Frequently Asked Questions
What is Tax Amnesty?
I think everyone understands the word “tax”, so I won’t bore you by attempting my own definition. The word “amnesty” means forgiveness, pardon or leniency by the government. Amnesty is used most often in the context of political offenses, bad behavior or crimes. Quite simply, “tax amnesty” means forgiveness of tax debts by the government.
I credit my friend Dan Pilla for coining the term “tax amnesty”. In about 1984, Dan wrote a book called: How Anyone Can Get Tax Amnesty. In his book, Dan uses tax amnesty to describe four programs by which a person can be relieved from tax liabilities. The programs Dan describes in his book are:
- Chapter 7 Bankruptcy;
- Chapter 13 Bankruptcy;
- Offer in Compromise;
- Being deemed “currently not collectible” (a/k/a “CNC”) by IRS.
I have had dozens of my clients deemed currently not collectible by IRS. CNC is a huge relief for most taxpayers, but it’s not really a tax amnesty program because the tax debts are not forgiven. CNC status is a determination by IRS that it can’t collect any money from the taxpayer right now, because the taxpayer owns few assets, and all of the taxpayer’s income is needed to pay basic living expenses. If you are deemed currently not collectible by IRS, that’s great, but you should be aware that CNC status doesn’t last forever. The IRS will typically leave you alone regarding collection for about eighteen months. After that, IRS will contact you and get new financial information to see if your financial condition has improved so that you can start making monthly installment payments.
I would add one other program to Mr. Pilla’s list of tax amnesty programs: Audit Reconsideration which is explained in more detail in the Tax Problem Resolution section.
I am very experienced in all of these forms of tax amnesty. Please contact me if you are interested in obtaining tax amnesty.
Am I Going to Jail for This?
In my practice, I often meet with clients who haven’t filed for a number of years, or if they have filed, they owe the IRS a lot of money. The first question from the tax debtors and non-filers is usually: “Am I going to go to jail for this?”
My answer to the clients who have filed their income tax returns but owe the IRS money is, “No, because you probably haven’t committed any crime.” It is almost never a crime to fail to pay the tax when you file the return.
My answer to the clients who have not filed returns in a number of years is: “You have arguably committed the crime of willful refusal to file a required return, but your chances of going to jail are virtually zero.” People who are prosecuted for willful refusal to file a return generally fall into two categories.
The High-Profile Taxpayer. The first category at risk for criminal prosecution is high profile individuals whose prosecution will make headlines and scare the rest of us into compliance. Prosecution of Joe Blow, twenty-five-thousand-dollar-a-year carpenter, doesn’t make good headlines. But mean, rich Leona Helmsley–that’s a different story. Just ask Rudy Giuliani.
The “In-Your-Face” Tax Protestor. The second category at risk for prosecution is the blatant in-your-face tax protestor. These are people who claim, for various reasons, that they are not required to file returns, and the “revenuers” don’t have the power or the guts to prosecute. There is nothing that makes federal law enforcement officials more resolute than a defiant tax protestor with a copy of the United States Constitution in one hand while the other hand is raised in the “Dallas is No. 1″ middle finger salute.
The wisest and best course for everyone is to timely file all returns when due. Even if you can’t pay the tax, go ahead and file the return. That way you will steer clear of any criminal problems. But even if you haven’t filed your tax returns for a number of years, you are not likely to do time at Club Fed. If you think we have a prison overcrowding problem now, just imagine if the government prosecuted every delinquent filer. The Feds would have to rent the whole state of Montana to hold everyone.
If this FAQ strikes a chord with you (you non-filers know who you are), why don’t you contact me? Let’s talk about your situation. I have helped hundreds of taxpayers deal with delinquent tax returns and liabilities. Imagine how well you’ll sleep when you stop worrying about the Feds coming after you.
Can I Get an Extension of Time to Pay My Tax?
Yes. The extension of time to pay tax is obtained by filing Form 1127. The extension will allow you to avoid any late payment penalties, but it will not avoid interest. You should understand that Form 1127 is an obscure form. IRS is not likely to tell you about Form 1127, but I will.
You must present evidence of a genuine unforeseen hardship when you file Form 1127. “The dog ate my homework” will not work! Some examples of undue hardship are set forth in the IRS Form 1127 instructions. In addition to the hardships listed in Form 1127 instructions, it seems to me that such things as loss of an important account, serious illness, family tragedy, and theft would also qualify. You will still be charged interest on the underpayment of tax for the entire extension period, but you will not be charged with any late payment penalty if your IRS Form 1127 request for extension is granted by the IRS.
Do I Have A Right To A Hearing Before The IRS Seizes My Assets?
Yes you do, but this hasn’t always been the case. Before the IRS Reform and Restructuring Act passed in July of 1998, IRS would routinely seize assets with little or no warning and with no meaningful opportunity for appeal. We’ve all heard the stories of the relentless, Javert-like IRS Revenue Officer who seizes paperback books, plastic dishes, moth-eaten clothing and other worthless stuff; not to get any money, just to cause hardship for the tax debtor and to generate fear in the hearts of every other taxpayer. The stories may be exaggerated, but they have a few grains of truth. The IRS was and still is relentless in its quest to “get the money”, but there is a provision that allows you a “Collection Due Process Hearing” before any further collection action is taken.
Are my deductions going to cause an audit?
At a social event a few years ago, a friend of mine cornered me and told me he had just received a notice of audit. My friend wanted to know what triggered the audit. He said: “I just know it’s the home office deduction I claimed. I’ve heard IRS hates that deduction. It’s just a giant audit red flag.”
I represented my friend in the audit, and it was clear from the start that the home office deduction did not “cause the audit.” The audit was probably “caused” by the fact that my friend had made a very large non-cash charitable contribution for which he took a proper deduction. In the audit, I spent less than two minutes proving that the home office deduction was legitimate. I spent twice as much time making small talk with the auditor about her family and the weather. The charitable deduction which was thoroughly documented and substantiated was clearly the target.
Here is my rule for all deductions regardless of kind or amount: If you are legally entitled to the deduction, take it! You should not give the government any more or less in taxes than they are entitled by law to get.
Who Is an “Innocent Spouse”?
The innocent spouse provisions of the Internal Revenue Code are among the most equitable and taxpayer-friendly provisions in the entire Code. I have saved my clients thousands of dollars by using the Innocent Spouse provisions.
Although Innocent Spouse is an important legal benefit, there’s an easier way to avoid liability for your spouse’s tax debts: Just don’t file a joint return! If you are uncertain whether your spouse has reported all of his or her income or whether your spouse has paid his or her share of the taxes, it is your right to file “married filing separate”. See my article “Married Filing Joint or Married Filing Separate – It’s Not Your Call to Make.”