“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.  

IRS collectors moved to answering questions on economic stimulus refund

Posted on June 4, 2008
Filed Under Automated Collection Service | Leave a Comment

The Government Accountability Office (GAO) has outlined the costs to the IRS collection function in implementing President Bush’s Economic Stimulus Refunds. 

Of the roughly 2,000 employees in the IRS Automated Collection Service, the GAO report stated that approximately half were moved in this spring from collecting delinquent taxes to answering taxpayer calls about the economic stimulus refund.  

Here’s the impact of moving ACS employees to answering refund questions:

1.   The IRS suspended the issuance of ACS generated levys on taxpayer accounts due to the workforce reallocation.  The IRS did not want to send out collection notices without the staffing to implement them.

2.   Lost collection revenue to the IRS was estimated to be $565 million. 

3.   Level of service on inbound telephone calls dropped.  Callers hung up 43% more often while waiting to speak to an IRS assistor.  

Read the full report here.

IRS employee charged with improper access to taxpayer files

Posted on June 2, 2008
Filed Under Criminal investigation, IRS Employee Misconduct | Leave a Comment

The U.S. Attorney’s Office in the Eastern District of Kentucky has issued a release detailing that an IRS employee at the Covington, Kentucky, IRS Service Center has been charged and arrested with improperly accessing the accounts of taxpayers.  

It is alleged that the employee, John Snyder of Cincinnati, who worked in a business return function, accessed the account information of Cincinnati Reds players, Cincinnati Bengals head coach Marvin Lewis, and actors including Kevin Bacon, Alec Baldwin, Sally Field and Chevy Chase.  

The charges are important to maintaining the integrity of the tax system, and are highlighted by the celebrity news aspect of the charges. The maximum sentence Mr. Snyder currently faces is up to one year in imprisonment, not more than a $250,000.00 fine, or both, and up to 1 year of supervised release.

The activities were uncovered from an investigation by the Treasury Inspector General for Tax Administration (TIGTA), which routinely looks for suspicious accesses from employees.  

As reported by Federal News Radio from an interview with IRS Spokesman Chris Kerns, over the past 10 years TIGTA special agents have investigated 4,704 cases of potential access violations. Among the “adverse personnel actions” taken in those cases, there were: 

Federal News Radio reported that another 883 employees resigned from the IRS during investigations or before personnel actions could be taken.

TIGTA was established by the IRS Restructuring and Reform Act of 1998.  Its purpose is to provide independent oversight of IRS activities.

TIGTA investigations include unauthorized access by IRS employees, attempts to bribe IRS employees, assault against IRS employees, fraud committed by IRS employees, impersonating IRS employees and improper use of IRS emblems. 

Gas at $4.00 gallon; IRS National Standards lag behind

Posted on May 31, 2008
Filed Under Form 433A, Form 433B, IRS Collection Financial Standards, IRS Financial Statements, Installment agreements, Offer in compromise | Leave a Comment

The Speedway gas station I can see from my suburban office window lists gas at $4.00 gallon. It now costs about $75 to fill-up a F-150 truck these days. At one fill-up per week, that is $325 per month for gas for one family car.

The IRS, in reviewing an ability to repay a tax liability, uses what it refers to as “Collection Financial Standards” as a guideline to determine what living expenses should be allowed before the IRS is paid. These guidelines include what the IRS will allow for gas, insurance, maintenance and repairs for the operation of a personal vehicle.

Here are some current IRS cost allowances for the monthly cost of operating one family car:

Atlanta $226            
Boston $225
Chicago $216
Cleveland   $186
Houston $263
Los Angeles $261
Miami $275
Phoenix $232
Seattle   $192

Keep in mind that these numbers include the cost of insurance, maintenance and repairs.

In every major city across the United States, that F-150 truck costs more in gas alone than the IRS is currently allowing for gas, insurance, maintenance and repairs combined.

The IRS will allow more than their standards if it can proven, but very few people keep every single one of their gas receipts to do this, or records to recreate where they drove.

The IRS allowances lag behind the economy and does not reflect the economic reality of what it costs to operate a personal vehicle.   Actual costs that exceed IRS allowances will be requested to be included in an repayment agreement, absent negotiation with collections otherwise.     

What happens if the IRS accepts my offer in compromise, but then I have trouble staying current on my taxes?

Posted on May 25, 2008
Filed Under Audits, Offer in compromise | Leave a Comment

This is frustrating, and has happened to my clients in the past. The IRS does not want the compromise to default any more than you do. The IRS wants to give you an opportunity to remedy a potential default in an already accepted compromise.

There are three primary ways the IRS will consider defaulting an already accepted offer in compromise:

1. You failed to make timely payment of the amount due under the terms of the offer;

2. You have not abided by the compliance provisions of the compromise. The IRS imposes a five year probation as a condition of the compromise. All taxes must be paid and filed on time (extensions are permissible) for five years after the compromise is accepted.

3. You mistakenly received a refund after the offer was accepted, and failed to return the money to the IRS. Terms of an offer require that any refunds be kept by the IRS for any year in which the compromise was pending.

In most default situations, the IRS will first send you a letter notifying you of a potential default. This is done by IRS guidelines. The Internal Revenue Manual, at Section 5.8.9.3, states that in potential default scenarios the offer in compromise unit “will make an attempt to secure compliance. If the taxpayer fails to comply with any requests for delinquent returns and/or payment,” the offer be defaulted.

Recently, the IRS audited one of my client’s tax returns within a year after they accepted a compromise from him. My client could not immediately pay the balance due from the audit, and the IRS sent a notice of potential default on the compromise. We were able to negotiate an extension of time to pay the tax due from the audit, avoiding immediate default of the offer. The IRS was reasonable in this regard in working with the client to salvage the compromise, but it helped that the client was able to raise the funds to pay the tax due from the audit in a reasonable amount of time.

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