audits

IRS Mess Creates Taxpayer Anxiety

July 27, 2021 by Frank

The IRS has a huge backlog on its hands due to its pandemic closing; lack of Congressional funding; increase of IRS responsibilities regarding stimulus payments, unemployment compensation benefits, advanced child tax credit payments; early IRS retirements resulting in a loss of its most experienced agents; and poor U.S.P.S. mail service.

The IRS Crisis in a Nutshell

Currently, several millions of taxpayers are waiting for their refunds and stimulus payments. Millions more are trying to settle issues with past tax returns and are unable to speak with someone at the IRS. Taxpayer anxiety builds with each warning notice received from the IRS assessing additional interest and penalties. The Washington Post quoted that if a taxpayer calls the IRS, he has a 1-in-50 chance of speaking with an agent.

How Big of a Tax Return Backlog?

At the end of the 2020 tax filing season, it was reported that the IRS had a backlog of 35 million unprocessed tax returns. Most of those unprocessed returns are due to the absence of IRS employees when the IRS shut down during the pandemic. Due to recent legislative changes, the IRS had to process a historically high number of returns manually to check for identity theft to ensure that scammers were not receiving refunds not due them. The current backlog is estimated at 15 million unprocessed returns (approximately 1 in 10 taxpayers).

What Happens if a Taxpayer Calls the IRS?

During the 2021 filing season, the IRS received 167 million telephone calls — over four times the number during the 2019 filing season. At one point, the IRS received calls at the rate of about 1,500 per second. How did the IRS manage to answer that many calls?

The simple answer is that the IRS was not able to handle that many calls. On the 1040 line, the most frequently called toll-free IRS number, only 3 percent of 85 million calls from taxpayers reached a phone assister. The Washington Post reported that Congressional funding only allowed the IRS to provide a 60 percent level of service. Thank you Congress. Michelle Singletary, a columnist for the Washington Post, said to think about that for a second, because that’s all it takes to see the callousness of this choice by Congress. The IRS, if it receives an expected $318 million in funding to increase taxpayer assistance, hopes to answer 75 percent of calls received. That falls short of the IRS goal to answer 80% of the calls it receives. That’s right, the IRS goal is not to answer 100% of the calls it receives due to budgetary restraints.

Nina Olson, the former director of the IRS’s taxpayer advocate office, said that “When the level of service gets so poor and correspondence and problems aren’t being addressed, it just gets cyclical. You call and then you are cut off after you are on hold. Then you write a letter explaining the situation, but no one answers it. And on it goes until sometimes taxpayers just give up and pay a bill that they really don’t owe, just because they are afraid of what might happen to them.” Does this sound familiar to your situation? This capsule explanation by a former IRS employee is a very good reason why using an IRS tax resolution specialist should be considered rather than self-representation.

Tax Tip #1

Nobody enjoys opening an envelope showing the sender as the IRS. Yes, bad news may be contained in the IRS notice, but it is most important that the IRS letter be opened immediately upon receipt as there are usually deadlines stated in which to reply to the IRS or to appeal a proposed tax assessment. Not opening an IRS letter does not make the problem go away. Often, by not timely responding, the taxpayer has simply compounded the problem. Taxpayers have certain rights, but those rights must be acted upon within certain time deadlines.

Tax Tip #2

Regardless of how simple you believe the response can be handled by yourself, send a copy of your draft response letter to the IRS to your tax advisor and ask them for their thoughts. If you make a misstatement of fact or your proposed response can be misinterpreted, you need to realize that your response becomes part of your tax record and can be difficult to correct. You could inadvertently have made your situation worse.

Tax Tip #3

Never send original tax documents to the IRS. Always send photocopies in case the IRS misplaces your response to it and those documents need to be resent.

Tax Tip #4

Always make photocopies of what you send to the IRS. If you are unable to resolve your IRS issue at the lower administrative level and you need to appeal the IRS’s decision, your tax professional will need to see what you have shared with the IRS.

If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.

BE SURE TO READ THE DISCLAIMER PAGE: Tax laws, IRS rules and regulations change frequently. Although we hope you’ll find this information helpful, this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher shall not assume liability for any losses, injuries, or damages from the display or use of this information.

About F. Bryan Haarlander, EA, CTRS:

Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

Taxpayer’s Excuse for Non-filing is Dismissed by the Courts

July 22, 2021 by Frank

1985 U.S. Supreme Ct. case of Boyle Again Confirmed

U.S. Supreme Ct. Case of Boyle

The 1985 Supreme Court case United States v. Boyle (469 U.S. 241, discussing IRC Sec. 6651(a)(1) and (2), confirmed that the IRS can impose delinquency penalties for failing to file a tax return or pay a tax unless the taxpayer can establish that the failure was due to reasonable cause and not willful neglect.

What If the Taxpayer Relied Upon His Attorney?

Boyle engaged an attorney to file his mother’s estate tax return. Boyle periodically checked with the attorney and was told that the return would be filed by the statutory due date. However, due to a clerical error at the attorney’s office, the return was not timely filed and the IRS assessed late filing penalties. Boyle appealed the assessment of the penalties saying that his reliance upon the attorney demonstrated reasonable cause by him and not willful neglect. The Court stated that while it was “reasonable” for Boyle to assume that the attorney would meet the statutory deadline with respect to matters between the two of them, it did not relieve the taxpayer of his obligation to file the return on time. The court noted that it required no special training or effort on the taxpayer’s part to ascertain a deadline and ensure that it is met. That the attorney, as respondent’s agent, was expected to attend to the matter did not relieve Boyle of his duty to meet the filing deadline. In other words, taxpayers have a nondelegable duty to be aware of tax deadlines. An agent’s incompetence or willful misconduct will not excuse the taxpayer from delinquency penalties.

What If the Taxpayer Was Incarcerated and Relied Upon His Attorney?

Jeffrey Allen Lindsay (U.S. Court of Appeals, 5th Circuit) was incarcerated and executed a POA (Power of Attorney) with an attorney to manage his affairs, including filing his tax returns. The attorney assured Lindsay he was doing so. However, he failed to do so and embezzled hundreds of thousands of dollars from Lindsay.

Lindsay eventually filed his tax returns and paid the assessed delinquency penalties. He filed a claim for refund; IRS rejected and he filed a suit in district court. The Court of Appeals found for the IRS, citing Boyle.

Lindsay had claimed that he exercised ordinary business care and diligence by giving his attorney his power of attorney and by directing the attorney to file his income tax returns and to pay his taxes. Lindsay routinely asked the attorney whether he was handling Lindsay’s tax obligations, and the attorney confirmed he was. In Lindsay’s view, he had a reasonable cause for late filings and delayed payments because he used ordinary business care and prudence. He was unable to file his returns and pay his income taxes due to circumstances beyond his control, i.e., his incarceration and his attorney’s malfeasance. Unfortunately for Lindsay, the Court found for the IRS. While on the surface it appears that Lindsay had reasonable cause relying upon an attorney while he was incarcerated, it does not meet the IRS’s standard of reasonableness as confirmed by the U.S. Supreme Court.

Tax Tip

Lindsay, like many other taxpayers, found that the courts agree with the IRS when it comes to trying to recover delinquency penalties that can be directly linked to an agent’s misconduct or incompetence. The burden is solely upon the taxpayer and that responsibility cannot be delegated to another person.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

IRS Levies Social Security Benefits

July 19, 2021 by Frank

It is Well-Established that the IRS has 10 Years from its Date of Assessment to Collect Delinquent Taxes – Or Does the IRS Authority to Collect Social Security Benefits Go Beyond 10 Years?

Collection Statute Expiration Date

Internal Revenue Code section 6502 provides that the length of the period for collection after assessment of a tax liability is 10 years. The collection statute expiration ends the government’s right to pursue collection of a liability unless it seeks a judgement against the taxpayer which would extend the collection period for an additional 20 years. The date upon which the IRS can no longer collect the tax is referred to as the Collection Statute Expiration Date (CSED).

Dean v US (USCA11 Case: 20-14421)

Dean v US involved a motion to dismiss a taxpayer’s suit alleging that the IRS recklessly disregarded the law by continuing to levy on a taxpayer’s Social Security payments beyond the ten year SOL on collections. The 11th Circuit Court of Appeals agreed with the district court’s finding that the IRS’s actions were proper.

What Have We Learned from the Dean Case?

The case illustrates how the ten-year collection period does not prevent collection beyond the ten-year period when there is a timely levy relating to a fixed and determinable income stream.

Most taxpayers and tax professionals understand that the IRS will usually levy an automatic 15% on certain federal benefits, including social security (IRC Sec. 6331(h)). In the Dean case, the IRS levy was made under IRC Sec. 6334(a)(9) whereby the SSA began paying over all of the benefits slated for Dean to the IRS (subject to certain taxpayer exemptions).

Why All the Confusion?

With the CSED expiring, the IRS filed a certificate of release of federal tax lien stating that Dean had “satisfied the taxes,” that the lien was “released,” and authorized the proper IRS officer to “note the books to show the release of this lien.” IRS also abated the assessments. It sure seems as if the 10-year CSED expired and the IRS collections have come to a halt. However, the IRS continued to levy Dean’s social security benefits which resulted in Dean filing a complaint in the district court alleging that the levy was an unauthorized IRS collection action.

Fixed and Determinable Levy Payment

The IRS regulations under Section 6331 describe the relationship between a levy and fixed and determinable payments: “[A] levy extends only to property possessed and obligations which exist at the time of the levy.” 26 C.F.R. § 301.6331–1(a). “Obligations exist when the liability of the obligor is fixed and determinable although the right to receive payment thereof may be deferred until a later date.” The courts have ruled that:

An obligation is fixed and determinable “[a]s long as the events which gave rise to the obligation have occurred and the amount of the obligation is capable of being determined in the future …. It is not necessary that the amount of the obligation be beyond dispute.” United States v. Antonio. 71A AFTR 2d 93-4578], *6 n. 2 (D. Haw. Sept. 24, 1991). Numerous cases establish that Social Security benefits are a fixed and determinable obligation of the SSA and are subject to one-time levies.

As the lower court opinion discusses, the 2013 levy created a custodial relationship between IRS and the SSA and as such the benefits came into constructive possession of the IRS. The regulations under Section 6343 also provide that “a levy on a fixed and determinable right to payment which right includes payments to be made after the period of limitations expires does not become unenforceable upon the expiration of the period of limitations and will not be released under this condition unless the liability is satisfied .” 26 C.F.R. § 301.6343-1(b)(1)(ii).

The Eleventh Circuit also helpfully explains the relationship between the levy and the benefits, directly refuting the claim that the collection occurred after the expiration of the SOL:

Instead, the IRS seized his entire Social Security benefit—that is, his “fixed and determinable right to payment” of his Social Security benefit in monthly installments—immediately upon issuing the notice of levy in June 2013. 26 C.F.R. § 301.6343-1(b)(1)(ii); see Phelps, 421 U.S. at 337. Having seized his entire benefit before the expiration of the collection limitations period, the IRS was not required to relinquish it after the period expired. See 26 C.F.R. § 301.6343-1(b)(1)(ii).

The lower court opinion also nicely discusses the lack of legal significance of the IRS’s abatement of the assessment and issuance of the release of federal tax lien. Both events did not change that Dean owed an underlying tax. As to the abatement, taxpayers are liable for the tax regardless of whether there has been an assessment. While the release of the federal tax lien affects the IRS’s security interest, it did not release the levy and had no bearing on the underlying tax debt.

Disclosure

We wish to thank Leslie Book, a professor at Villanova School of Law, for his posting to the Procedurally Taxing Blog which alerted us to the Dean case.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

When You Say “I Do”, You Need To Do

July 13, 2021 by Frank

Newlyweds Need to Understand How Tying the Knot Affects Their Taxes

Tax Checklist for Newly Married Couples

Name. When a name changes through marriage, it is important to report that change to the Social Security Administration. The name on a person’s tax return must match what is on file at the SSA. If it doesn’t, it could delay any tax refund as well as generating a notice from the IRS to verify your identity. To update information, taxpayers should file Form SS-5, Application for a Social Security Card. It is available on SSA.gov, by calling 800-772-1213 or by visiting a local SSA office.
Address. If marriage means a change of address, the IRS and U.S. Postal Service need to know. To do that, people should send the IRS Form 8822, Change of Address. Taxpayers should also notify the postal service to forward their mail by going online at USPS.com or their local post office. Further information can be found at Topic 157, Change Your Address – How to Notify the IRS.
Withholding. After getting married, couples should consider changing their withholding. Newly married couples must give their employers a new Form W-4, Employee’s Withholding Allowance. If both spouses work, they may move into a higher tax bracket or be affected by the additional Medicare tax. They can use the Tax Withholding Estimator on IRS.gov to help complete a new Form W-4 or contact their tax professional. Taxpayers should review Publication 505,Tax Withholding and Estimated Tax for more information.

Filing Status. Married people can choose to file their federal income taxes jointly (MFJ) or separately (MFS) each year. While filing MFJ is usually more beneficial, it’s best to figure the tax both ways to find out which works best. Remember, if a couple is married as of December 31, the law says they’re married for the entire year for tax purposes. The same holds true for divorcees – if you are divorced on or before December 31, you are considered not married for the entire tax year.
Joint and Several Tax Liability. When a couple files MFJ, remember that both spouses are jointly and severally liable for the tax owed on that return signed as being true and correct under penalties of perjury. This can develop into an IRS tax debt situation for both spouses if one spouse is self-employed and is failing to report all of their income or is exaggerating their expenses. In such situations, the IRS will assess both spouses the taxes owed and attempt to collect from both spouses. Make sure you are comfortable with the income and expenses being reported on your MFJ return before you sign it. If you have any doubts about the information being shown on a MFJ return, speak with a tax professional about filing MFS.
IRS Tax Debts. Often when a delinquent taxpayer is considering marriage, they will get religion and wish to get into tax compliance so as not to burden their newly-wed with their tax problems. However, that is not always the case. Consult with an experienced tax professional as to how each spouses IRS tax compliance can be verified.
Scams. All taxpayers should be aware of and avoid tax scams. The IRS will never initiate contact using email, phone calls, social media or text messages. First contact generally comes in the mail. Those wondering if they owe money to the IRS can view their tax account information on IRS.gov to find out.

Tax Planning Tip #1

NEVER sign a tax return without first reviewing it. You are ultimately responsible for what is reported on your tax return, even if the preparer included fictitious business losses to increase your refund or decrease the taxes you owe.

Tax Planning Tip #2

Inflating business profits may sound counter intuitive as one may think that the taxpayer would be subject to additional income taxes, but some tax credits, such as the earned income tax credit, could result in additional refunds to the taxpayer by showing more business profits.

Tax Planning Tip #3

Due to taxpayers filing false returns claiming tax credits, and tax preparers preparing false returns claiming illegitimate child care and tuition credits, the IRS is now requiring tax preparers to perform due diligence by asking questions and documenting the taxpayer’s responses to the required questions in the IRS’s efforts to combat tax fraud.

Tax Planning Tip #4

When you engage an unscrupulous tax return preparer, you are increasing the odds that your return will be audited by the IRS. When the IRS identifies an unscrupulous tax preparer, it runs the returns prepared by that person through IRS computers looking for similarities. For example, if a preparer is claiming erroneous childcare or educational credits, the IRS computers will identify all taxpayers who have claimed those credits who used that tax preparer.

Return preparer fraud is one of the IRS’ Dirty Dozen Tax Scams and taxpayers seeking a return preparer should remain vigilant. The IRS has information on its website for choosing a tax preparer and has launched a free directory of federal tax preparers.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

John Doe Subpoena to Identify Foreign Holdings

April 8, 2021 by Frank

As the Use of Cryptocurrency Gains Popularity, IRS Enhances Its Enforcement Procedures

FBAR Reporting Requirement

Every year, under the law known as the Bank Secrecy Act, U.S. persons (includes citizens, residents, corporations, partnerships, etc.) must report certain foreign financial accounts, such as bank accounts, brokerage accounts and mutual funds, to the Treasury Department and keep certain records of those accounts. You report the accounts by filing a Report of Foreign Bank and Financial Accounts (FBAR) on FinCEN Form 114.

Case of John Doe

A federal court in the District of Massachusetts entered an order authorizing the IRS to serve a John Doe summons on Circle Internet Financial Inc., or its predecessors, subsidiaries, divisions, affiliates, including Poloniex LLC (collectively “Circle”), seeking information about U.S. taxpayers who conducted at least the equivalent of $20,000 in transactions in cryptocurrency during the years 2016 to 2020. The IRS is seeking the records of Americans who engaged in business with or through Circle, a digital currency exchanger headquartered in Boston.

“Those who transact with cryptocurrency must meet their tax obligations like any other taxpayer,” said Acting Assistant Attorney General David A. Hubbert of the Justice Department’s Tax Division. “The Department of Justice will continue to work with the IRS to ensure that cryptocurrency owners are paying their fair share of taxes.”

“Tools like the John Doe summons authorized today send the clear message to U.S. taxpayers that the IRS is working to ensure that they are fully compliant in their use of virtual currency,” said IRS Commissioner Chuck Rettig. “The John Doe summons is a step to enable the IRS to uncover those who are failing to properly report their virtual currency transactions. We will enforce the law where we find systemic noncompliance or fraud.”

What is Cryptocurrency?

Cryptocurrency, as generally defined, is a digital representation of value. Because transactions in cryptocurrencies can be difficult to trace and have an inherently pseudo-anonymous aspect, taxpayers may be using them to hide taxable income from the IRS. The courts have agreed with the IRS that there is a reasonable basis for believing that cryptocurrency users may have failed to comply with federal tax laws.

The IRS issued guidance regarding the tax treatment of virtual currencies in IRS Notice 2014-21, which provides that virtual currencies that can be converted into traditional currency are property for tax purposes. The guidance explains that receipt of virtual currency as payment for goods or services is treated as income and that a taxpayer can have a gain or loss on the sale or exchange of a virtual currency, depending on the taxpayer’s cost to purchase the virtual currency (that is, the taxpayer’s tax basis).

Déjà vu 2007?

When one thinks of Switzerland, images of skiing on snow covered mountain tops, expensive watches or chocolate may come to mind. There was a time when Switzerland was known as a tax haven because of its bank secrecy laws. In 2007, the United States began an intensive tax investigation of Swiss banks when it probed the financial activities of one of the world’s largest banks, United Bank of Switzerland (UBS).

Eventually the IRS, with the enforcement powers of the U.S. Justice and Treasury Departments, began requesting account information from other Swiss banks. By 2009, the number of taxpayers running to their lawyers for advice to avoid criminal prosecution peaked. By 2011, tax haven banks from other countries were complying with providing the Justice Department with their customer’s account information.

How the IRS is Approaching Cryptocurrency Compliance

Cryptocurrency compliance will very likely follow that of the Justice Department’s approach to foreign bank accounts – seeking records of all cryptocurrency exchanges to identify its customer base and potential tax evaders.

What Is Tax Fraud?

To prove tax fraud, the burden is on the IRS to show an underpayment of tax due to an act of the taxpayer to evade the assessment of tax which the taxpayer believed to be owing, that the underpayment act was willful and not a result of inadvertence, reliance on incorrect technical advice, a sincerely held difference of opinion, negligence or carelessness.

Where Does the IRS Go From Here?

The IRS has begun making available on its website and IRS publications information about cryptocurrency and virtual currency. If you click here, you will learn what virtual currencies are and their tax consequences.

Although the IRS has budget restraints, it is hiring agents in its criminal investigation fraud unit to identify potential tax evaders, including cryptocurrency tax evaders.

In addition, the IRS is now using artificial intelligence (AI) technology to more efficiently detect tax fraud, hidden assets, money laundering, identity theft, and other noncompliance. In the past, instances of tax-related criminal activity had to be manually discovered by revenue agents, which could take an inordinate amount of time to process. Now, thanks to AI, the IRS can process data and conduct criminal investigations in a much more efficient manner. The IRS is now deploying machine learning, natural language processing, and graph analytics to successfully identify instances of fraud and illegality before financial loss occurs.

The IRS plans to mine data from tax returns, property returns, bank reports, and even social media accounts. The project will then employ algorithms and AI to identify patterns where taxpayer noncompliance might be present. In addition, the IRS will use natural language processing – technology that enables a computer to read and translate filings, as well as contemplate their meaning, which, will help predict IRS success in its appeals process. Through language processing, machine learning is able to provide indicators of why appeals were either won or lost, and thereby, provide the probability of future success for cases with similar facts. In a cost-conscious environment, the IRS is under pressure to be smarter about how it selects cases that are most likely to conclude well.

Tax Planning Tip #1

Carefully review the questions (and your answers) on your Form 1040 before checking “yes” or “no”. You are signing your tax return as being true and correct under penalties of perjury. If you fail to answer these questions truthfully, you could be accused of committing tax fraud.

Tax Planning Tip #2

Carefully complete your tax professional’s tax organizer each tax year. Due to the U.S. Treasury Department and IRS’s focus on foreign reporting requirements and virtual currencies, it is difficult to envision a tax professional not having a question in the tax organizer inquiring about foreign bank, investment holdings and cryptocurrencies. If you do not understand a question on the organizer, ask for guidance. All of your responses need to be truthful and to the best of your knowledge.

Tax Planning Tip #3

Review the draft of the tax return prepared by your tax professional for completeness and accuracy before signing the return (or the e-file authorization Form 8829). Remember, you are signing your tax return under penalties of perjury that you have examined your return and its attachments, and to the best of your knowledge and belief, that the return is true, correct and complete.

Tax Planning Tip #4

If you would like to learn more about how the IRS recognizes and develops its fraud cases, we suggest you read IRS Internal Revenue Manual Section 25.1.2.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

Currently-Not-Collectible (CNC) Status – A Tax Resolution Alternative

March 30, 2021 by Frank

Resolving a taxpayer’s tax debts with the IRS usually falls into one of three major categories. These three settlement options are offers-in-compromise (OIC), installment agreements (IA) and currently-not-collectible (CNC).

What You Need to Know About CNC

IRS Currently Not Collectible is defined as the decision the IRS takes in concluding that a taxpayer has no ability to pay their annual federal income taxes. In fact, IRS Form 12153 lists three collection alternatives: Offer in Compromise, Installment Agreement, and “I Cannot Pay Balance”. It is the “I Cannot Pay Balance” that is the focus of this blog.

How Does a Taxpayer Get the IRS to Declare CNC?

In order for a taxpayer to receive CNC status, the taxpayer must demonstrate a severe financial economic hardship that he/she does not have the financial means to pay his/her IRS debt after accounting for his IRS-allowed expenses. He does this by providing written evidence of his inability to pay. The evidence will include the submission of IRS Form 433-A to an IRS Revenue Officer or 433-F to the IRS Automated Collection System. These forms are different, but very similar, IRS Collection Information Statements (CIS).

The IRS will also require several months of paid invoices to substantiate the expense amounts shown on the CIS as well as proof of monthly gross income. In addition to analyzing the taxpayer’s monthly income available to pay the IRS (gross monthly income less IRS allowable expenses), the IRS also considers the liquid fair market value of the taxpayer’s assets less the debts associated with those assets.

If the IRS determines that the taxpayer has no income remaining after the offset of IRS allowed living expenses and has no assets that can be liquidated to satisfy the IRS outstanding debt, the IRS realizes that its collection efforts would be fruitless at the time the CNC status is granted.

If the account is deemed collectible per the FIS, then the IRS will request payment terms based on its analysis of the taxpayer’s financial situation. Thus, great care needs to be taken when submitting the IRS Form 433-A or 433-F to properly reflect the taxpayer’s ability to pay based on IRS published and unpublished criteria. This is where a tax resolution specialist can be very valuable.

What Happens When the IRS Declares a Taxpayer as CNC?

Once a taxpayer is declared IRS CNC, the IRS stops all collection activities, which include issuing levy and garnishment orders. However, you will still be subject to federal tax liens on your home and other property.

The IRS will send the taxpayer an annual statement outlining the outstanding taxes due by tax year. During the period the taxpayer is in CNC, interest and penalties continue to accrue increasing the total tax debt.

On the other hand, the IRS’s 10-year statute of limitations to collect the tax (and associated interest and penalties) continues to run. Thus, if the taxpayer is unable to pay his tax debt and the IRS fails to collect the balance due it within the Collection Statute Expiration Date (CSED) of 10 years from the date of assessment of the tax, then the taxpayer will not need to repay his tax debt (unless the IRS filed a tax judgment with the courts).

It is important to note that CNC is NOT a permanent form of tax debt resolution.

Once the IRS grants a taxpayer CNC status, the IRS will continue to review and monitor the taxpayer’s financial situation to determine improvement and ability to pay taxes owed. The IRS views CNC status as a temporary fix to allow the taxpayer sufficient time to create a household budget that will allow the repayment of his tax debt.

The IRS will monitor the taxpayer’s income tax return filings and third-party income information statements such as W-2s and 1099s to determine if the taxpayer’s income has sufficiently increased to enable the repayment of any portion of the taxpayer’s IRS debt. If the taxpayer sells property, the proceeds will go towards paying off your taxes, interest and penalties. This is the reason why the IRS reserves the right to place liens on the taxpayer’s property during CNC status so that it will be alerted when a sale is contemplated by the taxpayer.

Generally, the IRS will require a periodic resubmission of its CIS and a redetermination will then be made as to the taxpayer’s ability to pay the IRS. Usually, the IRS reviews the taxpayer’s CNC status for a period not exceeding two years. If you are on a fixed income (e.g., social security, disability, pension, etc.), a taxpayer could conceivably remain in CNC status until his tax liabilities expire due to the 10-year statute of limitations.

As a condition of being placed in CNC, the taxpayer agrees that any overpayments reflected on future-filed tax returns will be applied by the IRS in satisfaction of the taxpayer’s IRS debt, and that the taxpayer will timely file all future tax returns.

Once a taxpayer is placed in CNC status, we recommend that the taxpayer continue to maintain a rotating six-month summary of his income and expenses with substantiating documents. If for some reason the IRS were to terminate ones CNC status with no warning, having this six-month summary of income and expenses would enable the taxpayer to quickly appeal the IRS decision.

If you owe the IRS and believe that you may qualify for the CNC status, you are welcome to contact us using the contact information on this site. We can help screen you to determine if IRS currently non-collectible status is right for you.

Tax Planning Tip #1

We strongly recommend that a taxpayer with IRS tax debt consult with an IRS tax resolution specialist. To resolve IRS tax debts can often be a very time-consuming and an arduous process. It often is not a black or white process, but there are several shades of grey that a specialist knows how to present to the IRS to best present the taxpayer’s financial situation.

If you would like to discuss your IRS or PA tax debts, or business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.

About F. Bryan Haarlander, EA, CTRS:

Bryan Haarlander, an Enrolled Agent and a Certified Tax Resolution Specialist, is an affiliate member of the Suburban West Realtors® Association, a member of the American Society of Tax Problem Solvers (ASTPS), PA Society of Tax & Accounting Professionals (PSTAP), the National Society of Accountants (NSA) and the National Association of Tax Professionals (NATP). He is the author of “How to Resolve Your IRS Tax Debt Problems” as well as a book on how to start your own business. He has been practicing in Exton for 20 years. His firm serves clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.

If not a subscriber to his blogs, http://www.taxexpertblog.com and http://www.stopmytaxproblems.comyou may wish to do so as he discusses various pertinent tax and business issues.

For individual tax payers, real estate professionals, contractors and other self-employed individuals with IRS tax debt issues or tax planning issues, feel free to contact me at (610) 594-2601 or by email at info@keysolutions.us.

Keystone Financial Solutions, Inc. specializes in providing innovative tax planning, tax preparation, and solving IRS tax debt problems. The company’s web site is https://www.keysolutions.us and its telephone number is (610) 594-2601.

By visiting our website you can learn about the 5 Secrets the IRS Doesn’t Share and order a FREE SPECIAL REPORT: Should You Represent Yourself or Hire a Tax Professional.