Howard's IRS and the Law Blog

Will my IRS debt ever just go away?  Will there ever be a time that the IRS will just leave me alone?

Yes, and yes.

The collection of most every IRS debt eventually ends, and that would include yours.  This is called the statute of limitations on IRS collections.  The Internal Revenue Code gives the IRS a window of time to collect from you; after that window closes, you are free from your tax debt and the IRS.

Here are five truths about how many years the IRS to collect back taxes from you:

1.     There is an IRS statute of limitations on collecting taxes.  The IRS is limited to 10 years to collect back taxes, after that, they are barred by law from continuing collection activities against you.

2.     The IRS 10 year window to collect starts when the IRS originally determines that you owe taxes – that is usually when you filed your tax return, or when the result of an IRS audit becomes final.

3.     You can unknowingly give the IRS more time to collect.  The filing of an offer in compromise, innocent spouse request, collection due process appeal or bankruptcy all gives the IRS more than 10 years to collect.  Each of these acts extends the 10 years during the time they are pending.  If you submit an offer in compromise, and it takes the IRS 9 months to investigate it, and the compromise is rejected, the IRS will tack 9 more months on to your collection time frame.

4.     IRS tax liens become legally unenforceable when the collection window closes.  After the collection statute of limitations expires, the IRS will no longer have an valid lien on your property, including your house.

5.     After the IRS can no longer collect from you, they will make an internal adjustment to their books and credit your account for the amount of unpaid taxes, interest and penalties. IRS account transcripts can be obtained verifying that you no longer owe them – they will contain a line entry along the lines of “Time Frame To Collect Expired” and a resulting zero balance.

We can determine how much time the IRS has left to collect from you.  First, the IRS has a date in their internal database – they will tell us what it is if we ask.  Also, IRS account transcripts can be obtained and analyzed to determine and confirm your end date.  If you are uncomfortable calling the IRS, a Federal tax lien will have information on it that can be used to calculate the statute of limitation on collection.  It is important to know where you stand with the IRS, and to know whether you may soon be on ground that the IRS will be unable to reach.

Currently not collectible status protects you from the IRS, stopping levies, threatening letters and collection enforcement.  It forces the IRS to simply leave you alone without requiring any payment on your end.

The IRS will consider your account to be currently not collectible if we provide them a collection information statement verifying that there would be a financial hardship if the IRS forced you to pay them.

To the IRS, currently not collectible is “putting a debt on the shelf” – they take your case out of their active collection inventory (shelving it).  The Treasury Inspector General reports that from 2008-2013, the IRS reported 5.7 million delinquent accounts as currently not collectible.

In many cases, I have seen clients become uncollectible and remain there until the time frame the IRS has to collect (10 years) expires, after which the IRS debt is permanently removed and forgiven.

But what would make the IRS want to remove you from their inventory of uncollectible cases to determine if you are no longer entitled to financial hardship status?

To begin with, to remain uncollectible, the IRS requires that you file and pay all of your future taxes on time.  That means if you are self-employed and previously had trouble setting aside money to pay your taxes, you have to do that to stay uncollectible.

In addition to remaining current on your future taxes, what else should you be aware of if you are uncollectible?

1.     Increases in your income indicating to the IRS that you may no longer be in financial hardship.  The IRS will be looking at your future tax returns, and comparing that your income levels when they determined that you were currently not collectible.  If there are significant increases in your income, the IRS may contact you for a new collection information statement to see if the increased income translates into an ability to pay.

2.     Sometimes, when the IRS places your account in currently not collectible status, they will mark a follow-up date for review of your account.  If this occurs, in most situations, the IRS will give you two years as uncollectible until the follow-up date kicks in.  The IRS usually marks a case for future review only if there is an indicator when your are placed in uncollectible status that there could be an increase to your ability to pay later.  This could be the case if, for example, you earned significantly more last year, but had a dip this year and you cannot make payments to the IRS, they may mark your case for later review of whether the hardship continues.

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Do you need IRS audit or collection help, or can you go at it alone with the IRS?

You may currently be uncomfortable with what an IRS agent is telling you, or what your rights are, or if your case is proceeding the way it should.

Or there may be IRS threats of enforcement against your wages, bank accounts, or real estate – are they real, and if so, how can they be avoided?

Maybe the IRS may be requesting to interview you, or visit your house, or tour your business. Can they, should they?

Are there better options and solutions to your problem than what the IRS is telling you?

What are they not telling you?

Here are a few things you should know about your rights with the IRS:

To enter your house, you can voluntarily let the IRS in, but you may be uncomfortable with that.  Absent your permission, know that the IRS cannot enter your house without a court warrant allowing them to enter.  The same is true for your business.  You want to cooperate with the IRS, sure, but maybe usually we arrange a meeting at a neutral site, like my office.

The IRS likes to conduct interviews.  In audits, it is the first thing they will usually request – to meet with you, and interview you about your finances and tax return.  But you may uncomfortable with that, too.  Know that to interview you, the IRS must send out a summons to require your attendance if you do not want to voluntarily do it.

In most every audit, the personal interview process is alleviated as the IRS interview with me, about you.  In other words, I familiarize myself with your situation to answer the IRS questions about you, and for you.  Most IRS agents permit this provided their questions are satisfactorily answered.

If the IRS is threatening to levy your accounts or wages, know that before the IRS can take your property, the IRS has to send you a registered-mail letter notifying you of their intent to levy.  They can’t just do it randomly, by surprise, and without notice.

You also have the right to appeal most every IRS decision and not accept an auditor or collector’s decision as final.  You have rights to appeal the following:

–    The findings of an IRS auditor, both to the IRS Office of Appeals, and if that’s unsuccessful, to the independent U.S. Tax Court.  Yes, IRS audits are not final, nor are the findings of an IRS auditor.

–    Any decision by an IRS collections employee that you disagree with can be appealed by using the IRS Collection Appeals Program.  While the review is pending, the IRS is put on hold, and no enforcement occurs.

–    A rejection of an IRS offer in compromise is not final.  You have the right to appeal any dispute over settling your debt by an offer in compromise to an IRS appeals officer.

–    Similar to IRS audits, you have the right to appeal an IRS decision to levy to an IRS appeals officer, and then to Tax Court.  The appeal stops the IRS from levying until it is decided.

–    If you have offered to pay the IRS with an installment agreement, but the IRS denied your request, that decision is not final – you have the legal right to have a denied installment agreement reviewed by an independent, third party at the IRS.

–    If you already have an installment agreement, but the IRS sent you a notice to terminate it, you can appeal that, too, before it becomes final.

Taking your living quarters, denying you transportation, or taking your business from you is possible – and serious – but also fairly low on the IRS to-do list, all appearances and myths aside.

As a former IRS attorney, I have an appreciation of how the IRS works, how they think, and the best strategies to negotiate with them.

I spend most of my work day talking to the IRS, and I work to understand their job demands, work flow, and internal criteria to close a case.  My IRS experience and has helped me to bridge the gap between my clients and the IRS by having a better understanding for both sides.

So my answer is yes, if you have professional representation, the IRS will treat you differently. And that is exactly what you should want – to be treated in a manner where your rights are preserved, protected, and respected.

 

Can bankruptcy get you out of a bind with the IRS and eliminate your tax debt?

If this was a true or false law school exam, I would say that’s a trick question.  The answer is both – bankruptcy can discharge tax debt, and it can’t.

Huh?

There are many rules in the bankruptcy code that must be followed to have a tax debt discharged. And those rules make some taxes dischargeable, and some not. You can’t always just file bankruptcy and poof!, the IRS is gone.  But if you know the bankruptcy discharge rules, and follow those rules before you jump in, then yes, bankruptcy can be a friend in solving your IRS problem.

Here it is a nutshell:  Bankruptcy makes some debts easy to discharge, like credit cards and medical bills.  This is because Congress does not consider those debts to be of a type where extra effort has to be exerted for a fresh start.

Congress gives the IRS a chance to collect unpaid taxes before they can be discharged in bankruptcy.  That is different from, say credit cards, where there is no direct law giving credit card companies time to collect the debt before you can say bye-bye to them.  Congress has also made some taxes – like unpaid payroll taxes, or tax fraud – never dischargeable in bankruptcy.

Sometimes, you are ready to file bankruptcy and we determine that the time the IRS is allotted to collect has already expired, and you can immediately file bankruptcy and be done with your taxes, whether the IRS likes it or not.

Other times, we may have to put the IRS on hold and buy a little bit of time to get your bankruptcy filed so your taxes can be eliminated.

And there may be times where your taxes cannot be discharged in bankruptcy no matter how long you wait to file, such as when you owe employment taxes, have tax fraud, or your debt is the result of an IRS substitute for return.

Here, then, are the rules to making the IRS go away with bankruptcy.

First, the timing rules – how old must your tax debt be to wipe out the IRS in bankruptcy – there are three main rules to follow:

     1.  Three Year Rule.  Your bankruptcy must be filed at least three years after your tax return was due to filed with the IRS, including extensions.

Example:  You owe the IRS for 2010 taxes.  Your 2010 tax return was due to be filed with the IRS on April 15, 2011.  Your tax debt is eligible for bankruptcy after April 15, 2014.

and

      2.  Two Year Rule.  Your bankruptcy must be file at least two years after your tax return was actually filed.

Example:  You owe the IRS for 2010 taxes.  You filed the return late – on June 1, 2013.  Your debt is eligible for bankruptcy after June 1, 2015.

and

      3.  240 Day Rule (usually, eliminating tax debts from an IRS audit).  Your bankruptcy must be filed at least 240 days after the IRS puts the balance you owe on its books (called an assessment).  This rule usually applies in audit scenarios, when the IRS finds you owe them money after your return has been filed.  After the audit is complete and the IRS puts the money owed on its books, you have to wait 240 days to file the bankruptcy.

Example:  Your 2010 tax return was due on April 15, 2011, and filed on time.  The IRS then audited you, with audit completed and tax owed put on the IRS’ books on February 1, 2014 (assessment).  Your tax debt is eligible for bankruptcy on October 1, 2014, which is 240 days after the audit assessment was made, and more than three years since the return was filed.

All three of these rules – the Three Year Rule, the Two Year Rule, and the 240 Day Rule – must be met before you file bankruptcy.

But be careful – there are traps to avoid on the way to beating the tax bankruptcy timing rules.  Avoid these actions, which can extend the timing rules:

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