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Do not ignore communications from the IRS.
The first thing that must be taken into account when needing help with the IRS is that they usually do not call by phone, or communicate via e-mail, in order to resolve a taxpayer’s tax liability. If this happens to someone, it surely is a scam attempt. The IRS usually communicates in writing with a taxpayer and, depending on the issue in question, needs to receive an answer within certain time limits.
When a taxpayer files a year-end tax return, and ends up owing money to the Government, they may be unable to pay such an amount immediately. This can also occur even if the taxpayer does not file a return, as the IRS receives information from third parties with respect to moneys paid to the taxpayer, which allows them to calculate the tax due and to pursue its collection.
In order to carry out collection, the IRS’ computer system automatically issues communications, most of which contain the letters CP (abbreviation for Computer Paragraph) and certain numbering.
IRS Help: check your mail
A letter CP14, for example, is a notification issued after the return has been filed and no payment is made. If the taxpayer does not respond to this payment request, they will receive another letter numbered CP501 as a reminder. In the absence of a response, a letter CP503 follows, where the text is somewhat more demanding, and if the taxpayer’s “silence” persists, they will receive is a letter CP504 where the term “levy” appears.
The frequency with which the IRS system issues these requirements ranges around 5 weeks, so by the time the taxpayer has received a CP504, it is easy to assume that a few months have gone by before the IRS started to use less friendly language.
If despite these recurrent printed cyber requirements, the IRS remains without news from the taxpayer, other notifications begin to appear where the numbering read is 1058 or LT11 – they include the phrase Final Notice of Intent to Levy– and lay down a 30-day term to receive a response. Similarly, the taxpayer may receive a letter numbered 3172, accompanied by a Form 668 (and) (c), as a notification that the Government has filed a Lien against the taxpayer’s present -and future- property, which is also conveyed to the taxpayer’s credit report. It is also possible for the taxpayer to receive a Notice of Deficiency, which establishes a deadline to respond within 90 days.
IRS Letter: knowing the facts
It is very important to understand that when the situation has reached this level of apparent aggressiveness from the IRS, the circumstances have been caused by the taxpayer’s lack of response. If the tax liability is $10,000 or less, it would be sufficient to call one of the telephone numbers listed on the several communications mentioned in this article, where it could be verified that: 1) the IRS’ staff is not as aggressive as the texts of the most recent letters and 2) they can offer the taxpayer a relatively simple solution to catch up with their obligations like a possible installment agreement.
If the liability exceeds $10,000, or if the problem has accrued over the course of several years, the solution -resolution, rather- may entail a bit more of complexity. However, tax laws and regulations provide tools to taxpayers -and to specialized professionals who bear a deep knowledge of them-, to find a solution to a situation that may seem not to have one. These professionals may be CPAs, attorneys and EAs. The latter, Enrolled Agents, have no restrictions as to taxpayers who they can represent or the types of tax matters that they can handle. While the first two are professionals with State constituency, the latter hold a federal credential, which can mean the difference between night and day!
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IRS Tax Liens and Tax Levies: what’s the difference?
In order to force a taxpayer to pay their tax liability, the IRS has certain mechanisms to achieve such a purpose.
What is a Tax Lien:
A Tax lien does nothing but to protect the Government’s interests. This is not a situation where the Government confiscates or takes something from the taxpayer, but it simply files the lien at the local office so that the taxpayer is unable to dispose of their property. According to law, the lien exists when the liability is assessed, even if no notification has been sent out to the local office where the lien has to be filed. Familiarly this situation is referred to as the invisible lien, since it has not been officially filed, but given that the assessment of the tax liability is a fact, so is the lien.
The lien applies to all property currently owned by the taxpayer, as well as any property the taxpayer may acquire in the future. Liens can be released, discharged, subordinated, or withdrawn.
- When a lien is released, it’s because the tax liability has been paid. However, it may remain in the taxpayer’s credit report and cause damage to it, even though it has already been released.
- Discharging a lien occurs when part of a taxpayer’s property may be liquidated, in order to satisfy a tax liability. The IRS then discharges the lien on such part of the property, in order to get a partial payment.
- A subordination represents a waiver on the collection priority in the event of an asset liquidation. For example, if there’s equity on a property through which a loan can be applied for, either through a bank or a third party, for the purpose of paying the IRS, the latter can take a secondary position as a creditor for the purpose of collecting from the loan product.
- A withdrawal of the lien is requested so that lien is actually removed from the taxpayer’s credit report.
Liens are not considered by the Government as collection activity. Again, they are only protecting their interests.
The Notice of Lien is communicated by means of a letter 3172, which is issued 5 days after the lien has been filed and attaches a Form 668 (and) (c), which contains a detail of the lien, the tax type that causes it, the tax periods which it corresponds to, as well as the amount of tax liability tied to the lien in question.
What is a Tax Levy:
A Tax Levy on the other hand, have an immediate impact on the taxpayer. In the case of a levy, the Government actually takes possession of certain taxpayer’s assets. These assets may be bank accounts, wages, compensation, or even property, in which case also referred to as a seizure.
The levy of wages, bank or investment accounts, generally occurs when the IRS sends a notification to either an employer, a Bank, or an investment company. When it’s about wages, depending on the taxpayer’s filing status, there are charts indicating the amount that should be withheld from the taxpayer’s wages and sent to the IRS.
When it comes to wages, it is referred to as a continuous levy, whereas when it comes to other types of accounts it is referred to as a singular occurrence. When the latter takes place, it is valid for all amounts deposited in the account on the day the financial institution receives the notification from the IRS. Thus, if on the next day, an additional amount is deposited, such an amount is not subject to levy.
Another peculiarity is that, when a levy is set over a financial account, the financial institution holds the seized amount in their possession for 21 days and, if the taxpayer has not made any payment arrangement, then the financial institution is required to send that money to the IRS. Of course that the levy has a limit on the amount the tax liability, that is, if the value of the account is higher, a lower amount would be withheld. On certain occasions, the Bank may freeze even the amounts that are deposited after having received the Notice of Levy, in which case the taxpayer’s account freezes. However, this is not a Government’s provision, but the Bank’s policy.
Contrary to a lien, where the notice comes after the fact, a levy is a fact that takes place after the corresponding notice (a letter 1058 or a LT11).
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Tax Obligations Payment Options.
According to official figures, there are currently about 15 million open collection cases with the IRS. The amounts of each one of these tax debts vary within a wide range.
Regardless of the above, the vast majority of taxpayers who owe the Government do not have the financial capacity to immediately meet their tax obligations. The law offers some options to consider, which depend on the particular financial situation of each taxpayer.
These options are grouped into three categories: 1) Currently Non Collectable status, 2) Installment Agreements, and, 3) Offers in Compromise.
The Currently Non Collectable, CNC, status occurs when the taxpayer is unable to make any payment at the moment. The description of this status is contained in Chapter 5 of the Internal Revenue Manual, IRM, on section 5.16.1, and its availability depends on the taxpayer’s income, compared to their basic living expenses.
Currently Non Collectable, CNC:
When the IRS places a taxpayer in this status, it also suspends any enforced collection actions. Normally, when suspending any action collection by the IRS, the expiration of the statutory collection period is also suspended, i.e. the Collection Statutory Expiration Date, CSED, is postponed while collection actions are detained. Normally this date expires 10 years after the tax liability assessment.
Now, those 10 years may not be continuous, since there are events that may temporarily suspend this 10-year period, such as a request for bankruptcy, an Offer in Compromise, OIC, or a Collection Due Process, CDP.
Regardless, on the CNC status, the Statutory Collection Period is not suspended, but it rather continues. This is a great advantage for CNC, because just as the forcible collection procedures are suspended, the IRS is unable to levy salaries or to freeze bank accounts.
However, a disadvantage is the fact that while the CNC status is in place, interest and penalties continue to accrue. And since the CNC status, may be reviewed by the tax authority every two years, to the extent that the taxpayer’s financial situation may change, the IRS may decide to remove the CNC status and resume collection actions.
Installment Agreement: anything is possible
Alternatively, a taxpayer who does not have the immediate ability to meet all of its obligations, may propose an Installment agreement, IA, to the Government. In general terms, this may be a Statutory Agreement, which applies to obligations of $10,000 or less (aside from penalties and interest) with a maximum payment term of 3 years. For higher amounts of tax debt, terms may be extended up to 72 months, or 84 months in more extreme cases. In addition, depending on the taxpayer’s financial situation, it is possible for the IRS to grant a Partial Payment Installment Agreement, PPIA, on which the tax obligation may not be paid in full. In the latter case, the law grants the IRS the ability to revise the amount of payments every two years, on the basis that the taxpayer’s financial situation may change. It is important to note that the IA is the most frequently repeated mechanism on tax resolution cases.
Offers in Compromise are contracts with the IRS, by means of which a tax debt is “negotiated” for a lower amount than what is actually owed. There are two modalities: 1) Cash (or Lump Sum) Offer, where the payment term is 5 months, after the taxpayer has put a down payment of 20% of the proposed amount, and 2) Short Term Deferred Payment Offer, where there is no 20% down payment, but the offered amount must be completely paid over the course of the next 24 months. It is important to note that this mechanism is not available for any taxpayer, but there are very precise qualification requirements.
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Tax Penalties and Interests. Can they be disputed?
The Internal Revenue Manual, IRM, contains the provisions relating to Penalties and Interest on its part #20, while Chapter 1 refers specifically to the first one, i.e. Penalties.
In the 50s there were no more than 15 provisions related to tax penalties, while nowadays there are more than 150 on the Internal Revenue Code, IRC.
Each year new penalties are introduced, whose purpose is, of course, forcing taxpayers to comply with tax laws and regulations. Non-compliance results in significantly increased tax obligations.
Penalties apply to the various types of taxes and situations, as there are Estimated Tax Penalties, Collection Related Penalties, Accuracy Related Penalties, among others.
Civil Penalties
There are also Civil Penalties, due to failure to file informational returns: W-2, 1099, 5471, 5472, etc., as well as Criminal Penalties, which can even lead to prison (when they are fraud related).
Penalty abatement, in the first place, may be requested on the basis of Reasonable Cause. This request can be made through the use of Form 843, or through a letter explaining the details describing the Reasonable Cause. Nowadays there even is a telephone line exclusively dedicated to this purpose.
In the vast majority of cases, it’s about the taxpayer’s circumstances. Chapter 20 the IRM contains a description of what may be considered as reasonable cause, and the strategy to the abatement request passes through fitting the taxpayer’s circumstances to those probable reasonable causes.
It must be proven that the taxpayer acted in good faith and that they did what any prudent person would have done under similar circumstances. It should also be noted the extent to where efforts were escalated to pay the tax, and strongly elaborate with respect to the time elapsed between the event’s occurrence and the efforts to resolve it.
If the argument made in order to demonstrate that there was Reasonable Cause for incurring a penalty does not provide the desired result, i.e. eliminate the penalty, First Time Abatement, FTA, may be the option.
First Time Abatement is available only for the following three types of penalties:
- Failure to File Penalty, FTF, which is assessed due to a failure to file a return by the due date (including extensions). It is equivalent to 5% of the tax owed for each month or fraction, and builds up to a limit of 25%.
- Failure to Pay Penalty, FTP. This penalty is assessed when the tax amount (or a fraction of it) is not paid by the due date of the return. It’s equivalent to 0.5% of the tax owed, per month, and accrues at a rate of 0.5% for each month (or fraction) of delay, up to the legal maximum of 25%. It should be noted that when there is a request for an extension, this is an extension of the time to file a return. It’s not an extension of the time to pay the tax.
- The Failure to Deposit Penalty, FTD, refers to employment taxes (Social Security, Medicare and Federal tax withheld) not paid either in the correct amount or in the correct way. If the delay is from 1 to 5 days, the applicable penalty is equivalent to 2% of the unpaid amount, while, if the delay is from 6 to 15 days, this rises to 5% of the unpaid amount. If it has been more than 15 days, the penalty reaches 10% of the unpaid amount.
It is important to note that a taxpayer’s delay to pay the tax generates interest, but also does the delay to pay a penalty. If a penalty is removed, the IRS also removes the interest corresponding to such penalty.
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Innocent Spouse vs. Injured Spouse.
In the area of Innocent spouse, there are actually three separate subcategories. The first requirement, obviously, is to have a joint return, where a significant tax liability is caused by only one of the spouses and, because the liability under this tax filing status is joint and indivisible, the intention is to ease the burden for the other spouse.
Innocent Spouse Relief.
The first subcategory is really the so-called Innocent Spouse Relief. It occurs when there is a tax understatement, the couple is still together, and the understatement is due to an incorrect item of the other spouse.
Understatement normally occurs whenever income has been earned, but it has not been reported in its entirety. It can also occur, when there are overestimated or inflated expenses, where the final effect is to reduce taxable income, and therefore the corresponding tax.
In this case, it must be proven that the spouse for whom relief is sought was unaware of the wrong item, and that they did not derive any benefit from the error, so it would be unfair to attribute liability to that spouse.
There may be situations where the spouse is unaware of the other spouse’s tax circumstances. It can also happen that there is knowledge about the other spouse’s tax circumstances, but there is a domestic abuse situation.
Under these circumstances, there may be knowledge by the innocent spouse with regards to the tax understatement, but they were forced to sign the return under pressure, knowing that such return may be intentionally wrong. It is possible for the IRS to determine that such return, so signed, is invalid and require the innocent spouse to submit another return.
Separation of Tax Liability
The second subcategory refers to Separation of Tax Liability. This occurs when there is a tax understatement, and the couple is separated. It is well known, that a separate return may be amended, to make a joint return. What cannot be done is the reverse, i.e., from a joint return, amend it to make it a separate return. Under Separation of Liability circumstances, that is precisely what the IRS is doing.
Separation of Liability, applies only to unpaid amounts, since the IRS will not refund any amounts already paid. The spouses must be either divorced already, legally separated, or living apart for at least 12 months for them to be considered within this subcategory.
The first two subcategories involve tax understatement, while the third one considers a reduced tax payment, and this has to do with Equitable relief.
This subcategory applies when there is a payment which is lower than the tax or an understatement of said tax. Both the reduced payment and understatement coincide in this case.
Injured Spouse
An Injured Spouse situation occurs when two taxpayers, who have different patterns of tax conduct, decide to get married and file a joint return going forward. While one of them would regularly file their returns and make payments, the other one incurred in delays both on filing and paying. At the time of filing their first joint return, it’s possible that the IRS withheld a refund to cover a prior obligation corresponding only to the spouse with irregular tax behavior.
Under these situations is when, by filing of the appropriate Form, a request is made to allocate only their part of the tax liability to the Injured Spouse, and if there was a refund, that this person receives whatever corresponds to them in justice.
