What is tax representation?
Tax representation is when a taxpayer engages a credentialed professional (Enrolled Agent/Attorney/CPA) to represent them in a civil tax matter before the IRS. These matters most commonly occur when a taxpayer is undergoing an IRS examination (known to the public as audits) or owes the IRS taxes for prior years and wishes to enter into one of several payment arrangement options with the IRS. A taxpayer may also engage a tax professional to represent them in IRS “Appeals” if they disagree with the IRS’ decision in an audit or collections case.
How do I “engage” a credentialed tax professional to represent me?
You should meet with the tax professional. Once you are comfortable in hiring them, they will have you sign a Power of Attorney (Form 2848) which gives them the right to gather your tax history and speak to the IRS on your behalf over the phone or in person at meetings or conferences with IRS employees. This Power of Attorney is just for the IRS, not for your personal finances.
Is there a difference between hiring a CPA/Enrolled Agent/Attorney?
One difference between the three might be cost. Another is that a CPA or Attorney is “admitted to practice” on a state by state basis. You might not live in the state that they are admitted to practice in. The Enrolled Agent credential is a federal credential issued by The Department of Treasury enabling Enrolled Agents to represent taxpayers in all fifty (50) states.
I see those TV commercials talking about this subject. Should I call their 800 number?
I don’t recommend it. Most likely you’ll be speaking to a telemarketing salesperson that knows little about tax representation and is just trying to gather information from you and get you to send in a retainer payment. Good luck getting hold of them after that. Better to engage someone in your local area that you can meet with that will follow your case all the way through.
If I owe the IRS for back taxes what are my options?
There are several. The most common resolution options are:
Installment Payment Agreement – a monthly payment plan made over several years to pay what you owe)
Currently Not Collectible – if you can’t pay due to some recent hardship like loss of employment or illness)
Offer-in-Compromise – to settle your debt for less than the full face amount. This is the option most often advertised on the TV commercials. You make an offer and the IRS compromises. These are rare. Each year there are almost 150 million 1040 tax returns filed. Guess how many OIC’s are submitted? About 60,000. How often are they accepted? About 40% of the time because almost all taxpayers and even many tax professionals don’t know the rules. But I do.
Innocent Spouse – if there are tax debts still unpaid years after a divorce, the IRS can come after both ex-spouses, regardless of what the divorce decree states. It’s a legal provision called “joint and several” liability. It may not seem fair if the lower income spouse is being hounded years later but that’s how it works. You can request “Innocent Spouse” to have your tax liability adjusted to reflect the tax due on your income only while married to your ex-spouse.
Bankruptcy – believe it or not, federal income taxes are dischargeable in bankruptcy if they meet certain conditions, namely that it is for tax years three years and older, the tax returns were filed more than two years ago and there have been no additional assessments (due to audits) for the past eight months, generally speaking.
How does the IRS determine how much I can afford to pay them?
There are several variables that go into this calculation such as:
How much you owe?
For how many years? Generally speaking, the IRS has ten (10) years from when the tax return is filed to collect the debt.
On average, what is the monthly income in your household?
How many people are in your household?
Where do you live? The IRS has “allowable living expense” standards that go to the county level by state.
What are your monthly living expenses? You won’t get all of these (like private school tuition, four car payments, etc.)
What assets and debts do you have? Think house with mortgage, retirement accounts, investment accounts, cars, boats, cash in bank, crypto, foreign bank accounts, etc.
The IRS has a formula called “Reasonable Collection Potential” which takes all of these assets and debts, income and expenses into account in determining a taxpayer’s ability to pay when deriving a monthly payment amount or what the IRS will “compromise” the debt for.
What is a tax lien?
A tax lien is a legal claim against all a taxpayer’s current and future property or “interests”. It lets all possible creditors know that you owe the IRS. A lien “arises” often without you knowing it once tax has been assessed (with the filing of a tax return), a demand for payment has been made (that letter you got from the IRS which went into the sock drawer) and payment was never made.
Can the IRS put a lien on my house?
This is a very common misconception as to how liens work. Liens aren’t “placed” on your assets they are “placed” against your SSN and then “attach” to everything you own. Bank accounts, retirement accounts, cars, you name it, the lien “attaches” to it. You don’t even have to own a home to have tax liens.
How do I get rid of a tax lien?
Tax liens “release” in several ways. Once the tax debt is paid in full, discharged in bankruptcy or compromised (think Offer-in-Compromise), the liens are “released”. Also if the ten (10) year period that the IRS has legally to collect the tax expires the liens “release”. An important concept with liens is that they are “self-releasing”. You don’t have to do anything for them to release. They automatically release once the conditions I mentioned are met. This language about “self-release” is actually on the “Notice of Federal Tax Lien” document.
Can I refinance my mortgage if I have a tax lien?
You need to do “lien subordination”. You ask the IRS permission to let your lender go ahead of them in the creditor line. If the refinance results in more money available to pay your IRS debts faster, there’s a good chance the IRS will accept your lien subordination request.
Can I sell my house if I have tax liens?
Sure. For this you would request a “lien discharge”. If your net proceeds from the sale are less than the tax debt you owe, the IRS will “discharge” the house from the lien and allow you to sell the house. The key points here are that you walk away with nothing if the proceeds are less than the debt. The IRS gets whatever you would get. The lien is still in existence for the remaining balance due but you can sell the house.
What is a tax levy?
A levy is an actual “taking” of your assets. The most common examples of a levy are a “one-time” bank levy where the IRS cleans out your bank account to collect on your tax debt or if you have a “continuing” levy like a wage garnishment.
A lien is a legal claim placed on your SSN attaching to your property and a levy is the actual taking or seizure of your property to satisfy a debt.