DARRIN T. MISH: Hello, hello, hello, this is IRS solution attorney Darrin T. Mish here today with my lovely and talented cohost, Katrina Madewell. How are you doing today, Katrina?
KATRINA MADEWELL: That’s me, doing great. How are you, Darrin?
DARRIN T. MISH: I’m so fired up to be live today and to talk about the solutions to IRS problems instead of just focusing on the negative and the problems all the time.
KATRINA MADEWELL: We are live. By the way we’re going to give you the studio call in number so if you’re cruising around and you’re listening live, not via podcast, call us in at 727-441-3000. Again we’re in the studio today with Darrin Mish, IRS solution attorney live 727-441-3000. Got that burning IRS question that you always wanted to ask, but you’re too scared to step up and ask or you’re not sure and you just want to ask anonymously, you can call us 727-441-3000.
DARRIN T. MISH: Yeah, go ahead and put me on the spot and I look forward to trying to help you in any way I can.
KATRINA MADEWELL: He can take the heat.
DARRIN T. MISH: Absolutely.
KATRINA MADEWELL: Put him in the fire right with the…in the kitchen right with the fire. He can do it. Today’s topic is going to be federal tax lien versus levy, right?
DARRIN T. MISH: Yeah, you know just about every day I talk to taxpayers that owe liabilities to the IRS and I’ve noticed that there is a very strong trend to use those terms interchangeably or incorrectly. A lot of times people will say, oh I have a lien, does that mean the IRS is going to garnish my paycheck and whatnot. Really, we got to get it nailed down to use those terms correctly because they mean dramatically different things.
KATRINA MADEWELL: Yeah, I imagine they would. What kind of stuff do you see, the general questions are “Oh, I have a tax lien”, but it’s really a levy? Or, what are you saying?
DARRIN T. MISH: What happens is the IRS has the right to file something called a federal tax lien. Actually a notice of federal tax lien. When the taxpayer owes more than $10,000 and more than 10 days has elapsed from the time the taxpayers have been given a bill, basically. The IRS can file a lien anytime they want to.
KATRINA MADEWELL: That notice of the federal tax lien, is that a public notice for anything else where they have to put it in the paper or different places? Or no?
DARRIN T. MISH: What they do, is it’s kind of interesting because everything else the IRS does, you can appeal before they do it. You get notice before they do it and you have rights to appeal. The filing of a tax lien is different. It’s actually you get the right to appeal the tax lien after they’ve done it. What the lien is, it’s a public notice that’s filed typically in the clerk’s office in the county that you reside in. It’s notice to the world that you owe this amount of money. The scary part is…
KATRINA MADEWELL: So those are the things we see as public records, right? That pop up on credit reports?
DARRIN T. MISH: Absolutely, they pop up on credit reports and they cause problems with closings for homes, things like that.
KATRINA MADEWELL: I can imagine. If you have a federal tax lien showing up in the public record section, you’re not going to be doing a whole lot of anything.
DARRIN T. MISH: The challenge is, that lien attaches to attaches to all the person’s property, real and personal wherever it may. Now that’s kind of a fancy sounding thing, right? Real property, as you know, Katrina, means real estate. So it means any land or anything like that.
KATRINA MADEWELL: Like tangible.
DARRIN T. MISH: Well, yeah, you can go walk on it I suppose. It’s tangible from that aspect. Personal property means all of your stuff. So everything else. I always say…
KATRINA MADEWELL: So bank accounts, cars, clothes if they wanted to, theoretically, right?
DARRIN T. MISH: I typically say something sophisticated like it attaches to the socks and underwear in your drawer. Literally everything. That’s kind of a challenging thing when the IRS files a tax lien against you versus a levy is actually a seizure. It’s not a seizure like if you have epilepsy or something like that. It’s a seizure where they come and take stuff. A levy is a much more serious situation because nobody really likes to have their stuff taken.
KATRINA MADEWELL: So what’s the timeline, like to actually get to this point where someone does the notice of federal tax lien just use an example or a hypothetical for the show. If someone’s doing…what timeframe? Is it a couple months? Is it several years that leads up to that time place where they’re actually filing this notice of federal tax lien?
DARRIN T. MISH: That’s a really good question. The standard operating procedure within the IRS dictates that they’re supposed to file that lien whenever there’s been a notice in demand. Basically the taxpayer owes over $50,000, but it doesn’t always happen like that because people don’t realize this but the IRS is absolutely overloaded with people who owe money to the IRS. It’s something like 10 percent of the population.
KATRINA MADEWELL: Wow, that’s a big number.
DARRIN T. MISH: Yeah, if you think the population of the United of the States is like 300-350 million.
KATRINA MADEWELL: Million? More than million. We’re up there. In the whole United States?
DARRIN T. MISH: 350 million, something like that. 30-35 million people owe money to the IRS at any given point in time so when you think about just the enormous job that the IRS is tasked with trying to collect that money. I’m not sympathetic of that.
KATRINA MADEWELL: Didn’t they hire more people to ramp it up awhile back?
DARRIN T. MISH: They did. They’ve hired some new people, but Congress is constantly in sort of a friction battle with them, you know? The IRS does collect the money that goes to the treasury, at least a large part of the money that goes to the treasury, but congress has a love/hate relationship with the IRS. They don’t want to fund them even though…
KATRINA MADEWELL: We all do, don’t we?
DARRIN T. MISH: Oh, yeah, that’s true.
KATRINA MADEWELL: I don’t think anybody likes the IRS.
DARRIN T. MISH: I think the stat that I’ve heard is they collect $40 for every dollar in funding they get or something like that. It’s really a pretty good value proposition to for congress to give the IRS more money. But especially, and I don’t want to get too far into this, but especially with the recent political issues that have been going on. The IRS had their budgets cut. You can actually tell by the way they’re conducting their mission of collecting revenue. You can tell that their budgets have been cut and you can tell they’re not happy about it.
KATRINA MADEWELL: That’s funny. It’s funny just from the outsider perspective looking in.
DARRIN T. MISH: One of the ways we know that they’re not happy about it is right now if you call the toll free numbers, pretty much every bill that you get from the IRS is going to have a 1-800 number on it and it’s going to ask the taxpayer to call. Even as a professional that does this on a daily basis, when I call, I often have to wait in excess of two hours and sometimes after waiting an hour or two, I get a recording that says our lines are too busy, so for better customer service we’re going to terminate the call now.
KATRINA MADEWELL: That’s fabulous. That’s your tax dollars at work.
DARRIN T. MISH: So you can tell that somebody there at the IRS has made the decision that they’re going to show congress who’s boss and provide that level of customer service I guess.
KATRINA MADEWELL: You got to love it. So, actually getting back to our topic when you say federal tax lien versus a levy…?
DARRIN T. MISH: A tax lien is going to get filed typically after somebody owes usually over 50,000 dollars, sometimes less. I wish I had the answer to when is it going to happen. Because I don’t have an answer. I would typically say, typically after at least six months of getting the notice and demand for payment. But sometimes it can be never. So literally I’ve had clients that owe well into the six figures, there’s very little to no collection action, very little to no contact on behalf of the taxpayer reaching out to the IRS to try to stabilize or improve the situation. No lien ever gets filed. So there’s not a rhyme or reason.
KATRINA MADEWELL: It’s not based on the amount or…?
DARRIN T. MISH: It’s supposed to be based on the amount and it’s supposed to happen regularly, but routinely, it seems like they don’t get filed even though it’s something that they’re supposed to be doing on a regular basis to protect the government’s interest.
KATRINA MADEWELL: Walk somebody, like for the person listening and for me, if I were to imagine what a levy looks like and what that sounds like and what would happen and that experience. What happens? Let’s say this tax lien is filed and now the IRS has decided they’re going to levy, what does that mean?
DARRIN T. MISH: When the IRS decides to levy, there’s basically two different kinds of levy that they can carry out. The first is what we think of as a wage garnishment, right? That’s a wage levy and what they do is, they use a form or a table called Publication 1494 and if I’m looking at the publication right now. It’s basically a chart or a table and it tells the employer how much the employee gets to keep as in their paycheck after taxes and benefits and child support and that kind of thing are paid. I’ll give you an example here.
KATRINA MADEWELL: Yeah, what does that number look like? So you actually get to keep some after the levy, that’s surprising.
DARRIN T. MISH: It’s interesting because that’s a different perspective than you would think. You would think, oh, if they levied your paycheck, they’d get 20% or 10% or some reasonable figure, right? Well, no, that’s not how it works at all. It’s the inverse of that. I’ll give you an example. Married filing joint couple, it’s a married couple that typically files a joint return. Let’s say there’s four people in the family. If they get paid twice a month, they only get to keep 1100 dollars out of their paycheck. It doesn’t matter if they make 2500 dollars a month, or if they make 25,000 a month. They only get to keep 1100 dollars out of each paycheck.
KATRINA MADEWELL: That’s more than the average rent payment right now.
DARRIN T. MISH: This is a dramatic draconian thing that kind of happens. The government does this primarily not to collect the money. This is sort of interesting I think. It’s not to collect the money, figuratively what they’re doing is they’re grabbing you by the shoulders and they’re shaking you and saying “hello! McFly!”
KATRINA MADEWELL: Wake up!
DARRIN T. MISH: You need to be dealing with this. You need to do something. So that’s why…
KATRINA MADEWELL: How many people actually bury their head in the sand and say I’m moving to Mexico and how many people actually step up and do this. That’s like a permanent thing, they can go on working but they’re going to get $1100.
DARRIN T. MISH: I don’t know how many people actually move to a different country. Although I did have a client one time that was living in Venezuela, came up to see me in Tampa at my office, we talked about it and he decided he was moving back to Venezuela to outlast the statute of limitations.
Let’s talk about what the statute of limitations is again. We talked about that last week. The IRS only has ten years from the date the tax is assessed to go ahead and collect the money. So the tax is assessed typically you can think of that when the tax return is filed. If a tax return for 2014 was filed on April 15, 2015, the IRS has to collect that money before April 16, 2025, ten years later. What’s interesting about the guy that moved to Venezuela, or was living in Venezuela, is technically that statute of limitations is stopped if the taxpayer is outside of the country. This was before we had the Patriot Act and all those passport controls that they were all computerized. I don’t think they ever knew. I think that gentlemen actually did outlast the statute even though he was out of the country, the IRS didn’t know he was out of the country so he beat it that way. I think, and I can’t prove this, but I do think now that our passport controls go into a central database and so they know. Like, when you go on a cruise, Katrina, they know.
KATRINA MADEWELL: They know where you’re at.
DARRIN T. MISH: Yeah. I don’t think if you go on a cruise for 4 or 5 days that that’s going to toll your statute, but I do think the exception is more than 180 days out of the country. It’s actually stops the collection statute of limitations.
KATRINA MADEWELL: That’s a good tidbit to know.
DARRIN T. MISH: I do, rarely, but I do get calls from people in Costa Rica and things like that that are afraid to come back into the country. I think it’s a little bit drastic for most folks. I wouldn’t recommend going to another country. I think the United States is still the best country in the world.
KATRINA MADEWELL: Right, I know. But I’m just thinking head to head with the IRS, you just grab them by the horns like it’s no big deal, but most people are like running from them like they’re the devil.
DARRIN T. MISH: In another segment here we’ll talk about some of the solutions to deal with the liens and levies and the alternatives, but there are alternatives that, for most people, that don’t require that you go down to Mexico and hide out for 8 or 9 years.
KATRINA MADEWELL: So when they levy, do they actually show up at your house and start taking stuff out? I think we’re saving that, right? We’re going to make you guys hang around for the after the break. Big Ed’s looking at us going, take a break! We’ll be back in a minute.
KATRINA MADEWELL: Welcome back, you’re listening to the IRS solution attorney. I’m your cohost, Katrina Madewell. In the studio here with Mr. Darrin Mish.
DARRIN T. MISH: Hey, hey.
KATRINA MADEWELL: Our topic for today’s show was federal tax lien versus levy. Interesting conversation we had talking about that those two things are not interchangeable, they’re actually two totally different things that people always kind of use them as one and the same and they’re not.
DARRIN T. MISH: Yeah, they use them interchangeably. Think of it this way, liens are bad and levies are terrible.
KATRINA MADEWELL: Great analogy, I love it.
DARRIN T. MISH: When a tax lien gets filed against you it hurts your credit and it might keep you from buying and selling real estate and things you’re trying to accomplish. Levies mean your kids can’t eat.
KATRINA MADEWELL: Very true.
DARRIN T. MISH: What happens in those situations…a wage levy, it’s funny, you wouldn’t really think there would be tax emergencies. Can you imagine having to call your tax lawyer at three in the morning because you have a tax emergency? By and large, there aren’t tax emergencies until you get a wage levy, or a bank levy. We’ll talk about that in a minute. When you get a wage levy, I would say that’s a wage emergency or a tax emergency because the example that we gave in the last segment was a couple that files a joint tax return, which is pretty typical in the united States, where both people’s income goes on the tax return and then they calculate their tax based on that combined income. For a family of four, gets paid twice a month. You only get to keep $1100 in your paycheck. What if your mortgage is $2500? Which is really not that uncommon, right?
KATRINA MADEWELL: Yeah, I’m thinking you’re not doing so good.
DARRIN T. MISH: Or worse, what if the rent’s due and you’re going to use this paycheck and they took it all and now you might get evicted. So what happens in that situation?
KATRINA MADEWELL: Yeah, I can tell you this. The eviction process is probably going to be a lot faster than the foreclosure process.
DARRIN T. MISH: Consider that the home foreclosure process in Florida right now is taking five or six years or something like that.
KATRINA MADEWELL: Well, they’ve gotten a little bit better but it’s still, you know, a little longer than the norm.
DARRIN T. MISH: I can guarantee you the eviction process is much faster than that.
KATRINA MADEWELL: And if you have an eviction and tax lien, good luck finding another place to live.
DARRIN T. MISH: Yeah, that’s going to be complicated, right? You’re going to need a bigger deposit and where’s that going to come from?
KATRINA MADEWELL: Everybody pre-screens and I can tell you if we see tax stuff, that’s a red flag. So if we’re prescreening someone even for a rental, we’re like, hey, what is this? You’ve got to tell us more about this because we know that if they freeze or garnish or take, you’re not going to have any money for the rent.
DARRIN T. MISH: So, what we do when we have one of these tax emergencies, these wage levies, is we call the IRS and we try to work out some sort of collection alternative. So, what is that phrase?
KATRINA MADEWELL: Yeah, what does a collection alternative mean? Does that mean I’m writing a big check or can I make payments or, what does that mean?
DARRIN T. MISH: Collection alternative means an alternative to writing a check today, which most people obviously can’t do, if you owe 78,000 dollars, most people can’t just, they don’t have the means to write a check for that entire amount. So collection alternative is something else other than writing that check. There’s basically five collection alternatives. The first and the most common that people think about is the installment agreement. It’s simply the payment plan that everybody sort of wants to get on it. It’s kind of funny and amusing in kind of a sad way. Without fail, no matter if the person owes 10,000 dollars or they owe 250,000 dollars when they say let’s talk about an installment agreement, a payment plan, what would you feel comfortable paying on a monthly basis? Without fail, the answer is, 300 dollars a month.
KATRINA MADEWELL: Really? So it’s just like a random 300 bucks?
DARRIN T. MISH: Yeah, it’s pretty much 98 percent of the people say, well, gee, I can afford 300 dollars a month. I think it’s because we’re in a place economically where people are wasting 300 dollars a month, easily most people.
KATRINA MADEWELL: They’re probably spending most of that on dinner.
DARRIN T. MISH: Right, so they’re feeling like 300 dollars a month, they can swing. Well, news flash, most people are probably going to have to pay more than 300 dollars a month. Especially if they have 250,000 dollars.
KATRINA MADEWELL: It’s a good thing to think about. When you think about that, I’m curious to know what all five are and what I’m also thinking is what kind of advantage do you have to do payment plan over some of the other things, but we’ll answer that after we go through the five.
DARRIN T. MISH: Yeah, for sure. The second one that I usually talk about is the statute of limitations that we talked about on the last segment. The statute of limitations is ten years from the date of the assessment of the tax. What happens if the person owes for five tax years? Is the statute of limitations the same? Probably not, unless they filed all those returns on the same day. And that happens sometimes.
KATRINA MADEWELL: So if they’re following the tax lien or the levy or whatever’s going on, is it going to be for all of them, or is it only for one year?
Darrin T. Mish: A tax lien can only be for some of the years, and the levy is typically going to be for all of the years. Because if the taxpayer owes, let’s say they owed 10,000 dollars a year for five years, that’s 50,000 dollars, right?
KATRINA MADEWELL: Right?
DARRIN T. MISH: So the IRS wouldn’t want to file a wage levy for just 10,000, they would want to file it for the whole 50.
KATRINA MADEWELL: But that’s still only for one year. Or one tax incident.
DARRIN T. MISH: Before the IRS, this is important because we might be freaking people out here. Before the IRS can file a wage levy, or a bank levy and we’re going to talk about that in a minute too. They have to send the taxpayer what’s called a final notice of intent to levy and that comes certified mail. It must be sent to their last known address, come certified mail, and there’s an opportunity to file an appeal within 30 days of the date of that notice.
KATRINA MADEWELL: So that’s always green certified mail. Notice of intent to levy. Really bad. Call Darrin, right? Because something big’s going to go down.
DARRIN T. MISH: A lot of times we’ll go ahead and when people come in in that state where we have the opportunity to file the appeal, we will file the appeal. Because the filing of the appeal is rock solid protection. It’s like the automatic stay in a bankruptcy. Where we kind of know as a society that when you file bankruptcy, people got to leave you alone. Well, that’s kind of the same thing when you file an appeal which is called a Collection Due Process hearing, when you file an appeal to prevent that levy, then you get that rock solid collection protection. At least on that tax year, or the tax years that were on that notice.
KATRINA MADEWELL: So it’s kind of a good way to kind of keep things at bay for a while.
DARRIN T. MISH: We use that to stabilize the situation because we’re going to have to look at the client’s situation. They have to get any of their missing returns filed because that’s a prerequisite to any of these collection alternatives that we’re going to be talking about. We got to get some things in order before we can set up an installment agreement or get them in hardship status or do an offer in compromise or bankruptcy or anything. You need some time to stabilize the situation and get people ready.
KATRINA MADEWELL: Right
DARRIN T. MISH: Very few people are ready off the street.
KATRINA MADEWELL: I doubt it. I don’t see that happening. They have the tax bill, they’re probably not going to be ready for that either.
DARRIN T. MISH: Right, and it’s because they just don’t know what they don’t know.
KATRINA MADEWELL: So the other collection alternatives other than the payment plan, the statute of limitations… Do they ever file the statute of limitations like they can’t even collect. Does that happen?
DARRIN T. MISH: Yeah, it happens a lot actually.
KATRINA MADEWELL: So they’re trying to collect on something they really shouldn’t even be trying to collect on.
DARRIN T. MISH: Oh, no. So your question was, do they ever try to collect unlawfully after the statutes expired?
KATRINA MADEWELL: Yeah, have they already sent this notice and really their ten years is kind of up and you’re calling their bluff?
DARRIN T. MISH: I have seen that. I’ve never seen them do that intentionally. I’ve seen it done by mistake.
KATRINA MADEWELL: These automatic letters that probably go out.
DARRIN T. MISH: Yeah, I have not had many cases like that recently. In the early 2000’s, there was a time when the law actually changed and there was some uncertainty on did the law change on this date or that date? So we had maybe a decade where we saw that more often. Nowadays pretty much they follow the statute of limitations. But I thought the question was, does the IRS ever just write off tax debt after the statute of limitations. I’ve seen that quite a bit. I’ve seen that happen in six figure cases.
KATRINA MADEWELL: For the most part they do, right? Because the limitation’s gone, right?
DARRIN T. MISH: Yeah, it’s pretty much rock solid and if the ten years expires and the IRS didn’t get the money, they just write it off and you can actually see it on the transcript when we get it from the IRS.
KATRINA MADEWELL: Wow, interesting.
DARRIN T. MISH: It’s pretty cool when you see the notation on the transcript that says account balance write off and then it has a big negative number next to whatever they used to owe.
KATRINA MADEWELL: Wow, that’s gotta hurt the IRS.
DARRIN T. MISH: I don’t think it hurts the IRS. I don’t think of the IRS really as people. And I don’t mean that I don’t think they’re…
KATRINA MADEWELL: Don’t they get reprimanded for that? Like big losses?
DARRIN T. MISH: No, I really don’t. I think the IRS is just a giant government bureaucracy full of people most of whom are trying to do a good job, but there’s limitations anytime you get a bureaucracy that big.
KATRINA MADEWELL: Well, they’re overworked and understaffed.
DARRIN T. MISH: Yeah, and I don’t think there are a lot of incentives to absolutely get the money like those of us in private enterprise.
KATRINA MADEWELL: They should hire their contractors based on commission, they’d probably collect a lot more.
DARRIN T. MISH: Interesting you should mention that. For a few years in the last decade, we had to deal with the private debt collectors. The IRS did try that. They used private debt collectors and it was not a success.
KATRINA MADEWELL: Wow, that’s weird. I’m sure stuff like that changes all the time, but it’s so green to me, I don’t know anything about that.
DARRIN T. MISH: A lot of the states still use private debt collectors and they have problems because you know the debt collectors have different motivations and so sometimes they don’t follow the rules, they don’t follow the laws. They might be motivated by commission or some kind of quota situation. I do have to give it to the IRS as far as that goes. I don’t believe there’s a quota. Or I certainly know there are IRS employees even here locally that I deal with that it kind of feels like they feel like it’s their money, but by and large, it’s a business transaction and we usually get it worked out.
KATRINA MADEWELL: So what’s number three on that collection alternative list?
DARRIN T. MISH: So, the third one is actually pretty darn interesting. It’s called Currently Not Collectable or Hardship Status and what that is is it doesn’t really matter how much a taxpayer owes, it could be 10,000 dollars, it could be 1,000 dollars or a million dollars but if we can demonstrate, or the taxpayer can demonstrate that they have no ability to pay on a monthly basis, then the IRS will just put them in this holding pattern kind of status called Currently Not Collectible. If that happens, it’s pretty neat because the statute of limitations continues to run and if the statute of limitations is short, then it can be the be all end all solution. It’s designed really to help people get back on their feet so they can pay at some time in the future.
KATRINA MADEWELL: What’s an example of how or why someone would go into that status?
DARRIN T. MISH: Oh, well this is really common, let’s say they owe 100,000 dollars, they make 5,000 dollars a month and their allowable expenses are 5,000 dollars a month. So let’s talk about…I keep using these terms right, that are probably confusing. What does allowable expense mean?
KATRINA MADEWELL: We probably have to do a whole show on that right?
DARRIN T. MISH: Yeah, we really could. But in a nutshell, an allowable expense is the IRS has categories for each type of thing that a typical person would spend money on, so there’s an allowable expense. It’s actually off a table for food, clothing, and miscellaneous expenditures. There’s a table for every county in the United States, so there’s a maximum housing allowance for every county in the United States. There are maximum expenditures for operating expenses for a vehicle, this is one of my favorites. So, you know within the last few years, gas has been everywhere from $2 a gallon to like $4.25.
KATRINA MADEWELL: Yeah. Easy.
DARRIN T. MISH: The maximum operating expense for a private vehicle in this part of the country is only $244 a month. That’s supposed to cover gas….
KATRINA MADEWELL: Your truck’s going to use more than that in gas, Darrin.
DARRIN T. MISH: Well, for sure. But that’s supposed to cover the taxpayers, gas, maintenance, and insurance.
KATRINA MADEWELL: Car payment if you have that.
DARRIN T. MISH: The car payment’s slightly different, but right now it’s just the gas, maintenance, and insurance for that one vehicle. For right now, that’s $244 for this part of Florida. How does that even make sense when it’s been $244 for at least five years and that’s when gas was $2. Right now is $2.25, something like that.
KATRINA MADEWELL: So it never took into account inflation is what you’re saying.
DARRIN T. MISH: NO, and they’re supposed to review these numbers annually and make adjustments. Even when there are adjustments, there’s like, oh, yeah, it’s $4 more this year. Things like that.
KATRINA MADEWELL: That’s so far off.
DARRIN T. MISH: So the IRS will look at the taxpayer’s allowable expenses versus their monthly income and if that allowable expense is really small difference, you know they have 17 bucks or something like that, or if it’s negative, which is pretty common, then they’ll put you in a hardship status and they’ll leave you alone. The key there is making sure that you can adequately demonstrate that there is no disposable income. Disposable income is the difference between your actual…
KATRINA MADEWELL: Whatever’s left.
DARRIN T. MISH: Yeah, it’s your actual income minutes your allowable expenses.
KATRINA MADEWELL: Oh, so allowable, not even real expenses. Allowable.
DARRIN T. MISH: Right, there is one sort of semi-generous exception to that rule and that is if the taxpayer’s actual expenses exceed allowable expenses, they’ll give you one year to get those things back in line. For example, if a family of two in Hillsborough County, their housing allowance was $1900 and that’s supposed to cover your mortgage, your insurance, all your maintenance, your property taxes, everything. So if your maximum allowable housing and your mortgage was $2500, they’ll give you one year to get that in line.
KATRINA MADEWELL: Your housing payment? With the tax lien, that’s interesting. Good luck with that one.
DARRIN T. MISH: Yeah, it’s not a real realistic solution, but it’s how the situation works right now.
KATRINA MADEWELL: So, what’s four on the collection alternative list?
DARRIN T. MISH: I think we need to go to break right now before we go to number four. Number four is an offer and compromise where you get to make a deal to settle for less.
KATRINA MADEWELL: Oh, you have to wait to find out what the offer and compromise is about. Be back in a minute.
KATRINA MADEWELL: Welcome back! IRS Solutions Attorney Show, this is your cohost, Katrina Madewell with Mr…
DARRIN T. MISH: Darrin T. Mish. Let’s make sure to tell people to visit the website at irssolutionattorney.com where you can listen to past episodes of the IRS Solution Attorney radio show.
KATRINA MADEWELL: That website again was…
DARRIN T. MISH: Irssolutionattorney.com
KATRINA MADEWELL: So when we left off before the break, we were talking about some of the collection attempts, or collection alternatives, right? Is that the right word?
DARRIN T. MISH: Yeah, collection alternatives is the right word. We talked about the installment agreement, which is a payment plan, and then we talked about the statute of limitations and we talked about currently not collectable, or hardship status. Now we’re going to talk about what everybody really kind of wants to hear about because it’s pretty darn sexy when it gets right down to it and it’s the offer and compromise. That’s not really that interesting of a name, but what it is, when you can make a deal with the IRS to settle for less and that’s the sexy part of the situation.
KATRINA MADEWELL: Sounds like making a deal with the devil. Offer and compromise, make a deal.
DARRIN T. MISH: Listen folks, that was Katrina that made a comment about making a deal with the devil.
KATRINA MADEWELL: That was me. If Chris was here he’d be throwing some (inaudible) music in there or something.
DARRIN T. MISH: I love making deals with the IRS because it allows people to get the fresh start that they really need. It’s kind of analogist to a bankruptcy, but without any of the negative implications, without any of the negative credit score kind of stuff. In some cases, it’s actually a little bit easier to do than a bankruptcy.
KATRINA MADEWELL: Is this some of the crazy stories that I hear? Granted some of them are amazing, some of them are it is what it is you get what you get and you don’t throw a fit, you’re still paying them less. But this is the stories that I see and hear when we follow you, right? About people owe this gigantic tax bill and they settle it for a fraction.
DARRIN T. MISH: Yeah, we settle a couple, it seems like a few offers and compromise every month and some of them are just really spectacular. We’re going to talk about one of those cases in the Train Wreck of the Week segment, in the last segment. So stay tuned for that, that’s always a lot of fun to talk about.
KATRINA MADEWELL: Every week we’re going to bring you guys the Train Wreck of the Week in the last segment so you’re going to have to stick around to hear those stories.
DARRIN T. MISH: It sounds kind of negative, right? The IRS Train Wreck. But really what it is that folks were a train wreck when they came in and there’s always going to be a happy ending to the IRS Train Wreck of the week.
KATRINA MADEWELL: Well, you got to clean it up after that train wreck, that’s what it’s about. Clean up the mess. Start cleaning.
DARRIN T. MISH: Speaking about cleaning up, it’s always interesting that people come into my office and maybe they haven’t filed tax returns in eight or ten years, so it took them eight or ten years to get into the problem, right? They want to know how long it’s going to take to fix. The truth is, folks, it’s going to take, no matter who handles your offer and compromise, this is going to take anywhere from six months to a year. Maybe even a year and a half and so it’s interesting that people who spend ten years getting in trouble want to get out tomorrow.
KATRINA MADEWELL: That’s what I tell these people that come with these credit reports that are a train wreck. I’m like, you didn’t create this mess in six months, it’s going to take a little bit to get it unwound.
DARRIN T. MISH: Absolutely. An offer and compromise is where you make a deal to settle for less. We’re going to talk about the cash offer. Cash offer means you’re going to pay within five months of the acceptance of the offer.
KATRINA MADEWELL: Is that number five or is that different?
DARRIN T. MISH: It’s actually number four, it’s the fourth collection alternative. A cash offer just means that you’re going to make an offer in cash to settle your tax liability. It doesn’t really matter how much you owe, with a few exceptions, it matters how much you can afford to pay. It really kind of boils down to a pretty simple math equation. It’s your monthly disposable income that we talked about on the last segment.
KATRINA MADEWELL: Yes.
DARRIN T. MISH: And you can see that monthly disposable income is kind of like a bedrock foundational principle in dealing with the IRS. That’s kind of what is going to be part of the equation no matter how you solve your IRS problem is how much monthly disposable income do you have? If you have a lot of monthly disposable income? You’re probably not going to have a great solution come out at the end. If you have enough monthly disposable income to full pay your tax liability, you’re probably going to have to full pay the tax liability. That’s the bad news.
KATRINA MADEWELL: Of course.
DARRIN T. MISH: The good news is there are some things we can do some time to plan and minimize monthly disposable income. So they take your monthly disposable income, they multiply that by twelve and then add in the value of assets and that equals the amount of offer. So that sounded like a bunch of gobbledy gook so let me give you an example.
KATRINA MADEWELL: So they have this whole formula of course on how they’re going, what they’re going to take.
DARRIN T. MISH: Yeah, absolutely. And it comes down to proper planning before you do the offer and compromise. I very rarely see people that, again, walk in off the street and they’re the perfect offer and compromise candidate, we can file today. That typically doesn’t happen.
Let me give you an example of how this thing is calculated. If your monthly disposable income was $1,000 and you multiply that by 12, that’s $12,000 and let’s assume you have no assets, well your offer amount is going to be $12,000. Doesn’t really matter if you owe 100,000 a million dollars, 50,000 dollars, it doesn’t really matter that much that’s going to be about how much your offer is going to be. So, where some of the planning comes in, the skill quite frankly, comes in is how do you reduce that monthly disposable income from a thousand dollars to a hundred dollars?
KATRINA MADEWELL: Yeah, how do you show you’re broke?
DARRIN T. MISH: Yeah, absolutely. Sometimes what we do is we have people buy cars, if they don’t have a car payment, they’re entitled to have a car payment of about $600/month.
KATRINA MADEWELL: Are they actually getting cars? They’re probably buy here, pay here places, right?
DARRIN T. MISH: Sometimes. You know I haven’t found that cars since they’re secured to the car and the repo industry is pretty good at what they do.
KATRINA MADEWELL: You got a whole reality t.v. show in that.
DARRIN T. MISH: Yeah, they’re pretty darn good at what they do, you don’t usually have to go to a buy here, pay here just because you have a tax lien. Most car dealers are going to get you into a car. It’s probably not going to be at 2 percent, but you’re probably going to get some kind of reasonable interest rate on that.
KATRINA MADEWELL: Considering the rates are low, yeah, you’re going to get a great rate.
DARRIN T. MISH: There’s any number of, and just because you have a tax lien, if you have otherwise good credit you’re probably going to be able to go to any old car dealer and get a car. You just don’t want to exceed that maximum amount, but it’s around $600/month. That’s one of the things we do sometimes is we have people buy cars. People sometimes will be mistakenly be driving the 1992 Buick Skylark because they think they can’t, they owe the IRS so they don’t think they should be able to drive a reliable car and nothing could be further from the truth. They’re entitled to have a car payment. it’s sort of an interesting thought.
KATRINA MADEWELL: I know, I’m just wrapping my brain around that whole statement.
DARRIN T. MISH: Some of the other things we sometimes have them do is we have them buy health insurance or buy life insurance. I have two stories about-or one story about each of those things. On one occasion I convinced a couple to go out and get health insurance. Now, with Obamacare nowadays, you pretty much have to go get it. But this is before Obamacare and we had a client go and get some health insurance and I want to say it was $800 and it really helped their offer and compromise situation because think about this. Every dollar you spend in an allowable expense category saves you 12 bucks.
KATRINA MADEWELL: Yeah
DARRIN T. MISH: Them going and buying health insurance for $8000/month saved them like 10 grand, even I can’t do the math that fast. $9600 right? So it saved them close to ten grand off the bottom line on the offer. Here’s what it gets kind of inspiring. They had not had health insurance for many years. Years, probably decades prior to that. We got them some health insurance we got the offer and compromise through. I get a call about 3-6 months after the offer went through and they told me that one of the spouses had come down with cancer and the health insurance was the only thing that actually kept them alive.
KATRINA MADEWELL: Wow, that’s crazy. Talk about a rainbow at the end of the IRS train wreck.
DARRIN T. MISH: Kind of interesting that the IRS problem kind of forced them to get health insurance and then it actually saved their life. I’ve had a number of other stories where we convinced people to go get term life insurance. Again, another allowable expense category, and then one of the spouses die. Before the purchase of that life insurance, they wouldn’t have had any coverage at all.
KATRINA MADEWELL: Wow, that’s amazing. So is the IRS swooping some of that money?
DARRIN T. MISH: NO, here’s the great thing. Typically after an offer and compromise is accepted, it’s a contracted and they don’t renegotiate, they release liens within 90 days. The taxpayer has to stay current and file their tax returns on time for the next five years.
KATRINA MADEWELL: So as long as they do their thing, they’re good. Number five, before we run out of time.
DARRIN T. MISH: We’ll talk about number five. Number five is bankruptcy. A lot of people don’t know that bankruptcy can be used to resolve tax debts. There’s some timing limitations that we’ll talk about probably in the next segment.
KATRINA MADEWELL: Absolutely.
DARRIN T. MISH: We want to make sure that people visit the IRSsolutionattorney.com website. If you’re interested in more information. And you want to stay tuned for the IRS Train Wreck of the Week.
KATRINA MADEWELL: Hang tight, be back in a minute.
KATRINA MADEWELL: Welcome back. You’re listening to the IRS Solution Attorney Show. I’m your cohost, Katrina Madewell.
DARRIN T. MISH: And I am Darrin T. Mish, your IRS solution attorney.
KATRINA MADEWELL: And if you missed the earlier part of the show, hop on over to the irssolutionattorney.com where we’ll put all the shows we’ve had via podcast. Just to catch up real quick. Our topic for today’s show is federal tax lien versus levy. What’s the difference in those? Then we were talking about some of the collection alternatives. How you can actually fix the problem. We went through one, which was the payment plan. Two was the statute of limitations. Three was currently not collectible or hardship. Four was Mr. Sexy offer and compromise. And the fifth one was bankruptcy.
DARRIN T. MISH: Bankruptcy can be used to solve or to resolve and discharge certain tax problems. There’s some timing rules, I’m going to go over them very quickly. The returns have to have been due for at least three years including extensions. The returns if they were filed late, have to have been filed for at least two years and the taxes have to have been assessed for at least 248 days. So, that was a lot of information in 15 seconds. What you can think about it is the returns, assuming you filed them, have to be at least three years old. If you kind of think about that, you’re going to be right, 98 percent of the time. So bankruptcy can sometimes be used to solve IRS problems, discharge taxes and whatnot, but it’s not typically our first solution. A lot of times we use that bankruptcy threat as leverage in an offer negotiation for example. Sometimes bankruptcy can be very useful if all else fails to, what I call dislodge a levy. So you get that wage levy and you try to negotiate with the IRS and they just aren’t going to budge, the filing of the bankruptcy actually….
KATRINA MADEWELL: That’s your wild card.
DARRIN T. MISH: Yeah. It’s just drop dead, automatic collection stay goes into effect.
KATRINA MADEWELL: Is that a Chapter 7 like total discharge or 13 repayment? Or what is that?
DARRIN T. MISH: We try to put more people in Chapter 7’s because it wipes out the debt and you get off scott free. A Chapter 13 is a repayment plan kind of bankruptcy where they take your debt and they put into a 60 month plan, typically and you make some payments out over those 60 months. Both of those kinds of bankruptcies can be effective in the resolution of taxes. One of the things, we’re running out of time here. One of the things we haven’t talked about yet was the bank levy. The bank levy is…if you thought the wage levy where they take your paycheck is bad, the bank levy is actually worse. The bank levy is when the IRS sends a levy notice to your banks. Your bank or banks. And you go to swipe your debit card at Publics or worse, I can’t even imagine this. You just got done at Burns and it’s 400 bucks and you swipe that debit card and it comes back rejected and you got no other credit cards. I don’t even know what happens.
KATRINA MADEWELL: Who carries cash?
DARRIN T. MISH: In the I Love Lucy days, you’d be washing dishes, right? I don’t think I’ve ever heard of anybody having to do that. I don’t know what happens in that situation.
KATRINA MADEWELL: I don’t think I’d want to find out.
DARRIN T. MISH: For sure, I know I don’t want to find out. What happens is they issue that levy notice and the IRS is entitled to all of the money in the account on the date that the bank levy notice was processed. This freezes the account. It doesn’t freeze the account…
KATRINA MADEWELL: So this is not forever?
DARRIN T. MISH: No, it’s actually not forever. They’re just entitled to the money in that account on that one day.
KATRINA MADEWELL: Do you think they’re watching and when the account gets high they’ll like BOOM! We’re going to take it today. We want that money.
DARRIN T. MISH: I see a pretty high incidents of levies around the first and around the fifteenth.
KATRINA MADEWELL: OK. So they’re swooping whatever’s in there.
DARRIN T. MISH: Yeah.
KATRINA MADEWELL: Well, I guess they figure people’s money’s in there so they’re either getting paid like the end of the month or close to the first they might have a mortgage payment in there, right? Or by the fifteenth which is your grace period.
DARRIN T. MISH: They’re just trying to get lucky on that one day. On day two, the day after the bank levy was processed by the bank, your bank account’s usable again. You can put money in there, you can use your card, everything. But they’re just entitled to the money in the account on that one day. Then the bank has to hold that money for 21 days to give the taxpayer a chance to contact the IRS and try to resolve it. The way you would resolve it…
KATRINA MADEWELL: So the banks like swoopin’ it, they’re putting it aside, you can’t access whatever was in there, but if you make a 5 dollar deposit in there the next day, it’s yours?
DARRIN T. MISH: Absolutely and there’s a high incidence of banks not understanding that the bank account’s only frozen for that one day. A lot of people think the bank account is frozen frozen permanently.
KATRINA MADEWELL: I would think it was frozen forever too. So, I mean, the banks don’t know this either, is what you’re saying?
DARRIN T. MISH: I often have to go ahead and tell the lawyer at the bank what the deal is and what the law is. The way you get rid of the bank levy…
(Train wreck sound)
DARRIN T. MISH: I guess it’s time for the Train Wreck of the Week. Real quick, the way you get rid of the bank levy is using one of the five collection alternatives that we talked about previously. That’s the way to do it. You got to come up with some alternative to them just taking the money. So the IRS Train Wreck of the Week this week, involves a couple. They owed something that we haven’t talked about it yet on the show, which is they owed payroll taxes. They actually had a business and at some point in time, they managed to not pay the payroll taxes. The taxes that are supposed to be held on behalf of the employees. Ultimately what happened was that couple were individually assessed a large portion of the payroll tax against them personally. So they each owed about 156,000 dollars, so a total of 318, give or take. They’re an older couple and they were living on social security and had very limited assets, really no assets. The weren’t even in great health. We filed an offer and compromise, one of my favorite collection alternative, we filed an offer and compromised and we offered some small amount of money. I think we offered about 10,000 dollars collectively. 5,000 each in that case. And it came back rejected. This is kind of an interesting case because I filed an appeal and I ultimately convinced the people that were working the offer locally, took a second look at it and they actually had a change of heart. The joke is, who knew they had a heart, right? But they had a change of heart and they actually went to bat for us and ultimately we got that case settled for 15,000 each. So grand total of 30,000 dollars took care of in compromise 316,000 dollars and they’re pretty happy campers.
KATRINA MADEWELL: So, the 30,000, was that chunk of change you had to write a check for?
DARRIN T. MISH: Yeah, the couple had to write a check for 30,000, but they have five months after the acceptance of the offer to come up with that money. They had a plan.
KATRINA MADEWELL: So it sort of is a payment plan, right? It’s whatever plan they want, but within five months?
DARRIN T. MISH: Yeah, in that context, it could be a payment plan, you could pay that out over five months in equal or unequal installments. They’re going to, they’re borrowing the money from someone so they’re just going to stroke a check and be done with it. They’re going to have their liens released, their credit’s going to start to improve, there’ll be no possibility of any levies coming up in their lives so they’re going to be in pretty good shape.
KATRINA MADEWELL: So they release their liens right away, as soon as that paperwork’s signed or they want the money first?
DARRIN T. MISH: They certainly want the money first. Typically, that’s going to be done within 90 days of payment of the offer and compromise.
KATRINA MADEWELL: So they got 90 grace period to loosen up.
DARRIN T. MISH: Absolutely.
KATRINA MADEWELL: It’s been a great show today.
DARRIN T. MISH: It’s been a lot of fun, talking about how to make deals with the IRS and make big problems into really killer solutions.
KATRINA MADEWELL: You’re listening to the IRS solution attorney show. You can catch the whole show and any other information over at irssolutionattorney.com. I’m your cohost Katrina Madewell.
DARRIN T. MISH: And I’m IRS solution attorney Darrin T. Mish.
KATRINA MADEWELL: We’ll be back here same time same place next week. For this week…
DARRIN T. MISH: Thanks for tuning in.
KATRINA MADEWELL: We’re out.