Treasury Secretary Timothy Geithner is pushing for more money for the Internal Revenue Service for enforcement, and he told lawmakers Thursday that he wants to streamline the nation’s tax code. “The president has asked Treasury to redesign and bolster enforcement of our Tax Code so that it supports growth, sets the stage for our return to a sustainable fiscal path, and accomplishes these goals in a manner that is fair, efficient and supportive of our society’s broadest goals,” Geithner testified to the House Appropriations Committee’s Financial Services Subcommittee.

Unclaimed refunds totaling approximately $1.3 billion are awaiting over a million people who did not file a federal income tax return for 2005, the Internal Revenue Service announced today. However, to collect the money, a return for 2005 must be filed with the IRS no later than Tuesday, April 15, 2009.
Especially in these tough economic times, people should not lose out on money that is rightfully theirs,” said IRS Commissioner Doug Shulman. “People should check their records, especially if they had taxes withheld from their paychecks but were not required to file a tax return. They may be leaving money on the table, including valuable tax credits that can mean even more money in their pockets.”

The IRS estimates that half of those who could claim refunds for tax year 2005 would receive more than $581. Some individuals may not have filed because they had too little income to require filing a tax return even though they had taxes withheld from their wages or made quarterly estimated payments. In cases where a return was not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund. If no return is filed to claim the refund within three years, the money becomes property of the U.S. Treasury. For 2005 returns, the window closes on April 15, 2009. The law requires that the return be properly addressed, postmarked and mailed by that date. There is no penalty assessed by the IRS for filing a late return qualifying for a refund.

The IRS reminds taxpayers seeking a 2005 refund that their checks will be held if they have not filed tax returns for 2006 or 2007. In addition, the refund will be applied to any amounts still owed to the IRS and may be used to satisfy unpaid child support or past due federal debts such as student loans.

By failing to file a return, individuals stand to lose more than refunds of taxes withheld or paid during 2005. Many low-income workers may not have claimed the Earned Income Tax Credit (EITC). Generally, unmarried individuals qualified for the EITC if in 2005 they earned less than $35,263 and had more than one qualifying child living with them, earned less than $31,030 with one qualifying child, or earned less than $11,750 and had no qualifying child. Limits are slightly higher for married individuals filing jointly.

Current and prior year tax forms and instructions are available on the Forms and Publications web page of IRS.gov or by calling 1-800-TAX-FORM (1-800-829-3676). Information about the Earned Income Tax Credit and how to claim it is also available on IRS.gov. Taxpayers who need help also can call the toll-free IRS help line at 1-800-829-1040.

First-time homebuyers should begin planning now to take advantage of a new tax credit included in the recently enacted Housing and Economic Recovery Act of 2008.

Available for a limited time only, the credit:

• Applies to home purchases after April 8, 2008, and before July 1, 2009.
• Reduces a taxpayer’s tax bill or increases his or her refund, dollar for dollar.
• Is fully refundable, meaning that the credit will be paid out to eligible taxpayers, even if they owe no tax or the credit is more than the tax that they owe.

However, the credit operates much like an interest-free loan, because it must be repaid over a 15-year period. So, for example, an eligible taxpayer who buys a home today and properly claims the maximum available credit of $7,500 on his or her 2008 federal income tax return must begin repaying the credit by including one-fifteenth of this amount, or $500, as an additional tax on his or her 2010 return.

Eligible taxpayers will claim the credit on new IRS Form 5405. This form, along with further instructions on claiming the first-time homebuyer credit, will be included in 2008 tax forms and instructions and be available later this year on IRS.gov, the IRS Web site.

If you bought a home recently, or are considering buying one, the following questions and answers may help you determine whether you qualify for the credit.

Q. Which home purchases qualify for the first-time homebuyer credit?

A. Only the purchase of a main home located in the United States qualifies and only for a limited time. Vacation homes and rental property are not eligible. You must buy the home after April 8, 2008, and before July 1, 2009. For a home that you construct, the purchase date is the first date you occupy the home.

Taxpayers who owned a main home at any time during the three years prior to the date of purchase are not eligible for the credit. This means that first-time homebuyers and those who have not owned a home in the three years prior to a purchase can qualify for the credit.

If you make an eligible purchase in 2008, you claim the first-time homebuyer credit on your 2008 tax return. For an eligible purchase in 2009, you can choose to claim the credit on either your 2008 (or amended 2008 return) or 2009 return.

Q. How much is the credit?

A. The credit is 10 percent of the purchase price of the home, with a maximum available credit of $7,500 for either a single taxpayer or a married couple filing jointly. The limit is $3,750 for a married person filing a separate return. In most cases, the full credit will be available for homes costing $75,000 or more. Whatever the size of the credit a taxpayer receives, the credit must be repaid over a 15-year period.

Q. Are there income limits?

A. Yes. The credit is reduced or eliminated for higher-income taxpayers.

The credit is phased out based on your modified adjusted gross income (MAGI). MAGI is your adjusted gross income plus various amounts excluded from income—for example, certain foreign income. For a married couple filing a joint return, the phase-out range is $150,000 to $170,000. For other taxpayers, the phase-out range is $75,000 to $95,000.

This means the full credit is available for married couples filing a joint return whose MAGI is $150,000 or less and for other taxpayers whose MAGI is $75,000 or less.

Q. Who cannot take the credit?

A. If any of the following describe you, you cannot take the credit, even if you buy a main home:

• Your income exceeds the phase-out range. This means joint filers with MAGI of $170,000 and above and other taxpayers with MAGI of $95,000 and above.
• You buy your home from a close relative. This includes your spouse, parent, grandparent, child or grandchild.
• You stop using your home as your main home.
• You sell your home before the end of the year.
• You are a nonresident alien.
• You are, or were, eligible to claim the District of Columbia first-time homebuyer credit for any taxable year.
• Your home financing comes from tax-exempt mortgage revenue bonds.
• You owned another main home at any time during the three years prior to the date of purchase. For example, if you bought a home on July 1, 2008, you cannot take the credit for that home if you owned, or had an ownership interest in, another main home at any time from July 2, 2005, through July 1, 2008.

Q. How and when is the credit repaid?

A. The first-time homebuyer credit is similar to a 15-year interest-free loan.  Normally, it is repaid in 15 equal annual installments beginning with the second tax year after the year the credit is claimed. The repayment amount is included as an additional tax on the taxpayer’s income tax return for that year.  For example, if you properly claim a $7,500 first-time homebuyer credit on your 2008 return, you will begin paying it back on your 2010 tax return. Normally, $500 will be due each year from 2010 to 2024.

You may need to adjust your withholding or make quarterly estimated tax payments to ensure you are not under-withheld.

However, some exceptions apply to the repayment rule. They include:

• If you die, any remaining annual installments are not due. If you filed a joint return and then you die, your surviving spouse would be required to repay his or her half of the remaining repayment amount.
• If you stop using the home as your main home, all remaining annual installments become due on the return for the year that happens. This includes situations where the main home becomes a vacation home or is converted to business or rental property. There are special rules for involuntary conversions.  Taxpayers are urged to consult a professional to determine the tax consequences of an involuntary conversion.
• If you sell your home, all remaining annual installments become due on the return for the year of sale. The repayment is limited to the amount of gain on the sale, if the home is sold to an unrelated taxpayer. If there is no gain or if there is a loss on the sale, the remaining annual installments may be reduced or even eliminated. Taxpayers are urged to consult a professional to determine the tax consequences of a sale.
• If you transfer your home to your spouse, or, as part of a divorce settlement, to your former spouse, that person is responsible for making all subsequent installment payments.

Under this type of relief, you allocate (separate) the understatement of tax (plus interest and penalties) on your joint return between you and your spouse (or former spouse). The understatement of tax allocated to you is generally the amount for which you are responsible.

This type of relief is available only for unpaid liabilities resulting from understatements of tax. Refunds are not allowed.

To request relief by separation of liability, you must have filed a joint return and meet either of the following requirements at the time you file Form 8857.

You are no longer married to, or are legally separated from, the spouse with whom you filed the joint return for which you are requesting relief. (Under this rule, you are no longer married if you are widowed.)

You were not a member of the same household (explained next) as the spouse with whom you filed the joint return at any time during the 12-month period ending on the date you file Form 8857.

Members of the same household. You and your spouse are not members of the same household if you are living apart and are estranged. However, you and your spouse are considered members of the same household if any of the following conditions are met.

1. You and your spouse reside in the same dwelling.

2. You and your spouse reside in separate dwellings but are not estranged, and one of you is temporarily absent from the other’s household as explained in (3) below.

3. Either spouse is temporarily absent from the household and it is reasonable to assume that the absent spouse will return to the household, and the household or a substantially equivalent household is maintained in anticipation of the absent spouse’s return. Examples of temporary absences include absence due to imprisonment, illness, business, vacation, military service, or education.

Burden of proof. You must be able to prove that you meet all of the requirements for separation of liability (except actual knowledge) and that you did not transfer property to avoid tax (discussed later). You must also establish the basis for allocating the erroneous items.

Limitations on Relief

Even if you meet the requirements discussed previously, a request for relief by separation of liability will not be granted in the following situations.

1. The IRS proves that you and your spouse (or former spouse) transferred assets to one another as part of a fraudulent scheme. A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, ex-spouse, or business partner.

2. The IRS proves that at the time you signed your joint return, you had actual knowledge (explained next) of any erroneous items giving rise to the deficiency that were allocable to your spouse (or former spouse). For the definition of erroneous items, see Erroneous Items under Innocent Spouse Relief.

3. Your spouse (or former spouse) transferred property to you to avoid tax or the payment of tax. See Transfers of Property To Avoid Tax, later.

The relief discussed here does not apply to any part of the understatement of tax due to your spouse’s erroneous items of which you had actual knowledge. You and your spouse remain jointly and severally liable for this part of the understatement.

If you had actual knowledge of only a portion of an erroneous item, the IRS will not grant relief for that portion of the item.

You had actual knowledge of an erroneous item if:

· You knew that an item of unreported income was received. (This rule applies whether or not there was a receipt of cash.)

· You knew of the facts that made an incorrect deduction or credit unallowable.

· For a false or inflated deduction, you knew that the expense was not incurred, or not incurred to the extent shown on the tax return.

Knowledge of the source of an erroneous item is not sufficient to establish actual knowledge. Also, your actual knowledge may not be inferred when you merely had a reason to know of the erroneous item. Similarly, the IRS does not have to establish that you knew of the source of an erroneous item in order to establish that you had actual knowledge of the item itself.

Your actual knowledge of the proper tax treatment of an erroneous item is not relevant for purposes of demonstrating that you had actual knowledge of that item. Likewise, neither is your actual knowledge of how the erroneous item was treated on the tax return relevant for purposes of demonstrating actual knowledge; For example, if you knew that your spouse received dividend income, relief is not available for that income even if you did not know it was taxable.

Example.

Bill and Karen Green filed a joint return showing Karen’s wages of $50,000 and Bill’s self-employment income of $10,000. The IRS audited their return and found that Bill did not report $20,000 of self-employment income. The additional income resulted in a $6,000 understatement of tax, plus interest and penalties. After obtaining a legal separation from Bill, Karen filed Form 8857 to request relief by separation of liability. The IRS proved that Karen actually knew about the $20,000 of additional income at the time she signed the joint return. Bill is liable for all of the understatement of tax, interest, and penalties because all of it was due to his unreported income. Karen is also liable for the understatement of tax, interest, and penalties due to the $20,000 of unreported income because she actually knew of the item. The IRS can collect the entire deficiency from either Karen or Bill because they are jointly and individually liable for it.

Factors supporting actual knowledge.   The IRS may rely on all facts and circumstances in determining whether you actually knew of an erroneous item at the time you signed the return. The following are examples of factors the IRS may use.

·         Whether you made a deliberate effort to avoid learning about the item in order to be shielded from liability.

·         Whether you and your spouse (or former spouse) jointly owned the property that resulted in the erroneous item.

Domestic abuse exception.   Even if you had actual knowledge, you may still qualify for relief if you establish that:

·         You were the victim of domestic abuse before signing the return, and

·         Because of that abuse, you did not challenge the treatment of any items on the return because you were afraid your spouse (or former spouse) would retaliate against you.

If you establish that you signed your joint return under duress, then it is not a joint return, and you are not liable for any tax shown on that return or any tax deficiency for that return. However, you may be required to file a separate return for that tax year.

Transfers of Property To Avoid Tax

If your spouse transfers property (or the right to property) to you for the main purpose of avoiding tax or payment of tax, the tax liability allocated to you will be increased by the fair market value of the property on the date of the transfer. The increase may not be more than the entire amount of the liability. A transfer will be presumed to have as its main purpose the avoidance of tax or payment of tax if the transfer is made after the date that is 1 year before the date on which the IRS sent its first letter of proposed deficiency. This presumption will not apply if the transfer was made under a divorce decree, separate maintenance agreement, or a written instrument incident to such an agreement. The presumption will also not apply if you establish that the transfer did not have as its main purpose the avoidance of tax or payment of tax.

If the presumption does not apply, but the IRS can establish that the purpose of the transfer was the avoidance of tax or payment of tax, the tax liability allocated to you will be increased as explained above.

The Internal Revenue Service today announced an expedited process that will make it easier for financially distressed homeowners to avoid having a federal tax lien block refinancing of mortgages or the sale of a home.
If taxpayers are looking to refinance or sell a home and there is a federal tax lien filed, there are options. Taxpayers or their representatives, such as their lenders, may request that the IRS make a tax lien secondary to the lien by the lending institution that is refinancing or restructuring a loan. Taxpayers or their representatives may request that the IRS discharge its claim if the home is being sold for less than the amount of the mortgage lien under certain circumstances.
The process to request a discharge or a subordination of a tax lien takes approximately 30 days after the submission of the completed application, but the IRS will work to speed those requests in wake of the economic downturn.
“We don’t want the IRS to be a barrier to people saving or selling their homes. We want to raise awareness of these lien options and to speed our decision-making process so people can refinance their mortgages or sell their homes,” said Doug Shulman, IRS commissioner.
“We realize these are difficult times for many Americans,” Shulman said. “We will ensure we have the resources in place to resolve these issues quickly and homeowners can complete their transactions.”
Filing a Notice of Federal Tax Lien is a formal process by which the government makes a legal claim to property as security or payment for a tax debt. It serves as a public notice to other creditors that the government has a claim on the property.
In some cases, a federal tax lien can be made secondary to another lien, such as a lending institution’s, if the IRS determines that taking a secondary position ultimately will help with collection of the tax debt. That process is called subordination. Taxpayers or their representatives may apply for a subordination of a federal tax lien if they are refinancing or restructuring their mortgage. Without lien subordination, taxpayers may be unable to borrow funds or reduce their payments. Lending institutions generally want their lien to have priority on the home being used as collateral.
To apply for a certificate of lien subordination, people must follow directions in Publication 784, How to Prepare an Application for a Certificate of Subordination of a Federal Tax Lien. Again, there is no form but there must be a typed letter of request and certain documentation. The request should be mailed to one of 40 Collection Advisory Groups nationwide. See Publication 4235, Collection Advisory Group Addresses, for address information.
Taxpayers or their representatives may apply for a certificate of discharge of a tax lien if they are giving up ownership of the property, such as selling the property, at an amount less than the mortgage lien if the mortgage lien is senior to the tax lien. The IRS may also issue a certificate of discharge in other circumstances if the taxpayer has sufficient equity in other assets, can substitute other assets, or is able to pay the IRS its equity in the property. Without a tax lien discharge, the taxpayer may be unable to complete the home ownership change and the ownership title will remain clouded.
To apply for a tax lien discharge, applicants must follow directions in Publication 783, Instructions on How to Apply for a Certificate of Discharge of a Federal Tax Lien. There is no form but there must be a typed letter of request and certain documentation. The request should be mailed to one of 40 Collection Advisory Groups nationwide. See Publication 4235 for address information.
The IRS also urges people to contact the agency’s Collection Advisory Group early in the home sale or refinancing process so that it can begin work on their requests. People sometimes delay informing lenders of the tax liens, which only serves to delay the transaction.
Currently, there are more than 1 million federal tax liens outstanding tied to both real and personal property. The IRS issues more than 600,000 federal tax lien notices annually.

In the vast majority of cases, you will not lose any of your stuff to the IRS.  Most clothing and personal household belongings are beyond the scope of the IRS collection power.  Here’s why:

Section 6334(a)(1) of the Internal Revenue Code allows you to keep all of your clothing.  Bear in mind that the tax code uses the words “necessary” in describing the clothing that is exempt from IRS collections, meaning that the IRS can technically take clothing that is not necessary, like designer shoes, handbags, etc. (click here for some fancy clothing that the IRS did see fit to seize, and note that this is type of activity is highly unusual). 

Section 6334(a)(2) of the tax code protects your furniture and household effects up to $7,900 in value from the IRS.  The IRS is not taking your television, or your bed, or lawnmower.

The Internal Revenue Manual, at Section 5.17.3.4.7, Property Exempt from Levy, restates these exemptions in guidance to IRS employees.

It is important to remember these exemptions when completing IRS financial statements, like Form 433A. Claim the value of these everyday items as exempt.  And in an offer in compromise, make sure that these assets are not included in the value of the offer as they are off limits to the IRS - again, claim it as exempt. 

IRS Revenue Officers continue to become more aggressive in the field. Here is a new approach to look for:

I had a recent case in which a Revenue Officer sent my client a notice stating that that there would be an interview at my client’s house. These meetings usually take place at an IRS office. It was a somewhat bold move to request access to a personal residence for an interview in a collection case, especially because my client lived with her mother. This made my client very uncomfortable, for good reason (then again, wasn’t that the point of the IRS request?).

Here is my response:

1. The IRS has no right to access a taxpayer’s private living quarters or business without the permission of the taxpayer or a court ordered writ of entry. Sometimes it makes sense to grant permission or access, but not this time.

2. Under Internal Revenue Code 7521(c), the IRS cannot compel the presence of a taxpayer at a meeting if the taxpayer has representation.

The relevant parts of Section 7521 state as follows:

Any attorney, certified public accountant, enrolled agent, enrolled actuary or any other person permitted to represent the taxpayer before the Internal Revenue Service… who has a written power of attorney executed by the taxpayer may be authorized by such taxpayer to represent the taxpayer in any interview…(a)n employee of the IRS may not require a taxpayer to accompany the representative in the absence of an administrative summons issued to the taxpayer.

The taxpayer is not required to meet with the IRS if there is representation. If the representative is not going to be at the client’s house or place of business, then there is no meeting. The Revenue Officer is required to meet with the representative, and that would either be at the representative’s office or at the IRS. Compelling the taxpayer’s attendance can only be done with a summons, which was not present in this case. The IRS was testing the waters on this one.

There can be circumstances where access to a personal residence or business can be beneficial. A Revenue Officer once drove by my client’s mobile home and stated afterwards that she believed (correctly, I might add) the case would be uncollectible.

As a general rule, cooperation and good communication is essential in dealings with the IRS, but that must be tempered with knowing when to say no.

If I file bankruptcy on the IRS, but my spouse does not, will the filing stop the IRS to both of us or only me?

Posted on October 26, 2008
Filed Under Bankruptcy, Chapter 13, Chapter 7 | Leave a Comment

When a bankruptcy is filed on the IRS, Section 362 of the Bankruptcy Code imposes what is called an “automatic stay” on collection activity by creditors, including the IRS. The automatic stay requires the IRS to release any levys and to cease any further collection action.

But what if a husband and wife owe back taxes on joint returns, and only the husband files bankruptcy? Will the bankruptcy cause the IRS to stop collecting on the whole amount or just the husband’s portion?

The bankruptcy will stop the IRS from collecting against the spouse who filed the bankruptcy (husband in this case), but it will not stop the government from collecting against the non-filing spouse (here, the wife) on a joint liability.

This question refers to what is known as a “co-debtor stay.” In most Chapter 13 bankruptcy cases, a co-debtor stay protects both the filing and non-filing spouse against all collections on joint debts during the bankruptcy. The catch is that co-debtor stays apply only to consumer debt. Most courts define consumer debt to mean extenstions of credit, like loans and credit cards, not taxes. So, taxes are not consumer debt, and are not subject to the co-debtor stay in Chapter 13 cases. As to Chapter 7 cases, there are no co-debtor stays regardless of the type of debt involved.

That being said, bankruptcy can be a very effective way to eliminate taxes. Learn a little more in this post, or read an article I recently wrote on the topic for the Journal of the National Association of Enrolled Agents (NAEA).

In most cases, the IRS will require the past six years of unfiled tax returns for an account to be considered current.  This is a written directive of the IRS, found in IRS Policy Statement 5-133, “Delinquent Returns - Enforcement of Filing Requirements”.  

If the unfiled returns have a balance due, the amount you owe will double every five years from the interest and penalties charged by the IRS (more about the time limitations to collect here.  Since IRS billing notices will start after the returns are filed, an early financial analysis is always recommended to determine the collection approach (offer in compromise? bankruptcy? installment agreement?).  You will receive refunds, but only for returns that were to be filed within the last three years.  

Exceptions to the six year rule may apply in cases involving a prior history of noncompliance, false statements, existence of income from illegal sources, or the class or industry the taxpayer is in (a physician with advanced education may be held to a higher standards of awareness).  These cases could involve criminal elements and must be handled very delicately, although the vast majority of nonfiling cases are civil matters, not criminal.