Howard's IRS and the Law Blog

Offer in compromise pointer: Claim the $200 ownership cost for an older car

September 26, 2010

in Collection Financial Standards, Form 433A, IRS Financial Statements, Offer in compromise

Before jumping in with an offer in compromise, it is important to understand how the standardized IRS expense allowances apply to you, and how they can benefit you.

Here is a valuable offer in compromise expense allowance to be aware of and to claim:

The IRS will allow you to claim a $200 vehicle ownership cost if you own an older vehicle and do not or will not have a car payment on it.  Yes, the IRS will give you an expense in this situation even if you do not actually have it.

In an offer, the IRS is trying to predict your future cash flow to pay them back. The purpose of the $200 auto ownership cost allowance is recognition that older cars will need replacement, and, as a result, it is likely you will have a car payment in the near future, even though you do not have one now.

You will qualify to claim the $200 auto ownership cost on your IRS 433A financial statement submitted with an offer in compromise if:

1.     You own a car and there is no monthly payment on it; or

2.     You own a car and have a monthly payment, but the car will be paid off before the IRS statute of limitations on collection expires;

and

3.     The car is over six years old; or

4.     The car has over 75,000 miles.

Here is an example from Internal Revenue Manual 5.8.5.6.3 illustrating the IRS’s allowance of auto ownership costs on older vehicles in compromises:

“The taxpayer, owns a 1995 Ford Taurus, with 90,000 reported miles. The vehicle was bought used, and the auto loan will be fully paid in 30 months, at $300 per month. In this situation, the taxpayer will be allowed the ownership expense until the loan is fully paid, i.e., $300 plus the allowable operating expense of $231 per month, for a total transportation allowance of $531 per month. After the auto loan is retired in 30 months, the ownership expense is not applicable; however, at that point, the taxpayer will be allowed a $200 operating expense allowance, in addition to the standard $231, for a total operating expense allowance of $431 per month.”

If the car referenced in this IRS example had no car payment when the offer was submitted, the IRS would immediately allow the $200 ownership cost allowance, rather than waiting for the car to be paid off.

Either way, making use of every IRS expense allowance in an offer in compromise goes a long way towards getting an offer through and putting the IRS behind you.

Will bankruptcy help in getting the IRS to release a levy or seizure?

September 11, 2010

in Bankruptcy - Chapter 13, Bankruptcy - Chapter 7, Bankruptcy and the IRS, IRS levies and property seizures

If you are having trouble convincing the IRS to release a levy or seizure of your property, bankruptcy may be the solution.

The filing of a bankruptcy creates what is known as an automatic stay against your creditors, including the IRS.   As its name implies, the automatic stay is indeed automatic – the filing of bankruptcy puts a “stay” on the IRS and requires immediate release of a levy or seizure of your property.

The purpose of the stay is to stop the pursuit of you and your property while you seek a fresh start from bankruptcy.

Bankruptcy takes away IRS discretion in releasing a levy or seizure – Section 362(a) of the bankruptcy code requires it.  In most cases, after a bankruptcy has been filed, a levy or seizure should be released within 24 hours.  Bankruptcy also prevents the IRS from filing Federal tax liens.

Relief from IRS collection enforcement is powerful part of our bankruptcy laws, but it is not the limit on what bankruptcy can do.  For example, if you cannot afford to repay the IRS, Chapter 7 bankruptcy can eliminate your taxes.  If you have some ability to make payments back to the IRS, a Chapter 13 bankruptcy can stop the IRS from charging additional interest and penalties on your payments, shorten the length of how long you will be making payments, and lower the amount of your payment.

If you are in a bind with the IRS, and when all else fails, bankruptcy may be the answer to stopping the IRS and reducing your debt load.

Offer in compromise rejected and want to try another one?

September 6, 2010

in IRS Financial Statements, Offer in compromise, Statute of limitations on collections

The offer in compromise program is the best known way to solve an IRS problem.  The compromise program is so popular that I often see clients who have submitted multiple offers, each one having been rejected by the IRS.

In fact, a 2006 report by the Government Accountability Office found that 40% of submitted compromises were repeat offers.  That is a statistic I advise you avoid being part of.

Submitting multiple offers is rarely the solution to ending your IRS troubles.  Unless there is something very different in your circumstances, multiple attempts to compromise will likely only add to your IRS frustration.  If the IRS said no the first time, is your case strong enough to get them to agree to a settlement a second time or third time around?

But did you know that every time you submit an offer in compromise, you extend the 10 year timeframe the IRS has collect unpaid taxes?

I see clients who still have the IRS coming after them even though they have owed the IRS for more than 10 years.  They should be done, but they are not because of the rejected offers they submitted over the years. They unknowingly extended their problem – and the statute of limitations on collection – rather than solving it.

Do your research before submitting an offer in compromise.  Make sure the offer has a legitimate chance for acceptance.  Know how your  living expenses stack up to the IRS standard allowances. Understand how the IRS will look at your cash flow and asset values.  And if your offer is accepted, can you raise the settlement funds and pay it to the IRS?

Know about bankruptcy as an alternative to an offer in compromise.  Learn whether you can use the statute of limitations on collection to your benefit by being uncollectible.  Consider whether an installment agreement is better for you than an offer in compromise – making payments does not add time to the collection statute.

An offer in compromise is not the only way to handle an IRS problem – it is just the best promoted.  The IRS compromise program is viable for the right candidate, but it is not an open door policy.  There are consequences to just plunging in blindly with an offer in compromise. Before you submit an offer, know what you are getting into and make an informed decision as to all of your options, not just one.

IRS levy on my bank account: When can I use it again?

July 31, 2010

in Automated Collection Service, Economic hardship and the IRS, IRS levies and property seizures, Revenue Officers

My response to a reader’s question about what happens to your bank account after the IRS hits it with a levy.

The IRS has levied my bank account and there was not enough funds to cover the total levy. Will the IRS levy all future deposits until it is satisfied or can I continue to deposit and pay my bills? Thank you, Jerry.

An IRS bank levy attaches only to funds in your account at the time your bank processes the levy. Any future deposits that you make are not subject to the levy once it has been processed.

For example, if you have $200 in your account at the time of levy, your bank will deduct that.  If you make a $1,000 deposit the next day, that money is yours and is not subject to the levy – you keep it. The levy was extinguished when the $200 was deducted.

An IRS bank levy is not continuous on your account.

After the levy is processed, you can continue to use the account and pay your bills.  The IRS would have to send a brand new levy to get money out of your account again.  This is certainly possible, but my experience is that another bank levy is unlikely to happen in rapid fire succession, but caution should be exercised.  Your account is clearly active in the IRS collection queue, and you may also be at risk for a levy on wages.

You should also know that an IRS bank levy requires your bank to hold the levied funds for 20 days before sending it to the IRS. This gives you a window of time to contact the IRS, negotiate a release of the levy and have the funds restored to your account.

If you have been hit with a bank account levy, the IRS is trying to get your attention.   The IRS resorts to enforcement when they cannot get account resolution voluntarily.  What to do next depends on many factors, including the age of your account, your need to recover the funds, and your ability (or inability) to repay the debt.

Losing your tax refunds to the IRS every year but need the money? Consider these changes.

July 24, 2010

in Divorce and the IRS, Innocent spouse, IRS Financial Statements, Unfiled returns

If you owe the IRS and have a refund on your tax return, the IRS will keep the refund and apply it to your unpaid taxes.  The problem is not repaying the debt – you would if you could – but that you simply cannot afford to lose the refund.  The refund is needed to pay bills, repair a car, or see the doctor.

The solution to any lost refund issue:  Review your withholding to eliminate the IRS refund and put the cash in pocket for necessary expenses.

If you are losing your refunds to the IRS, change your withholding.   Take your refund, divide it by the number of your paychecks, and tell your employer to lower your withholding by that amount each pay period.  You can also change the number of exemptions you are claiming, although I prefer making a specific dollar change.  You will probably need to complete a new W-4 for the change.

If you are married, file jointly and only your spouse owes the IRS, it is important to attach an Injured Spouse Allocation (Form 8379) to your return.

You are being injured by the IRS taking your refund and applying it to your spouse’s tax liability. You can still file jointly – there are benefits to you over filing separately –  but use the injured spouse allocation – it permits the IRS to calculate how much of the refund was generated by you, and pay it to you, rather than apply it to a debt that is not yours.

Most tax refunds are generated from too much withholding.  In essence, this means you are making a loan to the IRS of your money by overpaying the current year’s taxes.  While for some this is a good way to accelerate paying the IRS back, if it is more than your budget can take, change your withholding or file a injured spouse claim.

Why? How? When? Making designated payments to the IRS

July 17, 2010

in Automated Collection Service, Employment taxes, IRS Collection Problems, Revenue Officers, Statute of limitations on collections, Trust fund recovery penalty

When you make a payment to the IRS, it will be automatically applied to your account in a manner that is in the IRS’s best interest.

But what is best for the IRS in handling your payment can be different from what is best for you.

In some situations, it is in your best interest to make a designated IRS payment, which tells the IRS how you would like them to handle and apply your payment.

Designated payments should be considered in the following situations:

1.     If you owe income taxes, it may be beneficial to designate your payment to pay a more recent tax liability off before paying an older liability.  This is recommended due to the 10 year IRS statute of limitations on collection.

Example:  If you owe taxes for 2001 – 2008, collection of the 2001 liability should expire well in advance of the 2008 debt.  If you are about to make a payment that will pay some – but not all – of your taxes, you could be best served by designating the payment to be applied to the most recent debt (2008) first.  This allows the older taxes a greater chance to expire from the statute of limitations on collection.

Without the designation, the IRS will apply the payment to the oldest tax year first (the one in which collection is set to expire).

If you are considering bankruptcy, voluntary payments can also be designated to pay nondischargeable taxes.

2.    If you owe employment taxes, a designated payment can help reduce exposure to the trust fund recovery penalty.  The IRS uses the trust fund recovery penalty to hold owners and employees of a business personally responsible for a portion of unpaid employment taxes.

If your business is set to make a payment on a past due employment tax liability, consider designating the payment to the trust fund portion of the employment taxes. This strategy reduces the exposure of the operators of the business to the IRS while simultaneously paying down the business debt.

You can make a designated payment only if your payment is submitted voluntarily. Payments made by installment agreement or by enforced IRS collection action (i.e., levy) are not considered voluntary and cannot be designated.  A payment is voluntary even if you are working with a Revenue Officer or Automated Collection Service provided it is made by your own choice and without an installment agreement or levy.

To properly make a designated payment, you need to specifically tell the IRS how to earmark it.  To accomplish this, first, in the memo portion of your check, insert your tax identification number, the tax form to which your payment relates (i.e., “Form 1040″) and the tax year or period you want to pay (i.e, “Tax Year 2003″).  Second, a cover letter should accompany your check stating the same information.  Keep a copy of the cover letter and your cancelled check as proof of the designation.

It is important to understand why, how and when IRS payments can be applied to your benefit.  Designating payments to the IRS is a right that should not be overlooked when voluntarily paying down your account.

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