Streamlined Installment Agreements
When the IRS negotiates with a taxpayer to establish a payment plan, the length of time over which you propose to pay them, can make a great deal of difference to the outcome. In a majority of the cases, taxpayers that don’t owe the IRS more than $50,000 may be able to work out a repayment plan with little or no financial analysis and no substantiation of expenses.
Simplified Requirements (addressing only Income Tax Liability):
1. The aggregate unpaid balance of assessments (the SUMRY balance) is $50,000 or less. The unpaid balance of assessments includes tax, assessed penalty and interest, and all other assessments on the tax modules. But, it does not include accrued penalty and interest; and
2. The minimum payment amount is determined by dividing the SUMRY balance by 72. The IA must resolve all balances due prior to the expiration of the Collection Statute Expiration Date (CSED) .
But, what if you don’t meet the standard for streamlined installment agreements? In cases where taxpayers cannot full pay and do not meet the criteria for a streamlined agreement, they may still qualify for the six-year rule. The time frame for this rule was increased in 2012 from five years to six years.
The Six Year Rule for Repayment of Tax Liability
Collection Financial Standards are used in cases requiring financial analysis to determine a taxpayer’s ability to pay. The six-year rule allows for payment of living expenses that exceed the CFS, and allows for other expenses, such as minimum payments on student loans or credit cards, as long as the tax liability, including penalty and interest, can be full paid in six years. Taxpayers must complete and submit an IRS Collection Information Statement (IRS Form 433-F), but do not have to provide substantiation of reasonable expenses.
If you think you are going to need more than six-years to repay the IRS, prepare for a hard time. The CFS will be applied and the IRS will review your financials with a fine tooth comb. What you think may be reasonable is unlikely to meet the IRS standards. While their are exceptions that allow the IRS to deviate from those standards, they will be slow to agree to do so.
Can a Notice of an IRS Bank Levy Extend to Savings Acounts or Certificates of Deposits Pledged as Security for Loan?
There are really a couple of issues here and one has to do with lien priority. This is a battle between the Uniform Commercial Code (UCC), Article 9, and the Internal Revenue Code (IRC). Because we have a limited amount of space, suffice it to say what matters is whether the bank perfected its security interest in the certificate of deposit (CD) or other collateral prior to the notice of federal tax lien (NFTL) being filed. There are other variables that also matter, but in most cases that is the bottom line. However, that is not the whole story. An equally important issue is whether just an IRS notice of bank levy is enough to get the CD. In some cases the IRS has to jump through a few more hoops.
If intangible property is represented by a negotiable document, actual seizure of the document must be made. Service of notice of levy upon the maker of the note, the corporation or the bank is ineffective to reduce the property right to possession. Money on deposit in a bank represented by a nonnegotiable certificate of deposit in the hands of a delinquent taxpayer is subject to the levy. Rev. Rul. 73-12, 1973-1 C.B. 601. The holding in Rev. Rul. 73-12 is not applicable to negotiable certificates. Rev. Rul. 75-355, 1975-2 C.B. 478. A levy by the government on funds represented by a negotiable certificate of deposit must be made by presentation of the negotiable certificate and surrender of such certificate to the maker.
A second and more common issue is what happens when a bank receives a notice of bank levy and the funds in your savings account are subject to setoff pursuant to a security agreement with the bank. In this case, if the federal tax lien attached to a taxpayer’s property prior to setoff, then a bank takes funds encumbered with a federal tax lien. The government may still levy on the bank to obtain the encumbered funds. United States v. Donahue Industries, Inc., 905 F.2d 1325 (9th Cir. 1990); Rev. Rul. 2006-42. See also IRM 126.96.36.199.4.
Pledging collateral to a bank does not make it immune from IRS collection activity. Be mindful that the IRS has a very long reach and your bank might be surprised to learn that it is not always first in line! If the bank loses its collateral to the IRS, your loan may go into default and the bank is then likely to call the loan. If you are a small business owner that owes back taxes to the IRS and don’t have an installment agreement (IA) in place or a collection hold, you and your bank may be in for a nasty surprise.
Filing Deadline Extended for Some:
Filing deferral for certain individuals with signature authority only, effective through April 15, 2017. Per FinCEN Notice 2015-1, the due date for filing FBARs by certain individuals with signature authority over, but no financial interest in, foreign financial accounts of their employer or a closely related entity, to April 15, 2017.
Who Must File an FBAR
United States persons are required to file an FBAR if:
1. the United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and
2. the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported.
United States person includes U.S. citizens; U.S. residents; entities, including but not limited to, corporations, partnerships, or limited liability companies, created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.
Exceptions to the Reporting Requirement
Exceptions to the FBAR reporting requirements can be found in the FBAR instructions. There are filing exceptions for the following United States persons or foreign financial accounts:
1. Certain foreign financial accounts jointly owned by spouses
2. United States persons included in a consolidated FBAR
3. Correspondent/Nostro accounts
4. Foreign financial accounts owned by a governmental entity
5. Foreign financial accounts owned by an international financial institution
6. Owners and beneficiaries of U.S. IRAs
7. Participants in and beneficiaries of tax-qualified retirement plans
8. Certain individuals with signature authority over, but no financial interest in, a foreign financial account
9. Trust beneficiaries (but only if a U.S. person reports the account on an FBAR filed on behalf of the trust)
10. Foreign financial accounts maintained on a United States military banking facility.
U.S. Taxpayers Holding Foreign Financial Assets May Also Need to File Form 8938
Taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets, which is filed with an income tax return. Those foreign financial assets could include foreign accounts reported on an FBAR. The Form 8938 filing requirement is in addition to the FBAR filing requirement.
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 firstname.lastname@example.org.
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.
It is not uncommon for clients to come to us under stress with an IRS Form 433 in hand. Taxpayers who want to set up an installment agreement with the IRS, apply for an offer in compromise or be declared currently not collectible (CNC) are commonly required to prepare and submit a Collection Information Statement, otherwise known as a Form 433. But, just which version of that form should they be filling out, if any at all? If they owe less than $50,000 and qualify for a streamlined installment agreement, they may not need to fill one out at all. In other cases, it all depends on who they are working with at the IRS.
Local IRS Offices and Revenue Officers
In general, IRS Form 433-A is used by local IRS offices and is frequently requested by Revenue Officers in collection cases. Form 433-A is a very lengthy form that requires the taxpayer to provide information regarding their assets, income and expenses. If you are working with a Revenue Officer (RO), it is generally not a bad idea to consult a tax attorney or other tax professional. In our experience, IRS Revenue Officers can be a little harder on unrepresented taxpayers.
Automated Collection Services
In contrast, IRS Form 433-F is requested by Automated Collection Services (ACS); these are the folks you talk to when dialing the IRS 800 numbers. This form is a shorter, more streamlined version of the Form 433-A However, when working with ACS they will want you to complete the entire form while on the telephone with them and so having all your paperwork ready and being close to a fax will be essential.
Submitting and Offer-in-Compromise to the IRS?
In fact, there is another variation just for the IRS Offer-in-Compromise process, IRS Form 433-OIC. But, all of these variations fulfill a basic purpose: they are Collection Information Statements.
If you have further questions about IRS Form 433, you may contact the Tax attorneys at the Perliski Law Group at (214) 446-3934 for a free initial consultation.
Certain financial debts from your past may affect your current federal tax refund. The law allows the use of part or all of your federal tax refund to pay other federal or state debts that you owe.
Here are six facts you should know about tax refund ‘offsets.’
1. A tax refund offset generally means the U.S. Treasury has reduced your federal tax refund to pay for certain unpaid debts.
2. The Bureau of Fiscal Service (BFS), a new Bureau of the Treasury Department formed from the consolidation of the Financial Management Service and the Bureau of the Public Debt. This is the agency that issues tax refunds and conducts the Treasury Offset Program.
3. If you have unpaid debts, such as overdue child support, state income tax or student loans, BFS may apply part or all of your tax refund to pay that debt.
4. You will receive a notice from BFS if an offset occurs. The notice will include the original tax refund amount and your offset amount. It will also include the agency receiving the offset payment and that agency’s contact information.
5. If you believe you do not owe the debt or you want to dispute the amount taken from your refund, you should contact the agency that received the offset amount, not the IRS or BFS.
6. If you filed a joint tax return, you may be entitled to part or all of the refund offset. This rule applies if your spouse is solely responsible for the debt.
If you would like to know more about IRS Tax Refunds and Offsets, contact a tax attorney with the Perliski Law Group for a free initial consultation at (214) 446-3934.
Short answer: Yes, you can lose your home to the IRS. Are you likely to lose it? No. Let’s take a look at why.
First, it is not a simple process, the IRS Revenue Officer assigned to your case cannot decide to do this on their own. A seizure of your personal residence requires that the Revenue Officer get the approval of the area director first (either Field Area or Advisory/Insolvency), unless collection of the tax is in jeopardy. Seizing your home is also against IRS Policy. See Statement 5-34, Internal Revenue Manual (IRM) 188.8.131.52.8. Second, a Court order is required. Finally, you have the right to take the IRS to Tax Court to dispute the sale, and if unsuccessful, to defend your house against a Department of Justice foreclosure complaint.
The Seizure Process
There are two options for enforcing collection against the principal residence of a taxpayer or residence which is owned by the taxpayer but occupied by the taxpayer’s spouse, former spouse, or minor child. These two options cannot be used concurrently. One is a proceeding to obtain a court order allowing administrative seizure of a principal residence under Internal Revenue Code (IRC) section 6334(e)(1). The other is a suit to foreclose the federal tax lien against a principal residence under IRC section 7403. The suit to foreclose is the secondary alternative used only when the seizure remedy is not the optimal solution.
The current IRM 184.108.40.206, Judicial Approval for Principal Residence Seizures, provides the instructions for obtaining a court order allowing administrative seizure of a principal residence under IRC section 6334(e)(1). While not explicitly stated, the same considerations apply to suits to foreclose the tax lien on a taxpayer’s principal residence. Additionally, a suit to foreclose should only be pursued when there are no reasonable administrative remedies and hardship issues, as described below, are considered.
The No Equity Rule
If your home has “no equity”, the IRS is barred from seizing and selling it. The sale must result in money recovered. If you are not sure what this means, the term “Equity” is defined as the difference between what your house is worth, and how much you owe the bank on it. Generally, when the IRS or your tax attorneys determines the equity in your property, a quick-sale discount figure will be applied (FMV x.80) (or a 20% discount). In many cases, applying this calculation alone makes the seizure and sale of your residence a no go for the IRS.
How Often Does this Happen?
In 2014, for example, the IRS Data Book reported that there were 432 seizures of real property (houses) and personal property (cars) made. That’s out of the millions of delinquent taxpayer collection accounts. Folks, that is 0.00003927272 percent. Remember, this is generally against established IRS Policy. In most cases that I have seen, the IRS only goes after a residence if there is very large tax bill, a whole lot of equity, and the client failed to take the matter seriously enough and all other collection methods failed (e.g., bank levy or wage garnishment).
Unless you are a high roller or have just ignored the IRS collection efforts to work out a payment arrangement, chances are they don’t want your home. And, not only is seizing it a lot of work, but selling it is even more work. The lesson learned is that engaging the IRS early and tendering a well thought out plan to address your tax debt will avoid most of, if not all of, the unpleasant IRS collection tactics. In short, take the initiative; don’t wait for the IRS to send you a Notice of Seizure.
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).