Howard's IRS and the Law Blog

You have not filed your tax returns with the IRS in years, and want to put that behind you and make amends with the IRS.

But how many years of nonfiled returns do you need to prepare to become compliant with the IRS?

It seems so overwhelming – where do you start?

5 years?

10 years?

20 years?

The good news is that the IRS does not require you to go back 20 years, or even 10 years, on your unfiled tax returns.

In most cases, the IRS requires you to go back and file your last six years of tax returns to get in their good graces.  And then, to make arrangements on payment of what is owed.

That’s right, a fairly reasonable and more manageable six years and working with IRS collections on payment options.

The six year enforcement period for delinquent returns is found in IRS Policy Statement 5-133 and Internal Revenue Manual

Part of the reason the IRS requires six years is manpower – the IRS cannot administer and staff the enforcement of unfiled tax returns going back as far as 10 or 20 years.  And believe it or not, the IRS’s records rarely, if ever, go back that far.  The IRS is looking to draw a line in the sand that is consistent with their internal resources, and at the same time secure a good faith effort at compliance from taxpayers to get current.  And that line in the sand is six years.

As for payment of what you will owe after the returns are filed, the IRS offers several programs, including installment agreements, offer in compromise settlements, and even currently not collectible status (where the IRS agrees not to enforce collection of your tax debt as it would create a financial hardship).  In some situations, bankruptcy can eliminate what you owe on the returns, too.

Bear in mind that this is a general rule, and will likely apply to most taxpayers who seek in good faith to come forward to the IRS on their unfiled tax returns.  The IRS can seek enforcement of longer periods if there are unique circumstances, such as income from illegal sources or hiding or concealing assets.  That is the exception, not the rule.

Indeed, not filing your tax returns is most always a civil issue (not criminal) that simply requires (1) filing the last six years’ tax returns and (2) making arrangements with the IRS to repay what you owe.

If you do not have all the records to prepare the returns, the IRS will often have copies of your W2s, 1099s, etc.  There are also methods to recreate your income and business expenses if your records are incomplete – one way, for example, is to determine your living expenses for any year you did not file.  You likely earned at least what you spent, and that forms a basis to recreate your income for a good faith tax return filing.

And criminal nonfiling cases are the exception, not the rule.  In most every case, the IRS simply wants you to voluntarily file the last six years returns, and then work with them on an agreement to pay or settle what you owe.  Criminal cases usually involve a level of sophistication and planning on your part that would show an intent beyond the good faith reason why you probably did not file – poor recordkeeping, medical trauma, divorce, fear or procrastination.

You do not have to be held back by unfiled tax returns.  The path to a fresh start is the last six years’ returns, and providing the IRS a plan of repayment. You do not have to be in a state of fear and inaction from the prospects of getting this behind you, and moving on.  It can actually be more manageable than you may think.

You just received a batch of IRS collection letters stating that your tax problem is “Urgent,” that the IRS might levy your wages, and, finally, that you should call the IRS immediately.

You consider doing what the IRS asked – picking up the phone and calling the IRS Automated Collection System (commonly known as “ACS”).  The day of reckoning cannot be put off any longer.

But the call to the IRS is not always that simple.

First, know that when you call, the IRS ACS agent on the other end is trained to immediately ask you a script of questions.

Here are the first questions you should expect to be asked when you call the IRS Automated Collection System:

1.     Your current address.

2.     Your telephone number.

3.     Where you bank.

4.     The name of your employer.

That’s right, before you can even get started in conversation, the IRS account representative is trained to extract financial information from you, including where you bank and work.

The purpose is to update the IRS’s database with bank levy and wage garnishment sources.

You are five minutes into the call, have disclosed valuable information, and received nothing back.  And the IRS is not done with its requests for information.

Expect the IRS account representative to next request that you provide a financial statement, which will include the amount of your income, a list of your monthly living expenses, the car you drive and what it’s worth, and the value of your house.  The IRS has specific forms for you to use for completing the financial statement disclosures, known as Form 433F (short form) or 433A (longer form).

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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.


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