So, you received a letter from the I.R.S. informing you that the I.R.S. is attempting to collect your unpaid federal income taxes. What do you do? How do you respond?
The letter may have come from the I.R.S.'s Automated Collection System or it may have have come from an I.R.S. Revenue Officer. Both the ACS and a Revenue Officer have broad authority to collect delinquent taxes, and both should be taken seriously as both can make your life difficult at best.
The first order of business is to read the letter. I know this seems obvious, but many of my clients do not read I.R.S. letters. They may have the attitude if they ignore the problem it may go away. This isn't an effective strategy for dealing with the I.R.S. The I.R.S. doesn't just go away because you do not read or respond to the letters.
Second, note the response date. This is the latest date to respond to the I.R.S.'s letter and/or provide the information the I.R.S. is requesting. The response date is not a suggestion. While you can negotiate more time to respond, it is imperative that you respect the I.R.S.'s response date. If your response is late, bad things may happen, including liens and levies.
Read and understand what information the I.R.S. is requesting. The I.R.S generally requests bank statements, asset and loan balance information, income, and expense information.
The information you provide to the I.R.S. may seem very intrusive, and it is. But it is imperative that you provide the information. When assembling the information the I.R.S. is requesting please understand that the I.R.S. will use this information to determine if and how much of your delinquent tax liabilities are collectible (your reasonable collection potential).
The I.R.S. may also request a financial statement. This financial statement may be via I.R.S. Form 433-A , 433-B, and/or 433-F. These forms require that you supply your financial information, with substantiation for your entries. These forms provide the basis for most of the I.R.S.'s collection decisions. Do not take these forms lightly.
Some of the information the I.R.S. may request is readily available, such as bank and brokerage statements, loan balances, and asset descriptions. Less available will be asset values, including the value of any real estate and vehicles. You can use estimates to determine the value of your assets, but understand the I.R.S. sees values every day and if your values are suspect (too low), the I.R.S. may request that its internal appraisers determine your assets' values.
We use one or more of the online auto valuation guides to determine the value of vehicles, including automobiles, RVs, motorcycles, etc. We provide the I.R.S. with copies of the source of our valuation, if the I.R.S. questions our valuation.
Valuing real estate is much more problematic. You could commission an appraisal by a licensed real estate appraiser. This can be expensive, but if you have considerable equity or value in your real estate, if may be worth it. If you do not use a licensed real estate appraiser you can value your real estate by examining comparable sales in your area. In Lee County, Florida the property appraiser's office provides comparable sales information on its website. You can also consult local real estate agents. They generally have a good idea as to the value of real estate.
Whatever method you choose to value your real estate, please make sure the value is accurate and that you can defend the value. The I.R.S. personnel are not so gullible that they will accept any number that you provide, especially if your case is being worked by a local office.
After the I.R.S. receives your information, the I.R.S. computes what it calls your reasonable collection potential. This is the amount the I.R.S. believes is ultimately collectible from you.
Your reasonable collection potential can be a monthly amount or it can be a lump sum amount. Your reasonable collection potential is, in its essence, a math computation.
The I.R.S. may not allow you your actual expenses to compute your reasonable collection potential if your reported expenses exceed the I.R.S.'s Collection Financial Standards for your area. The Collection Financial Standards are the average expenses for your area as computed by Bureau of Labor Statistics. If your expenses exceed these standards, you may be allowed only the Collection Financial Standards amount. The I.R.S. may allow expenses in excess of the Collection Financial Standards amount, but this isn't the norm.
The theory behind not allowing expenses in excess of the Collection Financial Standards is that the taxpayers should not fund your lifestyle that exceeds the average lifestyle in your area.
As a consequence of the I.R.S. allowing expenses only up to the amount of the Collection Financial Standards, you may be confronted with a proposed payment or settlement greater than you anticipated or can afford given your current financial condition. This isn't uncommon. There is some room for negotiation here.
The last point I will make is that the I.R.S. requires that all of your current year tax liabilities be paid, including any required estimated tax payments before they will consider any collection alternatives. This hurdle is the one most violated by my clients. The I.R.S. may require that you prove that you have made your required estimated payments by providing a taxable income computation.
If you haven't made all of your required estimated payments, the I.R.S. will not consider an Offer in Compromise or installment agreement. You may be surprised when the I.R.S. requires you to bring your estimated payments current in addition to any delinquent tax payments they require.
I will discuss Offers in Compromise and installment agreements in a future post.
This post simplifies this topic. Your situation may be much more complicated than I have portrayed it here. If you feel out of your element, please call us. We are here to help.