Posted on by Jan Roberg

Things To Do If the IRS Threatens to Levy Your Bank Account

Tax Concept

If you’ve received an IRS notice saying that they intend to levy your bank accounts if you don’t pay up in 30 days, then it’s time to pay attention. Before the IRS actually issues a levy notice, they’ve usually made a few attempts at contacting you and trying to get a payment. If you’ve received an IRS levy notice, it means that the IRS hasn’t heard from you—they think you’ve been blowing them off (which in many cases is true). If you ignore the levy notice, they’ll just take your money and the law is on their side so you need to act now.

First, the responsible thing is to call them, or hire someone to deal with them for you. (I personally think that if you’ve reached this point, it’s best to hire someone—but remember, I do this for a living, so note that I’m biased.)

There are things you can do to prevent the IRS from going through with the levy. Let’s assume that you really do owe the money:

1. You can set up a payment arrangement–you pay off the IRS on a monthly bill schedule

2.Your situation might qualify you for an offer in compromise (the pennies on the dollar thing you see in TV commercials), or

3. Maybe you’re going through hard times and need to be put into the currently uncollectable status—you still owe, but the IRS quits hounding you until you get a job or your situation changes.

But maybe you don’t really owe the money. That’s the big kicker for me. Usually, if you’re getting IRS levy notices, you do owe them money—or at least part of it, but I have seen several cases where my clients don’t owe the IRS anything! A couple of times I have even gotten them refunds instead. If you didn’t do your taxes, and the IRS did them for you, don’t assume that the IRS did them right. When the IRS does your taxes for you, they automatically put you in the highest tax bracket they can justify and you get no deductions or tax credits that you might have qualified for. (Here’s a hint: if you’ve got kids, the IRS probably did your taxes wrong.) Even if you find that you don’t owe the IRS money—you still have to contact them, let them know the situation, and then you’re going to have to provide proof. Usually your proof is your corrected tax return.

Dealing with the IRS is the best way to get yourself out of levy trouble. But here are a few things that you also might want to consider doing while the threat of a levy is still hanging over your head:

1. Make sure your name is taken off of your kids’ and/or parents’ bank accounts. If you’re on someone else’s bank account, the IRS can and will levy that account too.

2. Don’t keep large amounts in your bank accounts. If you’ve got lots of cash, then maybe you can just pay your debt. But usually, this isn’t an option for most people. If your paycheck is going direct deposit into your bank account, get the money out immediately. You can put your cash onto a prepaid Visa debit card. Once the levy is in place, the IRS can only take the funds that are in your account at the time of the levy, if you get another deposit, that money is accessible. Transfer money in only as you need to make payments out of the account.

IRS levies are serious business. Don’t make the mistake of ignoring them.

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Posted on by Jan Roberg

The Truth About All Those People Who Don’t Pay Income Tax

Photo by Christopher Holden on Flickr.com

I’m sure you’ve heard it all before: 51% of Americans don’t pay any income tax! I got an earful of it just the other day from Granny’s boyfriend (who, by the way, also pays no federal income tax). A lot of people have been asking me about that lately; the two main questions are 1. Is it true? And 2. How come so many people aren’t paying? I did some research and here’s what I found.

1. According to the Tax Policy Institute, 46% of American households are not expected to pay federal income tax in 2011. It’s not 51%, but that’s still a pretty big number.

2. Of that 46% (that’s roughly 76 million American households), half of them pay no federal income tax due to standard deductions and basic exemptions. In English—it means they’re poor. Our tax system doesn’t tax subsistence level incomes. For example: a married couple making $18,700 a year or less would pay no federal income tax. It’s important to note that they still are subject to Social Security and Medicare taxes, either through their wage withholdings or through their self employment taxes on their federal return. There’s a big difference between “no federal income taxes” and “no taxes ”.

3. That leaves 38 million households that pay no income tax because of special provisions in the tax code.

So what are these special provisions and who is affected by them?

1. 44% of those 38 million households are covered under tax benefits for the elderly. That would include the extra standard deduction for senior citizens and the exclusion of some social security benefits from taxation. (The report also mentions the credit for the elderly, but in reality, I have never, ever prepared a return where someone actually qualified for that credit.)

2. Another 30% of those tax provisions are credits given for children and the working poor, namely the Child Tax Credit and the Earned Income Credit.

3. That leaves the remaining 26% (less than 10 million households) reducing their federal income tax liability to zero through tax breaks.

So what are these tax breaks and how do they break down? (By the way, in the Tax Policy Report, Tax breaks are called “Tax expenditure provisions” and households are called “tax units”. Forgive me for trying to make people sound human.)

1. Exclusion of cash transfers accounts for 6% or 2.28 million households. In English we’re talking about people who receive SSI or other non-taxable payments like that.

2. Education credits account for 5.6% or 2.128 million households.

3. Above the line deductions and tax exempt interest account for 5.1% or 1.938 million households. Above the line deductions are those things on the front of a 1040 tax return like the deductions for an IRA, alimony paid, student loan interest and the teacher deduction to name a few. Tax exempt interest is usually earned on state and local government bonds.

4. Itemized deductions account for 5% or 1.9 million households. The most commonly claimed deductions here are for mortgage interest, real estate taxes, state and local taxes, and charitable contributions.

5. Other credits make up 2.5% or just under one million households. The foreign tax credit isn’t counted in this as it’s considered to be a tax paid. This category is more for things like the residential energy credit, items you’ll find on the back of the 1040.

6. The last category is reduced rates on capital gains which accounts for 1.3% or less than half a million households. Regular income is taxed at your regular tax rate, but long term capital gains are taxed at a lower rate (between 0 and 15%).

So what does all this mean and why should you care? That’s the question of the day, isn’t it? Let’s be real, it is kind of aggravating to think that 46% of the American public doesn’t pay any income tax, especially if you’re paying taxes. But where are we going to make the changes?

Do you want to eliminate the tax benefits for the elderly? I’m not recommending that; Granny’ll whop me upside the head. If Congress slashes the Social Security and Medicare budgets, you can’t attack seniors with increased taxes on the other side.

We could reduce the standard deduction and exemptions and push more people into the taxable income category—but that would raise everyone’s taxes, not just the poor.

We could eliminate the other tax breaks like the education credit and itemized deductions, etc. While doing so would take some people out of “pay no income tax” category, it would also greatly increase the taxes of many people who are already paying into the system.

If you’re looking for an easy answer here, there really isn’t one. If you would like to learn more about the Tax Policy study, here’s a link to their site: http://www.taxpolicycenter.org/publications/url.cfm?ID=1001547

Posted on by Jan Roberg

Five Things You Can Do to Reduce Your Self-Employment Taxes

 

deductions for small business owners

Author’s note: Yes, this is a stock photo that I bought online. My home office has never been this neat and tidy. But that green accountant’s lamp? I’ve got that on my desk too!

 

A fellow business owner told me that he was really surprised last year at tax time. His business had done well and he didn’t have many expenses to offset his income. You want to have income—it’s sort of necessary if you like to do things like eat, wear clothes, and have a roof over your head, but the more income you have, the more you pay in taxes. These tips are things that you might be spending money on anyway that can help reduce your “business income” and reduce your self-employment tax.

 

Claim a home office. If you are working for yourself, you should have a home office. I actually have two offices: one in an office building where I meet clients, and my home office where I perform administrative duties like paying my company’s bills. If you have more than one office, your home office should be your administrative office—doing so makes your commute to the other office a deductible expense (normally, commuting is not deductible).

 

If you’re already claiming a home office, make sure that you’re maximizing your deduction. Did you know that hallways, stairways, crawl spaces, and bathrooms don’t count towards your total square footage? And don’t forget to claim the depreciation on your home. I’m always amazed at the number of folks who don’t claim it. If your business has a loss, the deduction carries forward to next year.

 

Hire your kids. If you have children under the age of 18, you can pay them to work for you and you aren’t required to pay FICA, and you don’t have to pay Federal Unemployment tax on them either. The work has to be real and the wages have to be commensurate to what you’d pay someone who is not your child. They also have to do work for the company, not things like clean up the kitchen for this to count. Have them keep a time sheet so that you have documentation of the work in case the IRS checks on it. For this you must be a sole proprietor, you can’t be a Sub S corporation.

 
Hire your spouse and set up a Section 105 Health Plan. Sure you can deduct your health insurance on the front of your tax return, but it doesn’t affect what you pay in self-employment taxes and it only covers your health insurance. With a Section 105 Health Plan, you hire your spouse as an employee and the compensation package includes 100% health coverage for him (or her) and his family (which includes you). This has the effect of putting all of your family’s health care expenses as a deductible business expense. Just like with hiring your kids, your spouse will have to perform a real job for the company, keeping a time sheet, etc. (You must be a sole proprietor, LLC is okay. You cannot be Sub S Corporation.)

 

Maximize your auto deduction. The majority of people claim auto mileage for their business because it’s easier (I’m talking about claiming real mileage and not the folks who go around claiming 40,000 business miles a year on a car that’s only been driven 12,000. I like to stick with honest deductions). For a lot of folks, it’s worth it to claim your actual expenses, especially now with the price of gas so high. Take the time to really keep track of your actual auto expenses for one year. This will vary a lot depending upon your auto usage, but for some people it’s a big savings.  Compare your actual expenses to the standard mileage rate and claim whatever gives you the larger deduction.  Remember, you still have to keep track of your business versus personal miles to claim your actual expenses as a deduction.

Posted on by Jan Roberg

Small Business Taxes for Beginners: How Much to Set Aside

 

self employment tax

When you start a new business, one of the hardest things to figure out is how much money you need to set aside to pay your taxes.

One question I hear all the time is: How much should I put away to pay my business taxes? If you’ve been in business for a few years, you probably have a good feel for how much you take in versus how much your expenses are and what your overall tax bracket is. After a while, you’ll be able to make estimated tax payments with fairly good accuracy. But if you’re just starting out and you don’t have a lot of experience, it’s really hard to guess. This post is for you.

Starting with the very first payment you receive, put away 10% of your revenue. Ideally, you will set up a special savings account at a bank to escrow your taxes, but you can use a piggy bank at home for all I care. Set aside 10% of your revenue.

But I thought my self-employment taxes were more than that? They are. Generally, self employment taxes are 15% of your income, and then you pay your regular tax rate on top of that. If you’re in the 25% tax bracket, the taxes on your business are 40%. This puts people into a panic—most people don’t pay 40% of their revenues, you have to back out your expenses first.

So shouldn’t I put away 40% of my profit? Yes, after you’ve got your business settled in and running smoothly. In the beginning, most start ups lose money, so your business taxes might be zero. You could even reduce your other taxes by reporting a business loss. Setting aside the 10% is your safety net. 10% is easy. 10% is a number you can live with. Most importantly, 10% might save your life.

You were right, I had a loss my first year. Can I spend the tax money that I had set aside? No. You’re going to add to it the next year so that you’ll have enough money to pay taxes then.
What if I have a loss for my second year of business? Keep setting aside 10%. There are basically three things that could happen:

Eventually your business will start making a profit and you’ll be glad that you set aside some money to pay your taxes.

Your business will never make money, so the IRS will decide to call your business a hobby and you’ll have to pay back the taxes you avoided by claiming business losses. We don’t want that to happen! But again, you’ll be glad you have that money set aside.

Your business doesn’t make any money and you’re smart enough to get out before the IRS declares you to have a hobby. Now you’ve got a nice little savings account started.

The 10% rule is a win/win situation for you no matter what.

I make really good income as a contract laborer and I don’t have any expenses. What if I expect to definitely make a profit my first year? A good example of this situation would be an independent IT contractor; a lot of these folks are profitable from day one. If you’ve got a similar situation, I’d hold back 25% at a minimum, 30% is better. If you’re married and you’re adding your income onto a spouse’s earnings, I’d put away 40% right from the start. If you anticipate over $100,000 of income your first year, you should sit down with a professional and do some strategy planning. Your self-employment taxes will actually go down after $106,800 but you could be in a higher overall tax bracket.

Face it, if you’re making over $100,000 a year, you can afford to pay the consulting fee to an accountant. By the way, you’ll write that off as a business deduction.

Okay, so I set aside 10% of my revenue for my business taxes the first year but it wasn’t enough. Now what do I do? First, be glad that at least you had the 10% set aside. Now you’ve got some figures to work with for next year. Based upon your tax return, you can now compute a percentage for you to set aside. Maybe it’s 20%, maybe 30%. Once again, you’ll set aside a percentage of your revenues. You’ll make estimated tax payments every quarter based on what you owed last year. Let’s say you had a balance due of $4,000 last year, then you’ll make quarterly estimated tax payments of $1,000 each this year. You’re still putting money in the bank for your taxes and you’ll pay the estimated taxes from your set-aside fund.

I see a lot of people with small businesses get into tax trouble. They scrape to get ahead and then when success finally comes, the tax bill is a big slap in the face. Success is sweet, but there’s a price. If you start from day one setting aside a portion of your revenue for taxes, you’ll be prepared.

 

Posted on by Jan Roberg

Social Security is Changing How They Issue the Numbers

Photo by DonkeyHotey on Flickr.com

One of the quirky things I enjoy about doing taxes is that when I get someone’s Social Security number, I can tell where the person is from. The first three digits of your Social Security number are tied to a geographic area. The second two digits are a group number and the last four digits are a serial number. Social security numbers that were issued since 1972 can be tied directly to a state and is determined by the zip code on the address of the application. I can tell you 012 is Boston and the numbers go higher as you head west. (I can tell you a lot more, but it’s kind of embarrassing to admit that I know what the social security number codes mean.)
That’s all going to change now. On June 25, 2011, the Social Security Administration (SSA) adopted a new randomization program. It’s going to eliminate assigning the numbers based on geography. Part of this is due to the lack of new numbers available for use. Currently, there are approximately 420 million numbers available to be issued, but because the numbers are restricted by state, the numbers available were greatly limited. Randomizing the Social Security numbers opens up all of the available numbers for use, and keeps the SSN at nine digits instead of changing it to a larger number.
Another benefit to the randomization process is privacy. It will be more difficult for an identity thief to reconstruct someone’s Social Security number based on public information once the numbers are randomized.
Some numbers that still won’t be in use are 000, 666, or anything from 900-999. Only new social security numbers will be under the randomization process. You do not have to do anything about your Social Security Number if you already have one.
For more information about the Social Security randomization program, you can click this link: http://www.socialsecurity.gov/employer/randomization.html

Posted on by Jan Roberg

Baseball Fans and Taxes: Christian Lopez and the Derek Jeter Ball

Derek Jeter

Photo by Keith Allison on Flickr.com

You’ve probably heard the story about Christian Lopez, the guy who caught Derek Jeter’s 3,000 career hit ball at Yankee Stadium and then was classy enough to return the ball to Mr. Jeter. He was rewarded handsomely by Yankee management with box seat tickets for the rest of the season, autographed balls and other merchandise. There’s been a lot of talk on the radio and in the media about the IRS going after Mr. Lopez for taxes. And while there are some really good articles out there already about the tax issue, I’ve decided to answer some of the actual questions people have been asking me because not all the stories running around out there are accurate.

I’ve heard that the IRS has already issued a bill to Christian Lopez for $10,000, how can they do that? That rumor isn’t true. There’s some speculation about how much tax Lopez will have to pay, but no bill has been issued by the IRS-they just can’t do that. The IRS will have to wait until April 15, 2012 to see any money from this event.

I’ve heard that Christian Lopez will have to pay a gift tax to the IRS for giving the ball to Derek Jeter. Why? First, that’s not true. But this is why people are talking about that: You can give a “gift” to someone with a value of up to $13,000 and not have to deal with any gift tax issues. People estimate that the ball Christian Lopez caught is worth between $275,000 – $300,000. Since Lopez gave it to Jeter, some people are erroneously calling that a gift. Even if they would be right about the gift, you can gift up to $5 million in your lifetime without paying tax on it—it just requires paperwork.

But I say it’s not a gift at all. Christian Lopez caught the ball and gave it back right away. Kind of like turning down a prize at a game show, he just gave it back so there’s no taxable transaction there. I’m from St. Louis. In 1998 when the fan returned Mark McGwire’s ball when McGwire broke Roger Maris’ single season home run record, the IRS did not require a gift tax return. That gives Lopez legal precedent.

But what about the tickets and stuff the Yankees gave him? Will that be taxed or is that a gift too? It would be nice if it could be considered as a gift, but it won’t. I’m pretty sure that the Yankees will issue a 1099 to Christian Lopez for the value of the tickets and merchandise he was awarded.

So he’s screwed no matter what? Not completely. One option is for Christian Lopez is to sell some of his tickets.

But if he sells the tickets, then won’t he have to pay tax on that money too? Only if he makes a profit. You see, because he’s paying tax for receiving the tickets then he has what’s called basis in the tickets. Say for example one of the tickets is worth $100 (I know it’s worth more than that, but let’s make the math easy.) Christian Lopez is getting taxed on receiving the full fair market price of the ticket, right? So it’s like he paid the full $100 for the ticket. So if he sells that same ticket for $100, he hasn’t made a profit on it, so there’s no tax on the $100 (because he’s already paid the tax on it). For you tax geeks, it would go on a Schedule D, just like selling stock.

Now it’s possible that Christian Lopez could sell his $100 ticket for $125. (Come on, really. Wouldn’t it be kind of cool to sit in Christian Lopez’s box seat? I think people would pay extra for that.) If he sells his tickets for more than their face value, he would be stuck paying taxes on the profit. That’s cool, make a profit and smile. If I were Mr. Lopez, I’d sell enough tickets to be able to pay the taxes and have fun going to as many baseball games as I could.

For more tax information about the Jeter baseball, this article at Accounting Web.com makes the most sense: http://www.accountingweb.com/topic/tax/jeter-baseball-fan-catches-bad-tax-advice

Posted on by Jan Roberg

Why Closing the Tax Gap Won’t Solve America’s Budget Crisis

Finding Company Tax ID

Photo by Calita Kabir on Flickr.com

According to reports from Washington, instead of raising taxes or cutting spending we could solve America’s debt crisis simply by going after uncollected taxes. It’s claimed that over $400 billion dollars a year go uncollected. The difference between what is actually collected on time and what the IRS believes should be collected is referred to as the “tax gap.”
While I am quite certain that there is a gap between what is owed and what gets paid, I am equally certain that the tax gap is significantly under $400 billion per year. Working from the other side of the table, I find it very rare that the amount the IRS claims someone to owe in debt is accurate.
One case I worked on involved a young woman who received an IRS notice stating that she owed over $2 million in taxes. Yes, two million dollars! Clearly, there was a mistake. Once we sorted the whole thing out, it turned out that she owed $13. That’s not a typo; the IRS said she owed $2 million when she really owed $13. How many more mistakes like that are out there?
Although the $2 million case is an unusual example, the taxpayers I work with who receive collection notices from the IRS often wind up receiving refunds after I’ve finished processing their paperwork. This is not because I’m some kind of master tax genius (although I‘d like people to think so), but merely because I’ve done the paperwork correctly.
The tax code has become so complex that even college educated professionals have trouble navigating the tax code. This is my job, I have training and experience, and it’s not always easy for me to interpret the tax code. Sometimes, even IRS personnel have trouble interpreting the tax code. I recently represented a taxpayer at an audit that was very focused on one item on the tax return. Although it was implied that the taxpayer had prepared the information “wrong,” there were no guidelines as to how to do it “right.” I asked the auditor, “Tell me how you want this done. I will do it.” She couldn’t answer me. Not because she was stupid or incompetent, but because there are no IRS guidelines for that particular issue (Yes, we won that audit).
One particularly galling point in the “tax gap” argument is a claim made by Benjamin Harris, a research economist at the Brookings Institution. He was recently quoted in an article in the St Louis Post Dispatch, “You kind of feel like a sucker as a wage earner. Here you are paying taxes because someone else is paying you, but if someone else is getting paid on their own, they pay taxes at half the rate.” As a self-employed business owner, this makes me furious. First, I pay taxes at a higher rate than Harris because I have to pay my self- employment tax over and above my regular tax rate. Additionally, as an employer, I pay my share of my employee’s FICA taxes, a benefit that Mr. Harris receives but appears to be blind to. To see the entire article, here’s a link: http://www.stltoday.com/news/national/article_890fa85f-c788-5a96-978c-d90edae37593.html?print=1
Are there people who cheat on their taxes? Certainly, and they should be caught and prosecuted to the full extent of the law. However, do not assume that all business owners cheat on their taxes. They probably don’t owe what the IRS says they do.

Posted on by Jan Roberg

How to Boost Your Home Office Deduction

Photo by Biking Nikon of Flickr.com

If you’ve claimed a home office deduction on your tax return, you’re familiar with the form—they ask you for the square footage of your home office and then they ask for the square footage of your home. Let’s say that your home is 2,000 square feet and your home office is 100 square feet, then your home office percentage is 5%. If your home operating expenses were $10,000 then you’d get to claim $500 for your home office deduction before claiming depreciation (because $500 is 5% of$10,000).
But did you know that if the rooms in your home are roughly the same size that you can figure the percentage based upon the number of rooms in your house? Say you had 8 rooms in your house, a kitchen, living room, dining room, family room, three bedrooms and your office. That would change your percentage to 12.5%, and now your deduction would be $1250—that’s more than double the difference.
Now if your home is like mine, your rooms aren’t all the same size and you can’t use the ‘number of rooms’ formula. But—the ‘number of rooms’ formula does help those of us who must use the regular square footage formula. You see, when you use the ‘number of rooms’ formula, you’re leaving out things like hallways, staircases, and bathrooms. When you’re determining the square footage for your whole home, you are allowed to deduct the following items from your total square footage:
o Hallways
o Staircases
o Bathrooms
o Crawlspaces
o Space occupied by heating and air conditioning units, and water heaters
o Foyers
o Outside walls
By reducing your overall square footage, you increase the percentage that you can use for your home office expense. Using the office mentioned above, let’s say the taxpayer measures out his stairs, foyer, hallways, etc. and finds that it reduces his overall square footage by 500 feet. Now his percentage would be 6.67% raising his deduction to by $167 to $667.
This might not seem like a huge savings, and certainly it will vary depending upon the size of your home and your expenses. The important thing here is that its extra tax savings to you without spending any additional cash. You’ve done nothing extra except re-measure your house.
Let’s add depreciation into the mix. Let’s say, for this same house, the owner’s purchased it for $250,000. $50,000 of that was attributed to the cost of the land so we’re depreciating $200,000. If 5% of the home were depreciated, the deduction would be $256 (200,000 x 5% x 2.54% depreciation rate). By increasing the percentage used to 6.67%, then the depreciation would be $342, an increase of $86.
So now, by doing nothing more than re-measuring your house, you’ve increased your home office deduction by $253 and, if you’re self employed and in the 25% tax bracket, you’ve just saved yourself $101 in taxes.
This is one of those cases where everyone’s results will be different, but the example that I used was pretty conservative. It’s highly likely that you can save even more than this example does, especially if your expenses are higher or your home office is larger to begin with.
You always want to take advantage of any tax issue that puts money in your pocket without you putting money out. Re-measuring your home for the home office deduction is like a little gift from the IRS to help you save money on your taxes.

Posted on by Jan Roberg

Emails from the IRS

No-Spam logo

Photo by David Hegarty on Flickr.com

Did you get an email from the IRS? Maybe it said they owed you more money and they wanted your bank account number so they could direct deposit it. Or maybe it said that there was a problem with your return and they needed your social security number to verify they reached the right person.
Those emails are SPAM. Don’t open them, don’t click on the links, don’t open the attachments, and whatever you do, don’t send them any information.
The IRS is not going to send you an email asking you for information. If the IRS needs something from you, you’ll get a letter the old fashioned way. The only IRS e-mail that you might possibly receive is a form letter that says your electronic return was received (or rejected). It won’t say anything else.
The IRS will never ask you for your social security number by email; they already know it. They also know your bank account number, your date of birth, where you work, and a lot of other things. If you call the IRS, they might ask you those things—not because they don’t know the answers, but to confirm that they’re really talking to the person you say you are.
These fake emails may look very official. They often have the IRS logo on them. The links can be very deceiving. You’ll see something that says www.irs/importantmessage.com But if you click on it, it will take you someplace totally different. (Did you try clicking on that link? It took you to my Facebook page. Spammers can set up links to look like they’re real, but they’re not).
If you receive IRS spam, and have the presence of mind to do so, forward it to the IRS at phishing@irs.gov That’s a real IRS email address. This will give the IRS the opportunity to hunt down the criminals and put a stop to them. Don’t be mistaken: these phishers are criminals and they’re dangerous. If you don’t have the presence of mind to forward it, just delete it. It’s probably a good idea to run a virus scan on your computer too. Sadly, many of those IRS scam emails are booby trapped with computer viruses, some of them can even wipe out your hard drive.
I hate to sound so much like Chicken Little with the “sky is falling” routine, but I’ve gotten asked about these emails twice in two days. One person forwarded his email to me, fortunately my virus protection program picked up the problem before I opened it.
Remember, no matter how real it looks, no matter how official it seems; the IRS will never send you an email asking for personal information.

Posted on by Jan Roberg

IRS Liens

North African Ostrich / Masai Ostrich - female non-breeding (Struthio camelus)

Photo by Lip Kee on Flickr.com

 

Updated January 2016

Okay, so you owe money to the IRS and haven’t paid yet. You get a notice in the mail saying that the IRS has slapped a lien on you (the lovely form 668(Y) Notice of Federal Tax Lien). So what exactly does that mean?
A lien means that the IRS is claiming first dibs on your money if you sell something—like a house or a car. A lien is a legal document that goes through the courts. Your creditors; the mortgage company or the bank holding your car loan are publicly notified that you owe the IRS money.
Let’s say you owe the IRS $20,000 and the IRS places a lien for your tax debt and you sell your home. The IRS is in line to get its money before you get any of the profit.
The lien also goes on your credit report. If you’re trying to buy a new home or even get a credit card, the IRS lien may prevent you from obtaining credit.
How bad does your tax debt have to be before the IRS files a lien? It used to be that the IRS would file a lien once you owed over $5,000, but starting in February of 2011, they raised it to $10,000. If the IRS issued a lien on you under the old rules, they won’t withdraw it just because of the rule change.
So how do I get the IRS to withdraw a lien? Well, paying the tax is the most effective way to remove a lien.
What if I don’t have enough money to pay the tax? That’s harder, but not impossible. You’ll need to be in a payment agreement, but not just any payment agreement—you’ll have to have a “Direct Debit Installment Agreement” if you want to have the lien removed. Direct debit is where you give the IRS permission to take the money directly out of your checking account every month (as opposed to mailing them a check or you paying them online.)
If you want your lien removed, you’ll also have to meet some other eligibility requirements.
· First, the amount you owe must be $50,000 or less. If you owe more than that, you can’t apply to have your lien withdrawn until you’ve paid the debt down to that amount.
· Also, your Direct Debit Installment Agreement monthly amount must be large enough that you can pay off the full amount of your tax debt within 6 years. For example, if you owe $20,000, you’d take the $20,000 and divide by 72 months. You wouldn’t be able to release your lien for less than $278 per month.
· Don’t apply for a lien release until you’ve made at least three consecutive direct debit payments.
· You can’t have already gotten a lien withdrawal for the same taxes, meaning that if you filed for a withdrawal before and then screwed up later, you’re not getting it withdrawn this time.
· Also, you can’t have defaulted on your current, or any previous, direct debit installment agreement.
Okay, so I’ve done everything necessary, how do I get the lien withdrawn? You’ll need to file another form of course! It’s called form 12277, Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien. Is that a mouthful or what? The name of the form is longer than completing the form itself. Most of the questions are easy, like your name and social security number. The only question that you need help with is number 8: what reason are you requesting the withdrawal for? You want to check box “b.” You entered into an installment agreement. That’s it. Here’s a link to the form: http://www.irs.gov/pub/irs-pdf/f12277.pdf
What if I can’t do all of this stuff? Then you live with the lien until things change. It’s a lien, not a levy. They haven’t garnished your wages, they haven’t grabbed your bank account. Now if you don’t shape up and get your taxes taken care of, that could happen in the future, but not if you stay on top of things and actively work with the IRS to get your debt taken care of.
Don’t play ostrich and bury your head in the sand. Trust me, the IRS won’t just go away. A lien isn’t good, but it’s not the end of the world. If your financial situation is that bad, perhaps you might be able to negotiate an offer in compromise or a reduced payment option. (This is a point where it might help to get professional assistance. Some people are perfectly comfortable with these negotiations, but most folks aren’t). The point is, you have to make the move to solve the problem. You must be in control (as best as you can). Generally, if you’re on top of things, the IRS will be much easier for you to work with.