Telling Tips is a series of articles from local experts to help you save money, make better decisions and plan for a better future.
When you can’t pay your credit card or car loan, it’s a problem. When you can’t pay the IRS, it’s a BIG problem.
Here’s What You Do First
You should always try to avoid the IRS collection process. The first things you should do are:
- Pay as much as you can with your return as well as with each of the notices that follow.
- Try to borrow from a bank, finance company, friend or family.
- Call the IRS, explain your situation, and as ask for an installment payment plan that you can afford. They will work with you, giving you up to five years to pay, plus non-deductible interest, of course. Always keep the lines of communication open.
- If the amount is way over your capabilities and you cannot pay it off over the next 10-plus years from your employment or other income, consider an ‘Offer in Compromise.’ (See below.)
In our ‘voluntary’ system of taxation, the IRS may use a ‘Levy’ or ‘Lien’ to collect taxes you owe but don’t pay. These are generally used only after a number of letters, calls, and other contacts.
Federal Tax Levy
If you receive a ‘Notice of Levy,’ you are being informed that your various assets are subject to be confiscated to satisfy a tax debt. These assets include your money, wages, bank accounts, Social Security benefits, or retirement income, as well as your car, boat, or real estate. To round things out, you can lose your future federal and state tax refunds.
The IRS must do the following three things before a levy is exercised:
- There must be a collection due process notice.
- There must be a ‘notice of intent to levy’ 30 days prior to the levy.
- There must be a ‘notice and demand’ 10 days prior to the levy.
Federal Tax Lien
If you receive a ‘Notice of Lien,’ it means that the IRS has filed this within the last five business days. The IRS must do the following three things before a lien can be filed:
- A tax liability is assessed.
- You are notified of the deficiency, and the IRS sends you a demand for payment stating the amount owed.
- You do not pay the debt within 10 days of the notification.
The lien notifies other creditors that it has an interest in your assets, and it is used by the courts to prioritize claims. The lien is public record, and remains as public record until the debt is paid off or withdrawn. It can be withdrawn if:
- The IRS did not follow proper procedures, like filing the notice too soon.
- You enter into an installment agreement to pay your debt.
- The IRS feels that the collection of the tax will be made faster without the lien.
- The IRS feels it would be in the best interest of the taxpayer and the government.
A lien does not give the government a priority over other creditors for your assets.
A lien is something you do not want for several reasons:
- Your credit rating is affected immediately
- You may not be able to sell your home
- You may not be able to get financing to buy a home or an automobile
- You may not be able to get credit
What You Can Do
- Assert Innocent Spouse Relief: Proving that the taxes owed was all your spouse’s, not yours. You had no knowledge, and you were not aware, or even suspicious, of your spouse.
- Taxpayer Assistance Order (TAO): If you can show that the collection activities of the IRS will result in ‘significant hardship,’ not general economic or personal inconvenience.
- New Audit: If the assessment is due to an arbitrary assessment of tax because you never received an audit notice, never had the opportunity to substantiate your deductions, or you moved, you can request a new audit.
- Administrative Appeals: This is available after you receive a Notice of Federal tax Lien, a Notice of Intent to Levy, or other collection notices.
- Injunctive relief: You can petition the Tax court or District court after you have exhausted the administrative appeals.
- Installment Agreement: The IRS is fair when granting this relief.
- Offers in Compromise: This is used when it is unlikely that you can pay your tax obligation. The rejection rate is about 75 percent. The three types of ‘offers’ are: ‘Doubt as to Collectability,’ ‘Doubt as to Liability,’ and ‘Effective Tax Administration.’ It is accepted when it reflects reasonable collection potential, or to promote effective tax administration if full payment would create an economic hardship.
The two fundamental rules IRS operates by for offers in compromise are:
- If you have enough assets to pay the taxes, your offer will not get approved.
- If you earn enough money to pay your tax debt over five to 10 years, your offer will be rejected.
8) Bankruptcy: Generally, only federal income tax debts that are more than three years old, and for which a tax return has been filed, are discharged. Even a threat of bankruptcy may be enough to force the IRS to settle on your terms.
My outline is only a summary. There are numerous requirements, time limits and other hoops you have to jump through. Contacting a tax professional who has experience in this area is your best course of action. Paying this person $1,200 to $5,000 or more for the 30-50 hours working for you is not unreasonable.
Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.