Not only are your tax problems with the IRS stressful, but they can impact multiple areas of your financial life.  When you owe the IRS there is a “silent” tax lien that automatically attaches to a taxpayer when the IRS has assessed the tax against you, notified you of the tax that you owe and you have failed to pay it.  It is referred to as “silent” because there isn’t a form that is filed anywhere, it just happens by operation of law.  The lien protects the government’s interest in all your property, including real estate, personal property and financial assets.  A lien is different from a levy because a levy is where the IRS physically takes your property (by wage garnishment, taking all of the money from your bank account, or selling your property).

The typical threshold for the filing of a formal Notice of Federal Tax Lien is at $10,000.00 owed in taxes, but depending on the circumstances, it could be filed when you owe less than that.  A Notice of Federal Tax Lien is filed in the register of deed’s office for the county where the taxpayer lives.  That means your tax debt has now become a public record and this will also be included in your credit report so your credit score will drop having a negative impact on your ability to borrow.

The Notice of Federal Tax Lien has an automatic release provision built into it so that when the date listed on the form has passed usually ten years from the date of assessment of the tax, the lien is automatically released.  But, what if you have gone through the offer in compromise process and settled your tax debt, or you have been making monthly payments for a few years and were able to pay off your tax debt?

Since you paid off your tax debt prior to the automatic release date on the lien, the IRS will issue a release of the tax lien that is also filed with the register of deeds and becomes a public record.  That’s great that the tax debt is now gone, but the big problem is that it doesn’t come off of your credit report automatically.  While they notify the county, the IRS does not notify the credit bureaus.

Here’s what you do.  Head over to IRS.gov and download Form 12277.  There is a link in the show notes at 6minutelegal.com/tpt006.  Begin completing the form.  The first eight questions will be your name and contact information.  Question 9 will begin asking for specific information about the lien that has been filed.  You will need a copy of the lien that has been filed so you can refer to the lien number and date and location of filing.  Question 10 will ask the current status of the lien.  If you have received a notice of release of federal tax lien, you can check the released box.  If you haven’t you should check “open” or “unknown.”  Since you have already paid your tax in full, the issuance of a release should be automatic by the IRS, but often it is not.   In box 11, I would suggest checking the last box for “in the best interest of the tax payer and the government.”  And, in box 12, you can detail the reason for your request which is essentially that your tax debt has been paid in full and you desire to have the lien withdrawn.  You can also refer to the IRS Fresh Start Program that authorizes the filing of a lien release when the tax has been paid in full.  Finally, you will sign and date Form 12277 at the bottom.

I hear you saying, “That is the formal request to the IRS to release the lien, but what about your credit?“  Paragraph 4 of the instructions for this form state, “At your request, we will notify other interested parties of the withdrawal notice. Your request must be in writing and provide the names and addresses of the credit reporting agencies, financial institutions, and/or creditors that you want notified.”  So, along with your request, you should mail a separate letter to the IRS with this request:

 Sample Addendum to IRS Form 12277

(YOUR NAME)

(YOUR SOCIAL SECURITY NUMBER)

(ADDENDUM TO FORM 12277)

Pursuant to your instructions,

There are three main types of offers in compromise that you can submit to the IRS.  The most common is the offer in compromise based on doubt as to collectability.  By filing this type of offer in compromise with the IRS you are telling them that you agree that you are liable for the taxes, interest and penalties that have accrued against you, but you can’t afford to pay them.  Since you cannot afford to pay the taxes in full you are requesting that the IRS take a reduced amount for this.  No doubt you have seen the late night television commercials stating that they can help you settle your taxes for “pennies on the dollar.”  They make it sound so easy.  So automatic.  My friends, it is not always that easy or automatic.  It all depends on your individual financial situation at the time you file your offer in compromise.

When I say your “financial situation” what I am talking about is your current income, your monthly expenses, and the equity that you have in the assets that you own.  Figuring out your income is usually the easy part.  If you are employed at a job, then you probably get a normal paycheck or at least a W2 at the end of the year that tells you what you made that year and you can average that out over the months.  I know that many of you are self-employed but that you do not keep good records and it is hard to determine what you actually earn.   In this situation it takes a lot more work to determine what to put in this line on the IRS forms.  But, you have to do this work – for a couple of reasons.  First, it is just good business for you to keep good records and stay on top of your company’s finances.  How else do you know how well your company is doing?  Second, the IRS is going to require you to prove to them what you say your income is.  They do not simply just take your word for it.

You will also need to include your spouse’s income in this calculation.  This is probably common sense if your spouse also owes the taxes with you, but a alarming question is often asked when the other spouse is not liable for the taxes.  Your spouse wants to know why they have to provide their income information.  Will they become liable for the taxes by doing so?  The short answer is no, they will not become liable for the tax by submitting their income information.  The IRS just requires the total household income in order to calculate what percentage of the household expenses to allow you to claim in the offer in compromise.  So, if you have the only income for the home, then you will be able to claim 100% of the expenses.  If, you and your spouse have equal incomes then you will only be able to claim 50% of the expenses and so on.

Now, where the IRS really gets you is on the expense side of the equation.  Most people do not live extravagant lifestyles.  They are simply trying to get by from one month to the next or maybe even one week to the next.  You have a mortgage or rent payment, the usual utilities like power, water, gas, cable and telephone, a car or two, some monthly prescriptions, and so on.  Here’s the catch: for many of the expenses you will list on your financial statement the IRS has “national standards” that they will allow as your monthly expenses.  These are called collection financial standards.  The problem with these national standards is that they are lower than what the average person spends on these monthly expenses and they do not changes very frequently so they will not take into consideration things like gasoline that costs $4 per gallon.  So if, for example, you have a family of three and your mortgage payment is $1,500 per month, the IRS may only allow $1,100 per month as the national standard for your area.  So right off the bat you are $400 in the hole.  Most Americans do not know about these national standards until it is too late when dealing with the IRS and they have already los...

There are few things scarier than getting a notice from the IRS about your taxes.  They are so impersonal and all seem to threaten to take your stuff or garnish your wages.  Today, we talk about how to identify when you are dealing with the IRS automated collection service (ACS) and what that means.

ACS is essentially comprised of two things: a computer that generates letters and collection notices and a call center to handle the incoming calls that the letters create.

The ACS computers send out a series of collection letters beginning with the CP 501 “Reminder” letter, followed by the CP 503 “Important – Immediate Action is Required” letter.  Next comes the CP 504 “Urgent – We intend to Levy on Certain Assets” letter and finally the CP 90 Final Notice of Intent to Levy letter is sent.

The first three notice letters sent out by the IRS are done completely free from human interaction.  That means there is no revenue officer huddled over your account file creating these notice letters.  These are all computer generated notices designed to get you to communicate with the IRS to try to resolve your tax debt.  The Final Notice of Intent to Levy (CP 90) can either be sent by the ACS computer or a revenue officer assigned to your case.

Typically, the notices will cause you to call the 1-800 number listed to communicate with the IRS about your case.  I have found that constant communication, meeting the deadlines (or at least calling and asking for an extension) keep the IRS happy and prevent them from jumping into active collections like bank levies or wage garnishments.  But, you can be sure that if you fail to communicate with them, the ACS computers will begin to look for “fast cash” to help satisfy your tax debt.  They find this information in their database that you and your employers have provided through the filing of tax returns, W2s, and 1099s.

One of the main problems with dealing with ACS is that there is no one revenue officer assigned to your case.  Remember, this is a call center and when you call the 1-800 number you are going to get the next available operator.  If you’ve called before you know because you have likely sat on hold for a long time.  The creates issues of fluidity with getting your case resolved.  The employee at ACS you spoke with last week may have been helpful and sweet, but the person who answered your call this week may not care about your case, speak in a terse manner, and make your case much more difficult.

But, there are ways to speak with someone outside of ACS that will be assigned your case.  If you receive the CP 90 Final Notice you can file a collection due process appeal and that will remove your case from ACS and transfer it to IRS appeals whom you may have a sit-down, in person meeting with or have a telephone conference with.  The collection due process appeal must be filed within 30 days of receipt of the CP 90.  If you miss that window, the IRS will typically still allow you to have what is known as an equivalent hearing if you file your request within one year of receipt of the CP 90.  While you are not afforded all of the same protections you still remove your case from ACS and put it in the hands of an Appeals officer.

While ACS can levy your wages or bank accounts, they cannot seize your personal property.  That takes a whole lot more authority than that section of the IRS has so you don’t have to worry about that outcome.  Just know, that good communication and follow through can help you navigate your tax issues when you are dealing with ACS.

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Questions?

Let's continue this conversation in the comment section below. What questions do you have about dealing with IRS collections?

There are a few common ways of resolving your IRS tax debt.  The most popular are the offer in compromise and the installment agreement.  But, there is an uncommon way that many people believe doesn’t exist: bankruptcy.  Most people have bought into the myth that bankruptcy filings cannot help with tax problems.  I have even run into some bankruptcy lawyers who believe the same thing.  That couldn’t be further from the truth.  Bankruptcy can eliminate income taxes and non-trust fund related taxes.  You can look at it like this – if you are holding the tax and supposed to pay it on behalf of someone else (e.g. the trust fund portion of payroll taxes or sales tax) then you cannot bankrupt it.

Before we dive in to talk about whether bankruptcy may be a possibility for your taxes, let’s talk about why you may consider filing bankruptcy to resolve your tax debt.  The first reason is so you can resolve your tax debt and other debts like medical bills and credit cards all at one time.   You may just want to get someone else to review your tax debt when the IRS is being unreasonable or is simply unwilling to work with you to resolve your debt in a fair way.  You can use a bankruptcy as leverage to get an offer in compromise accepted that may otherwise be rejected by the IRS.  Filing a bankruptcy will have the immediate effect of releasing any lien or levy the IRS has filed against you. The filing of bankruptcy will stop all interest and penalties from accruing against you and it can be a quick means to resolving your tax problems.

The issue of bankruptcy and taxes are simply a question of timing.  That is, your taxes have to meet certain time requirements before they become bankrupt-able.  Here are some general rules to keep in mind: first, the bankruptcy must be filed more than three years after the tax return was due to be filed (including extensions) and if you are a late filer, the bankruptcy must be at least 2 years after the return was actually filed.  The final timing issue is that if the tax due is a result of an IRS examination (or audit) at least 240 days must have passed since the audit was final and the tax was assessed.

So your first step in determining whether you can bankrupt your taxes will be to examine the periods you owe the IRS for and see if they meet the timing requirements.  The next step will be to review the different types of bankruptcy to determine what you will qualify for and if it will have an impact on your tax situation.

While bankruptcy is an option for corporate taxes, today we are going to focus on the personal tax liability and personal bankruptcy options.  So we will be talking about Chapter 7 and Chapter 13 bankruptcies.

Chapter 7 bankruptcy is the most common form of bankruptcy.  It will generally take between 4-6 months and will result in the elimination of your tax liability.  There are two types of Chapter 7 bankruptcy, asset cases and no asset cases, but before we determine what type of case we have, we must qualify for Chapter 7 by having no disposable monthly income after paying some reasonable living expenses.  While the IRS also considers “reasonable living expenses” they do so according to their collection financial standards which are more strict than the bankruptcy allowances.  But, the determination is similar to that used to determine currently not collectible status like we discussed in episode 2.  If you do not have any monthly disposable income you will be a candidate for a Chapter 7 bankruptcy.

Next, we evaluate your assets.  A no asset case means that you have no meaningful equity in any of your assets to satisfy your debts.  If you have no equity in your assets your case will be considered a no asset case and you will emerge from bankruptcy with all of your assets.  There are also exemptions the bankruptcy code allows for including up to $800 in cash on hand, $1,000 of equity in a car, and up to $5,000 of equity in a personal residence and it will typically al...

Contrary to what collectors at the IRS may tell you, there is a hardship status available to you known as currently not collectible.  Essentially, this means that the IRS agrees that you are financially unable to pay your tax debt at this time without it becoming a financial or economic hardship for you and they agree to forbear collections activity on your account.

To be clear, this does not do away with your tax debt.  It simply means that the IRS is going to take some time off from pursuing your case.  This can last for years and it is not uncommon for taxpayers who are placed in currently not collectible status to remain there until the collection statute of limitations passes.

So how can you qualify for this hardship status?

The first step is preparing a financial statement to the IRS.  This financial statement is known as a Form 433 and it is a comprehensive list of your assets, debts, income and expenses.

The IRS will examine your financial statement to see if you can actually pay your taxes or if doing so will create a hardship for you.  Here’s what they are looking at.  On the income/expense side, they are certainly considering your full income as reported on your paystubs or other documentation.  They are also looking at your expenses; however, when considering your expenses, the IRS is considering their national guideline expenses or the Collection Financial Standarsds), not your actual expenses.  The guideline expenses are generally less than your actual expenses.  From this examination, the IRS must find that paying your reasonable living expenses will leave you no money left to pay the taxes.

Next, the IRS will look to your assets to see if they can provide some relief to paying your taxes.  Essentially, they are looking to see if there is significant equity in the assets that could be applied to your tax debt, but they will not require you to take a step that will put you in further hardship – like selling your car that would prevent you from getting to work.

I appreciate you listening and encourage you to stop back in for the upcoming episodes of Tax Problem Toolkit.  The next episode will drop next Thursday morning where we discuss using bankruptcy to resolve your tax issues.

Remember, this podcast can’t happen without you and your questions. I understand tax problems are pretty private affairs and you don’t necessarily want to share your information with just anyone, even a lawyer, but if you would like some information about resolving tax problems, please send those to me via e-mail at Connect (at) 6MinuteLegal.com or visit 6MinuteLegal.com/Connect.

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Welcome to Episode 1 of the Tax Problem Toolkit podcast.  I wanted to take this few minutes to share with you a little of my vision for this podcast and what you can expect over the coming weeks.

Right now my plan is for this to be a weekly podcast about tax problems, specifically with the IRS, and a place to provide you encouragement, information, and tips on how to resolve those tax problems and resume your regular life.

I have represented hundreds of clients with tax problems and I understand that the IRS can be frustrating, confusing, and down right scary.  Most of that comes from the complexity of the tax law and most Americans simply not understanding their obligations and rights.

This podcast can’t provide specific legal advice for individual situations, but it will give general guidance for people wishing to resolve their problems with the IRS on their own.  We’ll discuss topics like unfiled returns, tax liens, wage garnishments, collections, and settlement topics such as installment agreements, offers in compromise and the IRS hardship status.

I appreciate you listening and encourage you to stop back in for the upcoming episodes of Tax Problem Toolkit.  The next episode will drop next Thursday morning and I discuss the IRS hardship status commonly known as currently not collectible.

This podcast can’t happen without you and your questions.  I understand tax problems are pretty private affairs and you don’t necessarily want to share your information with just anyone, even a lawyer, but if you would like some information about resolving tax problems, please send those to me via e-mail at Connect (at) 6MinuteLegal.com or visit 6MinuteLegal.com/Connect.

Subscribe to the Tax Problem Toolkit Podcast