What is a “Big” California Tax Debt?

So, you may have made an error on your taxes, or forgot to change back your tax withholdings on your paycheck stub after covering some unexpected expenses and ended up owing Internal Revenue Service (IRS) taxes or California Franchise Tax Board (FTB) taxes. Or perhaps, you were audited by the IRS or California’s income taxing entity, the FTB. Either way, you are staring a tax bill and wondering if it you owe more than “average”.

Unfortunately, if you owe a California FTB tax debt, they will tell you, and the public at large that you owe a big tax debt. They will even post your name online, try to suspend your drivers license and state issued professional license that you may have in order to force you resolve your tax liability. This is known as the “Top 500 past due balances” list and its most recent victims has just been published.

Initially started as a list of the top 250 by California Assembly Bil No. 1424, it has been amended and expanded to the top 500 individual taxpayers who owe $100,000 or more in California FTB tax debt and is published twice a year.

The current list updated in June 2024 has the lowest liability published as $102,409.61. With penalties and interest on tax liabilities, you may be closer to being published than you think. There are tax collection defense strategies that can be implemented to keep you off of this list, or remove yourself from this list if you see your name on the list. But it is up to you to pursue those tax defense strategies before the tax man pursues you. So, if you do have a California Tax Debt that is getting “Big” you may need a consultation with our law firm to determine if there is an FTB collection defense that may work to keep your name from being published as a top 500 past due balance.

The IRS Substitute for Return (SFR)

We have all heard the saying “if you want something done right, do it yourself.” Let’s explore the applicability of that phrase in the context of filing tax returns. It all depends on how we define “yourself.” We have explained in previous articles that you cannot escape the requirement to pay taxes by not filing, and failing to do so may lead to serious consequences. And if you fail to file one or more tax returns, you run the risk of the IRS filing taxes for you in the form of a “Substitute for Return.” The IRS will prepare an estimate of what should be owed based only on information reported to them via third party information returns (W-2, 1099). The tax due on a SFR is almost always overstated because it does not take into account the correct credits, deductions & exemptions. The IRS generally allows only one exemption, the standard deduction, and a filing status of “single,” or “married filing single.” In other words, the IRS is not going to make sure it is “done right.” They will overstate the tax and “round up,” essentially placing the burden of claiming exemptions, credits, and deductions on the taxpayer. Once the SFR has been completed and the taxpayer has been given an opportunity to respond (including the opportunity to file their own return instead of relying on the SFR), the tax is officially assessed, and then the IRS can go into collections mode with enforcement tools such as liens and levies.

Even though filing yourself is best, we don’t always recommend that the taxpayer personally do the heavy lifting. In other words, when we say that filing “yourself” is best, what we mean is it is better to take care of it yourself with the help of a tax preparer as opposed to leaving it in the hands of the IRS SFR. If you have a very simple tax return, there is no reason why you couldn’t use self-file tax software, or even the IRS Free File program if you qualify, to knock it out in a few minutes. However, for most of our clients, we really prefer that they hire a tax professional to prepare their returns. That doesn’t always mean an accountant is necessary. For many taxpayers, an experienced preparer is sufficient. You just want to spend some time getting to know the preparer and their experience level and attention to detail. So, yes, if you want something done right, do it yourself, but only if you truly know what you’re doing. If you need help or have questions, don’t hesitate to contact Montgomery & Wetenkamp.

IRS 2645C Letter (updated)

If there is one letter that the IRS should eliminate, it’s the 2645C letter. This letter has never really worked the way it was intended. We first described the rationale behind the 2645C way back in 2014. It wasn’t working then, and it doesn’t work now, almost 10 years later. It is supposed to function as an acknowledgement that the IRS has received something from the taxpayer and that the IRS will review and provide some kind of response (or request for additional time) within the next 45-60 days.

If something is mailed to the IRS, an acknowledgement letter is not a bad idea… in theory. For example, an acknowledgement letter might eliminate the need to call the IRS to make sure they received what was sent. During the pandemic it was not a good idea to send physical mail to the IRS because they literally were not opening it, and even snail-mailed tax returns were not being processed normally. Things are somewhat better now, but I think this period of inattention has made taxpayers, and particularly tax professionals, very reluctant to send physical mail to the IRS. However, the 2645C letter doesn’t work for a few different reasons:

  1. The 2645C letter is too vague,
  2. The 2645C letter is not mailed out promptly,
  3. The follow-up estimates are not accurate.

The 2645C is not customized so that it pinpoints what exactly was received, so if there are multiple concurrent issues on a tax account, it is impossible to determine what the letter refers to. Also, the 2645C is often mailed out weeks – or even months – late, causing all kinds of confusion to the taxpayer and their representative. Sometimes these letters appear out of nowhere after the issue has already been resolved. And we’ve all seen a 60-day follow up turn into 90, then 120, and so on. This has become more like the rule than an exception.

Sometimes the IRS will even send out the 2645C letter following a telephone contact from the taxpayer or their representative. Again, an acknowledgement letter might theoretically be helpful when sent in response to something that was mailed to the IRS, but what good is a 2645C letter that is sent in response to a telephone inquiry? If you’re already on the phone with the IRS, why would you require a 2645C letter sent by the IRS to confirm that they received your call? It is just confusing and unnecessary, especially if the letter comes weeks after the phone call. If you can think of a good reason to keep this letter, or if you have ever found it helpful, please explain in the comments! If you need IRS tax assistance or more information about our tax debt relief services, contact us today.

Home Office Deduction in California 2021

Do you qualify for a home office tax deduction?

So many people work from home nowadays. Even before the pandemic, some of the biggest and best employers were trending towards more flexible work schedules and remote work options. Here we are almost one year into the Covid-19 pandemic and it seems that working from home is more the norm rather than the exception. Those of us who always dreamed of being able to work from home often imagined how ideal it would be to not have to commute into the office, not have to give face-time to management, not have to shave or get fully dressed. Now that most of us have gotten a taste of it, we can’t wait for things to return to normal, especially if we share our workspace with little “distance-learners.”

If there is one thing this pandemic has taught us, it is that we have to always look for the silver lining; that’s what keeps us motivated and optimistic when times are tough. Wouldn’t it be nice if there were some kind of tax benefit associated with working from home? Well, for some taxpayers, there might be, and it’s called the home office deduction.

First of all, don’t even think about claiming this expense unless you are self-employed. If you are self-employed, you would report the home office tax deduction on your Schedule C. The requirements are fairly strict, so not everyone who does work out of their home will qualify, and if you get too aggressive with this deduction, then you might get audited. You can claim a separate structure such as a barn or garage, an entire room in your home, or even a portion of a room, but whatever area you claim must be your principal place of business and it must pass the “exclusive & regular use” test. You must use this area exclusively for conducting your business, and you must conduct business there on a regular basis. Obviously, the more difficult element is exclusivity. If you use the claimed area for any other purpose besides for your business, then it does not qualify.

If you do in fact qualify for the home office deduction, the calculation is fairly simple: you would measure the square footage of the work area and divide it by the total area of the house to arrive at a percentage. Then the percentage is used to determine what fraction of your overall bills (rent, utilities, maintenance, etc.) can be claimed. There is also a simplified method whereby you are allowed $5.00 per square foot, (capped at $1,500 maximum deduction) without regard to actual expenses.

What about the increased costs associated with working at home such as faster internet, higher utility bills, and office equipment… can any of that be written off? Again, if you work as a 1099 independent contractor, you can deduct those expenses, but if you work as a W-2 employee, the answer is no. If you are an employee and you are required to work from your home office, the best option for you is to seek reimbursement from your employer.

Contact us today for more information or a free consultation!

Changes to IRS Offer in Compromise Tax Settlement Procedures

Does the IRS offer settlements? If you owe a tax debt that you cannot afford to pay, you may want to consider negotiating your tax debt through a tax settlement. The procedure is known as an offer in compromise. The Internal Revenue Service (IRS) began charging taxpayers who want to attempt to reduce their tax liabilities through a tax settlement an offer in compromise application fee in November 2003.

Beginning April 27, 2020, the application fee for IRS offer in compromises will be $205.00. This is an increase from $186.00. According to a memorandum from Director of Collection Policy Nikki Johnson, the Department of Treasury reviewed the offer in compromise program costs and issued final regulations to increase the amount of the application fee imposed under section 300.3 of the Treasury Regulations for processing an offer in compromise.

There will be a grace period through May 27, 2020 for taxpayers that have submitted an offer in compromise with the prior fee of $186. The IRS will require any shortfall be paid prior to continuing the offer investigation. While the increase in the IRS offer in compromise application fee is only $19.00, the IRS will continue to waive the application fee for low-income taxpayers and those taxpayers that base their offer to settle based on doubt as to liability.

Additionally, if you live in California, the IRS has changed the unit that will be assigned to investigate your request for an offer in compromise. I believe there is a group of IRS agents in Brookhaven, New York that is now very happy that they won’t have to fight with our attorneys anymore. We hope this helps you understand how to get a settlement with the IRS.

Contact us today for more information on how to settle debt with the IRS or a free consultation!

The New Large-Font IRS Form 1040-SR

What is IRS form 1040-SR? The IRS rolled out a new tax form this filing season called the 1040-SR. It’s basically a simplified, large-font 1040 form similar to the 1040-EZ. I know the IRS means well, but was this really necessary? Who can use form 1040-SR? There are a number of restrictions on who is permitted to actually use this form; and of those that are, it is questionable just how many will want to. If you itemize your deductions, you may not use this form. If you earn over $100k, presumably you should be able to afford to hire a tax professional to file your taxes, and you may not use this form. If you have investment income or income from a business, you may not use the new 1040 form. And if you are under 65 years old, regardless of how bad your eyesight is, you may not use this form. Side note: I know many people under 65 who would benefit from a tax form 1040-SR, one of them being the referee at my son’s basketball game the other day.

Furthermore, the large font only helps if you’re actually filling out the form by hand with a pen. These days a vast majority of taxpayers file electronically and even pay someone else to do it. I suppose if there are any traditionalists left who fill out tax forms by hand, they probably fall in that 65+ group. But even that group may derive only a small benefit from the new form if they use any of the lettered schedules because none of the tax schedules and attachments have been updated with larger fonts. The IRS even admitted that the group of taxpayers who will benefit the most from Form 1040-SR makes up less than 10% of all tax filers.

It’s always easier (and more fun) to poke holes in IRS programs and the way they administer the tax code than it is to identify what they’re doing right. It just seems like they’re often more concerned with the minutia and less relevant details. It’s the same brand of thinking that results in the auditing of small business owners, sometimes year after year, while major corporations often avoid taxes altogether. Age 65 is not that old anymore. Seniors are resourceful; they wear glasses, they use computers, and they pay younger eyes to do what they no longer can. My thinking about taxes won’t change when I’m 65; I guarantee I’ll care way more about the size of my tax obligation than I will about the size of the font on my 1040.

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IRS Gives Private Debt Collection Firms More Power

The IRS is constantly coming up with new convenient payment options for taxpayers with back tax debts. As we know, the IRS is always so very concerned about the taxpayer, and they like to be as generous and accommodating as possible. Payment option language takes up some of the most prominent positions in collection notices. And clicking that “Pay” tab on the IRS website reveals no less than seven different payment options. Of course, when my clients tell me that they don’t know how they’re going to pay their tax bill, its usually not because they can’t decide between writing a check or paying in cash. As usual, the IRS is missing the point and still thinking inside the box, and their latest attempt to beef up collections from people who can’t pay is very concerning to me. The IRS is now allowing private debt collection firms that have contracted with the federal government to accept payments from taxpayers (see IRS News Release IR-2019-165, October 8, 2019).

The IRS has tried using private debt collection agencies (PCAs) off and on, unsuccessfully, but never before have they been authorized to accept payments. There are concerns that these programs often cost more than the revenue collected. There are concerns from the National Taxpayer Advocate and others within the industry about security of information and violation of taxpayer rights by employees who do not have the same ethical standards as the IRS (Did I just suggest that the IRS has standards?). And probably the most glaring problem I see is a potential diluting of the message that the IRS and others (myself included) have been preaching for years: you don’t send federal tax payments to anyone other than the IRS/Department of Treasury.

It’s no secret that some people have a hard time distinguishing between communications from the IRS and communications from scammers. I think it muddies the waters a bit now that it is permissible to give credit card info to Pioneer Credit Recovery, for example, besides the IRS. No longer is there a bright line rule about sharing sensitive information. For the record, there are only four potential PCAs that have contracts with the IRS: Pioneer, CBE, Performant, and ConServe. But if it is difficult for some to distinguish between the IRS and criminal IRS impersonators, then it’s only that much harder to distinguish between authorized third-party collection agencies and their unauthorized criminal counterparts. Even the IRS seems to acknowledge the added risk to taxpayers since a good portion of their news release appears under the subheading “Be aware of scammers.”

The IRS promises that PCA employees will not make threatening calls and that they will abide by the Taxpayer Bill of Rights and the Fair Debt Collection Practices Act, but how much oversight and control do they really have over these private firms and their employees? I don’t know the answer to that question, but I know how well-trained and well-behaved actual IRS employees are who work under the same roof as their supervisors, so I can only imagine.

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The IRS LT11 Collection Notice

A follow-up to the last article (Aug 2019) about the IRS CP504 notice to compare it to IRS LT11 notice.

In this article I am going to dissect that notice’s evil cousin: the LT series letter. The one I happen to be looking at for reference today is a LT11 notice. Again, the notice code can be found in the upper right corner of the first page along with the notice date, social security number (often times partially masked these days), case reference number, and IRS phone number.

There are many similarities between the CP and the LT letters. Both come with a payment coupon at the bottom of page one. Both contain information about the denial or revocation of a US passport, information about penalties and interest, and information about “what you need to do immediately.” The LT11 has a more descriptive section on Federal Tax Liens, but for the most part it actually has less information than the CP504. I think the rationale is that they have already spelled things out in previous letters and its just not necessary to repeat everything.

The first thing a taxpayer will probably notice on the IRS LT11 notice is what appears in the boldest, biggest font on the front page: “Intent to seize your property or rights to property / Amount due immediately: $_______.” The heading, which actually appears above this phrase, is “notice of intent to levy and notice of your right to a hearing.” The right to a hearing is key because without it the IRS can’t move forward with levies. Some of the types of property that become subject to levy are listed on the first page of the LT11 notice: wages and other income, bank accounts, business or personal assets (including your car and home), Alaska Permanent Fund dividend and state tax refund, Social Security benefits.

Another major difference between LT11 and CP504 is where the letter comes from. The office address is in the upper left corner of the notice, and the LT letters will come from ACS or “ACS Support.” ACS stands for “Automated Collection System.” ACS is difficult to define because it is an IRS operation/function, it is a physical place (or places) with support sites in Atlanta, Cincinnati, Fresno, Kansas City, and Philadelphia, and it is a case status. According to the Internal Revenue Manual:

Automated Collection System Support (ACSS) is a Compliance Operation, supporting ACS Call-Sites, resolving correspondence from taxpayers, their representatives, and/or third party contacts. These include Taxpayer Delinquent Accounts (TDA) with a balance due and/or Taxpayer Delinquency Investigations (TDI) with delinquent returns.

IRM (02-20-2018)

As for the “what you should do immediately” section of the letter, the options are (1) pay what is owed; (2) make arrangements to pay/resolve what is owed; or (3) request a Collection Due Process hearing. If you do not believe you are responsible for the tax, it might be worth while to file a CDP hearing request. If you know that you owe, but can’t pay, then you’ll want to explore other resolution alternatives such as an installment agreement or offer in compromise. Everything from this point on in your case is extremely time sensitive. Even if you’ve been able to fly under the radar for several months, once you’re in collections, things start to move more quickly. A tax attorney can help you decide which is best for your individual circumstances, help you to meet important deadlines, and get you back on track with the IRS.

Contact us today for more information or a free consultation!

Deciphering the IRS CP504 Notice

The CP504 notice is one of the most misunderstood IRS notices. To the average inexperienced taxpayer, the heading can be completely terrifying: “Notice of intent to seize (levy) your property or rights to property.” The next line, appearing in a larger, bold font states “Amount due immediately: $XX,XXX.” Just for good measure, the word “immediately” appears three more times on the first page of the notice. If that weren’t enough, the CP504 often arrives via certified mail, so it cannot be easily ignored.

If you have a healthy heart and you get past the first page without experiencing any serious cardiac symptoms, you’ll notice there are a total of 5 pages of light reading (precise length will vary and will likely increase over time as the IRS discovers creative new ways to torment us). To summarize, you’ll find multiple options for paying in full, including a nifty payment voucher to make paying the IRS as convenient as possible. You’ll see information about how to appeal the actions specified in this letter, as well as information about penalties charged, interest rates, and what will happen if you don’t respond to the notice. The newest addition to the IRS CP504 notice is a paragraph describing the passport revocation provisions of the Fixing America’s Surface Transportation (FAST) Act. This is the legislation that calls for revocation (or denial) of passports where a taxpayer is considered “seriously delinquent” (meaning they owe more than $52k and have not made arrangements with the IRS to pay).

So, what makes this notice so difficult to understand? Let’s go back to the first page. For most red-blooded humans, after they sign for the letter and get it open, there is an immediate emotional reaction to the first couple lines (“Notice of intent to levy” and “Amount due immediately”) that somehow prevents them from reading beyond those horrifying words to see what it all really means. Is this a catch-all “intent to levy” notice? Is the IRS moments away from emptying your bank account or issuing a wage garnishment? Maybe not, actually. The CP504 notice informs you of the government’s intent to levy a very specific asset type: your state tax refund. This is actually explained fully on page three: “In most other situations, before we levy on your property or rights to property [defined as income, bank accounts, personal assets], we’ll send you a notice that gives you the opportunity to request a Collection Due Process hearing, unless you have already received one.”

Now this is where the attorney in me wants to chose my words carefully and my lawyer instincts go on red alert. Please do not misinterpret what I have said in this article. I am not saying that the CP504 certified mail notice is “no big deal.” I am not saying it is not urgent. I am definitely not saying you can ignore it. What I am saying, though, is that in most cases you’ll get another warning (another letter) before the IRS engages in active collections. As you can see, the IRS does not want you to feel too comfortable, so they avoid using completely definitive phrasing in this letter. The fact is there are always exceptions, and sometimes they make mistakes, and sometimes you’ll get a CP504 when you’ve already previously received the more urgent levy warning letter that includes an explanation of your due process rights.

So, while the CP504 certified mail notice is probably not the last notice you’ll receive from the IRS, it’s also not the first. When someone calls because they received a CP504, that tells me there is a little bit of history; it tells me that prior notices have been sent and the tax issues have not been resolved. The silver lining is that I also know we still have time to jump in and fix things. But the window is small, and it closes quickly. If your tax issues are not resolved at this critical stage, your account will undoubtedly end up in the IRS Collections Department, which will present a whole different set of challenges.

Contact us today with any further questions!

How to Read an IRS Letter Notice

I Received A Letter From The IRS – Now What?

This article presupposes that you will actually open your IRS correspondence instead of tossing it out or leaving it on your desk unopened. Yes, letters from the IRS can be frightening, but you do yourself no favors by pretending that you didn’t receive it, so OPEN IT… that’s step one.

Next, you’ll want to pay attention to the information in the top right corner of the received letter from IRS. There you’ll find important details such as the notice number/code, the tax year(s) involved, the notice date, your social security number or tax ID number, and IRS contact info. I like to keep IRS notices in chronological order. Your IRS tax account is continually evolving (hopefully your balance is shrinking instead of growing) so notices that are over a year old are of little value. The “tax year” is an important piece of information, especially if you owe for more than one year or tax period. Some people will automatically glance at the amount due in the letter (which is normally in the boldest and biggest font on the page) and assume that’s their total balance, but many, if not most, IRS tax notices address individual years. So, if you’re not careful in the way you read an IRS notice, you could think you owe far less than what you actually owe. If you want the IRS to teach you about your notice, you can search by notice number on the IRS website.

Also, you should take note of the IRS address in the top left corner of the letter or notice. Your notice could come from any number of far-away locations:

  1. Holtsville, NY
  2. Ogden, UT
  3. Kansas City, MO
  4. Cincinnati, OH

Sometimes they come from close by, but that isn’t necessarily a bad thing. For example, many of our California clients receive notices from Fresno, CA. The IRS Office in Fresno is one of the main hubs for the IRS, so that city could be included in the list above. Having said that, if you receive an IRS letter from really close by, it could mean that your account has been assigned to a local field agent, aka “revenue officer.” If you receive mail from an IRS revenue officer, then that means your account has been singled out as needing special attention, possibly due to multiple missing returns, a very high balance, delinquent business/payroll taxes, or all of these things.

Most of the time the IRS reveals the main purpose of the notice in the first line. For example, I am currently looking at a CP49 notice from Fresno, CA, and the first line states “We applied your 2018 Form 1040 overpayment to an unpaid balance… Amount due immediately: $7,946.93.” It goes on to show exactly how much was applied and where it was applied, and the $7,947 is what is left to pay for one specific year.

If there’s anything in this particular letter that throws people off, it’s the line “Amount due immediately: $7,946.93.” As stated earlier, the eye is drawn to this line since it is the biggest and boldest font on the page. If you don’t continue to read, you might assume that all previous deals are off and the IRS is demanding full payment “immediately.” There’s even a payment coupon directly below on the first page. However, an overpayment will obviously not default an installment agreement that’s already in effect, and the letter confirms this, but you wouldn’t know it if you only read the first couple lines.

I always recommend a careful reading of the entire IRS tax letters, but this is a good way to get started.

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