1 The How-To Manual on Resolving your IRS Debt Through an Installment Agreement Introduction First thing is first. YOU ARE NOT ALONE IN THIS. Hundreds of thousands of people owe the Internal Revenue Service (IRS). Most individuals are just like you.. Had either bad or no tax planning help during the year, filed their tax returns and ended up owing a balance that they could just not pay. More and more you are hearing about specific cases of people not being able to handle the stress of owing money to the IRS. This is not only because the Institution itself is designed as a collection agency on steroids, but also because even when you try to take care of your debt, you are hounded, sought after and researched by IRS agents. Now, this does not mean that the people working at the IRS are out to get you, it just means they are doing their job. Collecting the debt you owe to the government. Some are nice, some, not so much. The main thing to keep in mind is that there are many ways to resolve your IRS debt. Most people try to call the IRS themselves to work out an agreement.. Once they are sucked into an agreement that they cannot afford and cannot for the life of them remember why they agreed to such things, they call Tax counsel. This manual is written for the average person. It provides the step by step guide needed to resolve your case in a fair, affordable manner. It also explains the WHY behind many actions and steps, providing a better understanding of what to look for when dealing with IRS agents themselves. Imagine a conveyer belt going through a long narrow tunnel controlled mainly by computers. This is your case. It travels through the IRS system from the moment your tax return is received and posted. If there is a balance, these automated computers generate a series of letters. If you do not respond to these letters, after a period of time, it will automatically generate letters notifying you of the IRS s intent on levying your bank accounts, wages or 1099 earnings. Time is critical. You are not dealing with any single person at this point. 1 You are following a strict computer generated time line. The only time an IRS 1 This references cases that are not being handled by individual local Revenue agents.
2 agent actually handles your case is when you call in or you have a Revenue agent assigned to it. As you can imagine, this is an extremely confusing process. Computers are not full proof and agents are not miracle workers. Most of the time, people do not know how or what to do to resolve their cases. This is where this manual comes in.
3 Step 1: Compliance Before even contacting the IRS for a balance due issue, you must make sure you are compliant. There are two prongs to being compliant. The first refers to the filing of ALL tax returns for previous years that have a filing requirement. If you have any un-filed tax returns, the IRS will not even deal with you. They will grill you and try to get pertinent information that they can later use to levy you. Thus, be sure you file all your tax returns. The second prong of compliance has to do with making sure sufficient taxes are being withheld from your monthly earnings so that you do not accumulate an additional balance in the future. For wage earners, make sure you lower the number of exemptions. For self employed taxpayers, make sure you submit your quarterly estimated tax payments. This is important for 3 significant reasons: 1. Withholding sufficient funds qualifies you as being compliant for current taxes. 2. Prevents you from owing the IRS in the future 3. The amount of taxes can be used for purposes of lowering the amount of monthly disposable income available when negotiating your Resolution. Step 2: The Investigation Balance due and Statutory End Dates The first step in resolving any problem you may have with the IRS is obtaining the necessary information. First, it is important to get the total balance owed. When asking the IRS about your total balance, it is best to get the balances year by year. Each year has a statutory end date which expires ten years from the date the balance was assessed 2 (CSED). Incorporating the CSED date into a tax 2 Section 6502 of the IRS Code provides that the IRS generally has 10 years to collect on the balance due from the time of a timely assessment of the balance with the exception of several provisions that toll the statutory period. Section 6331(k) operates in part to suspend the period of limitations on collection for the period of time during which an offer in compromise is pending, for 30 days after rejection, and while a timely filed appeal is pending. Section 6503(h) also tolls the statutory due to a bankruptcy proceeding, and
4 plan resolution is the best way to get the best resolution possible. Once you understand the importance of the CSED date, you can begin negotiating with the IRS. Un-filed Tax returns After finding out the balance and the CSED dates of each tax year owed, the next step is finding out what tax returns have not been filed. This ties back to the compliance issue. The investigation is the best time to request information regarding any tax returns that have not been filed and if there is even a filing requirement for that year. If you need to file a tax return, you should request the wage and income information for the tax year involved. The IRS will fax or mail the information to you. Always request a hold on your account to allow you time to file your tax return. Filing Status Inquiring about the filing status of your filed tax returns will help you determine if you are solely responsible for your tax liability or if you share that tax balance responsibility with a spouse. This will also affect the information in the future if you decide to file an Offer in Compromise petition, as discussed later on in the Manual. Originally Filed Tax Returns If you do not file your tax returns, the IRS may file a substitute for return for you. This tax return will be deemed a filed Tax Return for all purposes, but you may owe much more than if you had filed the Tax Return yourself. This is because the IRS files your Tax Returns with no exemptions. This may lead to a greater tax liability or tax due than what you actually owe. You may always submit an amended tax return with your exemptions, and in most circumstances are urged to do so. Keep in mind however, that if the CSED date is about to expire on an older tax year it may be better to not submit an amended tax return because that would start the CSED tolling date over. If there is a balance on this tax return, the IRS will for 6 months thereafter.
5 proceed as it does when you file the tax return and have a balance on that tax return. The whole purpose of a Substitute for Return (SFR) is to arrive at a definite dollar amount of your tax liability, so that the IRS can begin collection efforts. The IRS uses its substitute tax return to issue a proposed assessment of taxes you owe 3. Once you have the investigation complete, your next step is making sure you have all your tax returns filed. Evaluate the CSED dates to determine how much time you have before the Statute runs out on each year, and lastly, make sure you request additional time to resolve your account. If you have already received a final notice of intent to levy, the IRS will most likely not grant you additional time past the date on the levy notice letter. Step 2: Resolution Below you will find several methods of resolving your balances with the IRS. The investigation and status of your case will dictate what path you should go down first and the best resolution for your case. If you have received a levy notice, the first course of action is negotiating an Installment Agreement with the IRS. The only way to release or prevent a levy is by entering into an installment agreement or paying your liability in full. Filing an Offer in Compromise will prevent the IRS from filing future levies on your account, but levies that have already hit in most cases will not be released. A. Streamline Installment Agreement: A Streamline Installment Agreement is the fastest way to remove a levy and get on a payment agreement. Unfortunately, if you owe an assessed balance greater than $25,000.00, this option will not be available for you unless you find a way to pay down your assessed balance. According to the Internal Revenue Manual( IRM ) , streamlined agreements may be entered into quickly without a financial analysis or managerial approval. The amount of the agreement is determined by taking the total balance due and dividing it by 60 months. You are making an agreement to pay your entire liability in full within a 5 year 3 Perez, William. Substitute for Return, About.com: February 28, 2009.
6 period. The fastest way to get on the Agreement is to call the IRS and request a streamline installment agreement. You will have to go through a tiered interview process at which point the IRS agent will try to extract as much information as possible from you. They will try to verify your employer and bank account information. This is for purposes of future levy activity if you happen to default on your Agreement. THIS IS WHERE REPRESENTATIVES HAVE THE UPPER HAND. Your representative can get through the tiered interview fairly quickly without having to disclose financial information if they don t have it. You can try to explain that you would not like to provide further information at the time, but the agent may not want to continue working with you. During the tiered interview, the IRS agent will inquire as to whether you have a means to pay the balance off instead of getting on the payment agreement. Below are the main questions asked: 1. Are you able to full pay your liability? 2. Are you able to pay your liability within 6 months? 3. Are you able to borrow from friends or family? 4. Are you able to pull any money out from a credit card to pay your liability? 5. Do you have any equity in assets that can be used to pay down your balance? 6. Can you send any money in today? If your answer is no to all these questions, the IRS agent will proceed on entering your agreement on the IRS system. If you are being levied, you should have a fax number to your payroll department handy before you call the IRS. Once the Agreement is in place, you should request that the agent fax over a release of levy to your employer. If you would like to enter into an Agreement online, and you owe less than $25,000.00, you may use the Online Payment Agreement option at: https://sa2.www4.irs.gov/irfof/lang/en/eiatpstatus.jsp If you owe more than an assessed balance of $25,000.00, and are receiving notices from the IRS, you will need to
7 establish a payment agreement in a different manner. B. Payment Agreement Based of Financial Documentation The IRS makes taxpayers who owe more than $25, go through a more difficult time before agreeing to an installment agreement. Regardless of whether or not you are able to full pay the liability before the statutory end dates expire, the IRS wants more information on you. The way to obtain this information is by requiring you to fill out a form 433-F and by requesting supporting documentation. Please see form 433-F at: This form is very specific with regards to the kind of information requested by the IRS. The IRS will want to know where you bank, what kind of accounts you have, and how much money you have in each account. The form also requests information on all assets ranging from real property to vehicles. Once you disclose this information, you must provide further information on when you acquired the property, whether you have an outstanding loan on the property or whether you have any equity in the property that you may be able to pull out to pay the IRS. The form is self explanatory, but most people have trouble understanding HOW the IRS comes up with the magic number that is to be your monthly payment amount. You first must provide all avenues of income including wages from your current employer, income from rental, social security, interest, pension etc. The IRS determines what your income is by calculating your GROSS income and then taking out only the taxes. Any other deductions will be handled in the expense portion of the financial statement. The real secret is in the expense portion. You have to realize that the IRS works within set guidelines 4 and standards. The IRM allows a miniscule amount of wiggle room when dealing with these standards but in most cases will defer to these set standards. If you go above the standards for food, clothing, household expenses, transportation or housing and utilities, you must make your case to the IRS that these expenses should be allowed because they are necessary AND you have extraneous 4 You may view these standards at
8 circumstances. According to the IRS, National Standards for food, clothing and other items apply nationwide. Taxpayers are allowed the total National Standards amount for their family size, without questioning the amount actually spent. National Standards have also been established for minimum allowances for outof-pocket health care expenses. Taxpayers and their dependents are allowed the standard amount on a per person basis, without questioning the amount actually spent. Maximum allowances for housing and utilities and transportation, known as the Local Standards, vary by location. In most cases, the taxpayer is allowed the amount actually spent, or the local standard, whichever is less. Internal Revenue Website, Collection Financial Standards 3,00.html 1. Food, Clothing, housekeeping supplies and Miscellaneous items: Lets dissect this paragraph. The first party references the standard for food, clothing and other items. The IRS will automatically allow the standard for your household (if you claim them on your Tax Returns as dependants). If you only claim yourself, but have more people in your household, you will not be allowed to claim the higher standard. If you spend more than the allowable standard, the general rule is that you will not be able to claim more. However, if there is a valid reason such as a need to purchase expensive food due to a health reason, and you are able to prove this expense, you have a chance that the IRS will allow this even though it is over the standard allowable amount. For example, if you have diabetes and need a special diet that costs more than the monthly allowable standard, the IRS will most likely allow you to claim this expense as long as you provide proof of purchase of the food (receipts for food) and a medical report or letter from your Doctor diagnosing your condition. Below is a list of the current amount allowed per person for food, clothing, household goods and miscellaneous items: One person $526 Two people $985
9 person Three people $1152 Four people $1371 More than 4 people------$262 per additional 2. Out of Pocket Medical Expenses: The second standard: out of pocket medical, is very low and is the same case as the above food standard. It will automatically be allowed, no questions asked, for each person in a household (that is claimed on the tax return). The following is what is automatically allowed: Taxpayers over the age of $144 Taxpayers under the age of $60 If you have expenses that are over the standard, I urge you to keep records of the monthly payments made under this category which includes Dr. visits, co-pays, and payments for prescription medication. Any CURRENT monthly medical bills will fall under this category and can be used to lower your monthly payment amount. As explained above, you must provide proof of the bill and proof of the monthly payment. You should have at least the most current 3 months of bills and payments to provide to the IRS Housing and Utility Standard Housing and Utility standards are based off Local standards for the district in which you live in. The wording of the IRM actually changes. With this standard, the IRS will generally allow either what you pay each month for housing and utilities or the IRS standard, whichever is LEAST. Thus, it is always wise to know what the standard for your area is beforehand so you have a basic idea of what the IRS is going to allow you to claim. Generally, if you claim the IRS standard or fall below the standard, the IRS will not request proof of your expenses. However, I have dealt with some situations where the IRS insists on obtaining proof even when I claimed below the allowable standard. 4. Transportation 5 SPECIAL NOTE: work with the numbers. If you have medical expenses that are ongoing but may not be incurred every month, use a year to date analysis. If you can provide a year analysis up through today s date and average the medical costs per month, and it is more than if you used only the last 3 months, use this as an argument. Remember, you must provide proof of the bill and proof of payment.
10 The Transportation operating standard is also based off a local standard chart. This standard allows you to claim your monthly expense for car insurance, gas, tolls, parking and maintenance. I would suggest looking up your local standard at: Your transportation ownership costs are based off a national standard. You will be allowed to claim up to $496 per month for one vehicle and up to $992 for two vehicles (in a household of 2). If you pay more for the ownership of your vehicles, the IRS will most likely not allow you to claim the full amount of your monthly payment. It is correct to assume that the main arguments when dealing with the IRS have to do with the standards. The IRS is in a constant battle to limit your monthly expenses to their set standards. This then portrays lower monthly expenses while in reality, you may be spending much more than what they are allowing you to claim. Section 5 of IRM ( ) specifically states that the standards are only guidelines and if a taxpayer meets the necessary expense test, then they should be allowed to claim these expenses after providing reasonable proof to the IRS. If it is determined a standard amount is inadequate to provide for a specific taxpayer's basic living expenses, allow a deviation. Require the taxpayer to provide reasonable substantiation and document the case file. However, the IRM also is quick to state that these standards should not be deviated from simply because a Taxpayer would be inconvenienced by disposing valuable assets or by being forced to limit excessive spending. The main question is what is excessive spending and who determines whether an expense is excessive or not. Unfortunately, it is an up-hill battle that you will probably not win because the IRS agent is the one who will determine these items at the time of negotiation. The best you can do is argue that your expenses are not excessive and be ready to show proof of these monthly bills and payments. Once you determine what all the standards are, you should enter any additional monthly expenses you have, including
11 child support payments, life insurance, union dues, health insurance, car payments, Court ordered payments. If you are making any formal monthly payments on any debt, you should include it in the expense portion. Keep in mind that medical payments will always be allowed. Remember to provide proof of the bill and proof of payment for the last 3 months. Anything older than 3 months will most likely be too old and irrelevant, unless the IRS requests proof for 6 months or a year. To calculate your monthly Installment Agreement payment, subtract your monthly expenses from your Net monthly income (net monthly income is your gross income minus Federal income tax, Social Security, Medicare, and State and Local taxes). Net Income = Gross Income - (Federal income tax+ Social Security+ Medicare+ State and local taxes) Monthly Installment Agreement Amount = Net Income-Expenses Once you request an Installment Agreement and go through your financial information with an IRS agent, the IRS agent will prepare your case and submit it to his or her manager for approval of your Agreement. Be ready to fax in (or mail in) the following financial documentation: 1. Updated pay-stub with year to date figures. 2. Bank statements for the last 3 months. 3. Proof of housing and utilities if over the standard. 4. Proof of Court ordered payments and Court orders. 5. Proof of health insurance if any. 6. Proof of life insurance if any. 7. Proof of any formal monthly payment agreements and proof of payment. C. Payment plan when dealing with a Revenue Officer Dealing with Revenue Officer agents can be scary, intimidating, and costly if you don know what you are doing. Revenue Officer Agents are local IRS agents that are assigned to your case and handle the notice, collection, and resolution part individually. These agents have the authority to visit your home or place of work or business to try to collect on your IRS debt. They will take inventor of what you own and will expect substantiation for every claimed expense on your financial
12 statements. The same rules above apply when dealing with Revenue agents. In order to obtain a resolution, you must be compliant with the filing of your tax returns and you must provide financial statements to verify your assets, income, and expenses. 433-A and 433-B Financial Statements Taxpayers who are wage earners or self employed individuals must fill out the 433-A form when dealing with a Revenue Officer agent. This financial statement goes more in depth with your finances than the 433-F form. Keep in mind the national and local standards when filling this form out, which can be found at: I would suggest you research the standards and fill them on the form before any other information. That way, you understand what is being allowed and not being allowed. If you pay more than the standard each month for certain items such as housing expenses, you should be ready to provide documentation proving this. Along with this, your Revenue Officer will request additional documentation such as proof of your income, the last 3 months of your bank statements, Proof of any monthly health insurance payments, proof of Court ordered payments (the Court order as well as proof of payment) and proof of any vehicle payments if you have any. The 433-B financial form must be filled out if the client with the IRS debt is a business. You must provide information as to any assets, property, debt, liability, gross income, and employees. You will have to provide proof of each, as you did with the other forms mentioned. Dealing with a Revenue Officer does have one advantage. You deal with the same person who is handling your case. Normally, when dealing with the IRS collections or the service line, you will deal with the first person who picks up your call who is based out of one of many call centers. However, always keep in mind, any employee from the IRS is going to want to collect the debt owed. They can be nice about it and sweet talk you into providing information or they can levy you or threaten to levy you. You have rights. Provide a financial statement and proof of your monthly expenses as well as your assets and request a
13 payment agreement. On a side note, if you have equity in any property, your Revenue Officer may request you try to pull the equity out of the asset to pay the IRS. Please contact me with Questions or more information on how to get a FAIR Agreement with the IRS. Lucy Ludwig, Esq. Ludwig Law Firm, A.P.C. (619)
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