A friend of a friend was recently referred to me for some help with a tax problem. This individual isn’t rich, works a regular job for a paycheck, and simply got behind on personal income taxes. The situation is compounded by the possibility of some errors on the originally filed tax returns, which I have yet to examine to make that determination one way or the other.
This is NOT an uncommon situation these days. Regular, working class folks that owe a few thousand this year that they can’t pay, and the same thing the next year, etc. Do this for 3 or 4 years, and suddenly you owe the IRS $10k, $15k, $20k…with penalties and interest growing it daily. So, what to do?
First and foremost, I have a rule. It kind of stems from my rule regarding work from home opportunities (“Never pay a fee to get a job”), and it goes like this: Don’t get screwed by a tax resolution firm promising you the world when you can easily fix the problem yourself.
Yes, the IRS carries a big stick. But they’re not going to hit you upside the head with it if you take care of the situation.
First of all, if you believe you’ve made mistakes on your tax returns that caused the liability, then you should have the tax returns amended. You have three years from the date a return was filed in order to correct it, so if you’re in that time window and you think you would owe less if they were fixed, start there.
Second, if your tax liability is under $25,000 and it’s personal income tax, then there is a special program available called a Streamline Installment Agreement that you should look at. Under this program, the IRS will let you enter up to a 5 year payment plan (or less, if you can shoulder the monthly payment), in order to pay this off. Warning: Penalties and interest still accrue while you’re on a payment plan!
If the tax debt is getting old, say older than 6 years, then another option might be to get you into a non-collectible status and just ride it out until the statute of limitations expires (which is 10 years). For this, you have to be able to demonstrate that, in a nutshell, you are flat broke and scrape by paycheck-to-paycheck. If you suddenly win the lottery, the IRS will see that and come knocking on your door again, of course.
The final option to consider, if you *are* broke and really just want the monkey off your back, is an Offer in Compromise. Despite the commercials you may see on TV, the Offer program is not a straight up “pennies on the dollar” deal, but you must rather demonstrate financial necessity. If you’re single with no kids, have a car payment, and don’t own anything of value (art, a house, coins, gold, guns, stocks, bonds, retirement accounts, classic cars, an island, etc.), and you make less than about $3000 to $4000 per month (it depends on what part of the country you live in), then you might be a candidate for making an Offer in Compromise of some nominal amount (it has to be at least $1). This route requires extensive personal financial disclosure and takes about 6 months from start to finish, most of which is simply waiting on the IRS to process the application. If you have kids or a spouse, the amount you can make and still qualify goes up. If you don’t have a car payment, the amount you can make and still qualify goes down.
Elsewhere on this blog, I cover the OIC program and Streamline Installment Agreements in further detail. Also look for the Guaranteed Installment Agreement post if you owe less than $10,000 — those are easy as pie and can be done over the phone using an automated voice response system.
If you qualify for a Guaranteed or Streamline Installment Agreement, you can easily do it yourself over the phone. Getting into Status 53 (Currently Not Collectible) is almost as easy, and takes less than an hour on the phone with the IRS. An Offer in Compromise is obviously a bit more complicated, and while plenty of people do these themselves, many choose to hire representation to help them out on this (but you still need to be weary of getting screwed on fees and doing business with a reputable firm).
Jassen Bowman, EA
Yesterday, the IRS rolled out a shiny, brand new version of Form 656-B, the Offer in Compromise application booklet. After years of complaints from every corner of the tax world, including tax professionals, taxpayer advocacy groups, the government’s own Taxpayer Advocate panel, and even members of Congress, the IRS has finally fixed the worst problem that has ever existed with the Offer in Compromise program.
Under the system as it has existed for nearly 15 years, the IRS expected you to include in your offer amount the equivalent of your next 4 or 5 years worth of disposable income. In other words, the IRS would look at your current income, deduct your allowable household expenses, and then multiply that number by either 48 or 60…and then expect you to come up with that amount of money (plus the value of your assets) within the next few months, which obviously isn’t practical and defeats the very purpose of the OIC program.
Here’s an example: If you make $4,000 per month, and the IRS “allows” you credit for $3,500 in monthly expenses, then you have $500 per month left over. If you agree to pay your Offer amount in 5 months or less, they multiply that $500 times 48 months, which is $24,000. If you also happen to have $20,000 of equity between a car and your house, your minimum offer amount suddenly becomes $44,000, or almost an entire year’s salary…and they expect you to come up with that amount in 5 months. And if you owe the IRS less than this amount, then you’re not even eligible for the program.
In other words, the Offer program was really only an option for people that owed hundreds of thousands, if not millions, of dollars, and could come up with that kind of cash to make a lump sum payment, OR was only good for people that were absolutely destitute, with absolutely no assets and so little income that they couldn’t even realistically put a roof over their head.
Well, the IRS finally wised up after years of effort by tax consultants such as myself, advocacy groups, and the Taxpayer Advocate. Under the new rules announced yesterday, the IRS has dropped the “multiply by 48 or 60″ rule and made it a “multiply by 12 or 24 rule”. If you are paying your offer amount in full within 5 months, this means that your minimum offer amount you must send the IRS just dropped by 80%. Thank you, IRS, it’s about damn time!
If you would like professional assistance in preparing your Offer in Compromise application, please get in touch with me and consider my Offer in Compromise Application Service, which will save you thousands of dollars over traditional tax resolution options.
To furthering tax sanity,
Jassen Bowsman, EA
Expecting a tax refund this year after you filed your tax return last month? You did file your tax return last month, right? A couple quick things about that.
First, if you have filed an IRS Offer in Compromise (OIC) and it is pending approval, or it has been accepted, you MUST file your tax returns on time and paid in full for a period of 5 years. If you fail to do this, your Offer in Compromise will be denied or, if already approved, REVOKED, and your full tax liability reinstated.
Second, if you filed your tax return and are waiting for that refund check, you’re going to be waiting for a very long time. One of the conditions of filing an Offer in Compromise is that the IRS will intercept (i.e., take) your tax refunds on any tax returns you file. They will do this through December 31st of the year in which your Offer in Compromise is ACCEPTED. Since it takes usually 6+ months for an Offer in Compromise to work it’s way through the complete bureaucracy of the IRS and negotiate it’s final acceptance, you really don’t want your Offer in Compromise to span multiple years.
If you are thinking about filing an Offer in Compromise anytime soon, do it NOW. Then, try to get it DONE before the end of this year. That way, you will get to keep any tax refund you might be due to get when you file your tax return next year.
If you need assistance with your Offer in Compromise, check out our Offer in Compromise Application Service, which offers preparation of your OIC application and required financial forms for a low flat rate as an alternative to traditional full service tax representation, which will typically cost you several thousand dollars for an Offer in Compromise application.
Many people may recall the debt/deficit debate that raged in the Federal government last August. The agreement that was reached included extensive budget cuts, a new national debt ceiling, and a clause prohibiting further debt ceiling increases unless certain budget cut trigger points were reached.
While nearly $1 trillion in budget cuts have been identified, spread out over the next decade plus, the trigger points have still not been met. Under current projections, the U.S. government will run out of money sometime towards the end of the year, perhaps in November or December.
The U.S. Treasury, along with it’s enforcer, the IRS, is pulling out all the stops to make available debt limits last as long as possible. In other words, the Treasury is stepping up enforcement, to collect as much money as humanly possible from as many sources as possible. Revenue Officers, the government’s collections agents, are under more and more pressure from their management to bring in as much money NOW as they can.
As an example, just two weeks ago a Revenue Officer issued a levy notice against one of my client’s banks, in an effort to seize any money that was in there. Fortunately, the account was nearly empty, and the IRS only took a few dollars out of the account. The problem was that this client is on an active payment plan and is compliant with current deposit and return filing requirements. Under these conditions, it is actually a violation of Federal law for the IRS to issue a levy and forcefully take money. My client has a legitimate claim to sue the U.S. government if he chose to, and no judge would rule in favor of the Feds.
In addition to actions like this, the Treasury is also trying to identify other sources of funds to extend the inevitable. The Treasury has been raiding the Social Security Trust Fund for decades, to the point where that trust fund doesn’t actually exist anymore, and all payroll taxes collected by the government that should be going into the Social Security fund actually go to pay current benefits and into the general fund.
Now, the Treasury is looking to raid other Federal pension funds. These are funds set aside to monthly benefits for Federal retirees, including both civil service and military pensions.
Yes, if you are a Federal retiree, your pension fund is going to be “borrowed from” later this summer in order to fund Federal government operations.
This sort of thing is going to continue until there is nothing left to borrow from. With the U.S. dollar on a path to be removed as the world’s reserve currency, the value of the dollar will continue to plummet, and there will be fewer and fewer buyers for U.S. Treasury debt.
If you haven’t already started, I would encourage you to start looking towards ways to hedge yourself against the inevitability of the U.S. reaching the same point that Greece and several other countries are already in. In future, I will be writing more and more about this topic, and we will be covering this topic quite a bit in the monthly Taxing Times Premium subscription newsletter.
A recent tax case in Washington state is starting to garner quite a bit of attention, and is raising significant questions about the extent of state taxing authority.
The case involves a processed food ingredient company that manufacturers rice byproducts and sells them as ingredients in other processed foods. The company operates out of three states, and ships it’s products to other manufacturers in all 50 states.
In 2011, the owner of the company was invited to visit the facility of a customer in Washington State, and he did so. This visit triggered an audit by the State of Washington, and resulted in a $180,000 tax bill for 7 years worth of unpaid business and occupation taxes.
While Washington does not have an income tax, it does have a tax on gross receipts of businesses. The tax rate varies based on the type of business, but as an example equals 1.8% of GROSS annual revenue for service businesses. Different product types have different taxing rates.
The manufacturer has no facilities, no sales reps, no offices, not even any registered vehicles in the state of Washington. By any legal definition, the company does not “conduct business” in the state.
However, the state of Washington has determined that, by making ONE business-related visit to the state, the manufacturer established a taxable presence in the state.
Obviously, this is complete and utter BS. However, it is apparently not an isolated case…simply the most egregious.
As state coffers are drained, they are all searching for every dime they can get their grubby hands on. In order to protect yourself, it is important to know the tax laws in regards to any location where you will be doing business.