Answer: Yes.  Medical bills are one expense that the IRS will allow 100% of what you can prove you actually pay.  I have many clients who bring me their “Explanation of Benefits” from the insurance company that shows what their medical bills are, but they are not actually paying those bills.  If you are in fact paying those bills, you can claim 100% of those bills in determining what your offer in compromise amount will be.

Why is this different?  Because the IRS has national standards that they require you to use for expenses such as food, clothing, housing, and transportation.  No matter what you actually spend each month, your expenses in those categories are capped at the IRS standard.  For the most part, I have found that my clients spend much more than the IRS standard.

Keep in mind that the medical expenses do not just include doctor or hospital bills.  You should remember to claim your pharmacy bills, health insurance premiums, and all other health care related costs.  Your pharmacy can provide you with a very detailed print-out that shows exactly which prescriptions you received in the past year and the total amount you actually paid so you can get a nice monthly average cost.

If you are healthy and don’t have any regular medical expenses, take heart, the IRS kindly allows you an automatic, guaranteed $54 per month per person in your household for medical expenses.

So how do you know if you are required to pay your estimated taxes rather than waiting until April 15 to pay your taxes with your income tax return?

You must pay estimated tax for 2008 if both of the following apply.

Note. These percentages may be different if you are a farmer, fisherman, or higher income taxpayer. See Special Rules on the next page.

For more information about estimated taxes and whether you are supposed to pay them check out this IRS web site page.

Coming next - When are estimated tax payments due and how should you pay them?  The answer is probably  not what you will expect.

ANSWER: This is an interesting dilemma you face. When you file an extension of time to file a return that only gives you additional time to file your return, but not additional time to pay your taxes. So any tax that you will owe for 2007 was due on April 15, 2007. When you have an installment agreement in place and you do not file a return on time, keep up with your estimated tax payments, or you do not pay your taxes on time your installment agreement will be defaulted by the IRS and the IRS can begin to take collection action against you such as levying your bank account or garnishing your paycheck. So it is very important that you go ahead and take action now to prevent the IRS from taking any collection action against you. You will need to have your installment agreement reinstated and have to pay an additional fee for reinstatement. You may also ask the IRS to add your current year tax liability to your installment agreement. Depending on the amount of money you owe in total, it may be necessary that you provide financial information to the IRS to determine your monthly payment.

In order for the IRS to levy your wages or bank accounts to pay a tax liability they must give your written notice of their Intent to Levy by either personally delivering it to you, leaving it at your home, or sending it by certified mail to your last known address.  Practically speaking, 99% of my clients receive their levy notice by certified mail.

This notice must be given at least 30 days prior to any seizure by the IRS.  And the letter must give you notice of the tax periods the IRS is trying to collect for and an explanation of the levy process, your collection alternatives, and your right to an appeal.

Since you have an opportunity to appeal, this can help give you a little more time to get things together and work out a settlement with the IRS for your tax liability.  As you can see, the amount you owe the IRS is not a factor in whether they can levy against you or not.

Answer: The IRS requires that the current year tax return and the prior six returns be filed before an offer in compromise is "processable."  Sometimes after you have not filed a tax return for several years, the IRS will prepare what is known as a "Substitute for Return."  This is a very basic return and does not give you all of the tax deductions that you would otherwise be entitled to claim.  They do this because the law requires the IRS to assess the tax against you prior to attempting to collect the tax.  They cannot assess the tax until a return or substitute for return is filed.  Even though the IRS has prepared a substitute for return, that is still not considered a "filed return."  Therefore, you will still need to file any unfiled returns for the last six years. 

So today, in July 2008, what returns are required to be filed?  The current year return (2007) and the previous six years: 2006, 2005, 2004, 2003, 2002, and 2001. 

Tags: irs problems, offer in compromise, unfiled returns

One thing that the IRS has not accounted for is the high gas prices.  Recently, the national collection standards were changed; however, the transportation standard is well below what most people have to spend on gas and maintenance of their vehicle each month.  For example, the standard in Greenville County, South Carolina (the South Region) is about $181 per month.  It costs me nearly $70 a week to fill up my tank just to get to work. 

I think the IRS still has some work to do to make their collection standards more fair with the cost of life in America today. 

Actually, innocent spouse is not a good title for this type of relief at all because it gives many people lots of false hopes about their liability and their ability to get out of the taxes they owe because it is really only applicable in a few situations and only a handful of people actually qualify for the relief. 

The most difficult of the requirements to qualify for this relief is that your spouse intentionally under-reported income to the IRS - meaning, your spouse did not list some of his or her income from last year.  This is generally not the case.  Nine times out of 10, I speak with a wife signed the joint income tax return with her husband and assumed he was going to take care of paying the taxes "because he always does."  Other times, the spouse has agreed to be liable for the taxes in a divorce agreement.  Most recently I was very disappointed to hear that an IRS employee advised my client (before she was my client) to go ahead and file joint tax returns for the back tax returns that had not been filed even though her husband was deceased.  Now that is not inherently wrong, but in this case, the wife works for a church and makes a modest salary and has taxes withheld while the husband was self-employed and had made no tax payments during any of the last six or seven years.  By filing these joint returns, she has now taken on this tax liability of her deceased husband and does not qualify for innocent spouse relief!  (That is just wrong!!)  However, none of these effect the IRS.  You continue to be liable for the taxes that are due no matter what your spouse does. 

If you are looking at tax problems because of your spouse (or for any other reason) I just want to let you know there are options and if you do not qualify for innocent spouse relief there are several other things that can be done to help you pay less than what the IRS says you owe.  Read through the rest of this irs problems blog for information about offers in compromise, currently not-collectable status, and installment agreements for information about some of the ways you can resolve your tax problems with the IRS.

Answer: You still have a couple of options when your offer in compromise is rejected by the IRS.  I am going to have to make an assumption in order to answer this question with some specificity.  First, that you filed an offer in compromise based on doubt as to collectability meaning you owe the tax, but you don’t have the money to be able to afford to full pay. 

The first thing I would do is to look at why your offer in compromise was rejected.  Sometimes we can learn why the IRS has rejected your offer in compromise and resubmit an offer in compromise that gets around the issue that the IRS didn’t like the first time around.  Sometimes it is an issue of income and expenses and other times it is an issue of equity in your assets.  But many times, an offer examiner simply does not look at each issue as completely as we would like, or they simply do not have the discretion to vary from the IRS regulations.

The next option you have is to set up an installment agreement.  Depending on the amount of money you owe the IRS, including taxes and penalties, you may be able to easily set up an installment agreement.  If you owe over $25,000 you will be required to submit additional financial information and pay what the IRS says you should pay.  I would recommend that you speak to a professional who deals with the IRS regularly if you fall into this camp because they will be able to assist you in negotiating the best monthly payment plan with the IRS. 

Finally, there is currently non-collectable status.  This means that based on your financial situation, your necessary living expenses exceed your income and the IRS will not take any collection action against you for a period of usually two years.  As an aside, the IRS will almost 100% of the time file a tax lien against you if they haven’t already.  Basically currently non-collectable means you can’t afford to pay your taxes right now and they are giving you some time to get back on your feet financially speaking. 

Lawyers like to call this piercing the corporate veil.  This is because one of the positives in performing your work from within a corporation is that your personal assets, etc. are protected from corporate creditors.  Therefore, if you own a contracting company that is incorporated and you tear up someone’s property, they can only sue the corporation and get damages from the corporation - not from your personal checkbook.

In some instances, creditors (including the IRS) can “pierce the corporate veil” to reach in to the assets of the owners of the business personally.

The IRS can reach into the personal assets of a business’ owners if the corporation fails to pay the payroll taxes that it holds in trust from employees’ wages.  This does not include corporate income taxes, just the portion of the taxes the corporation is supposed to withhold from the employee and hold in trust for the government.  The IRS calls this the trust fund penalty, and it allows them to collect from anyone who has authority to write checks, or who is in charge of payroll.

I have written a couple of trust fund recover penalty articles:

What is the Trust Fund Recovery Penalty

Who is Responsible for the Trust Fund Recovery Penalty

Can I Reduce My Trust Fund Recovery Penalty with an Offer in Compromise?