Tax Guidance & Information

Tax Liens

The IRS has certain tools at their disposal when they are seeking to collect past due taxes. One of the most common types of collection methods is the Lien, and corresponding Notice of Federal Tax Lien. Typically, a Lien is put into effect when the IRS has been repeatedly unable to collect a debt from a taxpayer or when they have lost communication with the tax payer and have decided to escalate their collection of the past due taxes. More importantly, the IRS has the authority to implement these methods without any prior notice so the taxpayer is often caught off guard.

A Lien essentially gives the U. S. government the right to the taxpayer’s property as security for a tax debt, preventing the owner from being able to sell or refinance that asset without authorization or release by the Internal Revenue Service.

Releasing a Lien generally requires coming to some kind of repayment agreement with the IRS; for instance, if a taxpayer decides to file an Offer In Compromise, then the IRS may release the Tax Lien while the taxpayer prepares and submits that Offer In Compromise. However, the IRS will not just release a Tax Lien simply because a tax payer requests that they do. In most cases, expert assistance is required to present the financial condition to the IRS on the taxpayer’s behalf and demonstrate that he or she is willing to settle the outstanding tax debt.

If you have received a Notice of Federal Tax Lien, then it means the IRS has knowledge of your debt, and you must take action to resolve it.

Lien Subordination

Under this method the delinquent taxpayer is able to secure financing for the purpose of making a payment towards their federal tax liability. A Federal Tax Lien gives the IRS a secured interest in any property that is subject to the Lien. Because of this secured interest, prospective banks are not willing to loan money to a taxpayer with a Federal Tax Lien unless they can obtain a security interest superior to that of the IRS Lien. By subordinating the Lien, the IRS allows a lender to take a priority interest ahead of any IRS claims on value of the property. In return, the IRS will require that it receive ALL proceeds in excess of sales costs and amounts due to Lien holders who are a priority to the IRS (the bank that holds your loan, etc…), up to the amount of taxes you owe. While there is no specific IRS Form for Subordination or discharge of a Federal Tax Lien, the process is very specific. As long as the IRS is receiving the full proceeds (other than closing costs) from the sale or refinance of a property, the IRS will usually grant a Lien Subordination.

This procedure, though it is quite common, is sometimes difficult to achieve without assistance from a tax professional. The first thing that needs to be done is finding a bank to fund your loan. Ask us if you need a referral to a lender. Once you have your financing application in place, we will need to supply the IRS with required information on your property and the impending loan. Once this information is delivered to the proper department within the IRS, your subordination should be granted. The normal processing time for subordination may be as long as 30 to 60 days. However, when there is danger of losing the loan, the IRS may expedite the certificate at our request.

Wage Garnishment and Levy

It is important to understand that levy, garnishment, or wage attachment are actually all the same thing. When the IRS files a levy it is as a last resort. Communications between the taxpayer and the Service has ceased and the IRS has no alternative but to employ additional efforts to collect. The levy is a demand made by the IRS on a third party; an employer, a bank, a financial or securities firm or really anyone else they can locate that has possession of assets owned by the taxpayer who has failed to remit taxes due.

The most common type of levies or garnishments are on salary and wages, and bank accounts held by the tax payer.

There are differences in the nature of the levies and the way they are administrated on these asset classes.

Wage levies are ongoing. Once the employer receives the levy he is obliged to continue to withhold wages until the levy is satisfied or the levy is released, whichever occurs first.

As of this writing, the IRS may withhold all wages due above $3.83 per hour for a single individual with no dependents. That is far below the minimum wage. One must note, however, that the taxpayer is liable for income tax on the full amount of wages paid even though some wages were withheld.

As with a bank levy, the employer is obligated to hold the funds until 21 days from the date of levy has expired, not counting the day the levy was received and implemented. In the instance of a bank levy on a time deposit, the bank must deduct the 10% penalty for early withdrawal if it applies and remit the balance to the IRS. In essence, the IRS can break into your certificate of deposits or other time deposits and take the money while the bank assesses the penalty to you. It is very difficult to retrieve funds impounded by the employer or financial institution. It can be done, but in most cases that will require the intervention of the Taxpayer Advocates Office.

The levy will be satisfied and the process is completed when all tax, penalty and interest is paid if full, or when the IRS withdraws or releases the levy order, whichever comes first. The levy order may be withdrawn when the Service is satisfied the taxpayer is attempting to comply with his/her tax obligations. Compliance with that tax obligation may be achieved by paying the tax, entering into an installment agreement, submitting an Offer in Compromise or being placed in non-collectible status (because the taxpayer does not have enough money to pay the back taxes). A levy may result in the individual being unable to make other important payments such as home loan, car payments or child support obligation. As a result, any documentation received from the IRS or any tax authority that indicates a levy or seizure of assets should be given immediate attention.

Installment Agreement

A program like this is typically for delinquent taxpayers and businesses that cannot settle their entire tax debt all at once and need to make payments. Typically the installment agreement is 60 months or less although the IRS is allowed to collect over 10 years. Installment Agreements are employed when the taxpayer has the ability to pay back tax as evidenced by his or her financial profile when using IRS Collection Standards. Those Standards are averages of expenses that individuals living in various parts of the nation are likely to incur. Standards are set for food and clothing, housing and utilities, transportation costs and health care (allowances for health care are set, not on standards, but on actual experience of each individual, plus court ordered or legally mandated payments such as family support, student loans and judgments.  The allowances indicated in the Standards are added together and then subtracted from monthly after tax income. Any excess of after tax income over the allowance is referred to by the IRS as ‘ability to pay’ and is the amount the IRS will demand each month in an Offer in Compromise or Installment Agreement If 60 payments of the ‘ability to pay’ amount is less than the tax debt the IRS will consider an offer to pay the lesser amount. If the ‘ability to pay’ amount is greater than the tax liability, the IRS will demand their money in an Installment Agreement of not more than 5 years.

The Installment agreement provides the taxpayer valuable time to catch up on finances and escape the harassment and embarrassment of dealing with revenue officers and IRS agents. If the IRS has burdened you with an unreasonable payment plan or is threatening to levy or garnish your wages, bank accounts and other seize your assets, we may be able to arrange an Installment payment plan for you that conforms to your current financial situation or, if your financial condition warrants, we can have your account placed in a “not currently collectible” status. Under this program, the IRS withholds all collection activity until you are financially able to accept a payment plan or have an Offer in Compromise submitted.

Offer In Compromise

If you have a tax problem with the IRS you need to exercise your legal rights and consider submitting an Offer in Compromise.  The amount of money you owe the IRS is not relevant. Instead, what is important is your financial ability to pay your tax owed. You must prove two things to the IRS before they will accept your Offer in Compromise.  First, you must prove your asset value is low or nominal and second, your monthly allowable expenses equal or exceed your monthly income. If you meet these two criteria, you may qualify for a reduced settlement with the IRS.

You must determine your asset value before you submit an Offer in Compromise. The IRS will not accept an Offer in Compromise for an amount less than your total equity value. The equity you have in an asset is the value of the asset minus the liability you owe on the asset. For example, if your home is worth $100,000 and your loan against the home is $50,000, you have $50,000 in equity value in that one asset. The total equity in all of your assets must be determined and be LESS than the total tax you owe.

You will need to determine if your monthly allowable expenses equal or exceed your monthly income. If your monthly allowable expenses equal or exceed your monthly income, and your asset value is low or nominal, you may submit an Offer in Compromise. An experienced tax professional can help you decide if you qualify for an Offer in Compromise. The IRS mandates that you cannot use all of your monthly expenses when you calculate whether your monthly expenses equal or exceed your monthly income. The IRS only allows you to use allowable monthly expenses. The IRS divides monthly allowable expenses into necessary expenses and conditional expenses. This is an allowable expense. The IRS has mandated monetary limits on some allowable expenses. As a result, you will not be allowed to claim the entire amount you spend on certain allowable expenses. When you are calculating whether your monthly allowable expenses equal or exceed your monthly income, you must be certain that your actual expenses do not exceed the IRS monetary limits for that expense as mandated by the IRS.

Filing all Unfiled Tax Returns Required.
The IRS is extremely rigid when it comes to filing all of your federal tax returns as a pre-requisite to filing an Offer In Compromise. The IRS is unlikely to accept your Offer in Compromise unless all of your federal tax returns have been filed. The IRS agent who will handle your Offer in Compromise will check your IRS files and records to find out if you have filed all of your federal tax returns. The IRS will not accept your Offer in Compromise if you are not current or have failed to file all of your federal tax returns. Being current and having all of your federal tax returns filed is critical to having your Offer in Compromise accepted. This is an extremely important aspect of this process. There is a $150 filing fee that must accompany any Offer in Compromise.

Withholding of Collection Action when An Offer In Compromise is Filed.
The IRS will usually stop collection actions against you after you submit your Offer in Compromise. According to the IRS, all collection activity must be stopped if the IRS believes that you submitted your Offer in Compromise in good faith.

How is Good Faith defined? Good faith means that you submitted your Offer in Compromise for the purpose of settling your back taxes and not for the purpose of stopping or hindering IRS collection actions.  However, in many instances, the IRS illegally continues to enforce collections against a taxpayer after the Offer in Compromise has been submitted.  Typically an experienced tax professional may be able to help you release collection action by the IRS.

After the Offer In Compromise is Remitted
If your offer is accepted, the Internal Revenue Service will ask you to pay the reduced amount suggested in your offer. After you have paid the offered amount, the Internal Revenue Service will likely release any liens against you on your property.

Penalty Abatement

In addition to an Offer in Compromise, there is another, very effective option for reduction of an outstanding tax debt. If there were circumstances beyond your control that prevented you from paying your tax debt and led to delinquency, the penalties and interest that have built up may be able to be disputed and an attempt made to negotiate them. Relief from penalties falls into four separate categories. They are:

  • Reasonable Cause – Mistake made by the taxpayer, ignorance of law, death, serious illness, unavoidable absence, etc.
  • Statutory Exceptions – Simple or complex legislative tax code changes.
  • Administrative Waivers – Undue hardship, fire, flood, natural disaster, bad legal/tax advice.
  • Correction of Service Error – Mistake made by the IRS. Source IRS

Since the criteria for waiving accrued penalties and interest is based more on your stated representations rather than financial hardship, terms for a successful penalty abatement are more rigorous. More so than any other, this option involves a great deal of skill to successfully navigate the IRS protocol to bring a successful result. If successful, results are substantial; savings are usually significant, your personal tax professional will cover the intricate details of a penalty abatement, accurately explaining why you would or wouldn’t be a candidate for this relief


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