Where do Tax Court judges get their experience from?

Posted on August 17, 2008
Filed Under Tax Court | Leave a Comment

Tax Court judges have experience either as former government lawyers or in the private sector at law firms. Of the thirty-two Tax Court judges, thirteen previously worked for the government as IRS lawyers; four were employed by the Department of Justice’s Tax Division.  

The remaining judges have legal experience in the private sector (with the exception of two who were counsel to the Senate Finance Committee, and another judge who served as counsel to the House Ways and Means Committee).  Sixteen have advanced masters degrees in tax law (LL.M).

Tax Court judges are appointed by the President for 15 year terms.      

The judges travel to designated cities to decide the trials of the cases set to be heard during that visit - it is a “traveling court.”  There are no jury trials in Tax Court; all cases are decided by the judge.

Tax Court judges are essential to due process - they provide an independent review of IRS actions (like audits and collection cases) when administrative attempts at resolution fail.

Agreements to repay IRS debts under $25,000 can be simple and straightforward.

Posted on August 2, 2008
Filed Under Automated Collection Service, IRS Financial Statements, Installment agreements | 1 Comment

I often have new clients come in who owe the IRS under $25,000 and have the ability to repay the debt with monthly installment agreements.  If we determine they can repay the debt within 60 months, we secure from the IRS a repayment that is called a “streamlined installment agreement.”  The Internal Revenue Manual makes these agreements simple and straightforward.       

Benefits of streamlined installment agreements include:

-     No financial disclosures are required to the IRS (bank accounts, source of income, assets, etc.) as would be necessary in other IRS collection cases.

-     No negotiation is necessary with the IRS - they will set up the agreement automatically at the 60 month repayment rate with interest.

-     The agreement can be established either by phone or online at the IRS website.

Streamlined installment agreements are creatures of Section 4.20.4.3 of the Internal Revenue Manual. These agreements are available only on income tax liabilities, not employment taxes.  As is the case with any installment agreement, remaining current on all tax filings and payments is necessary. 

Doing away with an audit result in bankruptcy.

Posted on July 26, 2008
Filed Under Audits, Bankruptcy, Chapter 7 | 2 Comments

I received this referral this week about eliminating taxes in bankruptcy:

I was audited for my 2005 taxes and owe $55,000 to the IRS as a result.  I owe other debt in addition to the IRS liability, and was considering bankruptcy even before an IRS Revenue Officer came to my house and left her card in my door. Can I include the IRS in my bankruptcy?

Yes, a Chapter 7 bankruptcy can “discharge” taxes from IRS audits if certain “timing” rules from the bankruptcy code are followed. Those rules are:

1.     The bankruptcy must be filed 3 years after your 2005 return was due to be filed (the return was due to be filed on 4-15-06, so three years is 4-15-09); and

2.     The bankruptcy must be filed 2 years after your 2005 return was actually filed (the return was filed on time, on 4-15-06, so two years is 4-15-08); and

3.     The bankruptcy must be filed 240 days after your audit result became final (the audit was finalized on 10-15-07, so 240 days later is 6-15-08).

To determine our bankruptcy filing date to wipe out the audit result, we look for the latest of these three dates.  The latest of 4-15-09, 4-15-08 and 6-15-08 is 4-15-09.  That is the date when the audit liability would be eliminated in bankruptcy.

Until then, we will cooperate and negotiate with the Revenue Officer, which most likely means providing financial statements to her, to prevent any IRS levy action until next spring (4-15-09) when bankruptcy will eliminate the liability.

For more detail on discharging taxes in bankruptcy, see my recent article in the Journal of the National Association of Enrolled Agents, “But I Thought You Can’t Eliminate Taxes in Bankruptcy.“

When does the collection of IRS debt expire?

Posted on July 19, 2008
Filed Under Collection Statute Expiration Dates | Leave a Comment

With more money sitting delinquent in the US Treasury than the government has resources to collect, this is a great question.  All of that “quiet” debt does go eventually go away.  

The IRS has 10 years to collect a tax debt.  The IRS refers to this as a “Collection Statute Expiration Date.” Internally, IRS personnel call it by the acronym “CSED” (pronounced “see-said”).

The 10 years begins when an act is taken to create the debt. That is usually the filing of a tax return with an unpaid balance, resulting in an ‘assessment” by the IRS of the liability.  The collection timeframe can also start from the “assessment” of a balance due from an audit.

After 10 years, the IRS will clear the account balances to zero.  Transcripts can be obtained from the IRS as verification.  The transcripts will show an IRS entry reading “Balance cleared to zero - expiration of statute collection date.”  Any tax liens that were filed will also expire and become legally unenforceable.

“Running out” the collection statute expiration date is a strategy that must be implemented carefully, understanding when it is an appropriate remedy and what actions taken by you can inadvertently extend the timeframe (i.e., offer in compromise, bankruptcy, collection appeals).  If you take an action to give the IRS more time to collect, make sure it is worthwhile.

More on the “CSED” from the Internal Manual 5.1.19, Collection Statute Expiration, can be found here. Legal reference can be found in Internal Revenue Code section 6502. 

“But I thought bankruptcy couldn’t eliminate IRS taxes…”

Posted on July 15, 2008
Filed Under Audits, Bankruptcy, Chapter 13, Chapter 7, Substitute returns, Trust fund recovery penalty | 1 Comment

I hear this often when I suggest bankruptcy as a source of resolution.  I heard it again today during a telephone conversation with a new client.  Here is what I explained to the client:

Under the bankruptcy code, the answer is ”Yes” to bankruptcy as a means of IRS resolution if you owe income taxes, you filed your returns, and the returns were filed so that they are what I call ”a little bit older.”  This means that the returns were actually filed with the IRS more than 2 years before the bankruptcy is commenced, and they were due to be filed with the IRS more than 3 years before the bankruptcy.  In other words, income taxes that are a little bit older can be eliminated in a bankruptcy.

If you owe taxes from an IRS audit, then the result of the audit has to be final on the IRS books for more than 240 days before the bankruptcy is filed, in addition to the returns needing to be a little bit older.

A big “No” to a Chapter 7 bankruptcy if the taxes are more recent, meaning the return was due to be filed within the last 3 years, or was actually filed within the last 2 years.  This “more recent” rule applies to any type of tax - if it is recent, bankruptcy will not eliminate the taxes.  Add a “No” to employment taxes withheld from your employees’ paycheck regardless of when the returns were filed.  These employment taxes are known as trust fund taxes, and cannot be eliminated in a bankruptcy.

A Chapter 7 bankruptcy will usually not eliminate income taxes if you failed to file a return, and the IRS filed a substitute return for you estimating your tax liability.  This is not a return at all for bankruptcy purposes.  If the IRS audits you, and can prove fraud, bankruptcy won’t make it go away.

No one wants to file bankruptcy, but sometimes it can really help and end the problem.

IRS by the numbers

Posted on July 11, 2008
Filed Under Currently Not Collectible, IRS Collection Problems, IRS Enforcement Statistics, IRS Levies, IRS Seizures, Offer in compromise | Leave a Comment

IRS enforced collection activity continues to heat up.  Compromise settlements are down by 70% while bad debt accounts continue to accumulate.  Here are the numbers:

1.     779,000 taxpayer accounts were assigned to the IRS collection queue.

2.     The number of offers in compromises accepted by the IRS declined by 70% from 2001 (38,643) to 2007 (11,618).

3.     40% of withdrawn and rejected offers in compromise are ultimately written off as uncollectible.   

4.     The number of IRS levies against wages and bank accounts increased from just over 500,000 in 2000 to 3.7 million in 2007.

5.     The number of IRS seizures against property like real estate, automobiles and business equipment increased from 74 in 2000 to 676 in 2007.  

Source:  Annual Report of the IRS Taxpayer Advocate Service

What do all of these different IRS collection letters mean?

Posted on June 28, 2008
Filed Under IRS Collection Problems, IRS Levies, IRS Seizures, IRS collection letters | Leave a Comment

IRS collection letters often look similar, and all seem intimidating. But they are not.

I get calls from my clients all the time who have received IRS collection letters and are in a state of anxiety. I ask them to read me what the heading of the letter says, and fax a copy over so I can advise them if the letter puts them in any jeopardy.

The IRS issues collection letters in this order:

CP 14                Balance Due

CP 501              Reminder, We Show You Still Owe

CP 503              Important - Immediate Action Required

CP 504              Urgent Notice - We Intend to Levy on Certain Assets, Please Respond Now

CP 90/CP 297   Final Notice of Intent to Levy and Notice of Your Right to a Hearing

CP 91/CP 298   Final Notice Before Levy on Social Security Benefits

This cycle can take several months to complete.  Each notice is usually issued about five weeks apart.  In high dollar cases or for businesses, the IRS may sometimes skip the complete cycle and go to the final notices.

Of the notices, only two are a true source of anxiety.  Those are (1) the Final Notice of Intent to Levy and Notice of Your Rights to a Hearing (CP 90/297) and (2) the Final Notice Before Levy on Social Security Benefits (CP 91/298). These notices are the only ones that permit the IRS to start proceedings to take wages, bank accounts, automobiles, real estate and business assets.  

The Final Notice of Intent to Levy contains important legal rights, including being able to file an appeal to have a hearing to settle the case, and take the results to U.S. Tax Court if they are not acceptable. No collection action occurs while the appeal is pending provided it is filed within 30 days from the issuance of the notice. 

Do not be confused by the other notices, they may be important and urgent, but they are not threatening. Only the “final notices” gives the IRS legal rights.

When do I know its right to file an offer in compromise? 5 top reasons. Part I of II.

Posted on June 21, 2008
Filed Under Offer in compromise | 2 Comments

1.     You are pretty much broke.   In a compromise, the IRS must be convinced that they will be unable to collect the amount of money you them in the timeframe they have to do it (10 years).  Every $100 that the IRS determines you can pay them results in $6,000 compromise value (i.e., if you can pay the IRS $200 per month, then the value of your cash flow in a compromise is $12,000).

2.     You have minimal equity in assets.    If the IRS took your assets, and paid off any loans against those assets, what would be left to be applied to your tax debt?  The IRS usually reduces the valuation of cars and real estate by 20% in a compromise.  Most of your personal household goods will be considered out of reach by the IRS.  Add in the value of retirement plans, less taxes to liquidate.  So, what is left?

Note:  You can submit an offer in compromise if you are not “broke” and if you do have equity in assets; it just increases the value of the compromise.

3.     You have considered how long an offer in compromise can take.   Figure six months to a year for the IRS to complete an initial investigation of the compromise.  If the IRS is unwilling to accept the amount offered, you then have the right to then file an administrative appeal stating your disagreement with the initial findings.  Figure another six months to a year for the appeal.  If you can reach an agreement with appeals, the IRS will allow you to pay the settlement over up to two years. It is not until the final payment is made that your offer is considered complete.

4.    You have considered the timeframe the IRS has left to collect the tax.   The IRS has ten years to collect a tax liability.  Submitting an offer in compromise extends the collection timeframe.  For example, if a compromise is unsuccessful after a two year investigation, those two years are added back into the timeframe the IRS has to collect.  Careful consideration should be given to whether it is advantageous to submit an offer if the IRS is running out of time to collect. Be careful that the offer sends you forward to resolution, not back in time.  

5.    You have considered other options.  Bankruptcy can eliminate taxes, and requires no negotiation with the IRS.  A Chapter 7 bankruptcy can be completed in six months.  The IRS also has a program known as “uncollectible,” where they write-off debts that cannot be collected.  If the collection timeframe is ticking, what is the best way to run it out?  An installment agreement?  Uncollectible? What is the best option under the circumstances?

IRS property seizures and auctions for June and July, 2008

Posted on June 14, 2008
Filed Under IRS Seizures, Property Exempt from Collection | Leave a Comment

The IRS has announced its public auctions of seized taxpayer property for June and July, 2008.  Property being sold includes designer clothing and jewelry in New Jersey, vacant commercial real estate in Cleveland, Ohio and, yes, even the frozen horse semen of three time National Champion Park Stallion MHR Nobility in Fort Collins, Colorado.  

In 2007, the IRS made 676 seizures nationwide. In days gone by (1992), the IRS would make up to 11,000 seizures per year. The lowest level was in 2000, with only 74. Seizure activity was reduced significantly after 1998 by the IRS Restructuring and Reform Act, which gave taxpayer’s more rights to dispute IRS collection activity.  

The circumstances of these current cases is probably severe.  Most seizure cases involve uncooperative taxpayers, who have been given many opportunities to solve their problem before drastic measures are taken.  There also has to be equity in the property that will result in the IRS receiving money from the auction (See IRC Section 6334(f)).  

The vacant commercial property in Cleveland, for example, most likely had substantial equity in it, maybe even was paid off, and secured by IRS liens.  The business operated there is obviously closed.  In most cases, the owner of the property would have been given multiple opportunities to liquidate the property voluntarily, or negotiate to keep the property but pay the equity in another way. The owner could have even proven a hardship to payment, although this is difficult.  

There are many remedies to avoid this type of action, including offers in compromise, installment agreements and bankruptcy (which stops IRS seizures and can eliminate the taxes).  Taxpayers have the right to dispute any collection action administratively before an independent IRS Appeals Officer and in U.S. Tax Court or U.S. District Court.

As to the designer clothing, Section 6334 of the Internal Revenue Code lists all property exempt from IRS collections.  These exemptions include clothing that is necessary for the taxpayer and his or her family. Again, it is likely that something the taxpayer did caused the IRS to go after designer clothing.  Gucci and Louis Vuitton may not be necessary, but it is somewhat extreme for a seizure as the IRS Liquidation Specialist valued the property at $3,000, not much of a recovery after the costs (and efforts) of sale.  Skilled negotiations should not result in these types of seizures.  

More on IRS collections and seizures from two articles I wrote for the Cincinnati Bar Report here and here.

How do soaring restaurant costs translate into a IRS collection problem?

Posted on June 8, 2008
Filed Under Employee Withholding Taxes, IRS Collection Problems, Trust fund recovery penalty | Leave a Comment

This week, the New York Times reported that the cost of a 30-pound sack of rice has doubled, and a 15-pound bag of flour has almost tripled for restaurants.  An article yesterday in The Cincinnati Enquirer had pasta up 130 percent, eggs up 73 percent.  Flour is up 87 percent just in the first three months of 2008.

So, where do some restaurant operators turn in tough times?  Loans from the IRS.

Well, not real loans.  Loans in the sense that the restaurant operators often fund daily operations when short on cash by not paying their employee withholding taxes to the IRS.  Suppliers are at the door today, and employees need to be paid tomorrow, but the IRS requires only a quarterly accounting of whether the withholding taxes were paid.  There is a time lapse for the tax liability to make it through the IRS collection queue and rear its ugly head.  This can take as little as a few months to several years, depending on the severity of the problem.

Operating a business with an unwilling government partner has a tremendous downside.  It is a gamble: pay suppliers and employees now, and hope to recover to pay the IRS back before it becomes a problem. 

These “IRS loans” are expensive for the small business owner, of course, more expensive than typical bank financing.  The IRS will charge interest and penalties, which will cause the original amount owed to double in five years. 

The IRS does not kid around with this.  Business owners and managers who made the decision to use employee withholding taxes to pay suppliers will be pursued by the IRS for the taxes.  This is called a trust fund recovery penalty, meaning there was an implied “trust” between the IRS and the restaurant operator to keep and pay the employee’s taxes to the IRS, not suppliers.  The IRS routinely recovers trust fund taxes from the personal assets of small business owners (in addition to the business assets). The quickest recovery is a clean-out of bank accounts.

Trust fund cases can be defended and settled on the basis of either liability and collectibility, but being both personally and professionally ensnarled in an IRS tax controversy is a life experience best avoided.  

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