IA Eligibility Requirements

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Who is eligible to pay back taxes to the California Franchise Tax Board via an installment agreement?  It can be a little complicated.

It’s difficult not to compare FTB and IRS collection tactics.  Both almost always first demand/request payment in full.  The collection notices are worded in a way that if you don’t read beyond the first sentence, it will appear that full payment is your only option.  And when you call them up, that’s the first thing out of their mouth.  IRS will usually say “Do you have the ability to pay your tax bill in full?” If you cannot write them a check, then the discussion typically shifts to what is required for an installment agreement.  However, the FTB will often (at least at first) demand full payment without regard for your ability to pay and then very reluctantly tiptoe around the option of paying back your taxes in installments.

The eligibility requirements for an FTB installment agreement are more stringent than the IRS requirements.  First and foremost, it is very difficult to obtain an installment agreement with FTB if you have an active earnings withholding order (EWO).  An EWO is just another word for “wage garnishment” or “wage levy.”  Once the FTB has brandished this collection tool, and they have a steady stream of payments coming in, it is very difficult to convince them that they should trade these “guaranteed” payments for a promise to pay from the taxpayer.

Like the IRS, the FTB does require that all back tax returns have been filed so there is no question as to how much is owed.  Also, like the IRS, FTB requires that the entire tax debt be paid off within a specified time frame.  They give as much as 60 months for some tax debts, but only 36 months for others.  The IRS will allow a full 72 months for tax debts under $50,000.

Both FTB and IRS recognize certain events that will cause an installment agreement to default.  Some of these events include (a) failure to make timely payments, (b) failure to timely file a future tax return, and (c) incurring a new tax debt.

Whether you owe FTB or IRS (or both) it would be a mistake to think that you can always just request an installment agreement to avoid enforced collection action.  It’s not always that simple.

What’s the Point of IRS Letter 2645C?

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Are you wondering what the IRS letter 2645c is and what it means? 2645C is my all-time favorite and most ambiguous IRS inquiry letter. The Internal Revenue Manual refers to them as “interim letters” (IRM 4.19.23), which is a nice label given to a letter that is simply saying the IRS has received something from the taxpayer but has not acted on it yet.  And when I say the IRS has received “something,” I literally mean anything — it is up to the taxpayer to figure out what that might be based on the receipt date in the letter that is often inaccurate.  The IRS inquiry letter does give a few options as if to jog one’s memory:

  • Correspondence
  • Telephone inquiry
  • Payment
  • Form
  • Response to our inquiry or notice
  • Penalty abatement request
  • Installment agreement
  • Other

Yes, it says “other.”  This list is taken directly from the IRS letter 2645C.  It goes on to say that the IRS hasn’t resolved the matter because they haven’t completed all the processing necessary for a complete response.  This letter is completely baffling to me, and I am always wary of those times I am told that the IRS hasn’t “finished processing” something.  What that usually means is they haven’t even looked at it.  If they had looked at it, then would it really be that difficult to specify if this something is a payment, a phone call, penalty abatement, or “other”?

Probably the most perplexing option in the list above is “payment” because what kind of processing is really necessary when a payment is received?  Yes, a determination needs to be made as to where to apply the payment (what tax year or period), but what else?  It seems to me that the processing of a payment is the one thing that the IRS would not put off for later.

Next this IRS inquiry letter states that the IRS will contact the taxpayer within a specified time frame (usually 45 days).  The letter ends with a friendly reminder about how to make installment payments, including how to annotate your check.  In other words, we’re not sure what you sent us, and we won’t get to it for 45 days, but in the meantime be sure you don’t miss a payment.  Sincerely, IRS.

If you have any further questions about IRS Letter 2645c or are seeking tax relief, please don’t hesitate to give us a call. Contact us today!

OIC Fees: It Matters How you Pay

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A question came up recently about whether or not a taxpayer must submit his or her Offer in Compromise fees in the form of a cashier’s check or money order as opposed to a personal check.

Just a little background first.  When filing an Offer in Compromise, you must submit two payments: one is the $186 application fee, and the other is the 20% deposit or initial offer payment.  That’s 20% for “cash offers” or the first of 24 payments for “periodic payment” offers (the difference between these two types is not relevant here and could be the subject of a completely different blog entry).  If either of these payments are missing or insufficient, the offer is almost certainly going to be returned and you’ll have to start all over again.

First of all, the IRS does not require cashier’s checks or money orders.  In fact, the instructions in the Form 656 Booklet specifically state that a taxpayer may send a “personal check, cashier’s check, or money order.”  However, what is required is that the money be available in your personal checking account when the personal check is cashed by the IRS.  Since a cashier’s check or money order is already paid for, there is no risk of insufficient funds.  Therefore, if your tax attorney asks for a cashier’s check or a money order, he is not being a jerk, he is being cautious.

Will the IRS Take Your Home?

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The likelihood of the IRS resorting to collection of taxes through asset seizure — probably the most severe tax collection method — can only accurately be determined on a case-by-case basis*.  Certainly the IRS has authority to seize and sell assets in order to satisfy a tax debt, but it has to make sense for the Service to do so.  They want to be sure that the target asset (or assets) will raise enough money to cover all or most of what is owed.  They want to be sure that the profits from the seizure and sale will at least match the effort and preparation going into the procedure.

Furthermore, the IRS has internal guidelines dictating when and how they may proceed with asset seizures.  In other words, the IRS doesn’t normally go after granny’s little two bedroom farm house, but there are exceptions.  The IRS doesn’t like to boot people out of their primary residence; it’s not good public policy and not a great PR move.  And the IRS doesn’t normally resort to seizure at all if they can collect what is owed through other means.  Much more common is the wage garnishment, bank levy, and federal tax lien.  Of course the preferred method of tax collection is through voluntary payment, but not everybody pays their taxes so willingly.

But don’t be mistaken, the IRS can and will seize assets, primarily real property, vehicles, and valuable estate assets.  Local news outlets often advertise public auction dates.  The IRS also posts details about asset sales on their dedicated IRS auction website.  If you do attend an IRS auction, you should know that they don’t accept personal checks, and they don’t take American Express.

*You might argue that the most severe IRS collection tool is criminal prosecution and prison sentences; however, I don’t know if I would consider this a collection method, except to the extent that it encourages others to file and pay on time.

1st Grade Tax Tips

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Do you endorse the "shoe box" strategy of document storage?

This is usually the time of year when people start digging through their file, or shoe box as the case may be, in an effort to get started on their dreaded Form 1040.  If you wait until the eve of tax day, then you’ll find yourself furiously rifling through said shoe box.  And if you really use a shoe box to secure your important records, then chances are you not very organized, and you have other records scattered all throughout the house or in multiple files on your computer.

I know that nobody ever taught you about income taxes or finances in grade school; my kids haven’t had that class yet either.  But as they get older, I do intend to impart some wisdom on them, even if by force.  And for now, there are many habits I can help them develop that will hopefully carry over into their adult life and will make their future April 15ths that much more bearable.

1.  “Get started on your homework right after school.”    If you at least begin the process with a few weeks to spare, then when things come up that inevitably pull you away from the task at hand, you will still have time to put out those fires and get your return filed on time.  And, if due to your personal high principles, you refuse to pay Uncle Sam a nickle before the 15th, at least have it ready to go, then you can hit “send” at 11:59pm.

2.  “Keep everything in your backpack.”    It really doesn’t matter if you’re using a shoe box for your tax docs.  A shoe box works just fine if all your stuff fits in there.  One disorganized shoe box is way better than having multiple piles around the house.  The key is to keep everything together.

3.  “Once it has been graded, throw it out.”    Sometimes we want to save a particularly well-made craft or an A+ essay, but most of the stuff that comes home from school each day goes directly into the trash.  We couldn’t possibly save everything, nor would we want to.  Same with your tax records.  If you can access it online, then why keep a paper copy?  The “three-year rule” should generally suit you just fine.

One month left until tax day; who should prepare your tax return?

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There’s about one month left to file your 2013 taxes. You may notice that there are lots of places soliciting to prepare your taxes these days. Every time you pass a strip-mall you likely see some type of gimmick, from air dancers, flags, and a person dancing on the corner with a sign. These gimmicks were formally found at a used car lot to attract your attention, but competition can be tough these days. Just like buying a car, you want to make sure you don’t get a lemon when it comes to choosing a tax preparer.

These strip mall tax centers are virtually everywhere. Just because they are everywhere, does not necessarily make them better. The quality and expertise of these types of tax preparers rests entirely on who specifically within the pop-up shop prepares your tax return. There really is a spectrum in the quality and experience you may encounter at one of these shops because these companies are often so big and/or individually owned and franchised.

On the one hand, you may be trusting your taxes with a seasoned tax preparer who’s a licensed accountant, really knows what they are doing, and will work closely with you to ensure your returns are accurate. On the other hand, you may be risking doom with someone using the franchise’s own do it yourself software, who’s simply answering the Turbo Tax type questions for you. So the key when trusting your returns with these types of tax preparation shops is to consider the complexity of your tax returns and to ask about the experience and qualifications of the specific person who is actually going to prepare your tax return.

Beware of the “Turbo Tax audit”

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With advancements in tax software and technology, it’s rare to find tax returns that are filled out by hand; without the assistance of a tax preparer or tax preparation software. These advancements have given rise to a whole market of self-preparation software. The most popular is Turbo Tax, but there are others.

With the popularity of these self-preparation tools and software, have come the aftermath, the Internal Revenue Service (IRS) tax audit. I personally like self-preparation tax software tools, like Turbo Tax, because they have led to business for me in what IRS examiners refer to as a “Turbo Tax Audit”. The key with the do-it-yourself software is whether you, the tax preparer, know what you’re doing because you don’t get the professional representation you didn’t pay for.

The software is advertised as easy to use and typically uses question and answer formats. To prepare your tax return, you answer questions posed by the tax preparation software, and plug in your data, and then your taxes are done. When there is trouble, it’s usually rooted in whether the tax preparer (you), answered the questions correctly for the purposes of the tax return. Because the computer software doesn’t know you or your situation, this is where you need to have some knowledge of taxes in general to ensure that you’re not taken on a path that will lead you to an appointment with my office, and eventually the IRS.

The self-preparation software sometimes offers “audit protection.” However, be sure to read the fine print as to the limitations and conditions of such “protection” should you want it, as there may be circumstances where your audit “insurance” is not covered. And, you’re again in my office or facing the IRS alone.

IRS Tax Scam Tips

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Every tax season the IRS warns taxpayers of tax-time scams and how to avoid them.  The IRS says that “tax scams proliferate during the income tax filing season.”  This year the filing season begins January 31st.  I hope taxpayers take this to heart, but I also hope that they remain vigilant throughout the entire year.

People often ask me if business picks up during tax time, and I usually explain that the IRS’ collection machine runs 24/7 and 365 days per year.  The IRS Collections Department doesn’t really have a “season” so to speak; they work year-round.  We do tend to get more phone calls during the first few months of the year, but this is due to the fact that the tax season is when people tend to think more about their tax issues.  The thought of having to file income taxes again naturally leads to the next thought of having to do something about the prior tax years and tax debts already on the books.

I suppose that a similar phenomenon occurs with tax scammers.  They definitely do their dirty work around the clock and any time of the year.  But they know that they will have more success during the income tax filing season.  Poor, unsuspecting taxpayers are just more likely to pick up the phone, divulge confidential information, and open spammy emails during this time of year.

The common-sense advice that the IRS gives each year can be summarized as follows: Don’t give out your personal information such as passwords, PINs, credit card or bank info via emails or over the phone.  This is not how the IRS operates, and if you do get a phone or email request for such information, it is probably a scam.

Testing My Theory

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Apparently it wasn’t only me who thought the new Practitioner Priority Service (PPS) guidelines were ambiguous.  I don’t think the PPS customer service reps understand them either.  The best I could tell, I thought that they would be checking qualifications more closely, maybe even refusing to speak with anybody lacking a duly executed power of attorney.

It wasn’t long before I was able to test my theory.  Here’s how my first post-Jan. 6th PPS call went:

IRS: “How can I help you today, Mr. Wetenkamp?”

ME: “It’s my first call on this case; can you just give me an account overview such as balances due, missing returns, collection status, etc.?”

IRS: “Oh no, we can’t help you with that sort of thing anymore.  As of January 6, 2014 we are only allowed to assist you with active tax issues.”

ME: “WELL THEY DO OWE TAXES, DON’T THEY?!”

IRS: “Uh, . . . well, . . . yes.”

When the IRS makes informal procedure adjustments it is usually impossible to tell how they will materialize at the individual call centers.  For one thing, call center managers do not always interpret internal memoranda uniformly, so it is common to have slight variations from one city to the next.  But even if all IRS managers agreed, something inevitably gets lost between the team meeting where the memo is thoroughly explained and the cubicles of IRS rank and file.  You’ve probably heard anecdotally that the IRS doesn’t follow its own rules.  Well, this is precisely where it comes from and it happens every single day.