Tax Abatement | Removing a Tax Lien

What is Tax Abatement?

Under some circumstances, even government interest charges related to a corporation or individual’s tax obligations can be abated – reduced or waived.

Federal and state tax abatement programs decrease or wipe out tax liability. In effect, the government gives the taxpayer a break on what he or she owes in income taxes. A tax abatement for a business or corporation may involve reducing or eliminating altogether property tax assessments to encourage economic development in a particular community or area. In addition, payroll tax, and business income tax penalty assessments for late payment may be abated -reduced or eliminated – on application.

Property tax abatements may also apply to individuals, as with corporations, to encourage economic development, or when the taxpayer can show that his/her home’s property tax assessment was calculated based on erroneous valuation metrics.

Individuals may also apply for the abatement of their income, and estate tax penalties for their  failure to file their income and estate tax returns on time, or for their failure to pay timely or accurately what is owed.

Under some circumstances, even government interest charges related to a corporation or individual’s tax obligations can be abated – reduced or waived.

Let’s look at how these penalty and interest abatement programs work and how Ely J. Rosenzveig & Associates can help.

Are There Different Types of Tax Penalty Abatement?

Yes, there are a number of federal tax penalty abatement programs that are available. For federal  income tax relief, the IRS has programs for the following:

• Failing to file a tax return on time;
• Failing to pay on time;
• Failing to deposit certain taxes as required; and
• Other penalties.

If you have any of these issues, the following types of penalty relief are offered by the IRS:

Reasonable Cause: This determination is based on all the facts and circumstances of the taxpayer’s specific situation. Typically, the IRS will consider “any sound reason” for failing to file a tax return, making a deposit, or paying tax when due. If shown, sound reasons can include:

• Fire, casualty, natural disaster or other disturbances;
• The inability to obtain financial records;
• Death, serious illness, incapacitation, or the unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family; and
• Other reasons that show a taxpayer used “all ordinary business care and prudence” to meet his or her federal tax obligations but couldn’t do so.

It’s important to note that a lack of funds by itself won’t be considered reasonable cause for failure to file or pay on time. But the IRS says that the reasons for the lack of funds may satisfy the criteria for reasonable cause for the failure-to-pay, and failure-to-file penalties described above.

Administrative Waiver and First Time Penalty Abatement: a taxpayer may qualify for administrative relief from penalties for failing to file a tax return, paying on time, and/or depositing taxes when due under the IRS’s First Time Penalty Abatement policy, if the following are true:

• The taxpayer wasn’t previously required to file a return or has no penalties for the three tax years prior to the tax year in which he or she received a penalty;
• The taxpayer filed all currently required returns or filed an extension of time to file; and
• The taxpayer has paid, or arranged to pay, any tax due.

Innocent Spouse Relief: A taxpayer may be relieved of responsibility for paying tax, interest, and penalties assessed on a joint return, if a spouse (or former spouse) improperly reported items or omitted items on the taxpayer’s income tax return.

Know that the IRS doesn’t abate interest for reasonable cause or as first-time relief. Interest is charged by law and will continue until a taxpayer’s account is paid in full paid. If any penalties are reduced, the IRS will automatically reduce the corresponding interest.

Statutory Exception: The IRS says that tax legislation may also provide a taxpayer with an exception to a penalty. This happens when a taxpayer receives incorrect written advice from the IRS.

IRS Form 843, Claim for Refund and Request for Abatement should be filed to request penalty relief.

Innocent Spouse Relief: A taxpayer may be relieved of responsibility for paying tax, interest, and penalties assessed on a joint return, if a spouse (or former spouse) improperly reported items or omitted items on the taxpayer’s income tax return. Generally, the tax, interest, and penalties that qualify for relief can only be collected from the taxpayer’ spouse or former spouse. However, the taxpayer is jointly and individually responsible for any tax, interest, and penalties that don’t qualify for relief. The IRS can collect these amounts from either the taxpayer,  or his or her spouse (or former spouse).

The IRS states that erroneous items can be either of the following:

• Unreported income. This is any gross income that is attributable to the taxpayer’s spouse (or former spouse) that isn’t reported; or
• Incorrect deduction, credit, or basis. This is any improper deduction, credit, or property basis claimed by the taxpayer’s spouse (or former spouse).

A taxpayer must satisfy all of the following conditions to qualify:

• The taxpayer filed a joint return which has an understatement of tax due to erroneous items of his or her spouse (or former spouse);
• The taxpayer can show that at the time he or she signed the joint return they didn’t know, and had no reason to know, that there was an understatement of tax;
• Considering all the facts and circumstances, it would be unfair to hold the taxpayer liable for the understatement of tax; and
• The taxpayer and his or her spouse (or former spouse) haven’t transferred property to one another as part of a fraudulent scheme, which includes a scheme to defraud the IRS or another third party (like a creditor, ex-spouse, or business partner).

I Hear a Lot About “Settling” with the IRS… What’s an Offer in Compromise?

This is an agreement between the taxpayer and the IRS that resolves a tax debt for less than the full amount owed. The IRS will examine a taxpayer’s situation, as well as their ability to pay, income, expenses, and asset equity. The IRS will typically approve an offer in compromise when the amount offered is likely to be the most it believes it can expect to collect within a reasonable period of time.

Before the IRS will consider a taxpayer’s offer, he or she must complete the following:

1. File all tax returns;
2. Have received a bill for at least one tax debt included in the offer;
3. Make all required estimated tax payments for the current year; and
4. Make all required federal tax deposits for the current quarter if the applicant is a business owner with employees.

An Offer in Compromise has to be completed correctly, and if a taxpayer has failed to file all tax returns they’re required to file, the offer will be immediately returned without any consideration by the IRS. Likewise, if the IRS decides that the taxpayer hasn’t filed all their tax returns, the IRS will apply any initial payment sent with the offer to their tax debt—and return both the offer and application fee. And this decision can’t be appealed. Also, a taxpayer isn’t eligible if they’re involved in an open bankruptcy proceeding.

Note that submitting an application doesn’t guarantee that the IRS will accept a taxpayer’s offer in compromise. That’s why anyone considering this relief option should have experienced legal representation in tax matters like the attorneys at Ely J. Rosenzveig & Associates.

Can I Get a Tax Lien Removed?

Yes. To remove a lien, a taxpayer has two options: (i) a lien release and (ii) a lien withdrawal.

A lien release requires that the taxpayer pay the outstanding tax to be released from the obligations of the lien. However, the lien stays on the taxpayer’s public record (it will disclose that the taxpayer owed a tax lien, even if it was paid).

With a lien withdrawal, the taxpayer can proactively inform the major credit-reporting bureaus (Experian, TransUnion, and Equifax) and have the lien withdrawn. Because this can have a long and sustained effect on a taxpayer’s background history, a lien withdrawal should also be pursued because it purges the lien entirely from the public record.

The IRS will release a federal tax lien for several reasons. A release means that the IRS has cleared both the lien for the taxpayer’s debt and the public Notice of Federal Tax Lien. The IRS will release the taxpayer’s lien if:

• The debt is paid in full;
• The payment of the debt is guaranteed by a bond, or the taxpayer has satisfied the payment terms of an Offer in Compromise accepted by the IRS; or
• The period for collection has closed. That is, if the deadline for collecting the lien has passed, the release is automatic).

How Does Tax Abatement Work for New York State Income Taxes?

New York State provides for abatement of late filing and late payment penalties when they’re because of reasonable cause rather than willful neglect. Again, like the federal relief, interest on the tax can’t be waived for reasonable cause and will continue to accrue on any unpaid balance until the payment date.

The New York State Department of Taxation and Finance may impose a penalty on a taxpayer for several reasons, including:

• A penalty for late filing;
• A penalty for late payment;
• A penalty for failing to deposit taxes when required;
• A penalty for the wrong calculation of tax;
• A penalty for negligence, fraudulent returns, or frivolous returns; and
• A penalty for underpaying estimated tax.

When New Yorkers don’t pay their income tax, the New York State Department of Taxation and Finance will file a tax warrant with the appropriate New York State county clerk’s office and the New York State Department of State. This is like a civil judgment in a lawsuit and becomes a public record. A filed tax warrant creates a lien against the taxpayer’s real and personal property. In addition, a tax warrant may allow the State to do any of the following:

• Seize and sell a taxpayer’s real and personal property;
• Garnish a taxpayer’s wages or other income;
• Impact a taxpayer’s ability to buy or sell property; or
• Affect a taxpayer’s ability to obtain credit.

Luckily, New York State also provides for abatement of late filing and late payment penalties when they’re because of reasonable cause rather than willful neglect. Again, like the federal relief, interest on the tax can’t be waived for reasonable cause and will continue to accrue on any unpaid balance until the payment date.

This penalty relief in New York doesn’t apply to the payment of any withholding taxes, the filing of withholding tax returns, or the payment of estimated tax.

Are There Different Types of Tax Penalty Abatement in New York?

Yes. There are a several option for taxpayers in New York to obtain state tax debt relief. Some of these options aren’t really relief, but it will resolve the tax debt. The most common options are an offer in compromise, hardship status, a payment plan, and penalty abatement.

Offer in Compromise: Like the IRS, New York State has an Offer in Compromise program. The State generally accepts qualifying Offers in Compromise in fairly small amounts in proportion to a taxpayer’s total tax debt.

Hardship Status and Temporary Relief: This is a type of tax debt relief in which the State agrees that the taxpayer has insufficient funds to pay the bill, and the State won’t for some reason accept an Offer in Compromise. In most situations, those taxpayers who would qualify for hardship also qualify for an Offer in Compromise. Here are a few examples of when hardship may be the only option for a New York State taxpayer:

• The taxpayer owns a residence with more equity than the tax debt but doesn’t want to sell the home or is unable to access the equity;
• The taxpayer applied for an Offer in Compromise but are in their prime earning years and are denied for that reason. The State may decide to wait to see the taxpayer makes enough money in the future so that they can ultimately collect (The State of New York has a 20-year statute of limitations, while the IRS will wait only 10 years); or
• The taxpayer applied for an Offer in Compromise but was turned down by the State for some reason but yet doesn’t earn sufficient income to use an installment payment plan.

The State doesn’t have to accept a hardship status request. When it’s granted, it typically is valid for a year. A taxpayer is required to complete a financial form and disclose updated financial information every year.

Hardship status is often granted to the disabled or retired, who don’t expect their financial circumstances to change in the future.

Innocent Spouse Relief. New York State has an Innocent Spouse Relief program, which is like the federal version. Again, this relief is for spouses or former spouses who filed a joint tax return. New York has three types of innocent spouse relief options: (i) the normal innocent spouse relief; (ii) separation of liability; and (iii) equitable relief.

Innocent Spouse Relief is a good option for spouses or former spouses who were not aware and had no reason to know that a joint tax return they signed had an omission or error. Moreover, the spouse believes that the IRS or the New York State Department of Taxation and Finance shouldn’t hold him or her responsible for a tax issue created by his or her spouse or former spouse.

Payment Plan: If a taxpayer is unable to pay his or her New York State income tax in full, they may qualify for an installment payment agreement (IPA). Under the agreement, the taxpayer will make monthly payments. If he or she doesn’t qualify for an Offer in Compromise or hardship but can’t pay the tax debt in full in one lump sum, a payment plan may be a wise option. However, in some instances, there’s no relief with the payment plan; a taxpayer may only get more manageable payments for their budget.

IPA payments are typically debited directly from the taxpayer’s bank. New York State most likely will file tax warrants along with an Installment Payment Agreement, but any levy action, such as an ongoing income execution, is suspended when an IPA is put in place.

Are Any Types of Funds Exempt in New York?

Yes. Several types of funds are exempt from State garnishment and levy, such as Social Security and supplemental security income, welfare, alimony and child support, unemployment or disability payments, worker’s compensation benefits, and public and private pensions. Note that social security benefits – up to a cap of 15% – are subject to federal (IRS) levies/liens.

How Do I Request Abatement of New York State Income Tax Penalties?

With any of these issues with tax penalties, New Yorkers  should work with experienced legal counsel to help achieve the most favorable outcome for their situation.

Contact Ely J. Rosenzveig & Associates for aggressive advocacy, and experienced legal representation in tax matters, including options for tax abatement, offers in compromise and help with tax liens.

Remember, tax problems don’t go away by simply ignoring them. You must act.

Also, if you have more complex issues like expatriate tax compliance, FBAR (Foreign Bank Account Reporting) filing requirements, and penalty relief, the Offshore Voluntary Disclosure Program, and streamlined filing for non-resident U.S. taxpayers, Ely J. Rosenzveig & Associates can also help with these matters.

Please contact our office for a consultation.