Getting Rid of a Federal Tax Lien

When personal or financial crises occur, circumstances can spiral out of control. Unpaid federal income taxes, whether due to prolonged illness, job loss, or divorce, can result in a tax lien being placed on a taxpayer’s property. This week’s blog discusses how to get rid of a federal tax lien. Next week, we’ll address how to avoid a federal tax lien altogether.

 

So, what is a federal tax lien?

 

A federal tax lien is the government’s legal claim to real estate, personal property and financial assets. The IRS can place a federal tax lien when a taxpayer neglects or refuses to fully pay a tax liability.

 

The IRS files a public document, the Notice of Federal Tax Lien, to alert creditors that the government has a legal right to the property. Property or assets subject to a tax lien cannot be sold or used for collateral on a loan. That can make a bad financial situation much worse.

 

Four ways to get rid of a federal tax lien:

 

  1. Paying the tax debt in full is the best way to get rid of a lien. The IRS releases the lien within 30 days after the tax debt has been paid.

 

  1. Discharge of property removes the lien from specific property, within Internal Revenue Code (IRC) provisions that determine eligibility.

 

  1. Subordination does not remove the lien, but allows other creditors to move ahead of the IRS, making it possible to get a loan or mortgage.

 

  1. Withdrawal removes the public Notice of Federal Tax Lien and assures that the IRS is not competing with other creditors for taxpayer property; however, the tax is still due.

 

Of course, the IRS decides whether a taxpayer can get rid of a tax lien, other than paying it in full. Eligibility requirements for taxpayers to get rid of a tax lien by discharge, subordination, or withdrawal include full compliance with other filing and payment requirements and up-to-date payments on any current or previous tax payment agreement.

 

All of this sounds pretty bad. Read next week’s post to learn more about avoiding federal tax liens altogether.

 

Managing Nonprofit Risk

Nonprofits are always focused on serving the community, raising funds, and recognizing volunteers. They often overlook identifying and managing the organization’s risks. That can result in some nasty and expensive surprises.

 

Nonprofit organizations have all the risk exposures that for-profit businesses have. Plus, they are exposed to other risks peculiar to nonprofits, like risks associated with taking donations and engaging a volunteer workforce.

 

Failure to appropriately manage nonprofit risk can result in reputational damage and a drop in fundraising. In addition to the “normal” processes and insurance coverages used by for-profits, nonprofits should also manage risks related to these four groups of stakeholders:

 

  1. Directors & Officers

Board directors and key officers, such as the Executive Director, are responsible for making decisions and taking actions using donated funds. The Board should have a robust set of financial policies to establish risk tolerance and decision-making parameters. To further protect those individuals, consult an insurance specialist about appropriate coverages for various liabilities, based on activities and size.

 

  1. Employees

Every work environment requires guidance for its employees to communicate employer and employee responsibilities, work conditions, benefits, and rights. Employee or Personnel Manuals assist with training and holding people accountable. Employee candidate screening, especially for staff who work with vulnerable populations or financial assets, is a common risk mitigation tool.

 

  1. Volunteers

Even though they don’t get paid, volunteers should also have set of procedures to guide their recruitment, training, supervision, and expected conduct. Volunteers should also undergo a screening process and be supervised to ensure that she or he is following the organization’s rules and standards. Volunteers involved with serving vulnerable populations or handling donations should undergo additional screening, training, and supervision.

 

  1. Clients/Participants

Most for-profit businesses provide services or goods to anyone who needs them. Nonprofits can’t necessarily do that because they have a mission and policies that strictly define who is eligible to receive their services. Managing the risk of providing service outside the mission is mitigated by clear, consistent client in-take and screening procedures.

 

Nonprofits that manage risk for their directors, employees, volunteers and clients experience fewer surprises that can interrupt service delivery and damage reputations. Getting ahead of those risks with a few preventive measures allows nonprofits to focus time and energy on the mission — serving the community.

Are Legal Fees Tax Deductible?

The answer is—it depends! Generally, it depends on the nature of the expense. Legal expenses incurred for business purposes are generally deductible as ‘ordinary and necessary’ expenses of the business entity. Most legal fees paid for personal reasons are not deductible, but some exceptions exist.

 

Some relatively common situations exist where non-business legal fees may be deductible. These situations relate to doing or keeping a job, collecting taxable income, or getting tax advice. As always, details matter. The rules that apply and how to report can get pretty complicated.

 

Legal Expenses that May be Deducted are generally related to business, employment/income, and income taxes, such as:

  1. Legal expenses incurred in attempting to produce or collect taxable income, or paid in connection with the determination, collection, or refund of any tax.
  2. Related to either doing or keeping a job, such as legal fees paid related to a claim of unlawful discrimination.
  3. Tax advice related to a divorce if the fees are billed specifically for tax advice, determined in a reasonable way.
  4. To collect taxable alimony.
  5. To resolve individual tax issues relating to profit or loss from business, rentals or royalties, or farm income.

 

Legal Expenses that May Not be Deducted are generally related to personal legal needs, such as:

  1. Preparation of a will.
  2. Property claims or property settlement in a divorce.
  3. Custody of children.
  4. Civil or criminal charges resulting from a personal relationship.
  5. Damages for personal injury, other than for certain whistleblower and unlawful discrimination claims.

 

This list of situations highlights the importance of understanding the rules about which legal fees are tax deductible and which are not.  While the details of what’s going on aren’t under your control, you can control obtaining the documentation needed for those tax deductible legal fees.

 

Want to know more? This topic is so complicated, it’s addressed in four separate IRS publications: Tax Guide for Small Business, Publication 334, http://bit.ly/2sCks0Z; Miscellaneous Deductions, Publication 529, http://bit.ly/2tHPiom; Business Expenses, Publication 535, http://bit.ly/2pkyRwT; and Basis of Assets, Publication 551, http://bit.ly/2tF2c6X.

Tax Reform Facts (so far, anyway)

Taxpayers and their advisors want to know as soon as possible — as in “now” — the impact of any upcoming tax law changes. We still don’t know many details, but the White House has proposed tax code changes which include both individual and business reform.

 

The upcoming months will see significant discussion and changes to the initial tax proposal put forward by the Trump administration. Until then, Americans will have to make plans based on the limited information made available at the White House press briefing to unveil the President’s tax reform plan on April 26, 2017.

 

Here’s a summary of the tax reform fact sheet that was handed out back in April:

 

Goals for Tax Reform

 

  • Grow the economy and create millions of jobs — no details provided.

 

  • Simplify the tax code.
    • Eliminate targeted tax breaks that mainly benefit the wealthiest taxpayers.
    • Protect the home ownership and charitable gift tax deductions.
    • Repeal the Alternative Minimum Tax (AMT).

 

  • Provide tax relief to American families — especially middle-income families.
    • Reduce the seven tax brackets to three tax brackets — 10%, 25% and 35%.
    • Double the standard deduction.
    • Provide tax relief for families with child and dependent care expenses.

 

  • Lower the business taxes.
    • 15% business tax rate.
    • Territorial tax system similar to American companies.
    • One-time tax on dollars held overseas.
    • Eliminate tax breaks for special interests.

 

  • Other provisions
    • Repeal the estate tax.
    • Repeal the 3.8% tax on high-income wage earners.

 

The Trump administration and Congress still have a long way to go before new tax laws are drafted, argued over, and passed into law. That makes it tough for taxpayers and business owners to plan between now and then. Decisions that can’t wait should be based on available information, while keeping potential tax law changes in mind.