Why would you want specific property discharged from a Federal Tax Lien ?
* You may have a buyer for the property. The buyer is unwilling to purchase property subject to a Federal Tax Lien
* A Certificate of Discharge under Internal Revenue Code § 6325(b) removes the Government's lien from the property named in the certificate.
What are the bases for application for discharge ?
1. The value of property remaining attached by the lien is at least double the liability of the federal tax liens plus the other liabilities which are senior to the liens (e.g., 1st mortgage notes).
2. The United States receives at closing an amount at least equal to the amount owed.
3. Interest of the United States in the property to be discharged has no value (i.e., the property is "under water". After closing and other senior debts are paid, there is no funds left).
4. Proceeds from property sale held in escrow subject to liens and claims of the United States.
5. Deposit made or bond furnished in an amount equal to the value of the United States interest.
How do you apply for Discharge of Federal Tax Lien ?
Form 14135, Application for Certificate of Discharge of Federal Tax Lien" The sections and parts of Form 14135 that require you to fill out depend on which of the five aforementioned options fits your situation to receive discharge.
The application may be made by the taxpayer, the property owner or the bank, credit union or other institution providing the financing necessary to buy the property. If the applicant is not the taxpayer (e.g., property owner or bank), in section 2, fill out name , address, day time phone number and fax number of the applicant other than the taxpayer. Also, attach a copy of the taxpayer's Notice of Federal Tax Lien. If applicant and taxpayer are the same, check the box in section 2 that the information in section 1 applies to section 2 and write "same" in section 2.
If the basis for application is number 4 above, list the information related to the Escrow Agent. Submit a copy of the proposed escrow agreement with Form 14135.
If your basdis for application is number 1 above, show proof by appraisal of the remaining property subject to encumbrace byt the federal tax lien is at least twice the amount of your tax liability. The appraised values must be first reduced by the amount of the federal tax lien plus other debt that has priority over the federal tax lien. Priority is given to liens filed before the federal tax lien (e.g., mortgages, mechanics liens, etc.).
If your basis for application option 2, the IRS will receive funds at closing equal to your tax debt or if at closing funds are less than the amount of tax debt, it will apply that amount to the debt.
A discharge may be issued under provision 3 above in cases when it is determined that the government's interest in the property has no value. When priority debt exceeds the fair market value of the property, there are no funds available for the IRS, thus its interest in the property has no value.
Certain documents must be made available regardless of the option you choose that best fits your situation. There are:
* Copy of deed(s) - real estate
* Copy of title - Personal property
* Appraisal - Performed by a professional
* One additional document that shows value (e.g., County property tax valuation).
* Names, addresses, daytime telephone numbers of all parties involved (e.g., banks, applicant, if not taxpayer.
When taxpayer receives any of the following notices, taxpayer has the right to a "hearing" before an Appeals officer. The Appeals officer is independent from the Collection Division that issues the notice.
* Notice of Federal Tax Lien and your Right to a Hearing under IRC 6320
* Notice of Intent to Levy and Notice of Right to a Hearing
* Notice of Jeopardy Levy and Right to Appeal
* Notice of Levy on your State Tax Refund
* Notice of Levy and Notice of your Right to a Hearing
Request for a Hearing is made on Form 12153, Request for a CDP or Equivalent Hearing. The request for a CDP hearing generally, suspends collection action, and suspends the running of the collection statute of limitation. The appeal must be filed or postmarked within 30 days of the date on the Notice in order for you to qualify for a CDP Hearing. An adverse determination issued by Appeals may be appealed to the United States Tax Court. The tax court petition must be timely filed.
An Equivalent Hearing, which is not appealable must be requested within one year of the date on the "Notice of intent to Levy and Notice of Right to a Hearing" In the case of "Notice of Federal tax Lien and Your Right to a Hearing under IRC 6320" the time to file for an Equivalent Hearing is one year plus five business days.
Filing Form 12153 within the 30 day time frame for a C D P hearing suspends the statute of limitation for the IRS to collect taxes (i.e., 10 years from the date the taxes were assessed), and will prohibit levy action.
Filing for an Equivalent Hearing neither suspends to statute of limitation nor prohibits the IRS from taking collection actions.
In most cases, the taxpayer will suggest one or more collection alternatives. What alternatives are available ?
* Installment Agreement
* Offer in Compromise
* Status 53 ( You are presently facing a hardship (e.g. unemployed, medical emergency, temporary disability. etc.), but you expect the situation to normalize in the future. The IRS will suspend collection action expecting a future improvement in your status. Penalty and interest continue to accrue during the time of suspension
* Lien subordination, lien discharge or lien withdrawal
* Innocent Spouse Relief
* Other you must give reason
As with most dealings with the IRS Collection Division, time is of the essence. You must submit your request within the time frame dictated by the IRS.
When a taxpayer or third party's property is subject to collection action, a Collection Appeal Request Form 9423 can be used to halt the action cold.
Following are the collection actions the CAP will stop:
* Levy or seizure action has or is being taken,
* A notice of Federal Tax Lien has been or will be filed,
* A Notice of Federal Tax Lien has or will be filed against an alter-ego or nominee's property.
* A lien certificate, subordination, withdrawal, discharge or non-attachment has been denied,
* Rejection of proposed modification or Modified, or proposed termination or terminated installment agreements.
* Dis-allowance of taxpayer's request to return levied property
* Dis-allowance of property owner's claim for return of property seized
To appeal, time is of essence. Following are the procedures and time frames to be followed in a Collection Appeal case involving lien, levy and seizure actions
* Arrange a conference with collection officer's manager
* If manager agrees with collection officer's decision within two business days, inform collections within two business days after the conference of your intent to file an appeal - Form 9423
* Within three business days of conference, file or have postmarked your appeal - Form 9423
* If the manager fails to contact you within two business days of your request, make a note of that fact on Form 9423 and file it or postmark it within four business days of your request
* If after a seizure of property, you must appeal to the Collection Manager within 10 business days after Notice of Seizure is provided you or left at your home or business.
In actions involving installment agreements, you are not required to request a manager conference, but, it could help, and you have 30 calendar days from IRS Notice to file for an appeal
Appeals decision is final. Filing Form 9423 normally stops collection actionC
Our practice focuses on, in addition to tax preparation, IRS Representation of taxpayers before the IRS concerning collection matters. Asheville Total Tax Solutions, Inc. does tax planning on event driven bases or comprehensively. More than a few taxpayers who petition the United States Tax Court to settle their dispute with the IRS choose to represent themselves before the Court rather than engage an attorney. Asheville Total Tax Solutions, Inc., assists these taxpayers through Income Tax Research and other guidance.
1. As part of the IRS Restructuring and Reform Act of 1998 (RRA 98 ), Congress added § 7122 (c) to the Internal Revenue Code. That section provides that the Service shall set forth guidelines for determining when an OIC should be accepted. Congress explained that these guidelines should allow the Service to consider:
* Public policy, and
Treasury Regulation § 301.7122-1 authorizes the Service to consider OIC's raising these issues.
These offers are called Effective Tax Administration ( ETA ) offers
The ETA offer allows for situations where tax liabilities should NOT be collected even though:
* The tax is legally owed, and
* The taxpayer has the ability to pay the tax in full.
The IRS will first determine whether the taxpayer qualifies under a Doubt As to Liability offer or a Doubt As to Collectibility offer before considering an Effective Tax Administration offer.
In a Doubt As to Collectibility offer the tax liability equals or exceeds the taxpayer Reasonable Collection Potential (REP). The RCP is calculated as an amount of net equity in asset (Fair market value of asset less liabilities associated with the asset and less a discount for quick sale of the asset). To the total net equity in assets is added future income. Reasonable living expenses and cost of earning income (e.g.,tools,union dues) are subtracted from future income. Monthly income as determined above is multiplied by a number of months, usually 12 or 24 depending on the choice of payment options. The result is the income factor which is added to net equity in assets. This combination is the RCP.
In an Effective Tax Administrative offer, the taxpayer's tax liability is less than the taxpayer's RCP. The RCP shows the taxes owed can be collected in full.
When a taxpayers liability can be collected in full but collection would create an economic hardship, an ETA offer based on economic hardship can be considered. In addition to basic living expenses, other factors that impact upon the taxpayers financial condition include:
* The taxpayers age and employment status.
* Number,age, and health of taxpayers dependents.
* Cost of living in the area the taxpayer resides, and
* Any extraordinary circumstances such as special education expenses, a medical catastrophe, or natural disaster.
Factors that support an economic hardship determination include:
* The taxpayer is incapable of earning a living because of a long term illness, medical condition or disability, and it is reasonably foreseeable that the financial resources will be exhausted providing for care and
support during the course of the condition.
* Taxpayer may have a set monthly income and no other means of support and the income is exhausted each month in providing for the care of dependent(s)
* The taxpayer has assets, but is unable to borrow against the equity in those assets.
* The taxpayer has assets, but if the assets were sold to pay the tax liability, the taxpayer would be unable to meet basic living expenses.
1. The taxpayer has assets sufficient to satisfy the tax liability and provides full time care and assistance to a dependent child, who has a serious long-term illness. It is expected that the taxpayer will need to use the equity in assets to provide for adequate basic living expenses and medical care for the child. The taxpayers overall compliance history does not weigh against compromise.
2. The taxpayer is retired and the only income is from a pension. The only asset is a retirement account and the funds in the account are sufficient to satisfy the liability. Liquidation of the retirement account would leave the taxpayer without adequate means to provide for basic living expenses. The taxpayers overall compliance history does not weigh against compromise.
3. The taxpayer is disabled and lives on a fixed income that will not, after allowance of adequate basic living expenses, permit full payment of the liability under an installment agreement. The taxpayer also owns a modest house that has been specially equipped to accommodate for a disability. The equity in the house is sufficient to permit payment of the liability owed. However, because of the disability and limited earning potential, the taxpayer is unable to obtain a mortgage or otherwise borrow against this equity. In addition, because the taxpayers home has been specially equipped to accommodate the disability, forced sale of the taxpayers residence would create severe adverse consequences for the taxpayer, making such a sale unlikely. The taxpayers overall compliance history does not weigh against compromise.
The economic hardship standard authorizes compromise regardless of the cause of the liability, provided compromise does not undermine compliance by other taxpayers.
4. In economic hardship cases, an acceptable offer amount is determined by analyzing the financial information, supporting documentation, and the hardship that would be created if certain assets, or a portion of certain assets, were used to pay the liability.
5. The taxpayer was diagnosed with an illness that eventually will hinder any ability to work. Although currently employed, the taxpayer will soon be forced to quit their job and will use personal funds for basic living expenses. The taxpayer owes $ 100,000 and has a reasonable collection potential of $ 150,000. An offer was submitted for $ 35,000. Through the investigation, it is determined that collecting more than $ 50,000 would cause an economic hardship for the taxpayer. A determination on economic hardship was made due to the fact the taxpayer's reasonable living expenses, including ongoing medical costs will exceed their income once the taxpayer is unemployed. The taxpayer is advised to raise the offer to $ 50,000 since it is the amount the Service can collect without creating an economic hardship.
Our practice focuses on, in addition to tax preparation, IRS Representation of taxpayers before the IRS concerning collection matters. Asheville Total Tax Solutions, Inc. does tax planning on event driven bases or comprehensively. More than a few taxpayers who petition the United States Tax Court to settle their dispute with the IRS choose to represent themselves before the Court rather than engage an attorney. Asheville Total Tax Solutions, Inc. assists these taxpayers through Income Tax Research and other guidance.
OFFER IN COMPROMISE ( PART II ) DOUBT AS TO COLLECTABILITY
The IRS may accept an Offer in Compromise from a taxpayer when it is doubtful that the taxpayer’s income and assets will satisfy the full amount of the tax due. This is called “ Doubt As To Collectability “ and is the most common reason an Offer In Compromise is accepted by the IRS.
If the taxpayer’s combination of assets and income do not satisfy the full tax liability, the taxpayer may make an offer to pay a lesser amount. The lesser amount must be valued at a “reasonable collection potential (RCP).” RCP is based on the combination of the liquidation value of assets and the capitalized expected income.
The IRS determines the taxpayer’s RCP. The taxpayer must supply the IRS three most recent months of bank statements and all current financial information as reported on IRS forms. This information will include assets, liabilities, expenses and income. If the taxpayer is self-employed, business income and business expenses must also be reported. The IRS will perform an equity calculation for each of the taxpayer’s assets. These assets will be included in the Offer in Compromise. Additionally, the IRS will determine the taxpayer’s “collectability” using wages and income versus household and other expenses.
Part of calculating a taxpayer’s RCP includes determining basic living expenses. Guidelines published by the IRS on a national/local living expense standard as well as an evaluation of the individual facts and circumstances of the taxpayer are considered.
After the Offer in Compromise is created, an IRS settlement officer will thoroughly review the offer and decide whether it is to be accepted. If the settlement officer rejects the Offer in Compromise, the IRS will conduct an independent administrative review to determine if this rejection is reasonable. If the IRS review determines that the rejection is reasonable, the IRS must issue a written notice to the taxpayer that explains the reason for the rejection and provide the taxpayer with information about the taxpayer’s right to an administrative appeal.
Taxpayers submitting Offers based on Doubt as to Collectability must make a partial payment of the amount owed when submitting their Offer. There are two payment options for these taxpayers:
Option 1 Requires that 20% of the total Offer amount be paid with the Offer and the remaining balance paid in five or fewer payments; or
Option 2 Requires that a first payment be made with the Offer and the remaining balance paid according to the proposed offer terms. The taxpayer must continue to make all subsequent payments while the IRS is evaluating the Offer.
An offer in Compromise may be used by most taxpayers, including individuals, trusts, estates and taxpaying corporations. Fees for submitting an Offer in Compromise vary. Taxpayers generally must pay a user fee of $ 186 for each Offer submitted, however, offers based solely on doubt as to liability or Offers filed by a low income taxpayer do not require a fee.
An Offer in Compromise that is accepted by the IRS becomes binding and is as enforceable as a contract. The taxpayer must abide by the terms of the agreement. Breach of the contract restores the portion of the tax liability which had been compromised. If the taxpayer does not hold up their end of the agreement then they are in breach of contract and must pay the original amount owed.
A tax professional will help you navigate the maze of the Offer in Compromise process. Asheville Total Tax Solutions, Inc. has the expertise and experience to guide you through this intricate and confusing process. Call us today at (828) 253-7231 for a face-to-face meeting. We are ready to help.