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. 

What Is The IRS Offer In Compromise?

IRS Offer In Compromise form

Offer in Compromise is an IRS program that enables taxpayers to get a fresh start with the Internal Revenue Service. In doing so, they have the chance to settle their tax debt for less than the overall amount of money they owe. Therefore, if you are struggling to pay your federal or state tax debt, this could be a useful program to consider. In 2018 alone, the IRS accepted around 24,000 offers (up 24% from 2010) while rejecting just as many.

So, how can you determine if Offer in Compromise (OIC) is an initiative that could solve your tax issues? How can you get an offer accepted? How much should you offer to the IRS? We give you all the necessary details and answer these concerns below.

How Much Should I Offer in Compromise to the IRS?

This is perhaps one of the most challenging parts of submitting an Offer in Compromise. On the one hand, you don’t want to come forward with an unrealistically low offer that could ruin your acceptance chances. On the other hand, you do aspire to pay as little as possible to the IRS so that you can finally settle your tax debt. Given that each case is different, there is really no magic formula. In fact, it requires a lot of experience to be able to recognize when an offer is too low.

That being said, there ARE some ways to get some idea of how much is probably enough when you make an Offer in Compromise. Let’s start with the basics – the bare minimum offer sum. Note that it will NOT guarantee that your offer gets accepted by the IRS. It will, however, give some confidence that your offer is in the right ballpark.

What the IRS is primarily focused on is to receive offers of at least the same amount of the taxpayer’s Reasonable Collection Potential (RCP). This is a number the IRS uses to determine your ability to pay the owed taxes, and takes into consideration several liabilities, such as your:

  • Assets
  • Monthly living expenses
  • Monthly income

So, generally speaking, you can begin with an estimate of 12 months’ worth of your disposable income. Then, calculate any additional cash you can get from selling valuable assets and submit an offer with an amount higher than your RCP. This is critical, especially if you are planning on submitting an Offer in Compromise on the basis that you are unable to pay the due tax (as opposed to Effective Tax Administration or Doubt as to Liability).

The problem lies in calculating your Reasonable Collection Potential. Here are some steps to follow:

  • Estimate the income you have from all sources within a month and then subtract the full sum that corresponds to your living expenses (the necessary ones only, such as car payment, groceries, utilities, rent, etc.). The number you will get is your monthly disposable income.
  • Multiply your monthly disposable income by 12 to get your annual disposable income.
  • Add to that amount any assets that you could sell, such as valuable collectibles, investments, and an extra car. At this point, note that determining how much these assets are worth is a point of negotiation with the IRS for many taxpayers.

The result of these calculations will give you the bare minimum you can offer.

Should You Pay Installments or All At Once?

Many taxpayers wonder if they should pay the offer amount in installments rather than with one lump sum payment. Although the IRS enables monthly payments for this purpose, it is best to pay the offer in fewer than five monthly installments if it is possible. This is because the IRS will use 24 months of your disposable income for anything beyond five installments to calculate your Reasonable Collection Potential (with five or fewer installments, they will use 12 months of your RCP). If that happens, the amount the IRS will want from you will essentially double.

How To Get An Offer in Compromise Approved

As already mentioned, the IRS is highly likely to turn down offers that do not meet (even better, exceed) the taxpayer’s RCP. That being said, some factors play a leading role in making an Offer in Compromise quicker. These include:

  • Low Income W2 Earnings – You make less than $30,000 annually, and your only income source is a wage-earning job.
  • Fixed Retirement Income – You are a 55+ years of age retiree and receive a fixed income.
  • Social Security/ Disability Income – You only get a Disability or Social Security income.

Some factors, on the other hand, can contribute to longer-than-average decisions about your Offer in Compromise, such as:

  • High Balance – Offers with balances $25,000+ usually take much longer to process than those with lower balances.
  • Self-Employment – The IRS conducts in-depth research on your expenses, making sure you don’t mix your personal and business expenses.
  • Initial Rejection – If you have already submitted an offer that got rejected and want to have it reevaluated, you could be adding up to six more months to the overall procedure.
  • Other Circumstances – If you own multiple vehicles, have lots of loans, or many different deposits all over the place, you will need to do some explaining to the IRS. This pushes the process further back in time.

So, is everything lost? Not at all. You can still boost the Offer in Compromise process by doing the following:

  • Ensure you have all the necessary details – The IRS will request things like bank statements. Check that the ones you submit have all the pages, even those that you may find useless (i.e., a blank page). Then, send your Offer.
  • Provide good explanations – If your financials, for some reason, does not look right, make sure that you give a sound reason for it in the cover letter.
  • Reply fast and accurately – It is paramount that you respond to IRS requests for further clarification as timely as you can. The information you provide should also be accurate.
  • Propose the presumed maximum amount of money – The IRS expects to collect some money from you within a reasonable time period. Offering them the max sum of the presumed amount will most likely get your offer approved

To get there, ensure that you have filed all tax returns, made the required estimated tax payment for the current year, and include a bill of one or more tax debt in your offer. Business owners with employees must have made the needed federal tax deposits for the current quarter.

Besides what is reported to Form 433-A, the IRS will investigate several other factors, such as your level of education, age, asset equity, expenses, income, Collection Statute Expiration Date, and, of course, your lifestyle. If something about the way you live is contradictory to the fact that you are unable to pay your taxes, the IRS may reject your offer.

How Can I Submit An Offer In Compromise Application?

To apply for an Offer in Compromise, you will need the following Offer in Compromise Forms:

    • Form 656 – You need this to make your offer.
    • Form 433-A – This Collection Information Statement for Wage Earners and Self-Employed Individuals helps the IRS determine whether you are facing financial strain and to what extent.
    • Form 433-B – This is the same as with Form 433-A with the difference that it is a Collection Information Statement for Businesses. It serves the exact same purpose as Form 433-A.

Common Mistakes to Avoid when Filling out your OIC Application

The IRS will get all the information they need about your financial situation from Form 433-A (see above). It is, therefore, crucial that you ensure you don’t make any math errors on that form, although the form indeed requires a considerable amount of complex calculations. You certainly don’t want to put your OIC process to a halt to have incorrect calculations sorted out.

Other mistakes on OIC forms we usually see and either cause confusion or have a dramatic impact on a case are as follows:

  • Leaving empty/blank spaces – Never leave a field on a 433 or 656 empty. It is best to write “N/A” in these spaces.
  • Writing negative equity – It is essential that any negative equity is reported as zero. Many tax accountants subtract the negative equity from the taxpayer’s NRE (Net Realizable Equity) when the taxpayer’s asset (property, in this case) is worth less than they owe on it, which is wrong.

 

How Long Does It Take To Get a Response From the IRS?

Although there are no set timelines for exactly how long it will take the IRS to decide whether to reject or approve an Offer in Compromise, our experience has shown that it usually requires between 4-9 months. However, some more complex Offers in Compromise may need much more time to get resolved, which could reach 48 months from the day the OIC process was completed, which usually takes roughly 6 months. The most common factors that could drag a response from the IRS are related to self-employment. Regardless, the IRS does respond within two years.

If the IRS accepts your offer, you need to stick to your part of the deal and pay the agreed sums. Now, if your offer gets rejected, know that you can file an appeal via Form 13711 (hence, renegotiate your OIC under more favorable terms) within 30 days of the rejection notice date.

Is an Offer In Compromise the Best Option for You?

Although an Offer in Compromise is an excellent collection solution, it is not the only option you could consider. To determine that, you will need to have a trusted tax professional evaluate your tax situation, the IRS collection alternatives, and your personal finances as a means to develop the optimal approach to repay your debt. Don’t hesitate to call or contact us for a free tax consultation to see how we can help you get out of debt as painlessly and swiftly as possible while negotiating the best terms for you.