And With California Taxing Agencies Concerning Your Tax Problems. 

The WORST mistake you can make is to speak directly with, or to respond in writing to, IRS or any California taxing agency. Don’t be foolish and delude yourself that you can talk your way out of trouble because you cannot. IRS and California taxing agency employees are well trained to get you talking way too much, providing evidence you should not, all while the taxing authority employee takes notes and gathers evidence to use against you later. NEVER represent yourself or your business entity before IRS or any California taxing agency, because if you do the results are almost always disastrous. ALWAYS know that if IRS or any California taxing agency is asking you questions or requesting evidence production, you and/or your business entity is being targeted for audit, or for adverse collection actions, or something else not in your best interests.

You have a legal right to never speak directly to, and to never respond in writing to any IRS or California taxing agency demand to produce answers and/or evidence, by hiring a tax lawyer of your choosing to do your talking and evidence production for you. I have 30 years of experience in tax matters and I know what to say, what to do, and often more importantly what not to say and what not to do. Whenever IRS or any California taxing agency contacts you by letter, by telephone, or in person, asking nicely or demanding not nicely that you answer questions and produce evidence, ALWAYS respond [1] that you have nothing to say or produce at the present time, [2] that you will consult with and hire a tax lawyer whom will respond for you, and get the IRS or California taxing agency employee’s business card or name, title, address, telephone number, and fax number.

After you receive the IRS or California taxing agency contact, you should call me for a free telephone consultation to discuss case matters and how to best position you and/or your business entity to defend and to resolve the tax controversies at issue.

CALL TOLL FREE AT (877) 895-2950 FOR A FREE CONSULTATION.

FINAL NOTICE OF INTENT TO LEVY,  THE LAST AND MOST IMPORTANT OF IRS’ COLLECTION LETTER SEQUENCE. HOW TO STOP IRS FROM TAKING YOUR INCOME AND ASSETS BY LEVY.

If IRS has charged {assessed} you or your business entity any tax that is not full paid, IRS will eventually get around to mailing a series of five collection letter notices for individuals, and four collection letter notices for business entities.  If IRS mails you threatening collection letters, call tax defense lawyer David C. Dodge, toll free for a free telephone consultation at (877) 895-2950. You must understand basic IRS collection procedure to best prepare your defense. I refer to “you” as any individual taxpayer or any business entity taxpayer.   This article discusses what IRS must do before IRS can levy {involuntary seizure, or take} your income and/or assets, and what you should do about it.  Do not confuse “levy” with “lien” because they are not the same thing.  A levy is an involuntary seizure of your assets and/or income, a lien is a county recorded public notice that federal taxes are owed.  

What IRS Must Do Before It Can Levy.  Other than the three exceptions discussed below, for each period an assessed but unpaid tax liability exists, IRS cannot levy take your income and/or assets until after 30 days from the date on a FINAL NOTICE OF INTENT TO LEVY.  You can and should stop IRS from levy action if you file {meaning, by certified mail, return receipt requested} for COLLECTION DUE PROCESS RIGHTS within 30 days from the date on the Final Notice of Intent to Levy. Failure to to file for COLLECTION DUE PROCESS RIGHTS within 30 days from the date on the Final Notice of Intent to Levy allows IRS to levy your assets thereafter, with no further notice to you.   ALWAYS file for COLLECTION DUE PROCESS RIGHTS within 30 days from the Final Notice of Intent to Levy, and ALWAYS accept or retrieve all IRS certified mail.

You can ascertain where your IRS tax collection case is procedurally by the letters IRS mails you.  IRS typically mails individuals a series of five IRS collection notice letters in the following sequential order:  1st a Notice CP14, 2nd a Notice CP501, 3rd a Notice CP503, 4th a Notice CP504, then 5th the critical Final Notice of Intent to Levy most often an IRS Letter 1058.  IRS typically mails business entities a series of four IRS collection notice letters in the following sequential order:  1st a Notice CP501, 2nd a Notice CP503, 3rd a Notice CP504, then 4th the critical Final Notice of Intent to Levy most often an IRS Letter 1058.   Next I summarize the meaning of each of these sequential IRS collection letters.

First, Notice CP14, Status 21.    Receiving a Notice CP14 means federal tax liability is assessed for which IRS claims is owed, and you are in the IRS five collection notice letter sequence {four letter sequence if a business entity}.   IRS mails a Notice CP14 by regular mail.  There is no legal procedural significance to a Notice CP14.  At this point IRS may not levy take your assets or income.   “Status 21″ means IRS’ computer, called the Master File, coded the status of your collection case as Notice CP14 mailed, but the next Notice CP501 has not yet been mailed.  Click the following link to see what page one of a Notice CP14 looks like: Notice CP14

Second, Notice CP501, Status 20.    If a business entity, this is the first of four IRS sequential collection notice letters.  IRS mails a Notice CP501 by regular mail. There is no legal procedural significance to a Notice CP501. Rather, a Notice CP501 receipt means an individual has been IRS mailed the second of five sequential collection letters, and a business entity has been IRS mailed the first of four sequential collection letters.  At this point IRS may not levy take your assets or income.  “Status 20″ means IRS’ computer has coded the status of your collection case as Notice CP501 mailed, but the next Notice CP503 has not yet been mailed.  Click the following link to see what page one of a Notice CP501 looks like:  Notice CP501

Third, Notice CP503, Status 56.    If a business entity, this is the second of four IRS sequential collection notice letters.  IRS mails a Notice CP503 by regular mail. There is no legal procedural significance to a Notice CP503.  Rather, a Notice CP503 receipt means an individual has been IRS mailed the third of five sequential collection letters, and a business entity has been IRS mailed the second of four sequential collection letters.  At this point IRS may not levy take your assets or income.  “Status 56″ means IRS’ computer has coded the status of your collection case as Notice CP503 mailed, but the next Notice CP504 has not yet been mailed.  Click the following link to see what page one of a Notice CP503 looks like: Notice CP503

Fourth, Notice CP504, Status 58.   If a business entity, this is the third of four IRS sequential collection notice letters.  IRS mails a Notice CP504 by certified mail, return receipt requested.   A Notice CP504 has legal procedural significance, it allows IRS to levy take your state tax refund only.  At this point IRS may not levy take your assets or income.  “Status 58″ means IRS’ computer has coded the status of your collection case as Notice CP504 certified mailed, but the FINAL NOTICE OF INTENT TO LEVY has not yet been certified mailed.  Click the following link to see what an entire Notice CP504 looks like:  IRS Notice CP504

Fifth, FINAL NOTICE OF INTENT TO LEVY, Usually An IRS Letter 1058.  If a business entity, this is the fourth and final IRS sequential collection notice letter.  IRS mails any Final Notice of Intent to Levy by certified mail, return receipt requested. By far a Final Notice of Intent to Levy is the most CRITICAL legal procedure in a federal tax collection case.    IRS cannot levy take your assets and/or income until after 30 days from the date on the Final Notice of Intent to Levy.  TO STOP IRS FROM LEVY SEIZURE OF YOUR ASSETS/INCOME, I ADVISE YOU HAVE ME CERTIFIED MAIL FILE FOR YOUR COLLECTION DUE PROCESS RIGHTS Sometimes IRS uses a Final Notice of Intent to Levy Letter 11 rather than the more common Letter 1058, but both are the same relative to legal collection procedure.   Also, an IRS Notice CP90/297 also certified mailed, return receipt requested, is a Final Notice of Intent to Levy – Federal Payment Levy Program, which provides for Collection Due Process rights if filed for within 30 days from the Notice CP90/297 date.  The most common use of an IRS Notice CP90/297 is when the taxpayer is receiving federal benefits, like social security benefits.  Also, an IRS Notice CP92/242 also certified mailed, return receipt requested, is a Final Notice of Intent to Levy – State Tax Levy Program, which provides for Collection Due Process rights if filed for within 30 days from the Notice CP92/242 date.   Also, an IRS Notice CP77 also certified mailed, return receipt requested, is a Final Notice of Intent – Alaska Permanent Fund Dividend Levy Program, which provides for Collection Due Process rights if filed for within 30 days from the Notice CP77 date.  Whatever letter or notice form of a Final Notice of Intent to Levy, a Letter 1058, or a Letter 11, or a Notice CP90/297, or a Notice CP92/242, or an Alaska Notice 77, all are a Final Notice of Intent to Levy, and provide you only 30 days to certified mail file for Collection Due Process rights which will stop IRS from further levy seizure.  Failure file for Collection Due Process rights within 30 days from a Final Notice of Intent to Levy, allows IRS to thereafter seize your assets and income at will with no further notice to you!   Click on the following links to see what the various Final Notice of Intent to Levy letters/notices look like:

Final Notice of Intent to Levy, IRS Letter 1058

IRS Notice CP90, Federal Payment Levy Program

IRS Notice CP297, Federal Payment Levy Program

Notice CP92/242, Final Notice of Intent to Levy, State Tax Levy Program (no image)

EXCEPTIONS TO LEVY PROHIBITION BEFORE FINAL NOTICE OF INTENT TO LEVY PLUS 30 DAYS

The general rule of law is that IRS cannot levy take your income or assets until IRS first certified mailed you its Final Notice of Intent to Levy, plus 30 days after the Final Notice of Intent to Levy date in which you may stop IRS from levy by filing {I advise to file only by certified mail, return receipt requested} for your Collection Due Process rights.   There are four exceptions to this as follows:

1. Jeopardy Levy.   If IRS determines that collection of tax is in “jeopardy”, meaning the taxpayer has done some bad act to avoid collection, IRS may levy take assets/income before a Final Notice of Intent to Levy.  For example, if a taxpayer transfers valuable assets to another person or entity for no value, to avoid IRS collection, then IRS may levy before a Final Notice of Intent to Levy.  If IRS makes a jeopardy levy, IRS must still provide Collection Due Process rights within a reasonable time after levy.

2.  Disqualified Employment Tax Levy.  If any taxpayer that owes payroll/employment taxes has filed for Collection Due Process rights for prior payroll/employment taxes arising in the most recent two years, then IRS may levy assets/income for the later periods before a Final Notice of Intent to Levy.  After IRS so levies, IRS certified mails, return receipt requested, an IRS Letter 1058(e), Final Notice of Intent to Levy – Notice of Disqualified Employment Tax Levy.   If IRS makes a Disqualified Employment Tax Levy, IRS must still provide Collection Due Process Rights within a reasonable time after levy.   NOTE however that if the taxpayer, individual or business entity, has not within the most recent two years filed for Collection Due Process rights, then IRS may not levy until 30 days after a Final Notice of Intent to Levy, Letter 1058 or 11 date.

3.  State Tax Refunds.   After IRS certified mails a Notice CP504, IRS is free to levy take a taxpayer’s state tax refund, and if IRS so levies, IRS certified mails, return receipt requested, an IRS Notice CP 92/242, Final Notice of Intent to Levy – State Tax Levy Program.   If IRS makes a State Tax Levy Program levy, IRS must still provide Collection Due Process Rights within a reasonable time after levy.

4.  Federal Contractor Levy.  If IRS makes a Federal Contractor Levy, IRS must still provide Collection Due Process Rights within a reasonable time after levy.

I.R.S. Tax Audit Defense Lawyer/CPA Advice Of How To Best Defend Against An I.R.S. Audit.

Every individual and business fears getting a letter from the I.R.S. announcing it/he/she has been chosen for a tax audit. This article explains a few critical things to know during the course of an I.R.S. audit to survive with the least financial pain and with the least mental anguish.

The Best Defense Strategy Is To Hire An Experienced Tax Lawyer To Represent You Personally And/Or Your Business Entity Before I.R.S.

Do not make the huge mistake of engaging I.R.S. on your own. Self representing rarely works out well for any taxpayer. I.R.S. auditors are well trained to trick unrepresented taxpayers into making fatal mistakes, like admitting to things that should not be admitted to, providing evidence that need not be provided, etc., all of which I.R.S. will use against the taxpayer later.

As an Orange County / Los Angeles County tax lawyer/CPA with over 30 years experience, I know how to best defend against any I.R.S. audit. I know how to effectively handle I.R.S. auditors, and how to navigate I.R.S. appeals procedure and United States Tax Court litigation if necessary. I advise any taxpayer that I.R.S. has audit targeted to call me for a free telephone consultation well before the audit begins.

Never Speak Nor Letter Correspond Directly With The I.R.S. Auditor.

Accept the truth that the I.R.S. auditor’s job is to build a case file against you or your business, to assert additional tax liability. The I.R.S. auditor’s job is build a case file against you in case you fight on to an I.R.S. appeal, or on to United States Tax Court litigation. To so build against you, I.R.S. auditors always ask, or demand with threats, to speak directly with you and seek to do so before you hire a qualified tax lawyer. This is part of the I.R.S. auditor’s intentional plan to get more tax liability from you or from your business entity. You have nothing to gain and much to lose by talking directly to any I.R.S. auditor. Let your hired tax lawyer do all your talking for you.

Resist the urge to “come clean” with the I.R.S. auditors by providing I.R.S. with way too much talk and/or letter statements. Taxpayers often wrongly think that by consenting to I.R.S. auditor interviews to answer questions directly, the auditor will be kinder, gentler, and will not be as aggressive. This is usually a fatal mistake and often results in a much larger tax bill, or worse, into a criminal tax case. The more a taxpayer speaks to an I.R.S. auditor, the more will typically be owed in the end. A lot can be learned from that large fish on the wall of your friend’s home. Ask yourself what every dead fish on the wall has in common – the answer is an open mouth – don’t suffer the same fate as the dead fish on the wall.

Unfortunately, I.R.S. auditors often attempt to bully with threats, to get what they want from you – your compliance with their demands, which results in more tax liability owed. My belief and practice is to always start an I.R.S. tax audit with professional courtesy and to appropriately respond to I.R.S. auditor evidence requests that are reasonable and legal. Too often, I.R.S. auditors routinely engage in improper abusive and/or illegal misconduct to get what they want. When this happens my belief and practice is to swiftly put an end to I.R.S. auditor misconduct, and where appropriate, to expose misconduct to the appropriate I.R.S. managers. Many taxpayers think that challenging I.R.S. auditor misconduct will result in retaliation and a larger tax bill. Although this belief is pervasive, it rarely is true. With over 30 years experience, I know that the more a taxpayer fights the I.R.S. in an audit, typically the less additional tax the taxpayer will owe as a result of an audit.

Do Not Form 872 Consent To An Extension Of Time To Legally Charge Additional Tax.

Generally, the I.R.S. has three years from the filing of a tax return to charge additional tax, interest, and penalties (called the “Assessment Statute Expiration Date). Because many audits start around two years after a tax return is filed, and because I.R.S. audits tend to take several months, the I.R.S. auditor usually asks the taxpayer to execute I.R.S. form 872, Consent to Extend the Time to Assess Tax, including interest and penalties. Although many tax practitioners advise taxpayers to sign an extension of time to give the I.R.S. auditor more time to audit, it is unwise, if not absurd, to provide I.R.S. more time to perfect its audit case file against you by executing form 872 to extend the Assessment Statute Expiration Date.

Perhaps the majority view, though flawed, is that a taxpayer should bend over and execute the form 872 extension as the I.R.S. auditor desires, or the auditor will retaliate by issuing an audit Notice of Deficiency (final I.R.S. audit opinion) alleging more liability. It is absurd and wrong to give the I.R.S. auditor more time to make your life miserable, and more time to perfect an I.R.S. audit case file against you. I advise it is better that you exercise your right to not execute a form 872 extension, accept that the I.R.S. auditor will retaliate by a guessed or estimated Notice of Deficiency allegation of additional tax liability, then proceed to United States Tax Court to attempt a quick settlement without any trial, with I.R.S. lawyers, or with I.R.S. Appeals. It is better to get rid of I.R.S. auditor as quickly as possible by refusing to execute a form 872, take the revenge Notice of Deficiency, then proceed to settlement negotiations with I.R.S. Appeals or with I.R.S. lawyers, based on a weaker I.R.S. audit case file.

Never Fall Victim To An I.R.S. Auditor’s Abusive Improper Administrative Summons.

If an overly aggressive and abusive I.R.S. auditor does not get what they demand (i.e., like a demand the taxpayer appear for live in-person testimony before the I.R.S. auditor, or anything else), most auditors routinely deploy their bullying tactic of serving a taxpayer with an administrative summons demanding with threats, that the taxpayer appear in-person before the auditor to testify answer auditor questions and provide the auditor evidence. Do not fall for this I.R.S. abuse trick by doing as the I.R.S. auditor demands, and especially do not appear before the auditor and provide live testimony. While I.R.S. auditors are entitled to reasonable relevant responses to proper evidence requests, the abuse tactic of administrative summons is wrongful if the taxpayer or tax lawyer representative reasonably responds. Only if a taxpayer refuses to materially cooperate with an I.R.S. auditor requests for relevant evidence would a the use of an administrative summons be proper.

A bullying I.R.S. auditor does not want you to know that an administrative summons is not a self-enforcing legal document, meaning that if a taxpayer does not comply with the administrative summons’ demands, the I.R.S. cannot do anything to the taxpayer: cannot arrest or jail, cannot charge a fine or penalty, and cannot charge additional tax liability. In order for the United States to enforce an I.R.S. administrative summons, the I.R.S. auditor must convince his/her bosses to request I.R.S. lawyer approval to proceed, and I.R.S. lawyers must ask the United States Attorneys’ Office, to file a summons enforcement litigation in United States District Court, seeking a judge’s order to comply with the summons. Rarely does the United States commence summons enforcement litigation in United States District Court.

Never Forget The I.R.S. Auditor Has No Power To Charge Additional Tax, Interest, And Penalties.

Many I.R.S. auditors brag, and act as though they have power to charge taxpayers additional tax liability. Such is nonsense! I.R.S. auditors have no power whatsoever to charge you any additional tax liability. In truth, I.R.S. can only charge additional tax liability in one of three ways: {1} you consent in writing to be charged additional tax liability, {2} I.R.S. proceeds to audit Notice of Deficiency and you fail to file an United States Tax Court petition within 90 days from the Notice of Deficiency date, or {3} the United States Tax Court determines additional liability by trial decision or by your settlement agreement.

If You Want To Pay Less Tax Than The I.R.S. Auditor Demands,
Then Fight On –The Most Common Result Is You Pay Much Less.

If you have an experienced tax lawyer representing you, the results will likely be you end up owing much less if you fight the I.R.S. auditor’s allegations of additional liability by Notice of Deficiency. See my article “How To Challenge An I.R.S. Audit” for discussion of I.R.S. audit procedure.

This article, How To Challenge An IRS Audit Notice of Deficiency, discusses the most common types of I.R.S. audits: corporation and individual income tax audits.

I.R.S. Audit Procedure Summary.

I.R.S. cannot charge you any additional tax liability unless:
(1) you consent in writing to be charged; or

(2) I.R.S. certified mails you its Notice of Deficiency, and you fail to file a petition in United States Tax Court within 90 days from the Notice of Deficiency date; or

(3) a Tax Court judge’s decision order after trial and after post trial briefs, or the Tax Court judge’s decision order agreeing with your settlement with I.R.S. lawyers.

Therefore, do not let overly aggressive I.R.S. auditors get away with bragging, or threatening, they have great power to charge you additional tax liability, because they have no such power. Rather, I.R.S. auditors only opine what your tax liability is.

The Typical I.R.S. Audit.

The audit begins by I.R.S. letter noticing you or your business entity that
I.R.S. will audit your/its federal income tax return(s). Sooner or later, I.R.S.’ auditor will mail a Form 4564 “Information Document Request” setting out the evidence items that I.R.S. desires to audit. Usually, I.R.S. auditors’ Information Document Requests are overly broad and improper seeking to examine too many documents, a tactic used as a fishing expedition trying to sniff out what items to audit. I challenge overly broad Information Document Requests and fight I.R.S. management to reduce its produce all documents approach to a proper set of documentation to audit.

After completing several to many Information Document Requests, the I.R.S. auditors will opinion propose by letter audit adjustments, nearly always alleging additional tax liability, penalty liability, and interest liability. This process is known as a “30-Day Letter” because I.R.S. invites you to request an I.R.S. appeals conference within 30 days of the 30-Day letter. I advise against proceeding to I.R.S. Appeals until after an United States Tax Court petition is filed (discussed below), for a variety of tactical reasons. If you desire to know for what tactical reasons, call me for a free telephone consultation. The 30-Day Letter will include various I.R.S. schedules explaining, sometimes well, but more often ambiguously, what I.R.S.’ audit opinions are, those schedules being:

* Form 4549, Income Tax Discrepancy Adjustments

* Forms 886-A, Explanation of Items (separate forms 886-A
for each proposed audit adjustment).

If you agree with what I.R.S. proposes for audit changes, you can end your audit case by signing Form 4549, agreeing to be charged as I.R.S.’ auditor opined, then full pay I.R.S. or face I.R.S.’ mean and angry Collection Division.

How To Challenge An I.R.S. Audit Opinion.

The short answer is you must file an United States Tax Court petition challenging I.R.S.’ Notice of Deficiency audit opinions, within 90 days from the Notice of Deficiency date. I always so file only by certified mail – return receipt requested, or by Federal Express or U.P.S. overnight delivery, and I keep all filing evidence to prove the petition was filed within 90 days of the Notice of Deficiency date. If you so proceed in United States Tax Court, you do not have to first pay the amount I.R.S. demanded in its Notice of Deficiency. Next, I discuss the details.

Sooner or later, if you do not agree with the I.R.S. auditor’s opinions as stated in I.R.S.’ prior 30-Day Letter, I.R.S. will certified mail serve you with a Notice of Deficiency, which begins a 90-Day period from the Notice of Deficiency date, to file an United States Tax Court petition challenging I.R.S.’ audit opinions. To see what a Notice of Deficiency looks like, click the following link (click the upper left back arrow after reading):  Notice of Deficiency 90 Day Letter

It is CRITICAL that you accept all I.R.S. certified mail, or immediately retrieve it from your U.S. Post Office, because all I.R.S. needs do to charge you additional audit tax liability is to certified mail you a Notice of Deficiency to your last known to I.R.S. address, then wait 90 days, then charge you followed by an ugly I.R.S. enforced collection case. In other words, it does not matter if you intentionally or unintentionally fail to accept or retrieve I.R.S.’ certified mailed Notice of Deficiency, the only thing that matters is that I.R.S. certified mails you a Notice of Deficiency to your last address known to I.R.S. {usually the address you stated on your last filed federal income tax return}. You cannot successfully file an United States Tax Court petition after 90 days from the Notice of Deficiency date. The law is clear that the United States Tax Court only has jurisdiction to consider your audit challenges if you file the petition within 90 days from the Notice of Deficiency date. Whenever you move, I advise you certified mail file an I.R.S. form 8822, Change of Address, so you will receive by mail all I.R.S. notices/letters.

The Notice of Deficiency also includes various I.R.S. schedules explaining, sometimes well, but more often ambiguously, what I.R.S.’ audit opinions are, those schedules being:

* Form 4089-B, Notice of Deficiency – Waiver

* Form 4549-A, Income Tax Discrepancy Adjustments

* Forms 886-A, Explanation of Items (separate forms 886-A
for each proposed audit adjustment)

* Other computation schedules like Alternative Minimum Tax,
Exemptions, Penalties, Interest, Sch. A Itemized Deductions,
Capital Gains, Qualified Dividends, etc.

If you would like to see what a real I.R.S. Notice of Deficiency with all the forms and schedules, click the following link (click the upper left back arrow after reading):
Notice of Deficiency With Form 4549-A Form 886-A
At this point, if you agree with I.R.S.’ Notice of Deficiency allegations, you can end your case by signing the Notice of Deficiency enclosed Form 4089-B, Notice of Deficiency – Waiver, and mail it to I.R.S. If you do not agree, then fight on by filing an United States Tax Court petition within 90 days from the Notice of Deficiency date.

You must follow United States Tax Court rules on the contents of your petition, but generally you have to state your allegations of error, a summary of the facts that support your allegations of error, and whatever affirmative defenses you claim you have.

Almost always, I am able to settle audit dispute cases pending in United States Tax Court, with I.R.S. lawyers with no need to prepare for and conduct an expensive trial and post trial briefs usually required in Tax Court litigation.

Do NOT attempt to represent yourself during the I.R.S. audit, and especially in United States Tax Court. Instead, hire the tax lawyer of your choice to represent you. I have 30 plus years experience, and as a tax attorney and CPA with decades of audit experience, I know what to do and when to best defend your interests at the least possible legal expense. Usually, the more you fight an audit, the less you pay. I.R.S. auditors are unreasonable, aggressive, and as such I attempt to get rid of them ASAP, followed by fighting for a good settlement with I.R.S. lawyers once in United States Tax Court.

Although beyond the scope of this article, you can also challenge an I.R.S. audit Notice of Deficiency by full paying the amount stated on the Notice of Deficiency, then filing within two years from the payment date a refund claim to I.R.S. administratively, followed by refund litigation in either United States District Court or the United States Court of Federal Claims. Common reasons for this route is to stop interest expense from accruing, or seeking better case law on the merits compared to United States Tax Court.

This article discusses what you must know to best prepare your defense against an IRS TRUST FUND RECOVERY PENALTY.  It is best to be lawyer represented in payroll tax matters, so I encourage you to call me toll free at (877) 895-2950 for a free telephone consultation. Federal law (26 U.S.C. § 6672) allows IRS to assess individuals personally for business entity unpaid federal payroll trust fund taxes not paid to the United States Treasury.   Payroll trust fund taxes are income tax, social security, and medicare amounts withheld from employee wage checks but not paid to IRS.  Any individual whom was responsible to so pay IRS, but willfully failed to pay, is personally liable.   The willful element is satisfied if the business entity paid other creditors for quarters where payroll trust fund taxes are not paid.   Any individual whom was responsible and willful may be personally assessed a trust fund recovery penalty, but typical individuals include business owners, corporate officers, business bank account signers, partners, and limited liability company members.

TRUST FUND RECOVERY PENALTY PROCEDURE.  An IRS collector, called a revenue officer, typically begins trust fund recovery penalty investigation by serving the business entity banks with an administrative summons demanding bank account signature card copies, and a selection of canceled check copies to see who signed checks.   Revenue officers also search public records to find out who owns the business, and who the business entity owners, partners, members are.  Thereafter, most revenue officers make their determination of which individuals are trust fund recovery penalty liable, usually the business entity owners and bank account signers. From here the revenue officer continues to gather and add to IRS’ case file, additional evidence of trust fund recovery penalty liability, including a revenue officer demand to submit to an in-person interview to answer live questions, while the revenue officer fills out a trust fund recovery penalty liable biased interview document called an IRS form 4180, “Report of Interview with Individual Relative To Trust Fund Recovery Penalty”, followed by the revenue officer’s request/demand the interviewee sign the form 4180 as factually accurate.  My clients do not appear before any IRS employee to provide live answers to questions, period.  Rather, my clients wisely exercise their constitutional right to be lawyer represented, to never appear before any IRS employee, and to have their lawyer do all of their talking for them.   If you would like to see what an IRS form 4180 Report of Interview with Individual Relative To Trust Fund Recovery Penalty looks, like, click here (after viewing, click upper left arrow to return to this article):  IRS Form 4180, Report of Interview with Individual Relative to Trust Fund Recovery Penalty.

Once the IRS revenue officer opines which individuals are personally liable for a trust fund recovery penalty, he/she will prepare internally used IRS form 4183, “Recommendation re:  Trust Fund Recovery Penalty Assessment”, followed by the revenue officer’s boss Group Manager’s rubber stamp approval.

After the IRS Collection Division group manager rubber stamp approves IRS form 4183, IRS’ revenue officer will certified mail {or serve in-person but rare} to each trust fund recovery penalty target, an IRS statutory notice of deficiency letter 1153, formally alleging personal trust fund recovery penalty liability, beginning the legal procedure to assess against individuals.    If you would like to see what an actual letter 1153 looks like, click here (after viewing, click upper left arrow to return to this article): Letter 1153 Trust Fund Recovery Penalty  ALWAYS accept or U.S. Post Office retrieve all IRS certified mail.   It doesn’t matter whether or not you accept or retrieve an IRS Letter 1153 alleging trust fund recovery penalty, rather, all IRS need do is to certified mail it to your last known to IRS address.

HOW TO STOP IRS FROM ASSESSING A TRUST FUND RECOVERY PENALTY.    In order to stop IRS from assessing, the IRS letter 1153 target must file a written appeal within 60 days from the letter 1153 date.  Always file by certified mail, return receipt requested, and retain all certified mail timely filing evidence.  Failure to certified mail file for an appeal within 60 days from the letter 1153 date results in IRS assessing against the individual personally, a trust fund recovery penalty liability, and removes the future opportunity to challenge trust fund recovery penalty liability administratively before IRS. Based on current trends, it usually takes IRS Appeals six to twelve months to schedule and conduct an appeal conference, followed quickly by an IRS Appeals’ Decision Letter determining the target to be liable or not, and for how much.   The hard reality is that IRS will assess a trust fund recovery penalty against one or more individuals, but often there is advantage in proceeding to an IRS administrative appeal.  If evidence exist that a letter 1153 target was not responsible to pay the business entity payroll trust fund taxes, or the target did not willfully fail to pay, trust fund recovery penalty liability should be challenged.  Sometimes a letter 1153 target is trust fund recovery penalty liable, but IRS incorrectly computed the liability amount, so the amount should be challenged.  Whatever the defense arguments, adequate evidence must be presented to IRS Appeals, and I advise conducting a trust fund recovery penalty appeal conference by audio recording it so there is a truthful administrative case record if later needed.

IRS HAS THREE YEARS TO LETTER 1153 ALLEGE TRUST FUND RECOVERY PENALTY LIABILITY.    Assuming all quarterly form 941 payroll tax returns were filed within one month from the quarter end, IRS has three years to certified mail or serve in-person a letter 1153 alleging trust fund recovery penalty liability.   For all four quarters, the three year “Assessment Statute Expiration Date” begins to count on Apr. 15 of the following year.  For example, if a business entity fails to pay payroll trust fund taxes for the 2014 1st quarter, IRS has until Apr. 15, 2018, to letter 1153 allege trust fund recovery penalty liability.

An offer in compromise (OIC) is the most preferred collection remedy to pursue, if you or your business qualify.  If IRS accepts your OIC, your tax liability is fully settled for less, often much less than your original tax liability.   Here is what you want, an IRS OIC acceptance letter  (click upper left arrow after reading):
IRS Offer In Compromise Acceptance Letter   If your IRS tax liabilities exceed $50,000, and if you file an I.R.S. OIC and represent yourself or your business entity, your OIC will not likely be IRS accepted so I advise you only hire a qualified tax attorney/CPA with decades of OIC prosecution experience to prepare, file, and prosecute your OIC.  With decades of experience, and as a tax attorney/CPA, I am an expert at IRS OIC practice with a very high IRS acceptance rate.  If you owe less than $50,000, generally you will not hire me nor any other lawyer because probably there is not enough at issue dollars to justify the legal expense to fully prosecute an IRS OIC.  I advise you call me for a free telephone consultation to determine if you are an OIC candidate, and to learn about OIC procedure and how to best proceed.

What Is An IRS Offer In Compromise?

An accepted IRS OIC is a contract, an agreement between you and IRS, to fully resolve your assessed but unpaid federal tax liabilities by paying less than what is owed to IRS.   Any taxpayer may file an OIC application including individuals, corporations, partnerships, and limited liability companies.   Even if a business entity still in business owes federal payroll taxes, that business entity may file an IRS OIC application.  

What Kinds Of IRS Offers In Compromise Are There?

There are two kids of IRS OICs:  {1} most commonly an OIC doubt as to collectibility (you or your business entity owes IRS but cannot afford to full pay), and {2} less common an OIC doubt as to liability (challenging liability).  This article discusses OIC doubt as to collectibility.   If you claim you or your business entity does not owe what IRS has assessed and seeks to collect, then call me for a free telephone consultation to further discuss.   I am an expert in both types of IRS OICs and have done many with a very high acceptance rate.

What Must Be Filed To Request IRS Accept Your Offer In Compromise?

In addition to the following, my clients get the added benefit of my initial filed legal brief making legal arguments with evidence, requesting that IRS accept the offer in compromise.  To file an IRS OIC, a business must file a completed Form 433-B, Collection Information Statement For Businesses, an individual must file a completed Form 433-A Collection Information Statement For Individuals, and either a business or individual must file a completed form 656.   Here is the current Jan. 2014 IRS OIC Form 656 Booklet (click upper left arrow after reading):  IRS Form 656 Offer In Compromise Booklet

How Is The IRS Offer Amount Determined?

An IRS OIC amount is a formula consisting of two components, a net asset equity component plus a future net monthly income component.   Here is how most OIC amounts are determined:

Fair Market Value of all Cash Assets

plus:  Fair Market Value (FMV) of all other assets, less a 20% discount of FMV, less 100% balance of secured debt

plus:  Net monthly income times 12 future months.

You need a qualified tax attorney/CPA to compile your form 433 Collection Information Statement because asset valuation and monthly net income are tricky and require considerable accounting skills.

The IRS Offer In Compromise Game – It’s Not Easy To Get IRS To Accept Your OIC!

Don’t be fooled by idiot representatives that claim getting IRS to accept an OIC is easy.  In truth, IRS is not in the business to accept OICs, rather, IRS is in the business to reject OICs.   Only a skilled tax attorney/CPA like myself has a reasonable probability of getting IRS to accept an OIC.  If you proceed to IRS OIC, expect a fight and realize that in order to get IRS to accept an OIC, you must fight on to the end, which means through an IRS Appeals case conclusion, or by United States Tax Court litigation decision {if IRS lawyers agree by stipulated decision and if the OIC was filed through collection due process procedure which is by far the best method to file an IRS OIC – SEE MY SEPARATE COLLECTION DUE PROCESS ARTICLE on the left of my home page}.  Generally, IRS’ Collection Division will reject nearly every OIC if more than $50,000 is owed, so be prepared to fight on past IRS rejection attempts.  IRS hopes you will give up after IRS’ Collection rejects, but the key to acceptance success is to fight on by timely filing an appeal.

Once you file an IRS OIC, IRS will procrastinate delay, on average for eight to fourteen months after the filing date.   Eventually, when IRS decides to consider your OIC, it will generally argue you undervalued your asset equity, understated your gross monthly income, and wildly overstated your monthly expenses, further arguing you are rich so full pay now.   I call this the fling the crap on the wall and hope it sticks approach.  Nearly every time IRS’ initially fabricates a fake financial condition that lacks truth and lacks economic substance.   The key to OIC acceptance success is knowing how to fight IRS’ incorrect offer amount allegations, then preparing and filing arguments and evidence packages attempting to negotiate an acceptable offer amount, and proceeding to higher level IRS managers nearly every time.

Because IRS is very OIC rejection oriented, and if you owe more than $50,000, you should hire a competent tax attorney/CPA in order to have a better than 50% probability that in the end, after an IRS fight, IRS managers will accept your OIC.  Here is an actual IRS Appeals’ OIC acceptance letter with the personal client information redacted(click upper left arrow after reading):  Actual IRS Offer In Compromise Acceptance Letter

Call me for a free telephone consultation if you owe IRS more than $50,000. You will be glad you did so.  (877) 895-2950.

IRS Collection Due Process Rights.

The best method to request any IRS accepted tax collection remedy is through collection due process rights procedure- period!  This article discusses what collection due process rights are and how to get collection due process rights.

You Must Understand Basic IRS Collection Procedure, And How To Get Collection Due Process Rights.

IRS cannot levy {involuntarily take} seize your or your business entity’s assets and/or income, until IRS first certified mail serves you with a Final Notice of Intent to Levy for each tax period you, or your business entity, have an assessed but open unpaid balance due.  There are a few exceptions that usually do not apply.  You have 30 days from the date on IRS’ Final Notice of Intent to Levy, to file IRS Form 12153 to request collection due process rights (click upper left arrow after reading):
IRS Form 12153 Request For Collection Due Process Hearing  
I strongly advise that you file for collection due process rights by certified mail, return receipt requested, and keep timely certified mail filing proof so that you can prove you timely filed.  Type the certified mail article number on the bottom of page one of Form 12153.   If you fail to request collection due process rights within 30 days from an IRS Final Notice of Intent to Levy, then IRS is free to levy take your assets/income thereafter without any further notice to you.  See my separate article “Final Notice of Intent to Levy – How To Stop IRS from Levy”, to the left of this article, for more details.

What Are Collection Due Process Rights?

Collection due process rights are your legal right to argue before IRS levy seizure of your assets/income, that IRS should not levy seize your assets/income, rather, IRS should accept your less intrusive collection remedy like offer in compromise, installment agreement, innocent spouse relief, or currently not collectible status.  Individuals and business entities are entitled to collection due process rights.  If you certified mail file Form 12153 for collection due process rights within 30 days from IRS’ Final Notice of Intent to Levy, your IRS tax collection case is transferred out of the nearly impossible to deal with IRS Collection Division, to the usually more reasonable and more experienced IRS Appeals Division.    Based on current trends, IRS Appeals will delay working and completing of your collection due process case for ten or more months after you certified mail file your Form 12153.

If you certified mail file Form 12153 within 30 days from an IRS Final Notice of Intent to Levy, IRS is barred as a matter of law from levy seizing your assets/income for the duration of your collection due process case plus 30 days after it ends by IRS Appeals’ Notice of Determination.  If you disagree with IRS Appeals’ Notice of Determination, you have 30 days from the Notice of Determination date to sue IRS by filing a “petition” in United States Tax Court, and if done IRS is further barred from levy seizing your assets/income until your United States Tax Court case ends.

Collection due process rights are by far the best method to request IRS acceptance of any collection remedy you desire.  In a collection due process case, whatever collection remedy you desire to file will be filed directly to IRS Appeals, rather than the hard headed rejection oriented IRS Collection Division.   In addition, timely filing for collection due process rights gets you the right to challenge an IRS Appeals’ Notice of Determination rejection, in United States Tax Court litigation if needed. IRS Appeals is more likely to accept your collection remedy, {a} if you have an aggressive tax attorney/CPA like myself representing you, and {b} if you have United States Tax Court litigation jurisdiction through collection due process rights, to challenge an IRS Appeals’ Notice of Determination rejection.  For example, if you or your business files an offer in compromise seeking to settle tax liabilities for pennies on the dollar, and if you file the offer the normal way with IRS’ Collection Division, IRS’ Collection Division will likely reject it, then you may appeal, and if IRS Appeals later also rejects your offer your case is lost – no United States Tax Court litigation jurisdiction in a non-collection due process offer in compromise.  Conversely, if IRS Appeals’ Notice of Determination rejects your collection due process offer in compromise, you can challenge IRS Appeals’ rejection in United States Tax Court!   Only through collection due process rights can an IRS Appeals’ rejected collection remedy like offer in compromise or installment installment agreement, or sometimes disputing liability, be challenged in United States Tax Court litigation.   I have had huge success in quickly getting IRS lawyers to reasonable settle collection due process litigation, without the need to conduct expensive litigation discovery or pre-trial motions practice or prepare/conduct a trial.

The  Bottom Line.

IRS’ Collection Division is mean and angry, difficult to deal with, and you need a fair level battle field to engage IRS in collection remedy request practice.   If you face IRS’ Collection Division and later Appeals Division the normal way, not through collection due process procedure, IRS is far more likely to reject your collection remedy desired.   Conversely, if you face IRS Appeals Division through collection due process procedure, you are spared the waste of time and legal expense of fighting IRS’ Collection Division, only to end up in IRS Appeals anyway, and you get collection due process rights protection of no levy seizure of your assets/income during the pendency of your collection due process case.   Also, you get United States Tax Court litigation jurisdiction if you need it, and you may indeed need it.

I advise you call me for a free telephone consultation to discuss your case facts. You will be glad you called, and you have no obligation to hire me.  Toll Free:  (877) 895-2950.

IRS Levy, Know Tax Collection Procedure

The best IRS tax levy defense and release strategy starts with understanding IRS tax collection procedure.   An IRS tax levy is an involuntary seizure of assets and/or income to pay assessed but unpaid federal tax liability.  Before IRS can levy take your assets/income, IRS must first certified mail you a Final Notice of Intent to Levy, then wait 30 days to see if you file for collection due process rights {see my other articles under Federal Tax Matters discussing these important events in more detail}. 

If you fail to file for collection due process rights, and if for any reason you do not full pay IRS, then IRS will levy take your assets and/or income, typically for starters: wages, bank accounts, investment accounts, automobiles, business accounts receivables, or your income from your business.  

IRS Levy Defense And Release

Without any doubt, your best defense strategy is to stop IRS levy activity by filing {do your filing by certified mail and keep your certified mail filing evidence} for collection due process rights within 30 days from IRS’ first Final Notice of Intent to Levy, and thereafter arguing to IRS Appeals that your tax collection case should be resolved by an IRS Appeal’s accepted collection remedy as an alternative to levy taking your assets/income.   Typical IRS collection remedy alternatives are offer in compromise, installment agreement, penalty abatement, innocent spouse relief, and currently not collectible due to hardship.

If you failed to file your request your collection due process rights and IRS has levied your assets/income, you still may fight for levy release based on hardship.  If you can prove with evidence that IRS’ levy creates a hardship, then IRS must release the levy.  However, IRS does not play nice and fights against levy release routinely.

Hire An Experienced Aggressive Tax Attorney

Don’t go it alone if IRS has levied your assets/income, or is threatening to levy.  Most taxpayers that self represent do poorly and take a much worse IRS thrashing.  Hire an experienced and aggressive tax attorney whom routinely handles IRS tax collection cases.  As a tax attorney and certified public accountant with decades of experience, I know how to defend against IRS collection actions, get levies released, and obtain an IRS accepted collection remedy at the least possible legal fee expense.   I invite you to call me for a free telephone consultation if you owe IRS more than $50,000.
(877) 895-2950    

IRS lien release or subordination is desired by all taxpayers, but the hard reality is IRS seldom releases or subordinates a tax lien before full payment or before the ten year collection statute expiration date.   So do not be fooled by incompetent representatives that claim or advertise a federal tax lien release or subordination is routine or easy.  

A federal tax lien is the United State’s claim against the taxpayer’s property when an assessed but unpaid federal tax liability exists.  IRS claims it will file a Notice of Federal Tax Lien when the taxpayer neglects or fails to pay. To file a Notice of Federal Tax Lien means that IRS will record it in the County Recorder’s Office, to put the public on notice of the unpaid IRS tax liability and that IRS’ tax lien attaches to the taxpayer’s property.  

There Are A Few Collection Remedies To Obtain Federal Tax Lien Release Or Subordination

Despite the fact that IRS rarely releases tax liens, there are a few fact situations that you or your business might consider fighting for relative to lien release or lien subordination.

Offer In Compromise – Doubt As To Collectibility, If Accepted. If IRS accepts an offer in compromise, doubt as to collectibility {taxes owed, but cannot full pay}, IRS will release the tax lien upon full payment of the accepted offer amount, which is usually much less than the original federal tax liability owed.

Lien Subordination.  A Certificate of Subordination does not release the federal tax lien, it allows some other creditor to move ahead of the United States, meaning the other creditor has priority to some or all of the taxpayer’s assets which is superior to the the federal tax lien.  Generally, the taxpayer must present argument and evidence that the United States benefits by granting subordination in that the subordination will facilitate collection of the tax liability owed.  

Lien Release If In The Best Interests Of The United States.   This is possible, but not often IRS granted.  If the taxpayer can prove that federal tax lien release will increase IRS’ collection of the unpaid federal tax liability, full lien release is possible.  An example would be that the taxpayer’s income source prohibits by contract the existence of a tax lien, and IRS’ failure to release its federal tax lien will result in the taxpayer’s loss of income.

Hire An Experienced Tax Lawyer To Argue For Lien Release Or Lien Subordination

Lots of good people end up with tax problems and related tax liens for a variety of life’s reasons.  Most people facing tax problems fear the almighty IRS and IRS’ mean and aggressive tactics.  Do not engage IRS on your own as self represented because if you do chances are you will fail to obtain your objectives.  If you owe IRS $50,000 or more, then hiring a tax lawyer is justified financially.   Call me for a free telephone consultation, you will be gald you did so.  (877) 895-2950.

This article discusses what you need to know about an IRS Installment Agreement collection remedy when you or your business owe IRS more than $50,000.  If you or your business are experiencing financial hardship, resulting in inability to pay your federal tax liability, then one collection remedy option is to file a request for an IRS accepted Installment Agreement.  As with any other IRS collection remedy requested, by far the best procedural method to request IRS acceptance is through collection due process procedure.  To learn about IRS collection procedure and collection due process rights, read my other articles:  Final Notice Of Intent To Levy – How To Stop IRS From Levy, and IRS Collection Due Process rights, to the left under Practice Areas, Federal Tax Matters.

What Is An IRS Installment Agreement, And Is An Installment Agreement The Correct Collection Remedy To Pursue?

An installment agreement is a monthly payment arrangement over time to full pay your federal tax liability.  Any type of federal tax liability, and any type of taxpayer, may request IRS to accept an Installment Agreement.  IRS alone has discretion to accept or reject your request for a monthly Installment Agreement.   An Installment agreement is an appropriate collection remedy to pursue if you or your business cannot afford to full pay now, but can afford to full pay over time by monthly payments.  It would be foolish to request and get an accepted Installment Agreement at monthly payment amounts which could not be future paid.   Too often, IRS Collection Division employees fabricate a fake financial condition, like higher net monthly income than actually exists, then demand the taxpayer pay that fake monthly income by Installment Agreement, only to later have the taxpayer default the Installment Agreement.  If you or your business cannot afford to full pay over time, then offer in compromise, doubt as to collectibility would be a more appropriate collection remedy to pursue because if IRS accepted, an offer in compromise will fully settle your IRS tax liability for typically much less than the original balance owed.   If you or your business think an offer in compromise might be more appropriate, read my IRS Offer In Compromise discussion to the left under Practice Areas, Federal Tax Matters, then call me for a free telephone consultation if you owe more than $50,000.

Do I Need A Tax Lawyer?

If you or your business owe more than $50,000, then a qualified and experienced tax lawyer should be hired to prepare and prosecute an installment agreement request.  IRS often wrongly attempts to have too high a monthly payment amount, over too short a payment term.   If you or your business allow this IRS tactic by proceeding to an Installment Agreement, the consequences of a subsequent default will cause you or your business big IRS trouble.  With decades of experience, David C. Dodge, Tax Lawyer and C.P.A., knows how to effectively and aggressively fight for an IRS accepted installment agreement.  Call for a free telephone consultation if more than $50,000 is owed.  Toll Free:  (877) 895-2950.

How Do I File An IRS Request For An Installment Agreement?

For individuals seeking an IRS accepted installment agreement, I advise certified mail filing (to the address stated on form 9465 instructions):
{1} an executed form 9465, Installment Agreement Request (click upper left arrow after reviewing) IRS Form 9465; and
{2} an executed form 433-F, Collection Information Statement (click upper left arrow after reviewing). Form 433-F.

For a business entity seeking an IRS accepted installment agreement, I advise certified mail (to the address of the revenue officer working the case, or to the IRS address on the most recent letter addressing the unpaid liability) filing,
{1} an executed form 433-D, Installment Agreement (click upper left arrow after reviewing) IRS Form 433-D Installment Agreement, and
{2} an executed form 433-B, Collection Information Statement for Businesses (click upper left arrow after reviewing) Form 433-B Collection Information Statement for Businesses.

Other Issues You Must Know About An IRS Installment Agreement.

You Must Comply With All Federal Tax Law.  In order to file your request for an IRS Installment Agreement, all federal tax returns due must be filed.   If IRS has not filed {recorded in the County Recorder’s Office) a Notice of Federal Tax Lien,  IRS will so file a Notice of Federal Tax Lien when you request an Installment Agreement, or after an Installment Agreement is accepted.  It is possible to negotiate an Installment Agreement contract term that IRS will not file a lien, but usually IRS will refuse such a term.  If IRS accepts an Installment Agreement, you contractually agree to perfectly comply with all federal tax law thereafter while the Installment Agreement is pending, and “perfect” federal tax law compliance includes filing all future tax returns when due and paying all federal taxes when due.   If, after IRS accepts an Installment Agreement, you default by not complying with federal tax law or not paying any monthly installment, IRS will default the Installment Agreement and commence aggressive collection actions, and next time around an accepted Installment Agreement will be much more difficult to obtain.

IRS May Not Levy Your Income/Assets.  IRS is not permitted to levy (involuntarily taking) your assets and/or income, while your Installment Agreement:  {a} is pending for IRS consideration, {b} for 30 days after requested but rejected, and continuing during the pendency of an IRS administrative appeal if you file for an appeal within 30 days from rejection, {c} is in effect after IRS acceptance,  and {d} for 30 days following termination.

The Ten Year Collection Statute Expiration Date.  Generally, IRS has ten years from assessment to collect the tax liability owed.  This ten year period is tolled (stops counting) when an Installment Agreement is pending, when an Installment Agreement is in effect, 30 days after rejection and during a timely requested appeal, and 30 days after termination.

Other Issues.  Penalties and interest continue to accrue during an Installment Agreement.   During an Installment Agreement, IRS can demand you update your financial condition evidence, and IRS may later require higher monthly payments or a shorter term, but you can appeal any modification.  If your financial condition deteriorates after IRS accepted your Installment Agreement, you may apply for a lower payment, for a longer term, or other appropriate modifications.  If the Installment Agreement is accepted, you must pay a fee of $120.

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The Difficult Task Of Defending Against An IRS Real Estate Professional Audit.

This discussion addresses IRS real estate professional audits when more than $25,000 of real estate loss is deducted against other income, a difficult type of IRS audit and one for which most taxpayers lose based on inadequate evidence.  If you have real estate rental loss over $25,000, if you want to deduct all of it against your other income, or if you are in or about to begin and IRS audit, then this discussion will greatly assist you.

This area of federal tax law is complex.  As a tax lawyer and certified public accountant with decades of experience, I understand these complexities, I understand audit and United States Tax Court procedure, and I will well defend you against an IRS audit of any kind including a real estate professional audit.   I advise you call me for a free consultation.  (877) 895-2950.

For decades, and continuing today, tax advisers persuaded investors to purchase and operate real estate rental properties, take huge depreciation deductions, write off real estate rental loss against other income like wages, investment income, and business income, all while having positive cash flow of rental income in excess of rental property costs. In 1986, Congress ended the practice of writing off these losses, called “Passive Activity Loss Rules”. In 1993, Congress carved out a narrow exception to the Passive Activity Loss Rules for “Real Estate Professionals” whom have real estate rental losses.  Federal courts’ litigated case decisions through the years have added complex evidence requirements.

Summary Discussion Of What You Must Prove To Deduct Real Estate Losses In Excess Of $25,000.

Generally, rental losses are not deductible, period. However, for real estate rental losses, if you or your spouse separately qualify as a “Real Estate Professional,” you remove the obstacle that generally real estate rental losses are not deductible. Obtaining real estate professional status does not mean you can deduct your realty rental loss, only that the general obstacle of so deducting is removed. To deduct real estate rental loss, you must also prove you and your spouse’s combined hours worked in your real estate rentals, satisfy one of seven separate and additional work standard rules called “Material Participation”.

In the following order, here is what you must prove, with evidence, to deduct all of your real estate rental loss over $25,000.  First, you must prove you have adequate “adjusted basis” to deduct your real estate rental losses {an accounting measure of your investment in realty rental properties}. Second, you must prove you have adequate “at risk” amounts concerning your investment in the real estate rental properties {another accounting measure of your investment}. Third, you must prove real estate professional status initially, and then you must prove you also met one of seven additional work standards called “material participation”.

When you deduct real estate rental losses on your form 1040 federal income tax return, schedule E, which are more than $25,000 for which you deduct against your other active income, YOU ARE AN IRS AUDIT TARGET!  IRS does lots of real estate professional loss audits and wins nearly every case due to poor taxpayer evidence records to prove they worked enough hours in real estate activities.

Detailed Discussion Of What You Must Prove To Deduct Real Estate Losses In Excess Of $25,000.

Condition 1: To Deduct All Your Real Estate Rental Losses — have adequate ADJUSTED BASIS.

Generally, you can deduct business losses, but only if you have adequate “adjusted basis,” stated in a simplistic accounting summary as follows:

+ acquisition costs of your realty rental properties;
+ capital improvements {improvements with a use life greater than one year};
+ contributed property
+ taxable income;
+ loans for which you personally are on the hook to pay;
– taxable loss up to adjusted basis.

In other words, the sum of this simplistic formula plus or minus other appropriate basis adjustments beyond the scope of this discussion, must be a positive amount more than the real estate rental loss sought to be deducted. If a year’s real estate rental loss exceeds the adjusted basis amount, that loss is suspended until such future year that adequate adjusted basis exists.

Condition 2: To Deduct Realty Rental Losses — be AT RISK.

Real estate rental loss deduction is also limited to the amount “at risk”, that amount equaling the money and adjusted basis of property you contributed to your real estate rental business, plus amounts you borrowed for which you are personally liable for repayment. In other words, you must be on the hook to lose the real estate you contribute to your real estate rental business, you must be have to repay loans personally, and the amount must be a positive amount more than the realty rental loss sought to be deducted. If a year’s real estate rental loss exceeds the amount at risk, that loss is suspended until such future year that adequate amount at risk exists.

Nightmare Condition 3: To Deduct All Your Real Estate Rental Loss, You Must Prove You Have REAL ESTATE PROFESSIONAL Status And You Must Satisfy One Of Seven Additional Work Standards Called “MATERIAL PARTICIPATION.”

In general, rental losses cannot be deducted, period, and are passive {meaning, you do not work enough in the rental business so you cannot deduct a net tax loss}, the consequence of which is that rental loss may only be deducted against passive rental income, no matter how many hours were worked in the rental business. Pursuant to this general rule, if real estate rental loss exist, such are passive losses which are suspended until such future time there is passive real estate rental income, or when you dispose of all your real estate rental properties.  Real estate rental losses that are passive may NOT be deducted against other non-realty rental passive income like interest and dividend income.

The Exception – “Real Estate Professional”.  However, as in many areas of federal tax law, there are exceptions. If you have real estate rental loss, if you can prove “real estate professional” status, and if you can additionally prove that you satisfied one of seven work standards called “material participation of regularly, continuously, and substantially,” relative to your work in your real estate rental business, then all of your real estate rental loss is nonpassive, the loss is active and deductible against your other income (i.e. interest, dividends, wages, business income). This federal tax law is complex, and I will next attempt to explain the law in easy to understand words, not in tax law jargon, as much as possible.

To obtain “Real Estate Professional status,” year by year separately, either you or your spouse separately,

(1) must have worked more than 50% of that person’s personal service hours, working specific kinds of real estate business activities for which the hours qualify as “materially participated”; and

(2) must have worked more than 750 hours doing any kind of real estate related work for which the hours qualify as “materially participated”.

You cannot combine your spouse hours worked for either of the two above requirements, but you can combine your spouse hours worked for the material participation tests discussed below. Also, if either you or your spouse were an employee in the real estate profession, those employee hours do NOT count towards real estate professional status, unless you own 5% or more of the employer.

The above paragraph might sound not so hard to claim and to satisfy, but it is not easy to prove with evidence that IRS or a federal court will accept!  Federal tax law, mostly litigated case law, requires that you prove real estate professional status for which you materially participated, with evidence that was created in the year at issue. Overall, federal tax law promulgated in treasury regulations state that your real estate hours worked evidence may be from any reasonable means, but federal litigated case law requires the evidence must have been created in the year at issue, not created years later for purposes of defending against an IRS audit.

Most taxpayers seeking real estate professional status during an IRS administrative audit, or by United States Tax Court litigation decision challenging IRS’ audit opinions, or in refund litigation, fail to prove with adequate evidence they qualify as a real estate professional, or fail to prove with adequate evidence that they satisfied any of the seven work standards called “Material Participation”.  This means that IRS’ auditors, IRS appeals officers, IRS lawyers, and federal courts’ judges,

i. will not accept your uncorroborated testimony about your compliance with these rules,

ii. will not accept your testimony corroborated by written records prepared after the tax year at issue,

iii. will not accept your testimony corroborated by the testimony of witnesses not having detailed, first-hand knowledge.

In order to prevail against IRS during audit, or in United States Tax Court, or in refund litigation in either the United States District Court or United States Court of Federal Claims, you must prove your real estate hours worked satisfy Real Estate Professional status, and you must prove you meet one of the seven additional material participation work standards with written evidence records created in the year at issue. It would also help if you have other persons’ detailed testimony that they personally observed you working those real estate rental hours themselves and in the year(s) at issue.

If you own real estate rental properties, if you have net real estate rental loss over $25,000, and if you desire to deduct all of your real estate loss against your other income, you MUST create during the year of this real estate rental loss, detailed accounting records of your real estate rental hours worked created in the year you seek to deduct your losses, and if you do not you will not win an IRS audit. The detail accounting records are documents like a calendar, appointment books, or written summaries, all created the same day or a few days later, and with detailed time entries like: “May 1, 2014, 9:15 am to 4:45 pm, met with realtor Joe Blow, and contractor Bill Fixit, to go over all conditions of rental lease for prospective tenant John Doe, at 123 Main Street, San Francisco, CA”, along with retaining whatever related paper documents existed for such a meeting. While this level of evidence strikes many as absurd hair splitting, this is what you are up against.

The Material Participation Standards: You Must Satisfy One Of Seven Additional Work Standards.

Even if you can prove that you or your spouse were a real estate professional, it does NOT mean you can deduct your real estate rental loss, it only means that the automatically not deductible obstacle is removed. Once real estate professional status is proven, you next must prove you satisfy one of seven additional work standards, known as “Material Participation” standards

[a] for all your rental properties together, but only if you filed an election in the year at issue or before with an original income tax return, to combine all your rental properties into an aggregate single realty rental business, or

[b] for each rental property separately if you did not file an election to combine all your rental properties into an aggregate single realty rental business.

For meeting one of the seven additional material participation work standards, you can combine your and your spouse’s hours worked in your realty rental business {spouse hours count for material participation, but not for real estate professional status}. To discuss each of the seven work standards is beyond the scope of this discussion, but if you desire to further torture yourself, study 26 C.F.R. § 1.469-5T, “Material Participation.”   

Election To Treat All Rental Properties As A Single Rental Activity.
You must meet one of the seven additional material participation work standards for EACH real estate rental property separately, unless you made a tax election to aggregate all your realty rental properties into a single realty rental business. This election must be made in a prior year you seek to deduct all your real estate rental loss, or in the year you first seek to deduct all your real estate rental loss. Proving one of the seven material participation work standards for each real estate property you own separately is much more difficult, if not impossible, than proving one of the seven material participation work standards for all your real estate rental properties combined. This election is made by attaching a written statement to your original federal income tax return, electing to treat all real estate rental properties as a single realty rental activity.  Failure to have made this election means a nightmare from hell evidence project having to prove one of seven material participation work standards for each real estate rental property separately.

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