Lately a number of people have called our office fearful that the IRS was going to sue them, but completely in the dark about why. In some cases, those people owed the IRS back taxes, but in others they did not. A few folks were rightly suspicious and asked us if this was real. Fortunately, the answer was simple and the rest of this post will explain why.
No, the Internal Revenue Service did not call you. IRS has warned consumers about a sophisticated phone scam targeting taxpayers, including recent immigrants, throughout the country.
How to recognize this scam.
Victims are told they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, they are then threatened with arrest, deportation or suspension of a business or driver’s license. In many cases, the caller becomes hostile and insulting.
“This scam has hit taxpayers in nearly every state in the country. We want to educate taxpayers so they can help protect themselves. Rest assured, “we do not and will not ask for credit card numbers over the phone, nor request a pre-paid debit card or wire transfer,” says IRS Acting Commissioner Danny Werfel. “If someone unexpectedly calls claiming to be from the IRS and threatens police arrest, deportation or license revocation if you don’t pay immediately, that is a sign that it really isn’t the IRS calling.” Werfel noted that the first IRS contact with taxpayers on a tax issue is likely to occur via mail.
The IRS does not need to threaten you with a lawsuit to get paid.
You need to know that the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS also does not ask for PINs, passwords or similar confidential access information for credit card, bank or other financial accounts. And, recipients of any suspect e-mail should not open any attachments or click on any links contained in the message. Instead, forward the e-mail to email@example.com.
Other characteristics of this scam include:
1. Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
2. Scammers may be able to recite the last four digits of a victim’s Social Security Number.
3. Scammers spoof the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
4. Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
5. Victims hear background noise of other calls being conducted to mimic a call site.
After threatening victims with jail time or driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.
If you get a phone call from someone claiming to be from the IRS, here’s what you should do:
A. If you know you owe taxes or you think you might owe taxes, call the IRS at 1.800.829.1040. The IRS employees at that line can help you with a payment issue – if there really is such an issue, or if you are nervous about contacting the IRS directly, then contact a local tax controversy lawyer and hire them to look into the matter for you. In many cases, with just a few moments an attorney can confirm that the call was a scam. But, in all cases, a call by your tax attorney to the IRS will verify if the collections division has you in their crosshairs.
B. If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), then call and report the incident to the Treasury Inspector General for Tax Administration at 1.800.366.4484.
President Obama recently signed into law the 5-year infrastructure spending Bill. It adds a new section 7345 to the Internal Revenue Code. It is part of H.R. 22 – Fixing America’s Surface Transportation Act, the “FAST Act.” What you need to know about the FAST Act is that the IRS now has the ability to revoke your U.S. passport for an unpaid tax bill. More specifically, the IRS can now ask the State Department to do it for them if the IRS certifies you as having a seriously delinquent tax debt in an amount in excess of $50,000 and the IRS has filed a notice of lien.
Not planning on traveling out of the country any time soon? The Act’s potential effects are wide ranging and in some states in 2016 and beyond it may even be necessary to have a valid passport to board a domestic flight. If you are contesting a tax assessment, then don’t worry; the Act applies to a tax assessment that is final. So, if you are in Tax Court still arguing over your liability, then you are safe for the moment.
How all this is going to work is not yet known. Whether this is constitutional is also the subject of a heated debate in some quarters. However, if this new law may apply to you, and you have not yet entered into an installment agreement (IA) with the IRS exempting you from its effects, you may want to discuss the issue with your CPA and your tax attorney.
The Offer in Compromise
An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service (IRS) that settles the taxpayer’s tax liabilities for less than the full amount owed. Taxpayers who can fully pay the liabilities through an installment agreement or other means, will not be eligible for an OIC in most cases.
In order to be eligible for an OIC, the taxpayer must have:
1. filed all tax returns;
2. made all required estimated tax payments for the current year
3. made all required federal tax deposits for the current quarter, if the taxpayer is a business owner with employees.
How do I know if my offer will be enough?
In my experience it is not possible to know if your offer will be accepted (about 1 in 4 are), but it is possible to know if it will be rejected before you even file. In most cases, the IRS will not accept an OIC unless the amount offered by a 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. The RCP includes the value that can be realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property. In addition to property, the RCP also includes anticipated future income less certain amounts allowed for basic living expenses.
How does the RCP Calculation work?
Lets take a look at a hypothetical business owner. Ned used to be a top salesman at a high flying software company, but he was laid off and is now self-employed. Ned owes the IRS $190,000 in back taxes. He has a home worth $265,000, but he owes $165,00 on it. He runs a successful lawn care business and nets about $84,000, after business expenses. He owns two trucks and some lawn care equipment worth about $38,000. He also owns an old sports car worth about $12,000. He has a 401(k) account with about $50,000 in it, but he has borrowed about $20,000 to cover out-of-pocket medical expenses from an injury. Ned’s living expenses are $5,250 a month.
Let’s calculate Ned’s RCP:
Step One – Asset Evaluation
1. Ned’s home is worth $265,000 but the quick sale price of his house (FMV x .80) is only $212,000. After allowing for his first mortgage debt, he has $47,000 of equity available. For offer purposes, we will count $47,000.
2. Ned’s two trucks and business equipment all generate income for his business. Under current IRS rules, equity assets that produce income will not be factored into an offer because the income steam produced by those assets will be picked up in the future income calculations (see below).
3. Ned’s car is worth $12,000, but the quick sale value is (FMV x .80) is only $9,600, which we will use for offer purposes.
4. Ned’s 401(k) is worth $50,000, but we can argue that the liquidation value of this asset is about 70%, which gives us a value of $35,000. Since Ned also has a loan of $20,000 against the account, there is only $15,000 of asset value here for offer purposes.
Ned’s total asset value for offer purposes is $71,600; this figure represents the asset based component of his RCP.
Step Two – Future Income
Ned is making a nice living from his lawn care business, but he is not getting rich. Nonetheless, the IRS still looks at his income when calculating RCP. Ned makes $84,000 a year or $7,000 a month, and his allowable monthly expenses are $5,250, leaving him with $1,750 a month. Assuming Ned wants to pay off the IRS quickly (within 5 months), the IRS will only look at 12 months of future income (12 x $17,50) or $21,000, otherwise they will multiply his remaining income by 24.
Ned’s Recommended Offer Amount
If Ned wants a reasonable chance a settling with the IRS, his offer should be $92,000 (his RCP).
It is not at all uncommon for a spouse to find out after marriage that their husband or wife owes back taxes to the IRS. While your new husband or wife may never be “personally” liable for those tax debts, their income and tax refunds may still be vulnerable to IRS collection tactics. Forewarned is forearmed.
If spouses file a joint income tax return and an IRS tax debt is owed by one of the spouses, the Service will generally offset the entire overpayment. If the spouse who does not owe the obligation (referred to as the “injured spouse”) files a claim for his or her share of the overpayment (referred to as an “injured spouse claim”), the Service is required to refund his or her share of the overpayment. The question is just what is that share?
In Texas, all tax debts may be satisfied with 100% of the liable spouse’s sole management community property (i.e., any withholding attributable to the liable spouse’s wages) and 50% of the injured spouse’s sole management community property (i.e., any withholding attributable to the injured spouse). In addition, 100% of any part of the overpayment that is attributable to the liable spouse’s separate property is vulnerable as well. See Medaris v. United States, 884 F.2d 832 (5th Cir. 1989)
Texas law provides that property acquired during marriage, other than by gift, devise, descent or personal injury recovery, is community property. Tex.Fam.Code Ann. Sec. 5.01 (Vernon 1975). Each spouse has a one half interest in all community property. See Broday v. United States, 455. F.2d 1097, 1100–01 (5th Cir. 1972). Therefore, the IRS can reach your non-liable spouse’s wages too — or at 50% of them.
What about other community property states?
Subject to some variation, the following quick reference chart is will give you an idea:
New Mexico 50%
What can a Pre-Nupital and Post-Nupital Agreement Do to Help?
The lesson here is to talk to your fiance about debt and back taxes before you marry. Taxpayers with a prenuptial agreement can opt out of state community property laws and elect to have income treated as if they were domiciled in a non-community property state, in which case Section 66 of the Internal Revenue Code (IRC) would not apply and a much better result will follow. Post-nuptial agreements allow spouses to accomplish many of the same goals as prenuptial agreements, but are executed during the marriage. In many cases, the IRS will accord the same effect to such agreements.
Does a single member limited liability company (SMLLC) afford protection to taxpayers who owe the IRS personally?
Question: Does a Single Member Limited Liability Company (SMLLC) afford protection to taxpayers who owe the IRS personally?
Answer: State law will control whether the IRS or any creditor has the right to LLC assets. In general, the answer is that creditors of an LLC member have no rights to the “assets” of the LLC. They may be able to intercept payments the LLC makes to a member through what is known as a charging order or other means.
The IRS must look to state law to determine whether a person has an ownership interest in any particular asset. Aquilino v. United States, 363 U.S. 509 (Sup. Ct. 1960). If state law does not vest an ownership interest in an asset in favor of the person who owes the tax, the IRS cannot seize that asset. But, not everyone working at the IRS understands the law in detail and a zealous IRS Revenue Officer may go after your accounts.
Can the IRS attempt to levy the LLC bank account? Yes, they can. Would they be correct in doing so? Assuming the LLC was run properly and not as a personal piggy bank, then the IRS would not be justified in doing so. However, just because the IRS may not be able to successfully levy the Company’s bank account does not mean you are out of the woods.
If the LLC is paying you a salary, the IRS could garnish you wages. The IRS could also attempt to collect as against any distributions made by the LLC to you on account of your ownership interest in the LLC.
Direct Debit Installment Agreements and Federal Tax Liens
In recent years, the IRS has made several fundamental changes; one of them affects federal tax liens. Where taxpayers enter into a Direct Debit Installment Agreement (DDIA) with with unpaid assessments of $25,000 or less, the IRS will now allow lien withdrawals under several scenarios:
1. Lien withdrawals for taxpayers entering into a Direct Debit Installment Agreement.
2. The IRS will withdraw a lien if a taxpayer on a regular Installment Agreement converts to a Direct Debit Installment Agreement.
3. The IRS will also withdraw liens on existing Direct Debit Installment agreements upon taxpayer request.
Liens will be withdrawn after a probationary period demonstrating that direct debit payments will be honored. In general, 3 consecutive direct debit payments (see below)
Other conditions that apply to lien withdrawal are:
1. You are in full compliance with other filing and payment requirements
2. You have made three consecutive direct debit payments
3. You can’t have defaulted on your current, or any previous, Direct Debit Installment agreement.
There are many reasons why you should keep a copy of your federal tax return. For example, you may need it to answer an IRS inquiry. You may also need it to apply for a student loan or a home mortgage. If you can’t find your tax return, the IRS can provide a copy or give you a transcript of the tax information you need. Here’s how to get your federal tax return information from the IRS:
- Transcripts are free and you can get them for the current year and the past three years. In most cases, a transcript includes all the information you need.
- A tax return transcript shows most line items from the tax return you originally filed. It also includes items from any accompanying forms and schedules you filed. It does not reflect any changes made after you filed your original return.
- A tax account transcript shows any changes either you or the IRS made to your tax return after you filed it. This transcript includes your marital status, the type of return you filed, your adjusted gross income and taxable income.
- You can get transcripts on the web, by phone or by mail. To request transcripts online, go to IRS.gov and use the Order a Transcript tool. To order by phone, call 800-908-9946 and follow the prompts.
- To request a 1040, 1040A or 1040EZ tax return transcript by mail or fax, complete Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript. Businesses and individuals who need a tax account transcript should use Form 4506-T, Request for Transcript of Tax Return.
- If you order online or by phone, you should receive your tax return transcript within five to 10 calendar days. You should allow 30 calendar days for delivery of a tax account transcript if you order by mail.
- If you need an actual copy of a filed and processed tax return, it will cost $57 for each tax year. Complete Form 4506, Request for Copy of Tax Return, and mail it to the IRS address listed on the form for your area. Copies are generally available for the current year and past six years. Normal processing time is about 60 days.
Generally, both you and your spouse are responsible, jointly and individually, for paying any tax, interest, or penalties from your joint return. If you believe your current or former spouse should be solely responsible for an erroneous item or an underpayment of tax from your joint tax return, you may be eligible for innocent spouse relief.
There are actually three different types of Innocent Spouse Relief, and each one has slightly different qualifications. A basic overview is given below, but for a more detailed explanation you should consult an experienced tax attorney.
- Innocent Spouse Relief: you qualify if your spouse did not report income or claimed false deductions, and you did not know about it. Under this program, the IRS will not hold you liable for any of the debt.
- Separation of Liability: you qualify if your spouse did not report income or claimed false deductions, and you did not know about it. Under this program, the IRS will calculate your “fair share” of the tax debt based upon how much of the income on the return was yours and only hold you responsible for that amount.
- Equitable Relief: you qualify if your spouse did not report income or claimed false deductions, OR you just couldn’t pay the tax when you filed the return. If your issue is simply one of not being able to pay, this is the only program available to you. Under this program, you explain to the IRS what portion you should be held liable for and why that is the fair thing for them to do.
Being divorced or separated does not automatically qualify you for Innocent Spouse relief, but is a factor that the IRS considers. Innocent spouse relief may also be available if you were a resident of a community property state and did not file a joint federal income tax return and you believe you should not be held responsible for the tax attributable to an item of community income.
If you need help with filing for Innocent Spouse Relief with the IRS, contact the tax attorneys with the Perliski Law Group at (214) 446-3934 for a free consultation or use our online form.
You will get this letter if you owe additional tax or other amounts for the tax year(s) listed in the letter. The letter explains how to dispute the adjustments if you do not agree. If you want to dispute the adjustments without payment, you will have 90 days from the notice date to file a petition with the Tax Court.
If would like more information on how to appeal an IRS audit, you can call a Dallas tax attorney with the Perliski Law Group at (214) 446-3934 for a free phone consultation to see how we can help, or fill out our online contact form.