The IRS releases revised publication for Innocent Spouse Relief

A joint filer who wants relief from responsibility for the tax on a joint return must file a request for innocent spouse relief. This is done by submitting Form 8857, Request for Innocent Spouse Relief. Usually, the request must be made no later than 2 years after the IRS begins collections of the tax owed. However, the new publication reflects an exception to this rule for equitable innocent spouse relief. In line with a change in IRS policy earlier this year, the publication notes that the amount of time to request equitable relief depends on whether you are seeking relief from a balance due, seeking a credit or refund, or both:

• Balance due. Generally, you must file your request within the time period the IRS has to collect the tax. The IRS usually has 10 years from the date the tax liability was assessed to collect the tax; in certain cases, the 10-year period is suspended. The amount of time the suspension is in effect will extend the time the IRS has to collect the tax.
• Credit or refund. Generally, you must file your request within 3 years after the date the original return was filed or within 2 years after the date the tax was paid, whichever is later. But you may have more time to file if you live in a federally declared disaster area or you are physically or mentally unable to manage your financial affairs.
• Both a balance due and a credit or refund. If you are seeking a refund of amounts you paid and relief from a balance due over and above what you have paid, the time period for credit or refund will apply to any payments you have made. The time period for collection of a balance due amount will apply to any unpaid liability.

Over the past several years, the IRS has processed a small number of all tax returns through its new processing system called CADE. This new system is designed to release refunds more quickly.

The IRS plans to implement CADE 2 in January 2012. Under this initiative, up to 75% of all returns are expected to be processed under this new system, up to double the number processed under CADE last year. This change will finally set the stage for all returns to be moved to this new system.

Bank products released under the CADE system are typically released in as few as 5 to 7 business days of the IRS receiving the tax return. This is down from the traditional 9 to 14 days.

As a result of the shortened time it takes to receive a refund, taxpayers find even more value in bank products as a way to provide a secure mechanism to receive their refund proceeds and easily pay for tax preparation services.

What Is a Tax Lien?

A Tax Lien is the first major step the IRS takes against individuals in order to collect back taxes. A Tax Lien gives the IRS a legal claim to your property as security or payment for your tax debt. It is used in order to protect the government’s interest in your assets.

When and Why is a Tax Lien Filed?

If you have unpaid back taxes and have not cooperated with the demands of the IRS to make the payments of the tax amount owed, it is likely that eventually you will receive a tax lien, which will then lead to a tax levy. Recently, the IRS will raise the debt threshold for issuing tax liens in most cases from $5,000 to $10,000 (policy change will be reviewed in 1 year) largely due to the fact that tax liens can hurt taxpayers further and lessen their likelihood of getting into compliance with the IRS.

Here is how the process works. The IRS will first send you a letter with an assessment of your tax liability. This letter will typically state the amount that is unpaid as well as late payment penalty and interest. If the assessment letter is ignored, the IRS will follow up with four more letters, CP-501, CP-CP-503, CP-504, and finally LT11/L1058 in most cases. These letters will get more and more threatening as the numbers get higher. The final one of the CP letters mentions it’s intent to levy. After these letters are sent to the taxpayer and there is no response or the tax amount is not paid, the IRS determines that they are not able to collect the tax the conventional way, so the IRS will then file a Notice of Federal Tax Lien (NFTL) and potentially move forward with a levy. Once you receive this tax lien, the lien has already been attached to your property. The purpose of the tax lien is to prevent you from selling or borrowing against any of the major assets that you own. With a tax lien in place, it gives legal claim to the IRS over that piece of property that the lien was placed and removes your rights to the property. Moreover, tax liens are public records.

Effects of a Tax Lien

A tax lien makes it very difficult to get any credit to make additional large purchases, such as a boat, car, or house. Having a lien placed on you by the IRS can be financially crippling for the time it is in place, it pretty much means you can’t hold any assets in your name and you have to rely on other people for financing (as lien is on your credit too). All creditors would be notified including your mortgage company. A tax lien will stay in place as long as the IRS can legally enforce action against you (typically 10 years statute of limitations), or until your tax liabilities have been paid or settled with the IRS. The IRS becomes the highest of priority of creditors, so if you sold your house, car, or whatever property the lien was one and you had other liens on that property, the IRS would be the first to be paid.

If you do nothing about the tax lien, the IRS will eventually begin to seize your assets and sell them at a public or private sale. Once the IRS actually starts seizing your assets to satisfy the back tax liability, this is known as a tax levy. A tax levy is the most lethal weapon that the IRS possesses for collecting taxes.

One thing to note, is even when a tax lien is “released,” and your public records are updated as showing the tax lien was released, the history or the fact that you received a tax lien the first place may still hinder your ability to borrow, get a job, rent a house and so forth. The IRS in February of 2011 announced policy changes, whereby in most cases tax lien can be withdrawn or expunged from public records if the taxpayer sets up a direct debit installment agreement (DDIA), has one already setup (they can just request to have lien withdrawn), and owes $25,000 or less. Of course, exceptions do happen.

What To Do About a Tax Lien?

It is best to take action as soon as possible when a lien is put in place. It is not a good idea to try to wait it out until the statute of limitations expires because most likely you will get a levy placed on you before then and the IRS will seize your assets before the statute of limitations expires. In order to release a tax lien you will have to file a tax return or file your back taxes (if you have not), then decide whether you want to pay your back taxes in full, setup a payment arrangement with the IRS, or settle your back taxes if your financial situation qualifies you.

They also have stated that they are going to stop doing automatic liens and instead will look at each individual case. I sure hope so! When the IRS puts those automatic plans in place, it never works out.

Tax liens can cost more then headaches. They stay on your credit report for 7 years from the date the liability is resolved.

The IRS is considering withdrawing liens after the taxes are paid. This will remove them from credit reports.

Settling for less

The IRS is also expanding its offer-in-compromise program to cover more taxpayers.

Under the new rules, individuals with annual incomes of up to $100,000 and tax debts of up to $50,000 can participant in the program that allows the IRS to settle the tax liability for less than the full amount owed.

In a famous Charlie Brown cartoon, Charlie is sitting at a typewriter
pecking out a letter saying,
“Dear IRS,
Please take me off your mailing list.”

About 20,000 taxpayers will be on the IRS’s randomly selected mailing
list soon BUT THAT’S NOT A BAD THING!

These 20,000 letters from the IRS are not letters to be feared because
they are not audit notices. 

WHAT ARE THEY?

Those 20,000 envelopes contain surveys that ask taxpayers to
estimate how much time and money you spend on matters relating to complying with income tax requirements
– recordkeeping, tax planning, tax return preparation, etc., etc.

An additional 24,000 surveys will go to ‘business’ filers such as corporations and partnerships.

WHY THE SURVEYS?

Rumor is that there is a Congressional committee that wants to simplify the current, outrageous tax system, and they have the IRS collecting proof of how onerous the current, convoluted, unmanageable Tax Code is, so that it can be simplified.

WHAT SHOULD YOU TO DO IF YOU GET ONE OF THESE SURVEYS?

1. Do not ignore it. This is YOUR chance
to help do something about tax simplification.
Here’s how…

2. When estimating the time it takes YOU
to comply with the outdated, overly-complex,
requirements do NOT
under-estimate the time tax it takes you
to deal with it. I’m not suggesting you
‘exaggerate’ the time it takes you; I’m just
saying…

3. When filling out the questionnaire,
remember the purpose of this exercise –
to provide proof that our tax system needs
to be overhauled and simplified.

If YOU get one of those 20,000 surveys, please take the time help provide that “proof.”

It is rare that an individual taxpayer gets the chance to “weigh-in” on the important and overdue need to simplify the Tax Code, but 44,000 individuals and small business will get that chance soon.