Tax Problem Definitions
Tax Lien
The IRS sends you a very nice letter
after they discover you owe them money. The letter following the nice
one will be INTENT TO LEVY LETTER. Of course they cannot levy until
they file a tax lien at your County Recorders office. Millions of
these are filed each year. The
intent of a tax lien is to protect the government’s interest in your
property. The effect of a tax lien destroys your credit. If
you don’t own and real estate and if have no credit.
Tax Levy
Anyone who pays a salary is responsible to withhold income and
social security tax to the IRS. If you collect it, you have a fiduciary
relationship. You are responsible to pay the tax to the government.
If you have a bank account and ever
used it to pay the Internal Revenue Service or for a dog license, the
IRS probably has access to the account number because local and state agencies
share information with them. If
you are a W-2 wage earner, the IRS knows your work location because of a
group of forms your employer files yearly. With this information the
[computer] sends out these levies to your employer and/or your bank.
If you are self employed, they know exactly were you are and most
likely your bank.
Social Security
Of course the Social Security
Administration works with the Internal Revenue Service. If you are receiving monthly benefits for social
security or disability, it is no secret. The nice thing is they will
not take all of your social security. I think, but don’t quote
me, they take about 10%. Of course 10% of not very much makes not
very much, much less.
Offer in Compromise
The
idea of allowing you to compromise your tax liability goes back to Genesis,
but in terms of tax law it has its origins to the early part of the twentieth
century. It recognizes that some people can’t
service a tax debt within the prescribe statute period which is about ten
years. I say about because some things can change that. On the home
page, I gave you some idea of what an offer is and what is required. The
workings are really complicated much too complicated to go into it here,
but knowing you can compromise is important.
Most people ask for a compromise because of an inability to pay. Almost
all my clients ask on that basis. But you can also argue that you
do not owe tax in the first place or for some reason it would be unfair
or unreasonable to collect the tax. 99% of all offers, maybe more
are because of the inability to pay.
Current Compliance
Current compliance is really
the lynch pin of the whole process. To
be in current compliance, you need to have filed all the tax returns due
and be up to date in your payments [see below for businesses]. It
sounds simple but most of my clients have not filed in years. They
have no idea what they owe. I must complete the returns to bring
them into current compliance and make sure that they are having enough withheld
from there paychecks to service next years tax debt. It is a pay as
you go system and the tax return just reconciles the fact that you paid
along the way enough to satisfy the debt.
Business people pay estimated tax payments that are based on the
prior year’s tax due. That means four times per year, the first
payment being on April 15th and the last one on January 15th of the following
year. If that all adds up to the amount of the prior years tax;
the business person is in current compliance. However, when he does
his tax for the year and his current debt is higher than what he paid
in, he must pay the difference before April 15th to stay in current compliance
[plus] the first payment of estimated tax for the following year.
As your tax advocate, I’ve got to make sure you are in current
compliance before anything else is done about your indebtedness. I
often write the IRS and tell them we are in the process of preparing
those returns and that seems to quiet them down.
When you secure an offer, you are making a promise that you will
stay in current compliance for five years. That’s is after
all the purpose.
Net Equity in Assets
As you will recall, we talked
about Current Compliance as the first requirement of an offer. The second is Net Equity in Assets. What
this means is that if you owe more on your house and car than they are worth,
you have no net equity in assets. There are some other quirks in the
definition, but 99.9% of the people who put in offers, only have to worry
about the house and the car. In today’s I have not seen anyone
with equity either in a house or a car. However, if you do have net
equity, your offer cannot be lower than that net equity, so if you have
$2000 value in your car and nothing else, that is your offer.
The IRS is interested in how much equity you have in assets
because some of that equity goes to creating the dollar value for offer purposes.
The IRS for the purpose of this computation is interested
in your tangible and intangible assets. Look to the Intangible Assets Section
for more information on this issue.
For our purposes here, most intangible assets are worth 100%
to the IRS.
Tangible assets include, in most cases, a home, car and boat.
Before counting them for offer purposes, 20% is removed from there value so,
if you own a home worth $200,000 and have a $160,000 note against it, you
have not equity in it for offer purposes.
Again, if you own a car worth $10,000 and owe $8,000 on it,
you have no equity for offer purposes. If however, you own a car worth $10,000
and you owe $7,000 on it, you have $1,000 in net equity in assets and that
is added to your offer.
Income above Expense
You know what your net income
is. If your total [ordinary
and necessary] expenses are the sale or less than your income, you have
no income above expense. That has been the case for most of my clients.
But if you do, it is subject to a multiplier. Remember I mentioned
there was a statute of limitations on the collection of tax? Well
let’s say that limitation in your case is [36] months down the road. Let’s
also say that you have $100 of income above expense. You multiple
the amount of months by the amount of excess income and that is your
offer amount which equals $3,600.
An offer can be a combination of both. Let’s say you
car is worth $2,000 and you have, as I outlined in the above, $3,600
of income above expense. Those two are added together for an offer
of $5,600.
The point of all of this is that it doesn’t
matter how much you owe. You are offering out years, not $$$. So
if you owed $180,000, your offer would still be $5,600.
Settlement Agreement
Let’s say for whatever reason, you did not qualify for an offer
and your liabilities statute of limitations was [36] months away and an
IRS financial statement indicated you had $500 extra income above expenses. We
would ask for a payment plan of 36 [x] $500 paid monthly until the statute
expired or until the liability had been paid in full.
Payment Plan
There are all kinds of payment
arrangements the IRS will accept as long as they represent income above
expense and they can run until the statute runs out and all the tax,
penalty and interest just disappear.
Uncollectable Status
If you have no net equity in assets and no income above expense,
but can maintain current compliance, the same paperwork necessary for all
the other plans can be filed with the IRS requesting that you are uncollectable.
There are good things and bad things about that status. The
good thing is the IRS will not attempt to collect from you. While
it is supposed to last one year and then is subject to review, it often
lasts more than that. The bad thing is that the debt is not serviced
and will grow very quickly.
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