On-Demand Webinar: Liens and Levies
- Oct 20, 2020
During this webinar we covered the mechanics of tax liens and tax levies, and when the IRS utilizes these enforcement tools.
Daniel Gibson:One of the things I wanted to start out with in the program here is this first slide which you'll get what I'm talking about once we go through the program, but everything when we're dealing in the area of liens and levies, it's in the collection activity of the IRS. And the activity that goes on, if you look at this chart, it's really broken down into audit and collection. And if you look at the process, you go from basically left to right in resolving issues through the IRS when it comes to tax controversy in the audit in the collection area. So it's very important that you get that. And again, I'll be emphasizing that through the program.
The other reason showing this is that, one of the things you need to do as you're going through with the tax resolution or tax controversy areas is that the IRS has certain enforcement tools that they could use. Two of them, what we're going to be talking about specifically today the liens and levies, but we have tools too as taxpayers and as practitioners but the tools are getting to know the program. It's almost akin to playing a game. If you know the rules, you can pretty much do a good job in the game. But if you don't know the rules, you can get pretty messed up. So again, just emphasizing that in this chart here.
The second chart is to kind of put this in as a kind of a spoof. And then it's actually it's an actual chart that the IRS put out by the taxpayer advocates office. And it's basically, I think it's only about half the page actually. And you can just see how complex and convoluted it is just getting through the whole tax system that's set up. Just kind of mimics a City subway, and again, it's only about a half a page or so.
So, let me just begin by just introducing myself. I'm Dan Gibson. I'm a partner in the private business services group in Metropark, New Jersey. I have approximately 35 years in with the firm. I actually started out with Eisner firm early in my career, actually beginning of my career, switched over to Amper after a couple years and then during the 2000s we did the merger with Eisner and Amper and there I am. And I do mostly tax compliance planning and controversial work in the Metropark office. One of the things I want to try to get accomplished today is to distinguish between the liens and levies how the government uses that, and again, how we as taxpayers and practitioners can use our tools in order to address the liens and levies. A lot of the liens and levy activity in general with the IRS has subsided by the shutdown that we've had over the last six months. I do foresee that changing pretty rapidly over the next couple years.
The other thing I want to be able to do before we start out is do a shout out. There's a number of folks here that are listed here that I use as resources for myself and I really lean on them, particularly in this area. Foremost is actually Charles Rettig. He's the current IRS Commissioner. He's actually a former practitioner like many of us are on the call. Did a great job representing his clients which were taxpayers. Now he represents the IRS and I expect him to be just as vigorously representing his current client, which is now the US government that he did when he was doing his taxpayer work. So again, that's one of the reasons why I see the activity in the IRS really starting to become more aggressive as we go on these days as we start coming out of the shutdown.
Also, our group, got a great group of people in our firm, and the least of which they're not the least of which is the folks that run our controversy group, Walter Pagano and Miri Foster. So just keep in mind, we are definitely open for business when it comes to the tax controversy area.
So the first place I wanted to start which I mentioned initially when we started out with the chart is that, assessment really is where it all starts when it comes to most of our tax controversy areas. And there's really three methods of assessment. The first one is the self-assessment that's when you file your tax returns, and the substitutes for return. If you don't file your return, guess what? The IRS will file a substitute return for you on your behalf. Usually based on 1099 that have been filed with them, they may look at prior returns to see trends and numbers that you reported. Or they may base it on other things like the Department of Labor Statistics, or other industry statistics to build that a tax return for you. It's usually not very favorable at all. And when you get hit with it with an SFR, the assessment is pretty high. And usually, again, it gets with most cases, it gets the taxpayers attention and they then file their own return to reduce the assessment at that point.
The other assessment is deficiency. When you have an audit or an examination of your tax returns, could be just as simple as IRS checking 1099 against your returns. It could be a situation where an auditor comes out and visits your location or you visit the IRS office and they go through your stuff. Or it could be through the mail, which is probably more common these days. But that's how deficiencies may come up. And they become assessments at that point.
And the other is jeopardy or termination. These are things that most of us don't see when the IRS is fearful that somebody is going to flee the country or something very, very, very egregious happens they can just hammer down the assessment right away, they could terminate a year, cut off a year at a point so they can make an assessment and start collecting action as soon as possible. But again, the assessment is what is needed for the collection process to start. Don't ever let any revenue auditor or agent tell you that they're going to take away your house and what have you. It's not the revenue agent yet to worry about. It's the revenue officer, the one that's out there collecting the money at that point, those are the ones that really have the power.
And the assessment date is not necessarily the date the return is filed. So you normally want to get a transcript. And a transcript will usually know when the assessment data is. And why is that critical? Well one, once the return has been filed, the IRS has a certain amount of time to audit that return. They've got three years to audit the return to make any changes or things of that nature. And then they have time to actually make the collection once that assessment is done. It's a 10 year statute. It can be, that statute can be extended at times that there are totalling events that we'll talk about later, such as an offering compromise, installment agreement, bankruptcy, plus six months as to tolling. It's during those periods of time that the IRS do not do any enforcement action against you. At that point it's called what we call a tolling event.
Hopefully, it's a pretty easy question to answer for you. And again, just remember how important the assessment is. And again, if the auditors in most cases, though they do wield quite a lot of power there. They do not have the power to collect or doing a collection enforcement actions against you. It's really after their work is done and they've made their assessment during an audit, once they're done and they've made their assessment, then the collection division takes over. And it's usually the collection people and normally someone like a revenue officer is normally one of the more powerful members that, in my opinion, the RSA have to deal with, and to just be sensitive to doing any tax collection issues that you have.
Okay. I've got a pretty stacked program here so I'm going to get going pretty rapidly through this material that I have. The, as we talked about before, the assessment process of how very important that is, and that the assessment process starts with a return being filed to the IRS, filing a substitute for return, or there's an examination or there's an audit notice that's issued.
After that, if especially after the audit process is done, there's usually a 30-day letter that's issued. Usually I say, because in a lot, and not a lot of cases, but in many cases, particularly if the IRS has gotten behind and doing their audits kindly, they may be brushing up against a statute of limitation, a three year statute of limitation. But many times what they will do is they'll go right to the 90-day letter. All right. Which is very important. It's a statutory letter. Meaning it can't be changed. That 90-days is not flexible at all. That's really your ticket to the tax court. And once you get one of those 90-day letters, you really need to at that point petition tax court. And the form actually is not that difficult to fill out. I mean, you could probably get a sixth grader to fill out a petition to tax court. But it really needs to be done and needs to be filed. And if you haven't had an appeal conference because of that statute issue, normally you'll be referred back to the appeals division in order to get that done.
And then there's a final decision that's made by the appeals division. You can then send that up to tax court, try the tax court and then at some point, the assessment for that additional amount due is done and collection begins at that point. That's where the fun starts and as far as the collection area.
So this is the life of a collection case. Tax again, tax must be assessed. That data is extremely important because that puts the stake in the ground for the 10 year clock that starts clicking on the statute of limitation. Soon after that, usually within 60 days and notice or demand the payment comes out for the assessment, and 10 days after that notice or demand there's a statutory or what's often called the silent lien that's issued at that point. Right after that, soon after that the Federal lien is perfected. Perfected meaning now everyone sees it. It's not just silent. And then there's normally a final notice of lien, which is sent out actually five days after the lien has been put into place. And you have what's called a Collection Due Process hearing available to you at that point.
Once that is done, you go through what I usually call a letter of campaign. It's a series of requests for payments. They gradually gear up. They're very nice at the beginning. The 501 is basically issuing you for payment, by the time you're hitting 504 they're starting to tell you that we're going to start taking away state refunds. Then it really starts to crank up at that point. Then you get what's called a final notice of intent to levy. That's when you have a collection due process hearing available. And normally, there's three different forms. I don't know why they won't just have one form, but they got to have three different forms. A letter 11, and 1058, and a CP-90. So if you get any of those letters in the mail, you know you've got 30-days to request this collection due process hearing. Very important.
I consider that to be really the crown jewel, and it's very rarely used. Statistics out there say that only about 3% of the cases actually use it when it's available. I think it's a great tool to use. Obviously in this program, I can't get into great detail on it. But it's one of those tools that we can use as taxpayers and tax practitioners to stop and form an enforcement activity and to kind of get our stuff together so that we can start working with a department that's more concerned about settling a case than one that is trying to collect the tax from you. So you can start putting together your arguments, your financial statements to try to cut a deal with the IRS.
Again, it's very important to get to do within 30 days, if it's not done within 30 days, you lose the right to Collection Due Process hearing, but you do still retain a right for the equivalent hearing. It's up to a year after the final notice of levy has been issued. And the equivalent hearing, just like it sounds, it's similar to the Collection Due Process hearing except you lose the right to the tax court review. Which is very important, especially when you're dealing with appeals officers who are concerned about having their work being reviewed by the courts. So the equivalent hearing is not as good. It's, if you can salvage it, it's great because again, it stops for processing for their IRS' normal procedures. Again, unless there's an egregious case, they will stop the enforcement of collections and an equivalent hearing. But you don't get the tax court here.
So just a few words on liens and levies, the liens are really out there to protect the government's interest. They're there to cover the assets of the taxpayer, we'll get into that a little bit more in depth. There are mitigating measures that the taxpayer practitioners can take. We'll talk about those in more detail. Levies are really to get the taxpayers attention. So they're taking the ownership of your stuff that you have in your banks, your bank accounts, other assets that you may have. And it's really motivating the taxpayers now to have to do something when they wake up one morning and their brokerage account and their cash accounts are empty. And again, one of the things I talked about before is getting a tax payer transcript. You definitely want to get tax payers transcripts. It really clarifies where the IRS is at in their process and it will allow you to know what you can do as far as using these enforcement tools.
As I said, the statutory or silent tax lien, that comes into being basically once an assessment has been made maybe a couple days, but there's a tax lien that gives the government the right to basically pay collateral over your stuff that you have. It's an automatic thing. It's done 10 days after the assessment is made. And it's applicable, that lien is applicable to any currently held future acquired assessments authorized by Internal Revenue Code 6321. Again, the assessment must be valid. Exist in order for this to be enforceable. And the taxpayer must have been given notice and fail to pay the full amount as assessed. It's silent because no third party knows about this. Just the IRS and the taxpayer. And quite frankly, in a lot of cases the taxpayer probably doesn't even know about.
The perfected lien. That's the silent lien becoming perfected meaning you're filing the UCC filings. Now you're letting the whole world know at that point that the IRS has a lien on the property that they have. Obviously, the third parties know about this at this point. So if there are third parties already in line, such as if you have a house with a mortgage on it, obviously the bank who is already in line in front of the IRS, but the IRS can take a second position behind the house at that point. Again, it protects the government's interest. That's extremely difficult once those have been put into place to get those taken off because the IRS again, wants to make sure that you're not going to get anything that they can't get a hold of. The major credit bureaus have taken tax liens off of the credit reports back in 2008, but I would still caution you, you can expect any potential creditors to be able to run lien reports to see whether or not the IRS has any liens on you or not.
So just remember that a lien is really, and we'll go back on this a little bit more in detail in a couple of slides here. But the lien is basically a, it's a blanket thrown over all of your assets. And at first it's what we call a silent lien. And shortly thereafter the lien is perfected so that everyone that needs to know or wants to know can determine whether or not the IRS has a lien on your assets or not. So the lien, other than the fact that now it's known that the lien really doesn't change, it comes from a status in which it's not known really by anyone to a status in which the whole world, if they wanted to know, could go in and look to see whether or not there's a lien on your property or not.
There is a question raised here on the Q&A board, what should we tell clients about the scam IRS agent calls? Basically if you're getting a call from an IRS agent, it shouldn't be a surprise to you. It shouldn't be something out of the blue that you have no idea what's going on. IRS basically doesn't do business that way. They normally do business by sending a number of notices to the taxpayer. And they normally don't call out of the blue. So I would be telling practitioners that are out there that are dealing with clients like that, that they want to send out a general email to their clients, they should be basically telling them that's just not the way the IRS does business calls. And if there is a call, they should always just politely say, "Well, I'll have my accountant or my attorney give you a call. Give me your name and number." All right?
Some planning tips to the liens. And remember, I spoke about it, the lien is a blanket. It goes over all of your assets that you currently own, or that you could acquire in the future. And they really shouldn't be unless again, there's some egregious cases but you really, they really should not be putting any liens when the tax liabilities are $10,000 or less. So they should only be for those that are greater than that. Again, once they're on there, it's like a dog on a bone. You're just not going to get those off without a really, really good strong case to get the domain taken off. And if you argue that it hurt somebody's credit, or somebody's job is going to be lost, I mean, you really got to come up with a compelling case for that. The lien is like everybody else's lien for the most part, the IRS. If you have a mortgage on your house, they're not going to jump in front of the bank, they're going to be behind the bank on it. So they're going to get in line with everybody else.
Just a tip here. I see a lot of clients doing this. You're loaning money to, it could be a husband, it could be a brother, a sister, niece, nephew. You may not think it but it's a good idea at that point, you may want to file your own UCC filing on that particular person to either running a business. And I have an example of this on the next page. They're either running a business, a towing business, and the husband goes out, buy some vehicles. Then he gets in trouble with the IRS. His wife has loaned him the money. She's got a UCC filing on the trucks. And the husband's business goes south. And the IRS comes in, closes the business, liquidates it. But the wife really is in line first.
She could actually grab the vehicles by default before the IRS can and do something. Maybe the husband starts another business. And now she just leases the trucks to him. Same thing with monies that you may have lended somebody or assets that they may have. Just keep that in mind. I call the friendly creditor strategy, and could be useful to folks. Again, with somebody whose business doesn't do well going forward.
The notice of federal tax lien which is really the perfecting lien. This is where the IRS takes a claim out and they stick it out there in the open. The IRS has to give the taxpayer notice within a notice that this is a notice after the fact. So it's already been placed. Taxpayer does have rights to a hearing to remove the lien which is very slim chance but by exercising your rights to a hearing, it gives you time to start putting together your case, whether it'd be somehow mitigating the liens, which we'll get into, or proposing some collection alternative so it doesn't get ugly with the levies, like they start coming in.
So in order to do that, there's a form one 153 that's filed. Again, I can't get into that in much detail here, I could do that in another program in the future. But with that form, you can get a Collection Due Process hearing to basically state your case with a settlement officer. This has to be done within 30 days of receiving the final or the final notice of lien. And if that gets blown, then you have the ability to get what they can called equivalence hearing. Which you need to do within a year. And as we talked about before, you do lose the right to appeal to a tax court. So it's not quite as strong, but it still gives you obviously the ability to get in front of an appeals officer, someone is probably a little bit more lenient, I should say, more willing to listen to the various alternatives that maybe we get if you're dealing with the collection division. Collection division there to collect taxes. Period. You want to get in front of somebody whose stated mission is to settle cases, not somebody who his mission is to collect taxes.
So the nexus of the federal tax lien life, the federal tax lien continues until it's satisfied or expires. And that's usually a 10-year period. Those federal tax liens are self releasing after 10 years. The IRS has hundreds of thousands, if not millions of liens out there, and it could not possibly go through and manually send out release forms for each and every lien that they have. So they built into the lien document the self-release. So the tenure statute that we have, as I spoke about before, that could be somewhat extended by the innocent spouse, installment agreement, offer-in-compromise, bankruptcy, if you're living outside of country, those things can extend it over the 10 years. But the IRS has only 10 years with the lien. If they want to extend the lien because of the tolling, they need to refile a lien before the tenure exploration comes up. And within 30 days of the exploration. Otherwise, they lose their place in line at that point.
In the next page is a copy of the federal tax lien. A lot of banks unfortunately don't really understand this lien. So in many cases bankers will, if there's been a lien on property that's actually beyond the lien and the lien is expired, they don't realize the fact that if you read this thing, and I haven't highlighted the first highlight there is important, release information, which basically says that this is a self-releasing lien. And you look to the last date of refiling to see when that last day is, when it expires. Which is that second box that I have highlighted here.
But in some cases, the bank will insist, and you'll have to go back to the IRS. And they've become more flexible over the years of actually writing a letter to the bank to demonstrate that the lien has been satisfied, or it's expired. And the one thing that the IRS has done, pushed probably over the last year, a couple years or so was the suit to bring the lien to judgment. So if the lien is coming to an expiration and you have some like real assets, like a real estate, a lot of times they will refer the case over to the Department of Justice. And if the lien is reduced to a judgment, you have 20 years then as a statute to deal with that. So again, keep that in mind as you're coming to the end. If you have a substantial amount of property, there's a really good chance these days that the IRS will refer that over to the Department of Justice to get the lien reduced to a judgment.
Talk about some of the mitigation issues that we want to deal with. And these are good things. So you have a mitigation activity called the subordination. And what this does this, this allows you in cases where, and for these mitigation issues, you're basically, you're in a situation where the IRS has liens and potentially going to levy or sell certain property that you have and you may be able to go to them and say, "Listen, in this one case, if you subordinate yourself as a lesser creditor, I can refinance, say my house. And I can get the payments reduced to the bank. Which means I'll have more money to give to the IRS or maybe my lowering of interest will give me more money to pay to the IRS."
IRS doesn't want your property. They want the cash that's represented by your property. So if they can feel comfortable that you're going to squeeze out the equity, or get lower payment terms so they can get more money, they're more than willing to listen. But you have to fill out a form 14134. It is a bit in negotiation in these cases, but it can be done.
The next one is a discharge of assets. So, a lot of times people confuse this and say the discharge of a lien, it's not really a discharge of a lien. Liens go in place. Again, it's a blanket over your assets but you have the ability to take a piece of those, one of those assets, maybe it's your house, maybe it's something else, maybe it's a piece of land, you can take it out from underneath of that blanket. And if you have the ability to sell that property. IRS is not going to try to stop you from selling property that you may have on its lien to turn it into cash, the most important thing is one is the sale that you're doing, is it a fair sale? So you need to get appraisals and all the other stuff that you would have to prove to the IRS, that it's a good move for them.
And whatever comes out of it, as far as cash, they're going to want to have as much cash from that deal to satisfy or reduce the liability that the taxpayer has with the IRS. So given all the factors and given all the support that it's a good deal for the IRS to do. Again, they can't do anything with your property other than to go through the trouble of selling it because they got to turn it into cash. They would much rather not do that, they would much rather that you go through that trouble. And as long as the deal is fair, they're more than willing to go through and allow you to discharge an asset for what you need to do. And by the way, if you have assets where you're maybe underwater and where they have no stake in it, there's no money in it for them. Again, in many cases if you need to dump that property for whatever reason, more than likely, the IRS will not give you a hard time. But there's really nothing in there for them.
But as with selling the other property, you need to make sure that you have all the documentation in place to show them that that is in case, the place. And the IRS at the end of the day, they're going to make sure that the buyer of that property has good title. The form that has to be filled out for that is form 14135.
The other mitigating approach here is withdrawal of the liens for smaller amounts due. If you have tax debt that's $25,000 or less, and if you don't, and you can get a lump sum paid to get it down under 25,000. You can set up an installment agreement. And if it's the installment agreement, that would be the shorter of 16 months or the remaining collection statute. And the collection statute if you then set up the taxpayer on a direct debit payments, and three consecutive debit payments go through and they go through successfully, you normally can file a 12277 form which will allow you to go through and do that and get the taxpayers get the lien off of the other property. Which is good. I mean, a lot of times it's as good for somebody who may have made a mistake, has gotten themselves all caught up. It'll have an extremely large amount of IRS debt, but there's some there that they get this thing, it can be somewhat controllable for the taxpayers that go forward in addressing that debt with the IRS.
Just keep in mind the mitigation actions that you can take. We often, one of the mistake and conception that the IRS is not willing to do deals when it comes to this, but it's worth exploring. Especially the subordination and the discharge actions that you can take for the taxpayer to potentially, if they've got some assets that they could get rid of and turn into cash to help pay down the amounts that are due. That it's well worth exploring.
All right. Great. Okay. So just to end up here on the challenging of the liens, and there's not much you can do, you can raise some arguments as far as the IRS really is the measure that they're taking commensurate with the severity of the tax liability and the ability of the taxpayer to pay. Got to be kind of measure there. Now, is the government's interest really being protected here? Does the taxpayer have enough equity in these assets to make it even worthwhile for them to have the liens? What about the overall compliance of the taxpayer? What's the effect that the liens are having on collections? And a lot of times you're going to be going on deaf ears when it comes through the IRS, when it comes to these sort of things. But it's, again, it's well worth it if you're talking with the IRS on the liens to at least consider these items.
Next is the, what I call the birth of the levies. You really just have to make sure that in these cases, this is where the IRS starts taking your stuff. And as I will show you, the taxpayer is saying that they've gotten a notice and all of a sudden they've gotten their bank accounts cleaned out. The notice doesn't usually fly very well with me, because I know that the taxpayers had been warned several times before the IRS takes any action. And the IRS has this, like I was saying before, they have this campaign, this letter campaign that they have when they send out the collection letters to the taxpayers. And it's usually three letters that go out maybe once a month. So you have a three month period, then you get a final notice of intent to levy with letter 1058, CP-90 or the LT 11. Wording can sometimes be conspicuous, you got to make sure you read it properly.
These things are normally delivered certified mail, there really should be no question at that point, what the taxpayer has gotten themselves into, and it's really so important to be able to act on this ability to get the collection due process hearing to stop all of the enforcement activities if you possibly can. What you're doing is you're getting a case taken out from underneath a what the collecting part of the IRS to the settlement part of the IRS, which is very important. CDP also gives you that tax court petition rights. And, again, the collection activity does stop. The equivalent hearing gives you a lot of the same issues or rights, but you don't have rights to the US Tax Court. And there's no collection activity by the IRS by their own procedures. However, it's not by statute. So if there's egregious cases, a lot of times they will go and continue to go and continue their collection activity.
There are two kinds of levies, one's a continuing, one's a regular. The continuing is, it's a levy on fixed and determinable rights to a series of payments. This is for wages, for continuous streams of payments, social security. Yes they can go after social security. They can go after routine paid commissions, 1099s. And they continue in place until the levy is released, or the taxpayers come up with some sort of an alternative payment plan. And this continue to go. This continue to operate.
The regular is a levy which is only foreclosing upon those things that you have at the time that the levee is served. These are used for banks, receivables, bank accounts. So if the bank gets a levy today and you have $400 in the bank today, you lose the $400. Tomorrow you put in a million dollars, the IRS has to do another levy in order to get that million dollars. So that's the difference between a continuing and a regular levy. And anybody who wants to play games as far as employers or bank officers who refuse to implement that Levy, they're going to get hit with a 50% penalty on the amounts that are due. So be very cautious if you're in that sort of situation.
Next to the levy on retirement accounts and denial of passports. As I said, they not only can go after the social security payments, they can go after the retirement accounts. Now, for ERISA there are protections from third parties on retirement accounts. However, the federal government surprisingly enough is exempt from this provision. So the bottom line is if the account holder on that retirement account can get to that money, their IRS can get to it as well.
All right. Passports, if you've got some significant amounts that are due now as a result of the 2015 FAST Act, the state department can take away or not issue you a passport. Significant meaning $50,000 or more. So there has to be a serious delinquent tax debt. And they don't have any sort of Cayman arrangement already set up with the IRS such as an installment agreement, or you're undergoing an offering compromise. There is a question regarding currently not collectible at this point, because it's really not a payment arrangement. But most of the folks I know that I've dealt with, I've got them into collection are currently not collectible, are normally not people that are traveling overseas anyway.
What can be seized? There's a number of things here that can be seized. Again, we still got federal payments such as social security wages. Probably 80% to 90% of your wages, they're going to suck it up. Accounts receivable bank, banks have a 21 day hold rule. It's there just in case there might be a mistake, it gives you the 21 days. Hopefully if the client gets to you quickly enough, or taxpayer gets to you quickly enough, you can deal with that. And hopefully get at least some of that put back into the bank for the taxpayer to pay their living expenses time and again. And the IRS can go after that. They will go after it somewhat hesitantly but they can go after it. Brokerage accounts, Cash Surrender Value which have insurance, they can go after real estate, they can go after personal property, money held by third parties. They can go after alimony, but not child support.
And for primary residence, the IRS needs to actually get an order from the US District Court judge to get that. And in order to do a second or a rental property they need a district director to get that from them. Some of the exempt things are 85% of the unemployment benefits or workers comp cannot be touched in these levies. And as I said, the child support cannot be touched as well.
Just keep in mind that the 21 days is there really as a safe measure. So if you're in that situation, and hopefully your taxpayer has gotten to you early enough, they can talk to the IRS. In many cases, particularly in an egregious case, the IRS is going to push back on that, but if you come forth with them and give them the necessary living expenses that the taxpayer needs, many times the IRS will acquiesce and allow some of the money to go back into the account so that people can pay their mortgage payments, their rental payments, food and electric bills, or things of that nature.
Very good. Okay. Just come down to the closing here and thanks everybody for hanging in there at this point. Again, the federal tax levies, they're a punishment basically. They're there to get taxpayers attention. And in many cases, we as practitioners step in and do what the taxpayer should have been doing to begin with. And listen, if you're filing returns, you don't have the money to pay for whatever reason, and we're going to have a lot of those reasons coming up typically because of the shutdown with folks. We need to respond to the IRS and give them some comfort that things are under control. We know what's happened, we know what we need to do, and one of the really important things is to make sure that your compliance with all of your filings, that's number one, right off the bat, need to make sure that everything is filed and filed properly, and is up to date.
The other is making sure that your current year's taxes are being addressed and paid in as best as you possibly can. Because if you're not controlling your current year taxes, for them to talk about a compromise or an installment agreement for prior years, it's very difficult for them. Very, very difficult. So you want to really seem to be proactive with the IRS at that point. A lot of times what to do is at least get yourself into an installment plan, and it gets them off your back, and then maybe if you have an opportunity to maybe to do an offering compromise, or maybe there's a currently not collectible situation you can get yourself in, those can be quite helpful when it comes to dealing with the IRS at that point. But it's really giving the IRS comfort that you know where you're at, you know what the situation is, and this is what I'm going to do in the future.
They might not be happy with the current situation, but the issue that you can make the job for the collection people as far as providing them with making sure that again, you're complying, you're paying your taxes. Currently you're starting to put together financial statements, if you want to do an installment agreement or an offer-in-compromise, the better off you're going to be.
And these are some of the collection alternatives that are out there. Full pay. That's usually where I start out at. If someone is just for whatever reason, has not paid their taxes but they have a million dollar house with no mortgage on it and they owe 15 grand or something, there's not much you can do in those cases. That's a full pay case. You have, we talked about it before the substitutes for returns. If those are giving you a very out of whack results when it comes to amounts that are due, you need to replace those with the real return that should have been filed to begin with. If you have to look at tax liabilities, maybe they're incorrect. You need to address that, to take a look at those.
Now, if they've assessed you, typically would be one where you have a capital gains transaction. The IRS doesn't know what the basis is for that capital gain. So they're charging you for the entire thing without taking into consideration any of the cost basis. Installment agreement is probably the most used tool that you can use as far as mitigating some of these egregious collection activities that the IRS has. And if you can't pay the whole thing, a lot of times you can do partials. On the partials, a lot of times the IRS will revisit it on a periodic basis to make sure that you shouldn't be doing a full installment agreement. But again, it's a way of getting yourself back into compliance.
Offer-in-compromise. Very involved process. There needs to be a lot of money at stake in order to do something like this because there is a lot of work involved. But again, it's something that in the right conditions can work. Penalty abatements. Never stop looking at those items, whether it be for a reasonable cause issue or first abatement opportunity. And by the way, next month, November 17th at this same time, I'm actually doing a program on penalty abatement where we're going to talk about reasonable cause first time abatment. So if you're interested in that topic, please register for the program.
Bankruptcy. That's normally that's out of my realm, but it's an alternative that normally has to be taken care of by a bankruptcy attorney. But it is an alternative. One that we don't often take lightly, but it is an alternative that we can do. Innocent spouse relief. Done quite a few of those in the past, where we've had innocent spouse, and it's usually an ugly situation where we have a divorce and we find out later that one of the spouses has a large tax payments that are due and the innocent spouse was not aware of it at that point.
And the collection statute, we talked about it before. If you have that tenure collection statute and you always want to know when that ends. If you're coming up to where it's within a year or less possibly or somewhere in that range, you may not want to do some of these things. You may want to try to run out the clock. Get yourself into a currently not collectible status. Get yourself into an installment agreement, or a partial and just really play out the clock into the end. And once the end is done, the end is done. The IRS has got to fold up it's tent at that point and there's not a whole lot that can be done.
So that ends the program at this point. And thanks Sarah for hosting the program. And I don't know if you have any closing comments that you need to make before we all close out.
Transcribed by Rev.com
What's on Your Mind?
Daniel Gibson provides accounting, tax planning and consulting services to real estate and services industries and is a member of the AICPA and New Jersey Society of Certified Public Accountants.
Start a conversation with Daniel
Explore More Insights
Receive the latest business insights, analysis, and perspectives from EisnerAmper professionals.