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Tax Numbers and Calculator

Top 4 Reasons Not to Ignore Tax Debt

Tax Debt: A Debt Not to Ignore

Owing taxes may not seem like a big deal. Tax debt is not immediately reported on your credit and the IRS seems to only send collection letters. While it is true, the Internal Revenue Service (IRS) is not usually aggressive the first year you owe traditional income taxes, the IRS can ramp up collection efforts and be very aggressive if they are not satisfied you are trying to pay back the debt and/or get current going forward.

1. The Impact to your Credit Report

While not a direct action against your wages or bank account, a tax lien can have a more lasting impact on your life. They are public record and can be reported to your credit report.  You can see a credit hit of more than 50 points from a federal tax lien.  They attach to all property whether real or personal.  The IRS rarely goes after personal property, unless you are living a lavish lifestyle.  They will go after real property, especially if it is not your primary place of residence.  The lien is the way they have the right to take more aggressive action.

2. IRS Can Levy Wages up to 100%

A wage levy is a headache that nobody wants to deal with. The IRS has a chart that they use to determine how much of your paycheck is exempt from levy.  It is not a favorable chart for the taxpayer.  If you are paid hourly or salary you could see as much as 85% of your pay seized every pay period.  If you are an independent contractor who is paid via 1099 you could lose 100% of your income if a levy is issued to your source of income.  This affects truck drivers more than most.  Also, if you own your own business the IRS can go after accounts receivable with a levy.  Wage levies stay in place for wage earners until the tax debt balance is paid or the taxpayer takes the necessary steps to get it removed, typically agreeing to an installment agreement with the IRS.

3. IRS Can Seize You Bank Accounts or Investment Accounts

Even if the IRS does not go after your wages directly, they can still get your income via a bank levy. The IRS can send notices to any financial institution that you may be banking with.  The institution then will set aside whatever funds are in your accounts at the time the bank receives the levy for 30 days.  After 30 days the bank will release those funds to the IRS if they have not received a levy release directly from the IRS. Even with those funds frozen you can still use your account with any additional money that gets deposited during the 30 day hold.  If you have previously gotten refunds from the IRS and gave them banking information for direct deposit of the refund, the IRS will go after that bank first if you owe debt in the future.

Investment accounts that are levied go through the same 30 day hold on the account before funds are send to the IRS. The major thing to remember here is that when those funds are sent to the IRS that creates a taxable event on most retirement accounts. So the taxpayer who has an investment account levied by the IRS, then gets hit with another tax liability because the IRS does not let you choose to withhold any of the investment funds for tax purposes.

To get your bank account unfrozen and save some of the money in there you have to show an undue hardship with the IRS. In the past I have been able to get funds saved on joint accounts where the other person was a child who was away for college, shown that some of the funds in the account are for an upcoming mortgage payment, and shown that the taxpayer has no ability to pay and the account was placed into Currently Not Collectible status.  However, this does not always work and it is sometimes determined by how nice of a collections agent you get on the phone with the IRS

4. Your Passport Can Be Suspended

The most recent attempt to force people into handling their tax situation is the suspension of passports. Congress passed a law that allows the IRS to tell the Department of State when a taxpayer is seriously delinquent with their tax debt.  Anyone with more than $51,000 in back taxes, who has not taken steps to pay back the debt, could be subject to their passports being suspended.  If you do not have a passport your social security number could still be sent to the Department of State and you will be denied a passport should you apply for one.

The IRS started implementing this in 2018 and some taxpayers are seeing their passports being suspended. There are ways to get your account back in good standing with the IRS.  Two most common ways are: 1) an installment agreement to pay back the debt over time or 2) having an offer in compromise accepted, not just filed.  The IRS will not simply remove the passport hold because a taxpayer pays their debt below the $51,000 threshold.  The taxpayer has to get into an agreement to repay the balances.

 

 

 

Arthur Rosatti, Esq. is a Florida licensed attorney authorized to represent clients with the Internal Revenue Service and the U.S. Tax Court. He has experience negotiating with various taxing agencies on behalf of individuals and companies. His goal with their tax debt and get them into the best plan possible to manage the debt. If you have concerns about your tax liabilities, schedule an appointment with our office.

Credit Score Board

Improving Your Credit Score: Taking Steps Toward Perfect Credit

Improving Credit: Tips and Tricks for Getting Your Score Closer to 850

Often after helping individuals manage their debts, we provide guidance on improving credit. In today’s world your credit score affects every day of your life.

A good credit score can mean getting approved for credit that you need to buy a house or car. A poor score can make it difficult to find an apartment rental or needing a large deposit to turn on the utilities. Improving your credit can help everyone, even individuals with already good credit.

Your credit score is a score created by the credit bureaus using information in your credit report. Credit scores range between 300 to 850. The score is designed to give creditors the likelihood that you will become delinquent on your debts. Your score will also vary slightly between credit bureaus.

Regardless of the reason you need to improve your credit, including old collection accounts, limited credit history, trying to buy a house, etc., the tips below can help you get your credit on track. For most credit cards and loans, you will be offered the best rates when your credit is above 750; you will be qualified for most types of credit if your score is at least 700.

Monitoring Credit Reports

To get a good idea about your starting point, you need to know what your credit looks like. Tools, like Credit Karma and Credit Sesame, give you a good basis about your credit score and what you can do to improve it. But, these are not real credit agencies. There are actually three credit bureaus: Transunion, Equifax, and Experian. Federal law allows you to get a free copy of your credit report every 12 months from each credit reporting company. You should regularly pull your credit report to ensure that everything is reporting accurately. Removing inaccuracies, like late payments, can quickly help you improve your credit. Additionally, reviewing your credit regularly can help you prevent issues with identity theft. Many credit cards now also offer free credit scores, which can help you keep an eye on your credit in between pulling full reports.

Credit Factors

When trying to improve your credit, it is important to understand the factors that make up your credit score. There are five elements that the credit bureaus weigh when determine your credit score: Payment History, Amounts Owed, Length of Credit History, Types of Credit, and New Credit.

Payment History – 35%

As you might expect, the repayment of past debt is a major factor in the calculation of credit scores. It helps determine future long-term payment behavior. Both revolving credit (i.e. credit cards) and installment loans (i.e. mortgage) are included in payment history calculations. This factor is why one of the best ways to improve or maintain a good score is to make consistent, on-time payments.

Credit utilization  – 30%

Creditors look at the total amount you currently owe, and the percentage of the amount owed compared to your available credit. When a high percentage of a person’s available credit is been used, this can indicate that a person is overextended, and is more likely to make late or missed payments. That is why it’s a good idea to keep low credit card balances and not overextend your credit utilization ratio. Additionally, this factor is why it is important to keep old credit cards open, even when not being used.

Length of Credit History – 15%

The credit bureaus look at the length of time all credit accounts have been open and the time since the newest account was opened. Those with a longer credit history have more data on which to base their payment history. This factor is why it is easier for old individuals to have a high credit score than younger individuals.

Types of Credit  – 10%

The credit bureaus want to see a combination of different types of debt, such as credit cards, installment loans (like student loans or car loans), open accounts (like lines of credit), and mortgage loans. This is important to show you can mange different types of debt.

New Credit – 10%

Creditors do not like seeing many recently opened accounts; opening several new credit accounts over a short period (which can be defined as anywhere from 6 months to 2 years) can signify greater risk. Creditors worry it is evidence of you facing financial difficulty. This is why it is recommended no new credit accounts should be opened one year before a major purchase, like a car or house.

Pay Bills on Time

Your payment history makes up 35% of your credit score. One of the easiest ways to improve your score is to always make sure you pay bills on time. Missed payments stay in your credit for 8 years. The more time that passes after a missed payment, the less of an impact it will have on your credit. One missed payment, won’t ruin your credit, but if it was within the last year, the impact will be obvious. Additionally, monthly bills like your electricity, cable and rent usually are not reported on your credit report every month. But, if you do miss a payment or the account goes into collection, the negative mark will usually appear on your credit.

Secured Credit Cards

One of the best tools for improving credit is a secured credit card. A secured card requires a cash collateral deposit that becomes the credit line for that account. For example, if you put $500.00 in the account, the bank will give you a credit card with a limit of $500.00. This allows for you to get a credit card with little risk to the bank; if you miss a payment on the secured credit card, the bank will take the deposit and close your account. Often a bank will reward you for good payment history and add to your credit line without requesting additional deposits or offer you a new credit card. Be sure to check the fine print on these cards; some banks may charge fees.

One important rule to remember about using a secured credit card (or really any credit card) is keeping your balance low. For credit building purposes, you should never have a balance over 30% of your total credit limit. Even if you are paying your balance off in full every month, having too high of a balance signals to creditors you could be over extending yourself.

Loans & Lines of Credit

If you are in need of a vehicle, consider getting a car loan. Or if you do not need a car, look into a line of credit. If it’s a car loan, buy a vehicle that is affordable and that you can pay off successfully. Additionally, you will see a drastic increase in your credit if you can make a large additional payment early on in the loan. A large additional payment will help bring down your credit usage and help improve your credit utilization. You may receive a higher interest rate to start. Shop around for the best rate; usually you will we get the best rate from a credit union. If you get a line of credit, keep in open but use is sparingly. The available credit — without a balance — will help your available credit.

Bankruptcy

For some individuals with many delinquent accounts and limited ability to improve their credit in a reasonable time period, bankruptcy can be used to get you a new starting point. Bankruptcy can even improve your credit faster than just trying to rehabilitate your credit (but it depends on your specific situation).  One of the many reasons bankruptcy is a great tool for managing debt is that it helps improve credit fairly quickly. After filing a Chapter 7, Debtors can usually see offers for new credit soon after filing bankruptcy. After a Chapter 7 discharge, you cannot qualify for a Chapter 7 for another eight years. To many lenders, you may actually appear to be a better risk immediately. The discharge zeros out any past due payments and delinquent accounts. Additionally, your income to debt ratio improves. This also helps your credit utilization rate as well.

Bankruptcy does have its limitations. If your goal is to buy a house, there is a required 2 year wait period to purchase a home after a Chapter 7. Two years post discharge, you may qualify for an FHA mortgage, if you have kept improving your credit and your income allows for it. You may need to wait longer for a conventional mortgage. There is no waiting period to qualify for new credit cards or car loan; however, your interest rates may vary depending on many factors. Since you cannot file a Chapter 7 more than once every 8 years, you will not have the available option if something happens during that period, such as job loss or illness.

Be Diligent

Most important part about improving credit is to keep at it. Your credit will not improve overnight. Being diligent at paying your bills on time, making conscientious decisions about opening new accounts, and understanding your credit report can make all the difference.

 

 

 

 

If you are dealing with debts, make sure you understand all your options. Ashley F. Morgan Law, PC helps many individuals manage their debts every month. Attorney Ashley Morgan has experience dealing with all the above issues. She understands good credit is important, and she wants her clients to completely understand all the tools at their disposal before taking action.