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Articles Posted in Tax Debt

It seems at times as though the IRS is an all-knowing, all-powerful entity that no one can escape. You can’t run, and you can’t hide. They know how much money you make, how much you have in your bank and investment accounts, and even how much you won while playing roulette at the casino last week. But the real question is: do they truly know all of this? Or do we just assume they do? How can they obtain all this personal information? The answer is pretty simple. In reality, the IRS does have plenty of financially insightful access to everything from your bank accounts to every tax form submitted with your name and social security number on it. But is there a limit to “Big Brother’s” financial access?

How Does the IRS Know That I Have Undisclosed Income?

The IRS uses a sophisticated computer system in order to match up your income as reported on your tax return with everything that your employers have reported under your name and social security number. For example, if you submit a return that only has the money that you’ve made from one client or job, neglecting to enter any of your other income, the IRS’ computers will catch the mistake. Then, you’ll receive a letter from them informing you of their findings and their impact on your current tax situation.

Audits are not a welcomed entity in anyone’s eyes. So, if you’ve just received a notice informing you of an impending IRS audit and state audit, do not panic. In some cases, people or businesses are selected for an audit at random. In others, an IRS audit is triggered by issues with your tax return, either because something appears irregular or incorrect or people associated with you, such as your business partners, are being audited as well. This dreaded process if often filled with stress and fraught with mixed emotions, because it may result in you having to pay fines or back taxes if the IRS or state agents find discrepancies on your filed tax forms. The good news is that riding out an audit doesn’t have to be scary or intimidating, as long as you have professional tax accounting guidance and representation.

How Will You Be Informed of a Pending Audit?

Depending on the type of audit and the inconsistencies found in your taxes, you’ll either receive a certified letter or an official IRS agent will come knocking on your door. In most cases, a letter comes first. It will describe the type of audit that you’re facing (more on that below), as well as how the IRS will further contact you in order to obtain your records.

Did you just receive a letter in the mail from the IRS stating their intention to put a lien on your assets? Then you need to request collection due process hearing representation. When you owe money to the IRS, whether it is due to years of unpaid taxes or a mistake that was made on your tax returns which led to a failure to disclose all of your income (or any other reason for that matter), they will take whatever steps are necessary to ensure that they receive the funds owed to them. In most cases, this is process begins with a written notice. So, what should you do when you receive one? And what possible options are at your disposal? Let’s dive into an in-depth look at the process and what options are available.

When the IRS Believes You Owe Them Money

Sometimes, errors occur on tax forms that are not caught before they are submitted. For instance, if your wages were not properly disclosed on your yearly return, you may owe money. On the other hand, the IRS can also make mistakes. Though not often, this does happen, and it usually does not turn out in your favor because they now think you owe them back taxes and want to collect. No matter the reason, when a discrepancy is found, a notice will turn up in your mailbox from the IRS. They may plan to place a lien or levy on your home or business, your vehicles, your bank account, or even your future paychecks. This kind of notice is not ideal, but it happens more often than you think, so do not panic.

Owing back taxes to the IRS or any State  Department  or Department of Revenue can result in a plethora of unwanted penalties. Those who avoid paying and owe large amounts may even have their personal property, including their homes, boats, cars, SUVs, and even their bank accounts seized in order to pay those debts. State Department of Revenue may go one step further.  In certain states, such as New York, or Louisiana, the Department of Revenue commonly seizes the driver’s licenses of taxpayers who owe past taxes, preventing them from renewing their licenses. Or suspending their licenses outright, so driving is no longer an option. In addition, if an extremely delinquent tax debt is sent to the State Department of the Federal Government, your passport may also be seized or deemed non-renewable as well. With this, you will be unable to legally travel outside the country. Thankfully, there are some options available to you before things get to this point.

Falling Behind on Your Taxes

There are many reasons why people fall behind on their taxes. For example, someone who freelances for a living or is considered an independent contractor by their employer may not be putting away a portion of their income to pay taxes or may fail to make quarterly tax payments. There are also people and businesses who simply do not have the money they owe to the IRS, and rather than agree to a proactive payment plan, they simply avoid their letters until an IRS agent appears at their door.

The IRS must follow a series of procedures to collect unpaid taxes. The first step is to send written correspondence to the taxpayer informing them that their tax return is overdue and advising them of the penalties for continuing to fail to file. From there, the IRS may place a lien on a taxpayer’s property, followed by the execution of a levy. It could hand long-delinquent cases over to private debt collectors. Our Los Angeles tax advisors have observed that the IRS recently announced that revenue officers (ROs) will be visiting high-income taxpayers with at least one unfiled tax return in 2020. “High-income” in this instance means annual income of more than $100,000.

What Is a Revenue Officer?

ROs work at IRS field collection offices located around the country. Their job is to collect unpaid taxes, but their powers in that regard are somewhat limited. They are civilian employees, not law enforcement officers. They therefore do not wear a uniform or carry a firearm, and they cannot make arrests. They carry identification cards, not badges.

If an RO has reason to believe a criminal offense, such as tax fraud, has occurred, they must refer the matter to the IRS’s Criminal Investigation Division (CID). CID agents carry badges and can make arrests.

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Student loans account for a substantial portion of this country’s total indebtedness. Outstanding student loan debt is estimated at $1.5 to 1.6 trillion. The U.S. Department of Education (DOE) holds almost all of this debt, giving it substantial power over repayment, forgiveness, and discharge. Normally, discharge of debt is considered a taxable event. The IRS has established revenue procedures creating a “safe harbor” for discharges under certain DOE programs. Our Los Angeles tax advisors observed that it recently issued a new revenue procedure expanding that safe harbor.

Student Loan Discharge Programs

The DOE maintains several programs that allow partial or total discharge of student loan debt in specific situations. These programs only apply to student loans made or guaranteed by the DOE.

Closed School Discharge

The Higher Education Act (HEA) of 1965, as amended in 1986, directs the DOE to discharge the student loan debt of a borrower who is unable to complete their studies because their school closes, or because of certain fraudulent actions on the part of the school. Borrowers must apply to the DOE to obtain a discharge under this program. They must be able to demonstrate that they were either enrolled in the school or on an “approved leave of absence” at the time of closure, or that they withdrew 120 days or less before the school closed.

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The Social Security program has provided benefits for millions of people in its eighty-five years of existence. Political compromises have kept the program going as the cost of living has increased faster than wages. One of these compromises resulted in the assessment of federal income taxes on some Social Security benefits. This only applies to taxpayers with income above a threshold amount. Even if an individual’s income is above the threshold, only part of their Social Security benefits are taxable. Not all benefits payable by the Social Security Administration (SSA) are subject to federal income tax, and our Los Angeles tax advisors can explain the extent to which tax rules apply.

Types of Social Security Benefits

The SSA is an independent federal agency, meaning that while it is part of the Executive Branch of the federal government, it is not part of a federal executive department. Much of the funding for SSA programs comes from payroll taxes. The agency administers numerous benefit programs, including:
Retirement benefits, which are available to people who have made a minimum number of payments into the program through their payroll taxes, and who have reached the age of sixty-two;
Social Security Disability Insurance (SSDI), which helps eligible individuals who are unable to support themselves because of an injury or medical condition;
Survivors benefits, which provides assistance for family members of SSA beneficiaries; and
Supplemental Security Income (SSI), which pays benefits to elder individuals, blind individuals, and individuals with disabilities.

Most of these benefits are taxable if the individual meets the income threshold. Dependent or survivor benefits received by a child are usually not taxable, unless the child has sufficient income to file their own income tax return. SSI benefits are not subject to federal income tax under any circumstances.

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The IRS has many options for collecting unpaid taxes, but a limited budget means that the agency must prioritize its enforcement and collection efforts. For most taxpayers who are in arrears, penalties and interest accrue as the IRS sends notices by mail. Eventually, the IRS might place liens on a taxpayer’s property, and then execute a levy. This can be costly and time-consuming, and the agency would rather obtain unpaid taxes by other means. It recently announced that IRS revenue officers will be conducting in-person visits with delinquent taxpayers in several states. While this will not affect California taxpayers right away, that could change in the future. If you are behind in filing and/or paying taxes, you may want to speak with a California tax advisor about your situation.

IRS Debt Collection

Federal law gives the agency two main options for pursuing tax debt that has remained on the books for some time. These may apply to both individual taxpayers and businesses. The Taxpayer’s Bill of Rights (TBOR) applies in all cases.

Revenue Officers

The IRS describes revenue officers (ROs) as “civil enforcement employees” assigned to cases involving unpaid taxes or missing tax returns. A RO’s involvement in a case typically begins with another written notice sent by mail. The RO’s job, according to the IRS, is to help bring taxpayers into compliance, “not to make threats or demand some unusual form of payment for a nonexistent liability.”

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