How to Avoid The Filing of An IRS Federal Tax Lien

July 19, 2011 by

By Matthew J. Previte CPA MST
www.taxproblemsrus.com
July 20, 2011

Federal tax liens filed by the IRS for unpaid back taxes can cause serious damage to many areas of your life. IRS tax liens can not only ruin your credit rating but also cause problems with employers. Companies often pass up on hiring an otherwise qualified candidate because of IRS tax liens on the candidate’s credit report. Employers in some industries, (banking, finance, legal, accounting, law enforcement, or government agencies requiring security clearances) often have to terminate employees due to IRS tax problems when they discover an IRS tax lien has been filed against their employee.

For well known public figures (politicians, celebrities, etc.), IRS federal tax liens can do great damage to your reputation once the local press gets a hold of the news that the IRS has filed a federal tax lien on you for unpaid back taxes. Often they will publish news of your IRS tax problems for the world to see causing not only embarrassment and humiliation but damage to personal and business relationships.

So what can you do to avoid the IRS filing a federal tax lien?

Once a federal tax is assessed, the IRS collection cycle begins. Besides the usual IRS collection letters threatening to levy and seize your assets, the IRS will eventually issue a federal tax lien and file it in the public record as notice to the public that you owe back taxes to the IRS. The trick to avoiding the filing of a federal tax lien is to be proactive before the federal tax lien is filed by the IRS.

In lieu of a federal tax lien, the IRS can in many cases accept a Collateral Agreement which protects the government’s interest so they do not have to file a federal tax lien. The three most common assets used as collateral are: (1) letters of credit from a lender, (2) securities, or (3) surety bonds. There are other assets that can be used but these three are the most common and can go a long way towards getting a Collateral Agreement accepted quickly to avoid the filing of a federal tax lien.

So, avoiding the filing of an IRS tax lien is possible. It just takes knowledge of the Collateral Agreement process and approaching the IRS early in the collection cycle before they issue a federal tax lien. An experienced tax CPA or tax attorney is best suited to help you with this process as they know how to properly draft a Collateral Agreement, negotiate with the IRS, and get the Collateral Agreement accepted.

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Getting Rid of IRS Tax Liens and Fixing Your Credit Report

July 12, 2011 by

By Matthew J. Previte CPA MST
www.taxproblemsrus.com
July 12, 2011

Nothing can kill your credit rating like an IRS tax lien. Your credit report can drop about 100 points after an IRS tax lien is filed in the public record. Having a federal tax lien on your credit record can eliminate many lenders from loaning you funds to buy a house, a car, or to refinance your existing loan to get a more favorable rate. So just how do you deal with an IRS tax lien and fix the mess it has left in its wake? Well, to explain how, we need to start with what is an IRS tax lien, when does it come into existence, and how does one get it off your credit report.

IRS tax liens are filed in the public record to protect the federal government’s interest in IRS tax debts owed to it by you, the taxpayer. It is kind of like the IRS’s insurance policy. If you have any real estate or personal assets, the IRS tax lien attaches to it and allows the IRS to pursue enforced collection action (liens, levies, seizures) against your assets in order to collect what you owe them.

All IRS tax liens come into existence upon the assessment of a federal tax against a taxpayer. This usually happens when you file a tax return and it is processed by the IRS. However, federal tax assessments may also come into existence when the IRS audits your tax return, adjusts your tax return due to a mistake or missing W-2 or 1099, or they file a substitute tax return against you because you didn’t file a tax return. However the federal tax assessment came into existence, the IRS tax lien exists but is not effective against certain assets (like real estate) until it is perfected under state law by the filing of a federal tax lien in the public record.

The federal tax lien is filed in one of several places to insure it becomes public notice that you have an IRS tax problem and that the IRS has a federal tax lien securing the back taxes owed by you, the taxpayer, against your assets. Where an IRS tax lien is filed depends on state law. Some of the most common places the IRS files a federal tax lien is with one of the following: the Registry of Deeds or County Recorder, the office of county clerk, the office of town clerk, the office of probate judge, or the clerk of the circuit court. There are a few other places for some states but we won’t list them all here. The point is, state law controls where the IRS has to file its federal tax lien to be considered public notice that you owe them back taxes and that they have a claim against your assets. Most states have one place where federal tax liens need to be filed to be considered valid as against real estate while they have another place for IRS tax liens filed against personal property. To be sure, one must research their state’s law to determine where it requires federal tax liens to be filed.

To obtain a certificate of release of federal tax lien, one of several things has to happen. Either you have to full pay the tax, settle your tax debts through an Offer In Compromise and full pay the settlement amount, run out the statute of limitations on collection, or discharge the back taxes in bankruptcy. If there is real estate when you discharge any back taxes owed, the IRS will not release the lien until it expires. Liens generally last ten years but can be refiled if for some reason the collection statute has been extended beyond 10 years. There are several events that can extend the collection statute but we will discuss that in another article.

Keep in mind that with bankruptcy, some types of taxes are never dischargeable and for those types that are, you must have filed tax returns and wait certain periods of time before the taxes become dischargeable. There are also other rules beyond whether the taxes are old enough and of the proper type which must be met before one can qualify to file bankruptcy and discharge back taxes in bankruptcy. You should always consult a qualified tax resolution specialist as well as a bankruptcy attorney before filing. Otherwise, you may be surprised after you come out of bankruptcy court and the IRS is in hot pursuit, threatening to levy and seize every asset in sight.

To fix your credit rating, one must obtain a certificate of withdrawal of federal tax lien. A certificate of release of federal tax lien will not do as it only demonstrates that the IRS tax debts have been resolved to the satisfaction of the IRS. The problem with a certificate of release of federal tax lien is that it effectively lets the world know you have resolved your back tax debts but it does not remove the fact that at one time you owed the IRS back tax debts. Mailing a copy of the IRS certificate of release of federal tax lien to the big three credit agencies (Equifax, Trans Union, and Experian) only helps them update your credit file and notate that you have resolved your outstanding back taxes with the IRS. The original federal tax lien will stay on your credit report, along with the notation that it has been resolved, for 7 years. This hardly restores your credit score to its former level pre-IRS lien.

Obtaining a certificate of withdrawal of federal tax lien necessitates first requesting and receiving a release of federal tax lien with one exception which we will discuss in a bit. Once the back tax debt has been resolved through normal means (either full paid, discharged in bankruptcy—with no real estate owned, settled through an Offer In Compromise, or the collection statute has expired) and a certificate of release of federal tax lien has been requested by the taxpayer and issued by the IRS, then a request can be made for a certificate of withdrawal of the federal tax lien and the IRS will issue a certificate of withdrawal of federal tax lien.

As stated above, there is one exception where there is no need to obtain a certificate of release of federal tax lien first before requesting a certificate of withdrawal of federal tax lien. In fact the strange thing is that IRS procedure does not allow for a certificate of release of federal tax lien to be issued unless one of the above four criteria is met but it will allow a certificate of withdrawal of federal tax lien to be issued under new guidelines if the taxpayer enters into a Direct Debit Installment Agreement. Only certain taxpayers qualify to enter into a Direct debit Installment Agreement and they must meet one of several eligibility requirements as well.

Due to the current state of our economy, the IRS realized that the filing of federal tax liens was doing great damage to people’s credit ratings and their ability to borrow money for life’s necessities (car, home, college tuition, etc). So, they developed a new program that would allow those taxpayers who have resolved their tax debt or entered into a Direct Debit Installment Payment Agreement and that are currently compliant with all tax filings and current tax estimates or withholding levels, to request a withdrawal of federal tax lien. What the withdrawal effectively does is eliminate the effect of the original federal tax lien. It’s as if the original federal tax lien should have never been filed by the IRS in the first place. With a certificate of withdrawal of federal tax lien in hand, you can effectively remove and completely eliminate any trace of the federal tax lien from your credit report as if it never existed.

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All IRS Payment Agreements Are Not Equal

July 7, 2011 by

By Matthew J. Previte CPA MST
www.taxproblemsrus.com
July 7, 2011

If you owe back taxes to the IRS, you have undoubtedly wondered how on earth you’re going to get a mountain of back IRS taxes off your back so you won’t have to live in fear anymore. Living with IRS tax problems is stressful and can cause many problems in your life. One of these IRS tax problems is having an IRS tax levy placed on your wages or bank accounts which leaves you with little to no money to live on. An IRS tax lien can also be filed against you in the public record (usually the county recorder or registry of deeds) which not only lets the world know about your IRS tax problems but severely damages your credit rating by a good 100 points or more, leaving you unable to get a loan. So what can you do to resolve your IRS tax problems?

Although Offer In Compromise is advertised heavily on late night TV, it is rarely an option for most people with back IRS tax debts. Roughly 95% of delinquent taxpayers with IRS tax debts do not qualify for the IRS Offer In Compromise program. Unfortunately, these late night TV hucksters tout the OIC as the magical cure-all for your IRS tax debt woes. There is an old saying, if it sounds too good to be true, it probably is. And so it is with the Offer In Compromise program. Although my tax resolution firm has filed many Offers In Compromise over the last 16 years, most of our clients who owe large back taxes to the IRS do not qualify. Simply put, they have too much equity in assets (bank accounts, houses, retirement accounts, etc) and/or cash flow (what’s left over after what the IRS allows for basic living expenses) to qualify. So that begs the question, what are my options?

While bankruptcy can sometimes be a good option, we will leave that discussion for another article (see archives for February 2011). Short of running out the statute of limitations on collection, which is generally ten years, or hitting the lottery or inheriting a boatload of money and paying off the IRS tax debts in full, the only option left is an installment agreement. However, not all installment agreements are equal.

The IRS has two different types of installment agreements to pay off back taxes. The first type is a Full Pay Installment Agreement. In this type of IRS installment agreement, the monthly payments are sufficient to pay off the back taxes (plus any penalties and interest that accrues) until it is paid off in full. With this type of IRS installment agreement, your payments will full pay the back IRS tax debts, as well as all penalties and interest accruing on the debt, within the statute of limitations on collection. The statute of limitations on collection is generally 10 years. However, there are numerous actions that can extend the time the IRS has to pursue collection action (liens, levies, seizures, etc). We will leave that to another article to discuss.

The second type of IRS installment agreement is called a Partial Pay Installment Agreement. Under this type of IRS installment agreement, the monthly payment is insufficient to pay off the back taxes plus accruing penalties and interest by the collection statute expiration date. What does this mean in plain English? Well, it means that you make payments until the statute of limitations on collection (in IRS speak the “CSED”) runs out. So if at the collection statute expiration date there is $10,000 of unpaid back tax debt, it expires to zero and you do not owe it anymore. Nice huh? There is one catch however. As part of the terms of the Partial Pay Installment Agreement, the IRS will review your financial condition every two years to see whether or not your financial condition (i.e. your ability to pay more) has improved. If it has, they will require a higher payment if your financial condition shows you can afford to pay more towards the back tax debt. The downside of this type of installment agreement is it is possible that in the future your financial condition improves and the new monthly payment required becomes sufficient to full pay the back taxes, penalties, and interest by the collection statute expiration date. In other words, it’s possible to start out with a Partial Pay Installment Agreement and end up with a Full Pay Installment Agreement. The positive aspect of a Partial Pay Installment Agreement is that if your financial condition does not improve enough or at all, you could still end up paying less than the full amount owed and end up with a large balance of unpaid back taxes expiring to zero at the collection statute expiration date.

With all IRS Installment Payment Agreements, your financial condition is reviewed via a Form 433-A and/or 433-B depending on whether your tax issues are personal or business tax debts. Individuals and sole proprietorships use the Form 433-A while corporations, partnerships, and LLCs use a Form 433-B. If you owe personal taxes and have income on your personal tax return from a flow through entity (S corporation, partnership, or LLC treated as an S corporation or partnership), you may have to submit both the Form 433-A and the Form 433-B to get your installment payment agreement approved.

There are strategies to minimize your monthly payment amount but that will be discussed in a future article. Also, just because the IRS initially denies your IRS installment payment agreement does not mean you should give up. Many initially rejected IRS installment payment agreements were later accepted upon filing an Appeal to the IRS Appeals Division. Persistence and perseverance are key to obtaining a fair IRS installment agreement that you can live with.

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Finding A Good Tax Attorney, Tax CPA, or Tax EA to Fix Your IRS Tax Problems

July 6, 2011 by

By Matthew J. Previte CPA
www.taxproblemsrus.com
July 6, 2011

Finding a competent tax attorney, tax CPA, or tax EA to represent you before the IRS can be a daunting task. Fixing IRS tax problems is a tricky business left to those who do it full time year round. Although any attorney, CPA, or EA (enrolled agent—takes 2 day test on federal taxes given by the U.S. Treasury) is legally allowed to represent you before the IRS, not every attorney, CPA, or EA is qualified or competent enough to do so. IRS tax problems are a specialty requiring full time dedication to learning how the IRS works and how to work within that system to fix IRS tax problems.

Very few attorneys have any experience in dealing with the IRS on a daily basis much less a few times a year. Although some attorneys pursue and obtain a Master of Laws degree (LLM), this does not necessarily mean they know how to resolve IRS tax problems since most Masters programs in Taxation have but one general survey course on IRS practice and procedure. A good tax attorney will have represented hundreds or thousands of people with IRS tax problems before the IRS and rarely will they practice in this area less than full time.

CPAs and EAs are also legally able to represent taxpayers before the IRS. Although most are competent in preparing tax returns, most CPAs and EAs do not have any experience in fixing IRS tax problems on a regular basis. They are lucky if they see one or two cases a year. CPAs and EAs greatly shy away from taking on an IRS tax problem client because they have no experience resolving messy complicated IRS tax problems or they fear they won’t get paid since the client owes huge amounts of money to the IRS.

One of the first things you should do in searching for a competent tax attorney, tax CPA, or tax EA is Google their name. See if there are any negative articles or postings on websites about them. If you find a lot of complaints or bad reviews, beware! A good tax attorney, tax CPA, or tax EA should have very few if any complaints out there. Check also with their state licensing board to see whether any complaints have been filed against them.

Second thing you should do is make sure they have a current license. This is easy enough to check out online as most state licensing boards post the names of licensees and whether or not their license is current or has expired. If you are researching an EA, you will have to call the IRS Director of Practice in Washington D.C. or look on their website (irs.gov).

Next, I would check out their website. What type of content do they have. Do they give you their address, phone number, and email address. Many tax resolution firms on the net only have a contact page for you to email them your name and address and a description of your IRS tax problem. They have no information about who they are, key officers or employees, where they are located, etc. This should be a tip off that you’re dealing with a fly by night operation. If their site has little content or makes guarantees about what they can achieve, even without getting any information from you, watch out! There are a lot of scam artists and snake oil salesmen on the internet. Caveat emptor. Let the buyer beware.

The size of the organization should also be a clue as to how you will be treated. Large national tax resolution firms usually operate on volume. Their goal is to sell as many people as they can usually with little or no regard to actually providing good service and most importantly fixing your IRS tax problems. Their salespeople are almost never tax attorneys, tax CPAs, or tax EAs but unqualified sales reps who haven’t the foggiest idea of how to fix even the most basic of tax problems. Oh sure, they will tell you all the right things to make you believe their tax resolution firm can make all your IRS tax problems go away. Problem is, they haven’t a clue as to nature of your IRS tax problem and how to fix it since they have absolutely zero experience fixing IRS tax problems. They’re sales reps! A small tax resolution firm will have experienced tax attorneys, tax CPAs, and/or tax EAs on staff to answer calls from prospective clients. This assures that the prospective client with the IRS tax problem is speaking with a licensed tax professional who understands IRS tax problems and how to fix them.

The quality of service that large tax resolution firms offer tends to be haphazard, inconsistent, and unreliable. Small tax resolution firms are much more suited to providing great service since they are able to respond quickly without clients getting lost in the shuffle. Without all the layers of management and bureaucracy that large national firms have, small tax resolution firms can deal with issues in a more timely manner. Large national firms often give you an unlicensed “case representative” as your point of contact instead of the licensed tax attorney, tax CPA, or tax EA who is actually representing you. This is a big red flag. If you can’t have access to the licensed tax professional actually representing you, run away as fast as you can. You WILL experience frustration since you will almost never speak, if at all, with the licensed tax professional representing you.

One other issue that should be discussed is the location of the tax resolution firm. There are national firms and local firms. Which would you rather hire, a firm hundreds or thousands of miles away or a local firm you can actually meet with face to face. There is nothing like looking someone in the eye to get a sense of their honesty and integrity. Seeing their office in person will tell you how they run their operation. Does it appear to be smoothly operating or in a state of chaos. A local firm is also much more accountable since they live and work in the community or state where you live. Maintaining their reputation is far more important than a firm thousands of miles away. I would exercise extreme caution hiring anyone you can’t hop in the car and meet with face to face. That doesn’t mean work can’t be done via fax, phone, email, and Fedex. However, meeting your tax representative face to face at least once before you hire them tells you a lot about them, their firm, and how you can expect to be treated after you hire them to fix your IRS tax problems.

So before hiring any tax attorney, tax CPA, or tax EA to help you fix your IRS tax problems, check them out carefully and spend the time to look in depth at their track record, any complaints on the web or with state licensing boards (the IRS Director of Practice if an EA). And, use your gut. If something sounds too good to be true, it probably is. Do your due diligence and get educated on the different types of resolutions available to people with IRS tax problems. That way, you will be able to sort out the scam artists and snake oil salemen from the good competent licensed tax professionals out there.

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