Why Does The IRS Issue Penalties?         

The IRS imposes tax penalties for many reasons. Actually there are over 148 IRS penalties. Although usually monetary in nature, penalties involving forfeiture of property or even jail time are not uncommon. Some of the more common reasons that taxpayers face IRS penalties include:

• Late filing penalties. If you fail to file your tax return on or before the due date the penalty assessed is based on the amount of tax owed as well as how long the return remains unfiled.
• Late payment penalties. Even if the taxpayer files on time the IRS may impose a penalty if payment of taxes is delayed for any reason. As with the late filing penalty, this penalty will be vary depending on the amount owed.
• Accuracy related penalties. If taxes owed on a tax return are adjusted upward by the IRS at a later date the taxpayer may be subject to this type of penalty. The penalty can range from 20% to 40% of taxes owed due to substantial inaccuracies for reasons like the following: negligence of rules, understatement of tax, various valuation misstatements and pension liability overstatement.
• Trust Fund Recovery Penalty. This penalty is imposed against employers who neglect to withhold income and social security taxes paid to their employees and then forward this income to the government.

What Is IRS Penalty Abatement?

The IRS may remove or reduce a penalty or interest imposed upon a taxpayer. This process is known as penalty abatement and is achieved by many taxpayers seeking this type of tax relief. The taxpayer must be prepared to have a legitimate reason for making the request and must have their case well documented and substantiated.

Positives are that abatement can sometimes reduce the total tax debt to a manageable level. Also, the IRS does not charge a fee as they do in other circumstances.

Negatives are that it can be tedious (including documenting your basis for the claim). And, in the end, you still owe the original taxes.

When Are IRS Penalties Abated?

The IRS grants penalty abatement for the following reasons:

• Reasonable cause (examples: death or serious illness in the family or prolonged unemployment),
• IRS fault (examples: an error or delay that led to a correction)
• Administrative waiver (example: government directive to provide natural disaster relief).
• Statutory exception (change in the Internal Revenue Code mitigates a liability).

The IRS resolves less than half of penalty abatement cases in favor of the taxpayer. Interest abatement cases are even more difficult to have resolved favorably. While any IRS level can grant abatement, it is the supervisory level that grants most favorable resolutions.

Who Should The Taxpayer Seek Advice From?

IRS personnel are trained to say to reject these types of requests as a matter of due course. Relying on the help of a tax problem expert, can increase significantly the chances of obtaining a favorable resolution. An experienced certified Enrolled Agent or tax attorney will be able to frame your case in the best possible light for favorable resolution.

Wage Garnishment (Wage Levy) Exempt Amount

Only the “exempt” amount limits what the IRS can garnish (levy) from a taxpayer’s paycheck. The taxpayer’s employer sends all wages above the “exempt” amount to the IRS. The taxpayer then keeps this “exempt” amount.

IRS Form 668-W and IRS Publication 1494

The IRS sends form 668-W and publication 1494 to the taxpayer’s employer. The employer fills out the form 668-W according to information supplied by the taxpayer. The employer uses this information to select the “exempt” amount from the tables in publication 1494. To arrive at the correct amount, the employer asks for tax information from the taxpayer.

Wage Garnishment (Wage Levy) Calculation

Previous year tax return filing status, number of exemptions and salary frequency are all used to decide the “exempt” amount. The taxpayer has three days to provide this information to the employer. If not provided in time, the IRS assumes a taxpayer filing status of married filing separately with one exemption. This often results in a lower “exempt” amount.

Wage Garnishment Example

For example, assume a taxpayer’s true filing status is married-filing-jointly, has three exemptions and a $1,000 weekly salary. The 2012 IRS publication 1494 tables show an “exempt” amount of $448.08. The employer sends the $551.92 weekly balance to the IRS. If the taxpayer does not present timely information the IRS then assumes a much lower “exempt” amount of $187.50. The lower “exempt” amount obviously causes more pain.

Wage Garnishment Release (Removal)

This wage levy remains in effect until either of the following occurs:

1. Garnished wages fully pay off the tax debt.
2. A wage garnishment release (wage levy release) is obtained after the taxpayer reaches a settlement with the IRS.

1) Go to Jail

Not filing federal tax returns is often the result of tax fraud. Each unfiled tax return can result in a one-year jail sentence and a $25,000 fine. The IRS could send a taxpayer to jail for up to 5 years for a single tax felony offense. Penalties like these are rare and are the result of serious felonies. The IRS has gotten aggressive in recent years in their pursuit of tax cheats.

2) Incur a 25% Penalty

One of the harshest yet common IRS penalties is the failure-to-file penalty. The failure-to-file penalty begins the day after April 16th or October 15th if the taxpayer has filed an extension. The penalty is 5% a month for a maximum of 5 months. The ceiling is 25% of the tax debt.

3) Incur Added Penalties

The IRS has an arsenal of 140 penalties to use against taxpayers. For example, it also assesses a failure-to pay-penalty of .5% a month and combines it with the failure-to file-penalty to reach a 25% ceiling. And the IRS charges interest on the combined amount of back taxes owed and penalties.

4) Increase Taxes Due

The IRS may file a “Substitute for Return” if a taxpayer does not file a timely tax return. These IRS filed tax returns always favor the government and never favor the taxpayer. The taxpayer receives one standard deduction and one personal exemption. The “Substitute for Return” does not include added standard deductions, personal exemptions, other deductions and tax credits that may be due a taxpayer. This often subjects the taxpayer to a larger tax liability and greater interest on the tax due plus penalties assessed.

5) Delay Tax Relief

The IRS will not resolve a tax problem until that taxpayer files all delinquent tax returns. Filing unfiled tax returns quickly reduces the penalties and interest the taxpayer will owe.

6) Lose Tax Refund Forever

It’s never too late to file a tax return. But to claim a refund, the taxpayer has only 3 years from the original due date of the tax return to file. Once past this 3 year deadline, the taxpayer can only use the refund toward back taxes owed. The taxpayer cannot receive the refund.

7) The 10 Year IRS Collection Statute

The IRS has 10 years from the date it finalizes the tax liability to collect the taxes owed. This is usually the tax return filing date. On this date the 10 year collection clock begins ticking. Delayed tax return filings only delay the start date of the 10 year period. The IRS calls the last day of this 10 year period the “Collection Statute Expiration Date”.

What Is an IRS Bank Levy?       

The IRS uses the bank levy as one of it’s tools to collect back taxes owed. It is the preferred IRS tax levy method because they can get large amounts of unpaid taxes easily. The IRS simultaneously lets the taxpayer and the taxpayer’s bank know of their intent to carry out a levy. The IRS will levy the following types of bank accounts: checking, savings, money market and certificates of deposit. The IRS wants the taxpayer to respond within 21 days. If the taxpayer does not respond, the IRS will ask the bank to release the levied funds. The IRS can follow up with more levies until they get the full tax debt amount.

The 5 Steps Leading To an IRS Bank Levy!

The IRS has 5 steps that it takes before levying a taxpayer’s bank account:

1. The IRS discovers the taxpayer owes back taxes.
2. The IRS then issues a series of notices demanding payment for the tax amount.
3. If the taxpayer ignores the deadlines of the first series of notices, the IRS then sends a Final Notice of Intent to Levy. The taxpayer then has 30 days to respond.
4. If the taxpayer ignores the Final Notice of Intent to Levy, the IRS then assesses the taxpayer’s finances. They contact the taxpayer’s bank to discover if there are funds available to satisfy all or part of the tax debt.
5. The IRS issues the bank levy if enough funds are in the taxpayer’s account.

The IRS examines the taxpayer’s employment if enough funds are not in the taxpayer’s bank account. They will consider using a wage garnishment, an alternate form of tax levy.

How to Stop an IRS Bank Levy!

Once the IRS launches a bank levy, it is important to act quickly. The IRS prefers to work with the taxpayer to help resolve the tax problem. The taxpayer needs to be aware of suitable solutions. First, file any unfiled tax returns. Next consider solutions such as an installment agreement, offer in compromise or full and immediate payment of back taxes. The tax payer can also appeal the bank levy. The full title of the final notice reads “Final Notice of Intent to Levy and Notice of Your Right to a Hearing“.

We recommend working with a tax resolution specialist to solve any tax problems such as a bank levy. The IRS will view this step as a serious try by the taxpayer to resolve the tax problem. Also, an expert has the experience necessary to help the taxpayer choose the right solution for their specific tax problem.

Tip #1: Deal With Your IRS Tax Problems Today!

The ostrich approach to dealing with IRS back tax problems simply does not work. If the IRS is calling you or writing you letters, your IRS tax problems will only worsen if you do not deal with them immediately. The IRS designed their collection actions to become increasingly severe over time.  Phone calls and letters eventually lead to wage garnishments, bank levies and tax liens. Even if you cannot pay your tax liability you still need to address it today without delay. Penalties and interest continue to accrue on a daily basis on the tax liability and delaying action only compounds the problem.

Tip #2: File Back Tax Returns Immediately!

The IRS will not agree to a settlement until the taxpayer files all unfiled tax returns.  Taxpayers often neglect to file the back tax return because they don’t have the money to pay the back taxes owed.  A taxpayer should always file a tax return even if they cannot pay the tax liability. The penalties for failure to file tax returns are among the highest the IRS imposes: 25% in many cases. Finally, filing your back tax returns can lead to significant savings on your overall tax liability.

Tip #3: Pay Back Taxes First!

The IRS is the most powerful collection agency on earth. The law protects taxpayers to a greater degree from creditors than it does from the IRS.  If the taxpayer is faced with owing several creditors at the same time, they should always choose to pay their IRS tax liability first.  The IRS uses collection tools such as a wage garnishment or a bank levy and others. These actions can be financially crippling.  A good IRS tax consultant has experience in debt management analysis.  Good debt management can lead to significant savings on a the tax liability and on other debt as well

Tip #4: Pay An IRS Tax Liability With A Credit Line!

There are many good reasons for using a credit line to pay back tax debt owed:

• For example, credit line interest may be lower than IRS interest & penalties.
• Also, the cash flow from a credit line can fund some kinds of tax debt settlement.
• Finally, a credit lender is easier to deal with than the IRS.

Essentially the taxpayer is converting a tax liability into personal credit.   An IRS tax consultant, experienced in this type of analysis, can assess the chances of success.

Tip #5: Hire An IRS Tax Consultant!

A taxpayer should not try to handle their own IRS tax problem case.  An experienced IRS tax consultant, like a U.S. Treasury Appointed Enrolled Agent or a Tax Attorney, is the best choice to deal with the complexities surrounding a taxpayer’s IRS tax problems.  They can predetermine a taxpayer’s chances of success in an IRS tax relief program such as Offer in Compromise or penalty or interest abatement.

1. An Offer In Compromise

Many taxpayers qualify for the IRS Offer in Compromise program. If you qualify, this program gives you the opportunity to settle a tax liability for far less than the total amount owed. A tax resolution specialist is able to calculate if a taxpayer can qualify for an OIC.

2. Penalty Abatement

The IRS can grant abatement and remove penalties or interest if there is a legitimate reason for not paying taxes on time. Penalties and interest can comprise a large percentage of the overall tax debt, sometimes as high as 50% or more. A taxpayer should consult with a tax resolution specialist to see if they are a candidate for abatement.

3. Wage Garnishment Removal

The IRS can garnish a taxpayer’s wages until the tax debt is paid in full. It is important to act quickly to stop or release this type of levy. The taxpayer should seek help from a tax resolution expert who can develop a strategy to reduce or release the wage garnishment.

4. Stopping A Bank Levy

A bank levy is another form of legal seizure of property by the IRS to satisfy a tax liability. A bank levy freezes an amount available in your checking or savings account and sends it to the IRS in 21 days. It is advisable to work with a tax resolution expert to resolve your tax problem quickly with a goal of getting a release of levy.

5. Filing Delinquent Tax Returns

A taxpayer cannot successfully resolve a tax problem unless they file all previously unfiled tax returns. Often the IRS files a “substitute for return” which does not include any deductions owed to the taxpayer. Filing a first time or an amended tax return can often obtain those deductions and lower a taxpayer’s tax liability.

6. Optimizing An Installment Agreement

The most common IRS tax debt solution, for taxpayers with enough assets or income, is an installment agreement. The taxpayer should consult with a tax resolution specialist to develop a plan which fits their specific case. A properly structured installment plan can reduce the total amount to be paid.

7. Managing The Statute Of Limitations

The IRS has 10 years from the date of assessment of taxes to collect all taxes, penalties and interest from a taxpayer. A tax resolution specialist can help the taxpayer reduce an overall tax liability by managing the debt with an eye on the 10 year statute of limitations.

8. Innocent Spouse Relief

When two individuals file a joint tax return, typically each is liable for the tax debt. Occasionally the tax liability is the responsibility of just one individual. There are three categories of innocent spouse relief in which a taxpayer may qualify for tax relief.

9. Filing An Appeal

Every taxpayer has the right to appeal an IRS tax ruling. An advantage to filing appeal is the IRS will typically suspend their efforts at collecting the tax debt. This reprieve gives the taxpayer time to meet with a tax resolution expert to develop a defense.

10. Currently Not Collectible

If you have no assets or income above that which is necessary to cover living expenses you become currently not collectible. Collections against you will temporarily stop. This is a temporary form of relief.

Mistake 1: Believing That Tax Resolution Firms Are Regulated

Neither the IRS nor any other branch of the government regulates tax resolution firms. This has resulted in rampant abuse. Large nationally advertised firms have charged many thousands of taxpayers excessive fees with little or no results. Research whether a firm is a scam artist. Google the firm by entering “name of the firm, scam” or “name of the firm, complaints”. Chances are the nationally advertised firm you are speaking with has at least one huge class action suit against them.

Mistake 2: Letting Emotion Dictate Tax Relief Decisions

This is usually the result of the taxpayer falling prey to the empty promises of sales agents of the large TV advertisers mentioned in Mistake 1. Taxpayers with tax debt problems hear what they want to hear instead of what they need to hear. Do the following slogans sound familiar?

• Settle your tax debt for “pennies on the dollar”!
• The IRS has a “one chance program” to settle your tax debt!
• Reduce your tax debt to a fraction of its current amount!
• Become tax debt free!
• End your IRS fears today!
• Get the IRS off your back!
• Don’t become another IRS victim!
• Are IRS tax problems ruining your life?

Mistake 3: Choosing The Wrong Tax Resolution Company in Long Island

It is startling how many taxpayers fail to do the following necessary homework when researching a tax resolution firm:

• Avoid firms who say “former IRS agents” will handle your case. While the IRS background may be significant, it can lack “big picture” experience. Look for a tax resolution specialist with lengthy and broad experience rather than a former IRS employee with only specialized experience.
• Only Enrolled Agents, CPAs or Attorneys can represent you before the IRS. Look closely at qualifications, certifications and length (and breadth) of experience. These should suggest a dedication to the tax resolution field. The person handling your case should be the same person representing you.
• Large tax resolution firms usually do not have efficiencies which lead to faster conclusions or lower costs to you. They are more likely to neglect the case.

Mistake 4: Believing It Easy To Qualify For An Offer In Compromise

An Offer In Compromise (OIC) can lead to a significant decrease in tax debt. However, OIC programs aren’t for everyone. The IRS resolves less than 30% of cases in taxpayer favor. Reasons like significant debt or negative cash flow are not always good enough reasons to chase this solution. The taxpayer should seek the advice of a tax resolution specialist. Familiarity with IRS financial models is necessary.

Mistake 5: Focusing Only On The Back Tax Problem

Use of a financial plan can solve a back tax problem. The taxpayer may simply need to follow a budget. Often, full-blown financial planning is necessary. Trying to resolve tax debt without a budget or a financial plan is like a ship trying to reach its destination without benefit of navigation instruments.

Mistake 6: Settling For A High Cost Installment Plan

Less expensive options may be available. Lack of a budget or a financial plan will cause the taxpayer to be unaware of alternative solutions. Please see Budgeting Your Way Out of Tax Debt.

Mistake 7: Assuming The Tax Resolution Specialist Will Do All The Work

This is the single biggest obstacle to the tax resolution specialist. It increases the time to resolve a case. These taxpayer clients believe that once signing the necessary forms to engage a tax resolution firm, their job ends. Total cooperation is necessary. The client needs to present added tax documentation and background information.

Mistake 8: Believing The IRS Has Forgotten About You

The IRS might delay contacting a taxpayer. The taxpayer may then mistakenly think the IRS is finished with them. A taxpayer’s representative may file paperwork on their behalf. The taxpayer may confuse this with speedy resolution. The IRS has thousands of  talented and capable employees. But the sheer size of the organization, the volume of work and complexity of tax related issues makes the IRS plodding and slow. Eventually they will get to you.

IRS or State tax debt is usually a symptom of a more serious underlying financial problem. Specific causes can be the loss of a job or a serious medical condition. But more typically, poor money management skills of the individual or a small business owner taxpayer are the reason. Aggravating a taxpayer’s poor financial management skills are the following:

• Interest and penalties the IRS or State will charge on tax debt are high. They are higher even than that charged on home mortgages.
• Interest and penalties on tax debt are not tax deductible, worsening the tax debt problem. Nondeductibility makes the after-tax effect much greater than on home mortgage interest.
• Interest and penalties on top of tax debt, increasing at prevailing interest rates, can double the total debt in as little as five years.
• Unnecessary delays of tax debt repayment are never a good idea. Postponing tax debt repayment altogether or selecting an installment payment plan that is longer than necessary are poor financial decisions. The IRS or State assesses interest charges against either the total tax debt balance or the declining balance if the debt is being repaid. The faster the taxpayer pays off tax debt, the lower the total debt will be.

For many taxpayers, an installment plan is the best alternative for paying off tax debt. This assumes the taxpayer does not qualify for an IRS or State Offer In Compromise (and most do not qualify).

Set up a monthly budget to discover what the correct monthly payment should be. Expenses will include the tax debt installment payment. Too high of a payment will lead to financial catastrophe. Too low of a payment will unnecessarily increase the overall debt. 

Budgeting is the preferred method of dealing with the tax debt problem. It isn’t sexy and sounds boring, but is the most sensible way out of a tax debt mess. Budgeting is much more than just classifying income and expenses. Budgeting puts the taxpayer in charge of managing their own finances like any good company or government should do. It puts the taxpayer and family on the path of fiscal responsibility and toward financial freedom.

The IRS sends out millions of notices to taxpayers every year. IRS Notice CP 504 (Intent to Levy), delivers a stern warning to taxpayers with tax debt: “Urgent!! We intend to levy on certain assets. Please respond NOW.” If not responded to, the IRS can begin seizing assets such as automobiles, bank accounts, investment accounts, wages, state income tax refunds and more.

The tax code limits what the IRS can seize from taxpayers. There are assets allowances for personal property and tools used in a trade or business. Also there are limits for the following expense categories: housing, clothing, transportation and others.

The IRS applies these tax code limits to calculate what the taxpayer can pay. This is the taxpayer’s Reasonable Collection Potential. The numbers provided by the taxpayer on the IRS financial disclosure forms feed this calculation. A taxpayer working with a tax resolution specialist will know their Reasonable Collection Potential. They will know precisely the limits of what the IRS can seize.

It is good idea for the taxpayer to prepare for such seizures on receiving the CP 504 notice. It is important to analyze all relevant information and then choose the right strategy. It is often possible to resolve a tax dispute before any asset seizures take place.

• The taxpayer should examine the IRS CP 504 notice to find out the precise issues in dispute. Few taxpayers will even take the time to see what the notice is saying. The basis for the notice might be as simple as a math error, or something more serious like a missing tax return or overdue payment.
• The next step is to ask for the IRS taxpayer files. Electronic IRS files known as “transcripts” provide valuable information about each taxpayer. Also, the taxpayer’s administrative file contains more details. The Freedom of Information Act entitles the taxpayer to this file.
• If the taxpayer agrees with the IRS assessment of taxes owed, then an installment agreement is probably the best alternative. The taxpayer negotiates a monthly payment which minimizes interest and penalties, while leaving enough for monthly living expenses. Planning will help the taxpayer choose a payment plan that fits their finances best.
• However, if the taxpayer does not agree with the IRS assessment in CP 504 notice then an immediate appeal may be the best course of action. The IRS may have already decided (rightly or not) the taxpayer owes back taxes and begun collection. The IRS will give the taxpayer a hearing to explain why further collection action should not occur.

One of the most powerful collection tools the IRS can use is wage garnishment (also known as a wage levy). Garnishment can be sudden, leaving the taxpayer with inadequate income for monthly expenses. The taxpayer also faces the risk of job loss. To levy income, the IRS sends a notice to the taxpayer’s employer. The IRS directs the recipient to give the taxpayer a copy of the notice immediately. The IRS can also garnish 1099 income from investments or self-employment. The levy remains in effect until the IRS releases it. Fortunately there are steps the taxpayer can take to ease an impending or existing wage garnishment:

• Respond quickly to the IRS levy notice. Fill out the form and return it to the suggested IRS address. If the taxpayer fails to meet the three day deadline, the IRS allows only one exemption for calculating the levy amount.
• Make certain the IRS is not levying more than the guideline amount. The taxpayer can verify this by checking IRS Publication 1494: “Tables for Figuring Amount Exempt For Levy on Wages, Salary and Other Income”. The IRS updates the amounts in this publication yearly.
• If the taxpayer is experiencing genuine hardship, contact the IRS immediately to get the garnishment lifted or reduced. Please refer to blog post “How To Qualify For IRS Hardship Status“.
• The taxpayer should consider other tactics if they do not qualify for IRS hardship status. These would include strategies like the installment agreement and the offer in compromise program. It is advisable the taxpayer seek the advice of a tax problem specialist.