Managing Your Federal Tax Liability

Most people want to ignore federal tax liability hoping that it will go away.  However, the consequences of tax debt far outweigh the cost of resolving the liability. A quick acting taxpayer can save hundreds and thousands of dollars in interest and penalties by proactively pursuing a resolution.  In fact, the methods described below can be executed relatively quickly and without a large expense.

Offer in Compromise

Under I.R.C. §7122, the federal government provides taxpayers an opportunity to settle federal tax debt.  This method is called an Offer in Compromise.  A properly filed Offer in Compromise is a binding agreement between the IRS and the taxpayer.  The IRS agrees not to collect more than the amount offered if the taxpayer remits payment in full.  The IRS permits taxpayers to make installment payments on their reduced offers.

The IRS may eliminate a taxpayer’s entire debt in an Offer in Compromise.  However, not all offers are accepted.  As a matter of fact, the IRS accepted less than 25% of offers per the IRS Data Book in 2010.  The IRS does not arbitrarily reject offers; however, they reject offers that do not qualify based on IRS standards outlined in IRS Policy Statement P-5-100.  Experienced tax attorneys possess insight and understanding on how to evaluate taxpayers’ likelihood of a successful Offer in Compromise.

Taxpayers must proceed with caution when hiring many national tax resolution offices who promote themselves as settling taxpayers’ tax debt for “pennies on the dollar”.  Many of these firms fail to inform their clientele that their offers are hopeless until their checks have been cashed.  While an Offer in Compromise is an attractive resolution to a large tax liability, it may not be attainable in everyone’s situation.  Therefore, it is important to find trained attorneys to conduct a thorough analysis of a client’s financial situation prior to pursuing an Offer in Compromise.  In the cases where an offer is not a realistic option, a seasoned tax attorney can assist taxpayers select an alternative option to relieve the pressure of federal tax liability.

Installment Agreement

In certain circumstances, a taxpayer who does not qualify for an Offer in Compromise can come to an agreement to pay the IRS over a designated period of time.  Section 6159 of the I.R.C. authorizes the IRS to enter into an Installment Agreement to satisfy tax liabilities.  Taxpayers who comply with the terms of the Installment Agreement with the IRS can avoid adverse collection actions such as wage garnishments and levies.  Penalties and interest accrue until the entire debt is paid off or the collection period expires.

Currently Non-Collectible Status

The IRS follows Fair Tax Collection Practices as defined by I.R.C. §6304.  The Internal Revenue Manual 5.16.1 defines Currently Non-Collectible status.  A taxpayer can apply for currently non-collectible status in circumstances where collection would result in undue hardship on the taxpayer.  If the application is approved, the IRS will cease collection action for a set period of time.

Generally, this provides the taxpayer an opportunity to reorganize their financial situation to get past tough times.  It does not relieve the taxpayer of any debt.  Interest and penalties will accrue while the taxpayer is in Currently Non-Collectible status status.  The IRS reviews Currently Non-Collectible status taxpayers’ financial situations periodically; however, this status assists taxpayers in managing difficult times.  In certain circumstances, obtaining Currently Non-Collectible status can completely eliminate tax liability because the 10-year collection statute continues to run while in this status.  If the 10-year collection expires while a taxpayer is in Currently Non-Collectible status, their debt is erased.

Final Notice of Intent to Levy

Prior to the IRS placing a levy or lien on any of your assets, I.R.C. § 6330 requires the IRS provide the taxpayer with notice of their a statutory right to a hearing.  This notice gives the taxpayer 30 days to request a Collection Due Process hearing.  The notice will be titled “Final Notice of Intent to Levy”.  These notices are serious matters that require immediate action. If the taxpayer makes a timely request, the IRS cannot garnish wages or place any liens on a taxpayer’s property.  However, if the taxpayer fails to make a timely request for a hearing, the IRS can take these adverse actions at any time.  Furthermore, the taxpayer’s right to a Tax Court appeal of a determination is waived.

Collection Due Process Hearing

Collection Due Process (CDP) hearings are the essential method of negotiating with the IRS.   Collection Representatives have no leeway to reduce your debt.  They merely enforce collection laws and have no intention to listen to your circumstances.  At a CDP hearing, you will be dealing with an Appeals Officer.  This person is trained to settle cases.  They have the leeway to take your circumstances into consideration and reduce your debt.

Another benefit of a CDP hearing is that any collection activity, i.e. garnishments, levies, liens, etc., must cease during the process of the CDP case.  The typical CDP case can take 4-6 months; therefore, it provides taxpayers temporary relief from IRS collections.  In addition, if a resolution cannot be reached at the CDP hearing, a taxpayer may petition the Tax Court.  This option does not exist through other channels of IRS negotiations.

If you have received a Final Notice of Intent to Levy, it is imperative that you file a request for a CDP hearing within 30 days.  If a timely request is not made, the alternative is a CDP Equivalent Hearing.  This hearing does not attach the same rights as a CDP hearing.

CDP Equivalent Hearing

Taxpayers who receive a Final Notice of Intent to Levy have 30 days to request a CDP hearing.  If this deadline is missed, taxpayers have the right to request a CDP Equivalent Hearing.  An equivalent hearing still must be requested within one year of receiving a Final Notice of Intent to Levy under Treasury Regulation §301.6330-1(i)(2).

A taxpayer relying on an equivalency hearing waives certain rights held under the traditional CDP hearing.  A CDP Equivalent Hearing does not legally restrict the IRS from using collection methods to obtain payment while the hearing is pursued.  This means the taxpayer is vulnerable to levies, liens and garnishments while their hearing is pending.  Furthermore, the taxpayer will not have the right to petition the Tax Court if they disagree with outcome of CDP Equivalent Hearing.

While resorting to a CDP Equivalent Hearing waives many taxpayer rights, unlike a timely CDP request, the taxpayer’s collection statute will continue to run while an equivalency hearing is pending.

Managing Your Federal Tax Liability

Tollefsen Law can help you manage your federal tax liability

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