IRS Trust Fund Recovery Penalty: What it is and How to Settle

When you have employees, you withhold their Medicare and Social Security contributions from their checks, and in most cases, you also withhold some income tax. These amounts are referred to as trust fund taxes, and you are obligated to send that money to the IRS.

If you fail to make those payments, the government can charge a very serious penalty called the Trust Fund Recovery Penalty.

What is the Trust Fund Recovery Penalty (TFRP)?

The Trust Fund Recovery Penalty is the penalty you face if you withhold income tax, Medicare, and Social Security payments from your employees’ paychecks, but you don’t send the money to the IRS. It is one of the largest penalties charged by the IRS. The agency takes it very seriously, and if you are deemed responsible for the missing payments, the IRS will not hesitate to take your personal assets to recoup their money.

Who Can Be Responsible for the TFRP?

The IRS can and will levy this penalty on anyone who willfully fails to collect and pay trust fund taxes. That includes owners, CEOs, and directors, but it can also include employees, third-party payroll administrators, outside accountants, and bookkeepers. For corporations, shareholders can also be held responsible, and for non-profits, members of the board of trustees may be considered responsible.

Essentially, anyone in the organization who collects or pays these taxes can be held responsible. In addition, anyone who knows the taxes are not being paid can also be held responsible. The IRS can hold multiple people responsible, and the agency will do what it takes to get the money.

To establish responsibility, the IRS has to prove that the individual in question was aware that the taxes were due and aware they weren’t being paid. The individual must have purposefully or willfully ignored the law. For example, if you or someone related to your organization took the money set outside for payroll and income taxes and used it to pay another bill, that’s a clear sign of willfulness.

What to Do If the IRS Thinks You're Liable for Your Employer's Trust Fund Recovery Penalty?

Employees and third parties who handle payroll need to be careful. If the IRS decides that you are responsible for these unpaid taxes, you can face serious penalties and even criminal charges. Check out this link to learn what to do if the IRS is threatening to hold you liable for your employer's or client's trust fund taxes.

How Much Is the Trust Fund Recovery Penalty Amount?

The Tax Fund Recovery Penalty is not small. In fact, it is equal to the amount of taxes that were unpaid. Once again, that includes any income taxes withheld from an employee’s paycheck plus the employee’s Social Security and Medicare contributions. Note that Social Security and Medicare contributions are also referred to as FICA (Federal Insurance Contributions Act) taxes. Any payments that were timely or designated as being for trust fund taxes only will be subtracted. 

To explain, let’s say you paid an employee $1,000. You noted on the paycheck stub that you withheld $100 for income tax plus $62 for Social Security and $14.50 for Medicare. However, you didn’t send any of that money to the IRS. In that case, the unpaid tax bill is $176.50. You owe that amount plus that amount again as a penalty. That doubles your bill.

With a single employee, that can be a lot over an extended period of time. With multiple employees, the numbers can be staggering.

What Happens If the IRS Assesses a Trust Fund Recovery Penalty?

If the IRS believes that a company hasn’t been paying its trust fund taxes, an officer from the agency starts an assessment to figure out who is responsible. As part of that process, the IRS requests multiple documents and lots of information from the company.

That includes bank statements and canceled checks, but it also includes details about who has passwords for online accounts and who knows PINs for bank cards. The IRS wants to see who’s paying the bills, who controls the money, and where the money is going.

The agency will likely also request articles of incorporation or partnership contracts to get a sense of the layout of power in the company. Then, when the agent hones in on a potentially responsible party or parties, the IRS will request an interview with those people.

What Is the Interview for a Trust Fund Recovery Penalty?

There’s a lot to understand about the interview process. Whether you are the owner of a company or just someone the IRS thinks is responsible for the missing taxes, you may be summoned. You might be required to complete a Form 4180 interview., to assess the full extent of your job duties and responsibilities. The IRS will determine responsibility based on whether an individual exercised independent judgment with regard to the business finances. If an employee simply pays creditors directed by their manager or boss, they generally won't be held responsible. Click the links for detailed information on the interview process and how to avoid an interview.

How Can You Settle the Penalty?

Like other types of tax liabilities, there are options to pay this penalty. If you don’t have the full payment, you can apply for a payment plan or an installment agreement. Alternatively, you can try to settle the taxes owed for less than you owe through the Offer in Compromise program or through a partial payment installment agreement.

The important thing is to contact the IRS and set up an arrangement before the IRS tries to garnish your wages or seize your assets. You cannot discharge these penalties in bankruptcy.

What Are Non-Trust Fund Taxes?

To get a better understanding of trust-fund taxes, you should understand non-trust fund taxes. Trust fund taxes have that name because employees trust their employers to send the funds to the government on their behalf. Basically, employers are supposed to keep that money in a trust fund until they send it to the IRS. They are not supposed to do anything with the funds.

However, there are also non-trust fund taxes. In particular, employers must match their employees’ Social Security and Medicare contributions. Those matching amounts are considered non-trust fund taxes.

The IRS typically only holds the business responsible for non-trust fund taxes. It does not hold individuals responsible. However, the exact liability rules depend on your business structure. If you’re self-employed or the sole principal of an LLC, you may be held personally responsible for both trust-fund and non-trust fund taxes.

What Forms Are Involved in the Tax Fund Recovery Penalty?

If the IRS thinks you are responsible, you will receive Letter 1153. This comes with Form 2751. If you sign this form, you are admitting liability. Follow the link for more information on these forms and what to expect.

What Is the Statute of Limitations on the Trust Fund Recovery Penalty?

If the IRS assesses a penalty, it has up to 10 years to collect it. During that time, the IRS will take your assets if you are responsible.

However, the IRS only has 3 years to assess the penalty. This clock starts ticking on April 15 after the year the trust fund taxes were due to be filed. For instance, let’s say a company was supposed to pay some trust fund taxes in October 2016. The IRS has three years from April 15, 2017 to assess the penalty. If the IRS doesn’t do anything by April 14, 2020, it can’t do anything After that date, it’s illegal for the IRS to investigate or conduct interviews.

Help with the Trust Fund Recovery Penalty & TaxCure

Here at TaxCure we have compiled a network of tax professionals from around the country with a wide variety of backgrounds resolving various tax problems. We have a unique ranking algorithm that can help taxpayers find the best professionals to help with particular tax problems. To see the top-rated professionals that can help with trust fund recovery penalties, visit this link here. You can see their backgrounds and reach out to them with details on your situation to get more information on how they can help you.

IRS LT 1058: Final Notice of Intent to Levy – What to Do

Letter 1058 from the IRS is your final notice of intent to levy for unpaid taxes. This letter is serious, and if you don’t take action within 30 days, the IRS has the right to levy or seize your assets. This is generally issued by Revenue Officers, whereby the IRS ACS issues LT11. 

Understanding Letter 1058

The majority of letter 1058 explains the situation. The letter tells you why the IRS is contacting you and what you need to do. It also provides a look at what happens if you can’t pay your taxes owed.

The most important part of the letter is at the bottom, where it shows what you owe.

The Amount You Owe

In letter 1058, the amount you owe is presented in a table. The table shows which tax return you filed (for most people, that’s 1040), and it notes the last date of the tax period in question.

The table also includes the balance from your last notice, penalties incurred since the last notice, and new interest charges. Finally, it lists the total due. If you have submitted any payments since your last notice, they are included as well.

How To Appeal Letter 1058

If you don’t agree with the amounts listed in letter 1058, you have a legal right to appeal. To start that process, complete Form 12153, Request for a Collection Due Process or Equivalent Hearing.

You must send the IRS that form within 30 days, or you forfeit the right to appeal. Note that the 30 days start on the date the letter was issued. They do not start the day you receive the letter. To help you, the deadline should be noted in the letter.

How to Make Payment

If you are making a full or partial payment, make a check or money order payable to the United States Treasury. Then, mail the payment to the address on the letter. Put your Social Security number or Employer Identification Number on the memo line so the IRS knows where to apply the payment.

The Risks of Ignoring Letter 1058

If you don’t respond to letter 1058, the IRS may move forward with more serious collection activity. That includes seizing funds from bank accounts, levying personal assets (cars, automobiles, houses, etc), and garnishing wages.

The IRS may also issue a Notice of Federal Tax Lien. That tells creditors that the IRS has the legal right to put a lien on your current or future assets. When a federal lien appears on your credit report, it’s virtually impossible to take out a loan.

Unable to Pay the Balance

If you can’t pay the balance, you should contact the IRS about making alternative arrangements or reach out to a tax professional on TaxCure using the "find a local tax pro" button at the top of the page. A licensed tax professional can represent you and can help you set up a payment arrangement or submit an offer in compromise.

Depending on your situation, a tax professional may be able to help you appeal the amount that is due, reverse penalties and late fees, and set up a tax resolution. If you have ignored every other notice from the IRS, this is the one you need to pay attention to—fill out the form at the top of the page to get help today. 

Stopping a Levy

If the IRS has already started to levy your assets there are a variety of ways that the levy can be stopped even after it has started. Every person has a unique situation and there are methods to stop a levy depending upon your situation.  For more details on stopping a tax levy after it has already started, please refer to this guide on stopping or releasing a tax levy. If you are dealing with an IRS bank levy, you can read more about ways to stop or release one. To connect with a tax professional who has experience preventing tax levies, visit these search results. 

IRS Notice CP297 Intent to Levy: What this Means and What to Do

The CP297 notice is a formal notification that the IRS can levy your assets in 30 days. This notice is almost exactly the same as the CP90 Notice. However, the CP297 is for businesses, while the CP90 is for individuals.

What To Do If You Receive a CP297

You should not ignore this notice. After sending this notice, the agency the legal right to take your assets. To avoid that risk, you should respond or pay within 30 days.

How to Appeal a CP297

If you don’t agree with the notice, you can appeal using Form 12153, Request for a Collection Due Process or Equivalent Hearing.

To appeal, you must be prepared to argue that you do not owe the balance due. You must have a legitimate tax-based reason for the argument, rather than just a general objection.

Unable to Pay a CP297

If you can’t pay your tax bill, you also must respond within 30 days. You may be able to set up a payment plan—keep in mind interest will continue to accrue on the balance while you make payments.

In other cases, you may be able to make an offer in compromise. That is when you settle the bill for less than you owe.

Risks of Ignoring CP297

Ignoring CP297 is not a good idea. The IRS can legally start taking your assets within 30 days. That can include property, vehicles, and income. In most cases, you are only allowed to hold onto essential tools for your trade (up to a certain value). Personally, you can usually keep essential clothing, furnishings, and a primary vehicle.

If the IRS plans to levy your Social Security benefits in particular, you may receive notice CP298. Note that the agency can take 15% of your payments, but it cannot take supplemental Social Security payments.

What is a Tax Levy?

A levy is imposed by the IRS, permitting the seizure of property to cover the tax liability owed. The IRS can impose a levy to garnish wages, seize bank account funds, withhold refunds, seize real estate, and more. 

Stopping a Levy

If the IRS has already started to levy your assets there are a variety of ways that the levy can be stopped even after it has started. Every person has a unique situation and there are methods to stop a levy depending upon your situation.  For more details on stopping a tax levy after it has already started, please refer to this guide on stopping or releasing a tax levy.

Getting Help With Unpaid Taxes & TaxCure

If you have received a CP297 notice, consider contacting a licensed tax professional for help. TaxCure can help match you with qualified tax professionals based on your unique situation. We have a unique ranking algorithm that can help you find the top tax professionals that can assist with various problems. To see the top tax professionals that can help with unpaid taxes and potential tax levies, start your search here to be assured you talk with the best professional. 

IRS LT11 Notice of Intent to Levy: What this Means and What to Do

If you’ve received Letter 11, that is the IRS’s notification that it plans to levy your property. Similar to CP297, & LT1058, this notification gives the IRS the legal right to seize your assets within 30 days.

How Long Do You Have to Respond to LT 11?

The IRS gives you 30 days to respond to LT 11. The final date for a response is noted on the left side of the letter, next to the amount you owe. If you do not take action by that date, the IRS may issue a lien on your assets or start seizing them.

What Are the Options With Letter 11?

Letter 11 typically comes with Form 12153, Request for a Collection Due Process Hearing. If you believe that you don’t owe the amount on Letter 11, you can appeal the bill with this form. With an appeal, the IRS will appoint an appeals representative to go over your return, and the case may go to Tax Court.

If you agree with the amount due, you can pay the bill in full.

What Happens If You Ignore Letter 11?

As indicated above, if you ignore this letter or refuse to pay, the IRS has the right to seize your assets. In addition, you risk losing your passport.

Under the Fixing America’s Surface Transportation Act, the IRS may take your passport if you refuse to pay taxes. If you don’t have a passport, the IRS can prevent you from getting one.

What If You Don’t Have Enough Money to Pay Your Taxes?

If you can’t afford to make the payment in full, contact the IRS to arrange a payment plan.

Consider one of the professionals on TaxCure, our unique algorithm ranks the professionals that meet the needs of your unique situation. Here is a list of top professionals that help with unpaid IRS taxes, apply more filters if you have issues with other agencies as well. Tax professionals can stop the levy process and help you deal with your taxes owed.

Stopping or Release a Tax Levy

If the IRS has already started to levy your assets there are a variety of ways that the levy can be stopped, even after it has started. Every person has a unique situation and there are a variety of methods that can be used depending upon your situation. For more details on stopping a tax levy after it has already started, please refer to this guide on stopping an IRS tax levy.

IRS Notice CP22A: What This Notice Means and What to Do

What Is a CP22A Notice?

CP22A is an official letter that the IRS sends as confirmation of changes to your tax return. In some cases, the IRS sends this notice when you have requested changes, and in other cases, this notice comes after the IRS has made updates to your return.

What Does the CP22A Notice Mean?

The notice simply explains which changes were made to your tax return and how much you owe (similar to a CP14 notice) as a result of those changes. Typically, CP22A notices deal with changes to your filing status or the number of dependents.

For instance, if you claimed a dependent that the IRS believes you were not entitled to claim, you may receive a CP22A notice.

What If You Don’t Agree with the Amount Owed on a CP22A Notice?

If you don’t agree with the CP22A, you can contact the IRS directly over the phone. Make sure to have the letter and your tax return with you so you can answer any questions.

You also have the right to appeal. Note you must start the appeals process within 60 days.

What If the CP22A Assessment Is Correct?

If the letter is correct, you should update your personal tax records accordingly. That ensures you have an accurate copy of the finalized return that has been submitted to the IRS.

Then, you should send payment to the IRS by the due date specified on the letter.

What If You Can’t Afford Your Tax Payment?

Even if you don’t have the funds to pay the bill, you should contact the IRS by the due date. Failure to contact the agency will result in a late penalty.

However, if you notify the IRS in time, you can avoid the penalty and set up a payment plan. Interest will accrue on the balance as you make payments. If you cannot afford a payment plan with the IRS you can also consider other types of settlements that are available.

What If You Need to Make Additional Changes to Your Return?

If the CP22A doesn’t cover all of the changes you made on your return, you can make additional changes. Simply, file Form 1040X, Amended Individual Income Tax Return.

If you want help appealing a CP22A notice, reach out to a licensed tax professional that has experience with appealing IRS decisions. 

Qualifying and Requesting IRS First Time Penalty Abatement Waiver

First-time penalty abatement (FTA) is when the IRS removes penalties from your taxes owed. That includes penalties for failure to file, failure to pay, and failure to deposit. The IRS also removes interest related to those penalties. It applies to the tax periods ending after December 31st, 2000.

Which Penalties Does the First Time Penalty Abatement Cover?

The FTA erases failure-to-file penalties for 1040s (individuals) and S-Corps. The IRS considers a Substitute For Return (SFR) as a filed return. In either case, this is a stiff penalty for failing to file or filing late. The penalty is 5% of your balance per month.

The FTA also eliminates the failure-to-pay penalty for 1040s (individuals). This penalty is 1/2 percent (.5%) of your outstanding taxes owed per month. If you have penalties related to an audit, you may be able to get rid of those as well (but not accuracy-related penalties).

Finally, the FTA also erases penalties related to a Failure to Deposit (941s) regarding payroll taxes (employment taxes).  This would include things such as the deposit wasn’t made timely, for the correct amount, or in the correct manner.

How to Qualify for the First Time Penalty Abatement

To qualify for this penalty abatement, you must meet three basic criteria:

1. You incurred no penalties or penalty abatements for the three prior tax years.

The IRS only considers penalties that exceed $100. For example, if you received a $50 penalty in one of the previous three years, you can still qualify for the abatement.

If you incurred penalties for underpaying estimated tax in previous years, don’t worry. The IRS does not take those penalties into account. You can still qualify for the first-time penalty abatement.

2. You have filed all required returns or extensions (IRS considers you compliant)

If you have outstanding paperwork, you will not qualify. Before applying, make sure that you have filed all requested tax returns and extensions with the IRS.

3. You have made payment arrangements on your outstanding taxes.

You also must have paid your taxes owed in full or set up a payment arrangement (installment agreement) on your outstanding taxes. If you are on a tax payment plan, you must be making regular payments. Your arrangement must be in good standing.

How to Apply for a First Time Penalty Abatement

Taxpayers may apply for first-time penalty abatement online, in writing, or over the phone. In some cases, if you qualify, the IRS removes the penalties on the spot. In other cases, the IRS agrees to remove the penalties, but it does not do so until the tax owed is paid in full. To get an FTA, the taxpayer has to have an outstanding balance or the RSED (refund statute expiration date) for the FTA year in question cannot be expired.

If the IRS refuses to remove the penalties right away, you will continue to see the penalties growing. As long as you qualify for the abatement, you don’t have to worry about that. The penalties will be removed eventually.

How Much Can Be Abated

The IRS only removes penalties incurred in the first year. There is a monetary limit on the number of penalties that can be removed. The agency has not published a limit, but it appears to be up to $10,000 for most phone calls. Taxpayers can get an FTA over $10,000 but generally requires the request in writing. Furthermore, the IRS allows the FTA once every four years.

Abatement for Penalties More Than a Year Old

If you have tax penalties that extend back more than a year, the IRS will only remove them if you show “reasonable cause.” That means that you had a serious reason for not paying or filing your taxes.

To qualify, the situation must be out of your control. However, you must also show that you took steps to get past the issue. Basically, the IRS wants to see that you really tried to pay your taxes, but that it truly wasn’t possible.

Examples of Reasonable Cause

There are a number of situations that can constitute reasonable cause. Here are some of the most common reasons accepted by the IRS:

• Records destroyed by flood, fire, or natural disaster
• Inability to calculate the amount owed due to a lack of records
• You were in Rehab or Prison
• You were held hostage in another country
• A close family member (spouse, child, etc) died
• A civil disturbance such as a mail strike prevented you from making payment
• You received bad information from a tax professional
• Bad advice from an IRS representative

In some cases, you can even receive an abatement for an error. However, you need to demonstrate that the error was made in good faith. The IRS may also accept other reasons. You should show that the issue created a situation where you truly couldn’t pay or file on time.

The IRS offers first-time penalty abatement and abatement for reasonable cause for years. However, many people don’t even know about these programs.

If you are looking for assistance with a tax professional who has penalty abatement experience, you can use this link or you can start a search below: 

The Benefits of Paying Taxes In Full

Paying tax liabilities in full simply means that you pay your tax balance with a single payment. If you can afford to do this, it is the best option. If you have the funds, the IRS will require you to take this route whether you want to or not.

Even if you don’t have the money on hand, you may want to consider taking out a bank loan or borrowing from friends or family. Paying taxes in full offers numerous benefits. If none of the options work for you below and you cannot pay in full, there are more options for those that can't pay taxes.

Avoid Interest and Fees

Penalties

The main benefit of paying overdue taxes in full is that you avoid interest and penalties. That can save a lot of money. The failure to pay penalty is 0.5% of your balance every month. That equates to more than 6% interest per year. That penalty also increases to 1% per month if the IRS issues an immediate demand for payment due to a jeopardy assessment or 10 days after a notice of intent to levy notice.

Interest Charges

In addition, unpaid taxes accrue interest on a daily basis. The interest rate is 3% plus the current short-term federal funds rate.

If you take out a low-interest loan to pay your tax bill in full, you will save money. Of course, if you can obtain an interest-free loan from your friends or family, you will save even more money.

If you can only pay the taxes in full by using a credit card, you may want to avoid that unless you are sure you can pay off the balance quickly. To decide, compare the interest rate on the card to the fees and interest you face from the IRS. For example, if your credit card interest rate is only 4%, slap the taxes owed on plastic. On the other hand, if your rate is 19%, it makes sense to explore other options.

Sidestep Installment Plan Fees

Entering into an installment plan or a payment plan also involves extra fees, and if you pay late taxes in full, you avoid those fees. As of 2017, fees for new installment agreements are between $31 and $225. Plus, while you make the payments, interest and penalties continue to accrue on the taxes owed.

No-Risk of Defaulting on Agreement

If you decide to enter an installment agreement, the IRS is not flexible about late payments. If your check doesn’t make it on time or if the check bounces, the IRS terminates your agreement, and you have to pay anywhere from $43 (low income) to an $83 reinstatement fee to get back on the plan.

A lot of people use direct debit for their installment payments, but that approach can also be problematic. The IRS doesn’t send out monthly reminders, and if you forget to have the money in your account and the payment doesn’t go through, your installment plan goes into default.

When you pay taxes in full, you avoid the risk and expenses associated with defaulting on a payment agreement. In most cases, if you’re paying a lender or a family member instead, you get a bit more flexibility on your payment schedule.

Prevent a Lien

If you owe over $10,000 or if your tax bill is seriously delinquent, the IRS puts a lien on your assets. This is called a Notice of Federal Tax Lien, and it has a very negative effect on your ability to obtain credit. Even though they no longer show on your credit report, lenders still have ways to find out if the IRS has placed a lien on your assets. To put it into perspective, it’s as bad as repossessions or judgments.

With a tax lien filed against you, it’s very hard to obtain car loans, mortgages, credit cards, and other types of financing. If you can find a lender to approve a loan, you will be classed as high risk and subject to a high-interest rate.

If you pay in full, you don't have to worry about a lien being filed. In addition, if there’s already a tax lien filed, the IRS removes it within 30 days of receiving your payment. You can also get liens removed with payment plans, but there are a few more hoops to jump through.

Easier Process

It’s significantly easier to pay in full than to deal with any other arrangement. There is no paperwork or website forms to worry about. You just make the payment, and it’s done.

Future Access to Installment Plans

Paying off your taxes in full also opens the door to being approved for an installment plan in the future.

Generally, if you owe less than $10,000 and you apply for an installment plan, the IRS automatically approves the request. However, if you have a history of filing late returns or if you have used an installment plan in the last five years, your request will not automatically be approved.

Even if you don’t plan to pay future taxes late, you may want to pay in full now to be on the safe side. That way, you can save your “free chance” for an installment plan for another year.

Access to Refunds

Finally, having taxes owed prevents you from receiving refunds. If you become eligible for a refund, the IRS just keeps the money and applies it to your outstanding taxes.

If you can get the funds, paying your taxes in full is your best option. That said, most people aren’t that lucky. If you’re dealing with taxes owed, look at the top professionals in our network that help with unpaid taxes (and apply a filter for a state issue if you have one as well).

My husband is a huge Yankees fan. We’d follow the baseball season obsessively no matter what, but this year has been “special” because Derek Jeter is finally calling it quits and retiring, at the age of 40, as the Captain of the team. We’ve had fun watching the commercials saluting him, and enjoyed watching different teams present him with personalized and sometimes funny gifts.

The value of these gifts is in the tens of thousands of dollars. He’s received everything from high-end cowboy boots to cupcakes to a bronze bat to a paddleboard to a seat from a stadium to a portion of a scoreboard, the farewell tour has included a lot of interesting and unique gifts.

However, while the IRS generally allows that gifts are tax-free, the items that Jeter has been receiving might not be considered “real” gifts. In fact, Jeter might even have to pay taxes on the items, since they might be considered income (although he has a big enough salary that the tax bill would be little more than chump change to him).

Gift or Marketing Ploy?

One of the issues is that the gifts to Jeter might not be seen as true gifts, such as those exchanged between family and friends. Instead, the IRS might view these gifts as marketing expenses. Something similar happened a few years ago when Pontiac gave everyone in Oprah’s audience one day a new car. Since Pontiac wasn’t giving the gift in order to be generous, and the stunt was more in the nature of marketing to raise awareness, the IRS decided that the recipients had received a windfall.

Many of the middle-class moms in Oprah’s audience couldn’t afford a “gift” like that that could bring their household incomes up another tax bracket. It’s important to note that these types of items are considered income to the recipients; even though Jeter didn’t receive cash, he still might have to report it as income — and pay taxes in cash. And, in Jeter’s case, the argument can be made that these teams are trying to raise their profiles by presenting Jeter with these gifts. They aren’t doing it as a spontaneous gesture. It’s a calculated move to generate buzz about what was given.

The only way to avoid taxes when you receive a marketing ploy masquerading as a gift is to decline the gift. In the case of receiving a car for being in a studio audience, you might be able to decline it because you don’t want to pay the taxes on the value of the car. If you’re in a prominent position, like Jeter is, declining might not be a real option. After all, it’s rude for the Yankee Captain to refuse these expensive and personal gifts. Better to accept them and just pay the taxes.

It’s a sticky situation, but the assumption should almost always be that you should consider that the IRS will likely want a cut. Double-check with a tax professional to brush up on gift tax rules, and verify that what you have received is truly a gift. Then plan for the disappointment associated with paying taxes on the gift you received.

IRS Form 656-B: Instructions for Requesting an Offer in Compromise

When you cannot pay your taxes owed in full, but you do have some resources from which to make payments toward your taxes owed, you may choose to apply to the IRS for an Offer in Compromise (OIC).

You can also apply for an Offer in Compromise if paying your entire tax amount owed would cause you economic hardship, would be unfair or inequitable, or because you have insufficient assets and income to pay the full amount of the taxes owed.

An Offer in Compromise allows you to settle your taxes owed with the IRS for an amount that is less than the full amount that you owe.

Basic Guidelines for Requesting an OIC

To request an Offer in Compromise from the IRS, you must fill out and submit IRS Form 656-B. It is highly recommended you work with a tax professional as the process is not easy.  The IRS OIC booklet includes Form 656, Form 433-A (OIC) which is for individuals, and Form 433-B (OIC) which is for businesses. This is when your offer is based on doubt as to collectibility or effective tax administration.

To complete your application on the former basis, you must pay a $186 non-refundable application fee as well as a payment toward your taxes. The amount of your initial payment may vary. You have the option of paying either:

• 20% of the initial offer amount with your application, with the offer amount to be paid in full once the IRS accepts your offer, or
• initial monthly payment, which you continue to pay each month while the IRS considers your application, as well as after the IRS accepts your offer. Generally, the payment period is from 6 to 24 months or when the CSEDs expire, whichever comes first.

However, if you meet the Low-Income Certification guidelines of the IRS, you will not need to pay the $186 application fee or make an initial monthly payment until the IRS accepts your offer. After the IRS accepts your offer, you must then begin making payments toward your compromised taxes.

Completing Form 656

In order to complete Form 656, you will need to gather certain information about the taxes, interest, and penalties that you owe, as well as the tax years or periods for which you owe those taxes.

Section 1: Your Contact Information

This section of Form 656 asks for basic contact information for you, your spouse and/or your business, including names, addresses, social security numbers, and employer identification numbers.

Section 2: Tax Periods

Choose the type of tax, tax return(s), and tax period(s) that you are including in your application for an Offer in Compromise. If you need more room than provided on the form, you can attach an additional page or pages, which you should title “Attachment to Form 656 dated ____________.”

Section 3: Reason for Offer

Select one of the following two options as the reason for your Offer in Compromise:

• Doubt as to Collectibility (insufficient assets and income to pay)
• Exceptional Circumstances (paying taxes owed would cause economic hardship or would be unfair and inequitable)

If you choose the “Exceptional Circumstances” option, you must include a written statement explaining your exceptional circumstances to the IRS. You also should attach any documentation of your circumstances. For instance, if you have a serious illness that impairs your ability to work and causes you extensive medical expenses, you could attach medical reports and bills in order to help prove that you have a serious illness.

Section 4: Low Income Certification (Individuals Only)

Only individuals, not businesses, can complete this section of Form 656. You must evaluate your family size, geographical location, and your applicable monthly gross household income in order to determine whether you qualify for low-income certification.

If you qualify for low-income certification according to the IRS guidelines, then you will not have to pay the Offer in Compromise application fee, and you may not have to make a payment toward your taxes while the IRS is in the process of considering your application.

Section 5: Payment Terms

In this section, you first must provide the IRS with the amount of your total offer of payment toward our taxes owed. You then have two different payments options from which to choose:

• Payment Option 1 – Payment of offer in five or fewer monthly payments
  • You must include a check for 20% of your offer amount, unless you are an individual and eligible for low-income certification.
  • You also must fill in the dates and amounts of your future payments.
• Payment Option 2 – Payment of offer in more than five monthly payments
  • You must include a check for the amount of one monthly payment, unless you are an individual and eligible for low-income certification.
  • You also must fill in the amount of your monthly payment, the day of the month on which you will make your payment, and the total number of months that you will make payments in order to pay off your order amount.
  • You must continue to make the monthly payments while the IRS is considering your application for an Offer in Compromise.

Section 6: Designation of Down Payment and Deposit (Optional)

This section of Form 656 is optional for you to complete. If you wish, you can have the payment included with your application applied to a specific tax amount from a specific tax year. You can also pay more than your required initial payment, and have that amount designated as a deposit on your Offer in Compromise.

Section 7: Source of Funds

In this section, you must describe the source of the funds that you will use to make payments toward your taxes owed, whether it is money that you have borrowed from family or friends, a bank loan, or the proceeds from selling your property.

Section 8: Offer Terms

There is no information for you to provide in this section of Form 656. Rather, this section sets forth all of the terms and conditions of making an Offer in Compromise. More specifically, this section details all of your rights and responsibilities with respect to making an Offer in Compromise and the consequences of failing to meet the requirements of an Offer in Compromise.

Section 9: Signatures

In this section, you must sign and date Form 656 under oath. If you are filing an Offer in Compromise jointly with your spouse, he or she must also sign and date the form.

Section 10: Paid Preparer Use Only

This section is to be completed only if you are using a paid preparer for your Offer in Compromise application.

Section 11: Third Party Designee

In this section, you can authorize the IRS to discuss your Offer in Compromise application with another person whom you designate.

Submitting Form 656 to the IRS

Once you have completed Form 656, you must submit it to the IRS with the rest of your application packet, including Form 433-A or Form 433-B, your application fee, and your initial payment fee. The IRS then will consider your Offer in Compromise application and determine whether you are entitled to pay your offer amount rather than the full amount of your taxes.

Getting Help with IRS Form 656

Completing and getting form 656 accepted is not an easy task for someone without experience. It is suggested to consult with an OIC tax professional when doing this type of filing to increase your chances. A tax professional can also analyze your situation and make a determination if you are a good candidate for an offer in compromise. If you are, they can help with the filing.

If you aren't, they can suggest other alternatives such as applying for separation of liability if your ex-spouse was responsible for the issue. Here at TaxCure, we have a unique ranking algorithm that allows you to find the top professionals based upon specific problems and solutions you are looking for. To see the top-rated tax professionals that can help with an offer in compromise, visit this link here for top-rated IRS offer in compromise experts, or start your search below.

IRS CP501: Reminder of Balance Due – Meanings & Actions Needed

If you owe a balance to the IRS, you will receive this notice. Generally, the IRS sends this notice after sending you a CP14.  The CP501 is a relatively straightforward notice letting you know that you need to pay your outstanding income tax bill. The letter tells you how much you owe, the due date for payment, and what can happen if you don’t pay. To get a sense of what the CP501 looks like, take a look at this sample. Then, keep reading to see what you should do with this notice.

What Does Notice CP501 Mean?

When you receive Notice CP501, it merely means that you owe tax from a previous tax year. Typically, the IRS sends this notice to remind you to pay your taxes, but in some cases, the IRS issues this notice even if you are not expected to pay your taxes immediately. If you receive a CP501 notice and any of the following are correct, you can disregard it:

• You have paid your balance in full in the last 21 days.
• You are already making payments on that tax amount through an installment agreement.
• The IRS issued you currently not collectible (CNC) status, and they notified you that the agency was suspending collection activity because it would create a financial hardship for you.
• You are in the midst of filing bankruptcy, and a stay has been issued to your creditors.

Every year your income tax payment for the previous year is due on April 15th or the following business day. If you don’t make your payment by that deadline, you face interest and penalties on your balance, and this notice is one of the first that you may receive.

What Should You Do If You Receive CP501?

If you can afford to pay the entire balance, merely detach the payment stub, write a check or money order to the United States Treasury, and mail the payment to the address on the notice. Make sure to put your social security number, the tax year, and the tax form you filed on the check. You can also pay online. If you disagree with the information on the notice, contact the IRS directly at the number provided on the form. When you speak to an IRS agent, they will let you know your options regarding the balance. Contact a tax resolution specialist to help you if you want assistance in dealing with the IRS.

What Happens If You Can’t Pay Your Taxes?

Generally, payment is due within 21 days of receiving the notice, but if your balance is over $100,000, it is due within ten days. If you don’t pay, the IRS will continue to assess interest and the failure to pay penalty on your account. The penalty is 1/2% of your total balance every month, up to a total of 25% of the balance. For instance, if you owe $10,000, the monthly penalty is $50, and the IRS can add penalties worth up to $2,500. Interest accrues on top of these penalties.

With this notice, the IRS also lets you know that they may issue a federal tax lien against you. A tax lien is an official notice that the IRS has a claim to your assets. Usually, it appears on your credit report, which can make it very difficult to obtain loans, but as of 2018, all three major credit bureaus (Experian, TransUnion, and Equifax) have removed all consumer tax liens. As a result of that shift, tax liens may not be as disruptive as they once were.

That said, if you ignore this notice, the IRS may send another letter about levying your assets. Failure to respond to that notice can result in the IRS seizing your wages, bank accounts, or other assets. Additionally, once the IRS sends that notice, your failure-to-pay penalty can increase to 1% of your balance per month. For instance, if you owe $10,000, your monthly penalty rises to $100. To avoid penalties, try to make arrangements with the IRS. In special situations, the IRS may even remove penalties, and this notice also details the steps you can take to apply for penalty abatement.

What If You Can’t Pay the IRS in Full?

If you can’t pay the balance in full, contact the IRS immediately to discuss other options. Here are some standard options:

• IRS Installment Agreement: An installment agreement lets you pay off your taxes in manageable monthly payments. There are a few different types of installment agreements, and you need to choose the right one for your financial situation.
• IRS Hardship: If you can prove that paying the tax would cause financial hardship, the IRS will put a temporary stop to all collection activity. This agreement is called an IRS hardship, uncollectible, currently not collectible (CNC), or status 53. Mostly, you have to show the IRS that you can’t afford to cover the tax owed and your essential living expenses.
• Offer in Compromise: With an offer in compromise, you settle the taxes owed for less than the total balance. You have to meet strict income requirements to qualify for this arrangement.

Note that even if you make a payment arrangement, interest will continue to build upon the balance until it is paid in full. If you want to minimize the final costs, you should take action as soon as possible. To get help, reach out to a tax professional on our site that has IRS experience. You can find them here.