Most Frequent Tax Relief Questions

Note: the following is NOT intended to be legal advice. The following is an overview of the most common tax problems and related tax terms. For specific answers to your specific circumstances, you should seek the counsel of an Enrolled Agent, CPA or attorney.

I didn't file my taxes. What should I do?

The short answer is to file your taxes. There are at least two penalties that you may accrue when you don’t file your tax returns: 1) Failure to file, 2) Failure to make payment If you do not file the IRS may eventually file a Substitute for Return.

How much penalties and interest does the IRS charge?

There are too many penalty combinations and interest rates to cover here. The short answer is that interest and penalties can add a very substantial amount to a tax liability.

Can penalties be removed?

The IRS may provide administrative relief from a penalty that would otherwise be applicable under its First Time Penalty Abatement policy.

You may qualify for administrative relief from penalties for failing to file a tax return, pay on time, and/or deposit taxes when due under the IRS’ First Time Penalty Abatement policy if the following are true:

  • You didn’t previously have to file a return or you have no penalties for the 3 tax years prior to the tax year in which you received a penalty.
  • You filed all currently required returns or filed an extension of time to file.
  • You have paid, or arranged to pay, any tax due.

The failure-to-pay penalty will continue to accrue until the tax is paid in full. It may be to your advantage to wait until you fully pay the tax due prior to requesting penalty relief under the IRS’ first-time penalty abatement policy.

Other administrative relief: If you received incorrect oral advice from the IRS, you may qualify for administrative relief.

Will the IRS forgive or stop interest accrual?

Interest charges never ever stop so long as taxes are due. Period.

However, the interest charged on a penalty will be reduced or removed if that penalty is reduced or removed. If an unpaid balance remains on your account, interest will continue to accrue until the account is fully paid.

What is a Substitute for Return?

If an individual decides not to file a return, the IRS may (after it has sent several reminders) file a substitute return. This is a “worst-case scenario” for the taxpayer since the substitute return does not consider many types of deductions and exemptions. In other words, it is still advantageous to file a return, either before the substitute return or in response to it, in order to avoid paying more than necessary.

What is a Tax Lien?

When the IRS (or state) has determined that taxes are owed and past due balance exists, a federal tax lien may be filed. The below is related to the IRS, while states have different rules but similar principles to the IRS.

A tax lien is imposed by law upon a property to secure the payment of taxes. A tax lien may be imposed for delinquent taxes owed on real property or personal property, or as a result of failure to pay income taxes or other taxes.

IRS Code Sec. 6321. LIEN FOR TAXES
If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belong to such person.

The general rule is that where two or more creditors have competing liens against the same property, the creditor whose lien was perfected at the earlier time takes priority over the creditor whose lien was perfected at a later time (there are exceptions to this rule). Thus, if the government (which is treated as a “creditor” with respect to unpaid taxes) properly files a Notice of Federal Tax Lien (NFTL) before another creditor can perfect its own lien, the tax lien will often take priority over the other lien.

IRS CodeSec. 6322. PERIOD OF Tax Lien
Unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed (or a judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of lapse of time.

The term “assessment” refers to the statutory assessment made by the Internal Revenue Service under 26 U.S.C. § 6201 (that is, the formal recording of the tax in the official books and records at the office of the Secretary of the U.S. Department of the Treasury). Generally, the “person liable to pay any tax” described in section 6321 must pay the tax within ten days of the written notice and demand. If the taxpayer fails to pay the tax within the ten-day period, the tax lien arises automatically (i.e., by operation of law), and is effective retroactively to (i.e., arises at) the date of the assessment, even though the ten-day period necessarily expires after the assessment date. You can read additional information about IRS liens and how to get rid of an IRS lien.

What's the difference between a tax lien a levy?

A Tax levy, under United States Federal law, is an administrative action by the Internal Revenue Service (IRS) under statutory authority, without going to court, to seize property to satisfy a tax liability. The levy “includes the power of distraint and seizure by any means”. The general rule is that no court permission is required for the IRS to execute a section 6331 levy. For taxpayers in serious liability to the IRS, the most feared weapon in the IRS arsenal is the tax levy. Using the powers granted to the IRS in the Internal Revenue Code, the IRS can levy upon wages, bank accounts, social security payments, accounts receivables, insurance proceeds, real property, and, in some cases, a personal residence. Under Internal Revenue Code section 6331, the Internal Revenue Service can “levy upon all property and rights to property” of a taxpayer who owes Federal tax. The IRS can levy upon assets that are in the possession of the taxpayer, called a seizure, or it can levy upon assets in the possession of a third party, a bank, a brokerage house, etc. All future statutory references will be to the Internal Revenue Code unless noted otherwise.

Can the IRS garnish my wages?

Under U.S. federal tax law, a garnishment by the Internal Revenue Service (IRS) is a form of administrative levy. In the case of an IRS levy, no court order is required.

Only a few requirements must be met before the IRS starts a wage garnishment:

  • The IRS must have assessed the tax and must have sent a written Notice and Demand for Payment;
  • The taxpayer must have neglected or refused to pay the tax within the time prescribed in the notice; and,
  • The IRS must have sent a Final Notice of Intent to Levy and Notice of Your Right to A Hearing (levy notice) at least 30 days before the levy.

The IRS may serve the Final Notice in person, may leave the notice at the taxpayer’s home or usual place of business, or may send it to the last known address by certified or registered mail. The IRS is required to send the Final Notice to the last address known to the agency. The taxpayer does not need to actually receive the notice for the notice to be effective. Many taxpayers never actually receive the final notice. Those taxpayers may not realize they are in danger of receiving a levy until their wages are actually garnished.

Can the IRS levy a 401k or retirement account, or garnish a disability check?

Yes, yes and yes.

If I submit an Offer in Compromise will the IRS levy?

Under federal tax regulations, “The IRS will not levy against the property or rights to property of a taxpayer who submits an offer to compromise, to collect the liability that is the subject of the offer, during the period the offer is pending, for 30 days immediately following the rejection of the offer, and for any period when a timely filed appeal from the rejection is being considered by Appeals.”

Once the IRS decides that an offer is processable and that the offer includes all the paperwork and forms properly filled out, the IRS must stop levy actions under §6331. If the offer is missing documents or forms, however, the IRS can return the paperwork to the liability or as un-processable, and can then levy or garnish her property.

What is an Offer in Compromise?

The Offer in Compromise (or OIC) program, in the United States, is an Internal Revenue Service (IRS) program under 26 U.S.C. § 7122 which allows qualified individuals with an unpaid tax liability to negotiate a settled amount that is less than the total owed to clear the liability. A taxpayer uses the checklist in Form 656, Offer in Compromise, package to determine if the taxpayer is eligible for the offer in compromise program. The objective of the OIC program is to accept a compromise when acceptance is in the best interests of both the taxpayer and the government and promotes voluntary compliance with all future payment and filing requirements.
At least one of three conditions must be met to qualify a taxpayer for consideration of an OIC settlement

  • Doubt as to Liability — The taxpayer can show a reason for doubt that the assessed tax liability is correct
  • Doubt as to Collectibility — The taxpayer can show that the liability is likely uncollectible in full by the IRS under any circumstances
  • Effective Tax Administration — The taxpayer does not contest liability or collectibility but can demonstrate extenuating or special circumstances that the collection of the liability would “create an economic hardship or would be unfair and inequitable.” This Offer in Compromise program is available for any taxpayer but is primarily used by individuals that are elderly, disabled, or have special extenuating circumstances.

An Offer in Compromise can be submitted to settle any federal tax liability incurred under the Internal Revenue Code. This includes both business taxes (payroll, income, etc.) and individual taxes (income, trust fund recovery penalties, etc.).

An Offer in Compromise can only settle taxes that have already been assessed. In the United States, Income tax is considered assessed on the date the return is due, or, if the return is filed after the due date, on the day the return is received. For income taxes in the United States, the due date is April 15. If a tax liability has not yet been assessed, it cannot be included in an Offer in Compromise. Certain taxes, however, are due throughout the year. And those taxes can be included in an Offer in Compromise.

Can I be held liable for a business tax liability?

In the United States, the term trust fund recovery penalty refers to a tax penalty assessed against the directors or officers of a business entity that failed to pay a required tax on behalf of its employees. The name derives from the fact that Social Security and Medicare taxes are paid into a trust fund which is used to pay out benefits under these programs. Section 6672 of the Internal Revenue Code provides that employers (rather than the employees themselves) must pay Social Security and Medicare taxes on their employees’ wages, as well as withhold a certain percentage of the wages and pay this withholding to the Internal Revenue Service. If the employer is a business entity such as a corporation or a limited liability company, then any person who was “required to collect, truthfully account for, and pay over” the individual is liable “for a penalty equal to the total amount of tax” that went unpaid. Once assessed, these “trust fund penalties” cannot be discharged in bankruptcy, and the taxpayer will be liable for them even if the business entity itself is liquidated.

Can the US government revoke my passport for owing taxes?

Yes, actually. The IRS is required to notify the State Department about US citizens who are “seriously delinquent.”

What if I cannot afford to pay my tax liability?

You may be eligible for the Offer in Compromise (above) or a Currently Not Collectible status.

If the IRS determines that you cannot pay any of your tax liability due to financial hardship, the IRS may temporarily delay collection by reporting your account as currently not collectible until your financial condition improves. Being currently not collectible does not mean the liability goes away. It means the IRS has determined you cannot afford to pay the liability at this time. If the IRS delays collecting from you, the liability will continue to accrue penalties and interest until the liability is paid in full. The IRS may temporarily suspend certain collection actions, such as issuing a levy, until your financial condition improves. The IRS may still file a Notice of Federal Tax Lien (explained above) while the account is suspended.

I read that taxes are 'voluntary.' Do I really need to pay them?

Some taxpayers assert that they are not required to file federal tax returns because the filing of a tax return is voluntary.  Proponents of this contention point to the fact that the IRS tells taxpayers in the Form 1040 instruction book that the tax system is voluntary.  Additionally, these taxpayers frequently quote Flora v. United States, 362 U.S. 145, 176 (1960), for the proposition that “[o]ur system of taxation is based upon voluntary assessment and payment, not upon distraint.”

The Law: The word “voluntary,” as used in Flora and in IRS publications, refers to our system of allowing taxpayers initially to determine the correct amount of tax and complete the appropriate returns, rather than have the government determine tax for them from the outset. The requirement to file an income tax return is not voluntary and is clearly set forth in sections 6011(a), 6012(a), et seq., and 6072(a) of the Internal Revenue Code. See also Treas. Reg. § 1.6011-1(a).

Any taxpayer who has received more than a statutorily determined amount of gross income in a given tax year is obligated to file a return for that tax year. Failure to file a tax return could subject the non-compliant individual to civil and/or criminal penalties, including fines and imprisonment. In United States v. Tedder, 787 F.2d 540, 542 (10th Cir. 1986), the court stated that, “although Treasury regulations establish voluntary compliance as the general method of income tax collection, Congress gave the Secretary of the Treasury the power to enforce the income tax laws through the involuntary collection . . . .  The IRS’ efforts to obtain compliance with the tax laws are entirely proper.” The IRS warned taxpayers of the consequences of making this frivolous argument in Rev. Rul. 2007-20, 2007-1 C.B. 863 and in Notice 2010-33, 2010-17 I.R.B. 609.

Relevant Case Law:

Helvering v. Mitchell, 303 U.S. 391, 399 (1938) – the Supreme Court stated that “[i]n assessing income taxes, the Government relies primarily upon the disclosure by the taxpayer of the relevant facts . . . in his annual return. To ensure full and honest disclosure, to discourage fraudulent attempts to evade the tax, Congress imposes [either criminal or civil] sanctions.”

United States v. Tedder, 787 F.2d 540 (10th Cir. 1986) – the 10th Circuit upheld a conviction for willfully failing to file a return, stating that the premise “that the tax system is somehow ‘voluntary’ . . . is incorrect.”

United States v. Richards, 723 F.2d 646 (8th Cir. 1983) – the 8th Circuit upheld a conviction and fines imposed for willfully failing to file tax returns, stating that the claim that filing a tax return is voluntary “was rejected in United States v. Drefke, 707 F.2d 978, 981 (8th Cir. 1983).”

United States v. Hartman, 915 F.Supp. 1227, 1230 (M.D. Fla. 1996) – the court held that, “The assertion that the filing of an income tax return is voluntary is, likewise, frivolous.” The court noted that I.R.C. § 6012(a)(1)(A), “requires that every individual who earns a threshold level of income must file a tax return” and that “failure to file an income tax return subjects an individual to criminal penalty.”

Other Cases:

United States v. Drefke, 707 F.2d 978 (8th Cir. 1983); United States v.Schulz, 529 F. Supp. 2d 341 (N.D.N.Y. 2007); Foryan v. Commissioner, T.C. Memo. 2015-114, 109 T.C.M. (CCH) 1591(2015);Jones v. Commissioner, T.C. Memo. 2014-101, 107 T.C.M. (CCH) 1495 (2014).

Can I go to Prison for owing taxes?

No. Owing taxes is a problem but not a crime. Filing false or fraudulent tax returns and willfully evading taxes, however, can be a crime punishable by incarceration. See above, “are taxes voluntary?”

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