Articles Posted in Tax Debt

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A 2017 case is a stark $300,000 reminder that the IRS is not bound by statements made by its employees, such as Revenue Officers. Tommy Weder was a responsible officer of a corporation which failed to pay its payroll taxes, and as a result, he was assessed a trust fund recovery penalty (TFRP) pursuant to IRC Section 6672. After he paid the $300,000, he filed suit in federal district court in Oklahoma requesting a refund. His theory was that the company had paid $300,000 towards the trust fund taxes, and that, therefore, his personal liability was reduced by that amount. In most cases, a taxpayer must pay any tax in full (not just a portion) before he or she can file a suit for a refund. However, under the so-called Flora rule, payroll taxes are divisible taxes, therefore, the taxpayer must only pay the tax due for one employee for one quarter.

The IRS took the position that the payment was not properly designated toward the trust fund, and that it was therefore entitled to, and did, apply the payment towards non-trust fund taxes owed by the company, which of course doesn’t reduce the trust fund recovery penalty. Weder didn’t dispute that there hadn’t been a written designation of tax. The payment had been made through the IRS’ EFTS system, and there was no designation. Weder argued, however, that the Revenue Officer that had been assigned to collection had met with representatives of the company, including its CPA, and that the Revenue Officer had demanded that the payment be made through EFTPS, and represented that the payment would be applied to the trust fund taxes.

The court ruled that absent a WRITTEN designation by the company, the IRS was free to apply the payment in the “best interest” of the government. The Court relied on Rev. Proc. 2002-26, which provides that absent written directions, the IRS “will apply payments to periods in the order of priority that the Service determines will serve the Service’s best interest.” It pointed out that prior to Rev. Proc. 2002-26 being promulgated, the prior IRS guidance was contained in Rev. Rul. 73-2. CB 43. That Revenue ruling only required that taxpayers give “directions.”

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The IRS has issued a notice stating it will begin the process of revoking passports of individuals with “seriously delinquent tax debts.” Seriously delinquent tax debts are those totaling more than $50,000 indexed for inflation. According to the Internal Revenue Manual the threshold is now $51,000. The amount includes not just the tax, but penalties and interest as well. However, the statute refers to “assessed” liabilities, and there are many instances where the IRS doesn’t assess all of the accrued interest and penalties so it is possible to owe the IRS more than $50,000, and still not meet the threshold. Notably, FBAR penalties are not counted towards the threshold.

Revocation of passports is not new. It was authorized by Congress in December of 2015 pursuant to new Internal Revenue Code Section 7345. However, the IRS has not implemented the program until now.

Although most tax attorneys and tax accountants refer to the IRS revoking passports, what actually happens is the IRS sends a certification to the State Department, and the State Department will take action to revoke the passport. The IRS will notify taxpayers in writing at the time of certification using IRS Notice CP 508C. The IRS will send the notice by regular mail to the taxpayer’s last known address. Since they will not be sending it by certified mail, there will be no way to prove that the IRS didn’t send it in cases where the notice is not received.

Is There Anything I Can Do to Stop an IRS Wage Garnishment?
It’s best to try to stop a wage garnishment before it happens. If you owe the IRS back taxes and do not have any arguments for why the tax assessment is improper or incorrect, you should consider entering into an installment agreement or negotiating an Offer in Compromise. This will prevent any collection actions—such as a wage garnishment or bank account levy—as long as you fulfill your end of the agreement.

However, you may reach the point where a wage levy is imminent and you don’t have much time to stop it from happening. Fortunately, the IRS is required to give you a Collection Due Process (CDP) notice before initiating a wage garnishment against you.

Stop Wage Garnishment at a Collection Due Process Hearing

When is Tax Debt Dischargeable in Bankruptcy?
Some types of tax debt can be discharged in a Chapter 7 bankruptcy, and a debtor may pay less than the full amount owed for some taxes in a Chapter 13 bankruptcy. The amount of tax relief that is available will depend on several  factors including:

  • The type of bankruptcy you are filing
  • If your tax debt is old enough to be discharged (explained in detail below)

What is IRS Tax Lien Subordination?
Once the IRS files a federal tax lien, all other creditors or potential buyers have notice of the lien.  If someone buys your home, they will be buying the home subject to the lien unless you are able to negotiate a lien discharge. If you attempt to refinance your home, you will run into difficulties because the lender will not want their lien to be in a junior position to the IRS tax lien.

The general rule for lien priority is “first in time, first in right”, so if your first mortgage was recorded prior to the recording of the IRS tax lien, the first mortgage lender retains their priority. However, if the loan were refinanced, the lender would lose priority and fall behind the IRS if the home was foreclosed upon and the funds were disbursed to lienholders.

The IRS could give up its priority—which is known as tax lien subordination—which would allow the new lender to take a senior position to the IRS lien. Unfortunately, the IRS is not going to make such a gesture out of goodwill alone. They are only going to subordinate their lien interest if you have something to offer them, which usually takes one of two forms.

Can I Sell My Home Subject to a Federal Tax Lien?
Shortly after you fail to comply with an official demand for payment of your tax debt from the IRS, a secret lien attaches to all of your real property and personal property. However, the IRS can also file an official notice of federal tax lien on your home, and other property at the county recorder’s office, which puts the public on notice of the tax lien. This can seriously interfere with your ability to sell your home because any buyer would have to take the home subject to the lien.

However, the IRS will remove the lien—known as a lien discharge—in certain situations. By removing the lien, the IRS is giving up its right to this specific piece of property, which can be assigned a specific monetary value. The IRS will generally only give up this right if it receives something of equal value, or if there is sufficient equity in your other assets to convince the IRS that it will be able to get the money from your other assets.

For example, if you want to sell your home for $400,000, and you owe $300,000 on the first mortgage, the IRS has a lien interest of $100,000 on your home. If you want the IRS to give up this interest, you will have to either give $100,000 in value or show that you have other assets satisfactory to the IRS that will satisfy their claim.

What Happens After I Receive an IRS Notice?
The IRS sends taxpayers millions of notices per year. Whenever you receive correspondence from the IRS you should read it carefully and attempt to understand what the IRS is trying to tell you. This can be difficult because some notices are unclear to those who do are not familiar with tax laws or IRS procedures.

IRS notices can be informational, such as when you are notified that your tax return is going to be adjusted. However, you may still disagree with this notice, and you can attempt to take action to dispute the mistake by the IRS.

Other notices will warn you that the IRS is about to take a specific action. This could a Notice of Intent to Levy, which means that the IRS is about to seize some of your assets, including the funds in your bank account or a state tax refund. Another common notice is the Notice of Deficiency, which states that the IRS is planning to assess a tax liability against you, and gives you one last chance to dispute the amount in Tax Court before the IRS begins to collect it.

Which Option Should You Use to Settle Your Tax Debt?
Choosing the wrong option to settle your tax debt can be a very costly error. If you apply for an installment agreement, when you could have eliminated some of your debt with an Offer in Compromise, it could end up costing you thousands, and you can’t expect the IRS to notify you of your alternative settlement options. They will simply accept your payments, while you are forced to take on debt or deal with other financial difficulties in order to pay off your tax debt.

There are several options available to settle your tax debt. While this is by no means an exhaustive list, many taxpayers will be able to use one or more of these methods to reach a tax debt settlement.

Installment Agreements

Actions to Take Before You Can Pursue an IRS Tax Settlement
Before attempting to settle your IRS tax debt, there are a few things that every taxpayer should do. While some tax settlement cases can be fairly straightforward, there may be more advanced settlement options available for certain taxpayers, and missing out on these opportunities may prevent you from eliminating significant back taxes, penalties, or interest.

Follow these steps before attempting to settle you tax debt:

File Back Tax Returns

What to Do When You Can’t Pay Your Taxes
If you have an upcoming tax payment that you can’t pay, or have delinquent tax debt that is continuing to accrue, you may be tempted to delay filing your taxes. You may also want to avoid responding to any IRS notices you receive because you can’t pay off the tax debt listed on the notice. The desire to hide from your tax problems is understandable, but it is actually the worst thing you can do when you are unable to pay your tax liability.

Instead, you should file your taxes on time, respond to all IRS communications, and consider talking to a tax attorney about your options. Taking this proactive approach has several benefits, including the possibility of substantially reducing the amount of penalties and interest you owe and preventing any IRS collection actions.

Do Not Put Off Filing Your Taxes