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INTRODUCTION

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The biggest challenge facing Americans living and/or working abroad is the United States Internal Revenue Service. The U.S. is one of the few countries that tax its citizens abroad, and the only one that regularly locks up its people up in prison cells for violations of the tax code.

The Service’s hostility to foreign tax planning and attacks on international business has become legendary over the last five years. Criminal penalties aside, the financial risks for failing to file a report or form on time are extraordinary…some include penalties of up to $50,000 per year, per form. For this reason, many Americans are afraid to hold funds or assets abroad.

Even after determining what forms are required, an ever moving target, figuring your tax liability is like learning a foreign language. “IRS speak” is unique and convoluted…and a distant cousin to the business English you speak every day.

And, once you learn the lingo, applying that language to your situation requires advanced training in accounting and finance.

How much time will it take an average business person to learn the language, organize the accounting, and prepare the forms for a standard foreign corporation return? The IRS estimates you should spend 174 hours to complete Form 5471 and its schedules! That’s about 22 days, working 8 hours per day, while completely ignoring your business, employees, and other obligations.

Note: Time estimates are contained in the instructions for each form. For Form 5471, see page 14 of 17 at http://www.irs.gov/pub/irs-pdf/i5471.pdf

As few international entrepreneurs have the time or energy required to learn this language, some give up and stay onshore and others hand the entire mess over to their accountants and hope for the best. Those who really like to gamble, place their bets on off the shelf software costing anywhere from $25 to $150, with the expectation that the software will guide them through the maze and costly traps safely.

Think about that. Spending $25 to protect themselves from risks of $50,000+ is quite a gamble. Would you do that in any other area of your life or business?

Note: The tax attorneys and enrolled agents at Premier Offshore, Inc. have decades of combined experience in international taxation and we spend about $5,000 per year for professional level tax software.

With that in mind, the objectives of this tax guide are to

1) give you the tools to maximize profits and minimize taxes while working and living abroad,

2) provide a road map to the U.S. forms and reporting requirements, and

3) to point out the landmines of international taxation – costs and risks of failing to keep up with tax compliance.

Armed with this manual, you will be able to structure your business and plan your life abroad to your advantage…and those advantages can be significant. For example, a business owner may be able to reduce or completely eliminate U.S. income tax on his ordinary income while taking a salary tax free of up to $97,600 for 2013.  This means no Federal income taxes, no State income taxes, and no employment taxes (payroll, FICA, etc., which add up to 15% in the U.S.).

While you might not become a U.S. tax expert by the end of this guide, you will be better prepared to deal with your tax attorney, CPA or accountant. You will have an understanding of the options available, the forms required, and the questions that must be asked. You will be able to determine if your current preparer is capable of handling your new and more complex tax reporting and, by being better prepared, you should cut down on the time—and fees—spent with your advisor.

In addition to this guide, there are resources available on the IRS website at www.irs.gov.

For example, IRS Publications 593 and 54 should be reviewed by all U.S. ExPats (anyone living and/or working outside of their home country).

Publication 54 is a lengthy document, which goes into the nitty-gritty of overseas taxation—for a summary of the highlights, use Publication 593. Publication 593 can be viewed athttp://www.irs.gov/publications/p593/index.html and Publication 54 is at http://www.irs.gov/publications/p54/index.html.

If you have been living abroad, or had an offshore account, for several years and not been filing your U.S. forms, this guide can help you get in to compliance. However, a complete analysis of your situation should be undertaken by a qualified tax attorney before you file any amended or delinquent tax returns or forms. I suggest you start with the section of this report entitled “2012 IRS Offshore Compliance Program,” then review the IRS website at http://www.irs.gov/uac/2012-Offshore-Voluntary-Disclosure-Program for any new information. After you understand your options, read the rest of this guide to become familiar with your filing obligations and future planning options.

Finally, this guide is focused on your U.S. Federal Taxation issues. It is not meant to help you with

(1) liability for state income taxes;

(2) estate and probate matters;

(3) local taxes of a foreign country; or

(4) the community property laws of the U.S. states or foreign countries.

Other
Christian Reeves

Hiding Money in the U. S. of A.

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Want to hide money from the tax man? Come to America – Hiding Money is big big business.

“…the U.S. system welcomes foreigners with arms wide open and eyes wide shut.”

A few days ago, I met with the president of a large international investment bank in Panama. We’ve been friends for a number of years and went to one of my favorite places for dinner, Chalet Suizo – 1985, in El Cangrejo. After a few drinks, we got to talking about money laundering and the U.S.’s attempts to “stop the evil and protect us from terrorists.”

My friend’s view was that the vast majority of money laundering is done in the United States by American banks. He believes that 80% to 90% of the money hidden from international tax authorities is invested in the United States, and that there is nothing these foreign governments can do to get to it. Most of this money is from Europe, but a great deal comes from Mexico, Venezuela, Colombia, and other parts of Latin America.

Every international banker I’ve ever met will agree with this assessment, as do a number of scholarly studies. In fact, some estimate the amount of money hidden in the U.S. in the billions of dollars. It represents a very significant portion of fund held in U.S. dollars, and the liquid capital of many prominent banks.

While the Department of Justice is aggressively going after its citizens for not paying up, the government is making it easier to bring in untaxed money and protecting foreigners from discovery. While it is near impossible for a U.S. citizen to get an account abroad, anyone can open an account in the United States with no questions asked.

Don’t believe me? Here is how the system really works:

Let’s say you, an upstanding U.S. citizen, want to open an account in Panama. First, you might not be able to find an institution willing to take your money…about 90% of the banks are closed to Americans. Second, if you manage to talk your way past the front door, you will have a battle on your hands to get an account approved. You will be required to travel to Panama for an interview where you must:

1. explain why you need the account,

2. prove where the money came from (source of your savings),

3. where the money that will go through the account will come from (prove your business model),

4. provide two forms of ID,

5. provide two professional reference letters (these will be verified),

6. provide statements and a letter from your U.S. bank saying how long you’ve been a client, that your account is in good standing, and how much money you usually have at the bank,

7. pass a WorldCheck screening,

8. undergo a due diligence investigation by the bank’s compliance department that will take weeks, and

9. if this is a corporate account, the above is required for all shareholders and directors, not just those who are signors on the account.

If you manage to get an account open and operating, each time you write a check or send a wire, the bank will want to know why you are sending the money and to whom. Recipients of any significant wire transfers will also need to go through a WorldCheck screening before the wire will be initiated.

And these rules apply to all foreigners, not just Americans. Are you a Colombian or Venezuelan working in Panama? You must go through all the same due diligence. In fact, I know of only one bank in Panama that will accept smaller accounts from Colombians, compared to 3 or 4 banks that accept Americans.

Want to open an account in the U.S. with your Panama corporation? Good luck! While my well-healed clients (those with $250,000+ at a bank with long standing relationships with a private banker) have been able to open these accounts, average Americans are being told to pound sand. I’ve even seen some Americans with foreign entities at Wells Fargo and Bank of America kicked to the curb after the account was opened and compliance had time to review the file.

Now, let’s say you are a Mexican citizen and you want to open an account in the United States. Just walk in to any branch with your “passport” or other ID and you’ll have an account within 15 minutes. There are no questions asked, no references required, and no background checks. In fact, the bank does not even bother to verify the passport or ID document in any way. The only due diligence the bank will undertake is to run the name on the account through their database to see if you’ve bounced a check or had problems under that name at other banks.

Well, what if you are an undocumented worker or illegal immigrant in the U.S. and want an account? No problem. Just show up with some sort of ID and get an account. No verification required. This is not a secret…institutions like Union Bank and Bank of America have marketed these services to undocumented workers and let them know in advance that no questions will be asked.

Note: Back in 2007, bank accounts for illegals were a hot political topic and got a lot of press. For an example, see: http://articles.latimes.com/2007/feb/14/business/fi-credit14. These days, they are common practice and no one cares.

What’s the catch? If you have a checking or savings account and are not a U.S. citizen, or can’t be bothered to fake a Social Security card, you won’t earn interest on your account. Yes, the bank makes their money…they just don’t give you a cut.

Now, here’s the story that really got me thinking and initiated this article:

A friend in Panama called me this morning and told me about opening a corporate account at a large bank in the United States by email with no questions asked. She is 28 years old, Panamanian with no ties to the U.S., and has had a small savings account at this bank in America for about 6 months. She sent an email to her representative basically saying:

“Hey, I have a small CD and savings account at your bank and I want a corporate account for my new business. I will form a corporation in Panama and want to know what is required to open a checking account at your bank.”

The banker wrote back (I summarize): “Dear Senorita, We will be happy to take your money and we don’t need nothing. Just let me know the name of the company you will form and I’ll will have your account ready today. We don’t want to know anything about the shareholders, source of funds, or business, and we don’t need a copy of the company documents. By the way, we have a special on a combo checking, savings, and corporate CD, which will save you money on fees…I suggest we open all 3 accounts today.”

After battling for so many clients to open accounts abroad, stories like this really hurt. Basically, the bank was willing to open the account under any corporate name, with no due diligence or hassle. She did not even need to form the corporation…just provide a name…any name…and the account will be ready.

While the IRS is locking up Americans with unreported income, the U.S. system welcomes foreigners with arms wide open and eyes wide shut. My friend has no intentions of doing anything illegal, but her experience proves how easy it would be for non-nationals to hide and launder funds in the U. S. of A.

Keep in mind that it is the United States who is pushing for “compliance” worldwide and forcing banks in countries like Panama to put up so many barriers to new clients. This means that citizens have very few options abroad, which may force them to return their funds to U.S. banks. At the same time, it pushes foreign money out of smaller countries and in to the American system (path of least resistance), where accounts are easy and no one gives a damn where the money came from.

Essentially, America gets its cake ($5 billion+ and counting in taxes and penalties raised on the backs of Americans with international accounts) and to eat it too (billions in the banking system and in U.S. dollars from undisclosed and unreported sources).

Convert to a Roth 401k
Christian Reeves

Fiscal Cliff Tax Break for Your 401(k)

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Good news for the millions of Americans with 401(k) plans – you can convert to a Roth 401(k) at any time. Buried in the Fiscal Cliff bill was a big break – you can now convert your 401(k), 403(b) and other defined contribution plans to a Roth at any time.

In previous years, you could convert your 401(k) to a Roth only if you changed jobs, retired, or turned 59 ½. Now, you can convert to a Roth at any time on the same terms as an IRA. In other words, 401(k)s and IRAs are on a level playing field when converting to Roth tax status.

The tax differences between a 401(k) and a Roth 401(k) are simple enough. With a traditional 401(k) you deduct contributions as they are made and pay taxes when you take distributions (tax deferred). With a Roth 401(k) you do not get a deduction when you make the contribution and your 401(k) grows tax free (tax exempt). Note that tax free principal and growth in a Roth 401(k) still requires that the funds be invested for at least 5 years and can’t be withdrawn until you reach age 59½.

The other major differences between a 401(k) and a Roth 401(k) are the contribution levels. For 2013, those under 50 can contribute $17,000 and those 50 and over can contribute $22,500 to a 401(k). The most you can place in a Roth 401(k) is $5,000 if you are under 50 and $6,000 if you are 50+. Additionally, Roth IRA contributions are prohibited when taxpayers earn a Modified Adjusted Gross Income of more than $110,000, ($160,000 for married filing jointly). For other issues, such as catch-up contributions, click here for the IRS website.

Employers are permitted to make matching contributions on their employees’ designated Roth 401(k). However, these contributions do not receive the Roth tax treatment. The matching contributions are allocated to a pre-tax account, just as matching contributions to a traditional 401(k). So, employer contributions are tax deferred, not tax exempt.

Here are a few other considerations when converting to a Roth 401(k):

  • Roth 401(k) contributions are irrevocable. Once money is invested into a Roth 401(k) account, it cannot be moved to a traditional 401(k) account. This means there are no mulligans when you convert to a Roth 401(k). The Fiscal Cliff legislation does not allow for an in-plan recharacterization – the ability to undue the conversion. If you convert and lose your job, or the bottom falls out of the market, you are stuck paying the taxes.
  • Employees may roll their Roth 401(k) contributions over to a Roth IRA account upon changing jobs or retiring.
  • Not all employers offer the Roth 401(k). Many smaller companies may feel that the added administrative burden is just too costly.
  • Unlike Roth IRAs, owners of Roth 401(k) accounts must begin distributions upon reaching age 70 ½, similar to required minimum distributions for IRA and other retirement plans.

So, now that you can convert, should you? For a related article, please see my comments on why Expats should convert to a Roth ASAP. I note this was written in 2012 when tax rates were guaranteed to go up (5% short term capital gains increase, etc.).

A Roth 401(k) plan will probably be most advantageous to those who might otherwise choose a Roth IRA – for example, younger workers who are currently taxed in a lower tax bracket, but expect to be taxed in a higher bracket upon reaching retirement age. Higher-income workers near the Roth IRA income limits may prefer a traditional 401(k).

Another consideration is your views on the future of income tax rates in the U.S. If you believe taxes will continue to rise, then paying taxes now through a Roth 401(k) may be preferred. If you are an optimist, and hope tax rates will go down, then deferring taxation through a traditional 401(k) might be your bet. As I wrote in 2012, if you believe tax rates will go up, then convert to a Roth ASAP.

The same holds true for your investment methodology. If you are in “preservation” mode, holding U.S. treasuries and following the recommendations of your broker, then the tax free growth of a Roth 401(k) is of little benefit. If, on the other hand, you are actively diversifying out of the United States, using offshore self-directed LLCs and related strategies to grow your wealth, and investing with an eye towards maximum growth, a Roth 401(k) may result is significant tax savings in the long run.

Here are some of the other situations where a Roth conversion may make sense:

  • You want to leave a tax-free inheritance to your heirs, regardless of the cost, or your tax rate is significantly lower than your beneficiaries.
  • You are at the lower end of the tax-rate scale now and will likely be at a much higher tax-rate during retirement.
  • You have enough deductions and tax credits to offset the tax bill that would be due on the Roth conversion.
  • When will you need to access your retirement money? If very soon, say in the next 8 to 10 years, then a Roth conversion may not make sense.
  • Can you afford to pay the taxes on the conversion? If you are under age 59 ½ and need to take money from your retirement account to pay the taxes, it almost never makes sense to convert. If you are over 59 ½, and the 10% penalty will not apply, then payment of taxes from your retirement account may be advisable.

In conclusion, I note that the optimal strategy may include both Roth and traditional accounts. This will give you the most flexibility when navigating the sea of tax law changes in the years to come. For example, you might be able to avoid increased taxation of your Social Security benefits, or increased Medicare premiums and Obama-care costs by using tax-free Roth withdrawals to keep taxable income below a given threshold.

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Unfiled Tax Returns

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First Things First: Taking Care of Unfiled Tax Returns

The first step in dealing with the IRS is to file your delinquent federal personal income tax returns. Until these tax returns are submitted, the IRS can’t set up an Installment Agreement or accept an Offer in Compromise.

Clients often come in missing two, five or even ten years of returns. Our computer system and the workflow we set up are designed to quickly and efficiently prepare multiple years of delinquent tax returns while minimizing the taxes due.

When multiple years of tax returns are needed, it is common for records to be missing or incomplete. Our licensed tax attorneys and enrolled agents will access your IRS archives and get a report of income for each year. This data, along with your records, will be used to prepare your delinquent tax returns.

Premier Tax & Corporate, Inc., LLC can prepare both your federal and state returns, regardless of where you live. We can also prepare multi-state returns for those who have moved, or those who work in one state and live in another.

You can submit your tax data to us by mail, fax, or by uploading it to our secure server. You can also download one of our questionnaires to help you get started.

We have decades of tax preparation experience, clients in over 15 different countries, and we are qualified to prepare tax returns for all 50 states.

Whether you have a

  • 1040 – Individual Tax Return;
  • 1065 – Partnership Tax Return;
  • 1120 – Corporate Income Tax Return;
  • 1120S – Corporate Income Tax Return for an S Corporation; or
  • Informational returns for Foreign/Offshore Corporations (Form 5471) and Trusts (Forms 3520 and 3520-A),

we can help you save money and get compliant.

Preparation Fees:

  • Basic personal tax return with W-2 wages: US$225 per year.
  • Basic personal tax return with W-2 wages and itemized deductions, such as mortgage interest: US$325 per year
  • Personal tax returns with wages, itemized deductions, and Partnership or S-Corporation Income (Form K-1): US$425 per year and up, depending on complexity.
  • Personal return with small business (Schedule C/self-employment income): starting at US$325 per year (total fee will depend upon completeness of your income and expense records).
  • Personal returns with Foreign Earned Income Exclusion, Form 2555: US$325 per year.
  • U.S. Corporation and Partnership returns with less than US$250,000 in assets or sales: starting at US$625.
  • U.S. Corporation and Partnership returns with more than US$250,000 in assets or sales, requiring a balance sheet: starting at US$750.


Please contact us for a free quote. Click here to send an e-mail or call us at (800) 581-6716/(213) 985-1876.

Note: Because everyone’s tax preparation needs are unique, sign-up and payment must be made by phone, e-mail, fax, or regular mail.

Online Resources

You can submit all of your tax information to us through our secure web interface.

First, fill in the Tax Organizer with your income, expense, and other data. This form will help you get organized and will guide you through most tax situations. You can access your form as many times as you need, or create multiple forms to cover several tax years.

  • Click hereto download a standard questionnaire.

  • Click here to download a questionnaire for U.S. citizens living abroad.

  • Click here to download an additional form for self-employed persons.

  • Click here to download an additional form for rental real estate.

  • Click here to download a questionnaire for corporations.

Next, you can fax your supporting documents to us at (213) 260-8371, or upload them through the Document Upload Tool on our website. Using the online system will get your confidential information and documents to us in the most secure way possible.

 

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IRS Wage Garnishments

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The IRS Wage Garnishment: How It Works, How to Stop It

When you owe money to the IRS and you do not contact the government to set up monthly payments or file an Offer in Compromise, they can levy your paycheck, and this course of action is referred to as an IRS wage garnishment or IRS wage levy.

It is important to note that the only obligation the IRS has is to send a series of letters to your last known address. Once these have been sent, and 30 days have passed, the government can take most of your paycheck, as well as levy your bank account. There is no requirement that they make any real effort to find you, verify your address, or even make a phone call before attacking.

In a wage garnishment or wage levy, the IRS can take about 75% of your salary, leaving you with a subsistence wage…enough to pay for food, but that’s about it. The exact amount of a wage garnishment will depend on your salary, number of dependents, and other factors, but 75% is a good rule of thumb.

A wage garnishment is often more difficult to deal with than a bank levy. When the IRS takes 100% of your available assets with a bank levy, it may be easy to demonstrate that this created an unreasonable hardship. By comparison, when the IRS takes 75% of just one paycheck, it may be harder to show you are suffering. They then take 75% of the next paycheck, the next, and so on, until your debt is paid or other arrangements are made. On occasion, the IRS leaves a wage levy on your account to force you to get your financial statement and supporting documents together more quickly.

Time is of the essence when dealing with an IRS wage garnishment/wage levy. Allowing the IRS to drag out the process makes your financial situation more precarious with each paycheck.

The best way to avoid an IRS wage levy or wage garnishment is to be proactive. Contact the IRS and make payment arrangements. If you can’t afford to make monthly payments, submit an Offer in Compromise or request to be considered “temporarily uncollectable.” What you can’t do is ignore the problem.

You should not wait for someone to knock on your door, as this generally happens only after your bank accounts have been taken or a wage levy/wage garnishment is in place. It is up to you to be proactive and contact the IRS to resolve your debt.

By submitting a complete, accurate, and well-planned financial statement to the IRS you can stop a wage garnishment from happening, negotiate the release of a wage garnishment, as well as minimize an Offer in Compromise payoff amount or an Installment Agreement payment amount.

Premier Tax & Corporate, Inc., LLC will analyze your case, determine your best course of action, prepare your forms, review your supporting documents, send you a completed package reviewed by a tax attorney and an enrolled agent, and prepare a custom-made, detailed letter of instruction. We will also support you throughout the process by phone and online chat.

Put our decades of IRS experience to work for you and get great results. Click here to get started now, here to send an e-mail inquiry, or phone us at (800) 581-6716/(213) 985-1876 with any questions.

Christian Reeves

IRS Tax Liens

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IRS’s Enforced Collection Measures and What to Do About It

If you owe money to the IRS, the government will usually file a Federal Tax Lien. A tax lien is a negative mark on your credit report and “attaches” to any real estate you own. It is typically filed with your country recorder’s office.

By recording a lien with the credit-reporting agencies, the IRS is putting your other current and future creditors on notice that you owe money to the Federal Government.

By filing the lien with your country recorder, the IRS is attaching your personal income tax debt to any real estate you own. This places them in line as one of the creditors on your home.

For example, let’s say your home is worth US$300,000 and that you have a first mortgage for US$100,000, a second mortgage for US$50,000, and a Federal Tax Lien for US$50,000. When you sell your home, your first and second mortgages get paid, as does the IRS, leaving you with US$100,000.

Same example, but let’s say you owe the IRS US$500,000. When you sell your home, your first and second mortgages get paid in full, and the IRS taxes the balance of US$150,000…leaving you with nothing but a remaining IRS debt of US$350,000.

Same example where you owe the IRS US$500,000, but a lender foolishly lends you US$100,000 against your home after the IRS files its lien. When you sell your home, your first and second mortgages get paid in full, and the IRS takes the remaining US$150,000 of equity, leaving the new lender with nothing.

If you file an Offer in Compromise that is accepted by the IRS and you pay in full, the tax lien will be removed from your home and reported as satisfied to the credit agencies. However, your Offer in Compromise must include 80% of the equity available in your home.

Using the same example as above, where you have US$150,000 of equity in your home, if you file an Offer in Compromise, your offer amount must include 80% of that US$150,000, plus any extra income you have over your allowed expenses.

Therefore, if you are a retired person, living on a Social Security pension, and your only asset is your home, then you may be able to settle your IRS debt of US$500,000 for 80% of US$150,000, or US$120,000.

Note: The 20% non-refundable deposit must include your available equity and therefore you need to come up with the US$150 filing fee plus 20% of US$120,000, or US$24,000, to file the OIC above.

If you are working and your income is US$2,000 per month over your allowed expenses, then you may be able to settle for US$120,000 + (US$2,000 x 48) = US$216,000. In this case, your 20% non-refundable deposit is 20% of US$216,000, or US$43,200.

Because the value of your home is used in determining the 20% deposit, as well as the offer amount, a proper valuation of the home is a key component to a successful Offer in Compromise. Also, proper planning and documentation of the OIC prior to filing may reduce the value of any assets, minimize the 20% deposit, and ensure you get the best deal available from the IRS.

Premier Tax & Corporate, Inc., LLC will analyze your case, determine your best course of action, prepare your forms, review your supporting documents, send you a completed package reviewed by a tax attorney and an enrolled agent, and prepare a custom-made, detailed letter of instruction. We will also support you throughout the process by phone and online chat.

Put our decades of IRS experience to work for you and get great results. Click here to get started now, here to send an e-mail inquiry, or phone us at (800) 581-6716/(213) 985-1876 with any questions.

Christian Reeves

IRS Offer in Compromise

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What to Do When You Owe the IRS: The Offer in Compromise

The IRS Offer in Compromise (OIC) program is the most misunderstood, misrepresented, and abused tax debt resolution program in history. It reached nearly mythic status with late-night television ads promising to settle your tax debt for pennies on the dollar, and then crashing to earth when the government stepped in to shut down companies they alleged were “scams.”

The purpose of this web page is to separate myth from reality and explain the IRS Offer in Compromise program in a simple and straightforward way.

The Basics

The IRS Offer in Compromise program allows you to settle your IRS tax debt for less than the full amount if 1) you can’t afford to pay the debt in full; 2) your assets are significantly less than the debt; and 3) you convince the IRS that they can’t collect the debt in full in the future.

The intent of the program is that you offer something to the IRS that they could not otherwise take from you. For example, you might borrow money from a family member to settle your tax debt. Offers will not be considered if the liability can be paid in full as a lump sum or under an Installment Agreement.

First, it is said that you can’t afford to pay the debt in full when you do not have the money to pay all at once, and can’t make monthly payments over the statute of limitations, that will satisfy the debt. Your ability to pay is based on your income when compared to your allowed expenses, as well as cash in any bank accounts, retirement accounts, cash-value life insurance policies, money in investment/brokerage accounts, etc.

Note: The IRS has about 10 years to collect from you once you file your returns or the tax debt is “assessed” (usually as result of an audit). Once this period has expired, most tax debt is eliminated. This 10-year period is called the “statute of limitations.”

Second, your assets must be significantly less that the debt you owe to the IRS. These assets include the equity in real estate, automobiles, boats, etc. Basically, your assets are said to be less than your tax debt if, in the case you sold/liquidated everything you own, you still wouldn’t be close to paying off the IRS.

Finally, you must convince the IRS that they will not be able to collect from you in the future. This means that you must show that your income will not increase and that other circumstances will remain the same, making it impossible for you to pay the debt.

For example, if you are unemployed you do not qualify for an Offer in Compromise. The IRS will simply wait until you find employment and then make a determination on how much, if any, they can take from you.

Another common example in today’s tough economic times is someone who made good money in prior years, but whose salary has decreased significantly. In most cases, the IRS will wait a year or two to see if your situation improves before granting an Offer in Compromise. In other words, you may need two or three years of similar income before an OIC will be granted.

The Offer in Compromise Program is summarized in the following IRS policy statement:

“The Service will accept an Offer in Comprise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. An Offer in Compromise is a legitimate alternative to declaring a case as currently not collectable or to a protracted Installment Agreement. The goal is to achieve collection of what is potentially collectable at the earliest possible time and at the least cost to the government.”

Approval Rates

Most people do not have the skills or knowledge of the IRS collection process to prepare and document an Offer in Compromise that is in their best interest. Informal IRS estimates in Southern California for 2010 indicate that 75% of Offers in Compromise are returned due to forms being filled out incorrectly and that, of the 25% that are processed, approximately 50% of them are rejected.

The keys to a successful IRS Offer in Compromise are 1) a proper analysis of your tax situation, including a review of your income, expenses, and financial documents, and 2) a complete and accurate Offer in Compromise package.

Note: A proper analysis often shows that you do not qualify for an Offer in Compromise. Therefore, forms and instructions are produced to set up an Installment Agreement or to list you as “temporarily uncollectable.”

The Process

There were approximately 52,000 Offers in Compromise processed in 2009, and about 11,000, or 26%, of those were accepted. This compares to the height of the Offer in Compromise boom in 2004, when approximately 100,000 OICs were filed.

There are hundreds of IRS agents assigned to work these thousands of Offers in Compromise, and they must treat all taxpayers the same. This means that the Offer in Compromise program is very mechanical,with agents following strict guidelines and mathematical formulas to determine acceptance or rejection.

In most cases, an IRS agent receives the OIC package, researches the accuracy of the information provided, looks at prior-year income history, potential future earnings, and accepts or rejects the Offer in Compromise. Almost zero negotiation goes into this process. The only communication one is likely to get from the IRS during an OIC is a request for additional information or documents.

A typical Offer in Compromise requires:

  • IRS Form 656 – Offer in Compromise Booklet and Form;
  • Form 433-A – Collection Information Statement for Wage Earners and Self-Employed Individuals;
  • Form 433-B – Collection Information Statement for Businesses;
  • Supporting documentation: You will need three months of documentation on just about every expense and income you have. These amounts include pay stubs, credit card statements, mortgage or rent statements, investments, transportation, W-2s, tax returns, etc.

By preparing these documents correctly and properly researching the Offer prior to submission you are guaranteed of the best possible result.

What If I Don’t Qualify for an Offer in Compromise?

Most clients who contact us for tax relief do not qualify for an Offer in Compromise. Therefore, we assist them to set up an Installment Agreement, to be listed as “temporarily uncollectable,” or with one of the many other solutions available.

All forms of tax relief require the same steps and documentation:

  1. Filing all tax returns;
  2. A proper analysis of your tax situation to determine the best course of action;
  3. Planning and accounting in order to prepare an IRS financial statement, Form 433-A and/or 433-B when applicable;
  4. A complete and accurate IRS financial statement, Form 433-A and/or 433-B; and
  5. Supporting documents which match the information reported on the IRS financial statement(s).

Therefore, the key to successfully dealing with the IRS is to submit a complete, well-planned, and detailed package of information. This, combined with our unlimited phone and Internet support, guarantees you the best result possible.

Conclusion

Once you understand the intent and structured nature of the IRS Offer in Compromise program, as well as all other forms of tax relief, dealing with the IRS becomes much less scary, and it is easier to move forward toward resolving your IRS tax debt.

Keep in mind that the IRS’s objectives for the Offer in Compromise program are:

  • To effect collection of what would reasonably be collected at the earliest time possible and at the least cost to the government;
  • To resolve accounts receivable in the best interest of both the taxpayer and the government;
  • To give taxpayers a fresh start to enable them to voluntarily comply with all filing and paying requirements;
  • To collect funds which may not be collected through any other means.

If you qualify for an Offer in Compromise, you will eliminate your debt permanently and gain a fresh start with the Internal Revenue Service. If you do not qualify, you will prevent levies and other hostile actions from the IRS by dealing with the situation head-on through the Installment Agreement program, or one of the many other options or variations available.

Premier Tax & Corporate, Inc., LLC will analyze your case, determine your best course of action, prepare your forms, review your supporting documents, send you a completed package reviewed by a tax attorney and an enrolled agent, and prepare a custom-made, detailed letter of instruction. We will also support you throughout the process by phone and online chat.

Put our decades of IRS experience to work for you and get great results. Pleaseclick here to get started now, call one of our experienced and licensed tax professionals at (800) 581-6715/(213) 985-1876 to discuss your case, or click here to send us an e-mail.

Christian Reeves

IRS Bank Levies

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When Your Hard-earned Money Is at Risk—The IRS Bank Levies

If the IRS has levied your account, you have only 21 days to submit all the necessary documents and secure a release before the money is gone. Time is of the essence, so please contact us immediately!

One of the most powerful and vicious collection tools in the IRS toolbox is the bank levy. It allows the government to take all of the cash in your account up to the amount of your debt.

In other words, if you owe the IRS US$10,000 and you have US$12,000 in your bank account, a levy will take US$10,000 and leave you with US$2,000. If you have US$8,000 in your account, the IRS will take all the money, leaving you with nothing.

Making matters tougher on the taxpayer, the IRS does not need to get a court order, or make any real effort to collect from you, before draining your bank account. All the government is required to do is send a series of letters to your last known address. Whether you receive them, respond to them, or whether the address on file is current is of no consequence.

Once the IRS has your money, it is challenging to get it back. The burden is on you to prove that the levy created an unreasonable hardship, such as resulting in your being evicted from your home, for example.

The best way to prevent a bank levy is to face your tax issues head-on, providing the IRS a completed financial statement, Form 433-A, and all of the supporting documents. As a part of this process, you may need to file missing or delinquent tax returns.

Do not wait for someone to knock on your door, as this generally happens only after your bank accounts have been taken. It is up to you to be proactive and contact the IRS to resolve your debt.

If your account has been levied, you will need a completed financial statement and supporting documents to prove the levy created a hardship and that it should be released.

You should also note that a bank levy is a one-time event. For example, let’s say your bank received a levy on Monday. They will pay all items that posted that day and then execute the levy, depleting your account. If you make a deposit on Tuesday, the IRS has no right to that money…the levy only applied to your balance at the end of the day on Monday. Of course, the IRS can send a second levy to get additional deposits.

If you are concerned that the IRS may levy your account, you have several options:

  1. Move your account to a new bank.
  1. Keep a minimal amount of money in your personal bank accounts. Make your deposit and immediately pay all bills.
  1. The IRS can levy any personal bank account in your name. If you have a joint account, remove your name to protect the other party.

For example, a son is a signatory on his elderly father’s account, for estate-planning reasons. The IRS can take all of the money from this account, up to the amount of the debt. The son’s name should be removed from this account until his tax issues are resolved, either by an Offer in Compromise, an Installment Agreement, or by paying in full.

  1. If you have a business, keep money in your corporate or LLC account, and not in your personal account. However, never pay personal bills from your corporate or LLC account.
  1. Keep money in your retirement accounts, as it is very rare for the IRS to levy such an account.
  1. In the case where one spouse has a tax debt and the other doesn’t, the bank account may be held in the name of the innocent spouse.

For example, a husband owes money to the IRS from unpaid payroll taxes. This debt doesn’t include his wife, who should be the only signer on the household bank account.

Never deposit a husband’s paycheck in his wife’s account. Keep all transactions separate.

Note:Taxes that are the result of a business, such as payroll and sales taxes, generally only affect the spouse involved in the business. The spouse not involved in the company is referred to as the “innocent spouse.”

  1. Request an Installment Agreement or file an Offer in Compromise. While you are working towards a resolution of your tax issues, the IRS can’t levy your bank account…just be sure not to miss a deadline to provide documents, or your accounts may be depleted!

By submitting a complete, accurate, and well-planned financial statement to the IRS, you can stop a bank levy from happening, negotiate its release, as well as minimize an Offer in Compromise payoff amount or an Installment Agreement payment amount.

Premier Tax & Corporate, Inc., LLC will analyze your case, determine your best course of action, prepare your forms, review your supporting documents, send you a completed package reviewed by a tax attorney and an enrolled agent, and prepare a custom-made, detailed letter of instruction. We will also support you throughout the process by phone and online chat.

Put our decades of IRS experience to work for you and get great results. Click here to get started now, here to send an e-mail inquiry, or phone us at (800) 581-6716/(213) 985-1876 with any questions.

 

Christian Reeves

IRS FAQs

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Frequently Asked Questions (FAQs)—IRS Tax Problems and IRS Tax Debt Relief. The IRS Offer in Compromise Program Defined

1. What is an IRS Offer in Compromise?

In most cases, an IRS Offer in Compromise is a way to settle your IRS debt for less than the balance due, because you are unable to pay the full amount. You are basically offering the IRS something they could not take from you…something over and above what they could collect.

2. Do I qualify for an IRS Offer in Compromise?

If you can afford to pay your IRS debt in full, either over time or all at once, then you do not qualify for an Offer in Compromise.

If your assets, such as equity in real estate, retirement accounts, etc., are more than your IRS debt, then you do not qualify for an Offer in Compromise.

If you can’t afford to pay your IRS debt and your assets are significantly less than your IRS debt then you may qualify for an Offer in Compromise.

3. What are the “allowed expenses?”

You are allowed to spend up to certain amounts for your personal expenses such as food, clothing, housing, utilities, automobile, etc.

Some of these amounts, food and clothing for example, are regulated by the National Standards, which means that everyone in the U.S. is allowed the same expense.

Other expenses, such as housing and utilities, are based on where you live.

For example, a family of three living in Bailey County, Texas, is allowed only US$830 in housing and utilities. However, if that same family lives in New York County, New York, they are allowed up to US$4,976 in housing and utilities.

The logic of the IRS here is that you should not be allowed to make payments on your mansion and Ferrari, and not pay the government.

One of the most important tasks when filing an Offer in Compromise is to understand the interplay between the various allowed expenses to ensure you get the best deal available.

4. If I do not qualify for an IRS Offer in Compromise, what alternatives do I have?

If you can’t settle your IRS tax debt with an Offer in Compromise, you have two options:

  1. Set up an Installment Agreement. With this, you must pay the IRS each month until the applicable statute of limitations has expired. When the statute of limitations has run out, any remaining debt is eliminated.
  1. Request to be considered “temporarily uncollectable.” If you do not qualify for an IRS Offer in Compromise and you can’t afford to make monthly payments, then you can request that your account be placed on hold until your situation improves. The IRS will review your income and expenses each year and require you to make payments when you can afford to do so.

5. What is a “statute of limitations?”

In the case of an IRS Offer in Compromise, a statute of limitations is the length of time the IRS has at its disposal to collect taxes from you.

The IRS has 10 years to collect once you have filed your tax return or after your IRS tax debt has been assessed. “Assessed tax debt” generally refers to debt which is the result of an IRS audit.

Once the statute of limitations runs out, your IRS tax debt is eliminated.

For example, you file your 2009 federal personal income tax return on April 15, 2010, and owe US$100,000. The IRS has until about April 15, 2020 to collect that amount from you. If you made monthly payments totaling US$25,000 over 10 years, the remaining US$75,000 of debt is eliminated and you get a fresh start.

6. I am unemployed. Do I qualify for an IRS Offer in Compromise?

In general, if you are unemployed you do not qualify for an Offer in Compromise. The IRS will wait until you’ve been employed for around six months and then determine your ability to make monthly payments.

While you are unemployed, you should qualify to be listed as “temporarily uncollectable” (see above). When your income has stabilized, you might submit an Offer in Compromise.

Note:“Unemployed” means that you are capable of work and under age 65. Someone over age 65, or disabled and unable to work, is considered retired and may qualify for an Offer in Compromise.

7. If my IRS Offer in Compromise is rejected, what will happen?

In most cases, the IRS person working your Offer in Compromise will set up an Installment Agreement or list you as “temporarily uncollectable” if you do not qualify for an Offer in Compromise.

If you disagree with the rejection of your Offer in Compromise you can file an appeal, which will move your case to a more senior IRS person in your region. This person may have more authority to consider your unique circumstances.

8. How long does an Offer in Compromise take to complete?

It generally takes four to 12 months for your Offer in Compromise to be assigned to an IRS agent to work on. Then, it may require two to three months for the case to be completed. The precise time will depend on the amount of the debt and the complexity of your situation.

If your Offer in Compromise is rejected and you file an appeal, this may take another six months or so.

9. Can the IRS collect from me while I am in the Offer in Compromise program?

The IRS is prohibited from collecting from you while your Offer in Compromise is pending. Also, the applicable statute of limitations is on hold while your Offer in Compromise is being considered.

For example, if your debt would expire on April 15, 2020, and your Offer in Compromise takes 12 months before it is rejected, then the IRS has until April 15, 2021 to collect from you.

10. Is it expensive to have a professional help with an Offer in Compromise filing?

Legal fees for an Offer in Compromise typically range from US$3,500 to US$25,000. Complex cases cost more, and these fees do not include the IRS US$150 filing fee or the 20% non-refundable deposit. We estimate the average cost of a case to be US$4,500.

11. What forms do I need for an Offer in Compromise?

Planning and preparing the documents for an Offer in Compromise are complicated and require lots of experience. We believe that 90% of the work for an Offer in Compromise is done prior to filing.

A typical Offer in Compromise requires:

  • IRS Form 656 – Offer in Compromise Booklet and Form;
  • Form 433-A – Collection Information Statement for Wage Earners and Self-Employed Individuals;
  • Form 433-B – Collection Information Statement for Businesses;
  • Supporting documentation: You will need three months of documentation on just about every expense and income you have. These amounts include pay stubs, credit card statements, mortgage or rent statements, investments, transportation, W-2s, tax returns, etc.

12. What forms are required for an Installment Agreement or a request to be considered “temporarily uncollectable?”

Just like in the case of an Offer in Compromise, you will need Form 433-A and/or Form 433-B, along with the supporting documentation.

13. After the forms are complete and the Offer in Compromise filed do I need a tax attorney to negotiate the best deal? Will a tax attorney get me a better deal than I could get on my own?

The IRS Offer in Compromise program is very structured, with hundreds of different IRS agents handling thousands of cases. These agents receive a case, investigate whether the information provided is complete and accurate, apply the National and Local Standards, look for exceptions, and then accept or reject the Offer.

Because very little negotiation occurs and the IRS agent has almost no ability to diverge from the allowed standards, an expensive tax attorney is not required in most cases.

This means that most work is done before filing the Offer in Compromise, and an experienced professional adds the most value in planning, preparing, and documenting the Offer. Also, just as important, a professional can determine if you qualify for an Offer in Compromise prior to its being filed, saving you thousands of dollars and months of time.

14. I have not filed all of my federal personal income tax returns. Can I still submit an Offer in Compromise?

No, all of your tax returns must be filed before you submit an Offer in Compromise or set up an Installment Agreement. Basically, the IRS will not deal with you until all of your tax returns are filed.

We are experienced in preparing delinquent returns of all types and will be happy to assist you.

15. Is the IRS required to give me an Offer in Compromise if I qualify?

No, the IRS is not required to grant you an Offer in Compromise simply because you qualify. If the IRS believes your income will increase, they are likely to deny your Offer in Compromise and list you as “temporarily uncollectable.”

For example, a real estate agent made US$150,000 in 2008, US$125,000 in 2009, US$45,000 in 2010, and files an Offer in Compromise in 2010 for back taxes owed. The IRS is likely to wait a year or two to see if the taxpayer’s income increases significantly. If it doesn’t, they may grant an Offer in Compromise in 2011 or 2012.

16. What about all of the TV and radio ads promising to settle my IRS debt for 10 cents on the dollar?

Any firm that files a large number of Offers in Compromise will have success stories. However, these are the exception, not the rule.

For example, one of our clients owed US$250,000 to the IRS and settled his Offer in Compromise for US$7,500, or three cents on the dollar. This is the type of case we could use in our advertising.

Well…this client was 71 years of age, was living on Social Security and Disability income, and had no assets. I suspect that this more-detailed description fits very few of those of you reading these FAQs.

Therefore, every case and set of circumstance is different, and careful planning, preparation, and documentation of an Offer in Compromise are the keys to success.

17. Why are there so many websites promising to settle my IRS debt for less?

In fact there are only a few national firms marketing IRS tax debt settlement services. Also, there are many small local law firms and CPA offices offering this service.

However, there are hundreds of marketing websites. These are small companies, oftentimes guys in their basements, who put up a website to generate marketing leads on their spare time. They then sell these leads to an Offer in Compromise mill, or a tax person just starting out and who is not able to get business on his own. Our research indicates that the majority of sites on the Web are marketing sites.

18. How much does it cost to file an IRS Offer in Compromise?

The filing fee for an IRS Offer in Compromise is US$150. Also, you must submit a non-refundable deposit of 20% of your Offer amount.

For example, if you owe US$100,000 and offer to settle your debt for US$10,000, your filing fee is US$150, and your deposit is US$2,000 (20% of US$10,000).

19. What does the IRS say about the national Offer in Compromise mills?

Since 2004, the IRS has continually informed the public about unscrupulous promoters who prepare and file Offers in Compromise they know will be rejected, just to make the fee. IR-2004-17, issued on Feb. 3, 2004, warns that “[…]some promoters are inappropriately advising indebted taxpayers to file an Offer in Compromise (OIC) application with the IRS. This bad advice costs taxpayers money and time.”

20. Have government agencies shut down any of the national IRS Offer in Compromise mills?

Yes, state and federal agencies have stepped in to protect taxpayers from OIC mills.

For example, the Attorney General of California announced on Aug. 23, 2010 that he was suing the national firm of Roni Deutch for “victimizing thousands who sought her aid in dealing with the IRS.” He is seeking US$34 million in damages. For more information, click here to check the California Attorney General’s website.

In addition, California sought to enjoin Roni Deutch from doing business. Click here to read the legal brief.

In a second example, the Federal Trade Commission (FTC) took action against American Tax Relief, a national tax debt relief company, claiming ATC is a scam that swindled clients out of millions of dollars. At the FTC’s request, ATC was shut down and their assets frozen.

For more information, click here to go to the FTC’s website and here to read the news clippings.

In a third example, the Texas Attorney General has filed suit against TaxMasters, Inc. The Texas Attorney General’s office states that there are nearly 1,000 complaints about TaxMasters, Inc., and that are seeking restitution and fines on behalf of those harmed.

To quote the Attorney General’s press release, TaxMasters, Inc. “routinely misled customers about the nature of their tax resolution service agreements – and worse, attempted to enforce those improper agreements through unlawful debt-collection tactics.” To read more, click here to access the Texas Attorney General’s website. Also, for an article in the Houston Chronicle detailing the lawsuit against TaxMasters, Inc. click here.

According to an ABC News report, there are thousands of similar complaints. To see this report, click here.

21. What do the consumer protection and business review websites have to say about the national IRS Offer in Compromise mills?

There are many opinions and unverified statements on the Web, which should all be taken with a grain of salt. Here are links to a few websites that may be of interest:

 

Swiss Banking
Christian Reeves

Swiss Banking is Dead

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Let’s face reality. Swiss banking is dead. It’s a brisk day here in Geneva with highs in the mid 40’s and a strong breeze coming off the lake. I spent the day ringing in the New Year with a group of investment advisers and bankers on Rue de Rhone, all of whom are typically Swiss about what’s happening to their country.

With Swiss banking privacy in the rear view mirror, banks are struggling to find their place. In days gone by, they were able to charge high fees in exchange for their integrity and a history of defending their client’s rights. Now, after rolling over for the Americans, Swiss banking is in a tailspin.

But the Swiss are pressing on. To a man, their attitude is that, while this is a permanent contraction, business will go on in one form or another. Those who can adapt to a new world order will succeed, and those who can’t will be left behind. Life changes and goes on.

Switzerland’s biggest banks, UBS and Credit Suisse, have shed 7,000 jobs and the downsizing is expected to continue. In addition to losing its allure, an overpriced Swiss Franc, a weak Euro, and other economic woes have hit this small country of nearly 8 million hard.

And those who still have their jobs are looking at significant pay and bonus cuts, as bank profits have fallen sharply. Because of a significant decrease in international business, combined with higher regulatory and other costs, salaries and all types of compensation are lower. Lower margin as forced to compete on price and not on privacy and protection.

In addition to lost respect and business affecting all Swiss banks, UBS has been singled out and smashed time and time again by U.S. authorities. In 2009, UBS paid the U.S. tax man $790 million and the U.S. SEC $200 million to avoid criminal prosecution, and gave up info on 17,000 accounts, which precipitated the current mess. Then, in May of 2011, UBS came up with another $160 million for the SEC. With cash strapped agencies smelling blood in the water, regulators are currently suing UBS for $1 billion in damages related to the U.S. mortgage crisis.

Not wanting to kill the cash cow, the Justice Department has given UBS conditional immunity on the LIBOR rate fixing case they are planning. Conditional immunity indicates that UBS confessed and gave evidence against others in the pending investigation.

A corporation can avoid criminal conviction and fines for antitrust crimes “by being the first to confess participation in a criminal antitrust violation, fully cooperating with the division, and meeting other specified conditions,” according to the Justice Department.

While the Swiss may be stoic, I believe this new world order will continue for the foreseeable future and that Switzerland as a world financial center is done. When banking secrecy was torn asunder, Switzerland lost its competitive advantage. Why hold money in Switzerland over Luxembourg, Singapore, or smaller and more competitive nations such as Andorra? The Americans have succeeded in doing what even World War II could not…turn Switzerland in to just another pretty tourist destination.

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Expat Taxes

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Filing Tax Returns—The Basics

The following page applies to U.S. citizens and residents living and/or working outside of the United States.

U.S. persons (citizens and permanent residents/Green Card holders) are required to file a tax return each year, no matter where they live, if their income is above US$9,350 when filing as single, or US$18,700 if filing as married (2010 thresholds).

Failure to file your U.S. personal income tax return can result in the loss of your Foreign Earned Income Exclusion, creating a disastrous situation for any U.S. citizen living abroad. As this exclusion can legally eliminate the income tax on your income earned outside the U.S., you don’t want to lose it.

You can qualify for the Foreign Earned Income Exclusion through either the Bona Fide Residency Test or the Physical Presence Test. The maximum amount to qualify was US$91,400 in 2009, and it’s currently US$91,500 for 2010.

The Physical Presence Test mandates that you must be outside of the United States for 330 out of any 365-day period. You meet the Bona Fide Residency Test if you are out of the United States for one full calendar year and move to a country with the intention of making it your home for the foreseeable future.

In addition, those living abroad are generally required to file a Foreign Bank Account Report with the United States Treasury. Failure to file this form can result in extremely severe penalties of up to US$100,000 per violation.

It is common for people living and working abroad to have neglected to file income tax returns for five, 10, or even 20 years. Because our computer system and the workflow we set up are designed to handle the preparation of multiple years of delinquent returns in a quick and efficient manner, in order to minimize the tax due, we are proud to say that we have successfully represented many expats and achieved excellent results.

Preparing and filing past delinquent returns (i.e., becoming compliant) is the first step towards an Offer in Compromise or an Installment Agreement with the IRS.

Also, the collection process is more complex for those living abroad. Because there are no standardized expenses, you must prove the necessity of each item. Also, the IRS may levy certain international banks and lien property in some countries, which makes experienced planning and preparation the key ingredients for success.

The expertise required to prepare international returns and the risks facing expats are unique. Our international tax group is headed by the U.S.-licensed tax attorney Christian Reeves, the author of the 2010 International Tax Bible, published by International Living, an expert in the field of international taxation. Together with him we will guide you through the maze of IRS collections in a professional and efficient manner.

Click here

Note:Because everyone’s tax preparation needs are unique, sign-up and payment must be made by phone, e-mail, fax, or regular mail.It is not available through our website shopping cart.

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Taxpayer Bill of Rights

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Taxpayer’s Bill of Rights

In tough economic times, many business owners and self-employed people find it difficult or impossible to pay their Federal taxes. When the debt is too large to pay, you then get the joy of negotiating with the Internal Revenue service.

NOTE: Of course, everyone has a hard time paying their taxes. Business owners and the self-employed are more likely to have large debts because many do not have taxes withheld from their paychecks, do not make quarterly estimates, and hope that there is enough cash in the business at the end of the year to keep the IRS at bay.

The following is a list of protections that taxpayers have when facing the IRS, known in the industry as the “Taxpayer’s Bill of Rights.” The first step in dealing with the IRS is to know these basic rights.

  • Innocent Spouse Relief (Publication 971):
    • Is available for ALL understatements of tax (previously, only substantial understatements) attributable to erroneous items (previously, only grossly erroneous items) of the other spouse.
    • You must file this claim within 2 years of the IRS beginning collection action.
    • You must show that the innocent spouse did not know and had no reason to know about the underpayment of taxes.
    • Innocent Spouse can be claimed for any tax liability arising after July 22, 1998 and any tax liability unpaid as of that date.
    • If Innocent Spouse is claimed and rejected, you can file a petition and go to tax court.
    • The IRS can grant equitable relief to taxpayers who do not satisfy the above tests.
    • If you filed a joint return, you can use innocent spouse as long as: 1) you are divorced or legally separated, or b) have been living apart for more than one year.
  • The IRS must abide by the Fair Debt and Collections Practices Act, which includes not communicating with you at an inconvenient time or place. This right basically protects against harassment.
  • The 10-year statute of limitations period on collection may generally not be extended, if there has been no lien on any of the taxpayer’s property.
  • The IRS must give you an installment agreement if:
    • You owe less than $10,000.
    • In the previous 5 tax years you have NOT 1) failed to file a tax return, 2) failed to pay any tax required to be shown on a return, and/or 3) entered into an installment agreement. and
    • Require full payment within 3 years.
  • A supervisor must approve the issuance of a Notice of Lien or Levy or seizing of property.
  • The IRS must notify you within 5 business days after the filing of a Notice of Lien and must include certain information in the notice, such as the amount of the tax and your appeal rights.
  • Anyone who will be affected by the filing of a lien is entitled to a fair hearing with an Appeals officer who had no prior involvement with the unpaid tax that gave rise to the filing of the lien.
  • You can get a certificate of discharge of a lien by depositing the amount in question with the IRS or you furnish a bond. You then have the right to sue to dispute the tax due.
  • The IRS must release a wage levy once it is determined that your outstanding tax liability is uncollectible. This basically means that the IRS determines that you do not have the financial resources (cash flow after allowed business and personal expenses and assets) to pay the debt.
  • You and 3rd parties can sue for money damages for reckless or intentional disregard of the statutory collection provisions. This has been made easier because it includes negligence on the part of an IRS employee. You must first follow administrative remedies and you are limited to $100k for negligence and $1m for intentional or reckless disregard.
  • The IRS must notify you, 30 days before filing a levy, that you have a right to a hearing.
    • You can then request an appeals officer hear the case before the levy.
    • You cannot challenge the underlying tax unless you had no previous opportunity to do so.
    • If not resolved, you have 30 days to appeal to the U.S. Tax Court or Federal Court.
  • Increase the amounts exempted from levy to $6,250 for furniture and personal effects and $3,125 for tools of the trade.
  • Property can’t be sold below the property’s minimum bid price.
    • Where no one is willing to pay the minimum bid price, the IRS can return the property or it is deemed to have paid that price.
    • b. Generally, this is 80% or more of the forced sale value.
  • If the amount of the debt is less than $5,000, the IRS cannot take your primary residence.
  • The IRS cannot seize your principle residence without prior court approval.
  • The IRS cannot reject an Offer in Compromise from a low income taxpayer solely on the basis of the amount of the offer.
  • While you have an Offer in Compromise pending, and 30 days thereafter, the IRS cannot take your property or levy your bank account.

The key to success and minimizing the expense, in your dealings with the IRS is a well-planned and documented financial statement, used to setup an installment agreement or to submit an Offer in Compromise.

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Offer in Compromise Basics

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Getting Out of Trouble—the Offer in Compromise

By Christian Reeves

Tax Attorney

“Chris, I’m in a big trouble,” started one of my clients. “I owe around US$50,000 to the IRS for the last three years and I’m now unemployed. My only asset is a car worth about US$1,000. Do I have options?”

“Yes, you do,” I assured him.

My client owed back taxes, but couldn’t afford to pay the entire bill. I advised him to opt for an Offer in Compromise, which would allow him to clear his debt by paying just part of what he owed.

Let’s start with the basics.

The Offer in Compromise is a program established by the IRS aimed at helping people who can’t pay their back taxes because they are experiencing financial hardships. Through this program, taxpayers can negotiate a reduction of their debts.

“How come,” you’d ask. “Isn’t the government running huge deficits these days?”

Correct.

The government needs your money…but many hardworking Americans cannot afford to pay their bill in full. To the IRS it’s better to get back even a small percentage of that debt than nothing at all. Seen from this perspective, making a deal with you makes sense.

Note that the IRS does not grant Offers in Compromise to everyone. In fact, only one in every four Offers in Compromise filed is ever negotiated. However, when it made a deal, the IRS settled for an average of about 16% of the taxpayer’s ability (Source: United States Government Accountability Office, Report to the Committee on Finance, U.S. Senate, April 2006)

Filing an Offer is not for the faint of heart. You must prove you can’t afford to pay in full and it is in the best interest of the IRS to settle for less. This means that you have to open up all of your financial records to the IRS, including bank statements and mortgage documents. You need to provide receipts for each and every item on your expense list. To make matters even more complicated, you have to take into account the fact that the IRS has its own table of “allowed expenses” to determine what kind of lifestyle you should be permitted to keep until the tax debt is paid off. Properly analyzing your tax satiation (actual income vs. allowed standards) and fully documenting your case are the keys to getting an Offer in Compromise accepted.

 The Procedure

You will be required to submit forms 656, 433-A, and 433-B, if applicable, as well as all the supporting documentation to substantiate your assets, liabilities, income, and “allowed living expenses.”

The amount you can afford to pay the IRS each month is determined by subtracting from your average monthly income the “allowed living expenses.” In determining these living expenses, the IRS uses what it calls the “national standards” of what it will allow for food, clothing, and other items; the “local standards” are used to determine the maximum allowed expenses for housing, utilities, and transportation. These calculations are applied regardless of your actual expenses documented on form 433-A.

The amount you can afford to pay the IRS in the Offer in Compromise program is the value of this stream of income plus the value of your assets, such as retirement accounts, automobiles, real estate, etc. The value of your monthly payments (income stream) is calculated by multiplying the monthly figure by 48 or 60 months, depending on the type of Offer you submit. More on this in a minute…

Remember: The IRS will only consider an Offer in Compromise after all other payment options have been exhausted. In fact, the Service encourages you to explore all the available ways to pay the liability such as cash advances on credit cards, borrowing against 401(k) funds or life insurance policies, etc. You may even be given an extension of time to pay, ranging from 30 to 120 days.

Finally, before an Offer in Compromised is considered, the IRS evaluates the possibility of you qualifying for an Installment Agreement. For this purpose, if you owe less than US$25,000 in taxes, Form 9645 also needs to be filed. If you can’t afford to pay the tax debt in full in an Installment Agreement, only then will you be considered for an Offer in Compromise.

When applying for an Offer in Compromise you must generally include a US$150 application fee and a deposit of 20% of the amount you offer (for example, if you owe US$50,000 and offer to pay US$2,000, then you have to include one check for US$150 and another one for 20% of US$2,000, or US$400) in the case of a “lump sum” payment option. You can also choose other payment options, but this typically results in your Offer being delayed for up to 12 months.

There are additional requirements for applying for an Offer in Compromise. For a start, all your federal tax returns must be filed…the IRS absolutely will not consider an Offer in Compromise if your returns are unfiled. Also, you can’t be in bankruptcy. You must wait to exit bankruptcy to file an Offer in Compromise, if your tax debt will not be discharged.

If you are a senior citizen living on a fixed income or suffering from a serious illness, then you may expect special consideration from the IRS. Be prepared to show medical records, doctor’s statements, and other supportive documents, even write a letter detailing your special circumstances. As a colleague of mine used to say, ”paint it black” and you’ll stand a better chance of reducing your debt through an Offer in Compromise.

In the event your Offer in Compromise is accepted, you will be required to file and pay all your taxes on time for a period of five years. Also, you’ll agree that the IRS may keep any tax refunds that would have been payable to you during the calendar year when your Offer in Compromise was approved and for the years prior to the Offer.

 Pros and Cons of Making an Offer in Compromise

Having an Offer in Compromise approved is not taking a free ride. The government runs vigorous enforcement programs and, if not careful, your original debt may be reinstated in full, together with all penalties and interest accumulated.

But let’s first talk about the advantages (some of them are…well, obvious):

  • You save money…a lot of money, actually. If accepted, the amount you’ll pay under the agreement may be just pennies on the dollar of the original debt.
  • After you’ve paid the amount agreed to, any tax lien is released within 30 days and your credit rating will improve.
  • Your stress level is reduced while the Offer is pending because all collection actions are suspended during this time.

Are there disadvantages? Sure, I’ve just mentioned one at the beginning of this section…having to adhere religiously to the IRS rules. Here are others:

  • Filing an Offer gives the IRS extra time to collect from you. Normally, the IRS has 10 years to collect your debt; after the 10 years are up your debt is canceled. When you file an Offer in Compromise, the collection period is extended by the time the Offer is under consideration, plus 30 days.
  • You’ve now provided the IRS with everything about your financial situation, and thus with a roadmap for the Service to take better collection action in case your Offer is rejected.
  • And now a biggie…In most cases when the taxpayer has a large debt for which an Offer in Compromise is desired, he/she also owes state income taxes, credit card debt and/or other financial obligations. The Offer in Compromise will not do anything for solving these issues. Therefore, the Offer in Compromise is not a complete solution for all the debt you owe. The only solution to eliminate the federal tax debts as well as other financial problems you may have is bankruptcy. Read hereLINK about dumping your tax debt in bankruptcy.
    • Note than many states have Offer in Compromise programs very similar to the federal program. It is possible to eliminate state and federal tax debts by filing Offers in Compromise with both agencies simultaneously.

 What if My Offer Is Rejected?

This happens very often. It may be that the IRS thinks you can pay off all your debt or it deems the amount you offered to pay too low. I’ve even had Offers rejected on the nebulous grounds of “against public policy,” whatever that means.

Also, a very large number of Offers are returned each year because the forms are completed incorrectly, or the Offered amount, and thus the 20% deposit, is unreasonable. The reason may even be as simple as forgetting to sign the form (it happens more often than you’d think) or not listing your Social Security number. Analyzing, documenting, and submitting an Offer in Compromise is a very mechanical and detailed process, which takes years of experience to master.

In the case when the Offer amount is too low then you can submit another form, with a higher amount. If the rejection is due to a different reason, you will find it explained in your rejection letter. You have the right to appeal the IRS decision within 30 days from the date of the rejection.

 When You Need a Tax Professional…

Always choose a reputable tax professional who has experience preparing Offers in Compromise. Many unscrupulous promoters claiming they can slash your debt to just pennies on the dollar advertise on billboards, late-night TV, and the Internet. These so-called “offer mills,” often with slick advertisements, can take away your money and not live up to the promises they made in the first place. For reviews of some of these promoters, check out the FAQs section LINK of this website.

At Premier Tax & Corporate, Inc. you will find a group of well-trained professionals who will work together with you in order to achieve the best available result for your particular situation. Our enrolled agents and tax attorneys add the most value in planning, preparing, and documenting your Offer in Compromise. Also, just as important, our professionals can determine if you qualify for an Offer in Compromise prior to its being filed, saving you thousands of dollars and months of time. Contact us by phone at (800) 581-6716 or by e-mail at sales@taxreliefguaranteed.com. We are here to help.

 

 

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IRS Statute of Limitations

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IRS & The Statute of Limitations

By Christian Reeves

Tax Attorney

 The bottom line is that the IRS usually has 10 years to collect from you once a tax return is filed, and generally has 3 years to audit your return to assess additional tax.

Understanding the 10 year collection statute is important when negotiating an installment agreement or Offer in Compromise with the IRS. For example, if there is only one year remaining on the collection statute, offering to settle the debt for 75% is probably not a good deal for the taxpayer. It may be better to delay and enter in to an installment agreement for the remaining collection period.

Here are the basics:

Tax Return Audits

The statute of limitations limits the time during which an action can be brought by the IRS for an audit and the time for IRS tax collection activities. Generally, there is a 3-year statute of limitations when the IRS audits a tax return and a 10-year statute of limitations for the IRS to collect tax.

Under section 6501(a) of the Internal Revenue Code (Tax Code) and section 301.6501(a)-1(a) of the Income Tax Regulations (Tax Regulations), the IRS is required to assess tax within 3 years after the tax return was filed. This means that, unless special circumstances apply, the IRS must assess a new tax as the result of an audit within 3 years of the return being filed.

Under section 6501(e) of the Tax Code and section 301.6501(e)-1 of the Tax Regulations the statute of limitations is 6 years if the taxpayer omits additional gross income in excess of 25% of the amount of gross income stated in the tax return filed with the IRS. This is known as the substantial understatement assessment period because it comes in when the taxpayer understates their income by 25% or more on the return.

If the tax return was prepared by the IRS as a Substitute for Return (SFR), under the authority of section 6020(b) of the Tax Code, the statute of limitations does not apply. See section 6501(b)(3) of the Tax Code and section 301.6501(b)-1(c) of the Tax Regulations. This is because an SFR is generally based on the information the IRS has in its computers, and without the participation of the taxpayer.

Also, the statute of limitations does not apply in the case of a false tax return or fraudulent tax return filed with the IRS with intent to evade any tax. See section 6501(c)(1) of the Tax Code and section 301.6501(c)-1 of the Tax Regulations. In other words, if you commit tax fraud, or intentionally attempt to defraud the IRS with the filing of your return, you do not receive the benefit of the statute of limitations.

Statute of Limitations on the Collection of Tax

As of November 5, 1990, the collection statute of limitations is 10 years. Prior to this date, the collection period was six year. Basically, the IRS has 10 years to collect from you from the date you file your tax return or the date tax is assess. Tax is usually assessed after an audit is completed and all of your rights of appeal have been exhausted, or you agree that the results of the audit are correct. Tax is also assessed when the IRS files a SFR. Note that, if you do not file your tax return, and the IRS does not file an SFR, then the collection statute never begins to run.

The 10 year statute of limitations can be extended by agreement between you and the IRS provided the agreement is made prior to the expiration of the 10 year period. See section 6501(c)(4) of the Tax Code and section 301.6501(c)-1(d) of the Tax Regulations.

In rare instances, the IRS can go in to Federal court and extend the statute by 10 years without an agreement with the taxpayer. This is very uncommon, thus not discussed in detail here.

For additional information, see Section 6502(a)(1) of the Tax Code and section 301.6502-1 of the Tax Regulations. Court proceedings must also be started by the IRS within the 10 year statute of limitations. Section 301.6502-1(a)(1) of the Tax  Regulations.

Tolling of the Collection Statute

The collection statute is tolled, or placed on hold, any time the IRS is prohibited from collecting from you. There are two common instances where the statute is tolled:

  1. The collection period is tolled while you are in bankruptcy. This may be a few weeks, a few months, or even a few years, depending on your situation.
  2. The collection period is tolled while you have an Offer in Compromise pending with the IRS. Assuming your Offer is reasonable, it generally takes 6 to 12 months for it to be processed by the Service, during which time all collection actions are on hold.

It is important to note that, while the IRS is prohibited from collecting while the statute is tolled, interest and penalties continue to accrue. It is common for someone to exit bankruptcy with a much larger tax debt than they entered with.

Make sure you understand the starting date for the running of the statute of limitations, any exceptions to the tolling of the statute of limitations, the last day that the IRS can audit a tax return, and the last day that the IRS can collect overdue tax on a tax return.

Because the IRS is unable to collect from you once the 10 years is up, the collection statute can be a very valuable tool for the knowledgeable taxpayer the Offer in Compromise and Installment Agreement program. Once the statute expires, the debt is eliminated and any installment agreement terminates. An installment agreement that does not pay off the tax in full is called a partial pay agreement.

Statute of Limitations on Taxpayer to Claim a Tax Refund

A taxpayer may file a claim for a tax refund of an overpayment of any tax within 3 years from the time the tax return was filed with the IRS or 2 years from the time the tax was paid to the IRS, whichever period is the longer. If no tax return was filed with the IRS, the claim may be made within 2 years from the date that the tax was paid to the IRS. See section 6511(a) of the Tax Code.

In this instance, “tax paid” includes amounts taken by the IRS in a bank levy or wage garnishment. This means that, if your account is levied as the result of a tax assessment from a SFR, you should immediately prepare your delinquent return to ensure you will get any refund due.

This 3 year statute can be quite harsh on taxpayers who have taxes withheld from their paychecks but never file a tax return. I once filed a return for a client who lost a $55,000 refund because she came to me 1 week after the refund statute expired.

 

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Installment Agreements

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When the IRS Makes a Deal with You—the Installment Agreement

By Christian Reeves

Tax Attorney

 

“I owe the IRS $20,000 because I didn’t have enough withheld from my paycheck over the last few years. I’m working full-time, but I have no savings. Is there any way I can pay off my debt?”

Yes. In fact, almost every client I have worked with in the last 10 years, who has requested an installment, has been approved…eventually. The trick is always the same: getting to a number that both you and the IRS can live with.

If you owe taxes to the IRS, but can’t afford to pay it off all at once, and you don’t qualify for (or can’t afford) an Offer in Compromise, then you can usually set up a payment plan, called an “Installment Agreement” in IRS lingo. The amount you will need to pay each month is based on a number of factors, including:

  • Your income;
  • Your assets;
  • The amount you owe;
  • Your actual expenses;
  • Your allowed expenses;
  • The remaining collection statute of limitations; and
  • Whether or not you can afford to pay off the debt in full over the collection statute.

The key to setting up an Installment Agreement is the analysis of these and other factors, and thereby proving to the IRS how much you can afford to pay each month.

Here are the basics of an IRS Installment Agreement.

The IRS will enter a written agreement with you which requires installment payments based on the amount you owe and your ability to pay it within the period of time the Service has to collect from you (the “statute of limitations,” as it is called). The IRS has 10 years to collect from you once you filed a return. When the 10 years are up, the debt is canceled and you get a fresh start. Depending on the amount of tax due, there are different options within the program (see below).

To apply for an Installment Agreement, you usually need to file Form 9465 and Form 433-A or Form 433-F (versions of the IRS Financial Statement, the key form when dealing with IRS collections at any level). If you are self-employed, or own a business, you may also need to file Form 433-B. A few people also need Form 433-D. If your Agreement is accepted, you will be charged a fee of $105 for a new agreement, or $45 for a reinstated agreement.

“What is a ‘reinstated agreement,’” you’d ask.

An Installment Agreement is binding. You must pay the amount agreed-upon on time, every month of the year. If you skip a payment, you usually have 30 days to catch up. If you are not able to get current with your payments, the Agreement is canceled. You may apply for a new Agreement, but your new proposal may be met with skepticism and can even be rejected. Worse, you must provide updated financial information, which may have very dire consequences if your income has increased or the person reviewing your data is less accommodating than the prior agent. If you’re lucky and it’s accepted again, then you’ll have a “reinstated agreement.”

There are two types of Installment Agreements, mandatory and discretionary.

A “mandatory” agreement means that the IRS is required to accept the Agreement you propose if:

  • You owe less than $10,000 (exclusive of interest and penalties);
  • You’ve filed your tax returns and paid your due taxes on time during the past five years;
  • You haven’t entered another Installment Agreement during those past five years;
  • You demonstrate that you can’t pay the tax in full;
  • You agree to pay the full amount you owe within a period of three years;
  • You guarantee that you’ll comply with the tax laws during the term of the Installment Agreement.

If you meet all these criteria, the IRS doesn’t have the right to reject your Installment Agreement. An additional advantage of this type of agreement is that it doesn’t require the same in-depth financial verification that a normal application does.

If you owe more than $10,000, you need a “discretionary” Installment Agreement, which means that the IRS can deny you a payment plan if it deems it unsatisfactory. The IRS has to consider your Installment Agreement and will request you to prepare a Financial Statement (Form 433-A or Form 433-F). If the IRS concludes that more information is needed to evaluate the proposal, then it can request you to provide supporting documents or other proof of income and expense. If not supplied, the IRS can reject your application.

During the processing of your Installment Agreement (until you receive the notice about the result of your application) your stress level will lower considerably as the IRS is not allowed to collect from you. If your IRS installment agreement request is rejected, your case will be on hold for 30 days, giving you time to appeal. If you file a timely appeal, then the IRS can’t touch your property or money during the pendency of the appeal.

How much of my debt will I pay through an Installment Agreement?

The answer is that it depends on your ability to pay, the assets you have available, and the collection statute of limitations. If you have sufficient means then the IRS will require a Full-pay Agreement. This is when you pay your tax debt in full, including interest and penalties, over a period of time.

A Full-pay Installment Agreement may be for a fixed monthly amount, or it may increase at predetermined intervals. In each case, it will pay off the debt during the collection statute of limitations.

An IRS Installment Agreement where you pay a fixed amount each month until the debt is paid in full is easy to understand. An Installment Agreement where your monthly payments increase over time takes a bit of explaining.

As you know, your ability to pay the IRS is based in part on your income vs. your allowed expenses. When your actual expenses exceed your allowed expenses, you are generally given time to modify your lifestyle.

For example, you may be given six months to find a lower-cost apartment. If your current apartment exceeds your allowed rental expense by US$400, the IRS may set up an Installment Agreement that will increase by US$400 in six months’ time.

Another example is where your allowed expenses go down. The most common situation is where your automobile will be paid off, thereby reducing your allowed expenses. If your auto payment is $550 and your car will be paid off in eight months, you might set up an Installment Agreement that will increase by $550 in eight months’ time.

 

Warning: What if you have unexpected repair bills, or need to purchase another car when this one is paid? You might be forced to default on the IRS Installment Agreement and need to start the process over…something everyone dreads.Careful analysis of your current and future finances, along with a solid understanding of IRS practice and procedure, prior to applying for an Installment Agreement can prevent these and other problems.For example, as a result of planning ahead, you might decide to purchase a new car, with a longer payoff period, before submitting your request. 

What if I can’t afford to pay off the IRS in full?

In the case you (1) do not have sufficient income to support a Full-pay Agreement, and (2) have no significant equity in assets or cannot sell or borrow against assets due to the fact that selling them will cause an undue hardship, then the IRS will grant a Partial-pay Agreement and you’ll pay off only a portion of your debt within the statute of limitations, with the remaining debt being canceled.

However, if you are granted a Partial-pay Agreement, you must provide updated financial information every two years to prove your continuing financial hardship. If your income has increased, or your allowed expenses have decreased, you will be required to increase your monthly payment.

Still, there’s a third situation. You pay zero dollars. Is that possible? Sure. Basically, when you cannot afford an Offer in Compromise, you have no assets to use to pay the IRS, and your income equals your allowed expenses, you can’t afford to pay IRS anything.

A taxpayer in an Installment Agreement at zero dollars is referred to as being “temporarily uncollectable,” with temporarily being the operative word here. As with a Partial-pay Installment Agreement, the IRS will review your financial situation periodically to see if it can start collecting from you. If your financial situation doesn’t improve and the statute of limitations runs out, then your debt is eliminated. In other words, if you prove to the IRS that you are uncollectable over the entirety of the collection statute of limitations, you have paid nothing and your debt expires.

IMPORTANT NOTE: While you are making installment payments to the IRS, penalties and interest accrue on the unpaid balance. Essentially, you are locked into a late-payment penalty of one quarter of a percent a month plus interest on the unpaid amount. Taken together, the cost comes at around 10% a year. It’s still less than the interest you pay on your credit card, but you need to think before you commit.

What if my Installment Agreement is rejected?

This may happen in one of the following cases:

  • The information included in Forms 433-A or 433-B is incomplete or untruthful. If the IRS discovers that you have property or income not recorded on the forms then it will reject your application.
    • Your financial statement is signed under penalty of perjury, so it is very important to be truthful and very detailed in the information you provide to the government.
  • The IRS deems some of your living expenses unnecessary. If you owe money to the government but nevertheless send your kids to private schools or drive expensive cars, then be prepared to get no deal at all. The IRS expects you to have quite a frugal life while paying off your debt.
  • You defaulted on a prior Installment Agreement. It’s a matter of trust…if you’ve once defaulted on your payments then the IRS will think twice whether to grant you a second chance.

If your Installment Agreement is rejected, then you can appeal the decision. If the IRS sees your efforts to pay off your debt then your application may be reconsidered.

What if I need professional help with filing an Installment Agreement?

A reputable tax professional masters the art and science of analyzing your tax situation, as well as your income and expenses, preparing a plan of attack, and then filling out the forms necessary for an Installment Agreement. More importantly, he can determine your chances of obtaining the Agreement in the first place, and will help you plan, prepare, and document your application.

At Premier Tax & Corporate, Inc. we will work together with you in order to achieve the best available result for your particular situation. If you are ready, let’s get started

<LINK Get Started>.

For more information, contact us by phone at (800) 581-6716 or by e-mail at sales@taxreliefguaranteed.com. We are here to help.

 

 

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Collection Standards

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The IRS Collection Standards—Friend or Foe?

By Christian Reeves

Tax Attorney

 Chances are that you are reading this because you are considering paying your back taxes through an Offer in Compromise or an Installment Agreement. In the forms you have to fill out in both cases you’ll need to document all your expenses. There’s a lot of common sense here: You cannot owe the government $50,000 and continue living like a king, send your kids to private schools and eat at fine restaurants every day of the week. In the case you are making an Offer in Compromise or an Installment Agreement the IRS gets to set the standard of the lifestyle you are permitted to keep until the debt is paid off.

The collection standards. What are they?

The IRS has developed living expense standards that are used by agents when working out payment plans with taxpayers for overdue taxes. In the IRS lingo they are called “allowable living expenses.”

The “allowable living expenses” include those expenses that meet the necessary expense test.   The necessary expense test is defined as expenses that are necessary to provide for a taxpayer’s (and his or her family’s) health and welfare and/or production of income. These expenses are calculated in at least two different ways. In some cases, as with transportation and housing, the debtor puts his or her own expenses into the calculation, up to the amounts allowed by the IRS guidelines. With food, clothing, personal care, and entertainment, the debtor can put into their budget the full amount allowed for these items by the IRS, even if he or she does not normally spend that much.

But I’m getting ahead of myself…Let’s first examine the basics.

The IRS has established both national and local standards in order to establish the minimum a taxpayer and his family need to live. The “national standards” have been established for six necessary expenses: food, housekeeping supplies, apparel and services, personal care products and services, miscellaneous items, and out-of-the-pocket health care. In the case of the first five categories, the standards are derived from the Bureau of Labor Statistics’ Consumer Survey, which collects information on country’s buying habits. As I started mentioning above, for these categories taxpayers are allowed the total national standards’ amount per month for their family size, regardless of the total sum they actually spend. The out-of-the-pocket health care standards have been established for expenses allowed in addition to the amount taxpayers pay for health insurance. The table for health care allowances is based on the Medical Expenditure Panel Survey data for the whole nation and establishes reasonable amounts for health care costs including medical services, prescription drugs, and medical supplies (e.g., eyeglasses, contact lenses, etc.).

The “local standards” are established for two categories of expenses: (1) housing and utilities and (2) transportation. The housing and utilities standards are derived from the census data and are provided for each county within a state. They include mortgage or rent, property taxes, interest, insurance, maintenance, repairs, gas, electricity, water, heating oil, garbage collection, telephone, and cell phone for taxpayer’s primary place of residence. The transportation standards for vehicle owners include ownership costs (amounts for monthly loan or lease payments) and additional operating costs (maintenance, repairs, fuel, registrations, etc.) broken down by Census Region and Metropolitan Statistical Area. If a taxpayer has a car, but no car payment, only the operating costs portion of the transportation standard is used to figure the allowable transportation expense. In both of these cases, the taxpayer is allowed the amount actually spent or the standard, whichever is less. For the taxpayers who are using public transportation there is a single nationwide allowance for mass transit fares for train, bus, taxi, ferry, etc.  Taxpayers with no vehicle are allowed the standard per household, without questioning the amount actually spent.

You may also qualify for what is called “conditional expenses.” These do not meet the necessary expense test, but are allowable if the tax liability, including the penalties and interest accumulated can be fully paid within five years. If you cannot pay within five years, the IRS may allow you the excessive necessary and conditional expenses for up to one year in order to modify or eliminate the expense.

Remember: Properly analyzing your tax situation (actual income vs. allowed standards) and fully documenting your case are the keys to getting an Offer in Compromise or an Installment Agreement accepted.

At Premier Tax & Corporate, Inc. you’ll find a group of well-trained professionals who will work together with you in order to achieve the best possible result for your particular circumstances. Contact us by phone at (800) 581-6716 or by e-mail at sales@taxreliefguaranteed.com. We are here to help.

 

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Bankruptcy & Taxes

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Can I Dump My Tax Debt in Bankruptcy?

Bankruptcy and Tax Debts

By Christian Reeves, Tax Attorney

Personal income tax debts may be eligible for discharge under Chapter 7 or Chapter 13 of the Bankruptcy Code. However, special rules apply to tax debts that make it difficult, if not impossible, for most people to dump their tax debt.

Of course the Federal Government put in special rules to ensure they collect your tax debt ahead of any other type of creditor…did you think it could be otherwise?

The bottom line is this: The IRS usually gets to come after you for two to three years before you can discharge your tax debt in bankruptcy. This means you must set up an Installment Agreement, file an Offer in Compromise, or come to some other agreement that keeps the IRS out of your bank account and paycheck until you are eligible for bankruptcy.

Here are the rules. You must meet all four to qualify for bankruptcy.
1. The due date of the return must be from at least three years before you file for bankruptcy.

The tax debt must be related to a tax return that was due at least three years before you file for bankruptcy. The due date includes any extensions.
For example, your 2008 personal income tax return is due on April 15, 2009. If you did not file an extension, you can usually bankrupt those taxes on April 16, 2012.
2. The return was filed at least two years before you file for bankruptcy.
The tax debt must be related to a tax return that was filed at least two years before you file for bankruptcy. This time is measured from the date you actually filed the return.
So, if you file your delinquent 2002 and 2003 tax returns on October 20, 2009, you can usually bankrupt these taxes on October 21, 2011. Your 2003 return was originally due on April 15, 2004, it has been more than three years since its due date, and you filed your returns at least 24 months before declaring bankruptcy.
3. Your tax assessment has to be at least 240 days old.
Your tax debt must have been assessed for at least 240 days before you file for bankruptcy.
A tax assessment generally refers to two types of tax cases:
1. After an IRS audit runs its course and all of your rights to appeal have been exhausted, then the balance due becomes final. This date is the assessment date.
For example, if your 2005 return is audited and the resulting balance due becomes final on March 30, 2007, you must wait 240 days from this date before bankrupting these taxes.
2. When you don’t file your tax return on time and the IRS computers have data indicating that you might owe money to the IRS, the computers will prepare a “substitute for return” on your behalf. After sending a number of notices to your last known address, the amount due on this substitute return becomes assessed and payable.
a. It is important to note that these substitute returns use the highest tax rate, assume you have no deductions, and are never calculated in your favor. If you owe money to the IRS from this type of assessment, you should file accurate returns before dealing with collections or considering bankruptcy.
b. You must file all delinquent tax returns, including the years involving substitute returns, before declaring bankruptcy.
4. The return is not fraudulent and you are not guilty of tax evasion.
The tax return filed cannot have been fraudulent or frivolous and you can’t be guilty of tax evasion. For the sake of this article, we will assume you filed a reasonable tax return and have not been convicted of tax evasion.

Some Tax Debts Aren’t Dischargeable

Personal income taxes are generally eligible to be discharged in bankruptcy. Personal taxes that are the result of payroll tax or sales tax penalties, known as civil penalties, cannot be discharged.

NOTE: All types of tax debt, including civil penalties, may qualify to be eliminated with an IRS Offer in Compromise, paid off over time with an Installment Agreement, or resolved through other IRS programs.

Bankruptcy to Delay

Bankruptcy will stop all IRS collections and put Installment Agreements on hold until your case is completed. Your bankruptcy case may take weeks, months, or even years, and thus provide you time to get your affairs in order.

However, as stated above, interest and penalties continue to accrue. Also, your collection statute is on hold while you are in bankruptcy. If you are in bankruptcy for 24 months, the collection period is extended by the same period of time.

Collection statute: The IRS typically has 10 years to collect from you once a tax return is filed or tax is assessed. Any time the IRS is prohibited by law from collecting, the collection statute is on hold.

Because there are many remedies available to you within IRS programs, bankruptcy should not be used solely to delay collections. Of course, you may have other debts you wish to discharge, and delay may be an added benefit, but it should not be a primary factor in your decision.

The Effect of These Rules

As a result of these rules, most clients who contact us do not qualify for bankruptcy. Most people can only hide from the IRS for a short time before their bank accounts are drained or their paychecks garnished.

Of those who file bankruptcy to eliminate other creditors, most emerge with a larger tax debt and a more aggressive IRS, because interest and penalties continue to accrue. In most cases we see, bankruptcy leaves only the IRS standing…which is the objective of the rules.

Those of you who are not eligible for bankruptcy must face the tax debt head-on and without delay.

Those who file bankruptcy, and are unable to discharge their tax debt, must keep close tabs on their status and contact the IRS with a complete package of financial information once their bankruptcy has been discharged.

Being proactive and contacting the IRS before they knock on your door is the best and only way to prevent a bank levy or wage garnishment from wiping you out.

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Premier Tax & Corporate, Inc. does not offer legal advice and does not provide document preparation or filing for bankruptcy petitions. If you are considering bankruptcy, you should consult an attorney in your area.

2013 Tax Increase
Christian Reeves

The Spoils of War – Big Time Tax Increases for 2013

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The mêlée at the edge of the fiscal cliff is over and the Democrats have scored a decisive victory.

The battle lines were simple: Democrats wanted to raise taxes while Republicans wanted to cut spending. When the fighting was over, tax revenues were up by $620 billion against only $15 billion in spending cuts…a massacre if there ever was one.

And you can be sure there are hidden landmines and random scud missiles on the way – in the form of concessions on unemployment insurance, Social Security, FICA, et al and the inheritance tax. When taken in total, revenues may be increased by as much as $800 billion.

As it stands today, the fiscal cliff deal resulted in $1 dollar of spending cuts for every $41 in tax increases…possibly the most one sided victory since the Battle of Little Bighorn in 1876. By comparison, when President Ronald Regan increased taxes, he secured $3 in spending cuts for every $1 in tax hikes. When George H. Bush was at the helm, he negotiated $2 in spending cuts for every $1 in tax hikes.

Most of the casualties in this battle royale are individuals with incomes over $400,000 and couples making over $450,000, but there will be significant pain and suffering for those with incomes as low as $250,000.

I also note that any hope of a tax system which treats married couples and single persons with some level of equality was blown to hell. Two single persons could earn $800,000 combined before being smashed by the tax hikes, compared to only $450,000 for a married couple.

Here are the casualties by the numbers:

  • Tax rates will shoot up to 39.6 percent from 35 percent for individual incomes over $400,000 and couples over $450,000.
  • Tax rates on dividends and capital gains would also rise, to 20 percent from 15 percent, on income over $400,000 for single people and $450,000 for couples.
  • Personal exemptions and deductions will be phased out, beginning at single people earning $250,000 and $300,000 for couples.
  • The estate tax will increase, but less than Democrats had wanted. The value of estates over $5 million will be taxed at 40 percent, up from 35 percent. Democrats had wanted a 45 percent rate on inheritances over $3.5 million.

Under the deal, these new rates on income, investment and inheritances are permanent.

Among all of the explosions and cries of anguish, there was good news for the American abroad: The Foreign Earned Income Exclusion survived, and even got a little bump up for the cost of living. If you are living and working abroad, you can earn $97,600 in 2013, up from $95,100 in 2012.

Also, the self-employed Expat can avoid the Unemployment, Social Security and FICA tax increases (also called self-employment taxes) by incorporating offshore and qualifying for the FEIE. By operating your business through an offshore corporation, you might eliminate these taxes completely, a savings of about 15%.

But be careful: the 2013 tax increases and phase-outs will apply to any ordinary income over $97,600 and all passive / investment income.

Because the tax brackets ignore the FEIE, and Expats are taxed on their worldwide capital gains (now at 20% rather than 15%), many higher earning Americans abroad will be shocked by their 2013 tax bill. For additional information on these issues, please see: http://premieroffshore.com/offshore-tax-international-tax/

For the self-employed, there are a number of planning opportunities. For example, you can retain earnings over the FEIE amount in your offshore corporation or utilize a Solo 401-K to shelter income in a retirement plan.

For the investor, you can make tax advantaged investments offshore through your IRA and thumb your nose at the 20% short term capital gains tax. In fact, there are a number of tax advantages for the sophisticated offshore IRA investor – just ask Mitt Romney.

As tax rates go up, so does the need for competent tax and business advice. I strongly recommend you contact your international advisor as early as possible this year to develop a plan of action.

And remember, so long as you hold a U.S. passport, you must file Federal returns and abide by these laws. Regardless of which country you call home, make sure your global tax plan is approved by a U.S. tax expert.

For additional information on this article, or for a free international tax consultation, please contact us at info@premieroffshore.com or call (619) 483-1708.

Foreign Earned Income Exclusion 2013
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Foreign Earned Income Exclusion 2013 Amount

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The Foreign Earned Income Exclusion 2013 amount got a little bump up for inflation and managed to avoid the financial cliff. The Foreign Earned Income Exclusion 2013 amount is $97,600, up from $95,100 in 2012.

As an American citizen living overseas, you are subject to the same U.S. tax laws as a United States resident. One of the only personal tax benefits you get for living abroad is the Foreign Earned Income Exclusion. If you are out of the U.S. for 330 days, or are a resident of another country, you can exclude up to $97,600 of earned income from your U.S. personal return using the Foreign Earned Income Exclusion 2013 amount via Form 2555.

Note: My website has a number of resources explaining the Foreign Earned Income Exclusion 2013 amount and use. Please click here for an in-depth article on international taxation for Americans.

Earned income is active income and is defined as wages, salaries, commissions and professional fees. It does not include investment, rental, or other types of passive income.

If you earn more than the Foreign Earned Income Exclusion 2013 amount, you will pay Federal tax on the excess. However, if you are operating a business, or are self-employed, you may be able to eliminate this tax by using an offshore corporation and retaining earnings in the entity over and above the Foreign Earned Income Exclusion 2013 amount.

Note: Yes, the ability to retain earnings offshore also survived the fiscal cliff and will be the topic of a future article. For additional information, check out this article from Bloomberg.

Foreign Earned Income Exclusion 2013 and Prior

Historically, the Foreign Earned Income Exclusion has increased with inflation, with the exception of 2002 through 2005, when it was stuck at $80,000.

  • Tax year 2013: $97,600
  • Tax year 2012: $95,100
  • Tax year 2011: $92,900
  • Tax year 2010: $91,500
  • Tax year 2009: $91,400
  • Tax year 2008: $87,600
  • Tax year 2007: $85,700
  • Tax year 2006: $82,400
  • Tax years 2002-2005: $80,000
  • Tax year 2001: $78,000
  • Tax year 2000: $76,000
  • Tax year 1999: $74,000
  • Tax year 1998: $72,000

Sources: IR-2012-78, Oct. 18, 2012 for the 2013 amount, Revenue Procedure 2011-52 (PDF) for the 2012 amount, Revenue Procedure 2010-40 (PDF) for the 2011 amount, Revenue Procedure 2009-50 (PDF) for the 2010 amount, Revenue Procedure 2008-66 (PDF) for the 2009 amount, Revenue Procedure 2007-66 (PDF) for 2008 amount, Revenue Procedure 2006-53 (PDF) for 2007 amount, Revenue Procedure 2006-51 (PDF) for 2006 amount, Internal Revenue Code Section 911 for the tax law concerning the foreign earned income exclusion.

Remember that the Foreign Earned Income Exclusion is a “use it or lose it” tax break. If you are living abroad, do not file your returns, and are audited, you may lose the Foreign Earned Income exclusion. This means that 100% of your worldwide income will be taxable in the US.

If you are delinquent on your U.S. tax filing obligations, catch up before the IRS gets a hold of you. For information on our Expat tax filing services, please call us at (619) 483-1708 or email info@premieroffshore.com for a confidential consultation.

For the current FEIE amount, see Foreign Earned Income Exclusion 2020

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