Tax Debt Solutions Blog

Tax Debt Relief: Get the Facts and Know Your Rights!

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Postponing Collection of Your Tax Bill

A ‘53’ is used by individuals who are in dire financial straits such as no employment, insistent creditors and no money.  If the collector agrees he/she recommends your case is ‘currently not collectible’.  He completes a Form 53.  If it is accepted it is computerized and the IRS will not contact you again for at least six months.  Penalties and interest keeps accruing.  Once the ‘53’ period is finished the IRS process starts again.  It’s not easy to get a ‘53’ approved and you will have to show documentation to prove your situation is desperate.  A ‘53’ only gives you time to sort out your financial problems with the IRS.  It can help you reach the ten year collection cut-off or give you time to file for bankruptcy.

Suing the IRS

If the law is carelessly treated by an IRS collector you can sue the IRS for negligence up until $100,000.  If your home is taken without a court order you can sue the IS for $1 million.  It is rare for a tax payer to sue the IRS because they don’t win.  This means hardly any lawyers want to take on such a case against the IRS on contingency.

Highlights

• The IRS is the most powerful bill collector and can seize your properties, bank accounts and salaries.
• The start of the collection process by the IRS is in the form of computerized letters.  If you don’t have the finances to pay, ask for more time.
• Don’t give the IRS banking and employment details.  Ask for a face to face meeting at your local IRS office instead of a phone conversation.
• Be respectful and polite to a collector but know your rights.
• You may remain silent regarding assets but you may not lie to the IRS as it’s a crime.
• Have your financial data in order prior to speaking with a collector and never undervalue your living costs.
• Offer a monthly payment plan if you can’t settle your taxes in full.  Penalties and interest keep accruing until they are paid up.
• Tax debts can be done away with by bankruptcy or give more time to pay minus penalties and interest increasing.
• Economic hardship is a reason to ask the IRS to temporarily postpone collection.

Tax Relief Tip: Guard Your Assets

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Safeguarding Your Assets from the IRS

When the IRS is attempting to collect from you it is unlawful to transfer assets as a means of keeping them from the IRS.  However, if you plan ahead and use a family member you can lawfully protect your assets.  If you go ahead with transfer you may not be able to retrieve your assets.  No plan of protection is flawless and the IRS has the legal power to recover transferred assets.  Don’t do an unlawful transfer and avoid a fraudulent action on creditors including the IRS.

You can protect your assets by:

Find a corporation that will allow your assets to be transferred to them.  IRS could take corporate assets if it suspects a fake transfer.

Place assets into a partnership that is owned by family only.  A joint tenancy is not sufficient so seek counsel from an expert.

 Place assets in a trust for a family member or spouse.  A living trust means you control the assets.  The IRS won’t accept this kind of arrangement.  They are distrustful of off- shore trusts.

 Use an insurance trust for life insurance policies.  This must be carried out prior to tax difficulties.

 Retirement plans and 401(k) accounts must be completely funded.  Although they can the IRS disapproves of taking plans that are non-ERISA eligible.  You can lower the 401(k) account by borrowing against it in case of IRS seizure.

 Complete transfer of assets to your family members.  This will avoid an IRS tax bill on property you want to bequeath to your children on your death.

 File separate tax returns.  The IRS can take a married couple’s refunds if they file jointly.  If one spouse owes then a separate tax return protects the other.

 Tax Debtors Overseas

 You may have to leave the country with all your assets.  The IRS computer is linked to US Customs and Immigration so you may have to stay abroad for good.  A large number of countries allow the IRS to collect taxes owed by US tax payers.

Tax Relief: Chapter 11 Bankruptcy

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Taxes and Chapter 11 Bankruptcy

Chapter 11 provides a refuge for businesses from creditors as they try to show a profit and appropriately manage debt.  Private individuals may file for Chapter 11 but it is extremely rare.

Chapter 11 is complicated and a bankruptcy attorney is necessary but costly.  Their fees start at $10,000.  It may drag on for a number of years and the business in question may either fail or improve.

In the event of a Chapter 11 interest keeps on accruing but there is an automatic stay on IRS collections.

Taxes and Chapter 12 Bankruptcy

Debts caused by a family farm are assisted by a Chapter 12.  It is akin to a Chapter 13.

State Income Taxes and Bankruptcy

Although only taxes are discussed in the Bankruptcy Code there are unique concerns about state taxes and bankruptcy. There are states like California that don’t send a final notice for tax assessment.  Instead, they send interim notices.

A large number of states want you to file a return that is amended subsequent to an IRS review founded on audit or inspection.  The three year regulation starts from the time the amended return was due.  The two year regulation starts from time of filing.

Chapters 7 and 13 must be settled in full as state sales taxes are not normally dischargeable.  In a small number of states such as Illinois, Hawaii and California if sales taxes are not paid it means they are eligible for discharge in the same way income taxes are.  However, they must be in line with the three year, two year and 240 days regulations.

Tax Relief: Chapter 13 Bankruptcy

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A Chapter 13 may be the answer if your tax debts aren’t eligible for a Chapter 7 solution.

Fundamentals of Chapter 13 Bankruptcy

Most tax payers holding tax debts choose Chapter 13 for bankruptcy.  An offer for a monthly payment plan is made to the Bankruptcy Court.  If the court approves you are responsible for making monthly payments to a trustee appointed by the court.  The trustee shares out the money to your creditors as well as the IRS.  Such a payment plan remains in operation for five years.

Taxes Paid in a Chapter 13 Plan

You are obliged to pay secured taxes in full.  This is if you have a recorded lien and property with a present value the same as the tax lien.  When this is paid the lien is no longer attached to your current property or upcoming property.

Additional Motives Why Chapter 13 is Advantageous:

The IRS is forced to accept a repayment plan.  The IRS may only take what the bankruptcy judge endorses.  Chapter 13 ensures property and wages may not be seized and recollection procedures may no be resumed by the IRS.  If a revenue officer refuses to allow an evenhanded payment plan then Chapter 13 is a means of bypassing this obstacle.

As soon as you file for Chapter 13 all penalties and interest cease accruing but not on secured taxes.  On the other hand, an IA (Installment Agreement) agreed to by the IRS keeps on accruing late payment penalties and interest.  Tax penalties are handed out at the discretion of the bankruptcy judge.

Becoming Eligible for Chapter 13 Bankruptcy

To find out if you qualify for Chapter 13 you must reveal your liabilities, expenses, assets and income by completing a set of forms.  In addition, all your tax returns from four years before the bankruptcy must be filed.  You are also obligated to present a proposed payment plan.

Once you have all of the above you can present it to the bankruptcy judge who assesses your request and assigns a trustee to watch over your case.  All your creditors may attend a meeting to oppose your plan.  This hearing is set up by the assigned trustee.  It is not usual for the IRS to oppose a Chapter 13 request.

It is possible for the judge to make revisions to your plan but if your forms are in order it will be permitted.  Your sixty monthly payments go to the trustee who pays your creditors on a pro rata basis.

Tax Relief and Chapter 7 Bankruptcy

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Taxes and Chapter 7 Bankruptcy

If you want to file for bankruptcy it is essential you filed the previous four years’ tax returns beforehand.  You must also be aware not all debt can be put aside by bankruptcy.  If you want to know if bankruptcy can help your tax debt troubles you have to read through some complex rules.

Taxes That Can Be Eliminated in Chapter 7 Bankruptcy

In the instance of Chapter 7 Bankruptcy an individual or married couple can have their taxes discharged or erased in special conditions.

A discharge of income taxes in a Chapter 7 can take place if all of the following are accurate:

• Bankruptcy can only do away with incometaxes and not fraud penalties, payroll taxes or Trust Fund Recovery Penalty.
• You have not submitted a false tax return or knowingly tried to evade the payment of tax money. This is relevant if you were given a penalty for fraud.
• Taxes must be due a minimum of three years prior to filing for bankruptcy.  Normally three years from 15 April, of the year the return was owed.  However, an extension must be filed from 15 October.  If the 15^th is a Sunday or a Saturday the return was due on Monday.
• You must have filed all tax returns a minimum of two years prior to filing for bankruptcy.  An alternate return by the IRS on your behalf is not valid for this purpose.  Unfiled tax returns means the discharge of taxes owed in that year of bankruptcy is not allowed.  You are allowed to encompass those taxes within a repayment plan.
• The IRS must have reviewed the income taxes a minimum of two hundred and forty days prior to the appeal being filed.

If you want your tax debt to be eligible for discharge in bankruptcy then if any of the following is relevant, time must be added to two year, three year or 240 day regulations:

• All of the time periods i.e. two year, three year and 240 days halt during the time you filed a prior case for bankruptcy.  If you did file previously you must add another one hundred and eighty days to the three time periods.
• The 240 day rule can be postponed by a Compromise in Offer.  The stay begins on the date the offer is made.  It remains until the offer is refused by the IRS or withdrawn by the tax payer.  Thirty days is added for any period affected by a petition.
• A time period rule is lengthened by sixty days following a decision or dismissal by the US Tax Court.

Prior to filing for bankruptcy for tax debt get a record of your filing dates from the IRS.  This record is known as MFTRA-X or a literal transcript printout.  You need the years on which you owe money.  You will see important tax dates like filing of returns, tax reviews and time changes.  Scrutinize the dates on the transcript prior to a bankruptcy filing.  The printout is free of charge.

Federal Tax Lien and Chapter 7

Prior recordings of tax liens on your record are a problem even if you are eligible for a Chapter 7 discharge.  The problem is they stay on your record.  It is solely your private responsibility to settle tax owed.  A lien prior to you filing for bankruptcy outlives a discharge.  Your property includes equity where the lien can be affixed.

The IRS is allowed to seize assets in your possession at the time you filed bankruptcy once your bankruptcy has ceased.  An IRS lien can harm you if you have a pension plan or real estate.

Tax Relief: Using the Bankruptcy Code to Halt the IRS

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Filing for bankruptcy can do away with or lower tax debts.  On the other hand, it can force the IRS to accept a payment plan or it can simply get you more time.  Bankruptcy could be the means to lessening your tax woes but make sure you are aware of any recent changes to the laws governing bankruptcy.

Bankruptcy Categories

Bankruptcy should be seen as a lawful procedure.  It can be used to organize and resolve debt problems.  It slots in tax debt.  In this case you file an appeal with the Federal Bankruptcy Court.  There are two kinds of bankruptcies:

• Chapter 7 i.e. Straight Bankruptcy – an insolvency of debts, it can waive all or some of your income taxes.
• Chapters 11, 12 or 13 i.e. Repayment Plans – permit payment of debts and tax debts over a time period of that is extended and frequently pay less than you owe.

The Automatic Stay

There is a lawful safe haven known as the automatic stay.  This is halts all creditors and collectors as well as the IRS as soon as you file for bankruptcy.

If a creditor wants to collect during a bankruptcy case he must get a removal, lift or stay from the bankruptcy judge.  It is very seldom the IRS makes such an application.

Bankruptcy Negatives

There is a downside to consider before filing for bankruptcy:

Additional Time for IRS to Collect

If not all your tax debt is removed after bankruptcy the IRS gets additional time to collect the outstanding monies owed by you.  Ten years is the usual time they have to get interest, penalties and tax bills from you.  When your time of bankruptcy has ended, the remaining time of the initial ten years for collection has the pending period of your bankruptcy case added on for the IRS.

Your Credit Rating and Tax Liens

When you file for bankruptcy it is in the public record and it shows on your credit history for ten years.

If the state taxing authority or the IRS documented a tax lien notice it harms your credit report.  However, a bankruptcy filing does prove you are attempting to sort out your debt troubles.

How To Appeal a Rejected Offer in Compromise

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Appealing a Rejected OIC

There are two routes to take if your Offer in Compromise is refused:

1. Call the IRS officer who signed the rejection letter or you can make an appeal. 
2. A formal appeal is handled by a different division than the one that refused your offer.

A formal appeal is your last resort.  You don’t have the right to take the IRS to court for a rejection of your Offer in Compromise.  You start the process with a letter formatted by the IRS.  Your appeal must be received by the IRS within thirty days of the rejection date.  The submission of a new offer earlier than six months from the initial rejection date, without notable changes in your financial situation or without a significant hike in your offer, will not be appreciated by the IRS.

If you want the IRS to take your appeal seriously you must do the following:

• Provide all information asked for by the IRS throughout the processing of your offer.
• All previous tax returns have been filed.
• The present year’s payments and filings are up-to-date.
• Self-employed individuals have completed quarterly anticipated tax payments.
• Employers must be up-to-date with payroll tax filings as well as deposits for the present time and two previous quarters.

An appeal does postpone collection.  However, the accrual of interest carries on if a deal isn’t reached.

Offer in Compromise- Rejected

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Awaiting the IRS’ Answer

If your offer requires corrections the IRS will return it.  You correct it and refile.  It’s not unusual.

It takes four to eighteen months for a valid offer to be scrutinized prior to a decision.  You must keep making payments according to the current installment agreement.  Only permission from the IRS can stop such payments.  You must file a tax return on time or file an extension and pay the taxes outstanding.  If you don’t, the IRS can refuse an OIC.  An acceptance is automatic if the IRS doesn’t contact you within twenty four months.

If Offer Is Initially Rejected- Keep Trying!

When an offer is refused, the IRS must give an explanation in writing.  An Offer in Compromise can be refused due to:

• An offer being too low
• Insufficient information

If the amount is too low, the written explanation must tell you what amount is satisfactory.  You must be provided with a copy of the list of features responsible for the refusal.  This is your right according to the Freedom Information Act.

When you know the reason for refusal you must write a letter with a fresh offer that differs from the first.  Your financial situation must be more or less the same.  Affirm that your reason for a change of offer is to increase the amount.  If your offer differs significantly from the first offer then complete a new Form 656.  The IRS will assist you in making a more suitable offer.

In order to help you, it is permissible for you to call the IRS at 800-829-1040 to view Offers in Compromise that were accepted within the last year.  These offers are a matter of public record for a full year; private details are not made public.  You must go to an IRS office to see such documents.  Doing this, will provide you with a better idea of what an offer should contain to be deemed acceptable by the IRS.

Offer in Compromise: The Pros and Cons

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Pros and Cons:  Offer in Compromise

Pros:

• If an OIC is granted, it saves money if your offer has interest continues to accrue and deferred payments according to the OIC and not the initial sum owed.
• If your offer is turned down there is less stress during the procedure because usually property and salaries aren’t seized during that time.
• Tax liens must be relinquished by the IRS within thirty days of receiving the agreed amount for an OIC from you. When a Certificate of Release of Federal Tax Lien becomes public your credit rating recovers.

Cons:

• Once an OIC is agreed to you are obligated to file upcoming tax returns and make tax payments on time for five years.  This applies to payroll tax and estimated business tax, if self-employed.
• If accepted or rejected, the IRS has more time to collect tax owed when you file an offer.  They add the time the offer is under deliberation and thirty days to the usual limitation of ten years to collect.
• All tax refunds before your offer and during the year of acceptance by the IRS must be forfeited.  You may have to forfeit refunds for three to five years.
• Subsequent to submitting an offer you may not appeal to the IRS or court for years stated in the offer.  This applies if offer is accepted or rejected.
• The IRS will revoke an offer after acceptance if you were untruthful.
• It’s not usual but the IRS can audit you during the OIC process depending on what you reveal or withhold.
• The OIC can be revoked if you don’t make a payment.  You will be liable for the initial amount, penalties and interest.  The same pertains if you don’t file and pay all taxes for five years prior to an OIC acceptance.

Tax Relief: You Need To Know This About Installment Agreements

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Installment Payment Plan

Debt under $25,000 easily qualifies for a payment plan, but debt over $25,000 must be negotiated.  A payment plan has the downfall of penalties and interest accumulation during payment which could take years to pay off.

IR Code 6502 allows ten years for the IRS to collect tax money.  To get an IA, the IRS will grant you the extension if you sign Form 900.  Delay the process by first speaking to a tax advisor.  The IRS may not remember to give you the form; in those cases, make sure you request a Form 900. If you don’t sign the form, you don’t get an installment agreement.

Negotiating Monthly Payments

If you can’t pay your tax in a maximum of three years or you owe in excess of $25,000 ask for a monthly payment plan and complete Form 433-A or –B.  Each revenue officer will come to a different conclusion on how much you should pay. 

Strategies to get a payment plan:

• Tell them what payments you can afford when handing in Form 433- A or -B.
• Commit to paying less for income essential living costs only, i.e. amount IRS states you can afford after essentials.  You offer to pay lowest amount as it’s hard to revise once you sign installment plan.
• If you have $0 or a minus amount contemplate an Offer in Compromise, collection suspension, or bankruptcy.
• Make an initial payment when you suggest an agreement.  Continue the payments regardless if the IRS permitted your IA.  Paying a set amount, in a timely matter, for three months may convince the officer that the payment plan and amount is right for you.  If you don’t have the means to start immediate payments, a check that is postdated may be accepted.

Tax bills higher than $25,000 must be approved by a manager, not a tax officer.  If an IA is approved it could take months to get it in writing.

If You Can’t Fulfill your Installment Payment

Being unable to fulfill a monthly payment requires an exceptional reason such as disability or loss of employment.  Call 800-829-1040 for help and also contact the relevant tax officer.  If the IRS doesn’t agree, they can start procedures to seize your property; contact the Taxpayer Advocate Service.

An appeal against a revocation can be restarted but the IRS is usually not compliant if the amount is more than $10,000.  You must supply new documentation showing your changed circumstances, affecting income and living costs. During the new process for an IA, the IRS may take wages and accounts.