Is My Pension At Risk?

IRS problems can cause you and your family a lot of stress. You’ve labored all your life to be able to purchase a nice home and a car. Now they might be taken away by the IRS. You have received notice from the IRS stating that they are going to seize your properties to settle the back taxes you owe. Can they do this? Can they seize your car, your home, even your pension?

Certain assets cannot be taken by the IRS to pay your tax liability:

• Furniture, food, fuel, and personal effects as much as $2,500
• Clothing and books for school
• Undelivered mail
• $1,250 worth of tools and job-related books
• Certain annuity and pension benefits, which includes Special Pensions for Medal of Honor awardees, Retired Serviceman’s Family Protection and Survivor Benefit Plan, Railroad Retirement Act, and Railroad Unemployment Insurance Act
• Certain service-oriented disability payments
• Public assistance, job training, unemployment, and worker’s compensation benefits
• A minimum amount exempt from levy on salary, wages, and other income
• Deposit to the special Treasury Fund made by Public Health Service employees and members of the armed forces who are on permanent duty assigned outside the US

You will notice that on the list, it says “certain annuity and pension benefits”. These benefits aren’t completely exempt from the IRS. The larger the sum you need to pay to the IRS, the higher the risk is to your pension.

Assets are seized in order, typically:

1. Savings and checking accounts
2. Vehicles – boats, cars, planes, luxury vehicles
3. Life insurance cash equivalent
4. Accounts receivable
5. Stocks and bonds
6. Salary
7. Collectibles
8. Real estate – investment and vacation
9. IRAs, Keoghs, and pensions
10. Your home

Pensions are not top priority.

The IRS only seizes enough assets to pay the tax liability, though you have to consider that interest and penalties are accruing on top of it. With no other assets available to shoulder the tax liability, your pension is at risk.

What is the Audit Process?

Thousands of tax returns are audited every year by the IRS. Correspondence, field, and face-to-face are the three forms of audits. You haven’t necessarily done something wrong if you are being audited. What it means is that the IRS must determine if your tax return was prepared correctly.

Each tax return filed is examined by the Discriminate Function System or DIF that compares your deductions with averages. You’re likely to be audited if your DIF score is more than average.

Done by mail, a corresnpondence audit will have the IRS requiring more information about certain items on your tax return. The notice may require you to submit documentation to support your tax return, so quickly comply by sending the documentation through certified mail, but don’t send the originals to the IRS.

The IRS can make errors too, so if you are informed that you need to pay more taxes due to errors, compare the information on the notice with your tax return before you settle the added tax. If you disagree with the notice, you must appeal within sixty days.

You’ll be asked to appear in the auditor’s office (face-to-face audit) or you will be paid a visit by the auditor (field audit). If you don’t want the auditor in your office, prove that his presence will be disruptive to business. An audit can also be done in the office of the tax professional who filed your tax returns.

Professional tax preparers (enrolled agents, CPAs, and lawyers) who filed your tax returns can attend the audit instead of you.

The auditor will ask easy questions at the beginning of the audit. After the initial questions, the audit will start in earnest. Remember not to disclose more information than what’s needed. Don’t answer questions that are irrelevant to the tax return in question or provide documentation that weren’t requested on the notice. Answer questions courteously but with short answers and no further explanations. The more you say, the more you may alert the auditor to audit you more.

After the audit, you will get a copy of the auditor�s report. If you disagree with the auditor’s findings, you may appeal to the auditor’s supervisor right there and then. You may appeal to the IRS Appeals Division in 30 days if the supervisor does not agree with you. The Tax Court is the last stop if you still disagree with the result.

How Being Self-employed Can Be An Issue

You’re a candidate for an IRS audit if you are self-employed. This is because self-employed individuals are prone to cheating on taxes. With cash settlements and the lack of W-2s, it’s easier to file false tax returns. The IRS actually uses the most staff in the Small Business/Self-Employed Division. You have a chance of being audited, regardless if you run an honest business and pay your taxes on time. Without being aware of it, you have IRS issues.

If you’re being audited, the IRS will require information regarding:

• If you have workers who have been classified as independent contractors when they are really employees
• If you paid proper payroll tax deposits
• If you declared all cash transactions
• If you claimed large business entertainment expenses
• If you have reported car expenses for travel expenses that were not business-related
• Lifestyle exceeds the income declared
• If you write off living expenses as business or home office expenses
• If the business�s sales and receipts were declared

Keep records, so you’re ready if the IRS requires necessary documents.

Lower the risk of audit by:

• Avoid math errors. The IRS may want to check you out if you have numerous math errors on your tax return.
• Do not forget to sign your tax return because the IRS will believe you’ve forgotten other things.
• Donations shouldn’t be overestimated. When donating big value items, use the market value and get a letter from an appraiser for your files.
• Do not underreport your income. Take note that the IRS can investigate your accounts.
• Cash transactions more than $10,000 should be reported within fifteen days of the transaction on IRS Form 8300.
• Keep good records of insurance and utilities for the home office, so you don’t overestimate home office deductions.
• You’ll be considered illegally borrowing funds from the government if you neglect to pay your payroll tax payments.
• Live within your means.

A few other factors for the IRS to audit you:

• growth in income
• a partnership
• improvement in lifestyle
• a trust, or tax shelter investments
• hiring relatives
• employing employees vs. employing independent contractors

You may be audited up to 3 years after a return is filed, so organize your records for that long and convince the IRS that you’re running an honest business by settling your taxes on time.

How to Abate Penalties

Interest and penalties accumulate, so if you have back taxes, you need to be aware that it keeps growing. Settling the initial tax debt was difficult enough, and it will be harder with these additions. Penalties are automatically added by the IRS computer system to your tax bill. Your personal situation are practically unknown to the IRS. This IRS issue can be addressed with certain options.

Reasonable Cause

The IRS may eliminate or lessen the penalties if you can prove reasonable cause. What does reasonable cause mean? The IRS�s definition is: “reasonable cause relief is normally granted when the person exercises business care and prudence in addressing his tax obligations but is not able to abide by those obligations”. What does it mean?

To show reasonable cause, you must be able to prove to the IRS in legal and logical means that you attempted to pay your taxes by the deadline but was prevented by circumstance.

Reasonable cause can be:

• Acts of God
• Fire, natural disaster, casual, other disturbance
• Erroneous advice from the IRS
• Incorrect advice from tax professional
• Couldn’t obtain records
• Serious sickness, unavoidable absence, or death
• Forgetfulness
• Mistake or error was committed
• Ignorance of the law

The IRS will really accept any reason as long as it shows that you exercised ordinary business care and prudence but was not able to abide by your tax obligations.

Penalty Abatement Request

If your tax bill includes penalties, request for an abatement right away by a Claim for Refund and Request for Abatement, also known as Form 843, or write a letter to the IRS, attaching a copy of the IRS notice and documentation that may support your reasonable cause. If you are going to pay, attach a note indicating that the payment is for the tax, not for penalties and interest, and note this on the check itself. You may get subsequent bills before you get a response, so make copies of the request.

Refusal of your penalty abatement request will stop you from making another request with the same reason.

You Could Recover Your Seized Property

The IRS can use the power of a levy to seize your assets in response to non-payment of back taxes. You have big IRS issues if your property has been seized. Once an asset is seized, it won’t be easy to get it back. Your assets will be sold to pay off your tax debt.

The most obvious way to get a release for your property is to settle the tax bill in full, as well as all the penalties assessed and interest that accrued. If that is not a feasible option, you might want to consider one of these:

• You may request an appeal with the head of the IRS unit filing the levy by a conference.
• Qualify for financial hardship. The IRS will determine if your health or welfare is affected.
• If you don’t have assets worth seizing and your present income just supports you, you may become “temporarily uncollectible”.
• Issue a substitute collateral or a bond that’s equal in value to the seized property.
• Declare bankruptcy, so the IRS will leave you alone.
• Part of the seized assets could be returned if its worth more than what you owe.
• The 10-year statute of limitations on the collection of your tax bill has passed.
• If the asset is necessary for you to operate in business and make money, give evidence that the release of your property will enable collection.
• Negotiate an installment agreement that lets you pay your tax bill monthly.
• Go for an Offer in Compromise to resolve your tax debt.

The point is, you shouldn’t stand there and do nothing while the IRS seizes your assets. There are better ways to resolve your IRS problems.