Tax Debt Resolution Archives

Does Bankruptcy Void Tax Debts?

Bankruptcy allows a debtor to get a fresh start by ‘discharging’ some of their debts including those owed to the IRS. But there are lots of exceptions. Here are some of the general rules for you to discuss with your attorney if this is a path you are considering:

100% penalties (trust funds) assessed on a responsible party for failure to pay the payroll taxes of a business are not dischargeable.
Tax debts due to income tax returns are dischargeable provided that the due date of the return was at least 3 years before the bankruptcy filing date and the return was actually filed at least 2 years ago. Tax fraud negates this rule as does a conviction for tax evasion.
Tax liens filed against property that were filed prior to the bankruptcy petition date remain in place and are enforceable.
The Statute of Limitations is automatically tolled (put on hold) for the period of the bankruptcy estate plus 6 months.
The IRS is not allowed to continue collection processes while the bankruptcy estate is in existence.

There was recent good news for people in the 11^th Circuit of the Court of Appeals which includes Florida. The court held that income tax returns that were filed late are still eligible for discharge provided they were filed at least 2 years ago. The 1^st Circuit in Massachusetts holds a contrary position that any late filed returns are never dischargeable. Too bad for the people in the Northeast.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.

Filing an Offer-in-Compromise? Timing is Critical

The best time to file an Offer-in-Compromise is when you have all your ducks in a row. Failure to get this right usually results in the Offer being rejected and all your work will be for naught.

Here are the steps I follow:

Get the IRS Tax Transcripts showing the dates filed and amounts owed and the date that the Statute of Limitations
Get any past due tax returns filed and current year estimated tax payments up to date. The IRS will automatically reject any offers when the taxpayer is not in compliance.
Gaither all the client information regarding financial assets and their expectations for future earnings.
Prepare the IRS Form 433 which is used to report the financial information to the IRS.
Calculate the Reasonable Collection Potential (also known as RCP) using the IRS
Recommend changes that might make reduce the RCP result. For example, the IRS treats life insurance premiums as an allowable expense. If the client does not have life insurance, then we get them signed up and paying those premiums.
Once the client makes the recommend changes, we must wait long enough so that the new payments will show on three months of bank statements.

Once we have the three months of bank statements, we can finish up the Offer-in-Compromise and include all the documentation that is needed to support our position. Typically, this is close to a 5-month proposition to get an offer completed. Not being in compliance, not including the documentation to support your position, or making the offer for an amount that is less than the RCP formula is a guarantee that the offer will be rejected.

How IRS Levies Work

I represent taxpayers in Gainesville and the state of Florida who have tax issues with the IRS.

The IRS Tax Levy is the method used to actually seize a taxpayer’s assets in order to collect on a tax debt. These levies happen when the taxpayer ignores the IRS about the debt, or there is a breakdown in the negotiations between the two parties. The Levy is the IRS’s hammer and they know how to use it.

The process is straight forward and happens after the IRS has sent various notices trying to collect on the debt. The process itself is as follows:

The IRS issues a Notice of Intent to Levy – you have 30 days to respond and either request a Collection Due Process hearing or negotiate some other deal such as a Payment Plan.
The IRS will next issues a Notice of Levy to any third party who is holding the taxpayer’s assets such as banks, IRA trustees, employers and customers in the case of contractors.
Banks will hold the money in your account at the time of levy for 21 days before sending it to the IRS. This means that it still might be possible to work out a deal and get the levy released before the money is sent to the IRS.
Employers will receive a “Continuing Levy” for wages and commissions which stays in place until it is released by the IRS. This type of levy is designed to hurt and drive the taxpayer back to the bargaining table.

What should you do if you have a received a Notice of Intent to Levy?

The time for inaction is over. You need to contact the IRS and make some sort of arrangement with the IRS or request the Collection Due Process hearing. Hiring an attorney, CPA, or enrolled agent who specialize in these procedures is probably your best plan of action.

Bankruptcy Judge OKs IRS Pension Levy

During bankruptcies, an automatic stay prohibits creditors from taking collection actions while proceedings are ongoing. But a Wisconsin couple recently found that the stay was not an absolute thing. Enter the IRS.

In Pansier v. U.S., 2019 PTC 494 (E.D. Wis. 2019) a district court affirmed a bankruptcy court’s decision to lift the automatic stay. This lift let the IRS levy the debtor’s pension even though the bankruptcy case was still in motion. The reasoning from the bankruptcy court: The pension was exempt from regular creditors and was therefore still available to the IRS outside of the bankruptcy.

Take-away: The IRS has far more collection power than most creditors!

If you or someone you know has received a Notice of Intent to Levy or has some other federal or Florida state tax problem, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.

Yes Dad, IRS CAN Levy Pensions

A common belief is that pensions, IRAs, and 401Ks are safe from all creditors. When it comes to the IRS—don’t kid yourself. The IRS CAN levy pensions. While it can’t force you to liquidate such accounts, it can levy any proceeds from them. Here are three ways to shelter your retirement funds:

Go with a Payment Plan

The easiest (proactive) way to protect your pension, IRA, or 401K when you the IRS is to sign up for an IRS installment agreement so the IRS does not issue the levy in the first place. This is what most people do, and the long-term monthly bite may not be too painful— but it’s not the only option.

Negotiate with the IRS

A more attractive, more complex alternative is to make an Offer-in-Compromise (OIC) to clear your tax debt for less than you owe. Despite what you may have heard, the IRS does not ‘nonchalantly’ clear tax debts for ‘just pennies on the dollar’ but the agency will accept an offer that represents their best bet to collect from you, based on a formula that takes into account your current assets and future earnings potential.

Lump-Sum Out for Fixed Income Retirees

Retired people living on a fixed income typically have little chance of ever paying off their tax debts in full. The IRS is often willing to take a smaller lump sum payment in these cases in order to get the debt off the books.

If you or someone you know has received a Notice of Intent to Levy or has some other federal or Florida state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.

How (Not!) to Make a Gift of your Refund to the IRS

The majority of taxpayers get a refund after filing their 1040. Late filing by these people is not normally a problem since all the penalties are based on the amount of tax due. But, filing too late can be costly.

When you file a 1040 requesting a refund you can think of it as having two different functions.

Function 1 is your report to the IRS to self-assess your total tax liability.
Function 2 is to file an administrative claim for a refund on the overpayment.

If you file your tax return more than 3 years after its original due date, you will lose the right to claim the excess. This is because the claim is only good for tax payments made within the three years prior to the claim itself.

This recently happened to some taxpayers in Wisconsin who filed their 1040 more than three years after the due date and lost their right to claim a $7,000 plus refund. The Golden Rule here is “FILE THE BLOODY RETURN WHEN IT’S DUE”. These things simply do not age well.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.

The IRS Option to Sue You

Generally, the IRS has 10 years to collect from someone. This period starts on the date of assessment and can be tolled (suspended) for a variety of different reasons. Once the Statute runs out, the IRS is barred from doing anything to collect on the debt.

A big part of the strategy to minimize the impact the IRS can have on someone’s life evolves around getting to that statute date. You might be tempted to believe that your almost there at year nine, but you need to be aware that the IRS has a very big weapon in its arsenal. They could sue you in Federal Court and get the debt reduced to a judgement. Judgements usually run 20 additional years from the date of judgment.

When will the IRS head for court? According to the Internal Revenue Manual, the Revenue Officer should consider doing so in cases where:

There is a significant amount of money involved. How much is considered significant is anybody’s guess. My guess is under $100,000 not likely at all, over $500,000 there is probably a good chance.
The taxpayer has some asset that they could get to if they had more time. Examples include IRA accounts, life insurance policies with a large cash surrender value, or maybe a pending inheritance.
The taxpayer’s personal residence has a significant amount of unclaimed equity built up and the IRS wants to force the sales.

Finally, I have heard of cases where the taxpayer did something incredibly stupid such as buying an expensive yacht or luxury vacation in the last years before the statute would have run. This kind of stuff is pretty much guaranteed to tick off the Revenue Officers and result in them suing for judgment.

The IRS and Third-Party Contacts

You get a call from your stockbroker or maybe even a customer that they have been contacted by the IRS requesting information about you. The IRS is supposed to notify you in advance of such contacts, but that notification in the past has been less than clear about their intent. The result is that you are taken by surprise and embarrassed while trying to explain to someone why they were called. That IRS process has now been changed for the better.

The 2019 Taxpayer First Act includes a requirement for the IRS to improve their notice requirements before contacting a 3^rd Party regarding the assessment or collection of taxes. Effective 8/15/19 the IRS will send a clearly stated notice of their intent to contact which will have a definite time that covers no more than one year in the future. They will also send you this notice a minimum of 45 days in advance of the contact.

Why is this good news? With proper notice you will have an opportunity to satisfy the IRS’s request for information without them contacting the other parties. Better that you provide the documents rather than the government demanding it.

You may also request from the IRS a list name for of all 3^rd Parties that they have contacted. This can be a written or oral request made with the auditor.

Dissipated Assets May Maim Your Offer-in-Compromise Application

Dissipated Assets can maim your OIC application.

Let’s say you spent many hours producing an Offer-in-Compromise Application that shows it’s in the Government’s interest to accept your payment offer of 50 percent on each dollar owed. Your tax debt, cut in half. With a smile, you submit it to the IRS. Many months later, the IRS responds with a counteroffer that is $20,000 higher. Why?

IRS Eyes Form 4797 for Dissipated Assets

It turns out that part of the IRS process when evaluating an OIC Application is to look back at your last three years of tax returns, specifically at Schedule D and Form 4797 where you report sales of assets.

There, they found a big sale of stock that netted you $20,000. Now they want that money plus your offer amount.

The moral of the story? Always look back in time — three years of returns worth — before finalizing an Offer-in-Compromise Application. Maybe that stock sale was on the earliest return and waiting a year before you make your offer is possible.

Another strategy is that if you owe the IRS and have a big sale that nets cash, make sure you spend it on “allowable expenses.”. Allowable expenses are housing, food, medical expenses, not vacations and personal loans. Paying down a credit card debt is not an allowable expense unless the underlying charge can be categorized as such.

Foreign Financial Accounts Can Cost You Big Time

I represent taxpayers in Gainesville and the state of Florida who have tax issues with the IRS. Participating in the global economy can easily run you afoul of the Government for the failure to report on Foreign Financial Accounts. The civil penalties for failing to report can cost you 50% of your holdings. Here is the real kicker, you may have to file information on these accounts in two different places – the IRS with Form 8938 and Department of the Treasury with Form 114.

The complexity behind these filings is immense, so here are the bear minimums to alert you if you have a potential problem with this issue. You need to worry about this if:

You are a US Citizen or Resident, or any US business entity to include corporations, limited liability companies, partnerships and trusts.
You have either a financial interest or signature authority of a Foreign Account or Accounts that exceed $10,000 in value at any time over the calendar year.
The exception to the both rules are foreign accounts held by IRA’s, 401Ks, and US mutual funds.

From here, life gets really tough in that you must figure out if you need to file with either the IRS or the Department of the Treasury or both. Very likely – both. There are differences as to the threshold amounts requiring filing and whether a US Territory is considered to be a foreign account. For more information, here is the link to the IRS information on FBAR