Tax Relief – Remedy for Perverse Liabilities
What are recourse liabilities? These are the non-recourse debts owed to you by a third party. Also called a non-recourse loan, this kind of loan allows the creditor to collect from either the borrower or the debtor’s personal assets in the event of non-payment by the other party. Non-recourse loans have many advantages to borrowers over conventional loans.
It all started when the Internal Revenue Service (IRS) discovered some people had been using a “for profit” scheme to avoid paying their debts. The Internal Revenue Service decided to go after these owners of profit schemes, which were acting as if they did not owe any taxes on their income. Essentially, they were not paying their taxes because they thought their income had already been taxed. The government considers such behavior to be criminal and violation of the rights of the American citizen. The tax collection agency may seize the assets of the owner(s) of the business and may also require the owner to reimburse all applicable taxes.
When a property owner fails to pay his/her taxes, the IRS can take possession of the property until the full debt is repaid. If the property owner then fails to reimburse the tax liability, the IRS has the authority to sell the property used as collateral, along with any related interest and penalties. This is a recourse option for the creditor, because it means the owner will be unable to redeem the property. There is an exception to the non-recourse clause in this case – if the owner of the property abides by the terms of a written contract with the IRS or a state tax debt collector, the IRS is authorized to seize the property only if the owner has not paid the taxes in full. An owner who is delinquent on his/her tax bill is in breach of contract and cannot validly excuse themselves from repaying the tax liability.
Because of the potential for tax liability, IRS will not undertake actions that will significantly impact a debtor’s ability to pay their taxes. Tax law is very complex and the IRS offers many options for addressing various tax liability situations. The ultimate goal of IRS is to facilitate tax compliance rather than enforcement. The IRS has flexibility and limitations when considering which tax issues to pursue. The ultimate goal of IRS is to provide taxpayers with tax relief that keeps them solvent. Therefore, the IRS does not pursue collection on tax debt just to recover additional funds.
Many taxpayers believe they have no recourse against the Internal Revenue Service (IRS). In reality, IRS has the inherent right to pursue recovery of tax debt – it is just the process that can vary from one taxpayer situation to the next. The most common outcome for IRS action relates to a taxpayer’s failure to repay an IRS debt – typically in the form of a voluntary return not filed with enough information to satisfy the tax liability. For example, an individual fails to itemize deductions on their tax return. If this taxpayer had itemized deductions that exceeded their tax liability, the Internal Revenue Service can seek recovery from that person’s primary payee (their landlord) or their dependent spouse.
In addition, the IRS can recover tax debts from taxpayers who own assets and/or use those assets for tax evasion purposes. For example, taxpayers who use their home as their residence for tax purposes may be liable for income tax liability even if they only use part of their residence as their residence. However, taxpayers may be able to avoid liability for income tax by keeping certain personal property in a separate bank account. Taxpayers can also create “blind banks” in which all of the taxpayer’s accounts and transactions are managed by a non-connected third party. An example of a blind bank is a brokerage account maintained with an unrelated third party.
Many taxpayers have a limited amount of recourse (meaning, limited amounts of relief from IRS recovery action). This amount is usually based upon the taxpayer’s AGI; AGI is the amount of income that the taxpayer has to pay tax on. There are a couple ways that a taxpayer can get tax relief if their AGI exceeds their liable income. First, if the taxpayer’s AGI is so low that he/she is not required to file a tax return, then the taxpayer may be able to claim a tax deduction for their low taxable income. Also, if the taxpayer is married, then filing joint returns could further reduce the taxpayer’s tax liability because the joint tax returns will qualify for higher tax breaks.
It is important to understand that the IRS treats all forms of recourse as taxable income, and all taxable tax liabilities as taxable income. Liabilities arising through actions taken in negligence will be subject to greater tax relief than liability arising through voluntary actions. As such, it is imperative for tax filers to be aware of and understand the perils that come with liability.