

How to Get IRS Tax Relief

The Complete Tax Resolution Guide for IRS: Back Tax Problems & Settlements, Offer in Compromise, Payment Plans, Federal Tax Liens & Levies, Penalty Abatement, and Much More

By David Hickam, CPA

www.hickamcpa.com

Copyright © 2013 David Hickam

Published on Smashwords

Formatted by eBooksMade4You

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All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording, or otherwise) without the prior written permission of both the copyright owner and the above publisher of this book.

Smashwords Edition License Notes

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IMPORTANT NOTICE TO READERS:

Although every effort has been made to ensure that the information in this book is accurate and up to date as of the time of publication, be aware that tax laws are constantly changing. While this book is designed to provide accurate information on the subject matter discussed, it is sold with the understanding that the publisher is not engaged in rendering legal advice. If legal advice is required, contact a qualified professional. The author and publishers of this book do not guarantee similar results to those discussed and assume no legal responsibility for reliance on the information contained herein.

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Table of Contents

Introduction

Overview of the IRS Collections Process

Examination and Collection Letters

Your Rights as a Taxpayer

Three Steps to Tax Relief

Installment Agreements / Payment Plans

Offer in Compromise

Currently Not Collectible Status

Federal Tax Liens

Federal Tax Levies

Penalties and Interest

Employment Taxes and the Trust Fund Recovery Penalty (TFRP)

Innocent Spouse Relief

Knowledge Gives You Power

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Introduction

**Do you have unfiled tax returns?** You must file all required IRS tax returns to be eligible for any of the tax relief options discussed in this book. Call us at 949-768-3045. We can help you.

Knowledge is power when dealing with the IRS. This complete tax resolution guide explains your rights and options when you owe back taxes to the IRS. It contains the latest IRS rules, procedures and links to forms. After reading this guide, you will gain confidence when communicating and negotiating with the IRS. I have included valuable tips and strategies from many years of personally dealing with the IRS.

About the Author

Hello, my name is David Hickam and I am a professional tax problem solver with an accredited A+ Better Business Bureau rating. I am a licensed Certified Public Accountant in California and I represent clients in all 50 states. I have over 15 years of experience helping people resolve their tax issues. While this guide will give you the knowledge and tools to help you resolve your tax debt on your own, there are many times a competent tax professional can make a big difference in the outcome of your tax settlement. If at any time you feel that you need to contact a tax pro, give my firm (CPA Tax Relief) a call. You can speak directly to me. At CPA Tax Relief, we offer:

-A free, no obligation consultation to analyze your tax your tax problem and discuss your options

-A firm that is owned and managed by CPAs that specialize in solving IRS and State tax problems

-Reasonable fees

-Direct contact, from beginning to end, with a licensed CPA and not a salesperson or manager

-Commitment to negotiate the lowest possible payment allowed by law

Contact info:

David Hickam, CPA – President & Owner of CPA Tax Relief

Call toll free 949-768-3045

Email: davidhickamcpa@gmail.com

Website: www.hickamcpa.com

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Overview of the IRS Collections Process

The IRS Has Sent You a Tax Bill

After you file your tax return or if you don't file a tax return, the IRS will determine if you owe taxes. If you owe, the IRS will send you a bill for the amount due, including any penalties and interest. If you don't pay the first bill, the IRS will send you at least one more bill. As time progresses, the amount of penalties and interest will increase with each bill. If you still don't pay after you receive your final bill, the IRS will begin collection actions. Collection actions can range from applying your previous tax year's refund to tax due to seizing your property and assets.

What You Should Do After You Get an IRS Tax Bill:

Compare the details of the IRS bill to your personal tax records, then;

-If you agree with the IRS bill, pay the full amount before the due date. If you can't pay the full amount due, pay as much as you can, and immediately call the IRS phone number on the bill to explain your situation. Based on your ability to pay, the IRS may provide you with alternative payment options.

-If you disagree with the IRS bill, call the number on the bill. Be sure to have a copy of the bill and any tax returns, cancelled checks, or other records that will help the IRS understand why you believe your bill is wrong. If the IRS finds that you are right, they will adjust your account and, if necessary, send a revised bill.

-If you don't pay the amount due or tell the IRS why you disagree with it, they may take collection actions while penalties and interest continue to increase.

Tip:

If you receive a tax bill from the IRS, respond to it as quickly as possible. Ignoring it will only make things worse.

There Are Three Ways to Pay Your Taxes:

1-Pay in Full

The IRS will first ask if you can pay in full. This method will minimize interest and penalties. You can pay via;

-Electronic funds transfer at www.eftps.com

-Credit or debit card (for a fee) at www.irs.gov/e-pay

-Check mailed to the address on the bill

-Check delivered to a local IRS office www.irs.gov/localcontacts/index.html

2-Installment Agreement (explained in more detail later)

If you can't pay in full, the IRS will consider putting you on an Installment Agreement for the remainder of taxes owed. An Installment Agreement with the IRS means that they will allow you to make smaller periodic payments over time.

3-Offer in Compromise (explained in more detail later)

If you can't pay the amount you owe in full or through an Installment Agreement, you may be eligible for an Offer in Compromise. With an Offer in Compromise, you settle your taxes for less than the full amount you owe.

Do you need more time to pay?

If you can't pay any of the amount due, you can request that the IRS delay collection (aka Currently Not Collectible Status) until you are able to pay. Prior to approving your request, the IRS may ask you to complete a Collection Information Statement Form 433-F and, provide proof of your financial status.

How long does the IRS have to collect your taxes?

The IRS can attempt to collect your taxes up to 10 years from the date they were assessed. Once, the 10 year window closes, the IRS loses its claim towards the back taxes. However, there are exceptions to this time frame. For example, by law, the IRS will suspend and extend collection while:

-The IRS is considering your request for an Installment Agreement or Offer in Compromise. If your request is rejected, the IRS will suspend collection for another 30 days, and during any period the Appeals Office is considering your appeal request.

-You live outside the U.S. continuously for at least 6 months. Collection is suspended while you are outside the U.S. and, if at the time of your return the normal collection period would expire before 6 months from the date of your return, the extended period won't expire before the expiration of the 6 months after your return.

-The tax periods the IRS is collecting on are included in a bankruptcy with an automatic stay. The IRS will suspend collection for the time period the IRS can't collect because of the automatic stay, plus 6 months.

-You request a Collection Due Process hearing. Collection will be suspended from the date of your request until a Notice of Determination is issued or the Tax Court's decision is final.

-The IRS is considering your request for Innocent Spouse Relief. Collection will be suspended from the date of your request until 90 days after a Notice of Determination is issued, or if you file a timely petition to the Tax Court, until 60 days after the Tax Court's final decision. If you appeal the Tax Court's decision to a U.S. Court of Appeals, the collection period will begin 60 days after the appeal is filed, unless a bond is posted.

Is it worth it to wait it out for 10 years?

If you don't own any property (including wages) in which the IRS can attach a lien or levy, this may be your only option. On the other hand, if you do own property (including wages) and you try and wait out the 10 years, there is a very good chance the IRS will attach a lien or levy to the property before the 10 year period has expired.

How to appeal an IRS decision

You can appeal most collection actions. Your main options for appeals are the following:

1-Collection Due Process (CDP)

The purpose of a Collection Due Process hearing is to review collection actions that were taken or have been proposed. You can request a Collection Due Process hearing if you receive any of the following notices:

-Notice of Federal Tax Lien Filing and Your Right to a Hearing

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

-Notice of Jeopardy Levy and Right of Appeal

-Notice of Levy on Your State Tax Refund – Notice of Your Right to a Hearing

-Notice of Levy and of Your Right to a Hearing

To request a Collection Due Process hearing, complete Form 12153, Request for a Collection Due Process or Equivalent Hearing, and send it to the address on your notice. You have 30 days from the date of the notice to request a Collection Due Process hearing. You can also request an Equivalent Hearing within one year from the date of the notice.

2-Collection Appeals Program (CAP)

Under the Collections Appeals Program, if you disagree with an IRS employee's decision and want to appeal it, you can ask their manager to review your case. If you then disagree with the manager's decision, you may continue with the Collection Appeals Program as outlined in Publication 1660. Instances in which you can pursue the Collection Appeals Program include, but aren't limited to:

-Before or after the IRS files a Notice of Federal Tax Lien

-Before or after the IRS seizes ("levy") your property

-After the IRS rejects, terminates, or proposes to terminate your Installment Agreement (a conference with the manager is recommended, but not required)

For more information about the Collection Due Process and Collection Appeals Program, see Publication 1660, Collection Appeals Rights.

What happens if you don't pay the IRS on time?

The IRS will most likely start collection actions on you. Here, are some of the most common collection actions the IRS uses:

-Federal tax lien: A legal claim against all your current and future property, such as a house or car, and rights to property, such as wages and bank accounts. The lien automatically comes into existence if you don't pay your amount due after receiving your first bill.

-Notice of Federal Tax Lien (NFTL): A public notice to creditors. It notifies them that there is a federal tax lien that attaches to all of your current and future property and rights to property.

-Levy: A legal seizure of property or rights to property to satisfy a tax debt. When property is seized ("levied"), it will be sold to help pay your tax debt. If wages or bank accounts are seized, the money will be applied to your tax debt.

-Seizure: this is the same as a levy.

-Notice of Intent to Levy and Notice of your Right to a Hearing: Generally, before property is seized, the IRS will have to send you this notice. If you don't pay your overdue taxes, make other arrangements to satisfy the tax debt, or request a hearing within 30 days of the date of this notice, the IRS may seize your property.

-Summons: A summons legally compels you or a third party to meet with the IRS and provide information, documents, or testimony.

Tips:

-If you receive a letter (notice) from the IRS, relax and don't panic. Not all letters from the IRS are bad news. Sometimes the IRS may be asking for simple information about your tax return. An example might be a request for back-up documentation for a deduction that you claimed on your tax return;

-When speaking with any person at the IRS, always write down their employee number, reason you called, and the date and time of the phone call;

-If you feel that you have been unfairly treated by an IRS employee, you can request to deal with a supervisor;

-When mailing anything to the IRS, it is recommended to use Certified Mail;

-Always keep back-up copies of all supporting documents and correspondence with the IRS;

-The IRS prefers to deal with you by mail, but you can call the telephone number in the upper right corner of the letter and speak to an IRS agent;

-If an IRS employee says your case is closed, make sure you receive a confirmation by a follow-up letter from the IRS;

-Carefully prepare your financial information before speaking with an IRS employee. Make sure you don't understate your living expenses;

-Avoid giving bank account and employment information to the IRS over the phone;

-If you don't want to deal with an IRS employee over the phone, request that your file be sent to a local district office so you deal with the IRS in person.

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Examination and Collection Letters

Don't feel alone. Every year the IRS sends out 30 to 40 million postal letters (notices) to taxpayers. These letters are sent out in two stages: stage one - examination letters and stage two - collection letters.

Stage One – Examination letters

The following are common Examination letters the IRS will mail to you when they believe that you owe money.

Letter 525 – General 30 Day Letter

This letter accompanies a report giving you a computation of the proposed adjustments to your tax return. It informs you of the courses of action to take if you do not agree with the proposed adjustments. The letter explains that if you agree with the adjustment, you sign, and return the agreement form. If you do not agree, you can submit a request for appeal/protest to the office/individual that sent you the letter. You need to file your protest within 30 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

Letter 531 – Notice of Deficiency

This letter is notice of the Commissioner's determination that you owe additional tax or other amounts for the tax year(s) identified in the letter. The Internal Revenue Code authorizes the Commissioner to send this notice. The letter explains how to dispute the adjustments in the notice of deficiency if you do not agree. To dispute the adjustments without payment, you file a petition with the Tax Court within 90 days from the notice date.

Letter 692 – Request for Consideration of Additional Findings

This letter accompanies a report giving you a computation of the proposed adjustments to your tax return. It informs you of the courses of action to take if you do not agree with the proposed adjustments. The letter explains that if you agree with the adjustment, you sign and return the agreement form. If you do not agree, you can submit a request for appeal/protest to the office/individual that sent you the letter. You need to file your protest within 15 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

Letter 915 – Letter to Transmit Examination Report

This letter explains adjustments in amount of tax. The letter explains that if you agree with the adjustment, you sign and return the agreement form. If you do not agree, you can submit a request for appeal/protest to the office/individual that sent you the letter. You need to file your protest within 30 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

Letter 1153 – Trust Funds Recovery Penalty Letter

This letter explains that the IRS's efforts to collect the federal employment or excise taxes due from the business named on the letter have not resulted in full payment of the liability. Therefore, the IRS proposes to assess a penalty against you. If you agree with this penalty for each tax period shown, you are asked to sign Part 1 of the enclosed Form 2751 and return it to the person/office that sent you the letter. If you do not agree you can submit a request for appeal/protest to the office/individual that sent you the letter. You need to file your protest within 60 days from the date of the letter in order to appeal this decision with the Office of Appeals.

Letter 3391 – 30-Day Nonfiler Letter

This letter advises you the IRS believes you are liable for filing tax returns for the periods identified in the letter. It includes a report giving you a computation of the proposed adjustments to your tax return and explains the adjustments. The letter explains that if you agree with the adjustments, you sign and return the agreement form. If you do not agree, you can submit a request for appeal/protest to the office/individual that sent you the letter. You need to file your protest within 30 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

In addition to the above, there are other Examination letters related to earned income credit, innocent spouse, and straight deficiency or over assessment.

Stage Two - Collection Letters

If you don't respond to an examination letter, the IRS will send you a collection letter. At this stage, the IRS explains to you how they intend to get the taxes that they believe you owe. The following are common Collection letters sent by the IRS:

Letter 11 – Final Notice of Intent to Levy and Notice of Your Right to a Hearing

This letter is to notify you of your unpaid taxes and that the IRS intends to levy to collect the amount owed. If you do not agree, you need to file a Form 12153, Request for A Collection Due Process Hearing and send it to the address shown on your levy notice within 30 days from the date of the letter in order to appeal the proposed action with the Office of Appeals.

Letter 1058 – Final Notice Reply Within 30 Days

Similar to Letter 11, this letter is to notify you of your unpaid taxes and that the IRS intends to levy to collect the amount owed. If you do not agree, you need to file a Form 12153, Request for A Collection Due Process Hearing and send it to the address shown on your levy notice within 30 days from the date of the letter in order to appeal the action with the Office of Appeals.

Letter 1085 – 30-Day Letter Proposed 6020(b) Assessment

This letter is to notify you of your unpaid taxes and that the IRS intends to levy to collect the amount owed. If you do not agree, you need to file a Form 12153, Request for A Collection Due Process Hearing and send it to the address shown on your levy notice within 30 days from the date of the letter in order to appeal the action with the Office of Appeals.

Letter 3172 – Notice of Federal Tax Lien Filing and Your Rights to a Hearing under IRC 6320

This letter is to notify you the IRS filed a notice of tax lien for the unpaid taxes. If you do not agree, you need to file a Form 12153, Request for A Collection Due Process Hearing and send it to the address shown on your lien notice within 30 days from the date of the letter in order to appeal the action with the Office of Appeals.

Other mail correspondence the IRS uses, include the following notices:

CP 90 – Final Notice of Intent to Levy

CP 90 notifies you of your unpaid taxes and that the IRS intends to levy to collect the amount owed. If you do not agree, you need to file a Form 12153, Request for A Collection Due Process Hearing and send it to the address shown on your levy notice within 30 days from the date of the letter in order to appeal the action with the Office of Appeals.

CP 92 – Notice of Levy upon Your State Tax Refund

CP 92 notifies you that the IRS levied your state tax refund to pay your unpaid federal taxes. If you do not agree, you need to file a Form 12153, Request for A Collection Due Process Hearing and send it to the address shown on your levy notice within 30 days from the date of the letter in order to appeal the action with the Office of Appeals.

CP 242 – Notice of Levy upon Your State Tax Refund

CP 242 notifies you that the IRS levied your state tax refund to pay your unpaid federal tax. If you do not agree, you need to file a Form 12153, Request for A Collection Due Process Hearing and send it to the address shown on your levy notice within 30 days from the date of the letter in order to appeal the action with the Office of Appeals.

CP 523 – IMF Installment Agreement Default Notice

CP 523 notifies you that the IRS intends to terminate your Installment Agreement in 30 days. You have the right to request an appeal if you do not agree by following the instructions in the notice.

CP 2000

You receive this letter when the IRS receives income, deduction or credit information that does not match your return. You are provided a computation of the proposed adjustments to your tax return based upon this information. If you agree, you sign and return the agreement forms. If you do not agree, you can submit a request for appeal/protest to the office/individual that sent you the letter. You need to file your protest within 30 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

Tip:

It is very important to not ignore these notices. Things will only get worse, if you do.

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Your Rights as a Taxpayer

You have rights when you are dealing with the IRS. Here are some of the most important rights you have as a taxpayer:

Declaration of Taxpayer Rights

I-Protection of Your Rights

Throughout the entire process, your rights will be explained and protected by the IRS.

II-Privacy and Confidentiality

Except as authorized by law, the IRS will not disclose to anyone the information you give to them. You have the right to know why the IRS is asking you for your information, how they will use it, and what happens if you do not provide requested information.

III-Professional and Courteous Service

If you believe that an IRS employee has not treated you in a professional, fair, and courteous manner, you should tell that employee's supervisor. If the supervisor's response is not satisfactory, you should write to the IRS director for your area or the center where you file your return.

IV-Representation

1-You may either represent yourself or, with proper written authorization, have someone else represent you in your place. Your representative must be a person allowed to practice before the IRS, such as an attorney, certified public accountant, or enrolled agent. If you are in an interview with the IRS and ask to consult such a person, then the IRS must stop and reschedule the interview in most cases.

2-You can have someone accompany you at an interview.

3-You may make sound recordings of any meetings with our examination, appeal, or collection personnel, provided you or your representative let the IRS know in writing 10 days before the meeting.

V-Payment of Only the Correct Amount of Tax

You are responsible for paying only the correct amount of tax due under the law-no more, no less. If you cannot pay all of your tax when it is due, you may be able to make other payment options.

VI-Help with Unresolved Tax Problems

The Taxpayer Advocate Service can help you if you have tried unsuccessfully to resolve a problem with the IRS.

VII-Appeals and Judicial Review

If you disagree with the IRS about the amount of your tax liability or certain collection actions, you have the right to ask the Appeals Office to review your case. If you are still unhappy, you may ask a court to review your case.

VIII-Relief from Certain Penalties and Interest

The IRS will waive penalties when allowed by law if you can show you acted reasonably and in good faith or relied on the incorrect advice of an IRS employee. The IRS will waive interest that is the result of certain errors or delays caused by an IRS employee.

Tip:

In addition to knowing your rights, you need to know how to interact and negotiate with the IRS. For example, when answering a question asked by an IRS employee, never give more information than you need to. The IRS can use your own comments against you at a later date. If you are not sure how to answer a question, just answer "I do not know". When negotiating with an IRS employee always remain calm, cool and collected even if the IRS employee is difficult. You can always ask to speak to a manager or supervisor, if you feel you are getting nowhere with an IRS employee.

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Three Steps to Tax Relief

Step 1

File all due tax returns (being compliant). This will show the IRS that you are serious about settling your tax debt. Getting compliant is critical for the following reasons:

-It is required to pursue any of the three tax relief options (Installment Agreement, Offer in Compromise or Currently Not Collectible Status).

-Your filed returns will replace IRS SFRs (substitute for returns). When you don't file your return on time, the IRS may file an SFR. These returns are based on information the IRS has received from other entities (W-2s, 1099s, etc.). An SFR will usually work against you because it won't include your deductions or other items that may reduce your tax liability.

-Professional tax preparation and financial analysis can lower your tax liability. In some cases, amending already filed tax returns can lower your tax liability.

-Shows a good faith effort on your part to resolve your tax problem with the IRS.

-May reduce penalties and interest. Also, puts you in a position to apply for penalty abatement.

Step 2

Determine which IRS option is best for you:

-Option 1: Installment Agreement. If you are able to make monthly payments large enough to pay off your total tax debt within 72 months, then the IRS will want to put you into an Installment Agreement.

-Option 2: Offer in Compromise. If you don't qualify for an Installment Agreement, then an Offer in compromise may be a viable option. The IRS will ask for detailed information about your financial situation when you apply for an Offer in Compromise.

-Option 3: Currently Not Collectible Status. If you don't qualify for an Offer in Compromise then Currently Not Collectible Status would most likely be your next option. During Currently Not Collectible Status, collection action is delayed but penalties and interest continue to accrue.

Step 3

Stay current with all required payments and tax return filings with the IRS.

Note:

For most taxpayers with back IRS tax debt, the aforementioned three steps would apply. However, there are certain circumstances where an Installment Agreement, Offer in Compromise or Currently Not Collectible Status might not be the best course of action. For example, if the IRS determines that you are an innocent spouse, your spouse (or former spouse) would be responsible for part or all of the back tax debt owed.

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Installment Agreements / Payment Plans

You can make monthly payments through an Installment Agreement also known as a payment plan or payment agreement, if you're not financially able to pay your tax debt immediately. To be eligible for any Installment Agreement, you must:

-Make sure that all tax returns are filed

-Understand that penalties and interest will accrue

-Know that in most cases a user fee is charged

A general rule about IRS Installment Agreements: As the payment period and the money owed increase, so does the qualifying criteria and conditions that have to be met.

There are three Installment Agreement types:

1-Short term extension – pay in full within 10 days

2-Short term extension – pay in full within 30, 60, 90 and 120 days

3-Regular monthly payments – user fee applies

What are the advantages of a short term extension to pay?

-Pay in 120 days or less

-Regular payments not required

-Pay by agreed date

-Less penalties and interest

-No user fee

-Financial statement not required

You can setup a short term extension to pay online, if you owe $50,000 or less, by going to  http://www.irs.gov/Individuals/Online-Payment-Agreement-Application . To make a payment online (debit, credit, electronic funds transfer, check or money order) go to <http://www.irs.gov/Payments> .

What if you can't pay off your tax debt within 120 days?

Consider getting a long term Installment Agreement which will allow you to make monthly payments for up to 72 months. Long term Installment Agreements require a user fee:

-$52 for direct debit agreement (advantage: lower user fee, automatic payments from your bank account, no need to write a check and mail it)

-$105 for standard agreement

-$43 if low income

There are three long term Installment Agreement plans. The Guaranteed Installment Agreement (you owe $10,000 or less in income tax); the Streamlined Installment Agreement (you owe $50,000 or less in combined income tax, penalties and interest); and the Standard Installment Agreement (you over $50,000 in combined income tax, penalties and interest).

Guaranteed Installment Agreement:

Your request for an Installment Agreement cannot be turned down if the tax you owe is not more than $10,000 and all three of the following apply:

-During the past 5 years, you (and your spouse if filing a joint return) have timely filed all income tax returns and paid any income tax due, and have not entered into an installment for payment of income tax.

-The IRS determines that you cannot pay the tax owed in full when it is due and you give the IRS any information needed to make that determination.

-You agree to pay the full amount you owe within 3 years and to comply with the tax laws while the agreement is in effect.

The easiest way to apply for a Guaranteed Installment Agreement is to do it online at  http://www.irs.gov/Individuals/Online-Payment-Agreement-Application . If you prefer to apply for a Guaranteed Installment Agreement over the phone, call the IRS phone number on your bill or notice.

Streamlined Installment Agreement:

This type of Installment Agreement requires less financial disclosure than the standard installment agreement. Most taxpayers that apply will qualify and be approved. To be eligible for a Streamlined Installment Agreement you must not owe more than $50,000 in combined income tax, penalties and interest and you must be able to pay off your tax debt in 72 months.

If you apply for a Streamlined Installment Agreement and you owe $25,000 or less, you will need to provide:

-Your name, address, date of birth and Social Security Number

-The name and address of your bank and employer

-Balance of tax debt

-The monthly payment amount that you can make each month

-The monthly payment due date

In addition to the above, if you owe between $25,001 and $50,000, you will need to:

-Provide income and expense analysis to verify to the IRS the ability to pay

-Set up direct debit payments to automatically be taken out of your checking account each month

You can apply online for a Streamlined Installment Agreement at  http://www.irs.gov/Individuals/Online-Payment-Agreement-Application . If you apply over the phone or by mail and you owe greater than $25,000 but less than $50,000, you will have to complete a  Form 9465 . If applying by phone, call the IRS phone number on your bill or notice.

Standard Installment Agreement:

If you owe more than $50,000 in combined income tax, penalties and interest, you are not eligible for a Guaranteed or Streamlined Installment Agreement. The IRS may recommend that you pay down your tax debt to $50,000 so that you will qualify for a Streamlined Installment Agreement. If you can't pay down the tax debt to $50,000, you can still apply for an Installment Agreement. The IRS will ask that you complete  Form 9465 and Form 433-A . You cannot apply for this type of Installment Agreement online. You have to call the IRS phone number on your bill or notice to start the application process. For this type of Installment Agreement there is no guarantee that it will be accepted. The IRS will require a full financial statement and disclosure. This means the IRS will review every aspect of your income, expenses, assets and liabilities. In addition, the IRS will perform a root cause analysis to understand what caused your tax debt. The IRS will evaluate whether or not your financial situation is improving. In some cases, the IRS may recommend alternatives for payment, such as; selling assets to pay your tax debt, borrowing money to pay your tax debt, temporarily delaying collection until your financial situation improves or recommend you propose an Offer in Compromise.

Important:

When you submit a completed Form 433-A to the IRS, you are giving the IRS all of the details about your personal assets, liabilities, income and expenses. Know that the IRS can use this information against you at a later date.

What if you own a business that owes back income taxes and you want to apply for an Installment Agreement?

The above were the requirements for individuals that are applying for Installment Agreements. If you own a business, the business may qualify for a Streamlined Installment Agreement, if it meets the following:

-Out of business (defunct); can be any business type; owes any type of tax; owes $25,000 or less

-Out of business (defunct) Sole Proprietorship; owes any type of tax; owes $50,000 or less

-Operating business; owes income tax (Corporation 1120) only not payroll tax; owes $25,000 or less

Since only individuals can use the online application for a Streamlined Installment Agreement, if you own a business and wish to apply for an Installment Agreement, you should apply by phone. Use the IRS phone number on your bill or notice.

What if you own a business that owes back payroll taxes and you want to apply for an Installment Agreement?

Business payroll taxes also called trust fund taxes are required to be deposited periodically and reported quarterly. When a business fails to meet trust fund obligations, the IRS gets very serious. There is an Installment Agreement option for some active businesses with back trust fund taxes. It is called In-Business Trust Fund "Express". The requirements are:

-Trust fund payroll taxes owed can't be more than $25,000. If the business owes more than $25,000, the IRS may request that the balance be paid down to $25,000 before entering into this type of Installment Agreement.

-Trust fund payroll taxes owed must be paid in full within 24 months.

-Payments must be made through direct debit if the business owes between $10,000 and $25,000.

-The business must be and stay current with all filing and payment requirements including payroll requirements.

How do you apply for an In-Business Trust Fund Express Installment Agreement?

-As of the writing of this eBook, there is no online option for applying for this type of Installment Agreement.

-Call the IRS phone number on your bill or call (800) 829-4933, or

-By mail, complete and submit  Form 9465, send to address on page 2 of 9465 instructions, or

-In person, visit your local IRS office

What if you own a business that owes back payroll taxes in excess of $25,000 and you would like to apply for an Installment Agreement?

In this situation, you may be able to get an Installment Agreement. Before contacting the IRS, make sure that all tax returns are filed. Continue to stay current with all filings throughout the Installment Agreement review period. The IRS gets very serious in these types of situations. They have been known to seize assets at this stage. The IRS will ask that you complete a Form 433-B which is a financial statement that lists all of your business income, expenses, assets and liabilities. The IRS will review your information and consider available options for payment of taxes owed. To apply for this type of Installment Agreement, call the IRS phone number on your bill or notice.

Here is a real life scenario for applying for an Installment Agreement:

It is March 15 and you are ready to file. It turns out you owe money but can't afford to pay all of the tax due. What should you do?

-File the return

-Pay what you can

-Apply for a payment plan as soon as possible

In this scenario, what are your application options?

-Apply online (if you owe $50,000 or less)

 -File Form 9465 with return (if you owe more than $25,000 and less than $50,000). If you are e-filing, send to the address in the instructions

-Call (800) 829-1040

-Visit IRS Assistance Center

-Wait for a tax bill

Strategies for Negotiating an Installment Agreement

If you owe more than $50,000 or can't pay the amount you owe in 72 months or less, your request for an Installment Agreement begins when an IRS employee analyzes your Collection Information Statement on Form 433-A (or Form 433-B, if applicable). The IRS employee will use your financial information on the form to determine the amount you can pay. While payment amounts are at the discretion of the IRS, the following are some strategies for negotiating a payment plan:

-At the least, offer a payment amount that is equal to your income minus your necessary living expenses.

-Be assertive and defend your necessary living expenses.

-Submit a first payment when you propose the payment amount you can afford and continue to making monthly payments even if the IRS hasn't approved your payment plan, yet. Until you receive notice form the IRS that your payment plan is approved, send the payments to your local service center using the payment slips and bar-coded envelopes provided.

Note:

It can take several months for the IRS to notify you in writing that your Installment Agreement has been approved.

Options for making payments to the IRS

Once your Installment Agreement is approved, you have three options for making payments to the IRS each month. You can:

1-Write a check and mail it to the IRS.

2-Have your bank account directly debited. This is probably the safest option for making sure you don't miss a payment and risk having the agreement revoked.

3-Have your paycheck directly deducted. For this option you will have to make a request with the IRS using Form 2159. Your employer must agree to send payments to the IRS each month using the IRS's payment slips.

Denial of your Installment Agreement proposal by the IRS

If the IRS denies your Installment Agreement request, it is usually for the one of three reasons:

-The IRS has determined that the information on your Form 433-A is either incomplete or untruthful. You will have to explain any discrepancies between their information and the information you submitted. It is important to always be accurate and thorough when you complete Form 433-A.

-The IRS may determine that some of your living expenses are not necessary. For example, if you have large credit card payments, make charitable contributions or send your kids to private school, the IRS may deem these expenses as too extravagant.

-You defaulted on an Installment Agreement in the past. While you may still be eligible for a new Installment Agreement, the IRS may take a skeptical viewpoint when considering giving you another Installment Agreement.

Tip:

If your Installment Agreement proposal is denied, ask to speak to the IRS employee's manager and keep negotiating. Sometimes when you request to go above the IRS employee's head this alone will cause a change in attitude and get you a reasonable Installment Agreement.

Revocation of an Installment Agreement

Once your Installment Agreement is approved, the IRS can revoke it if any of the following occur:

-The IRS discovers that you provided incomplete or inaccurate information when you were negotiating your Installment Agreement.

-You miss a payment.

-You didn't stay current with required tax return filings and payments while you were in your Installment Agreement.

-Your financial condition significantly improves or gets worse. The IRS may periodically require that you submit a current Form 433-A to stay in the Installment Agreement.

The Pros and Cons of an IRS Installment Agreement as a tax relief option:

-Pros: Makes IRS content, prevents further collection action, flexible, and almost always available.

-Cons: Interest and penalties continue to accrue while you still owe. When combined with penalties, the interest rate is often 8% to 10% per year. Also, you must remember to make payments or else default (not an issue if you utilize the direct debit option).

Tip:

If you can't pay of your tax debt in full, the IRS will encourage you to enter into an Installment Agreement. While this may suitable for some taxpayers, others may benefit from an Offer in Compromise or other tax relief solution. For example, if your tax debt cannot be paid in full after 72 months of payments, you may qualify for an Offer in Compromise, where your tax debt is settled for less than you owe.

* * *

Offer in Compromise

What is an Offer in Compromise?

An Offer in Compromise (offer) is an agreement between you (the taxpayer) and the IRS that settles a tax debt for less than the full amount owed. The offer program provides eligible taxpayers with a path toward paying off their debt and getting a "fresh start." It may be a legitimate option if you can't pay your full tax liability, or doing so creates a financial hardship. The ultimate goal is a compromise that suits the best interest of both the taxpayer and the IRS. To be considered, generally you must make an appropriate offer based on what the IRS considers your true ability to pay. The IRS will consider your unique set of facts and circumstances, such as:

-Your ability to pay;

-Your income;

-Your expenses; and

-Your asset equity

The IRS will generally approve an Offer in Compromise when the amount offered represents the most the IRS can expect to collect within a reasonable period of time. The IRS will encourage you to explore all other payment options before submitting an Offer in Compromise. Not every taxpayer is eligible for an Offer in Compromise.

Submitting an offer application does not ensure that the IRS will accept your offer. It begins a process of evaluation and verification by the IRS, taking into consideration any special circumstances that might affect your ability to pay.

Generally, the IRS will not accept an offer if:

-You can pay your tax debt in full via an Installment Agreement.

-You can pay your tax debt in full via a lump sum.

To be eligible to submit an offer, you must:

-File all tax returns you are legally required to file.

-Make all required estimated tax payments for the current year.

-Make all required federal tax deposits for the current quarter if you are a business owner with employees.

If you are a business owner and your business owes trust fund taxes (payroll taxes), and individuals may be held liable for the trust fund portion of the tax, you are not eligible to submit an offer unless the trust fund portion of the tax is paid or the Trust Fund Recovery Penalty determinations have been made on all potentially responsible individual(s). Trust fund taxes are the money withheld from an employee's wages, such as income tax, Social Security, and Medicare taxes.

You are not eligible to apply for an offer, if you or your business is currently in an open bankruptcy proceeding. Any resolution of your outstanding tax debts generally must take place within the context of your bankruptcy proceeding.

There are three types of Offer in Compromises:

1-Doubt as to Collectability: This type of offer is applicable when the IRS doubts they can collect the full amount owed before the 10 year statute of limitations on your debt expires. You can prove doubt as to collectability, if you prove that you don't have the money or assets to pay the IRS the tax debt owed within the collection period.

2-Doubt as to liability: This type of offer is applicable when you believe that the amount the IRS claims that you owe is incorrect. Acceptable reasons the amount may be incorrect are; an IRS employee made a legally erroneous decision, an IRS employee didn't consider all of your evidence, or you provide new evidence which proves the amount is incorrect. For this type of offer, you will need to complete a Form 656-L.

3-Effective Tax Administration: This type of offer is applicable when you can pay for the offer and you believe the tax amount owed is correct, but paying will create an economic hardship or would be unfair.

Tip:

Due to the complex nature of an Offer in Compromise, it may be in your best interest to secure professional tax representation (www.hickamcpa.com or 949-768-3045) to help you with the legal process and deal directly with the IRS for you.

Note:

You cannot submit an offer that is only for a tax year or tax period that has not been assessed.

Determine How Much You Should Offer

The amount of an Offer in Compromise must be equal to the "realizable value" of your assets plus the amount of money the IRS can take from your future income. For example, if your total assets are worth $16,700 and the amount of your future income that is available to the IRS is $13,300, your minimum offer must be $30,000. Use the IRS Offer in Compromise Pre-Qualifier to help you determine your offer amount.

Tip:

Even if the offer amount required by calculating the realizable value of your assets and your available future income is well beyond your ability to pay, consider making the offer anyway. In some cases, an IRS employee can accept less money than is required under the rules.

Paying for your offer:

The IRS requires a $150 application fee. There is an exception: If you are submitting an individual offer and meet the Low Income Certification guidelines (see page 2 of Form 656, Offer in Compro¬mise), you will not be required to send the application fee.

There are two payment options when submitting an Offer in Compromise:

-Lump Sum Cash: This option requires 20% of the total offer amount to be paid with the offer and the remaining balance paid in five or fewer payments within 24 months of the date your offer is accepted.

-Periodic Payment: This option requires the first payment with the offer and the remaining balance paid, within 24 months, in accordance with your proposed offer terms. Under this option, you must continue to make all subsequent payments while the IRS is evaluating your offer. Failure to make these payments will cause your offer to be returned.

Submitting an offer requires the selection of a payment option as well as sending an initial payment with your application. The amount of the initial payment and subsequent payments will depend on the total amount of your offer and which of the following payment options you choose.

The length of the payment option you choose may affect the amount of the offer the IRS will accept. Generally, an offer paid within five months of acceptance will require a lesser amount. In all cases,

-Your offer amount must be paid within 24 months of the date the offer is accepted.

-Your offer amount cannot include a refund the IRS owes you.

If you meet the Low Income Certification guidelines, you will not be required to send the initial payment, or make the monthly payments during the evaluation of your offer but you will still need to choose one of the payment options.

If your offer is returned or not accepted, any required payment(s) made with the filing of your offer and thereafter, will not be refunded. Your payment(s) will be applied to your tax debt. You may designate payments to a specific tax year and tax debt.

If you do not have sufficient cash to pay for your offer, you may need to consider borrowing money from a bank, friends, and/or family. Other options may include borrowing against or selling other assets. NOTE: If retirement savings from an IRA or 401k plan are cashed out, there will be future tax liabilities owed as a result. Contact the IRS or CPA Tax Relief (949-768-3045 or www.hickamcpa.com) before taking this action.

How to Apply:

The application involves sending:

-Form 656 (Offer in Compromise)

-Completed Form 433-A (OIC), Collection Information Statement for Wages Earners and Self-Employed Individuals, if applicable

-Completed Form 433-B (OIC), Collection Information Statement for Businesses, if applicable

-$150 application fee, unless you meet low income certification

-Initial offer payment, unless you meet low income certification

If you and your spouse owe joint and separate tax debts

If you have joint tax debt(s) with your spouse and also have an individual tax debt(s), you and your spouse will send in one Form 656 with all of the joint tax debt(s) and a second Form 656 with your individual tax debt(s), for a total of two Forms 656.

If you and your spouse have joint tax debt(s) and you are also each responsible for an individual tax debt(s), you will each need to send in a separate Form 656. You will complete one Form 656 for yourself listing all your joint and separate tax debts and your spouse will complete one Form 656 listing all his or her joint and individual tax debts, for a total of two Forms 656.

If you and your spouse/ex-spouse have a joint tax debt and your spouse/ ex-spouse does not want to submit a Form 656, you on your own may submit a Form 656 to compromise your responsibility for the joint debt.

Each Form 656 will require the $150 application fee and initial down payment unless your household meets the Low Income Certification guidelines (See page 2 of Form 656, Offer in Compromise).

COMPLETING THE APPLICATION PACKAGE

Step 1 – Gather your information

To calculate an offer amount, you will need to gather information about your financial situation, including cash, investments, available credit, assets, income, and debt.

You will also need to gather information about your average gross monthly household income and expenses. The entire household includes spouse, significant other, children, and others that reside in the household. This is necessary for the IRS to accurately evaluate your offer. In general, the IRS will not accept expenses for tuition for private schools, college expenses, charitable contributions, and other unsecured debt payments as part of the expenses calculation.

Step 2 – Fill out the Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals

Fill out the Form 433-A (OIC) if you are an individual wage earner and/or a self-employed individual. This will be used to calculate an appropriate offer amount based on your assets, income, expenses, and future earning potential. You will have the opportunity to provide a written explanation of any special circumstances that affect your financial situation.

Step 3 – Fill out Form 433-B (OIC), Collection Information Statement for Businesses

Fill out the Form 433-B (OIC) if your business is a Corporation, Partnership, Limited Liability Company (LLC) classified as a corporation, single member LLC, or other multi-owner/multi-member LLC. This will be used to calculate an appropriate offer amount based on your business assets, income, expenses, and future earning potential. If you have assets that are used to produce income (for example, a tow truck used in your business for towing vehicles), you may be allowed to exclude equity in these assets.

Step 4 – Attach required documentation

You will need to attach supporting documentation with Form(s) 433-A (OIC) and 433-B (OIC). A list of the documents required will be found at the end of each form. Include copies of all required attachments, as needed. Do not send original documents.

Note:

A completed Form 433-A (OIC) and/or Form 433-B (OIC) must be included with the Form 656 application.

Step 5 – Fill out Form 656, Offer in Compromise

Fill out Form 656. The Form 656 identifies the tax years and type of tax you would like to compromise. It also identifies your offer amount and the payment terms.

The Low Income Certification guidelines are included on Form 656. If you are an individual and meet the guidelines, check the Low Income Certification box in Section 4, on Form 656.

Step 6 – Include initial payment and $150 application fee

Include a check, cashier's check, or money order for your initial payment based on the payment option you selected (20% of offer amount or first month's installment).

Include a separate check, cashier's check, or money order for the application fee ($150).

Make both payments payable to the "United States Treasury." All payments must be made in U.S. dollars.

If you meet the Low Income Certification guidelines, the initial payment and application fee are not required.

Make a copy of your application package and keep it for your records.

Step 7 – Mail the application package

Mail the application package to the appropriate IRS facility. See page 23, Application Checklist, for details.

Important Information:

After you mail your application, continue to:

-File all federal tax returns you are legally required to file.

-Make all required federal estimated tax payments and tax deposits that are due for current taxes, and make all required periodic offer payments.

-Reply to IRS requests for additional information within the timeframe specified. Failure to reply timely to requests for additional information could result in the return of your offer without appeal rights.

During the offer evaluation period know that:

-Penalties and interest will continue to accrue;

-The IRS extends the legal assessment and 10 year collection period;

-Other collections actions are suspended;

-If you currently have an approved Installment Agreement with IRS and are making installment payments, then you may stop making those Installment Agree¬ment payments when you submit an offer. If your offer is returned for any reason, your Installment Agreement with the IRS will be reinstated with no additional fee.

-Your offer is automatically accepted if the IRS does not make a determination within two years of the IRS receipt date.

-Your non-refundable payments and fees will be applied to the tax liability. You may designate payments to a specific tax year and tax debt.

Federal Tax Liens and Levies during the evaluation period:

The IRS may file a Notice of Federal Tax Lien during the offer investigation. This gives the IRS a legal claim to your property as security for payment of your tax debt. However, unless a jeopardy situation exists, a request for a Notice of Federal Tax Lien will usually not be made until a final determination has been made on the offer. Generally, other collection activities are suspended while your offer is being evaluated.

If you have a Federal Tax Lien on your assets before you submit an Offer in Compromise, the lien will not be released until your offer terms are satisfied.

The IRS may keep any proceeds from a levy served prior to you submitting an offer. The IRS may levy your assets up to the time that the IRS official signs and accepts your offer as pending. If your assets are levied after your offer is pending, immediately contact the IRS person whose name and phone number is listed on the levy.

After your offer is accepted know that:

-You must continue to file and pay your tax obligations that become due in the future. If you fail to file and pay any tax obligations that become due within the five years after your offer is accepted, your offer may be defaulted. If your offer is defaulted, all compromised tax debts, including penalties and interest, will be reinstated;

-You must meet all the Offer Terms listed in Section 8 of Form 656;

-The IRS will keep any refund, including interest, for tax periods extending through the calendar year that the IRS accepts the offer. For example, if your offer is accepted in 2012 and you file your 2012 Form 1040 showing a refund, the IRS will apply your refund to your tax debt;

-The law requires the IRS to make certain information from accepted offers available for public inspection and review. These public inspection files are located in designated IRS Area Offices.

If Your Offer is rejected: Appeal

If your offer is rejected, you may formally appeal within 30 days using Request for Appeal of Offer in Compromise, Form 13711. Remember for your appeal to be seriously considered you must have:

-Given all of the data requested by the IRS during your offer processing.

-Filed all past tax returns.

-Remained current on your tax payments for the present year. If you are self-employed you made all quarterly estimated tax payments. If you are an employer you made all payroll tax filings and deposits.

Because an Offer in Compromise is not a legal right, appealing is within the IRS's discretion and you cannot sue the IRS for rejecting your offer or appeal.

Reasons the IRS rejects an offer:

-The offer is too low.

-You have a criminal background

If your offer is rejected because it is too low, the IRS letter will tell you the amount that is acceptable. Make sure you ask the IRS for a copy of the report that lists the details for rejecting your offer. If the IRS doesn't give it to you, request it using the Freedom of Information Act.

Tips:

Alternatives to a formal appeal using Form 13711:

-Within 30 days of receiving the rejection letter, try calling the IRS employee who signed the rejection letter and ask that your offer be reconsidered. This person may help you come up with a way to make your offer acceptable.

-Within 30 days of receiving the rejection letter, send a certified letter to the address listed on the rejection letter stating that you wish to change your offer by increasing the amount of cash.

Pros and Cons of an Offer in Compromise

Pros:

-If accepted by the IRS, you will pay less than you owe. The IRS has been known to accept as little as 1% of a tax bill as a settlement.

-If accepted by the IRS, you will get peace of mind knowing that your tax problem has been significantly reduced.

-Certain collection actions are suspended.

-You can keep certain assets.

Cons:

-It can be an exhausting and time consuming process to put together all of the financial documentation required by the IRS.

-Due to the financial disclosure requirements, the IRS now has information on all your assets which they can use against you if they decide to accelerate collection actions.

-Interest continues to accrue during the Offer in Compromise process. Therefore, if your offer does not get accepted, your tax debt will have increased.

-The IRS has zero tolerance for noncompliance before, during, and five years after your Offer has been completed.

-A high initial payment is required.

-Liquidation of assets may be required.

-Can take up to two years to complete.

Why you should contact CPA Tax Relief if you are considering an Offer in Compromise:

In recent years, only 25% of offers submitted were accepted by the IRS. Due to the complexities of submitting an Offer in Compromise, it is recommended that you get professional tax help when considering this option. An experienced tax pro that is proficient at negotiation will increase the likelihood of your offer being accepted.

Why use CPA Tax Relief (949-768-3045) for your Offer in Compromise instead of doing it yourself?

-We can determine if you qualify for an Offer in Compromise.

-Applying for an Offer in Compromise is a long and complex process. Experience and expertise will make a big difference in the outcome.

-Most Offers are denied by the IRS and State. Your chance of success will be greater when you use a Certified Public Accountant.

-We will help you prepare and submit the necessary documentation.

-During the process, we will deal with the IRS or State taxing agency, so that you don't have to.

* * *

Currently Not Collectible Status

If you aren't eligible for an Installment Agreement or an Offer in Compromise, you can request Currently Not Collectible Status with the IRS. The IRS may delay collection of the money you owe if you are unable to make any payments. Collection will be delayed until you are able to pay. Prior to approving your request, the IRS may ask you to complete a Collection Information Statement Form 433-F and, provide proof of your financial status.

Here are some things to consider when pursuing the delay of collection status:

-You must file all tax returns and stay current

-Penalties and interest still accrue during the delayed period and until the tax owed is paid in full.

-The IRS will apply any tax return refunds towards paying off your taxes owed.

-The IRS may file a Notice of Federal Tax Lien.

-The IRS may request updated financial information during this temporary delay to review your ability to pay.

-This is only a temporary solution and not a long term answer to relieving back taxes.

-To qualify you have to prove that your living expenses exceed your income.

-Very few people actually qualify.

-Your case gets reviewed annually and can go on for many years until your financial situation improves.

How to apply for Currently Not Collectible Status with the IRS

1-Go to http://www.irs.gov/pub/irs-pdf/f433f.pdf. Read the instructions and complete Form 433-F.

2-Organize documentation for your income, assets, and expenses, such as;

-Bank accounts (checking and savings), online accounts, certificates of deposit,, trusts, individual retirement accounts,, pensions, profit sharing plans, lines of credit, business accounts, stocks, bonds, and other investment accounts, etc.

-Home, vacation home, timeshares, vacant land, and other real estate

-Cars, boats, recreational vehicles, whole life policies, and business assets (tools, inventories)

-Business accounts receivables

-Employment information (paystubs)

-Income from self-employment, rental(s), unemployment, alimony, child support, pension, interest, dividends, social security, etc

-Credit cards

-All monthly living expenses, such as; food, housekeeping supplies, clothing, personal care, rent, utilities, telephone, real estate taxes and insurance, maintenance and repairs, child/ dependent care, estimated tax payments, term life insurance, retirement, union dues, delinquent state and local taxes, student loans, court ordered child support or alimony, etc.

Important:

When filling out section H. Monthly Necessary Living Expenses of Form 433-F, be sure to compare your actual expenses with IRS allowable expenses. After calculating your actual expenses, go to <http://www.irs.gov/Individuals/Collection-Financial-Standards>. Here, you will determine your allowable expenses. Add up the allowable expenses the IRS will give you. Use your actual expenses if they are greater than the IRS allowable amounts. If actual expenses are not greater than allowable amounts, then use the IRS allowable amounts.

Contact the IRS by calling the number on your most recent letter or notice. You can also locate contact information for the IRS by visiting <http://www.irs.gov/uac/Telephone-Assistance>. When you reach the IRS, state that you want to be placed in Currently Not Collectible Status.

The IRS will ask you questions about Form 433-F. You may be asked to send in Form 433-F and all supporting documentation.

Pros and Cons of Currently Not Collectible Status:

Pros:

-While you are in Currently Not Collectible Status, the IRS must stop most collection activities, including levies and garnishments. As mentioned earlier, the IRS can still file a notice of Federal Tax Lien on your assets.

-While you are in Currently Not Collectible Status, the 10 year statute of limitations continues to toll. If the IRS cannot collect the tax within the 10 year statutory period, then your tax debt will expire.

Cons:

-If you qualify for Currently Not Collectible Status, your financial situation is in bad shape.

-It can take years and years to benefit from the 10 year expiration of your tax debt.

Tips:

-When speaking with any person at the IRS, always write down their employee number, reason you called, and the date and time of the phone call.

-When mailing anything to the IRS, it is recommended to use Certified Mail.

-Supporting documentation should be as complete as possible.

* * *

Federal Tax Liens

Federal tax lien: A legal claim against property

A lien is a legal claim against all your current and future property. When you don't pay your first bill for taxes due, a lien is created by law and attaches to your property. It applies to property (such as your home and car) and to any current and future rights you have to property.

Notice of Federal Tax Lien: Provides public notice to creditors that a lien exists

A Notice of Federal Tax Lien gives public notice to creditors. The IRS will file the Notice of Federal Tax Lien to establish the priority of their claim versus the claims of other creditors. The Notice of Federal Tax Lien is filed with local or state authorities, such as county registers of deeds or the Secretary of State offices.

If a Notice of Federal Tax Lien is filed against you, it's often reported by consumer credit reporting agencies. This can have a negative effect on your credit rating and make it difficult for you to receive credit (such as a loan or credit card). Employers, landlords, and others may also use this information and not favorably view the fact that a Notice of Federal Tax Lien has been filed against you.

What to do if a Notice of Federal Tax Lien is filed against you

If possible, pay the full amount you owe immediately. If you can't pay in full, consider setting up an Installment Agreement or making an Offer in Compromise with the IRS. If you can't pay anything, request the IRS put you into Currently Not Collectible Status. Keep in mind the Notice of Federal Tax Lien only shows your assessed balance as of the date of the notice. It doesn't show your payoff balance or include IRS charges for filing and releasing the lien. To find out the full amount you must pay to have the lien released, call 1-800-913-6050. If you have questions, call the number on your lien notice or 1-800-829-1040.

How to appeal a Notice of Federal Tax Lien

Within 5 business days of filing the Notice of Federal Tax Lien, the IRS will send you a Notice of Your Right to a Collection Due Process Hearing. You'll have until the date shown on the notice to request a Collection Due Process hearing with the Office of Appeals. Send your Collection Due Process hearing request to the address on the notice. For more information, see Form 12153, Request for a Collection Due Process or Equivalent Hearing.

After your Collection Due Process hearing, the Office of Appeals will issue a determination on whether the Notice of Federal Tax Lien should remain filed, or whether it should be withdrawn, released, discharged, or subordinated. If you disagree with the determination, you have 30 days after it's made to seek a review in the U.S. Tax Court.

If you don't file a hearing request within 30 days, you aren't entitled to a Collection Due Process hearing, but you may be entitled to an equivalent hearing. The request for an equivalent hearing; however, doesn't prohibit the IRS from seizing and doesn't suspend the 10-year period for collecting tax. In addition, you aren't entitled to a judicial review of the decision from the Equivalent Hearing.

In addition to any Collection Due Process rights you may have, you may also appeal a proposed or actual filing of a Notice of Federal Tax Lien under the Collection Appeals Program.

Reasons the IRS will "release" a federal tax lien

A "release" of a federal tax lien means that the IRS has cleared both the lien for your debt and the public Notice of Federal Tax Lien. They do this by filing a Certificate of Release of Federal Tax Lien with the same state and local authorities with whom we filed your Notice of Federal Tax Lien. The IRS will release your lien if:

-Your debt is fully paid,

-Payment of your debt is guaranteed by a bond, or

-The period for collection has ended. (In this case, the release is automatic.)

For more information, see Publication 1450, Instructions on How to Request a Certificate of Release of Federal Tax Lien.

Reasons the IRS may "withdraw" a Notice of Federal Tax Lien

A "withdrawal" removes the Notice of Federal Tax Lien from public record. The withdrawal tells other creditors that the IRS is abandoning their lien priority. This doesn't mean that the federal tax lien is released, or that you're no longer liable for the amount due. The IRS may withdraw a Notice of Federal Tax Lien if:

-You've entered into an Installment Agreement to satisfy the tax liability, unless the Agreement provides otherwise. For certain types of taxes, the IRS will routinely withdraw a Notice of Federal Tax Lien if you've entered into a direct debit Installment Agreement and meet certain other conditions,

-It will help you pay your taxes more quickly,

-The IRS didn't follow IRS procedures

-It was filed during a bankruptcy automatic stay period, or

-It's in your best interest (as determined by the Taxpayer Advocate) and in the best interest of the government. For example, this could include when your debt has been satisfied and you request a withdrawal.

For more information, see Form 12277, Application for Withdrawal of Filed Notice of Federal Tax Lien.

How to apply for a "discharge" of a federal tax lien from property

A "discharge" removes the lien from specific property. There are several circumstances under which the federal tax lien can be discharged. For example, the IRS may issue a Certificate of Discharge if you're selling property and a Notice of Federal Tax Lien has been filed; you may be able to remove or discharge the lien from that property through the sale. For more information on whether you qualify for a discharge, see Publication 783, Instructions on How to apply for a Certificate of Discharge of Property from Federal Tax Lien.

How to make the federal tax lien secondary to other creditors ("subordination")

"subordination" is where a creditor is allowed to move ahead of the government's priority position. For example, if you're trying to refinance a mortgage on your home, but aren't able to because the federal tax lien has priority over the new mortgage, you may request that the IRS subordinate their lien to the new mortgage. For more information on whether you qualify for a subordination, see Publication 784, How to Prepare an Application for a Certificate of Subordination of Federal Tax Lien.

Appeal rights for withdrawal, discharge, or subordination

If the IRS denies your request for a withdrawal, discharge, or subordination, you may appeal under Collections Appeals Program. For more information about appeal rights for withdrawal, discharge, or subordination, see Publication 1660.

The key to dealing with a lien is to act immediately!

* * *

Federal Tax Levies

Levy: A seizure of property

While a federal tax lien is a legal claim against your property, a levy is a legal seizure that actually takes your property (such as your house or car) or your rights to property (such as your income, bank account, or Social Security payments) to satisfy your tax debt.

Keep in mind that the IRS can't seize your property if you have a current or pending Installment Agreement, Offer in Compromise, or if they agree that you're unable to pay due to economic hardship, meaning seizing your property would result in your inability to meet basic, reasonable living expenses.

Reasons the IRS may seize ("levy") your property or rights to property

If you don't pay your taxes (or make arrangements to settle your debt), the IRS can seize and sell your property. The IRS will usually seize only after the following things have occurred:

-The IRS assessed the tax and sent you a bill,

-You neglected or refused to pay the tax, and

-The IRS sent you a Final Notice of Intent to Levy and Notice of your Right to a Hearing at least 30 days before the seizure.

However, there are exceptions for when the IRS doesn't have to provide a 30 day notice before seizing your property. These include situations when:

-The collection of the tax is in jeopardy,

-A levy is served to collect tax from a state tax refund,

-A levy is served to collect the tax debt of a federal contractor, or

-A Disqualified Employment Tax Levy (DETL) is served. A Disqualified Employment Tax Levy is the seizure of unpaid employment taxes and can be served when a taxpayer previously requested a Collection Due Process appeal on employment taxes for other periods within the past 2 years.

If the IRS serves a levy under one of these exceptions, they will send you a letter explaining the seizure and your appeal rights after the levy is issued.

What you should do if your property is seized ("levied")

If your property or federal payments are seized, call the number on your levy notice or 1-800-829-1040. If you're already working with an IRS employee, call him or her for assistance.

Examples of property the IRS can seize ("levy")

-Wages, salary, or commission held by someone else. If the IRS seizes your rights to wages, salary, commissions, or similar payments that are held by someone else, they will serve a levy once, not each time you're paid. The one levy continues until your debt is fully paid, other arrangements are made, or the collection period ends. Other payments you receive, such as dividends and payments on promissory notes, are also subject to seizure. However, the seizure only reaches the payments due or the right to future payments as of the date of the levy.

-Your bank account. Seizure of the funds in your bank account will include funds available for withdrawal up to the amount of the seizure. After the levy is issued, the bank will hold the available funds and give you 21 days to resolve any disputes about who owns the account before sending the IRS the money. After 21 days, the bank will send the IRS your money, plus any interest earned on that amount, unless you have resolved the issue in another way.

-Your federal payments. As an alternative to the levy procedure used for other payments such as dividends and promissory notes, certain federal payments may be systematically seized through the Federal Payment Levy Program in order to pay your tax debt. Under this program the IRS can generally seize up to 15% of your federal payments (up to 100% of payments due to a vendor for goods or services sold or leased to the federal government). The IRS will serve the levy once, not each time you are paid. The one levy continues until your debt is fully paid, other arrangements are made, the collection period ends, or the IRS releases the levy. The federal payments that can be seized in this program include, but aren't limited to, federal retirement annuity income from the Office of Personnel Management, Social Security benefits under Title II of the Social Security Act (OASDI), and federal contractor/vendor payments.

-Your house, car or other property. If the IRS seizes your house or other property, they will sell your interest in the property and apply the proceeds (after the costs of the sale) to your tax debt. Prior to selling your property, the IRS will calculate a minimum bid price. They will provide you with a copy of the calculation and give you an opportunity to challenge the fair market value determination. The IRS will then provide you with the notice of sale and announce the pending sale to the public, usually through local newspapers or flyers posted in public places. After giving public notice, the IRS will generally wait 10 days before selling your property. Money from the sale pays for the cost of seizing and selling the property and, finally, your tax debt. If there's money left over from the sale after paying off your tax debt, the IRS will tell you how to get a refund.

Property that can't be seized ("levied")

Certain property is exempt from seizure. For example, the IRS can't seize the following: unemployment benefits, certain annuity and pension benefits, certain service-connected disability payments, workers compensation, certain public assistance payments, minimum weekly exempt income, assistance under the Job Training Partnership Act, and income for court-ordered child support payments.

The IRS also can't seize necessary schoolbooks and clothing, undelivered mail, certain amounts worth of fuel, provisions, furniture, personal effects for a household, and certain amounts worth of books and tools for trade, business, or professions. There are also limitations on their ability to seize a primary residence and certain business assets.

Lastly, the IRS can't seize your property unless they expect net proceeds to help pay off your tax debt.

How to appeal a proposed seizure ("levy")

You can request a Collection Due Process hearing within 30 days from the date of your Notice of Intent to Levy and Notice of Your Right to a Hearing. Send your request to the address on your notice. For more information, see Form 12153, Request for a Collection Due Process or Equivalent Hearing. At the conclusion of your hearing, the Office of Appeals will provide a determination. You'll have 30 days after the determination to challenge it in the U.S. Tax Court.

If you don't file a hearing request within 30 days, you're not entitled to a Collection Due Process hearing, but you may be entitled to an Equivalent Hearing. The request for an Equivalent Hearing, however, doesn't prohibit the IRS from seizing and doesn't suspend the 10-year period for collecting tax. In addition, you're not entitled to a judicial review of the decision from the Equivalent Hearing.

If Collection Due Process rights aren't available for your case, you may have other appeal options, such as the Collection Appeals Program.

Reasons the IRS will "release" a levy

The Internal Revenue Code (IRC) specifically provides that the IRS must release a levy if they determine that:

-You paid the amount you owe,

-The period for collection ended prior to the levy being issued,

-It will help you pay your taxes,

-You enter into an Installment Agreement and the terms of the agreement don't allow for the levy to continue,

-The levy creates an economic hardship on you, meaning the IRS has determined that you are unable to meet basic, reasonable living expenses, or

-The value of the property is more than the amount owed and releasing the levy won't hinder the IRS from being able to collect the amount owed.

In addition, a levy on wages or salary must be released as soon as possible if the IRS determines that your tax isn't collectible.

The IRS will also release a levy if it was issued improperly. For example, a levy will be released if it was issued:

-Against property exempt from seizure,

-Prematurely,

-Before the IRS sent you the required notice,

-While you are in bankruptcy and an automatic stay is in effect,

-Where the expenses of seizing and selling the levied property would be greater than the fair market value of the property,

-While an Installment Agreement request, Innocent Spouse Relief request, or Offer in Compromise is being considered or had been accepted and is in effect, or

-While the Office of Appeals or Tax Court is considering certain appeals and the levy wasn't a Disqualified Employment Tax Levy to collect employment taxes, a state refund, or jeopardy levy.

Reasons the IRS may return seized ("levied") property

The IRS may return your property if:

-Its seizure was premature,

-Its seizure was in violation of the law,

-Returning the seized property will help the IRS collect your debt,

-You enter into an Installment Agreement that doesn't allow a levy,

-The IRS didn't follow IRS procedures, or

-It's in the best interest (as determined by the Taxpayer Advocate) and in the best interest of the government

If the IRS decides to return your property but it's already been sold, you will be given the money the IRS received from the sale. You can file a request for seized property to be returned, or the IRS can return seized property on their own initiative, generally up to 9 months after the seizure.

How to recover seized ("levied") property that's been sold

To recover your real estate, you (and anyone with interest in the property) may recoup it within 180 days of the sale by paying the purchaser what they paid, plus interest at 20% annually.

If your property has been seized ("levied") to collect tax owed by someone else, you may appeal under the Collection Appeals Program or (within the time prescribed by law), file a claim under Internal Revenue Code section 6343(b), or you may (within the time prescribed by law) file a suit under Internal Revenue Code section 7426 for the return of the wrongfully seized property. For more information, see Publication 4528, Making an Administrative Wrongful Levy Claim under Internal Revenue Code section 6343(b).

How to recover economic damages

If the IRS seizure was in error, your payment was lost or misplaced, or there was a direct debit Installment Agreement processing error and you incurred bank charges, the IRS may reimburse you for charges you paid. For more information, see Form 8546, Claim for Reimbursement of Bank Charges. If your claim is denied, you can sue the federal government for economic damages.

If the IRS intentionally or negligently didn't follow Internal Revenue law while collecting your taxes, or you're not the taxpayer and they wrongfully seized your property, you may be entitled to recover economic damages. Mail your written administrative claim to the attention of the Advisory Group Manager for your area at the address listed in Publication 4235, Collection Advisory Group Addresses. If you've filed a claim and your claim is denied, you can sue the federal government, but not the IRS employee, for economic damages.

Summons: Used to secure information

If the IRS is having trouble gathering information to determine or collect taxes you owe, they may serve a summons. A summons legally compels you or a third party to meet with an officer of the IRS and provide information, documents, and/or testimony.

If you're responsible for a tax liability and the IRS serves a summons on you, you may be required to:

-Testify,

-Bring books and records to prepare a tax return, and/or

-Produce documents to prepare a Collection Information Statement, Form 433-A or Form 433-B.

If you can't make your summons appointment, immediately call the number listed on your notice. If you don't call the IRS and don't attend your appointment, serious legal action may be taken against you.

If the IRS serves a third-party summons to determine tax liability, you'll receive a notice indicating that the IRS is contacting a third party. Third parties can be financial institutions, record keepers, or people with relevant information to your case. The IRS won't review their information or receive testimony until the end of the 23rd day after the notice was given. You also have the right to:

-Petition to reject ("quash") the summons before the end of the 20th day after the date of the notice, or

-Petition to intervene in a suit to enforce a summons to which the third party didn't comply.

If the IRS issue a third-party summons to collect taxes you already owe, you won't receive notice or be able to petition to reject or intervene in a suit to enforce the summons.

* * *

Penalties and Interest

April 15 is the deadline for most people to file their individual income tax return and pay any tax owed. Tax returns are checked for mathematical accuracy. If there is any money owed, you will be sent a bill. You must file your return and pay your tax by the due date to avoid interest and penalty charges. Often the funds necessary to pay your tax can be borrowed at a lower effective rate than the combined IRS interest and penalty rate.

There are possible exceptions to the general deadlines for filing a return and paying tax. One possible exception is if you are a member of the armed forces and are serving in a combat zone. Refer to Publication 3, Armed Forces' Tax Guide, for additional information and qualifications. The second is if you are a citizen or resident alien working abroad. Refer to Publication 54, Tax Guide for U. S. Citizens and Resident Aliens Abroad, for information.

If you believe there is an error on your notice or bill, write to the IRS office that sent it to you within the time frame given. You should provide photocopies of any records that may help correct the error. Also, you may call the number listed on your notice or bill for assistance. If you are correct, the IRS will make the necessary adjustment to your account and send you a corrected notice.

Interest

Generally, interest is charged on any unpaid tax from the due date of the return until the date of payment. The interest rate is determined quarterly and is the federal short-term rate plus 3 percent. Interest is compounded daily and based on the type of tax owed (example: individual or business-tax liabilities).

Interest Abatement

In most cases, interest charges may not be abated and continue to accrue until all assessed tax, penalties, and interest are paid in full. The law does provide exceptions for allowing abatement or suspension of interest, such as:

-Excessive, barred by statute, erroneously or illegally assessed

-Attributed to certain unreasonable errors or unreasonable delays by the IRS

-Assessed on an erroneous refund

-Due to an additional liability that was not identified by the IRS in a timely manner

-Disregarded for a period of time due to a taxpayer's participation in a combat zone

-Disregarded for a taxpayer for qualifying for Military Deferment

-Due on an account for a taxpayer located in a declared disaster area

Reasonable cause is never the basis for abating interest.

Penalties

Here are two of the most common types of IRS penalties:

-Failure to file penalty: This penalty starts at 5% for each month the tax return is late, up to a maximum penalty of 25%. It's based on the amount of tax you owe. So, if it looks like you're not going to be able to file your return by the due date, file an extension. That may reduce or even eliminate the penalty. Be mindful that filing an extension does not extend the payment due date. If possible, try to pay as much as you can by the original due date to minimize the late-payment penalty. If your return is over 60 days late, the minimum penalty for late filing is the lesser of $135 or 100 percent of the tax owed.

-Late-payment penalty: This penalty is assessed when you file a return but don't pay all amounts shown as due on time. It is calculated as one-half of one percent of the tax owed for each month, or part of a month, that the tax remains unpaid from the due date, until the tax is paid in full or the 25% maximum penalty is reached. The one-half of one percent rate increases to one percent if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy. For individuals who file by the return due date, the one-half of one percent rate decreases to one-quarter of one percent for any month in which an Installment Agreement is in effect. The penalty calculation begins from the original payment deadline, generally April 15th for a Form 1040, until the balance due is paid in full.

-Both combined: When failure to file and late payment penalties apply at the same time, the maximum combined penalties for the first five months are 25%.

Penalty Abatement

The penalties for filing and paying late may be abated, if you have reasonable cause and the failure was not due to willful neglect. Abatement applies to penalties and interest not the principal amount the IRS claims that you owe. Penalty abatement has the potential to remove a big chunk of the total tax owed. In some cases, the reduction can be as high as 20-25% of your total tax.

Common reasons the IRS will consider for Penalty Abatement:

-Erroneous advice from an IRS employee

-Erroneous advice from a tax professional

-Declared natural disasters

-Job loss or substantial periods of unemployment

-Incarceration

-Destruction, theft or loss of your financial records

-A traumatic personal experience or event, such as; major illness, death of a family member or divorce.

Make sure that you can provide documentation or some sort of proof to back up your claim.

There are four ways to file for penalty abatement:

1-Request an interview over the phone: You explain your case and reasoning for removing the penalties.

2-Request an interview in person: You explain your case and reasoning for removing the penalties.

3-Through the mail: You send a written petition to the IRS justifying your position and why the penalties should be removed.

4-Form 843: Complete and mail to the IRS Form 843 detailing your reasons that your penalties should abated. If you have multiple tax years of penalties, you have to send a Form 843 for each year. If you have different reasons to abate penalties for each year, make that clear with each Form 843. Some years may be abated and some may not.

Tips for successful submission of Form 843:

-When filing Form 843, it is a good idea to include a cover letter in which you explain your justification for penalty abatement.

-Either pay in full the principal amount the IRS claims that you owe or set up an Installment Agreement before filling for penalty abatement. The IRS likes it when taxpayers are showing a good faith effort to resolve their tax debt.

-There is no need to try the excuse "unaware of the tax owed" or "unaware of the law". The IRS will not abate penalties in this situation.

-If applicable, make the case to the IRS that you had valid reasons for incurring the tax debt that led to the penalty assessment in the first place.

-The most common reason the IRS accepts for penalty abatement is serious illness or hospitalization during the tax period in question.

-Providing evidence and documentation will strengthen your case.

If your penalty abatement request is accepted by the IRS, any amount you over pay will be refunded to you.

* * *

Employment Taxes and the Trust Fund Recovery Penalty (TFRP)

To encourage prompt payment of withheld income and employment taxes, including social security taxes, railroad retirement taxes, or collected excise taxes, Congress passed a law that provides for the TFRP. These taxes are called trust fund taxes because you actually hold the employee's money in trust until you make a federal tax deposit in that amount. The TFRP may apply to you if these unpaid trust fund taxes cannot be immediately collected from the business. The business does not have to have stopped operating in order for the TFRP to be assessed.

Who Can Be Responsible for the TFRP?

The TFRP may be assessed against any person who:

-Is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and

-Willfully fails to collect or pay them.

A responsible person is a person or group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes. This person may be:

-An officer or an employee of a corporation,

-A member or employee of a partnership,

-A corporate director or shareholder,

-A member of a board of trustees of a nonprofit organization,

-Another person with authority and control over funds to direct their disbursement,

-Another corporation or third party payer,

-Payroll Service Providers (PSP) ore responsible parties within a PSP

-Professional Employer Organizations (PEO) or responsible parties within a PEO, or

-Responsible parties within the common law employer (client of PSP/PEO).

For willfulness to exist, the responsible person:

-Must have been, or should have been, aware of the outstanding taxes and

-Either intentionally disregarded the law or was plainly indifferent to its requirements (no evil intent or bad motive is required).

Using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness.

You may be asked to complete an interview in order to determine the full scope of your duties and responsibilities. Responsibility is based on whether an individual exercised independent judgment with respect to the financial affairs of the business. An employee is not a responsible person if the employee's function was solely to pay the bills as directed by a superior, rather than to determine which creditors would or would not be paid. In this situation, pleading ignorance is not acceptable to the IRS.

If the IRS concludes that you are directly responsible for not paying employment taxes, they will send you a letter stating that they plan to personally assess you for the TFRP. At this stage, it may be in your best interest to get professional tax representation (call CPA Tax Relief at 949-768-3045 or go to www.hickamcpa.com).

Figuring the TFRP Amount

The amount of the penalty is equal to the unpaid balance of the trust fund tax. The penalty is computed based on:

-The unpaid income taxes withheld, plus

-The employee's portion of the withheld FICA taxes.

For collected taxes, the penalty is based on the unpaid amount of collected excise taxes.

Assessing the TFRP

If the IRS determines that you are a responsible person, they will send you a letter (the Trust Funds Recovery Penalty letter 1153) stating that they plan to assess the TFRP against you. You have 60 days (75 days if this letter is addressed to you outside the United States) from the date of this letter to appeal the proposal. The letter will explain your appeal rights. Refer to Publication 5 (PDF), Your Appeal Rights and How to Prepare a Protest if You Don't Agree, for a clear outline of the appeals process. If you do not respond to the letter from the IRS, they will assess the penalty against you and send you a Notice and Demand for Payment.

To appeal the Trust Funds Recovery Penalty letter 1153, send a package to the IRS office or individual with the following enclosed:

-A formal written protest with your name, address, social security, and a daytime phone number,

-A statement that you want to appeal the IRS findings to the Appeals Office,

-The tax periods or years involved,

-A copy of the IRS Trust Funds Penalty letter (1153),

-A list of the changes that you don't agree with, and why you don't agree,

-The facts supporting your position on any issue that you don't agree with,

-The law or authority, if any, on which you are relying,

-Your signature on the written protest, stating that it is true, under the penalties of perjury.

It is important to include documentation and evidence that casts doubt or disproves the IRS's assertion that you owe them money. After you promptly file your appeal letter and supporting documents, file an  claim, and, if you qualify, file an Offer in Compromise (Doubt as to Liability). Like individuals with tax debt, businesses may also be eligible to file an Offer in Compromise.

Caution: IRS code section 6672

Once the IRS asserts the penalty, they can take collection action against your personal assets. For instance, the IRS can file a federal tax lien or take levy or seizure action. If the IRS believes that you have made a voluntary, conscious, and intentional decision to not pay the money that has been withheld, they will use section 6672.

Avoiding the TFRP

The best way avoid the TFRP is by making sure that all employment taxes are collected, accounted for, and paid to the IRS when required.

* * *

Innocent Spouse Relief

By requesting innocent spouse relief, you can be relieved of responsibility for paying tax, interest, and penalties if your spouse (or former spouse) improperly reported items or omitted items on your tax return. Generally, the tax, interest, and penalties that qualify for relief can only be collected from your spouse (or former spouse). However, you are jointly and individually responsible for any tax, interest, and penalties that do not qualify for relief. The IRS can collect these amounts from either you or your spouse (or former spouse).

For innocent spouse relief, file Form 8857. For details on where to file, see the instructions for Form 8857.

The IRS will figure the tax you are responsible for after you file Form 8857. You are not required to figure this amount.

There are three types of Innocent Spouse Relief:

1-Innocent Spouse Relief,

2-Relief by Separation of Liability, and

3-Equitable Relief

Innocent Spouse Relief

You must meet all of the following conditions to qualify for innocent spouse relief.

1-You filed a joint return which has an understatement of tax due to erroneous items (defined below) of your spouse (or former spouse).

2-You establish that at the time you signed the joint return you did not know, and had no reason to know, that there was an understatement of tax (See Actual Knowledge or Reason to Know, defined below).

3-Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement of tax. (See Indications of Unfairness for Innocent Spouse Relief, later).

4-A request for innocent spouse relief will not be granted if the IRS proves that you and your spouse (or former spouse) transferred property to one another as part of a fraudulent scheme. A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, ex-spouse, or business partner.

Erroneous Items

Erroneous items are either of the following.

-Unreported income: This is any gross income item received by your spouse (or former spouse) that is not reported.

-Incorrect deduction, credit, or basis: This is any improper deduction, credit, or property basis claimed by your spouse (or former spouse).

The following are examples of erroneous items.

-The expense for which the deduction is taken was never paid or incurred. For example, your spouse, a cash-basis taxpayer, deducted $10,000 of advertising expenses on Schedule C of your joint Form 1040, but never paid for any advertising.

-The expense does not qualify as a deductible expense. For example, your spouse claimed a business fee deduction of $10,000 that was for the payment of state fines. Fines are not deductible.

-No factual argument can be made to support the deductibility of the expense. For example, your spouse claimed $4,000 for security costs related to a home office, which were actually veterinary and food costs for your family's two dogs.

Actual Knowledge or Reason to Know

You knew or had reason to know of an understatement if:

-You actually knew of the understatement, or

-A reasonable person in similar circumstances would have known of the understatement.

Actual knowledge

If you actually knew about an erroneous item that belongs to your spouse (or former spouse), the relief discussed here does not apply to any part of the understatement of tax due to that item. You and your spouse (or former spouse) remain jointly liable for that part of the understatement. For information about the criteria for determining whether you actually knew about an erroneous item, see Actual Knowledge later under Relief by Separation of Liability.

Reason to know

If you had reason to know about an erroneous item that belongs to your spouse (or former spouse), the relief discussed here does not apply to any part of the understatement of tax due to that item. You and your spouse (or former spouse) remain jointly liable for that part of the understatement.

The IRS will consider all facts and circumstances in determining whether you had reason to know of an understatement of tax due to an erroneous item. The facts and circumstances include:

-The nature of the erroneous item and the amount of the erroneous item relative to other items.

-The financial situation of you and your spouse (or former spouse).

-Your educational background and business experience.

-The extent of your participation in the activity that resulted in the erroneous item.

-Whether you failed to ask, at or before the time the return was signed, about items on the return or omitted from the return that a reasonable person would question.

-Whether the erroneous item represented a departure from a recurring pattern reflected in prior years' returns (for example, omitted income from an investment regularly reported on prior years' returns).

Partial relief when portion of erroneous item is unknown. You may qualify for partial relief if, at the time you filed your return, you had no knowledge or reason to know of only a portion of an erroneous item. You will be relieved of the understatement due to that portion of the item if all other requirements are met for that portion.

Example

If at the time you signed your joint return, you knew that your spouse did not report $5,000 of gambling winnings. The IRS examined your tax return several months after you filed it and determined that your spouse's unreported gambling winnings were actually $25,000. You established that you did not know about, and had no reason to know about, the additional $20,000 because of the way your spouse handled gambling winnings. The understatement of tax due to the $20,000 will qualify for innocent spouse relief if you meet the other requirements. The understatement of tax due to the $5,000 of gambling winnings will not qualify for relief.

Indications of Unfairness for Innocent Spouse Relief

The IRS will consider all of the facts and circumstances of the case in order to determine whether it is unfair to hold you responsible for the understatement.

The following are examples of factors the IRS will consider.

-Whether you received a significant benefit (defined next), either directly or indirectly, from the understatement.

-Whether your spouse (or former spouse) deserted you.

-Whether you and your spouse have been divorced or separated.

-Whether you received a benefit on the return from the understatement.

For other factors, see Factors for Determining Whether to Grant Equitable Relief later under Equitable Relief.

Significant benefit

A significant benefit is any benefit in excess of normal support. Normal support depends on your particular circumstances. Evidence of a direct or indirect benefit may consist of transfers of property or rights to property, including transfers that may be received several years after the year of the understatement.

Example

You receive money from your spouse that is beyond normal support. The money can be traced to your spouse's lottery winnings that were not reported on your joint return. You will be considered to have received a significant benefit from that income. This is true even if your spouse gives you the money several years after he or she received it.

Relief by Separation of Liability

Under this type of relief, you allocate (separate) the understatement of tax (plus interest and penalties) on your joint return between you and your spouse (or former spouse). The understatement of tax allocated to you is generally the amount for which you are responsible. See How To Allocate the Understatement of Tax, within Publication 971.

This type of relief is available only for unpaid liabilities resulting from understatements of tax. Refunds are not allowed.

To request relief by separation of liability, you must have filed a joint return and meet either of the following requirements at the time you file Form 8857.

1-You are no longer married to, or are legally separated from, the spouse with whom you filed the joint return for which you are requesting relief. (Under this rule, you are no longer married if you are widowed.)

2-You were not a member of the same household (explained next) as the spouse with whom you filed the joint return at any time during the 12-month period ending on the date you file Form 8857.

Members of the same household

You and your spouse are not members of the same household if you are living apart and are estranged. However, you and your spouse are considered members of the same household if any of the following conditions are met.

-You and your spouse reside in the same dwelling.

-You and your spouse reside in separate dwellings but are not estranged, and one of you is temporarily absent from the other's household as explained in (3) below.

-Either spouse is temporarily absent from the household and it is reasonable to assume that the absent spouse will return to the household, and the household or a substantially equivalent household is maintained in anticipation of the absent spouse's return. Examples of temporary absences include absence due to imprisonment, illness, business, vacation, military service, or education.

Burden of proof

You must be able to prove that you meet all of the requirements for separation of liability (except actual knowledge) and that you did not transfer property to avoid tax (discussed later). You must also establish the basis for allocating the erroneous items.

Limitations on Relief

Even if you meet the requirements discussed previously, a request for relief by separation of liability will not be granted in the following situations.

-The IRS proves that you and your spouse (or former spouse) transferred assets to one another as part of a fraudulent scheme. A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, ex-spouse, or business partner.

-The IRS proves that at the time you signed your joint return, you had actual knowledge (explained below) of any erroneous items giving rise to the deficiency that were allocable to your spouse (or former spouse). For the definition of erroneous items, see Erroneous Items under Innocent Spouse Relief.

-Your spouse (or former spouse) transferred property to you to avoid tax or the payment of tax. See Transfers of Property to Avoid Tax, later.

Actual Knowledge

The relief discussed here does not apply to any part of the understatement of tax due to your spouse's erroneous items of which you had actual knowledge. You and your spouse remain jointly and severally liable for this part of the understatement.

If you had actual knowledge of only a portion of an erroneous item, the IRS will not grant relief for that portion of the item.

You had actual knowledge of an erroneous item if:

-You knew that an item of unreported income was received. (This rule applies whether or not there was a receipt of cash.)

-You knew of the facts that made an incorrect deduction or credit unallowable.

-For a false or inflated deduction, you knew that the expense was not incurred, or not incurred to the extent shown on the tax return.

Knowledge of the source of an erroneous item is not sufficient to establish actual knowledge. Also, your actual knowledge may not be inferred when you merely had a reason to know of the erroneous item. Similarly, the IRS does not have to establish that you knew of the source of an erroneous item in order to establish that you had actual knowledge of the item itself.

Your actual knowledge of the proper tax treatment of an erroneous item is not relevant for purposes of demonstrating that you had actual knowledge of that item. Likewise, neither is your actual knowledge of how the erroneous item was treated on the tax return relevant for purposes of demonstrating actual knowledge. For example, if you knew that your spouse received dividend income, relief is not available for that income even if you did not know it was taxable.

Example

Bill and Karen Green filed a joint return showing Karen's wages of $50,000 and Bill's self-employment income of $10,000. The IRS audited their return and found that Bill did not report $20,000 of self-employment income. The additional income resulted in a $6,000 understatement of tax, plus interest and penalties. After obtaining a legal separation from Bill, Karen filed Form 8857 to request relief by separation of liability. The IRS proved that Karen actually knew about the $20,000 of additional income at the time she signed the joint return. Karen will not be granted relief under Separation of Liability because she actually knew of the item, but may be granted relief under Equitable Relief. Equitable Relief considers all the facts and circumstances to determine if it is equitable to grant relief.

Factors supporting actual knowledge

The IRS may rely on all facts and circumstances in determining whether you actually knew of an erroneous item at the time you signed the return. The following are examples of factors the IRS may use.

-Whether you made a deliberate effort to avoid learning about the item in order to be shielded from liability.

-Whether you and your spouse (or former spouse) jointly owned the property that resulted in the erroneous item.

Domestic abuse exception

Even if you had actual knowledge, you may still qualify for relief if you establish that:

-You were the victim of domestic abuse before signing the return, and

-Because of that abuse, you did not challenge the treatment of any items on the return because you were afraid your spouse (or former spouse) would retaliate against you.

If you establish that you signed your joint return under duress, then it is not a joint return, and you are not liable for any tax shown on that return or any tax deficiency for that return. However, you may be required to file a separate return for that tax year.

Transfers of Property to Avoid Tax

If your spouse transfers property (or the right to property) to you for the main purpose of avoiding tax or payment of tax, the tax liability allocated to you will be increased by the fair market value of the property on the date of the transfer. The increase may not be more than the entire amount of the liability. A transfer will be presumed to have as its main purpose the avoidance of tax or payment of tax if the transfer is made after the date that is 1 year before the date on which the IRS sent its first letter of proposed deficiency. This presumption will not apply if the transfer was made under a divorce decree, separate maintenance agreement, or a written instrument incident to such an agreement. The presumption will also not apply if you establish that the transfer did not have as its main purpose the avoidance of tax or payment of tax.

If the presumption does not apply, but the IRS can establish that the purpose of the transfer was the avoidance of tax or payment of tax, the tax liability allocated to you will be increased as explained above.

Equitable Relief

If you do not qualify for innocent spouse relief, relief by separation of liability, or relief from liability arising from community property law, you may still be relieved of responsibility for tax, interest, and penalties through equitable relief. If you request any of these types of relief, and the IRS determines you do not qualify for any of them, the IRS will consider whether equitable relief is appropriate.

Unlike innocent spouse relief or separation of liability, you can get equitable relief from an understatement of tax (defined below) or an underpayment of tax. An underpayment of tax is an amount of tax you properly reported on your return but you have not paid. For example, your joint 2009 return shows that you and your spouse owed $5,000. You pay $2,000 with the return. You have an underpayment of $3,000.

Understatement of Tax

An understatement of tax is generally the difference between the total amount of tax that should have been shown on your return and the amount of tax that was actually shown on your return.

Conditions for Getting Equitable Relief

You may qualify for equitable relief if you meet all of the following conditions.

1-You are not eligible for innocent spouse relief, relief by separation of liability, or relief from liability arising from community property law.

2-You and your spouse (or former spouse) did not transfer assets to one another as a part of a fraudulent scheme. A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, ex-spouse, or business partner.

3-Your spouse (or former spouse) did not transfer property to you for the main purpose of avoiding tax or the payment of tax. See Transfers of Property to Avoid Tax, earlier, under Relief by Separation of Liability.

4-You did not file or fail to file your return with the intent to commit fraud.

5-You did not pay the tax. However, see Refunds, later, for situations in which you are entitled to a refund of payments you made.

6-You establish that, taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement or underpayment of tax. See Factors for Determining Whether to Grant Equitable Relief, later.

7-The income tax liability from which you seek relief must be attributable to an item of the spouse (or former spouse) with whom you filed the joint return.

There are exceptions to item 7 above:

-The item is attributable or partially attributable to you solely due to the operation of community property law. If you meet this exception, that item will be considered attributable to your spouse (or former spouse) for purposes of equitable relief.

-If the item is titled in your name, the item is presumed to be attributable to you. However, you can rebut this presumption based on the facts and circumstances.

-You did not know, and had no reason to know that funds intended for the payment of tax were misappropriated by your spouse (or former spouse) for his or her benefit. If you meet this exception, the IRS will consider granting equitable relief although the underpayment may be attributable in part or in full to your item, and only to the extent the funds intended for payment were taken by your spouse (or former spouse).

-You establish that you were the victim of abuse before signing the return, and that, as a result of the prior abuse, you did not challenge the treatment of any items on the return for fear of your spouse's retaliation. If you meet this exception, relief will be considered although the deficiency or underpayment may be attributable in part or in full to your item.

-You established that your spouse's (or former spouse's) fraud is the reason for the erroneous item causing the understatement of tax.

Refunds

If you are granted relief, you are eligible for a refund of separate payments that you made after July 22, 1998, if you establish that you provided the funds used to make the payment for which you seek a refund. You are not eligible for refunds of payments made with the joint return, joint payments, or payments that your spouse (or former spouse) made. The amount of the refund is subject to the limit discussed next.

Limit on amount of refund. If you request relief within 3 years after filing your return, the refund cannot be more than the part of the tax paid within the 3 years (plus any extension of time for filing your return) before you filed your request for relief.

If you request relief after the 3-year period, but within 2 years from the time you paid the tax, the refund cannot be more than the tax you paid within the 2 years immediately before you filed your request for relief.

Factors for Determining Whether To Grant Equitable Relief

The IRS will consider all of the facts and circumstances in order to determine whether it is unfair to hold you responsible for the understatement or underpayment of tax. The following are examples of factors that the IRS will consider to determine whether to grant equitable relief. The IRS will consider all factors and weigh them appropriately.

Relevant Factors

The following are examples of factors that may be relevant to whether the IRS will grant equitable relief.

-Whether you are separated (whether legally or not) or divorced from your spouse. A temporary absence, such as an absence due to imprisonment, illness, business, vacation, military service, or education, is not considered separation for this purpose. A temporary absence is one where it is reasonable to assume that the absent spouse will return to the household, and the household or a substantially equivalent household is maintained in anticipation of the absent spouse's return.

-Whether you would suffer a significant economic hardship if relief is not granted. (In other words, you would not be able to pay your reasonable basic living expenses.)

-Whether your former spouse has a legal obligation under a divorce decree or agreement to pay the tax. This factor will not weigh in favor of relief if you knew or had reason to know, when entering into the divorce decree or agreement, that your former spouse would not pay the income tax liability.

-Whether you received a significant benefit (beyond normal support) from the unpaid tax or item causing the understatement of tax. (For a definition of significant benefit, see Indications of Unfairness for Innocent Spouse Relief on page 6 of Pub 971.)

-Whether you have made a good faith effort to comply with federal income tax laws for the tax year for which you are requesting relief or the following years.

-Whether you knew or had reason to know about the items causing the understatement or that the tax would not be paid, as explained next.

Knowledge or reason to know

In the case of an underpayment of tax, the IRS will consider whether you did not know and had no reason to know that your spouse (or former spouse) would not pay the income tax liability.

In the case of an income tax liability that arose from an understatement of tax, the IRS will consider whether you did not know and had no reason to know of the item causing the understatement. Reason to know of the item giving rise to the understatement will not be weighed more heavily than other factors. Actual knowledge of the item giving rise to the understatement, however, is a strong factor weighing against relief. This strong factor may be overcome if the factors in favor of equitable relief are particularly compelling.

Reason to know

In determining whether you had reason to know, the IRS will consider your level of education, any deceit or evasiveness of your spouse (or former spouse), your degree of involvement in the activity generating the income tax liability, your involvement in business and household financial matters, your business or financial expertise, and any lavish or unusual expenditures compared with past spending levels.

Example

You and your spouse filed a joint 2009 return. That return showed you owed $10,000. You had $5,000 of your own money and you took out a loan to pay the other $5,000. You gave 2 checks for $5,000 each to your spouse to pay the $10,000 liability. Without telling you, your spouse took the $5,000 loan and spent it on himself. You and your spouse were divorced in 2010. In addition, you had no knowledge or reason to know at the time you signed the return that the tax would not be paid. These facts indicate to the IRS that it may be unfair to hold you liable for the $5,000 underpayment. The IRS will consider these facts, together with all of the other facts and circumstances, to determine whether to grant you equitable relief from the $5,000 underpayment.

Factors Weighing in Favor of Equitable Relief

The following are examples of factors that will weigh in favor of equitable relief, but will not weigh against equitable relief.

-Whether your spouse (or former spouse) abused you.

-Whether you were in poor mental or physical health on the date you signed the return or at the time you requested relief.

Are You an Injured Spouse?

You may be an injured spouse if you file a joint tax return and all or part of your portion of the overpayment (refund) was, or is expected to be, applied (offset) to your spouse's legally enforceable past-due federal tax, state income tax, state unemployment compensation debts, child or spousal support, or a federal nontax debt, such as a student loan.

You qualify if:

-You filed a joint tax return with your spouse

-The IRS used the joint overpayment (refund) to pay any of the following past due debts owed by your spouse; federal tax, state income tax, state unemployment compensation, child support, spousal support, federal nontax debt (such as a student loan)

-You are not legally obligated to pay any of the aforementioned past due debts owed by your spouse

-You made payments to the IRS, such as federal income tax withholding or estimated tax payments, or

-You had earned income, such as wages, salaries, or self-employment income, or

-You claimed the earned income credit or additional child tax credit, or

-You claimed a refundable tax credit, or

-You made no tax payments, had no income and didn't claim any tax credits but you lived in a community property state during the year in question.

To file for injured spouse relief, complete Form 8379. You can file Form 8379 with your joint tax return or amended joint tax return (Form 1040X). Or, you can file it afterwards by itself. File Form 8379 with Form 1040x only if you are amending your original return to claim a joint refund. If you file Form 8379 separately, be sure to attach a copy of all Forms W-2 and W-2G for both spouses, and any Forms 1099 showing federal income tax withholding, to Form 8379. See Form 8379 instructions for more details.

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Knowledge Gives You Power

While having IRS problems is a serious situation, there is a solution to very problem. Tens of thousands of people just like you have settled with the IRS.

Tips:

-Do not be reactive. When you are reactive you let the IRS determine your financial future. Instead, be proactive by putting together a strategy to solve your IRS problem.

-Be responsive, professional and assertive. This will give you some control when dealing with the IRS.

-Knowing that many taxpayers are afraid of the IRS, IRS collection agents will try to use this perceived fear to work in their favors. Do not be intimidated by IRS collection agents.

-Know your legal rights and options. Knowledge gives you power.

We can help.

If you feel overwhelmed, give us a call. We can help relieve stress and anxiety and save you time and money. You will get back peace of mind knowing that our experts are dealing with the IRS for you.

For a free, no obligation consultation and tax analysis to discuss your options with a Certified Public Accountant, call (toll free) 949-768-3045 or go to www.hickamcpa.com.

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