Howard's IRS and the Law Blog

When all of your efforts at resolution with the IRS have failed, and your frustrations have reached a boiling point, intervention from the IRS Taxpayer Advocate can help.

The IRS Taxpayer Advocate Service is just that – an independent operation inside the IRS charged with solving taxpayer problems and advocating on their behalf to the IRS.

When your IRS situation is dire, when everything else has failed, when the IRS is not responding or listening, or are not following their own guidelines or legal procedures – that is the time to bring in the IRS Taxpayer Advocate.

In other words, the Taxpayer Advocate is your friend at the IRS, an ally on the inside.

If you can prove to the IRS that any of the following situations are impacting you, we can request that the IRS Taxpayer Advocate open a case and intervene to help get you relief:

1.     The problem you are experiencing with the IRS is about to put you in financial distress. This could include the likelihood that the IRS’s failures are about to result in a levy on your paycheck or bank account and you will not be able to pay your rent.  Or maybe you have received an IRS letter stating that you owe them money when you do not.  But no one at the IRS is listening to your protestations.

2.     The IRS has put you under an immediate threat of adverse action.  For example, an IRS Revenue Officer may have made a demand for financial records and not given you enough time to complete the request, and is getting ready to levy your paycheck as a result.  You simply need a little more time, and need the IRS Taxpayer Advocate to help slow the Revenue Officer down so you can comply.

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If you have a tax dispute with the IRS, expect negotiations to be different than what you may be accustomed to.

In most negotiations, both sides have something at stake, something to gain and lose. In other words, an element of risk.

That dynamic can change when you have to step up to the plate and negotiate with the the IRS.

You have a lot at stake. It can be an IRS auditor queuing up a report that your return is wrong and that you owe the IRS money. Or it can be a threat from an IRS Revenue Officer that there will be a seizure of your wages, accounts, or even your house.

The IRS employee is doing his job, but without the same risk of loss that you have.

Simply put, the skin in the game is different.

And the approach to negotiating is different, too.

This is an oversimplification, and it is not the fault of IRS employees. They have a job to do in ensuring compliance with our tax laws, to audit a tax return for errors, or collect an unpaid tax liability.

The point is to gain an understanding of the nature of negotiating with the IRS. You cannot approach negotiating with the IRS the same way you would in the private sector.

For example, in the private sector, if you owed a $5,000 debt to a neighbor, you might be able to say “I have owed you this money for quite sometime. I feel really bad about it. A family member will give me $2,500 to call it a day – does that make sense and work for you? Why don’t we move on.”

If that $5,000 was owed to the IRS, making sense and moving on would have little to do with it.

Making that deal would involve the IRS getting out their guidelines to determine if you qualified for an offer in compromise. Those guidelines are located in the Internal Revenue Manual. The IRS would need to review a financial statement from you, looking at your income, living expenses, your assets and your debts. The IRS would also require documentation to support your financial status: pay stubs, bank statements, written verification of your other debts, and proof of living expenses.

This process can take at least six to nine months.

So much for handshake settlements with the IRS, huh?

If the IRS, after reviewing your information, thinks they can get paid in full over the time remaining on the statute of limitations on collections (which is 10 years), they will say no thank you. They will wait and see.

If that debt was owed to your neighbor (or a friend or relative), they probably would not want to wait 10 years to see if they could get paid in full, and would rather get some money in now and call it a day.

Not so for the IRS – their settlement guidelines do not permit that.

In negotiating with the IRS, common sense is following their playbook, the Internal Revenue Manual. You need to know, understand, and follow their guidelines to have success in negotiating.

And it also important to understand the power of the IRS when negotiating. Threats get nothing, and usually will only make matters worse.

In negotiating with the IRS, remember: When your head is in he mouth of the bear, say nice bear.

And adjust your negotiating style to accommodate IRS rules and regulations.

It is possible to get an IRS installment agreement to repay your taxes without ever disclosing where you work, what car you drive, what your house is worth, or even what you can actually pay.

No IRS Form 433A, Form 433B or 433F.  No application of the IRS Collection Financial Standards that can put a cap on your living expenses.

The IRS calls these payment plans direct debit installment agreements.  Sometimes, they are also referred to as streamlined installment agreements.

No managerial approval is required with direct debit installment agreements, and the IRS probably will not even file a tax lien against you and damage your credit if you qualify.

But qualifying for a simple IRS plan of resolution with the direct debit installment agreement is not always so simple.

The IRS bases qualifications for the direct debit installment agreement on a technical term called your “assessed balance.”

An assessed balance is what you originally owed the IRS when you filed your return.

Your assessed balanced has to be under $50,000 to qualify for the direct debit installment agreement.  That begs the question:  What is my assessed balance?

Here’s how the IRS calculates your assessed balance:

When you filed your return, the IRS made a bookkeeping entry on its books for the amount of tax you owed. This entry is called an assessment.

At the same time, the IRS probably charged you penalties.  These penalties could be for not paying your tax on time when you filed the return, for filing the return late, or not making estimated tax deposits.

When you file your return, the IRS will add a bookkeeping entry calculating the amount of penalties you owe at that time.  This is also an assessment.

The IRS will also make a calculation of any interest you owe on the unpaid balance when your return is filed, and place that amount on its books as an assessment.

Most penalties are charged over time.  For example, the late fling penalty is calculated at 5% for every month the return is filed late, maxing out at 25%.  The late payment penalty is 1/2 of 1% per month, maxing out at 25%. Interest also continues to accrue over time after the initial assessment.

Both the penalties and interest will continue to grow in an amount that is more than what was assessed when you filed your return.  After assessment, the IRS will continue to charge you for the penalties and interest.  The continued compounding of penalties and interest after the initial assessments are made are called accruals.

With our definitions (assessment and accruals) out of the way, let’s pull this all together.

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You have tried and failed at settling your tax debt with the IRS – your offer in compromise was rejected – and are now considering bankruptcy for relief from the taxman.

But before you jump in with the bankruptcy filing, it is important to understand how your offer in compromise could have complicated success with your bankruptcy discharge.

The bankruptcy code has several rules that must be followed to discharge a tax debt.  Most of the timing rules are based on the passage of time, including the time an offer in compromise was pending with the IRS.

An offer in compromise can upset the timing rules and delay your bankruptcy filing.

There are three primary timing rules when it comes to filing bankruptcy after an offer in compromise was submitted.

The first timing rule requires that your bankruptcy must be filed more than three years after your tax return was due to be filed.  This is known as the Three Year Rule.

The second bankruptcy timing rules involves the date you actually filed your tax return.  If you filed your tax return late, the bankruptcy must also be filed more than two years after the return was filed.  We call this the Two Rule.

The third rule is that bankruptcy must also be filed more than 240 days after the IRS placed your tax debt on its books (called an “assessment”).  This is the 240 Day Rule, and is where your offer in compromise comes into play and could trip up your bankruptcy filing.

If you filed your offer in compromise within those first 240 days after the IRS placed your tax debt on its books (“assessment”), the clock stops, and the 240 days stops running. That’s not a good thing, because the passage of time is essential to discharging taxes in bankruptcy.

That’s right, the bankruptcy code has specific language that limits the dischargeability of taxes if an offer in compromise was filed within 240 days of assessment.

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A certified mail slip comes in the mail, with a notation a letter awaits from you from the IRS, likely from the IRS Automated Collection Service.

Or maybe an IRS Revenue Officer makes an unannounced visit to your home or work, and after introductions, hands a letter to you.

This, you tell yourself, is serious.

You get the letter and open it, and find that you have been served with an IRS Final Notice Notice of Intent to Levy, identified in the upper-right hand corner as LT11.

Intimidating as it all may seem, you have the right to put the brakes on the IRS’s desire to levy your accounts, and transfer the handling of your case from the IRS collection division to the IRS office of appeals. To accomplish this, within 30 days, you have the legal right to file a Collection Due Process appeal.

But how do you file that appeal to protect yourself and your assets and get the appeal filed?

The IRS has a simple two page form that it wants you to use for the appeal, known as Form 12153, Request for a Collection Due Process Hearing.

The Final Notice of Intent to Levy should have come with a package of inserts, one of which would be the Form 12153 for you to use in filing your IRS-stopping appeal.

Great, another IRS form to fill out that you do not understand, right? The good news is the Form 12153 is pretty straightforward to complete and get filed.

Here’s how to complete the Form 12153 and get your Collection Due Process appeal underway:

Starting at top of the the first page of the Form 12153, fill in your name, address and social security number.

Next, you will find that the IRS requests that you tell them what taxes you are appealing.  To do to this, reference the Final Notice of Intent to Levy – it will state the type of tax you owe (for example, income taxes), the IRS tax form that you filed creating the debt (i.e., Form 1040) and the years you owe (i.e., 2010, 2011, 2012).  Take that information from the final notice, and use it to tell the IRS what you owe and what you are appealing.

That’s it for the first page.

Now on to the second – and last – page.

The second page of the Form 12153 is primarily a “check-the-box” – it has boxes for you to check – the first being whether you are appealing the filing of a Federal tax lien or a Final Notice of Intent to Levy.  If you received a Final Notice of Intent to Levy, check the box “Proposed Levy or Actual Levy” as you dispute the IRS’s stated desire to levy you.  If the IRS also filed a tax lien, you can check that box, too.

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Owing just credit cards or just the IRS is a heavy load.

But what if you are strugglng with credit card debt and have fallen behind on your taxes, and are understandably sinking under their combined weight?

For a while, it may be manageable – the IRS sometimes takes a while to rear its ugly head, and you can buy a little time by paying the credit cards a little every month and keeping them off your back.

But the monthly credit card payments get you nowhere – despite the good money you are throwing their way, you hardly make a dent in the balances.

And then the IRS come calling.  A local Revenue Officer pays you a visit at home or work, or maybe your bank account or wages are garnished, it could even be the onslaught of IRS collection letters filling your mailbox.

And you find out that the IRS really does not care about your credit card problem.  The payments you are sending to the credit cards, well, the IRS tells you to send that to them, or they will garnish your accounts.  In debtor-creditor law, the IRS is often considered a preferred creditor, meaning that they have a right to get paid before the credit cards.

Your house of cards is crumbling.  If you pay the IRS what they want, then the credit card companies are going to start dunning you – calls, letters, third-party debt collectors, threats of lawsuits from lawyers.

There are solutions to slay this two-headed monster.

First, if you owe the IRS under $50,000, they will give you a 72 month payment plan on your taxes and not inquire about your credit card debt. The IRS will not ask you to send the credit card money to them if you can afford to repay the taxes over 72 months.  In fact, the IRS won’t even ask you for financial disclosures of where you work, what you drive, how much your house is worth, or if you even have credit card debt. The IRS offers this as a simplified method to repay your taxes. It is called a direct debit installment agreement.

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