Hello, I'm Tom Black, attorney at law. You've reached my free information message about IRS collection defense- what can be done to protect you against the Collection Division of the Internal Revenue Service. I'm Board Certified in Consumer Bankruptcy Law by the Texas Board of Legal Specialization.

Please note that the information that I'm giving you is general information only. This is not legal advice or guidance for your particular situation. Only after you consult with me or another professional, can you receive advice that you should rely upon.

And also, if you meet with an attorney such as myself, be assured that whatever you tell me is absolutely privileged and confidential, and will not be disclosed without your consent. CPA's have a similar privilege. There are also individuals licensed to practice before the IRS called enrolled agents, and many of them are quite capable and competent to act on your behalf. Please always be sure to tell your tax professional the truth, the complete truth.

Introduction.

Now, I'm going to explain a lot to you, so I'll first tell you what I'm going to tell you. I'm going to tell you about (1) the Collection Powers of the IRS, (2) Your Rights, (3) Your Options, (4) if your tax debt is "Currently Not Collectible," (5) the Statute of Limitations on Collection of Tax, (6) how the Collection Process works, (7) Resolving your Tax Problems without Bankruptcy, and finally, (8) How Bankruptcy can Solve Your Tax Problems.

IRS Collection Powers.

If you owe the IRS money, you know how it feels. It feels QUITE scary, and it should, sort of like having a 900 pound gorilla knocking on your front door. IRS Revenue Officers have enormous power to collect the delinquent taxes. They can seize practically everything you own, with very limited exceptions, known as exemptions. The "exemptions" allowed you against the claims of your other creditors under other state or federal laws, that is, the property you're allowed to keep, are not applicable to the IRS.

IRS Revenue Officers can seize your bank accounts, certificates of deposit, and accounts receivable, without anyone's approval. With an IRS manager's approval, a revenue officer can seize your automobiles, business assets, contents of safe deposit boxes, jewelry or other collections, and real estate other than your homestead.

There are some things that the IRS cannot take away from you, but they're very limited. Examples: Necessary clothes and school books; a small amount of furniture, fuel, food and personal effects; a small amount of books or tools of trade; unemployment benefits; undelivered mail; and an exemption for wages in the amount of the sum of your standard and personal exemptions (that's not much).

Even your principal residence (your homestead) can be taken and sold, but the revenue officer must first get approval of the IRS district director or assistant district director. Yes, the IRS can seize your homestead, even in the state of Texas. In "flagrant" cases, The IRS can even take your pension or retirement plan and your social security payments.

The collection powers of the IRS are truly awesome, but, they really have to be, or some people would just not pay the tax. And you better believe it, the IRS is going to collect tax, if it's at all possible. After all, they have the Army, Navy, Air Force, and Marines.

Your Rights vs. The I,R,S.

Now, I'm not telling you that you're powerless against the IRS. Not at all. The IRS must follow their own rules. The law that the IRS has to obey is the Internal Revenue Code, and IRS employees must also abide by the Internal Revenue Manual, and other regulations.

If You're "Dead Broke"

If you have no assets or income subject to levy (seizure by the IRS), or if the IRS determines that a levy would create an "undue hardship", that is, if an IRS levy would prevent you from meeting your necessary living expenses, as defined by the IRS, then the IRS can declare that your account is "currently not collectible" and close your account.

This doesn't mean that the tax is forgiven, or that the IRS will release any Notices of Tax Lien it has filed. In fact, when an account is declared currently not collectible, the IRS may input computer codes that will "kick out" your account to a revenue officer for collection, either periodically, say every year, or before the account becomes time-barred, or when you file a tax return showing so much income, say, over $30,000 or $50,000.

But, having your account declared currently not collectible at least resolves the matter temporarily, and unless your situation changes substantially, the tax eventually becomes time-barred.

The Statute of Limitations.

Many people aren't aware that the IRS tax claims against you can become unenforceable because of lapse of time. The IRS has ten years from the date of the assessment to collect the tax. It used to be 6 years. "Assessment" of the tax against you is when the IRS notes in its records that you owe the tax; this usually occurs within a day or so of the receipt of your return.

If the IRS doesn't collect the money by the end of the ten years, whether it's income tax or payroll tax, (money you've withheld from your employees' pay), the IRS is time-barred from collecting the tax. Exceptions: If the IRS sues you and gets a judgment, the judgment is valid longer (This rarely happens). Or, if you leave the country, the statute is extended. The statute can also be extended for the time an offer of compromise is pending, and the time that a bankruptcy is pending, plus six months.

Now, it's very important to file your tax returns. It is a federal crime to willfully fail or refuse to file a tax return. But it's also quite stupid to not file returns, because the statute of limitations never begins to run until the tax is assessed, which only happens after you file a return.

The Collection Process.

If you owe the IRS money, typically as soon as you file a return showing a balance due, a lien arises in favor of the IRS. The lien is on all of your property, world-wide. Technically, this occurs when the IRS assesses the tax, makes demand upon you for payment, and you have neglected or refused to pay.

The IRS can then file a Notice of Federal Tax Lien against you in the public records, and this puts others on notice that you owe taxes. After this happens, you'll find it impossible to sell real estate, without paying the tax. The Notice of Tax Lien will appear on your credit report.

Typically, though, before a Notice of Lien is filed, you'll receive a series of several letters from the IRS about the money you owe. The letters start out quite nicely, asking for the money, but become increasingly harsh. The final letter will be entitled "Notice of Intent to Levy", giving you 10 days to pay the tax before bank accounts may be levied upon, or 30 days before the IRS will levy, or seize, wages. The IRS can levy sooner than these periods, but collection of the tax must be "in jeopardy".

Here in the Houston area, the letters come from the IRS Automated Collection System in Austin. If they have "levy sources," that is, if they know where you bank or work, then they can simply mail a Notice of Levy to your bank or employer. The bank levy is a one-shot deal, and only traps the money in the account on the date of levy.

Wage levies are continuing, and the IRS gets the wages until you pay all the tax or the levy is released. The IRS finds most of its levy sources by simply calling taxpayers on the phone and asking. While it's certainly your decision, if the IRS calls you to ask where you work or bank, I wouldn't tell them. Tell them you want to talk to your lawyer before answering.

Revenue Officers

If the IRS doesn't have a levy source, and you don't pay, the account will eventually be assigned to a Revenue Officer, basically a well-trained and very aggressive tax collector. He or she will either call you, or quite likely show up at your home or business to demand payment of the tax. These folks are not kidding. I explained a few minutes ago that these people can legally seize just about all of your property to satisfy the unpaid tax. If it gets to this point, obviously I would suggest you hire me or someone else experienced in these matters to help you deal with the problem.

In the meantime, I wouldn't let a revenue officer into my home. The Revenue Officer must get your consent or a court order to enter your private premises, and getting a court order is a big hassle for them.

If the IRS representative shows you a gold badge, they are probably with the CID, the IRS Criminal Investigative Division. If you are the subject of an IRS criminal investigation, I would decline to answer questions without an attorney. Call me and I'll recommend you to a criminal defense attorney.

What you can do to resolve IRS problems, without Bankruptcy.

Now, if you owe some taxes, and are willing to pay, it may be possible to enter into an installment agreement with the IRS. This is basically a time-payment plan. Some people are able to make such an agreement with the IRS over the telephone. But if you've been contacted by a Revenue Officer, or if you have a significant amount of income, a large tax debt, or a lot of property, you may be better served to hire me, or someone else experienced in these matters, to help you fill out an IRS Form 433 Collection Statement, listing all of your assets, debts, income, and necessary monthly living expenses, and negotiate on your behalf with the IRS.

That's necessary monthly living expenses. Not cable TV. Not college tuition. In small cases, involving no more than a few thousand dollars, this procedure can work fine. You make a monthly payment to IRS, just like your other bills. You agree to pay current taxes as they come due.

Offers in Compromise

If you owe a large amount of tax for some reason, whether it's income tax or payroll taxes that were withheld from your employees, you may want to make what's called an Offer in Compromise to the IRS. This may allow you to settle with the IRS for less than the full amount owed. I strongly recommend that you hire a professional to handle any Offer in Compromise that you might make to the IRS.

To complete an Offer in Compromise, a Collection Statement is filled out, but instead of making monthly payments, you offer a lump sum to the IRS to settle up. The Offer must equal your "net equity in assets" plus your ability to make payments over five years, discounted to present value. The IRS will then consider your offer, and tell you if it's acceptable or not. To get the lump sum to offer, many people making offers in compromise will borrow it from friends or relatives. In some circumstances the IRS will permit up to 24 months to pay out an Offer in Compromise.

For example, let's say you owe $50,000 in payroll taxes, but your assets are only worth $5,000 and you will have only $5,000 of income in excess of necessary living expenses over the next 5 years. First, your excess income is discounted to $2,500, and that's added to the $5,000 in equity in assets you have. The IRS may very well accept the $7,500 total to settle the $50,000 tax liability. And if it does, that's it, the remaining tax, interest and penalties are abated or canceled, any notices of tax lien are released, and it's over.

However, part of the IRS acceptance of any offer is that you comply with IRS laws strictly for the next 5 years. If you later fail to file or pay, look out, all deals are off, and the IRS KEEPS the money.

Handling Tax Problems through Bankruptcy

The filing of a bankruptcy case can greatly help, and sometimes completely solve, IRS Tax problems.

Once a bankruptcy case is filed, an automatic stay goes into effect, that stops the IRS from taking any further collection action on the account.

In certain circumstances, income taxes are completely dischargeable or cancelable in bankruptcy.

Keep in mind that payroll taxes, taxes that you withheld from the paychecks of employees, are never dischargeable in Bankruptcy. They become unenforceable by lapse of time, the 10 year Statute of limitations, or they can be compromised by an accepted Offer in Compromise, they can be paid out over time in a Chapter 11, 12, or 13 Bankruptcy, oftentimes without interest, but payroll taxes cannot be discharged (canceled) in Bankruptcy.

Now as to income taxes, if the due date of the tax return, including extensions, is more than 3 years before the filing of the Bankruptcy, the return was filed more than 2 years prior to the filing of the Bankruptcy, and the tax liability was assessed more than 240 days before the Bankruptcy was filed, the taxes may be dischargeable in a Chapter 7 bankruptcy.

There are a couple of other qualifications to this general rule. But if your tax liability meets this general definition, the taxes are usually dischargeable in Chapter 7. You may not qualify to be a Chapter 7 debtor for other reasons. If you have a lot of disposable income, or if you've had a Chapter 7 discharge within the past 6 years, then you may not qualify to be a debtor under Chapter 7.

If you have a consultation with me, we'll discuss these issues. If you have a sizable IRS debt, we will likely order your transcript of account from the IRS, to determine the exact status of your taxes. Then I'll work through a flow chart with you to determine whether or not your taxes are dischargeable prior to filing your Chapter 7 Bankruptcy.

If the taxes are discharged in your Bankruptcy, following your Bankruptcy the IRS can never try to collect the taxes from you personally again, by levy, for example.

However, if you have property, and the IRS had filed their Notice of Federal Tax Lien prior to when you filed the Bankruptcy, then the tax lien continues to exist after the Bankruptcy, and will have to be dealt with in some manner. Usually, we pay the IRS an amount of money after the Bankruptcy to release the lien (based on the value of your property) or allow the lien to expire by the lapse of time, i.e. the running of the statute of limitations.

Chapter 13

If your taxes are not so old as to be dischargeable in Chapter 7, or for other reasons you cannot file Chapter 7, it may be best to file a Chapter 13 case. In Chapter 13, the same automatic stay goes into effect as soon as the case is filed, just like in Chapter 7. The IRS, as well as all of your other creditors, cannot bother you in any way.

However, in Chapter 13, if the taxes that you owe are "priority" claims and are not yet dischargeable, for example if they are not yet 3 years old, then the amount of tax and accumulated interest up to the date you file Chapter 13 must be paid during your Chapter 13 plan, together with your other debts to the extent of your ability to pay, over as long as 60 months.

The IRS is not entitled to additional interest on the tax, unless they have filed a Notice of Tax Lien prior to your Chapter 13 case being filed with the Bankruptcy Court. Even if they have filed a notice of lien, the interest that you must pay is limited to the amount of interest that accrues on the amount of your equity in property, which is often much less than the full amount of interest that you would otherwise have to pay.

Now this all sounds quite complicated, and it is; most lawyers and accountants are not aware of the legal issues and principles involved in tax collection defense. In fact, it's even more complicated than I can explain here. But take my word for it, Chapter 13 can be a terrific way for people to solve their tax problems. When you come in for a consultation, it's really quite simple for me to show you how Chapter 13 can be used to resolve your problems with the IRS.

Getting Help from My Office

Your first consultation with me about your tax problems is free and usually takes about a half an hour. Please bring your most recent communication from the IRS, and any Notice of Federal Tax Liens. Please download a questionnaire from this web site, fill it out and bring it in, as well. Fees vary depending on the work needed, but will be discussed with you in advance.

Please see the map on this web site for directions to my office. Call my office anytime during business hours to make an appointment at 713-772-8037. I'm Board Certified in Consumer Bankruptcy Law by the Texas Board of Legal Specialization.