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.

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.

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.