Howard's IRS and the Law Blog

In today’s difficult economic times, every dollar counts.  An offer in compromise may help, but for many there is a hidden cost – lost tax refunds.

Tax refunds increase the amount you pay to the IRS in an offer in compromise.

Here’s why:  The terms of an offer in compromise requires the IRS to keep your tax refund for the year in which the offer is accepted.  This means if your offer is accepted in 2010, the IRS will keep your refund from your 2010 tax return.

It may get worse.  The IRS will also keep your refund in any year in which the offer is under investigation.  So if you submit your offer in late 2008 but it is accepted in early 2010, you will lose the refunds on your 2008, 2009 and 2010 tax returns.

The solution is simple:  Always check how much your tax withholdings are before submitting an offer in compromise.  If a refund is on the horizon, request that your employer reduce the IRS withholdings so no refund is available.  The cash will be in your pocket, not the governments.

Your tax refunds can easily double the amount the IRS accepts in an IRS offer in compromise.  Planning ahead of time will ensure that the amount you pay is equal to the amount the IRS accepts.

Bankruptcy is a powerful tool in solving IRS problems – but can it stop the IRS from auditing you?

A centerpiece of bankruptcy law is the concept of an “automatic stay.”    The automatic stay stops creditors from calling and writing to enforce or collect a debt from you.  The “stay” on your creditors – including the IRS – starts the minute you file bankruptcy.

The automatic stay is why the IRS will immediately release a levy if you file for bankruptcy protection.

But can bankruptcy stop the IRS from conducting an audit?

Bad news first:  Although bankruptcy can be pretty absolute on the IRS, it falls short of being able to slow down an IRS audit.  The bankruptcy stay does not apply to IRS audits and will not stop them (Bankruptcy Code section 362(b)(9)).

Here’s the good news:  Bankruptcy can, however, eliminate any taxes, interest and penalties you might end up owing after an audit is completed.  The timing of the filing of the bankruptcy is important – among other conditions, you have to wait 240 days after the audit is final to be able to bankrupt an audit result.

IRS audits are often painstaking, but there can be light at the end of the tunnel.  You may not be able to stop the machine, but bankruptcy can clean up the damage.

IRS levies on those who are self-employed are serious, but it may not always be as bad as it seems.

If you are self-employed, and if your right to a payment is dependent on the performance of future services – meaning the “job” has not yet been completed – an IRS levy reaches nothing. Your right to the money is contingent upon completing performance. The IRS would need to serve the levy after the job is completed for it to be effective.

This result is because a levy on self-employment income reaches only what you have a fixed and determinable right to. In other words, the IRS stands in your shoes.  Whatever you have a right to at the time of levy, so does the IRS.  You have no right to money for uncompleted services.  See Treasury Regulation 301.6331-1(a)(1) and Internal Revenue Manual and Internal Revenue Manual

On the other hand, if performance has been completed, then there is a receivable owed to you – it is fixed and determinable, even though payment might be made later.

Here is a real example: I had a client who was self-employed playing piano at his church on Sundays. After services concluded, he was paid for his performance that same day. Before the performance – earlier that week – the church received an IRS levy.  The levy resulted in no funds to the IRS because no funds were due to my client at the time of the levy.  The IRS would have to serve the levy on the church on Sunday right after the performance to receive payment.  That was when my client’s right to the money was fixed and determinable.

One of the most feared powers of the IRS is their ability to take your property.  Wages, bank accounts, self-employment income and receivables are some of their favorites. But how much power the IRS has depends on the type of property they are seeking to take.  All IRS levies are not created equal.

Even if no money is due, if the IRS taking these steps, proper negotiation needs to be put in place to stop the aggression and achieve account resolution.

ACS can be intimidating – big, impersonal and far away on a 1-800 number.

Most IRS collection letters are sent from an Automated Collection Service Center (ACS).  ACS handles the incoming calls from the collection notices. It is responsible for levy releases, lien determinations and setting up installment agreements.

Here are some tips for successfully navigating ACS:

  • Be respectful.  It is easy to get frustrated with ACS, but it will get you nowhere.
  • Expect a wide range of policies and approaches.  It is important to know what IRS internal policy really is, and what the tax laws permit the IRS to do.
  • You should always write down the name and identification number of the representative helping you.
  • Good results are often based on the personality of the employee.  If you are getting a bad feeling, politely end the call and try again.
  • Be prepared:  Every time you call, you will speak to a different representative.
  • You can request to speak with a manager if necessary; you should receive a call back within 24 hours.
  • The representative has a computer in front of her.  She will be documenting your conversation.
  • Before ending the call, request that the representative read back to you her notes.  If you have to call back, the first thing the IRS will do is review the case history.

Closing the gap between you and an IRS Automated Collection Service can be simple if you are courteous, educated, and organized with the information that ACS is looking for.

Ads for IRS problems: Be informed, get the facts

by Howard S. Levy, Esq. on November 23, 2009

in Offer in compromise

Pennies on the dollar!  Act now before its too late! The laws may change!

During first consultations, my clients often have questions about advertisements they have seen on television or heard on the radio about the IRS offer in compromise process.  Here is my response:

The IRS offer in compromise rejection rate is 75%. The IRS accepted only 11,000 offers last year (out of the 44,000 that were submitted).

An offer in compromise is not for everyone.  Your finances have to match up with the IRS settlement guidelines.  Pennies on the dollar is possible, and is certainly a worthwhile goal.  But a detailed understanding of the what the IRS looks for in a financial statement is key to success.

Some ads also have a call to action – “act now as the laws might change.”

The insinuation that the laws might be changing for the worst is incorrect.  There are no changes in law pending in Congress that would hurt the offer in compromise program or disfavor taxpayers.

The irony is that there is a bill pending in the House Ways and Means Committee – The Tax Compromise Improvement Act that would help taxpayers by removing the current 20% nonrefundable offer deposit requirement.  This would make entry into the compromise process more affordable.

Bottom line is to be careful.   Ask questions, be informed and get the facts.  As my readers know, as an alternative to the 75% compromise rejection rate, I am a strong advocate of bankruptcy to elminate IRS taxes.

Everyday, I see how the IRS is responding to people hurt by the economy. The Journal of Tax Practice and Procedure asked me to write an article about it  – “IRS Collections in Troubled Times.”

Current IRS enforcement is centered on recovering government money that was spent to stabilize the economy.  As a result, the IRS is increasing its collection enforcement activities, with lien and levy filings hitting levels not seen since the mid-1990s.

The IRS has sought to soften the impact with public statements that it will attempt to be compassionate to taxpayers.  To their credit, the IRS is trying to be sensitive to those who have had job losses and income reductions.  But much of what the IRS is offering – like flexibility for missed installment payments – were available even in better times.

The reality is that fairness often comes down to individual situations and the IRS employee on the other end of the phone.  I have seen compassion and indifference.  There is some flexibility from the top; the essential question is how it is exercised.

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