If you have unfiled or missing IRS tax returns; you owe the IRS back taxes that you just can't pay, or you are experiencing wage levy or asset seizure – you have IRS problems and you are not alone. There are thousands of U.S. taxpayers that owe back taxes and need IRS tax help. The majority of taxpayers do not know what to expect once they have gotten behind with the IRS. You have rights as a taxpayer and more importantly – you have options. At Shields Tax Consulting, LLC our professional staff of Tax Attorneys protect those rights while our CPA’s and Enrolled Agents work with you to find the best option for you. Now that you have begun to take control of your IRS issue, here are some terms with which you should be familiar.
IRS Federal Tax Liens
Federal Tax Liens are public records that indicate you owe the IRS various taxes. They are filed on a Form 668 (Y) (c) with the County Clerk in the county from which you or your business operates. While they do secure the IRS interest in your house or land, the Federal Tax Lien is really the instrument with which the IRS uses to levy, garnish & seize assets. There is no hard & fast rule as to how soon the IRS will use these tools once the Federal Tax Lien is filed. What is certain is that it is time to seek competent representation from a reputable tax resolution firm. If a lien has not been filed yet it’s a great time to act. Shields Tax Consulting can head off the filing of the Federal Tax Lien in most cases. Once a federal lien is filed, all other creditors will be notified, since federal liens take precedence over all others under most circumstances.
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Levies and Garnishments
A levy is a legal seizure of your property to satisfy a tax debt. Levies are different from liens. A lien is a claim used as security for the tax debt, while a levy actually takes the property to satisfy the tax debt.
If you do not pay your taxes (or make arrangements to settle your debt), the IRS may seize and sell any type of real or personal property that you own or have an interest in. For instance,
The IRS can seize and sell property that you hold (such as your car, boat, or house), or
The IRS can levy property that is yours but is held by someone else (such as your wages, Social Security, retirement accounts, dividends, bank accounts, licenses, rental income, accounts receivables, the cash loan value of your life insurance, or commissions).
New IRS Enforcement numbers are out. Levies soared again from 2.6 million to 3.4 million. That number increased 17 times since fiscal year 2000 when just over 200,000 IRS levies were issued.
The following is an excerpt from the National Taxpayer Advocates Report To Congress on Fiscal Year 2011 Objectives:
“The IRS is failing to address the needs of taxpayers who are experiencing economic difficulties and has not revised collection policies that harm taxpayers, thereby undermining its goal of increasing voluntary compliance.
The National Taxpayer Advocate is not alone in expressing concern with IRS collection actions. In several significant cases, the United States Tax Court found that the IRS’s actions in Collection Due Process hearings were an abuse of discretion.
In our view, the IRS’s failure to quickly and adequately respond to our concerns has caused taxpayers unnecessary harm.
In our view, misguided IRS collection practices are certainly not limited to lien filings. In past Annual Reports to Congress, we have criticized the IRS for failing to utilize collection alternatives such as partial-payment installment agreements and offers in compromise.
More recently, we have been examining the effectiveness of the IRS’s levy policies and the underuse of installment agreements. In FY 2009, the IRS issued about 3.5 million levies and according to the IRS, in FY 2009 it collected $2.3 billion attributable to levies. The National Taxpayer Advocate is aware that a levy is sometimes effective in getting the taxpayer’s attention and getting the taxpayer to call the IRS to work out other payment arrangements.
It also demonstrates that when an account is in ACS, the default procedure is to issue levies, not to attempt to resolve the debt through collection alternatives that address the tax debt while also increasing the likelihood of future tax compliance. In our view, the current ACS approach is short-sighted and is not a sound tax administration practice.”
If the IRS levies your bank account, your bank must hold funds you have on deposit, up to the amount you owe, for 21 days. This holding period allows time to resolve any issues about account ownership. After 21 days, the bank must send the money plus interest, if it applies, to the IRS.
IF YOU HAVE ANY INDICATION YOU ARE ABOUT TO BE LEVIED CALL IMMEDIATELY - WE CAN HELP!
Garnishments are levies automatically deducted from wages, salary, commissions, or other payments for personal services, and applied to the tax liability. A garnishment does not need to be served each time you are paid. Once you are served a garnishment, the garnishment continues until your tax debt is paid in full or other arrangements are made to satisfy the debt, or the time period for collecting expires.
If you have received any document from the I.R.S. that uses the word 'levy' or ‘garnishment’ you should be aware that the agency is only days away from seizing your bank account or paycheck or notifying your customers that they should pay the I.R.S. and not you.
If you have unfilled or missing tax returns the IRS will usually issue a wage garnishment before or at the time they file a Federal Tax Lien against you.
Unfiled Tax Returns
It's important to understand the ramifications of not filing a past due return and the steps that the IRS will take. There are many reasons why taxpayers fail to file required tax returns, but whatever the reason, not filing can be a very serious matter. Not filing a Federal Tax Return is a criminal offense and if ignored will put you at risk of imprisonment.
If you have not filed a tax return for one or multiple years, the IRS will file "SFR" (Substitute For Return) Tax Returns on your behalf and without your knowledge or approval. On an SFR, you will not get credit for deductions to which you may be entitled such as exemptions for your spouse and children, deductions for interest and taxes on your home, cost of any stock or real estate sales, business expenses, and more. Worse still, the IRS will begin to aggressively collect on this arbitrary amount.
If you have not filed your tax returns or your Lien Notice has the letters “ACS” near the bottom under Title then enforcement may have already begun. From the National Taxpayer Advocate (NTA) – “…it demonstrates that when an account is in ACS, the default procedure is to issue levies, not to attempt to resolve the debt through collection alternatives that address the tax debt”
Because all IRS action is subject to appeals we can still STOP the garnishment and/or levy while we prepare your missing returns. First, we must file a Power of Attorney ASAP and obtain an IRS Stay of Aggressive Enforcement for you.Once we get your returns processed we can begin to negotiate your Settlement, Installment Agreement (IA), Partial Pay IA or even have you designated as Uncollectible. The IRS can and will impose a 6721 penalty (failure to file) upon you in addition to other penalties and interest if your taxes continue to go unfiled. By bringing us on now we can prevent this. The following is an article written by Charles Delafuente and published in the New York Times on February 14th, 2012:
WHEN confronted by a letter from the Internal Revenue Service, some people look as though they’ve seen a ghost. And when they open certain letters, a few people do see a ghost — or, more accurately, the ghost of a tax return.
When the I.R.S. detects that a person had reportable income but did not file a return — even after much cajoling — it steps in and does the job itself. Based on what it knows, the agency prepares what it calls a “substitute for return” — a Form 1040. It lists income, calculates the tax due, adds interest and a penalty for failing to file, and sends the recalcitrant taxpayer a bill based on its efforts.
In one way, that may be a relief to procrastinators who just didn’t get around to filing — perhaps for years. But it often comes at a very high price.
Substitute returns are really no substitute for ones that taxpayers could have filed themselves. That’s because the I.R.S. uses data from only the income side when it creates such a return, which means that it doesn’t include all kinds of items that might offset that income.
The I.R.S. works from W-2 reports of wages paid, filed by employers, and reports of payments to self-employed people from companies that used their services. The agency also uses reports from financial institutions about interest and dividends paid and reports from brokers about assets sold. All these things are taxable income.
The I.R.S. now has an easier task in detecting delinquent taxpayers because it receives electronic reports of far more kinds of income than it did several years ago.
What the I.R.S. does not consider are offsetting amounts like exemptions for a brood of six children or deductions for mortgage interest or a big charitable contribution or thousands of dollars of dental work.
For self-employed people, in particular, there is often a big disparity between payments received and taxable income, because much of what they receive goes for supplies or salaries or other expenses. But the I.R.S. will know only the gross payment, and will plug that figure into its return.
It does not even know about the original cost of assets that were reported sold.
In other words, the I.R.S. does not include many of the deductions to which a nonfiler may be entitled. But this doesn’t mean that the I.R.S. is being mean or vengeful or evil.
The I.R.S. is candid that it does not even look for deductions. In a fact sheet in what it calls the “tax gap” series on its Web site, the I.R.S. warns that a substitute return it prepares is a “basic” one that will not include any of your additional exemptions or expenses. It is the worst possible result for the taxpayer.
Substitute-return calculations are always based on a standard deduction. The I.R.S. does it in a straightforward way. It treats you as a single person. It makes no difference that you could have filed a joint return.
The substitute return is its move of last resort, said Anthony Burke, an I.R.S. spokesman, and is prepared only after sending the taxpayer several letters saying it has no record of a return for a given year. Mr. Block calls them “We miss you” and “We’re thinking of you” letters. Typically, the return will not be prepared for at least a year, after the I.R.S.’s patience has worn out.
The I.R.S. investigates about a million “nonfiler situations” a year, Mr. Burke said. But it does not prepare a substitute return for everyone that it believes failed to file. People in the underground economy do not leave a trail that can contribute to such a return, tax experts said. If those people are caught, they may not get an official printout in the mail. A visit from someone who dangles handcuffs from a belt is more likely.
And the I.R.S. substitute is not used when a taxpayer has filed a return but the agency believes that he or she failed to report some income. It has other methods for resolving those issues — often an audit, Mr. Burke said.
A taxpayer prompted to action by a substitute return can file the return that he or she should have filed in the first place, and “the I.R.S. will adjust the taxpayer’s account accordingly,” Mr. Burke said.
That step, in which taxpayers can claim their exemptions and deductions, can sharply cut the amount due or even yield a refund.
Many nonfilers wouldn’t owe large amounts if their returns were done properly. The I.R.S. fact sheet says its research shows that such failures “could simply be due to procrastination.”
There was the case of a client whose sale of hundreds of thousands of dollars’ worth of stock was reported to the I.R.S. The agency sought tax on that amount on a substitute return, having no way to know that the client earned almost no profit on the sale. With an accurately prepared return, he said, she was due a small refund.
But even if a return calls for a refund, it won’t be paid if the return is filed more than three years after it was due, because of a statute of limitations.
ONCE a ghost return appears in the mail, simply avoiding it isn’t a viable option. The I.R.S. will send reminders. If there is no response, it will start collection efforts, based on its calculations.
“The worst thing a taxpayer can do is not file a return and then ignore letters from the I.R.S.,” Mr. Burke said.
But taxpayers sometimes do just that, provoked by “fear, paralysis, and denial — how could this be?” as Mr. Donnelly put it.
Enforcement efforts against people who don’t respond are quite straightforward. “You don’t need Eliot Ness to do this,” he said. Typically, the agency will put a levy on an employed person’s paychecks, taking a chunk from each one until the bill is paid. It may direct a company that pays a self-employed person to send the money directly to the government. It can also freeze bank accounts and put liens on homes.
Unpleasant though it may be, filing a tax return — and paying the bill to begin with — may prove much more appealing than those alternatives.
Delinquent Payroll Taxes (940 & 941)
The IRS considers one of the worst tax violations to be the failure of an employer to remit payroll taxes it has withheld from its employees’ pay. Business owners today are struggling to keep the lights on and the employees paid. When it comes time to remit the payroll taxes there may be nothing left to send. Because IRS enforcement is swift and harsh in these matters, it is crucial for the owner of a small to medium size business to contact a Shields Tax Consulting professional immediately. Please do not talk to the IRS before consulting with us. We can help you
keep your business open
keep your accounts from being levied
keep your inventory & equipment from getting seized
We can and will do all of these things while working out an affordable repayment schedule between you and the IRS. It is a sad fact but over half of the business owners that we contact but choose not to hire us, pass it off to their tax prep person or worse, do nothing, are no longer in business 90 days after the lien is filed.
6672 AKA the "100% Penalty", the "Personal Assessment" or the "Trust Fund Recovery Penalty"
In 1954, Congress made a major revision to the Internal Revenue Code that enacted IRC section 6672, the 100% penalty for individuals that do not remit payroll taxes. Congress enacted section 6672 to reduce the occurrence of the IRS being a discharged creditor by encouraging prompt payment of these payroll taxes.
Section 6672 provides that any “responsible person” required to collect and remit trust fund taxes shall be liable for a penalty equal to the amount of the tax that was to be withheld and paid to the IRS (the 100% penalty). The new name for the penalty is “the trust fund recovery penalty.” A responsible person can be any officer or employee of a corporation who is responsible for accounting for and paying the taxes to the IRS.
Two primary tests must be met in order for IRC section 6672 to apply: the responsible person test and the willfulness test. These two tests determine whether a person can be held liable for the taxes due. A responsible person has the primary duty in the corporation to collect and remit taxes on wages. If more than one person fits this definition, all may be held liable under section 6672. The IRS has broad powers for selecting responsible persons. As a practical matter, it often pursues those with the deepest pockets. In some cases, it pursues those standing nearest the fallen corporation. A responsible person could be someone who computes the payroll, writes payroll checks, signs checks, supervises the payroll function, or has managerial control over the affairs of the corporation. Directors and shareholders can be responsible persons.
The critical factor that makes someone a responsible person is the power to make a decision to pay or not to pay. The courts look broadly over the company to find who had the actual authority to pay the funds and who controlled the process of determining the preference of payment. In many court cases, accountants in management have claimed that they were merely acting on orders from superiors and would have been punished or fired if they had paid the tax to the IRS. The courts have sided with the IRS in most cases, because these accountants held additional managerial positions over and above their accounting role, making them already in fact responsible persons.
The willfulness test determines if a person knew the taxes were not paid and willfully and intentionally did not remit the funds to the IRS after knowing that such funds were due. Responsible persons act willfully if they know taxes are due and use funds to pay other debts. Responsible persons do not act willfully if they do not know of a tax liability but, upon learning of the liability, use funds to pay current taxes.
Bankruptcy Does Not Discharge a 6672 Penalty
According to the Federal Bankruptcy Code, the IRC section 6672 penalty is not dischargeable if a corporation declares bankruptcy. Before bankruptcy, a responsible party may direct payments to the trust fund portion of employment taxes before other taxes are paid. After a company files for bankruptcy, any payments to the IRS are considered out of the control of the company. The IRS may apply subsequent payments to any liabilities due, but typically applies payments to non–trust fund liabilities first. It can always pursue collection of the tax against the responsible party after the bankrupt company is stripped of available assets.
The IRS must assess and collect the IRC section 6672 penalty the same way as any other tax. The statute of limitations is the same, which means the IRS must assess the penalty within three years from the time the return is filed and has 10 years in which to collect. During that time, the IRS has the power to file a lien on all of the responsible person’s property, seize assets, including bank accounts and homes, and garnish future wages and income. The credit record of the individual party is usually ruined, and no credit can be obtained as long as a lien exists.
Penalties and Interest
If you thought the late-payment fees charged by credit card companies were high, then you'll find the IRS's late-payment penalties outrageous. Penalties for "Failure to Deposit", "Failure to File" and "Failure to Pay" can double your original tax debt within a short period of time. To make matters worse, they also charge you interest on the penalties! As you may have already discovered, IRS Tax Penalties can turn a fairly manageable debt into an overwhelming burden pretty much overnight. In the case of business owners, penalties can reach into the hundreds of thousands for something as simple as sending out W-2 Wage statements late.
Oftentimes, taxpayers can afford to pay the original amount of the tax debt but are unable to pay the penalties and interest. This is where Shields Tax Consulting can help you with a request for Penalty or Interest Abatement form.
Get started today and be on your way to a tax debt-free life and peace of mind!