Howard's IRS and the Law Blog

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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The average amount the IRS settles for in an offer in compromise is $6,629.  Sounds good, doesn’t it?

If only it was that easy – everyone would be doing it, right?

The reality is that in 2014, the IRS received 68,000 offers in compromise from taxpayers.

The IRS accepted 27,000 of those offers.

That’s an acceptance rate of 40%.  Or, if you are a glass half full kind of person, that’s a rejection rate of 60%.

The total amount accepted in those offers was $179 million.

If you are keeping score, that’s an average settlement of $6,629.

Now, that does not mean that you can settle with the IRS for that amount, or that there is a 40% chance your offer will be accepted.  The IRS uses a very specific formula in determining the settlement value of an OIC and whether to accept or reject it.  Your success depends on how you fit into the IRS formula.

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An IRS auditor wants to interview me – do I have to go?

by Howard S. Levy, Esq. on May 3, 2015

in IRS Audits

You just received a notice from the IRS that your tax return has been selected for audit.

But the real kicker is the IRS auditor’s request to interview you, face-to-face, possibly at your home or office.

IRS auditors like to move fast, and your letter probably has a date and selected for the interview.  There is not much time allowed for you to prepare, ready, or even steady yourself for the IRS.

Meeting with the IRS auditor is especially problematic – there is the anxiety, nerves, taking time off work, fear of the known or unknown, concern over saying something that could inadvertently hurt you, lack of familiarity with the process, or even a feeling of intimidation.

You have rights in IRS audits to protect you against yourself.

One of your most important IRS rights is that of representation.  You have the right to retain a professional – it can be an attorney, certified public account or enrolled agent – to help you and represent you in the audit.  Your representative takes you out of the middle of this.  Your nightmare is their expertise.

Once you have retained a professional, all IRS calls, correspondence and, yes, interviews, route through your representative.

That means your representative handles all the talking, writing, documents and negotiations with the IRS agent.

That includes meeting with the IRS agent – your attorney, for example, is fully authorized and permitted to meet with the IRS for you, and handle all interview questions for you.  You do not have to go to the interview and meet with the auditor.  Your attorney can do it for you.

Here’s why you don’t have to submit to an interview with the IRS auditor:

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