It is no secret that Americans have been facing difficult times. At Professional Tax Resolution Inc., we have found that more taxpayers than ever are finding themselves with significant tax debts that are so large they are very difficult or even impossible to pay.
For some people a monthly tax settlement payment can create a hardship by leaving them unable to meet their necessary living expenses. In other words, tax settlement payment is just beyond their financial means. If this is the case, the IRS may classify the tax debt as “currently not collectible”. While more and more people find themselves living on less and less, getting the IRS to classify a taxpayer as “currently not collectible” is often difficult particularly without professional guidance. It should be noted that even if you obtain this classification, this status is that it is NOT a permanent designation and it may only temporarily provide to relief to the taxpayer. The fact is that a “currently not collectible” status continues to accrue penalties and interest on outstanding tax debt liabilities.
When tax debt continues to accumulate, the IRS can become more and more aggressive about collection attempts regardless of your ability to pay. At Professional Tax Resolution Inc., we are often contacted by taxpayers after they have received intent to file a tax levy from the IRS. Usually the tax debt that results in a tax Levy is accumulated from multiple years and includes a significant amount of penalties and interest.
One of the more common ways Tax debt results is from not filing returns. In these situations, the IRS may do a substitute return that only considers income and does not give credit for deductions for which the taxpayer is likely eligible. When the IRS substitutes your returns for you, it can result in an overstatement of the tax debt. How is this related to a tax levy or “currently not collectible” status? When the IRS moves to impose a tax levy, the unfilled returns can be a significant obstacle in halting the collection efforts. So, even if you can demonstrate you have a clear economic hardship caused by the tax levy, in most cases the IRS will not even consider a resolution alternatives until all returns are filed. If you have not filed your tax returns and a tax levy is imposed, you may be caught in a chicken and egg situation. It can be difficult to obtain expense and other records form past years leaving you unable to prepare outstanding tax returns in time to halt the filing of the tax levy.
A court case addressed this how these very issues interact. In Vinatieri v. Commissioner, a taxpayer faced both financial hardship and aggressive collection efforts by the IRS. In this case the Tax Court held that the IRS abused its discretion by proposing a tax levy upon a taxpayer with un-filed returns who had shown that they were in economic hardship. In other words, the taxpayer was in an economic situation that might have qualified them as “currently not collectible”, yet the IRS abused its discretion by imposing a tax levy without regard to their financial ability to pay at the time.
Unfortunately despite the ruling, IRS procedures for placing an account into “currently not collectible” status remain unclear. The net result is that a number of tax levies are being impressed upon people who are in such dire financial situations that they should be at least temporarily be ineligible from such collection actions.
There is some hope that the growing issue will finally be addressed. The national taxpayer advocate service has recently recommended that the IRS provide its employees with clear guidance that employees are able to classify an account as “currently not collectible” independent of any other criteria and even when the taxpayers has unfilled tax returns. The TAS has also recommended that the IRS provide its employees with additional training on how to manage accounts for taxpayers facing an economic hardship.
While the IRS may overtime become more accommodating to those in dire financial circumstance, the best advice for those with tax debt is to take action immediately. The effects of a tax levy, wage garnishment or other collection method can be devastating to a taxpayer that is already struggling financially. Don’t let years of interest and penalties continue to accumulate. Call us now and let us help you to evaluate your tax debt resolution options.
