CTRS Tax Problem Resolution Strategies 2 — Questions and Answers
Question 1: A taxpayer owes $85,000 in back taxes and cannot pay in full. They own a home with $20,000 in equity and have monthly disposable income of $300. Which resolution strategy is most appropriate to explore first?
- Currently Not Collectible status
- Offer in Compromise based on doubt as to collectibility (Correct answer)
- Installment Agreement for the full balance
- Penalty Abatement only
Correct answer: Offer in Compromise based on doubt as to collectibility
With significant equity and some disposable income, an Offer in Compromise based on doubt as to collectibility allows the taxpayer to settle for less than the full amount owed.
Question 2: Under the Fresh Start Initiative, the IRS expanded the Offer in Compromise program by changing the calculation period for future income from how many months to how many months?
- From 60 months to 24 months for offers paid in 5 or more installments
- From 48 months to 24 months for lump sum offers
- From 60 months to 24 months for lump sum and 12 months for periodic payment offers (Correct answer)
- From 48 months to 12 months for all payment types
Correct answer: From 60 months to 24 months for lump sum and 12 months for periodic payment offers
The Fresh Start Initiative reduced the future income multiplier from 60 to 24 months for lump sum offers and from 60 to 12 months for periodic payment offers.
Question 3: A taxpayer has a federal tax lien filed against them. They want to sell their home to pay off the lien. What is the IRS process that allows the sale to proceed with lien proceeds applied to the tax debt?
- Lien Subordination
- Lien Withdrawal
- Lien Discharge (Correct answer)
- Lien Reduction
Correct answer: Lien Discharge
A Certificate of Discharge removes the federal tax lien from a specific property, allowing the sale to proceed with net proceeds applied to the tax liability.
Question 4: Which IRS program allows a taxpayer to have their federal tax lien removed from the public record even though the tax debt has not been fully paid?
- Lien Discharge
- Lien Subordination
- Lien Withdrawal (Correct answer)
- Lien Release
Correct answer: Lien Withdrawal
A lien withdrawal removes the Notice of Federal Tax Lien from public record, which can help the taxpayer obtain credit, even if the underlying tax debt still exists.
Question 5: A taxpayer enters a Direct Debit Installment Agreement (DDIA) under the Fresh Start Initiative for a balance under $50,000. What is a key benefit of a DDIA compared to a standard installment agreement?
- Interest stops accruing on the balance
- The IRS will not file a Notice of Federal Tax Lien (Correct answer)
- Penalties are reduced by 50%
- The taxpayer can skip up to 2 payments annually
Correct answer: The IRS will not file a Notice of Federal Tax Lien
Under a DDIA for balances under $50,000, the IRS generally will not file a Notice of Federal Tax Lien, protecting the taxpayer's credit and asset position.
Question 6: When the IRS issues a levy on a taxpayer's bank account, what is the standard holding period before the bank must turn over the funds?
- 7 days
- 14 days
- 21 days (Correct answer)
- 30 days
Correct answer: 21 days
Banks are required to hold levied funds for 21 days before turning them over to the IRS, giving taxpayers time to resolve the issue or seek a release.
Question 7: A taxpayer qualifies for Innocent Spouse Relief under IRC Section 6015(b). What is a required element to qualify under this provision?
- The couple must have been divorced for at least 2 years
- The requesting spouse must have had no knowledge of the understatement (Correct answer)
- The tax must relate to community property income
- The requesting spouse must file within 1 year of assessment
Correct answer: The requesting spouse must have had no knowledge of the understatement
Under IRC 6015(b), the requesting spouse must establish they did not know and had no reason to know of the understatement of tax at the time the return was signed.
CTRS Tax Problem Resolution Strategies 2
A taxpayer owes $85,000 in back taxes and cannot pay in full.
They own a home with $20,000 in equity and have monthly disposable income of $300.
Which resolution strategy is most appropriate to explore first?