Just filed a tax return and have a balance due you can’t pay?

Posted on by katemley

You have many opportunities to deal with this situation – but the most important thing to remember is that taking action sooner is better than waiting.  Your timely response can provide you with an opportunity to review your financial situation and determine if it is best to use other resources to retire your tax debt.  Tax liens are not filed right away and as such, it may be in your best interest to borrow against the equity in your real estate.  Once a tax lien is filed, which happens in many cases, your likelihood of getting a loan is greatly reduced.

 Should you not have the ability to borrow money to pay off the tax debt, the time immediately after filing your return is the best time to analyze your financial situation to determine what options you have.  Once the IRS begins to send you notices, they will ultimately issue a Final Notice of Intent to Levy and then they have the right to seize assets and levy income.

 If a professional is assisting you with your financial analysis, they are working to put together a Collection Information Statement.  This document will allow the person assisting you to determine if you are a candidate to submit a settlement proposal to the IRS – known as an Offer in Compromise.  Nobody can tell you that you are a good candidate for a settlement unless they complete a full financial analysis and know how much you owe in taxes, interest and penalties.

 The Collection Information Statement is not only utilized to determine if you are a candidate for an Offer in Compromise settlement, but this document is also used to determine what you can pay on an Installment Agreement, a Partial Payment Installment Agreement, or if you are a candidate for the Currently Not Collectible Status.

 An Installment Agreement is an agreement to full pay your outstanding balance plus interest and penalties over a period of time.  There are instances where you do not have to disclose all of your financials in order to set up an Installment Agreement.  This is typically based on the amount you owe the IRS and the amount of time remaining for the IRS to collect the debt – the statute of limitations on collections.

 A Partial Payment Installment Agreement is an agreement where you will pay the IRS a monthly payment, but that payment amount would not pay off the entire debt before the IRS statute of limitations to collect runs out.  Because there is a possibility that the IRS will not collect all of the tax liability from you, they reserve the right to review your financial situation every couple of years.

 In addition to the above, many taxpayers qualify for placement in Currently Not Collectible status.  This status is given when you substantiate to the IRS through financial disclosure on a Collection Information Statement that you do not have any equity in assets, nor do you have the ability to make a monthly payment.  When placed in this status your debt continues to grow from accrual of interest and penalties.  The IRS will review your financial situation from time to time to determine if you can begin paying something toward the tax debt.

 Given the fact that the IRS has the power to levy your wages or seize assets if they issue a Final Notice of Intent to Levy, it is important to be aware of the status of collections of your tax debt.  When the Final Notice of Intent to Levy is issued, the taxpayer has the right to have the matter reviewed by Appeals Division of the IRS.  This review is independent of the Collection Division and the reviewing officer has the ability to establish one of the plans above.  Sometimes this is advantageous as the taxpayer’s matter is assigned to a single caseworker rather than a service center where the taxpayer has less of an opportunity to work directly with an IRS employee.

 As can be seen from the above, there are many options to deal with your tax obligations.  The situation can only get better by dealing with it sooner.  If you have tax liabilities you can’t pay, please contact us.  We would be happy to provide you with guidance to determine how best to proceed.

IRS delay creates special penalty relief for tax year 2012 return filers

Posted on by katemley

The Internal Revenue Code at section 6651(a)(2) penalizes a taxpayer who does not timely pay the tax shown on their return.  While this provision applies to a variety of tax returns, it certainly includes the income tax return.  There is an exception to this penalty – where the failure to pay is due to reasonable cause, and not willful neglect. In that instance, the IRS will abate the penalty.
    From a practical perspective, this penalty is assessed against taxpayers as a matter of course at the time of filing a return with a balance due that is paid late.  The IRS simply sends the taxpayer a notice with the penalty assessment.  The penalty is calculated at a rate of 0.5% of the late payment for each part of a month that the payment is late.  The penalty maxes out in 50 months at 25% of the late payment.  It is important to note that extending the filing date of a tax return does not extend the time to pay the balance due.  As such, this penalty will apply during the extension time frame unless the late payment is actually paid with the filing of the extension.
    As many are aware, Congress was rather last minute in its efforts to avoid automatic tax increases and expirations of a variety of tax clauses at the end of 2012.  Ultimately, Congress enacted a new law on January 2, 2013.  The new law is known as the American Taxpayer Relief Act of 2012 (ATRA).  This new law, like most tax laws, required the IRS to revise many tax forms and test those revisions in its system.
    As might be imagined, adjustments to the comprehensive programming at the IRS because of changes in the law take some time and the implementation of the ATRA law was no different.  In spite of its best efforts, and because of the delay by Congress, the IRS was well into filing season before it finalized many tax forms, therefore causing delay to some taxpayers.
    In an acknowledgment of the above, the IRS issued a notice on March 20, 2013, at http://www.irs.gov/pub/irs-drop/n-13-24.pdf.  In this notice, the IRS basically created a scenario where a taxpayer could show automatic reasonable cause for an abatement of the failure to timely pay penalties of section 6651(a)(2).  If the taxpayer included any of the forms that are referenced in the Notice, which are all forms that were delayed by the new law, then the taxpayer responds to the notice calculating the penalty by sending the IRS an explanation that identifies the form that was included in the return which was part of the delayed processing and that the taxpayer qualifies for the abatement because of the special IRS Notice – which is known as Notice 2013-24. 
    To qualify for relief under the Notice, taxpayers must still pay their estimated tax balance by the due date of the return. Any estimated balance due that isn’t already paid is typically paid with the filing of the extension.  And, taxpayers must pay the remaining balance by the filing of the properly extended tax return. There are 31 tax forms that could cause a taxpayer’s penalty to qualify for abatement under this Notice.   The Notice includes forms relating to Residential Energy Credits, the Work Opportunity Credit, Mortgage Interest Credit, Passive Activity Loss Limitations, Qualified Adoption Expenses, American Opportunity and Lifetime Learning Credits, Energy Efficient Home and Appliance Credits, and the Alternative Motor Vehicle Credit, among others.
    Ideally, the IRS would simply program their systems to automatically abate any taxpayer’s penalty that meets the parameters above, relieving the taxpayer of the burden of follow up to abate the penalty.  Presumably, the procedure of Notice 2013-24 is a more feasible resolution to this problem.  Should you have any questions regarding this matter, don’t hesitate to contact our office.

Partial Payment Installment Agreements

Posted on by katemley

Since its inception in 2005, this collection resolution has become a common way to resolve IRS problems in our office.  Given the fact that the Offer in Compromise program only solves a relatively few taxpayers’ problems (offer acceptance has been fewer than 15,000 Offers accepted a year in the past few years), it is necessary to explore other resolutions when assisting a taxpayer with a delinquent balance.

In 2005 Congress allowed the IRS to enter into installment agreements that only partially pay a tax liability.  This was accomplished by amending Internal Revenue Code section 6159. It is Congress’ reference to “partial collection” of the tax debt that caused the IRS to label this type of agreement Partial Payment Installment Agreement (PPIA).

The statute requires that in order to enter into one of these agreements, the IRS must “review the agreement at least once every 2 years.” Congress was balancing the need to collect revenue now by entering into a payment agreement with a taxpayer that would not fully pay the debt, against the possibility that the taxpayer may have more means to pay later.  As such, the IRS will review the taxpayer’s status at a later date to determine if he or she can pay more.

A few things have to happen in order to establish a PPIA.  The taxpayer must complete a full financial analysis to determine an ability to pay.  During the course of this financial analysis, the IRS will review the taxpayer’s equity in assets.  Because the PPIA will not pay the entire debt based on the payment amount at establishment, the IRS will expect the taxpayer to either liquidate or borrow against equity in assets before establishing a PPIA.  It is not an absolute requirement that the equity be borrowed against or liquidated; however, the taxpayer must seek to take these actions before the PPIA will be established.

In order to understand the concern of the government when establishing a PPIA, it is important to understand the statute of limitations for collection of a tax debt. An important date in the analysis of any delinquent taxpayer’s tax debt is the Collection Statute Expiration Date

(CSED).  This is the date on which the IRS loses the ability to collect a tax debt, or the collection statute of limitations.  This date is generally 10 years from the date of assessment, which is when the tax return is processed or the IRS creates a balance for the taxpayer.  Some actions stop the running of this statute, such as the filing of a bankruptcy, a submission of an Offer in Compromise, or a variety of appeal actions before the IRS. Therefore, you can’t assume that you know the exact date of the CSED based on a return filing date.

After equity in assets is addressed, the IRS will review the taxpayer’s future income potential.  This number is generally the taxpayer’s gross monthly income less allowable expenses.  If equity is addressed and the taxpayer has some ability to pay, but not enough to fully pay the tax debt before the CSED, then the taxpayer would generally qualify for a PPIA.

A simple example would be a taxpayer that owes the IRS $50,000.  If that taxpayer had $20,000 of equity in her home, she would be expected to try to establish she can’t borrow against it.  If this is the case, then the IRS would look at her future income potential.  If the CSED is 60 months and the taxpayer can pay $300 per month, the IRS would establish a PPIA knowing that at the time of establishment of the PPIA, the taxpayer would only pay $300×60 = $18,000.  The IRS would review the agreement at least every two years to determine if the taxpayer could pay more.

In the above example, and all PPIAs, once the CSED expires, all remaining tax debt is closed out and not collected by the IRS.  In other words, the taxpayer effectively pays less than the total tax debt, though there is no technical settlement.

The PPIA is a good option that removes many taxpayers from risk of enforcement actions like levy and seizure.  A tax lien is typically filed at the time of establishment of the PPIA if one has not already been filed.  Further, like many other resolutions, if the taxpayer fails to remain compliant with his return filings and current year tax payments, he will default the PPIA even if he is making payments.

Should you have questions about Partial Payment Installment Agreements or any other resolution options for delinquent IRS matters, feel free to contact our office.

Have You Received an IRS Notice of Intent to Levy?

Posted on by katemley

Unfortunately, this question is more confusing than you would think. The reality is that once a taxpayer owes the federal government, a series of notices will be sent to the taxpayer by the IRS demanding payment and referencing the federal government’s ability to levy, or seize the taxpayer’s assets. While the taxpayer is always encouraged to pay his or her indebtedness to the U.S. government, the risk of enforcement action through levy of assets may only happen if certain statutory requirements are met – even though many IRS notices mention that the government may seize or levy assets.

The Internal Revenue Code authorizes the IRS to levy or seize assets in order to satisfy delinquent taxes. While there is no need for the government to file a lawsuit in order to proceed with such a seizure, it must abide by proper statutory guidelines. The IRS must send a Final Notice of Intent to Levy and Notice of Your Right to a Hearing at least 30 days prior to actual seizure of assets. The IRS may levy your State tax refund prior to issuing a final notice, but must provide you with a right to a hearing, after. The final notice may be left at your home or business, provided to you in person, or sent to your last known address by certified or registered mail, return receipt requested.

Given the importance of your hearing rights explained below, if the IRS has created a debt for you a few years ago, or you failed to file returns for a period of time after a return with a balance due was filed, then you need to make sure the IRS has your proper address. This can be done by filing Form 8822 – Change of Address. The IRS is most likely to send a Final Notice of Intent to Levy and Notice of Your Right to a Hearing to the address on your last filed tax return. If you have moved since this return was filed and your mail forwarding notice has expired, you will miss your right to a hearing. Remember, the IRS may have current income source information for you – such as W-2 or 1099 information. So, making sure the government has your proper address makes sure you are properly advised of your rights and provides you with an opportunity to address your debt before the IRS enforces collection action through a wage or bank levy, for example.

A Final Notice of Intent to Levy is only issued one time per tax period. Once issued, a 30 day clock starts. Every taxpayer has the opportunity during this window of time to request a Collection Due Process hearing. That hearing is held by the Appeals Division of the IRS, an  independent division from the Collections Division. When a taxpayer requests a hearing after receiving a final notice, Appeals will make sure that all proper statutory requirements were followed by the Collections Division. Further, and maybe most important, the Appeals Division can entertain collection alternatives at this hearing. This means that you can work with Appeals to set up an installment agreement, a partial payment installment agreement, place your account in currently not collectible status, or work with the taxpayer to process an Offer in Compromise. This is a very important taxpayer right and no taxpayer should miss this opportunity to bring their matters into compliance and eliminate the uncertainty that having a delinquent tax matter creates. Please contact our office if you have any questions about these matters.

Voluntary Classification Settlement Program

Posted on by katemley

Expansion and Temporary Changes

The Internal Revenue Service has recently issued guidance expanding eligibility for taxpayers to qualify for the Voluntary Classification Settlement Program (VCSP). In addition to the expanded qualification guidelines, the IRS is temporarily removing a key requirement for acceptance into the program that could provide many employers with a valuable opportunity to reclassify its workers with very limited federal employment tax liability for prior nonemployee treatment. The temporary relief is associated with taxpayers who have failed to properly issue 1099’s to their workers.

The VCSP has been critical given the aggressive nature of worker reclassification at the state level. Many states are seeking to close the gap on unemployment benefit contributions paid by employers versus unemployment benefit payments paid to workers. As the states have had to borrow from the federal government, they have many times incurred additional costs and interest to do so. Several states have increased program activity associated with the recharacterization of 1099 workers to employees. Of course, the contributions to the state unemployment office for re-characterization may not be terribly burdensome, but recharacterization by the IRS becomes much more likely after a state audit and paying inappropriately withheld income taxes, Social Security and Medicare taxes, may very well be too burdensome for the average small business.

The objective of the IRS as set forth in Announcement 2012-45 is to “facilitate voluntary resolution of worker classification issues and achieve the benefits of increased tax compliance and certainty for taxpayers, workers and the government.” In order to expand the program, the IRS has modified it by adjusting the following items:

1) The IRS will now permit a taxpayer under IRS audit, other than an employment tax audit, to be eligible to participate;

2) Clarified guidance that a member of an affiliated group is not eligible to participate in the program if any member of the affiliated group is under an employment tax audit by the IRS;

3) Clarified that a taxpayer is not eligible to participate in the VCSP if the taxpayer is contesting in court the classification of the class or classes of workers from a previous audit by the IRS or Department of Labor; and

4) Eliminated the requirement that a taxpayer agree to extend the period of limitations on assessment of employment taxes as part of the VCSP closing agreement with the IRS.

IRS Announcement 2012-46 temporarily expands eligibility for the program until June 30, 2013. One of the requirements of the existing program is that all 1099s were to have been properly filed for the previous three years with respect to the workers to be reclassified. Many times, this prohibited the taxpayer from qualifying for the program. As such, the IRS will temporarily eliminate this requirement and allow taxpayers who have not complied with 1099 filing requirements to qualify for the program.

If the taxpayer qualifies but is not compliant with 1099 requirements, the taxpayer will pay a greatly reduced employment tax liability for reclassified workers based on the prior year’s compensation. Additionally, the taxpayer will pay a reduced penalty for unfiled Forms 1099 for the prior three years with respect to the workers being reclassified. There will not be any interest or penalties otherwise calculated.

The potential savings from this program along with the certainty it provides are well worth the effort to explore whether or not the taxpayer qualifies. If you require any assistance with a review or submission of an application for the VCSP please do not hesitate to contact our office.

DC Court Ruling Prevents IRS Regulation of Tax Return Preparers

Posted on by katemley

In major news for tax professionals, the United States District Court for the District of Columbia has ruled that recent regulations imposed on tax return preparers are not permissible under current federal statutes. This ruling does not affect professionals such as attorneys, CPAs, or Enrolled Agents who were already regulated under Circular 230. The complete Memorandum Opinion is available here:

Buy-Sell Agreements

Posted on by katemley

Any business that has more than one owner has an opportunity to use contract law to create expectations for how the business will operate in the event of major life transitions for its owners.  All businesses spend time planning how they will generate revenue to maintain their existence.  Most businesses even plan for catastrophe through the purchase of a variety of insurance products that can prevent the failure of the business if certain things occur.  Many businesses are missing the chance to address several lifetime events that could dramatically affect the operation of the ongoing business.  These events are many times a virtual certainty, such as death or retirement, and therefore taking the time to plan should not be perceived as being overly cautious, but rather simply an exercise in prudent long-term business planning.

 Many advisors will suggest that executing a buy-sell agreement to create mechanisms to deal with issues such as death, disability, retirement, bankruptcy, forced buy-out, etc. is best done as soon as the business is formed.  This advice certainly has credibility and yet is problematic.  It is best to draft at least some form of buy-sell agreement to address as many issues as possible early in business operations.  However, this document should not be set aside and forgotten until a triggering event occurs.  Rather, it would be most useful to review the agreement once a year in the first several years of business operations.  If the business is viable, it will grow rapidly in the first few years and decisions made at the outset of operations may make little sense as the business begins to function at a more complex level.  Ideally the agreement will be regularly reviewed by the business owners as long as the business continues to function.

 Drafting of a buy-sell agreement is essentially a game of “what if?” Discussions regarding what happens when a partner dies, wants to retire, wants to sell his or her ownership interest to an outside party, becomes disabled and cannot continue to contribute to the business in the same way, gets divorced, or files bankruptcy, can all be addressed in the buy-sell agreement.  There are endless options for how to deal with each situation and the partners in the business have the opportunity to come to a consensus of personal preference in the contract.

 Probably one of the most powerful aspects of the buy-sell agreement is the ability to address the practical issue of funding.  Many authorities will suggest that a buy-sell really only works if the instrument is “funded.” In other words, if a partner is required to sell because of certain triggering events, the other partners or the business itself may or may not be able to acquire lending to fund the transaction.  The buy-sell agreement creates the opportunity to address this situation by allowing the parties to draft the ability of the buying partner to utilize the selling partner as the lender.  The selling partner may be put in a position, either because the buying partner can’t get financing or simply because the agreement calls for the selling partner to providing the financing, to carry a note for payment of the value of the ownership interest.  Depending on the circumstance, the parties may not be able to come to an agreement of this sort at the time of the triggering event.  The buy-sell effectively acts as pre-nuptial agreement of sorts in that disagreeing owners have made decisions with “cool heads” at contract drafting time, rather than in the heat of a potentially problematic situation.  There is no doubt that this creates a beneficial situation for all concerned.

 Other funding options may involve the purchase of life or disability insurance that could provide the cash necessary to fund a buyout based on the triggering events of death or disability.  A variety of tax and legal issues are associated with the purchase of these insurance products, but all of  these issues can be addressed with legal and accounting counsel at the time of drafting to determine what is in the best interest of all contracting parties.

 The buy-sell agreement can also be an opportunity to set a value on the ownership interest at the death of an owner for estate tax purposes.  If sales of ownership interest will be to family members at death, there will be heightened scrutiny by the IRS of the valuation placed on the ownership interest.  Nevertheless, if planned properly, the valuation portion of the buy-sell agreement can have a beneficial effect for estate tax purposes.

 If you require a review of your existing agreement or would like to discuss the drafting of a buy-sell agreement for your business, please don’t hesitate to contact us.

“Fresh Start” Changes to the Offer in Compromise Program

Posted on by katemley

The airwaves are inundated with television and radio ads promising delinquent taxpayers an easy solution to their tax problems: the Offer in Compromise. What these ads fail to disclose is that this program has rigorous guidelines for calculating a proper offer amount, and that in recent years, few offers have been accepted by the Internal Revenue Service. Often, taxpayers believe these slick sales pitches and find themselves no closer to a real resolution after hiring an “offer mill” that does not do the proper analysis to determine a correct offer proposal. 

Despite the misleading advertisements of offer mills, the Offer in Compromise is a valid program. Fortunately, the Internal Revenue Service has made changes to the financial analysis required by the program to make it easier for taxpayers to participate in the program and settle their outstanding tax debt. These changes include: 

Reducing the calculation for taxpayers’ future income

Previously, the IRS would look at 48 months of future income potential for lump sum offers and 60 months of future income for short-term deferred offers. The “Fresh Start” changes have reduced these timeframes to 12 months and 24 months, respectively. The bottom line is that the calculation of an offer has been reduced substantially. For example, a taxpayer with a monthly “ability to pay” of $500 previously would have this amount multiplied by 48 months as part of a lump sum calculation, totaling $24,000. Now, the same $500 ability to pay is multiplied by 12 for the same offer, totaling $6,000. In this example, this change reduces the required offer amount by $18,000—a substantial difference! 

Allowing taxpayers to repay their student loans 

One of the most common misconceptions taxpayers may have about the Offer in Compromise program is that the Internal Revenue Service will consider all of a taxpayer’s current expenses. This is simply not true. The IRS only considers necessary and allowable living expenses in the calculation of an offer. Often, this results in the IRS having a very different view of what a taxpayer can afford in the context of an offer! By allowing taxpayers to repay their student loans, the IRS is making a concession that student loans may be necessary and allowable, and these payments can be considered to determine a taxpayer’s future ability to pay. 

Allowing taxpayers to pay state and local delinquent taxes 

Frequently, when a taxpayer is unable to pay their federal taxes, they are also unable to pay their state taxes as well. Because state and local taxing entities do not halt their collection activities when a federal tax debt is present, coordinating resolutions of multiple tax debts can create unique problems for taxpayers seeking to come into compliance with all levels of government. By allowing taxpayers to pay state and local delinquent taxes when calculating an offer amount, the IRS now considers the difficulty of paying federal, state, and local taxes simultaneously. The result is that many taxpayers requesting an offer with the IRS will see a reduction to the final calculation of their offer. 

Expanding the Allowable Living Expense allowance category and amount 

Previously, the IRS did not allow for credit card payments or bank fees and charges to be allowed as living expenses in the calculation of an offer amount. Recent changes not only allow for these payments to be claimed, but also expand the “miscellaneous” category of living expenses to further account for these common expenses. 

These changes to the Offer in Compromise program will give many delinquent taxpayers new hope for resolving their tax matters in a quick and affordable manner.

Fresh Start Initiative from the IRS

Posted on by katemley

Over the last few years, the IRS has made numerous efforts to assist individuals and small businesses that are struggling to meet their tax obligations. The IRS intends to provide taxpayers with a “Fresh Start,” as these initiatives have come to be known. The Fresh Start Program is in the “best interest of both taxpayers and the tax system,” reports IRS Commissioner Doug Shulman. The IRS has issued new guidance for lien filings, lien withdrawals, more flexible installment agreements and an expanded offer in compromise program.  

Nina Olson, National Taxpayer Advocate, believes that the program has produced real results. In a recent report to Congress she explained that “components of the ‘Fresh Start’ initiative have produced significant changes in IRS collection actions, which in turn have had positive, meaningful results for many taxpayers.”  

Major changes were made by the IRS to its lien filing practice. A federal tax lien gives the IRS a legal claim to a taxpayer’s property for the amount of an upaid tax debt. A lien informs the public that the U.S. government has a claim against all property, and any rights to the property, of a taxpayer. This includes property owned at the time the notice of lien is filed and any property acquired thereafter.  

A lien will negatively affect a taxpayer’s credit rating. Therefore, the IRS made a decision to reduce the negative impact on taxpayer’s credit by adjusting the level at which the government generally files liens.  

Another aspect of the Fresh Start program is a modification of the lien withdrawal guidelines. The IRS realizes that there are significant effects on taxpayer credit when a taxpayer is under an IRS lien. Lending in these circumstances is either extremely difficult or impossible. The effect of the lien on lending was even more detrimental as lending standards tightened during the economic downturn.  

Liens will now be withdrawn upon payment in full of the taxes if the taxpayer requests the withdrawal. The IRS has also internally authorized additional personnel to withdraw liens for taxpayers.  

If a taxpayer still owes the government delinquent taxes, it may still be possible to obtain a lien withdrawal. If an individual or small business owes the IRS $25,000 or less in unpaid assessments, the IRS will allow the taxpayer to obtain a lien withdrawal if the taxpayer enters into a Direct Debit Installment Agreement (DDIA). A DDIA is essentially an installment agreement where the IRS is authorized to make automatic debits from a taxpayer’s bank account, rather than waiting for the taxpayer to initiate submission of the payment on their own – for example, mailing a check to the IRS.  

Likewise, the IRS will withdraw a lien if the taxpayer is already on an installment agreement and authorizes the government to convert their agreement to a DDIA. Some taxpayers already have a DDIA. In this case, they need to merely ask the IRS to withdraw the lien. The withdrawal will occur if the taxpayer meets the criteria above.  

Once the DDIA is established, the IRS verifies that the payments will actually be made through the DDIA, then it withdraws the lien. The IRS will not withdraw the lien at the time the DDIA is established – there is a probationary delay.  

At the time the IRS established the guidance above, they also expanded some of their criteria for streamlined installment agreements for businesses. Historically, it was only possible to obtain a streamlined payment agreement for a business that owed less than $10,000. This type of agreement generally avoids full financial disclosure to the government and the involvement of a field officer. Now if the business is willing to establish a DDIA they will qualify for a streamlined agreement if they owe up to $25,000. If a business owner owes more than $25,000 in assessed, they could pay their balance down with a lump sum payment to qualify.  

More recent guidance has benefited individual taxpayers. In the past, a taxpayer could establish a payment agreement over a 5 year period and avoid full financial disclosure if the taxpayer owed less than $25,000. This cap has now been increased to $50,000 and payments are allowed over a 6 year period. Not unlike the old agreements, the payment timeframe is shortened if the IRS collection statute is less than 6 years. Additionally, in order to qualify for the above, the taxpayer must enroll in a Direct Debit Installment Agreement. These changes will save the taxpayer a significant amount of money and time.  

Finally, the Fresh Start program expanded the Offer in Compromise program. The IRS has historically had a streamlined Offer in Compromise program available to taxpayers with lower incomes and debts below $25,000. The IRS expanded the income cap on this to taxpayers with up to $100,000 in income and IRS debts of up to $50,000.  

More recently, the IRS adjusted the analysis of Offers in Compromise in favor of taxpayers. They have provided greater flexibility in determining equity in assets. There is also greater flexibility in determining allowable living expenses and a reduction in the amount of future income that must be included for an acceptable offer.  

As the National Taxpayer Advocate explained, these changes by the IRS are significantly affecting how taxpayers are subjected to IRS collection efforts. If you are interested in learning whether or not any of theseprograms could help you, we welcome you to contact our office.

Understanding the Voluntary Classification Settlement Program

Posted on by katemley

Has your business recently undergone an examination by the state unemployment office?  Did that examination result in independent contractors being recharacterized as wage earners? If so, you likely are facing a new tax debt for unpaid unemployment contributions with the state agency.  Many businesses are finding themselves in this situation.  However, the problem does not end there. The recharacterization will be shared with the federal government, and the IRS will also assess a new debt for unpaid Social Security, Medicare, and income taxes for these employees.  
If your business has concerns about the status of independent contractors, there is an opportunity to be proactive and avoid the problems of federal reclassification by examination. Additionally, you can dramatically reduce the overall debt owed to the federal government.  The Voluntary Classification Settlement Program (VCSP) was created by the IRS to resolve worker classification issues and provide certainty to taxpayers.
The basic concept of the program is simple:  if a business is willing to voluntarily reclassify independent contractors as employees, then the IRS will allow the business to pay a greatly reduced amount for  any unpaid Social Security, Medicare, and income taxes for previous periods.  The important point is that the business will be required to pay all Social Security, Medicare and income taxes for all future periods after the reclassification has been completed.
When a business applies to the VCSP, the IRS will calculate a fee equal to approximately 1% of the amount paid to reclassified workers in the last calendar year.  No further assessment will take place by the IRS if accepted into the program and the employer begins treating the reclassified workers as W-2 employees.
This program has very specific criteria. However, the program is broadly available to businesses, not for profit entities, and governmental entities. In order to be accepted in the program, the taxpayer must meet the following criteria: 

  1. The taxpayer must want to voluntarily reclassify certain workers as employees for federal income tax withholding, Federal Insurance Contributions Act (FICA), and Federal Unemployment Taxes for future periods;
  2. The employer must be treating the workers as non-employees;
  3. The employer must have satisfied any 1099 requirements for each of the workers for the 3 years preceding the calendar year ending before the date the request for reclassification is submitted. If the worker didn’t work for the employer for the entire three year period, this requirement is met if the Form 1099 has been issued to the worker for the time period he or she did work for the employer;
  4. The employer must have consistly treated the worker as a non-employee. In other words, a business cannot reclassify a worker who is on a 1099 if that worker was provided a W-2 in a prior year;
  5. The employer must have no dispute with the Internal Revenue Service as to whether the workers are non-employees for federal employment tax purposes;
  6. The employer cannot be currently under examination by the IRS;
  7. The employer must not be under examination by the Department of Labor or any state agency for the proper classification of the worker. This is key a point—if the issue was brought to the taxpayer’s attention by a state unemployment agency, the taxpayer will want to apply for this program after the conclusion of the state examination, but before receiving a notice from the IRS that the taxpayer is subject to a federal audit!
  8. The taxpayer must not have been previously examined by the IRS or the Department of Labor for the classification of worker, or if the taxpayer has been examined previously by either entity, then the taxpayer must have complied with the results of the prior examination.

 Finally, there is a provision of the agreement that extends the statute of limitations for assessment of employment taxes for three years for the first, second, and third calendar years beginning after the date the taxpayer elects to begin treating the workers as employees under the program.
 The good news is that there is a high level of certainty upon completing this program. Once the proper form is submitted to the IRS, the IRS will review the request and if accepted, enter into a closing agreement with the taxpayer.
 To put the importance of this program into perspective, if an employer requested reclassification of workers previously reported on Forms 1099 that totaled $200,000 in the prior calendar year, and the IRS accepted the employer into the program, the employer would pay a fee of approximately $2,000 to address the periods of questionable classification. Absent this program, the employer would pay $26,600 in delinquent Medicare and Social Security taxes alone! This amount would also be increased by unpaid employee income taxes, penalties, and interest.
 The Voluntary Classification Settlement Program is part of the IRS Fresh Start program and a wonderful window to avoid burdensome delinquent taxes, penalties, and interest. If you have questions about the VCSP, please feel free to contact our office to learn more.