Notice of Federal Tax Lien: Understanding IRS Tax Liens

A Notice of Federal Tax Lien ("Notice") from the IRS is a public document meant to alert creditors that the government has a legal right to your property, all your rights to property and to property that you acquire after the lien is filed.  This Notice is issued because you have not paid your tax debt.  The purpose of the lien is to protect the government's interest in your property.  Nevertheless, the mere existence of this lien does not transfer title or constructive possession of your property to the government.  Instead, the IRS must either levy against the property or bring a civil action to collect the tax.

The IRS will only file a tax lien against you if (1) the IRS assesses your liability (2) sends you a bill that explains how much you owe and (3) you do not pay the debt in time.

When this Notice is filed, it is important to know your rights and options.  Many people intend to borrow funds to pay off their tax debts and the filing of the Notice may harm their ability to obtain these funds.  Also, people with tax liens on their credit records also may have a harder time getting a job, a car loan or finding a place to live.

Currently, as part of its Fresh Start Program, the IRS will not issue a tax lien unless you owe at least $10,000 in taxes.  Nevertheless, the IRS warns that a tax lien may still be filed on amounts less than $10,000 when circumstances warrant.

Appeal Rights 
The IRS is required to send you the Notice by certified mail under I.R.C. section 6320 within five days of the lien being filed.  The Notice also provides you with information about your appeal rights.  If you believe that this Notice is filed in error, you have 30 days to appeal.  The Notice is filed in error if any of the following apply:

• You satisfied your liability before the lien was filed
• Assessment of the tax liability violated either the notice of deficiency procedures (i.e. the notice of deficiency was mailed to the wrong address or you have already filed a timely petition with the Tax Court) or the bankruptcy code. 
• The statute of limitations for collection ended before the IRS filed the notice of lien 

If you request a hearing, the hearing will be conducted by an Appeals officer who was not previously involved with your case.  If the Appeals officer reaches a decision that you do not agree with, you may seek judicial review by filing a tax court petition within 30 days of the Appeals officers' decision.  

Release Of Lien
Per I.R.C. section 6325(a), The IRS will issue a Certificate of Release of Notice of Federal Tax Lien within 30 day after either:

• You pay the full amount of your debt, penalties, interest or the IRS adjusts the amount due 
• The IRS accepts a bond guaranteeing payment of the debt 
• A decision is made to adjust your account during an Appeals hearing or 
• The period during which the IRS can collect the tax ends.  

If the IRS has not released the lien within 30 days, you can request a Certificate of Release of Federal Tax Lien.

Withdrawal Of Lien 

Even if the IRS agrees to release a lien, it will remain on your credit report as "released" for up to seven years.  Therefore, you must request that the IRS also withdraw the lien in order for the IRS to remove the public notice.  This is not automatic.  In order to request that the Notice be withdrawn, you must complete Form 12277.  

General Instruction four on the form also states that you must request in writing that the IRS notify other interested parties of the withdrawal notice. You must provide the names and addresses of the credit reporting agencies, financial institutions and or other creditors that you want notified.  

In order to qualify for a withdrawal,

• Your tax liability must be satisfied and your lien must be released
• You must have filed all individual, business and information returns for the bast three years.  
• You must be current on your estimated tax payments and federal tax deposits 

Withdrawal Of Lien After Entering Into An Installment Agreement

If you meet the eligibility requirements, the IRS may withdraw your Notice after you enter into a direct debit installment agreement.  You will still need to complete and send the IRS Form 12277 to obtain the withdrawal. In order to be eligible, you must meet the following requirements: 

• The amount you owe must be $25,000 or less
• Your installment agreement must full pay the amount you owe within 60 months or before the collection statute expires (whichever is earlier)
• You must be in full compliance with other filing and payment requirements 
• You must have made three consecutive direct debit payments 
• You cannot have previously received a lien withdrawal for the same taxes (unless the withdrawal was for an improper filing of the lien)
• You cannot have defaulted on you current or any previous direct debit installment agreement.  

The IRS certainly does not make it easy or obvious for you to take the necessary steps to repair your credit.  Nevertheless, you do have options and is very important to be aware of your rights and obligations when resolving your tax liability with the IRS.

For a great overview and more information about the IRS Lien Process, please see this article by Attorney Anthony E. Parent.  

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

Recent Development in Foreign Bank Account Reporting

On June 26, 2012, the IRS released information about a new procedure (scheduled to go into effect on September 1, 2012) which will allow some non-resident U.S. citizens to resolve tax issues relating to their foreign bank accounts.  This will affect non-resident U.S. citizens who are behind on filing their U.S. income tax returns and/or disclosing their foreign bank accounts.  

All U.S. citizens, even those who reside abroad, are taxed on their worldwide income.  U.S. citizens with foreign bank accounts are also required to file Reports of Foreign Bank and Financial Accounts (FBARs) if the aggregate value of the accounts exceeds $10,000 at any time during the year.  

If these non-resident U.S. citizens qualify as low compliance risks, they have the option to come into compliance with their filing requirements without having to participate in the Offshore Voluntary Disclosure Program (“OVDP”). The OVDP allows US citizens to voluntarily come forward and report their foreign bank accounts. In order to participate in the OVDP, the U.S. Citizen is required to pay significant penalties calculated on the amount of tax owed and the value of the foreign bank account(s). In exchange, the government promises not to impose fraud penalties and to forgo criminal prosecution.

Under the new procedure, if the IRS determines that the taxpayer presents a low level of compliance risk, the IRS will expedite review of the taxpayer’s submission, will not assert penalties and will not pursue follow-up actions. The downside to this procedure is that the IRS could also determine that a taxpayer’s submission presents a higher compliance risk and is therefore not eligible for the procedure. If this is the case, the IRS will conduct a thorough review of the taxpayer’s information and possibly even a full examination. The taxpayer must make the determination of whether or not he is a low compliance risk taxpayer before he submits the required documents. If the taxpayer’s determination is incorrect, the taxpayer will be treated as if he opted out of the OVDP and chose to quietly disclose his account. This could subject him to substantial penalties and possible criminal prosecution.

In making its determination regarding the level of compliance risk, the IRS will consider the simplicity of the return and the amount of tax due. A taxpayer with simple tax returns and less than $1,500 in tax due in each of the years will most likely be considered a low compliance risk submission. If, on the other hand, the IRS determines that high risk factors are present, the submission may not qualify for the procedure. These risk factors that the IRS considers include, but are not limited to, the income and assets of the taxpayer, any indication of sophisticated tax planning or avoidance, material economic activity in the United States, the amount and source of United States source income and any history of noncompliance with US law. The IRS has stated that additional information regarding these specific factors will be released before this procedure goes into effect.

In order to take advantage of this procedure, the taxpayer must (1) file delinquent tax returns with appropriate related information returns for the past three years (2) file delinquent FBARs for the past six years, (3) provide any additional information regarding compliance risk factors which may be required by future instructions and (4) pay any federal tax and interest due.

Overall, this procedure will provide a welcome alternative to the OVDP to non-resident U.S. citizens who clearly fall into the low compliance risk category. Prior to the announcement of this procedure, these low risk non-residents could either participate in the OVDP and pay substantial penalties or participate in the risky quiet disclosure by filing their delinquent returns and FBARs.  

On the other hand, those taxpayers who are concerned about criminal prosecution should instead take advantage of the OVDP. Unlike the OVDP, this new procedure does not guarantee protection against criminal prosecution. It is important to note that once the taxpayer makes a submission under this new procedure, he can no longer participate in the OVDP. If a taxpayer is ineligible for the OVDP, he would also be ineligible for this procedure.

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

The IRS Makes Substantial Changes to the Offer In Compromise Process

On May 21, 2012, the IRS announced a new expansion of its "Fresh Start" program.  As part of this expansion, IRS has made a number of substantial changes to the Offer In Compromise (OIC) program (the program that allows taxpayers to settle their debts with the IRS for less than they owe).  These changes are more defined than the original "Fresh Start" Streamlined OIC which promised flexibility for certain offers but did not provide specifics. 

These new changes revise the financial analysis used to qualify a taxpayer for the program.  As a result, more taxpayers will have a chance to participate in the program and those who have submitted an OIC in the past and were rejected should consider refiling.  

Key points of the changes include:

• Revisions made to the calculation of a taxpayer's future income
• An expansion of the allowable living expenses which offset monthly income 

In order for the IRS to accept a taxpayer's OIC, the IRS must believe that the amount owed by the taxpayer cannot be paid in either a lump sum or through a payment arrangement.  In order to make this determination, the IRS looks at the taxpayer's Reasonable Collection Potential (RCP).  This RCP is the minimum that the taxpayer should offer to settle a liability and it is calculated through a two part formula (1) Future Remaining Income and (2) Total Available Assets.  

• Future Remaining Income

In order to determine Future Remaining Income, the IRS reviews the household income and allowable living expenses of the taxpayers.  If the taxpayer has income left at the end of the month after all allowable living expenses are accounted for, the IRS will require that this Future Remaining Income be paid as part of the offer.  Prior to these changes, the IRS would multiply this income by 48 or 60 months (depending on whether the offer could be paid in less or more than five months respectively).  Now the IRS will only look at one year of future income for offers paid in five or fewer months and two years of future income for offers paid in six to 24 months.  

What this change means is that before, a taxpayer with $500 left over at the end of the month would have to offer at least $24,000 to settle a liability.  Now this taxpayer will have to offer at least $6,000. 

In addition, the IRS has expanded the allowable living expenses to include credit card payments, bank fee charges and minimum student loan payments.  Furthermore, the IRS will also allow the repayment of state and local delinquent taxes, based on the percentage basis of tax owed to the state and IRS.  

What this means is that if a taxpayer owes the state $25,000 and the IRS $100,000, the taxpayer owes the state 20% of the total liability and the IRS 80% of the total liability.  If the taxpayer has $500  of disposable income per month, the IRS will allow $100 towards the repayment of state delinquent taxes. 

• Total Available Assets

The IRS requires that the taxpayer include all equity (less a quick sale discount for some assets) in assets owned by the taxpayer as part of the offer.  

While this second step appears straightforward, the IRS also includes the value of dissipated assets into the calculation of the RCP.  A dissipated asset exists "where it can be shown that the taxpayer has sold, transferred, encumbered or otherwise disposed of assets in an attempt to avoid the payment of the tax liability or used the asset or proceeds (other than wages, salary, or other income) for other than the payment of items necessary for the production of income or the health and welfare of the taxpayer or their family, after the tax has been assessed or within six months prior to the tax assessment."

For example, if a taxpayer has a 2007 tax liability with the IRS and sold his or her business in 2009, the taxpayer will have to provide an extensive and detailed accounting to the agent showing that the proceeds from that sale were used for the production of income (i.e. invested in a new business) or for necessary living expenses.  

As part of the new changes, the IRS states, that it can generally go back only three years to include dissipated assets, including the year of submission.  If the offer is submitted in 2012, assets dissipated prior to 2010 will not be included.  Nevertheless, this change is subject to exceptions where it may be appropriate to include the value of the asset dissipated more than three years ago.  The IRS provides several examples of these situations which, it notes, are not exclusive. These include:

• The dissolution of an IRA to pay for a child's wedding 
• The refinance of a house where the funds were used to pay credit card debt incurred during an extravagant vacation 
• The sale of real estate where the funds were gifted to family members 

Overall, it appears that the determination of whether dissipated assets should be included in the offer amount should be evaluated on a case by case basis and is up to the discretion of the individual agent assigned to the offer. As a result, these changes would still require the taxpayer who sold his business in 2009 to provide an accounting that shows that the proceeds were used for the production of income or for allowable living expenses.  This is evident from the examples provided by the IRS of situations in which the value of an asset should not be included:

• The dissolution of an IRA during unemployment or underemployment where a review of available sources verifies that the taxpayer's income was insufficient to meet necessary living expenses
• The disposition of an asset and use of the funds to purchase another asset which is included in the offer amount.  

Although the changes relating to dissipated assets appear to have little effect on the OIC process, hopefully, these changes will at least make it easier for taxpayers to avoid inclusion of these assets where the income actually was used to pay for necessary living expenses or the production of income.  

Regardless, the changes made to the calculation of Future Remaining Income should make a substantial difference in the amounts and types of offers that will be accepted.  

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

Trying to Leave California? Maybe Not: An Overview of California Residency Rules

If you intend to leave California and make another state or country your permanent home, avoiding California income taxes may be more difficult than you think.  Even if you do not live or earn income in California, you may be held to be a resident of California (or at the very least you may have to prove to California that you are a non-resident). 

If you file a California income tax return and claim that you are a non-resident of California, The Franchise Tax Board ("FTB") may conduct a residency audit. During this audit, you may be expected to provided (1) records detailng the purchase, sale or lease of real property (2) vehicle and vessel registration (3) Business activity information (such as employment contracts and travel logs) (4) Finacial records (including bank and credit card statements) and (5) records and information about your voting history and which service providers you have retained (i.e. doctors, attorneys, accountants, etc). 

Furthermore, if you do not file an income tax return in California and the FTB determines that you have some connection with the state of California, the FTB may prepare a proposed assessment of income taxes on your behalf.  If, for example, you hold a contractor's license in the state of California but do not live here, the FTB may estimate a reasonable salary for a contractor in California and assess taxes on this salary.  Examples of other contacts include: other licenses, owning a home, a vehicle or the payment of mortgage interest in California.  Once a proposed assessment has been filed, you must either contact the FTB and convince them that you are not a resident of California or file a nonresident tax return (which could be subject to a residency audit).  A successful determination that you are not a resident for one year may not prevent the FTB from preparing a proposed assessment on your behalf for the following year for the same reason.  

California defines "resident" as "every individual who is in this state for other than a temporary or transitory purpose and every individual domiciled in this state who is outside the state for a temporary or or transitory purpose."

The FTB claims that "the underlying theory of residency is that you are a resident of the place where you have the closest connections." The FTB has a list of factors to determine your residency status.  

1. The amount of time you spend in California versus the amount of time you spend outside of California.  
2. The state where your spouse and children are located
3. the state where your principle residence is located 
4. The state that issued your driver's license
5. The state where your vehicles are registered
6. The state where you maintain your professional licenses
7. The state where you are registered to vote
8. The location of the banks where you maintain accounts
9. The origination point of your financial transactions 
10. The location of your medical professional and other healthcare providers, accountants and attorneys
11. The location of your social ties, such as your place of worship, professional associations, social clubs and country clubs where you are a members. 
12. Location of your real property and investments 
13. Permanence of your work assignments in California. 

What does this mean for you if you have decided to leave California and take up residence in another state or country? This means that you have to substantially sever your connections with California when you leave and establish significant connections with the new state or country.  You may not maintain connections in California in readiness for your return.  

For example, you obtain a job opportunity in Arizona, leave California and move to Arizona on January 24, 2012.  Instead of selling your California home, you decide to keep it as a vacation home for when you come visit your grown children and friends.  You have an account with a California bank which you do not close. Your driver license does not expire for another three years and you make no effort to cancel it.  You also make several trips a year to visit your family and friends in California and, while there, you visit your regular doctor and/or dentist.  Under this fact pattern, if you are audited by the FTB, it may be determined that you are a resident of California for the 2012 tax year because you have maintained your connections in California in readiness for your return.  (These facts are similar to that of in the Appeal of Nathan H. and Julia M. Juran, where it was determined that Mr. and Mrs. Juran were residents of California).  

Those who are present in California for a vacation or a business transaction, are not automatically considered residents.  Nevertheless, when the visit becomes for other than a temporary or transitory purpose, you become a California resident.  This purpose could include being assigned to an office in California for an indefinite period or an indefinite recuperation period from an illness or injury. In addition, being present in California for more than nine months creates a rebuttable presumption that you are a California resident.  This is regardless of whether you also have connections with another state and consider yourself a true resident of that state (i.e. your wife and children remain in Arizona).  

In conclusion, if you intend to leave California, your intent to leave and make another place your permanent home is not enough.  Instead, California looks at whether the physical facts demonstrate that you have have relinquished your California residency.  Likewise, if you are present in or have contacts with California but consider yourself a resident of another state, you may still have to convince the FTB that you are not a resident and therefore are not subject to California income taxes.  

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

S.B. 459: California's Attack on the Independent Contractor Classification

It is not uncommon for business owners to avoid paying taxes and employee benefits (i.e. overtime pay) by hiring independent contractors instead of employees. These business owners are already at risk of an audit by the Employment Development Department and the IRS.  If the audit ends up in a reclassification, the business owner will be responsible for unpaid taxes, possible penalties and interests.  

Now, as a result of new California legislation, this practice of misclassifying workers can end up costing business owners and their advisers everything.    

• S.B. 459

As of January 1, 2012, the California Legislature enacted a harsh new law targeting the misclassification of workers as independent contractors by California business owners. Under S.B. 459, a business owner can be found to have engaged in the following unlawful activities:

1. The "willful misclassification" of an individual as an independent contractor and/or
2. Charging a willfully misclassified worker a fee, or making any deductions from compensation for any purpose that would have violated the law governing deductions from pay (Labor Code sections 221 and 224) had the worker properly been classified as an employee.  

Additionally, non-lawyer consultants are subject to joint liability for knowingly advising a business owner to classify a worker later determined to be an employee.

• Penalties

This laws allows California's Labor Commissioner or a court to levy a civil penalty of $5,000 to $15,000 for each violation found "willful." If it is also determined that the business owner engaged in a pattern or practice of "willful misclassifications" a civil penalty of $10,000 to $25,000 may be imposed. 

Additionally, this law also empowers the Labor Commissioner to assess additional damages of behalf of those misclassified (the workers themselves). As a result, if a business owner misclassifies a large group of workers as independent contractors, the business owner may be subject to a class action law suit by this group.  

• "Willful"

The key word here is "willful". "Willful misclassification" is defined as "avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor." Although this standard appears to be more stringent than the "voluntary and intentional" standard proposed in earlier versions of the law, it is still problematic because courts have defined "knowing" to included constructive knowledge. As a result, if it is found that the business owner should have known that the worker should have been classified as an employee, the misclassification will be found willful.  This is a very vague and subjective standard that will cause a lot of uncertainty and is unlikely to protect business owners who are simply mistaken about the proper classification.  

• Notice

In addition to the penalties, the law also requires the business owner to post a notice (either on its website or place of business accessible to all employees and the general public) at each location where a violation occurred.  This notice must contain the specific information about the violation, be signed by an officer and be posted for one year.  

In sum, this new law imposes potentially crippling and humiliating penalties upon California business owners who improperly classify their workers. Since the standards for determining whether a worker is an independent contractor or an employee are also often subjective, this law will likely excessively burden California business owners.  If the goal of the California legislature is to inflict fear in California business owners and thereby do away with most independent contractors, the new law will most likely succeed.  

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

What You Should Know If You Have A Foreign Bank Account

Currently, the IRS considers international tax enforcement its top priority. Therefore, if you have a foreign bank account, it is extremely important to be aware of your reporting requirements or else be subject to substantial penalties and criminal prosecution.

• The 2012 Offshore Voluntary Disclosure Program ("OVDP") 

On January 9, 2012, the IRS announced its third OVDP.  The purpose of this program is to help people with undisclosed income from foreign accounts become current with their US tax obligations.  The IRS has not yet released additional guidance to assist taxpayers in participating in this program and there is no deadline to participate (currently the guidance in existence is from the 2011 OVDP). 

Only those taxpayer who are not currently under civil or criminal investigation by the IRS may participate in this program. 

For those who choose to participate in this program by making a voluntary disclosure, the IRS promises that significant civil penalties and criminal prosecution will not be imposed.  In order to participate:

1. The taxpayer must file FBARS (see below) and amended income tax returns for the last eight years
2. The taxpayer must pay all income tax owed to the U.S.  plus a 20% accuracy-related penalty and interest for the eight years of returns 
3. The taxpayer must pay 27.5% of the highest aggregate balance in the undeclared foreign account during the past eight years.  There are exceptions to this rule.  

• FBARS

U.S. persons must disclose their financial interests in, signature authority over or other authority over, foreign bank, security or financial accounts if the aggregate value of each account(s) exceeds $10,000 at any time during the year.  This requires the filing of a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts ("FBAR").  The FBAR is an information return which is filed separately from the taxpayer's income tax return.  The deadline to file an FBAR is June 30th. 

If the IRS determines that a taxpayer's failure to file this form is willful, the IRS can impose substantial civil and criminal penalties.  If the violation is not willful, the penalty shall not exceed $10,000 per violation.  If the failure to file is due to reasonable cause and the account was properly reported, no penalty should be imposed.  

For each willful violation, the IRS shall impose a penalty which is the greater of $100,000 or 50% of the value of the account at the time of the violation (the time of the violation occurs on the due date for filing the FBAR).  A willful violation also subjects the taxpayer to five years in prison and/or a maximum fine of $250,000.  

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

Voluntary Worker Classification Settlement Program: A Fresh Start for Employers

As part of its effort to provide a "Fresh Start" to taxpayers and businesses, the IRS created the Voluntary Classification Settlement Program (VCSP)  to allow employers to voluntarily reclassify their workers (or a class/group of workers) as employees for future tax periods.  

Many employers erroneously miss-classify their workers as independent contractors or non-employees.  Whether a worker is actually an employee or an independent contractor depends on the facts and circumstances involved.  Nevertheless, the classification issue is most often resolved based on whether the employer has the right to direct and control the worker as to how to perform the services.  There are many situations where correct classification is unclear.  

If the employer is audited and the independent contractors or non-employees are reclassified as employees, the employer will face a substantial tax liability, including interest and penalties, for three years of employment taxes. The VCSP allows employers to avoid this possibility by giving them the chance to preemptively reclassify workers.  The VCSP builds on the Classification Settlement Program (CSP) that has already been in place for years.  The CSP is available to employers already under IRS examination and allows prospective reclassification of workers as employees with reduced federal employment tax liabilities for past non-employment treatment.  The VCSP, on the other hand, allows taxpayers to reclassify without first going through the burden of an examination. 

The employer does not have to reclassify all workers in order to be eligible under the VCSP.  Nevertheless, if specific workers are reclassified as employees, all workers in the same class must also be treated as employees.  

In order to be eligible to participate in the VCSP, the employer: 

• Must have consistently treated the workers or a class/group of workers in the past as independent contractors or non-employees
• Must have filed all required 1099s for the workers for the previous three years.  These 1099s must have been filed within 6 months of their due dates (including extension) to qualify as having been filed.  
• Must not currently be under audit by the IRS, the Department of Labor or a state agency concerning the classification of these workers.  If the employer has previously been audited regarding the classification of the workers, the employer must have complied with the results of the audit in order to be eligible. 

In order to participate in this program, Form 8952 must be filed at least 60 days before the employer wants to being treating the workers as employees.  The taxpayer should also provide the name of a contact person or authorized representative with a valid Power of Attorney.  The IRS will contact this person in order to complete the VCSP process. 

If the employer is accepted into the VCSP, the employer will enter into a closing agreement with the IRS to finalize the terms of the agreement and make full payment of the amount due.  

If accepted into the program, 10% of the employment tax liability that would have been due on compensation paid to the worker (or class/group of workers) for the most recent tax year must be paid.  This amount is determined under the reduced rates of section 3509(a) of the IRC.  Interest and penalties will not be assessed and the employer will not be audited on payroll taxes with regards to these workers for past years.  

Under section 3509(a), the tax rate for compensation up to the Social Security wage base is 10.28% in 2011 and 3.14% for compensation above the Social Security wage base.  Currently, the most recently closed tax year is 2011 so the 10.28% rate applies.  

For example: if in 2011 an employer paid $100,000 to workers that the employer wishes to reclassify under the VCSP, the employment taxes applicable to the $100,000 would be $10,280.  10% of this amount is $1,028.  (In this example all workers were compensated below the Social Security wage base). 

The employer must also agree to be subject to a special six-year statute of limitations (rather than the usual three years) for the first three years under the program.  

The IRS promises not to share information about an employer's participation in the VCSP with the Department of Labor or with any state agencies.  Furthermore, the IRS states that a rejection of the form 8952 will not automatically trigger a Federal audit.  

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