Before an individual will be placed in Currently not Collectible (CNC) status, his/her financial records will be thoroughly investigated.  More specifically, his/her monthly earnings will be weighed against allowable monthly expenditures, which are expenses IRS Code deems reasonable.  In the event that a taxpayer’s expenditures almost outweigh, or outweigh, his/her earnings, the individual may qualify for CNC status.

As a part of the investigation, the IRS will look for any assets owned by the taxpayer that could be used to pay off the IRS tax debt.  Home equity, second vehicles, additional monetary funds in any bank accounts, or any assets that could be traded for cash.  If the determination is that no cash would become available by liquidation of assets, or that said liquidation would cause undue hardship, then the taxpayer may still qualify for being placed in CNC status.

Overdue accounts find it more difficult to find IRS tax relief.  They will be investigated closely and will proceed with a negotiation, requiring proof of income, expenditures and any and all assets owned by the taxpayer before providing IRS tax relief.

Prior to acceptance, the Offer undergoes an investigative process that involves the taxpayer’s history and financial records.  In some cases, the IRS will reject an Offer on the grounds of a dissipated asset, which incurs when a taxpayer liquidates or transfers an asset after the accrual of the initial tax liability.  An asset becomes dissipated if either transferred, gifted, sold, or spent on objects deemed unnecessary, such that the individual with tax liability cannot use it to pay off their tax debt.  Retirement accounts, funds gained from the sale of a home or a refinance, as well as inheritance funds are some of the most common dissipated assets.

In the event that the funds were used to address necessities healthcare being one of these, or a portion of the funds gained from the asset, IRS may agree to reduce or negate the dissipated asset from consideration.

The IRS requires that a business has filed all overdue tax returns in order to gain compliance status.  For corporations, that means filing all overdue or absent 1120 tax returns.  For partnerships, that means 1065s and for businesses with employees, 940s and 941s.

The 940s and 941s are usually considered the most difficult of these to stay up-to-date on.  For each quarter that a business had its first employee to the quarter in which they have their last, they are required to file one 941, and if there are periods during that time period when the business has no employees, it is still required to file a payroll return.  941s allow for a business to communicate to the IRS that the business will no longer have employees, after which point, 941s become unnecessary.  Tax return 940 operates under the same rules; however, they are only filed once per year.

The final stipulation for compliance is that any business remain up-to-date with its current payroll deposit requirement.  In fact, before a business can pursue IRS tax resolution, it usually must stay in compliance two or more quarters.  As a business facing a potential IRS collections action, it is important to either be in compliance status or know how to gain compliance status.

Firstly, an individual must have filed every tax return that is overdue.  Additionally, the taxpayer needs to have completed all tax returns in the previous six years; however, the time frame may be extended depending on the circumstances, and the taxpayer may not be required to file in years that he/she did not make sufficient income to warrant a tax return.

The second concern is that the taxpayer be in compliance with all current tax payments.  In cases of individuals who are self employed or receive revenue from dividends or royalties, compliance includes estimated tax payments, which must be made four times per year, after each quarter.  So, for example, before a self-employed wage earner can resolve his/her tax debt, the IRS demands that he/she make all requisite Estimated Tax Payments.  It is advisable to know whether you are deemed compliant by the IRS, and if not, how you can take steps to obtain compliance status.

Any person who is called to provide information to the IRS, whether it be via records or oral testimony, is granted certain rights they may employ in their defense.  These rights include the Fifth Amendment Right against self-incrimination.  The Fifth Amendment grants that no one may be forced to give testimony as a witness against themselves.  It is important to note that information given voluntarily by the individual can be used to incriminate them, so the right can only be invoked to protect against an individual sharing testimony, not after the testimony has been given.

Any person who is called to provide information to the IRS is granted the right to an attorney, which includes the opportunity to hire one.  In addition to this right, any person appearing for an IRS Summons is given attorney-client privileges, or those of tax practitioner-client, wife-husband, or penitent-clergy.

Other powers granted the liable party include the right to create an audio recording of the meeting, as well as the right to ask to withhold a 3rd-party IRS Summons.  There are a number of more specific guidelines for the execution of this right, so under most circumstances, it would be advisable to seek the advice of an attorney to determine whether the exercise of this right could potentially aid the taxpayer.

Lastly, any third party summoned to the proceedings retains the right to opt not to comply with any unreasonable Summons and defend themselves from doing so accordingly.  Again, consult an attorney, whether the taxpayer under investigation or a third party, and you believe you may have been Summoned unreasonably.

The IRS must go to the District Court in order to force an individual to respond to an IRS Summons.  When this occurs, bear in mind that the Statute of Limitation on the IRS tax debt is suspended, to recommence once the lawsuit has been concluded in the District Court.

The service of an IRS Summons must meet the following guidelines: 1) the Summons’ face need have an attestation with the correct signature; 2) The Summons must either be given directly to the person summoned, left at his/her usual residence with a person with the maturity and discretion to send it to its intended recipient, or attaching the Summons to the door of the residence in a way that will not permanently alter the door.

Additionally, the time and place of the execution of the IRS Summons must fall within the following constraints: 1) The time and place must be deemed reasonable; 2) the date must not be a Saturday, Sunday, or legal holiday; 3) The date of service or appearance cannot be determined in the same way as the appearance or submission of records, which is ten days for the liable party, whereas a third party receives 23 days; 4) The date may be postponed by mutual agreement, if for example, the liable party becomes ill on the date of the Summons.

A number of people can be summoned via an IRS summons, including: 1) the liable party under investigation; 2) an employee of the person liable; 3) a person in care of books of the liable party; 3) a anyone who might have information that may aid the IRS in assessing the party’s liability or collecting that liability.

Additionally, the information that the summons intends to glean may be received by an oral statement or via the submission of the individual’s records, but it must be pertinent to: 1) Determining any return’s validity; 2) Making a new return; 3) Ascertaining tax liability; 4) Collecting an IRS tax debt; 5) Questioning any breech of the law regarding IRS laws.

Historically, the IRS is given a certain degree of freedom as to the information that a summons intends to ascertain, but there are still certain guidelines that an IRS Summons must meet in order to be enforceable, such as: 1) The Summons must be served in accordance with the law; 2) The summons must be authorized by the signature of an IRS officer of proper rank; 3) The Summons must detail the information that it intends to discover; 4) The Summons must stipulate a realistic time and place for the conference.

After each quarter, as the individual accrues income from sources that do not automatically withhold income for the federal government, the individual pays estimated tax payments on that income.  Both ways of remaining compliant with the IRS, that is, by withholding funds from paychecks and submitting ETPs, are designed to help the taxpayer avoid accumulating IRS tax debt.  ETPs are a little more involved, but all the relevant information can be found in the Estimated Tax Worksheet.

There are a number of reasons why an individual would want to send in ETPs regularly.  Firstly, it makes budgeting concerns easier, since tax payments are smaller and made more regularly, they are more easily planned.  Secondly, should the individual accrue an IRS tax debt, having submitted ETPs regularly and on time improves the individual’s prospects for resolving his/her tax debt.  In short, ETPs help the taxpayer avoid trouble with the IRS while serving as insurance that, should something unforeseen occur that drives an individual into tax debt, the individual would be better prepared to cope with the problem without significant or longstanding financial harm.

How does this happen?  When any new employee fills out a W-4 Form, he/she provides a social security number, as well as the number of exemptions he/she would like to claim.  Any employee may claim as many or as few exemptions as they wish, but the number of exemptions claimed does not alter the taxes that individual will owe at the year’s end.  So, if an employee claims more exemptions than he/she can legally claim on his/her tax return, then he/she will withhold less for federal taxes, allowing for flexible spending of those funds throughout the tax year, but possibly accruing back taxes without lump sum payment at the year’s end.

Even if back taxes do not accrue in the previous scenario, the IRS may send a lock-in letter to the individual’s employer, which delineates the maximum number of exemptions the employee may claim on Form W-4 in the future.  The letter will instruct the employer to forward a copy of the letter to the employee, which gives the employee a timeframe for returning a new W-4 with an additional document that supports the exemptions claimed.

After the date given by the lock-in letter passes (no longer than 45 days after the lock-in letter), the employer begins to withhold the necessary funds unless the IRS, in response to the duly supported W-4, adjusts the new maximum number of exemptions the employee may claim on the W-4.  If the employer fails to withhold the appropriate funds for the IRS, the employer could become liable for the back taxes it should have withheld from the employee’s paycheck.

Additionally, missing tax returns within the six-year time frame are excusable if the individual did not accrue sufficient income to warrant filing a tax return.  For years when this was the case, a missing tax return does not have any effect on the taxpayer’s compliance.  More detailed rules concerning the necessity of filing a tax return may be found in IRS Publication 501, 2008, as there are considerable differences for each individual.  For example, a couple comprised of individuals under 65 who, when incomes are conjoined, makes below $17,900, does not need to file a tax return.  That number changes depending on marital status, whether the individual is the head of the household, age, etc.

On the other hand, in the event that a taxpayer is responsible for a missing tax return, he/she may still choose to avoid compliance with the IRS by not filing the missing return.  In this case, the individual runs the risk of a Substitute For Return being filed by the IRS.  A Substitute For Return does not add any exemptions the individual may be entitled to, as well as deductions or credits.  The other major risk the individual runs when they choose not to pursue compliance is collection by the IRS.