Howard's IRS and the Law Blog

Trying to repay the IRS in an installment agreement can be difficult.  The interest and penalties the IRS charges doubles the original amount of tax you owe every five years.

Your installment agreement may keep the IRS at bay, but your tax liability does not get paid off.

The tax code and the IRS offers no real way of stopping interest and penalty accruals.  That is frustrating, but there are solutions.

The solution for many is in the bankruptcy code.  An IRS repayment plan made through a Chapter 13 bankruptcy can stop IRS interest and eliminate penalties. Chapter 13 can even reduce the amount of tax you pay.  This often results in a shortening the time it will take you to repay the IRS.

No one really wants to file bankruptcy, but making your installment payments by bankruptcy law, not tax law, can result in substantial benefits to you.

A Chapter 13 bankruptcy repayment plan can help you with the IRS.  Here’s how:

(1)     Interest stops.  Chapter 13 stops the IRS from charging you interest while you make your payments.  The interest you already owe the IRS can also be reduced by bankruptcy law.

(2)     Penalties can be reduced.  Chapter 13 can stop the accrual of IRS penalties.  Bankruptcy law can also force the IRS to accept a reduction in the penalties already charged.

(3)     Repay a percentage of what you owe to the IRS.   The amount of tax, interest and penalties repaid to the IRS can be as little as 1% by Chapter 13 bankruptcy law (vs. 100% in IRS installment agreements).  This is accomplished by use of the Chapter 13 bankruptcy “cramdown” rules.  You pay back olny what you can afford on older income tax debts in a Chapter 13.  Anything you cannot afford to repay on the older taxes is eliminated.

(4)     IRS collections stop.  Once you file a Chapter 13, the IRS is prevented from levying your property.  Bankruptcy creates a “stay” on the IRS.  You keep everything in a Chapter 13 tax bankruptcy.

(5)     Your budget.  If the IRS will not allow some of your expenses in an installment agreement, bankruptcy law could.  A Chapter 13 tax bankruptcy means you pay the IRS what your reasonable budget permits under bankruptcy law standards.  You eliminate much of the use of IRS “living expense standards.”

In most cases, the Chapter 13 bankruptcy results in you paying back much less than what you would in an IRS installment agreement.  What you pay does not double by tax law, but can be reduced by bankruptcy law.  Comparison of a Chapter 13 repayment plan vs. IRS installment agreement can save you time and money.

In most every case, the IRS cannot take your property until they send you a letter stating their intentions.  This letter – called a “Final Notice of Intent to Levy” – is the government’s last attempt to reach you before they start levying your wages, bank accounts or other property.

The Final Notice of Intent to Levy gives you very important rights to stop the levy and resolve your case.

Here is what you need to know:

(1)     If the IRS has not sent the Final Notice of Intent to Levy to you, you are protected.  If you are unsure if you have received it, the IRS can be contacted to determine if it has been sent and what action needs to be taken.  Here is what the IRS final notice looks like.

(2)     If the IRS has sent you the final notice, they have to wait 30 days after the letter is sent to start collection.  During this 30 day window, you have the right to file a request for an administrative meeting with an IRS appeals officer.  The purpose of the meeting is to discuss alternatives with the IRS to property seizure.  This is known as a collection due process appeal.

(3)     The IRS is legally prohibited from taking your property until your appeal is completed. Typically, it takes the IRS about four to six months to have your case assigned to appeals officer and for your conference.

(4)     IRS appeals officers tend to be best equipped to resolve your case in a manner that is fair to you. You will have one person assigned to your case and can have a face-to-face meeting if you request.  This is impossible if you go through the IRS automated collection 1-800 systems for resolution.  Meeting with an IRS appeals officer usually gives you the best chance at reaching a fair resolution – that is their job.

(5)     Solutions you can request from appeals include an installment agreement, hardship “uncollectible status,” offer in compromise or innocent spouse claim.

(6)     If you cannot agree with IRS appeals over how to resolve your case, you have the right to have an independent Tax Court judge review your case. If you have a strong case and can show that the IRS is being unreasonable, the hold on collection will continue while your Tax Court case is pending and decided.

If it has been more than 30 days since the IRS sent you the Final Notice of Intent to Levy, you still have options. IRS administrative policy (see Internal Revenue Manual 5.1.9.3.2.3) is to process a late-filed collection due process appeal if it is filed within one year after the final notice is sent.  Filing your appeal late gives you the same administrative rights as filing timely – a hold on collection and meeting with an appeals officer.  You lose the right to go to Tax Court by filing late.

Exercising your rights to a collection due process hearing allows you to achieve a solution with an IRS appeals officer without the threat of collection.  This levels the playing field during negotiations – no IRS  levy or seizure – and puts you in the best place for resolution.

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 5.17.3.4.2. and Internal Revenue Manual 5.11.5.3.

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.

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