What happens when you are in debt to the IRS

Assuming you received a letter from the Internal Revenue Service (IRS) a couple of years back indicating that you owed money to the IRS. At the time, you didn’t know what to do and missed the deadline. This year you are sure to get a refund, but the IRS is going to take it. You were going to fix your car or maybe catch up on your utility bills with the refund. Is there anything you can do?

There may be a way out. The IRS has a process called audit reconsideration. If you get a collection notice from the IRS and think you do not owe the money, you could request audit reconsideration, even if you have missed all the deadlines they gave to you.

Examples of someone who might want to ask for audit reconsideration:

• You claimed the earned income credit in 2019. Now, the IRS says you should not have claimed the earned income credit because the children did not live with you during 2019. If you have proof that the children lived with you, you can submit the proof and ask for reconsideration.
• You did not file a tax return in 2008. The IRS filed a return for you, as a single person with no dependents, using the W-2’s it got from the Social Security Administration. You were actually the head of your household with three children. Instead of owing taxes, you would be granted a refund, if the IRS used the head of household standard deduction and dependents exemptions.

To request audit reconsideration, you will need to send a letter to the Internal Revenue Service Center. In the letter, explain clearly to the IRS why you think they are wrong. You will also need to send documents and proof that the IRS is wrong. The letter should be sent to the IRS Campus that performed the original audit on your return. Look at the letter from your audit. If you cannot find that information, you can call the IRS.

 

What if the IRS is right about the debt but you just can’t pay?

There may be a way out of this.

• If you can pay the total amount, but just not right now, you can ask for an installment agreement with the IRS. This would give you more time to pay back the tax debt which you owe the IRS.
• If the debt is just too huge for you to pay in full, but you can pay part of what is owed, you can fill out an application for an offer in compromise. The IRS charges an application fee of $150 unless you are at or below 250% of the poverty level. You offer what you think you can pay. The IRS will look at all your expenses, income and assets and decide whether your offer is reasonable.
• The IRS can also place a taxpayer in “currently not collectible” status. The IRS can, however, reactivate your account at any time.

The U.S. Foreign Investment Tax System

We put into consideration that the changes to the tax regime for foreign investment in the United States described below are of particular interest to Canadian businesses with subsidiaries or branches in the United States as well as to Canadian investors with assets located in the United States.

Provisions intended at neutralizing the effects of hybrid arrangements between related parties: countering the double deduction

New paragraph 267A removes the possibility of deducting interest or royalties paid or accrued, if (1) it gives rise to a “ disqualified related-party amount” ; and if (2) are paid as part of a hybrid transaction or by or for a hybrid entity.

Generally, an “excluded related party transaction amount” means any amount of interest or royalties paid to or accrued by a related party if a) this amount is not included by the related party for the purposes of tax in her country of residence or in the country where she is subject to tax; or if b) the related party has the right to deduct this amount (as interest or royalties) under the tax system of its country.

“Hybrid transaction” is a transaction, series of transactions, agreement or instrument in which the payment or payments are treated as interest or royalties for US tax purposes, but are not treated as interest or royalties for tax purposes in the hands of the recipient. A “hybrid entity” means an entity that is considered as a tax-transparent entity for US tax purposes, but which is not considered to be a tax-transparent entity in the country of the recipient, or vice versa. Two parties are generally considered to be related for US tax purposes if either party “controls” the other (which means, for this purpose, that one of the parties directly or indirectly owns more than 50% of the voting securities of the other party or of the value of its securities), or if both parties are managed by a third party. Paragraph 267A does not apply to interest or royalties treated as “income covered by Subpart F” (Subpart F income) in the hands of an American shareholder.

This paragraph should disallow the deduction of interest paid under certain widespread cross-border funding structures, including the deduction of interest paid by a U.S. payer to a related party located in Canada in connection with a buyout (including a repurchase agreement title). It essential to mention that this legislative provision gives the United States Department of the Treasury the very broad power to enhance the scope of this paragraph, in particular to (i) prohibit the deduction of interest that is exempt in the hands of the beneficiary due to a participation exemption system; (ii) prohibit the deduction of interest arising from financing by conduit involving a transaction or a hybrid entity; (iii) add foreign branches to the entities covered by the provision;

New paragraph 267A the IRS applies to taxation years that begin after December 31, 2017 and does not provide a grandfather formula for existing planning.