Taxes 2016: Collection Cases, Unpaid Balances Increase

More people owe more money in unpaid taxes than at any other time in U.S. history, according to recently published figures from the Internal Revenue Service. According to the numbers for fiscal year 2015, unpaid tax balances increased by $7 billion and the number of active collection cases grew to 13.5 million.

All this data, coupled with the recent IRS announcement that the agency is planning to hire up to 700 enforcement agents to pursue collection efforts, points to an increasing need for tax resolution services, said David Miles, vice president of 20/20 Tax Resolution in Broomfield, Colo.

“With a growing emphasis on collection and the addition of 700 new enforcement hires, businesses and individuals facing unpaid tax burdens would be wise to take action first before the IRS takes it for them,” Miles said.

According to news reports, IRS hiring will first be focused on the department that monitors small businesses and self-employed individuals. This only increases the urgency for these audiences to address any lingering tax concerns, according to Miles.

“Most of our clients are an adaptable cross-section of American business,” he said. “They have a general sense of business, but the nuances of tax policy are not usually top of mind. Particularly with this new IRS development, our advice is always to err on the side of over preparation.”

Primarily, that means planning ahead for tax burdens, closely monitoring financial concerns throughout the year and keeping ahead of any potential IRS action.

“Undercapitalization seems to be the universal issue with companies facing tax problems.” Miles said. “Whether due to poor planning or unforeseen circumstances, undercapitalization often leads to a company’s collection problems. However, many companies compound the problem by ignoring the issue or just hoping it will go away. Being proactive before the IRS takes action is the best way to resolve tax challenges.”

Ambiguity around IRS Funds for New Enforcement Hires

Yes. You read the headlines right. Up to 700 new IRS enforcement hires are expected to begin work in the near future. And while some may believe that the government creating this volume of jobs within one agency without Congressional funding would be cause for celebration, others couldn’t disagree more. Take the instance of Rep. Jason Chafftez, chairman of the House Oversight and Government Reform panel’s opinion about Commissioner Koskinen’s recent announcement of the IRS’ plan to hire additional enforcement personnel.  A few weeks back Fox News reported that on May 6, 2016, Rep. Chaffetz wrote a letter to the Commissioner demanding to know the specifics of how the IRS is going to find the money to fund the hiring initiative less than three months after the Commissioner wrote a letter to Congress stating an “urgently needed” $1 billion budget increase to hire enforcement personnel.

Rep. Chaffetz’s reaction to the IRS announcement should not come as much of a surprise to those that have followed the IRS’ back and forth with Congressional Republicans. This is merely the latest in partisan bickering between the nation’s revenue collector and lawmakers following a number of IRS missteps, most notably the report on lavish IRS spending on agency parties and the targeting of conservative groups pursuing tax-exempt status. As a result, Congress reacted by slashing the IRS’ budget by about $1 billion over the past five years which has had a dramatic impact on IRS customer service and enforcement.

Admittedly, the Commissioner’s explanation of where exactly the IRS is acquiring the funding for the new hires is vague at best.  In his statement, Koskinen cites attrition and “certain efficiencies” as the source of the revenue but goes no further in outlining details.  Interestingly, however, Koskinen does go so far as to explain the rationale behind the funding allocation to enforcement by saying that money is specifically earmarked for certain expenses and cannot be allocated to different departments, i.e., the $290 million Congress recently gave the IRS for cyber-security and other technology improvements.

Despite any ambiguity around the allocation of funds to enforcement hires, there is no debate this function of the IRS has been hit hard by budget cuts. Referred to as one of the core competencies of the IRS Revenue Officer Staffing has fallen over 30% the last five years. The IRS’ inability to have an effective field presence threatens not only to diminish collection revenue but also to undermine voluntary compliance.

How does this affect you or your company? While the impact may not be too dramatic, an uptick in activity as a result of the new hires could mean that the IRS is likely to open more cases or work inactive cases as it has more hands to do so. Ultimately, being proactive when it comes to dealing with your tax issues is best practice as you don’t want to be caught by surprise while simultaneously racking up penalties and interest.

More IRS Enforcement on the Horizon

It’s not a secret that the Internal Revenue Service has been understaffed for quite some time. However, the IRS has announced that for the first time in five years there will be significant enforcement hires (between 600 and 700 new employees). Although the IRS is still suffering from years of successive budget cuts totaling almost $1 billion the IRS has, over the course of the last year, received funds that allow it to address its most dire staffing needs.

In announcing the new hires, IRS Commissioner, John Koskinen, provided an overview of how these decisions are made. According to Koskinen, earlier this year Congress provided $290 million specifically earmarked for taxpayer service, identity theft and cybersecurity. The more recent availability of funds necessary to fund the enforcement staffing was recognized through certain work efficiencies and the rate of attrition in enforcement.  

A cursory review of fiscal years 2014 and 2015 staffing illustrates that collection personnel such as Revenue Agents and Revenue Offices, have been two of hardest hit functions of the IRS. In fact, from 2014 to 2015 each role lost 10% of its workforce at a time when many other functions had almost no losses and some even added positions. Interestingly, Commissioner Koskinen, in his announcement, highlighted the fact that each enforcement position typically returns almost $10 for every dollar spent – and many times, much more. 

The enforcement hiring will be introduced in two waves, one in the next few weeks and the second wave later this year. The initial hiring will focus on entry-level positions in SB/SE (small business/self-employed) while the hires in the latter part of the year will assist with more high-profile enforcement areas.

It’s difficult to know the practical impacts on taxpayers, collection inventory and practitioners prior to implementation, yet it’s safe to say that there probably hasn’t been this much reason to be proactive in respect to resolving a collection case in six years. I think it’s reasonable to speculate that the hiring initiative together with the IRS’ Early Action Initiative and the private debt collection authorized by the FAST Act are going to shake things up. 

For the full Koskinen article, click here. 

 

 

 

 

Heed These Warning Signs When Seeking Tax Resolution

Nearly two-thirds of America’s small businesses say that the complexity and cost of federal tax preparation poses a significant problem for their business, according to the National Small Business Association. Consequently, small business owners can sometimes miss important nuances of the tax code, putting them at odds with the IRS and in need of tax resolution services.

“Businesses facing difficult tax problems can be very vulnerable,” said Brian Biffle, president of 20/20 Tax Resolution. “Owners feel they need to react quickly but they are often worried about facing IRS penalties and can be unsure of tax policy regulations. The rush to solve the problem, combined with a lack of knowledge, can make identifying a qualified tax resolution provider a challenging process.”

However, there are many reputable professionals providing tax resolution services, Biffle said. The key is to identify one that is knowledgeable, diligent and will actually help solve tax problems.

“Many tax resolution companies work very hard to provide honest and effective counsel to their clients,” said Biffle, whose company has successfully managed tax issues for more than 26,000 clients nationwide as of April 2016. “But there are distinct warning signs business owners should recognize when searching for a provider.”

  1. Overpromising – No tax consultant can guarantee results, whether those results include reducing tax liabilities or promising acceptance into the IRS Offer In Compromise program. If a company makes immediate guarantees with no information to back up its claims, it may be a sign to seek a different provider.
  2. Lack of transparency – Every tax resolution provider should be comfortable delivering background information on their company in an upfront and easily understood manner. The provider should be able to discuss company ownership, years in service and past client successes. When they aren’t able to do so (or are unwilling to do so), a business owner should move on.
  3. Demands for in-full payment upfront – As in any relationship with a professional services provider, trust is a key indicator of partnership. If a tax resolution provider wants to charge a fee just to speak with a consultant, you can end up paying an unlicensed salesperson to simply tell you what the company can do for you. Find a company that provides initial consultations completely free of charge.
  4. Lack of credentialed consultants – A competent tax resolution provider will not utilize unlicensed commission-based sales people to provide a diagnosis of your tax issue. Remember that only a CPA, an attorney or an Enrolled Agent can represent you before the IRS. If your tax resolution provider is not offering you assistance through a seasoned, credentialed consultant, it’s a good sign the provider will not be working in the best interests of the business.
  5. Unclear next steps – The provider should be able to discuss who will be managing the work, how often they’ll be in contact and what a business owner can expect with respect to ongoing reporting of progress. If these specifics are unclear, it’s a sign to walk away.

“These are the key indicators that should raise consumer concern,” Biffle said. “Of course, business owners should always use their best judgment, but as in so many aspects of business, if it feels too good to be true, it probably is.”

How Long Before the IRS Catches On?

While the IRS will initiate the process of collections almost immediately after a tax return with a balance is filed, its level of aggression varies widely from case to case.  Yet, the IRS has a ten-year statute of limitations to collect any federal tax debt.  This statute of limitations begins from when the tax is assessed and can be extended due to additional tax assessments or bankruptcy or other legal action.  Additionally, the IRS has three years to audit any given tax return.  However, if the IRS deems a return fraudulent there is no such statute of limitations for audit or collections, effectively the statute of limitations becomes infinite.  Again, not all cases are viewed equally within the eyes of the IRS.  Businesses are typically on a much shorter leash than are individuals.

The IRS will begin the process of collections with a simple, “Notice and Demand” for payment letter.  These letters are typically issued about 30 days after a delinquent tax return has been filed. If the IRS receives no response to its initial request for payment within the timeframe allotted in the letter, it will proceed with increasingly aggressive correspondence. After the timeframe to respond has elapsed the IRS will issue a CP504 notice, “Intent to Seize Property or Rights to Property.”  This is the IRS’s preliminary threat to enforce collections of a debt.  If it again receives no response, it will elevate its aggression and file a federal lien and/or provide a “Final Notice of Intent to Levy.”  After a Final Notice of Intent to Levy has been issued a taxpayer has 30 days to respond before the IRS can legally take this action.  After 30 days has elapsed and the taxpayer has not taken corrective action or requested an appeals hearing, the IRS can levy at any time.  This entire process can take as little as three months, but can take much longer.

For individual taxpayers, most of these notices will be computer-generated and most cases that are below $250,000 in total tax debt will remain with the IRS’s Automated Collections Department (ACS).  This means to speak with any IRS personnel a taxpayer will need to contact ACS at their toll-free line and bear through long hold times to discuss case specific options for resolution with IRS representatives standing by in a call center.  The IRS typically will not contact an individual taxpayer directly or by phone unless they are flagged for audit or the liability exceeds the $250,000 benchmark.  There are certainly exceptions to this for prolonged periods of delinquency or for “pyramiding” taxpayers.

For most businesses and particularly with regard to employment tax, the IRS will elevate the level of collections much more rapidly.  Any employment tax liability that exceeds $25,000 will require a field agent to be assigned for resolution of the account.  Employment taxes are considered to be held in a trust by the employer and are used to pay employee’s income tax as well as funding both Social Security and Medicare. Because of this, the IRS pursues this tax type much more aggressively than other tax types.  Due to tremendous shortfalls in financing for these entitlement programs, the IRS is ever increasing its effort to connect with business owners who fall short on their employment tax obligations as quickly as possible.

Experts: Plan Now To Improve Tax Outcomes Next Year

According to Internal Revenue Service data, nearly one third of all Americans wait until the last minute to file their federal income taxes. And that delay can come at a hefty price, say tax consultants at 20/20 Tax Resolution. Therefore, taking the time right now to plan for next year’s tax deadline is the surest way to ensure you and your business feel less pain and don’t run into trouble down the road.

“Business filers can take an average of 24 hours to prepare their annual tax returns,” said Brian Biffle, president of 20/20 Tax Resolution in Broomfield, Colo. “But for complex returns, that figure is typically much higher and poor planning comes with huge opportunity costs, including the risk of missing deductions, making errors and increasing stress due to the hurried rush to finish by the deadline.”

Instead of incurring these costs and risking another stressful tax season, Biffle and his consultants advise clients to take action immediately.

“Our clients come to us when their situation seems so dire they have no option but to seek professional assistance,” said Biffle, whose agents provide tax resolution services to clients facing action by the IRS or state taxing authorities. “But with a little proactive planning throughout the year, businesses and individuals can vastly decrease the pain of tax preparation and even save themselves the possibility of needing 20/20’s services in the future.”

Here are 20/20’s top tax planning tips for 2016:

  • Start maintaining better records: It seems like a no brainer, but maintaining organized, accurate records throughout the year is the quickest way to reduce tax headaches come next April. Rather than throwing receipts in a box and waiting till next year to review them, start documenting them now. You’d be surprised at how many businesses fall short in this area.
  • Get organized: If your accounting system is a hodgepodge of spreadsheets and documents in a folder called “Taxes” on your hard drive, now is the time to research and identify a manageable system for 2016. There are a lot of products available for nearly every need (no matter the size of your business) and using one of these will save immeasurable time and money next spring.
  • Get educated: You probably asked your accountant about a half dozen questions in the last week about your taxes (and they were the same six questions you asked last year). Take the time now to educate yourself on all things tax related, and give yourself an occasional refresher throughout the year. This education will make you a much more savvy taxpayer.
  • Plan for estimated taxes: If you were unprepared for your tax bill this year – just as you were last year and the year before that – start planning now for your quarterly and annual estimated taxes. Accurate planning takes the bite out of tax season. In addition, it helps you make smarter business decisions throughout the year.

“Obviously, we specialize in helping people resolve their tax issues when problems arise,” said Biffle. “But following these tips can help businesses start off on the right foot, and keep them from running into the problems that bring so many distressed taxpayers to our door.”

Justice Department Gets More Aggressive

Employment tax fraud has for many years been an issue of vital importance to both the Department of Justice and the Internal Revenue Service (IRS). Employers have the obligation to withhold and turn over taxes belonging to individuals—if they fail to comply with this responsibility, our system of relying on voluntary compliance can erode. Additionally, because the IRS does not pursue individuals for the non-payment of their withheld taxes, the loss to the government is exacerbated. Not only are the funds not collected from the employer, but the employee is actually given credit for taxes paid.

How exactly does this play out? While each situation may differ due to various circumstances, for the purposes of this discussion let’s think of it this way:

Imagine a company has in employee who is paid every two weeks. However, when pay day comes the employee doesn’t receive the full amount.  Instead, he/she is paid less, sometimes much less, because the employer is charged with making certain necessary deductions such as income tax (federal and state), social security and Medicare.

On top of that, the employer has the obligation to ensure that the withheld funds get to the IRS by making what is called a federal tax deposit. However, let’s pretend that in this particular situation, the employer does not send the funds to the IRS. At this point, a tax liability is created in the employer’s name and penalties and interest begin to accrue. The employee, however, still receives credit for the taxes that were withheld from his/her paycheck.

Fast forward to the end of the year. Now, the employee has a tax due based on income earned and deductions as we all do. The amount due is usually paid in advance by the withheld taxes even though in this particular example the funds aren’t actually paid in by the employer.

Recently, this issue has started to receive even more attention. In fact, the Wall Street Journal published an article discussing the Department of Justice’s intent to get tougher on employment tax fraud—which can include withholding by not paying over employment taxes (article link). This piece provides insight from the head of the Justice Department’s tax division, Caroline Ciaolo, “Employers across the country need a loud and clear message that this is not just a civil violation—that the willful failure to comply with the employment-tax laws is a crime and that we’re going to hold folks accountable.”

Despite the aggressive tone of Ms. Ciarolo’s statement and the Department of Justice string of victories against companies accused of employment tax fraud nothing has seemingly changed from a funding perspective to allow a new initiative. The question looms: has the Department of Justice realigned priorities and resources to target employment tax cases over other cases or is the publicity surrounding the recent verdicts an opportunity for the Department to send a larger message?

While no one has a crystal ball, at this point rather than focusing on the answer to this particular question, it is probably better to focus on resolving an employment tax issue before it gets the Department of Justice’s attention.  For those of you facing this type of tax problem, we strongly urge to you contact us today.  There is no reason for you to wait around to see what could happen given the current landscape.

 

Success Story: 20/20 Assists SMB Owner in New Jersey

Back in April of 2013, a small business (SMB) owner from Hackettstown, New Jersey, approached 20/20 Tax Resolution for help in resolving a $60,000 liability with the IRS. We worked over the next several months to obtain the appropriate documentation and analyze the taxpayer’s current financial condition. Because of the precarious situation the business was in when they came on board, we also filed several appeals on behalf of the business so as to keep them safe from enforcement actions (levies on bank accounts, seizure of assets, etc.), while we took the time to analyze their situation.

In July of 2013, we submitted a proposal for an Installment Agreement in the amount of $300 per month to resolve the liability through what’s called a Partial Payment Installment Agreement. Although we knew that this agreement would need to be reviewed every two years, the taxpayer could not afford a larger monthly payment to meet the six-year rule so as to avoid the two-year review. After submission of our proposal, there was the normal back-and-forth of negotiations and collection of additional supporting documentation as well as awaiting the appeals process for the previously filed appeals.

During this time, we also had to deal with a Revenue Officer who was not playing by the rules and issuing erroneous levies. We were successful at getting these levies released based on the rules and regulations set forth in the Internal Revenue Manual (IRM), but all of these issues lead to a delay in obtaining a formal resolution.

By April of 2014, the business’ financial condition was only worsening. Things were even more dire than they were a year prior. This being the case, we decided to move forward with an Offer in Compromise on behalf of the business. The taxpayer was skeptical at first that we could work out an agreement of this type, but we discussed with him the new rules and regulations surrounding the Offer in Compromise based on the Fresh Start Program and showed him why his business qualified for the program. By October 2014, we completed the Offer in Compromise and sent it to the taxpayer for signature and to forward with the appropriate down payment and filing fee. Unfortunately, the taxpayer forgot to send in the Offer, delaying our efforts a bit longer. By February of 2015, the Offer was submitted and we were then tasked with awaiting an Offer Specialist to be assigned to the case. The Offer process is quite lengthy and can take up to two years before a formal determination is made on the case. After negotiations back and forth, we were finally successful at resolving this case through the Offer in Compromise program, compromising the liability for a total of $324 in February of 2016.

We were all very pleased with the final results and received this “thank you” from the taxpayer:

I wanted to write to you to say thank you for all the work that you did for me to help me resolve this tax issue. As you may remember, we had previously used another company, which charged us huge fees and did not advance the process of settling the debt. That company went bankrupt. I had mistakenly turned over all my documentation to that company. I lost all of it. That was an enormous error on my part. I trusted the wrong people. I also lost all my records, which made your job even more difficult. I, not only, lost my money to that company, I also found that the tax issues worsened. I was quite “gun-shy” when I hired your company. However, you were very patient with me throughout the process. I thank you so much for that. When you laid out my options, I could not have imagined that this would have been settled so fully and completely. It is like a breath of fresh air. So, I just wanted to thank you so much for your professionalism, diligence, and patience.”

As you can see, not all cases are cut and dry, and the IRS can be an extremely difficult entity to deal with. This being said, with proper representation, and maybe a little bit of patience, your case could be resolved just as completely as this one was. Get in touch with us today to learn more about how we can help with your particular situation.

IRS Collection Cases: Top 5 Myths

It’s that time of year.  Taxpayers across the country are preparing returns only to learn that they owe taxes they cannot pay.  What’s the consequence of owing the Internal Revenue Service (IRS) unpaid taxes?  That’s a question that is difficult to answer since every case depends on the facts and circumstances of the specific situation.  However, what owing taxes does mean is that the taxpayer is likely to encounter the IRS Collection Division.

The Collection Division is responsible for collecting taxes that have not already been paid or placed on a voluntary resolution program.  Unfortunately, there is quite a bit of misinformation regarding cases assigned for collection by the IRS.  Regardless of your circumstances here are a few of the most common myths of IRS collection cases:

  1. You’re not responsible for mail you never get: Many taxpayers believe, mistakenly, that if they don’t let the IRS know their most current address they are not responsible for collection letters the IRS is sending.  Nothing could be further from the truth.  Generally, the IRS’ requirement for service by mail is the taxpayer’s last known address.  Therefore, if the taxpayer has not notified the IRS of an address change the taxpayer will actually be the one to suffer by being in the dark.  This issue can end up costing a taxpayer valuable collection appeal rights.
  2. The IRS will settle for “pennies on the dollar”: The IRS does have a settlement program called the Offer in Compromise (OIC). Interestingly, offers happen probably more often than many tax professionals think, but a lot less than taxpayers have come to believe. The IRS’ own numbers over the past two years show an Offer in Compromise acceptance rate of roughly 40%.  Still, the key to a successful offer is the pre-qualification process.  There are many nuances to an Offer in Compromise case and as a result, there is no substitute for experience when it comes to presenting a viable, realistic offer.Myth v. Reality
  3. The IRS can collect against you for a lifetime: Sometimes dealing with IRS Collections for more than a day can feel like a lifetime.  Especially, if you’re on hold.  In fact, the rules concerning how long the IRS can pursue unpaid taxes are quite clear.  Generally speaking the IRS’ statute of limitations for collection is ten years from the date a liability is assessed.
  4. The IRS will take your home: In actuality, the IRS is not going to take your home.  That’s not to say that the IRS can’t take it… only that the IRS doesn’t do it.  Seizures (which can include home, car, boat, etc.) themselves are fairly rare for the IRS.  In the past two fiscal years, the IRS has reported fewer than 500 total seizures.  And because policy statement and stricter rules make seizing a primary residence more difficult it becomes increasingly difficult to face that proposition.
  5. At least the IRS can’t get to your retirement accounts: Unfortunately, the IRS can get to retirement accounts.  There are very few assets exempt from the reach of an IRS levy.  They are outlined specifically in the Internal Revenue Code and include (here), but are not limited to, Workmen’s Compensation, Unemployment Benefits and minimum exemptions for salaries and wages.  What one won’t find exempted by rule are 401k accounts, stock accounts or Social Security benefits.

Of course, dealing with IRS Collections is a nuanced process that should not be taken for granted.  But, dispelling the myths above should help bring more clarity to what one may face when dealing with IRS Collections.

Glitch in IRS Direct Debit Installment Agreements

Direct debit installment agreements (DDIAs) allow taxpayers to make payments through a monthly direct debit from their bank or other shared draft account. From 2011 to 2015 the overall installment agreement default rate was often twice as high as the default rate of DDIAs. Yet, despite the apparent overall success of the DDIA program, we have found a recent pattern of issues with these agreements.

For years, our firm has been establishing resolutions for taxpayers around the country. We have found that monitoring the agreement after it has been established to ensure that both the IRS and the taxpayer abide by the terms set forth in agreement is crucial to the long-term success of these resolutions. Recently, in the course of our monthly monitoring of an agreement set up in May of 2015, we discovered that the plan was being defaulted. This was curious because the taxpayer had not missed any monthly payments or missed or made any other tax payments late.

In February, the IRS US Mailboxissued its formal default letter, Notice CP523 “Notice of Intent to Levy – Intent to Terminate your Installment Agreement” to the taxpayer. The notice stated that the taxpayer’s installment agreement payment was overdue and that the agreement would be terminated due to missed payments.  The explanation for the default raised even more questions because research illustrated that the IRS had not even attempted its most recent draft of the taxpayer account.

The events prompted extensive research with IRS Customer Service. Eventually, it was determined that due to an IRS error there was, in fact, no attempt made to debit many taxpayer accounts on DDIAs. The IRS then compounded its error by erroneously issuing default notices to the taxpayers whose payments were not drafted as though the taxpayers themselves had missed the payments.

In an ironic twist, at almost the exact same time that we discovered the IRS error in our case, the Treasury Inspector General for Tax Administration (TIGTA) released a report titled Direct Debit Installment Agreement Procedures Addressing Taxpayer Defaults Can Be Improved. In short, the report found that, “As a result, systemic DDIA defaults increased taxpayer burden because taxpayers incurred additional interest on their unpaid balances. In addition, revenue collection was suspended until the DDIAs were restructured, and some were not reestablished.” 

Thankfully, we learned through the IRS that letters outlining the erroneously issued default notices (example) would be mailed to all taxpayers affected by the glitch. All installment agreements erroneously defaulted would be reinstated with payments continuing as usual moving forward. Despite the recent hiccup and the concern of TIGTA with DDIA defaults, the program still offers the most reliable way for taxpayers and the IRS to enter into lasting agreements.