The following FAQs are questions commonly asked by taxpayers with tax resolution problems.
Q: What rights do I have as a taxpayer?
As a taxpayer, you have the right to be treated fairly, the right to privacy and confidentiality, the right to professional and courteous service, the right to be represented by someone when dealing with the IRS, and the right to disagree with your tax bill, the right to meet with an IRS manager if you disagree with the IRS employee who handles your tax case, the right to appeals and judicial reviews of most IRS collection actions, the right to transfer your case to a different IRS office, and the right to receive a receipt for any payment you make.
Q: What do you do if you have received a notice (CP-504) from the IRS?
If you have received this notice, it means you have ignored previous notices. The IRS intends to levy on certain assets. If you owe for more than one tax period, you will receive one of these notices for each year. This is one of the statutory notices. You may receive this notice even if you have decided to make installment payments or you have been placed in a "hardship" status. If this is the case, call the number on the notice immediately and advise them. Be sure to write down the name and badge number of the person you speak to as well as the date and time of the call. CP-523 (Notice of Intent to Levy) means that you have defaulted on your installment agreement. This can occur because you failed to make a scheduled payment, filed your most recent tax return late, filed a return and did not pay the balance due or failed to make estimated tax payments as required. If you owe for more than one tax period, you will receive one of these notices for each year.
Q: I filed my tax return late and was shocked when I saw my tax bill. How does the IRS compute penalties?
If you do not file your taxes and pay on time, the IRS will charge you a combined penalty. The monthly penalty is 5.0% for filing late and 0.5% for paying late. The combined penalty, therefore, is 5.5% of your unpaid tax for each month or part of a month your return is late, but not for more than five months, totaling 27.5% (25.0% late filing and 2.5% late paying). In addition to the 27.5% late filing/filing penalty, the IRS will continue to charge the 0.5% late paying penalty for each month or part of a month as long as the tax is unpaid, but not to exceed 25%. Therefore, the maximum penalty the IRS will charge for late filing and paying is 52.5% (27.5% late filing and additional 25% late paying). If you did not file your return within 60 days of the due date, the minimum penalty is $210 or 100% of the balance of the tax due on the return, whichever is smaller. If you do not pay your taxes when they are due, the IRS will charge you a failure-to-pay penalty. Initially, the penalty is 0.5% of the unpaid tax for each month or part of a month you didn’t pay your tax. If you file your return on time, this penalty will be reduced to 0.25% for any month in which you have an Installment Agreement in effect with the IRS. If the IRS issues you a Notice of Intent to Levy and you do not pay the balance due within 10 days from the date of the Notice, the penalty will increase to 1.0% a month. But, again, the late paying penalty cannot be more than 25% of the tax paid late. If you think the IRS should remove or reduce the above penalties, consider requesting from the IRS an abatement of penalties.
Q: What should a business owner who owes delinquent payroll taxes?
The first step is to stay current from this point forward. The IRS will close your business immediately rather than let you fall further behind. If you are still in business, the IRS officer’s actions will depend on:
Whether you pay your current taxes; or
Your prospects of paying the tax in arrears; or
The difficulty and time involved in liquidating your business; or
The money the IRS would get from a liquidation.
That’s why a heavily encumbered business can more confidently deal with the IRS than can a business with a large equity exposed to the IRS. As a business owner, you have the same rights as an individual taxpayer to negotiate an Installment Agreement. Twelve-month agreements are routine, and longer installment plans are possible. Finally, you can submit an Offer in Compromise (Offer) to settle the back taxes. A business Offer is less common than a personal Offer, but when your business has fewer assets than tax liabilities, it can be a viable alternative.
Q: Can the IRS go after me personally if my company owes payroll taxes?
Yes. To encourage the prompt payment of withheld income and employment taxes, Congress passed a law that provides for what is called the Trust Fund Recovery Penalty. The IRS may assess this penalty against anymore who is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and who willfully fails to collect or pay them. For willfulness to exist, the responsible person must have known about the unpaid taxes and have used the funds to keep the business going or allowed available funds to be paid to other creditors. This penalty may be applied whether or not the business is out of business. Once this penalty is assessed against the individual responsible person or persons, the IRS will proceed with collection efforts against the individual.
Q: Can I settle state taxes as I do federal taxes?
Possibly. Taxpayers commonly owe both IRS and state taxes and do negotiate simultaneous settlements. Most states have tax compromise programs similar to the IRS program. Other states compromise with delinquent taxpayers as a matter of practice if not official policy. You should prorate the offers to the IRS and the state, paying each their proportionate share. Parity is important. Payment dates and other terms of the offer should also coincide, as should your financial disclosures. Finally, make certain each agency knows you owe the other and that settlement with each is conditional upon settlement with both.
Q: What is the most common reason for the large tax liabilities that force taxpayers to file Offers in Compromise?
Large tax liabilities are generally caused by unpaid withholding taxes. Owners and other responsible parties within a business are personally assessed the unpaid trust portion, or taxes actually deducted from the employees. This is called the 100 percent penalty assessment under the Trust Fund Recovery Penalty. If business owners cannot pay the full withholding tax, they should at least pay the trust portion-that amount withheld from employees-and designate that the payment be applied only to the trust portion liability. The business will owe its share of the payroll taxes due, but its officers and other responsible parties will have no personal liability. Other common reasons for filing an Offer include extensive audits, not filing for a number of years or tax shelter investments that are disallowed.
Q: Can penalties and interest be compromised under an Offer?
Yes. Penalties and interest can both be compromised in the same way as the underlying tax liability. In fact, in submitting an offer, you must include all owed taxes, plus penalties and interest, for the offer to be considered. However, if penalties are your major concern, then consider an abatement, particularly if you have reasonable grounds for the IRS to waive the penalty. The abatement process is far simpler than an Offer, and it is your proper remedy when you can pay the tax, but believe you have justification for being excused from the penalties.
Q: How long does it take for an Offer in Compromise to be approved by the IRS?
Generally, you must allow 6-12 months. Sometimes as long as 18-20 months. If your case gets rejected and the IRS takes it to Appeals, it will take longer.
Q: Will an Offer show up on my Credit Report?
No. Unlike a bankruptcy or credit card charge off, an Offer does not get reported to the credit reporting agencies. An offer in compromise will not negatively affect your credit score. However, ignoring the problem will cause the IRS to file a notice of Federal Tax Lien, with your county recorder, which may show up on your credit report.
Q: How difficult is it to get the IRS to classify me as “temporarily uncollectible?”
The IRS must determine that you have no assets worth chasing and your present and foreseeable income does not exceed what you need to sustain a basic lifestyle. If the IRS decides, however, that you have even $50 in surplus income each month, it will expect that $50 to be applied to your tax liability. There are many more “temporarily uncollectible” determinations made each year than there are approved Offer’s. Keep in mind that “uncollectible” is only temporary. The IRS can always resume collection.
Q: Can property and wages of a spouse without a tax liability be factored in by the IRS to determine the “ability to pay” of the tax-liable spouse in an Offer?
Yes. Although the IRS cannot legally claim a non-liable spouse’s assets or income, the IRS, when negotiating settlements, nevertheless considers spousal assets and will make every effort to have you borrow from your spouse so you can increase the offer. Most spouses cooperate, whether from misunderstanding their rights of hoping their cooperation will facilitate settlement with the IRS.
Q: Are offers in compromise open to public inspection?
Yes, accepted Offers are public record for one year. And you can inspect Offers that have been approved in your district within the past year for an idea of what the IRS may accept in your case.
Q: What taxes are dischargeable in bankruptcy?
Only personal income taxes are dischargeable in bankruptcy. Payroll and federal excise taxes are not dischargeable. To be dischargeable, personal income taxes must be:
More than 3 years old. This is based on the due date of the return, including extensions; and
If the returns were filed late, they must have been filed for at least 2 years; and
The taxes must be assessed for more than 240 days-typically the result of an audit.
The assessment date is the date the return is due or filed, whichever is later. If you have not filed a return, the taxes are not dischargeable even though the IRS may have assessed tax based on a "substitute for return" which is a return they filed for you based on W-2 and 1099 data.
Q: What property can the IRS get after bankruptcy?
Generally, any property you have that is either exempt property during the bankruptcy or property abandoned by the trustee will be available to the IRS, if they filed a notice of federal tax lien “prior” to the filing of bankruptcy. A notice of federal tax lien puts the IRS in a position of a secured creditor, so although your home will be safe during bankruptcy, afterward it will be vulnerable to IRS seizure. If, you have little to no equity, this will not be a problem. However, if you do have equity in your home, bankruptcy may only forestall the inevitable.
Q: Can you file an Offer if your bankruptcy does not discharge your taxes?
Yes. Bankruptcy does not always discharge your taxes. Payroll taxes and income taxes not meeting certain rules (see above Q & A) are not dischargeable in bankruptcy. You can file an Offer to compromise these or any other taxes not dischargeable in bankruptcy. Taxpayers emerging from bankruptcy with undischarged taxes can also try to be classified “temporarily uncollectible” because the bankruptcy should convince the IRS that the taxpayer presently has no assets. The time you were in bankruptcy plus six months is added to the IRS statute of limitations to collect from you.
Q: What types of payment plans can you offer the IRS in a Chapter 13 bankruptcy?
There are four possible plans that usually extend payments over three to five years, including the following:
A standard or uniform installment plan that calls for constant payments over the term of the plan; or
A step-up plan that increases your payments as your income increases; or
A variable or seasonal plan that allows your payments to vary to coincide with cash flow or cyclical income; or
A balloon plan that obligates you to pay any remaining tax balance with your final payment and may be used with any of the others plans.
Q: What should I do if I discover an error in the supporting information I provided the IRS as part of my Offer?
For material errors, amend your incorrect information on the proper form (Form 433-A or 433-B) or explain the error in a letter to the IRS. Always put it in writing. Ignore small, immaterial inaccuracies. Notifying the IRS will needlessly delay the process and prompt the IRS to reconsider your application. If you are uncertain whether the error is significant, then correct the information.
Q: What can do if a tax lien was erroneously filed against you?
You may appeal an erroneous tax lien by filing an administrative appeal with the IRS Office of Appeals by a Collection Appeal (CAP), although you cannot use this administrative appeal to decide the underlying tax liability. Erroneous tax liens commonly occur when:
A tax lien was filed after the tax liability was paid, or the taxpayer was in bankruptcy, or
An examination assessment was improperly made; or
The statute of limitations for IRS collections has expired
Q: Can the IRS seize or levy a taxpayer’s property without advance notice?
Yes, but it unusual. For it to occur, the IRS must believe it would be in jeopardy if it did not act quickly and without notice. Jeopardy assessment taxpayers automatically have the right to IRS administrative review and if necessary, judicial appeal. However, the lien or levy will remain in force pending its income. A jeopardy assessment would occur, for instance, if the IRS suspects you of transferring assets or of planning to take your money out of the country.
Q: What property is exempt from IRS seizure?
By law, some property cannot be levied or seized. The IRS may not seize taxpayer property when the expense of selling the property would be more than the tax debt. Also, the IRS may not seize or levy property on the day a taxpayer is attending a collection interview because of a summons. The IRS also may not levy school books and certain clothing; fuel, provisions, furniture, and personal effects for a household, under a certain value; books and tools a taxpayer uses in his or her trade, business, or profession, under a certain value; unemployment benefits; undelivered mail; certain annuity and pension benefits; certain service connected disability payments; worker’s compensation; salary, wages, or income included in a judgment for court-ordered child support payments; certain public assistance payments; and a minimum weekly exemption for wages, salary and other income.
Q: When will the IRS release a levy?
The IRS will release a levy in the following circumstances:
When the tax, penalties, and interest are fully paid in full; or
When the statute of limitations has expired; or
When you reach an installment agreement; or
A filed Offer is in place with the IRS; or
When the release will facilitate collection; or
When the levy is causing extreme hardship; or
When the taxpayer has other assets to satisfy the tax
Q: How do I know if I am legally obliged to give information to the IRS?
The Privacy Act of 1974 and Paperwork Reduction Act of 1995 require that the IRS tell you when you are asked a question whether your response is voluntary, required to obtain a benefit, or mandatory. As a strictly legal matter, you can always refuse to answer IRS questions or refuse to turn over documents unless court ordered. Under these laws, the IRS must also tell you: why it wants the information, its legal authority in asking for it, or what could happen if the IRS does not receive it. Of course, without full disclosure of information and an attitude of complete cooperation, you have virtually no chance of having your Offer accepted. However, if you believe the IRS is asking improper questions, then decline to answer until you seek professional advice.
Q: Can politicians influence the IRS?
Many politicians intercede on behalf of their taxpayer constituents, particularly when they believe their constituents have been unfairly treated by the IRS. Contact your congressman only after you have tried and failed to get satisfaction through normal IRS channels. Your congressman will need your complete file, a letter stating your grievance and how you tried to resolve it, and the results you want. Your congressman will also need a signed Power of Attorney (Form 2848) or Tax Information Authorization and Declaration of Representative (Form 2848D), both available at your local IRS office.
Q: What is the difference between a revenue officer and a special agent?
A revenue officer is a regular IRS employee responsible principally for collection activities for the IRS through standard procedures. A special agent investigates possible criminal violations of the IRS code. If you are contacted by a special agent (who must disclose his or her status), then immediately terminate the interview and hire a lawyer.
Q: What will happen if I fail to file a delinquent tax return after repeated demands to do so by the IRS?
One possibility is that you will receive a federal summons compelling you to bring either the completed tax return or your books and record to the IRS office. This summons is backed by the power of the federal courts, which can hold you in contempt if you fail to do so. The IRS can prepare your delinquent tax return for you called a Substitute For a Return (SRF). This is guaranteed to result in a much greater tax than had you prepared your own return. It also makes the taxes at issue non-dischargeable for bankruptcy purposes.
Q: What if my tax return is due but I don’t have the money to pay the tax?
Submit your tax return by the date due (or extension date), even if you can’t pay the tax. You will be charged interest and penalty on your late payment but avoid a hefty late-filing penalty. Whether or not you expect to eventually pay the tax, do file on time. It is also important to file one time because the IRS has only 10 years from the date of assessment to collect your delinquent taxes, and taxes are not assessed until after you file or after the IRS files for you. If you have not filed a tax return, you have not started the statute of limitations for that particular tax year. This means that there is no limit to the amount of time that the IRS can pursue you. In addition, if you have any delinquent tax returns, the IRS will not negotiate with you. You must be current with your filing for the IRS to consider an Offer or even an Installment Agreement.
Q: Does the IRS share tax information with state taxing agencies?
Yes. In fact, this is standard practice, but it must follow strict guidelines. The IRS may also share information with the Department of Justice, other federal agencies and even certain foreign jurisdictions.
Q: Is conversation with my accountant privileged?
No. The IRS, the courts and others can compel your accountant to testify about your conversations and turn over letters and other correspondence between you. A solution is to have your attorney hire your accountant to handle your tax matters. Your accountant, working for your lawyer, would then come under the attorney-client privilege. Since confidential documents with your accountant can be subpoenaed, you should have these copies and all copies immediately returned to you. Only communication with your lawyer is privileged and protected. That’s one advantage to having a lawyer represent you rather than an accountant.
Q: What is meant by an “innocent spouse”?
When you and your spouse file a joint tax return, both you and your spouse are “jointly and severally” liable for any taxes due. Many married taxpayers do this because of certain benefits this filing status allows. If you did so, you may be held responsible for monies due, even if your spouse earned all of the income. And this is true even if a divorce decree states that your spouse will be responsible for any amounts due on previously filed joint returns. However, if you qualify for Innocent Spouse Relief, you may not have to pay the tax, interest, and penalties related to your spouse (or former spouse). For example, if it is later shown that one spouse had unreported income, the other spouse may try to escape civil and/or criminal liability for the tax on that unreported income under the “innocent spouse” rule. To claim this protection, the innocent spouse must neither have known about the understated income (or other tax) nor could have reasonably known about it. The “innocent” souse not only avoids tax liability but also provides a safe harbor for the family assets.
Q: When a bank account is levied by the IRS, when must the bank turn over the money to the IRS?
Since June 30, 1989, banks have 21 days from date of levy to turn over funds to the IRS. This gives the taxpayer time to resolve the tax problem or settle disputes concerning ownership funds in these accounts. The “21-day rule” applies only to banks. Other parties holding your funds must turn them over within the time provided for in the levy. Accounts receivable are paid to the IRS in accordance with their original credit terms.
Q: Will I get a warning before the IRS seizes my property?
Yes. The IRS will usually levy (seize) only after the following three requirements are met: The IRS assessed the tax and sent you a Notice and Demand for Payment, and you neglected or refused to pay the tax, and the IRS sent you a Final Notice of Intent to Levy and a Notice of Right to Hearing (levy notice) at least 30 days before the levy.
Q: Can the IRS seize and sell my home or car? What about my bank accounts? What about social security?
Yes. Through a levy, the IRS can seize and sell property such as your home or car. They could also seize your bank accounts and social security. Other items the IRS could seize include wages, retirement accounts, dividends, licenses, rental income, accounts receivable, the cash value of your life insurance, or commissions-pretty much anything of value.
Q: What is an “Automated Collection System”?
Several years ago, the IRS set up an automated collection system (ACS) to improve efficiency. This systematized process helps IRS collectors contact delinquent taxpayers by mail and phone. It has increased IRS productivity.
Q: Will I receive a refund if I currently owe federal taxes if I have an Offer?
No. You may not get all of your refund if you owe certain past-due amounts, such as federal tax, state tax, a student loan, or child support. Typically, you will not get taxes refunded in the year the Offer is accepted and finalized. The IRS will automatically apply the refund to the taxes owed.
Q: How can taxpayers claim a tax refund?
Taxpayers who believe they overpaid their taxes may file a claim for refund directly with the IRS. If the claim is denied, the taxpayer can file a lawsuit for the refund in either the U.S. Court of Claims or Federal District Court.
Q: Can a taxpayer demand to see his or her tax files?
Yes. In most instances, the IRS will show you your own file. If it refuses, the taxpayer can demand access to his or her files under the Freedom of Information Act.
Q: How does the IRS keep track of each taxpayer?
The IRS maintains a taxpayer account for each taxpayer. This IRS computer record contains your tax history, tax assessments, penalties, interest and credits for payment. To help manage the system, the IRS also issues to each taxpayer a taxpayer identification number (TIN). This is usually the taxpayer’s social security number, but for corporations and trusts, it is a separate 13-digit number.
Q: How does the IRS determine the “minimum bid price,” or what the IRS will sell the seized property for at a public auction or private bid?
The IRS starts with an estimated fair market value. This is then reduced by 25 percent. The minimum bid price is 80 percent of that amount. Of course, the IRS must pay all prior encumbrances and expenses of the sale from the sale proceeds received. Taxpayers can object to the minimum price bid on their property and request the IRS obtain a new professional appraisal.
Q: What can the IRS do if I fraudulently transfer my assets?
The IRS may do any of the following:
Sue you in Federal District Court to set aside the transfer; or
Sue the transferee for the value of the transferred property; or
File an administrative claim against the transferee for the value of the transferred asset
Q: What can a business owner do to protect business assets from IRS seizure?
The business, to the extent practical, should be divided into separate corporations so if one corporation has a tax problem, the IRS has no recourse to the remaining corporations. The business should also be heavily mortgaged or encumbered, leaving little or no equity for the IRS to seize.
Q: Do incorporated businesses commonly file Offers?
Few businesses file Offers. Most Offers are filed by individuals. Businesses with severe tax troubles usually also owe other creditors and file Chapter 11, so they can compromise all their liabilities under one comprehensive reorganization plan.
Q: How does the IRS value property held between husband and wife as tenants by the entirety?
This type of tenancy presents complex legal problems to the IRS, so it evaluates the interest of each spouse to be less than half the total value of the property. Twenty percent of the total value is generally considered each spouse’s net worth in the property. Property held as tenants in common or joint tenancy are fully valued based upon the taxpayer’s percentage of interest.
Q: How does the IRS compute the value of a taxpayer’s ownership in a family business?
It is always difficult to appraise a small business. However, the IRS will attempt to value it as a “going concern” rather than as assets to liquidate. If the IRS and the taxpayer cannot agree on this value, the IRS and taxpayer each can have the business professionally appraised.
Q: Can a taxpayer compromise some taxes and not others?
No. The offer In Compromise must include all owed taxes, plus penalties and interest
Q: Will the IRS accept an Offer from a taxpayer with a recent criminal record?
That depends on the crime, its notoriety, the taxpayer’s reputation in the community and the taxpayer’s compliance with the tax laws before and since the crime. If the IRS suspects that the crimes are ongoing, it will obviously deny the Offer for public policy reasons.
Q: How does the IRS determine whether a “Collateral Agreement” to share in the taxpayer’s future income is needed as a part of the Offer?
The IRS considers the taxpayer’s age, earning capacity, education, health, profession and experience. Taxpayers should underplay these factors when presenting an Offer. However, these Collateral Agreements are rarely requested by the IRS as newer provisions in the Internal Revenue Manual seem to discourage collateral agreements.
Q: What is the statute of limitation on IRS collections?
The IRS only has 10 years from the date of assessment to collect your delinquent taxes. Once the statute of limitations expires, your liability expires. However, this 10-year statute of limitations for collection can be extended for the following reasons:
By waiver, or
Filing an Offer; or
Application for taxpayer assistance order with the IRS Taxpayer Advocate’s Office; or
Collection due process hearing request; or
Absence from the country; or
An IRS lawsuit to enforce collections.
Q: When can a taxpayer sue the IRS for damages, and what can a taxpayer receive in damages?
It’s difficult, but not impossible, to sue the IRS. The taxpayer must show the IRS action to have been frivolous, malicious, or wantonly groundless. This means something more than that the IRS “guessed wrong” in determining the correct action.
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