Archive for the ‘ Collection Law ’ Category

IRS Delays Benefit my Clients

The IRS is woefully understaffed: in IRS offices across the country staffing is down 7 to 41% and not one office has seen an increase.

Complicated correspondence is not answered timely, or sometimes at all. I have a large collection of letters from the IRS saying that it received my inquiry some time ago, that it strives to answer inquiries within 45 days, but that it needs another 45 days to respond. But the understaffing and the resultant delays often work to my clients’ advantage. Here’s two examples.

Audit Reconsideration Example. A client’s CPA said she’d handle the client’s audit, but the CPA went out of business mid-audit and didn’t tell my client or the IRS.  The IRS continued with the audit and presented my client with a $50,000 tax bill. My client owes nothing if her expenses are presented correctly, which they weren’t. There’s a process to address this problem: the audit reconsideration which I promptly applied for once my client came to me. It’s now fifteen months later, and we still have not heard back from the IRS. However, collection notices for the $50,000 the IRS thinks it’s due have stop being sent to my client. Indeed, when looking at her account, I see that the IRS has flagged it as “claim pending,” an internal IRS code that prevents its personnel from issuing further collection notices. I have no idea when IRS will finally pick up my client’s file and grant the audit reconsideration. Frustrating but my client isn’t hurt.

Collection Due Process Example. Another client didn’t file tax returns and eventually an IRS collection agent called and said he was preparing and filing returns on her behalf (yes, the IRS can do this). This is always a bad thing because the IRS will make the most conservative guesses on filing status and deductions, so the total tax owed is always higher when the IRS prepares a taxpayer’s return, than when the taxpayer does. At this point my client hired an accountant, who worked up actual tax returns and sent them to the collection agent.

Six months later my client still hadn’t heard about her filed returns, but did start receiving collection notices on IRS-prepared tax returns. My client hired me at this point in the story, and I filed a collection due process hearing since the IRS clearly had not processed the returns she’d send. Collection due process stops the IRS collection, but only when the IRS has sent the last collection notice. It hadn’t, so the collection due process hearing request was denied. Almost exactly a year ago, I sent a request for an audit reconsideration and attached copies of the previously-filed returns and asked that they be processed finally. We still haven’t heard from the IRS. However, after I filed for an audit reconsideration, the IRS added the “claim pending” notation to my client’s account, thus ending all collection processes. We don’t know when or if the IRS will grant an audit reconsideration but, again, my client is not harmed by the delay – only irritated by the IRS’ glacial pace.

In both cases, I could call the IRS to see what’s happening and if there’s any way to speed up the process. However, such a call likely won’t get my clients’ cases unstuck, and it will end up in another bill from me: I have sometimes been on hold with the
IRS for over 6 hours, and the average time I wait is approximately 90 minutes.

Even though interest accrues on my clients’ unpaid liabilities at 4 to 10 percent per year, delay works to their advantage. They are likely to owe a lot less tax in the end than the IRS assessments on the books, and the 10-year collection statute of limitations is running. If the IRS never gets around to opening their files, then the tax assessments will disappear without being collected. If the IRS finally does deal with these situations, the taxpayer will have been able to postpone paying the IRS for a long time.

That’s good for my clients. It’s bad for the country; the tax system is at the heart of how our government functions. Good administration of the tax laws breeds respect for the rule of law in this country.

IRS Tax Debt Ten-Year Clock

Most people don’t know that the IRS stops trying to collect on tax debt after 10 years. This 10-year clock can be valuable to people who owe back taxes from several years ago.

The statute of limitation on collecting tax owed is at 26 U.S.Code § 6502(a)(1): the IRS may start a collection proceeding only within 10 years after the assessment of the tax. The “assessment” date is determined as follows: (1) if the tax return was filed before the due date for that year, then the assessment date is the due date for that year (for example, 2016 tax returns are due by April 17, 2017). Thus, a 2016 return filed on March 13, 2017, will have an assessment date of April 17, 2017. (2) If the tax return is late-filed after the due date for that year, then the assessment date is the date the return arrives at the IRS. The assessment date starts the clock, and the IRS tries to beat the clock by collecting all taxes owed before the 10 years run out.

Four actions will stop the 10-year clock and add to the time the IRS has to collect back taxes. First, filing for bankruptcy protection stops the clock until the bankruptcy court discharges the debt/case. Since it typically takes 4-6 months from the filing to the discharge of a bankruptcy case, a bankruptcy generally adds 4-6 months (and then another 60 days) to the 10-year clock. Second, filing a request with the IRS for a Collection Due Process hearing under 26 U.S. Code § 6330 stops the clock until the hearing occurs; it is currently takes an average of six months to get a hearing result. Third, submitting an Offer in Compromise to the IRS stops the clock until the offer is rejected or accepted, plus 30 days); it currently takes an average of two years to get an IRS decision on an Offer in Compromise. Finally, submitting a request for an installment agreement with the IRS stops the clock from the date the request is submitted until the IRS acts on the request, plus 30 days; it currently takes an average of two months for the IRS approve installment agreements.

Ten years is a long time. I rarely advise clients to try to run out the clock: anyone trying to avoid paying the IRS would need to join the underground economy, and, as a citizen of the United States, I have an interest in seeing to it that my neighbor pays the same tax that I do. But sometimes a client will come to me with a situation where the IRS has just figured out where he is, and there are only nine months left until the Collection Statute Expiration Date (CSED, for those of us in the know). In this situation, I might advise the client to just not contact the IRS, and attempt to get by without putting money in a bank account.

I feel much better about putting clients into installment agreements. Here, the IRS investigates the taxpayer’s financial situation, and agrees to accept a monthly payment in exchange for not levying on the taxpayer. It is a way to reach a truce with a most powerful government agency, an agency that can create chaos in one’s life. Sometimes, the taxpayer’s situation prevents him from paying more than a small token toward his large tax debt. During the time the installment agreement is in effect, the 10-year clock continues to run. When well-managed, this process may allow a portion of a taxpayer’s liability to die a natural death while he is still paying it off.

Note that this article speaks only of the IRS. California income tax is collected by the Franchise Tax Board, under California statutes. Until 2006, the FTB had no statute of limitations on collection; in that year, the legislature passed a law providing for a 20-year collection statute. Rev. & Tax Code § 19255. The statute provides for the FTB to collect a liability for 20 years after the latest tax liability becomes due and payable. Let’s say that 16 years after the assessment, the FTB files a notice of tax lien and charges a $35 lien filing fee. That action, according to the FTB, starts the 20-year clock all over again.

Conclusion: you can sometimes get out of paying federal income tax by being clever, but you can’t get out of the state tax so easily.

There are hundreds of strategies for handling IRS issues. But not all strategies are as effective as others.

A car-repair owner got audited and brought his tax-return preparer (Jim) to handle the audit. The preparer said to give the IRS as little information as possible . “The IRS won’t want to go to trial, and they’ll cave in at the last minute,” he said. But something didn’t seem right to the car-repair owner. Perhaps it was the approaching trial date, the lack of apparent concern on the IRS side or (most likely) the way the IRS threw Jim, the return preparer, out of the meeting when Jim became too confrontational. Whatever the reason, the tax-payer called me.

I explained why Jim’s advice was off-base: the law requires that taxpayers prove their expenses; the IRS does not disprove expenses. Unless there is a receipt and a valid reason for an expense, the IRS – and the Tax Court – will not allow it. Trial for an IRS attorney litigating expenses is a walk in the park; the IRS does not ‘cave’ in these situations, no matter how aggressive or obnoxious your accountant or tax attorney is.

I also told the taxpayer a bit more about ‘Jim’. I had handled a case against him when I was an IRS attorney and he obstructed that case to the point where I needed to tell the taxpayer to fire him. Jim was a disbarred attorney from another state. His advice routinely lost his clients’ cases, while costing them thousands of dollars.

I worked to get the best outcome for the car repairman, despite a poorly-prepared return. Jim had included many unsubstantiated expenses. My client ended up owing, but the audit ended more quickly and the final bill was lower than if Jim had continued stonewalling the IRS.

When it comes to expense substantiation, it’s always best to provide information, documentation, and answer questions quickly. Any advisor who tells you otherwise is simply wrong. Check credentials: a valid law license or an up-to-date CPA license won’t guarantee a good result, but they do indicate some level of responsibility.

It’s Not Easy Dealing with the Franchise Tax Board

My clients owed the California Franchise Tax Board (FTB) $8,000 for the  2011 tax year; they filed their return late, and couldn’t pay it all at once.

The FTB sent a notice that it was about to levy – standard procedure, it wants to get paid, let’s scare the taxpayers into making an agreement to pay it over time.

If you look at the FTB website, it really discourages people from calling up to make an installment agreement, and my clients feared doing this themselves. So, armed with their banking information, I went online and made the installment agreement for them.  The FTB spat back a confirmation number and thanked me for making these arrangements. The client was going to pay $300 per month until the debt was paid off.

Just to be sure that the levy was going to be stopped, I called the FTB. The collection officer had no record of an installment agreement. I said “but I’ve even got a confirmation number from your website.” The officer told me that this meant nothing, that the FTB wouldn’t do an online installment agreement for an old tax year. But it looked like everything was okay on the installment agreement; if I hadn’t called him, how would I have found this out? The officer said that I would have found out when my client got levied.

I set up the installment agreement with the collection officer over the phone. It costs $34 to do this; I asked if the FTB was going to charge that fee twice, once for the online agreement and once for the phone agreement. He said no, that the online agreement didn’t exist, my clients aren’t being charged for it, and even though the FTB has all their banking records from that interaction, it won’t make automatic withdrawals based on the online agreement.

I don’t quite trust it.

The state taxation system is dysfunctional, fraught with cronyism and unfair laws. There is little oversight. If the FTB goes ahead and levies on my clients, there is little recourse; the clients owe the tax money, and they aren’t legally damaged if they pay that amount quicker through a levy than peacefully through an installment agreement.

So I’m asking my clients to watch their accounts very carefully: if they see the FTB removing two automatic payments, then I’ve got more work to do.

Who Really Owns Your Debt?

I deal a lot with bill collectors.  Here is an eye-opening description of how their business works.

Settling a debt can be . . . .unsettling.  If some unknown company collects on a credit card debt that’s five years old, how do you know that the collector actually has the right to collect that debt and declare it done with?  I always ask for a written settlement contract specifying that the collector has the right to collect.  It’s also important to get a company name and physical address.

Unlike these “investors,” I would never pay a cent for debt that was more than three years old.  The statute of limitations runs out on it, and the collector no longer has the legal right to collect.  The debt collector, though, sees a moral right to collect, and no law stops him from collecting on a debt that is decades old.

Education is the best defense against these people.  If you need help from debt collectors, give me a call.

Business owners owing back payroll taxes often ask me why the IRS won’t lift its levy. After all, these clients argue, I just need a bit of free cash to invest back into my business and then I’ll make enough money to pay what I owe the IRS. Why can’t the IRS act more like my business partner – if I make more money, than we’ll both be better off?

While this reasoning is intuitively appealing – after all, isn’t payment of taxes what the IRS seeks? – it also overlooks how the IRS fundamentally differs from a business partner, and thus overlooks the incentives that IRS agents face and that result in the enforcement of levies for payroll taxes even if that enforcement bankrupts a business.

First, the IRS has no assurance that a faltering business that was unable or unwilling to make payroll tax payments in the past will do so in the future. Think about it: the only evidence the IRS has of the business’ future reliability to grow its business is the past failure to make required payroll tax payments. This is what’s known as negotiating from a position of weakness, and is highly unlikely to persuade a revenue officer to cut you slack.

Relatedly, the IRS is not a bank and revenue agents are not loan officers. The IRS has neither the mandate nor the expertise to decide on a business’s creditworthiness. After all, asking the IRS to lift a levy is like asking it to loan money to the business. Making such financial decisions, or even analyzing the documents on which such loan decisions are made, isn’t part of revenue agents training or skill set.

Second, even if revenue agents had the discretion to lift the levies on some businesses, do we want that? What if your business got the “hard-nosed” revenue agent, while a competitor of yours in a similarly-bad financial position was assigned an “easy” revenue agent: your levy is enforced and kills your company, while your competitor’s levy is lifted, giving them the chance to remain in business for at least a while longer, simply because you were unlucky on which revenue was assigned to your case. Unfair? You’d have a right to be steamed.

Please understand, I used to counsel collection officers at the IRS. They were conscientious, surprisingly kind people. Many were military veterans. And they all saw their job as making sure that everyone felt the same pain from the enforcement of tax laws. This meant that taxpayers couldn’t “buy” laxer enforcement with a promise of making more money if they could just use the taxes owed as a temporary loan.

Finally, the collection officers’ commitment to the consistent enforcement of the tax laws underscores that the IRS is first and foremost a law enforcement agency. As such, it views a business owing payroll taxes as having committed a criminal act, namely stealing employees’ tax payments for private and unauthorized use. For this reason, revenue agents are rewarded for closing cases, not for the amount of back taxes collected. The IRS is in the business of tax compliance – a mandate that needs to be carried out as consistently and fairly as is humanly possible in order to preserve the credibility of the agency and government (just think about the recent brouhaha over “tea-party” scrutiny).

So, the bottom line for business owners facing levies for back payroll taxes: the IRS never has and never will be your banker, no matter how convenient it would be for you if it were.

How to Deal with Debt Collectors

Pasadena attorney Daniela Romero has a good article on how to handle calls from debt collectors.  I invite you to read her post because I don’t have the time today to write this myself, and I can’t do it better than her.

You are a person who can’t pay your bills.  One day, a disheveled guy comes to your door, asks whether you answer to your name, and when you say “yes,” he hands you a summons in a state-court lawsuit seeking a money judgment for an unpaid debt.

Once you get the summons, you have 30 days to answer it.  You’re not going to answer, because it will cost you $400 to do so and you don’t really have a defense; you owe this money, you just can’t pay it.

If you don’t answer in 30 days, then the attorneys may file a request for a default judgment.  That usually takes about a month to get.

After they have the default judgment, they may take collection action.  That includes placing a lien on your house, garnishing wages, levying accounts, and dragging you down to their office for deposition to find out your social security number and your intimate financial details.

A bankruptcy filing will stop this process at whatever stage it has gotten to.  You won’t be able to recover money already levied or garnished, but you will be able to set aside a lien.

Unethical collection actions

In the cat-and-mouse game between debtors and creditors, it’s no surprise that there are dishonest debt-collection groups.  This article mentions Brachfeld Law Group: we interact often with this collector.  I generally find them ethical, although I have seen them go out of the bounds of legal and ethical propriety.  They can get away with a lot of rules-bending because their victims can’t afford to fight them.

The ultimate way to defeat Brachfeld and other groups is to file bankruptcy: so soon as the petition is filed, there is a federal injunction against any creditor from attempting to collect on a debt.  Brachfeld and all other honest debt collection agencies honor this injunction.

Some don’t, and the difference is spectacular.  I had a client with several “payday” loans, high-interest loans taken out against her next paycheck.  The creditors did not give addresses, only phone numbers.  For one client, they continued to call her asking her to pay back the loan even though the client said “I’ve already filed for bankruptcy.”  They said that didn’t matter, that they were pursuing a criminal action against her and pay up or they would send marshals to her workplace to arrest her.  The creditor would not talk to me, saying I did not represent her in the criminal matter.

Panic can set in on a debtor in such a case.  Here’s how I calmed my client down: criminal actions can only be brought by a government agency, and indeed, once the government agency has started criminal charges, the private party has no more say in the matter.  So a private party’s threat to arrest you is an empty threat.

I also sent a letter to the creditor via fax, asking it why I should not file a lawsuit alleging a violation of the automatic stay, and who is your agent for service of process?

The harassing calls stopped after my letter.