Friday, September 2, 2011

Don't Be Ashamed of Bankruptcy and Debt: Dispelling Common Myths

From my observations, the biggest hurdle most debtors face is the emotional turmoil of filing for bankruptcy relief.  I have seen clients crying, despondent, and ashamed about becoming a “bankrupt person” or a “deadbeat.”  But most people feel this way because of the myths surrounding debt and bankruptcy.  The following are some of the myths and untruths about debt and bankruptcy:

 MYTH #1: People who file for bankruptcy don’t want to pay their debts. 
In fact, the vast majority of people who file for bankruptcy have been trying to pay their debts for years.  Most debtors have tried debt consolidation, budgeting, payment plans, and other methods to satisfy all of their creditors.  And they have tried these options for years.  In my experience, almost EVERYONE wants to meet their obligations.  People see themselves as true to their word and obligations and therefore will bend over backwards to pay their debts.  Almost every debtor comes to bankruptcy as a “last resort”  -- when the pressure is too high or the debt too insurmountable.  They have long since paid the price of their spending – with interest!

 MYTH #2People file for bankruptcy as a result of living an extravagant lifestyle.
This is the most destructive and untrue myth about debt/bankruptcy.  The top three causes of bankruptcy are: 
  1. Illness and Medical bills 
  2. Loss of job 
  3. Divorce
 The most common scenario is one where some kind of “financial emergency” forces one to use credit cards or other expensive money (payday loan, Home Equity line of credit, consumer loan, etc.) to cover the emergency.  However, once the emergency passes, the high cost of credit (interest and fees) causes the “rob Peter to pay Paul” syndrome.  Soon debts are out of control even though the debtor has NOT spent extravagantly at all.   This is hardly a scenario in which the debtor can be called “irresponsible.”

MYTH #3: Filing for bankruptcy will ruin your credit forever.
Most people who file for bankruptcy relief already have credit scores at the lowest levels.  A bankruptcy will do little, if any, to make their score worse.  But once a bankruptcy has been filed, the debtor can take steps to quickly improve his credit score by the responsible use of credit.  Although it may take a few years before the debtor can borrow again for a car or a house (which he should be very careful about!), this timeline is often far shorter than the one for the hapless debtor paying the minimum payments on several credit cards.  A bankruptcy usually makes the road to recovery shorter.
 MYTH #4: Filing for bankruptcy is shameful.       
It is undeniable that many people will naturally feel ashamed for filing bankruptcy.  But is this shame any greater than the shame of being sued?  The shame of avoiding your phone and mail?  The fear that you feel when you check your bank account?  Unquestionably, the emotional toll of dealing with insurmountable debt year upon year can be “soul killing” and far greater than the burden of a bankruptcy.  I have personally witnessed divorce, depression, and worse as a result of the debt burden. 
In short, people are ashamed about debt/bankruptcy mostly because of falsehoods and unfounded judgments of others.  The truth is that most people file for bankruptcy for perfectly honorable reasons (see above).  I can assure you that the bankruptcy court will NOT make any ruling about your worth as a human being.  You should forgive yourself and let go of the old-fashioned notions you have about debt.  Instead, you must eliminate the emotional baggage from your decision-making process when assessing whether a bankruptcy is right for you.  

Sometimes, a “fresh start” is just what the doctor ordered.

Do you have questions about this topic? Email or call me for a free consultation and we can discuss your situation. (760) 990-1632

Monday, August 29, 2011

Chapter 7 Bankruptcy, Taxes, and the IRS: Your Retirement Plans

What happens to your retirement funds when you file for Chapter 7 bankruptcy? And what happens if the IRS also has tax liens filed against your retirement funds?

Generally when you file for Chapter 7 bankruptcy, your retirement plans (Individual Retirement Accounts, Roth IRA, 401k, SEP, Keogh plans, etc.) are protected.  Neither the bankruptcy trustee nor any of your creditors can reach the money in these retirement plans.  However, as we discussed in another blog post, “Tax Liens & Your Home,” tax liens survive a Chapter 7 bankruptcy if there are funds/assets/property to which the liens attach.

So what happens when the IRS files a lien which attaches to your retirement funds after you file for Chapter 7 bankruptcy?  This is a situation where an irresistible force (IRS lien) meets an immovable object (retirement funds).  The answer:  The IRS lien stays.  This means that the IRS rights to the retirement funds are unchanged from before the bankruptcy.

However, all is not lost because you have defenses to the IRS seizures of retirement accounts after bankruptcy.

How You Can Defend Your Retirement Money from the IRS

1.  If you can’t touch it, neither can the IRS.  
Your primary defense against an IRS retirement account seizure is that the IRS stands in your shoes as it relates to their ability to take your property, including retirement accounts.  The IRS has the same rights to your property that you have – if you have no rights to an asset, neither does the IRS.  This applies equally to whether the IRS is seeking a post-bankruptcy enforcement of a tax lien or just a straight seizure without any bankruptcy involvement.
 The IRS may have a tax lien on your retirement account, but has no right to enforce if you have no right to the property.  Therefore, you should be aware of which of your retirement funds you cannot touch and which funds you can touch – but with a penalty.  Many 401(k) plans, and all of your IRA/Roth IRA funds can be withdrawn by you – but with a penalty. Because you can withdraw these funds, even if it is with a penalty, the IRS can enforce the tax lien on these accounts.  On the other hand, many pensions (especially for government entities or union pensions) cannot be touched until the occurrence of some event (separation from employment, death, or disability), and therefore the IRS cannot enforce the tax lien against these accounts

2.  You can convince the IRS to leave your retirement funds alone.  
According to the Internal Revenue Manual, the IRS considers three factors when determining whether to enforce its lien against your retirement account (by seizing or levying).  The three factors are:
 1)    Other Collection Alternatives:  Before levying on a retirement account, the IRS is required to first consider collection alternatives before levying on the retirement plan, including monthly payments.  The IRS generally does not desire to take retirement accounts; it tends to make for bad public policy. 
2)    Your Conduct was Not Flagrant:  The IRS is generally interested in taking retirement accounts only if the conduct leading to the tax liability was flagrant. The IRS generally wants retirement accounts to pay a tax liability in cases of egregious behavior. Contributing to the retirement account while the unpaid taxes were accruing and a history of employment tax problems are factors in favor of account seizure. 
3)    Mercy Rule:  The final factor in whether the IRS will take a retirement account is whether you depend on the money in the retirement account, or will depend on it in the near future. Again, the IRS tends to be sensitive to retirement account seizures, and proving that the money in the account is important to meeting everyday living expenses can be a factor to keeping the money.

Again, a tax lien which survives your bankruptcy does not mean that you will be destitute in your retirement.  In practice, the IRS will often just let these liens die away once the bankruptcy case is closed.  However, if they do not, you are usually in a good position to make some alternate arrangement (since your financial situation should be better) or convince the IRS to leave your retirement funds alone. 

Do you have questions about this topic? Email or call me for a free consultation and we can discuss your situation. (760) 990-1632

Friday, August 19, 2011

Chapter 7 Bankruptcy, Taxes, and the IRS: Tax Liens and Your Home

It is very important that you know how Federal Tax Liens (“tax liens”) are affected by bankruptcy when deciding whether to file.  So let’s start with a basic fact: If the IRS has filed a tax lien, a bankruptcy will NOT automatically remove it.  Put simply, a tax lien survives bankruptcy.  So even if the tax is dischargeable (see my blog post entitled:  “Can I discharge my tax debt in bankruptcy?") the bankruptcy might not help you.

Let’s look at how a tax lien affects your home.  I will discuss how your retirement plans are affected in a separate blog post.  In all examples, I am assuming that the taxes are dischargeable.

How a Tax Lien Affects Your Home

1) IRS has NOT filed a lien when you file for bankruptcy:  If the IRS has NOT filed a tax lien prior to your bankruptcy, the IRS will have NO RIGHTS to your home after the bankruptcy filing.  The IRS cannot file a new tax lien after the tax has been discharged.  So you should always check whether a tax lien has been filed if you own real estate.

2) IRS HAS filed a lien:  However, if the IRS has filed a lien, you must determine if your house has any equity.  Liens attach to assets in the order in which they are filed (in legal terms, the lien is “perfected” when filed); liens filed first have first rights to the property.  That means if a tax lien is filed, it attaches to your assets after all other liens which were filed before it.   For example, if your house is worth $200,000 and the mortgage is $180,000, a properly filed tax lien attaches to the $20,000 of equity available in the property. Tax liens don’t jump to the head of the line!

So in order to figure out how the tax lien affects your house, you should first ask yourself: is there any equity in my house?

Is There Any Equity in My House? 
The answer to this question is either "No" or "Yes" but the yes answer has a few other things to consider.  Let's look at the possibilities:

1.  Your House has NO EQUITY:  If the IRS has filed a lien but your home has NO EQUITY, the IRS lien is essentially valueless.  The tax lien is UNSECURED since there is no value to which the lien attaches.  Therefore, the lien will NOT survive the bankruptcy. 
EXAMPLE:  A tax lien of $100,000 was recorded by the IRS.  John and Jane own a home valued at $500,000 with a mortgage of $600,000.  Their home has no equity and the IRS lien is fully UNSECURED.  The tax lien will not pass through the bankruptcy and the tax will be discharged.  Hooray for John and Jane! 
2.  Your House has LESS EQUITY than taxes you owe:  If you have equity in your home, but it is less than what you owe in taxes, the IRS tax lien is PARTIALLY SECURED in the amount of the equity.  Tax liens are secured only to the extent that there is value available to secure the lien.
EXAMPLE:  A tax lien of $100,000 was recorded by the IRS.  John and Jane own a home valued at $500,000 with a mortgage of $440,000.  Their home has $60,000 ($500,000 less $440,000) in equity.  The IRS lien is SECURED in the amount of $60,000  and UNSECURED for the remainder of the tax.  Therefore, a tax lien for $60,000 will survive the bankruptcy and the remainder of the tax ($40,000) will be discharged. 

3.  Your House has MORE EQUITY than taxes you oweIf you have enough equity in your home to pay all of the tax due (if you sold the home), the IRS tax lien is FULLY SECURED.  Therefore, the tax liens will survive the bankruptcy intact.
EXAMPLE:  A tax lien of $100,000 was recorded by the IRS.  John and Jane own a home valued at $500,000 with a mortgage of $300,000.  Their home has $200,000 in equity.  The IRS lien is FULLY SECURED in the amount of $100,000.  Therefore, a tax lien for $10,000 will survive the bankruptcy and the IRS lien rights will not be affected (although the IRS will not be able to collect from you directly. 
Please note the following final points when assessing a tax lien:

Important Note #1:  It is a very good idea to get an order from the bankruptcy court stating how much (if any) of the IRS tax lien was secured at filing.  You will need to hire a bankruptcy attorney to do this for you.  You will then know with certainty which part, if any, of the IRS tax lien you will need to deal with after the bankruptcy. 

Important Note #2:  Even though the IRS holds a tax lien, they rarely enforce the lien by foreclosure (forced sale) of your home.  Instead, they will wait for you to sell or refinance your home at which time they will have their hand out for money.  The tax lien will eventually be removed when the statute of limitations for the underlying tax expires.  The IRS will not be able to go after you personally, nor is it likely that it will force the sale of your home to get paid.  So all is not lost even if the lien survives. 

Important Note #3:  Remember that the tax lien survives as a claim on your home, but not against you personally.

Where Do I Go from Here?
Now that you've the basic facts about tax liens and how they affect your home in bankruptcy, what should you do now?  If possible, you should figure out if there are less drastic ways of dealing with your tax debt.  Bankruptcy is a very powerful tool and should be used only if absolutely necessary.  Next, you should look at your non-tax related debt.  Sometimes, your overall financial situation is sufficiently poor (lots of debts, lawsuits, little chance of repayment) that a bankruptcy that hits "two birds with one stone" (tax and other debt) makes sense.

If both tax and other debt are large and will be eliminated in bankrupcy without a loss of your home, the decision to file may be the only sensible thing to do.

Do you have questions about this topic? Email or call me for a free consultation and we can discuss your situation. (760) 990-1632

Monday, August 15, 2011

Chapter 7 Bankruptcy, Taxes, and the IRS: The Automatic Stay

As soon as you file your Chapter 7 bankruptcy, you are protected by the bankruptcy “automatic stay.”  This stay is one of the most powerful tools in bankruptcy.  It has the same effect as a federal injunction issued against all of your creditors – including the IRS. They must stop and ask for permission from the court to collect debts.  The automatic stay remains in place until your case is closed and the discharge is issued.  Here is how the automatic stay will protect YOU, and other things that you should be aware of.

Current Levies  
If you are being levied/garnished by the IRS (or state taxing entity), they will release the garnishment immediately upon the filing.  The release will occur by law; there are no negotiations or disclosures necessary for this to happen.  This is the quickest and most effective method of stopping a levy.

New Levies or Liens
The IRS is also forbidden from initiating any new levies, or filing any new tax liens.  So if the IRS has not attached your home (or other property) with a tax lien, they cannot do so once you file your bankruptcy.  This result could have immense implications after the bankruptcy (which will be discussed later) because the IRS rights so this property may survive the bankruptcy if there is a lien.

Collection Calls from the IRS
The IRS generally will not contact you after you file your bankruptcy.  They will code your case to be in “litigation status” and the IRS collectors will wait until that status is removed before they contact you again.

What the IRS Can Do
Be aware that the automatic stay will not help you if the IRS wants to audit or continue an audit of you, nor will it prevent the IRS from demanding that you file a tax return.  But whenever possible, you should plan your bankruptcy so that it will discharge as much tax debt as possible.  This planning would entail that there be no audits in progress and no unfiled tax returns.    

 Do you have questions about this topic? Email or call me for a free consultation and we can discuss your situation. (760) 990-1632.

Friday, August 12, 2011

Chapter 7 Bankruptcy, Taxes, and the IRS: The Means Test

In this post, I will cover one of the more complicated aspects of a Chapter 7 bankruptcy in general and its application to tax debt. 

What is the Means Test?

The “means test” was an addition to the bankruptcy code in 2005 designed to prevent abuse of bankruptcy by debtors who could afford to pay their debts in full.  This test marks a major attitude shift in bankruptcy philosophy.  Prior to 2005, there was a presumption that consumer debtors were entitled to relief under Chapter 7; the presumption now is that they are not.  If the debtor flunks this test, there is a presumption of abuse.  I believe that the law hurts debtors more than it helps them.  The amendment is mostly a benefit for large consumer lenders (e.g. – credit card companies).
If the debtor cannot pass the means test, his Chapter 7 petition may be dismissed, or the case can be converted to a filing under Chapter 11 or 13, if the debtor consents.  

The Three Steps to the Means Test

  1. Median Income Test: The means test requires the court to look at your average monthly income.  This average income is then compared to the median income for a family of the same size in your state.  If your income does not exceed the median Income, you will automatically pass the means test.  However, if  your average income exceeds the median income, then other parts of the means test must be applied.  Nationally, fewer than 20% of all debtors earn more than the median income. 

  1. Disposable Income Test: The next part of the test is take the your “current monthly income" and subtract living expenses (please be aware that calculating the “current monthly income” and “necessary living expenses” can be a complicated process if you have many sources of income and expenses; you should contact an attorney if this is the case).  This new number (let’s call this new number the “trigger number”) is then multiplied by 60 (the number of months in a 5 year period of time).  This trigger number is what the law considers the amount of money you have as income available for repaying debt obligations. 
If the trigger number is less than $6,000 (monthly income minus expenses is less than $100), you pass the test.  If it is greater than $10,000 (monthly income minus expenses greater than $166.67), you fail the test.  If the trigger number is between $6,000 and $10,000, then you apply the next test (another one!?)

  1. 25 Percent Test: So, you are above the state median income and your trigger number is between $6,000 and $10,000.  What now?  Now you need to look at the total amount of your debt.  If your trigger number is less than 25% of your debt, you pass this last test; naturally, if it is greater than 25%, you fail.  
Example: If your trigger number is $9,000 ($150 per month), you will pass the means test if your debt is over $36,000 (since $9k/$36k equal 25%).  The following chart gives examples of the application of this test.

CMI less Expenses
"Trigger" Number (x 60)
Pass Means Test?
Less than $100
Less than $6,000
Pass Means Test
Pass Means Test if debt $24,000 or less
Pass Means Test if debt $30,000 or less
Pass Means Test if debt $36,000 or less
More than $166.67
More than $10,000
Fail Means Test

For simplicity, Nolo has a calculator that you can use to make this entire explanation unnecessary.  

Do you have questions about this topic? Email or call me for a free consultation and we can discuss your situation. (760) 990-1632.

Wednesday, August 10, 2011

Chapter 7 Bankruptcy, Taxes, and the IRS: The Basics

In my last blog post, we discussed the eligibility requirements for discharging taxes in a bankruptcy.  This is the first of three blog posts, in which we will discuss the basics of Ch. 7 bankruptcy, the pros and cons of filing, and the consequences of  options for you once you have decided to file.  Ch. 13 options related to taxes will be discussed in later posts.

What is Chapter 7 Bankruptcy?

A Chapter 7 bankruptcy is sometimes called a “straight” bankruptcy or a liquidation bankruptcy.  Under this type of filing, you will not be required to make any payments and the bankruptcy case is usually opened and closed within 4 to 6 months.  Debts that you owe are wiped away and if there is any equity in your assets (which is not protected by law; see below), you will lose that property. 

In most Chapter 7 cases, there are no assets to be sold and no payments are made to the creditors.  My research discloses that anywhere from 90 to 99% of all filed Chapter 7 cases nationwide are “no asset” cases.  That is good news for you. 

After the filing, you will no longer owe taxes which are eligible for discharge, as well as a variety of other debts (credit cards, medical bills, and judgments).  Some debts cannot be eliminated in a bankruptcy, including child support, student loans, and taxes which do not meet the requirements described previously

Process and Timelines

A Chapter 7 bankrupcty begins by the filing of paperwork called a “petition” with the bankruptcy court.  You will be required to take a pre-bankruptcy credit counseling class prior to filing.  In your petition, you will be required to list:

  • All of your assets;
  • All of your debts, including debts that you are still paying (e.g. – car  or house payments);
  • Monthly household income and expenses;
  • Disclosure of recent payments, lawsuits, transfers of property, and other financial information. 
Note that you do not have the discretion to list only some of your assets or debts; full disclosure (in other words, ALL of your assets) is required.  Also, in some jurisdictions, failure to disclose may prevent a debt from being discharged or could cause the failure of the entire case.  Preparing and filing the petition is the most time-consuming and complex process for most liquidation bankruptcies. 

Most of your assets will be protected by “exemption” laws (usually unique to your state) which prevent your creditors and the bankruptcy trustee from seizing and selling them.  The purpose of the exemption is to protect you from losing your most valued possessions (home, personal items, auto and other items necessary for your livelihood).  You should consult a bankruptcy attorney about how to best use these exemptions.
Once the petition has been filed, the you will then be required to take a “financial management course.”  (These classes are a result of the 2005 changes to the bankruptcy code that also added the so-called “means test” which we will discuss at a later time.  In my opinion, the classes are mostly useless).

About 5-6 weeks after filing the petition, you are required to participate in a “meeting of creditors” where you will be asked questions by the bankruptcy trustee concerning the disclosures in the petition.  Creditors are also given the opportunity to ask questions.  In most cases, the meeting is fairly routine and takes no more than 5 minutes. 

Approximately 60 days after this meeting, you will be issued a “discharge” by the bankruptcy court which legally eliminates all dischargeable debt.  A debtor can only obtain a discharge once every 8 years.  

Up Next: The Means Test, IRS Levies/Garnishments During Bankruptcy, and Tax Liens

Do you have questions about this topic? Email or call me for a free consultation and we can discuss your situation. (760) 990-1632.

Technorati Tags: bankruptcy, discharging tax debt, IRS, tax debt

Monday, August 8, 2011

IRS Tax Debt and Bankruptcy: Can I discharge my tax debt in bankruptcy?

Question: Can I discharge my tax debt in bankruptcy?

No topic is rife with more falsehoods and misinformation than the dischargeability (the ability of a bankruptcy to wipe out) of tax debts.  In other words, Can I file bankruptcy to eliminate my IRS tax debt? Therefore, I will handle this topic carefully and over the course of several blog posts.

The Basic Rules

To begin with, here are the basic rules.  You can discharge debts for federal income taxes in bankruptcy only if all of the following conditions are true:

  1. The taxes are income taxes. Taxes other than income, such as payroll taxes or fraud penalties, can never be eliminated in bankruptcy.
  2. The tax return must have been originally due at least three years (including all extension periods) before you filed for bankruptcy. 
EXAMPLE: If you file for bankruptcy on May 1, 2011, you can discharge taxes that were due before May 1, 2008.  This would include income taxes for 2007 and earlier – but not taxes due for 2008 since those did not become due until April 15, 2009.

  1. You must have filed a tax return for the debt you wish to discharge at least two years before filing for bankruptcy.  Please note that if you don’t file the return, the tax is not dischargeable. 
EXAMPLE: if you file for bankruptcy on May 1, 2011, you can discharge taxes that you filed before May 1, 2009.  So if you filed a tax return for 2003 on June 2009, the tax due on this return will not be dischargeable even though the return is for an old tax year. 

  1. You did not commit fraud or willful evasion. If you filed a fraudulent tax return or otherwise willfully attempted to evade paying taxes, such as using a false Social Security number on your tax return, bankruptcy can't help.  Fraud and willful evasion usually involve some criminal finding by the IRS.  This isn’t an issue for most taxpayers but if it is, you have bigger problems. 
  2. You pass the "240-day rule." The income tax debt must have been assessed by the IRS at least 240 days before you file your bankruptcy petition.  A tax is considered “assessed” when the tax due become final in the IRS books.  If you filed a tax return, the assessment date will be shortly after the file date.  If the IRS has audited you, the assessment date is when the audited amount is entered into the IRS records.  This rule mostly becomes an issue in an audit situation. 

A Word About Time

I will not talk about anything Stephen Hawking would find enjoyable (mostly because I just ain’t that smart).  However, there are many events that will change the time frames set forth above.  The following list is NOT an exhaustive list of those events but points out the most common ones:

Collection Due Process Appeal:  A timely filed CDP hearing (where you contest the collection action) stops the time from running across he board while the appeal is pending plus 90 days (Bankruptcy Code §507(a)(8)(G)).  The clocks starts again after the appeal process has been closed.

Offer in Compromise:  Offers in Compromise filed within 240-day of the assessment of a tax extends this window during the time the OIC is pending plus 30 days.  Be particularly careful in filing for an OIC after an audit.  Once filed, OICs can remain open for as long as 1 to 1 ½ years – so this prevents you from filing for bankruptcy relief (for otherwise dischargeable tax debt) for up to 20 months. 

Previous bankruptcy:  Be careful when trying to discharge debt that was previously non-dischargeable in a previous bankruptcy, or for taxes in which the tax return was filed during a previous bankruptcy (IRS may have delayed assessing the tax until after the bankruptcy was closed). Also, case law has held that the time for calculating dischargeability (described above) will stop ticking during the time that the previous bankruptcy was pending.  Both the timing or substantive issues might prevent that tax from being discharged. 

For the sake of safety, simply call the IRS before you file for bankruptcy relief and ask them to give you the (i) FILING DATE, (ii) ASSESSMENT DATE, and (iii) whether a TAX LIEN was filed for each tax year that you owe.  The IRS representative will not be able to tell you if a tax is dischargeable in bankruptcy but you will have the basic information necessary to figure it out.


Although the rules seem a bit complex, let’s try to boil them down...

  • Tax return was due 3 years ago
  • You filed the return more than 2 years ago
  • No audit, appeals, or OICs
  • No fraud
THEN the tax will go away in a bankruptcy.  If any of the above is not true, you should consult with your bankruptcy attorney.

Do you have questions about this topic? Email or call me for a free consultation and we can discuss your situation. (760) 990-1632.

Thursday, August 4, 2011

IRS Installment Agreements: If the IRS Rejects or Revokes Your Installment Agreement Proposal

 In my last blog entry, I discussed how to set up an Installment Agreement with the IRS.  A good follow-up question to this topic is what happens if the IRS refuses or revokes your Installment Agreement proposal.  Here are some tips if this happens to you.

What if the IRS refuses my Installment Agreement proposal?
If the IRS won't agree to installment payments, it is usually for one of three reasons:
  1. Your living expenses are not all considered necessary. The IRS may deem your expenses extravagant. For example, if you have hefty credit card payments, make any charitable contributions, or send your kids to private school, expect the IRS to balk. Although reasonable people would disagree on what is necessary and what is extravagant, the IRS is rather stingy here.
  2. Information you provided on your Collection Information Statement, Form 433-A, is incomplete or untruthful. The IRS may think you are hiding property or income. For example, if public records show your name on real estate or motor vehicles that you didn't list, or the IRS received W-2 or 1099 forms showing more income than you listed, be prepared to explain.
  3. You defaulted on a prior IA. While this doesn't automatically disqualify you from a new IA, it can cause your new proposal to be met with skepticism.

If your IA proposal is first rejected, you can keep negotiating. Ask to speak to the collector's manager. Just making this request is sometimes enough to soften the collector up. If you get nowhere with the manager, you can go over her head – everyone at the IRS has a boss. You can complain to her immediate boss, then the collections branch chief, and then the district director. Squeaky wheels sometimes do get greased. Again, just talking about going up the ladder may cause a change in attitude at the lower rungs and get you a fair payment plan.

When can the IRS Can Revoke an Installment Agreement?
Once you receive approval of your IA, you and the IRS are bound by the terms of the agreement, unless any of the following are true:
  • You fail to file your tax returns or pay taxes that arose after the IA was entered into. Although IRS computers do not continue to review your finances, they do monitor you for filing future returns and making promised payments.
  • You miss a payment. Under the terms of all IAs, payments not made in full, and on time, can cause the IA to be revoked immediately. In practice, the IRS usually waits 30 to 60 days before revocation – at least on the first missed payment. You are entitled to a warning or a chance to reinstate the agreement.
  • Your financial condition changes significantly – either for the better or worse. The IRS usually won't find out about this unless you tell. The IRS may review your situation every year or two, however, and require you to submit a new Form 433-A in order to continue your IA.
  • The IRS discovers that you provided inaccurate or incomplete information as part of the negotiation. For example, you may have omitted to mention certain valuable assets.
If you need help or advice on this process, it might be helpful to seek the advice of an experienced tax professional.  Such a person often will advise you without a fee – just to help you out.  Feel free to call me at (760) 990-1632 if you need any clarification of this process.  I will be happy to hear from you.

Related Topics:

Do you have questions about this topic? Email or call me for a free consultation and we can discuss your situation. (760) 990-1632.

Tuesday, August 2, 2011

IRS Installment Agreements: How to Setup and Negotiate an IRS Installment Agreement (IA)

Yesterday, I blogged about how to determine if an Installment Agreement is the right course of action to mitigate your tax problems.  Today I will discuss how you can set up one of these Installment Agreements yourself.

Question: How do I set up an Installment Agreement?

If you have decided that an Installment Agreement (IA) is your best option, you may want to try setting one up yourself.  Generally, there are no hidden “secrets” or “tricks” to this process.  Being prepared is always the best strategy here.  This means you should be aware of what the IRS representative is looking for and be able to provide accurate information (and documentation in support of this information). 

In this blog entry, we will discuss the “nuts and bolts” of setting up an IA using a financial statement.  In certain situations, you can set up an IA without any disclosures or documentation to the IRS.  We will discuss this type of arrangement and its advantages on another day.
To start, you should be able to answer a few basic questions.

How much do I want to pay?
Your request for an IA begins with an IRS collector analyzing your Collection Information Statement (IRS Form 433-A, or the shortened Form 433-F).  The collector uses the information on the form to determine the amount you can pay.  Payment amounts are at the discretion of the IRS.  If you deal with 10 different collectors, you might end up with 10 different IAs!
Nevertheless, here are some strategies for negotiating an installment plan:
  • Be nice!  Do not take your frustrations out on the front-line IRS representative.  They have heard it all and more importantly, your aggression won’t help you.  You may be surprised how many more bees you can get with honey vs. vinegar.  A few minutes of being nice (even to the point of being phony) may save you a ton of pain over the next few years. 
  • Begin the negotiations with a number in mind.  If you don’t have a number in mind, you might end up committing to payments that you cannot afford.  This will cause you long-term hardship over the term of the plan as you try to plug the various financial holes that pop up as you try to meet your commitments.  You should also be prepared to give reasons for the number that you want – don’t just pull a number out of thin air. 
  • Complete the Form 433-A (or Form 433-F) before you talk to the collector.  The IRS will ask you how much you spend on individual expenses per month.  This includes FOOD, HOUSEKEEPING SUPPLIES, APPAREL & SERVICES, PERSONAL CARE PRODUCTS & SERVICES and MISCELLANEOUS but necessary personal expenses.  You will also be asked how much you spend on out-of-pocket health care expenses  (prescription drugs, medical services, co-pays, et al.), transportation, automobile expenses and finally housing and utilities.  Without a doubt, compiling all of this information and making sure that it will be accepted by the IRS is the “bread and butter” of the process.  Go to the IRS website at to make sure that (i) you claim all of the expenses that you are allowed, and (ii) the expenses do not far exceed the allowable amounts.  These expenses are the so-called “necessary living expenses” that is so important to the IRS collector.
  • You should also have certain “conditional expenses” in your back pocket.  Generally, the IRS will not allow expenses that are not “necessary” when determining the amount of an IA payment.  However, if you have additional monthly expenses that you are paying (such as credit cards, personal loans, 401K, etc.), be prepared to give these expense to the IRS with reasons why you must continue to pay them.  You will likely be required to document these expenses.  The IRS may reduce your monthly commitment to allow you to pay these creditors.
  • Set a monthly payment for as LOW as you can.  You can always pay MORE than the allowed amount, but you can never pay less.  Promising the IRS more than you can deliver is a serious mistake.  Once an IA is approved, the IRS makes it difficult for you to renegotiate it.  It is always helpful to set the bar as low as you can in case something unexpected arises.  I recommend that you pay off the tax as quickly as you can in order to reduce accruals (penalties and interest) but only if it doesn’t put the rest of your financial house in disorder.
  • Offer to pay at least the amount of your income minus your necessary living expenses. This is the cash you have left over every month after paying for the necessities of life.  Again, do not promise to pay more than you can afford just to get your plan approved.
  • Set the date of the first payment as far out as you can.  Generally, you can push the first payment out 45-60 days without any argument.  You can take this time to save up a fund from which you will pay the IA (and which could give you a cushion if some emergency comes up).  If you can afford make payments before the first due date, feel free to do so.  However, I have not found that making voluntary payments influences the IRS collector in any way. 
  • If the IRS grants an installment plan, it may take several months to notify you in writing.  Remember to ask the IRS where to send the payments if you don’t get the letter on time.

What method should I use to pay the IRS?
You have three (3) options for making payments once your IA is approved:
  1. Personal Check (or money order):  Until you receive written notice of approval, this is your only option.  You can send payments to your local service center (whose address you received from the IRS) using a personal check (if you don't want the IRS to know where you bank, use a money order or cashier's check from another bank).  Make sure to allow time for mailing.  You don’t want to default on the IA because it was late in the mail.
  2. Direct Debit. You can elect to allow the IRS to automatically debit your checking account each month in the amount of the payment.  As long as you keep the account open, this is the most foolproof way to make sure you don't miss a payment and risk having the agreement revoked.  However, never allow the IRS access to your personal checking account.  Instead, set up a separate account for the sole purpose of paying the IRS.  You can even establish an automatic transfer into this account to make life easier.
  3. Direct Payroll Deduction.  You can allow the IRS to take its payment directly from your paycheck.  Your employer must agree to send payments to the IRS each month using the IRS's payment slips.  I don’t suggest this option. 

In my opinion, your first priority is to make sure that the financial needs of your family are met first.  If an emergency arises, you want the option of defaulting on the Installment Agreement.  Personally, I would rather pay for the medical emergency of a child than send another payment to the IRS.  When you give the IRS access to your money before yourself (by payroll deduction or debit from your personal checking account), you put the needs of the IRS ahead of the needs of you and your family. 

If you need help or advice on this process, it might be helpful to seek the advice of an experienced tax professional.  Such a person often will advise you without a fee – just to help you out.  Feel free to call me at (760) 990-1632 if you need any clarification of this process.  I will be happy to hear from you.

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Do you have questions about this topic? Email or call me for a free consultation and we can discuss your situation. (760) 990-1632.

Monday, August 1, 2011

IRS Installment Agreements: When is an Installment Plan my best option (and when is it a bad option)?

Question: When is an Installment Plan my best option (and when is it a bad option)?

If you can pay your tax debt over time without financial hardship, an installment agreement (IA) with the IRS may be the right solution for you.  Tax debts less than $25,000 can usually be paid with an installment agreement (if you cannot pay off at $25,000 debt by IA, then another option is generally better).

There are definite drawbacks to an IA. The biggest drawback is that interest and penalties continue to accrue while you still owe.  Although the recent interest rates have been at all-time lows (for those who care, the IRS interest rate is 3% plus the “Federal short term rate” which has been an unheard of .35% in the past months), the penalties are still high.  When combined with penalties, the effective annual interest rate is often 8% to 12% per year.  In many cases, it is possible to pay for years and owe more than when you started!

But if the rest of your financial situation is stable, you can afford the monthly payment, and your payments will eventually pay off the tax debt – then go ahead and make the agreement.  It is probably the easiest path to getting out of the debt. 

However, in the following situations, an installment agreement may not be your best option:

  • You have no money left over after paying all of your necessary expenses (and should therefore be an “uncollectible” case);
  • You qualify for an Offer in Compromise;
  • You can discharge your taxes in a Ch. 7 bankruptcy;
  • You are unemployed or disabled;
  • You have no assets or money which can be seized.

If you are planning on filing an Offer in Compromise, do NOT enter into an Installment Agreement – especially one where the payments are taken directly from your bank account or paycheck.  Instead, just get the OIC on file with the IRS as soon as you can.  If you file an OIC while the IRS is taking payments pursuant to an installment agreement, those payments will not stop while the OIC is being reviewed.  In other words, you will still be paying even although the IRS cannot collect against you. 

Note: The Internal Revenue Code Sec. 6331(k) provides protection when an installment agreement is requested from the IRS. The IRS cannot take levy or seizure action while a request for an installment agreement is pending, for thirty days after denial or termination of an installment agreement, or during the time an appeal of a denied or terminated installment agreement is pending.  Therefore, you can ASK for an installment agreement (to protect against a levy/garnishment) and then file your Offer in Compromise.

All in all, the installment agreement is a mixed blessing.  It pays your taxes in digestible amounts, but it pays them all at high effective interest and prolongs the agony. Certainly if there are better alternatives, they should be pursued. However, the installment agreement is better than its alternative – enforced collection.

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Do you have questions about this topic? Email or call me for a free consultation and we can discuss your situation. (760) 990-1632.


Welcome to my new blog! I decided to start this blog to serve as an online resource for providing information about tax problems that are frequently asked about by my clients.  There is a lot of information out there on tax resolution, and it can get confusing very quickly.  I hope that with this forum it will be easy to search for answers to your general questions.  If you have a general question or topic that you'd like me to blog about, please submit it in the "Submit a Blog Topic or Question" section. I hope you will find this information helpful!


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