It is an unfortunate reality of our lives that tax controversies may arise when we least expect them. The various tax laws one must navigate on a day-to-day basis are often filled with traps for the unwary. No one likes to get that letter in the mail from the IRS or Department of Revenue, but if it happens to you, depend on Ourednik Law Offices for help.
Our response to your tax controversy is timely and effective. We have helped numerous clients both legally and emotionally through this tough experience. We will deal with the IRS on your behalf and work to ensure that your property remains yours and that settlement of your debt is manageable given your personal circumstances.
If necessary, our attorneys will fight for you in tax court or federal district court. Every case is different so contact Ourednik Law Offices today to find out how we can help you put your tax problems in the past.
What are some of the consequences
if I fail to pay federal taxes?
The IRS has several collection methods at their disposal if an individual does not pay their taxes. These include:
- Federal Tax Liens – When a taxpayer does not respond to an IRS demand for payment, the first step in the collection process is usually the filing of a federal tax lien. A lien is an encumbrance in favor of one party upon the property of another. In this case the lien is a “statutory” lien based on the power granted to the IRS under the Internal Revenue Code (IRC). Under the IRC, the lien attaches to “all property and rights to property” of the person or entity liable for the tax, and broadly includes both real and personal property. This can make it difficult for the taxpayer to sell the property in the future. Additionally, notice of the lien appears on the taxpayer’s credit report and a tax lien has a very negative effect on the taxpayer’s credit, making it difficult to obtain financing. Finally, since a tax lien is recorded in the area where the taxpayer resides, it becomes a matter of public record and can serve as a shameful stigma for the individual. A tax lien will stay in place as long as the IRS can legally enforce an action against the taxpayer (i.e. until the expiration of the statute of limitations), or until all outstanding tax liabilities have been paid or settled with the IRS.
- Wage Garnishment – The IRS may also resort to wage garnishment if the outstanding debt remains unsettled. Wage garnishment is a form of levy (discussed below) favored by the IRS as a collection method for a salaried taxpayer. Through the wage garnishment process, the IRS can compel an employer to take a portion of that taxpayer’s wages and send it to the IRS to satisfy the outstanding debt. Wage garnishment is an extreme step in the collection process and it is often successful in getting the taxpayer’s attention. Once the taxpayer resumes communication with the IRS and starts working to satisfy the outstanding debt, it is often possible to get a wage garnishment lifted in a relatively short period of time, especially if the taxpayer retains the services of a tax attorney to assist them.
- Tax Levy – Unlike the tax lien described above, where the IRS merely stakes their claim to a taxpayer’s assets, a tax levy constitutes the actual seizure and sale of the assets to satisfy the debt. Nearly any property interest held by the taxpayer can be subject to levy. Real property (including homestead), personal property (e.g. cars, boats, jewelry), bank or brokerage accounts, and wages (see garnishment) can be taken by the IRS and liquidated to satisfy the outstanding tax debt. A tax levy is the most powerful and feared collection mechanism of the IRS and should not be taken lightly. An individual facing a tax levy should contact a tax attorney right away.
What Can I Do About My Tax Controversy?
When looking to settle a tax debt with the IRS, there are several options which may be available depending on the circumstances of the individual. An experienced tax controversy attorney may utilize one or more of the following methods in seeking relief:
- Lump Sum Payment – The IRS is generally willing to accept a lump sum payment to settle a tax debt. Paying by lump sum means that interest and penalties are no longer added to the total amount owed, as the tax debt has been settled. Practically, this option is often not practical for individuals who have incurred a sizable tax debt.
- Installment Agreements – The most common method of settling an IRS tax liability is by seeking an “installment agreement.” An installment agreement allows a taxpayer to spread the repayment of the tax debt over a period of years. Most installment agreements are for a maximum of five (5) years, however an exception may be made under the proper circumstances. Individuals that owe $25,000 or less generally find it easier to receive an installment agreement over five years than those who owe more. If the individual owes more than $25,000, taxpayers often will have to negotiate with the IRS to get an installment plan and professional assistance is usually advisable. Importantly, penalties and interest continue to accumulate until the entire debt is paid off. Sometimes, it is possible to negotiate a “partial payment installment agreement,” which contemplates the taxpayer paying less than the full amount of the debt owed. Partial payment installment plans are generally easier to receive than an offer in compromise (“OIC”) but still require the proper circumstances to be successful.
- Offer in Compromise (“OIC”) – If an individual has a sizable tax debt, minimum assets and income prospects, and presents the proper circumstances, the IRS may accept an Offer in Compromise (OIC) to settle unpaid tax accounts for less than the full balance due. This settlement applies to all taxes, including any interest, penalties, or other additional amounts arising under the Internal Revenue laws. The OIC program is an option only for those taxpayers who are unable to pay their tax account in a lump sum, through an installment agreement or have otherwise exhausted their search for other payment arrangements. In reviewing an OIC, the IRS will take a broad look at the offeror’s total current assets as well as what may be reasonably collected from the offeror in the future. While the OIC is being considered, there should be no levy, lien, or other collection activity undertaken by the IRS. OICs are very difficult to obtain and an experienced tax attorney should be consulted before contacting the IRS about applying.
- Currently Not Collectible Status – If an individual does not qualify for an OIC or qualifies for an OIC that will require that they pay back more than they can afford because of assets they own, a tax professional can help them apply for currently not collectible (CNC) status. CNC is a good option for those who have a low cash flow but own valuable assets that may have prevented them from obtaining a successful OIC because CNC is based primarily on monthly cash flow. Note that the IRS can force a person to liquidate assets such as savings accounts, stocks, bonds, and mutual funds accounts, before granting CNC. Under CNC, the statute of limitations continues to run and the IRS suspends all collection efforts for a limited time. The IRS will continue to periodically review the individual’s finances and if their financial situation improves, the IRS will revoke the CNC status and resume active collection efforts. CNC status is usually accompanied by a tax lien against all of the taxpayer’s valuable assets.
- Bankruptcy – Sometimes, tax debt can be discharged through bankruptcy. Generally, 5 requirements must be met in order for this to happen: (1) the due date for filing a tax return is at least three years ago; (2) the tax return was filed at least two years ago; (3) the tax assessment is at least 240 days old; (4) the tax return was not fraudulent; and (5) the taxpayer is not guilty of tax evasion. Tax debts that arise from unfiled tax returns are not dischargeable and some types of tax debt or not dischargeable, such as unpaid payroll taxes. It is essential that an individual contemplating a discharge of tax debt through bankruptcy consult with an experienced tax professional to understand all of their options and the consequences of their actions.
A little bit of proactive behavior on the part of the individual can help avoid tax issues in the future. Those who are fearful of facing tax issues or who have successfully negotiated an agreement with the IRS in the past are well-advised to do the following:
- File Tax Returns: Individuals should always file the tax return whether or not they have the money to pay their taxes. Filing returns can alleviate any potential late filing penalty make it easier to work out a payment plan with the IRS. As stated above, the larger the tax debt the more professional assistance will be required to negotiate a payment plan. Thus, it is often more cost-effective to file the returns and set up the plan early. Also, the failure to file a return can cause the IRS to revoke a previously negotiated installment agreement.
- Talk to a Professional: Individuals should always consider consulting a tax professional if they sense that a tax controversy may be brewing. Even if the individual decides to ultimately go it alone in their dealings with the IRS, they should be aware of their rights and responsibilities ahead of time. The IRS is a massive government organization with thousands of employees who are not all aware of the various legal issues that may arise under any given set of circumstances. Contacting the IRS before consulting with a professional can put an individual at a serious disadvantage and may ultimately foreclose the possibility of some of the relief options discussed in detail above.
At Ourednik Law Offices, we understand that dealing with the IRS can be stressful. That’s why we do our best to put the client’s burden on ourselves while assisting them with settling their tax issues. In these kinds of situations, it is always best to consult with an experienced tax professional who can help you to fully understand the situation. Contact our office today if you are in need of tax assistance.