IA Eligibility Requirements

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.

Manteca Tax Cheat Files Lien Against IRS Commissioner

There was a story I saw in the Modesto Bee recently about a Manteca woman who pleaded guilty to defrauding the IRS out of about $313,000.  It is not really your typical refund fraud case in the sense that the more popular strategy involves preparing a series of false refund returns claiming smaller amounts.  All the returns together may add up to a small fortune, but no single refund claim appears right away to be anything out of the ordinary.  The Manteca woman wasn’t patient enough for the “slow drip” method apparently; she went all in.  And she lost big time.

Esther Robertson, 57, faces up to 5 years in federal prison and a fine of $250,000.  It is not mentioned in the Modesto Bee story, but typically the fine is in addition to the restitution aspect of the sentencing, which involves the taxpayer paying back what was stolen.  Robertson will have a lot of time to stress about the possible outcome since her sentencing is not expected until September 2015.

Court papers also indicate that, in February 2009, after the IRS was onto her, they issued a bank levy to try to recoup at least some of what was taken.  Then Robertson did something that I’m not sure I quite understand.  Presumably in an act of retaliation, she filed a lien against the property of the IRS Commissioner!  This certainly shows her contempt for the IRS, or the federal government, or both.

There are a number of questionable websites and online sources that claim to cite legal authority for filing a criminal suit against the IRS for taking one’s property.  I won’t link to any of these sites because I don’t really have a beef with them but, trust me, there are hundreds of them.  These are the same sites that are managed by tax protestors who believe taxation is illegal and the IRS has no legal authority to collect taxes.  My guess is that Robertson found  something online about filing a lien against the Commissioner of the IRS and she thought she would give it a try.  She probably didn’t have much to loose at that point either, knowing that the IRS had discovered her foul play and it was only a matter of time before she would be getting a visit from Criminal Investigations.  For Robertson’s sake, I hope this doesn’t count against her during sentencing.

IRS Collecting Less Revenue "By Force" . . . For Now

According to the latest TIGTA report, enforcement revenue is down at the IRS.  Enforcement revenue is the money collected through enforced collection activities rather than through voluntary compliance.  Enforcement revenue is down because the IRS has decreased the overall number of enforced collection actions (i.e., lien, wage garnishment, bank levy, property seizure).  The number of enforced collection actions is down because the number of IRS enforcement personnel is down.  And the number of enforcement personnel is down because the funding that the IRS used to receive for these positions is down as well.  According to TIGTA:

The 13 percent reduction in enforcement revenue correlates to the 14 percent reduction in the number of enforcement personnel … since Fiscal Year 2010, approximately 8,000 full-time IRS positions have been lost—about 5,000 from front-line enforcement personnel.

But who are considered enforcement personnel?  Auditors?  Revenue Officers?  Call center personnel?  All of the above?  One news source suggests that these 5,000 lost “enforcement” positions are auditor positions, but I would take it to mean something broader than that.  The TIGTA report does not specify.  I think it matters, because 5,000 lost auditor or revenue officer positions is rather significant, and could realistically be responsible for the 13 percent drop in enforcement income.  However, 5,000 fewer Automated Collection Department phone operators would result in extended hold times, but probably not a drastic drop in enforcement revenue.

Maybe 13 percent is not enough to make an appreciable difference from the perspective of a tax practitioner.  The IRS is supposedly issuing fewer liens and levies, but I sure haven’t seen this to be the case.  And it is certainly not something we can count on continuing for too long.

Interesting IRS Stats

image via grabstats.com

Let’s look back on some of the statistics compiled by the IRS for Fiscal Year 2011 and try to determine what will be reported for FY 2012.  Will we see any new tax relief trends?  My source is the Statistics of Income tax stats found in the “IRS Data Book.”

  • Number of new deliquent tax accounts in FY 2011: 8,011,000 (17,000 more than 2010)
  • Number of untimely filed returns by end of FY 2011: 3,862,000 (162,000 more than 2010)
  • Number of Offers in Compromise filed: 59,000 (2,000 more than 2010)
  • Number of Offers in Compromise accepted: 20,000 (6,000 more than 2010)
  • Number of Federal Tax Liens filed: 1,042,230 (54,146 less than 2010)
  • Number of levy notices served on 3rd parties: 3,748,884 (142,066 more than 2010)
  • Number of seizures: 776 (171 more than 2010)

The only stat that appears to be on a downward trend is the filing of Federal Tax Liens.  This is good news for taxpayers.  For several years now advocacy groups have been questioning the efficacy of tax liens as a collections tool; maybe the IRS is finally listening.

More and more taxpayers continue to file and pay late, and incur tax debt.  And the IRS tries to keep pace by increasing active collection activities.

What about the Offer in Compromise acceptance rate?  You see a lot of percentages thrown around by tax attorneys and tax resolution firms.  But according to IRS’ figures, they accepted 25% in 2010 and 34% in 2011.  This is probably the most encouraging data of all. Let’s hope this trend continues and the IRS accepts event more offers in compromise when the statistics are available for FY 2012.

Can the IRS Seize your Property Without Notice?

If you fail to comply with the individual mandate under Obama’s new health care law — if you can’t afford to purchase insurance or you don’t get around to it — you may be responsible for paying a special “tax” that will be enforced by the Internal Revenue Service.  And as I mentioned previously, the only real enforcement tool available to the IRS will be to capture any refund(s) that may be due to you to offset your tax debt.

Of course, if it’s actual taxes that you owe, you probably won’t be so lucky.  The IRS can be quick to issue a levy and seize your property (wages, bank account, and other assets) and there are really only a couple prerequisites.  Number one, the IRS must send you a bill.  And number two, you fail to pay the bill.

However, it is important to know that the IRS notice showing the amount of tax owed doesn’t have to actually be received.  As long as the IRS sends it to the last known address of record, then they are in full compliance with the law.  Also, there are some scenarios in which the IRS is not even required to give notice (listed in IRS Pub 594):

  1. collection of the tax is in jeopardy (i.e., the CSED is almost up)
  2. state tax refund levy
  3. levy served to collect the tax debt from a federal contractor
  4. seizure of unpaid employment taxes

My experience is that most people who owe the IRS know they owe, or at least know there is some kind of problem.  But it is always disturbing when the IRS comes knocking without sending a nastygram to tip the taxpayer off.

IRS Thinks Levy Power Needs More Teeth

One of the methods the IRS uses to collect past-due taxes is the levy. It has the authority to work with third-party financial institutions to seize cash from your bank account (bank levy) or with employers to intercept your paycheck (wage garnishment or wage levy).

Not all levies work the same. The levy on wages is “continuous.” In other words, once the levy is issued, the employer is instructed to submit payments to the IRS each pay period until the tax liability is paid in full or until the IRS otherwise releases the levy.  But the bank levy doesn’t work this way.  A bank levy affects only the funds that are in a specified account when the levy is issued.  If the IRS wishes to levy the account at a later date, it must submit another bank levy.  A levy on self-employment income works much like a bank levy in the sense that it is not continuous.  The levy on self-employment income is submitted to the third-party payor, and that person or company has a one-time obligation to turn over everything that is owed to the delinquent taxpayer.

The non-continuous nature of some levies is seen as an impediment to collections.  However, the IRS is trying to get this changed legislatively.

The Small Business/Self-Employed Division recognized the barriers the ROs [Revenue Officers] face when taking levy action and has taken some corrective action.  The Small Business/Self-Employed Division is preparing a legislative change proposal to expand continuous levies on additional income sources.  I.R.C. § 6331(e)  and § 6331(h) permit the continuous levy of salary and wages and certain other payments from the time of issuance until the levy is released.  The IRS has identified four additional categories of non-wage income that could be levied in a manner similar to wages and salary: non-employee compensation, rental income, royalties, and fishing boat proceeds.  These income sources totaled approximately $1.4 trillion for Tax Year 2009.  The proposal would expand the continuous levy authority to these additional categories of income and may increase revenue and assist taxpayers in becoming compliant through the use of additional collection options.

~ TIGTA Report #2012-30-007

It is beyond me how this change would “assist taxpayers.”  Taxpayers don’t need any “additional collection options”!  If this becomes law, it would be a major victory for the IRS.


How Much Can They Take?!

The short answer to this question is “A LOT.”

My clients always ask me how much the IRS can take from their paycheck if the IRS decides to issue a wage garnishment. This is a common question from someone who does not understand how the process works. The IRS does not take a percentage of one’s income; instead, the IRS is bound by a complex set of levy exemptions. The IRS takes all the income except the amount that is exempt from levy as shown on the tables in Publication 1494. It may be more appropriate to ask, “How much is the IRS required to leave for me?”

The amount of income that is exempt from levy depends primarily on the taxpayer’s filing status, the number of exemptions claimed, and the pay frequency. As an example, a single wage earner claiming one exemption who is paid once a month is allowed to take home $791.67 based on the 2011 rate. The IRS gets the rest regardless of the taxpayer’s actual earnings. That same wage earner, if he were paid weekly, would take home only $182.69. A married wage earner filing jointly and claiming two exemptions is allowed to take home $1,583.33 if paid monthly, and $365.38 if paid weekly.

A wage garnishment can deal a crippling blow to your finances. But a wage garnishment can be stopped. Contact Montgomery & Wetenkamp for more information.


Installment Agreements & Suspension of Collection Activity

Installment agreements provide some tax relief if a liability cannot be paid in full. As you may know, IRS procedures prohibit the filing of levies while an installment agreement (IA) is in effect. But did you know that, subject to certain exceptions, no levies may be filed in any of the following situations either?

1. While requests for installment agreements are pending

2. For 30 days after requests for installment agreements are rejected

3. For 30 days after  installment agreements are terminated

4. While an appeal of a default, termination, or rejection is pending or unresolved (See Internal Revenue Manual

What are some of the exceptions, you ask? One is when the taxpayer waives the particular restriction in writing. Another exception is when collection of the tax is in jeopardy (i.e., taxpayer is preparing to leave the country with a suitcase full of cash). And a third exception is when a levy is filed in connection with a tax balance from one or more years not covered by the IA or appeal.

And what qualifies as a “pending” IA? Another good question. A taxpayer must at least provide his identifying information, such as name and social security number, identify the tax period(s) to be covered by the agreement, and propose an amount to be paid. However, an IA will not be deemed “pending” if all back tax returns are not filed or if it is evident that the IA request was submitted solely to delay collections. See Internal Revenue Manual