An investigation conducted by the IRS to discover whether an individual has filed his tax return correctly. An audit can either be conducted through a face to face meeting or a letter asking for further information. The IRS audits returns that look suspicious, including tax returns that claim a high number of deductions, unreported income or home office deductions.
Taxes not completely paid when they are due. Back taxes can be assessed by federal, state or local taxing agencies. A taxpayer can be assessed back taxes by not paying taxes when they are due, failing to report all income on a return, taking too many deductions or failing to return a tax return all together. Back taxes are subject to fines and fees.
The IRS can issue a levy against a taxpayer’s bank account if the taxpayer refuses to pay back taxes. The bank levy will collect all of the funds in the taxpayer’s bank account, up to the amount owed, and send it to the IRS. Before the IRS can issue a bank levy, they must send out a Final Notice of Levy. They can then issue a levy within 30 days after sending out the final notice. When a levy is issued, the taxpayer’s bank must freeze all of his accounts for 21 days. On the 21st day, the bank must send all frozen assets to the IRS.
An individual declaring bankruptcy is protected from creditors seeking his assets. However, the IRS can generally get past any protection that bankruptcy offers. Therefore, a person can file for bankruptcy and still owe the IRS money.
Collection Information Statement
A statement that tells the IRS what a person’s income, assets and expenses are. The IRS uses the information collected from the statement to determine how much of a person’s tax debt to collect.
Currently Non-Collectible Status
This status protects taxpayers who are not financially able to pay their taxes. If the IRS accepts a taxpayer’s request to enter currently non-collectible status, they will keep him in this status until his finances improve. When a taxpayer’s account is in currently non-collectible status, the ten-year statute of limitations that the IRS has to collect taxes continues to run. Unless the taxpayer is removed from currently non-collectible status, the statute of limitations will eventually expire, and he will not owe the IRS back taxes.
Money used for paying something other than tax debt. If an individual owes back taxes and is asking for debt relief, the IRS will look for dissipated assets. The IRS may say that the dissipated assets should have been used to pay down tax debt and refuse to settle for less than the amount of the dissipated asset or refuse to negotiate all together.
The form used for individuals to file a tax return. Two simplified versions of this form, 1040EZ and 1040A, exist for individuals with relatively easy tax returns. The 1040 form has six sections that taxpayers commonly use:
- Schedule A – Describe itemized tax deductions. Individuals taking the standard deduction do not need to use Schedule A.
- Schedule C – Describes tax deductions from self employment. Self-employed individuals may write off many business expenses as long as they can prove that those expenses were used for their business.
- Schedule D – Describes capital gains and losses. A physical asset sold for a profit is a capital gain, and an asset sold for a loss is a capital loss.
- Schedule E – Describes income or loss from an estate, trust, royalty, real estate rental, S-Corporation or partnership.
- Schedule F – Describes tax deductions from farming income and expenses. This form is very similar to Schedule C.
- Schedule SE – Describes the amount of taxes a self-employed individual must pay based on his income. Generally, income tax from self-employed individuals is due quarterly.
A financial statement used by self-employed individuals to show their business’s profitability. The statement reports net income by calculating the revenue generated minus the expenses incurred.
Innocent Spouse Relief
The IRS offers innocent spouse relief to spouses who have a clean tax record, but get married to individuals who owe the IRS money. The relief means that the IRS will only assess fines and collect the assets of the individual owing back taxes. As long as the spouse does not file jointly, he or she should be eligible for innocent spouse relief.
An action that gives the IRS authority to seize a taxpayer’s property if that taxpayer does not pay back taxes. The IRS can issue a levy against a taxpayer’s property, home or even bank account. A levy is usually used as a last resort by the IRS, therefore individuals should have plenty of warning and opportunities to settle tax debt before a levy is issued.
A public record attached to a taxpayer’s property saying that he owes the IRS money. A lien tells creditors that the IRS has a claim on that taxpayer’s property, including the property that he buys after the lien is filed. A lien significantly hurts a person’s credit score.
Offer in Compromise
An offer in compromise is an agreement to settle debt between the IRS and a taxpayer who has no way of paying his back taxes. If the IRS accepts the offer in compromise, the taxpayer will be relieved of any tax debt he owes. The IRS will accept an offer in compromise if there is doubt a taxpayer’s tax is correct or if there is doubt he can pay what is owed. Occasionally, an offer in compromise will be accepted if a taxpayer proves the tax would be unfair or create an economic hardship. The taxpayer must file and pay tax returns for the next five years after his offer is accepted, or he will again be responsible for all taxes and fines.
The IRS can issue a tax penalty abatement, removing all tax penalties, if an individual can show that he had reasonable cause for not paying his taxes on time. To qualify for a tax penalty abatement, an individual must show the IRS that he has showed due diligence in trying to repay the debt. A person could qualify for tax abatement if he or a close family member has recently experienced a serious health problem, theft, bad accounting advice or a natural disaster.
Proposed Tax Change Notice
A notice sent to a taxpayer by the IRS showing proposed changes to the taxpayer’s income tax return. The IRS will send a proposal if the numbers on an individual’s tax return are different than the numbers provided to them by that individual’s employers and banks. The notice is not a bill, it is simply a statement that allows the taxpayer to disagree, partially agree or agree with the proposed changes.
Debt that is completely paid off. However, if the IRS is evaluating an individual’s ability to pay back debt when considering a debt relief compromise, they may consider debt that will soon be paid off as retired debt. It is important to consider debt that the IRS may consider “retired” when filing for an offer in compromise.
Statute of Limitations on Taxes
Under normal conditions, the IRS has 10 years to collect after a tax has been assessed. This statute of limitations can be suspended, however, if a person files for bankruptcy or an offer in compromise. The statute of limitations is not suspended if a taxpayer is in currently non-collectible status.
Substitute for Returns
All individuals are required to calculate their own taxes and file a tax return every year. However, the IRS will file a substitute return for an individual if he fails to file one. Before filing the substitute, the IRS will request one more time that the taxpayer files the late return on his own. Substitute returns are subject to fines and fees. They are usually not filed unless a tax return is late by at least two or three years.
If an individual completes his tax return and finds out that he paid more in taxes through the year than was required, he is eligible for a tax return. If that individual owes back taxes from previous years, the taxing agency might keep the tax refund to help pay that tax debt.
Trust Fund Recovery Penalty
If a business does not pay the IRS enough payroll taxes, certain individuals in that business could be held responsible to pay back that money. Owners, officers and payroll employees could be charged a trust fund recovery penalty, meaning that the IRS could go after that person’s property or bank account.
A levy that the IRS can issue against a taxpayer’s wages. When the IRS garnishes an individual’s wages, that person’s employer must pay a certain percentage of those wages directly to the IRS. The wage garnishment can be released only if the taxpayer completely pays off the debt, agrees to a payment plan or shows that the garnishment is causing an economic hardship. Wage garnishments usually collect a high percentage of an individual’s wages – sometimes 80 percent or more.