5 Things You're Overlooking About Your Tax Debt
So the notices are rolling in and every time you get the mail the feeling gets a little worse. “CP-501 Reminder Notice, CP-503 Immediate Action is Required, CP-207 FINAL NOTICE - INTENT TO LEVY”. Each letter from the IRS has you in constant distress.
I get it.
But before you freak out, take a deep breath and relax. Meltdowns cause people to make mistakes and not think through their issues. So before you flee to the borders with your stuff in a duffel bag wearing last year’s Halloween wig and sunglasses, here are 5 Things You’re Overlooking About Your Tax Debt:
1. SFRs
Government acronym! Intimidating, right? While not as intimidating as some other three-letter government acronyms out there, it could be the reason you have a six or even seven-figure tax debt! SFR stands for “Substitute for Return” - tax returns filed on the taxpayers’ behalf by the IRS when the taxpayer fails to do it themselves. If you don’t have one of those things people are always going on about… “lives”… you might’ve read through the titanic Internal Revenue Code and stumbled across Internal Revenue Code §6020(b). This section of the code is where the IRS gets the power to prepare and file a return for someone that doesn’t file their tax returns.
At the outset, you might think “This is awesome! The government is helping me out!”
It is not.
The IRS preparing and filing your return for you is like having someone wash your windshield at a stoplight against your will with dirty gutter water and then trying to charge you for it. The IRS preparers will typically give you the bare minimum for your return - one exemption, no dependents, and the standard deduction. In doing so, the IRS can then loosely assign you a tax liability. They estimate from whatever W-2's and 1099 reports they have or, if you don’t have any on file, they use your geographic location to determine what a minimal lifestyle would cost in your area and assign you that. For example, if you’re barely squeaking by in the Bay Area or NYC and the IRS gives you an SFR based on your area, you’re in for the tax bill from hell.
Why is this important?
If you have SFRs on your Master Tax Transcripts, they are bad for a whole host of reasons, mainly the lack of exemptions, deductions, and how much tax debt results from them - but they come with an upside. On one hand, because the IRS filed for you, tax debts based on SFRs don’t have a Statute of Limitations - there’s no running clock working against the IRS’ collections efforts. However, we can refile them to the most accurate degree possible - take the exemptions you are entitled to, use your real costs, W-2s, and 1099s and see how much your tax debt falls by. I’ve had clients reduce their tax debt by up to $60,000.00 just by refiling the SFRs on their transcripts. If you need someone to evaluate your Master Tax Transcripts for SFRs and anything else that might be wrong, let us know by going to our site and putting your email in where prompted!
2. What Notice You’re On
When you get a letter from the IRS, it’s common for your brain to cut off the second you see the return address. You start thinking back to news stories of celebrities going to jail over tax debts. You know from reputation alone that the IRS is the most powerful, ruthless, and efficient debt collection agency on the planet. And there, in your hands, is a letter saying you owe them money.
But when your brain shuts off and your fight or flight response takes over, you tend to overlook details - even details in the letter you’re reading. The most overlooked detail in the notices you’re receiving is the number of the notice!
Why is this important?
IRS collections go through an orchestrated process. And like any process, certain things need to happen before the next part can take place. Sure, there’s no denying that at the end of the process, you could be facing some pretty horrible stuff: your bank accounts frozen or seized, Federal Tax Liens on your home, seizure and forced sale at public auction of your own personal belongings, even a restrained passport just to name a few. But for now, get the last letter you’ve received from the IRS and look in the top right-hand corner next to the word “Notice”. That code signifies what part of the collections process you’re in.
For many people, their tax issues may not be so terrible or they just need a little time to get the money together to pay it off. Knowing where you are in the collections process gives you a idea of how much time you have to get it all together, when you should call the IRS and ask for more time, or when you know you’re past the point where you’ll be able to handle it and you need to call in a professional.
CP14 (CP stands for “Computer Paragraph”) - Balance Due: The IRS is letting you know that you have a balance due after a tax return has been posted to your account. They assert that you have 30 days to pay up what is owed. If you ignore it, expect the next notice in about 5 weeks.
CP-501 - Reminder Notice - Balance Due: This is a reminder notice. Reminding you that you have a balance due. Reminding you that you are on the IRS’ radar - in the Automated Collection System. Reminding you that you have a set date by which the payment of your balance must be received by the United States Treasury. If you ignore it, expect the next notice in about a month.
CP-504 - Urgent Notice - Intent to Levy: This is also a reminder notice in the 500 series of letters, but this might be the first time the IRS is putting you on notice of one of their go-to collections consequences: Levying. Federal Law requires the IRS notify you before they are able to Levy your assets - accounts, accounts receivables if you own a business, etc. This serves as a step in that process. If you ignore this, not only are you likely experiencing some very real stress, but you are that much closer to having something taken from you. Nevertheless, if you do, expect the next notice in about a month or less.
CP-503 - Immediate Action is Required: This notice should be among the last of the 500 series you will receive. It reiterates much of the previous information, but it’s about the tone. Like in an argument when you can tell the other person has finally lost their cool and it’s about to escalate - that’s what this letter is. You’ll have a pay-by date, you’ll be made aware of some possible consequences, but above all, you are made very aware that something is coming. Expect the next notice in a month or less.
CP-207 - Final Notice - Intent to Levy: There it is, the final warning. If you’ve received this letter, that date they have is when they need your payment for your balance or your accounts will be frozen first, and then seized in around 21 days. Your bank accounts are the most likely targets, though obviously there are a lot of things that can be levied. The financial institutions you bank with are intricately tied to the Federal Government so your accounts are very much within their reach. Additionally, CP-207 also means that your case is most likely going to be handled by a different arm of the IRS.
The total cycle varies even though it is a computer-run process. It can take anywhere from 4-6 months, and many things can happen on the other end of the screen that can alter the timeline and process depending on the particularities of your case. These notices you receive are the calm before the storm - the lull before all the horror stories you’ve heard about the IRS collections process coming true. So if you are at these points, there is time - but you have to be smart how you use it. If you want to talk to a professional in how to go about this the right way - we’re here. We represent clients from all over the country before the IRS.
3. Asking for More Time
While the Automated Collections Process might be a computer-driven process that’s designed to extract as much tax debt from taxpayers with as little human effort as possible (have to keep that bureaucratic overhead down, after all!), that’s not to say there are no humans involved. Invariably, if you pick up the phone, you can call the IRS and speak to an actual person. While the agency as a whole might be an ever-looming presence in taxpayers’ lives, especially those that owe a tax debt, I can say that every IRS representative I’ve ever personally interacted with has been professional, courteous, and absolutely willing to listen to what I’ve had to say. Do I always get my way 100% of the time? No. Sometimes I ask for difficult things - impossible even - to try to benefit my clients. And when I do that, most of the time it’s in the Federal Government’s best interest that they tell me “no”. And they do. But when I get those “yesses”, it’s because I provided them with a win-win scenario, had excellent rapport throughout the negotiation, and always kept my word.
Why is this important?
This most-overlooked item is important for those of you just waiting for your next paycheck, that one big commission check right around the corner, or your bonus to come through to pay your tax debt off. People get stuck in the collections process with these smaller debt amounts because they let fear paralyze them and they put it off. Meanwhile, time passes, penalties and interest get added. Before you know it, you’re talking to me on the phone about the $35,000 in tax debt that’s been hanging over your head for the past few years.
First, you’re going to want to look at your options. If you want a professional to evaluate your case, contact us. But if you want to go it alone and you are certain that it is your own best interest to just get a little more time, then here is a novel strategy to try: send the IRS a letter or give them a call.
To buy more time, just respond in writing to each notice you have received. Send a letter with a copy (always keep communication for your own files) of the tax bill they sent to you and state that you cannot pay at this moment. Request that they give you 45 more days. You don’t need to state reasons why or give any kind of excuse, simply state your request. When the next notice comes, send another extension letter.
Words of warning: if you are granted these time extensions, use them wisely. Spend the time getting the necessary funds to pay your tax debt and your financial situation in order. If that’s not actually going to be possible, at least get your financial documentation in order, and get a professional on your side that you feel comfortable working with.
Alternatively, if you choose to go the phone call route, you may sit on hold for a few hours, but before you even pick up the phone have all your information in front of you. Have your total tax debt amount, all of the notices you have received, your monthly expenses, and how much cash on hand you have written down. Have your Social Security Number (it’s also your “Taxpayer ID Number”) handy. Then when the IRS representative you’re transferred to asks what the purpose of your call is, request that they simply give you more time.
Bear in mind, however, that a phone call means conversation. The IRS representative may ask why it is that you need more time. When you speak to an IRS representative, you are subject to perjury laws* - so please keep that in mind and never make any kind of false statement to them. (This and many other reasons are why so many people choose to use professional representatives that practice under Circular 230 to represent them to the IRS - I urge you to consider doing so.)
If your request is granted, kudos! You just gave yourself enough time to get the funds to deal with the problem yourself. If, however, they do not give you more time, you are going to want to get with a professional and go through the case. Step 1 for our client is to get a Master Tax Transcript Report and Case Evaluation.
4. Make Sure You’re Actually Dealing with the IRS...or One of Their Duly-Contracted Representatives
Every year, I’ve personally gotten a phone call for my own “case” from an “IRS Collections Officer” saying I owe a tax debt that I need to pay immediately or I could be looking at jail time. They then go on to claim that if I don’t pay them right then (usually by purchasing a pre-paid Visa card and mailing it to some random address they provide). You know what I’ve done every year when I get that call?
I hang up.
Up until recently, the IRS or IRS-affiliated people almost never reached out via phone to collect on back tax debt. In fact, those phone calls were part of an infamous scam. I wasn’t hanging up on an IRS representative, I was hanging up on a thief out to prey upon the unsuspecting. Someone so loathsome that they would take advantage of scared, stressed-out taxpayers. So if you’re here because someone on the phone told you that you owed a tax debt, you need to make sure that you’re actually dealing with the IRS.
In fact, the IRS is aware of how widespread this scam is an mentions the best steps on how to protect yourself on their website: The IRS on the SCAM
In summary, the IRS will NOT:
Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. Generally, the IRS will first mail a bill to any taxpayer who owes taxes.
Demand that you pay taxes without the opportunity to question or appeal the amount they say you owe. You should also be advised of your rights as a taxpayer.
Threaten to bring in local police, immigration officers or other law-enforcement to have you arrested for not paying.
The IRS also cannot revoke your driver’s license, business licenses, or immigration status.
Keep in mind, there are special circumstances in which the IRS will call or come to a home or business, such as when a taxpayer has an overdue tax bill, to secure a delinquent tax return or a delinquent employment tax payment, or to tour a business as part of an audit or during criminal investigations.
Even then, taxpayers will generally first receive several letters from the IRS in the mail.
Why is this important?
Recently, there have been developments that could cause you some problems. In 2015, a piece of legislation known as Fixing America’s Surface Transportation Act (the FAST Act) became law. The bill (if you don’t want to read all 490 pages of it) gives the option to the IRS to contract tax debts out to private debt collectors specifically for “inactive tax receivables”.
SEC. 32102. REFORM OF RULES RELATING TO QUALIFIED TAX COLLECTION CONTRACTS. (a) REQUIREMENT TO COLLECT CERTAIN INACTIVE TAX RECEIVABLES UNDER QUALIFIED TAX COLLECTION CONTRACTS.—Section 6306 of the Internal Revenue Code of 1986 is amended by redesignating subsections (c) through (f) as subsections (d) through (g), respectively, and by inserting after subsection (b) the following new subsection: ‘‘(c) COLLECTION OF INACTIVE TAX RECEIVABLES.— ‘‘(1) IN GENERAL.—Notwithstanding any other provision of law, the Secretary shall enter into one or more qualified tax collection contracts for the collection of all outstanding inactive tax receivables. ‘‘(2) INACTIVE TAX RECEIVABLES.—For purposes of this section— ‘‘(A) IN GENERAL.—The term ‘inactive tax receivable’ means any tax receivable if— H. R. 22—423 ‘‘(i) at any time after assessment, the Internal Revenue Service removes such receivable from the active inventory for lack of resources or inability to locate the taxpayer, ‘‘(ii) more than 1⁄3 of the period of the applicable statute of limitation has lapsed and such receivable has not been assigned for collection to any employee of the Internal Revenue Service, or ‘‘(iii) in the case of a receivable which has been assigned for collection, more than 365 days have passed without interaction with the taxpayer or a third party for purposes of furthering the collection of such receivable. ‘‘(B) TAX RECEIVABLE.—The term ‘tax receivable’ means any outstanding assessment which the Internal Revenue Service includes in potentially collectible inventory.’’
So you don’t get a headache reading that:
‘Inactive tax receivables’ are tax debts that have been removed from active inventory because the taxpayers who owe them can’t be found, more than one-third of the statute of limitations has passed without the case being assigned to an IRS employee, or the case has been stagnant for more than a year.
So these private debt collectors are mostly going after accounts that are in some serious delinquency where the IRS would be hard up to get any real collections going on the account.
Unlike the scam I mentioned above, if one of these private debt collectors contacts you, you are probably going to have to deal with them. I wouldn’t advise you to do so alone.
5. You Don’t Have to do this Alone
This one is overlooked a surprising amount. You don’t have to face the IRS one on one. You can retain a professional to represent you. That’s where I come in. You want someone qualified, knowledgeable, skilled, and driven to advocate for you. Someone to defend you and guide you through the process and get you the best possible resolution. You want someone that will treat you like a person with problems that need solving - not a number to pad a bottom line, not a criminal, and not an idiot.
This is my career, this is what I do. I handle Tax Resolution exclusively. I don’t take every case that walks through the door - if I don’t think I can help or if you’re better off without me, I won’t accept you as a client. I went to school for 7 years, including the University of Florida - Levin College of Law. I started off in the courtroom, defending those accused of serious criminal violations and negotiating with the State Attorney’s Office. Now, I represent taxpayers from all over the country before the IRS under the authority of IRS Circular 230. I know the process, I am a straight shooter, and I am the Global Tax Advisor you want to pick up the phone when the IRS calls about your case.
If you want to talk about your tax debt, get a Case Evaluation and Investigation Report done, or talk about anything I’ve produced about Tax Resolution shoot me an email at info@theglobaltaxadvisors.com
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Author Bio: Jared Thoma graduated from the University of Florida - Levin College of Law. With a background in business operations, defense advocacy, and writing, he zealously represents taxpayers with tax debt for The Global Tax Advisors and runs an informational resource for independent contractors at www.ten99taxes.com. He lives in Michigan and Texas and competes in Rock Climbing and 5K’s when he isn’t wearing his suit and tie.
Disclaimer: The information in this blog post (“post”) is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from The Global Tax Advisors or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction. By using or viewing this blog site and the above post, you understand that there is no attorney client relationship between you and the Blog/Web Site publisher, The Global Tax Advisors, or the individual author.
