They appear on late night television and on the internet promising to reduce your tax debt, stop garnishments, remove tax liens and settle your debt for pennies on the dollar. Oh, if only it were true. Pay a company a few thousand dollars and voila, your tax debt is reduced from $100,000 to $5,000. How’s that for a great return on investment!
Here is how the scam works: One day you receive a letter from the Internal Revenue Service indicating that you owe $50,000 to the IRS. It turns out that in 1999 and 2000 you failed to file a tax return and now with penalties and interest you owe them this money. Your first impulse is to panic as you have never owed anyone this much money and on the salary you make it will take the rest of your life to repay this money. You decide to ignore this letter and hope the IRS will go away until next month when you receive a second letter, and then a month later a third. Finally, six months later, you receive a certified letter from your bank and your employer – the IRS is going to take what little money you have in your bank account and they are also going to garnish a large part of your wages. By now you are losing sleep and are considering moving to Bolivia. Good idea.
Then lying awake at three o’clock one morning the face of an angry female attorney appears on your screen telling you she will fight the IRS for you and that she will win! She promises to reduce your debt and stop the IRS from taking your stuff! All you need to do is call the following toll free number and, by the way, have your credit card ready! Step one of the scam is complete. You are in debt, you are losing sleep and you have her number.
Step two begins with a simple telephone call to someone called a tax advisor – in reality a commissioned salesperson. What you do not know is that this salesperson has financial problems of his own and that the only way he can pay them is to get your credit card number and sell you their bogus services. The salesperson will discuss your situation with you, not to determine how best to help you, but to figure out how much you would be willing to pay and how much he can put on your credit card. It will be a large figure.
He will be very positive about their ability to reduce your debt and stop the garnishment. He will repeat that your $50,000 debt can easily be settled for $3,000 given your financial situation, and it will only cost you $5,000. And the levy on your bank account, will never happen! So you give them your credit card number, they charge you five grand and you go to sleep that night feeling much better. After all, a total cost of eight grand is better than $50,000. Step two of the scam is complete.
Step three – your tax advisor (who yesterday was stocking shelves in Home Depot) asks you to send him dozens of documents, bank statements, car loan paperwork, your lease or mortgage, everything. It takes a few weeks but you get it together and mail it to them. A month goes by and you hear nothing so you call. Unfortunately your tax advisor is not in at the moment but will return your call. A few weeks goes by, nothing. You call again. Your tax advisor is no longer working there and your account has been transferred to tax advisor #2 who will return your call. A few weeks goes by, nothing. You call again and finally get to speak to someone. They tell you that they are new to your case and that they will need the following documents to effectively evaluate your situation. It takes a week or so, but you finally get them into the mail. A month goes by and you call to find out what is going on only to be told that your tax advisor is on vacation and will get back with you when he returns. Another month goes by – nothing. By now it has been almost six months since you hired this firm to help you. The IRS has since taken all the money in your bank account and your wages have been garnished every week leaving you with nothing.
Finally your advisor calls you – “We have evaluated your case and have determined that there is nothing we can do to help you. You do not qualify for an offer in compromise as you have a regular job and can pay the full amount. You should call the IRS and arrange for an installment agreement. We will do so for you, buy it will cost an additional $2,000. If you do not wish for us to do so, we will return your documents to you, thank you for your business.”
In the past six months your debt has grown with interest to $55,000, you are out $5,000 to the tax relief company and your situation is far worse than it was when you began. Of course you ask for your money back from the company that scammed you only to be told “It is not our policy.” “I’ll sue!” you bellow into the phone, but by then they are gone. You will never see your five thousand again. The scam is complete.
Arthur Weiss, Esquire
Law Office of Arthur Weiss, P.C.
2135 Grant Rd.
Tucson, AZ 85719
520-319-1124 https://artweisslaw.com
Thousands of taxpayers owe the IRS far more in back taxes than they can possibly pay in their lifetimes. If you are one of these people, take some comfort that you are not alone. The IRS knows that most, if not all, of these taxpayers will stop filing returns and stop paying even current taxes, hoping that somehow the IRS will not find them or never pursue them. When the certified mail from the IRS arrives, they put them into a drawer, pretending that the problem just doesn’t exist. Unfortunately it does exist, it isn’t going away and it needs to be confronted before it grows into an even bigger problem.
One of the possible approaches to resolving this long standing situation is to offer the IRS a lower amount to completely settle the tax debt, an offer in compromise. You have seen on TV (and I am sure been tempted to call) tax relief hucksters promising to reduce your tax debt by up to 90%! Who could resist that? It depends upon two concepts which require extensive explanation. The first concept is called “economic hardship” and the second is “reasonable collection potential (RCP).” This article will cover the latter term – RCP.
If you are contemplating making an offer to the IRS to settle your tax debt, you will need to compute the RCP because if you make an offer that is LESS than RCP it will be declined (unless you can demonstrate “economic hardship”). Simple example – you owe $100,000 in back taxes. You do not compute RCP but simply make an offer of $15,000 to settle the debt. The IRS computes your RCP (from the documents that you must send with the offer) and it is $45,000. Your offer will be declined and you will be asked to raise your offer above the $45,000 RCP threshold. Of course $45,000 is much higher than you can possibly afford and you cannot raise your offer to that amount. You have now wasted money and time in getting your problem resolved. Had you computed your own RCP, you would have determined that an offer of $15,000 would be useless.
So how does the IRS (and you) compute RCP? Simple – discretionary income, both present and in the future, plus the quick sale value of the net equity in your assets. A mouthful to be sure, let’s break it down into English.
STEP 1 – Compute Discretionary income
Presuming that you have some income, let’s start there. You and your spouse work for a living, and each week you both receive your paychecks. That’s it, no other income. The IRS knows that you will need this income to pay your mortgage, car loan, insurance, taxes, food, medical expenses, child support, alimony, gas, electric bill, telephone, etc. The list seems endless. The IRS will add up your allowable expenses (forget that $2000 monthly expense for movies and theater and your son’s astronomical tuition at private school) and subtract them from your income. What remains after this simple mathematical operation is your discretionary income. In the case of Harry and Sally, (after they met, got married and failed to pay their taxes) their combined income was $5,000 a month and they had allowable expenses of $4,000 a month. Discretionary income – $1,000 a month.
The IRS will now look at how much longer it can pursue them for this debt under the law. You should understand that the IRS is limited in the amount of time that it can try to collect your tax debt. The IRS calls this the Collection Statutory Expiration Date, (CSED) we mortals call it the statutory limitations period. The good news is that after that date, the IRS cannot touch you for these back taxes. The bad news is that it is a pretty long time. The IRS will check how many more months remain that they can chase you and possibly levy your stuff. In Harry and Sally’s case, the IRS had 75 months remaining – a little over six years. The IRS will then take the $1000 in discretionary income and multiply it by the 75 months remaining in the CSED to come up with $75,000. Pretty simple math so far.
The calculation above only considers past and current income, it does not consider future income. If during the next 75 months Harry and Sally will receive more income, the IRS will factor that in as well! It seems that Harry’s car note of $500 per month will be fully paid off in 25 months. Presumably this means that in 25 months from now, Harry and Sally’s combined income will increase by $500 per month. At that time there will be 50 months remaining in the CSED (75 – 25 = 50, get it?). The IRS will multiply that 50 times the $500 and come up with $25,000 which they will add to the RCP. Total RCP is now $100,000.
Any other future income from inheritances, insurance payouts, trust payouts, etc, will likewise be factored into the IRS’ calculation. Since Harry and Sally had no other future income expected, the first half of their RCP calculation is $100,000.
STEP 2 – Compute the Net Equity in Your Assets
The second half involves a look at their net assets, what they own minus what they owe against it. For most of us, this is basically our house. The IRS uses the concept of “quick sale value” (QSV) to factor in your house. Take the fair market value of your home and multiply it by .8 or eighty percent. If Harry’s home is worth $400,000 then the QSV is $320,000. Subtract from $320,000 mortgage of $300,000 and you come up with $20,000. Presuming that their home is the only real thing of value they have, the total net equity in assets will be $20,000.
The final step in computing the RCP is to add the $100,000 from Step 1 to the $20,000 from step 2 and voila – $120,000.
The only question now is – How much do Harry and Sally owe? If they owe a million dollars then they can make the IRS an offer of $120,001.00 and have a chance of success. If they offer $119,999, the IRS will decline the offer and ask them to raise it above their RCP.
I hope you made it this far because what comes next is vitally important! The IRS knows that when you make an offer to resolve your tax debt, the chances are that you will not be able to pay your offer in a lump sum, but will have to make payments over time. The IRS Offer in Compromise program permits that and offers three payment options – (1) lump sum payment (2) short term payments not to exceed 24 month and (3) long term payments over the statutory collection period. Your RCP will be determined by which of the three payment options you choose. The scenario above is for those of you who wish to make long term payments. If you choose one of the other options, the RCP will be less! In other words, the longer you drag out your payment schedule the more you will have to offer. Makes sense doesn’t it? If you can give the IRS the full amount NOW then they will be willing to take less.
What if I do not own a house and my furniture is old, I have no jewelry and my car is a 1992 Honda Civic worth $300 on a good day? If this describes your situation then the second part of the calculation will be zero. What if my allowable expenses really and truly exceed my income? If this describes you then the first part of the equation will be zero. What if I have no assets, my income does not cover all my expenses and I owe the IRS a lot of money? At that point you can ask the IRS to declare your debt uncollectible. You will have to fill out some forms, but you may succeed in convincing the IRS that you will never have the wherewithal to pay the debt within the time they have to collect it. You should be aware that even in uncollectible status, the interest and penalties will continue to accrue.
If you truly are in dire straits with negative income and no assets to speak of, you might consider an offer in compromise for a small amount that you might be able to borrow from a relative or credit card. If the IRS accepts your rather small offer, you can then borrow the money, pay over time and eliminate the debt.
Arthur Weiss, Esquire
Law Office of Arthur Weiss, P.C.
2135 Grant Rd.
Tucson, AZ 85719
520-319-1124 https://artweisslaw.com
The IRS levied my bank accounts but didn’t notify me first. What do I do now?
Before the IRS can take your property, whether cash or your dining room table, it must comply with the Constitution.
Under the Fifth Amendment the IRS cannot deprive you of your property without due process of law. This means that the IRS must provide you with thirty days notice that they are going to take your cash and/or other property, and must provide you with the opportunity of a hearing. The governing directive can be found in the treasury regulations at section 301.6331-2(a)(1). According to this regulation “the notice must be given in person, be left at the dwelling or usual place of business of the taxpayer or be sent by registered or certified mail to the taxpayer’s last known address.”
In most cases the IRS is careful to comply with these legal requirements and they do send a notice of intent to levy and notice of your right to a hearing before they empty your bank account. However, the IRS is a huge organization dealing with hundreds of millions of taxpayers, and sometimes the proper notice does not go out. Then there is the issue of mailing the notice to the wrong address. It happens.
Example – In 2002 you lived at 123 Elm Street in Toledo, Ohio. In 2003 the IRS determined that you owe them $10,000 for prior year taxes. In 2003 you moved to 789 Dover Boulevard in Dover Delaware. You filed your taxes timely in 2003, 2004 and 2005 reflecting your new mailing address. After sending half a dozen letters to 123 Elm Street in 2006 the IRS sends by registered mail a notice of intent to levy to the same address – 123 Elm. Since you now live in Dover, Delaware and not Toledo, Ohio you never receive the notice of intent to levy and therefore cannot respond to it. The levy is wrongful. The IRS knew your current address but for some reason sent it to the prior residence.
So they took your stuff but did not give you notice. In a nutshell, they cannot do that and you should ask for your money back. The procedures for asking for your money back are outlined in the U.S. Treasury regulations, section 301.6343-2.
According to that section, you simply need to write a letter (no special forms are necessary) to the “Special Procedures Staff” in the Internal Revenue District where you live. If you need the address call the IRS at 1-800-829-1040 or try to find it online. The letter must contain the following information:
1. Your name and address
2. A list of the property they took
3. The date of the levy
4. A statement outlining why you think the levy was improper.
As with most of your important rights, if you do not exercise them quickly you lose them. If the IRS has taken the cash out of your bank account you have nine months from the date of the levy to mail the letter referred to above. The same time limit does not apply to property, which the IRS can return at any time
Arthur Weiss, Esquire
Law Office of Arthur Weiss, P.C.
2135 Grant Rd.
Tucson, AZ 85719
520-319-1124 https://artweisslaw.com
