Upcoming IRS Webinar

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The IRS has gradually revealed some important changes to its tax collection procedures over the last several months under the “Fresh Start” program.  What began as a patchwork of provisions scattered here and there, has now been organized under its own tab on the homepage of the IRS website.   Most of the changes are now in effect, even though they have not made their way into the Internal Revenue Manual yet (see Interim Guidance Memo on changes to Offer in Compromise process).

In an effort to provide further guidance regarding the IRS Fresh Start program, the IRS is offering a free webinar on September 12th.  The webinar is entitled “Payment Alternatives – When You Owe the IRS,” so it is not 100% focused on Fresh Start.  It is supposed to cover Installment Agreements, Currently Not Collectible Status, and Offers in Compromise, hopefully presented through the lense of the Fresh Start program.  One of the bullet points is “Fresh Start enhancements.”

The presenter for this webinar will be Traci Suiter, Lead Public Affairs Specialist of the Small Business / Self-Employed division of the IRS.  Other IRS representatives will participate in a Q&A segment.

Another Fresh Start Gem: State Tax Installment Payments

Filing an Offer in Compromise (OIC) can be quite an ordeal if you’re not prepared.  If the IRS decides your offer is worth considering, then they will look very carefully at every aspect of your finances, including assets, income, and expenses.   The result of this analysis is your “reasonable collection potential” (RCP) — the single most important factor in determining whether or not your offer is accepted.

When the IRS looks at expenses, they determine which ones can be allowed, and of the expenses that can be allowed, how much can be allowed.  Generally speaking, more/greater expenses result in a lower RCP and a lower offer. 

Formerly:  The IRS did not allow payments made pursuant to a state or local tax installment agreement (IA) in the RCP analysis.  The underlying reasoning for this was that the laws of the federal government trump the laws of state and local governments when it comes to collection of revenue.  The IRS simply ignored the practical realities of the situation.

Currently:  Under the Fresh Start program, the IRS will allow state or local tax installment agreement payments — not all of them all of the time, but compared to the way the IRS used to treat them, this is a step in the right direction and very good news for those in need of tax relief.

Dissipated Asset No Longer the Barrier it Once Was

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Thanks to the IRS’ Fresh Start program, more people meet the criteria for an Offer in Compromise these days than quite possibly ever before. Many of the requirements have been modified in determining a taxpayer’s reasonable collection potential (RCP), one of them being the way the IRS deals with dissipated assets.

Formerly:  A dissipated asset usually consisted of property that was sold or distributions that were taken, sometimes years before the OIC filing date.  If the transaction occured after the tax was assessed and the money was used for anything other than paying down the back tax debt, then an amount equal to what was received would be automatically added to the taxpayer’s reasonable collection potential, even if the money was long gone.  The burden was on the taxpayer to avoid inclusion of a dissipated asset by showing that the funds were spent on the necessities of life and not on a ski boat.

Currently:  Inclusion of dissipated assets in RCP is no longer applicable, unless it can be shown (presumably by the IRS) that the funds were spent on a ski boat or other unnecessary items, or that the funds were intentionally pissed away in an effort to avoid having to pay the IRS.  It now appears that the burden is on the IRS to substantiate their hunches whereas before there was a presumption that the taxpayer was purposefully avoiding payment to the IRS.

Lien Subordination

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A Federal Tax Lien (FTL) is the government’s legal claim against a taxpayer’s real and personal property that arises by operation of law (automatically) when a taxpayer incurs a tax debt and fails to pay.  The taxpayer, other creditors, credit reporting entities, and the general public may only become aware of the tax lien when the IRS files a “Notice of Federal Tax Lien” — and it’s at that point that it can damage one’s credit.

Previously the only sure-fire way to get a FTL removed was to pay the liability in full.  However, under the government’s Fresh Start program the IRS will agree to withdraw a lien notice if certain requirements are met.  But even if you meet the criteria, you still have to request withdrawal of the lien by completing Form 12277.

If a taxpayer cannot pay the tax debt in full and does not meet the criteria for withdrawal of the lien, the taxpayer may want to consider requesting a “lien subordination.”  This does not remove the lien, but it allows other creditors to “cut” in front of the IRS in line and it is normally required before a lender will refinance a home loan.  Of course, if the IRS is allowing others to cut, then it is on their terms and with their permission.  You must either be willing to make a big payment — sometimes up to the amount of the lien — or you must be able to show that it would be in the IRS’ best interest to subordinate their lien.  From the IRS’ perspective, the only way it would be in their best interest is if it would result in them collecting more money from you.

 

IRS Makes Potentially Huge Changes to OIC Program

The IRS recently announced some historic modifications to the Offer in Compromise (OIC) program which could result in drastic increases in accepted offers.  I say it “could” have this result because the IRS is notorious for not training its personnel to understand their own rules.  Changes such as these take quite a while to trickle down to the rank-and-file IRS employees who handle most collections case.  And sometimes parts are lost or misinterpreted during the trickling process.

By far the most significant change that was announced has to do with the way the IRS calculates a taxpayer’s reasonable collection potential.  Previously this would have included the combined equity in all assets and the future earning capacity projected over 4-5 years following the offer’s acceptance.  It will still include all the equity in assets but now the future income calculation should be multiplied across only 1-2 years.

Some taxpayers have no available income (after paying allowable expenses), and this change will have no impact at all on them.  However, for everyone else, this change may mean the difference between an accepted or a rejected OIC.  If the IRS is serious about implementing these changes, then I think more people will obtain tax relief because more people will meet the criteria for the Offer in Compromise program.  And if other practitioners think like I do, then we should see a big increase in OIC filings, which will mean a backlog of OIC cases and longer delays.  So we’ll have to take the good with the bad on this one.

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“Fresh Start”: Installment Agreements

Those with a tax debt are often reluctant to disclose their individual financial information to the IRS, and rightly so. The financial information that is normally required includes details about one’s income, expenses, assets, and accounts. The IRS often uses employment and bank information as levy sources; it’s the first place they go when taking enforced collection actions.

The IRS allows taxpayers to enter into installment agreements without disclosure of financial information as long as the balance due to the IRS is below a certain threshold. Previously that threshold was $25,000, excluding accrued interest and penalties. But the IRS announced yesterday that the threshold has been doubled — now $50,000. Also, instead of a 60-month payoff period, the IRS will now allow payments to be spread over a maximum of 72 months. The only catch is that the taxpayer must agree to a direct debit payment arrangement whereby the IRS is automatically wired payments each month from the taxpayer’s bank account. Those who owe $25,000 or less may still make payments by other methods, including manually writing a check and sending it in each month.

Yesterday’s announcement shouldn’t have been a huge surprise given the new Form 9465-FS that was released in December 2011, although with little fanfare.

For additional information, visit the IRS Newsroom.

“Fresh Start”: Penalty Relief

Today the IRS announced it will be offering additional tax relief to struggling taxpayers under its Fresh Start initiative. One of the ways the IRS plans to help out taxpayers is by granting penalty relief for the unemployed.  Another way is by expanding the Streamlined Installment Agreement (SIA) program.  Today I will describe the penalty relief provisions and tomorrow I will discuss the changes to the SIA criteria.

Taxpayers who meet the criteria for Fresh Start penalty relief will be given a 6-month grace period on the failure-to-pay penalties for 2011 taxes.  So, what are the criteria?  There are several:

  • You must have been unemployed at least 30 consecutive days sometime during the period January 1, 2011 to April 17, 2012.
  • Self-employed taxpayers must have experienced a 25% or greater reduction in income compared to 2010 due to the economic downturn
  • Your adjusted gross income must be less than $100,000 (or less than $200,000 if married filing jointly)
  • The balance due on your 2011 tax return must be $50,000 or less.
  • You must pay the entire tax debt (including any tax, interest, and other applicable penalties) by the end of the grace period, which is October 15, 2012, otherwise a failure-to-pay penalty will be imposed and calculated from the original payment due date, April 15, 2012
  • You must complete a Form 1127A to request this type of penalty relief

See article in the IRS Newsroom for more details.

As I read through the terms and conditions of the new Form 1127A, I couldn’t help but notice that struggling self-employeds are held to a slightly different standard than the unemployed. What’s worse, earning 25% less for an entire year, or being completely unemployed for 30 days or more?  Clearly if its only 30 or 60 days of unemployment, then its worse to earn 25% less; therefore, the self-employed standard would appear to be higher.  Furthermore, the 25% reduction must be due to the economic downturn, but there is no similar requirement that the 30+ day period of unemployment also be due to the economy.  It appears that it may be easier for the unemployed to obtain 1127A penalty relief than for the self-employed, even though a self-employed who experiences a 25% reduction in income might find himself in worse shape financially.

Does the IRS View Marion Barry as a “Special Circumstance”?

Former D.C. mayor, Marion Barry, is in the news today because of a lien that the IRS filed against him in connection with a measly $3,200 in unpaid 2010 taxes.

Remember back in February of this year when the IRS announced it was going to provide taxpayers with special tax relief during these trying financial times? The IRS dubbed it the “Fresh Start” initiative. Remember when I blogged in June about the uncertainties of the program and how the IRS still had not clarified some major points? Remember what I said about the new lien filing procedures; how the lien filing threshold was reduced from $10,000 to $5,000 in most cases? According to the IRS website:

The Fresh Start changes increase the IRS lien filing threshold from $5,000 to $10,000. Liens may still be filed on amounts less than $10,000 when circumstances warrant. (emphasis added)

 

So, why did the IRS file a lien if the balance is under $5,000? Well, it appears that Barry’s 2010 liability is only the tip of the iceberg. He still owes for prior years, for which he is on an installment agreement in good standing, according to Barry’s official statement. It appears that the IRS will be looking at the overall balance in determining whether to file a lien, even under Fresh Start. At least that’s one possible explanation. The other possibility is that the IRS would have filed a lien on Barry even if $3,200 were all he owed . . . because circumstances warrant it. Let’s face it, he’s a public figure sitting on a Finance Committee in D.C, in charge of public funds, and he has a colorful history of corruption and tax delinquencies. If that isn’t a special circumstance, then I don’t know what is.

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IRS Fresh Start Webinar

The IRS webinar detailing their Fresh Start Initiative, which originally aired on August 31, 2011,  has been posted to the IRS video portal for all to see.  The Fresh Start Initiative is a tax reliefprogram designed to help taxpayers who are struggling to meet their tax obligations in this down economy.

As part of the initiative, the IRS has adjusted its lien filing procedures, opened up the installment agreement option to more businesses, and  instituted a “streamlined” Offer in Compromise program. I was hoping the IRS would, through this webinar, elaborate on the Fresh Start program and provide more details on exactly how these changes will impact taxpayers with balances that they cannot immediately pay. But they didn’t. Instead the speakers rehash what has already been explained on the IRS website and then go into a fairly detailed discussion of liens.

This is a good video for someone who wants a basic understanding of liens, how & why the IRS files them, and how to get them released. The IRS representatives even go into an explanation of lien “release” vs. lien “withdrawal,” complete with an analogy comparing it to a “divorce” vs. an “annulment.”

Unfortunately, very little was said about the changes that have been made to the Offer in Compromise program either. Click here to see the entire video.

Don’t Miss August 31st IRS Webinar

On February 24, 2011, the IRS announced its “Fresh Start Initiative” which consists of changes that are supposed to soften some of the collection practices, and provide at least some tax relief to Americans who are struggling to pay their taxes. So far we know that the IRS has made adjustments to their lien filing procedures, which is supposed to result in fewer lien filings. The IRS is making it easier for small businesses to pay back what they owe through Installment Agreements. And the Streamlined Offer in Compromise should be in full swing by now.

However, several ambiguities are present in the Fresh Start Initiative. And while these changes are supposed to help the struggling taxpayer in theory, we have yet to see the real life impact.

But the IRS speaks again on the matter next week by webinar. Maybe we’ll get a few more details, or examples, or something. If you want to participate, you need to register online here: IRS Live presents: “The Fresh Start Initiative — Help for Struggling Taxpayers.” The webinar will take place Wednesday, August 31st at 2:00pm EST. There will be a panel of speakers, so hopefully that means it’s not a rehash of what the IRS has already revealed about the program.