What are some key facts I should know?
- 240 million returns are filed annually.
- 1% or 240 thousand returns are audited or reviewed annually.
- 2008 (filed April of 2009) saw a 4.5% drop in the number of returns filed. Recessionary economics are blamed largely, as well as changes in tax law.
- Generally, the number of tax returns filed are expected to increase by 1.1% annually.
- 83% of all people file returns and pay their taxes timely each year.
- The goal of an audit is to scare people into compliance – everyone should know someone personally that can attest to the unpleasant nature of an audit.
- Audits are geared to those returns that have the highest likelihood of sustaining change via IRS decision – mostly, those returns with itemized Schedule C.
What types of audits are there?
The IRS has 3 years to audit a return from the time that it is filed. If a return is not filed, there is no timeline to assess a debt on the taxable year. If a taxpayer is found to have omitted 25% or more of his or her income, the timeline for completing an audit goes up to 6 years in favor of the IRS. Three types of audits exist:
- Correspondence audit: written letters from the IRS to address a minor error, such as a math mistake or omission of an auto-generated form like a 1099.
- Office audit: an audit that takes place in the offices of the IRS. This is a more investigative process, whereby the IRS can interfere with an individual’s life by contacting third parties. For example, a doctor’s record may indicate that a particular patient paid $600. The IRS may call that patient to verify the amounts paid. Bank records and expense receipts can be requested – and any omission or loss of records will likely work against the taxpayer.
- Field audit: an audit that takes place at the business location of the taxpayer. Typically considered least desired as this audit may disrupt daily operations. The same liberties described above are available to the IRS as an investigative tool.
At the end of an audit, a report is issued by the IRS. The taxpayer then makes a choice to agree to those changes or to challenge the findings. Many individuals without professional representation agree to those changes in fear of taking the next step or in desire of ending the entire process. Those are agreements that cannot be challenged after they are made and many individuals will find themselves in debt at this juncture of the process.
In the alternative, a taxpayer may decide to challenge the audit report via an appeal. Should no agreement be reached as to the amount owed, or if the audit report is agreed to by the taxpayer but not paid immediately, a Notice of Deficiency (NOD) is issued.
This NOD triggers many of the taxpayer’s rights as well as the rights of the IRS to pursue collection. The taxpayer may bring a lawsuit if it is desired at this juncture to challenge the amount owed, but few will do so. If the taxpayer could not or would not pay for professional representation during the audit process, he or she is unlikely to do so at this juncture. Thus, collection action typically proceeds.
What is nonfiling?
A nonfiler is not typically pursued after 6 years have elapsed past the filing deadline.
Nonfiling is a criminal offense punishable by one year in prison and a fine of $25,000 for each year not filed. To prosecute criminally, the IRS must establish that the returns were not filed willfully or intentionally. This is a tough sell for most individual cases.
The IRS locates nonfiler by matching documents submitted by banks, employers, and other such typically filing agencies or institutions against the returns required by an individual’s file (located via social security number). The IRS will next attempt to reach a nonfiler via a written request – three notices timed approximately 30 days apart. If that correspondence is unsuccessful, service representatives may contact the nonfiler via telephone, and ultimately via a physical visit from a revenue agent or officer.
After these efforts are exhausted by the IRS, the nonfiler is typically given a deadline for filing with an offer to help prepare the returns. Should the returns not be filed at this juncture, the IRS may legally prepare and file those missing returns for the nonfiler via Substitute for Return. Should debt be generated because the IRS has filed for an individual, that debt is legitimate and the IRS may collect it the same as any others. Debts are typically highest if this course of action is pursued as the IRS has no ability to maximize or utilize deductions on an individual basis.
Additionally, the IRS may levy a variety of penalties for a failure to file a return. The failure to file penalty is currently set at 5% per month up to a 25% maximum. The failure to pay (typically coinciding with failure to file) penalty is an additional 0.5% per month up to a 25% maximum. If no money is owed in either case, there is no penalty. Thus, the penalty is a percentage of what is owed.
A request for a standard extension is most certainly better than suffering the above-described penalties and actions and is typically given without any explanation for at least 6 months past the initial due date.
Due dates: March 15 – corporations, schedule K (partnerships, LLC’s). April 15 – individuals.
An individual must be under the age of 65 and earn a gross income of less than $8750 to lawfully not file a return in any given year. However, if that income amount is substantially less than the income earned in previous years, it may be a good idea for that taxpayer to file a return to simply alert the IRS to his or her personal financial condition.
The IRS is typically more gracious and is willing to give an individual a break if he or she comes forward willingly to file returns. The end game is that each individual will be located and found out eventually and that it is better to come forward voluntarily. Additional considerations are that all returns have a 3-year timeline to collect a refund (from the date the return should have been filed), but the statute to collect on an amount due to the IRS is 10 years from the time the return is filed. Thus, the taxpayer is in the best gear to either collect a refund or resolve debt by filing timely or as soon as possible.
Lastly, in certain cases where the IRS has filed on behalf of a taxpayer, the taxpayer may reduce or eliminate debt simply by gathering the appropriate documentation, preparing, and submitting the returns that are missing. The IRS sometimes makes educated guesses about the information that is required on a tax return and does not particularly worry about maximizing deductions. Thus, a correct return that is filed may have the effect of negating debt. The older the tax return, the more help the average consumer will require in preparing the documentation correctly.
What is the statute of limitations?
The statute of limitations is a legal term that refers to the maximum time the IRS can take any particular action. As discussed above, the IRS generally has a 3-year statute of limitation (SOL) to audit a return. That number is flexible, however, and varies according to when the return was filed. For example, if a return is due April 15, 2009, but is filed a month early on March 15, 2009, then the IRS has 3 years from the due date of April 15, 2009, rather than March 15, 2009. If a return is filed late, past the April 15 due date, the 3 years begins to run from the date the return is filed. As discussed above, that general 3-year SOL is extended to 6 years under certain circumstances. These SOL’s do not apply if the IRS has prepared and filed the return for the taxpayer due to nonfiling or if the return was deemed to have been filed falsely or fraudulently with the intent to evade taxes. Average consumers typically do not know if either of these actions has occurred, and will not be able to communicate these items effectively. Generally, if a taxpayer has not filed in many years, a review of his or her transcript is absolutely necessary to accurately gauge the individual situation.
The IRS generally has a 10 year SOL to collect on a tax debt. That 10 year period begins to run at the time the assessment is made. Thus, this may occur up to 6 years after a particular return is filed and practically extends the time to collect on a debt. For example, should a taxpayer file a return not showing more than 25% of gross income in the year 2000 (for the tax year 1999), and is audited 5 years later in 2005 with an adjustment that concludes in an assessment of debt, the 10-year SOL does not begin to run until the date of that assessment. Discharging debt via SOL is a relatively simple procedure, but making a valid evaluation of whether or not that is possible is not an option without reviewing the taxpayer’s IRS transcript first. Discharging debt via SOL should never be sold as a stand-alone service, but can be sold as one of the options Regal will pursue for the taxpayer should it be available.
The SOL in place for the federal IRS is one place where the collection of debt varies greatly on the federal level from the state level. California, for example, has no SOL for the collection of back taxes.
A taxpayer also has some SOL’s imposed on him or her, as a trade-off for the above-listed limitations. A taxpayer can make a claim for a refund that is due to him or her only 3 years from the original due date of the return. Thus, if a return was due in the year 2000 (for the tax year 1999), but no return is filed by the taxpayer until 2004, no claim for a refund may be made successfully. Refunds due past that 3-year SOL is lost and cannot be applied to any other tax due.
Certain actions serve to extend any given SOL by “tolling” the statute as a condition of the action. For example, the IRS cannot collect against any given individual during bankruptcy proceedings, and thus the taxpayer is saved from any aggressive collection techniques. The price for such an abatement in the collection is that the total SOL for collection is suspended or tolled, and that period of time during the bankruptcy does not count toward the total 10 years. Similarly, while an Offer in Compromise is being considered, the SOL is tolled.
What types of Enforced Collection Activities are there?
A levy is a legal seizure of property to satisfy a tax debt. The IRS has the ability and may seize any and all types of real or personal property, including bank account contents, retirement accounts, homes, cars, boats, etc. Some items, such as real property, are less likely to be taken than funds available within bank accounts or wages.
Timeline of a levy
Assessment of debt is made; taxpayer receives the notification of the existence of the debt. This can happen via audit after changes to the tax return are established, or when a taxpayer files a return without enclosing payment. The assessment of the debt letter will also include information regarding the penalties and interest applied. Approximately 30 days later, a Notice and Demand for Payment letter will be issued to demand payment or urging the taxpayer to call the IRS to make arrangements. Approximately 30 days after that, a Final Notice of Intent to Levy and Notice of Your Right to a Hearing is sent to give the taxpayer notice of the levy. Approximately 30 days after that, the levy takes place.
Most typically, each of these notices is sent via certified or registered letters. The IRS does reserve the right to leave a copy of such a letter at the taxpayer’s home, place of business, last known address, or left with the taxpayer in person. The timeline described above is the most usual method the IRS employs. Certain taxpayers will have significant variations; for example, if the IRS believes the funds to be at risk for asset flight, whereby the taxpayer moves such funds offshore or under another person’s name to avoid collection, the timeline may be moved up. In contrast, some people are able to live below the radar for years and years, and thus suffer no real collection activity. The letters are most typically numbered as CP 90, CP 279, and CP 279a. CP 279a is the letter that says a levy is imminent, most likely within 30 days from the date of the letter regardless of the receipt date.
Bank Account Levy
An IRS bank account levy is technically a one-time event. The above-listed notices should be sent, in order and with the timelines discussed above, each time the bank account is levied to satisfy back taxes. The bank typically removes all funds available on the account up to the amount listed within the levy, and “freezes” the account for 21 days. The exact procedures will vary from bank to bank, but they all remove the funds and hold them for 21 days. During that period of time, the taxpayer has the opportunity to attempt to release the funds or work something out with the IRS. At the end of the 21 day period, the bank forwards the funds to the IRS and the process starts again from the beginning.
Bank levies in process (within 21 days) are very difficult to release or stop midstream. However, Regal can always attempt to do so on behalf of a taxpayer, but the potential client should be notified that success is unlikely. Additionally, Regal can work quickly to ensure that no further bank levies are instituted against the taxpayer.
Most consumers believe that a bank levy is continuous, similar to a wage garnishment (discussed below), but it is a one-time event in that the notice process is renewed. Of course, the notice process and ultimately, the bank levy can be entered into by the IRS as many times as desired by the taxing agency.
A wage garnishment or levy is a written notice sent by the IRS to the taxpayer’s employer that requires that employer to withhold a percentage of the employee’s pay on behalf of the IRS. The withheld amount is typically taken from the gross amount (rather than the net amount) and usually looks like 30-70 percent of the total gross amount. The rest is taxed for current amounts due and very often, the taxpayer is left with little after both past and current taxes are removed. Wage garnishments can also be sent to self-employed taxpayers’ accounts receivables.
Wage garnishments are typically left in place until the debt is satisfied, resolved someway, or the taxpayer moves on to another job. The amount that the IRS can keep from any wage garnishment will vary greatly based on individual circumstances but can be summed up as adding the standard deduction that can be claimed to the amount that can be claimed by an exemption, and divided by 52. This is another area that varies greatly from federal to state regulations – the state of California for example, can collect up to 25% of a taxpayer’s disposable income only. Some specific circumstances, like paying child support, will reduce the total amount the IRS will take from a paycheck.
Wage garnishments are easier to lift than bank levies, but can still be very challenging. Specifically, if a taxpayer has his or her wages garnished, but has other sources of income, that garnishment will be difficult to lift. If that garnishment is stretching the taxpayer extremely thin and basic necessities are not being met, there is a higher chance for lifting the garnishment quickly. The process to lift the garnishment may require the taxpayer to prepare and submit the same types of forms as for an Offer in Compromise. Because the procedure for working with a garnishee vary so greatly, Regal cannot make any promises in regards to the timing of the release or the relative completion level. For example, Regal may be able to reduce the total percentage of the garnishment if not lift it completely. In order to accurately evaluate what Regal can do, a complete review of a taxpayer’s debt and financial situation will be required.
Although not usually touched, even monies like Social Security can be garnished – up to 15% specifically for this particular type of income. Other retirement distributions can certainly be reached as well.
A table showing the specific amounts that are exempted from garnishment is attached to this manual for reference. This table comes straight from the IRS and has been updated to reflect any changes made in 2009. If a potential client wants to know how much they can take, simply ask how they filed last year and how many children he or she can claim to find the correct box.
What are liens?
Liens give the IRS a legal claim to taxpayer property as security or payment on a tax debt. The timeline for filing an active tax lien is similar to that of a levy. The liability must be fully assessed, a Notice and Demand for Payment must be sent, and that notice must be neglected for at least 10 days after the taxpayer is notified about it. The IRS may or may not file the lien at any time after that – there is no requirement or deadline for them to file. The IRS will typically hurry to file in a case where there is a perceived risk of asset flight, or where the taxpayer is making decisions such as to file for bankruptcy that may threaten collection.
A lien placed on a real property typically will take first priority in a line of creditors. It will generally be filed in the county where the property is located. The IRS has wide latitude to utilize the lien in a way that best helps speed collection. For example, if subordinating or releasing the lien will help a homeowner refinance or sell a property to satisfy the debt, they are able to do so. A bond may be required by the IRS to guarantee payment, but the point is that there is room to work around a lien if the taxpayer so desires or has too much equity for anything else.
What is an installment agreement?
An installment agreement is a contract between a taxpayer and the IRS for the payment of past-due tax debt. This is a timed contract for a specified amount for the payment of all amounts due. All penalties and interest are typically applied and paid as well and the payment is made on a monthly basis. There are four types of Installment Agreements, as described below, but the nuances of each are not usually explained to a consumer. Generally, the taxpayer makes a commitment and agreement to file and pay on time in the future in order to effect an installment agreement.
Failure to make a payment on an installment agreement will generally trigger enforced collection activity very quickly (30) days. If a taxpayer is unable to make or meet his or her monthly obligation, contact with the IRS should be made immediately to avoid such collection action. Regal cannot tell any given person that he or she should not make their next monthly payment unless a review of transcript is made first and a definitive course of action has been discussed and agreed upon first.
Guaranteed Installment Agreement (IA)
The IRS is required to agree to an IA if the total amount due is $10,000 or under and the following criteria is also met: no returns have been filed or paid late in the last 5 years, all tax returns are filed, the monthly payment will pay off total balances in 36 months or less, and no other IA has been in effect over the last 5 years. The minimum monthly payment that will be accepted is the grand total of the debt (including penalties and interest) divided by thirty. The primary benefit to this IA is that the IRS will not pursue any other collection efforts and will not file a federal tax lien. Additionally, the IRS will not request financial statements for more information about the taxpayer’s current financial condition.
A debtor who owes this amount and is looking for this service will not generally spend the money to hire a professional.
Streamlined Installment Agreement (IA)
The IRS will agree to an IA if the balance owed is $25,000 or less, and the taxpayer agrees to pay off the balance within 60 months or less. If that balance due will expire within that 60 months due to an SOL on collections, then the IRS will require full payment within the statute period. The minimum payment the IRS will accept is the grand total of the balance due divided by 50. As above, all returns must be filed and the taxpayer must agree to file and pay all future returns timely.
Partial Payment Installment Agreement (IA)
This type of IA is for people who do not qualify for either of the IA’s described above. The monthly payment amount is based on what the taxpayer can afford after monthly income and expenses are calculated by the IRS. As in the Offer in Compromise, those monthly expenses are compared to national standards for items like housing, clothing, food, and other basic expenses. Some costs will be discounted or eliminated completely. For example, if a taxpayer’s mortgage is $3000 per month, but the IRS housing standard for the area is $2500, the maximum the taxpayer will be able to claim is that $2500. The excess $500 will be considered available to pay the IRS. Ultimately, this plan can be negotiated for the taxpayer to pay a more comfortable monthly amount over a longer period of time.
At the end of the payment plan, the taxpayer may be able to conclude the experience by paying less than the total amount that is owed, especially if the SOL is upcoming. Negotiating this type of IA is as involved as negotiating an Offer in Compromise because full financials and backup documentation are required. The IRS will likely file a federal tax lien to protect its interest during the payment plan and will require somewhat frequent re-evaluations. Such re-evaluations will require the taxpayer to prepare and submit analogous documentation as first submitted. Typically, this re-evaluation takes place every 2 years during the repayment term. This taxpayer will require periodic help by a professional and this is not a long term resolution strategy, but may be an individuals best option in certain cases.
Non-Streamlined Installment Agreements (IA)
If a taxpayers debt is over $25,000, or a repayment term longer than 5 years is required, and/or the criteria for the above IA’s is not met, this IA may be the taxpayers only option to enter into repayment. These agreements must be negotiated directly with the IRS and have few broad generalizations that can be made. Often, the taxpayer will be asked for the type of financials and backup documentation that is required in an Offer in Compromise. The IRS is likely to file a federal tax lien to protect its interest. These IA’s are done ad hoc and vary greatly on a case by case basis.
What is an Offer in Compromise?
The OIC program has been in existence for years, decades even, but had previously been available to certain business owners only. In 1998, as part of the Taxpayer Bill of Rights III, the IRS expanded the program and made it easier to apply or qualify. More recently, in 2006, the IRS has adjusted the program to include the payment options discussed below for the actual offer amount. The program is a longer process, typically taking 9-18 months to complete, and is an intense process of analyzing the taxpayer’s current financial situation to accurately gauge his or her ability to pay the debt within the SOL.
The last provided statistics for the OIC program are available for the year 2004 and states that only 16% of all submitted offers were accepted. However, the larger fail rate does not specify how many offers were submitted with professional help and how many individuals prepared and submitted the offers themselves. Because of the technical nature of the documentation required, as well as the frequent maintenance of any file, few individuals are able to complete the process without professional help. Each OIC is evaluated on its individual merits – the IRS is not forced to accept any given offer nor are any granted automatically. The OIC must be prepared and submitted under one of the following premises:
- Doubt as to Collectibility: Doubt exists that the taxpayer could ever pay the full amount of the tax liability owed within the remainder of the SOL.
- Doubt as to Liability: A legitimate doubt exists that the assessed tax liability is correct. This is typically utilized if an audit proceeded and the taxpayer must prove that the examiner (1) made a mistake in interpreting the law, or (2) failed to consider the taxpayer’s evidence, or (3) the taxpayer has new evidence to contest the debt.
- Effective Tax Administration: In this scenario, the taxpayer agrees that there is no doubt that the tax is correct and there is potential to collect the full amount owed, but some kind of exceptional circumstances exist that would allow the IRS to consider an OIC. To be eligible, the taxpayer must be able to demonstrate that the collection of the tax would create an economic hardship or would be unfair or inequitable. For example, significant medical issues may exist or the taxpayer may be receiving Social Security as his or her only income source.
In the vast majority of cases, the IRS will not accept an OIC unless the amount offered by the taxpayer is equal to or greater than the reasonable collection potential (RCP). The RCP is how the IRS measures the taxpayer’s ability to pay and includes the value that can be realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, retirement assets, and other property. The RCP most importantly includes anticipated future income, less certain amounts allowed for basic living expenses.
Those assets are all devalued for quick sale amounts and are offset by debt. Basic living expenses are set by the IRS with nationwide standards that are brought down to a regional level. If a taxpayer’s expenses exceed those standards, the excess is disregarded and counted towards the ability to pay. The vast majority of people do not know about these standards nor are aware of how to list them correctly in the documentation required to file an OIC properly, and fail in their attempt at this juncture. National standards are revised frequently, on an annual basis, and are not necessarily that close to actual living costs in any given area. The software purchased and utilized for gauging will do the heavy lifting in this arena, but additional considerations must be made.
All taxpayers must meet some basic eligibility criteria:
- All tax returns must have been filed. The taxpayer is current on estimated tax payments or income tax withholding. The taxpayer has a complete set of backup documentation (at least 3 months’ worth of all pay stubs, bank statements, mortgage statements, retirement account statements, appraisal of real estate, and household expenses).
- There is no pending bankruptcy case.
- Additionally, a business must have filed and paid employment tax returns for the two previous quarters, and be current with payroll tax deposits for the current quarter.
- It is of paramount importance that the potential client is convinced that they must provide Regal with full, accurate, and truthful information in order to evaluate what kind of offer can be made on his or her behalf. Although dollar and cents amounts are not required, large deviations will skew all results.
Should an offer be accepted, the taxpayer is additionally agreeing to the following items:
- To pay the offer amount made.
- To file and pay tax returns and amounts timely for the next five years minimally.
- Allow the IRS to keep tax refunds, payments and credits applied to the debt prior to the submission of the OIC.
- Allow the IRS to keep any tax refunds that would have been payable to the taxpayer during the calendar year that the OIC is approved.
If a taxpayer has an OIC that is approved but does not fulfill the above terms, the IRS may and probably will revoke the OIC in its entirety. As such the debt is reinstated in its entirety and the taxpayer is typically barred from applying again.
How much tax debt requires an attorney's help?
The Internal Revenue Service (IRS) allows taxpayers with $100,000 or less in taxes to pay the debt in an installment agreement. And, the IRS has adopted new rules under its Fresh Start program in 2012 making it easier for certain taxpayers to obtain an installment agreement.
Currently, taxpayers owing less than $50,000 are generally given an agreement to repay the debt in 72 months without having to provide additional financial information. If you have $50,000 or more in tax debt, however, you will need to negotiate a repayment plan with the IRS.
This is the time to contact Regal Tax & Law Group, PC. We have extensive experience negotiating installment agreements and payment plans on behalf of our clients.
While entering into an installment agreement with the IRS is one option, you should know penalties and interest will be applied to the debt, so it is crucial to come up with a workable payment plan. Moreover, you must meet certain eligibility requirements, not the least of which is being up-to-date on your tax returns.
When you consult with us, we will take the time to assess your finances and tax debt and advise you of the best course of action. If we determine that a payment plan is in your best interests, we will assist with completing the necessary forms, compiling the required financial documents, and negotiating a fair and reasonable installment agreement.
In addition to considering a payment plan, we will explore your other options to resolve your tax debt, including
- Offer in compromise to settle the debt for less than the entire amount
- Tax penalty abatement to reduce penalties assessed by the IRS
- Currently not collectible is a status granted in cases of serious financial hardship
If you owe the IRS $50,000 or more in taxes, you should consider working with us rather than negotiating with the IRS on your own. We have the skills and experience to negotiate your tax debt and will work to protect your interests, whether by negotiating an IRS payment or working out another arrangement with the IRS.
From our office in San Francisco, Regal Tax & Law Group, PC represents individuals and business owners in high-stakes tax disputes in California and throughout the nation. Contact our office today to schedule a consultation.