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.

Can the IRS Send Me to Jail?

main in jail

Cheating on your taxes is a crime. No doubt about that. However, a mere 0.002% of all taxpayers are convicted of tax crimes, even though roughly 16% of Americans are found not complying with the tax laws every year, in one way or another. 

As for the number of convictions for tax crimes, it has stayed relatively stable over the most recent 5-year period (less than 1% increase). This means that a person is rarely sent to jail for tax fraud. 

However, there is some fine print you do need to read, as not all cases end up being punished with penalties and fines. Some may as well put you behind bars. This is a topic that we get asked about a lot so we wrote this article to answer some commonly-asked questions.

 

Can You Go to Jail For Lying to The IRS?

The majority of cheating cases comes from tax evasion, which is the deliberate underreporting of income (willful or actual). This is the type of tax crime that is charged the most often. Truth be told, it can be tempting for some taxpayers to fudge the numbers to improve their tax refund. Nevertheless, misrepresenting yourself on your tax return can get you into trouble as it is considered tax fraud. So, you could be (1) audited, (2) fined considerable amounts, or (3) put to jail.

Remember that the IRS knows whether you report all of your income or not as it gets all of the 1099s and W-2s you receive. Your financial activity may also raise some red flags with the IRS (in case you are thinking of hiding income in the form of cash payments). All these may trigger a tax audit, which is an in-depth review of your financial records and taxes to make sure everything has been reported accurately. 

Although there is less than a 1% chance of being audited, most of the time, at least, undergoing an audit is simply not worth the risk as it involves a costly and time-consuming procedure, where you are called to present years of documentation. You may even be called in for multiple in-person interviews. 

Now, whether you go to jail for an IRS audit or not, it all depends on how the IRS finds you – guilty of tax fraud or evasion (so charged with an offense that carries jail time) or not. In general, an incorrect tax return case (i.e., under-reporting your income) comes with late payment penalties, while you may also be charged interest on the underpayment but you will not go to jail for it.

And, don’t fool yourself into thinking that tax fraud or evasion affects high earners only. Everybody should be careful, even those with low income. This is because the IRS does NOT differentiate its cases based on how much you underpaid your taxes or between income amounts. Falsifying any information on a tax return can end up with you being fined up to $250,000. 

 

Can the IRS Put You In Jail?

In a nutshell, no. The IRS cannot send you to jail. However, the court can. When an IRS auditor audits your tax returns and detects possible fraud, they can initiate a criminal investigation. It should be noted that around 3,000 taxpayers are convicted of tax fraud every year. So, lying on your taxes is, indeed, a big deal for the IRS. Overall, though, the IRS rarely charges taxpayers with fraud. Therefore, even if you are investigated, you will probably not face a criminal charge.

That being said, though, lying on a tax return carries potentially severe consequences that are just not worth the risk; you may end up having to pay way more than the sum you are attempting to hide. 

 

How Much Taxes Do You Have to Owe To Be Sent to Jail?

As already mentioned, the chances of facing criminal fraud penalties are very slim. In the overwhelming majority of cases (at least 98%), the IRS punishes this type of fraud with CIVIL penalties. This simply means that you will be called to pay a 75% fine that will be added to the tax due, plus interest on both the fraud penalty and the tax. So, if you owe $10,000 from tax fraud, you will have to pay an extra $7,500 as a penalty. 

Things change dramatically, though, when the IRS suspects that you have gone too far. In this case, it may call the CID (Criminal Investigation Department) to investigate your situation. The CID then has two options: (1) recommend that the Justice Department prosecute you or (2) drop it forever, depending on its findings. The good news is that the CID does not usually recommend prosecution except in very rare cases. 

Of course, the larger the sum you tried to hide, the more likely CID agents will recommend prosecution. In criminal cases, the typical amount of taxes owed is at least $70,000 and usually refers to tax cheating activities over a three-year time span (or more). 

To sum up, the IRS itself can NOT prosecute you, but the CID can recommend prosecution. If  it does, and you get convicted by the Justice Department, you may be fined, put on probation, imprisoned, or all three. The bad news is that if you are brought to court, there is more than an 80% chance of getting convicted and a high chance of going to prison even if you have a spotless criminal record. 

 

Tax Crimes That CAN Put You In Jail

Individuals that are recommended prosecution by a CID agent are typically charged with one of the following three crimes: (1) failing to file a tax return, (2) filing a false return, or (3) tax evasion. Here are some details about each:

Failing to file a tax return. This is the least serious tax crime of the three and is defined as not filing a return intentionally. So, if you must file tax returns and you do not, the maximum prison time you can get is 12 months and/or a $25,000 fine for each year you have not filed. However, most non-filers only get civil penalties and are rarely prosecuted criminally.

Filing a false return. This is the case where you file a tax return that contains a material misstatement. This is less serious than tax evasion and can get you behind bars for up to 36 months. Also, according to the Internal Revenue Code §7206 (1), you will be fined a maximum of $100,000. 

Tax evasion or fraud. This is the most serious thing you can be charged with as it is considered a felony rather than a misdemeanor, which is the case with the two situations mentioned above. Tax fraud or evasion is when you try to defeat the income tax laws intentionally, and carries a maximum prison sentence of five years. The fine you will also be called to pay per the Internal Revenue Code §7201 is up to $100,000. 

Important Note: The CID can also recommend prosecution for filing false claims against the IRS and for money laundering. Although these are not tax crimes in a technical sense, they tend to be charged in the same case as a tax crime against the same taxpayer (entity or individual). 

 

When Can the IRS Send You to Jail?

The truth is that failing to pay your taxes can eventually initiate a process to send you to prison. But, the IRS does not have the power to put you behind bars or file criminal charges against you if you have not paid your taxes, as already explained. Nevertheless, some exceptions apply. 

It all depends on the reason for not paying the due amount. If you can’t because you do not have the money, you are in the clear. But, if you intentionally try to deceive the IRS or lie on your tax return, this is regarded as tax fraud, and you could end up serving jail time. 

Let’s take things from the beginning, though. Bear in mind that most tax crimes are NOT criminal cases; they are considered civil cases. This is because the IRS understands that taxes can be confusing, and you could fill out your return incorrectly due to the complexity revolving around filing tax returns. So, if you get confused or forget to include an important document on your tax return, the IRS will most likely send you a letter asking you to address your mistakes and amend them. 

If you made a more serious error, the IRS will probably audit you and place a civil judgment against you. Again, this will NOT put you in jail as it is NOT a criminal act. It is simply a notice that you need to change your tax return and pay back your unpaid taxes. 

This is not the case when you intentionally change your taxes or file fraudulent taxes or fail to file. If the IRS thinks that you are failing to file your return altogether or intentionally fill out your tax return incorrectly (which is tax evasion in any case), you may face jail time. 

 

Should You Be Concerned That the IRS Is Going to Send You to Jail?

Generally speaking, it is extremely rare for the IRS to charge a person with a tax crime and attempt to send them to jail.  So for the most part, you don’t have to worry about the IRS sending you to jail.

But with that said, not filing your tax return or trying to hide income from the IRS is not worth it in the long run, as you will probably end up paying much more than the taxes you want to evade. And, if you are in a tight financial situation where you cannot meet your tax obligations, there are several tax relief strategies to help you get out of it. Feel free to contact us and we’ll help you find the best solution to your problem. 

How a 1099-C Affects Your Taxes

form 1099-C Cancellation of Debt

If your debt has become too overwhelming for you to repay, you could contact your lender and negotiate debt forgiveness. Unfortunately, you will probably be called to deal with a huge tax bill if the lender eventually decides to delete your debt and send you a Form 1099-C. This is because you are required by law to report the sum to the IRS by filling out the 1099-C form as taxable income.

We will give you all the details you need to know about a 1099-C Cancellation of Debt so you have an idea of what is involved and how to deal with any tax issues that may come along. 

 

What Is a 1099-C?

If you can no longer afford to pay off a loan or another debt and you have, somehow, managed to get your lender to cancel or write off your debt, the IRS will consider it income for you. Cancellations for more than $600 should be reported on a Form 1099-C Cancellation of Debt. Of course, some exceptions apply, usually in cases of foreclosed homes and bankruptcy (we will also talk about these in a subsequent section). 

Yes, it probably sounds unfair that a debt you have successfully negotiated away or canceled to return as taxable income, haunting your days. Sadly, it is, indeed, classified as income because the IRS sees it as you receiving a benefit without paying for it. This is because when you first borrowed money from the lender, you were bound by a contract to repay it. Therefore, you were not obliged to pay tax on the sum you got. Now that you got yourself a debt cancellation, the contract is no longer in effect, which means that you can do whatever you want with the money you borrowed. So, it looks like you have received money for free – money that you must pay back. This makes it taxable income. 

You can receive a Form 1099-C from a lender that discharged, forgave, or canceled your debt for the:

  • Modification of a loan on your principal residence.
  • Abandonment of property.
  • Return of property to a lender.
  • Foreclosure 
  • Repossession

 

What Is the 1099-C Tax Rate?

The amount of federal tax you will be asked to pay depends on several factors, such as your tax bracket. Taxpayers whose income is less than $35,000 are probably in the 15% tax bracket, which means that you pay 15% of every extra dollar of income on your return. This sum climbs to around $70,000 for married individuals filing jointly. However, your adjusted gross income affects things like phase-out ranges, deductions, and credits you might have. 

You may use the IRS Withholding Calculator to estimate the right amount of tax withheld and the best way to fill out your Form W-4. Or, you can ask an accountant for assistance. Note that any tax liability occurs when the loan obligation is released and not when 1099-C is issued. Failing to report this liability can lead you to be penalized for it (25% underreporting penalty). At the same time, your audit period increases from three to six years. That being said, though, the IRS will not impose penalties for underpayment of tax. The only exception is if you owe more than $1,000 when your return is filed. 

 

Where Does a 1099-C Go On a Tax Return?

You must enter the total sum of your 1099-C on Line 21 of Form 1040. This applies to 1099-C issued for a personal debt (Form 1040 is the Individual Income Tax Return form). If this is about a farm or business debt, you need to use either Schedule F or Schedule C (profit or loss from farming or business). Given that the original 1099-C has gone to the IRS, you do not need to send a copy of it with your return. Just don’t forget to include any interest you may qualify to deduct. 

Now, if you do not file a return that includes canceled debt as income on a 1099-C form, you must be able to prove that the sum is not taxable. This can be done by:

  • Attaching a statement of liabilities & assets or bankruptcy discharge forms to support your claim (in case of bankruptcy). 
  • Complete a Form 982.
  • Attach a letter to your return explaining your situation in detail (i.e., insolvency or bankruptcy). 

 

What’s the Difference Between a 1099-A and 1099-C?

Selling real estate comes with various tax forms that need to be filed, including 1099-A and 1099-C, which create a lot of confusion for everybody involved. Let’s help untangle this knot. 

When real estate property is either transferred or sold, you must notify the IRS using Form 1099-S (Proceeds From Real Estate Transactions). The seller receives this form to report the sale and help show whether there is a loss or gain on the property sale. The seller also receives this form in a deed of lieu of foreclosure and short sale. Nevertheless, when dealing with a foreclosure, the sale is involuntary, which is why no 1099-S is issued to determine whether there is loss or gain on the property sale. Instead, you (the seller) must report the property transfer via a 1099-A (Acquisition or Abandonment of Secured Property), which reports things like the:

  • Balance of principal outstanding on the transfer date.
  • Fair market value on the transfer date. 
  • Date of the transfer. 

Note that selling a property in a foreclosure auction is NOT always tied to zero capital gain. In certain situations, adjustments to cost basis may lead to a capital gain on such property sales, which may result in added tax liability that you might be unable to pay. 

Now, if a lender cancels or forgives a debt, be it a foreclosure, deed in lieu of foreclosure, or a short sale, it may involve the issuance of a 1099-C to report the cancellation of debt. Beware as the tax consequences are exactly the same for the cancellation of debt income, irrespective of where it is generated from (I.e., a foreclosure, deed in lieu of foreclosure, or short sale), as long as the forgiven debt is $600 or more. Certain exclusions apply that can eliminate or reduce the 1099-C sum from taxable income, such as:

  • Relief pursuant to the Mortgage Forgiveness Debt Relief Act – if the seller qualifies for it. 
  • Insolvency of the seller before having their debt canceled or forgiven.
  • Discharge of the debt in bankruptcy.

Do not hesitate to use our expertise and experienced tax professionals to help report these transactions on your tax return correctly. 

 

You May Be Able to Avoid Paying Tax on Canceled Debt

You may qualify for one of the many exclusions that enable you to reduce your taxable income from debts that have been forgiven or canceled. Here are some of the most sweeping ones:

  • Debts canceled when you were broke (IRS refers to this as being insolvent). It applies to the sum by which you are insolvent. 
  • Discharged debts in bankruptcy if you filed for bankruptcy protection.
  • Forgiven student loans after having worked for a period of time.
  • Canceled interest that would have been otherwise deductible (i.e., on business debt). 
  • The debt was canceled as a gift (usually from friends or family members).
  • Farm and business real estate-related debt that was canceled when you owned more than how much your property was worth at that time.   

It is paramount to let an experienced tax preparer handle this type of activity for you. If any of these exclusions apply to your case, you will probably need to file a Form 982 on top of the 1099-C. 

 

The Mortgage Forgiveness Debt Relief Act

The Mortgage Forgiveness Debt Relief Act (MFDRA) was passed in 2007 in an attempt to tackle the huge collapse of the real estate market that began in 2007. Congress decided that you may exclude up to $2 million for calendar years 2007 through 2020. This applies exclusively to forgiven mortgage debt, of course. The sum mentioned above relates to married individuals filing jointly. For other filing statuses, the amount that can be excluded is no more than $1 million. 

Note that you may benefit from the MFDRA for debt that was discharged in 2021. The only prerequisite is that you enter into a written agreement in 2020. This exclusion also covers mortgage debt that has been canceled in connection with a foreclosure or via a mortgage restructuring. 

 

Avoiding Tax Debt After Insolvency and Bankruptcy 

You might still be able to avoid taxation in case you have had your debt canceled, even if you receive a Form 1099-C if your debt was discharged in a Chapter 13, Chapter 7, or another Title 11 bankruptcy proceeding. This means that if your case falls under this category, you won’t have to pay taxes for your forgiven debt. 

Similarly, you can avoid taxes on canceled debt if you can show the IRS that you were broke (insolvent) when your debt was forgiven. 

Are you eligible for tax debt relief? Can you reduce or even eliminate your tax obligations after a 1099-C is issued to you? Give us a call or contact us for a free tax consultation and let’s discuss your options so that you can finally be relieved of your tax problems.