IRS Notices–What They Mean & What You Should Do

couple receives IRS notice

If you have received a notice from the IRS, don’t panic. Yes, it can derail your plans and throw you off balance both in your personal and business life. However, in most cases, there are solutions to help make the IRS offer you a reasonable way out of the unwanted situation you have found yourself in and a good deal. This means, of course, that you will have to settle. Here are some details about the four most common notices the IRS sends, as well as ways to tackle them so you can heave a sigh of relief.

 

What Are IRS Notices?

They are letters the IRS sends you when they think you owe them taxes. There is a specific sequence followed when it comes to the types of letters you receive. Each one proposes interest, penalties, and taxes the Internal Revenue Service says you owe per tax period and each has its own significance.

 

Notice of Deficiency – What is it?

Also referred to as ticket-to-Tax Court, 90-day letter, letter 531, SNOD, CP3219A or Statutory Notice of Deficiency, the Notice of Deficiency is sent due to under-reporting income and the underpayment of tax. You usually receive it about 6 months after filing via certified mail from the IRS. Nevertheless, it may take up to 3 years after filing before you get one.

This first notice gives you significant appeal rights. If you disagree with the IRS, you have 90 days to petition to the U.S. Tax Court (after getting the Notice of Deficiency). This, automatically, gives you extra appeal rights as your case goes to the IRS Office of Appeals. Then, you might be able to skip going to Tax Court and work something out with the IRS.

Or, you could contact your local Taxpayer Advocate Service office and let them assist you in case you have received a Notice of Deficiency in error or feel that your taxpayer rights have been violated. This is also a good option if your financial situation has worsened, causing you financial hardship after getting the Notice of Deficiency or if you have tried to speak with the IRS repeatedly and have not received a response from them. However, this is where getting help from professional tax experts could make a big difference in the outcome.

What You Should Do

First of all, act quickly because you only have 90 days to do whatever needs to be done. After the 90-day deadline has passed, you won’t be getting any extensions. Remember that during this 90-day period, the IRS can NOT collect your taxes. Now, if you must appeal an IRS decision, do consider filing a petition with the Tax Court. Otherwise, the IRS will send you a bill and charge you the taxes.

Truth be told, it is quite likely for taxpayers receiving a Notice of Deficiency to miss the 90-day window or fail to make any kind of arrangements with the IRS. This always results in the IRS initiating their collection procedure through tax levies, tax liens, and other tools. For that reason, we firmly recommend contacting Innovative Tax Relief and requesting a free tax consultation for help, advice, and protection. You may even have options to reduce Notice of Deficiency-related penalties or even remove them in their entirety.

 

Notice of Intent – What is it?

The IRS will send you a Notice of Intent when you have not paid a balance. This type of letter informs you that the IRS will start the process to collect to satisfy your tax debt. This letter may also represent the IRS’s intent to seize your property (levy) if you don’t pay or set up a payment arrangement. Most of the time, a Notice of Intent is sent when you have missed at least three payments in a row or failed to file on time. This is why it is critical that you stay current with filling your taxes. In the opposite case, you are regarded as in default even if you have paid all of the arranged payments. Then, the IRS considers you as an agreement breaker and sends you into Collections. This means that they will garnish your wages. Whether they continue accepting your payments or not is up to them, though

When taxpayers receive a Notice of Intent, they usually panic. However, in reality, a Notice of Intent is just a heads up from the IRS that they are about to start the process to collect if you do not try to set up a payment arrangement or pay. Nevertheless, don’t take it lightly because you are heading down the path to a levy. So, it is best to take some sort of action pronto before it is too late.

Beware, though, at this point, as there are two different types of Notices, the (1) Notice of Intent to Levy and the (2) Final Notice of Intent to Levy. The second one is the last notice the IRS will send you before they seize your assets, and gives the Service the legal right to do so. This means that you have very little time before the Internal Revenue Services can levy your bank account. On some rare occasions, the IRS will only issue a Final Notice of Intent to Levy. If you find yourself in this situation, seek professional assistance immediately because a levy is about to happen.

What You Should Do

First of all, know your rights. The IRS is obliged by law to give taxpayers proper written notice before they do anything with your bank account (i.e., levy the account), per the Internal Revenue Code Section 6330. That notice should definitely include details about your right to appeal the imminent collection action within a month’s time (30 days). In the majority of cases, the Notice of Intent and the Final Notice of Intent are around 4-5 months apart, which means you have more than 4 months to prepare for the Final Notice of Intent.

Nevertheless, if you receive any of these letters, please have a tax professional handle your case. We have seen too many taxpayers disclosing information that hurt them (or not disclosing the right details). So, their attempt to manage their own case actually backfired.

 

Notice of Default – What is it?

A Notice of Default (aka Notice of Demand or CP523) is sent when you have been in an agreement with the IRS and has defaulted. It informs you that you have missed several payments to a creditor or lender (normally more than three in a row). You may also receive a Notice of Default if you did not file on time from that point forward when you set up the payment agreement.

When you have reached the point of defaulting payments and receiving a Notice of Default, the IRS stops accepting your payments. Even worse, they continue accepting your payment and, at the same time, send you into Collections AND garnish your wages because you broke the agreement. It should also be noted that the IRS may terminate your installment agreement without letting you know first if the Secretary (or an authorized representative) considers the collection of the due tax is in jeopardy.

What You Should Do

Respond to it within 90 days of receiving the notice so the IRS does not file a federal tax lien (or a levy) that will enable them to seize your assets. So, ensure you (or your tax professional) contact the IRS to reinstate your payment plan. It is also paramount that you make a payment before the payment deadline or termination date listed on the Notice of Default – you might be able to get your installment plan back in good standing again. You may need to provide some information about your assets, though, in this case or even be asked to fill out a new Installment Agreement (Form 433-D).

You should also contact the IRS if you believe that they have terminated your payment agreement by mistake or if you disagree with the due amount. You will find all contact details in the letter.

 

Notice of Garnishment – What is it?

The IRS is free to garnish your wages if you have tax debt and may even do so without getting a judgment first. It should be noted that the IRS is the only creditor that has this kind of power – all other types of creditors need a court ruling first. Plus, the sum any other regular collector takes is a fraction of what the IRS can take. Fortunately, the IRS provides several different options for you to repay your tax debt and skip the unwanted wage garnishment process.

When it comes to the max sum creditors (judgment creditors and others) can take from your wages, these are defined by federal and state laws. However, the tax code enables the IRS to take as much as it can and leave you with the necessary amount you need (per the tax code) to pay for your basic living essentials. As for the sum you can keep (protected wage), it is directly related to the number of exemptions you claim for tax purposes. For instance, a married individual filing jointly (paid monthly) that claims two exemptions can keep $1,625. A single individual claiming five exemptions (gets paid weekly) is allowed to keep slightly less than $480. the IRS garnishes anything above these sums.

What Should You Do

Since the IRS sends out several notices before garnishing your wages, once garnishment begins your options are limited. You can either pay off the tax debt, prove to the IRS that the garnishment is creating a financial hardship for you and attempt to get it reduced, or file an Offer in Compromise.

And, if you are wondering whether you could plead with your employer to get your wages back, the answer is no. Since there is a court order to garnish your salary, they won’t risk facing a penalty of law for not abiding by it. It is not up to them, and it is not their choice – just something they are obliged to do.

Also, don’t think that quitting your current job and getting a new one will save you from having your wage garnished. The court order follows you wherever you go, including your new position. Finally, disputing the Notice of Garnishment won’t get you anywhere if you truly owe the tax debt. You will only waste money and time that you could spend elsewhere (i.e., to reduce or get rid of your debt).

 

If You’ve Received a Notice From the IRS, We Can Help

No matter the situation you are facing, know that there are ways out and solutions to consider. Just contact the tax relief experts at Innovative Tax Relief and ask for a free consultation. Let’s find the best way out of these stressful circumstances, always with your best financial interest in mind.

Understanding the IRS Statute of Limitations

You have probably been bombarded with tips from your tax professional to hang onto copies of your tax returns and any relevant receipts and forms after you file every single year. The question that arises is, “Just how long do you need to save these copies and receipts?”. With a statute of limitations, you can now have a definite answer.

In a nutshell, this means that the IRS cannot look at your old tax returns after a certain number of years have passed. Hence, you cannot be audited after that time frame has passed. Unfortunately, the statute of limitations is largely dependent on whether you have indeed filed the return and whether you have included fraudulent information on it.

To help you better understand the details of the IRS Statute of Limitations, we have prepared this guide. Note, though, that this is basic information. For an in-depth assessment of your case, please contact our tax experts.

 

What Is A Statute of Limitations?

In tax law, a statute of limitations is one of the most critical deadlines for the assessment of tax. It gives the IRS an X-year window to assess your tax files and attempt to collect your unpaid taxes. Just how many years back can the IRS go to assess these files depends on several factors. The truth is, though, that once the given time period is up, the IRS is obliged to stop its collection efforts.

Nevertheless, there are several exceptions to the general rule (see below for details) according to varying federal laws. This means that, under certain circumstances, like, for example, failure to file a tax return, the assessing period is extended. In some cases, it never starts to run and remains “open” perpetually.

It is, therefore, crucial that you familiarize yourself with the current exceptions, so you know what to expect and what your rights and obligations as a taxpayer, in each case, are.

 

How Long Is the IRS Statute of Limitations?

The general rule dictates that the IRS has the right to go through your tax files up to 10 years from the time of debt assessment which is the date your tax return is processed (not filed or received). In other words, the IRS can legally try to collect unpaid tax debt for up to 10 years from when your tax return was assessed. After the end of this ten-year period, the IRS must cease its collection attempts.

Now, here comes the confusion. The IRC (Internal Revenue Code) that governs federal tax laws in the USA was also published under the U.S. Code Title 26. So, don’t be surprised if you often see IRC statutes being referred to as statutes of limitations (i.e., the IRC § 6501 and 26 U.S. Code § 6501 share, more or less, the same details).

Irrespective of the format, the regulations established by both sets of code affect millions of taxpayers, including recording the taxpayer’s tax liability, the deadline for assessing tax, and other statutes of limitations.

26 U.S. Code § 6501(a), in particular, mentions that the IRS shall assess a taxpayer that owes taxes within three years after the filing of the return, regardless of when the return was filed (on or after the prescribed date). The exceptions referenced in this code are set forth under 26 U.S. Code § 6501(c), and give the Internal Revenue Service extra time to assess taxes in the following cases:

  • Up to 6 years – If there has been a significant omission of items, like, for example, an omission of a sum over $5,000. Also, if a taxpayer does not share specific details regarding their personal holding company return.
  • Unlimited amount of time – In case of tax evasion (a willful or deliberate attempt on behalf of the taxpayer to evade taxes). Acting with a lack of due care and negligence are two cases when this time extension does not apply. The rule also applies when the taxpayer files inaccurate or false tax returns (intentionally to evade taxes) or when they fail to file a tax return.

It becomes apparent that the federal law gives the IRS all the time they need to assess tax (even decades) when a taxpayer engages in fraudulent or intentional acts (i.e., reporting untruthful information on their income tax return). For that reason, it is crucial that you understand that, say, lying to an IRS civil auditor or even worse, an IRS Criminal Investigation agent about the prior tax fraud or tax evasion (in cases where tax evasion or fraud is suspected) gives the IRS and IRS Criminal Investigation Division unlimited time to prosecute you, especially when the last affirmative act of tax evasion took place in the 5- 6-year criminal statute.

Important Note: Depending on the specific criminal tax statute, the IRS can criminally prosecute income tax evasion in the following 5-6 years after the tax evasion attempt has occurred. This is a major consideration as the IRS won’t be simply civilly assessing additional tax that has no statute of limitations after tax fraud has been identified.

 

When Does the IRS Statute of Limitations Begin and End?

The clock of the statute of limitations begins to tick on the date your tax return is assessed (NOT when it’s sent or received) or of your account’s last activity, which is usually the date you last used your account or the date you last made a payment. Nevertheless, it may also include the date you entered a payment agreement, made a promise to pay, or acknowledged debt liability.

However, take note that you may hear from a debt collector even after the expiration of the statute of limitations. According to law, they can file a lawsuit against you at any given time. In case you are being sued for old tax debt, your tax attorney can try to avoid a judgment being entered against you by using the expired statute of limitations as your defense mechanism.

So, if you have an old debt, knowing whether the statute of limitations has expired or not will help you decide whether to leave that old debt alone or pay it off. This involves being aware of when your tax debt was assessed/processed (NOT when you sent your tax return or when it was received) – you will need to have your tax transcripts pulled to know these details.

 

Tolling Events — Events That Pause the Clock on the Statute of Limitations

Under certain circumstances, the statute of limitations can be tolled. This means that the running of the time period stops until a law-specific event occurs. When that happens, the taxpayer gets a time extension since the period of time set forth by the statute of limitations is either being delayed or paused/suspended.

However, it’s important to note that the length of time the statute of limitations was paused for the tolling event will extend the statute of limitations expiration date. So tolling events simply pause the statute of limitations but don’t actually shorten it.

Examples of tolling events are:

Filing for Bankruptcy

According to Chapter 3, the taxpayer gets a 3-month pause while Chapter 13 gives them 3 to 5 years.

Requesting an Offer in Compromise

This one adds about 12 months. However, the extra time is added to the original statute of limitations expiration date.

Lack of Legal Capacity

It applies when one of the parties involved is under a legal disability (i.e., mental illness) that does not allow them to initiate a legal action on their own behalf at the time the cause of action accrues. Once the disability is removed, the statute of limitations will begin to run again and will not be affected by subsequent disability unless the statute specifies otherwise.

Unconditional Promise to Pay

Either a debt acknowledgment or an unconditional promise to pay the due debt may toll the statute of limitations for obligation or debt. You will have to wait until the payment established by the acknowledgment or promise to pay has arrived before the suspension of the lawsuit that enforces payment of the debt. The period of limitations will begin again upon that due date.

Cause of Action Has Been Concealed (Fraudulently)

In this case, the statute is suspended until the action is discovered via the exercise of due diligence.

Note: Mere ignorance, failure, or silence to disclose the existence of a cause of action does not generally toll the statute of limitations. This is particularly true in cases when the facts could have been earned by diligence or inquiry. The statute of limitations is also NOT tolled (unless otherwise provided by the statute) if the taxpayer is absent from the jurisdiction.

 

How to Use the Statute of Limitations To Your Advantage

Sometimes the best way to take advantage of the statute of limitations is to simply let it run its course. We’ll use an example to illustrate.

Let’s say you’re a truck driver and back in 2006 you received a 1099 for the amount of $200,000 but only netted $50,000 because of the high costs associated with driving a truck. You avoided filing your taxes for that year and so the IRS eventually sends you a tax bill based on the entire $200,000. In reality, you should only have to pay tax on $50,000. But because the IRS filed for you with NO tax deductions and due to added penalties and fees, your tax debt is now $70k–more than you even made that year!

So you do what most people do–you go to a local tax filing company and they file an amended tax return and get your tax debt reduced to a certain extent. But you also still have IRS penalties and fees to deal with. However, if you had simply allowed the statute of limitations to run its course, you would have ended up owing the IRS nothing.

The key, of course, is to know exactly when the statute of limitations began. You or a tax expert would need to pull your tax transcripts to know that information.

You could also file for what’s called “Currently Non-Collectible Status” or get set up on a Partial Payment Installment Agreement (PPIA) based on a hardship status and make, for example, $25-$50 a month payments to the IRS until the statute of limitations expires. However, we should tell you that it’s very very difficult for an individual to get set up on a PPIA dealing directly with the IRS; it’s something that you will need the help of a tax expert to do.

Irrespective of your particular case, it is strongly advised to be represented by knowledgeable IRS tax experts with experience in statute of limitations cases and ways to make the most of them. So if you are facing IRS tax debt and collection, contact us and we will be happy to provide you with a free initial consultation, answer any questions that have been troubling you, and help you get out of this undesirable circumstance you have found yourself in.

What Is An IRS Revenue Officer & What Do They Do?

IRS Revenue Officer on the way to visit a business

Dealing with an IRS Revenue Office can be a challenging and, sometimes, even nerve-racking experience, especially when one shows up at your business or house doorstep unannounced. However, most of the time, these feelings of anxiety and stress are misplaced.

This guide will shed some light on the details surrounding IRS Revenue Officers, what exactly they do, and what to do if one contacts you. We also dispel some common myths and share some handy tips and information so you can use the acquired knowledge to your best advantage. 

 

What Does an IRS Revenue Officer Do?

Often confused with an IRS Revenue Agent, an IRS Revenue Officer is responsible for collecting money (taxes). They are civil employees employed by the IRS Field Collection office and collect taxes by interviewing taxpayers and running asset checks. If they cannot make contact with a taxpayer, they will work with third parties to gather the information they need. 

The general powers of an IRS Revenue Officer include:

  • Finding liens against you.
  • Interviewing 3rd parties about you.
  • Summoning records.
  • Issuing levies. 
  • Commencing seizure proceedings against you without needing a court order (see notes below). 
  • Referring you to the IRS CID if required. 
  • Levying any receivable accounts, bank accounts, subpoena documents, wages, or retirement funds. 

Remember that an IRS Revenue Officer is assigned to specific cases, not just any tax-debt-related case. In the overwhelming majority of cases, an IRS Revenue Officer will visit you if:

(1) The tax issue is associated with your business.

(2) Your tax debt is from older tax years.

(3) Your tax debt exceeds $100,000. 

 

Things to Know:

  • IRS Revenue Officers (1) do NOT carry weapons, (2) can NOT investigate you criminally, and (3) have absolutely NO right/authority to arrest you. 
  • Their badge is usually a plastic lanyard as opposed to that of an IRS Criminal Investigation Divisions (CID) officer, which is golden. 
  • An IRS Revenue Officer has a limited ability when it comes to seizing a taxpayer’s home, thanks to the Revenue and Reform Act of 1998. 
  • Anybody with a 4-year degree (not necessarily with a financial-related background) can get a job as a Revenue Officer. Before one visits you, though, they undergo months of (initial) training, and then ongoing training. 

 

What’s the Difference Between an IRS Revenue Officer and a Revenue Agent?

As already mentioned before, an IRS Revenue Officer collects taxes. Interestingly, they are not graded based on the sums they collect rather than how quickly they close cases. Although this is not always in the taxpayer’s favor, there may be cases when a taxpayer and a Revenue Officer have common goals and aspirations – for the case to be over and done with. 

IRS Revenue Agents, on the other hand, are assigned a different task – that of auditing taxpayers. So, the person that will collect taxes from you is NOT the same individual as the one who performs the audit

How Things Work – The Drill

As soon as the IRS assesses the tax, you will be called to pay the due amount (i.e., withholdings and unpaid employee taxes for business owners). If you cannot pay, the IRS will send out several notices. Then, the IRS will make contact with you to identify who is to blame for the underpayment. In doing so (most of the time, at least) an IRS Revenue Officer will visit your business and seek to assess the TFRP (Trust Fund Recovery Penalty), which is another word for the taxes, against as many taxpayers as possible. 

Therefore, you can understand that it is not just you, the business owner, who is at risk for a TFRP assessment – it includes everybody else also managing the finances of the company. It is worth noting that many times, these assessments reveal employees embezzling money from the business.  

Note: Depending on the amount of due tax, your collection case may as well stay with the ACS (Automated Collections System). This also happens when a taxpayer owes money to the IRS. In this case, you may never see an IRS Revenue Officer coming your way. Instead, you will be sent notifications of past due balance. If these are ignored, the IRS will try to collect the owed money via wage garnishments, bank levies, and liens. 

 

What To Do If an IRS Revenue Officer Contacts You

Nine out of ten times, the IRS Revenue Officer will try to determine your ability to pay. That aside, though, they may even investigate you for a TFRP assessment that you have not paid (this usually happens when you have unpaid employee taxes). No matter the reason why an IRS Revenue Officer shows up at your business, we strongly recommend ensuring you get the best representation possible. This can come from an individual that is helping you with this tax matter. You may, however, need a more robust representation, such as a lawyer or tax attorney (many taxpayers seek legal advice before giving an IRS employee any testimony). 

Keep in mind that things are usually fairly serious, especially considering that the IRS has half the field officers they used to have ten years ago. So, there must be a very important reason why you were assigned an IRS Revenue Officer. And, don’t think even for a second that the IRS will take it easy on you. 

When a Revenue Officer visits you for the first time, they should identify themselves by showing their ID (remember, badge carriers are usually from the Criminal Investigation Department). If you are certain that you don’t have fraudsters in front of you, you can sit down with the Revenue Officer and hear the “collection alternative” (i.e., Offer in Compromise) they have to offer you. If you agree to the proposed terms (meaning, a reasonable agreement is presented to you), you put everything behind you. If not, refer to the next section for the appropriate course of action.

In any case, you may want to consult with your tax professional before the IRS Revenue Officer pays their visit. Experienced tax representatives can be of significant assistance to you as they will:

  • Help you figure out your options.
  • Come to the negotiation table with the IRS agent knowing what to do. 
  • Deal with your IRS Revenue Officer and get a better agreement for you (than you). 

Tips:

  • Be honest with your Revenue Officer. You don’t want to annoy them by doing things like incurring a lot of new liabilities or hiding your assets while dealing with them. Just work with them. 
  • Cooperating with an IRS Revenue Officer does NOT mean that you must push yourself into something without considering the “aftermath” and consulting a tax professional. 

 

What To Do If You’re Getting Nowhere With the Revenue Officer

If the IRS Revenue Officer is being unfair or things show that you two will not see eye to eye anytime soon, you could:

  • Speak with their Group Manager (but do not keep your hopes up that they will take your side).
  • Address the Territory Manager (a step above the Group Manager). In this case, ensure you can prove that the IRS Revenue Officer did not act correctly. Otherwise, it may get you into deeper waters. 
  • Wait until you receive a Notice of Federal Tax Lien, Notice of Levy, or a notice proposing a levy and request for a CDP (Collection Due Process) hearing. Then, you or your tax representative can negotiate a better deal with a settlement officer. This action also puts the brakes on the revenue officer, who can do nothing while you appeal. 

Note:

  • It is required by law an IRS Revenue Officer makes their first contact in person, so do not expect a heads-up phone call. 
  • An IRS Revenue Agent will most likely notify you that you are under examination by sending notices to you before a field agent schedules their visit to your business or home. 
  • If you are being visited by an IRS CID officer, call a tax attorney immediately. 
  • If an IRS Revenue Officer or field agent leaves a note or business card on your door, use the contact information on the card and have your representative (i.e., tax or law firm) get in touch with the Revenue Officer. You are either being assessed for (probably) an underpayment of employee withholding or have a tax debt. 

 

The Best Course of Action to Take with a Revenue Officer

Your best bet when an IRS Revenue Officer visits you is to hire a tax professional or tax attorney to help you with your tax issue. Unlike what many people think, this does NOT make you look “guilty” in the eyes of the IRS agent. In fact, most of the time, IRS Revenue Officers admit being glad the taxpayer hired a tax or legal representative because they, as government employees, are not allowed to give any advice (legal or otherwise) that could help resolve your case in an instance. Indeed, the best IRS Revenue Officers want you to be well taken care of and represented. 

But, even if an IRS agent tells you that it is a waste of money and time to hire representation (“You could use the money you pay the tax prep company to repay your taxes”), you definitely need somebody that is 100% on your side. No matter how great a guy an IRS Revenue Officer is, they are still far from being your advocates – their position does not give them such liberty. Nor can they offer tax-related or legal advice. Plus, you will most likely be visited by a government employee that enjoys mowing over taxpayers. It is always good to know that you can get some control back into your own hands with the help of tax experts or legal representation. Plus, you can likely save a great deal of money!

 

Finally, remember that…

IRS Revenue Officers and Agents are ordinary people like the rest of us. This means that they, too, have good and bad days. They also have a significant workload they are called to manage every single day. This can force them to make decisions and offer agreements that may not be of your best interest.

Without a doubt, though, having to handle the stress and anxiety that comes with back taxes and the presence of an IRS Revenue Officer at your premises can lead to even more trouble and problems. For that reason, it is best to ensure you have a tax professional to help you resolve your issue and have your rights as a taxpayer well protected. 

 

All About Tax Penalties

dealing with tax penalties

Tax Day is the date by which you need to submit your individual tax return to the IRS (usually April the 15th each year). If you have all the money to pay your debt, then all is great. But, what happens when you lack the necessary funds? In this case, the IRS may charge tax penalties. The same applies to some other occasions.

All of that will be discussed in depth here, so you know exactly what to expect and what to do if you are called on by the IRS to pay tax penalties. 

 

What is a Tax Penalty?

The IRS charges both interest and penalties in several different instances. For example, you will be called to pay some additional costs for:

  • Failure to file – This means that you did not manage to file your tax return by April 15. Do note, though, that you can request a deadline extension. If it is approved, you won’t be charged any failure-to-file tax penalties. 
  • Failure to pay – You don’t have the money to pay the taxes on your return or are unable to make the needed payment before the expiration of the due date (April 15). Beware, in this case, because you will still have to pay your taxes within the given deadline even if your deadline extension (to file your tax return) request has been approved. 
  • Failure to pay tax – If you don’t make tax payments as you earn income (quarterly), you are penalized for late estimated tax payments. 
  • Dishonored check – You have submitted a preferred payment form (i.e., check), but your bank does not honor it.  Or in other words, your check bounces. 

If you owe money to the IRS, the Internal Revenue Service will send you a Notice of Tax Due and Demand for Payment, which includes not only the owed taxes but also the penalties and interest. 

 

What is The Penalty for Filing Taxes Late?

There are two different scenarios here, according to the Internal Revenue Code §6651(a)(1). 

If you owe taxes and fail to file your tax return on time, the IRS will start charging 5% of every unpaid tax you have to report on your return for every month you are late to file (0.5% for not paying and 4.5% for not filing). The total penalty you may be asked to pay for not filing taxes on time can add up to nearly 48% of the tax owed, plus interest. 

So, basically, the IRS begins to accumulate charges in your name. If you are more than 60 days late, the minimum penalty you will be called to pay equals to the lesser of two sums – either a specific dollar amount (for 2020, it is set at $435) or 100% of the tax required to be paid on your return (plus interest). 

Now, if you are expecting a tax refund and do not file your tax return within the due date, you won’t be charged any fees. However, you won’t be able to receive your refund until you do file your tax return.

Bear in mind that the late filing penalty is NOT the same as the penalty you get for making late payments. You are charged a late filing penalty when you don’t turn in essential tax documents on time, such as your Form 1040. The late payment penalty is applied when you are late in making your tax payments and is 0.5% of your unpaid taxes for every 30 days you do not pay your outstanding taxes. 

 

What is the Penalty for Not Filing Taxes?

If you fail to file, the IRS may file a substitute return for you, which will NOT include your standard deductions included in your return. The only exception to the substitute return is married filing separately or single filing. Under IRC § 6651(a)(1), the penalty is 5% of the due balance, plus an extra 5% for every 30 days (or a fraction thereof) during which you continue to fail filing taxes. The maximum penalty is 25%. 

Notes:

  • As soon as you pay your balance, both interest and penalties stop accruing. 
  • Even if you pay your tax in full before the month ends, the IRS will still apply full monthly charges. 
  • If you cannot pay your balance in full, you could apply for an Installment Agreement to help repay the remaining debt
  • You may be eligible for penalty relief if you have complied with the law requirements but were not able to meet your obligations toward the IRS. 
  • If you disagree with your balance, you can call 1-800-829-1040. Make sure you have all the required paperwork ready (i.e., amended return, canceled checks, etc.) when you make that call to the IRS. 

 

Do You Have to File Taxes?

You must file a tax return if you:

Note that for individual taxpayers under 65 years of age, the standard deductions are $12,000 (single filers), $24,400 for joint filers, and $18,350 for single parents (2019 IRS rules). For single filers over 65 years old, the amount climbs to $13,850 or $20,000 if you are the head of the household. For joint filers where one or both spouses are over 65, the deduction is $25,700. 

 

How is the Tax Underpayment Penalty Calculated?

Taxpayers in America pay taxes the moment they make money rather than a lump amount. And, they can pay taxes either by making estimated tax payments or via withholding. The penalty for underpayment of estimated tax is usually applied to individuals that have skipped some tax payments the previous fiscal year. To put it simply, a tax underpayment penalty is a penalty that you owe if you fail to pay enough in estimated tax payments or through withholding during the year. 

Failure to pay proper estimated tax usually comes with a penalty if you owe at least $1,000 when you file the return, per the Internal Revenue Code §6654. You might be able to make unequal payments and annualize your income as a means to lower or even avoid the penalty, though. This typically happens when you receive your income unevenly during the year. 

In some instances, you can waive this penalty:

  1. Your tax payments were (1) 90% or more of the tax liability during the year or 
  2. Your tax payments were 100% of the tax liability of the previous year. 
  3. You did not make a payment due to an out-of-the-blue event, such as a disaster or casualty. 

The IRS may also waive a tax underpayment penalty for retirees over 62 years of age or individuals that became disabled either during the current or the previous tax year. Some exceptions apply for some household employers and fishers. Ask us to give you all the details or read the IRS Publication 505

The IRS calculates your penalty for every installment separately, where they first determine the number of days you are late and then multiply that number by the interest rate that is effective for the installment period. However, you may also check whether you owe a tax underpayment penalty by using Form 2210 (Underpayment of Estimated Tax by Individuals, Estates, and Trusts) or Form 2220 (Underpayment of Estimated Tax by Corporations) depending on your case – look for the flowchart. 

If you do owe a penalty, you will need to figure out what you owe in taxes per quarter (and what you have paid in taxes during this time) to calculate the per-quarter penalty sum. Then, you will get your total penalty amount by totaling your quarterly penalties. According to the IRS, the following interest rates on underpayments apply:

  • 2.5% for the portion of an overpayment over $10,000 (for corporations).
  • 5% for underpayments and overpayments (not for corporations).
  • 4% for corporation overpayments.
  • 7% for large corporate underpayments. 
  • The federal short-term rate + 3% for taxpayers besides corporations (for underpayments).
  • The federal short-term rate + 2% for taxpayers besides corporations (for overpayments). 

Remember that all rates are determined on a quarterly basis. 

 

How Much Is the Penalty For Not Paying Estimated Taxes?

The estimated tax penalty is, at its core, an interest charge for not making estimated payments throughout the year (or sufficient estimated payments). The IRS-set quarterly rate for underpayments was 5% in the first and second quarter of 2020 and 3% in the third. This shows that taxpayers were called to pay a higher percentage quarterly rate on the first two quarter balances in 2020. It should be noted that interest is accumulated on a daily basis and is usually added to any tax you have not paid from the time of the due payment to the date you eventually pay the tax. As for the rates, they are set every three months and range around the federal short-term rate plus 3%. 

 

What Is the Tax Penalty For an Early Pension Withdrawal?

Tax breaks such as the Retirement Savings Contribution Credit comes with penalties for early withdrawal. This is the government’s measure to prevent individuals from using their retirement savings for things other than their retirement income. Generally speaking, an early withdrawal or distribution of your retirement plan is any money you cash out before you reach 59 ½ years of age. 

Note that qualified retirement plans do NOT include local or state government 457 plans, rather than:

  • A 403(b) plan (or anything similar) for public school employees and organizations that are tax exempt. 
  • A 403(a) or similar employee annuity plan.
  • A 401(k) or similar employee plan.
  • A Roth IRA
  • A Traditional IRA

The amount you withdraw from your retirement plan (a qualified one, that is) is added to your gross income. This means that you will owe the normal income tax PLUS an extra tax 10% tax penalty on the amount you have withdrawn from your retirement plan. Of course, there are exceptions for early withdrawal as well, where this is not applied. 

Note that not all distributions are taxable and subject to the 10% extra tax penalty, such as the ones you roll over to another retirement plan. Also, the following exceptions to the 10% additional tax penalty for early pension withdrawals apply (these are only some of the existing exceptions – contact us for more details):

  • You made a series of periodic and equal payments over your life expectancy, and the distribution was an installment in them. This provides that you have left employment before starting the payments if your retirement plan is not an IRA. 
  • You made a series of periodic and equal payments over the life expectancy of your beneficiary (or beneficiaries) and yourself, and the distribution was an installment in them. This provides that you have left employment before starting the payments if your retirement plan is not an IRA. 
  • You made the distribution to pay for an IRS levy.
  • You made the withdrawal to cover deductible medical expenses.
  • You made the withdrawal to cover post-secondary education expenses (applies to IRAs only).
  • You made the distribution due to permanent or total disability.
  • A beneficiary made the distribution after your death. 

Note: Reporting your withdrawal is income is still required even if you qualify for any of the exceptions. 

Here is the current tax regime of penalties for withdrawing from 401k and IRA accounts:

For distributions of up to $100,000 related to the coronavirus, the 10% is waived. The same applies to higher education expenses, first-time home purchases or new builds, medical expenses or insurance, or family circumstances (i.e., provide funds to a divorced spouse). The distributions may still be considered as income, though. Early withdrawals from these accounts are expensive unless you are over 59 ½ years old. In any other case, you may pay a 10% penalty on the account you cashed out money and federal income tax. Exceptions apply to the 10% penalty rule, though. Ask us for more details. 

 

Civil Tax Penalties

Taxpayers that are late on filing tax returns and paying tax, not prepay a sufficient sum of tax liability, or face accuracy-related problems are called to pay penalties for not meeting the given deadlines. 

In detail, the penalty for late filing applies to both non-filing and late filing and is the rate of 5% per month of the tax due (up to 25% max). For failing to pay the tax shown on the return by the due date of the payment and not paying an asserted deficiency within a short time frame after notice and demand, taxpayers face section 6651(a)(3) and 6651(a)(2) penalties, which are 0.5% per month of the sum shown as tax due (up to 25% max). Finally, taxpayers that do not prepay 90% of their tax liability via applying a prior year’s tax refund, making voluntary installment payments throughout the year, or withholding fall under Section 6654. The estimated tax penalty, in this case, applies automatically unless you can prove that you qualify for an exception (i.e., the paid sum during the subject year was greater than or equal to the tax liability for the previous year).

The failure to file penalty depends on the net tax sum required to be shown on the return, the penalty period, and the penalty rate (usually 5%). Plus, it is imposed according to the number of months during which the taxpayer has not filed, with the maximum being 4 months and one day. 

As for time extensions to file or pay, they do not affect the period for calculating the penalty for the late payment as they do not extend the due date to pay. Nevertheless, if you have paid at least 90% of the tax shown on the return by the due date, an automatic extension of time to file a tax return is treated as a time extension to repay the tax (Form 4868). This also entails that the balance is paid with the tax return as well. In any other case, the penalty applies to the total balance due from the initial due date. 

Lastly, if the IRS decides that you need to pay an additional tax that was not shown on a return. You will receive a notice that the Service has assessed an extra sum on top of what you have paid. Failure to pay this tax is subject to additional tax (0.5% for each month that the assessment is unpaid) for failure to pay (it should be paid within 21 days after your notice was issued).

Exception to Apply – General Requirements 

You can demonstrate an absence of willful neglect (reckless indifference or intentional failure) and reasonable cause for the failure to file a return.  The IRS considers the following factors, among others, to decide whether to abate the penalties or not:

  • The length of time between the event incident that was regarded as reason for noncompliance and the following compliance.
  • The taxpayer’s penalty history.
  • The taxpayer’s payment history. 
  • Whether the reasons of the taxpayer address the imposed penalty. 

Note: Record unavailability is usually not considered a reasonable cause, nor does ignorance of the law. You can also NOT claim things like unavailability of the needed information to complete the return, invalid extension, time or business pressures, forgetfulness or mistake, or a belief that no tax was due. The IRS might consider the following as constituting reasonable cause:

  • Unavoidable absence
  • Serious illness or death of the taxpayer
  • Natural disasters
  • Fire
  • Casualty

Accuracy-Related Civil Penalties

These are a group of civil penalties, including those imposed for substantially misstated valuations, those for reporting positions without adequate disclosure or substantial authority, or those for negligent reporting positions. In these cases, the taxpayer is called to pay an accuracy-related penalty. However, exceptions apply while there are several possible defenses tax practitioners can raise to help avoid these penalties.

 

Are Tax Penalties Tax Deductible?

According to the Code, no deductions can be taken for a penalty or fine that is issued for any law violation, including claiming false tax credits or deductions or misreporting income. It should be noted that a fine refers to both civil penalties and sums paid in settlement of potential liability for a penalty or fine that is not deductible. Compensatory damages paid to the government, though, is not considered as a penalty or fine. The IRS usually assesses penalties along with interest (not tax-deductible) on the due balance owed by the taxpayer. 

Let us note, at this point, that taxpayers may qualify for relief despite the fact that they cannot deduct penalties. For extenuating circumstances, and only if the IRS approves it, taxpayers may see some or all of their penalty being relieved. Nevertheless, until the due amount is paid in full, they will have to pay interest. 

What is also known is that legal expenses incurred in trying to collect or produce taxable income are not deductible anymore, according to IRS Publication 529. You can, however, fill out Schedule C to deduct expenses related to resolving tax problems linked to loss or profit from your business, or Schedule E for farm expenses and income, or Schedule E for royalties and rentals on the appropriate schedule. Nonbusiness-related expenses used to resolve tax issues are no longer deductible. 

 

How to Get a Tax Penalty Waived

Taxpayers that fail to file, pay, or deposit penalties may qualify for the first-time penalty abatement (FTA) waiver (only applies if there is reasonable cause for not paying or filing taxes on time). The IRS may grant relief to relieve this administrative waiver if certain criteria are met, such as having a clean compliance history (no penalties owed) for at least three years. You may also be eligible for the FTA waiver if you have:

  • Paid all tax due.
  • Made arrangements to pay all tax due (i.e., via an installment agreement – applies to current payments). 
  • Filed all necessary returns and cannot file an outstanding claim for a tax return.
  • Filed a valid extension for the necessary returns and cannot make an outstanding request for a tax return. 

To request penalty abatement over the telephone, you need to provide your tax practitioner with a Power of Attorney authorization to request the penalty on your behalf, especially if your case is being handled by a specific compliance unit. If you don’t receive a letter from the IRS indicating that you meet the FTA criteria and that your penalties have been removed within 30 days from the day you (or your tax practitioner) called them, it is strongly advised to follow up with the IRS. You may, nevertheless, request a penalty abatement by letter or mail, provided that you attach all relevant documents and information, such as transcripts that prove payment or filing compliance and/or a valid power of attorney, among others. 

Important Notes:.

  • If you have paid the penalty, you can file Form 843 and ask for a refund
  • First-time penalty abatement applies to one tax period. If you request for penalty relief for more than one year, your penalty relief will apply to the earliest tax period, as long as you meet the FTA criteria. The subsequent tax years may have a penalty relief based on reasonable cause criteria and other relief provisions. 
  • You may take your case to Appeals if you believe that you can receive penalty relief on hazards of litigation on other factors.

 

Conclusion 

Filing your tax returns and paying your tax bill on time is key to avoiding getting penalties. Nevertheless, in any other case, there are always reasonable IRS payment plans that you could consider. These offer significantly lower interest rates and may even allow you to settle your bill for less than the due amount, such as the Offer in Compromise.

Let’s talk about your options and see what is the best course of action based on your individual case so that you can enjoy a happier and more stress (and debt)-free life from now on. Contact us now and schedule your appointment for a free consultation

All About Tax Liens

IRS tax lien

If you owe back taxes, tax liens (and their siblings, tax levies) can affect you seriously if you don’t take proper action. In this guide, we give you all the details you need to know about tax liens, as well as ways to remove them if you get caught in their net. 

 

What Is a Tax Lien?

In simple terms, a tax lien is a claim the government makes on your financial assets (usually your real estate – see a house or another property) when you have not paid your income taxes on time. A tax lien is the first red flag you will get for failing to take care of your income tax obligations. At this point, you don’t risk having your assets seized. However, if you decide to sell the asset, you can expect the government to claim some of the proceeds (or all of them, depending on the sum you owe). However, do bear in mind that a tax lien may appear on your credit report and could:

  • Affect your ability to get a loan or keep a security clearance
  • Stick with you even if you file for bankruptcy.
  • Be a blockage for you when on a job hunt. 
  • Cause your creditworthiness to take a nosedive (the IRS will notify creditors of your financial situation by filing a public notice of the tax lien).
  • Prevent you from refinancing or selling your home (during title searches, things like tax liens do surface). 
  • Cost you a lot of time if you need to go through the IRS automated collection system (ACS) or a revenue officer that requires you to pay them a visit in person. 

A tax levy comes right after a tax lien and has the power to seize your property and bank accounts or even garnish your wages so that the government can eventually get its owed taxes from you. Note that you may receive a lien immediately after the IRS has assessed the tax. Nevertheless, it may take up to several months before the IRS figures out that you have not paid your taxes.

 

What Is a Federal Tax Lien?

Just like a tax lien, a federal tax lien is a federally-authorized lien placed against your assets (or any of them) for back taxes that have not been paid. It gives the US government the right to take or keep your personal property until you pay your due federal taxes. The steps involved from the moment the IRS realizes that you owe money to the government to the point they finally collect their money, are as follows. The IRS will:

  1. Assess the liability.
  2. Notify you with a Notice and Demand for Payment. 
  3. After that comes a public Notice of Federal Tax Lien that all creditors will be able to see. 
  4. Secure your property to secure payment if you continue to have your taxes unpaid, be it an estate, gift, self-employment, income tax, or another.  

Remember that when served a federal tax lien, any assets you may acquire during the lien may also be placed on a tax lien. Overall, a federal tax lien will most likely downgrade your credit score substantially, given that the IRS notifies creditors and individual states that you owe back taxes and that they are the first in line to receive payment for these unpaid taxes. In many instances, you may even be required to pay your due taxes in full so that you can regain your ability to receive any kind of financing. 

 

What Is a State Tax Lien?

This is slightly different from a federal tax lien as it is imposed by the state government. However, it still gives the government authority to secure the owed tax by exercising a legal right over your property, be it personal or real estate. Before any action is taken, the state issues a Notice of State Tax Lien after your tax liabilities are assessed, and a Final Bill for Taxes Due (or a Bill for Taxes Due) is then sent to you. The waiting period between the Bill for Taxes Due and the Notice of State Tax Lien is 35 days. Within that time, you need to reach some sort of appropriate resolution (if you cannot settle your tax debt). Until you do, though, the lien will remain on the property in question. 

Notes:

  • It may take up to three years for the IRS to assess liabilities on federal income taxes (from the date you are required to file or file a tax return). This legal time frame is called a Statute of Limitations, during which the IRS can bring legal action against you. 
  • A statute of limitations can be extended to six years if you underestimate your gross income by over 25%.
  • A statute of limitations can have no time limit if you fail to file a return (fraudulent or not). 
  • Some states follow the 3-year statute of limitations rule (see Ohio, Wisconsin, Michigan, Kentucky, Colorado, California, and Arizona) while others follow the 3-year plan for income taxes owed to the state (i.e., Tennessee, Oregon, New Mexico, Louisiana, and Kansas). 

If you find yourself dealing with a state lien, it is advised to consult with a tax professional to have all your questions about things like the statute of limitations in your state answered. 

A tax professional is undeniably your best line of defense when you want to protect yourself against liens and levies placed on your wages, assets, property, and bank accounts (and get out of the troubles brought by a state or federal tax lien). It is critical that you reach a settlement with the IRS (or appeal a lien) before they place a levy on your property or bank account, to prevent your assets from being seized. 

 

How to Find Out If You Have a Tax Lien

As already mentioned above, the IRS will most likely notify you if a federal tax lien has been filed by sending you a Notice of Federal Tax Lien. In general, a federal lien is effective almost immediately after the IRS issues a written demand for payment of due taxes (within the next 10 days or so). 

Nevertheless, you could find out whether you have a federal lien tax on your own. Given that tax liens are placed with local authorities, we suggest you visit your state’s Secretary of State website. There should be an option that reads UCC Search or Lien Filing. In either case, you will be called to enter some personal details, such as your filing name and other ID information, so you can retrieve the data you seek. 

Other than that, another great resource to figure out if you have a lien is legal databases, which usually offer access to up-to-date information on tax liens for a fee. Now, since your state may also place a lien on your property if you fail to pay the local taxes on time, you may want to check with the county in which your financial asset (the one that a lien may have been placed on) is located. The process varies among states. However, you will need the assistance of your state government offices to help lift your lien and pay your back taxes. In New York, for example, this procedure entails you call (518) 457-5434 or use your online services account to pay your tax bill. Other states offer a wide range of payment options – even provide you with the chance to set up a payment plan for a small fee (see California). 

Note: As soon as you pay your tax debt, remember to request a copy of your credit report so that you can check that the lien has indeed been lifted. If it has not been removed, do contact the relevant credit bureaus to sort this issue out with them. 

 

Can You Sell a House With a Tax Lien?

Yes, it is possible to still be able to sell your home if you have a lien on it. Of course, some conditions need to be met. For instance, you should ensure that you pay your tax lien first and then refinance or sell your home. 

You have two options here (1) pay the lien before you close the deal (you add the lien amount to your expenses) or (2) clear the lien by paying the taxes on your own before selling your house. If the latter is not doable (though, it is the best course of action since a property lien is listed on the title report, which may trouble or worry potential buyers), you could consider the following:

  • File For Chapter 13 Bankruptcy – This is a handy solution that will give you a greater negotiating power. But, that’s all there is to it. Although it will NOT clear your debt, it may open the road for a payment plan that serves you so you can repay your due taxes over a period of time. 
  • Dispute The Lien – Pursue this option if you believe that a lien has been wrongly placed on your property. In this case, the creditor may be willing to lift the lien. In any other case, you can bring your case to the court. If you win, your lien will be released. If you lose, you may be able to work something out with the creditor (some sort of settlement) to reduce the due amount. 
  • Apply For a Subordination – The IRS may discharge the sum of your back taxes so that you can sell or refinance your property or restructure your mortgage.  This means that the IRS will sell (subordinate) your debt to other creditors, who will wait for the closing of the deal to get paid. So, basically, your debt goes from the IRS to another creditor. That way, the title of your home is clear (and is passed on to the buyer clear) while you will still be called to pay the back taxes to the 3rd-party creditor. To apply for a subordination, you could use the services of creditors with liens (i.e., a mortgage company) or apply for a program like the Direct Debit Installment Agreement to have your lien withdrawn after making the needed payments. 
  • Increase The Selling Price – If nothing of the above works, you could add the amount you owe to the IRS to the selling price of your home to cover the property tax lien. Just ensure that the real estate market supports the asked price (the current market value should be around the price at which you are selling your house so that it is attractive to potential buyers). Also, don’t forget to pay your lien before you transfer the ownership of the house. That way, your buyer will get a clear title. 

 

How to Remove a Tax Lien

If you cannot afford to pay your back taxes, which is the single most effective way to stop a tax lien, you could come to some sort of agreement with the IRS. We suggest exploring options like an Offer in Compromise, which may help you settle your back taxes for less than what you really owe. In this case, though, take note that being accepted is quite a long shot. You will also need to fulfill certain conditions:

  • You have filled all of your tax returns.
  • You are not being audited.
  • You are not in bankruptcy.
  • You have made the needed estimated tax payments for the current fiscal year.

You may use this handy tool to check whether you qualify for an Offer in Compromise or not. 

Alternatively, you could consider getting on an IRS payment plan, such as the Direct Debit Installment Agreement, where you grant the IRS the right to take three or more consecutive payments out of your bank account. That way, you may be able to convince them to remove your tax lien from public records. That being said, you will still have to pay penalties and interest (and your tax debt, of course) until your tax balance is paid off. 

This list could go on forever. So, do reach out to us. Let’s sit down and go through your options together. Our expert tax relief professionals know the way to get you out of debt or at least relieve you of your financial strains considerably. Contact us today for a free tax consultation