Are Legal Settlements and Judgment Awards Taxable Income?

The tax problem usually starts with a poorly drafted settlement agreement or judgment, followed by a notice of audit; and then comes the blaming of an attorney, especially if the person was self-represented.

The situation is more common than you would think; are the funds a party to a lawsuit receives through a settlement or judgment taxable income? Well, it depends on what the settlement funds or judgment funds are actually for. The underlying claim that is the basis for why the person received the funds is important and controls whether the funds are to be included as taxable income. Therefore, it is important for you and your attorney, if you have one, to understand the tax consequences of settlement funds, the language used in the settlement document, and what type of damages are being awarded in a judgment.

When determining whether a settlement or judgment is taxable or not, it is easiest to start with the premise or generality that virtually all judgments or settlements are taxable. The general exception to this general rule is that settlements and judgments where the underlying claims are based on some type of personal injury or sickness.

Settlement funds and judgments that compensate for physical injuries or sickness are generally excludable from taxable income. However, an exception to this rule is that funds used to compensate for medical expenses that were previously deducted for a tax benefit in prior tax years may not be excludable as income, even if the funds are based on an underlying physical injury or sickness.

Another red-herring that tends to be audit fodder is compensation for emotional distress. Compensation for emotional distress is excludable from taxable income if the distress compensated for flows directly from some type of underlying physical injury or sickness. However, compensation for emotional distress as a standalone tort claim, or that is not based on some actual physical injury or sickness is actually considered taxable income. Lastly, punitive damage awards are also generally taxable, even if they are based on a physical injury or sickness.

So when it comes to settlement or judgment income, you have a general rule, an exception to the general rule, and several exceptions to the exceptions of the general rule. Confused yet? When all these exceptions are coupled with the legalese applicable to settlements and judgments, it gets very confusing. Therefore, it is important to understand the tax consequences of the settlement or judgment amount because that legal windfall may not last you as long financially once the Internal Revenue Service takes its bite.

Step-By-Step: You Owe the IRS and Have Not Filed Your Tax Returns

There are thousands of Americans every year who do not file their tax returns and owe the Internal Revenue Service (IRS) in violation of federal tax laws. Likewise, there are thousands of reasons why; stemming from those who believe that the United States lacks the legal authority to levy and collect taxes, to those who simply don’t know how to file a tax return or are not able to pay the taxes owed. Americans who owe the IRS a tax liability need to take a systematic and organized approach to rejoining the tax-filing and tax-paying society to ensure their tax headaches are minimized.

Step One – What Tax Years Need To Be Filed?

If you haven’t filed a tax return “for a while”, you need to precisely define “for a while”. Generally, a person that has not filed tax returns “for a while” will only need to file those tax returns within the preceding six years for which there was a filing requirement. Determining which of the past six tax years that need to be filed usually involves a review and analysis of IRS transcript information to determine for which tax years there was sufficient income or some other taxable event requiring the filing of a tax return. Next, you should compare any personal records you may have to the IRS transcript information for accuracy, and to confirm that all income and/or taxable transactions were reported to the IRS.

Step Two – Did The IRS File For You?

Leave it to Uncle Sam to think of ways to tax you, even if you didn’t file a tax return. In some cases, if the IRS has received sufficient income information for a person from third party sources, i.e. income reporting forms W2 and 1099; but does not receive a corresponding tax return, the IRS may prepare a tax return on behalf of the person. This process is called a Substitute for Return. Essentially, the IRS will use the income information it has on file for you, apply a minimal standardized deduction, ignore qualified credits and deductions, because such were not claimed on a filed tax return, and wallah! The once non-filer now has a tax debt; get ready to get out your checkbook or seek tax relief – or keep reading.

Although there are cases where a substitute for return filing is accurate, most persons who have a substitute for return assessment against them may benefit from amending their substitute for return, with an original tax return. That is preparing a tax return with the proper filing status, claimed dependents, deductions, and credits. Depending on the circumstances for each individual tax year, the application of such credits and deductions may resolve the IRS’s substituted tax assessment against you. However, in some cases there may still be a tax debt, although reduced. An experienced IRS tax attorney will be able to provide you with your legal advantages and disadvantages of amending a substitute for return, when the amended return would still result in a tax debt.

Step Three – IRS Rehabilitation is Hard Time

So now that you’ve reviewed your records, reviewed your tax transcripts, and determined which tax years you either need to file, don’t need to file, or the IRS filed for you; the next step is to file the required tax returns that are still outstanding. Even if the outstanding tax returns once filed, will result in a tax debt, the returns should be filed to get you back into the system. This is normally the most difficult step for persons facing a tax debt. Filing your tax returns is called compliance, and is a necessary requirement before exploring any tax relief option. Even if you can’t pay the debt owed, the outstanding required returns must be on file with the IRS before you can plead your non-payment case.

Step Four – Protect Your paycheck

You have now filed your required outstanding tax returns. You may not feel better now, but you’re on a path towards sleeping better at night. If you owe a debt that you can afford, pay the tax bill! However, if you’re like many Americans, this debt was not expected and you simply cannot afford it. Usually, the worst thing you can do is nothing, and simply hope that the IRS does not go after your hard earned money. The IRS is a very powerful and unforgiving collection machine. It is easier to be prepared and have an organized and systematic plan for tax relief rather than getting stuck in the bowels of the IRS collection machine. The IRS has several tax debt relief options available for taxpayers who cannot pay their taxes. Such options vary from allowing additional time to pay your tax debt in full, to reducing the total amount of your tax bill to an affordable amount. Most of the tax relief options are driven by your unique facts and circumstances, and how well and organized your facts and circumstances are advocated to the IRS on your behalf.

The tax attorneys at Montgomery & Wetenkamp ( provide tax relief representation and can assist taxpayers in resolving their tax headaches. For more information regarding IRS tax relief or other tax issues, contact Montgomery & Wetenkamp at (800) 454-7043 or

How Much Can the IRS Levy From Your Paycheck?

Clients frequently ask how much the Internal Revenue Service (IRS) can take from their paycheck if the IRS decides to issue a wage garnishment. This is a common question from someone who owes an IRS debt and is facing fierce IRS collection efforts. 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 an IRS levy as shown on the tables in IRS Publication 1494. It may be more appropriate to ask, “How much is the IRS required to leave for me?”

Another thing to keep in mind is that the IRS doesn’t actually take the wages/income in the normal sense of the word. The IRS sends a letter to the employer (Form 668-W) requiring the employer to hand over the non-exempt amount to the IRS. If the employer does not comply, then the employer could be held personally liable for the amount that would have been recovered by the IRS levy plus a 50% penalty.

The amount of income that is exempt from an IRS levy depends primarily on the taxpayer’s filing status, the number of exemptions claimed, and the pay frequency. The filing status and number of exemptions are taken from Form 668-W, which is provided to the taxpayer upon receipt of the IRS levy notice by the employer, it is not based on Form W-4. 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.

Other factors that may come into play in determining the amount of an IRS levy are the taxpayer’s age and ability to see: there are additional exempt amounts if the taxpayer is over age 65 and/or blind. The amount needed to pay a court ordered support obligation is also exempt from an IRS levy. Furthermore, some sources of income are completely exempt from an IRS levy such as Unemployment Benefits and Workers Compensation.

In cases where there are joint tax liabilities, the Internal Revenue Manual instruction is to “generally levy the income of the spouse with the larger income,” and to “levy both incomes only in flagrant cases of neglect or refusal to pay.” (Internal Revenue Manual Section However, a taxpayer with an individual liability and multiple sources of income will normally be allowed the exempt amount from only one source of income — 100% of the other income sources will be captured by the IRS (Internal Revenue Manual Section

Social Security benefits, Federal Old-Age, Survivors, and Disability Insurance Benefits are not subject to the above exemption scheme. Instead the IRS levies a straight 15% through the Federal Payment Levy Program regardless of how much would be left over for the taxpayer.

The tax relief attorneys at Montgomery & Wetenkamp provide tax relief representation and can assist taxpayers in resolving their IRS levy and wage garnishment problems. For more information regarding IRS tax relief help or other tax issues, contact Montgomery & Wetenkamp for your free consultation at (800) 454-7043 or

Mistaken IRS Bank Levy Procedures

The Internal Revenue Service (IRS) has many enforced collection tools at their disposal to ensure that a tax debt owed by a taxpayer that has not obtained tax relief pays the tax debt owed. One such tool is a bank levy. The IRS’ has the ability to issue a bank levy on an account that bears the name of a person who owes the IRS a tax debt. When the IRS decides to take enforced collection action via bank levy, a notice of levy is sent to the taxpayer’s bank and it attaches to all accounts in the name of the taxpayer whether a sole or joint account. The bank is then legally obligated to honor the levy. Once received, the levy freezes the funds on deposit in the account. The bank will not allow anyone access to the frozen funds for 21 days from the date of receipt of the levy unless released. This 21 day holding period allows time to resolve any issues about account funds ownership and collectability. After the 21 days have elapsed, the bank will send the money plus interest, if it applies, to the IRS if the levy has not been successfully released. Therefore, if you do not want the IRS to take the money in your bank account, you will need to seek an IRS tax attorney before the 21st day since your bank received your bank levy.

Luckily for taxpayers that have timely sought tax relief before their funds were remitted to the IRS, the IRS has implemented procedures for taxpayers to request a reimbursement of the fees charged by a bank against a taxpayer for processing a bank levy when the bank levy was issued erroneously by the IRS. Reimbursements are limited to $1,000.00 and must be claimed within one year of being incurred. The banking fees recoverable are the fees customarily charged by the financial institution for the financial institution’s compliance with the levy’s instructions. Fees may also include the bad check fees or overdraft fees incurred because of the freeze on the account incurred due to the levy, and are also subject to a successful reimbursement request.

An “erroneous” levy is one that properly seeks to capture a taxpayer’s property, rather than a third party’s property, but nevertheless is served prematurely or otherwise in violation of an administrative procedure or law. A claim that a taxpayer has been erroneously levied requires a factual analysis and timeline to demonstrate that the IRS’ issuance of the levy was a mistake.

The IRS must also make a determination that the taxpayer did not contribute to the continuation or compounding of the IRS’ error. Additionally, prior to the levy being issued, the taxpayer did not refuse to timely respond to service inquires or provide information relevant to the liability for which the IRS levy was made.

Successful reimbursement requests may be paid to taxpayers via an electronic funds transfer. Such payments may require disclosure of the taxpayer’s banking information needed to complete the transfer. Therefore, the IRS can also send successful claimants their reimbursement payment via check, to avoid disclosure of the taxpayer’s bank information. An experienced tax attorney will be able to recoup funds distributed by an erroneously issued IRS bank levy.

The tax attorneys at Montgomery & Wetenkamp ( provide tax relief representation and can assist taxpayers in resolving IRS bank levy issues. For more information regarding IRS tax relief or other tax issues, contact Montgomery & Wetenkamp at (800) 454-7043 or

Trust Fund Taxes Explained

Internal Revenue Code Section 6672 liability is referred to as the “Trust Fund Recovery Penalty” or “Civil Penalty” and is the legal basis for the federal government to collect “trust fund” taxes. In the context of employment taxes, the term “trust fund” taxes refer only to taxes withheld from employees for the payment of federal income tax and one-half of the Federal Insurance Contributions Act (FICA) taxes. Such taxes are reported on the Form 941 tax return that is filed by an entity with W2 employees on a quarterly basis and reports the gross wages paid, the federal income tax withheld, the sum of employer’s and employees’ FICA liability, and the deposits paid. After the deposits (if any) are accounted for, the taxes still owing are to be paid with the return. The unpaid balance due from these taxes may be the subject of a Section 6672 assessment.

Section 6672 allows the IRS to collect the unpaid trust fund tax liabilities of corporations and other types of limited liability entities from the personal assets of those persons who were responsible for the non-payment of such taxes to the government. Thus, the veil of the entity would not protect the income and assets of the individual from collection of a Trust Fund Recovery Penalty assessment.

The factual pattern is usually one wherein the entity is suffering financial strains and is unable pay creditors used by the entity for the purpose of remaining operational. Therefore, the money to be deposited for the purpose of the Form 941 debts are paid to the non-IRS creditor. When the financial strains of the entity continue, the deposits for the Form 941 debt are not returned and the Form 941 debt is incurred.

Trust fund deficiencies may be assessed against several persons for the same tax period liabilities owing. The policy permitting joint and several liability is to assert the penalty for collection purposes and allow the individuals to dispute the collection of the penalty assessment among themselves. However, the IRS cannot collect more trust fund taxes than are owed by the business.

Generally, a Section 6672 assessment will be assessed when:

1. The individual was a responsible person (someone who has the status, duty and authority over the financial decision-making) within the liable entity; and
2. The individual willfully failed to collect, truthfully account for, and pay over trust fund taxes (by knowingly paying other creditors while the trust fund taxes were due to the IRS).

The determination of who is a responsible person has been defined by administrative rulings and case law, not the Internal Revenue Code. Responsibility attaches when a person has the authority to decide which creditors to pay and when to pay them (or not pay them). Thus, the test is one of control of the payment responsibilities of the entity and not one of title.

The element of willfulness has been defined by case law and the Internal Revenue Manual, not the Internal Revenue Code. Willfulness for Section 6672 purposes merely requires a voluntary, conscious, and intentional decision not to remit funds properly withheld, to the government.

Internal Revenue Manual Section reads that the Trust Fund Recovery Penalty “will normally not be assessed when the likelihood of successful collection is minimal.” Therefore, in practice, the determination of whether a Trust Fund Recovery Penalty assessment should be made is a three element test that includes potential collectability, when Section 6672 is read together with Internal Revenue Manual Section

The IRS generally has three years to assess the Trust Fund Recovery Penalty. Civil Penalty assessments are usually investigated and proposed by a Revenue Officer in the IRS Collection Division. If a Trust Fund Recovery Penalty investigation cannot be avoided by resolving the outstanding payroll liabilities, the Revenue Officer will normally examine the tax returns, bank records, signature cards, Articles of Incorporation, Bylaws, canceled checks, corporate minutes and resolutions of the entity to establish the responsibility and willfulness elements needed for assessment.

Revenue Officers will also (attempt to) complete an interview of individuals who may have knowledge of the entity’s decision making processes and financial condition. Revenue Officers will then (attempt to) complete Form 4180 interviews with the potential targets of the Trust Fund Recovery Penalty. The Form 4180 interview is designed to elicit admissions that a Section 6672 assessment is warranted.

After the Revenue Officer’s recommendation for assessing a Trust Fund Recovery Penalty is approved by the Revenue Officer’s group manager, a sixty-day letter is issued to the taxpayer notifying the individual of the proposed assessments. After receiving the sixty-day letter, a taxpayer has two options to dispute the assessment of the Trust Fund Recovery Penalty: pre-assessment or post assessment appeal. Interest will not accrue if the appeal is made before the penalty is assessed. If the sixty days have expired without a response by the taxpayer, the Revenue Officer will assess the penalty. Collection efforts are pursued by the IRS when the taxpayer fails to respond to the 60-day letter and the penalty is assessed. A resolution to the assessments may be pursued after the merits of the Trust Fund Recovery Penalty have been resolved.

The attorneys at Montgomery & Wetenkamp can assist taxpayers in resolving their tax headaches. For more information regarding Trust Fund Recovery Penalties or other tax issues, contact Montgomery & Wetenkamp at (800) 454-7043 or

IRS Substitute Returns

Definition and Process
Investigation of Non-filers

Delinquent tax returns can be identified and worked by the IRS Examination Division, Collection Division, or the Service Center. Once a nonfiling situation has been identified, the Internal Revenue Manual (IRM) tells the assigned agent to review the situation for fraud. If there appear to be indications of fraud, the agent is instructed not to solicit returns or payment, but to refer the case to the Criminal Investigation Division. Assuming no indications of fraud, the IRS agent will contact the nonfiler and demand that he/she file all delinquent returns using Letter CP-515 and CP-518.
SFR Preparation

If after proper notice the taxpayer fails to file the requested return(s), the matter will be referred to Automated Substitute for Return (ASFR) or the Examination Division for preparation of a return by the IRS under the authority of IRC §6020(b). There is no precise timeline; sometimes the IRS moves slowly and does not get around to filing the SFR until several months, or even years, after the return is due. Once a case has been referred to ASFR, the ASFR system generates a thirty-day letter to the taxpayer requesting that the taxpayer file a return. If the taxpayer files the return, or provides proof that a return was not required, the case is closed in ASFR. But if no response is received, the system sends a ninety-day letter and the IRS-generated SFR. Eventually if the taxpayer does not respond, the tax liability is assessed, the case is closed in ASFR, and is passed on to the Collections Department of the IRS where liens and levies are likely to ensue to forcefully collect the past due taxes.

Impact on Balances, Refunds, Resolution of Case

If the IRS files a SFR, it is done based only on the information available in IRS
computers that has been obtained from various corporate and private industry sources. This typically results in a tax liability that is greater than if the taxpayer had filed his/her own “original” return or if the taxpayer files after a SFR is filed (a.k.a. SFR “reconsideration return”). The tax liability on a SFR is artificially inflated because the IRS does not include any additional exemptions or expenses that the taxpayer may otherwise be able to claim. The IRS includes as income the gross proceeds of a sale (not the gain after reduction for basis), and the IRS uses the standard deduction rather than itemizing deductions. Furthermore, the filing status used for SFR returns is typically single even if there are dependants, or it is married filing separate even if the filing status really should be married filing joint.

The Internal Revenue Code limits the time within which a taxpayer may obtain a refund of overpaid taxes. In general, a taxpayer must claim a refund within three years from the time the tax return was filed, or two years from the time the tax was paid, whichever period expires later. Withheld taxes and Estimated Tax Payments are deemed paid on April 15th of the year following the tax year in question. However, if no return is filed, a refund claim must be filed within two years of the date the tax was paid.

Non-filer cases typically take longer to resolve. And once a SFR is filed, the delays can be multiplied because processing of SFR reconsideration returns is not the highest priority at the IRS. According to the IRS, past due tax returns take approximately 6 weeks to process, if accurately completed. However, a past due reconsideration return can take several months to process because current-year tax returns normally get priority. Besides having to deal with an overstated IRS return and the delays described above, the IRS will take additional enforcement steps for those who repeatedly fail to file year after year.

Normally all past due tax returns must be filed before the IRS will consider resolving a past due tax account by way of an Installment Agreement, Currently Not Collectible status, or Offer in Compromise. However, as long as a SFR has been generated, failure to file an original return or a reconsideration return does not necessarily prevent resolution of a taxpayers delinquent tax account. The Internal Revenue Service is usually willing to move forward if the taxpayer has no interest in filing a reconsideration return or cannot reconstruct the IRS tax information necessary to file it.

Foreign Earned Income


Citizens of the United States and resident aliens must pay taxes on their worldwide income regardless of where they are living. However, citizens and resident aliens living abroad are afforded certain “tax breaks” for income earned in foreign countries. The rationale is that those who are not present in the United States and do not have the opportunity to enjoy the benefits of the government’s taxation efforts should not have to share the same tax burden as those who live here year in and year out. The available tax breaks come in the form of relatively simple exclusions and deductions which may be claimed on IRS Form 2555. However, a complicated test exists for determining who qualifies for these exclusions and deductions.

Filing Requirements for Citizens and Resident Aliens Living Abroad

The rules for filing income taxes are generally the same whether you are in the US or in a foreign country. Your gross income, filing status, and age generally determine whether you must file an income tax return. The IRS updates the minimum income requirements regularly. For purposes of determining whether or not there is a filing requirement, gross income must also include any income that one plans on getting excluded under foreign earned income rules. All the same rules apply regarding due dates, extensions, and estimated taxes as well.

The amounts reported on your U.S. tax return must be expressed in U.S. dollars. If you are paid (in whole or in part) in foreign currency, you must translate it into U.S. dollars on your return. If you pay expenses (in whole or in part) in foreign currency, you must translate it into U.S. dollars on your return. The exchange rate that should be used is the prevailing rate at the time the income is received or the expense is incurred. If you owe taxes on your return, you must also pay what you owe in U.S. dollars. If your income is “blocked” or otherwise not readily convertible, you have two options: (1) you can report the full income and pay with other available U.S. dollars, or (2) you can postpone the reporting of the income until it becomes “unblocked.” The second option necessitates the filing of an additional “information return” with your tax return. Income becomes unblocked when it becomes converted or convertible.

Foreign address filers may e-file. This is still the method that the IRS prefers. However, if they decide to mail in a paper return, it should be sent to the Austin, Texas service center for processing. Residents of U.S. territories are generally required to file with the particular territory, not with the United States.

IRS Requirements for Claiming the Foreign Earned Income Exclusion and the Foreign Housing Exclusion/Deduction

The tax breaks available to foreign income earners are: the Foreign Earned Income Exclusion, the Foreign Housing Exclusion, and the Foreign Housing Deduction. In order to claim any of these, your tax home must be in a foreign country, you must have foreign earned income, and you must meet the requirements of the bona fide residence test or the physical presence test. This is where the rules become convoluted and difficult to apply.

1. Tax Home in Foreign Country

Tax Home

Your tax home is the general area of your place of business or employment, regardless of where you maintain your family home. It is the place where you are permanently or indefinitely engaged to work and is not necessarily the same as your residence or domicile for tax purposes. The location of your tax home often depends on whether your assignment is temporary or indefinite. It also depends on the specific actions you take that reflect your intent to remain in that foreign location.

Foreign Country

A “foreign country” includes any territory under the sovereignty of a government other than that of the United States, including that country’s airspace and territorial waters. Excluded from the definition of “foreign country” are Antarctica and any of the U.S. possessions.

2. Bona Fide Residence Test / Physical Presence Test

Bona Fide Residence Test

To qualify under this test, you must be a U.S. Citizen or resident alien who is also a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. Whether or not an individual is considered a bona fide resident depends on all the facts and circumstances. The IRS makes this determination based on what is reported on Form 2555. Some of the factors that the IRS considers are intention, purpose of trip, and nature/length of stay.

Physical Presence Test

To qualify under this test, you must be a U.S. Citizen or resident alien who is physically present in a foreign country for 330 full days during a period of 12 consecutive months. The 330 days do not have to be consecutive. This test is based entirely on how long you stay rather than your intentions and actions while you are there.

Exceptions to the Minimum Time Requirements

There are two exceptions to the minimum time requirements of the Bona Fide Residence Test and the Physical Presence Test. One exception is for war, civil unrest, and other adverse conditions. The IRS is supposed to publish which countries fall into this category for any given tax year. If the taxpayer can show that the minimum time requirement would have been met but for the adverse conditions present, then the time requirement is waived. The other exception has to do with U.S. travel restrictions. If you are present in a foreign country in violation of U.S. law then you will not be afforded the tax benefits no matter how long you stayed there.

3. Foreign Earned Income

Once the first two elements are met, it is easy to apply the “foreign earned income” requirement – it is simply any income you receive for services you perform while your tax home is in a foreign country and while you meet either the bona fide presence test or the physical presence test. Of course one also has to make sure that the income is in fact earned. Earned income is defined as “pay for personal services performed.” Earned income includes salaries, wages, commissions, etc. By law, foreign earned income does not include any amounts paid by the United States or any of its agencies to its employees.

Foreign Earned Income Exclusion

If you qualify under the rules above, you may exclude $91,500 of your foreign earned income when filing your taxes. That figure will be adjusted upward for tax year 2011. For married individuals, each spouse may claim this exclusion (for a total of $183,000) if each meets one of the above tests.

Foreign Housing Exclusion and Deduction

If you qualify under the rules above, you may also claim an exclusion or a deduction from gross income for your “housing amount.” Your housing amount is the total of your housing expenses for the year minus the base housing amount. The base housing amount is calculated by taking 16% of your foreign earned income exclusion. This exclusion can be a relatively small figure in the end. For example, if the tax year in question is 2008 then the maximum foreign earned income exclusion is $87,600. 16% of this amount is $14,016. If you spent a total if $15,500 for housing during 2008 then your housing amount is only $1,484 ($15,500 – $14,016). The exclusion amount should be prorated based on the number of days during your qualifying period and it is also capped at 30% of the maximum foreign earned income exclusion.

The foreign housing deduction is for those with self-employment income. Calculation of the foreign housing deduction depends on whether you have only self-employment income or both self-employment income and employer-provided income.

Exemptions, Deductions, and Credits

In addition to the tax breaks discussed above, U.S. citizens living abroad are also allowed all the same exemptions, deductions, and credits as citizens and residents living in the United States. However, if you choose to exclude foreign earned income or housing amounts, you cannot exclude, deduct, or claim a credit for any item that can be allocated to or charged against the excluded amounts. In other words, you may not benefit from double exemptions or double deductions.

Form 2290 Taxes Explained

Internal Revenue Service Form 2290 is used by owner/operators of highway motor vehicles that have a taxable gross weight of 55,000 pounds or more. The owner/operator may be an individual, limited liability company (LLC), corporation, partnership, or any other type of organization (including nonprofit, charitable, educational, etc.). The owner/operator filing the Form 2290 must have an Employer Identification Number (EIN). A social security number cannot be used to complete a Form 2290. Form 2290 additionally requires the vehicle identification number and gross weight of each taxable vehicle.

A highway motor vehicle subject to Form 2290 taxes includes any self-propelled vehicle designed to carry a load over public highways. Examples of vehicles that are designed to carry a load over public highways include trucks, truck tractors, and buses. Generally, vans, pickup trucks, panel trucks, and similar trucks are not subject to this tax because they have a taxable gross weight less than 55,000 pounds.

A vehicle triggering a Form 2290 filing requirement consists of a chassis, or a chassis and body, but does not include the load. It does not matter if the vehicle is designed to perform a highway transportation function for only a particular type of load, such as passengers, furnishings, and personal effects, goods, supplies, or materials. It does not matter if machinery or equipment is specially designed to perform some off-highway task unrelated to highway transportation subject to specific exceptions. Generally, vehicles not considered highway vehicles triggering a Form 2290 filing requirement include specially designed mobile machinery for non-transportation functions, vehicles specially designed for off-highway transportation, non-transportation trailers, and non-transportation semi-trailers.

The taxable gross weight of a Form 2290 taxable vehicle, other than a bus, is the total of the actual unloaded weight of the vehicle fully equipped for service, the actual unloaded weight of any trailers or semitrailers fully equipped for service customarily used in combination with the vehicle, and the weight of the maximum load customarily carried on the vehicle and on any trailers or semitrailers customarily used in combination with the vehicle. The taxable gross weight of a bus is its actual unloaded weight fully equipped for service plus 150 pounds for each seat provided for passengers and driver.

Apart from Form 2290 non-payment cases, Form 2290 issues additionally arise in Internal Revenue Service collection cases for other liability types when there is a non-compliance issue. The typical fact pattern involves a taxpayer that is unable to resolve personal or business tax issues until all outstanding Form 2290s are filed through the final return period. Consequently, the filing of the delinquent returns generally creates additional tax liabilities that then require a resolution. Although belated compliance often creates additional liabilities, compliance with tax filing requirements is a primary requirement to any Internal Revenue Service collection case.

The tax attorneys at Montgomery & Wetenkamp provide tax relief representation and can assist taxpayers in resolving their tax headaches. For more information regarding Form 2290 liabilities or other tax issues, contact Montgomery & Wetenkamp at (800) 454-7043 or

Liquid Assets in Tax Relief Cases

In the context of Internal Revenue Service (IRS) tax relief and liability resolution, the term liquid assets refers to the value of those assets, holdings, deposits, and investments that may be immediately applied to a taxpayer’s tax liability as part of a resolution of the liability.

The general rule in determining an asset value for collection purposes is quick sale value. Quick Sale Value is an estimate of the price a seller could get for the asset in a situation where financial pressures motivate the seller to sell in a short period of time, usually 90 days or less. Generally, the quick sale value is calculated at 80% of fair market value. A higher or lower percentage may be appropriate depending on the type of asset and current market conditions. Internal Revenue Manual Section (05-09-2008). An exception to the general rule of using quick sale value to determine a delinquent taxpayer’s asset value are assets that the IRS deems liquidable.

A taxpayer’s access to liquid assets is a primary question that must be determined before an income and expense analysis has any significance for tax resolution purposes. Hence, an initial question in any tax collection interview completed by the IRS is whether the taxpayer has the ability to satisfy their tax liabilities by accessing cash, or converting other assets to cash, to pay the taxes that are owed. Internal Revenue Manual Section (10-02-2009).

Although there are many types of assets that the IRS may consider to be liquidable, there are several asset types that are common to most taxpayers:

Cash Assets

Cash assets are not subject to a quick sale reduction and generally include currency on hand, bank account balances, and securities belonging to the delinquent taxpayer. Careful attention is needed to skillfully and accurately present the true value of cash assets for the purpose of an IRS collection review. Taxpayers with significant cash holdings should seek tax resolutions that either apply their cash assets to their liability, or resolutions that do not require disclosure of such holdings.

Whole Life Insurance Policies

Whole life insurance policies are treated by the IRS as an investment that may be quickly converted to cash. The IRS will seek application of the cash surrender value of the policy and/or the loan value that may be obtained against the value of the policy. Therefore, careful review of the current state of the taxpayer’s policy is important in determining the liquidity of a taxpayer’s whole life insurance policy.

Retirement or Profit Sharing Plans

Funds held in a retirement or profit sharing plan are considered an asset and may be reachable by levy. Internal Revenue Manual Section (05-09-2008). However, the liquidity or treatment as income of such accounts by the IRS are specific to the terms of the specific investment plan and the circumstances of the taxpayer. Account funds that can be borrowed against or accessed are treated as liquidable by the IRS. However, allowable reductions in the total asset value must be presented and advocated to the IRS.

Furniture, Fixtures, and Personal Effects

A taxpayer’s furniture, fixtures, and personal effects are an exception to liquidable assets even though they usually can be converted to cash. With the exception of articles of extraordinary value, such as: antiques, artwork, jewelry, or collector’s items, the IRS usually doesn’t pursue conversion of these items by the taxpayer to satisfy the delinquent tax liability. The IRS has recognized the impracticality of liquidating such assets by setting exemptions for such items that are subject to collection and are updated on a regular basis.

Income-Producing Assets

Income producing assets are usually in the form of vehicles, tools, real properties, and commercial properties. When determining the reasonable collection potential, an analysis is necessary to determine if certain assets are essential for the production of income. When it is determined that an asset or a portion of an asset is necessary for the production of income, it may be appropriate to adjust the income or expense calculation for that taxpayer to account for the loss of income stream if the asset were either liquidated or used as collateral to secure a loan. Internal Revenue Manual Section (05-09-2008). However, should the taxpayer be able to sufficiently demonstrate that the asset is necessary for the production of income, the IRS normally does not require that such asset be liquidated.

Real Estate

The taxpayer’s use of real estate property holdings is determinative of the IRS’s treatment of a taxpayer’s real estate property. Subject to exceptions, the IRS normally does not require a taxpayer to vacate and liquidate their domicile or real estate property used for the production of income, to satisfy the tax liability owed. However, the IRS will require a delinquent taxpayer to access their equity in real property holdings regardless of its use classification. Hence, a taxpayer will be required to seek a loan against their equity in real properties, or demonstrate that they are not able to obtain any financing against their equity.


The IRS normally treats primary vehicles and vehicles used for the production of income as non-liquidable. However, the IRS does treat non-primary vehicles as excessive and subjects such vehicles to liquidation.


Treatment by the IRS of an asset as liquidable is dependent on the use and classification of the asset. Therefore, careful analysis and organization of a taxpayer’s assets must be completed before presenting a tax relief solution to the IRS. The tax attorneys at Montgomery & Wetenkamp provide tax relief representation and can assist taxpayers in resolving their tax headaches. For more information regarding IRS tax liabilities or other tax issues, contact Montgomery & Wetenkamp at (800) 454-7043 or

Federal Tax Lien Mailers

The Federal Tax Lien is just one of the many collection tools used by the Internal Revenue Service (IRS) to collect past-due taxes. The Federal Tax Lien secures the IRS’ interest in taxpayers’ property without actually seizing and selling the property on the spot. A tax lien technically attaches to all the taxpayer’s property, whether real or personal, and the IRS may choose to enforce its lien rights at the time the property is sold. In practice, however, the Federal Tax Lien usually only affects rights to real property, or personal property of extraordinary value. The Federal Tax Lien is considered a “passive” collection tool. In contrast, bank levies, wage garnishments, and property seizures are all active collection tools.

Under new IRS guidelines, a Federal Tax Lien should not be filed unless the amount owed is $10,000 or more, although circumstances may warrant that a lien be filed on amounts less than $10,000. Normally a tax lien will not be released until the tax liability has been fully satisfied. However, a tax lien can be released by entering into a Direct Debit installment agreement as long as the total balance is $25,000 or less. The IRS will also release a FTL if the taxpayer can convince the government that releasing the lien will facilitate collection of the tax or that it is otherwise in the best interest of the government.

Although tax practitioners and the Taxpayer Advocate Service have cast serious doubt on the effectiveness of the Federal Tax Lien as a collection procedure, it is still widely used and widely feared to this day. Some tax resolution firms feed off these fears by engaging in questionable direct mail marketing practices. While there is nothing fundamentally wrong with direct mail advertising, it appears that some tax resolution firms may be crossing the line.

Since the Federal Tax Lien filing becomes public record, these firms use the lien amount, filing date, and the name / address of the taxpayer to lend legitimacy to their tax lien mailers. These tax lien mailers are often given the appearance of an official IRS notice, complete with an official-looking seal, fabricated notice numbers, and meaningless codes. Some letters contain tables and formatting that is also meant to replicate the style of IRS correspondences. Most of these mailers, if read carefully and completely, do divulge the true identity of the sender. However, the firm name is usually somewhere near the bottom of the page, in a small font, and absent any contact information other than a toll-free phone number.

Furthermore, the content of the mailers is often inaccurate or misleading. For instance, some Federal Tax Lien mailers state that the IRS is on the verge of taking enforced collection actions against the taxpayer, such as a wage garnishment. This is sometimes the case, but it is impossible to know for sure without checking with the IRS first. Sometimes the filing of a tax lien is a signal that the IRS has actually stopped their active collection efforts. For instance, if a past due tax account has been approved as Currently Not Collectible, the IRS, as a matter of course, will immediately file a FTL to protect its interests, if a FTL has not yet been filed.

The practice of direct advertising itself is not concerning. Those who have been issued a tax lien often do need IRS tax help from a tax relief attorney. However, the public should be able to easily recognize the mail for what it is, an advertisement.

The tax attorneys at Montgomery & Wetenkamp provide tax relief representation and can assist taxpayers in resolving their tax headaches. For more information regarding IRS tax relief or other tax issues, contact Montgomery & Wetenkamp at (800) 454-7043 or

Traps of IRS Payroll Deduction Agreements

Normally if a taxpayer is unable to pay his taxes when they are due, the Internal Revenue Service (IRS) will enter into an Installment Agreement and accept monthly payments until the tax is paid in full or until the statute of limitations expires. There are three primary installment agreement payment methods: mail in a check, electronic funds withdrawal (direct debit), and payroll deduction.

The taxpayer can initiate the direct debit method directly on Form 9465 or Form 433-D, but a payroll deduction agreement requires use of a separate form: Form 2159. There are some potential traps associated with this form that taxpayers need to be aware of. One is the “increase/decrease” clause – you don’t want the IRS increasing your payment amount unless you specifically agreed to it. Another potential trap is the “additional terms” box – any additional terms would almost never be in favor of the taxpayer, especially since this field is “to be completed by IRS.”

There are three parts to Form 2159: the Acknowledgement Copy (to be returned to the IRS), the Employer’s Copy, and the Taxpayer’s Copy. The front page of each copy is identical. However, there is an instructional second page to each copy, each containing different information. The second page of the IRS Copy contains a list of internal codes and number designations. The second page of the Taxpayer’s Copy contains some rather redundant instructions on how to fill out the form and what to do with it after it is completed.

The second page of the Employer’s Copy is the most interesting. The employer is instructed to “continue to make payments unless the IRS notifies [the employer] that the liability has been satisfied.” This could obviously be prejudicial to the taxpayer. First, the likelihood that the IRS will notify the employer in a timely manner is not very high. The form itself acknowledges this by stating, “When the amount owed, as shown on the form, is paid in full and IRS hasn’t notified you that the liability has been satisfied, please call the appropriate telephone number below to request the final balance due.” Second, if the taxpayer’s financial situation changes and he is unable to continue with the installment agreement, it could potentially be difficult to cancel the payroll deduction agreement.

Under new IRS guidelines, a tax lien can be released by entering into a Direct Debit installment agreement as long as the total balance is $25,000 or less. But if a taxpayer does not fit these criteria, or is not concerned about the tax lien, then making installment agreement payments by check may be the best method because, if the taxpayer is no longer able to continue sending in payments, he simply stops sending in payments, and then other options can be discussed with the IRS. A taxpayer cannot expect that ceasing payments will have no consequences (the least of which would be a defaulted installment agreement), but sometimes the taxpayer has no choice, such as when he experiences a severe reduction in wages or the total loss of an income source. Some of the IRS tax problems discussed here can be avoided by electing to mail in installment agreement payments each month.

The tax attorneys at Montgomery & Wetenkamp provide tax relief representation and can assist taxpayers in resolving their tax headaches. For more information regarding IRS tax relief or other tax issues, contact Montgomery & Wetenkamp at (800) 454-7043 or

Potentially Dangerous Taxpayer

Given the number of contacts the IRS makes with taxpayers day after day, month after month, year after year, the number of (how shall we say this) “confrontations” is relatively small. Yet there are always those who hope they can find tax relief through nefarious means, including the use of force. And the IRS has fairly elaborate guidelines for handling situations involving dangerous or aggressive taxpayers, including a special PDT (Potentially Dangerous Taxpayer) classification that may be assigned to an account. See IRM 25.4.1.

The Criteria
So, what would you have to do to get added to the PDT list? The IRS has developed the following criteria, which must be based on verifiable evidence, not just hearsay:
1. Physical assault of IRS representative or family of representative;
2. Intimidating or threatening through the use of weapons, animals, stalking, etc.;
3. Participating in groups that advocate violence against the IRS where such participation could reasonably be understood to threaten the safety of a Service employee;
4. Any of the above acts committed against a government agency other than the IRS;
5. Clear propensity towards violence through acts of violent behavior in the prior 5 years;

Not only must these behaviors or acts be verifiable, but there must also be a nexus to tax administration. For example, even though a sport hunter or a professional boxer engage in behavior that may be considered violent to some, there is no relationship or connection to the collection of taxes. Therefore, a PDT designation would not be appropriate absent additional facts.

The Procedure
1. Employee reports incident to the Treasury Inspector General for Tax Administration (TIGTA);
2. TIGTA conducts investigation and forwards results to the Office of Employee Protection (OEP);
3. OEP decides whether or not taxpayer qualifies as PDT, and if so, inputs PDT code on account;
4. Area Director over reporting employee may appeal a “no PDT” determination;
5. PDT designation stays on the taxpayer’s account for at least 5 years;
The Consequences

IRS field officers are instructed to try to avoid in-person contact with PDTs. But if in-person visits are necessary, then they are supposed to arrange armed escort from TIGTA personnel. Regular Revenue Officers are prohibited from carrying firearms or any other weapons, including pepper spray (IRM ). The IRS does not always like to disclose its internal codes and designations. In fact, when taxpayers ask if their accounts have been designated “PDT,” employees are instructed to neither confirm nor deny it, then forward the request to Disclosure (IRM

If the act(s) or behavior(s) in question do not rise to the level of “dangerous,” then there is an intermediate designation known as “CAU” (Caution Upon Contact) with its own set of criteria and procedure.

The burden of an IRS tax debt can be stressful, discouraging, even overwhelming. However, resorting to threats or violence is never acceptable. Contact Montgomery & Wetenkamp, and let us demonstrate how the pen is mightier than the sword in getting you the tax relief that you deserve.

When Do Business Miles Count as Income?

It’s almost tax season again, and it is the last opportunity to make those last minute, end-of-the-year financial adjustments to ensure that you don’t owe a tax debt to the Internal Revenue Service and require IRS Tax Assistance. I was recently asked, “Why are my gas reimbursements from my W-2 employer counted as income on my Form W-2? Is this double taxation?” The best legal answer is, “it depends”.

If your employer reimburses you for your expenses, say vehicle expenses incurred while on the job, then it is possible that you may see your reimbursement amounts listed as supplemental income on your Form W-2, depending on your employer’s implemented expense reimbursement plan. If you are not adequately informed or prepared for this additional income, this could be a serious financial issue come tax day in April.

Whether your reimbursement amount will be treated as additional income on your Form W-2 depends on the reimbursement plan implemented by your employer, if any. If your employer uses what is called an “accountable” reimbursement plan, your business reimbursements should not be included as income on your Form W-2, so long as the accountable reimbursement plan rules are followed. Accountable reimbursement plan rules must specify: 1) That the reimbursed expense must have a business connection and was paid or incurred while performing services as any employee; 2) That the expense is documented or accounted for within a reasonable amount of time; and 3) Any excessive reimbursement is returned to the employer within a reasonable amount of time.

Alternatively, reimbursements paid by an employer under a non-accountable plan are treated as supplemental wages. Supplemental income may also include bonuses, commissions, overtime pay, and vacation allowances. A non-accountable plan is a reimbursement arrangement that does not require the employee to account for, or prove, business expenses to an employer or does not require the employee to return the employer’s payments that are more than the employee’s proven expenses. If you have reimbursable business expenses, your employer should tell you what type of reimbursement plan is used and what records you must provide if your employer uses an accountable reimbursement plan. However, it is the employer, not the employee that makes the decision on the type of reimbursement plan to implement. An employee who receives reimbursement compensation under a non-accountable reimbursement plan, is not permitted to try and convert the reimbursement amounts received to payments under an accountable plan by voluntarily accounting for their expenses and returning excess reimbursements to the employer.

However, if your employer uses an accountable reimbursement plan, and the requirements of the plan have been satisfied, then your business reimbursements should not be reported on your Form W-2. If your employer issues you a Form W-2 with the reimbursement amounts included as income, and all the rules for accountable reimbursement plans have been met, then a corrected Form W-2 should be requested from your employer.

Christian Montgomery is a West Sacramento resident and a tax attorney at Montgomery & Wetenkamp, Tax Relief Attorneys, located in Sacramento. For more information regarding tax matters contact Montgomery & Wetenkamp at (916) 452-7033 or online at This article is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

Received an IRS Tax Lien Notice? Don’t Panic

As IRS Tax Attorneys, our tax law firm regularly receives telephone calls from someone who thinks the Internal Revenue Service (IRS) is about to seize their home for an IRS tax debt that they owe. While real property seizures do happen, further inquiry usually reveals that the person calling received a notice of Notice of Federal Tax Lien; not a property seizure action. Federal tax liens are sometimes also confused with a tax levy or property seizure, and can be a pretty scary notice if you don’t understand what a tax lien is; and more importantly, what it is not. Fortunately we provide IRS Tax Lien Help. A tax lien is the operation of law that secures the government’s legal claim against your property when you fail to pay a tax debt. The Notice of Federal Tax Lien is the operative document that is filed with the county and notifies the public and creditors of your tax debt. A tax lien attaches to a person’s property, both real property and personal property.

The end result of a tax lien is when property is sold. If property subject to a tax lien is sold, the IRS will generally receive the sales proceeds before the seller receives any money from the sale. Therefore, the filing of a tax lien is what is considered a passive collection tool used by the IRS because there is no immediate monetary deprivation to the taxpayer. The passive nature of a tax lien may be contrasted to an enforced IRS collection tool, such as a bank levy, which may result in the seizure of funds on deposit in the target bank account and has an immediate monetary impact on the taxpayer.

The notice of federal tax lien has the effect of notifying the public that you owe a tax debt, even if you don’t own real property. This means that once a Notice of Federal Tax Lien is filed, it is a matter of public record and will likely be included as a derogatory debt on your credit report and lower your credit score. Derogatory debts and lower credit scores limit your ability to get credit and make financial transactions more difficult, or at the very least more costly. Unlike other types of debts shown on a credit report, the tax lien is filed and reported based on the tax debt owed at the time the Notice of Federal Tax Lien is actually filed and is not periodically updated based on the running balance owed. Therefore, even if you’re making payments to reduce your tax debt over time, for example, the debt is not reported publicly as being lowered.

Now that you understand the passive but derogatory effects of a tax lien, you are better informed of the IRS’ bag of collection tricks in the event you owe a tax debt. As with any tax debt situation, early attention and resolution will often render a more positive result than procrastination. This is true with resolving tax liens; it is easier to prevent a Notice of Federal Tax Lien from being filed by negotiating with the IRS once a tax debt is anticipated, than it is to remove a Notice of Federal Tax Lien and repair its damage.

Attorney Advertisement. Tax Attorneys Montgomery & Wetenkamp are licensed by the State Bar of California, are licensed attorneys authorized to practice before the United States Tax Court, and may practice before the Internal Revenue Service (IRS) as attorneys in all 50 states. Sacramento Tax Attorneys and Modesto Tax Attorneys Montgomery & Wetenkamp perform all services in Sacramento, California and Modesto, California. The content of this website is for informational purposes only and does not constitute legal advice. The tax information contained on this website, is not intended to be used, and cannot be used, referred to or relied upon, for the purpose of avoiding tax-related penalties under the Internal Revenue Code or promoting, marketing, or recommending to another party any tax-related transaction or matter addressed herein. Past successes cannot be an assurance of future successes because each case must be decided on its own merits and will differ if based on different facts.