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. 
  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 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.

[Infographic] 5 Tax Mistakes You Don’t Want to Make

Confronting an actual or potential tax liability with the IRS can be worrisome and overwhelming — it’s important to know what mistakes to avoid. There are may nuances to understanding how to work though a situation effectively. But, there are also some very simple rules that will be beneficial to both you and your business in the long run.

As a business owner, this infographic outlines five tax pitfalls that you DON’T want to make when dealing with a liability.

Five Tax Mistakes You Don't Want to Make

There are solutions available to taxpayers who owe taxes. The key to making the experience as manageable as possible is knowing a few easy tips about what to avoid.

You can always learn more about the ways in which we can help you and your situation, or feel free to contact us with any questions.

To download a high-resolution version of this infographic, please click here. 

What You Need to Know About Penalties & Interest

More often than not, clients come through the door and want to know one thing: how much can be removed from their total tax bill. While penalty abatements are available, I always caution my clients to focus on the more important matter first, which is obtaining a formal resolution to the tax debt. Although penalty abatement can grant some penalty relief if reasonable cause can be established, it is not always wise to request it until the client has paid the tax in full or established a resolution such as in Installment Agreement. In fact, if neither has been done, the taxing authorities will rarely grant penalty abatement.

A lesser known fact when it comes to interest is that Congress, not the IRS, sets the rates (currently 3%). And under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. Interest is probably not going to be waived, but there is an exception if penalties are abated. In such cases, interest on the penalty will be adjusted so that the interest on the penalty amount is removed. However, the interest on the tax itself is a necessary evil and typically cannot be removed.

When it comes to penalties assessed by the IRS, the most common are failure to file, failure to pay, federal tax deposit penalty, estimated tax penalty, and the Trust Fund Recovery Penalty (TFRP). To call the TFRP a penalty is a bit of a misnomer, since it is actually the principal tax amount that a business withheld from employees’ paychecks, and then failed to pay over to the IRS. It is a portion of the related business liability, so if a business is paying its liability through an Installment Agreement, those payments are applied to the TFRP as well. But, remember that establishing a resolution for the business collection case does not automatically resolve the TFRP case against the individual(s). The individual cases must be addressed and resolved separately. 

The IRS will abate or remove penalties if you establish reasonable cause. This is generally granted when the taxpayer proves that he or she exercised ordinary business care and prudence in determining his or her tax obligations but nevertheless failed to comply with those obligations. A showing of reasonable cause typically requires evidence that the taxpayer acted in good faith, and that the failure to comply was not due to willful neglect. Absent first-hand knowledge of what led to the tax accrual, a good starting point for a penalty abatement, is asking the taxpayer to describe in his or her own words what happened. This should provide enough insight for the tax professional to further investigate and eventually expound upon key relevant points. It’s always best to focus on the facts and timelines that overlap with the time of the accrual, thereby providing the best chance of success. 

Some of the specific reasons listed in the IRS penalty handbook that may establish reasonable cause are as follows:

  • Death, serious illness, or unavoidable absence of the taxpayer or in the taxpayer’s immediate family
  • Fire, casualty, disaster or other disturbance
  • Unable to obtain records
  • Erroneous advice or reliance

*The above list is not exhaustive, and other reasons may qualify for penalty relief. It is important to provide as much detail as possible, and any written documentation available, to have the best chance to obtain relief.

If penalties have been assessed against you or your business, you can minimize the damage by remaining current on all tax obligations moving forward, establishing a formal resolution to the back tax liabilities, and formally requesting abatement of all assessed penalties. In the meantime, if you are unsure about your liability, we encourage you to utilize our online calculator tool (click here) that will allow you to calculate the penalty and interest on your tax liability, today.

Payroll: What You Don’t Know Can Hurt You

I regularly speak to the collection system or process that underlies IRS and state collections. A common theme that is promoted in our collection representation education courses is to try and control as much of the collection process as possible. There is nothing more powerful to one’s role in the collection process than knowledge and communication.

These key components of dealing with the IRS are true for individuals and businesses alike. And yet, when we talk about knowledge and communication we are so often referencing areas of improvement for business owners. Small to medium-sized business (SMB) owners are typically inundated with responsibilities. Not only are the company’s employees looking to owners for their livelihood, but many are still directly involved in the company’s production, its product.

Take these burdens and couple them with an IRS system that sends an extraordinary volume of mail to report on even the slightest detail (a change in reconciling small dollars on a return) and certain problem patterns develop. There are two very common scenarios that lead to the owner getting behind and thus losing control of the collection process very early on:

  1. Not opening IRS mail
  2. Empowering someone other than themselves to control the payroll process

The IRS is infamous for its mountains of mail. Taxpayers know it, tax professionals know it and the IRS knows it.  For the IRS, it’s a crucial and relatively cost effective way to fulfill certain statutory obligations such as the need to keep taxpayers notified. And while it works there can also be a point of diminishing returns. It is not at all uncommon for the volume of mail to lead to the feeling that the letters never have any substantive material. This fosters an almost apathetic approach to the next letter that leads to missing key pieces of information such as notification of ability or an appeal.

That same feeling of apathy can develop in relationships within a business. Sometimes it’s not a lack of interest that creates the problem but rather putting too much unchecked trust in someone responsible for something as important for payroll. In any business, the owner carries the ultimate responsibility for ensuring that payroll tax obligations are met and met timely.  Although someone can be hired for a specific skill like accounting, a business owner cannot delegate responsibility for employment taxes. There is no way to move that burden. A business owner will always be in a position to know where their company stands with its payroll tax obligations if this is clearly understood. 

I recommend to my clients nothing short of weekly meetings, even if they are quick, to review the critical functions of their company. With many small businesses, there are going to be some issues. Knowing about the problems so they can be addressed is vital to getting back on top. Let us be of assistance when it comes to answering any of your questions by

Let us be of assistance when it comes to answering any of your questions by contacting us now, we are always here to help. You can also learn more about payroll tax issues, here.

Business Owner? Pitfalls of Not Paying Attention

Business owners wear many different hats and often times work long hours to ensure that they provide quality products and services for their clientele. Over the years, I have worked with many business owners that take considerable pride in their given trade. Whether I am working with an electrician, hair stylist, physician or daycare owner, there exists a certain level of experience and passion, a calling if you will, that leads one to start their own business. While applying a skill set in a particular trade is undoubtedly a vital aspect of running a successful business, the role of the business owner does not stop there.

Many small business (SMB) owners are forced to delegate duties and responsibilities to others as there are simply not enough hours in any given day to “do it all.” Delegation frees up more time to focus on strategic hands-on work, instead of worrying about small details. While effective, business owners must be cautious when delegating responsibilities relative to tax issues. It is not uncommon for a business owner to rely on a CPA to prepare tax returns, or a bookkeeper or payroll service to handle income statements and payroll tax deposits. Ultimately, however, a business owner must maintain accountability despite the fact that someone else is “handling” the taxes.   

The issue of accountability becomes paramount when dealing with tax liabilities in general, but particularly when that liability stems from unpaid withholding taxes. While it is clear that the IRS will attempt to collect unpaid withholding taxes from a business, many owners are surprised to learn that the IRS can also make assessments against willful and responsible parties under the provisions covering the Trust Fund Recovery Penalty. Regardless of whether or not a business owner is delegating the federal tax deposit responsibilities to others, in most cases the IRS will still find the owner responsible on a personal level.

Anyone that has dealt with IRS Collections has probably received numerous letters and notices regarding their liability. In fact, I would go so far as to say that IRS Collections can inundate taxpayers with notices over time. While no one wants to receive a letter from the IRS, it is imperative that business owners pay attention to each notice.  Often times these notices will include requests for a response or additional information, and may contain important deadlines. Failure to respond to a notice could result in audit, additional tax, interest and penalty assessment, or levies, garnishments and possibly seizure.

When it comes to tax issues, business owners must take an active role in reviewing tax returns, federal tax deposits, and notices on a consistent and on-going basis. Paying attention to the details may make the difference between working out a reasonable resolution or facing an insurmountable obstacle. When in doubt, it is essential to seek professional help. Contact us today, and we can help to answer any questions while simultaneously getting you and your business back on track.

Sometimes the Best Advice is Tough to Give

Recently, I came across an article on a major clothing company highlighting a payroll hiccup during which the employees went temporarily unpaid. From the sounds of it, this company has been facing money problems for quite some time, ultimately filing for bankruptcy protection in October 2015. The company chalked up the problem to a procedural error by a global banking and financial services company, specifically stating that its money woes had nothing to do with it.

Whether the company’s line is true is not the point. Let’s assume for a moment the worst, that the payroll problem was related to the finances. Then, let’s take a moment to applaud them for making the responsible decision to hold the net payroll, temporarily, until all of the payrolls related obligations could be met.

A company’s ability to fulfill its payroll tax obligations has a direct impact on the company, the owner, investors and the employees. It affects the company’s very existence. The responsibility to collect and remit payroll taxes is statutory, required by law. The law states that a company has the burden to collect and remit payroll taxes from its employees when the employees are paid. Therefore, if payroll is delayed so is the obligation to remit the tax-related aspects of the payroll.

It goes without saying, but running a company with employees carries a host of responsibilities. After all, a company’s employees rely on it to provide for their general well-being. But, to a business owner, the importance of trust taxes, specifically payroll, cannot be overstated. Therefore, when beginning a new representation case, it is critical to introduce an educational component to the work. It’s imperative for clients to understand how to make good decisions in the face of financial distress. We understand that it’s certainly not easy to have a conversation with employees about a payroll being held. After all, those people are likely counting on it because of obligations of their own.  Nonetheless, this can be the correct decision in some cases.

Holding a payroll is not the only answer and in some cases can be the wrong answer to a tough spot. But compared with the fallout from missing a payroll tax deposit, such as an IRS levy, it can actually prevent a bad situation from getting much worse. Dealing with IRS Collections is about ensuring that a company facing duress survives for everyone involved over the long term. The questions about what to do and when make it vital to have a qualified and competent professional to lean on.

If you are a business owner and find yourself facing a payroll problem, make it a priority to give us a call today. The longer you wait, the more complicated and difficult your situation can become. If you happen to be a tax professional with a client who could use our assistance, either contact us directly or fill out our client referral form, here.

“I’ve Got My Tax Liability Under Control”

Over the nearly 20 years that I have been in practice I can’t tell you how many times I spoke with taxpayers believing that they had their resolution under control by making voluntary payments.  These soon-to-be clients suffered from all too common misperception that these payments would in some way deflect attention from their case or cause it to be put to the bottom of the collection pile.

Unfortunately, they couldn’t be more wrong and it’s usually a levy or lien that brings about the realization.  Yes, of course, voluntary payments are important to paying unpaid taxes.  In fact, they are the first thing I recommend in nearly every case, especially employment tax cases.  But to think that voluntary payments alone will alter the course of one’s case can be a huge miscalculation.  State and IRS collections are done by system.  They’re not whimsical or based on good faith.  Until a tax liability is paid in full or a formal resolution, such as installment agreement, is agreed to the collection process moves forward exposing taxpayers to liens and levies.

Just recently, in fact, I encountered this very situation.  A taxpayer came to me at the end of last year irate about being levied by the IRS.  The company owes the IRS just over 100k in employment taxes but the owner of the company had been making voluntary payments of $2,000 per month.  He hadn’t spoken with the IRS but had noted less mail was coming since beginning the voluntary payments.  He was angry that the levy followed his very obvious effort at resolving the situation.  Unfortunately, this taxpayer had assumed that his payments had directly influenced the IRS’ lack of urgency with his case.

Immediately, I began my effort of educating the taxpayer about the collection process.  Most every state and definitely the IRS has a set protocol for collecting unpaid taxes.  The process begins with notification of a balance due, letters with an increasing demand for payment and ultimately assignment to a field personnel for collection.  Every collection case goes through this protocol until the liability is paid or a collection determination is made.  A collection determination means the state or IRS’ decision on how the liability will be resolved.  A tax practitioner’s goal is to mold and influence that collection determination within the rules to their clients’ best interests.

The point here is that making voluntary payments, while advisable, does not alter the collection process.  Short of full paying the liability proactive and consistent contact with the authorities is not just recommended but required in order to ensure that a client remains protected from enforcement action.

If you find yourself in this situation, it is now more important than ever to get in contact with us. We are always here to answer any questions that you might have about your particular situation. Make it a point to contact us today so that we can get your life back on track.

Spending Bill Increases IRS Funding

In a rare success story relating to the IRS budget, President Obama signed into law on Friday a spending bill that provides an increase in funding to the Internal Revenue Service.  According to an article written for The Hill, Naomi Jagoda explains how the $1.1 trillion omnibus provides an additional $290 million for the IRS, an increase of 3 percent over the last fiscal year.

The IRS budget has been in a free fall ever since the controversy erupted over the agency’s heightened scrutiny of Tea Party groups.  In fiscal year 2015, Republican law makers continued the trend by slashing another $346 million – a budget at its lowest level since 2008.

The Center on Budget and Policy Priorities conducted an analysis of IRS numbers back in September.  The analysis notes that since 2010, the IRS’ budget has been cut 18% after adjusting foMoneyr inflation.  The result is over 13,000 fewer employees, lowest individual and business audits in more than a decade and fewer than half of customer service calls being answered.

In granting the boost to the budget, lawmakers specified that the funding is to be used for “taxpayer services to ensure that the agency responds to taxpayer questions in a timely manner, and to improve fraud detection and prevention and cybersecurity,” according to a summary from Republicans on the House Appropriations Committee.  Despite the compromise that lead to the additional funding, tensions are still running high between Republicans and the IRS with four articles of impeachment introduced in October still looming over the Commissioner of the beleaguered agency.

While the funding increase seems to signal a sign that some recognize the difficulties that the political infighting has created for taxpayers and practitioners, there is still quite a bit left to be done before the IRS can operate in a more proactive capacity.  What’s more, new laws will inevitably stretch the IRS even further than before. For example, the Affordable Care Act, private debt collector provision of the transportation bill as well as initiatives like the passport revocation program and return preparer licensing.  To address meaningful reform within the IRS, lawmakers have to restore the IRS’ budget to a level that allows it to realistically address its mission.

 

New Law Broadens IRS Enforcement

Fun in the sun in Mexico?  Maybe not if you owe the IRS back taxes.  On December 4, 2015, President Obama signed into law the Fixing America’s Surface Transportation Act, also known as the FAST Act.  What does that have to do with taxes and your ability to travel?  Everything…

The FAST Act includes a new provision in the Internal Revenue Code (IRC), Section 7345, titled Revocation or Denial of Passport in Case of Certain Tax Delinquencies.  In short, the law says that the State Department can revoke, deny or limit passports for anyone the IRS certifies as having a seriously delinquent tax debt. 

So, what is a “seriously delinquent” tax debt?  The bill defines a seriously delinquent tax debt as one that is unpaid and legally enforceable, in excess of $50,000 (including penalty and interest) and has been assessed along with a Notice of Federal Tax Lien or Notice of Levy.  The $50,000 limit with be adjusted each year for inflation but still is a relatively low number especially considering the inclusion of penalty and interest.  After all, penalty alone can accumulate up to 47.5% and interest compounds daily.

Thankfully, there are exceptions to the rule.  A taxpayer that is subject to an Offer in Compromise, an installment agreement, due process rights or innocent spouse relief will not be affected.  But how the IRS will ensure those that are exempt raises the practical question of how exactly this information will be communicated to the State Department.  The law indicates that the State Department must rely on Treasury for a list of those taxpayers that may be affected by this law.  How often will the IRS send a list?  Will the list include every taxpayer owing over $50,000 or will the IRS set a higher bar, at least initially?  And what about a taxpayer listed by mistake or one that pays the tax debt? The concern then becomes: how quickly can they be removed.

Only time will tell how the IRS chooses to employ this new power.  And there is some question about whether a taxpayer that lands on the list will challenge it in court.  In the meantime, it behooves every taxpayer that could fall into this category to reach an understanding on repayment with the IRS as soon as possible.