penalty or interest due.  The penalty and interest are a percentage of the tax owed; so if no tax is owed, no tax is due.

In some situations, taxpayers can get the IRS to remove the penalties and interest.  I will discuss requesting abatement of the penalty and interest in another post.

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Every week someone calls me and tells me they owe the IRS, but do not have the money to pay the back tax.  Many of them are frustrated because the IRS notices keep coming and they feel threatened.  They want to pay their tax, but they are not able.  Does that sound familiar?

There are 6 main options available if you owe the IRS.

1. The first option is to full pay the tax.  Most people do not have the money sitting around in their checking account.  Do you?  Some other options if you do not have the money sitting in your checking account or in your mattress are as follows:  Refinance your home.  If the IRS has filed a lien on you, they will release the lien to get paid on a refinance or sale of a home.  Look around your home do you have a car, boat, motorcycle, 4 wheeler or other play-toy you can sell and payoff the IRS?
2. Pay the IRS back with an installment agreement is the second option.  Many times the IRS will work with you to set up an installment agreement if it will help them get paid.  Most people are not aware the IRS will allow an installment agreement.
3. If the money you are making is just enough to pay your basic living expenses (based upon the IRS standards) and your current year taxes, the IRS will set you up as “Currently Not Collectable”.  This is not a miracle!  The taxes do not go away, and penalties and interest continue to accrue.  However, if you truly cannot make payments, this gets the IRS off your back, and lets you go on with your life.  The IRS is not going to require you to make payments at this time.  However, they may come back later and ask you to update your financial information, so they can determine if you are still not collectable.
4. Offer in Compromise – This is the program where the IRS will settle your IRS tax debt for pennies on the dollar, if you qualify under the IRS standards.  Beware, a lot of companies promise to help you settle with the IRS for pennies on the dollar, if you pay their fee.  Many times they do not ask enough questions to find out if you qualify for an offer in compromise.  The IRS requires you to give them detailed financial information to determine what is your ability to pay them.  This process is very detailed and can take up to a year or longer for the IRS to make a decision.
5. In some circumstances IRS income taxes can be discharged in Bankruptcy.  Many people are surprised to find out taxes can be discharged in bankruptcy.  To find out if your situation qualifies for Bankruptcy, you need to consult with a qualified Bankruptcy Attorney.
6. The IRS does not have forever to collect back taxes.  Many people believe once they owe the IRS if they do not pay the tax, it will follow them until they die.  The Statute of Limitation for collections of the IRS debt is 10 years.  If the IRS does not collect the tax within 10 years, they lose it. Some actions can extend the 10-year period of collection.  The filing of an Appeal or Offer in Compromise will extend the collection period.  Filing Bankruptcy will also extend the collection period.

In future post I will discuss each option in more detail.

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Did you forget to get an extension for your IRS income tax return?  Are you in a panic?  What should you do?

The first thing to do is calm down.  This is not life or death.  The next thing to do is either prepare your tax return or hire someone to help you prepare your tax return.  What is the next step after you prepare the tax return?

If you have a refund there is no problem.  The IRS does not penalize you if you file late and have a refund.  The penalties and interest due on an income tax return are based on the amount owed.  If you do not owe any income tax there is no penalty or interest due.

Now you have prepared your income tax return and you owe income tax, what next?  The IRS assesses a penalty for filing a tax return late.  The penalty is 5% per month, or any part of a month (even 1 day).  The maximum amount of the penalty for late filing is 25%.

How do we stop the late filing penalty?  File the return as soon as possible.  If you file the return before May 15^th, you will only be subject to a 5% late filing penalty.  If you cannot get the return filed by May15th, file it as soon as possible after May 15^th.  But what if I am missing a piece of information needed to file my return?  Use your best estimate of the missing piece to prepare the return.  Once you know the correct amount, file an amended return if it is materially incorrect.

Can I get the late filing penalty removed?  It is possible to get the late filing penalty removed if you have what is called reasonable cause.  Reasonable cause is a reason beyond your control that kept you from filing a timely return.  Some possible reasons could be: you became ill the week the return was due, you were suddenly called out of town for work, you could be going through a messy divorce.  You will have a better chance of convince the IRS of waiving the late filing penalty if you can show you have a long standing record of timely filing and paying your taxes.  They are much more likely to waive the penalty for someone who has been in compliance in the past, rather than someone who habitually files late.

What should you do?  Stay calm, prepare the return, file the return and ask for a waiver of the penalty, if you have reasonable cause.

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