IRS MAKING IT EASIER FOR TAXPAYERS WITH TAX DEBTS UNDER $50,000
By John Claudell
FEBRUARY 2012 IRS TO RELAXE RULES FOR PAYMENT AGREEMENTS
Early in 2012 the IRS decided to broaden their streamlined payment agreement program. In the past the IRS has allowed Taxpayers who owe less than $25,000 assessed to enter into a 60 month payment agreement with the IRS to resolve their tax liability without requiring full financial disclosure. The IRS has now increased the amount allowed in a streamlined agreement to $50,000 assessed. The IRS has also lengthened the allowable term to 72 months.
The IRS still will require basic financial information like where you work and bank but they will not make you complete a full financial.
What this means for Taxpayers with IRS Tax Debts. It’s now easier to resolve your liability than it ever has been provided you owe under $50,000 in assessed taxes and you can afford to pay this amount in full through monthly payments not to exceed 72 months or six years.
What if I cannot afford an IRS payment agreement? In this case you will need to review your other options such as the Offer in Compromise or Currently Not Collectible status. There are always options you just can’t stick your head in the sand and wait till they levy your wages and bank accounts.
FEBRUARY 2012 IRS ANNOUNCES STREAMLINED TAX LIEN REMOVAL PROCESS
Provided you can afford the 72 month payment agreement to resolve the IRS tax debt and provided you are willing to have the payments debited directly out of your checking account every month the IRS will withdraw the tax lien they filed against you after 3 months of successful debits.
What this means for Taxpayers with Tax Debts and Liens. This means that all public record of the IRS tax lien filing is removed and if a tax lien has not been filed previously then none will be. This is why it’s important to move quickly. You want to avoid the tax lien filing at all or, in the very least, get the tax lien removed before the credit reporting bureaus catch it. It should be noted that this is an actual tax lien withdrawal as opposed to a tax lien release. The withdrawal removes all record of the tax lien filing whereas a tax lien release only shows the tax debt was paid or expired. In other words, a tax lien withdrawal is much better for the Taxpayer.
How does the IRS’s new Streamlined Tax Lien Removal process work. As discussed above, the IRS will not consider removal of a previously filed tax lien until 3 monthly payments are auto debited from your checking account. Once this occurs the IRS has created an appeal process that an experienced tax attorney can complete for you. From the point the appeal requesting the IRS withdraw its tax lien is filed it will take an additional 3-4 weeks before it’s officially withdrawn.
If you have any questions regarding whether you qualify for either of these new IRS programs please feel free to contact me via e-mail at [email protected] or by phone at 303-376-6267.
June 12, 2012
May 21, 2012 IRS Announces Relaxed Offer In Compromise Tax Settlement Requirements
By John Claudell
| IRS to Accept More Offer in Compromise Tax SettlementsAs a part of its Fresh Start Initiative, the IRS Collections Department has made many strides this year in working with Taxpayer’s who owe taxes that they just can’t pay. Earlier in the year they streamlined the process for payment agreements, now letting Taxpayers who owe up to $50,000 get on a payment agreement with the IRS for up to 72 months. They even relaxed their tax lien filing guidelines to allow for the non-filing or withdrawal of tax liens on Tax debtors who owe less than $50,000.Now they’ve turned their attention to their main and only tax settlement program known as the Offer in Compromise. For years the IRS has accepted settlements from Taxpayers who proved that they could not pay their IRS tax debt in full. The process of negotiating a tax debt settlement although remained a long drawn out bitter fight. It seems now with the economy suffering and a continuously high unemployment rate the IRS has added a much needed dose of reality to the program.
To understand the changes that the IRS announced and how they benefit Taxpayers with tax debts you need to know the basics of how the IRS Offer in Compromise program works. In simplest terms the IRS will accept a tax settlement for an amount equal to your total collection potential. Collection potential is your net equity in assets (Quick Sale Value minus loans against them) plus your monthly disposable income calculated out, in most cases, five years. Here is an example to demonstrate this: EQUITY IN HOME: Taxpayer owns home worth $200,000 and has a mortgage on the property of $150,000. First we reduce the homes fair market value (FMV) to its quick sale value (QSV). The IRS allows a 20% discount from FMV to reach QSV or in this example $160,000. We then subtract the loan balance of $150,000 to come up with net equity of $10,000 that must be included in the IRS offer in compromise. Please note you do not have to sell the home. They just want to include any equity you may have in your tax settlement. EQUITY IN VEHICLES: Taxpayer owns a car outright with no loan against it and a FMV of $5,000. The IRS will want to include the QSV of the vehicle $4,000 in the tax settlement. EQUITY IN TOOLS OF THE TRADE: Taxpayer owns $10,000 of automotive repair equipment that he uses to generate income. In the past the IRS only allowed the Taxpayer to exempt $4,180 of this equipment from inclusion in the Offer in Compromise amount. So the Taxpayer would have to include $5,820 in the tax settlement. DISPOSABLE INCOME: Taxpayer makes $3,500 net after taxes. Based on his family size and the state and county he/she lives in the IRS allows $3,400 in expenses. In this case the Taxpayer would have $100 net disposable income. In the past the IRS would factor this net disposable income out five years or 60 months to come up with $6,000 that would need to be included in the tax settlement. What the IRS will allow you in expenses is where it gets extremely tricky and it would be best to have a tax attorney pull these numbers for you. There are expenses that they allow that they do not “advertise” so to speak. ACCEPTABLE OFFER IN COMPROMISE AMOUNT: In this example, under the old rules the IRS would expect a settlement of $25,820 made up of the following: $10,000 net equity in the home, $4,000 net equity in the vehicle, $5,820 net equity in tools and $6,000 in future income. THE IRS TO ACCEPT LOWER OFFER IN COMPROMISE TAX SETTLEMENTS NOW The main changes the IRS made to the Offer in Compromise in 2012 and how they would affect the example above are: SHORTER FUTURE INCOME CALCULATION: The IRS now only factors your future income a maximum of two years or 24 months. In the above example this would save the Taxpayer at least $3,600 on their offer in compromise. INCREASED EXPENSES ALLOWED IN OFFER IN COMPROMISE: The IRS has now increased the types of expenses they allow. These include a portion of state/local back taxes being paid, maintenance on high mileage vehicles (75,000+ miles) and more types of student loan payments. This can dramatically decrease the Taxpayer’s disposable income which will in turn dramatically decrease the Taxpayer’s final tax settlement amount. For instance, if in the above example the Taxpayer was paying $100 a month towards a student loan there would be zero monthly disposable income so nothing would be added to the offer in compromise tax settlement for future income. PERSONAL VEHICLE EXEMPTION INCREASED FOR OFFER IN COMPROMISE: The IRS has now created a $3,450 equity exemption per personal vehicle. In the above example this would mean the Taxpayer would only have to claim $550 equity in the vehicle as opposed to $4,000 under the old OIC rules. MOST INCOME PRODUCING ASSETS EXEMPT UNDER NEW OFFER IN COMPROMISE RULES: The IRS in most case will now exempt any equity in tools of the trade that are used to produce income. In the past the IRS essentially wanted to “double dip” by first taking the equity in the income producing asset and then also using the income produced from such asset to increase the Taxpayer’s monthly disposable income. The IRS now seems to have realized that this is unfair in that if the Taxpayer has to sell the income producing asset to pay the Offer in Compromise tax settlement the Taxpayer will then not have the income from the asset. There is a complex formula that they apply to decide whether to include the equity in the asset or its future income. If you have this issue you should talk it over with an experienced Offer in compromise tax attorney. In addition to the above changes, the IRS has also relaxed its rules on dissipated assets. In the past they would look back 3 or more years to determine if in the past you had the funds available to pay the taxes but chose to pay another debt or go on vacation or basically do anything with the funds but pay the taxes. The IRS then would conduct a dissipated asset analysis and include those funds in any accepted Offer in Compromise tax settlement. It now appears that they will only be looking back six months, absent blatant fraud or transfers definitively made to avoid paying the taxes in question. You still can’t sign over your life’s savings to your buddy a day before the tax is assessed and not include the value in your OIC tax settlement. In the past, and I’m sure even in the future, the IRS is just not going rollover and give you a tax debt settlement. You are going to have to complete many long forms, collect all of your financial data and, in all but the simplest cases, hire an experienced Offer in Compromise tax attorney to negotiate it for you, but now more than ever, if you qualify for the OIC program and with professional legal assistance, you should get your IRS tax debt settlement. If you have any questions regarding whether you now qualify for an Offer in Compromise tax debt settlement I encourage you to give me a call at 303-376-6267 or send me an e-mail at [email protected]. If offer a free consultation which includes pre-qualifying you for the IRS Offer in Compromise program. |
June 12, 2012
May 21, 2012 IRS Announces Relaxed Offer In Compromise Tax Settlement Requirements
By John Claudell
| IRS to Accept More Offer in Compromise Tax SettlementsAs a part of its Fresh Start Initiative, the IRS Collections Department has made many strides this year in working with Taxpayer’s who owe taxes that they just can’t pay. Earlier in the year they streamlined the process for payment agreements, now letting Taxpayers who owe up to $50,000 get on a payment agreement with the IRS for up to 72 months. They even relaxed their tax lien filing guidelines to allow for the non-filing or withdrawal of tax liens on Tax debtors who owe less than $50,000.Now they’ve turned their attention to their main and only tax settlement program known as the Offer in Compromise. For years the IRS has accepted settlements from Taxpayers who proved that they could not pay their IRS tax debt in full. The process of negotiating a tax debt settlement although remained a long drawn out bitter fight. It seems now with the economy suffering and a continuously high unemployment rate the IRS has added a much needed dose of reality to the program.
To understand the changes that the IRS announced and how they benefit Taxpayers with tax debts you need to know the basics of how the IRS Offer in Compromise program works. In simplest terms the IRS will accept a tax settlement for an amount equal to your total collection potential. Collection potential is your net equity in assets (Quick Sale Value minus loans against them) plus your monthly disposable income calculated out, in most cases, five years. Here is an example to demonstrate this: EQUITY IN HOME: Taxpayer owns home worth $200,000 and has a mortgage on the property of $150,000. First we reduce the homes fair market value (FMV) to its quick sale value (QSV). The IRS allows a 20% discount from FMV to reach QSV or in this example $160,000. We then subtract the loan balance of $150,000 to come up with net equity of $10,000 that must be included in the IRS offer in compromise. Please note you do not have to sell the home. They just want to include any equity you may have in your tax settlement. EQUITY IN VEHICLES: Taxpayer owns a car outright with no loan against it and a FMV of $5,000. The IRS will want to include the QSV of the vehicle $4,000 in the tax settlement. EQUITY IN TOOLS OF THE TRADE: Taxpayer owns $10,000 of automotive repair equipment that he uses to generate income. In the past the IRS only allowed the Taxpayer to exempt $4,180 of this equipment from inclusion in the Offer in Compromise amount. So the Taxpayer would have to include $5,820 in the tax settlement. DISPOSABLE INCOME: Taxpayer makes $3,500 net after taxes. Based on his family size and the state and county he/she lives in the IRS allows $3,400 in expenses. In this case the Taxpayer would have $100 net disposable income. In the past the IRS would factor this net disposable income out five years or 60 months to come up with $6,000 that would need to be included in the tax settlement. What the IRS will allow you in expenses is where it gets extremely tricky and it would be best to have a tax attorney pull these numbers for you. There are expenses that they allow that they do not “advertise” so to speak. ACCEPTABLE OFFER IN COMPROMISE AMOUNT: In this example, under the old rules the IRS would expect a settlement of $25,820 made up of the following: $10,000 net equity in the home, $4,000 net equity in the vehicle, $5,820 net equity in tools and $6,000 in future income. THE IRS TO ACCEPT LOWER OFFER IN COMPROMISE TAX SETTLEMENTS NOW The main changes the IRS made to the Offer in Compromise in 2012 and how they would affect the example above are: SHORTER FUTURE INCOME CALCULATION: The IRS now only factors your future income a maximum of two years or 24 months. In the above example this would save the Taxpayer at least $3,600 on their offer in compromise. INCREASED EXPENSES ALLOWED IN OFFER IN COMPROMISE: The IRS has now increased the types of expenses they allow. These include a portion of state/local back taxes being paid, maintenance on high mileage vehicles (75,000+ miles) and more types of student loan payments. This can dramatically decrease the Taxpayer’s disposable income which will in turn dramatically decrease the Taxpayer’s final tax settlement amount. For instance, if in the above example the Taxpayer was paying $100 a month towards a student loan there would be zero monthly disposable income so nothing would be added to the offer in compromise tax settlement for future income. PERSONAL VEHICLE EXEMPTION INCREASED FOR OFFER IN COMPROMISE: The IRS has now created a $3,450 equity exemption per personal vehicle. In the above example this would mean the Taxpayer would only have to claim $550 equity in the vehicle as opposed to $4,000 under the old OIC rules. MOST INCOME PRODUCING ASSETS EXEMPT UNDER NEW OFFER IN COMPROMISE RULES: The IRS in most case will now exempt any equity in tools of the trade that are used to produce income. In the past the IRS essentially wanted to “double dip” by first taking the equity in the income producing asset and then also using the income produced from such asset to increase the Taxpayer’s monthly disposable income. The IRS now seems to have realized that this is unfair in that if the Taxpayer has to sell the income producing asset to pay the Offer in Compromise tax settlement the Taxpayer will then not have the income from the asset. There is a complex formula that they apply to decide whether to include the equity in the asset or its future income. If you have this issue you should talk it over with an experienced Offer in compromise tax attorney. In addition to the above changes, the IRS has also relaxed its rules on dissipated assets. In the past they would look back 3 or more years to determine if in the past you had the funds available to pay the taxes but chose to pay another debt or go on vacation or basically do anything with the funds but pay the taxes. The IRS then would conduct a dissipated asset analysis and include those funds in any accepted Offer in Compromise tax settlement. It now appears that they will only be looking back six months, absent blatant fraud or transfers definitively made to avoid paying the taxes in question. You still can’t sign over your life’s savings to your buddy a day before the tax is assessed and not include the value in your OIC tax settlement. In the past, and I’m sure even in the future, the IRS is just not going rollover and give you a tax debt settlement. You are going to have to complete many long forms, collect all of your financial data and, in all but the simplest cases, hire an experienced Offer in Compromise tax attorney to negotiate it for you, but now more than ever, if you qualify for the OIC program and with professional legal assistance, you should get your IRS tax debt settlement. If you have any questions regarding whether you now qualify for an Offer in Compromise tax debt settlement I encourage you to give me a call at 303-376-6267 or send me an e-mail at [email protected]. If offer a free consultation which includes pre-qualifying you for the IRS Offer in Compromise program. |
November 7, 2011
Are Student Loans Worse than IRS Income Tax Debts
By John Claudell
A lot of press and TV time has been spent on the Occupy Movement . A lot of it focused on what could be a lost generation of Americans coming out of college buried in student loan debt. For this reason I have chosen to dedicate this post to something that’s bothered me for a long time. I’m a tax attorney specializing in resolving back tax debts. As I work through my client’s options for resolving their tax debts I’m constantly amazed that they have more options and a better chance of putting their tax debt behind them than a person with student loan debt.
One can judge the logic of these students taking out massive student loans to fund their educations, but their actions were certainly no worse than an individual who did not file or pay their taxes, right? So, why would the government’s treatment of these two debts be so diverse? The treatment and options for resolving these two types of debts are so different that if I were to advise a potential client in dire financial straits which debt to pay first, I would be sorely tempted to recommend that they pay their student loan before their taxes. Here are six factors to consider when deciding whether student loans are worse than income tax debts.
Factor #1: What is the Interest Rate Charged
There is a variance in the interest charged for student loans dependent mostly on when the loan was originated or consolidated. In recent years, student loan interest rates have fallen to as low as 4.5%, but what about the borrowers who graduated college 5, 10, 15 and 20+ years ago? They are paying interest rates of up to 8.25% per annum. Here’s a link to student loan historical interest rate data http://www.finaid.org/loans/historicalrates.phtml .
The interest rate for underpaid Federal Income taxes changes with the Federal Reserve rate. Currently the interest rate charged for income tax debt is 4%, but it has been as high as 9% in the last decade, but that was only in the very early 2000s. Here’s a link to underpaid income tax interest rates http://www.taxalmanac.org/index.php/Federal_Underpayment_Interest_Rates.
But student loan interest is tax deductible right? Most people believe that student loan interest paid is always tax deductible while in reality for a lot of Taxpayers it is not. First of all, the maximum deduction for student loan interest paid is $2,500 per year regardless of the actual amount of student loan interest paid. Second, your student loan interest deduction begins to phase out when income exceeds $60,000 for single filers and $120,000 for joint filers. The student loan interest deduction is completely phased out when income reaches $75,000 for single filers and $150,000 for joint filers. Also, if you file married filing separate you are not allowed to take the student loan deduction at all. So if you make enough money to actually pay your student loan you’re probably not going to get a tax break for it.
Interest paid on a back tax balance is not deductible in any situation. So in this regard student loan debt is better than tax debt. At least it might be partially tax deductible.
Factor #2: Income Tax Debts are dischargeable in bankruptcy and Student Loans are not
Hopefully it never comes to it, but more and more Americans faced with overwhelming debt are filing for bankruptcy protection. For better or worse, student loans are almost never dischargeable in bankruptcy. The only time that it will even be considered is in cases of extreme hardship. The Courts have not ruled definitively on what extreme hardship is but it almost always involves extreme financial woes coupled with a physical or mental challenge.
Contrary to popular belief income taxes can be discharged in a bankruptcy. There are restrictions, but in a lot of cases they can be wiped completely away. The general guidelines for discharging personal income taxes in a bankruptcy are that they must have been due more than three years prior to the filing of the bankruptcy and if filed late the balance due must have been assessed more than eight months prior to the bankruptcy filing. In addition the taxes will not be discharged if there were any issues of fraud or tax evasion related to the income tax debt in question.
Sure you may have to wait a few years, but in the end the fact that you can discharge income taxes in bankruptcy does make them a more attractive debt than a student loan.
Factor #3: There is no time limit for collection of a student loan whereas the IRS has only 10 Years
A student loan will never expire. A student loan collector can chase you for this debt until the day you die and if they’ve reduced it to judgment can even collect it from your estate. The government has announced new income sensitive repayment programs where in you pay them 10-15% of your disposable income over 20 to 25 years after which the debt will expire. There are limitations. Most of the programs are only available to recent graduates and as your income goes up, your payments will go up, so it may end up that by taking this option you end up paying the loan in full and with more interest than if you went with a traditional repayment plan. The upside is you won’t be in default and you should have enough money to afford to meet your base nutritional needs, even if you are forced to live in your parent’s basement.
All IRS debts have a 10 year collection statute expiration date meaning that if the IRS does not collect the balance from you in 10 years it disappears for good. This is regardless if you’ve paid them a penny. If you can hold out and survive for 10 years you’re done and can start a new financial life. There are circumstances where the IRS has filed a tax lien and then reduce that lien to a judgment which would give them an additional 10 years, but I have never seen them do it. Not once in ten years of practice.
This factor clearly favors income tax debt over student loan debt. Ten years is a long time, but it’s nothing compared to a life time.
Factor #4: Is the debt Secured or Unsecured and will there be Public Notice of the Debt?
A student loan debt is an unsecured debt meaning that they do not record a lien or file a UCC Financing Statement against you. This means, that if you can qualify for a loan (despite your student loan balance) you can buy and sell real estate without the government being paid from the proceeds of sale. So technically you’re not as tied down as you would be with a secured debt, but based on the fact that they report the amount owed to the credit reporting bureaus student loan debt will still be considered by any lender. It will drive down your personal equity and reduce your net available income when considering whether you can afford that house payment. Your credit score will also be significantly lower due to the student loan balance which also makes it more difficult to get a loan. For many people this will result in them being unable to purchase a home or buy a vehicle at a favorable interest rate, if at all.
Depending on how much is owed and what you’re doing to repay it a Federal Tax Lien may or not be filed against you when you owe income taxes. The IRS has recently loosened their standards for filing tax liens. If you owe less than $25,000 and can afford a 60 month payment agreement they will not file a tax lien against you and will even release a previously filed tax lien. Furthermore, unless a tax lien is filed, the tax debt will never be reported to the credit reporting bureaus thus it won’t impair your credit score.
If you owe more than $25,000 in tax debt and you’re not able to pay it off over 60 months then a Federal Tax Lien will be filed which will tie up any assets you have now or hope to have in the next ten years. It will drive down your credit score and may even affect your ability to get a job. So in this instance, the size of the tax debt is a deciding factor in deciding which type of debt is worse.
Factor #5: What are the settlement options?
The reality is that there is no real settlement option for student loans. If you’re willing to work in the public sector or at a non-profit for the next ten years there are programs in which you can have your student loans forgiven. There is also a new income sensitive repayment plan for new graduates in which you pay 10-15% of your disposable income for 20-25 years at which point the debt will be forgiven. The problem with this is that as your income increases you just pay more to your student loan debt. You may end up paying it in full with a massive amount of interest. The other options is you don’t pay it in full and it goes away, but either way you’ve spent the last 20 to 25 years being effectively poor. Any extra money you’ve made has gone to increased student loan payments.
They also have forbearance where in you do not have to make payments, but they’re going to capitalize the interest accrued during that year and interest will just keep accruing thereafter. After you begin making payments again all of those payments are going to go to that capitalized interest before you even begin to touch the principal. If you think about it from their perspective, why would they ever agree to settle a debt that is guaranteed by the U.S. government, non dischargable in bankruptcy and never expires. Student loans are what banker’s fantasies are made out of.
The IRS has one main settlement option, beyond bankruptcy for income tax debts, the Offer in Compromise. This much maligned and much abused program is still an incredibly effective tool for eliminating a large IRS balance due. Basically, if you can prove to them that you have minimal equity in assets and minimal disposable income (expenses calculated under IRS standards not actual expenses) then there is a good chance you can settle your income tax debt with the IRS and you don’t even have to go through the bankruptcy. In fact, if you move forward with your offer in compromise tax settlement proposal fast enough there may not even be a tax lien filed, meaning no negative mark on your credit report. Even if you don’t qualify for an Offer in Compromise tax settlement, the IRS has all the same, forbearance (currently not collectable) and income sensitive repayment plans (partial pay installment agreement) except that instead of waiting 25 years for the debt to expire, it expires in 10 years.
Reason #6: Who is more aggressive collecting their debt, the IRS or a Student Loan lender?
IRS collections has a tough reputation that is generally well deserved. If you ignore them or refuse to comply with their requests they will levy your bank accounts and your wages, as well as take your income tax refunds and file a tax lien against you. If you stay in contact with them and comply with their requests for documentation they will consider your overall financial situation and try to come up with a workable solution to your issue. They may even recommend to you to file an Offer in Compromise to settle the tax debt. The major difficulty in working with them is just a lack of knowledge and expertise in the programs that are available. A knowledgeable tax attorney specializing in IRS collections can guide you in this regard.
Enforcement of a delinquent student loan can be undertaken by the original bank, Sallie Mae or by a private collection agency so it’s hard to say definitively how aggressive a collector they are, but in the end they have all of the same collection tools as the IRS. They can intercept tax refunds, levy wages, levy bank accounts and sue to collect the debt in civil court. They can also reduce the debt to a judgment so they can legally attach real estate holdings.
Sounds unbelievable, but for a person in dire financial straits and when viewed from a debt management and resolution perspective, IRS income tax debt is better than student loan debt. The reason is that when you look at these two very common debts it becomes clear that the options for resolving income tax debts are much better. Would I as a tax attorney ever advise a client in this situation to pay their student loan before their income tax debt? Yes, in the right circumstance I would.
September 16, 2011
How to Remove and IRS Tax Lien
By John Claudell
What is an IRS Tax Lien and what assets do they attach to?
An IRS Tax Lien is a Blanket Lien
An IRS tax lien filed against you or your business is a blanket lien, meaning that it will attach to anything you or the business own currently and anything purchased in the future. IRS tax liens are filed at the County Clerk’s office for the county in which you reside. Sometimes an IRS lien will also be filed with the Secretary of State’s office.
IRS Tax Lien on Real Estate
Despite the fact that IRS tax liens attach all assets, most IRS tax liens are enforced upon real estate. Any public records search will turn up the IRS tax lien and prevent you from selling your home or more accurately you can sell your home, but any proceeds from the sale, above and beyond, what is owed to prior secured creditors (1st mortgage, 2nd mortgage, Home Equity Line of Credit, etc…) will go to the IRS and not to you. Furthermore, if you’re trying to purchase real estate and have a tax lien you will most likely be denied financing because upon taking title to the home the IRS tax lien will immediately attach. The banks know this so they are obviously leery to lend money on a property that will immediately be subject to a tax lien.
For the most part the IRS is content to sit on their lien interest until the property is sold or refinanced at which time they will get paid, but in extreme circumstances where a delinquent taxpayer has a lot of equity in their property and is refusing to work with the IRS towards a resolution of the tax debt, the IRS will go to court and have the lien reduced to judgment after which they can move to foreclose on and take the property. They don’t like to put families out “on the street” but they will if they are not approached with a reasonable proposal for resolving the tax liability.
IRS Tax Lien on Vehicles
The IRS generally doesn’t record their lien with the State Department of motor vehicles so despite the fact that the lien technically attaches to vehicles you can sell a personally owned vehicle without the purchase price going to the IRS. This is the result of the fact that the IRS just doesn’t dedicate the time or resources to perfecting their lien claim against personally owned vehicles. With that being said if you own a business that owns vehicles the IRS will enforce their claim to those business vehicles. Most of the time when a business owes taxes a local collection officer will be assigned to collect the business tax liability and will have the time and ability to use whatever means necessary to collect the IRS’s tax lien interest.
With regards to purchasing vehicles the main problem caused by the tax lien is that they are picked up by the credit reporting bureaus which will drop your credit score dramatically and prevent you from qualifying for financing.
IRS Tax Lien on Business Assets
As mentioned above, when a business owes tax liabilities the IRS assigns a local revenue agent to collect the debt so the stakes are much higher. The IRS can collect on their lien interests in a variety of ways.
- They can go after any purchaser of business assets subject to their lien if such purchaser did not go through obtain a Certificate of Discharge of Tax Lien from the IRS lien department, by filing a nominee or alter ego tax lien against the purchaser.
2. They can reduce their lien to judgment and seize the business assets.
3. Within 45 days of IRS tax lien filing the IRS can step in and collect any amounts due from the businesses accounts receivable that are being factored. Factoring is when a lender fronts money to a business for their accounts receivable in exchange for a small fee.
How to Release or Remove an IRS Tax Lien?
Release IRS Tax Lien on Real Estate
There are two formal processes for releasing or discharging a tax lien on real estate. The first is the IRS’s Certificate of Discharge of Federal Tax Lien. If the property is being sold and the proceeds (what’s left after the bank is paid off) will pay the IRS off on full then all you need is an official payoff letter from the IRS. The sale goes through, the money goes to the IRS, the lien is released and you’re done.
If the proceeds from sale will not pay the IRS off in full then you must negotiate a Conditional Release of Federal Tax Lien with the IRS lien department. You do this by submitting an application to the IRS lien unit with proof that the sale is an “arms length transaction” to a bona fide purchaser for fair value along with substantiation of what is owed to your prior secured creditors. Upon review of your application the IRS will issue a Conditional Release of Federal Tax lien stating that in receipt for “X” amount of dollars they will release their lien. If the property is upside down they will approve these requests even if the “X” amount is -0-.
If you only want to refinance the property the IRS has a process called a Request for Certificate of Subordination of Tax Lien. In this process you are basically asking the IRS to let the new refinancing bank step in front of them in lien priority. The IRS will usually only do this in situations where there is minimal to no equity in the property and by doing so the IRS improves their ability to collect the debt. For instance, if by allowing you to refinance your home, your mortgage payment goes down which will then allow you to make payments to the IRS.
Even with the help of a seasoned tax attorney these processes take from 4-6 weeks so it’s important to start early.
Release IRS Tax Lien on Business Assets
Negotiating anything with the IRS related to a tax liability owed by a business is always more difficult and intense. Most taxes owed by business are payroll taxes which are a higher collection priority for the IRS and they have less qualms about shutting down a business than they do with putting an individual Taxpayer and their family on the streets. With that being said, if you approach them with a reasonable plan, based on the financial realities of your business they will listen. Crafting the right proposal and negotiating it to acceptance is where having an experience tax attorney help you is crucial.
September 8, 2011
Options for Businesses That Owe Back Taxes
By John Claudell
A business that owes back tax debt has options. Those options depend on what type of entity the business is (corporation, sole proprietorship, LLC, etc…) and what type of tax is owed. For most business types and for most business taxes owed the main options are as follows:
IRS Monthly Payment Agreement for Businesses.
This is the most common option for all types of businesses and for all types of business tax debts. The IRS will want to set the monthly payment at an amount that equals the businesses average monthly net income. Meaning anything over necessary business operating expenses will go to the IRS. The IRS will make their determination of net income based on a review of past years income tax returns and year to date financials of the business. The IRS’s goal is to set the monthly payment as high as possible so that the debt is paid in the shortest amount of time. The negotiation of a payment agreement that the business can afford while leaving enough for the owners to live on is a very difficult task. If it’s set to high and the business misses a payment the account will immediately be returned to the collection agent who set it up and you’re going to have a very angry and frustrated revenue agent to deal with. If the payment is too low or the business simply can’t afford a payment the IRS will be more likely to force the company out of business and pursue the owners for the Trust Fund Recovery Penalty (Corporations and LLCs) or pursue the owners for the entire amount due (Sole Proprietorships and partnerships).
Currently Not Collectible Status.
In some limited cases the IRS will agree to shelve the amount owed by the business for one year by placing it in a currently not collectible status. In these cases they will have reviewed the businesses financials and determined that the company simply cannot afford a payment at this time. If the business is continuing to accrue tax debt and the financial outlook of the business is truly hopeless the IRS will move to force the company out of business and pursue the owners for collection of the taxes due.
IRS Penalty Abatement (Forgiveness).
The IRS will forgive, or in their terminology, abate penalties assessed against a business if we can prove to them that the business had reasonable cause for not filing or paying its return(s) on time. The main factors the IRS will consider in granting the request are:
1. The businesses compliance history. The cleaner the compliance history the more likely the IRS is to grant the request for penalty abatement.
2. What was the reason for not paying or filing on time? The more compelling the reason the more likely the IRS will forgive the penalties assessed.
3. How closely in time is the reason for the late filing or payment to the due date for the return or payment to the IRS.
4. Unforeseen or other mitigating factors. Any other compelling reason that shows that the business acted in good faith and reasonably in planning to meet its tax obligations will be considered by the IRS in granting an abatement of penalties request.
Voluntary Company Closure and Asset Transfer or Corporate Restructuring.
In a situation where a corporation or limited liability company owes taxes back payroll tax (Form 941 Employment Taxes), back unemployment tax (Form 940) or corporate income tax (Form 1120 Income Tax) an experienced tax attorney can negotiate an agreement with the IRS wherein the company agrees to voluntarily close its doors and another business entity can come in and by the businesses assets out from under the IRS tax lien and continue on with the operations of the original business. The advantage of this strategy is that the entire tax debt of the original business will be placed in a permanently not collectible status and the company purchasing the assets can continue on without any tax issues. The owners of the original company would still have to deal with the Trust Fund Recovery Penalty but the savings to be had are extreme in the right circumstances. Whether the original owners can also be the owners of the new company purchasing the old company’s assets is determined on a case by case basis, but there is a real possibility that the original owners can continue on with their business, albeit under a different business entity, while paying little towards the original company’s tax debt. This type of strategy is extremely complex and should only be pursued with an experienced tax attorney on your side to avoid fraudulent transfer claims and alter-ego liability issues for the new company.
This is a review of the basic options available. I’d welcome you to contact me at 303-376-6267 or by e-mail at [email protected] if you’re interested in reviewing your situation in detail and receiving help working with the IRS to resolve back taxes owed by your business.
August 15, 2017
IRS Collections Makes it Easier for Taxpayers Who Owe Less Than $100,000
By John Claudell
The IRS collections department has now made it easier to enter to a repayment plan with them if you owe less than $100,000 in assessed tax debts. The IRS will now allow you to go on a long term payment plan with them without full financial disclosure provided you owe less than $100,000, your payments will full pay the tax debt prior to the collection statute expiring and you agree to have the payments automatically debited from your bank account.
This move should save a lot of taxpayer and IRS agent’s time. Prior to this taxpayers were required to go through an in depth financial review of all their assets, income and expenses prior to the IRS agreeing to a payment agreement. If you cannot afford the minimal monthly payment given you will still have to go through this review process to qualify for a lower payment plan or currently not collectible status.
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