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.

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.

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.

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.

Failure to file a tax return and then Filing it:

Before negotiating an IRS tax resolution with a taxpayer, the IRS requires the taxpayer seek compliance with the IRS, meaning that all requisite tax returns be filed.  The taxpayer then, has two options.  He/she may either: file the missing tax returns, thereby being in compliance with the IRS, or not file them.  In most cases, this choice boils down to either: the easy way, or the hard way.  This essay provides information regarding the ’easy way’.

To file the requisite tax returns, the individual will need to provide the IRS with all pertinent information, including number of dependents, income, adjustments, deductions, etc.  The disadvantages of this option include: 1) The information ceded to the IRS can possibly lead to additional liabilities; 2) the late-filing penalty may be applied; and 3) In the event that a tax liability has continued from previous years, any refunds the taxpayer could receive for the tax year could be forfeit.

On the other hand, filing missed returns makes the taxpayer achieve compliance status, allowing the individual to proceed with IRS tax resolution, for example, by pursuing an Offer in Compromise, seeking an Installation Agreement, or seeking a status change to Currently not Collectible (CNC).  Additionally, compliance allows the individual to address any forthcoming collection methods, such as IRS bank or property levies.

A tax Offer and compromise is merely an agreement between the IRS and a taxpayer whereby the taxpayer’s tax debt is settled for an amount that is less than the full balance that is owed. Generally, the IRS will not accept an Offer and compromise if it feels that the tax liability can be paid off in full either in a lump sum payment or through an installment agreement.

Upon accepting an Offer and Compromise, the IRS demands that the taxpayer remain up-do-date with their tax filings for five years afterward. Form 656 section V stipulates that, after having an Offer accepted, taxpayers must submit all tax returns in a timely manner. Failure to do so jeopardizes the status of the Offer.

In the event of an Offer becoming default, the original Offer and compromise becomes void; the full amount of the initial tax debt takes effect, complete with interest and penalties, and the duration of the Offer and compromise is added to the Statute of Limitation on the initial tax liability.  For these reasons, it is important to know all of the rules and regulations that provide the framework for Offers.

Don’t forget to pay your application fee or your offer could be rejected. For married couples who have the same joint tax liability, they can file just one Form 656 and list the joint liability. A fee of $150 must be attached to the form. When a married couple has a joint liability and one of the spouses has an individual tax liability, two offers and two application fees are required.

Once the applicable forms are filed, make sure to respond promptly to any additional requests the IRS may have. Often the IRS will just need clarification on your personal information or financial situation. A timely response will make it easier to get a tax Offer and compromise accepted.