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It’s my annual Taxes from A to Z series! If you’re wondering how to figure basis for cryptocurrency or whether you can claim home office expenses during COVID, you won’t want to miss a single letter.

U is for Undue Hardship.

If you’d read any posts on extensions – like this one – you are aware that filing for an extension is generally an extension of the time to file, and not the time to file. It’s almost the extension mantra.

But did you know that there actually is an extension available for payments – but there’s a pretty high bar.

First things first. The form is Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship (downloads as a PDF). It’s used to request an extension of time under section 6161 for payment of the tax shown on your return or an amount determined as a deficiency (an amount you owe after an examination of your return). It’s not meant to be a substitute for a regular extension or to set up an installment agreement.

You can file Form 1127 if you will owe any of the following, and paying the tax when it is due will cause an undue hardship. 

  • Income taxes
  • Self-employment income taxes
  • Withheld taxes on nonresident aliens and foreign corporations
  • Taxes on private foundations and certain other tax-exempt organizations
  • Taxes on qualified investment entities
  • Taxes on greenmail (popular in the 1980s but not so much now)
  • Taxes on structured settlement factoring transactions
  • Gift taxes (but not estate taxes)

Form 1127 can also be filed if you receive a notice and demand for payment (or tax bill) for any of the following if paying them at the time they are due will cause undue hardship: 

  • Normal taxes and surtaxes
  • Taxes on private foundations and certain other tax-exempt organizations
  • Taxes on qualified investments
  • Gift taxes

But here’s the key. You can only use the form if you can prove undue hardship. “Undue hardship” means more than an inconvenience: you must show that you would sustain a substantial financial loss if required to pay a tax or deficiency on the due date. The mere inability to pay does not ordinarily result in penalty relief. Under Treas. Reg. 301.6651–1(c), you must also show that you exercised ordinary business care and prudence for the liability. The IRS will look at all of the facts and circumstances, including your financial situation, and the amount and nature of your spending compared to your income. The IRS will consider whether you made reasonable efforts to conserve sufficient assets in a marketable form (you can’t have converted them to illiquid assets or restricted them in some way) and still could not pay all or part of your tax when it came due.

But you know how I noted earlier that an extension to file isn’t an extension to pay? The reverse is also true: undue hardship generally does not affect your ability to file. You can substitute this form for an extension to file (and it usually doesn’t provide a basis for penalty relief in a failure to file situation). 

You should file Form 1127 as soon as you know of a tax liability or a tax deficiency that you cannot pay. If the liability is for an upcoming return, file on or before the due date of that return, not including extensions. If you are requesting an extension of time to pay an amount determined as a deficiency, file on or before the due date for payment indicated in the tax bill. 

Typically, the IRS won’t give you more than six additional months to pay the tax shown on a return. However, other than taxes due under sections 4981 (excise tax on undistributed income of real estate investment trusts), 4982 (excise tax on undistributed income of regulated investment companies), and 5881 (greenmail), you may be granted an extension for more than six months if you are out of the country. And you must pay the tax before the extension runs out: do not wait to receive a bill from the IRS.

You can find the rest of the series here:

It’s my annual Taxes from A to Z series! If you’re wondering how to figure basis for cryptocurrency or whether you can claim home office expenses during COVID, you won’t want to miss a single letter.

J Is For Jeopardy Assessment.

Okay, I should come clean from the beginning: This post doesn’t involve Alex Trebek. I know, that part stinks. But even Trebek-less, jeopardy assessments are pretty interesting.

You already know that the Internal Revenue Service (IRS) has very specific procedures for assessments and collections. But sometimes, they have to do things a bit differently. And jeopardy assessments are one of those things.

Jeopardy assessments are made – before the IRS makes an assessment of a deficiency – when the agency believes that assessment or collection would be endangered if regular procedures were followed. So, if the collection of an unassessed liability is in jeopardy, the IRS can make an immediate assessment and pursue collection without the need to follow those “normal” procedures.

When a jeopardy assessment is made, the tax, penalties, and interest become immediately due and payable.

To make a jeopardy assessment, at least one of these factors must be present:

  1. the taxpayer is or appears to be designing quickly to depart from the United States or to conceal him/herself;
  2. the taxpayer is or appears to be designing quickly to place his/her property beyond the reach of the government either by removing it from the United States, by concealing it, by dissipating it, or by transferring it to another person; or
  3. the taxpayer’s financial solvency is or appears to be imperiled.

There are many factors that can influence whether to make a jeopardy assessment, including when a taxpayer may be involved in illegal activity. That could include organized crime, wagering cases, and receiving income from illegal sources.

And it doesn’t stop there: as mentioned earlier, once the jeopardy assessment has been made, if the IRS believes that the collection of the tax might be in danger, the IRS can also bypass the normal notice procedures and go ahead with a levy.

But, a jeopardy assessment isn’t the end: remedies are available. Those remedies are largely the same as those available to all taxpayers including filing a petition to have a court examine the assessment.

If this sounds pretty scary, be aware that these powers aren’t limitless. Jeopardy assessments are to be used when reasonable and appropriate – and as authorized by law. You can find the authority for jeopardy assessments in the Tax Code:

  • IRC 6861 (where the due date for filing of a return has expired);
  • IRC 6862 (taxes other than income, estate, gift, and certain excise taxes);
  • IRC 6867 (where the owner of a large amount of cash is not identified)

You can find the rest of the series here:

Some Internal Revenue Service (IRS) call centers and services are temporarily shutting down in response to COVID-19.

COVID-19 is the official name for the infectious disease caused by the most recently discovered coronavirus. According to Johns Hopkins, as of March 27, 2020, there are 593,291 confirmed cases of COVID-19 in 176 territories and countries. The United States has 101,657 confirmed cases with reported cases in every state.

As a result, the President of the United States issued an emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. And, Governors in several states have issued stay-at-home orders and ordered non-essential businesses to close. That includes many federal employees. For example, Social Security offices are closed to the public for in-person service.

The IRS is following suit. A notice on the IRS website declares, “In response to the national emergency and to protect our employees, America’s taxpayers, communities and our partners, the IRS has temporarily closed all Taxpayer Assistance Centers and discontinued face-to-face service throughout the country until further notice. The IRS is continuing to process tax returns, issue refunds, and help taxpayers to the greatest extent possible.”

The IRS subsequently advised in a tweet on March 25, 2020:

Earlier this week, tax professionals confirmed that the IRS is not answering phones at the Offer In Compromise Unit and the Practitioner Priority Service. A message on the OIC Unit advises that “Live telephone assistance is not available at this time.”

Now, the IRS has confirmed that “Due to staff limitations, the Practitioner Priority Service (PPS) line, the e-Services Help Desk line and the e-Services, FIRE and AIR system help desks are closed until further notice.” As a result, IRS suggests that you “Please make IRS.gov your first option for answers to questions.”

Additionally, the IRS is temporarily suspending acceptance of new Income Verification Express Services (IVES) requests and you can expect delays with existing IVES processing. There are also delays in Centralized Authorization File (CAF) number authorizations (notice how I didn’t make a snarky comment there suggesting the latter isn’t out of the ordinary).

There’s more. All AARP Foundation Tax-Aide services and most IRS Volunteer Income Tax Assistance (VITA) program sites have closed. Additionally, all Taxpayer Assistance Centers (TACs) are closed until further notice.

For taxpayers with open Taxpayer Advocate Service (TAS) cases, the IRS is advising taxpayers and practitioners to call their local TAS office directly. The TAS tweeted:

And those stimulus payment questions? You’ll have to wait on IRS to answer those, too. A notice to practitioners advises that “Additionally, the IRS is unable to answer any questions as yet on stimulus payments. Normal operations will resume as soon as possible. Please check IRS.gov for updates.”

Some of the closures may be frustrating for taxpayers, but there is a silver lining: collection and enforcement actions are limited. Relief ranges from suspending installment agreements payments (you have to make the arrangements) to postponing compliance actions like levies. Audits are also on hold.

And there’s some good news: The IRS will continue to work refund claims where possible, without in-person contact, and issue tax refunds. You can check the IRS  “Get Refund Status” tool for refund updates.

Eventually, things will get back to normal. In the meantime, be prepared for extended wait times for calls and correspondence. Be proactive and patient. 

If you have an update or tip, here’s how to reach me (including secure methods for employees who wish to remain anonymous).

The Internal Revenue Service (IRS) has announced a series of steps to assist taxpayers impacted by COVID-19. Relief ranges from easing payment guidelines to postponing compliance actions.

COVID-19 is the official name for the infectious disease caused by the most recently discovered coronavirus. According to John Hopkins, as of March 25, 2020, there are 451,355 confirmed cases of COVID-19 in 172 territories and countries. The United States has 55,568 confirmed cases with reported cases in every state.

As a result, on March 13, 2020, the President of the United States issued an emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. Additionally, several Governors have issued stay-at-home orders.

The result is that many taxpayers cannot get out to file or do other tax-related business. In response, the IRS announced that the tax filing season been pushed to July 15, 2020.

The IRS also started scaling back operations at its call centers, causing frustration for tax professionals and taxpayers alike. Now, the IRS is taking further action.

“The IRS is taking extraordinary steps to help the people of our country,” said IRS Commissioner Chuck Rettig. “In addition to extending tax deadlines and working on new legislation, the IRS is pursuing unprecedented actions to ease the burden on people facing tax issues. During this difficult time, we want people working together, focused on their well-being, helping each other and others less fortunate.”

Specifically, the IRS is introducing its IRS People First Initiative. “The new IRS People First Initiative provides immediate relief to help people facing uncertainty over taxes,” Rettig says. 

“We are temporarily adjusting our processes to help people and businesses during these uncertain times. We are facing this together, and we want to be part of the solution to improve the lives of all people in our country.”

So what’s in the initiative? Highlights include:

Existing Installment Agreements. For taxpayers under an existing Installment Agreement, payments due between April 1 and July 15, 2020, are suspended. The IRS will not default any Installment Agreements during this period. By law, interest will continue to accrue on any unpaid balances. 

Offers in Compromise (OIC). Taxpayers with pending OIC applications will have until July 15 to provide requested additional information as support; the IRS will not close any pending OIC request before July 15, 2020, without the taxpayer’s consent. Taxpayers with accepted offers can suspend payments on until July 15, 2020, although by law, interest will continue to accrue on any unpaid balances. Further, the IRS will not default an OIC for those taxpayers who are delinquent in filing their tax return for the tax year 2018; taxpayers should file any delinquent 2018 return (and their 2019 return) on or before July 15, 2020.

Field Collection Activities. Liens and levies, including any seizures of a personal residence, initiated by field revenue officers will be suspended through July 15, 2020. However, field revenue officers will continue to pursue high-income non-filers and perform other similar activities where warranted.

Automated Liens and Levies. New automatic, systemic liens and levies will be suspended through July 15, 2020.

Passport Certifications to the State Department. IRS will suspend new passport certifications to the Department of State for taxpayers who are “seriously delinquent” through July 15, 2020.

Private Debt Collection. New delinquent accounts will not be forwarded by the IRS to private collection agencies to work through July 15, 2020.

Field, Office, and Correspondence Audits. The IRS will generally not start new field, office, and correspondence examinations until July 15, 2020 (but see the note below related to statutes of limitations).

  • In-Person Meetings. In-person meetings for existing field, office, and correspondence examinations will be suspended. IRS examiners will continue examinations remotely where possible. Taxpayers are encouraged to respond to requests for information on all examination activity during this period if possible.
  • Unique Situations. The IRS understands that there may be instances where the taxpayers desire to begin an examination. When it’s in the best interest of both parties and appropriate personnel are available, the IRS may initiate activities to move forward with an examination.

Refund Claims. The IRS will continue to work refund claims where possible, without in-person contact. 

General Requests for Information. The IRS encourages taxpayers to respond to any other IRS correspondence requesting additional information during this time, if possible. 

Earned Income Tax Credit (EITC) & Wage Verification Reviews. Taxpayers have until July 15, 2020, to respond to the IRS to verify that they qualify for the EITC or to verify their income. Through July 15, 2020, the IRS will not deny these credits for a failure to provide the requested information.  

Independent Office of Appeals. Appeals will continue to work cases. Conferences may be held over the telephone or by videoconference. Taxpayers are encouraged to promptly respond to any outstanding requests for information for all cases in the Independent Office of Appeals.

Statute of Limitations. The IRS will continue to protect all applicable statutes of limitations. In instances where statute expirations might be jeopardized, taxpayers are encouraged to cooperate in extending such statutes. Otherwise, the IRS will issue Notices of Deficiency and take steps to protect the interests of the government in preserving such statutes. Where a statutory period is not set to expire during 2020, the IRS is unlikely to pursue significant collections and related actions until at least July 15, 2020.

Practitioner Priority Service (PPS). The IRS warns that there may be more significant wait times for the PPS. However, practitioners, including myself, are reporting that they are unable to reach representatives. Currently, when you call, a message advises, “Live telephone assistance is not available at this time.”

Expect that some of this could change. Rettig advises, “The IRS will continue to review and, where appropriate, modify or expand the People First Initiative as we continue reviewing our programs and receive feedback from others.”

“We are committed to helping people get through this period,” he said, “and our employees will remain focused on these and other helpful efforts in the days and weeks ahead. I ask for your personal support, your understanding – and your patience – as we navigate our way forward together. Stay safe and take care of your families, friends and others.”

The Internal Revenue Service (IRS) has announced that a new payment option has been added to the private debt collection program. The payment option is intended to make it easier for those who owe to pay their tax debts, although some practitioners, like me, fear that it could lead to abuse.

Taxpayers can now choose a preauthorized direct debit to make payments toward their federal tax debt. With direct debit, the taxpayer will give their written permission to the private collection agency (PCA) to authorize payment on the taxpayer’s behalf to the Department of the Treasury. This means that taxpayers can schedule payments with the PCA.

This option is being touted as a convenience for taxpayers and will supplement existing IRS payment options. Those other options still exist. You can find electronic payment options through IRS at IRS.gov/Paying Your Taxes. You can also pay by check: Checks should be made payable to the U.S. Treasury and sent directly to the IRS, not the PCA.

The option to pay through the PCA is brand-new and reflects a shift in collection efforts. In 2017, Congress forced the IRS to hand over some collections to PCAs. The law was pushed through despite the failures of past privatization efforts and despite concerns about what privatization efforts might mean for taxpayers (including those expressed by the Treasury Inspector General for Tax Administration and former National Taxpayer Advocate Nina Olson).

(You can read more about private debt collections here.)

One of the companies handling private collections is Pioneer Credit Recovery. In 2017, a group of senators sent a letter  to Pioneer, explaining that they were particularly concerned about “Pioneer’s contract because of the abuse of federal student loan borrowers by its parent company, Navient, through its Education Department student loan servicing contracts.”

The senators obtained the call scripts used by Pioneer and other PCAs. The Senators found all of the scripts to be concerning, but those used by Pioneer were “particularly troubling.” For example, part of the collection process should involve telling taxpayers that they have the right to obtain assistance from the Taxpayer Advocate Service (TAS). The Senators found, however, “there is no evidence in the Pioneer call scripts . . . that the collector intends to provide this information to taxpayers.” At least one PCA, Performant, did have scripts that included instructions on how a taxpayer may contact the TAS.

Pioneer’s call scripts also allegedly made an implied threat that the debt collector would have the means to seize payment involuntarily; that may be a violation of the Fair Debt Collection Practices Act (FDCPA) and other laws. Additionally, in keeping with issues raised by the IG, Pioneer’s call scripts ask for payment agreements that are too long. The IG previously reported to Congress that he had concerns that PCAs were extending payment requirements “beyond what the law provides.”

(For more on the IG’s concerns, click here.)

Months ago, Olson highlighted issues with PCAs as one of the 20 most serious problems encountered by taxpayers. According to the IRS, from the start of the program in April 2017 through June 13, 2019, the IRS has given PCAs more than 1.9 million total cases that represent more than $16.2 billion of the IRS’ balance-due inventory. To date, the PCAs have “assisted” (that’s the IRS’ word, not mine) more than 163,000 taxpayers who either paid their balances in full or set up a payment arrangement–just a fraction of the outstanding cases. 

Olson noted that while program revenues surpassed program costs for the last fiscal year, the surplus was achieved to a significant extent by collecting from financially vulnerable taxpayers. For example, 40% of taxpayers who entered into Installment Agreements (IAs) while their debts were assigned to PCAs had incomes at or below their allowable living expenses, and 44% of taxpayers who made payments while their debts were assigned to PCAs had incomes at or below 250% of the federal poverty level. Predictably, that didn’t yield good results: Default levels for taxpayers working with PCAs who entered into IAs were about twice as high as compared to taxpayers who were not working with PCAs. 

Allowing PCAs to take direct debit information over the phone doesn’t alleviate these concerns. In fact, in a high-pressure situation (one that is, by all accounts, not regularly monitored by the IRS), taxpayers may feel that offering payment information immediately is the best way to get the PCAs to stop calling–even if the taxpayers do not have the money. Remember those default rates for installment agreements? Think similarly, but with bounced checks. Based on the program’s history, it’s also a legitimate concern that taxpayers may be pressured into payment arrangements through direct-debit for more extended periods than authorized by law, and taxpayers who may be otherwise deemed uncollectible may be pressured to make payment.

When taxpayers have to make payment directly to the IRS, there’s generally a pause between the time that the collection has been demanded and the time that payment is made. Allowing PCAs to take payment over the phone takes away that pause and may lead to bad results. The data suggests that payment and other agreements made directly with IRS representatives produce better and more efficient results.

Additionally, according to the IRS, when taxpayers choose this new option, they’ll send a written authorization to the PCA (not the IRS) with their bank account information. Once the PCA receives the authorization, it should send a letter confirming the details before drafting a check to the Treasury. The check is then mailed to the IRS. 

The process–using that third-party intermediary–feels like the perfect environment for errors, compromised data or worse. Even the IRS seems to get that this could be problematic: In the press release announcing the new payment option, they reminded taxpayers to “be on alert for scammers and identity thieves pretending to be from a PCA.”

The Internal Revenue Service (IRS) has issued a reminder to taxpayers with significant tax debts: reach out now to avoid losing your passport.

On December 4, 2015, the Fixing America’s Surface Transportation Act, or “FAST Act,” became law. Under the FAST Act, the State Department can yank passports from delinquent taxpayers after notification from the IRS that there’s a seriously delinquent tax debt. A “seriously delinquent” tax debt is defined as “an unpaid, legally enforceable federal tax liability” greater than $50,000, including interest and penalties. The limit is adjusted each year for inflation and cost of living: for 2019, it’s $52,000. 

There are some exceptions under the law. The IRS isn’t supposed to report tax debt which is being paid on time as part of an installment agreement or under an Offer In Compromise. The law also snares any tax debt for which a Collection Due Process hearing has been requested timely in connection with a levy or a debt where the collection has been suspended due to an innocent spouse claim.

If you don’t meet any of the exceptions, the law requires the IRS to advise the State Department about taxpayers who meet the threshold. The law also requires the IRS to notify you in writing at the time that it certifies the debt to the State Department. The IRS does this by sending a Notice CP508C. The notice explains what you need to do to resolve the debt.

The IRS will also send you a Letter 6152, Notice of Intent to Request U.S. Department of State Revoke Your Passport, to give you another opportunity to resolve your debt. You must call the IRS within 30 days from the date of the letter. The IRS will typically not recommend revoking a taxpayer’s passport if the taxpayer is making a good-faith attempt to resolve the matter.

Once the IRS notifies the State Department, it will then hold your passport application or renewal for 90 days to allow you to resolve any errors, make full payment, or enter into a satisfactory payment plan. There is no grace period for resolving your debt before the State Department revokes an existing passport. 

The IRS may also ask the State Department to exercise authority to revoke a passport. For example, the IRS may recommend that the State Department take action if the IRS had reversed a taxpayer’s certification because of a promise to pay, and the taxpayer failed to pay. Similarly, if a taxpayer could have used offshore assets to pay the debt – and chose not to – the IRS may also ask the State Department to revoke the taxpayer’s passport.

If you’re on the revocation list and you have imminent travel plans, you’ll want to call the IRS promptly. The IRS can generally shorten the processing time by 14 to 21 days if you qualify for expedited treatment. You’ll need to inform the IRS that you have travel scheduled within 45 days or you live abroad. You’ll need to provide the following documents to the IRS: 

  • Proof of travel, like an airline or cruise ticket, hotel reservation, or other document showing your destination and approximate date of travel.
  • A copy of a letter from the Department of State denying your passport application or revoking your passport. 

To get off the list, you must prove that the debt is fully satisfied, is legally unenforceable or is not seriously delinquent tax debt under the statute (in case you’re wondering, that does not include debt that dips below $50,000 – once you’ve hit that threshold, you must either pay it down or meet one of the other criteria).

For more on denying, revoking passports because of tax debt visit IRS.gov.

Ready to file your federal tax return? If you know that you can’t pay up by Tax Day, April 15, file anyway. Penalties apply for failure to file and failure to pay. To reduce the hit to your wallet, file your return even if you’re going to owe and even if you know that you can’t pay. After you file, there are payment options available – and options when you can’t pay at all. Here’s what you need to know:

1. Pay by credit card. I’m generally not a fan of replacing one kind of debt with another. But if your ability to pay is a timing issue – as opposed to an “I absolutely don’t have it at all” issue – you can pay your federal income taxes by credit card. The Internal Revenue Service (IRS) accepts all major credit cards (American Express, Discover, MasterCard, or Visa). To make a payment, head over to the credit card payment page on the IRS website and choose one of the payment processors to pay online or by phone (if you’re paying by credit card and using e-file, your options are here).

The IRS doesn’t charge a fee for credit card payments. However, third-party credit and debit card providers may charge a fee, which may vary by provider, card type, and payment amount. 

Applicable fees for debit cards range from $2.00 to $3.95 while fees for credit cards range from 1.87% to 1.99% (minimum fees apply). Pay as much as you can upfront since you are limited to two credit card payments for individual income tax payments. If you’re paying more than $100,000 by credit card, call 1.888.734.8212; if you’re paying more than $500,000 by credit card, call 1.888.877.0450. If you’re paying more than $1,000,000, by credit call 1.888.889.7228 (you may also need a new tax preparer, just saying).

Remember, paying by credit card is a good option if you know you can pay the bill off eventually. Credit card interest and other fees can add up so if you know you won’t be able to pay off the balance at all, consider other options.

2. Refinance your home. Again, I’m generally not a fan of replacing one kind of debt with another (see #1) but even the IRS will recommend a re-fi to pay your taxes if you can afford it. If you have sufficient equity in your home, using that equity to resolve your outstanding tax debt may make sense. Mortgage rates remain relatively low which is good, but remember that the rules for deducting home mortgage interest when you refinance have changed, so don’t count on the offset. Also, if you’re already underwater, or headed that way, this isn’t a good option: you don’t want to lose your home over a tax bill.

3. Enter into an Installment Agreement. Consider an installment agreement with the IRS. An installment agreement lets you pay what you owe over time. Depending on how much you owe, you won’t even have to speak with a real person: if you owe $50,000 or less in combined individual income tax, penalties, and interest, you can apply for an installment agreement online. You can also apply for an installment agreement by mail using federal form 9465, Installment Agreement Request (downloads as a pdf). Fees do apply. Keep in mind that it’s cheaper if you sign up online and even less expensive if you agree to pay by direct debit.

You must file all of your tax returns before you apply. The IRS will usually let you know within 30 days after receipt of the request whether it is approved or denied. The IRS will charge you interest while you’re paying your bill and may file a federal tax lien until you pay in full. The IRS may also seize your tax refund while you’re in repayment (but you know that could happen anyway).

If you owe more than $50,000 or your taxes are other than individual income taxes, the rules are a bit different: check with the IRS directly in that event.

4. Consider an Offer in Compromise (OIC). An OIC allows you to settle your tax debt for less than the full amount you owe. The IRS considers a host of circumstances including the ability to pay; income; expenses; and asset equity. Generally, the IRS will only agree to an OIC if they determine they will not be able to collect the amount due within a reasonable period of time. This option shouldn’t be your first choice and please don’t believe those TV commercials that swear you’ll be able to settle your tax bill for pennies on the dollar. Please do your homework before signing up with any company that promises you the moon in exchange for your check.

Lots of taxpayers have good reasons why they can’t pay their tax bills, and the IRS is looking for a really good reason before they cut you a break: most offers are actually rejected. As with any installment agreement, you must be current with all filing and payment requirements to apply and the IRS will return any newly filed OIC application if you have not filed your tax returns.

There’s a non-refundable fee of $186 to apply for the OIC. In addition, you’ll need to be prepared to submit a lump sum payment of 20% of your tax due or the equivalent of a monthly payment upfront. Also, penalties and interest will continue to accrue during consideration of the OIC.

While you can apply for an OIC on your own, I highly recommend that you consider a tax professional. If, however, you opt to try it yourself, use the IRS’ Pre-Qualifier online tool to see if you qualify and to calculate a preliminary offer amount.

5. Ask for additional time. Based on your circumstances, you may be granted a brief amount of additional time to pay your tax in full. You can make the request through the Online Payment Agreement (see #3) or by calling 1.800.829.1040.

6. Can’t pay at all? If you are insolvent or unable to pay due to circumstances beyond your control (for example, unemployment or disability), the IRS is willing to work with you. Give them a call at 1.800.829.1040 or use the phone number on any notice that you might have received in the mail.

If you’re not quite sure how much you owe for a specific tax year, you can check your balance due with the online account tool available from IRS. You can also use the automated system available by phone at 1.800.829.1040.

Whatever you do, don’t ignore your outstanding tax bills. They won’t simply fade away. On the contrary, they’ll likely get bigger and Congress has become more aggressive with enforcement, authorizing private debt collectors and seizing passports for failure to pay. Take steps now to pay what you owe and avoid trouble down the line. Help is available.

Note that these options apply if you can’t pay your tax bill in full. If you’re ready to file and pay in full, check out these payment options.

Ready to file your federal income tax return? If you owe taxes, don’t forget to pay what you owe by Tax Day. If you pay your taxes in full by April 15, 2019, you’ll avoid additional penalties and interest. Here are several options for paying your tax bill this year:

1. Pay by cash. It used to be the case that you couldn’t pay your federal income tax bill in cash. Now, however, the Internal Revenue Service (IRS) offers a way for you to pay your taxes using PayNearMe. You can find a list of locations near you here.

To make a payment, you’ll need to visit the Official Payments page and follow the instructions. The IRS will then send you a code that you can take to a participating retailer where the clerk will scan the code so that you can make your payment. The whole process generally takes five to seven business days – which means your payment won’t be timely for 2019 – but if cash is your only option, it’s better to pay late than not at all. There is a fee ($3.99) to use the PayNearMe system, and the largest payment you can make is $1,000.

For more on paying with cash, click here.

2. Pay by check or money order. You can pay by check or money order even if you e-file. To pay what you owe, make your check or money order payable to “United States Treasury” for the full amount due. Write “2018 Form 1040” on the memo line together with your Social Security Number (if you are filing a joint return, write the SSN shown first on your tax return on the memo line). Make sure that your name, address, daytime phone number are on the check; that info may already be printed on your check so no need to duplicate it. Include payment together with a form 1040-V, Payment Voucher (downloads as a pdf) and mail the payment together with your form 1040-V to the address that corresponds to the state where you live:

While I know that writing a check to pay your taxes can be painful, be smart: Don’t write a check that you don’t have the funds to cover. You’re not fooling anybody, and there is a penalty for writing a bad check to the IRS ($25 or 2% of the check, whichever is more). It’s not worth it.

And remember that the Internal Revenue Service (IRS) no longer accepts checks over $100 million (you’re welcome)

3. Direct Pay. You can pay your taxes directly from your checking or savings account. To make a payment, click on over to the Direct Pay page. You’ll choose the tax form (1), the reason for payment (2) and the tax year (3):

You’ll need to verify your identity by providing information about your filing status from your last return as well as your name, SSN, birth date and address. Enter the payment amount, payment date and your bank account information. Click through to the end and you’re done. The IRS doesn’t keep your bank account information after payments are made and there is no fee for using the system.

You can schedule a payment or pay the same day, but IRS Direct Pay won’t accept more than two payments within a 24-hour period. And if you owe bunches, note that each payment must be less than $10 million.

4. Pay by wire. Consider a same-day wire from your bank or financial institution. Contact your bank or financial institution – not the IRS – for details, including fees and deadlines. To make a payment, download and complete the Same Day Payment Worksheet to take with you to make the wire.

For information on making international wire transfers, check out this prior post.

5. Pay by Electronic Funds Withdrawal. Electronic Funds Withdrawal (EFW) is an option that you can use to pay by direct debit from your bank account. The IRS doesn’t charge a fee to use EFW but your financial institution might (check first to avoid a last-minute panic). You’ll need to know your bank routing and account numbers (more on those here). For more information about EFW, click here.

6. Pay by Debit or Credit Card. You can pay what you owe by debit or credit card. Most of the approved IRS payment processors accept Visa, MasterCard, Discover, and American Express. You can find a list of payment processors here.

Generally, there’s no limit on the amount you can pay, but you are restricted to paying by credit card two times in one year for the same individual tax bill. High-balance payments of more than $100,000 may require coordination with your credit card or debit card provider.

Third-party credit and debit card providers may charge a fee, which may vary by provider, card type, and payment amount. Applicable fees for debit cards range from $2.00 to $3.95 while fees for credit cards range from 1.87% to 1.99% (minimum fees apply). The convenience fee paid to your provider will be listed as “Tax Payment Convenience Fee” or something similar, while the tax payment will show “United States Treasury Tax Payment.”

For more info about paying with a debit or credit card, check out the IRS website

Keep in mind that different rules (and fees) apply for integrated IRS e-file and e-pay service providers. Find out more here.

7. Pay using PayPal, Samsung Pay or Android Pay. You can pay your federal income tax bill using these features but only one payment processor currently offers these options:

PayUSAtax.com (WorldPay US, Inc.)

844.729.8298 Payment

855.508.0159 Live Operator

844.825.8729 Service

8. Use the Electronic Federal Tax Payment System (EFTPS) to pay by phone or online. To make a payment using EFTPS by phone, call 1.800.555.3453. People who are deaf, hard of hearing, or have a speech disability and who have access to TTY/TDD equipment can call 1.800.733.4829. To make a payment using EFTPS online, log in and follow the prompts. You can schedule your payment by 8 p.m. EST at least one calendar day in advance of the due date. It’s worth noting that your tax payment is due even if the website is not available, so plan ahead.

You must be enrolled to use EFTPS. To enroll, click here and follow the steps. After your information is validated with the IRS, you’ll receive a personal identification number (PIN) in the mail in five to seven business days. Between the IRS and the U.S. Postal Service, you’re going to need to be patient.

Also, as scammers ramp up their efforts to steal your personal and financial information, keep in mind that EFTPS will never contact you via e-mail. If you receive an e-mail that claims to be from the EFTPS tax payment service or from a sender you do not recognize that claims to have information about a payment scheduled through this service, forward the e-mail to phishing@irs.gov or call the Treasury Inspector General for Tax Administration at 1.800.366.4484.

A few more payment tips:

  • Plan ahead. If you pay by mail, your payment is generally treated as paid as of the date of the postmark. For other payment options, your payment is considered received when accepted, not initialized. Be sure to schedule electronic payments in advance to avoid late fees and penalties. And remember that accidents happen, so leave some extra time, just in case.
  • These options apply if you’re filing your tax return and if you’re filing for an extension. Remember, an extension extends the time to file, not the time to pay. You’ll want to make a payment with your extension request if you will owe tax. For more on extensions, click here
  • Paying late? Pay anyway. Notwithstanding the above, it’s better to pay late than not at all. If you’re going to be late, don’t let it stop you.
  • Be smart. No matter how you choose to pay, do not send cash through the mail.
  • Pay attention to your clicks. If you’re not sure that you’re using a legitimate payment method, you can always click back to the IRS website. Only use the methods approved by the IRS. Remember that you cannot pay your taxes with iTunes or other gift cards (more here).
  • Use the right currency. Even if you’re paying tax on foreign income, you must pay in U.S. dollars.
  • And here’s your money-saving tip of the day: You do not have to send payment if the amount you owe is under $1.

This information, of course, assumes that you have the money to pay your tax bill. If you can’t pay your tax bill in full, consider an installment agreement or check out these options.

It’s my annual “Taxes from A to Z” series! If you’re wondering whether you can claim home office expenses or whether to deduct a capital loss, you won’t want to miss a single letter.

C is for Choate

First things first. This is one of those words that people pronounce a lot of different ways. According to Merriam-Webster, choate is pronounced: \ ˈkō-ət, -ˌāt \. I use the latter (with the long ā), but then my kids also make fun of the way that I say “oil” and “mine” so take that for what it’s worth.

It’s fitting that choate is hard to pronounce because it’s also a complicated concept. But let’s give it a whirl.

In the law, choate means “something that is complete or justifiable against other claims” (the definition goes on to say that it’s also “the opposite of inchoate” which really doesn’t help).

The term isn’t solely a tax term, but it does have a specific meaning when it comes to tax. The “choateness” test first reared its head at the Supreme Court in United States v. City of New Britain, 347 U.S. 81 (1954). The fact that it arose at the Supreme Court level is amusing since former Supreme Court Justice Antonin Scalia long believed it not to be a word, hating it so much that he berated a young attorney for using it in Internal Revenue Service v. McDermott – that case later became United States v. McDermott, 507 U.S. 447 (1993) where Scalia was responsible for writing the dissent (for the record, the word choate appears in some form 24 times in that case).

Here’s what it has to do with tax. When you owe money to the Internal Revenue Service (IRS), the agency may place a lien on your assets. The purpose of a tax lien is to protect the government’s interest in your property, including your real estate and personal property. To file a lien, the IRS must first assess your tax liability and send you a bill. If you don’t pay the bill in full, the IRS can file a Notice of Federal Tax Lien which puts creditors on notice that the government has a legal right to your property. This is important because the government often has a priority claim: The lien lets creditors know that they may not be first in line if you don’t pay up on other debts. If and when you sell any of your assets, you may be forced to turn over the proceeds to the IRS to satisfy your debt.

If you pay your tax liability in full, the IRS will release the lien. The IRS may also work with you to release the lien under other circumstances, including efforts to demonstrate compliance while you’re on a payment plan. Filing for bankruptcy doesn’t necessarily help you out since a federal tax lien may continue even after you’ve filed for bankruptcy.

The authority for federal tax liens is outlined in section 6321 of the Tax Code:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

The validity and priority of tax liens, however, are explained in section 6323. And that’s where choate (sorry, Scalia) comes in. While section 6323 covers a lot of ground, it doesn’t contemplate all of the competing lien interests that could attach to a taxpayer’s property. The answer? The choateness test. Under the choateness test, federal rules determine lien priority (not state rules). Under those rules, “first in time” is “first in right.”

A federal tax lien is considered choate as of the assessment date (by statute, found at section 6322), and not the date of filing of the Notice of Federal Tax Lien. To remain ahead of a federal lien, a nonfederal (state or local) lien must be choate when the federal lien is assessed. To be considered choate, a nonfederal lien must say with specificity:

  1. The identity of the person or entity holding the lien;
  2. The property subject to the lien; and
  3. The amount of the lien.

If the nonfederal lien doesn’t meet all of the criteria, it takes a place behind the federal lien even it had been otherwise enforceable at the time the federal lien was created.

What about other creditors? If a lien is attached due to a creditor’s lawsuit, the attachment lien is deemed inchoate (a word Scalia liked much better) until it’s perfected by a final judgment. So, for example, let’s assume a creditor files a lawsuit in March of 2018, and a lien attaches to property during the lawsuit. Next, assume the IRS establishes a lien in April of 2018. Finally, let’s assume the creditor receives a judgment in May of 2018. Which lien has priority? The IRS lien. The creditor’s lien is inchoate until that May 2018 judgment.

Why does it matter? Let’s say you had a federal tax lien in the amount of $150,000 and a state tax lien in the amount of $25,000. If your liened property is worth $100,000, who gets paid? The priority of liens – who was first in time and first in right – matters because clearly everyone wants to get paid but there’s not always enough cash to go around.

For your taxes from A to Z, here’s the rest of the series:

A new law which went into effect this year directs the Internal Revenue Service (IRS) to hand over some unpaid tax bills to private agencies for collections. The law was pushed through despite the failures of past privatization efforts and despite concerns about what privatization efforts might mean for taxpayers (including those recently expressed by Treasury Inspector General for Tax Administration J. Russell George and National Taxpayer Advocate Nina E. Olson).
It appears those concerns were not unfounded. In response to complaints about how private debt collectors are handling taxpayer accounts, Sen. Sherrod Brown (D-OH), Sen. Benjamin Cardin (D-MD), Sen. Jeff Merkley (D-OR), and Sen. Elizabeth Warren (D-MA), have sent a letter Pioneer Credit Recovery, one of the companies which has a debt collection contract with the IRS.
According to the letter, the Senators have concerns that Pioneer may be:

(1) failing to adequately protect taxpayers from criminals posing as IRS agents;
(2) pressuring taxpayers into risky financial transactions;
(3) violating the Fair Debt Collection Practices Act (FDCPA) and provisions of the Internal Revenue Code; and
(4) violating IRS guidelines and provisions of Pioneer’s IRS contract.

The Senators explained that they were particularly concerned about “Pioneer’s contract because of the abuse of federal student loan borrowers by its parent company, Navient, through its Education Department student loan servicing contracts.”
(For more on a recent lawsuit claiming that Navient engaged in improper behavior related to student loan borrowers, allegations the company calls false, click here.)
To investigate the matter, the Senators obtained the call scripts used by Pioneer and other private debt collectors contracting with the IRS. According to the Senators, “[e]ach of the call scripts… raises concerns” about the Fair Debt Collection Practices Act (FDCPA) and will be referred to the Federal Trade Commission. Of those, however, “Pioneer’s call scripts are particularly troubling.”
For example, to prevent scammers from capitalizing on the opportunity to exploit these calls, collections activities are initiated after the taxpayer receives a letter in the mail with a unique identifier that will allow them to verify that the debt collector is legitimate. However, when a taxpayer has not received a letter, Pioneer’s script only allows for a five-day cessation of collection attempts while a new letter is mailed. Having such a short window creates an opportunity for scammer confusion: one of the hallmarks of a scam call has been a very small window to respond.
There are also concerns about the amount of pressure exerted on taxpayers. Previously, NTA Olson reported that a disproportionate number of those taxpayers on private debt collector lists are poor: 80% are taxpayers below 250% of the federal poverty level and the median income is $32,000 (1/3 of taxpayers turned over for collection reported income below $20,000). Despite those numbers, the Senators claim that Pioneer is “unique among IRS contractors in pressuring taxpayers to use financial products that could dramatically increase expenses, or cause them to lose their homes or give up their retirement security” such as shifting debt to credit cards, taking out a second mortgage, or borrowing against an existing 401k. The Senators assert that “[n]o other debt collector makes these demands.”
Pioneer’s call scripts also allegedly make an implied threat that the debt collector will have the means to seize payment involuntarily; that may be a violation of the FDCPA and other laws. Additionally, in keeping with issues raised by Inspector General George last month, Pioneer’s call scripts ask for payment agreements that are longer than authorized. George previously reported to Congress that he had concerns that private collection agencies were extending payment requirements “beyond what the law provides.”
Part of the collection process should involve information that taxpayers have the right to obtain assistance from the Taxpayer Advocate Service (TAS). The Senators found, however, “there is no evidence in the Pioneer call scripts…that the collector intends to provide this information to taxpayers.” At least one other collector, Performant, did have scripts which included instructions on how a taxpayer may contact the TAS.
Finally, private debt collectors are supposed to refer cases back to IRS if the taxpayer describes a significant hardship that would impact repayment. Again, at least one other collector, Performant, offered explicit guidance on this issue but the Pioneer call scripts which were reviewed did not.
As a result of these concerns, Pioneer has been asked to modify the existing call scripts “so they comply with the law, your contract, and IRS policy.”
(You can read the entire letter here.)
Sue Walitsky, Press Secretary for Senator Cardin, added that the Senator “has had significant concerns about the lack of taxpayer protections with any effort to privatize tax debt collection since the most recent version of the program was first proposed.” According to Walitsky, Sen. Cardin “voiced these concerns throughout the legislative process but the program was, unfortunately, enacted in 2015.  As the letter details, his concerns were not merely theoretical – now that the program has been implemented, there may be a potential erosion of taxpayer rights.”
Walitsky continued:

Going forward, Senator Cardin plans to continue working with his colleagues to exercise Congress’s oversight role over the program.  Ideally, the way this problem would be fixed is would be via legislation repealing the program; that is, halting the private collection of tax debt.  In addition to protecting taxpayers, the two times private collection of tax debt was previously attempted, those programs resulted in revenue losses for the federal government.  In other words, these programs have historically been a bad economic proposition—all while potential putting a target on the backs of our most vulnerable taxpayers.

Pioneer is one of four contractors authorized to collect unpaid tax debts on behalf of IRS. The other private collection agencies are CBE, ConServe, and Performant.
In response to the story, Pioneer released a statement saying,

Pioneer has followed all IRS protocols in working with the Internal Revenue Service to recover millions of dollars in taxes that have gone unpaid for years. Pioneer has satisfied an extensive list of IRS-conducted audits and tests, encompassing all facets of the program including receiving approval from the IRS on all scripts and procedures.

The company has set up a page “to illustrate what the payment process looks like.”
A spokesman for the IRS said about the concerns:

The IRS is committed to running a balanced program that respects taxpayer rights while collecting the tax debts as intended under the law. The IRS will be closely monitoring the private debt collection program and will be working closely with the firms to ensure the fairness and integrity of the initiative.

While IRS and Congress work to sort out complaints, the calls will continue. Here’s what you need to know to sort out a legitimate call from a scam:

  • If your tax account is to be handed over to a private collection agency, the IRS will send you a letter. Your first contact regarding overdue taxes will not come from a private collection agency.
  • Private collection agencies are required to follow the provisions of the Fair Debt Collection Practices ActThat includes following the law with respect to time and frequency of communication: among other things, debt collectors may not contact a taxpayer at “any unusual time or place or a time or place known or which should be known to be inconvenient to the consumer.” Typically, this means that calls should only be made between 8:00 a.m. and 9:00 p.m., local time.
  • Any payment of tax must be sent to the IRS, and not to the debt collector or any other person. Checks should only be made payable to the United States Treasury and not to the debt collector. Taxpayers will never be asked to pay in gift cards, including iTunes cards, or wire transfer. Additionally, payments of tax made by credit or debit cards should be made through the IRS online: never give out your credit or debit numbers over the phone to satisfy an alleged tax obligation.
  • Debt collectors are not authorized to take enforcement actions against taxpayers, including placing a lien or issuing a levy. Further, debt collectors cannot threaten a taxpayer with arrest or deportation.

To make a complaint about a private collection agency or report misconduct, you can call the TIGTA hotline at 800-366-4484; visit www.tigta.gov; or write to TIGTA, Hotline, Post Office Box 589, Ben Franklin Station, Washington, DC 20044-0589.

(Author’s note: The story has been updated to reflect a statement from Pioneer and from Sen. Cardin’s office.)