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Guide to Tax Law
- Introduction to Tax Law
- What is the IRS?
- Filing Your Tax Return
- Rights of Tax Payers
- Tax Free Income
- What is a Tax Credit?
- Tax Implications of Differed Income
- How Tax Deductions Work
- Recucing Your Taxes with Investments
- Tax Benefits for Homeowners
- Shifting Income withing a Household
- Your Status as a Tax Payer
- Small Business Owners and the IRS
- Minimize Taxes on Your Estate
- Tax Fraud and other Crimes
- Red Flag: IRS Audits
- Taking Your Case to Tax Court
- When to Hire a Tax Attorney
If an individual fails to properly pay their taxes, they will have to deal with the civil income tax penalties and fines and possible criminal consequences. Civil penalties include assessing interest of taxes due for the entire period of time for which they are outstanding, and unlike criminal penalties, civil penalties can accrue indefinitely. The IRS may send an IRS Agent to the home of business of a taxpayer in situations where the taxpayer owes the IRS $25,000 or more.
Individuals who under-report their income by 25% or more are within the income tax fraud provisions of the IRS business tax rules, and as such, the IRS will be able to go back for 6 years (as opposed to the normal 3-year statute of limitations).
If the IRS substantiates a claim of willful intent to evade paying taxes, they could go back as far as they wish, without any limitation and assess penalties, fines and interest on all unpaid taxes from the beginning of the taxpayer's adult life where the income tax evasion first occurred.
IRS Billing and Collection Operations
Revenue Officers
The IRS Revenue Officers act as collectors for the IRS and will make an on-site visit to the home or business of a taxpayer in situations where a taxpayer owes the IRS 940 tax or 941 taxes. The IRS Revenue Officer or Agent is not seeing information or a discussion with the taxpayer; rather, the IRS employee is seeking to collect owed taxes from the individual.
What collection steps do they follow?
The IRS Revenue Officers have broad discretion and authority when it comes to collecting taxes. Revenue Officers can take multiple steps to induce collections, such as: the initiation of:
- Levies
- Liens
- Wage Garnishments
- Seizures of the assets of a taxpayer
Often times, the IRS Revenue Officer is willing to work within the tax evasion law to with individuals who make an effort to pay the taxes they owe. If taxpayers contact the Revenue Officers to try and work out a compromise, there is generally at least marginal success gained.
Compromise Offers, or "Offer in Compromise"
An Offer in Compromise ("OIC") is an agreement between the IRS and a taxpayer that sets the parameters to settle the tax liability of a taxpayer for a portion of the full amount owed to give the taxpayer some IRS tax relief.
To submit an Offer in Compromise to the IRS, the taxpayer must file two separate payment documents: one for the application fee; and the second for the amount of the offered payment. All payments should be payable to the United States Treasury and should be in the form of a check or money order. The appropriate form must also be submitted in when filing for an Offer in Compromise. The forms are:
- Lump Sum Cash Offer - Form 656
- Periodic Payments Offer - 656-PPV
- Doubt as to Liability - Form 656-A
Who Qualifies for a Compromise Offer?
The IRS may accept An "Offer in Compromise" when the following qualified situations occur:
- Doubt as to Collectability - Doubt exists that the taxpayer would ever be able to pay the tax liability within the statutory period for collection.
- Doubt as to Liability – A true doubt exists that the tax liability is correct. Reasons for doubt include: (1) the IRS examiner erred in interpreting the law, (2) the IRS examiner did not adequately consider the evidence of supplied by the taxpayer; or (3) the taxpayer has produced new evidence.
- Effective Tax Administration – The taxpayer owes the money and can probably pay, the some exceptional circumstance exists that may induce the IRS to consider an OIC. In such circumstances, the taxpayer must show that the collection of the tax would produce a substantial economic hardship or would cause an unfair or inequitable outcome.
How Much Should be Offered?
Taxpayers should generally offer a reasonable sum of money to settle their tax liabilities. The IRS will typically not accept unreasonably low offers, especially in situations where they believe that the taxpayer is capable of paying the tax liability in full – either as a full payment or as a lump sum.
How the IRS Collects Tax Debt
Federal Tax Liens
Federal Tax Liens give the IRS a legal claim to the property of a taxpayer. A Federal Tax Lien is used by the IRS as a security for payment or as actual payment of a tax liability. The IRS will issue a Federal Tax Lien only after all three of the following have taken place:
- The IRS assess the taxpayer liability
- The IRS send Notice and Demand for Payment – informing the taxpayer that they have outstanding debt and specify how much is owed in taxed
- The taxpayer refuses or fails to pay the debt in full within a period of 10 days after the IRS sends notification
Once the IRS liens requirements are met, the IRS created a lien for the amount tax debt the taxpayer owes. The creditors of the taxpayer get notified of the lien because the notice is publicly filed. In many cases, the lien notice is used by courts to help establish priority of interests in certain circumstances, like bankruptcy or sales of real estate.
A Federal Ta Lien attaches to the physical property as well as to the rights of the taxpayer in the property. A release tax lien will occur after the full amount of the debt is paid off.
Tax Levies
The Federal Payment Levy Program ("FPLP") is a program that was started in 2000 by the IRS, Department of Treasury and Financial Management Services. The FPLP is authorized by Internal Revenue Code §6331 (h), included in the Taxpayer Relief Act of 1997. It allows the IRS to collect the overdue taxes of a taxpayer through a continuous levy on specific federal payments disbursed by FMS. The following are federal payments that may be the subject of a FPLP levy:
- Medicare Payments
- Federal Employee Retirement Annuities,
- Federal Payments Made to Business that are contractors of the Federal Government
- Travel Advances of Federal Employees
- Specific Social Security Taxpayer Benefits
The State Income Tax Levy Program ("SITLP") gives the state the right to levy (i.e. take) the tax refund of a taxpayer. This program only applies to individual state tax refunds.
Assets that Can Not be Seized by the IRS
The following are taxpayer assets (as of 2009) that can not be seized by the IRS – they include but are not limited to:
- Child support payments
- Worker's Compensation Benefits
- Basic clothing allowance
- Not more than $7,700 of personal items
- Nor more than $3,860 of educational, trade or professional textbooks and equipment
- 85% of Unemployment Benefits
- Undelivered mail
- Minimum Salary and Wage Exemption
- Social Security and Welfare Payments
Using Bankruptcy to Stop the IRS
Chapter 7
The process of filing for Chapter 7 Bankruptcy may eradicate tax debt, but not in all cases. Tax debts are considered non-dischargeable in some cases and therefore, these debts will not be discharged when Chapter 7 is filed. Income tax liability may be discharged by Chapter 7 bankruptcy only if all of the applicable tax rules are satisfied, including:
- The 3-Year Rule – the debt must be at least three years old – must have incurred the debt at least 3 years before bankruptcy filing
- The 2-Year Rule – The tax return for which the taxpayer has liability must be filed at least two years before the bankruptcy occurred
- The 240-Day-Rule – The tax liability was assessed at least 240 days before the bankruptcy filing;
- The tax liability is not the product of willful evasion; and the tax liability is for income taxes only (not payroll or other business taxes)
Chapter 11, 12 & 13 Bankruptcy:
An alternative to Chapter 7 Bankruptcy is Chapter 11, 12 or 13 Bankruptcy which can allow taxpayers to get more time within which to repay tax liabilities, while forcing the IRS to participate in a repayment plan when they would not otherwise be willing to do so.
Taxpayer Advocate
The IRS provides the Taxpayer Advocate Service< ("TAS"), an independent organization, formed within the IRS that provides assistance to taxpayers. TAS seeks to help taxpayers who are undergoing some sort of economic harm as a result of problems with the IRS.
Who Qualifies for a Taxpayer Advocate
To qualify for the Taxpayer Advocate Service> ("TAS"), an individual taxpayer must have tried to solve their tax problem on their own with the IRS to no avail, or, the taxpayer believes that the IRS process is not working well to help find resolution of their problem.
TAS services are available to taxpayers whose tax problems are causing actual financial difficulty and/or significant cost, (which may include the cost of representation by a tax professional).
Penalties and Interest added to Tax Bills
For taxpayers who filed their tax returns on time but who did not make the applicable payment on time, a late payment penalty will be assessed by the IRS. Generally, the late payment penalty is 0.5% of the amount owed for each month or partial month that the payment remains late after the original due date. The late payment fee cannot exceed a total of 25%.
If a taxpayer can show a reasonable cause for the failure to pay on the due date, the IRS may waive the late payment penalties. For taxpayers who neither filed nor paid on time, a failure to file penalty will be added to the late payment penalties.
The breakdown is as follows: 5% total penalty, 4.5% late filing penalty and 0.5% late payment fee for each month or partial month that the payment remains late after the original due date. The maximum total combined penalty for failure to file and failure to pay is 47.5% of the total tax owed. The maximum penalty is a combination of the 22.5% penalty for late filing and the 25% penalty for the late payment penalty.
Reducing and Eliminating Penalties and Interest
The IRS will reduce or eliminate the penalties and interest of assessed against taxpayers if the taxpayer can show reasonable cause for the delay, or if the taxpayer received written advice from the IRS that was incorrect or misleading.