We’ve previously written about tax scams, especially those involving the telephone. However, scams involving the telephone aren’t the only ones taxpayers need to be aware of. Another common scam, called phishing, uses e-mails and websites.
Perhaps you’ve seen or heard the television ads, where an individual claims to have their IRS tax debt settled for significantly less than what they owe. How is this possible? Through something called an offer in compromise, or OIC. But what is it and how does it work?
Having an IRS tax lien or levy imposed is one of the scariest situations a taxpayer can encounter. This fear is completely understandable given the immense power of the IRS. The good news is that the IRS won’t impose a tax lien or levy without first exhausting other collection methods. This means a taxpayer will usually have plenty of notice before things get so bad that the IRS will enact a tax lien or. However, if you are unfortunate enough to be subject to a tax lien or levy, below is some basic information about IRS tax liens and levies that may help figure out what to do next.
What Is an IRS Tax Lien?
A tax lien is a legal claim the IRS places on a taxpayer’s property as a result of an unpaid tax debt. This legal claim will attach to basically all of the taxpayer’s present and future acquired property, including bank accounts, real estate and personal belongings.
This legal claim, also called a security interest, can create problems for the taxpayer. First, it can severely damage the taxpayer’s credit since any credit checks will reveal the tax lien and make it very difficult to obtain credit, such as a mortgage or personal loan.
Second, the tax lien will effectively make the taxpayer’s property the IRS’ property. This means if the taxpayer sells something that has an IRS tax lien on it, the cash proceeds belong to the IRS, not the taxpayer. This situation will exist until the tax delinquency is resolved.
What Is an IRS Tax Levy?
A tax lien is considered to be more “serious” than a lien. This is because the tax levy will result in the IRS taking the property, not just having a legal claim to it. The IRS will take the taxpayer’s property then use it to satisfy the unpaid tax debt.
A tax levy can occur in several ways. First, the IRS can physically possess the property, then sell it and keep the proceeds (assuming the proceeds from the sale are not in excess of the tax debt). Second, the IRS can withdraw money from the taxpayer’s bank account. Third, the IRS can take a percentage of the taxpayer’s income. This is referred to as wage garnishment.
How Can I Avoid a Tax Lien or Levy?
The best thing a taxpayer can do is to pay all the taxes they are legally required to pay. Only when the taxpayer fails to pay his or her legal tax bill, will the potential for a tax lien or levy arise. Assuming a taxpayer gets behind on his or her tax obligations, the IRS will send a series of written notices explaining the taxpayer’s tax debt and how to fix it.
The last thing a taxpayer should do is ignore the tax notices from the IRS. It’s when the IRS isn’t getting anywhere with recovering the outstanding tax bill will they take steps to impose a tax lien or levy against the taxpayer.
So even if the taxpayer cannot quickly settle his or her tax debt, they should respond to the IRS collection notices and arrange a way to pay off the tax debt. The IRS may agree to set up a payment plan or settle the tax debt for an amount lower than the full amount owed. There may also be other options, but it’s strongly recommended the taxpayer consult with a tax legal professional to discuss what they are and to decide which option is best.
The saying “death and taxes” is incomplete. What it really should be is “death, taxes and scams.” For as long as an organized society exists, so will scams. This tax season has been no different, with many victims falling prey to unscrupulous individuals. Even though the vast majority of us have already filed our taxes for the 2016 tax year, that doesn’t mean the potential for tax scams is over until next season. One of the more prevalent tax scams still occurring is the IRS telephone scam.
How the Scam Works
The scammer will call the victim pretending to be an IRS agent or US government official. The call will often appear very legitimate, with the scammer providing a badge number to the victim, the victim’s caller ID showing the call as originating with the IRS and fake background noises played to make the victim think the spammer is calling from a busy call center.
With the stage set, the scammer tries to scare the victim into sending the scammer money because the victim has an existing tax debt with the IRS. Sometimes the scammer requests payment in an odd way, such as gift cards or money orders.
If the victim challenges the scammer’s claim that an unpaid tax bill is owed, the victim is threatened with arrest, a civil lawsuit, driver’s license revocation, deportation or other arbitrary punishments. In the current political climate, the threat of deportation will be especially effective.
Other ways the IRS telephone scam may appear genuine include:
- A follow-up telephone call from someone claiming to be from law enforcement.
- The scammer will have some basic information about the victim, such as a date of birth or the last four digits of the victim’s social security number.
- The victim may also receive a letter that appears to be from the IRS reminding the victim of an outstanding tax debt.
How the IRS Really Works
The IRS does try to collect its outstanding tax debts, but not in a manner used by most scammers. There are several methods the IRS will use when it attempts to collect an unpaid tax bill:
- The IRS will always provide the taxpayer with an opportunity to dispute the tax amount owed.
- The IRS will accept various methods of payment for a tax bill, not just one or two methods. Additionally, the IRS never asks for payment to be made over the telephone.
- The IRS may assign the tax collection duties to a private company, but there are only four private collection agencies authorized to represent the IRS: CBE Group, ConServe, Performant and Pioneer. Even if a taxpayer’s unpaid tax bill is assigned to a private collection agency, before a phone call is ever made, the IRS and the private collection agency will mail written notices to the taxpayer.
Scams Aren’t Just Limited to the Telephone
Variations of the IRS telephone scam can easily exist in other realms, such as e-mail. Many scammers will try “phishing” or pretending to be an official IRS e-mail or website in order to obtain personal information or money. The IRS may use e-mail to communicate with taxpayers, but it will never use e-mail as a method of first contact about an outstanding tax bill.
What You Can Do if You Think You’ve Been Contacted by a Scammer
Details for Tax Filing this Year
Tax season is here again with the dreaded April 15 deadline fast approaching. Some of the more proactive taxpayers out there have already filed their 2016 tax returns and maybe already have their tax refund checks, too. But for those who haven’t yet done the deed, here are a few pointers about filing your return this year.
What’s Needed to File?
By now, taxpayers should have all the necessary tax documents to file their taxes, such as any 1099 forms for contract work and W-2 forms for payroll work. These forms are usually sent by employers or clients in late January. If you don’t receive these documents, keep in mind it does not relieve you from the responsibility of declaring your income in your tax return. Also, if you already know what your income is (this can often be readily determined by looking at your invoices and pay stubs), you technically don’t need your W-2 or 1099 forms.
When to File?
The deadline to file your federal tax return is the same every year: April 15. An exception to this rule is when April 15 falls on a holiday or weekend. In that case, the tax filing deadline is actually the next business day. So the deadline for filing your 2016 taxes is Monday, April 17, right? Nope. April 17 is the Washington DC Emancipation Day holiday. Therefore, the actual deadline for filing your taxes this year is April 18.
What If I Need More Time to File?
Luckily, the IRS allows taxpayers to obtain an extension by submitting Form 4868 with their tax payment. However, taxpayers should still pay as much of their 2016 tax bill as they can by April 18. This is due to the fact that even though the IRS may grant an extension to file the return, they do not grant an extension to submit the tax payment.
So even if the IRS grants a tax filing extension, the taxpayer will still have to pay interest and late-payment penalties if their entire tax bill isn’t paid by April 18. The tax extension doesn’t sound so advantageous after all, and is all the more reason to get your taxes prepared and filed on time.
Ways to File?
There are two primary methods of filing your federal tax return. The first is the good ol’ fashioned way of mailing it in. If you do this, don’t forget to sign the return. When filing as a married couple, your spouse will need to sign as well. Keep in mind that when mailing in your return, it will often slow down the speed in which you get a tax refund check. On the other hand, it may theoretically decrease the odds of you getting audited, since the IRS must spend more time and effort to examine a paper return versus an electronic return.
The alternative way to file is electronically. It’s usually more accurate and faster with respect to the time it takes to get your tax refund check. By filing electronically, a taxpayer can expect a tax refund check several weeks sooner than if they filed through the mail with a paper return.
Taxpayers have an extra few days to file their taxes this year with a deadline of April 18. By now, taxpayers should be well on their way to preparing and submitting their 2016 tax returns. And if you need more time to file, you can often get an extension. But understand that the extension only applies to filing your return, not actually paying your taxes.
Working for yourself is great. You get to be your own boss, decide how much (or how little) work you want to do and control your own professional destiny. But working for yourself has its price, one of the biggest being the self-employment tax.
What Is Self-Employment?
According to the IRS, you are self-employed if you run a business as a sole proprietor, independent contractor or partnership and make $400 or more. Basically, if you’re your own boss, even in a part-time business, you have self-employment earnings as far the IRS is concerned.
What Exactly Is the Self-Employment Tax?
The self-employment tax is a 15.3% tax on your income that is really a combination of two taxes: Social Security (12.4%) and Medicare (2.9%). Even if you aren’t self-employed, you’re likely still paying these two taxes, but in much lower amounts.
For the most part, for every $100 anyone earns, the IRS gets $15.30 in Social Security and Medicare taxes. If you are a W-2 wage earner, such as someone who works as an employee for an employer who takes your taxes out for you, you only have to pay half that, or $7.65. The remaining $7.65 is paid by your employer.
If you are self-employed, you have no “employer” to pay half of the 15.3% Social Security and Medicare tax bill. As a result, you’re stuck with paying the entire 15.3% of the Social Security and Medicare taxes, instead of the 7.65% if you were a W-2 wage earner.
If you make over a certain amount ($118,500 in 2015), what you pay in self-employment taxes drops a large amount. Anything you make over that amount is subject to only Medicare taxes and not Social Security taxes.
Finally, the self-employment tax rules apply no matter how old the taxpayer is or if the taxpayer is already receiving Medicare and/or Social Security payments.
How Do I Pay Self-Employment Taxes?
If you are subject to the self-employment tax and have an expected end-of-year tax liability of $1,000 or more (after taking all withholdings) you generally have to pay your taxes quarterly. Even if you plan on paying your entire tax liability on April 15th, you must make estimated quarterly tax payments or pay a penalty.
One exception to this quarterly estimate tax payment requirement is when other income tax withholdings amount to 90% or more of your total tax bill. For example, if you make $100,000 per year, but $91,000 comes from a W-2 job and $9,000 comes from self-employment work, you won’t need to make estimated quarterly tax payments. This exception applies even if you will have more than $1,000 in expected end-of-year tax liability.
The Self-Employment Tax Deduction
The self-employment tax isn’t all bad news. The 7.65% in extra taxes you have to pay (compared to a W-2 wage earner) can be taken as a tax deduction. This doesn’t alleviate the entire self-employment tax burden, but it helps.
The self-employment tax isn’t the most complicated tax requirement ever handed down by the IRS, but things can get a little tricky if you have multiple jobs and are really close to the estimated quarterly tax payment threshold. If you’re not sure whether you’re subject to the self-employment tax, are required to make estimated quarterly tax payments or how much those estimated quarterly tax payments should be, you probably want to speak with a tax professional.
The IRS’ official task is to collect taxes as required by the Internal Revenue Code. But because not every taxpayer pays taxes on time or in the correct amount, the IRS effectively becomes a debt collector — and what an effective and powerful debt collector it is.
The IRS has several tools to collect taxes owed. One of its most feared and powerful tools is the tax levy. Tax levies are particularly burdensome because they allow the IRS to take your personal property and assets. Luckily, the IRS can’t go about taking whatever personal assets it wants. It has particular rules about what it can levy and how much it can take.
Tax Levy Basics
A tax levy is the actual taking of property by the IRS in order to pay a tax debt. The two main types of tax levies include wage garnishments and the seizure of personal assets.
A tax levy usually won’t occur unless a tax lien has been placed on the taxpayer’s property first. A tax lien is a security interest taken by the IRS in all of a taxpayer’s property. The purpose of the tax lien is to protect the IRS’ ability to collect the tax debt from a particular taxpayer.
Personal Property Subject to IRS Seizure
The specific types of property the IRS may seize in order to satisfy a tax debt is vast. Examples include paychecks, personal residences (subject to exceptions), vehicles and financial accounts. Basically, almost anything a taxpayer owns can be levied, unless specifically excluded by law. So an easier way to identify which personal assets can be seized by the IRS is to find out what personal assets must be left alone.
Personal Property That Cannot Be Collected by the IRS
Section 6334 of the Internal Revenue Code lists types of property that the IRS may not seize when attempting to recover an unpaid tax debt. These include:
- Essential clothing
- Up to about $7,700 worth of personal effects and furniture
- Up to about $3,800 worth of books or tools necessary for schooling or work
- 85% of a taxpayer’s public assistance, worker’s compensation and unemployment benefits. The IRS may levy these income sources, but only up to 15% of the amount.
- Undelivered mail
- Certain pension and annuity payments
- Wages necessary to pay child support and provide for basic living expenses
Personal vehicles and residences are subject to IRS seizure, but there are limitations and exceptions to this. Additionally, the IRS understands that there’s no point in taking something that might hinder a taxpayer’s ability to pay its tax debt.
For example, if a taxpayer needs his or her car to get to work, the IRS is probably not going to seize the car. Doing so might result in the taxpayer becoming unemployed and therefore the IRS will have a more difficult time collecting the tax debt.
An overarching theme of the IRS’s seizure powers is that it will take as much as it can to collect its tax debt, but it won’t take so much that the taxpayer is either unable to pay the rest of the tax debt or becomes destitute.
The IRS’ public policy considerations and list of exempt property are hardly going to serve as a consolation to anyone facing a tax levy. A taxpayer facing a potential levy is understandably going to be scared and extremely concerned. In order to stop the IRS from taking your personal property, you’ll likely need help from a tax professional.