What Are “Allowable Living Expenses” to the IRS?

What Are “Allowable Living Expenses” to the IRS?

In last week’s blog, “The Secret Sauce to Tax Resolution – RCP” linked here, https://activerain.com/blogsview/5329707/norwalk–ct–the-secret-sauce-of-tax-resolution—-rcp- I gave an overview of how the IRS determines the dollar amount of delinquent taxes that a taxpayer can repay.

 

Over the next several weeks I will go further into detail on the mechanics of this process.

This week I am going to write about what the IRS considers to be a taxpayer’s “allowable expenses” in making this determination.

 

My firm, By The Book Taxes, located in Norwalk, CT., specializes in income tax preparation and tax resolution services.

 

The IRS uses statistics on cost of living expenses gathered by the Department of Labor.

These costs can vary greatly depending upon which region of the country you live in and whether you are in an urban or rural area. The chart below illustrates the types of living expenses that the IRS considers and whether they apply the taxpayer’s actual expenses, a local standard or a national standard in determining how much in monthly payments a taxpayer can afford to repay. This chart is from Eric L. Green’s book entitled, “The Accountant’s Guide to Resolving Tax Debts”, pages 24 and 25.

 

Expense Actual Or Allowable
   
Food/Clothing/Misc National Standard
Housing & Utilities Lesser of Actual or Local Standard
Automobile Ownership Lesser of Actual or National Standard
Automobile Operating Local Standard
Public Transportation National Standard
Health Insurance Actual
Out of Pocket Health Care Costs Higher of Actual Or National Standard
Court Ordered Payments Actual
Child/dependent care Actual (must be necessary)
Life Insurance Actual (must be reasonable)
Current Year Taxes Actual FIT/SIT/FICA/SE/Local
Secured Debts Actual
Delinquent State Taxes % of State vs. Federal Debt

If you have years of unfiled tax returns or have tax debts that need to be resolved, please call me, I can help.

Tax Resolution’s Secret Sauce: Reasonable Collection Potential (RCP)

Tax Resolution’s Secret Sauce: Reasonable Collection Potential (RCP)

How does the IRS determine how much of your tax debts you can afford to repay?

Should they insist on full repayment? Settle for less than what you owe them? Leave you alone for a year or two while you overcome a financial hardship like the death of a spouse, loss of employment, serious illness, divorce, etc?

Last week’s article linked here: https://activerain.com/blogsview/5326733/norwalk–ct–resolve-irs-debt-with-an-installment-payment-agreement spoke about Installment Payment Agreements where you can (in most cases) pay back your tax debts in full within the statutory time period allowed to the IRS through monthly payments.

There are also two (2) other resolution options available to you:

  • Currently Not Collectible
  • Offer in Compromise

Currently Not Collectible (CNC) status is granted when the IRS determines that it would create a financial hardship to collect taxes owed from a taxpayer who at the time doesn’t have the income or asset level to support repayment.

An Offer in Compromise is easily the most misunderstood of the tax resolution options available to taxpayers. It is also the subject of those crazy TV commercials claiming to settle taxpayer’s debts for pennies on the dollars.

With an Offer in Compromise, the IRS may accept a settlement that is less than the full amount owed.

The questions remain; how do they calculate this? How much should I offer? Would I be considered “uncollectible” given my current financial situation?

The answer isn’t magic, it is arithmetic. The answer is a concept called Reasonable Collection Potential or RCP which is the sum of two calculations:

  • Net Equity in Assets plus
  • Future Income

Net Equity in Assets

What assets do you have that can be used, sold or withdrawn to pay your tax debts? Cash, real estate, antiques, vehicles, cash value life insurance, retirement accounts and investment accounts are all scrutinized.

Take the quick sale value (80% of fair market value) of the non-cash assets and subtract from that any loans or mortgages against them. You are allowed to keep a vehicle and tools you own since they may be required to generate income.

What you are left with is Net Equity in Assets.

Future Income

 After subtracting your monthly living expenses from your monthly gross income, how much is left over to pay the IRS?

There are some important things to know here. It’s not just based upon your employment income, but rather all sources of income. This is a cash flow analysis, first and foremost.

Another thing to know is that not all expenses are created equal. The IRS uses cost of living standards that are developed by the Department of Labor. For the purposes of this analysis, depending on which expense category is involved, the IRS may accept your actual expense for health insurance, the national standard for public transportation or the local standard for automobile operating expense.

Take your monthly gross income from all sources and subtract your allowable living expenses based upon the standards the IRS uses. Multiply that number by twelve (12) and that’s your future income for the next year.

Add Net Equity in Assets to Future Income and that’s your offer.

If this calculation exceeds your taxes owed, your offer will be rejected. If you have few assets of value to sell and your allowable expenses equal or exceed your gross income, you are a good candidate for Currently Not Collectible.

If you have a tax problem that needs resolution or have years of unfiled tax returns, please call me at 203-434-5626 or email me at mikeo24@bythebooktaxes.net, I can help.

 

 

Installment Payment Agreements

Installment Payment Agreements

In last week’s blog entitled, “Do You Owe the IRS? Here Are Your Resolution Options” attached here.I gave an overview of the three (3) primary options available to taxpayers, Installment Payment Agreements, Currently Not Collectible and Offer in Compromise.

For the next three (3) weeks I am going to take each one of these resolution options and describe them in more detail.

This week I am going to describe Installment Payment Agreements.

There are four (4) types of Installment Payment Agreements:

  • Automatic (taxpayer owes less than $10,000)
  • Streamlined (taxpayer owes less than $100K)*
  • Regular (taxpayer owes more than $100K)*
  • Partial Pay (taxpayer cannot pay the full amount owed)

Automatic Installment Agreement

A taxpayer can go online to irs.gov and complete Form 9465 and submit to the IRS to set up a payment plan if they owe less than $10,000, agree to pay the balance within three (3) years and haven’t owed any tax or had a previous installment agreement in the last five (5) years. There is a $120 fee to set this up which comes out of the first payment. If you set up a direct debit payment from your checking account, the fee is only $52. You can also submit Form 9465 as part of your tax return filing. No personal financial statements required.

Streamlined Installment Agreement

These are similar to the automatic agreements except for larger dollar figures and longer repayment periods. One issue bears a little explaining here which is why I placed the “asterisks” above. There are two (2) areas with the IRS that do “Collections”, Field Offices and Automated Collection Services (ACS). Field Collections only allows Streamlined Installment Agreements up to $50,000 as long as the taxpayer can full pay the balance due within seventy two months (6 years) or within the time that the IRS has legal authority to collect the debt which is ten (10) years from “assessment”, typically when you file your tax return. Automated Collection Services (ACS) offers these agreements for balances up to $100K and payment periods of eighty-four months (7 years). Once again, no personal financial statements required.

 Regular Installment Agreement

These agreements are for when you owe either more than the $50K threshold (Field Collections) or $100K (Automated Collections) and cannot full pay the balances due within the seventy-two month (6 years) or eighty-four month (7 years) timeframes. You must be able to pay the full balance within the ten (10) year statutory period in which the IRS is allowed to collect the debt. You must submit a personal financial statement (Form 433-A or 433-F) showing your monthly income from all sources and your monthly living expenses. In this way the IRS can determine how much is left over each month that can be used to pay down the tax debt.

There is an important point to be made here regarding your monthly living expenses. The IRS employs different standards (local or national) developed by the Department of Labor to determine how much you can claim for each expense category such as housing, transportation, insurance, health care, etc. Depending on the expense category, you may be claiming either your actual expense or the national standard or a local (county or region) standard.

Completing these personal financial statements can be difficult. You need a skilled tax professional to help you with them.

Partial Pay Agreements

These agreements are for when the taxpayer cannot pay the full balance due with the ten (10) year statutory period that the IRS has to collect the debt. Submit the personal financial statement (Form 433-A of 433-F) to the IRS to determine how much can be paid on a monthly basis just like the regular installment agreement. The IRS will revisit these agreements every year or two to see if the taxpayer’s financial situation has improved so that they may increase their monthly payments.

If you have a tax problem that needs resolution or have years of unfiled tax returns, please call me at 203-434-5626 or email me at mikeo24@bythebooktaxes.net, I can help.

Footnotes:

  • Streamlined agreements are only available up to $50K from IRS Field Collections Offices.
  • Streamlined agreements are available up to $100K from IRS Automated Collection Services.
  • Above $50K dealing with Field Collections, it’s a Regular Agreement.
  • Above $100K dealing with ACS, it’s a Regular Agreement.

 

 

Tax Resolution Options – Overview

Tax Resolution Options – Overview

How many times have you seen those commercials imploring you to call 1-800-TAX-DOPE if you owe the IRS more than $10,000? They promise to resolve your tax debts for pennies on the dollar. Does it sound too good to be true? About 99.97% of the time it is.

There are four (4) different ways to resolve your tax debts. They are:

• Installment Payment Agreement
• Currently Not Collectible
• Offer In Compromise
• Bankruptcy

I am not going to discuss bankruptcy today, but it could be used to discharge income tax liabilities that are more than three (3) years old if all tax returns have been filed and you satisfy a list of about nine (9) different requirements. My recommendation is to consult a bankruptcy attorney for this.

Over the next three (3) weeks, I am going to write more in depth explanations of how each of these other tax resolution options work, but for now I am just going to do an overview.

For an Installment Payment Agreement, you supply a personal financial worksheet (Form 433-A or 433-F) which shows your assets and debts, income and living expenses. It’s just like applying for a mortgage. The IRS wants to determine if you have enough cash left over to pay back the tax debt within the timeframe that they have the legal right to collect it, which is ten (10) years after assessment.

For a Currently Not Collectible filing, you go through the same process. If the answer is that the client has no assets to sell and no funds left after paying monthly allowable living expenses, then it would create a hardship for them to be required to pay back the tax debt. You should request that the IRS consider them to be Currently Not Collectible.

In determining if you qualify for an Offer in Compromise, there is no magic here, but rather a very basic formula used by the IRS to calculate what they call “reasonable collection potential”. Reasonable collection potential is the sum of two numbers, “Net Equity in Assets” plus “Future Income”.

Calculate the cash you would yield if you sold the assets that you could without creating a hardship (art, home, fourth or fifth cars) for 80% of their market value, known as the quick sale value. Then pay off the loans, like mortgages or car loans, associated with these assets. What you are left with is your “Net Equity in Assets”. Add to that figure an amount equal to either twelve (12) or twenty four (24) months of net positive cash flow from calculating monthly income versus allowable monthly living expenses. Combine those two figures (NEIA plus FI) and you have your offer.

If you are receiving collection letters from the IRS or have years of unfiled tax returns, please call me at 203-434-5626 or email me at mikeo24@bythebooktaxes.net

 

Tax Transcripts and Why They Matter

Tax Transcripts and Why They Matter

I received a phone call recently from a person who was very frustrated with his tax situation. He was expecting a large refund from his 2017 federal tax return which he filed right at the October 2018 deadline.

He didn’t get all of the refund because the IRS garnished or levied part of his 2017 refund in order to pay outstanding balances for tax years 2015 and 2016.

He asked me if I could help him. I said I could but first I needed to gather some information.

The best way to find out the tax history of a client is to request transcripts of the taxpayer’s filings for the past several years after the client signs a Power of Attorney (Form 2848) giving the tax professional the right to represent him or her before the IRS.

There are five (5) different transcripts available from the IRS. The four (4) that we are going to talk about are:

  • Tax Return Transcript – An almost line by line view of the filed tax return. Available for current and three (3) prior filing years.
  • Tax Account Transcript – A history of each tax year showing filings, payments, penalties, balances due and refunds. Available for every year that the client info is on IRS Master File.
  • Wage and Income – All income reported to the IRS by third parties such as employers, banks, investment firms, mortgage companies and contractors. Available for current plus nine (9) prior years.
  • Record of Account – Combines information from the tax return transcripts and tax account transcripts onto one report.

 

WHY IS ALL OF THIS IMPORTANT?

In order to help a client who comes to you in a distressed frame of mind, you first must figure out what happened here. Is the client telling you everything? Were errors made in the original preparation of the returns? Is the IRS incorrect in their interpretation of a tax provision?

These transcripts contain a wealth of information (called transaction codes) which enable a trained tax professional (Yours Truly) to determine what happened every step of the way in the processing of the returns and the subsequent collection enforcement actions taken against the taxpayer by the IRS.

Having the training and expertise in reading these transcripts is critical to crafting a strategy to help the client resolve their tax problems.

For questions about this or any other tax topic feel free to email me at mikeo24@bythebooktaxes.net  or call me at 203-434-5626

 

10 year collection statute

10 year collection statute

Most people have heard about a “statute of limitations” in the area of criminal law. There is a period of years, after a crime has been committed, to prosecute the people that the authorities believe committed the crime. Once that time limit has passed, charges can’t be brought.

Did you know that there is a “statute of limitations” on the IRS’ ability to enforce tax collection? There is. It’s the “10 year collection statute”.

Here’s an example of how it works:

  • John and Jane Q. Public e-file their 2017 tax returns on 4/1/18.
  • The IRS processes their electronic return on 4/5/18 and if there is a balance due, “assesses” the tax due on 4/5/18.
  • The IRS has until 4/4/28 to collect that tax by statute

The key date here is when the tax is “assessed”. The statute says 10 years from assessment, not 10 years from filing date or filing due date.

 

There are several actions that can cause the 10 year statute to “toll” or stop running. They are:

  • Filing for bankruptcy
  • Requesting a Collection Due Process Hearing
  • Filing an Offer in Compromise
  • Requesting an Installment Payment Agreement

The statute will start running again once the time period to consider these alternatives has finished. In the case of a bankruptcy, an additional six months is added to the collection period once the bankruptcy is discharged.

Why is all of this important?

Before considering the various tax resolution options available to a client, the tax professional has to know what the CSED (collection statute expiration date) is for each tax year in which the client has a balance due.

By knowing this, the tax professional can employ a strategy to resolve the taxpayer’s debts at the lowest possible cost to the taxpayer.

For example, if there is only a year or two left on the collection statute and the taxpayer just lost their job, got divorced or had a major medical expense that set them back, you could request a Currently Not Collectible status and hope to “run out the clock” on the collection period.

If there are many years left and the same scenario as above, you might make an Offer-in-Compromise to try to settle the debt for less than its face value.
Understanding when the 10 year collection statue expires for each year of a client’s tax debt is critical in formulating a strategy to resolve their tax debts.

For questions on this topic or any other tax topic feel free to call me at 203-434-5626, email me at mikeo24@bythebooktaxes.net