IA Set-Up Fees

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The IRS charges a one-time processing fee for setting up an installment agreement (IA). The fee is $105 for most people. However, if you agree to a “direct debit” IA — meaning that you allow the IRS to automatically debit your bank account each month — then the IRS charges only $52. This option is attractive, but some taxpayers are reluctant to give the IRS their bank information and would rather just send them a check. The IA set-up fee is even lower ($43) if your income is below the IRS’ poverty threshhold.

The IRS is usually willing to take the set-up fee out of your first payment as long as the payment amount is sufficient to cover the fee. For example, if your set-up fee is $105 and your monthly payment is $200, then the IRS will take $105 out of your first month’s payment and apply $95 to your back tax debt.

If you can afford to pay your entire tax debt in 3 months or sooner, then the best option is to obtain a “120 day extension to full pay.” You only have 3 months to pay, but you completely avoid having to pay any kind of set-up fee.

2013 IRS Tax Calendar Now Available

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You may pre-order your 2013 Tax Calendar for Small Businesses and Self-Employed (Publication 1518) by following this link to the IRS website or by calling (800) 829-3676.  My experience with IRS customer service personnel on the tax relief line leads me to believe that it would save you a lot of time by just ordering online.  It took me a whole 2 minutes.  You can order up to 5 copies for free and they will be shipped out in December.  The tax calendar is full of useful information, tips, and deadlines.

Don’t like poking holes in your wall?  Publication 1518 is also available in almost every other format imaginable besides a circular stone tablet (I don’t recall this being the case last year):

  1. Online Calendar
  2. “CalendarConnector” Desktop Tool
  3. PDF version
  4. Calendar subscription that will sync up with Outlook (for PC) or iCal (for Mac)

Fresh Start Tax Relief Deadline Looms

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The Tax Penalty Relief provisions of the Internal Revenue Service’s (IRS) Fresh Start Tax Relief programs announced earlier this year, have a crucial deadline of October 15, 2012, next Monday. The IRS announced earlier in the year new penalty relief for the unemployed on failure-to-pay penalties, which are one of the biggest penalties a financially distressed taxpayer faces on an IRS tax bill.

To assist those most in need, a six-month grace period on failure-to-pay penalties was made available to certain wage earners and self-employed individuals. The request for an extension of time to pay will result in relief from the failure to pay penalty for tax year 2011 only if the tax, interest and any other penalties are fully paid by October 15, 2012.

The penalty relief is available to two categories of taxpayers:

  • Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17 deadline for filing a federal tax return earlier this year.
  • Self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.

This specific penalty relief is subject to income limits. A taxpayer’s income must not exceed $200,000 if he or she files as married filing jointly or not exceed $100,000 if he or she files as single or head of household. This penalty relief is also restricted to taxpayers whose calendar year 2011 balance due does not exceed $50,000.

The failure-to-pay penalty is generally half of 1 percent per month with an upper limit of 25 percent. Under this new relief, taxpayers can avoid that penalty until next Monday, October 15, 2012. However, the IRS is still legally required to charge interest on unpaid back taxes and does not have the authority to waive this charge, which is currently 3 percent on an annual basis.

Know Your Taxpayer Rights

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Taxpayer rights are listed in Publication 1 as follows:

  1. Privacy and Confidentiality
  2. Professional and Courteous Service
  3. Representation
  4. Payment of Only the Correct Amount of Tax
  5. Help with Unresolved Tax Problems
  6. Appeals and Judicial Review
  7. Relief from Certain Penalties and Interest

There are actually 8 taxpayer rights, but the first one is a complete farce.  The first is entitled “Protection of Your Rights” in Pub 1, and it is described as follows:

IRS employees will explain and protect your rights as a taxpayer throughout your contact with us.

If that were really true then you would not need right #3 — you would never need a tax attorney — because the IRS would have your back every step of the way.  You wouldn’t need right #5 because there would be no unresolved tax problems.  And you wouldn’t need rights #6 or #7 because the IRS would always get it right the first time.

The truth is the IRS’ top priority is to collect 100% of the tax due, not protect your rights.   And they will make this abundantly clear throughout your contact with them.  That’s why the most important right is to have professional representation — just as tax relief is not automatic, your taxpayer rights are not self-enforcing.

Do I Need an EIN?

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Most people, including some IRS personnel, call it an EIN number.  But the “N” in the acronym stands for “Number,” so it should be referred to simply as an “EIN,” unless you mean to say “Employer Identification Number Number,” which is just silly.

The EIN is a federal tax identification number used by the IRS to identify most businesses.  An EIN number is generally tied to a social security number so that if a tax debt is incurred, the IRS can track down a “responsible party” for payment.  If your business is not considered a separate entity for tax purposes and you will only be required to file an individual 1040 tax return, such as in the case of a sole proprietorship, you do not need an EIN.  However, if any of the following factors apply to you, then an EIN is needed:

  • You have employees
  • Your business is a partnership or corporation
  • You are required to file employment tax returns
  • You are required to file excise tax returns
  • You are required to file alcohol, tobacco and firearms returns
  • You withhold taxes on income, other than wages, paid to a non-resident alien
  • You have a Keogh plan
  • You are involved with any type of organization listed here

You do not need a tax attorney to help you apply for an EIN — it is easy and free.  The best way to obtain an EIN is to apply online.  But you may also apply by fax, phone, or mail if you insist on doing it the hard way.

IRS First Impressions

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I always like to read about first-time IRS experiences.  The taxpayer usually expresses surprise — either that the IRS is “nicer” or “meaner” than previously thought.  Of course, the IRS is neither nice nor mean.  It is a massive agency run by thousands of employees, any one of whom may be nice or mean, polite or rude, skilled or utterly incompetent.  And, for better or worse, impressions of the IRS as a whole are often formed based on interactions with one or two of its representatives.

IRS first impressions are also colored by the nature of the contact: is the taxpayer calling to request account transcripts, to report identity theft, to check the status of a refund, to try to resolve a back tax debt, or to check on the status of an Offer in Compromise?  Even thought IRS personnel are trained to be cordial regardless of the circumstances, when taxes are owed or tax returns are missing, it’s naturally harder to be “nice.”

Here are a couple first impression stories that you might like:

1. Micki Bare mostly has a hard time finding her local IRS walk-in office

2. Rev. James Snyder talks affectionately about his first IRS love letter

 

 

Churches: Avoid Mentioning Romney or Obama

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It is common for some churches and religious leaders to integrate current events and circumstances into their sermons.  Currently the hottest topics around the nation happen to be political, as the Republicans and Democrats work around the clock to impress voters.  However, if they care to avoid tax problems, churches have to be very careful not to come out in support of one candidate over another.  Out of an abundance of caution, churches (and those who speak on their behalf) should not mention specific candidates this election year.  In fact, they should do little more than encourage their congregations to vote, and maybe provide non-partisan voter education information.

Under the Internal Revenue Code, all section 501(c)(3) organizations are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office. Contributions to political campaign funds or public statements of position (verbal or written) made on behalf of the organization in favor of or in opposition to any candidate for public office clearly violate the prohibition against political campaign activity.  Violating this prohibition may result in denial or revocation of tax-exempt status and the imposition of certain excise taxes.

~ www.irs.gov

Ordinary people are going to talk about politics at church; this is not the kind of activity that is prohibited by 501(c)(3).  But if you hear anything (or read anything) coming from those with authority to speak for your church that favors one candidate over another, or has the effect of favoring one of the candidates, you can be sure that this is a violation of the Internal Revenue Code.  Consult a tax attorney for more information.

 

Dissipated Asset No Longer the Barrier it Once Was

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

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

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

What About Your "Other Unsecured Debts"?

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Occasionally our clients are strapped with other unsecured debts besides their tax debt and they seek advice on whether or not they should file bankruptcy, believing that a bankruptcy would wipe out everything they owe. 

Sometimes it makes sense to file bankruptcy to achieve tax relief, but it is definitely not for everyone.  There is a formula used to determine if your tax liabilities may legally be discharged in bankruptcy.  Tax debts more than three years old are normally dischargeable, but this is only the general rule.  Each tax year must meet a fairly elaborate set of criteria (they are called “eighth priority” taxes by the IRS)  otherwise they are not dischargeable in bankruptcy.

In a chapter 7 bankruptcy, besides taxes that are entitled to eighty priority, the following tax liabilities are not subject to discharge:

  • taxes for which no return was filed
  • taxes for which a fraudulent return was filed
  • taxes that the taxpayer willfully attempted to evade
  • taxes for which a late return was filed (after 2 years before the bankruptcy)

OIC Comes in Different Flavors

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It may surprise you to learn that there is a tax resolution program on the books that permits the IRS to write off a tax liability or settle a tax debt for less than what is owed even though the taxpayer has the ability to pay it in full.

You’ve probably heard of the Offer in Compromise (a.k.a., tax settlement), but you may not be aware that there are several different kinds of offers.  Here is a brief overview:

  1. Doubt as to Liability Offer: Genuine doubt exists that the IRS has correctly determined the amount owed.
  2. Doubt as to Collectibility Offer: Taxpayer cannot fully pay the tax due; therefore, the IRS accepts an amount equal to what it reasonably can expect to collect — “Reasonable Collection Potential” (RCP) — as payment in full.
  3. Doubt as to Collectibility (Special Circumstances): Taxpayer cannot fully pay the tax due but has proven special circumstances that warrant acceptance for less than RCP.
  4. Effective Tax Administration Offer: RCP is greater than the liability (i.e., on paper the taxpayer has the ability to pay in full) but there are economic or public policy/equity circumstances that would justify accepting the offer for an amount less than full payment.

Some additional requirements for ETA Offers:

  • Taxpayer does not qualify for consideration under the other OIC programs
  • The taxes can be paid in full either by lump sum payment or via installment agreement
  • compromise of the liability does not undermine voluntary compliance with the tax laws