Category Archives:FAQs

Question: Should I file my taxes if I can’t pay?

Answer: Yes!  This is a question that that I’m always asked around tax season and the tax extension deadlines.

Putting aside that it is a misdemeanor to fail to file a tax return and a felony for the willful failure to file a tax return, it can be financially devastating to not file on time.

One of the biggest IRS penalties is the failure to file a tax return by its due date plus extensions.  The failure to file penalty runs at 5% per month up to maximum of 25% of the total tax due.  For example, if the tax return is reporting a balance $100,000.00 and its five months late, the IRS will assess an additional $25,000.00 in tax penalties.  Therefore, by filing the return timely, you would avoid criminal exposure and the costly failure to file penalty.

In addition to the failure to file penalty, the IRS would assess the failure to pay penalty on the amount owed plus statutory interest.  The failure to pay penalty is assessed at .5% per month up to a maximum of 25% for the late payment of tax.  The failure to file penalty is reduced by the failure to pay penalty when both penalties run concurrently.  If the government issues a notice of intent to levy and you do not pay within 10 days from the notice, then the penalty increases to 1% per month.  Therefore, if you have any money available, even if the amount is less than what is reported, then submit the funds with your tax return.  That way, you reduce the exposure to the failure to pay penalty which is based on the amount of back taxes owed.

In addition to the tax penalties and the taxes owed, the IRS assesses statutory interest on both the tax reported and the tax penalties assessed.  In the aggregate, penalties and interest could inflate your back taxes by 55%-75%.  Therefore, by timely filing and paying what you can, you can significantly reduce the amount of back taxes owed.

The disadvantage of filing a tax return without payment is that the IRS collection cycle will begin.  However, if you are proactive, you can negotiate for additional time to pay taxes, request an IRS payment plan, place your account in forbearance (i.e. currently not collectible, CNC, or Status 53), apply to settle your tax debt for less than what is owed (i.e. offer in compromise or OIC), or propose to the IRS another alternative that would resolve your back taxes.

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Can the IRS hold me personally liable for Payroll Taxes?

Yes.  Although it’s the business entity that accrued and is liable for payroll taxes, interest, and tax penalties, the government can hold an individual personally liable for back payroll taxes by assessing the Trust Fund Recovery Penalty.

Employers are statutorily required to deduct and withhold an employee’s federal income, Social Security, and Medicare taxes.  See IRC 3102(a) and 3402(a).  Additionally, employers are required to match the employee’s share of social security and Medicare taxes.  The withheld income tax and the employee’s share of social security taxes are referred to as the trust fund taxes. The employer’s share of social security taxes and Medicare taxes are excluded from the trust fund tax definition.  

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Can the IRS Take my Home?

house

Yes, but the IRS is required to obtain a U.S. District Court judge’s approval in writing before the seizure of your “principal residence.”

Generally speaking, the IRS does not want to foreclose upon your home.  The IRS would rather see you pay your back taxes through a payment plan or tax settlement, known as an offer in compromise, than foreclose upon your home.

Normally, the IRS will go after your principal residence as a last resort.  It’s much easier for the IRS to collect unpaid taxes by levying your bank accounts and account receivables or garnishing wages.  However, if there is no reasonable alternative to collect your unpaid taxes, then the IRS may foreclose upon your “principal residence.”

The definition of “principal residence” is critical in determining whether or not judicial approval is necessary in taking your home.  The meaning of principal residence in the tax foreclosure context is borrowed from the same tax code provision, §121, that determines whether you can exclude up to $250,000/$500,000 (if a joint return is filed) of the gain from the sale of a home with one exception. The IRS in Chief Counsel Advice 200947036 stated that the “2-out-of-5 year” residency requirement which is necessary to qualify for the capital gains exclusion is irrelevant in making the principal residence determination.  The tax regulations state that a houseboat, a house trailer, or shares or in a cooperative housing corporation could be your principal residence.

What if I have multiple properties?

If you have multiple properties, then your principal residence is where you spend the majority of your time during the year.  To assist the Revenue Officer, an IRS employee in charge of collecting back taxes, in their determination of a principal residence the following criteria is used:

  1. your place of employment;
  2. the place where your family members reside;
  3. the address listed on your federal and state tax returns, driver’s license, automobile registration, and voter registration card;
  4. your mailing address for bills and correspondence;
  5. the location of your banks; and
  6. the location the religious organizations and recreational clubs with which you are affiliated.

If the IRS is considering seizing your home, then the tax code, I.R.C. § 6334(a)(13)(A), requires that you owe more than $5,000.00 in back taxes. Therefore, if the amount you owe the IRS does not exceed $5,000.00, then your principal residence is exempt from levy.

If the IRS decides to foreclose upon your home, the Internal Revenue Manual, bylaws for IRS employees, instructs the IRS to obtain area director approval unless the collection of tax is in jeopardy. For a discussion on jeopardy levies, check out my blog at https://www.irsproblemsolve.com/2013/12/back-taxes-jeopardy-live/.

If the area director approves the decision to foreclose upon your home, then the next step is for the IRS to petition the US District Court for approval.  In court, the IRS must demonstrate the following:

1) You owe an outstanding tax liability;
2) The IRS followed the law and procedure pertaining to the levy; and
3) There is no reasonable alternative for the collection of your back taxes.

If the IRS successfully proves its case, you would have 14 days to object.

It may be possible to negotiate with the IRS for the release of your property any time up to the sale.  At the Law Offices of Todd S. Unger, Esq. LLC, we can verify that the proper administrative and judicial procedures have been followed if the IRS is threatening or has seized your home. If you owe back taxes and the IRS has threatened to seize your home or has seized your home, then contact the Law Offices of Todd S. Unger, Esq. LLC today 855-896-1566.

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Question: How long can the IRS collect back taxes?

Answer: It depends. Generally speaking, the IRS can collect a tax by levy or by a court proceeding if the levy has been made within ten (10) years from the date of an assessment. See IRC 6502(a). An assessment is a bookkeeping notation that is made when the IRS posts the liability on its database.

The IRS has three (3) years to assess a tax from the date a tax return is filed. If a taxpayer did not file their taxes, then the IRS can prepare a return for the taxpayer by filing what is known as a Substitute for Return (SFR). The date of assessment would be the date that the IRS processes the SFR.

There can be multiple assessment dates from where the ten (10) year period begins to run. If you are audited and assessed an additional tax liability, then the collection statue (also known as CSED) would run from when the original return was processed and when the additional liability was assessed. For example, if the IRS assessed your 2012 tax return on April 15, 2013 and then audited your return and assessed an additional tax on July 16, 2014, there would be TWO (2) CSED statutes. The IRS could collect the tax within 10 years from April 15, 2013 (April 15, 2023) and within 10 years from July 16, 2014 (July 16, 2024). In other words, there would be two CSED statutes running simultaneously.

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Question: Will the IRS disallow my deductions because my tax records are lost or destroyed?

Answer: Loss or destruction of tax records is common problem for taxpayers during a tax audit. Here in New Jersey, my clients have expressed frustration over the loss of records due to Superstorm Sandy and other events outside of their control such as a computer crash. My experience is that IRS tax auditors while ostensibly sympathetic penalize taxpayers that have lost their tax records. This is because Congress codified, under USC §6001, the requirement that every person liable to pay a tax has the duty to retain records. But considering that audits typically take place years after filing and there are circumstances where records get destroyed or lost, the requirement is draconian.

There are ways to overcome the loss or destruction of tax records; however, the burden is on the taxpayer to prove the deduction.

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Question: What is an essential component to resolving or negotiating a Tax Settlement with the IRS?

Answer: Tax Compliance, Tax Compliance, Tax Compliance.  My answer is a play on the slogan “location, location, location” which emphasizes the importance of location in real estate.  Similar to the importance of location in real estate, there is nothing more important than tax compliance in resolving your back taxes.

Ask any IRS Revenue Officer or an employee in the automated collection system (ACS), and they will echo my sentiment.  Whether you want to negotiate an installment agreement or settle your tax debt for less than what is owed through an offer in compromise, the first thing that must be accomplished is present and future tax compliance.  Tax compliance means that you must timely file all of your tax returns and pay all of your future tax obligations.

Before any negotiation with the IRS can occur, a taxpayer, either business or individual, must file all of his/her tax returns and get current with tax obligations. That means, if you are self-employed, you must have remitted all estimated tax payments to apply for an IRS installment agreement or offer in compromise (“OIC”).  If you your business has payroll, then you must have remitted all federal tax deposits and filed all tax returns (Form 941, 940 etc.)  The failure to remain compliant will cause your installment agreement proposal or offer in compromise to be returned which may result in IRS bank levies, garnishments, seizures, etc.

If you successfully executed an IRS payment plan and fail to timely file and pay your taxes in the future, then you will breach the installment agreement. The IRS adds a boilerplate provision to all installment agreements that requires that the taxpayer maintain future compliance.  The IRS then states that the failure to remain compliant will result in it taking enforcement which may include, but is not limited to, a bank account levy, placing a lien on assets, garnishing wages and social security, etc.

As part of the OIC contract, the IRS adds a boilerplate provision that calls for the timely filing and payment of taxes for five years following the acceptance date of an offer.  The failure to stay compliant would result in the offer in compromise being in default and the IRS reinstating the original back tax liability plus interest and penalties.  As a tax attorney, there is nothing more frustrating than negotiating a deal with the IRS and having your client call you for help with the same liability that the IRS forgave.  I explain to my clients that a successful tax offer is like hitting the lottery and the failure to remain compliance is similar to blowing all of your money.  If you are a business or individual that has successfully negotiated a back tax liability with the IRS, then you should meet periodically with your tax attorney to maintain checks on compliance.

If you are trying to negotiate an IRS tax lien being withdrawn, the IRS will also require compliance for the past three years.  That means all tax returns, information returns, and timely estimated tax payments and federal tax deposits must have been made three years before making an application for a lien withdrawal under the IRS Fresh Start Initiative.

As a tax attorney whose practice focuses exclusively on IRS tax audits and tax collection, I can tell you that there is nothing more important in resolving or negotiating a tax settlement than tax compliance. While negotiating with the IRS, you must maintain a series of checks and balances to ensure that you do not accrue additional tax liabilities.  At the Law Offices of Todd S. Unger, Esq. LLC, we can help you set up a system to ensure adequate tax compliance which is essential to the resolution of a back tax problem.

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Question: What is the difference between an IRS tax lien and an IRS tax levy?

Answer:  If a business or individual is liable for back taxes and cannot pay after the IRS issues notice and demand for payment, then a lien in favor of the United States exists upon all property and rights to property belonging to the business or individual.  This lien is referred to as the “secret lien” because it exits between the taxpayer and the IRS without the filing of any public documents.

To protect its interest against other creditors, the IRS will go to the county courthouse where the taxpayer resides or has property and will file a Notice of Federal Tax Lien (NFTL).  After the Notice of Federal Tax Lien is filed, taxpayers have the right to appeal the NFTL during the 30-day period beginning with the mailing or delivery of the notification.

When the IRS files its tax lien in the county court, it can be devastating for people and businesses who must maintain good credit.  In some cases, it can spell the end for a businesses that relies on financing or individuals who need good credit such as stock brokers, bankers, and people looking for jobs.

Notice, that I have not discussed the “taking” of property.  While the Notice of Federal Tax Lien protects the government’s interest in taxes owed, it does not bring in money. The IRS levy is how the government collects back taxes.  A tax levy, also known, as seizure, garnishment or bank levy, is the taking of your property to satisfy a tax debt. When the IRS levies, there is a transfer of ownership of your property to the IRS.

There are prerequisites that the IRS must follow before taking the taxpayer’s property.  First, the IRS must issue notice and demand for the payment taxes owed.  Second, the taxpayer must neglect or refuse to pay the tax within 10 days of the notice and demand.  Finally, the IRS must provide written notification of the right to a hearing 30 days before the levy is made on the taxpayer’s property.

The key difference with the procedural requirements between an IRS lien and an IRS levy is that the IRS must provide the right to a hearing 30 days before levy action is taken whereas the taxpayer has the right to hearing after the IRS files a lien.  Defending against an IRS lien can be difficult because once filed, the damage is done.  The IRS’s perspective on a tax lien is that it must protect its interest against other creditors at the risk of the taxpayer’s career or business.  Even though there are administrative remedies available to have the lien withdrawn, the key is to be proactive prior to the IRS filing the tax lien.  The IRS’s policy is to file a lien when the taxpayer owes more than $10,000.00 in back taxes.  There is no threshold amount for the IRS to levy against a taxpayer’s assets.

While both an IRS tax lien and an IRS levy are devastating, the key difference is the following: the tax lien is a security interest similar to a mortgage, whereas a levy is the taking of property similar to a foreclosure.  The government protects itself against other creditors by filing a tax lien whereas the tax levy generates the proceeds against which the lien may secure.

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Is it possible to negotiate a tax settlement to pay less back taxes than I owe?

Question: Is it possible to negotiate a tax settlement to pay less back taxes than I owe?

Answer: Yes, but not in the way that you are thinking. When my clients ask this question, it’s usually after they have heard a catchy advertisement. The client thinks that if they offer the government an arbitrary percentage of the back taxes owed, that the IRS will go away. For example, if the client owes $30,000.00 in back taxes and they offer to pay $10,000.00, the IRS would say, “thank you for the $10,000.00 when will you get us our $20,000.00.” If the IRS allowed the above negotiations, then there would be no incentive to pay taxes because you could pay less at a later date.

There are different methods to reduce or eliminate a tax debt. You can apply for innocent spouse relief, file an amended or original return, submit a doubt as to liability offer in compromise, demonstrate a financial hardship, although rare, eliminate tax penalties, eliminate interest, although rare, apply for an audit reconsideration, execute a partial pay installment agreement, submit an offer in compromise based on doubt as to collectability, file for bankruptcy, let the statute of limitations on collection run out, utilize accounting methods to offset liabilities, or contest the tax liability in various courts.

All the above methods can reduce or eliminate back taxes. A tax attorney can help you analyze each method’s applicability to your unique set of circumstances and assist in helping you execute a plan.

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Foreign Bank and Financial Accounts (FBAR) vs. Offshore Voluntary Initiative Program (OVDI)

Question: I have not been filing the Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR) despite having a filing requirement. Should I file amended income tax returns reporting and paying the tax owed and file FBARs going forward instead of entering into the Offshore Voluntary Initiative Program (OVDI)?

Answer: The above technique is known as a quiet disclosure. Quiet disclosures are admonished by the IRS. The IRS has a FAQ section for its 2012 OVDI program. In FAQ Number 15 and 16, the IRS explicitly states that it will closely monitor these late filed amended returns to determine whether enforcement action is appropriate. The IRS goes on to state that it may, if criminal tax evasion is evident, refer the matter to the Department of Justice. In March 2013, the US Government Accountability Office (“GAO”), released a report, GAO-13-318, about offshore tax evasion. In the report, the GAO stated that quiet disclosures undermine the incentive to participate in OVDI. The IRS concurred with the GAO’s report and acknowledged that it will utilize methods to effectively detect and pursue taxpayers deciding to execute quiet disclosures.

 

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Is there a statute of limitations period to claim a tax refund?

Question: I filed a tax return late which showed a refund.  The IRS sent me a letter denying my refund stating that I was not timely.  Is there a statute of limitations period to claim a tax refund?

Answer: Yes. Generally speaking, you have the later of 3 years from the return due date of a timely filed return plus extensions, if applicable, or 2 years from the time you “paid” the tax to claim a tax refund.  An exception that can extend the time to file a claim for refund may include service in a combat zone, a refund claim involving an item with a filing period in excess of the general 3 year period, or a financial disability.  A financial disability is defined by the Federal Tax Code as being unable to manage your financial affairs by reason of a medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of at least 12 months.

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