Archive for the ‘ Policy ’ 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.

Payday Lenders

Here is a very amusing and outraged report on “payday lenders” from John Oliver, the British reporter who apprenticed with Jon Stewart and Steven Colbert.

He’s accurate in presenting the problem: desperate and unthinking people can get money easily, but they will pay astronomical interest and the lenders are unscrupulous when it’s time to collect.

Few of my clients have “payday loans” to discharge, but one in particular stands out because the creditor threatened to arrest her. Actually, the creditor still threatens arrest today, but also gives no return address so I can’t serve it with papers to get an injunction and an award of attorney’s fees.

John Oliver bemoans the lack of regulation against these predators. I don’t see that better regulation will do much; industries almost always “capture” the governments trying to regulate them. Any industry has more capital and focused energy than the members of the general public who are exploited by the industry. Lawmakers will always listen respectfully to the industry’s side of the story, no matter how unconscionable their actions, because the industry can show results at election time.

On an issue like this, I become somewhat libertarian. The best defense against these predators is education, not regulation.

I love having my 18-year-old daughter work in my law firm.  She’s smart and motivated.  She gets to see law in action.  She’s done wonders for my website, and she gets the mail out.

She keeps a timesheet.  I pay her through a payroll company, which withholds funds for income and social security taxes, among other deductions.

Not every employer is as honest and real-world as I am about the employment relation with a child.  Hiring your child is perfectly legal, in fact, I encourage it, but it must be done carefully and transparently.  Some parents mistakenly believe that if they take some of their income and pay a child, they may take a deduction on the payment to the child and the child will pay tax at a lower marginal rate than the parent: a seeming win-win. Not so.

The IRS frowns on these schemes. The latest person to fall foul of the rules is a Ms. Patricia Diane Ross, who took her case to the Tax Court and lost: T.C. Summary Opinion 2014-68.

Ms. Ross owned a Schedule C business, Ross Professional Services, LLC, that helped government agencies staff their operations.  She had three children, ages 8 through 15.  The children, according to Ms. Ross, shredded paper, stuffed envelopes, copied, sorted checks, filed documents, put out the trash, carried equipment, and helped her shop for supplies. For these tasks, she paid the children.  But she made some mistakes that came back to haunt her:

  1. She paid the children in pizza.  Rather than give the children a paycheck, she claimed she kept a ledger of how much they had earned and deducted the cost of their restaurant meals and a tutoring/play activity service from that ledger.  These expenses sounded to the IRS and the Tax Court judge more like the regular kind of a support that a parent is expected to give to her children.

When I represented the Commissioner of Internal Revenue, I came across a family that paid their minor children a very regular wage: $5,000 twice a year, two days before the children’s private tuition bill was due.  The tuition bill got paid out of the children’s accounts.

Lesson one: if you employ your children, pay them in money rather than support.

  1. She did not pay a regular hourly wage.  Dividing “wages” paid by the hours Ms. Ross reported for each kid resulted in an hourly wage varying from $4 to $30 with little correlation between the child’s age, skill, or task, and the wage paid.

Lesson two: if you hire your child, keep good timesheets and pay a regular wage.

  1. She did not withhold Federal income tax or other deductions, saying that the children did not need to file tax returns.  But anyone who makes more than the standard deduction ($6,200) plus the exemption amount must file a tax return.  When the child is being claimed as a deduction on Mom’s tax return, the exemption amount is zero.

Lesson three: treat your employed child as a real employee subject to withholding.

  1. The children got paid for chores: “the activities performed by petitioner’s children seem analogous to . . . washing windows, cleaning screens; shoveling snow; moving grass; tending shrubs, trees, and underbrush; assembling papers; picking up mail.”  The Court found these activities sounded more like parental training and discipline, not services performed by an employee for an employer.

Lesson four: pay your children only for tasks that advance the business, not for tasks that advance the household.

  1. She did not give the children their own bank accounts.  Well, the children actually had bank accounts about 200 miles away (where their father lives?), but Ms. Ross said she was too busy to open local accounts for them.  Thus, she said, it was “more convenient” to pay for things as the children directed her to, matching spending against their “earnings.”  It does not appear that the judge found this explanation convincing.

Lesson five: give your employed children real accounts in a real bank.

I am pleased to say that, if the IRS were to audit my law firm, it would find that my daughter’s earnings are real earnings and a real deduction from the income I collect.




Bankruptcy works in unexpected ways.  That’s how a colleague sells his potential clients on hiring him to get a discharge in bankruptcy.  And he’s right.

My client opened a fast-food restaurant with a partner in 2008 and personally guaranteed debts to suppliers.  Time went by, the suppliers brought the potatoes to make into French fries, the restaurant paid the suppliers.

My client, meanwhile, moved out of state and no longer managed the restaurant.  But he didn’t turn in his ownership interest, and he didn’t stop the guarantee.

In 2012, the client got a bankruptcy discharge.

This year, the restaurant stopped paying one of the suppliers.  The supplier sued the restaurant for nonpayment, and sued my client on the guarantee.

I wrote back to say that the debt was discharged in bankruptcy.  The supplier’s attorney laughed at me: “the debt was incurred after the discharge.  Your guy needs to pay up!” At first, I thought he was right: a bankruptcy petition only discharges debts that are incurred prior to the petition.  A 2012 discharge does not get rid of a 2014 debt.

Some legal research, however, set me straight. The discharge gets rid of all claims existing prior to the petition date.  A guarantee of paying future debts is a claim that exists at the moment it’s signed.  Claims can arise long before there is a dollar value attached to them. My client isn’t on the hook for the guarantee made before his bankruptcy.  It was an unexpected benefit of bankruptcy.

As an example of a bankruptcy wiping out not just existing debt, but future claims, Piper Aircraft was able to disavow liability for product liability claims due to defective aircraft manufactured before it filed its bankruptcy petition. Think about it: someone gets in a plane, the plane falls out of the sky, the pilot’s family sues because the plane was built wrong, and Piper Aircraft is not liable because it went through bankruptcy a few years earlier.  Case law is very clear that the guarantee is discharged along with actual debts.


A client recently had the FTB, Franchise Tax Board, garnish his son’s bank account.  His son didn’t owe the tax money; my adult client did.  But the FTB didn’t care; it took the kid’s money – $14,000 – and paid it to the father’s tax liability.

The child had just turned 21.  His parents set up the bank account when their son was 10.  Because he was a minor at the time, the parents needed to sign on their son’s account and present one of their social security numbers.  So far as the FTB was concerned, this was the father’s money.  Presenting the signature card, with the boy’s uncoordinated 10-year signature, did not soften the hard hearts of the FTB.

The father could have sued the FTB in state court to return the money to his son.  That would have taken hours of attorney time, and it was the father’s burden to prove that the money didn’t belong to him.  If he succeeded, (more likely than not) he would have owed $14,000 to the FTB, because his son had effectively paid his tax debt for him.

I thought this would have ended the matter for the FTB.  It did not.  Not only did the FTB seize the son’s money, the seizure created a new debt.  The FTB assessed a $150 seizure fee that was not taken during the original raid on the son’s account, so the FTB threatened to levy on the father’s accounts again to satisfy the $150 still owing.

A few lessons here: first, the FTB is a harsher agency than the IRS.  After having worked at IRS, I believe it is more likely that the IRS would have returned the son’s money.  The FTB is harsher on collection matters because it has a different relationship to citizens than the IRS.  The IRS feeds the world’s largest pot of money; it’s also part of the Treasury, an agency that can just print more dollars. Dollars going back to the Treasury are like pouring water into the ocean, or electricity going to ground.  If someone doesn’t pay his taxes, the Treasury won’t miss it.  The state treasury will miss it much more immediately.  To make up any budget shortfalls, the state needs to issue new bonds, or declare bankruptcy (can a state declare bankruptcy?  Probably not; that discussion is worth another article).  In short, the FTB doesn’t have the fiscal flexibility to be nice; it must take such dramatic measures as it did against my client – whether it was ethical or not.

Second lesson: to avoid a similar incident, parents should set up an account under the Uniform Transfer to Minors Act (Cal. Probate Code § 3900 et seq.). The account needs specific language in the name.  If the proper procedural steps are followed, the state is bound to respect the ownership of the account.

A note that interests lawyers, though not laypeople: even though it’s called a “uniform” law, meaning that the language is the same in every state that adopts it, the actual provisions may not necessarily be the same in each state.  Courts in different states may interpret the same phrase in the Uniform Transfers to Minors Act differently.  The California legislature may have decided that the model statute needed to be improved in some way, so the California version may read differently than the Nevada version. When you set up an account like this, there are pitfalls.  Talk to a lawyer.  We can help.

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.

Does bankruptcy even have a negative side?

Not all effects of bankruptcy are negative. Certainly getting rid of your debt and starting fresh is a positive effect of filing.

Your name won’t be published in the newspaper (unless you’re famous). However, anyone who has access to your credit report will find out about the bankruptcy. This can make it more difficult to find an apartment, get a credit card, and get any credit in general.

Most people will say “I can’t live without credit.” Of course, this isn’t true. It may feel like it because you’re so used to living with credit (and consequently debt). But the goal is to get rid of all the debt so you can work on building a healthy reserve to deal with life’s unexpected “gifts” and to plan for the future.

Second, if you are in an industry where employers regularly checks your credit report, your job may be impacted. This typically applies for people that work in the financial industry or have security clearance.

Third, bankruptcy will be reported on your credit report for up to 10 years for Chapter 7 and 7 years for Chapter 13. This does not mean you can’t get new credit until the bankruptcy is removed. Most clients report being able to qualify for a credit card within a year or two of filing.

Lastly, filing for bankruptcy can have an impact on your self esteem. I frequently have clients tell me “I wasn’t raised this way.” “I can’t believe I’m in this situation.” No one wants to file for bankruptcy. You do so because it’s in you (and your family’s) best interest. What do you want your life to look like in 10 years? Do you still want to be struggling with debt or do you want to have a healthy savings/retirement and working towards a successful future? I encourage people to think long term when contemplating bankruptcy.

Credit: Jeena Cho, San Francisco Bankruptcy Lawyer

A couple recently asked me how to rebuild their credit after filing bankruptcy and I would like to share some of the information that I gave them as it may be helpful to you in improving your credit score after bankruptcy.

First, for those who are worried about a bankruptcy being on your credit report for at least 7 years, please realize high debt and failure to make your monthly payments on time is already hurting your credit score.  Although bankruptcy is not for everyone, for those who do file, bankruptcy is meant to give you a “fresh start” by discharging debt and high balances.

Here are 5 simple things you can to help rebuild your credit after bankruptcy.

1.       Get a secured card.  A secured card works essentially the same as a debit card, you pay the bank a security deposit before using it, but all the payments made will be reported as credit.

a.       Make sure the transactions are reported to the three major credit bureaus.

b.      Try to get the card at a bank you would want to continue using, as you can eventually inquire about an unsecured card.  After several months of managing the secured card, you should inquire about switching to an unsecured card.

c.       Stay away from cards with high “start-up” fees so that you do not go back into debt again.

2.       Build a budget. As obvious as it may sound, it is important to make a conscious effort to stay within your budget so you can make your monthly payments without a hitch.

a.       Make notes of your essential expenses so you can get an idea of where you are financially.

b.      Make cuts where you can.  For instance, downgrade your cell phone plan, eat out less often, or try to find alternate, less expensive means of transportation etc.

3.       Get a gas or retail credit card. These cards give the opportunity to report good credit at places where you would normally be spending money.

a.       Once again, make sure the transactions are reported to the three major credit bureaus.

b.      Make sure you are responsible with your retail card and only spend what you can pay off each month.

4.       Pay off your balance every month…. ON TIME. By paying your balance on time at the end of each month, you are proving to the bureaus that you are a responsible spender and in control of your finances.

a.       Try to keep your balances low and manageable so you can pay them off in full, on time, by the end of the month.

b.      Avoid charging up to the limit.

c.       DO NOT pay the minimum monthly payment.

5.       Check your credit report from the three major bureaus. It may seem like the last thing you want to do, but this is an important step. Each of the nationwide credit reporting companies [Equifax, Experian, and TransUnion] is required to provide you with a free copy of your credit report once every 12 months, if you ask for it.

a.        To order, click on or call 1-877-322-8228[1].

b.      It is important to see where you stand, and what you need to do to get to your goal.

c.       Notify the credit-reporting agency of any inaccurate or incomplete information. It is their responsibility to correct any mistakes, which may lead to an improved credit score.

The road to rebuilding your credit after bankruptcy takes some discipline.  Although the list is not exhaustive, following these simple steps will help you on that road. Remember that after discharging debt and high balances through bankruptcy, improved credit is a real possibility.

Credit: Daniela Romero, bankruptcy attorney in Pasadena

Living in semi-arid California, I’ve gotten used to seeing large columns of smoke on hot, windy days.  Most recently, I could see the Springs Fire burning between Camarillo and Malibu from a distance; happily, it did little damage to structures, and no one died from it.  This one was not caused by arson, but it sparked my curiosity: if authorities determined that someone was responsible for the fire, and fined him, could he discharge that fine in bankruptcy?

I am honestly a little surprised at the lack of hot air that has been expended on this topic elsewhere.  At the risk of fanning controversy, I think that a careless arsonist would probably be able to discharge his debt relating to a wildfire.

Dischargeability of debt depends on its nature.  The bankruptcy code assumes that debts are dischargeable; a nondischargeable debt is the exception, not the rule.

We saw the extreme in punishment for an act of wildfire arson in January this year: a state judge sentenced a methamphetamine addict to death for setting the Old Fire in San Bernardino County back in 2003.  That debt won’t be discharged by a bankruptcy; it will only be extinguished at the same time as the criminal’s life.

California does have provisions for fining arsonists: Cal. Penal Codes 452 and 456 prescribe a fine of up to $50,000 for arson, “unless a greater amount is provided by law.”  Where the arson is done for pecuniary gain, the court may impose a fine of up to twice the amount of the gain expected.  This would handle cases like the guy who made $80,000 renting equipment to the Forest Service to put out the fire he had paid $2,000 to have set ((I’m betting that he wasn’t able to report the $2,000 as a business expense on his Schedule C, either).

These fines are not dischargeable in bankruptcy: you can’t discharge a debt for a “fine, penalty, or forfeiture payable to and for the benefit of a governmental unit” that is not compensation for actual pecuniary loss.  11 U.S.C. § 523(a)(7).

But the big bucks in fire bills come from judgments for fire suppression.  Cal. Health and Safety Code 13009 provides for payment of the full amount of fire suppression by anyone who sets a fire, negligently or otherwise, or doesn’t clean up a fire hazard in a reasonable time.  Huffington Post reports that the Springs Fire cost $10 million to fight.  The state was awarded $7.6 million from a construction company in fire suppression costs for a 2002 fire in the Angeles National Forest.

These judgments are dischargeable in bankruptcy: the Health and Safety Code section says that they are to be treated as a contractual liability.  They are for pecuniary losses, therefore not subject to the “governmental fines” exception to discharge.

Who knew?  And now we do.

Bankruptcy: Redemption, not Failure

I like to say that I am involved in “capitalist recycling.” In a capitalist, free-market society, there are people who win and there are people who lose. Those people who do not win and cannot function economically because of crushing debt need to come back into the system and function again. By helping them through bankruptcy, I provide redemption; I like to say that capitalism without bankruptcy is like Christianity without forgiveness.
I recently read “The Antidote: Happiness for People Who Can’t Stand Positive Thinking,” by Oliver Burkeman. He devotes a chapter to embracing failure as a way to live a fuller and ultimately happier life. And he ties our current notion of failure to our ties to the economic system (at page 176, quoting from “Born Losers”, by Scott Sandage):

“ . . . the idea that a person could be ‘a failure’ [sprang] directly from the growth of entrepreneurial capitalism . . . One crucial development was the emergence of credit rating agencies, whose role was to sit in judgment upon individuals seeking loans from banks, helping the banks determine the risk they would be taking by making a loan. In a society increasingly dominated by business, a bad credit rating could all too easily come to be seen as a verdict condemning a whole person – and it is from the language of credit rating that we take several modern idioms for describing someone’s moral worth, such as ‘good-for-nothing’ and ‘first-rate.’ . . . From the middle of the nineteenth century onwards, failure started to be thought of ‘not merely as a cataclysm that adds to the plot of your life, but as something that stops your life cold . . . Failure, in short, came to be seen as a kind of death.”

I try to encourage my clients to see their identity as being more than their level of functionality in the economic system, and I try to redeem their status so that they may function in that system. I think the Stoics, Buddhists, and others quoted by Burkeman would do the same in my shoes.