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How To Resolve Your IRS Tax Debt Problems

FAS CPA & Consultants

The stress associated with a tax debt to the IRS is heavy to deal with many times. But instead of pretending time will solve it, you can be proactive and solve the problem. Don’t listen to the TV or social media trying to allure you with their offers. The truth is you need help dealing with the IRS but the helper you choose MUST be an attorney, an enrolled agent, or a CPA. The IRS accepts only people with such credentials for tax debt resolution.

 

No one wants to find himself or herself in debt with the IRS.  It’s a sticky situation that can be hard to get out of if you don’t know how to navigate the problem, and the stress you will deal with can be mind-boggling.  The IRS will only deal with CPA’s, attorneys, or enrolled agents when it comes to working out a debt plan with them. Don’t waste your time with any other individuals who claim they can work with the IRS on your behalf.  Make sure you are working with someone who knows what they are doing. You do have options if you are behind on your tax payments.

 

Steps to deal with your tax debt:

 

Get a tax transcript to determine your debt, interest, and penalties.

First things first. Make sure you get a complete tax transcript from the IRS for every year in question.  It will show you exactly what you owe along with any interest, and penalties.

 

Check if you filed your taxes for each year.

Many times tax debts arise because of unfiled tax returns. Because you cannot claim your deductions due to filing omission, the IRS will create a return with the minimum of deductions that work against you. If you have unfiled tax returns, after filing your debt may reduce substantially. One of our clients had a $479K debt with the IRS for unfilled taxes. After filing due returns, the liability was reduced to zero.

 

Determine if an installment agreement is the best way to go.

If you owe less than $50K to the IRS, the best option is to apply for an installment agreement. To calculate the minimum monthly payment the IRS will accept, divide the total debt amount (including interest and penalties) by 72.

 

If you are going through a financial crisis and you can prove your situation is critical, you may qualify for an offer in compromise even if you owe less than $50K.

 

Apply for Economic Hardship

If you have no property and your monthly income is under or just there of the above table for living expenses, you may apply for an economic hardship. But for this option, the IRS will investigate in more detail both of your property, like house and car as well as your monthly income and living expenses limit. Once such numbers are run and you are still under the water, having no property and your expenses are over your income, you may apply for economic hardship.

 

Economic hardship is a deferment of your taxes. No payments are required but interest keeps accumulating. If you sustain the same financial situation for 10 consecutive years, your tax debt will be forgiven. At the end of the 10-year period, you should notify the IRS.

 

Apply for an Offer in Compromise

If your financial situation has deteriorated and your property and income is decreased but you have the means to pay something to the IRS, then an offer in compromise is the way to go. Here the IRS will require an extensive questionnaire of your income, expenses, property, and debts you have. Depending on that information, your petition will be granted, and you will pay maybe 50% or less of the debt and interest.

 

Apply for a Bankruptcy

You can kill your tax debts by filing bankruptcy only for income tax. If you have a business and owe payroll taxes, you must pay them. Also, your income tax debt should be determined 240 days before the filing of bankruptcy. The IRS should have sent you a letter saying that you owe X amount of money. You cannot include your tax debts in your bankruptcy application if you filed an offer in compromise or an installment agreement.

 

IRS Debt Forgiveness Cycle

Finding yourself in any sort of debt with the IRS is never a pleasant experience and when it comes to taxes owed to the IRS the situation can get even more complicated. Surely, we all would be happy to ditch paying taxes on our earned income, but this is unlawful and therefore brings lots of problems for those who chose to disobey the law. Sometimes, however, you might end up in debt not because you deliberately avoided paying taxes, but due to several other reasons and circumstances. Either way, if you owe to the IRS, you will have to pay whether voluntarily or through the collection. Today we are going to explain the IRS debt collection process in more detail.

 

Assessment

When you do your annual tax return you must be very careful how you fill in all relevant information and are well informed about any laws and rules that can save you money (e.g.deductible costs). Many people who don’t have enough time or knowledge turn to professional CPAs. This is a very smart move because it is the first step towards escaping any debts to the IRS at all. Once you have filed your return, the IRS will assess it and check whether you owe any taxes or not. This process may last for 1 to 8 weeks depending on how busy the period when you filed the return is. For example, January is generally calm, and your return will be assessed quite quickly, whereas, in April when the peak of tax filing is, it may take almost two months for the return to be processed.

 

First Bill

If you are found to owe money to the IRS you will receive a first bill stating how much you need to pay, when is it due and how you can do it. It’s always best to pay your owed tax in full before the due date, but if you can’t make at least one payment of however much you can afford at that point. Some penalties and interest charges may apply until your debt is fully cleared. You are not required to set up installments agreement, but that might be a good idea to minimize the above-mentioned charges. IRS has made it very easy to make payments to them, so you can use almost any method including online. Whatever works best for you. Also, you have the option to disagree with the decision of the IRS on your first bill and appeal against it. This will delay the collection process until a final decision is made.

 

 Second Bill

If you don’t appeal the decision on your first bill and fail to make any payment on your due taxes within the set deadline, you will be sent another bill approximately 2-3 months after.

 

Again, you will be asked to pay in full or at least make any payment of an amount that is currently affordable to you. In some cases, you may receive a third bill after you failed to respond to the first two, but most likely your account will be flagged for debt collection after the deadline on the second bill has past and you haven’t made any payments or appealed the IRS decision.

 

Notice of Federal Tax Lien (NFTL)

If you haven’t paid or at least started to pay your debt after all the correspondence the IRS has been sending you during 3 to 6 months, a notice of federal tax line will be issued to your name. This is a public notice to creditors that the IRS has an interest in your current and future property like your house or car. NFTL is not something you want to have on your record, not only because it will majorly hinder your chances of getting any loan or entering a financial agreement, but also because it is hard to get rid of it even after you’ve paid your debt in full. If you get an NFTL you should aim to pay your debt in full within the deadline set on the notice or if you can’t, at least you should make arrangements for several payments over a period of time.

 

CP-504 Notice

If you ignored the IRS previous correspondence and failed to pay your debt either in full or partly even after getting a Notice of Federal Tax Lien, you will get another letter containing a CP-504 notice. Essentially this is a notice of seizure or levy on your federal tax refund or other sorts of assets, which value can cover the amount due to the IRS. In addition, you are also notified that you may lose the right to be issued a U.S. passport if you are planning to apply for one or your passport can be revoked if you have already obtained it. Points of action for you at that moment are pretty much the same as the options you had before: pay your debt in full or make arrangements for regular payments over time.

 

Letter 1058

You will get one final letter before an actual collection of your assets begins. This is letter 1058 or notice of intent to levy and right to a hearing. You will have 30 days from the date of the letter to pay or start paying your debt or request an appeal hearing. Failure to do any of these will result in seizure of your real estate property, cars, bank accounts and business assets. Owing money to the IRS is not something to joke with. The debt collection cycle has been made flexible enough to help individuals in different circumstances keep up with their due payments. Ignoring formal correspondence and failing to pay what you owe while appealing the IRS decision can result in seizure of your property and put a long-lasting stain on your reputation.

Download Our Guide: How to Plan Taxes To avoid letters From the IRS

Steps to Take When You Get a Letter from the IRS

There are currently several scams going around that pretend to be calling from the IRS, trying to collect money from the scam victims. These phone calls, texts and social media contacts are completely different from true IRS notices.

 

If you receive a letter from the IRS, it is likely genuine. The IRS mails millions of letters daily. Many of these letters are automatically created by the computer systems at the IRS. Although a letter from the IRS can be very bad news sometimes, most of the time there is no reason to be concerned.

 

Don’t Pretend It Doesn’t Exist

If you ignore the letter, you are just asking for trouble. Your IRS letter will outline a specific issue with your tax account or federal tax return. It may be a problem, or just a change.

 

Don’t Freak Out

Authorized IRS private collection agencies and the IRS itself send letters and notices in the mail. The letter will include instructions for how you can deal with the problem or change. Sometimes you don’t need to do anything, but if you need to take action it is important to follow the instructions. Read the letter carefully to be sure.

 

Don’t Procrastinate

There are likely deadlines associated with additional penalties or interest that you can avoid by acting quickly. Even if you don’t save any money, you will reduce your stress by taking care of the issue quickly.

 

Review Any Changes

When your letter outlines the changes or correction the IRS made on your tax return, you should review any of the changes they made and be sure to compare it to your original return. If you agree with the changes, make notes on your own copy of your tax return, then be sure to keep it for your records. Always be sure you let your accountant know, too.

 

Don’t Talk Back

Unless the letter specifically tells you to reply, don’t. If the letter asks for a payment, send it of course, but generally there is no reason to reply if the IRS made changes and you agree. Read the letter carefully. If it does not say to call or write, don’t.

 

Unless You Are Disputing the IRS Notice

Don’t reply of you agree, but if you disagree with the changes made by the IRS you need to dispute the notice. Put together a letter, with any documentation that supports your position, and send it to the address on the contact stub at the bottom of the notice you received from the IRS. You can expect at least 30 days before the IRS will respond to your dispute.

 

Don’t Call the IRS

Most of the time there is no reason to phone the IRS. They are just as efficient when dealing with the mail, so don’t spend your time on hold. If you do need to call, use the phone number in the top right corner of your letter. Be sure to have the letter and your tax return handy when you call. Often it can be better to check your tax account online at IRS.gov.

 

Avoid Scams

The IRS does some business over the phone, but they never initiate contact that way. In addition, they never use social media or text messages to contact taxpayers. Usually, your first contact with the IRS will be through a letter in the mail. If you are concerned about your taxes owed you can check online at IRS.gov, but don’t believe the scammer who texts you.

 

The IRS Will Never Call on You

You will have to meet with an IRS officer only if you have failed to attend to all of the IRS collection cycle notifications and actions, meaning you haven’t paid or started paying your tax debt even after a tax lien has been applied to your property.

 

What to Expect?

⇒ An IRS officer will make a surprise visit to your home or give you a call without previous arrangement.

⇒ You will have to answer some questions, likely about your financial circumstances and tax debt, and arrange an interview you need to attend at the office.

⇒ When you attend the interview you will be asked in detail about all of your finances. These will be outlined in a special form, which you will have to approve and sign.

⇒ The officer will try to collect your tax debt by offering some of the ways discussed in previous articles or:

⇒ Ask you to sell assets.

⇒ Get a bank loan.

⇒ Seize your wages, bank accounts, etc.

 

If none of these works they will report your case currently non-collectible. This is an extreme situation and is only granted in cases where the taxpayer and their family would be left on the street if the IRS collected the tax debt.

 

How to Avoid Meeting or Speaking to the IRS?

Having to meet with an IRS officer and undergoing an intense interrogation like that can be very stressful. You can avoid it either by complying with the rules on time or getting in contact with a professional such as an attorney, CPA or enrolled agent and ask them to represent you in front of the IRS. The professional of your choice will file a Power of Attorney and will deal with any IRS correspondence on your behalf.

Set Up Your Payment Plan And Apply For IRS Debt Relief

How to Qualify for IRS Tax Debt Forgiveness

If you have tried every available option for delaying or extending the payment and minimizing the amount of your taxed due, but you still find yourself unable to settle your debt to the IRS, there’s one last step you could take. You can apply for your tax account to be declared Currently Non-Collectible (CNC), which means the IRS will drop any debt collection procedures against you for the time being. It may sound like an appealing solution to get away with paying the tax you owe, but in reality, there are many underwater rocks you need to be aware of. Keep reading below.

 

What is Currently Non-Collectible Status

CNC status means that after you have declared and sold all your assets, you are still in no position to pay your debt whether in one go or in installments. Essentially, it is granted to people who would be in serious financial hardship if they had to make payments to the IRS to cover outstanding debt and that would affect their ability to pay for vital needs like accommodation, food, utility bills and basic clothing.

 

How Can You Qualify for CNC?

Some of the most common scenarios in which you are likely to qualify for CNC are if:

⇒ You are unemployed.

⇒ You have a fixed income and little to none of it is residual.

⇒ You have a health condition that does not allow you to work.

 

The IRS uses specific methods in which they calculate the amount of money you are allowed on expenses against your tax liability. If both collectible assets and residual income equal $0 or less, the taxpayer is eligible for CNC status.

 

A person can also fall into CNC if:

⇒ The IRS is unable to locate the taxpayer’s assets.

⇒ The IRS is unable to contact the taxpayer.

⇒ The taxpayer passes away with no significant assets left behind.

⇒ The taxpayer declares bankruptcy or their business gets suspended with no remaining assets.

If the taxpayer is part of the military personnel, serving in a war zone.

 

Why Should You Apply for CNC?

There are some circumstances in which applying for CNC would be a good idea as it would help a taxpayer who is in a really bad tax debt to have some time to get back on their feet. If you have tried to apply for Offer in compromise and Installment Agreement and the settlement offer or the monthly payment amount would put you in serious financial hardship, then it is best to try obtaining a Currently Non Collectible status. It’s a good method to get out of debt if:

⇒ Your 10-year statute of limitation period is about to expire.

⇒ You earn less than $84,000 a year and your expenses fall in line with the IRS guidelines.

⇒ Your income comes from welfare benefits, unemployment benefits or Social Security benefits.

⇒ You are unemployed and have no other source of income.

 

What You Should Know about CNC?

As much as it sounds like a blessing for someone who is really stressed about their financial situation, being put on a Currently Non Collectible status has its downsides. First of all, you must be prepared to provide full financial information. This includes bank statements, list of assets and their market value, proof of income and expenses, as well as evidence of paying for any significant medical procedure that you may have had to undergo. Secondly, even if you are granted CNC status, your tax lien will not be removed and the penalties and interests will continue to grow on your account. Thirdly, but very importantly, the CNC status is not permanent. It is usually given for a year at a time and it could be removed with every change of circumstance on your annual review when your tax return is filed.

 

How to Apply for CNC?

First and foremost, as every other application for IRS tax debt relieving options, you must make sure that you have filed all your returns up to date. Also, you need to prepare all required documents, which will determine whether you are eligible and will be the turning point of your application outcome.

 

After you’ve ensured you are current on your returns and have collected all necessary documentation, you will have to file Form 433-A/F, Collection Information Statement. In addition, you will be required to submit supporting documents to your claim. Some of the information the form asks for includes:

⇒ A full list of all your assets (vehicles, real estate, life insurance, bank accounts, investments, etc.)

⇒ Proof of the market value of these assets.

⇒ Proof of income in the last 3 months.

⇒ Proof of expenses in the last 3 months.

 

Usually, you should be able to fill in the form yourself without much trouble, but it is advisable to see a CPA or a tax advisor so that they can go over it before you submit. Also, a professional would be able to advise you is this is the right option for your particular situation after analyzing your circumstances. You could try assessing this yourself as well by using the IRS Financial Analysis Handbook, published in the Internal Revenue Manual.

 

After you’ve done all of the above and you are confident this is the best solution to your current tax debt, you need to call the IRS and start the application process. It will be quite a lengthy call and you must have all the documentation we mentioned in handy. Often times you will be told at the end of the conversation whether you qualify or not, but in some cases, you may be required to submit some follow-up items.

 

Who Can Grant CNC at the IRS?

Various types of bodies can grant CNC such as:

⇒ Service Center.

⇒ Automated Collection Systems.

⇒ Revenue Officers.

⇒ Group Managers.

⇒ Appeals Officers.

⇒ Settlement Officers.

 

If you don’t qualify for Currently Non Collectible status do not despair. Instead, contact a good CPA and ask what other options may be available to you that will correspond most appropriately to your current financial situation.

 

Solve Your IRS Tax Debt Before Buying A Home

Ideally, if you are in tax debt, you should look for ways to solve it before it gets to the point where a tax lien is applied to your property and has affected your credit score. Quite often, people also find themselves unable to get rid of a tax lien or it takes them a very long time to do so. If you are worried about being unable to buy or rent a house because you have a tax lien, you can try the below.

 

Subordination

This is a strategy that won’t get rid of the tax lien but it will neutralize the most damaging effects of that stamp, which are exactly related to your credit score. What subordination does is allowing creditors to move ahead of the IRS in any claim over a property, which means they are more likely to let you sign a financial agreement or give you a loan. There are specific requirements, determining whether you can get a subordination and how it will be applied, available in Section 7 of this IRS document.

 

Withdrawal

The withdrawal method can also be a solution to the problems a tax lien can impose on your credit score and ability to buy or rent a house. You will have to wait for a long time, but once you have the notification of tax lien removal from the IRS you will have no problem dealing with creditors.

 

Ask a Tax Accountant

If you don’t think that either of these options is good for you, you should contact an experienced attorney, CPA or enrolled agent who will give you more insights and the most accurate advice on how to proceed. FAS CPA & Consultants will be happy to help if you decide to take that route.

 

IRS Penalties for Filing Late or Not Paying Taxes

 

There are the two different penalties you may face if you file or pay late your taxes:

⇒ Penalty for failure-to-pay usually 0.5% of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25% of your unpaid taxes amount.

⇒ If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100% of the unpaid tax.

⇒ If you don’t file your taxes by the due date April 15, you will generally have to pay a failure-to-file penalty of 5% of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25% of your unpaid taxes.

⇒ If you request an extension of time to file by the tax deadline and you paid at least 90% of your actual tax liability by the original due date, you will not face a failure-to-pay penalty if the remaining balance is paid by the extended due date.

⇒ If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5% failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100% of the unpaid tax.

⇒ You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

 

Also note that if this is the first time you did not file on time and face penalties, you can apply for abatement.

 

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services.  This article cannot serve as a substitute for such professional services or advice.  Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation.  This article is subject to change at any time and for any reason.

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