How To Resolve Your IRS Tax Debt Problems
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 o 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. he 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.
These steps will make it easier to deal with your tax debt and create a plan to pay it:
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 thru 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.
If you are unable to pay the minimum to the IRS for an installment agreement
If your situation doesn’t allow you to afford the minimum amount, you should talk the IRS and tell them you cannot afford it: in addition to your installment agreement, you will be required to file all your financial information such as bank accounts, auto and real estate property, living expenses, etc. The IRS will evaluate it and respond with an amount you can afford.
If your financial situation has deteriorated so much you cannot pay your debt at all, there are two options depending on whether you expect the improvement of your finances in the future: economic hardship and offer in compromise. But before any of these options are selected, a detailed analysis of your situation is essential.
- If you sell all your belongings and property, how much is left to pay the IRS?
- Can you borrow thru a credit card or equity line to pay the IRS?
- After paying your living expenses, how much is left each month?
The IRS set their own limits for calculating living expenses. Subtracting your monthly income to the below living expenses limits will result in the amount left to pay the IRS:
|Expense||One Person||Two Persons||Three Persons||Four Persons|
|Apparel & services||$80||$148||$193||$227|
|Personal care products & services||$34||$61||$62||$74|
|More than four persons||Additional Persons Amount|
|For each additional person, add to four-person total allowance:||$341|
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 look into 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 have to 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.
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.
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.
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.
How A Tax Debt With The IRS Will Affect Your Personal Finances
Carrying a federal tax liability is perilous at best. You cannot have a worse creditor chasing you. The IRS is free from the constraints that hamper creditors like your credit card supplier; they do not have to prove that you owe them money in a court of law, for example. Under Federal preemption, they are free from any protections your state might offer you against creditors. To start off with, the IRS will simply charge you interest and penalties, which will summarily be added to your outstanding balance.
Interest and Penalties
Although we are now in an era with relatively low-interest rates, the IRS interest rates are certainly not cheap. IRS rates are based on federal short-term rates plus three percent. Federal short-term rates are reviewed and changed quarterly. IRS interest is compounded daily from the date your payment was due (usually April 15th of each year).
It is very difficult for the average person to calculate the IRS interest rate with any degree of accuracy. To succeed, you will have to determine the date your payment was due. From that date onward you will have to add the current short-term interest rate plus 3%, compounded daily. Whenever the government changes the short-term interest rate, you will have to use the new interest rate from this date onward until it changes again, and so on. It is just very confusing, and most people just accept the rate the IRS provides for them. Fortunately, the IRS is extremely accurate with these calculations, and they seldom make a mistake.
Penalties are just as difficult to determine accurately, partly because there are so many different behaviors that are penalized – a few of them are listed below:
- Failure to file penalty
- Late filing penalty
- Late payment penalty
- Failure to pre-pay penalty
- Accuracy related penalty (for mistakes on your original filed return)
- Negligence penalty
- Fraud penalty
Penalties are usually calculated using a flat monthly percentage, but fortunately there are maximum caps. Penalties of the IRS is such a vast topic that it could fill a book on its own.
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.
Levies and Garnishments
Levies, (sometimes referred to as garnishment) by the IRS against your bank account and wages, simply put, means the IRS seizes cash liquid assets from you. A levy or a garnishment is a collection action by a creditor to satisfy an outstanding debt. Your run-of the mill creditor will seize assets that belong to you and auction if off to offset your debt. It is quite a tedious process to actually seize property, to remove it and auction it off, in order to raise cash, and the IRS with its extraordinary authority to seize anything you own, normally prefers to put a levy on your money and income.
In terms of law, you have a right of due process. This means that the IRS has to inform you that they plan to seize (levy) your assets. The IRS has to inform you in writing, by way of certified mail, of their intention to take enforcement action against you and to levy your assets. This notice has to be given by certified mail.
The date of the IRS’s Notice of Intent to Levy signals the start date of your notice period, and you have 30-days from the date of the notice, before they will proceed with their intended action. After the end of the 30-days, you will receive a second notice, a Final Note of Intention to Levy which will inform you that you have a right to a collection due process hearing. You will be granted another 30-days from the date of this notice, before the IRS will proceed. If your account has not been resolved before the end of this second 30-days period, the IRS will commence with their action against you and levy your assets.
A bank levy is a freeze on your bank account. When the IRS sends a notice to your bank that your accounts are levied, the bank will immediately freeze the funds in your accounts on that day, for a period of 21 days. On the 22nd day the bank will forward ONLY the money that was available on the day notice were given, to the IRS to (partly) satisfy your tax debts.
Fortunately, there is an upside.
- You can keep on using your bank account for anything over and above the money levied on the day of the IRS notice.
- It is possible to release a bank levy once it has been issued, but this rarely happens. You are granted 21 days, and you can attempt the same during this period. Sometimes the IRS will release a levy partially, sometimes even fully, depending on the specific circumstances of the case. You will have to show that financial hardship will follow if the levy occurs.
- Hardship is carefully defined. If you will subsequently be unable to pay your utility bills (water; sewage; gas and electricity, cable is definitely excluded) or if you will be forced to default on your mortgage or rent or any other payment for the maintenance of basic necessities.
- If the levy was sent in error, the IRS will also release it.
- If you qualify for a release of a bank levy, I advise that you call the bank to obtain a fax number where you can have the release faxed to. When you speak with the IRS to request the release, make sure to give them the fax number. This will speed up the process with at least a week.
If you are employed the IRS can regrettably also levy your wages. The employer will receive a notice of the wage levy and has to respond by sending you notice of the same. The employer’s notice will contain a form that you will need to fill out and sign
The IRS cannot levy all your earnings. You are entitled to keep the portion of your income which are deemed exempt. The exemption amount is calculated by taking the following three factors into account:
- How frequently are you paid?
- What is your filing status?
- Your total number of exemptions claimed on your tax returns.
If you fail to complete the form for your employer, it will probably result in the employer taking much more from your pay than might be necessary.
Unlike a levy against your bank account, a wage levy stays in place until the tax debt is paid in full, or you succeed in having it otherwise released. It is easier to release a wage levy than a bank levy, however. A wage levy, like a bank levy, can be released on grounds of resulting hardship, or if it was filed in error. A wage levy has a third option – you can have a wage levy released for entering into a resolution with the IRS AFTER the levy was sent.
If you receive a wage levy on Monday and you call the IRS to arrange a payment plan on Tuesday, the IRS will immediately release the levy. It is again advisable to obtain your employer’s fax number for the release of the levy prior to calling the IRS, in order to expedite any release.
A lien is a legal right or interest a creditor claims on your property. A case in point would be if you own a house and have a mortgage. The mortgage is actually the interest that the bank or lender owns on your property. Similarly, an IRS tax lien is a filing with your local court that grants the Federal government an automatic interest in your property, and the lien becomes part of the public record. This means that your neighbors or peers could now find out about your personal tax problems.
This is driven by tax debt resolution companies that closely monitor these public record filings. As soon as a new lien is filed, your name and address becomes part of the public record, and these operators will start calling. They will use deceitful and even intimidating tactics to push you into hiring them to solve your problems. I cannot personally attest to which, if any, of these companies actually provide proper representation, but their tactics are certainly not above reproach.
A tax lien will also appear on your credit report, and it will drastically lower your credit score. This will undoubtedly prevent you from obtaining the best interest rates, and might even exclude your from accessing credit altogether. More and more recruitment managers also include a candidate’s credit report before hiring new staff. A tax lien by the IRS can actually cost you that new job you were gunning for.
Generally speaking, the only way to have a Federal tax lien released in full is to create a zero dollar balance with your IRS account. In the Resolution section of this book, we will cover this in more detail, but suffice to say, that the above does not mean that you necessarily have to pay the balance in full. A lien will have a $0 balance when you pay it off in full, when you pay of an accepted offer in compromise (settlement) in full or when the statute of limitations expires.
In certain situations the IRS will withdraw and subordinate their liens. A withdrawal is not exactly the same thing as a full release, but it does bring about the removal of the lien from public records. A recent IRS initiative, the Fresh State Initiative, if you qualify for it and agree to it after three months of steady payments under the plan, the IRS will withdraw the lien, but this will not follow automatically. You have to fill in and mail form 12277 [Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien] to them to request this withdrawal.
Instances where subordination of a lien becomes necessary, for example, is when you are attempting to refinance or sell your house. When a lien is filed it grants the government an interest in your property. But there might be other interests, liens, mortgages or judgments. Every creditor with an interest in your property has to fall in line, and their specific place in the line is determined by the type of interest and the time of creation of their interest in your property.
Yes, it is a crime to knowingly not pay your taxes or intentionally not file your returns. Most of my clients are terrified of going to jail for failure to pay their taxes. There is some good news however. Sources inside the IRS have confirmed to me that it costs the government an average of $250,000 to criminally prosecute a tax fraud-or evasion case. About eight percent of the population at any given moment, is non-compliant (owe a tax balance or forgot to file their returns). The government obviously cannot prosecute 8% of the US population. The IRS will always prosecute anybody that intentionally defraud the government. When it comes to knowledgeable taxpayers, such as attorneys and accountants, the risks are higher. It is presumed that their actions were intentional and fraudulent if any non-compliance arises. At the end of the day no one can say for sure that you will not be prosecuted as a matter of course, but it certainly remains unlikely – hence it would serve no purpose for you to divert your attention to criminal tax law and the possible penalties associated with it.
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How the IRS Taxes Your Income if You Have a Cash Side Job
25% of Americans have a part-time business activity, also known as a “side hustle”, the income from which they don’t include in their tax returns. Speaking of numbers, this is $214.6 billion that never gets to the IRS.
Millennials appear to be the group that engages most in such cash-based activities. Some of the work includes dog walking, gardening, cleaning, babysitting or selling crafts and products online or in person.
While entrepreneurship is generally encouraged by the country, if you are one of those people who use their skills and knowledge to earn some extra cash, you need to know that you must declare it. Evading taxes on any source of income is illegal. Not filing a tax return if your income is more than $10,350 and you are under 65 is also a subject to a penalty. If you get caught, you will definitely not like the consequences.
There are three most common penalties you can be charged with:
- Underpayment of taxes.
- Not paying owed taxes.
- Not submitting a return.
If you don’t file your return at all, you will have to pay 5% of the tax you owe for each month as a penalty charge. If you file but don’t pay the due taxes, the penalty is 0.5% of the total tax you owe, applied for each month you have missed a payment.
Underpayment of estimated tax can also cost you a lot. Generally, with the American tax system, you should pay taxes as you earn. You can learn more about how to avoid penalties for estimated tax underpayment and plan your tax strategies in advance in our recent post.
We wouldn’t recommend you try your luck with the IRS and just avoid mentioning your side hustle. The reality is that the Agency recovers $52 billion of evaded taxes each year, so it is unlikely that you will go under the radar for long.
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.
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.
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.
How to Get Rid of an IRS Tax Lien
An IRS tax lien showing up on your credit score can be very damaging to your ability to get a mortgage or any kind of loan. There are several ways of getting rid of a tax lien but they are not suitable for everyone. You should consider your situation carefully or even consult with a professional tax accountant before you take any of the below routes.
Pay In Full
This is the most efficient way to totally get rid of a tax lien, but it may not be suitable for many individuals if your tax debt amount is too high. There are very few people that can afford to pay more than $10,000 within the IRS deadline. However, if by some means you can do it, the tax lien will be cleared of your name and account within 30 days.
Discharge of Property
You may want to try to sell a property which has been stamped with a tax lien, but it won’t be easy to find a buyer. More importantly, this method does not actually guarantee that you will get rid of the tax lien. You can read about the eligibility criteria.
This method may be the most accessible to many individuals, however, it takes a long time to be completed and get rid of the tax lien – up to 5 years. To qualify you must:
- Owe less than $25,000 in tax debt.
- Have set up a monthly direct debit payment.
- Have not missed a payment in the last three months.
The IRS will respond to your application within 45 days and if accepted they will remove the tax lien. You will also be given a notification letter of the tax lien removal, which you can show to creditors if you need to take a loan before the process is completed.
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.
If you are currently dealing with IRS debt, be sure to contact us and discuss which debt resolution option would be most beneficial for your present situation and future goals and opportunities.
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