After a Divorce, Who Gets the Tax Benefits of Children?

In a divorce, parents often dispute who gets custody of the child. The answer to that question can have serious personal and financial consequences. One of the often overlooked long term effects of this decision is on who gets to take the tax break for having the children.

Can't lookThe most important tax break a parent receives is the dependency exemption. This exemption allows a taxpayer to treat a portion of their income as non-taxable. The exemption for the 2013 tax year is $3,900 per child (and adult). But who gets to claim this exemption?

The general rule is that whichever parent has the child for the longest period of time in the tax year gets to claim the dependency exemption. This general rule does have one big caveat, the parents collectively must have custody of the child for more than six months of the year. If the combined days of custody for each parent is less than half of the year, neither parent can take the personal exemption because the child will not be considered a dependent. There are also other requirements for establishing that the child is your dependent that must be met, such as the child must be younger than 19 (or 24 if they are in college). For more information on whether a child is your dependent, see this IRS guide.

If you are a non-custodial parent, all is not lost. There is an exception to this rule which permits the custodial parent to give the exemption to the non-custodial parent. To pass the exemption, the parents must sign a written declaration giving the non-custodial parent the right to take the tax break. Prior to 2009 this written declaration could have been included in the divorce decree. Now, however, the IRS requires a separate document signed by both parents. The best practice is to fill out IRS form 8332 which will define the custodial and non-custodial parents’ rights.

To claim the exemption as a non-custodial parent, the non-custodial parent should include a copy of the signed 8332 or similar document for every year that you are claiming the exemption. The IRS will apply the exemption to the account with the submitted 8332 or similar document.

For all other tax breaks that you can get from having a child, such as an earned income credit, only the custodial parent may receive that credit. Only the dependency exemption can be passed to the non-custodial parent.

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Recognizing A Scammer’s Demand to Pay Debts

While not common, from time to time one of our bankruptcy clients will receive a call from a scammer. These scammers try to convince people that they are an agent of a creditor and that our client needs to pay them money to satisfy a debt. Such scammers have tried convincing our clients that they still owe on a discharged debt and that they should make either a full or partial payment. Recently, just such a scammer tried to convince one of our clients to pay on a discharged debt.  Our client did the right thing; he contacted his attorney in our office. We advised him that the scammer’s demands were illegitimate and that he should not pay. This event serves to remind us all that there are unscrupulous people in the world trying to take your money, but how can you know if the demand is legitimate or a scam? Your first step should be to contact your attorney for their review, but there are also some warning signs you can look for yourself. If it is a scam, the person demanding payment will likely:

  1. Not provide a validation letter on the debt;
  2. Not have the underlying debt information (e.g. account number, date of the debt, location, and amount);
  3. Threaten to have the client arrested (you can only be arrested in a debt case if you fail to show up to a court ordered hearing);
  4. Not have a verifiable company name as a debt collector or a law firm;
  5. Not have an issued notice or not provide notice that their company is attempting to collect a debt;
  6. Demand payment via money transfer through Moneygram, Western Union, or similar; or
  7. Pretend to collect on payday or check cash loans.

After you have received a call demanding payment, you can take certain actions to verify the request. Once again, your first step should be to contact your attorney. After that, you can verify with the company allegedly calling to collect to verify they have made a request. If you do this latter step, make sure to not call any number provided by the suspected scammer and call the company directly.                 Any call that you receive that demands payment on a discharged debt should be treated with suspicion. Typically, trying to collect on a discharged debt violates the bankruptcy court’s order and will not be permitted by the court.

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A Tax Holiday? Not Quite: The Effect of the Government Shut Down on the IRS and on Taxpayers

U.S. CapitolThe two branches of the U.S. Congress cannot see eye to eye on nearly anything these days. In fact, the only piece of legislation they have agreed on recently has been a bill on managing the nation’s helium supply. Since then, it has been nothing but hot air.

For the IRS, this shutdown means that little business will take place. The IRS has confirmed that 90% of their employees are taking an unpaid holiday from their posts during this shutdown. This means that scheduled audits are being missed, collectors are not collecting, and appeals are not being processed. Essentially any non-automated service of the IRS is taking a break, at least for a little while.

I have made phone calls to a few of the IRS employees I have been working with closely. Each one has recorded a new message explaining that they will not be working until this budget standoff is resolved.

With the IRS taking some time off, does that mean you can too? No. The IRS has said today that it not only will accept tax returns and payments during the shutdown, it expects them. You won’t get a holiday just because the government is taking one.

This means that if you are a small business owner making monthly tax deposits, a taxpayer paying back the IRS through an installment agreement, or have some other arrangement with the IRS—it is just business as usual for you.

While the IRS expects you to pay them, they are not going to pay you. The IRS has said, “Tax refunds will not be issued until normal government operations resume.”

So, for those that have refunds outstanding or for those IRS agents whose mountain of work is just growing, let’s all hope that this gets resolved soon and that the IRS can get back to work.

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What is an installment agreement with the IRS?

If you owe the IRS money for unpaid taxes, it wants the money as soon as possible. While the IRS will sometimes take harsh actions, such as a levy (for information on levies, see our previous blog post), it also understands that most taxpayers cannot pay what they owe immediately. For this reason, the IRS allows taxpayers to enter into installment agreements to pay down their liability over time. The simplest installment agreement is the Streamlined Installment Agreement. This agreement allows a taxpayer with less than $50,000 of liability to pay down their tax debt in equal monthly installment payments over 72 months, or six years.

But, what if I can’t pay my entire liability, but still want to enter into an installment agreement to avoid the IRS taking other actions?

The IRS has a Partial Pay Installment Agreement which permits taxpayers to pay what they can, allowing the remaining liability to be excused. The IRS will expect the taxpayer to pay the excess of their income and necessary liabilities to the IRS. The length of the installment agreement is determined either by a number of years chosen by the IRS, usually six years, or by the length of time left on the IRS’s ability to collect. To this latter measure, the IRS may only collect for back taxes for a limited number of years; after their collection power expires, so does a taxpayer’s liability.

How do I enter into an installment agreement with the IRS?

Entering into an installment agreement with the IRS can be complicated and it is wise to seek the help of a tax attorney. The first thing to understand is that the IRS wants substantiation for all claims that you make. So to enter into an installment agreement you will have to gather documentation, usually for a three month period, of all of your income and expenses that you have. The IRS will also want to see three months of bank statements.

The next thing to know is that the IRS does not treat all expenses equally. The IRS has defined certain national standards that it uses to define what your expenses are. Even if you spend more in a month on certain expenses than the IRS’s standards, the IRS may not allow you to take your full expense.

After navigating these hurdles, the final step is to fill out the forms and submit your offer to the IRS.

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What is the difference between an IRS Levy and an IRS Lien?

Many of our clients retain us after receiving a paper that shouts the word levy or lien at them. An example of one of these letters from the IRS reads:

CALL IMMEDIATELY TO PREVENT PROPERTY LOSS FINAL NOTICE OF INTENT TO LEVY AND NOTICE OF YOUR RIGHT TO A HEARING”

Or they can receive something in the mail simply but ominously titled:

“Notice of Federal Tax Lien.”

But what does the word levy or lien even mean, and what is the difference between these powers?

A Levy and a Lien, in General.

A levy and lien are two of the IRS’s most powerful collection tools. They use these tools to assert their priority over other claimants and to seize property or income from taxpayers. The major difference between these two actions is that a lien only asserts a right to seize a taxpayer’s assets and a levy is used to seize such assets.

Examining the Lien

An IRS lien on your property is a way for the IRS to notify the world that they have an interest in your property due to a tax liability. This lien does not presently authorize a seizure, but it does provide the taxpayer and all other creditors or potential creditors notice that the IRS has an interest in the taxpayer’ assets.

Examining a Levy

A levy is the IRS’s mechanism for seizure or garnishment a taxpayer’s assets. Before the IRS may execute their levy power, they must notify the taxpayer who they are acting against that they will presently levy their assets.

Upon receiving a Notice of Intent to Levy letter, a taxpayer has thirty days to appeal the levy action. If the taxpayer fails to appeal, then the IRS may levy the assets of the taxpayer.

Upon receiving either an Notice of a Tax Lien or a Notice of an Intent to Levy, a person should immediately contact a tax expert to help them navigate their tax problems.

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Getting Your Ducks in a Row: Preparing to Negotiate with the IRS

To be eligible for the IRS’s Offer in Compromise program you must first make sure you are up to date on your filings and any payments owed. The IRS requires that you have filed all your tax returns, made all estimated tax payments, and made you federal tax deposits.

What Filings are Required?

Indian Runner DucklingsYou must file all required tax returns. If you do not have any employees, this is just your end of year tax return. You have to file it and if you have failed to file in a previous year, you must catch up and file now. If you have employees you have to make additional filings due, including a quarterly federal tax return.

Who Must Pay Estimated Tax Payments?

Just about everybody. If you are an employee of a company, the estimated tax payment is the withholding coming out of your paycheck. If you own a business or get income from some other source that does not automatically withhold the amount, then you should make estimated tax payments throughout the year. Not only can a failure to make these payments stop you from filing an offer in compromise, the IRS may also penalize you for underpayment.

Who Must Pay Federal Tax Deposits?

Only taxpayers who have employees. A federal tax deposit is made up of the tax withholding from an employee’s salary. A taxpayer who has employees must periodically pay this withholding amount as it is accrued. Failure to do so may result in penalties and will not allow the taxpayer to take advantage of the Offer in Compromise Process.

Getting into a position to make an offer in compromise is challenging and the IRS does not necessarily know at first if you are missing one of the above items. You could spend a substantial amount of time working with the IRS on an offer before they discover an error and bar you from their program. In order to make sure your Offer in Compromise is acceptable to the IRS, I recommend speaking with a tax attorney.

 

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When I Do an Offer in Compromise (OIC), How Long Will I Have to Pay the IRS?

When they first come to see us, some of our clients envision a hideous nightmare world where they have to deal with the IRS every single month, for the rest of their lives. Now, I can’t imagine a fate much worse than that, but the good news is that if your offer is accepted by the IRS, you will not be stuck with them forever.

How Long Does an Offer Take to Pay Down?

CalendarThe short answer is one to three years, but this answer largely depends on you. There are two broad mechanisms for paying the IRS, a lump sum payment plan and a periodic payment offer. Under the lump sum option, you are expected to pay the entire compromise amount in five payments within five months from the date of acceptance. This plan requires that you pay 20% of the offer amount down as an initial payment (though this requirement is waived if you are low-income). After that initial chunk, you have to pay the amount down in five or fewer payments.

With the periodic payment plan, you will pay the compromise amount in monthly payments for two years starting from the time you submit your offer. With this option, you can prepay a larger down payment and then pay a set amount every month for twenty-three months.

An Example of How the Lump Sum Plan Operates

Say that you are one of our clients, you came in to our office with an $80,000 tax liability and we have just proposed a $3,500 settlement to the IRS. Under the lump-sum plan you do not make a payment until the offer is accepted by the IRS, a process that can take up to a year.  Once the IRS has accepted, you would need to pay $700 as an initial payment and then determine how you would like to pay the remaining $2,800. If you were so inclined, you could pay the outstanding balance in one payment. All together, the lump sum plan can take anywhere from one year to two years to complete.

An Example of How the Periodic Payment Plan Operates

The periodic payment scheme is quite a bit different. Under this method of payment, you begin making payments even before your offer has been accepted. Taking the same facts from the previous example, you would begin paying the $3,500 when you submit your offer and then pay every month for the next two years—crossing your fingers that your offer is accepted. All told, this process typically takes two to three years.

If you are facing an offer in compromise, remember that there is light at the end of the tunnel and you will not be dealing with the IRS for the rest of your life.

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Calculating Income and Expenses in an Offer in Compromise

In an Offer in Compromise (OIC), how does the IRS calculate my income and my expenses?

This is one of the most common questions that we receive from our clients when we are preparing their offer.   Some clients worry that the IRS will take too much, leaving them without the ability to pay for basic expenses—such as food or housing. We have found that by carefully constructing the offer and by taking advantage of the programs the IRS provides, we can protect a portion of our client’s future income and alleviate these fears.

Then, how does the IRS calculate my income?

The IRS measures your monthly income. Whatever you make in a month from your job or income producing assets or interests is what you should report to the IRS. For taxpayers with a fluctuating monthly income, the IRS will look three years back and average the monthly income over that period. And for taxpayers who are close to retirement, the taxpayer’s income may be adjusted down to reflect the change in income after retirement.

Can my future income be offset by expenses?

It can be, but this is the most challenging part of filing an OIC. It is really worthwhile to contact a tax attorney to help get you through this process.

The IRS has a program that permits taxpayers to reduce his or her total monthly income by necessary expenses such as the cost of housing, transportation, and food. While this sounds promising, the IRS has generic expense schedules that they use to determine what your necessary expenses are, and it often undervalues your true monthly expenses.

Taking advantage of this IRS program is a good first step in protecting your future income, but in order to get the best result you will need convince the IRS to allow expenses in excess of their scheduled amounts. While this is not always possible, it is always a difficult process.

 

 

 

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To settle an OIC (Offer in Compromise), how much will I have to pay the IRS?

In an Offer in Compromise (OIC), how much is required to be paid to the IRS?

Usually the determining factor in deciding whether to file an Offer in Compromise is the amount necessary to settle with the Internal Revenue Service.

How does the IRS determine how much a Taxpayer must pay to settle an OIC?

There are basically 2 criteria: the amount of the equity in the taxpayers assets and the amount the IRS could get from the taxpayers excess income, after deducting reasonable living expenses.  This article will deal with the amount of equity in assets.  This is the starting point to calculate how much it will take to settle an Offer in Compromise.  The information in this article is simplified and general.  For specific information, contact a Tax Attorney.

Value of Assets in an Offer in Compromise

The IRS starts with the equity in assets, based on a quick sale value.  This amount must be paid in an OIC.  The IRS starts with the quick sale value of the asset.  This is usually considered to be 80% of its actual value.  Then they deduct any exemption.

For example if a taxpayer has a car worth $10,000, the IRS considers the value to be 80% of that or $8,000.  If the taxpayer owes $2,000 on the car, that amount is deducted from the value, leaving $6,000 in value.  The IRS allows in an Offer in Compromise a $3,500 exemption.  So, the value that must be paid to the IRS in an OIC is $6,000 less $3,500 or $2500.

Each asset is valued in a similar fashion.  There are many nuances concerning exemptions.  If a taxpayer is in business, any assets, such as equipment that are used for the production of income are not included.

This is a huge change, which has made it far easier for taxpayers in business to file Offers in Compromise.  It used to be that taxpayers had to pay the value of all business assets.  That made it difficult for small businesses to file an OIC.

There are many items that are exempt and are not included in calculating the amount necessary to pay the Internal Revenue Service to settle an OIC.  Examples include furniture and personal items, exemptions for vehicles, some money in the bank and a variety of other exemptions.  To determine how these exemptions apply to your particular situation, please contact us.

This is the first test for how much must be paid to settle an Offer in Compromise (OIC).  The second test is how much of a taxpayers future income must be paid to the IRS.  That will be discussed in the next post.  For more information about Offers in Compromise, please visit our website

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IRS issues new rules for Offers in Compromise (OIC)

Dramatic Reduction in amount required to settle an IRS Offer in Compromise (OIC)!

In a dramatic change in policy the Internal Revenue Service has issued new rules for acceptance of Offers in Compromise.

In the past the IRS has required taxpayers to pay an amount equal to their excess income for 4 years, all payable upon acceptance of and Offer in Compromise.  They recently made a huge change and now allow OIC’s to be settled for the amount of excess income for 1 year. They must also pay the value of their equity in assets.

‘For example under the old OIC rules if a taxpayer had $1,000 of excess income they were required to pay the IRS $48,000 to settle an OIC.  Now, they only have to pay $12,000.  If they have only $100 of excess income they pay $1,200 to settle, no matter how much they owe.  They, however, must pay an amount equal to the equity in their assets in addition.  For more specifics visit http://www.martellelaw.org/offer-in-compromise

EQUITY IN ASSETS

Equity in assets generally means the quicksale value of property after exemptions.  Property exempt includes:

  • Household furniture and furnishings
  • Personal property
  • $3,450 equity in a vehicle per taxpayer (2 if married)
  • Up to $1,000 cash
  • Property necessary to produce income

The value of non exempt assets for Offer in Compromise purposes is calculated using a Quick Sale Value or Auction Value.

EXCESS INCOME

The amount of excess income is calculated by determining how much income the taxpayer(s) have.  Then what the IRS considers to be reasonable living expenses are deducted from the income.

The difference between the income and the expenses X 12 is the amount necessary to be paid to the IRS.

For example if the taxpayers have assets that are not exempt with a value of $1,000 and excess income of $100 per month, then they must pay the IRS $1,000 plus $1,200 ($100 per month times 12) for a total of $2,200 to settle their Offer in Compromise.

The amount that must be paid is not in any way tied to how much the taxpayer owes the Internal Revenue Service.  They could owe $20,000 or $200,000 and they would pay the same $2,200 to settle all of their tax debt!

The information in this article is very much a simplification, used to illustrate the new rules.  Offers in Compromise are very complicated.  You should consult with a Tax Attorney to get representation in submitting and negotiating an OIC.

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