Let’s talk credit card debt

I realize that this is a blog about tax debt, but if you have tax debt, I assume that you have other debts as well. It has only been within the last few months that the IRS has softened their stance on allowing you to claim your minimum credit card payments as an allowable expense, so it’s a topic worth addressing.

Credit card debt in general is one of the biggest problems in our society. If you rack up a lot of it, and can’t pay it, life starts to suck when the creditors start calling. Five years ago, when I was heading into bankruptcy, one of my favorite days was the day that Qwest cut off my phone service because I couldn’t pay the bill. That was when the credit collection calls finally stopped!

If you’re looking to address your credit card debt, and other consumer debts as well, there is a simple and often repeated formula for paying down and eliminating those debts. You’ve probably heard two variations of this before, but I think they’re worth hearing again now and then.

The process is pretty simple: Make a list of all your debts, and rank them by priority based on either interest rate from highest to lowest, or by debt amount from lowest to highest. Then, take any extra money you have each month and put it towards the first item on the list.

Mathematically speaking, it’s best to rank them by interest rate. Most of the time, if you owe the IRS money, they’re going to be at the very tippy top because the combined interest and penalty rate can exceed 60% APR. However, many personal finance experts suggest doing it a little different, and paying off your smallest balances first. The rationale behind this is largely psychological, because paying off a smaller debt and being able to say, “It’s paid off!” gives a mental boost to the whole process.

After debt #1 is paid off, the money that was going towards it every month is now applied to debt #2. This accelerates payoff of that debt. Once debt #2 is paid off, the entire monthly amount from that goes to debt #3 until it’s paid off, etc. Eventually, everything is paid off.

While you’re making this debt paydown process, you’re generally making your minimum payments on your other credit cards. If you’re in a situation where money is extremely tight and you’re already several months behind on some bills, it may be worth considering stopping paying on them. If your credit score is already destroyed by being 90 days behind, being 9 MONTHS behind isn’t really going to make it much worse.

This is the strategy that I ultimately went to before my personal bankruptcy. Barely able to pay the mortgage and put food on the table, I started by no longer paying on my credit cards and unsecured lines of credit. It was more important to keep a roof over my head, the lights on, and food in my belly than to worry about my credit score and credit cards. The simple reality was that I didn’t have enough money coming in to pay everything, so I had to start making decisions about what was NOT going to get paid.

Hopefully, you aren’t or won’t get to that point, but it’s nice to know that it’s an option. Remember, debtors prison no longer exists in America, and sometimes you’ve gotta do what you’ve gotta do.

The Truth About Tax Resolution Fees

Within the tax resolution industry, there are a variety of fee models that you should be aware of. Different fee models have different potentials for abuse by the firm offering the services, and it is important to do your due diligence and fully understand what you are paying for, how much, and when, before ever paying a single dime to a tax resolution firm.

One of the most common fee models is a retainer model, which is a carryover from the world of legal and CPA firms from which many tax practitioners come. Under this model, you pay an up front amount, which the firm holds on to and then bills against on an hourly basis. Close to the time when the retainer is all used up, you will (or, actually, SHOULD) get a bill showing what was done, how long it took, and the hourly rate it was billed at. This bill will usually also include a request for additional retainer. The key thing to remember here is that if you don’t keep paying, they don’t keep working.

If you’ve been researching particular companies online, you may already have come across BBB, forum, Attorney General, and other complaints against some firms that aggressively bill down retainers, and are constantly asking their clients for more money, without making much significant progress on a client’s actual tax case. It is important that you thoroughly vet a company before giving them money, in order to avoid becoming another victim of a devious company.

Another common fee model is a flat fee-for-service model. This fee model has a large number of variations, from a flat fee for a specific package of quoted services, to a “menu of services” model where each service you can order off the menu has a specific fee. This latter method is very akin to the most common pricing model used in tax return preparation, where each specific tax form has a particular fee for preparing it. You’ll see this fee model used at just about any CPA firm or retail tax preparation outfit (including Jackson Hewitt, H&R Block, etc.).

When you are speaking with a sales person regarding a package of services, it is very, very important that you understand exactly what services you are being quoted for, and what the company’s policy is regarding fees for additional services. When it comes to tax matters, it is not uncommon for additional services to be required, which will require additional fees if they are not covered in the quotation you are already working under. Ideally, the sales person you speak with will have conducted a thorough analysis of your situation and will have included everything in the proposal sent to you.

When comparing proposals between multiple companies, keep in mind that you probably aren’t comparing apples and apples, but rather apples and oranges. Here are things to consider when comparing proposals between firms that are competing for your business:

  • Is any tax return preparation included in the quote?
  • Does the fee include all appeals necessary for handling your case?
  • For business owners, is Trust Fund Recovery Penalty representation included?
  • How many quarters or years of tax issues are covered by the fee quote?
  • Is a penalty abatement application included, or is that extra?
  • What specific resolution option does the fee cover, and what happens if the resolution strategy changes?

This last question is particularly important. There are some tax resolution firms that will try to sell everybody an Offer in Compromise, because they charge a higher fee for this service. However, it is critical for anybody and everybody to understand that most individuals and small businesses DO NOT QUALIFY for an Offer in Compromise. In fact, the IRS accepts less than 20% of all Offers that are ever submitted, and the only reason this number is so low is because of the high number of ineligible offers that get submitted in the first place. It is also important to understand that the average processing time for an Offer in Compromise exceeds 10 months.

What does this mean for your fee? Well, a reputable firm will conduct a thorough financial analysis, and tell you whether or not you are an Offer candidate. If you are not, then they will negotiate another resolution option for you within the same fee. If a firm tells you they will charge an additional fee for negotiating an Installment Agreement (monthly payment plan) after you’ve already paid a higher fee for an Offer in Compromise, then you should seriously question this.

You should also beware the firm that tells you that, yes, you are an Offer candidate, even when you own assets in excess of your tax liability. Simply put, if you have assets that exceed your tax debt, then the IRS will never accept your Offer. There is an incredibly rare exception to this rule, but it’s so rare that it only happens once or twice per year (literally). This exception is called the “Effective Tax Administration” rule, and if a firm tells you that you can qualify under this rule, then chances are you are being straight up lied to. You practically have to be on your death bed in order to qualify for this exception.

Another big thing to consider when discussing fees is the issue of what’s an appropriate fee, and what is too much. The cost of a service obviously varies based on geographical location, but in general fees for tax resolution services across the country do fall into a line of what’s appropriate and what’s not. Here are some examples of what would be considered standard fee ranges for certain services:

  • Negotiating an IRS Installment Agreement, penalty abatement, and all appeals on a $40,000 personal income tax debt: $2500
  • Same as above, but on a $200,000 business employment tax debt: $5,000 to $7,000
  • Trust Fund Recovery Penalty representation: from $1,000 to $2,500, depending on the nature of the case
  • Preparing a basic personal income tax return, married filing jointly, a home, two jobs, couple kids: $300-$500
  • Preparing a small corporate income tax return with less than $250,000 per year in revenue and no significant assets: $500-$800
  • Preparing a more advanced corporate tax return with multiple shareholders, assets, high revenues, etc: $1,200-$2,500
  • Negotiating an Offer in Compromise on a $150,000 personal tax debt: $3500 to $5000
  • Negotiating the release of a wage garnishment, and nothing else: $400 to $1,000

These are just examples of the types of fees you may see when it comes to working out tax problems. There are numerous factors that go into properly quoting a tax resolution fee, but when comparing proposals, these numbers can give you a good idea of what is considered reasonable.

Good, Bad, and Downright Ugly Tax Resolution Firms

The second most popular page on my personal blog lists the BBB ratings of tax relief firms. Unfortunately, I haven’t been able to keep up with that list over the past year, so it is woefully out of date.

However, I did recently find another Enrolled Agent by the name of Jay Freeborne that quite diligently maintains a very comprehensive list of tax resolution companies. When I found his list, he my company (Tax Help HQ) listed on the page of new and unknown firms, but after an email discussion, he moved us up to his “new, but acceptable” list. He called me an “interesting fellow”, which I’ll take as a compliment, and he seems like a good guy himself. I plan to meet with him in person in the next few weeks up in Seattle.

Since Jay does such a good job maintaining a list of new companies and the companies that are just going to take your money and run, I’m going to defer to his list if you are looking for that information. Here are his two lists:

Not Recommended – Companies With D to F BBB Ratings + Honorable Mentions

New & Unrated Companies, with commentary

Overseas assets, FBARs, and FATCA: a.k.a., FUBAR

Last month while I was in Switzerland for a week, I had the “opportunity” of visiting the US Embassy in Bern so that I could obtain a replacement for my stolen U.S. passport.

While I was there, I met several interesting people. One was attempting to obtain a U.S. Social Security Number so that she could file the U.S. income tax returns that the IRS was demanding that she file, since she was born in America, although technically German and Swiss. She had never been to the U.S. since she was 5 years old, and was now in her 50’s and the IRS wanted her returns.

Another lady was there to renounce her U.S. citizenship, under very similar circumstances. She had also been born on U.S. soil, technically making her a U.S. citizen. She had no family or other ties to the U.S., and not visited the U.S. since her teens, but had dutifully filed a U.S. tax return for the past dozen years. She was in her mid-30’s, had no intention of ever living in the U.S., and was very happily Swiss. She was renouncing her U.S. citizenship and turning in her U.S. passport for no other reason than to get away from the hassle of filing a U.S. tax return.

For those two individuals, it made absolutely no sense for them to being filing an American tax return.

But what if you do live in America, or intend to keep your U.S. citizenship, but spend time overseas? If you have overseas assets, especially banking and investment accounts, the IRS has you right in their crosshairs, and they are increasing the pressure.

The recently enacted Foreign Account Tax Compliance Act is the latest in a series of measures by the U.S. government to track down overseas assets and make sure that they are getting their cut. This legislation created a new form for us all to fill out, Form 8938, for certain overseas accounts. This is on top of the old Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts (FBAR).

Now keep in mind, there is absolutely nothing wrong, immoral, or illegal about having overseas assets or investments. In fact, it’s an incredibly smart move to invest some of your money overseas, since the U.S. dollar is so weak, U.S. banks are insolvent, and the U.S. economy stagnant. There are simply better places to obtain a higher rate of return on your money.

But what the IRS doesn’t like is when you are earning returns on that money, and not paying U.S. income tax on it. You see, America is one of the few countries in the world that taxes it’s citizens on their GLOBAL income, even if it wasn’t generated here. If you have overseas bond income, for example, then that is unearned income and subject to income tax, without the benefit of the Foreign Earned Income Exclusion (which allows you to exclude a certain amount of earned income each year that you earn overseas).

The IRS even wants to know how much money you have sitting in foreign bank accounts, even if that money has no tax impact, and has already been taxed as earnings here in the States. If you have more than $10,000 in a foreign bank or investment account at any time during the year, you have traditionally been required to file an FBAR report by June 30th of each year.

In addition, you must now file Form 8938 with your annual personal income tax return (Form 1040) if you have a foreign bank accounts, foreign stocks or other securities, or any other foreign financial interest if the total value of all your foreign stuff exceeds $50,000. The failure to report a foreign holding can result in a fine of up to $10,000.

Here’s the FUBAR’d part about new FATCA legislation: The U.S. government is now imposing a reporting requirement on foreign banks. That’s right: The U.S. government is forcing sovereign nations and their financial institutions to report information about American account holders to the U.S. government. Failure to make these reports will result in the U.S. government seizing 30% of any transaction coming into or out of the U.S. to or from that bank.

Some countries, such as Switzerland, that have traditionally had very strict bank secrecy protections, have been capitulating to the U.S. government and forcing their banks to send this information to the IRS, because American banking business is so important to the Swiss economy. However, many foreign financial institutions are simply choosing to no longer do business with American customers. There are nearly 6 million American citizens that legitimately live and work abroad that this could impact.

If you require assistance with FBAR compliance, taking advantage of the voluntary disclosure initiative open right now that waives criminal prosecution and some penalties, need help filling out Form 8938 or TD F 90-22.1, or have any questions regarding U.S. tax treaties with other countries or how to minimize your tax burden to the U.S., please contact me.

Are you ready for IRS collections season?

June is an interesting month at the IRS. It’s the month that marks the transition every year for the IRS from tax return processing season to tax collecting season. If you filed your 2011 tax return on time and had a balance due that you didn’t pay, then you’re now entering (or re-entering) the collections process.

If you had a 2011 tax balance, then you’ve probably already received a bill, and it’s about time that a lien gets filed if you haven’t paid the balance yet. If this is your first rodeo with the IRS, then you’re in for a not so fun ride. To learn what to expect, I suggest you read my article on How the IRS Works Collections Cases.

If 2011 brought you an increased balance on top of an existing tax debt, then you’ve already been through the drill. With return processing season finishing up, IRS personnel that were removed from other functions are now starting to be cycled back into their normal job functions. Many of these personnel are cycled from ACS, the IRS’ centralized collections agency. Now that they are going back to their normal jobs, the collections process will pick up.

I would highly encourage you to learn about your rights as a taxpayer (yes, you have rights), and to look at your options as soon as possible. DO NOT just ignore your tax debt, it doesn’t just go away. It is best to deal with it at the ACS level, and long before the IRS starts to consider enforced collections action against you, which could include levies and wage garnishments.

At TaxHelpHQ.com, we have many resources to help you resolve your tax debt situation. Be sure to look at the articles covering your specific situation, and take a look at our toolkits that may be applicable to your situation.

To fixing your tax issues,

Jassen Bowman, EA

Options for Low Income, Low Tax Debt Situations

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).

Until tomorrow,

Jassen Bowman, EA

IRS finally fixes the worst problem with the Offer in Compromise program

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

IRS Offers in Compromise And Your Tax Refund

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.

Federal Government Aims To Raid Federal Pension Funds

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.

Washington State Imposing B&O Tax On Out of State Businesses

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.