By Todd Whalen - November 12, 2018
Charles Forsyth and Todd Whalen recently went to the NAEA (National Association of Enrolled Agents) national conference in Las Vegas. The NAEA has great conferences on how to fix tax problems, including 24 hours of continue professional education specifically on IRS resolution. Charles finished his NAEA fellow designation this August and is now officially an NAEA Fellow, the highest credential the NAEA offers showing competency in fixing IRS problems!!!
Then, as if that’s not enough, in September Charles was awarded the Professional designation of Certified Tax Resolution Specialist by the ASTPS (American Society of Tax Problem Solvers). This designation is the highest designation of the ASTPS showing competency in fixing tax problems!!! Charles is currently working on his master’s in taxation at Denver University and is stocking up a pretty impressive assortment of professional designations to help people with tax problems!!! Naturally, we are pretty proud of Charles!
By Charles Forsyth and Todd Whalen - November 1, 2018
Many people wonder, “Can the IRS can take your house?” The short answer is yes, they can take your home if they desire to do so. Under §6334(a)(13)(B)(i) of the Internal Revenue Code, the IRS exempts the principal residence of a taxpayer from levy EXCEPT when a judge or magistrate of a district court of the United States approves the levy in writing. One recent case where a judge approved a principal residence levy was the Gower case from the Summer of 2018 United States v. Gower 122 AFTR 2d 2018-5111.
The taxpayer and spouse owed about $150,000 in taxes for the years 2008-2013. After unsuccessfully trying to make arrangements to get a solution for the taxes themselves, the taxpayers had a federal tax lien filed against them. Not too long after the lien, they were visited by an IRS Revenue Officer (the most senior employee of the IRS collections division who works in the field.) After ignoring the Revenue Officer’s requests to get more information and ultimately come to a solution for the taxes, the Revenue Officer submitted a seizure memorandum recommending the IRS commence a civil action seeking approval of a principal residence seizure in the taxpayer’s case.
The moral of the story is do not delay when dealing with the IRS!
BUT!!! Before you panic, please note, before the IRS seizes a house it has to jump through a lot of hoops, including legal processes with their own attorneys. A house seizure by the Internal Revenue Service really is at the bottom of the IRS’s bag of tricks. There are a variety of means to avoid an IRS seizure, such as setting up a payment plan, asking the IRS for uncollectable status (a period of time of no collections while you get on your feet), or even a settlement for less money (called an Offer In Compromise). The IRS would much rather make arrangements for collecting or settling the debt rather than taking your home. The big takeaway, however, is to NOT ignore the IRS. If you ignore them, they have incredible powers that you do not want to work against you! It’s always better to tackle the tax problem head on than to stick your head in the sand. The ostrich rarely gets a good solution and can even lose its home! If you need professional help, please call us at 303-753-6040.
October 23, 2018
Welcome and thanks for visitng our new website! While our online look and feel has been updated our commitment to prodividiing high-quality and thorough tax services remains the same. Whether you need help with your payroll tax or need to work out a payment plan with the IRS we underdstand that there is no one size fits all solution and we pride ourselves on tailoring solutions that work best for each client.
We welcome you to take a look around our new site and let us know what you think. Thanks again for visitng and we look forward to working with you soon. For questions and tax advice give us a call at 303-753-6040.
The IRS uses many collection tactics to collect tax debts, but most people don’t understand what the IRS is doing or threatening. The main items that people frequently don’t understand are the differences between levies, garnishments and liens.
A levy is where the IRS seizes something. The IRS can take Accounts Receivable, Bank Accounts, physical assets, inventory and even your wages. A levy against any one of these items is a one-time hit (except wages). This doesn’t mean the IRS can’t levy it again, but to do so, they have to issue another levy. In other words, if the IRS levies your bank account they are entitled to all the money that is in the account on that day. If you make a deposit the next week, the new deposit is not subject to the levy. Only the money that was there on the day the bank received the levy notice has to be turned over to the IRS. The next week’s deposit it exempt from the levy. That is, exempt until the IRS issues another levy. Unlike a garnishment, there is no exemption amount (see below) on a bank levy or an accounts receivable levy, the IRS gets 100% of what is there.
When the IRS seizes wages, it is a recurring event and happens as often as you get paid. This is called a garnishment, and is a type of levy. Once the IRS notifies the employer of the garnishment, the employer has no choice, by law, but to honor the levy and from that point on, turn over to the IRS funds that are withheld from your pay. A garnishment doesn’t take 100% of your pay. There is an exemption amount that the employer has to continue to pay the employee, and then anything above that goes directly to the IRS. The exemption amount is very small and varies depending on a few factors such as how often you get paid, your filing status, and personal exemptions. Anything above this small exemption amount is sent to the IRS. A lot of people think a garnishment amount is a percentage of your pay, which is not true. Whether you make $2,000 per month or $20,000, the IRS will allow you to keep the same exemption amount, and the rest goes to the IRS until the debt is fully paid. The exemption amount for a single person with one exemption is $845.83 per MONTH. That is the amount you keep, the IRS gets that rest whether you earn $2,000 per month or $20,000. Imagine trying to pay your mortgage (or rent), utilities, car payment, and groceries on $845.83 per month. I see a lot of car payments in the $500 range, and I see rent in excess of $900 all the time. It’s hard to live like that. Generally a payment plan with the IRS will let you live a much better lifestyle than that, as they do factor in allowed expenses such as car payments, rent etc.
Before the IRS can levy or garnish they have to issue a letter called Form 1058 “Final Notice of Intent to Levy and Your Rights to a Hearing”. This is a very important letter and comes with some great appeal rights. You have 30 days to file an appeal. If you miss the deadline to file an appeal the IRS must wait an additional 15 days to make sure the appeal isn’t in the mail. After that the IRS has all levy powers and can seize your assets, bank accounts, and wages without further notice. If you receive a Final Notice of Intent to Levy it’s definitely time to quit procrastinating, as things get serous real fast if you ignore it.
It’s always best to get into a solution before the IRS levies.
A lien is very different from a levy or a garnishment. A lien is not considered a collection activity. It is a notice of an already existing lien. How this works is that the when you file a tax return with a balance due a lien automatically arises and the term is ‘statutory lien’. It would be unfair to enforce the lien against 3rd parties, so the IRS has to file a Notice of Federal Tax Lien before it can be enforced. That is the letter that you get in the mail.
After the IRS files the Notice of Federal Tax Lien, it shows up on your credit and attaches to personal and real property (for it to attach to real property it must be filed in the county of the property). This doesn’t mean the IRS will take the property, it only means it has a lien. So, just like a mortgage, it must be satisfied (paid or released) before ownership can transfer.
What happens is that the lien can been seen on your credit report and it fairly well destroys your credit. This is because liens are paid in the order filed. Therefore, if a bank wanted to loan you money (for example to buy a house) then the IRS lien would come before the bank. So if the bank later wanted to foreclose on the property, the IRS would have to be paid before the bank. The bank simply won’t go for that, and it becomes all but impossible to get a loan with a tax lien on your record.
The second result is that if you have property (such as a house) and the lien is filed, you cannot sell the property and receive any equity until after the IRS is paid. Generally the proceeds go to the bank first to satisfy their lien, then any second liens, and then to the IRS, and if there is anything leftover, to the homeowner.
As a final note of interest, sometimes the IRS will remove a lien long enough for you to borrow money. This process is called a lien subordination. However, it has to be in the IRS’s best interest to do so. Generally this would be done so you could borrow money to pay the IRS.
The difference between a levy and a lien is that a lien ruins your credit and prevents you from accessing any equity in the assets either by borrowing or sale; a levy on the other hand is a where the IRS actually takes something from you (seizing assets). A garnishment is a recurring levy, generally on wages.
For more information on levies liens and garnishments you can find more on the IRS website at https://www.irs.gov/levy
There are many solutions to a tax problem that can stop a levy or garnishment. The solutions range from making a payment plan with them to having the debt placed as uncollectable (depending on the amount owed, under the IRS’s Fresh Start program you may be able to get the lien release) . You may even qualify for an Offer In Compromise, which permanently settles the debt for less than you own.
If you want to discuss these issues with a professional that understands these complicated rules or need help with a tax problem, please call the office at 303-753-6040
A lot of people ask me if the IRS REALLY does compromise IRS debts. The answer is a resounding YES! We do lots of them with great success. But you need to understand how they work. Here’s a BRIEF (and incomplete) overview of how it works.
The IRS wants you to include the value of two things in an Offer In Compromise. They want to know the value of your assets (adjusted value) plus the future value of your income. They add them together to determine your “reasonable collection potential”. The RCP is the amount they think they could collect over time. Following is a quick example of how these two items are calculated for the purposes on an Offer In Compromise.
Value of your assets (adjusted value).
Things to consider when determining the adjusted value of your assets is that you get to reduce the assets to “quick sale value”. Items like houses and cars are reduced by 20% right off the bat, and then you reduce it further by any debts outstanding against the asset. An example would be a house, Fair Market Value of $250,000 with a mortgage of $190,000. Without knowing the rules, you may assume your net equity in the house is $60,000. But really, it’s $10,000 in the IRS’s eyes. This is calculated by taking $250,000 times 80% (20% reductions) which equals $200,000. Then subtract the mortgage of $190,000 and the IRS values your house at $10,000 for the Offer.
Any cash you have can be adjusted too. The cash you have is allowed to be reduced by a $1000 exemption as well as one-months’ worth of living expenses. For example, if you have $3,500 in the bank and your normal living expenses are $2,000 per month you could value the Cash at $500.00. This is calculated by subtracting one month’s household expenses ($2000) and the $1000 exemption from the $3500.00 which least $500 that has to be included in the Offer.
If there were no other assets (but things like IRAs, cars, and such would all have to be similarly valued), then the ASSET part of the Offer would be a total of $10,500. ($10,000 for the house but $500 cash).
Value of your Income
The IRS also wants to see what they can collect over time. Let’s say you make $3000 per month. If your monthly living expenses (subjects to caps, or maximums allowed) were $2500 per month (for housing, food, cars entertainment etc.) then there would be $500 left over each month that could be paid to the IRS. The IRS would place a value on that $500 per month by using a “factor”. Right now, the IRS uses a factor of 12 for a cash settlement (paid 5 months after the Offer is accepted), or a factor of 24 if you pay over two years. Most people do cash offers as they are a much better deal. Therefore, for the purposes of this example, the IRS would value the $500 per month in a cash offer at $6000. This is calculated by taking the left-over income of $500 multiplied by the Factor of 12 which is $6000.
Value of your offer
As mentioned prior, the IRS wants the value of your assets, plus the future value of your income stream. In this example the assets, as adjusted, totaled $10,500. The future value of the income stream was $6,000. Add those together and the total is $16,500. This is what you’d offer the IRS. So, if you owed $100,000 in back taxes the $16,500 would be a great deal! However, if you only owed $12,000, you would not want to make an offer. Perhaps a payment plan would be a better solution!
This is a very big simplification to just help you understand how an Offer In Compromise works. It’s not intended to be everything you need to know about submitting an Offer. The IRS has caps (maximums that they will allow) that need to be factored in. There are other ways to value assets. Valuing retirements plans would include subtracting the taxes and penalties for withdrawing the funds. If the IRS could collect the entire balance over the remaining statute of limitations for collections, then you would not qualify for an Offer at all. Because of theses things, and more, you can’t assume because of the example above you know everything you need to know to submit an Offer In Compromise. However, this might be helpful to settle your mind that they do indeed work, and maybe even help clarify whether you potentially qualify for an Offer (or not). I hope it helps!