Tax – Frequently Asked Questions

No. It is time to come out of hiding. You have little chance of escaping IRS detection forever and that is what you would have to do. If a tax return has not been filed, the statute of limitation for that particular tax year has not yet started. This means that there is no limit to the amount of time that the IRS can pursue you. Plus, if the IRS catches you, they may charge you additional penalties and/or criminally prosecute you, particularly if your delinquent returns involve sizable taxable income. Not paying the IRS is a civil matter; however, failure to file is a misdemeanor under IRC 7203 and may in egregious cases be elevated to a felony under IRS 7201 Tax Evasion.

In addition, if you don’t file, the IRS may file a “SFR” tax return for you. SFR stands for Substitute for Return, which essentially means that this is the IRS version of your un-filed tax return. SFR returns are filed in the best interest of the government, which means that the only deductions you’ll see are standard deductions and one personal exemption. You will never get credit for other deductions for which you may be entitled. And once the IRS files the assessment on this SFR, they will begin collection efforts.

Yes. If a tax return has not been filed, the statute of limitation for that particular tax year has not yet started. This means that there is no limit to the amount of time that the IRS can pursue you. In addition, if you have any delinquent tax returns, the IRS will not negotiate with you. You must be current with your filing for the IRS to consider an Offer in Compromise or even an Installment Agreement.

If you do not file your taxes and pay on time, the IRS will charge you a combined penalty. The monthly penalty is 4.5% for filing late and 0.5% for paying late. The combined penalty, therefore, is 5% of your unpaid tax for each month or part of a month your return is late, but not for more than five months, totaling 25% (22.5% late filing and 2.5% late paying).

In addition to the 22.5% late filing penalty, the IRS will continue to charge the 0.5% late paying penalty for each month or part of a month as long as the tax is unpaid, but not to exceed 25%. Therefore, the maximum penalty the IRS will charge for late filing and paying is 47.5% (22.5% late filing and 25% late paying).

If you did not file your return within 60 days of the due date, the minimum penalty is $100 or 100% of the balance of the tax due on the return, whichever is smaller.

If you do not pay your taxes when they are due, the IRS will charge you a failure-to-pay penalty. Initially, the penalty is 0.5% of the unpaid tax for each month or part of a month you didn’t pay your tax. If you file your return on time, this penalty will be reduced to 0.25% for any month beginning after 1999 in which you have an installment agreement in effect with the IRS.

If the IRS issues you a Notice of Intent to Levy and you do not pay the balance due within 10 days from the date of the Notice, the penalty will increase to 1% a month.

But, again, the late paying penalty cannot be more than 25% of the tax paid late. If you think the IRS should remove or reduce the above penalties, consider requesting from the IRS an abatement of penalties.

Yes. Through a levy, the IRS can seize and sell property such as your home or car. They could also seize your bank accounts and social security. Other items the IRS could seize include wages, retirement accounts, dividends, licenses, rental income, accounts receivable, the cash value of your life insurance, or commissions – almost anything of value.

Yes. The IRS will usually levy (seize) only after the following three requirements are met:

• The IRS assessed the tax and sent you a Notice and Demand for Payment,
• You neglected or refused to pay the tax, and
• The IRS sent you a Final Notice of Intent to Levy and a Notice of Right to Hearing (levy notice) at least 30 days before the levy.

By law, some property cannot be levied or seized. The IRS may not seize taxpayer property when the expense of selling the property would be more than the tax debt. Also, the IRS may not seize or levy property on the day a taxpayer is attending a collection interview because of a summons. The IRS also may not levy school books and certain clothing; fuel, provisions, furniture, and personal effects for a household, totaling $9,200*; books and tools a taxpayer uses in his or her trade, business, or profession, totaling $4,600*; unemployment benefits, undelivered mail; certain annuity and pension benefits; certain service connected disability payments; worker’s compensation; salary, wages, or income included in a judgement for court-ordered child support payments; certain public assistance payments; and a minimum weekly exemption for wages, salary, and other income (see IRS Publication 1494 to determine the amount exempt from levy).

*These amounts represent calendar year 2017 and will be indexed annually for inflation

No, but they can levy your bank account for the funds presently in your account. A bank levy is a “one-time” levy of the funds that are in your bank account at the time the bank receives the levy notice (unlike a wage levy, which is a “continuous” levy and remains in effect until released). If IRS levies your bank account, the bank must hold the funds you have on deposit, up to the amount you owe, for 21 days. This holding period allows you to resolve any issues about account ownership. After 21 days, the bank must send IRS the money plus interest, if it applies.

No, but in most cases, they can levy most of it. By law, only a very small amount of your wages, salary or other income is exempt from levy (see IRS Publication 1494 to determine the amount exempt from levy).

A levy on wages, salary or federal payments will not end until the levy is released, you pay your tax debt, or the time expires for legally collection the tax.

In most cases, the best way to stop an IRS levy is to contact IRS and request an installment agreement or currently not collectible status or perhaps some time to file an offer in compromise. These options will likely require a Form 433-F or 433-A Collection Information Statement. But before providing such detailed information about yourself, your assets and your income to the IRS, it is a good idea to speak with a tax professional.

The IRS will issue a Release of the Notice of Federal Tax Lien within 30 days after you satisfy the tax due by paying the debt or having it adjusted or within 30 days after the IRS accepts a bond that you submit guaranteeing payment. See IRS Publication 1450, Request for Release of Federal Tax Lien.

Usually 10 years after a tax lien is assessed, a lien releases automatically if the IRS does not refile it. If the IRS knowingly or negligently does not release a Notice of Federal Tax Lien when it should be released, a taxpayer may sue the federal government for damages.

The IRS may withdraw a filed notice of tax lien if the notice was filed too soon or not according to IRS procedures, you entered into an installment agreement to pay the debt on the Notice of Lien and the agreement did not provide for a lien to be filed, you entered into a direct debit installment agreement and made 3 consecutive payments with a current balance due of less than $25,000, withdrawal will speed collecting the tax, or withdrawal would be in your best interest (as determined by the Taxpayer Advocate) and the best interest of the government.

The IRS may discharge a federal tax lien if you are giving up ownership of the property. See IRS Publication 783, Instructions on How to Apply for a Certificate of Discharge of Property from the Federal Tax Lien.

The IRS may make the lien secondary to another lien. See IRS Publication 784, How to Prepare Application for Certificate of Subordination of Federal Tax Lien.

The taxpayer may appeal the filing of a lien with the IRS Office of Appeals, who will issue a determination. That determination may support the continued existence of the filed Federal tax lien or it may determine that the lien should be released or withdrawn. See IRS Publication 1660, Collection Appeal Rights.

Yes. To encourage the prompt payment of withheld income and employment taxes, Congress passed a law that provides for the Trust Fund Recovery Penalty. The IRS may assess this penalty against anyone who is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and who willfully fails to collect or pay them. For willfulness to exist, the responsible person must have known about the unpaid taxes and have used the funds to keep the business going or allowed available funds to be paid to other creditors. This penalty may be applied whether or not the business is out of business. Once this penalty is assessed against the individual responsible person or persons, the IRS will proceed with collection efforts against the individual.

An Offer in Compromise is an agreement between a taxpayer and the IRS that resolves the taxpayer’s tax liability. The IRS has the authority to settle, or compromise, federal tax liabilities by accepting less than full payment under certain circumstances. This applies to all taxes, including any interest, penalties, or additional amounts arising under Internal Revenue laws. The IRS may legally compromise for one of the following reasons:

• Doubt as to Liability – “I do not believe I owe this amount.” Form 656-L must be completed and a detailed explanation of the reason(s) why you believe you do not owe this tax must be provided.

• Doubt as to Collectibility – “I have insufficient assets and income to pay the full amount.” Form 656 and Form 433-A (OIC) and/or Form 433-B (OIC) financial statements must be completed.

• Exceptional Circumstances (Effective Tax Administration) – “I owe this amount and have sufficient assets to pay the full amount, but due to my exceptional circumstances, requiring full payment would cause an economic hardship or would be unfair and inequitable.” Form 656 must be completed and a detailed explanation of the reason(s) why you believe you do not owe this tax must be provided and Form 433-A (OIC) and/or Form 433-B (OIC) financial statements must be completed.

Yes and yes. Through an Offer in Compromise, you can settle personal income taxes (1040 taxes), corporate income taxes (1120 taxes), withholding taxes (941 taxes), unemployment taxes (940 taxes), trust fund recovery penalty, and other federal taxes. Penalties and interest are compromised along with the underlying tax liability. In submitting an offer, you must include all owed taxes, plus penalties and interest, for your offer to be considered.

Possibly. Under the Bankruptcy Code Sections 523(a)(1) and, by reference, Section 507(a)(8), individual income tax liabilities are generally dischargeable if all the rules below are met:

• The bankruptcy petition is filed more than 3 years after the due date of the tax return involved – use the extended date rather than the due date if you filed an extension. However, if you requested a hearing or appeal of any IRS collection action taken or proposed and IRS was therefore prohibited under nonbankruptcy law from collecting a tax, this 3 year period is extended by the period the IRS is legally barred from taking collection action, plus 90 days. And, if you previously filed bankruptcy and IRS was prohibited therefore from collecting a tax, this 3 year period is further extended by the period IRS collection action was barred, plus 90 days.

• The taxes you want discharged have been assessed as an audit deficiency for more than 240 days – however, if you filed an Offer in Compromise within the 240 day window after assessment, the 240 day assessment time period is extended while the offer is pending or in effect, plus 30 days. And, if you requested a hearing or appeal of any IRS collection action taken or proposed and IRS was therefore prohibited under nonbankruptcy law from collecting a tax, this 240 day period is extended by the period the IRS is legally barred from taking collection action, plus 90 days. And, if you previously filed bankruptcy and IRS was prohibited therefore from collecting a tax, this 240 day period is further extended by the period IRS collection action was barred, plus 90 days.

• The tax return involved has been filed more than 2 years prior to the petition.

Tax penalties for non-filing, late payment, and negligence penalties are generally dischargeable if the underlying tax to which the penalties relate is dischargeable.

For the rules to apply, the taxpayer must not have filed a fraudulent return or otherwise tried to willfully evade payment of tax.

In addition, for the tax to be dischargeable, the taxpayer must have filed a valid tax return; if the IRS filed a “SFR” (Substitute For Return) tax return – this is the IRS version of the taxpayer’s un-filed return – the tax liability will not be dischargeable because the taxpayer did not sign the tax return.

Finally, if the taxpayer has filed a Chapter 7 case within the last 8 years, they will be prohibited from filing a new Chapter 7 case; however after 8 years they can file again. As for a Chapter 13, it will be prohibited for 4 years from the petition date of a 7 discharge or for 2 years from the petition date of a completed 13.

Note: Although bankruptcy can wipe out a debtor’s personal obligation to pay the tax, if the IRS recorded a Federal Tax Lien on your property before you filed for bankruptcy, the lien will remain.

No. You may not get all of your refund if you owe certain past-due amounts, such as federal tax, state tax, a student loan, or child support. The IRS will automatically apply the refund to the taxes owed.

Under IRC 6502, the IRS only has ten years from the date of assessment to collect your delinquent taxes. What this means is that each tax assessment has a Collection Statute Expiration Date (CSED) – a date on which the tax liability is no longer legally enforceable. Once the statute of limitations for collection expires, your liability expires – and with it the government’s right to pursue collection of the tax! However, this ten year statute of limitations for collection can be extended by waiver, an offer in compromise, bankruptcy, application for taxpayer assistance order, absence from the country, an IRS lawsuit to enforce collection, and more.

Yes. The statute of limitations on IRS assessments is generally three years from the date the return is filed, or from the regular due date if the return is filed before the due date. There are of course exceptions. The limitations period is instead six years if there is a substantial omission of income, which the IRC defines as an amount of income not reported that is greater than 25% of the amount of gross income reported on the return. And there is no limit for fraudulent returns filed with the intent to evade taxes.

As a taxpayer, you have the right to be treated fairly, the right to privacy and confidentiality, the right to professional and courteous service, the right to be represented by someone when dealing with the IRS, the right to disagree with your tax bill, the right to meet with an IRS manager if you disagree with the IRS employee who handles your tax case, the right to appeals and judicial reviews of most IRS collection actions, the right to transfer your case to a different IRS office, and the right to receive a receipt for any payment you make. Detailed information on these rights can be found in IRS Publication 1.

The Internal Revenue Service’s Fresh Start initiative makes it easier for individual and small business taxpayers to pay back taxes and avoid tax liens. The Fresh Start initiative fundamentally changes IRS Collection practices in the following areas:

• Fresh Start Notice of Federal Tax Liens – IRS increased the lien filing threshold from $5,000 to $10,000, IRS may now issue a withdraw of a filed lien after the lien has been released, and IRS may withdraw a lien after the taxpayer enters into a direct debit installment agreement.

• Fresh Start Installment Payment Agreements – IRS established simplified in-business trust fund express installment agreements for small businesses owing $25,000 or less, and IRS established streamlined installment agreements for individuals and certain businesses where the taxpayer owes $50,000 or less and can pay in full within 72 months or prior to expiration of the collection statute, whichever is earlier.

• Fresh Start Offer in Compromise – IRS has incorporated its Streamlined Offer in Compromise process into the overall investigation of offers and has added flexibility to the financial analysis used in evaluating offers.