Tips And Guide For Debt And Loan Management

However, although we do recommend running a tight ship, we do not recommend running a ship so tight it cannot sail. Scaling back your business, if done incorrectly and with too much zeal, can mean scaling back your primary source of income. Do not get rid of employees you will need again later. That is going too far. We would never recommend that you work fewer hours (and thereby make less money) to get out of personal debt, and we do not recommend scaling back your business to the point of making less money as a way to get out of business debt. We understand that there are times that a radical scaling back of the business is necessary. That is fine and should definitely be explored. The important thing to remember is that you need to make more money right now, not less; although tightening the belt is good, doing so to the point of cutting off all circulation is bad.

Small case tax courts are much like any other small claims court. They are the kind of thing you see on Judge Judy or The People’s Court. The key to winning a small claims case is the two P’s: preparation and proof.

• Preparation. You know your case inside and out. You understand why you think you are right and why the IRS is wrong (your home office should be an allowable deduction, for example). Preparation also means having everything ready when you go to court. You have all documents organized and legible, and you have extra copies for everyone. You have your witnesses ready to go the day of the trial. You are on time and have an outline of your case. Preparation means acting like a professional.
• Proof. You must be able to prove your argument. If you go in with no documents, no witnesses, and no way to prove that what you are saying is true, you will lose. If it comes down to your word against the word of a revenue officer, the judge will believe the revenue officer.

Like any trial, your case will begin with opening statements, go on to your presentation of your case, your testimony, evidence and witnesses, cross-examination, and the IRS’s case, and then will conclude with closing arguments. The judge will rule on your case within a few months. You are not allowed a jury trial in tax court. In order to begin a tax court case, you will need to go down to your local IRS service center and ask for all the proper forms. You will need a petition, a designation of place of trial, your deficiency notice, and any other forms that the clerk may require. You will have to pay a fee (under $100). You will then get back in the mail a confirmation letter, a case number, and a trial date. Good luck.

Assuming none of these solutions has worked for you—that you lost your audit and your appeal, that an OIC won’t work, and that you do not want to file bankruptcy—then your final option is to take the IRS to tax court. There are several advantages to this option:

1. Your chances of success are excellent. The IRS knows you are serious now. Half of all cases taken to tax court settle for less than the amount allegedly due.
2. You do not have to hire a lawyer.
3. It gives you time. At least another year will go by before any settlement occurs and taxes again come due.

The only downside is that interest and penalties will continue to accrue while you await your trial.
If you owe less than $10,000 for any one year ($40,000 for four years would therefore work, too), then yours is a small case and will be heard in that tax court. Cases for taxes in excess of $10,000 require the assistance of a tax attorney and are too complicated to discuss in any detail here.

What you need to understand at this point is that taxes can sometimes be wiped out (discharged) in a Chapter 7 bankruptcy. Taxes are dischargable if the following conditions are met:

1. A tax return for the year in question was filed on time, or if not, it was filed at least two years before the bankruptcy.
2. The tax debt is over three years old.
3. The tax was assessed more than 240 days before the bankruptcy is filed.
4. The debtor is not a tax protestor. For example, Matan and Tamar filed their taxes on time in 1994, but they never paid the bill. They now owe the IRS $8,000 and have never had a new assessment. They could file Chapter 7 bankruptcy and completely wipe out this debt without paying the IRS a penny. You should know, however, that this option does not get rid of tax liens. Although you won’t technically owe the IRS money any more, if the IRS has filed a lien against your home, that lien

remains valid after the bankruptcy is over and will have to be satisfied upon any sale of the property.
You will not owe the money anymore, but your house will. Who said the law is logical? Not us!

Preparing an OIC is a fairly straightforward affair. You will need to fill out form 433-A if you are an individual and forms 433-A and B if you are self-employed. You will also need to file form 656, Offer in Compromise. You should also type up an analysis of your offer: why you say your home is worth what you said, why your car is valued so low (high miles, needs work)—that kind of thing. Finally, submit a down payment with your offer. It does not hurt and can only help to make the right impression.
Expect this process to be fairly lengthy. The IRS has a special OIC unit, but do not expect an answer for a few months. The IRS may want additional documents, and it may take up to nine months for your offer to work through the different levels of bureaucracy and settle the tax bill for an amount everyone can live with.
After the OIC has been agreed to, it will need to be paid within about 60 days. Sometimes your payment can be divided into two payments, but not often. It would be better to get a loan for the agreed-upon amount than to let this opportunity to settle your tax debt slip away.

The second part of the OIC analysis is this: How much could you pay the IRS if you paid it back in a monthly installment agreement for five years? You must add that amount to your previous figure.
In Spencer’s case, he takes home about $2,000 a month, and his expenses are just about the same. Maybe he has $50 a month left over. He needs to add that amount ($50 multiplied by 60 months equals $3,000) to his previous $12,500 figure. Thus, Spencer’s entire OIC offer would look like the following table:

IC Ability to Pay (Example)
Equity in all assets: $12,500
Ability to pay: $3,000
Total: $15,500

Thus, Spencer has to offer an IOU of $15,500 to the IRS in his OIC. This amount is what the IRS would receive if it took everything it could from Spencer and forced him into a repayment plan. Although this amount certainly is a lot of money, remember that Spencer owes the IRS $40,000. Settling for $15,500 is less than 50 cents on the dollar.

Your offer to settle your tax bill must be more than what the IRS would receive if it seized and sold all your assets. Thus, the first part of your OIC will be an asset evaluation. When valuing your assets for this purpose, be sure to use the lowest possible, albeit ostensibly reasonable, price. What is the quick sale value of your house? That is the number to use. What would your furniture be worth at a garage sale? That is the value to use. Use the low blue book value on your car and be sure to deduct for anything that might lower the sale price, such as high miles. Understand too that the IRS cannot levy certain household items (listed earlier in this chapter), so these items need not be part of your analysis.
Say that Spencer owes the IRS $40,000. Assume further that his house is worth $100,000 and his mortgage is $90,000. His car is worth $2,500, and his personal effects have a yard sale value of $1,000. The first half of Spencer’s OIC would look like this table:

OIC Calculation (Example)
Home equity: $10,000
Auto: $2,500
Furniture (exempt): $0
Total: $12,500

Spencer has to offer the IRS an amount comparable to what the IRS would realize if it seized and sold all his nonexempt assets. That would be his home equity and his car, so his offer, at a minimum, must be for at least $12,500.

The offer in compromise (OIC) is our favorite tax tool. It is a relatively new program that allows taxpayers the chance to get rid of their tax problem for less than they owe, often pennies on the dollar. Almost all other tax programs, except penalty abatement, require a payment in full of some sort or another. As such, the OIC is a unique opportunity. You must fulfill a couple of prerequisites to qualify for the OIC program. The first is, you must be current on all filings and paying requirements. This means that if you have any unfiled returns, you must file them before you can submit an OIC. If you have estimated quarterly payments due, you must pay them. If you are a tax protester, you will be denied an OIC.
Although many of the things outlined in this chapter can be done on your own, it might be a good idea to hire a tax professional (either a tax lawyer or an accountant) to help shepherd your OIC through the IRS maze. You stand to gain a lot by doing this correctly.
Beyond these housekeeping formalities, an OIC is not for everyone. You have to meet two requirements before the IRS will accept your OIC. First, you must offer more than the net value of all your assets. Second, you must offer more than the IRS could expect to receive through an installment agreement.

Sometimes, no matter how hard you try to work out a solution to your IRS problem,you and the revenue officer cannot agree on the proper outcome. This disagreement
may occur for a variety of reasons. Maybe your revenue officer is being too much of a
stickler or has learned to dislike you. Maybe he does not have the authority to release the lien or wage garnishment. Whatever the reason, the IRS has recently instituted a new program that allows taxpayers to appeal collection actions and get the lien released, the levy withdrawn, and the sale cancelled.
Note that this program has nothing to do with reducing your taxes. This program is only for stopping a collection action. You can conduct a collection appeal against tax liens, notices of levy, actual levies, and property seizures.
The collection appeal is filed with form 9423, and instructions for how to proceed are available in IRS publication 1660. The form is simple, and the publication explains all the steps in the appeals process. Send the 9423 form to the manager of the IRS division that you are dealing with. Request the manager’s name and address the appeal to him directly.
Do not be discouraged by what will happen next. The manager will agree with his employee. Fortunately, when that happens, the manager is required to forward the appeal to the appeals division of the IRS.
Your collection appeal will be assigned to an appeals officer for immediate review.
Surprisingly, regulations require the appeals officer to reach a decision within five days. This requirement works to your advantage. Five days is faster than a speeding bullet to the IRS.
Because your appeals officer will not know who is right and who is wrong in this expedited case, he will probably want to resolve the matter to everyone’s benefit. Appeals officers are negotiators by trade and like to get win-win results. If you propose a fair solution to your problem in your appeal, you will likely get a fair result from the appeals officer.

A levy is a seizure of your property, other than your wages (which is a garnishment). With a levy, the IRS physically takes away your property. It then has the right to sell it within 45 days of the seizure.
The first thing to understand about levies is that the IRS cannot levy certain property:

• Clothing
• Furniture up to a value of $1,650 total
• Tools of the trade up to $1,100
• Unemployment, disability, public assistance, and workmen’s compensation benefits
• Certain pensions
• Child support payments
• Wages (only a portion may be seized)

The two things to be concerned about when dealing with levies are avoiding them in the first place and releasing them once they have occurred. There are many techniques that you can use to avoid a levy, and most involve hiding your assets. We are not recommending you do this, but you do need to know what your options are and what other people do in similar circumstances. We advise that you speak with a tax attorney before doing any of these things to make sure that you are acting properly and not breaking the law:

• Transfer your bank accounts. Some people have found that if the IRS does not know where their money is, it cannot be seized. It is especially a good idea to transfer your accounts to a main branch outside your city.
• Give your property away. Transfer title to a relative or friend. If you sell property, be sure to sell it for face value to avoid the appearance of impropriety.
• Lease a car. If you lease instead of buy, you are not the legal owner of the auto.

Similarly, rent a home instead of buying one.
When your property has been seized, getting it back is difficult. You will need to do one of the following:

• Submit an offer in compromise.
• Propose an installment agreement.
• Offer an alternative solution, such as the sale of some real estate.