Words That Hurt!

Tax problems can refer to any type of problems taxpayers are having with the IRS (federal) or state tax authority. These problems may include garnishments, levies, liens, back taxes and interest owed, unfiled tax returns, unpaid business taxes, unpaid self-employment taxes, unpaid installment agreements, etc.

As tax season quickly approaches, I felt that there were some very important IRS terms and definitions that all taxpayers should become familiar with. When most taxpayers receive a letter in the mail from the IRS they open, read and toss it aside. The following terminology will give you an idea of just how deterimental ignoring those notices can become.

Abatement of Penalties: An abatement of penalties is a request to the IRS to remove certain penalties that were added to the taxpayer's account for a particular year or multiple years. The taxpayer is required to have reasonable cause that is specific for each year when submitting this request and must be able to explain why this reason should grant the penalties to be removed from their account.

Appeal: An appeal is the IRS's administrative process whereby taxpayers can contest decisions made by the IRS. It is also known as the Appeals Division.

Compliance: In order to be in full compliance, all taxes must be paid up to date and all returns required to file must be filed to date. Therefore, if submitting an OIC, IA or CNC (Status 53) for an individual, the taxpayer must have all estimated tax payments paid to date and returns filed. If submitting an OIC or IA for a business, the taxpayer must have paid all taxes for the past two quarters and filed all returns.

Currently Non-Collectible: Status 53 is also referred to as Currently Non-Collectible, Currently Uncollectible, or CNC. Status 53 allows taxpayers to make no monthly payments to their delinquent tax debt due to minimal income to provide for themselves and their family.

Discharge of Federal Lien: Authorized under the IRS Code. The process whereby the taxpayer or interested third party applies to have the federal tax lien removed from a specific piece of property or other asset. The discharge may be granted if, the IRS has no interest in the property, the IRS will receive the net proceeds from the sale of the asset, or the taxpayer has equity in other assets equal to 3 times the amount of the tax liability.

Garnishment: Legal process whereas a creditor (the IRS in this case) has obtained judgment on a debt (IRS back taxes or other debt) may obtain full or partial payment by seizure of a portion of a debtor's (taxpayer in this case) assets such as wages, bank account, etc. A garnishment is also commonly known as a levy.

Installment Agreement (IA): A mutual agreement between the IRS and a taxpayer to allow the taxpayer to pay their delinquent debt over a specified period of time.

Levy: A garnishment attached to a taxpayer's wages, bank account, account receivable, social security income, etc.

Lien: Whether a taxpayer does or does not own any property, IRS will issue a lien against their SSN to hinder them from purchasing, selling or transferring any property. A lien will effect their credit report. If the taxpayer is preparing an OIC and it is accepted, the lien will be released once the OIC payment terms have been satisfied. If not preparing an OIC, the lien will be released when the tax debt is either paid in full or the statute to collect the tax has expired. The Internal Revenue Code of 1986 provides for a statutory lien of the Federal Government to be filed for a tax debt after a proper assessment, notice and demand, and a neglect or refusal to pay. Liens can be discharged or subordinated under special circumstances. A Federal Tax Lien is formally recording in the appropriate public records office (county recorder, MENSE, Secretary of State (UCC) or US District Court) in order to establish priority over creditors, judgement lien creditors and other lenders.

Lien Discharge: Removal of a lien on a specific piece of property to allow for its sale or disposal.

Lien Release: Issued by the IRS when a tax debt is fully paid or if the taxpayer can prove they are suffering from a financial hardship and are unable to provide for their family's health and wellbeing.

Lien Subordination: To set aside a lien temporarily to allow for a sale or refinance.

Notice of Federal Tax Lien: Whether a taxpayer does or does not own any property, IRS will issue a lien against their SSN to hinder them from purchasing, selling or transferring any property. A lien will effect their credit report. If the taxpayer is preparing an OIC and it is accepted, the lien will be released once the OIC payment terms have been satisfied. If not preparing an OIC, the lien will be released when the tax debt is either paid in full or the statute of collection has expired. The Internal Revenue Code of 1986 provides for a statutory lien of the Federal Government to be filed for a tax debt after a proper assessment, notice and demand, and a neglect or refusal to pay. Liens can be discharged or subordinated under special circumstances. A Federal Tax Lien is formally recording in the appropriate public records office (county recorder, MENSE, Secretary of State (UCC) or US District Court) in order to establish priority over creditors, judgement lien creditors and other lenders.

Notice of Levy: A notice imposing and collecting a fine. When used in conjunction with IRS, this normally refers to the document that is served on a third party that attack wages, bank accounts, and other personal property.

Offer In Compromise: Code Section 7122 authorized the Commissioner or his delegate the authority to compromise most tax liabilities. An OIC is an agreement between the IRS and taxpayer that allows the taxpayer's delinquent tax debt to be compromised for less than the amount owed. The offered dollar amount is based on the taxpayer's net worth plus their future income potential.An offer in compromise is an agreement between a taxpayer and the IRS that resolves the taxpayer's tax debt. The IRS has the authority to settle, or "compromise," federal tax liabilities by accepting less than full payment under certain circumstances. A tax debt can be legally compromised for one of the following reasons:

- Doubt as to Liability - Doubt exists that the assessed tax is correct.
- Doubt as to Collectibility - Doubt exists that you could ever pay the full amount of tax owed. - Effective Tax Administration - There is no doubt the tax is correct, and no doubt that the amount owed could be collected, but an exceptional circumstance exists that allows the IRS to consider a taxpayer's OIC.

To be eligible for a compromise on this basis, the taxpayer must demonstrate that collection of the tax would create an economic hardship or would be unfair and inequitable. The objective of the OIC program is to accept a compromise when it is in the best interests of both the taxpayer and the government, and promotes voluntary compliance with all future payment and filing requirements. Typically there is an application fee of $150.00 for the Offer in Compromise.

The IRS will accept an Offer in Compromise (OIC) when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. The ultimate goal is a compromise that is in the best interest of the taxpayer and the IRS. Acceptance of an adequate offer will also result in creating, for the taxpayer, an expectation of a fresh start toward complying with all future filing and payment requirements. The OIC process is based on a debt-to-asset formula devised by the IRS.

The Process - The OIC process is complex, time-consuming, and can take up to 18 months to resolve. Effectur relies on the client to provide detailed financial information required by the IRS. The IRS will not consider an OIC if the client-submitted documents are more than three months old. In addition, the client must be in compliance (all taxes must be filed and quarterly estimated payments, if applicable, have to be current).

Reasonable Collection Potential: The total realizable value of the taxpayer's assets plus any future income. The total is generally the minimum Offer in Compromise amount.

RCP Equation:
Total Income - Total Expenses = MDI (Monthly Disposable Income)
MDI x FIP Factor (Future Income Potential) = Future Income
Future Income + Equity in Assets = RCP

Refund Statute Expiration Date: A taxpayer may request a refund of an overpayment within three years from the time the return was filed or within two years from the time the tax was paid, whichever is later. If no return was filed by the taxpayer, the claim must be filed within two years from the time the tax was paid (IRC 6511(a)).

Statute of Limitation: The IRS has set specific time periods before expiration of certain actions (i.e. to collect a tax, make an assessment to an account, to request a refund, to file bankruptcy, etc).

Subordination of Federal Tax Lien: The legal process whereby the IRS will subordinate its Federal Tax Lien to a third party by temporarily setting aside the lien to enable a refinance or sale of a piece of property. Normally the IRS must determine that it is in its best interest to subordinate, which translates into, "What are we going to get out of this?"

Substitute for Return: If a taxpayer has not filed a return and the IRS feels it can collect from the money earned, an IRS Revenue Officer may file a SFR. When a SFR is filed, the agent lists all of the income reported to the IRS for that year, but only gives the taxpayer one exemption and only the standard deduction (i.e. nothing is itemized). Even if for the past 10 years the taxpayer has itemized, the IRS prepares the return in their favor. If the taxpayer has children the IRS tries to file the return based on the information from the previous years (i.e. married filing joint with 2 children), but IRS will only file this way if they have previous returns showing this info.

In summary, there are lots of companies that will offer tax help, but true tax debt help is not just setting up payment plans. Tax resolution firms can intercede on your behalf with the IRS to help solve your tax debt problems.

S. Raines, Sr. Financial Advisor/Tax Preparer