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Innocent Spouse Relief

Posted on by katemley

When spouses file a tax return together, they are held jointly and severally liable for the tax debt. Each spouse is legally responsible for paying the entire liability, including tax, additions to tax, penalties, and interest. Realizing that this may not be appropriate in all cases, the Internal Revenue Service offers “innocent spouse relief” to help spouses in a variety of situations. There are three different types of relief that fall under the umbrella of “innocent spouse relief”:

  1. Innocent Spouse Relief – you may obtain this type of relief if you filed a joint tax return and the return understated tax that is attributable solely to your spouse’s erroneous item. These items could be income received by your spouse, but not reported on the return or, the items could be incorrectly reported deductions, credits, or property bases attributed to your spouse. The effect of these items, the understatement of tax, would not appear on the return when you signed it. In other words, there was no tax due, or if there was tax due, the item left out and its effect was not shown on the face of the return. You must prove that at the time you signed the return, you did not know, and had no reason to know, that the tax was understated. Finally, when looking at the situation, you must prove it would be unfair to hold you liable for the understatement of tax.
  2. The next type of relief is known as “separation of liability” relief. Under this type, the understatement of tax, interest, and penalties is allocated between you and your spouse. In order to qualify for this type of relief you must no longer be married to, or are legally separated from, the spouse with whom you filed a joint return. You qualify under this provision if you are widowed. You must additionally not be a member of the same household as the spouse with whom you filed the joint return during the twelve (12) month period prior to filing your application for relief under this provision.
  3. It is very common for one spouse to seek relief from liability from a tax obligation clearly stated on the face of the return at the time of filing. If the liability is reflected on the face of the return, and not an understatement, then the only way to qualify for relief is through the third type of relief – “Equitable Relief.” In order to qualify for this type of relief, you must establish that taking into account all facts and circumstances, it would be unfair to hold you liable.

There are many factors relevant to relief under this provision. The IRS will consider if you would suffer economic hardship if relief is not granted. The IRS does factor in who is held liable for the taxes under a divorce decree or other agreement to pay the tax – even though the IRS is not bound by these agreements. The IRS will also look at whether or not you received significant benefit from the underpaid or understated tax and whether you knew or had reason to know about the item causing the understated tax or that the tax due would not be paid.

The IRS explicitly takes domestic violence and abuse into account when evaluating claims for innocent spouse relief, especially under the equitable relief provisions. In her most recent report to Congress, the National Taxpayer Advocate explained that “domestic violence and abuse, including economic abuse, have real consequences for tax administration.” See Annual Report to Congress by National Taxpayer Advocate, Most Serious Problems for more details about this issue. The Taxpayer Advocate indicates that about 16% of applicants for innocent spouse relief report that they are victims of domestic violence and abuse. To its credit, the IRS has revised all of its rules regarding review of innocent spouse applications and has expanded the effect abuse will have in determining if relief will be granted to the requesting spouse. The important fact is that domestic violence and abuse is a factor that is being reviewed in more detail than ever by the IRS in the analysis of a request for innocent spouse relief.

By regulation, the Department of Treasury and the IRS established a two year deadline to request Equitable Relief to encourage prompt resolution of liability determinations. Basically, applications for relief under this provision were denied if active collections had been ongoing for more than two years.

On August 8, 2011, the IRS issued Notice 2011-70. The IRS removed the two year rule pending formal alteration of Treasury Regulations. This action was the result of several court rulings that questioned the validity of the provision.

This action by the IRS is important because a somewhat arbitrary rule has now been disposed of and relief can now be granted to otherwise qualified individuals.

It is particularly interesting to note that the IRS included in Notice 2011-70 that those individuals who were previously denied relief under equitable relief provisions solely because of the two year rule, may re-apply for relief.

If you believe that you should be relieved of joint liability with your spouse or former spouse, on a tax return, please contact us. The likelihood for relief is at its highest point given current IRS rules and regulations on this topic.

Under an IRS levy and think there is nothing you can do about it?

Posted on by katemley

Unfortunately, this feeling of hopelessness is an all too common feeling of clients in this situation.  This blog intends to provide educational articles about tax topics, rather than playing on emotions as many firms do in the tax controversy area.  The reality is that these issues are emotional.  Unfortunately, an emotional issue can trigger irrational decisions.  One irrational decision is buying into the promise of a solicitor that your tax problems are easily resolved because you “qualify” for a settlement.  The fact is that everyone can “qualify” for a settlement.  That’s the wrong analysis to start with.  And, when a firm is approached with a levy situation, it is premature to analyze whether or not a client qualifies for a settlement.

At the time a taxpayer is under levy, the proper analysis is whether or not the taxpayer can get immediate relief of some sort from the levy.  If the levy is affecting the taxpayer’s wages, then the taxpayer’s representative should work through a detailed and documented financial analysis to determine if there is an opportunity for either immediate relief from the entire levy or partial levy relief.  If a taxpayer substantiates that the levy creates economic hardship, then relief may be possible.

Sometimes clients under levy have not prepared all of their tax returns and as such, believe that there is no way to remove the levy until their tax returns are filed.  This simply is not true.  While it may or may not be possible to acquire full relief, an analysis of income and expenses utilizing IRS standards will allow for the taxpayer to obtain at least partial relief to pay for many expenses.  These expenses can include basic necessities such as food, clothing, medicines and health insurance premiums.  Payments for housing and utilities will be allowed up to a maximum amount based on county of residence and household size.  Additional expenses such as car payments and vehicle operational expenses, like gas and insurance, will also be allowed up to a standardized amount.

After seeking partial levy relief, it is then appropriate to file tax returns as soon as possible.  Once the taxpayer has filed all outstanding tax returns, the IRS then makes available a variety of options that are not available when a taxpayer has failed to file all returns.  At that point, the representative can assist the taxpayer with an analysis of their income, expenses and equity in assets to determine if the taxpayer is a good candidate for an installment agreement, a partial payment installment agreement, an Offer in Compromise (settlement), or currently not collectible status.  It is ALWAYS best to go through this analysis as there are opportunities to come into compliance with the tax laws, move yourself out from under the enforcement action, such as a wage levy, and still address the old tax debt.  Many would be surprised to learn that the IRS does work with taxpayers to resolve many issues in a way that isn’t nearly as traumatic as believed.

Obviously, the best case scenario is to take action before a levy is in place, however, once that occurs, there is always something that can be done to make the situation more bearable.  We encourage you to contact our firm if you have any questions or concerns about these matters.

Tax Responsibilities during government shutdown

Posted on by katemley

Government shutdown does not relieve tax responsibilities of individuals and businesses.

Some individual and business taxpayers are wondering if they still need to meet their tax obligations, even though the federal government is shut down.  The easy answer is absolutely. The IRS has had to dramatically reduce its workforce during the shutdown, but the extension date of October 15, 2013 remains for individual return filers of Form 1040 who timely filed for an extension to file their returns.   Additionally, employment tax returns due October 31, 2013 for 3rd Quarter remain due on that date.  Businesses that are required to deposit their employment taxes remain obligated to deposit timely.  So, for example, the next monthly deposit due date for Form 941 is October 15, 2013.  That date will be the due date, regardless of whether or not the federal government is open or closed.

Failure to meet proper filing and payment deadlines could result in significant penalties.  It is unclear if the IRS would waive penalties based on reasonable cause.  It is presumed that the argument for failure to file or pay while the government is shut down would be that the taxpayer assumed there would be no federal employees to accept the return or payment. IRS automated phone lines and the official IRS website make it very clear that the taxpayer is required to continue filing and paying taxes during the government shutdown.  It is believed that there would be limited relief for late filers and payers based on this argument.  First time penalty abatement requests may very well be honored, however.

Taxpayers should note that penalties associated with non-payment and non-filing can be significant.  An individual or corporate taxpayer that fails to properly deposit will be assessed with a failure to deposit penalty that could be as high as 10% of the amount of underpayment.  Additionally, late payment penalties could apply that equal ½% of the unpaid tax for each month, or part of a month, that the taxpayer doesn’t pay a balance.  This penalty maxes out at 25%.

Failure to timely file penalties are some of the fastest accruing penalties the IRS assesses.  The IRS will assess a penalty equal to 5% of the unpaid tax for each month or part of a month that you file late.  This penalty will accrue monthly until is maxes at 25%.  This can happen quickly – in only five months.  If a taxpayer is on extension for his or her 1040 and has a due date of October 15, 2013, but assumes it is not necessary to timely file because the government is not open, then the taxpayer would be assessed a 5% penalty, at a minimum, even if they file their return on October 16, 2013 – assuming the government re-opened on that day. 

Heed the advise on the IRS website: “Individuals and businesses should keep filing their tax returns and making deposits with the IRS, as they are required to do so by law” during the current lapse in appropriations which has resulted in the current federal government shutdown.

If you have any questions regarding these issues, please don’t hesitate to contact our office. 

Why the use of a General Durable Power of Attorney is superior to Joint Ownership with Rights of Survivorship

Posted on by katemley

It may be easy to add someone as an owner with survivorship rights to your real estate or other property, but the simplicity of this action does not offset the risks associated with co-ownership. Many individuals either make the decision on their own, or with the advice of someone with practical knowledge about re-titling assets, to add a child or another intended beneficiary as the owner of their real estate, bank account, or other asset. The premise is rather simple: ownership with someone who has a right of survivorship, known as joint tenants with rights of survivorship, avoids probate at the death of the first owner, thereby leaving the surviving owner, (typically the younger intended beneficiary), with full ownership rights and no court involvement. Additionally, the objective of many is to make sure that someone, usually an adult child, has access to the original owner’s assets so that they can handle their financial affairs if that person is unable to do so on their own.

The objectives of avoiding probate at death and providing someone with access to financial means for care can be met by adding an individual as an owner to an asset. But the risks are far too high to approach these objectives in this way.

Probate avoidance at death generally involves planning that either utilizes a trust adopted by the individual owner of the asset, along with funding through transfer of assets to the trust, or, an individual may use non-probate transfer tools to make sure each asset transfers to its intended beneficiary outside of probate. Think of Transfer on Death (TOD), Pay on Death (POD), life insurance beneficiaries and beneficiary or transfer-on-death deeds. There are times when planners will utilize both a trust and a series of non-probate transfers. The point is that there are alternative methods of avoiding probate at death. These methods are used for a variety of reasons, many of which are illustrated below in a conversation about General Durable Powers of Attorney.

Adoption of a General Durable Power of Attorney (DPOA) is one of the most powerful probate avoidance tools available. Utilized during one’s life, the DPOA can authorize someone to act on another person’s behalf to make financial decisions. So, if you are incapacitated or disabled, your Attorney in Fact under the DPOA could access your checking account to pay your bills, sell your house if you were going into a nursing home, and make other financial decisions for you without a formal court order or the costs associated with that proceeding.

The General Durable Power of Attorney is a superior option to joint ownership for a variety of reasons. To begin with, when you add a person as owner of your property, that person will have equal rights to the property. This is a loss of control for you. This ownership option provides either owner with total access to the property. So, for example, if your pension or other income is deposited into a jointly owned bank account, the joint owner could legally remove 100% of that deposit for his or her individual use. Naming the same individual as your Attorney in Fact under a DPOA merely gives them rights to use your property for your benefit only. They are statutorily prohibited from using your property for their benefit. They merely have access to your property for your use and benefit, rather than acquiring any form of ownership interest allowing them to use the property for their own benefit.

From a tax perspective, it is more advantageous to continue to own the entire property in the name of the person who is thinking of transferring title. When you add an individual as a co-owner, you are actually giving them a gift equal to one-half of the value of the property at that time. If the value of the property exceeds the annual gift tax exclusion, (currently $14,000 for 2013), then you are required to file a gift tax return. Additionally, at your death, any built in gain from that part of the gifted asset will be subject to capital gains at the time your intended beneficiary sells it. This is due to the fact that the gift provides a carry over basis equal to the basis of the donor, while a death time transfer equates to a stepped-up basis to fair market value at date of death. So, if you have owned your home for 40 years and you deed half to your child, you have a basis equal to the cost of the home 40 years ago plus a variety of increases for certain improvements, etc. Likely the price has appreciated over the years and there is a built-in gain. That built-in gain merely transfers to your intended beneficiary at the time of the gift and when the home is ultimately sold, a tax will be paid by the intended beneficiary on this built-in gain. This could be avoided if the house remained in the donor’s name until death, at which point the intended beneficiary received a stepped-up basis to date of death value. This benefit most likely eliminates tax consequences presuming the home is sold shortly after date of death A similar analysis would occur for other assets, such as securities.

From a risk management perspective, joint ownership is objectionable because your assets become subject to creditors of the co-owner. So, if you add a child as owner of your home or bank account and that child is going through a divorce or has judgments outstanding to creditors, your asset could be used to satisfy those creditors. Furthermore, as joint owners, you could be held responsible for the other owner’s actions while using a jointly owned asset. Probably the most common example here would be a car accident where you get sued for being a co-owner of a car you weren’t even driving.

From a business owner’s perspective, joint ownership is particularly problematic for risk management. If the business operates as a sole proprietorship, adjusting ownership so that an intended beneficiary is a co-owner creates many negative tax consequences and the entire business operations could become subjected to the liabilities of the new co-owner. Should that new co-owner file for bankruptcy, the bankruptcy trustee will have a high level of interest in the operations of the business venture to determine how it’s cash flow and assets can satisfy the new co-owner’s debtors. Fundamentally, it is also possible to alter ownership interests in corporations, limited liability companies and other business organizations. Similar risk is involved in that new co-owners bring a whole host of potential creditors and liabilities that could affect the viability of the business in an unintended way.

The adoption of a General Durable Power of Attorney, in combination with a review of business operation documents, such as bylaws, operating agreements, buy-sell agreements, etc., could effectively protect the business from involvement by the Court if an owner is incapacitated and can’t function on their own. It would likewise eliminate concern for the above issues as created by a joint ownership situation.

Should you have questions about General Durable Powers of Attorney for your personal or business situation, please don’t hesitate to contact our office. 

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.