Making it through an IRS audit is stressful and anxiety ridden, but for many, it is not the end of the road in dealing with the IRS.  Many IRS audits result in balances due.  Here are my responses to great questions from a reader about dealing with IRS collections after the audit.

I just finished an audit covering three years … 08-09-10…and owe the IRS over $100,000.   My questions are:  Will the IRS do a payment plan?  Would they take a lump sum and forgive the balance?  And will a lien be put on my property as part of the payment negotiations?

To begin with, after the IRS concludes the audit, expect a steam of IRS collection notices seeking payment.   These notices are each sent several weeks apart, and bear titles like “Balance Due,” “Urgent,”  and “Final Notice of Intent to Levy.”   The most important of these notices is the Final Notice of Intent to Levy as this notice allows the IRS to start collecting the liability by levy action.   The Final Notice of Intent to Levy also provides important rights to file a request to talk to an IRS settlement officer to solve the liability.  This request is important as it stops the IRS from taking levy action while you negotiate  a solution of the balance due.

Speaking of solutions, the IRS would be likely to take a payment plan from you, but on a balance due of over $100,000 the IRS will require that you provide a financial statement listing your income, living expenses and valuing your property.   This is to help them determine your cash flow for an installment agreement.  Unfortunately, it is usually not as easy as saying “I want to pay $500 month” when you owe $100,000.

And beware:  the IRS has what they call “Collection Financial Standards” – these are living expense allowances the IRS applies to your budget.  For example, the IRS may think your mortgage and utility expenses are too high, and ask you for a payment you cannot afford.   There are solutions to this dilemma – for example, if you can repay the liability in five years, the IRS can allow all your expenses and you can pay what you can afford.  It is also important to know that disclosure of financials can be avoided on balances under $25,000.  If you owe under $25,000,  the IRS will enter into a “Streamlined Installment Agreement” – a simplified process that accepts repayment over five years regardless of how much you make, spend or are worth.

If you choose to provide a financial statement, the IRS can also  determine that you cannot make any payments and are entitled to a finding of economic hardship.  This is also known as “uncollectible” or “currently non collectible.”  In essence, the IRS will not force a payment if it would cause you to be unable to pay basic essentials.   This can  last as long you cannot reasonably afford to make payment.  And there is an end – the IRS has 10 years to collect the amount from your audit.

As to making a lump sum payment to the IRS to settle the debt, this cannot be done through a simple phone call.  Your offer to settle has to be routed through a formal IRS process known as an offer in compromise.   The IRS has to investigate your financials (yes, full disclosure is required) to determine if your offer represents the most they could collect over the 10 years they have to do so.   The process can take at least 6-9 months.  Bear in mind that, despite what you may have heard on TV or the radio, the IRS is more prone to say “no” to overall settlement, preferring instead to collect installment payments or to sit on uncollectible debt.

What is the policy of the IRS as to filing tax liens?  Based on the amount you owe (over $100,000), expect the IRS to file a tax lien against your property.   Your call to set-up an installment agreement will result in a lien being filed as part of finalizing the agreement.  If you owe under $25,000, there are more options to avoid the filing of the lien, but a general rule is that avoidance of the lien is difficult in large balance due cases.   The lien is good for the 10 years the IRS has to collect, and expires when the IRS is out of time to collect.

Life after an IRS audit often involves after the fact complications of dealing with the IRS Collection Division.   In audits that result in money owed,  it is recommended to be proactive and to understand the next step that awaits you – IRS collections – before the audit is over. There is no substitute for preparation.

Another great question from a reader on how the bankruptcy code and tax code can intersect when discharging taxes in bankruptcy.

Dear Mr. Levy,

We owe income tax from 2007.  We filed the return on October 15, 2008 with an extension.  We filed a collection due process appeal and had a hearing, agreeing to monthly payments of $100.00, which we have kept current.

My question is if we have met the proper time requirements for our income tax debt to be discharged in bankruptcy?

What stands out in your desire to use the bankruptcy code to solve your tax problem is the filing of the collection due process appeal (which is a creature of the tax code).

When you filed your collection due process appeal, you tolled two of the three timing rules in the bankruptcy code that allow taxes to be discharged. Those two rules require that a bankruptcy must be filed (1) three years after your tax return was due to be filed (including extensions) and (2) 240 days after the IRS officially places the amount you owe on its books (known as an “assessment”).

These two timeframes were tolled while your collection due process appeal was pending, plus an additional 90 days.  The tolling language is in bankruptcy code section 507(a)(8)(G).

(Note:  The third timing timing rule applied to late filed returns and requires a bankruptcy to be filed two years after a tax return was actually filed.  This rule was not tolled by your collection due process appeal because the two year rule is in a a different bankruptcy code section from the three year and 240 day rules).

With that background, let’s first apply the three year rule, 240 day rule and two year rule to your situation and solve your problem.  You state your 2007 return was timely filed on October 15, 2008.

Applying the three year rule, the earliest timeframe to discharge the IRS in bankruptcy would be October 15, 2011 (three years from when the return was due to be filed).

You should clearly meet the 240 day rule – the IRS likely put the amount you owe on its books shortly after you filed the return, which has been much more than 240 days ago.

As to the two year rule, it calculates to October 15, 2010 (two years from when the return was actually filed).

Ordinarily, your 2007 taxes would be eligible for a bankruptcy discharge on October 15, 2011, the latest of the three applicable timing rules.

But you filed a collection due process appeal, which tolled the ticking of the clock on both the three year rule and the 240 day rule.

Let’s presume the appeal took six months to resolve, which is fairly average for the IRS in these cases.  We must add those six months, plus an additional 90 days, to October 15, 2011.

After adding in this tolling from the collection due process appeal, your 2007 taxes should be eligible for a bankruptcy discharge after July 15, 2012 (Calculated as follows: October 15, 2011, plus six months while the appeal was pending, plus 90 days by law).

(Another note of value:  It is important to know that only timely collection due process appeals toll the three year and 240 day timing rules.  Timely collection due process appeals are those that are filed within 30 days from when the IRS sends out its Final Notice of Intent to Levy.  Late filed appeals – defined by the IRS as appeals filed more than 30 days after the Final Notice of Intent to Levy but still within a year after it was sent, should NOT toll the three year and 240 day rules.  This is because the bankruptcy code only references tolling in situations where the IRS is prevented from collecting by law – a situation present only when a collection due process appeal is timely filed).

The statute of limitations on collection will make most every IRS collection problem come to an end.  Internal Revenue Code 6502 puts a limit on how long the IRS can pursue the collection of a tax debt. The timeframe is 10 years from when the IRS puts a liability on its books.

But knowing there is an end is really just the beginning.

Most sources of IRS resolution – offer in compromise, innocent spouse claim, bankruptcy, collection due process appeal – extend the time the IRS has to collect while they are pending.  Be careful:  Not succeeding with a plan of resolution will only make a tax problem linger.  The IRS can even sue you and get a judgment that allows them to collect for more than 10 years.

Before jumping in the water, it is important to make sure that the timeframe for resolution, coupled with the potential for success, is greater than the risk of extending the collection timeframe and making a tax problem linger.

Think of this with a sports metaphor.   We are starting on the one yard line when assessment is made, and need to take the ball all the way down the field to the goal line – 100 yards in football, 10 years on IRS.  The decisions we make in between – the plays we call – affects the end result.

Read my entire article on how to avoid giving the IRS more time to collect, published in the Journal of Enrolled Agents, here.

When the IRS gets you with a levy, bad things can happen – your wages are frozen and you are looking at living without a paycheck. The money you need to pay bills is suddenly swiped out of your bank account.

This presents an urgent dilemma requiring immediate relief.

So, what are the two quickest ways to get an IRS levy released with no questions asked?

1. Bankruptcy.

Although for some a course of last resort, bankruptcy results in an immediate release of an IRS levy, no questions asked. The filing of bankruptcy results in what is known as a “stay” on collection actions by all creditors, including the IRS. There is no need for disclosures or negotiations with the IRS for relief from a levy – it is automatic by bankruptcy law.

2. Streamlined installment agreement.

If you owe the IRS $25,000 or less, you qualify for a repayment agreement with no financial disclosures. This speeds the levy release process and eliminates a drawn out negotiation process. When you enter into the installment agreement, the IRS will immediately release it’s levy against you. Sometimes, my clients pay down the amount they owe to $25,000 to qualify to get the quick levy release and avoid financial disclosures. The agreement requires repayment of your taxes within 60 months.

Another benefit to a streamlined installment agreement is that your monthly payment could be less than if you gave the IRS your income and living expenses and made a financial disclosure. This is because the most you will be committed to paying the IRS is approximately $425/month ($25,000/60 months). With no financial disclosures, the IRS makes a “streamlined” calculation of what you can pay. There is no application of the burdensome IRS collection allowances, and you can pay more than the minimum voluntarily to pay the IRS off sooner.

Although it is not as absolute as bankruptcy and a streamlined installment, the filing of an offer in compromise or innocent spouse claim can result in a levy release without more. The IRS is required by law to suspend collection when either a compromise or an innocent spouse claim is filed. Technically, this means the IRS is prevented from sending out future levies, not releasing one already sent, but an IRS employee often exercises good discretion to release an existing levy automatically once an OIC or innocent spouse claim is filed.

Getting an IRS levy released is serous business, and knowing the rules and understanding how to navigate through them is key to quick results.

Turn on your television, listen to the radio, and it will be there: advertisements encouraging you to settle up with the IRS. Or watch the media, and you will see government agencies getting coverage for cracking down and closing some “pennies on the dollar” promoters for, well, over promoting the offer in compromise.

Before jumping in with an offer in compromise, consider the following realities:

1. The IRS does NOT have an open door policy to settlements. Year in and year out, the IRS publishes its offer acceptance rate. On average, the IRS accepts about 25% of the compromises it gets.

2. An offer in compromise is NOT a “pick up the phone and make an offer” type of thing. An offer in compromise entails a detailed written disclosure of your finances to the IRS – where you bank, work, your monthly living expenses and the value of your assets. If your offer is rejected (and remember, many are),, you have just spilled the beans.

3. The IRS likes documentation to support an offer, meaning they will want you to provide bank statements, paystubs, verification of car and mortgage payments and proof of your living expenses, just to name a few. Sometimes, they will ask for this information more than once, depending on how long your offer takes to investigate. And things can happen in between the disclosures, like receiving a pay increase, which could negatively impact your settlement.

4. The IRS will likely disagree with the amount of your living expenses. They review your expenses to figure out how much cash flow you should have to repay your taxes. Notice I said cash flow that you should have, not actually have. The IRS has their own version of what you should be spending – known as “standard allowances” – and when they apply it to your actual expenses, the result is “phantom” cash flow that raises your settlement value and usually forms the basis of offer rejection.

5. An offer in compromise is not a quick fix. On average, the IRS takes 6 to 12 months to investigate a compromise. If the initial investigation results in a rejection, you have the right of further review in IRS appeals. Presume you will end up in appeals, and add another 6-9 months. Total expected time for a compromise: 12 – 18 months.

6. If your compromise is accepted, you need to pay the IRS the settlement value. If you do not have the cash readily available, the IRS will give you up to 2 years to make payments. Add that to the time it takes for the offer to be investigated to get to final resolution.

7. Here is a biggie: Submitting an offer in compromise extends the timeframe the IRS has to collect from you. This is known as the statute of limitations on collection, and lasts for 10 years. If you spend 18 months trying to get an offer accepted, and are unsuccessful, you will come out of the offer process having given the IRS another 18 months of your life because the collection timeframe was tolled. This is especially disheartening if you only had a short time left on the statute of limitations on collection when you sent in the offer, because you could have been done with the IRS on time but for the offer.

With all that said, the offer in compromise process is real and can work in the right situation. But careful consideration of whether your situation is right for an offer should always be undertaken before jumping in, with the knowledge that a compromise is not the always the best way out.

Here is a practical question from a reader about a concern of everyday living – IRS seizure of your car to pay your tax debt.

If I own a free and clear vehicle that is ten years old and has 115k miles on it, and it is worth 4,000.  Will it be seized if the IRS does a levy and I have no other assets/income for them to take?

The IRS is rarely in the business of taking your car and preventing you from getting to work, the grocery store, or the doctor.  To have the IRS interested in a seizure of a vehicle, in most cases, you will have to be in a extreme position of noncooperation.  Good communication with a Revenue Officer lowers any risk of the IRS seizing your vehicle.

Speaking of Revenue Officers, unless one has contacted you and is assigned to investigate collection of your tax debt, the chances of car seizure becomes even more remote.  This is because the IRS will need local enforcement to investigate the seizure of a car.  If all is quiet, or your case in the IRS Automated Collection Service, it is impractical that your car will be seized.

Speaking of practicality, the IRS is most interested in property seizures when it results in some real recovery to them.  A vehicle worth $4,000 most likely is not a prime source of recovery for the IRS, especially considering the hardship to you from loss of transportation.  A Ferrari would be a different story.

This prohibition on seizures without recovery is in the Internal Revenue Code, specifically section 6331(f), which prevents uneconomical levies.  You can also reference Internal Revenue Manual 5.10.1.2, which states that “Seizures where the taxpayer has insufficient equity in property – there must be sufficient net proceeds from the sale to provide funds to apply to the taxpayer’s unpaid tax liabilities.”

Also, keep in mind that Internal Revenue Code 6343(a) prevents an IRS levy if it creates an economic hardship.  Seizing a car that will prevent you from going to work creates an economic hardship.

The numbers speak for themselves that the IRS is not usually in the car repo business.  For the IRS fiscal year 2009, the IRS made 581 seizures made of real and personal property.  With millions of taxpayers in debt to the IRS, seizures of hard assets are relatively rare.  Of the seizures made, the vast majority were real estate, with a much smaller percentage out of the 581 being vehicles.

In other words, it is quite unlikely that the IRS wants your car.  The same logic applies to your house.  The real concern is your wages, bank accounts – liquid assets.

The time I spend helping my clients results in relationships that allows me to get to know them better.  I enjoy learning about my clients – many are small business owners, including everything from restaurateurs to electricians.  I represent doctors and lawyers and chief financial officers.  Some clients are retired on social security, and others are wage earners with a family.  It is all very diverse.

My clients have different backgrounds, different life experiences, and varying levels of education.

They have all found themselves – unintentionally – with IRS problems.

And they all are good people.

The reasons my clients are caught in the cross-hairs of the IRS is from life itself – divorce, addictions, business failures, money management, sometimes even the death of a loved one. Some of my clients amaze me at the skills they have in their trade, but – through no fault of their own – have problems with the IRS and their taxes.

If you have IRS problems, I am willing to bet that you are not a bad person, or dishonest.  If you were, than you probably would not bother to even be reading this.  You want to make your life better, and move on from worrying if your bank accounts will be levied, or living without any bank accounts at all.

Your problems have solutions – some are quick, some take longer than others and require more patience.  It may be a weight to carry, but you are not dishonest for making mistakes to the IRS and with your taxes.  You are only human.

The Internal Revenue Code does not make it easy to understand how Federal tax liens work.  Hopefully, that is what I am here for.

The starting point to understanding your tax lien is to know that it lasts for the amount of time the IRS has to collect from you – 10 years.  After the 10 year statute of limitations on collections expires, the IRS is required to release the lien.  To accomplish this on a wide scale, the IRS inserts language into the lien that makes it “self-releasing.”  That means it is automatically released when the 10 years is up.

This “self-releasing” aspect of a tax lien is right on the face of the lien.  Here is what a Federal tax lien says:

“IMPORTANT RELEASE INFORMATION:  For each assessment listed below, unless the lien is refiled by the date given in column(e), this notice shall, on the day following such date, operate as a certificate of release as defined in IRC 6325(a).”

Grab your tax lien (I know it may be painful to look at). The top of the document will say “Notice of Federal Tax Lien.”  As an overview, in the center of the lien are six columns, identified with letters (a) through (f). Each column lists (a) the type of tax you owe, (b) the tax years, (c) the last four digits of your social security number, (d) the date the IRS put your balance due on its books, (e) the last day the IRS can refile the lien if it needs to, and (f) a balance due.

Note the balance due is not what you owe now; it is not current and does not reflect accrued interest, penalties or any payments you may have made.

Tax liens may contain a foreign language, but you can learn a lot if you know how to read them.  Let’s focus on the fourth column of the lien (column (d) ), and the fifth column (column (e).  They are the heart of the lien.

Column (d) provides the date the IRS made its assessment against you; in other words, the day the collection statute began.  Take the date in column (d) and add 10 years.  From the lien itself, we now have the date the IRS collection statute should expire.

As stated on the face of the lien, the lien itself operates as a certificate of release after the collection statute expires. Column (e) gives you that date, which is 30 days after the IRS collection statute expired. Hopefully, for you,the lien ends there, after 10 years.

But sometimes there’s a catch:  You may have done something that extended the time the IRS has to collect.  Did you submit an offer in compromise?  File bankruptcy?  Submit a collection due process appeal?  All of these extend the time the IRS has to collect.

In cases where the collection statute is longer than 10 years, the IRS can extend the life of the lien by refiling it to match the longer collection period.  This is where the 30 days comes into play.

If the IRS refiles the lien within 30 days of the collection statute expiration date, the lien remains in place and maintains its priority against all of your other creditors.

Example of lien refiling:  Let’s say you own a house, and it is worth $200,000. You have a mortgage, and you owe $100,000 on it.  The IRS has a tax lien filed, which attaches to all of the equity in your house.  You filed an offer in compromise with the IRS, which was rejected (don’t believe what you see on TV; most are).  It took the IRS 12 months to complete the offer investigation.  Your offer gave the IRS 12 more months to collect against you and the equity in your house.

The tension is that the IRS lien self-releases when the original 10 year collection statute expires, but they have 12 more months to pursue your house.  What happens?

If the IRS timely refiles the lien before the 30 days expires, the tax lien maintains its priority against your house and will remain in place for the additional 12 months you owe the IRS.

If the IRS does not refile the lien timely, the lien loses its priority against your house, although you still owe the IRS for an additional 12 months. Their claim is unsecured.  The point:  You could sell your house if the lien is not timely refiled, and the lien would not be paid at closing.  Or you could put a second mortgage on the house equity as the lien self-released and was not refiled to maintain its priority from the extended collection statute.

One more thing:  The IRS can still refile its lien late – after 30 days – but their priority is at risk for any intervening event.  Using the example above, presume the IRS was late and refiled the lien after 30 days.  Before the lien was refiled, you took out a second mortgage.  The tax lien would now be third in line, after your first and second mortgages. If the IRS is late on the refiling of the lien, the lien goes to the back of the class.

“How long does the IRS usually take to investigate an offer in compromise?” is a great question, and one I am often asked by clients.

The answer is six to twelve months, on average, although it can be longer, depending on the complexity of the case. If an appeal is necessary, add another six months.

But there is a flip side to the often frustrating amount of time it can take the IRS to investigate an offer in compromise.  The IRS does not have forever, and there are ramifications if the IRS takes too long to act on an offer.

If the IRS does not act within two years and notify you of a decision, the offer is automatically deemed accepted.

That’s right – done, at the amount you offered, courtesy of Internal Revenue Code 7122(f).

So, if your offer is sitting in year two of consideration and things are progressing slower than molasses, maybe you want to think twice about the urge to call the IRS and kick it into gear. (If you wait, bear in mind the statute of limitations on collection is tolled while the IRS considers an offer).

Here’s the small print:  The offer is considered accepted only if the IRS does not make a decision on it within two years after it is received.  ”Decision” is defined to nclude the IRS rejecting the offer, returning the offer as not processable, withdrawal of the offer by you, or a failure to make payments under a periodic payment OIC.  If you have had any of these happen, the IRS has acted on the offer and made an decision. Time you spend in appeals from a rejected offer is not counted towards the two year time limit.

I have yet to have an offer accepted this way, although I have been close.  The IRS is more than aware of the timing limitations, and disciplinary considerations likely (and unfortunately) wait for the employee with the offer.  But if an offer is progressing slowly, it is important to know how to manage the clock and that too much time can work in your favor.

Some things can be simple to negotiate with the IRS.  If you are looking for a great way to repay an income tax liability to the IRS, consider a streamlined installment agreement.

Streamlined installment agreements are available to anyone who owes under $25,000 and can afford to repay their balance in five years.  If you qualify, the IRS will automatically approve the installment agreement, and there should be no questions asked.

Here are your advantages in using a streamlined installment agreement:

1.     Eliminates disclosure of your finances to the IRS.  The IRS does not require a financial statement (Form 433A or Form 433F) for streamlined installment agreements.   That’s right – no disclosure of where you work, where you bank, what your assets are.

2.     Simplicity in IRS negotiations.  A streamlined installment agreement can be made with one phone call to the IRS.   Just tell them you owe under $25,000 and want to repay the liability over five years under streamlined criteria.

3.     No documentation is required to be given the IRS.  To enter into a regular installment agreement, the IRS usually will require personal documents from you – recent paystubs, three month’s bank statements, verification of your living expenses.  If you notify the IRS that you are electing to repay them with a streamlined installment agreement, no documents are required to be provided.

4.     Eliminates the use of IRS financial standards.  In most installment agreement requests, the IRS will apply its financial standard allowances to your living expenses.  The result is often a request for you to pay more than you can afford.  However, in streamlined installment agreements, the IRS cannot apply their expense allowances as they do not have the information to do so – remember, no financial disclosure is required. Because of that, streamlined installment agreements can result in your payment being lower than if you disclose your finances and the IRS applies their expense allowances.

Example:  You owe the IRS $20,000.  Before you call the IRS, you complete an IRS financial statement.  After applying their expense allowances, you realize the IRS might ask you to pay $1,000/month.  You can afford $400.00, which will pay off the liability in five years and permit you to qualify for a streamlined agreement. You call the IRS, request the streamlined agreement, do not provide the financial statement, and get the $400/month payment.

5.     Saves time and money.  No financial disclosure + no documentation = less time negotiating with the IRS.  If you are hiring a professional to represent you before the IRS, less time should equal less money.  Even if you try it yourself, you are saving time (and aggravation) by going the streamlined route.

Making arrangements to repay the IRS does not have to involve fear or intimidation.  A streamlined installment agreement not only simplifies the process, but provides benefits to you in negotiating with the IRS.