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IRS Currency Transaction Report

06/26/2014/in Articles/by Christian Reeves

Today I’m taking time out from my offshore beat to warn you about the CTR. An IRS Currency Transaction Report is a form filed by U.S. banks and casinos each time you make a deposit or withdrawal of $10,000 or more. It is filed in secret, without your knowledge, you don’t receive a copy, and it becomes part of your permanent IRS file. An IRS Currency Transaction Report greatly increases your chances of an audit.

If you are a high stakes gambler, you should be aware that any casino transaction of $10,000 will result in a Currency Transaction Report being sent to the IRS. Just as high dollar wins are reported on form W-2G, buying in or cashing in high dollar chips is traced with a Currency Transaction Report. Both W-2G and CTR increase your chances of an audit and require you to prove 1) where the cash came from, 2) where the cash went, and 3) whether the cash was properly reported on your tax return.

IRS Currency Transaction Reports are filed by U.S. banks and U.S. casinos. These rules do not apply to offshore casinos. Also, offshore banks do not file CTRs … for now. I expect that will change soon enough.

If you are in a cash business, like a successful bar, or restaurant, you will generate an IRS Currency Transaction Report every time you deposit more than $10,000.

Now for the point of this article: Never attempt to avoid the IRS Currency Transaction Report. You might end up behind bars.

Yes, planning your deposits to avoid the CTR is a crime. While it might be hard to believe, there are Americans sitting in jail because they “structured” their cash transactions in an attempt to avoid a costly IRS audit.

And I’m not talking about terrorists, money launderers, or the likes of Al Capone. I mean ordinary citizens are sitting in jail for attempting to avoid an IRS exam by depositing $6,000 one day and $6,000 the next, rather than $12,000 all at once. Planning to avoid an IRS Currency Transaction Report is the crime of “structuring,” and it is punishable by up to 5 years in prison.

Never heard of structuring? Very few have, but ignorance of the law is not a defense to a criminal charge.

If you are in a cash business, you must have policies in place to track and deposit cash. Maybe you go to the bank every morning or maybe twice a week. Don’t vary your routine and never hold cash in your safe to prevent the CTR.

If you take steps to structure your affairs, you run the risk of your bank filing a Suspicious Activity Report. This will certainly bring down the weight of the Federal Government up on you and is far worse than and IRS Currency Transaction Report.

One interesting issue: If your policies result in your depositing around $9,000 twice a week, you might want to change to once a week. As strange as this sounds, it will guarantee the IRS Currency Transaction Report and avoid the STR.

As the United States works even harder to control its citizenry, and ensure only “approved or compliant” transactions get through, you can be assured that laws like the IRS Currency Transaction Report will continue.

A Cheap Offshore Company Cost Me $100K

06/16/2014/in Articles, Offshore Company Taxation/by Christian Reeves

Are you considering forming a cheap offshore company? Has some scammer in Nevis promised you tax freedom and privacy? Forming a cheap offshore company that does not include U.S. tax compliance is a roadmap to disaster for the American living, working or investing abroad.

How much would you be looking at in penalties for using a cheap offshore company formation mill? The most common error is failing to Ale the Foreign Bank Account Report or FBAR. Most get a penalty of $100K per year and are happy to avoid jail time.

Others get in to even more trouble for failing to file an offshore corporation return on Form 547 or one of the various LLC reporting forms. Those of you with complex asset protection trusts have even more risks. You may need to file a form when you fund the structure and Forms 3520 and 3520-A each year to report transactions in your trust. Add to this the requirement to report foreign assets in a variety of situations, and in improperly structured and reported cheap offshore company can cost you a fortune.

When asked how much a cheap offshore company will cost, I like to say about $100K. This is because the FBAR is the IRS’s first line of attack and other forms base their penalties on the amount of unreported tax or as a percentage of assets (i.e. an offshore trust). For the trust, the usual penalty is 25% of assets under management per year!

Back when I was defending cheap offshore company users, I commonly saw people who were out of compliance for multiple years and who owed more in taxes and penalties that they had taken offshore. In one case, a client put $75,000 offshore for a few years and ended up paying $225,000 in taxes, fines and penalties. . .and happy to pay up rather than sit in jail.

Some were not as lucky. U.S. jails are full of people who had a cheap offshore company and found themselves in theirs crosshairs – to eventually spend time

behind bars. How much does a cheap offshore company cost? If the IRS wants to make an example of you, about 3 to 5 years of your life.

The U.S. is one of the very few nations on earth that locks away its citizens for not paying taxes. In fact, America has put people away for failing to file a form when no tax was due (lawyers calls this a zero tax loss case). I personally know people in jail for 10 months for failing to file a form in a zero tax loss case. I know of another person who got 2 years home confinement on a zero tax loss case.

This is all to say, stay away from cheap offshore company formation mills unless you are an international tax expert, you are heading for trouble using such a provider because you can’t tell puffery and salesmanship from fact.

When you form an offshore company with Premier, we include 12 months of tax and business consulting services at no cost. Our U.S. tax experts are here to answer any questions from you or your tax preparer, explain what forms to use and when to file and make sure you in compliance with the IRS. We also assist with any business or banking questions – including opening additional bank or brokerage accounts in the first 12 months. We are always her to answer your questions.

While advice and consulting services are free, we also offer tax compliance packages for corporations, LLCs, trusts and asset protection structures that we have created. We do not prepare complex returns for structures we have not formed . . .this is just too much liability for us to assume from others’ mistakes.

We also prepare personal returns, Form 1040 and 2555, for anyone living and working abroad.

So, how much does a cheap offshore company formation cost? Too much! If you don’t select Premier to structure your international affairs, please use a U.S. attorney or firm that can keep you out of trouble. The cheap offshore company formation is not worth the risk.

For a confidential consultation, please call us anytime or send an email to info@premieroffshore.com. All discussions are private and there is no obligation.

Will the IRS Audit Me for Going Offshore?

04/23/2014/in Articles, Taxation/by Christian Reeves

For those of you living and working abroad, or investing outside of the United States, the fact that you file one or more of the offshore company forms and report a foreign bank account on the FBAR will have little to no effect on your chances of an audit. The IRS is focused like a laser on those who fail to report their offshore transactions. So, if you are in compliance, you have little to fear.

To put it another way, individuals who file an offshore return are not currently a target for the IRS. They have amassed their forces to go after the banks and non-compliant individuals because that’s what makes headlines…that’s what brings in the cash.

How much are we talking about you ask? The IRS has brought in about $4 billion through the Voluntary Disclosure Program and another few billion in fines and penalties against Swiss and other banks who helped Americans avoid taxes. These are the kind of numbers the government is going for…they are not concerned with the average person’s compliant offshore dealings.

This is all to say that the IRS is not so concerned with those in compliance. If you have been filing your forms and paying along, you are no more likely to be audited that the average person. If you get in to compliance voluntarily, then you take the target off of your back.

It is also important to realize that the IRS audits less than 1% of taxpayers each year…and their budget for 2014 and 2015 has been cut by Republicans angry about the way their fund raising groups were treated in the last election cycle. Based on the following factors, I believe that most of my clients have a 3% to 5% chance of facing the tax man…not because of international structures, but because of their higher levels of income.

My point here is not that you will never be audited. It is simply that going offshore does not significantly increase your probability of facing down the IRS. For more on this topic, please take a look at my article How to Avoid an IRA Audit – Expat Edition.

If you are behind in your U.S. tax filings, I suggest you take a look at my article on the IRS Voluntary Disclosure program. If you qualify as an Expat, this might be a cost effective avenue for you to get right with the Service.

How to Avoid an IRS Audit – Expat Edition

04/21/2014/in Articles, Taxation/by Christian Reeves

If you are living and working abroad, you still need to worry about the IRS. In this article, I will talk about how to avoid an IRS audit with a focus on Expats.

Are you worried that the IRS will come knocking on your door? Want to know how to avoid an IRS audit? I battled the IRS for a decade and here are a few of the tips and tricks learned, often the hard way, in those skirmishes.

So, what are the major audit flags? What will bring the IRS to your door? Some are selected at random, a kind of control group, but there are a number of items that can increase your chances of being selected by the computer for an audit.

The key factors are the amount you earn, the type and quantity of deductions you take, the volume of capital gains transaction on Schedule D, your line of work, and whether you own your own business.

Of these, income level is far and away the most important factor. As I said above, less than 1% of the taxpaying population is audited each year. If your income is $200,000 or more (defined as rich in today’s America), your chance of an audit jumps to 3.26%. If you have a great year, and make $1 million, your chance of a visit skyrockets to just over 11% (about 1 in 9). So, you want to know how to avoid an IRS audit…just stop working!

I assume you won’t decide to work less, or earn less, to keep the IRS from your door, so let’s talk about what you can control. By far, the most egregious error is failing to report all of your income…and this is exactly what the IRS is targeting with FACTA and its offshore banking initiatives.

You see, FACTA forces all banks around the world to report the income and transactions of their American clients to the IRS, just as American banks do today. It essentially turns your foreign banker in to an unpaid agent of the U.S. government.

Next, IRS computers compare these reports to the return you file and audit those whose report doesn’t match the computer file. The larger the discrepancy, the higher your chance of an audit. The purpose of FACTA is to ensure all Americans are reporting each and every transaction and to provide a tool to the IRS to easily track down and persecute those who failed to toe the line.

Therefore, the best way for the U.S. person living, working or investing abroad to avoid an IRS audit is to file all necessary forms.

Another red flag is your charitable donations. The IRS keeps statistical data by income bracket on this category. The further you get from the standard deviation, the higher your chance of an audit. If you give 5% of your income to charity, with no non-cash donations, your audit meter will hardly register a beep. Give 50% of your adjusted gross income in donations of clothing and personal affects, and I guarantee you will be audited…possibly before you have time to cash the refund check.

Next on the list of red flags are rental real estate losses. If you have a loss from one foreign or domestic property of less than $25,000, your risks are minimal. If you claim to be a real estate professional so you can take larger losses, or because your income from other sources exceeds $150,000, then your risk of an audit is very high.
The last major caution is to day traders and those claiming to be professional traders of their own accounts. I understand that the desire to be considered a professional trader can be strong, and I field a number of calls from those wishing to do this “business” offshore.

Those who trade in stocks and securities as professionals have big time advantages over the rest of us. Their expenses are fully deductible and their profits are exempt from self-employment tax. Losses of traders who make a special section 475(f) election are fully deductible and aren’t subject to the $3,000 cap on capital losses.

But, to be a professional trader, and not just a simple investor, you must regularly and continuously trade stocks. It must be your primary business and you should be spending about 30+ hours a week trading, researching, and working on your craft. If you aren’t that involved, you are not a trader.

And the IRS realizes that it can be quite difficult for a person trading his own portfolio to prove he is a professional, so they are easy targets…often fish in a barrel.

If you are reporting your business on Schedule C, rather than an onshore or offshore corporation, you have a significantly higher risk of audit compared to someone who is properly structured. The favorite categories on this form are home office deduction, automobile expenses, notoriously hard to prove and often estimated by clients, and meals and entertainment. Did you actually bother to keep all of your receipts and write down who you met with and why? Keep it “simple” and get a corporation.

Why will a corporation reduce your chances of an audit? Let’s say you reported $200,000 on Form 1120. You will be grouped together will all of the other corporate entities. At $200,000, you are probably a small fish in a big pond. But, report that same profit on Schedule C, you are probably a medium to large fish to the self-employed audit group in the IRS. In other words, not many are making $200,000+ on Schedule C, but the number of corporate entities earning more than that is significant.

As someone who has handled hundreds of IRS exams over the years, I believe that these categories cover 90% of the non-random audits. If you want to know how to avoid an IRS audit, focus on compliance and your corporate structure. I will give you a few more examples below, but as we move on, the effect on your chances of an audit get less.

Hobby losses are major red flags, but one most people manage to avoid. You must report income from a hobby (such as horse racing) and you can deduct expenses up to the amount of that income. You are prohibited from deducting expenses in excess of that income. So, if you are considering racing ponies in Panama, don’t deduct them on your U.S. return.

The same is true of gambling. U.S. casinos will report your wins, and you are allowed to deduct your losses to the extent of those wins. You should never take a loss from gambling, though some try on Schedule C by calling it a business. Keeping in mind that you must be able to prove your losses, usually with a gambling log, you can deduct foreign losses against U.S. wins. If you took $100,000 from a lucky streak in Las Vegas, and gave it all back to the Trump Casino in Panama City in the same year, you can net losses against wins to break-even.

Just about any small business has a high risk of audit. This is especially true of bars and restaurants with cash transactions. In fact, these establishments often get hit by the IRS, State tax board, and employment tax board in the same year.

If you are in a business offshore, and pay your employees or consultant’s in cash, you will have a tough time if the tax man comes calling. You must prove all expenses to the U.S. IRS, so you should try to pay by check or wire whenever possible and have an invoice or receipt in the file. If not possible, then a signed receipt may get you by.

I will conclude with this: if you are living, working, or investing offshore, and have been filing all of the proper forms, you have nothing to fear from the IRS. If you have been lax in your reporting, then you might just find yourself at the top of the IRS hit list. Did you miss an FBAR or two? Do you have foreign real estate in a corporation that you did not report? You should get these issued resolved before FACTA arrives in full for on January 1, 2015.

If you are considering filing your delinquent forms, please take a look at my article on the voluntary disclosure program. If you qualify as an expat, and you owe no tax to the IRS, you might get away with zero penalties.

Feel free to contact me for a confidential consultation on any of these issues. You can reach me at info@premieroffshore.com or by calling (619) 483-1708.

New FBAR Filing Requirements for 2014

03/28/2014/0 Comments/in Articles, Taxation/by Christian Reeves

As you, the American with investments abroad, get ready to prepare your 2014 tax return, there are important new FBAR filing requirements for 2014. Some of these FBAR filing requirements are cosmetic and others could get the misinformed in hot water.

Note: If you have no idea what an FBAR is, you might check out my general article on filing requirements for those living, working, or investing abroad. If you want to learn how to legally avoid the FBAR, click here.

First, let me tell you how your accountant or CPA thinks. The foundation of tax preparation for professions is SALY…prepare the return the Same As Last Year to reduce the risk of an audit.

So, when your preparer pulls out your file, he or she will be thinking SALY and will reach for the same old forms to file. When new FBAR filing requirements for 2014 are announced, but don’t get much press, tax preparers without many Expat clients can get caught unprepared.

It may be up to you to educate your preparer on the FBAR and these New FBAR filing requirements for 2014. Here they are:

Not one to bury the lead: IRA owners don’t need to file an FBAR in 2014!

For those of you with Offshore IRA accounts, the IRS has finally come out and said that IRA owners and beneficiaries do not need to file an FBAR. Whether an offshore IRA needed to file an FBAR was never clear, so we all aired on the side of caution and filed it year after year. Well, that burden has been lifted (see below).

The cosmetic change is that the name of the form has changed. The official name of the FBAR changed from Treasury Form TD F 90-22.1 to FinCEN Form 114. I’ll bet not many people even noticed, as we all refer to it as the FBAR.

The big change to the FBAR for 2014 is that it must now be filed online. No more paper allowed. So, when your preparer pulls out your file and grabs the same old forms, you may be in for penalties.

That’s right, if you or your preparer are unaware of the change and mail in SALY, you could face significant penalties for filing late…or not filing at all. So, be sure to talk to your tax man or woman!

Note: the deadline for the electronic FBAR filing did not change and remains June 30. If you file your FBAR with your personal return on April 15, all is well. If you procrastinate and get an extension for your personal return until October 15, your FBAR is still due on June 30. That’s right, the extension of time to file your personal return does not apply to the FBAR.

Do you prepare your own returns? Do you want to sound cool when you explain things to your preparer? Then here is how to file an electronic FBAR in excruciating detail.

To file an electronic FBAR:

Go to http://bsaefiling.fincen.treas.gov/main.html.

Click “File an Individual FBAR” on the left side of the page.

You will then be brought to the screen below, where you can download a PDF version the FBAR (FinCen Form 114). This PDF allows you to type information into the form and save the results (wow, a fillable PDF form – modern technology fresh from 2001!)

Fill in FinCen Form 114 PDF. You will need your information, including social security number and date of birth, as well as your bank name, address, account number, and highest balance for the year. Be sure to save the document when you are finished. If you are unsure what information you need to enter in a certain field, you can move the mouse cursor over that field, hold it for a moment, and a box of text will pop up explaining what you need to enter. See the picture below for an example.

Once everything is filled out correctly, go back to the first page digitally sign the document, save and validate it, and then finalize it for submission.

When you’re ready to submit the form, go back to the page from Step 3 and click the link to “Submit FBAR.” This will take you to the submission page, where you’ll need to enter some contact information and then upload the finalized PDF. The process is not complete until you submit the form.

As you can see, the government has taken a simple form, which could be filled out a a 5th grader and mailed in, and turned it in to a computer nightmare for some. How many of those preparing their own returns will be confused and confounded by this new fangled technology? It will be an interesting year.

New FBAR Filing Requirements for 2014 – Who Must File?

Anyone who is a “U.S. person” must file an FBAR and enjoys the honor of paying U.S. tax on their worldwide income. Basically, this is anyone with a U.S. passport, green card, or someone who lives in America for 6+ months in the year.

If you are not sure you qualify as a U.S. person, please read: Who is a US Person?

The list of those exempt from filing an FBAR has also been updated and codified. For many of you, the most important statement is that IRA owners and beneficiaries are not required to file an FBAR.

Here is the complete list:

Certain foreign financial accounts jointly owned by spouses;
United States persons included in a consolidated FBAR;
Correspondent/nostro accounts;
Foreign financial accounts owned by a governmental entity;
Foreign financial accounts owned by an international financial institution;
IRA owners and beneficiaries;
Participants in and beneficiaries of tax-qualified retirement plans;
Certain individuals with signature authority over, but no financial interest in, a foreign financial account;
Trust beneficiaries (but only if a U.S. person reports the account on an FBAR filed on behalf of the trust); and
Foreign financial accounts maintained on a United States military banking facility.

To be clear, the above list is not necessarily new FBAR filing requirements for 2014. I am saying that the IRS finally listed the exceptions on their website and ended the debate, especially in regard to IRA owners and beneficiaries. For more information, see IRS.gov.

I hope you have found this article helpful. Please post any questions or suggestions in the comments below. I will personally respond to every inquiry.

Americans Give Up US Citizenship in Record Numbers

03/26/2014/0 Comments/in Articles/by Christian Reeves

Record numbers of Americans gave up US citizenship in 2013. As the IRS mafia becomes ever more hostile to its citizenry, Americans give up US citizenship in record numbers. In 2013, 3,000 Americans lined up at embassies around the world to renounce their citizenship and get Uncle Sam out of their pockets for good. This is an increase of well over 200% in the last year, up from 933 renunciations in 2012, 1,780 in 2011 and 235 in 2008.

Why did so many Americans give up US citizenship? The three most common reasons given were 1) the IRS, 2) the IRS, and 3) the IRS.

Let’s take a step back: America is about the only country in the world that taxes its citizens on their worldwide income, regardless of where they live. So long as you hold a U.S. passport, the IRS wants its cut. And the IRS has become very hostile in attacking American’s abroad and those offshore accounts, putting a number of them in prison over the last few years. Of course, these attacks are limited to average people and not big corporations, who have record amounts of cash offshore.

This attitude has resulted in some very unreasonable tax assessments. For example, I have met many people who have never set foot in the U.S., but whose parents wanted them to have a U.S. passport at birth, who have been caught in the IRS mill. Once in the government’s sites, they were forced to pay enormous fines and penalties, in addition to the tax due. Adding insult to injury, some of these people had their bank accounts seized and real estate sold at auction to pay in to the Obamanation.

Then there are the laws targeting offshore banks. If you are a U.S. citizen, you are not wanted at most financial intuitions. Of those banks that will do business with you, most will hit you with extra fees, such as $500 to open the account and a $300 per year special assessment to cover compliance costs.

Finally, there is the invasion of privacy. As an American, you have zero right to privacy in your financial dealings. In fact, nearly all offshore banks will report your transactions to the IRS.

If an offshore bank fails to report your transactions, they are on the hook for major fines or being locked out of the banking system all together. Considering this risk, and the high cost of compliance, it’s no wonder that Americans are persona non grata.

HOW TO GIVE UP US CITIZENSHIP

If you are thinking of giving up your US citizenship, there are several hoops you must jump through. First, you don’t just show up at the embassy, burn your passport, give the ambassador the finger, and go along your way. You must complete a complex process and receive a renunciation letter before you are free. This might include an audit of your last 3 to 5 years of tax returns and an in-depth review of your finances to ensure you are paid-up.

Before you open a new account as a free man or woman, the bank will want proof that you have renounced your U.S. citizenship. Even if you have a second passport, you must prove that you gave up your US citizenship. Therefore, getting this renunciation letter from the consulate is of the utmost importance. It also ensures the IRS will not come after you years later looking for more cash.

Second, you might need to pay an exit tax. If your worldwide assets exceed $2 million, or your average tax bill over the past five years has been more than $151,000, a tax may be due on unrealized capital gains.

Basically, you will be required to file a final U.S. return as if you have sold all of your assets for fair market value and you will be taxed on that gain the year you give up US citizenship. Calculating this cost to escape is simple for those who hold major stocks. If your assets include private investments, real estate that has not easily appraised, or you have other issues in determining fair market value, you could be in for a battle with the IRS.

Third, you must have a second passport in hand before you give up your US citizenship. If you give up your US passport and don’t have another ready and waiting, you will be a person without a country and it will become impossible to travel or immigrate.

If you don’t already have a second passport, there are three ways to get one.

By nationality or family history: If your parents or grandparents were born outside of the U.S., you might be able to get naturalized in their home country. For more information on this option, I suggest you read up at Live and Invest Overseas.

Earn your second passport through residency: If you move to a country like Ireland, Panama, Chile, New Zealand, or Singapore, you should be able to gain citizenship within 3 to 9 years (assuming the rules don’t change while you are waiting).

Of the residency programs that I have investigated, I believe the best is the favored nation’s residency permit linked to a teak investment in Panama. This requires a minimal investment of $15,000 and allows you to gain residency immediately. Citizenship should be processed in 4 to 5 years. For more information on this program, please contact me at info@premieroffshore.com.

Pay for it: You can purchase citizenship and a second passport from St. Kitts and Nevis, Dominica, and a few other nations. Most of the available programs require you to have no criminal history and cost anywhere from $165,000 to $300,000, depending on family size and other factors.

For a detailed description of the available economic citizenship programs, please see my Second Passports page. You will find the requirements and costs for Dominica and St. Kitts on this page. If you have issues in your past and need a more lenient jurisdiction, please contact me for a consultation.

I hope this information has been helpful. As the IRS becomes ever more hostile to its populace, I believe we Americans will have fewer and fewer escape and banking options. I also predict it will become very challenging to move assets out of the United States. If you would like to know more about how to give up US citizenship, please contact me at info@premieroffshore.com for a confidential consultation.

Who is a U.S. Person for Tax Purposes?

03/10/2014/0 Comments/in Articles, Taxation/by Christian Reeves

Who must pay US taxes you ask? Who is a US person for tax purposes? Who is in the crosshairs of the IRS? The answer is not quite as simple as you may think…and something that confuses many people living and operating a business in the US.

Who is a U.S person for tax reporting purposes? Who are these unfortunate soles who must file an FBAR, report their foreign assets on IRS Form 8938, and pay tax on their worldwide income?

As those of you know who have met me at conferences or read my articles, I often ramble on about the many filing requirements for those living and working abroad. I won’t go in to them again here, but you can see my taxation page for more information.

First, a U.S. person is ANYONE with a U.S. passport. It doesn’t matter if you currently live in the United States, nor does it make a difference that you have never lived in the U.S. So long as you hold a passport from the U. S. of A., you are required to pay up and report everything.

That is the easy answer. But, what about those who were not blessed at birth with a blue passport and the honor of giving half of what they earn to the American machine?

For example, I recently had someone in my office that had been living in the United States for the five years on a Green Card. He had been filing his U.S. tax returns, and paying tax on his U.S. income, but had done nothing about his international obligations.

He was considering obtaining U.S. citizenship and was wondering what that would do to his tax situation. He had no idea that he was already screwed and a U.S. person for tax purposes.

A U.S. person for tax purpose includes any of the following: (see the IRS website):

A U.S. Citizen, which is anyone with a U.S. passport,
A green card holder (see: http://www.irs.gov/Individuals/International-Taxpayers/Alien-Residency—Green-Card-Test), or
A U.S. resident for tax purposes – most commonly defined as someone who spends more than 183 days in the US under the Substantial Presence Test. A U.S. resident for tax purposes is commonly referred to as a resident alien.

Therefore, if you have a U.S. passport or green card, or are a resident alien for tax purposes, you must report income from all sources within and outside of the U.S. For more information, see Publication 525, Taxable and Nontaxable Income.

Also, if you are a U.S. citizen, green card holder, or resident alien, the rules for filing income, estate and gift tax returns and for paying estimated tax are generally the same whether you are living in the U.S. or abroad. See the IRS website for information on how to file as a resident alien abroad.

So, a U.S. person for tax purposes is just about anyone with immigration ties to the U.S., or spends most of their time here. If you want to enjoy the benefits of America, it’s going to cost you…and if you are unaware of these obligations, it can cost you big time!

I hope you find this brief article helpful. For additional information, or questions on your tax filing

Is Your IRA Confiscation Proof?

10/10/2013/0 Comments/in Articles, Asset Protection, Offshore IRA/by Christian Reeves

Are you thinking of using your IRA to invest abroad? Do you want to move your retirement account out of the United States? There are two very different ways to accomplish these goals. First, you can use a simple self-directed IRA and allow your custodian to make whatever investments you need. Second, you can take control over your account by forming an offshore IRA LLC.

With a self-directed IRA, you can direct the custodian where to invest your money, but you don’t control the transaction. If your custodian is experienced in offshore deals, he will probably do as instructed. If he is not comfortable with a situation, then he can refuse to make the transfer.

With an offshore IRA LLC, you have complete control over your retirement account. Your custodian makes only one transfer…in to your offshore IRA LLC. From there, you are responsible for all transactions.

If your objective is to make a variety of investments, hold property in an offshore LLC, and gain complete control over your retirement account, then you need an offshore IRA LLC.

If you are making one investment, especially in to foreign real estate, then you might be satisfied with a self-directed IRA.

For small retirement accounts, or those with very few investments, the costs of an IRA LLC might outweigh the benefits. For example, a $40,000 account might be sufficient to buy in to a development in Belize, but you may not be willing to pay $3,000 to fully structure the transaction. Therefore, economics can dictate the investment be made in a self-directed IRA without the benefit of an LLC.

If your IRA is $150,000, you wish to purchase properties in various countries and invest the balance in stocks and bonds through an offshore brokerage, then an offshore IRA LLC is required. It is unlikely that a self-directed custodian will agree to handle multiple complex transactions, and he certainly will not allow you to trade your own funds in an offshore brokerage.

In other words, a self-directed IRA custodian will need to handle each and every trade, investment, and transaction, and he will charge you for each. If you have an active investment account, these fees will probably eat you out of house and home right quick.

By utilizing an offshore IRA LLC, you eliminate these transaction costs. The custodian makes only one investment – in to your IRA LLC.

The offshore IRA LLC also gives you complete control over your investments. If you are concerned with the US government taking over your retirement account, then you need an offshore IRA LLC.

There is approximately $18 trillion in US retirement accounts and the national debt is nearly $17 trillion and rising. Food for thought…

When you make an investment using a self-directed account, it is the custodian who is making that acquisition on behalf of your retirement account. If an order comes through demanding the funds be returned to the US for any reason, then your custodian will be forced to liquidate the investments for whatever he can get and pay over to Uncle Sam. As the signor on all accounts and investments, he will have the authority and ability to comply with such an order.

As I said above, if you have an offshore IRA LLC, the custodian invests in to that entity and you take it from there. This means that all investments and accounts are held in the name of your LLC and you are the only signor on these accounts and transactions. The custodian can request that you return the assets to his control, but it would be impossible for him to compel you to do so.

To put it another way, it would be impossible for the Custodian to go in to court in Belize and gain access to your bank or brokerage accounts there because he is not a signor to the accounts and has no power over them. He would have no standing or right to sue you or your LLC in a foreign country as his authority is limited to US retirement accounts and transactions where he is a signor.

This protection only applies to offshore IRA LLCs. If you are using a US LLC, rather than an offshore IRA LLC, and hold accounts the US, then the US government can simply issue a levy. The same is true of accounts and assets held in Canada, France and the UK. For more information on government takings, see: Can the Government Seize My IRA?

The above example is carrying things to the extreme and assumes you are willing to ignore the demand of the custodian to return your funds to his control. A more practical benefit of the offshore IRA LLC is that it creates a level of impossibility or impracticability in forcing the return of IRA assets. The US government, in its infinite wisdom, may decide to grandfather in these offshore IRA LLCs and block all future formations.

In fact, most experts, providers and IRA custodians agree on only one thing: that the offshore IRA LLC is not long for this world. This structure gives the average person to much control over his or her (possibly only) significant asset and allows them to move it out of the reach of Uncle Sam much too easily. If and when the US government decides to come after retirement accounts, their first attack will be against the offshore IRA LLC.

When this happens, those who have formed and funded their offshore structures will likely be left alone. The stigma and difficulty of going after a number of retirees will generate way to much fear and bad press. Can you imagine trying to criminalize and force the sale of foreign real estate? That would be very ugly.

Far more likely is that existing offshore IRA LLCs will be left alone and grandfathered in to a new law or rule. Forming and funding new offshore IRA LLCs will become an impermissible distribution that is taxable and a penalty will be imposed. Such a change would probably not even rate a blip on the national news cycle.

And this can be accomplished with a very simple change: investing in a single member entity / LLC can be added to the list of impermissible transactions (collectables, life insurance, businesses of which you own more than 50% or are a highly paid employee, etc.). Alternatively, managing an offshore IRA LLC can be deemed to be operating a business, and you own 100% of that business, so it is improper. Either way, future transfers to offshore IRA LLCs can be eliminated with the stroke of a pen, no act of congress, vote, or other law need be passed.

Therefore, the best and only way to ensure you are allowed to control your own finances, and make your retirement account confiscation proof, is to place it in to an offshore IRA LLC and invest outside of the United States before the tides change. By holding accounts at banks that have no branches in the US, in physical gold, foreign real estate, and in other assets not easily seized, you have the best protection available.

If you found this information helpful, I suggest you also read my article on Self Directed and Offshore IRAs. This is more detailed and focused on the legal requirements of these structures.

If you have any questions, please contact me at info@premieroffshore.com or at (619) 483-1708 for a confidential consultation.

Dealing with the IRS

01/09/2013/0 Comments/in Articles/by admin

Let’s say you have filed all of your delinquent returns, and the foreign-earned income exclusion, along with the other suggestions in this book, and did not eliminate your entire U.S. tax bill. Now the IRS is at your door…what should you do?

Step One: Know your risks

First, you must understand that the IRS can levy your U.S. bank account, and possibly your foreign bank accounts, put a lien on any real estate in the United States, and possibly take your real estate outside of the U.S.

Levy: A Tax levy, under United States Federal law, is an administrative action by the IRS under statutory authority, without going to court, to seize property to satisfy a tax liability. A levy is generally used to take money out of your bank account.

Lien: A tax lien is a lien imposed by the IRS upon real estate or other property to secure the payment of taxes. It may allow the IRS to seize your property. If you sell the property, the proceeds from the sale go first to the IRS to settle your debt, and then the remainder comes to you. An IRS lien comes after any preexisting liens, such as a first or second mortgage.

Here are several questions to consider if owe money to the IRS:

Did you know that the IRS can levy your foreign bank account if your bank has a branch in the U.S.?
Did you know that the IRS may be able to levy your paycheck if your parent company is a U.S. entity?
Did you know that the IRS can seize real estate in certain countries, such as France?
Did you know that moving money out of the U.S. to avoid an IRS levy, even if you live abroad, can be a crime?
Did you know that failure (refusal) to pay taxes can be a crime, in very specific circumstances?

Once your debt to the IRS becomes final and payable, the Service will attempt to mail four collection letters demanding payment. After sending those letters, whether or not you received them, the IRS can levy any U.S. bank account. This means they can take up to the amount of the debt out of your account(s). For example, if you owe $30,000, and you have $20,000 on the bank, they get $20,000. If you owe $30,000, and have $35,000, they get $30,000.

In addition, the IRS can levy any foreign account, so long as your bank has a branch in the U.S. For example, if you are living in Mexico, and banking with HSBC, the IRS can issue a levy to a U.S. branch of HSBC, and it must be honored by the branch in Mexico…and your money is gone.

Of course, this can be avoided by banking with institutions that do not have branch offices in the United States.

Second, the IRS can take real estate in the U.S. or real estate in certain foreign countries. The IRS can seize property in any country where such a taking is provided for in the treaty, known as a Mutual Collection Assistance Requests (MCARs) clause. There are currently five treaty countries with which the IRS has ongoing programs for MCARs that may involve seizure and sale.

Third, the IRS can levy a bank account, or garnish your wages (take money out of your paycheck) in most countries with which it has a MCARs.

This means that anyone living in a MCARs country is at risk of having their assets seized, just as if they were living in the United States. The treaty partners and types of taxes covered for collection are as follows:

Canada — All taxes
France — Income, Estate and Gift, Wealth and other specified taxes
Denmark — Income and other specified taxes
Sweden — Income and other specified taxes
Netherlands — Income and other specified taxes

Note: It is very rare for the IRS to seize real estate, especially one’s primary residence. This only happens after the IRS exhausts every other collection alternative, and the taxpayer refuses to cooperate. If you owe money, and can’t afford to pay, a tax attorney can negotiate a settlement that both you and the IRS can live with. As long as clients are honest and cooperate, the process is surprisingly painless. It is those who are unwilling to cooperate, or are too scared to do so, that get hit the hardest by the IRS.

Step Two : Negotiate

There are two basic options for those who owe the IRS, and are unable to pay:

1) An installment agreement; or

2) Offer in Compromise.

In an installment agreement, you agree to pay what you can afford each month, and the IRS agrees to stop collection actions while you make these payments. The IRS has 10 years to collect from you, thus your installment agreement can go on for several years.

In an Offer in Compromise, or OIC, you and the IRS agree to settle your debt for one lump sum, or payments over a few months. Let’s look at the OIC process in detail.

OFFER IN COMPROMISE

Everyone is well aware of the U.S. credit crunch, plummeting home values, and the generally tough economic situation. At the same time, the U.S. government is running at a staggering deficit and looking to the Internal Revenue Service (IRS) to bring in more cash by stepping up audits and collections.

Put simply, an OIC is an offer to settle your IRS tax debt for less than the total obligation because you cannot pay the debt in full over the “collection period.” Before you can request an OIC, all of your tax returns must be filed and you must pay a deposit of 20% of your offer amount.

Collection Period: In most cases, the IRS has 10 years to collect on a tax debt after it has been assessed. A debt is assessed when you file your returns, the IRS files returns for you, or an audit is finalized.

A settlement can be made in one lump sum, or over a number of months. However, it is more difficult and costly to get OICs approved that will pay over time, so a lump sum payment is the most practical option for most taxpayers.

During the OIC process, your objective is to convince the Service that you are paying them something that they would not otherwise get. To prove this claim, you are required to complete a detailed financial statement, listing all of your income, bank accounts, and assets. If your assets exceed your debt, your offer will not be accepted.

If you do not have sufficient assets to satisfy the debt, your income is compared to your allowed expenses to calculate your offer amount. For example, in 2012, a family of four living in San Diego, California is allowed to spend $3,142 per month for housing and utilities. The same family of four, living in Armstrong County, Texas, would be allowed only $1,427 per month, and $5,625 in New York County, New York.

If your income exceeds your allowed expenses, the difference, times 48 months, is added to your assets to determine your total offer amount.

For example, if you owe $100,000 to the IRS, the equity in your home, your only asset, is $20,000, and your net income after allowed expenses is $1,000 per month, your total offer amount is $68,000 ($1,000 x 48 = $48,000 + $20,000), or 68% of the debt.

Expats & Allowed Expenses: When negotiating with the IRS, you are allowed to spend fixed amounts on housing, utilities, automobile, health care expenses, food, clothing, and other living expenses. Collection Financial Standards are published for U.S. residents, but none have been created for those living abroad. Therefore, every aspect of an expats financial statement must be negotiated. For more information on the Collection Financial Standards, visit www.irs.gov/individuals/article/0,,id=96543,00.html

INSTALLMENT AGREEMENT

Let’s say you owe $10,000, $30,000, $100,000 or more to the IRS and your assets exceed your debt. You are working full time abroad, but you have no savings to pay off the IRS. Can you pay off your debt over time?

Yes. In fact, almost every client onshore or offshore 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 $400, the IRS may set up an Installment Agreement that will increase by $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:

(1) 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. Be careful here..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.

(2) 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.

(3) 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?

DON’T GET SCAMMED

So, why do you see so many claims on the Internet and television promising to settle your tax debt for pennies on the dollar? Because there are settlements like that, which are then used by a few unscrupulous promoters to mislead people into spending thousands of dollars to only have their OICs rejected.

Take the example above, but assume the tax debt is $1 million. It will still settle for $68,000, or about 15%.

If that same family owes $1 million, has lost their home, and their income does not exceed their allowed expenses, or the breadwinner is permanently disabled and unable to work, then total offer amount might be $1,000. This is a dream scenario for any national OIC marketing firm…the perfect client who can be used in their multi-million dollar advertising campaign!

I have had a few such clients over the years. For example, a 72-year-old retired person, who was living with family and on Social Security only, settled his debt of $150,000 for about $2,000.

Before hiring anyone, especially a national firm, you should check them out on the Internet. Here are a few suggestions:

Click here to go to a review of American Tax Relief by the Better Business Bureau.
Click here for a review of JK Harris by the Better Business Bureau. Click here to read what consumers have to say about JK Harris.
Click here for a review on Roni Lynn Deutch by the Better Business Bureau. Click here to see what consumers have to say about Roni Deutch.
Click here to read a review of TaxMasters, Inc. by the Better Business Bureau. Click here to read what consumers have to say about TaxMasters. For more opinions on TaxMasters, click here and here.
Click hereto see what consumers have to say about Power Tax Relief. Click here to read a review of Power Tax Relief by the Better Business Bureau.

NOTE: Government figures show that 75% of Offers in Compromise are returned due to forms being filled out incorrectly; and of the 25% that are processed, approximately 50% of them are rejected. Add to this the complexities of expat negotiations, and it is clear quality representation is required…just be careful!

When do I need Help?

Many clients ask, “Do I need an attorney to help me deal with the IRS?” That’s a hard question and depends on your ability to negotiate, organize, and handle IRS paperwork. Some people are much more capable than others when it comes to handling their tax matters.

My standard answer is this:

If you owe the IRS $24,000 or less, and can afford to pay $500 per month, just call them up and make that offer. If it is accepted, as it usually is, you do not need professional help.

If you owe $24,000 to $99,000, you have an average sized case that will usually be handled by a centralized collection unit. While this size accounts for about half of my collection cases, they are easier to handle than larger cases…thus, we charge a lower fee.

If you owe $100,000 or more, you have a large case and can expect the IRS to be very aggressive in collecting from you. I suggest that anyone with a debt in excess of $100,000 seek legal counsel immediately.

Finally, you should decide if you need representation before contacting the IRS. It is very difficult to overcome mistakes and I generally do not take on cases after the documents have been filed. It’s like coming in to the game down by 21 points and being asked to bring the team back with five minutes to go.

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 two 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 five 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 you
Agree to full payment within three years.

A supervisor must approve the issuance of a Notice of Lien or Levy or seizing of property.
The IRS must notify you within five 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 third 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 $100,000 for negligence and $1 million for intentional or reckless disregard.

The IRS must notify you, 30 days before filing a levy, that you have a right to a hearing.
1. You can then request an Appeals officer hear the case before the levy.
2. You cannot challenge the underlying tax unless you had no previous opportunity to do so.
3. If not resolved, you have 30 days to appeal to the U.S. Tax Court or Federal Court.

Standards are provided exempting some personal property and tools of the trade from levy.

Property can’t be sold below the property’s minimum bid price.
1. 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.
2. 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.
1. This does not apply to the self-employed.

While you have an Offer in Compromise pending, and 30 days thereafter, the IRS cannot take your property or levy your bank account.

For additional information, please refer to these IRS publications:

Form 565http://www.irs.gov/pub/irs-pdf/f656.pdf
Form 433-Ahttp://www.irs.gov/pub/irs-pdf/f433a.pdf
Form 433-Bhttp://www.irs.gov/pub/irs-pdf/f433b.pdf

2012 IRS Offshore Compliance Program

01/09/2013/in Articles/by Christian Reeves

Great News for Some ExPats and Dual-Nationals

As an ExPat American, you know that you are required to file a U.S. tax return each year and report your foreign bank accounts if you have more than $10,000 offshore. Unless you have been living under a rock in Bangladesh, you also know that the IRS has been pushing hard to force disclosure, compliance and payment.

The drive for increased revenues started in 2003 when the IRS began investigating offshore credit cards. At that time, it was about compliance. The government had not yet figured out that putting people in jail for tax crimes would generate a lot of news, and thus cause many more thousands to come forward.

In 2008 the U.S. government began its attack on UBS in Switzerland, eventually forcing the Swiss to disclose 4,450 names of U.S. citizens with unreported accounts. The U.S. followed this up by prosecuting a few people in each State or region of the country to ensure maximum news coverage and created the voluntary disclosure program to maximize the return on their campaign.

So far, there have been three programs allowing people to come forward and voluntarily report their offshore bank accounts. As of June 26, 2012, the IRS has brought in over $5 billion in new taxes, interest and penalties.

The third, and current, program came into effect on September 1, 2012 and has several benefits for what it considers “low-risk” persons. These are U.S. citizens, including dual-citizens, who currently reside overseas, who owe little or no U.S. taxes. The objective is to convince these people to report the value and locations of their money and assets in exchange for not being hit with civil penalties.

These low-risk persons will be able to file three years of delinquent U.S. tax returns (including required information reporting forms) and six years of FBARs without the imposition of penalties. Whether a taxpayer is “low-risk” will depend on a number of factors, but will primarily require that the tax due is less than US$1,500 for each of the covered years, that the person was living and working outside of the U.S. during these years, and that the person did not take steps to conceal their income from the U.S.

It should be noted that this procedure will provide no protection from the risk of criminal prosecution. The IRS website indicates the following regarding criminal prosecution: “The Voluntary Disclosure Practice is a longstanding practice of IRS Criminal Investigation whereby CI takes timely, accurate, and complete voluntary disclosures into account in deciding whether to recommend to the Department of Justice that a taxpayer be criminally prosecuted. It enables noncompliant taxpayers to resolve their tax liabilities and minimize their chance of criminal prosecution. When a taxpayer truthfully, timely, and completely complies with all provisions of the voluntary disclosure practice, the IRS will not recommend criminal prosecution to the Department of Justice.”

Because the tax due amount takes the Foreign Earned Income Exclusion and Foreign Tax Credit into consideration, many Expats and foreign residents will qualify for the program regardless of their income. For example, anyone that is an employee in a high tax country (a country with a tax rate equal to or greater than the U.S.), should qualify, as will most people earning less than $80,000 to $95,000 per year who are living in a low tax country. Those at risk are entrepreneurs living in low tax countries, high net worth individuals with significant untaxed capital gains or passive income, and just about any self-employed person who was not operating through a foreign corporation and is thus subject to self-employment tax.

There are two groups of ExPats that are excluded from this program: 1) if your account is at a bank that is currently under investigation by the U.S., you may not be eligible, and 2) if you attempt to fight the release of your banking information from your foreign bank, you will not be eligible for this program. For example, the U.S. issues a summons to Bank ABC in Lichtenstein requesting all U.S. accounts. If you attempt to block this release by exercising your rights in Lichtenstein, you are disqualified from this program.

In addition, the IRS may announce that certain groups of taxpayers that have or had accounts at specific offshore banks will be ineligible to participate in the OVDP due to pending US government actions in connection with those specific institutions. Details regarding eligibility or ineligibility of specific taxpayer groups connected to such institutions will be posted to the IRS website.

The IRS says: “US persons with undeclared bank accounts are reminded that the 2012 OVDP gives taxpayers with unreported foreign bank accounts a chance to come clean while mitigating the risk of criminal prosecution, and that they should consider remedying any past non-compliance with their US tax and information reporting obligations while there is still an opportunity to do so.”

If you are a U.S. citizen who has been living and working abroad, and are willing to disclose your accounts and assets, now is the best time to evaluate your rights. I recommend the following three step plan of action: 1) discuss your situation with a qualified tax attorney and evaluate your risks of criminal prosecution, 2) have your attorney prepare U.S. tax returns to determine the amount of taxes due, and 3) if you qualify as a low-risk citizen, join the voluntary disclosure program as soon as possible, before your bank comes under attack or you are disqualified for another reason.

If you do not qualify as a low-risk taxpayer, you may still participate in the current voluntary disclosure program. However, you will be subject to substantial taxes and penalties, which are more severe than those levied by previous initiatives.

In addition to the standard tax, interest and penalties associated with your delinquent returns, the following penalties will be assessed, and must be paid or you will be disqualified from the program:

Pay a 20% accuracy-related penalties on the full amount of your offshore-related underpayments of tax for all years;

Pay failure to file penalties, which are up to 25% of the unpaid tax, if applicable;

Pay failure to pay penalties, which are up to 25% of the unpaid tax, if applicable;

Pay, in lieu of all other penalties that may apply to your undisclosed foreign assets and entities, including FBAR and offshore-related information return penalties and tax liabilities for years prior to the voluntary disclosure period, a penalty equal to 27.5% (or in limited cases 12.5% or 5%) of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the period covered by the voluntary disclosure;

- - Note that this penalty includes the value of all foreign assets, including real estate.

As you can see, the penalties are very severe if you do not qualify as a low-risk taxpayer. However, getting back in to the system and removing the risk of criminal prosecution will motivate many to come forward, pay and sleep well at night knowing they are in compliance with their tax filing obligations.

If you have unreported accounts or questions about your U.S. taxes please contact a U.S. licensed tax attorney or Enrolled Agent at Premier Offshore, Inc. We offer a free and 100% confidential consultation and have decades of experience in international taxation of U.S. citizens abroad. We can be reached at (619) 483-1708 or by email info@premieroffshore.com.

Expatriation – The Final Solution

01/09/2013/1 Comment/in Articles/by Christian Reeves

Each month I get one or two inquiries from U.S. citizens who have had enough and want to give up their U.S. citizenship. While it is rare for someone to take such drastic steps, especially after they learn how to manage their U.S. tax obligations while living abroad, it is an important subject. Here are the facts:

Individuals who give up their U.S. citizenship, or long-term residents who give up their residency status after June 16, 2008 are subject to a mark-to-market tax regime under which they are taxed on the unrealized gain in their property to the extent it exceeds $651,000 for 2012.

To calculate gain, the IRS assumes the all of your assets were sold at fair market value on the day before you expatriated. If the net gain from these deemed sales exceed $651,000, you pay tax on that difference.

These rules apply to any U.S. citizen who relinquishes citizenship or any long-term resident who ceases to be a lawful permanent resident of the United States, and the individual who has:

An average annual net income tax liability for the five preceding years of more than $145,000,
A net worth of $2 million or more on the expatriation date, or
Fails to certify under penalty of perjury that he or she has complied with all U.S. tax obligations for the preceding five years or fails to submit evidence of compliance required by the IRS.

Of course, paying tax on assets you do not sell can cause a problem, for which the IRS has graciously made allowances: You may elect to defer this tax so long as you provide adequate security, as required by the IRS, to ensure payment and you give up any treaty rights that would preclude assessment or collection of the tax in the future.

In addition to any other requirement, an expatriate must also file an information return on Form 8854 in each tax year they are subject to the rules above. This form can be found at http://www.irs.gov/pub/irs-pdf/f8854.pdf

There are a lot of contingencies and complexities to the rules above. For example, special rules apply to deferred compensation items, interests in non-grantor trusts, special gift and inheritance rules, etc. Anyone considering expatriation should consult a tax expert.

U.S. licensed tax and expatriation experts are available to speak with you. Feel free to phone us at (619) 483-1708 or send an email to info@premieroffshore.com for a confidential consultation.

Unfiled Tax Returns

01/04/2013/in Articles/by admin

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.

IRS Wage Garnishments

01/04/2013/0 Comments/in Articles/by admin

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.

IRS Tax Liens

01/04/2013/0 Comments/in Articles/by Christian Reeves

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.

IRS Offer in Compromise

01/04/2013/in Articles/by Christian Reeves

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:

Filing all tax returns;
A proper analysis of your tax situation to determine the best course of action;
Planning and accounting in order to prepare an IRS financial statement, Form 433-A and/or 433-B when applicable;
A complete and accurate IRS financial statement, Form 433-A and/or 433-B; and
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.

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.

IRS Bank Levies

01/04/2013/in Articles/by Christian Reeves

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:

Move your account to a new bank.

Keep a minimal amount of money in your personal bank accounts. Make your deposit and immediately pay all bills.

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.

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.

Keep money in your retirement accounts, as it is very rare for the IRS to levy such an account.

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.”

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.

IRS FAQs

01/04/2013/0 Comments/in Articles/by Christian Reeves

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:

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.

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:

Click here to go to a review of American Tax Relief.
Click here to read a review of JK Harris.
Click here for a review on Roni Lynn Deutch.
Click here to read about TaxMasters. To see more opinions on TaxMasters, click here and here.
Click here to go to an analysis of Power Tax Relief.

Taxpayer Bill of Rights

01/04/2013/in Articles/by admin

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.

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.

Offer in Compromise Basics

01/04/2013/0 Comments/in Articles/by admin

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.

IRS Statute of Limitations

01/04/2013/in Articles/by admin

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:

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.
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.