The IRS "Fresh Start" Initiative: Expanded to Help Struggling Taxpayers

Since 2008, the IRS has been adjusting its collections practices to help struggling taxpayers during this difficult financial climate.  

Part of these efforts is the "Fresh Start" initiative, announced on February 24, 2011.  The changes included in this initiative are: (1) Adjustments to Lien Polices (2) Easier Access to Installment Agreements for Struggling Small Businesses and (3) Expanding the Streamlined OIC Program.

Last week, the IRS announced a major expansion of this "Fresh Start" initiative.  As part of this expansion, the IRS is taking steps to provide new penalty relief to the unemployed and allowing even more taxpayers to qualify for an installment agreements.

Adjustments to IRS Lien Polices

Under the Fresh Start Initiative, the IRS will no longer file a lien if the tax owed is under $10,000 (unless special circumstances warrant otherwise).  

After a lien has been released because the tax liability has been satisfied, a taxpayer may request a withdrawal in writing by submitting form 12277. 

Furthermore, a taxpayer who owes $25,000 or less will be eligible for a lien withdrawal if he or she sets up an installment agreement through direct debit and makes three consecutive direct debit payments.  

Installment Agreements for Businesses

Small business that owe $25,000 or less in payroll tax, can set up an installment agreement without submitting a financial statement if the installment agreement allows for the debt to be paid within 24-months and the installment agreement is set up through direct debit.

Offer in Compromise

The streamlined OIC program is available to wage earners, the unemployed and self-employed taxpayers with no employees and gross receipts under $500,000.  A taxpayer is eligible for this program if his or her total household income is $100,000 or less and the amount owed to the IRS is less than $50,000.  If the taxpayer qualifies for this program, fewer requests will  be made for additional financial information and there will be greater flexibility in calculating a taxpayer's reasonable collection potential.  

Following the initial expansion of the streamlined OIC Program in 2011, the IRS has been working to put in place additional common-sense changes to the program to reflect real-world situations. 

  

Relief From Penalties 

The IRS plans to allow a six-month grace period on failure-to-pay penalties for certain wage earners and self-employed individuals.  In order to qualify, the taxpayer must fit into one of the following categories:

• Wage earners who have been unemployed for at least 30 consecutive days during 2011 or in 2012 (from January 1-April 17 2012).  
• Self-employed taxpayers who experience at least a 25% reduction in business income in 2011 as a result of the economy.  

Furthermore, the taxpayer's income must be equal to or less than $200,000, if filing married filing joint, or $100,000, if filing single or head of household.  The taxpayer's balanced owed for 2011 must also not exceed $50,000.  If these eligibility requirements are met, taxpayers need to complete Form 1127A in order to request relief.  

If the tax, interest and other penalties are fully paid by October 15, 2012, a request for an extension of time to pay will shield the taxpayers from the failure to pay penalty for 2011.  

Interest, which is currently 3% per year, is not affected by this grace period and will continue to accrue on unpaid back taxes.  

Installment Agreements

The IRS has also expanded the streamlined installment agreement process to allow individual taxpayers who owe $50,000 or less to request an installment agreement without having to submit a financial statement.  The maximum term for payment has also been raised to 72 months.  In order to qualify for for this expanded streamlined installment agreement, taxpayers must agree to pay through direct debit.  

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional. 

Unreasonable Expectations: Offer in Compromises and Tax Liens

While I was watching a YouTube video earlier today, an advertisement for Tax Resolution Services ("TRS") popped up. This was the first time that I heard of this company so I decided to do a Google search for reviews. A preliminary search revealed a B+ BBB rating due to 39 complaints filed. Eventually, during my search, I came across a website called Complaints Board and found the following review: 

"I hired TRS over 3 years ago and they have yet to have my case resolved. I paid $5,000 to have an Offer in Compromise submitted (that's already .25 cents on the dollar). They accepted payments over a 10 month period, but did no work at all until the entire amount was paid. My case has now been in appeals process with IRS since October of 2008. My current case rep at TRS (it has changed 5 times) tells me the IRS is the reason for delay. As of Aug 1, I now have to pay an additional fee of $1,500 or they will no longer represent me. This is not right. I can not believe they do nothing and then charge you for what are supposed to be IRS delays. Additionally, they did not stop (nor did they make any attempt to stop) the IRS from issuing a Tax Lien that appears on my credit reports. So, after 3 years, still carrying a monkey on my back, my credit is in the toilet, and the company that is contracted to resolve the issue is demanding more money - immediately." (submitted August 17, 2009). 

Although I don't know the exact circumstances of this case and all the facts involved, two issues in this complaint immediately jumped out to me as worthy of explanation: (1) the delay with the Offer in Compromise ("OIC") and (2) failure to stop an IRS lien.  

Offer in Compromise Delays 

These two issues reflect the unreasonable expectations of many taxpayers. First of all, the OIC process takes a very long time. The acceptance of an OIC is not a right, it is an exception to the general rule that taxpayers have to pay their taxes. This reviewer sounds extremely shocked at how long this OIC process has taken. Well, it can take a long time and IRS representatives can be very unresponsive.

After an OIC is submitted, it takes anywhere from six months to a year before a representative contacts you for additional information. If the representative decides to reject the OIC, and many of them do, an appeal should be submitted. It takes about another six months or more for a new representative to be assigned to the case. These representatives are IRS Appeals Agents who are swamped with cases. For example, I submitted an appeal for my client's OIC near the end of August 2010. I was contacted by an Appeals Agent in March of 2011. After all the documents requested by the agent were submitted and all the issues dealt with, the agent stopped returning my calls. I began calling and leaving her voice mails once a week. Eventually, after no call back, I left monthly voice mails. This OIC was finally accepted on January 19, 2012.

Tax Lien Prevention 

The other issue that I want to address is this reviewer's complaint that the company "did not stop (nor did they make any attempt to stop) the IRS from issuing a Tax Lien." The IRS almost always files a tax lien if a debt is owed and it is almost impossible to prevent the IRS from issuing the lien. The lien is there to protect the government's interest in the tax debts owed to it. 

In order for the IRS to release the lien, the debt must either be paid in full (or a bond is submitted that guarantees payment of the debt in full) or settled through an OIC. Additionally, if your tax debt is less than $25,000 and you set up a direct debit installment agreement (monthly payments will be withdrawn from your checking account), you can request that the IRS withdraw the lien after three months of successful payments. 

The other option is to wait for the collections statute of limitations ("SOL") to expire. The IRS has 10 years from the date of assessment to collect the taxes owed. Nevertheless, this SOL can be extended by a number of actions including, the filing of an OIC, bankruptcy, a formal request for an installment agreement and a voluntary agreement to extend the SOL. While this SOL is running, unless you have an installment agreement with the IRS, the IRS will do everything in its power to collect what you owe.  If they can, they will garnishing your pay check and take money out of your bank account.  

Since I don't know the specifics about this reviewer's billing complaint, I don't want to go too much into this issue.  This billing problem is probably the main reason that this customer posted this complaint.  If this reviewer had a flat fee agreement of $5,000 with TRS to submit the OIC, it was not right for this company to demand the extra $1,500 by threatening to terminate representation. Why they did so I do not know. 

It also does not seem right that the company waited to receive all the payments before they began working on the OIC.  Nevertheless, if this reviewer was informed beforehand that no work would be done before the balance was paid, she should not be complaining about the deal she agreed to.  Also, I do not know how much preliminary disclosure this reviewer received from TRS.  It is important for a tax professional to inform the client that the OIC process is burdensome and long and why tax liens will be filed.  Disclosure, frequent communication and flexibility in dealing with billing problems prevents clients from getting frustrated when their case does not go as planned. 

In conclusion, there are companies out there that take advantage of taxpayers and the OIC process.  Whether TRS is one of them, I don't know.  The company has bad reviews but so do other legitimate companies and attorneys.  I am not making a recommendation about the legitimacy of this company. If you are considering hiring this company, I recommend that you read the reviews yourself before you make a decision.  

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional. 

Does Your Home Office Qualify for a Home Office Deduction?

If you work from home (a house, condo, apartment or boat), you may be able to claim the home office deduction.  If certain requirements are met, this deduction is available to both self-employed individuals and employees.  In order to qualify, (1) the area used as a home office must be used, regularly and exclusively, for your business and (2) the business portion of the home must be either your principal place of business or where you meet or deal with patients, clients or customers in the normal course of business (therefore, if you do meet with clients at your home office, keep a log listing which clients you met with on which days). 

The "regularly and exclusively" requirement is probably the biggest barrier to using the deduction.  The area used as an office is usually a separate room or, if the division is clear, a section of a room may qualify.  The most important point is that personal activities must be excluded from the business section.  For example, an attorney who uses  a room in her home 10 hours a day, 7 days a week as an office will not be able to claim the home office deduction if her children are allowed to do their homework in that room.  

Nevertheless, there are two exceptions to exclusive use.  The exclusive use test does not have to be met if you use part of your home to store inventory or product samples or as a daycare facility.  To read more about these uses, take a look at IRS Publication 587.

This deduction is easier for self-employed individuals to claims than for employees because an employee's use of a home office must also be for the convenience of his or her employer.  For example, if the employer does not provide an employee with a work space at the employer's location, the employee may be entitled to a deduction for maintaining a home office.  If office space is provided by the employer and the employee also choose to work from home, the home office is not considered for the convince of the employer. Furthermore, the employee cannot rent any part of his or her home to the employer and then use the rented portion to perform services for the employer.  

If your use of a home office qualifies, some of the expenses that you are entitled to deduct include (1) a portion of your real estate taxes, (2) deductible mortgage interest (be careful not claim this interest twice), (3) rent, (4) utilities, (5) homeowner's or renter's insurance, (6) depreciation of your home and (7) painting and repairs (not permanent improvements).  If you make permanent improvements to your home, the value of these improvements is added to your basis in the home and can be recovered through depreciation.  If you choose to depreciate your home office, there may be consequences when you decide to sell the home. 

In order to calculate the deductible amount, determine the percentage of your home used for business and apply that percentage to the deductible expenses. For example, if the total area of your home is 2,000 square feet and your office is 200 square feet, the business percentage is 10%.  

If you are self-employed, you would use form 8829 to figure out your home office deduction and would report the deduction on your schedule C.  

Employees, on the other hand, would claim these costs as miscellaneous itemized deductions on their schedule A and these expenses must exceed 2% of the employee's adjusted gross income before they can be deducted.  Therefore, if you earn $60,000 per year, the first $1,200 of your expenses cannot be deducted.  If your total eligible deductions are $12,000 and your business percentage is 10%, that means you are left with no deduction.  

Finally, it is worth mentioning that the home office deduction has been subject to scrutiny because many believe that taking the deduction could trigger an audit.  This is most likely no longer the case as a result of changes made in the late 1990s.  Nevertheless, there is a lot of potential for abuse with this deduction, so it is important to keep proper records to back up this deduction in the event that you are audited.  You should use this deduction if you are entitled to it and can prove it in case of an audit.

For more information on claiming the home office deduction or for answers to your specific questions, take a look at IRS Publication 587.

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional. 

Offer in Compromise: Don't Get Caught in a Scam

If you owe taxes to the IRS, the IRS has an amazing program through which you can settle your tax debt for much less you owe.  Does this sound too good to be true?  For most people it is.  Although there is a program called the offer in compromise (OIC), very few people qualify to actually settle their debt.  The IRS will accept a settlement if you can prove that the IRS will not be able to collect the full amount of your debt before the statute of limitation for collection expires (this is known as your "reasonable collection potential" and it must be less than the amount of taxes you owe).  

Nevertheless, there are many companies out there who market themselves as being able to "settle your debt for less." These companies abuse the OIC program by reeling in consumers with deceptive promises and failing to qualify taxpayers for an OIC.  An example of one these companies is the Roni Deutch Tax Center (RDTC).  After being prosecuted by state agencies, Tax Attorney Roni Lynn Deutch (A.K.A the "Tax Lady"), closed her law practice and resigned from the California State Bar in May 2011.  

Deutch had an extremely promising start.  After obtaining her law degree, she opened her own tax practice in 1991.  After several years of success, she launched RDTC, a tax preparation franchise company. By 2009, RDTC was named on of the fastest growing franchise companies in the US.  In addition, Deutch was also a popular author, blogger and television show guest.  

Her downfall began in 2006 when the New York City Department of Consumer Affairs (DCA) sued her for misleading television advertisements.  The DCA argued that she failed to disclose eligibility requirements when advertising the OIC program, thereby concealing the fact that a majority of people do not qualify for the OIC.  Deutch settled this lawsuit for deceptive advertising practices in 2006 by agreeing to pay $300,000.  

In August 2010, the Attorney General of California filed a $34 million lawsuit against Deutch for her fraudulent scheme.  According to the lawsuit, "only 10% of her clients ever [got] their tax debts resolved.  Most quit or [were] terminated by Deutch's firm and [were] denied refunds after Deutch's staff bills them for work that wasn't performed." In the end, Deutch filed for bankruptcy, surrendered her bar license and closed her doors.  

Deutch's story should be a lesson to consumers: Be careful who you hire to resolve your tax problems and be particularly careful about companies advertising themselves as being able to settle your tax debts for less.  If the company is a fraud, an internet search may uncover its deceptive practices through customer complaints.  When you are hiring a representative for an OIC, be skeptical of guarantees made before your finances are reviewed. 

Also, be aware that the OIC process is difficult and time consuming.  It could take anywhere from 1-2 years for an offer to be resolved.  Nevertheless, many OICs are accepted every year.  In order to determine whether you qualify, a tax professional should consider your reasonable collection potential.  This amount is equal to the liquidation value of your assets (which includes 100% of your cash and investments) plus your monthly disposable income over a period of 48 months.  If this amount is less than what you owe to the IRS, you qualify for an OIC and must offer this amount as settlement.  

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.  

Final Notice of Intent to Levy and Notice of Your Right to a Hearing

If you owe money to the IRS, you will receive a consistent stream letters that become progressively more threatening.  There is one letter, in particular, that may be the most important one you receive from the IRS. If you agree with your liability but have not yet paid it, this letter is titled "Final Notice of Intent to Levy and Notice of Your Right to a Hearing" ("Final Notice").  Do not ignore this letter or else you will soon find your bank account empty and your wages garnished.  The other important letter is the "Notice of Determination" which gives you 90 days to petition the Tax Court in order to dispute your liability. 

What does the Final Notice" mean? Lets go back to the beginning.  When you initially owe money to the IRS and your rights to dispute your liability in Tax Court have expired, you will receive a notice stating something along the lines of "according to our records, you have an amount due on your income taxes."  This notice will encourage you to pay your balance in full or set up an installment agreement.  This notice is polite because, at this time, your account with the IRS is not yet in Automated Collections.  Collections is the branch of the IRS that deals with actively collecting a liability due from taxpayers. If you do not respond to this notice, you may receive several other notices prompting you to pay.  Again, even though these notices appear increasingly more threatening, your account is still not in Collections.  Eventually, you will receive a notice titled "Intent to Seize your Property or Rights to Property" (CP-504).  The CP-504 is your final notice before your account is transferred to collections.  If you don't pay the amount due, the IRS may seize your state tax refund and file a Notice of Federal Tax Lien on your property.  

This is also the notice before the IRS sends you your Final Notice. When you receive the Final Notice, you have to request a Collection Due Process Hearing ("CDP Hearing") by filing out and sending in Form 12153 (please read this form carefully when you are filling it out).  When you request a CDP Hearing, the IRS will assign your account to an agent who will contact you directly through the mail or phone in order to set you up on an installment agreement or, if you are experiencing hardship, place you on Currently Non-Collectible Status ("CNC"). Otherwise, if you ignore this notice, there are no more protections between your assets and the IRS.  The IRS can and will go after you.  

In conclusion, when you receive mail from the IRS: read it and look carefully for any deadlines that the IRS has imposed.  If you don't, you may be in for a much bigger hassle then you orginally thought.  

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional. 

Understanding IRS Penalties and Penalty Abatement Requests

FAILURE TO FILE AND FAILURE TO PAY PENALTIES

When you own money to the IRS, there are two common penalties that the IRS can tack on to your liability in addition to interest.  If your tax return is filed late, the IRS will impose the "Penalty for Filing Tax Return After the Due Date (failure to file)" which is up to 25% of the net tax due.  This penalty is imposed at a rate of 5% per month, for every month that your tax return is not filed, subject to the 25% ceiling (reaching its maximum at 5 months)

The second penalty is the "Penalty for Late Payment of Tax (failure to pay)." This penalty is imposed at a rate of 0.5% per month, subject to the 25% ceiling (reaching its maximum at 50 months).  When both penalties are imposed together, the 5% failure to file penalty will be offset by the 0.5% failure to pay penalty.  This means that if you fail to file a tax return and pay the tax due on time, you will be subject to a maximum penalty of 47.5% of the net tax due (this is assuming that the failure to file and pay is not fraudulent).  These are very hefty penalties and it's best to try to avoid them if possible. 

This year, you have until April 17, 2012 to file your taxes (individual).  In the alternative, if you cannot file your taxes by April 17, you can submit to the IRS the "Application for Automatic Extension of Time To File U.S. Individual Income Tax Return".  By filing this form, you will get an additional six months to file your tax return, thereby avoiding the late filing penalty if the return is filed by October 17, 2012.  Nevertheless, this form does not extend the time to pay any taxes owed.  All taxes owed must be paid by the April 17, 2012 deadline or else the IRS will assess the late payment penalty.  

If, on the other hand, you can show that undue hardship will be suffered if payment is made on the payment due date, the IRS may grant an extension to pay.  In order to apply for this extension,  you should submit "Application for Extension of Time for Payment of Tax Due to Undue Hardship."

PENALTY ABATEMENT

If you can show reasonable cause for failing to pay and file on time, the IRS may waive the failure to file and pay penalties. In order to request abatement, you should send a letter to the IRS (either with a delinquent individual tax return or after penalties have already been assessed) describing the penalties involved and providing an explanation for why reasonable cause exists.  In the Internal Revenue Manual (IRM), the IRS states that "reasonable cause relief is generally granted when the taxpayer exercised ordinary business care and prudence in determining their tax obligation but nevertheless failed to comply with those obligations." 

The IRS also lists several defenses that may satisfy the reasonable cause standard.  These include 

• Death or serious illness of the taxpayer or a member of his immediate family 
• Fire, casualty, natural disaster or other disturbance and
• The taxpayer's inability to obtain records through no fault of his own.  

Even if your specific situation does not fall into one of these three categories of defenses, you should still submit a request for abatement.  

That is not to say that getting the IRS to grant your penalty abatement request will be easy.  

• First, it could take three month to a year before your penalties are abated (while this request is pending, you must either pay your liability in full or you must be making payments through an installment agreement).  
• Second, in order to get the late payment penalty abated, you need to, at least, pay the amount of tax owed (excluding interest and penalties) in full. 
• Third, it is best to submit as much proof supporting your reasonable cause defense as possible.  For example, if you are claiming illness (either your own or in your immediate family), you should submit a doctor's note supporting the illness.  

Finally, many penalties abatement letters get rejected and must be appealed before they are accepted.  At the initial stage, your defenses will be inputted into a computer program and, unless the issues are extremely clear cut and well supported per IRS standards, it is likely that you will receive a computer generated rejection letter.  Appealing the rejection is highly recommended because the IRS representative reviewing the appeal has substantially more discretion and leeway to abate the penalties.  Remember, the penalty abatement process is not a simple one but it is worth fighting for considering that you may be assessed penalties up to 47.5% of the net tax due.

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional. 

The Dispute Over Newt Gingrich's Taxes: What is Reasonable Compensation to an S Corporation's Shareholder-Employee?

An article posted by Forbes last month brought up an interesting dispute regarding Newt Gingrich's tax planning technique.

What did Gingrich do? He treated only $444,327 of his S corporation's earnings as wages and reported the remaining $2.4 million in earnings as profits or dividends.  What is wrong with that?  By reporting only $444,327 in wages, he avoided paying Medicare tax on the remaining $2.4 million.  S corporations are flow through entities which means that they do not pay corporate income tax.  Their income flows through to their owners' individual tax returns.

My interest in this dispute came from a bog post by William M. Funk (RealTaxLaw) criticizing Forbes for not understanding tax planning.  The blogger describes Gingrich's allocation as "vanilla tax planning" and explains that the IRS usually only attacks "extreme cases" in which there is a substantial under-reporting of wages (i.e. a CPA who receive $24,000 in wages and takes $203,651 in distributions).  It is difficult to argue that anyone can be underpaid with $444,327 in wages.

On this issue, the IRS provides that "S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee".  In order to determine what is reasonable, the IRS looks to the sources of the S corporations's gross receipts.  These sources come in three major categories: (1) services provided by the shareholder-employee; (2) services of non-shareholder employees, or (3) capital and equipment.  If gross receipts are from second and third categories, they are not associated with the shareholder-employees's services and should not treated as his or her wages.  If, on the other hand, most of the gross receipts come directly from the shareholder-employee's services, they should be treated as wages.

In addition, the IRS goes on to say that the shareholder-employee should also receive wages for administrative work performed with the second and third categories.

So the real issue is what is the source of Gingrich's S corporation's earnings?  Forbes explains that according to Gingrich Productions' website, there is no suggestion that the company profits from anything or anyone other than the work of the Gingriches.  In fact, as Forbes points out, the "About Us" section of the website states that "together, Newt and Callista host and produce historical and public policy documentaries, write books and newsletters, give speeches, record audio books, produce photographic essays, and make television and radio appearances."

While this portion indicates that Gingrich Production relies upon the work of the Gingriches, it seems a little irresponsible to apply the IRS's reasonable compensation test to a public figure almost entirely on the basis of the above statement.  I would hope that if the IRS chooses to audit the Gingriches, they perform a more in-depth look at the sources of income.

Most likely, RealTaxLaw has a good point.  The IRS will probably not attack Gingrich's compensation as unreasonable.  Nevertheless, it is worth noting that public figures sometimes should go above and beyond to avoid public scrutiny.  For example, Forbes points out that President Barack Obama paid Medicare taxes on all his book profits ($1.4 million).

What will this damaging press cost Gingrich?

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.