Howard's IRS and the Law Blog

Losing your house to the IRS may be your worst fear.  And it’s true that the IRS can seize and sell a home to pay a back tax debt.  But it is harder – and less likely – than you what you may have read or believe.

To begin with, the Department of Justice seizes and sells houses for unpaid taxes, not the IRS.  To sell a house, the IRS makes a referral over to the Department of Justice; the IRS does not sell houses on its own. Unless you have heard from the Department of Justice Tax Division, your house is not in the process of being sold.  And rest assured, the Department of Justice does not get involved in many unpaid tax cases – the IRS is usually pretty picky and choosy about what cases they send to the Department of Justice.

How many houses do you think the Department of Justice forecloses on every year because of a tax problem?  25,000?  10,000?  5,000?  1,500?

If you thought those numbers seem too high, you are correct.  In 2013, for example, the IRS Data Book reports that there were 547 seizures of real property (houses) and personal property (cars) made.  That’s out of over 11 million tax accounts in the IRS’ inventory.  547 out of 11,000,000.  Chances are, the IRS is not interested in your house.

The IRS is not a maniacal house-seizing machine that relishes the thought of putting people out on the street.  Referring a case to the Department of Justice to deprive a taxpayer of his house is usually the last, not the first, thing the IRS wants to do.

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What do you do when the IRS knocks on your door?  Fear, anxiety, jail time – many different ideas pop into mind about what the government will do because of a failure to pay taxes.  A knock on the door from the IRS is extremely important, but most of what you fear is more myth than reality.

Your anxiety:  Is the IRS going to show up one day and seize my house?  Levy on my income so I cannot provide for my family?  Shut down my business?  Take my retirement account? Put me in jail.

The answers may surprise you, and your fears are usually bigger than the reality.

On Thursday, October 2, 2014, I will be giving a live webinar with myLawCLE.com that will give you the knowledge of how the IRS works, how to defend against aggressive IRS actions, and ultimately, reach settlement and case resolution.  The webinar is at 9 am PST, 10 am MST, 11 am CST and 12 pm EST.

Here is the agenda of what will be covered:

  1. Knock, Knock – Who is at My Door from the IRS?
  2. The Power of the IRS to Destroy: What Can the IRS Really Seize, and What Are the Likely Sources?
  3. IRS Seizure Process: Is There Due Process in IRS Collections?
  4. IRS Collection Enforcement Priorities: Is it Likely that the IRS Will Take a House?  Retirement Account?
  5. Settling with the IRS: Offers in Compromise – Myths vs. Reality.
  6. Negotiating Payment Agreements: Providing the IRS with Financial Statements.
  7. IRS Forbearance: Convincing the IRS to Leave an Unpaid Tax Debt Alone.
  8. Yes, My Dear, Bankruptcy Can Eliminate an IRS Tax Debt: Here’s How.
  9. How Long Can the IRS Collect a Tax Debt? Expiration Dates on the IRS Collection Power.

To learn more, please visit MyLawCLE.com.

Believe it or not, the IRS really does not want to levy your wages and take your paycheck.

An IRS levy is usually issued when all else fails.

There are three things the IRS wants if you owe them back taxes and not providing those three items usually results in the IRS levying.  Here is what the IRS wants:

1.     Communication.  Yes, the IRS wants to hear from you.  If they have written you a letter, they want a response.  If an IRS Revenue Officer has called you or stopped by your house, he wants to hear back from you.  In other words, IRS collection employees have a job to do: figure out how the IRS can collect taxes.  You are in the center of their job.  Ignoring IRS efforts makes their job harder.  That makes the IRS unhappy.  We want to satisfy the IRS so they leave you alone.  A happy IRS is good for you.

I always tell my clients that when your head is in the mouth of the bear, say nice bear.  The harder you make it for the IRS, the harder they will likely make it for you.  That means cooperation, not avoidance.  (I understand that it is human nature to want to avoid the IRS, and that’s okay, but to solve an IRS problem, the IRS needs communication.)

The good news is that I have spent the last 20 years talking to the IRS – you don’t have to speak with them, leave it to me.

2.     Compliance.  If you owe back taxes, the IRS wants to make sure that you stop the problem.  That means paying your taxes going forward.  If you are self-employed, it is likely you owe the IRS because you did not make estimated tax payments on your income – you got paid, but the IRS did not.  A simple solution is to open up a separate bank account – put your name on it, and ask the bank to title the account as an Estimated Tax Account.  Every time you get paid from a customer, take 15-20% of the gross check, and immediately put it in the estimated tax account.  Every quarter, the money you have set aside is paid to the IRS.  And then, you should be in compliance with your IRS future tax obligations.

If you have unfiled tax returns, the IRS wants those returns to be filed.  In most cases, the IRS considers filing of the last six years’ returns as being in compliance.  If you don’t have all of your W2s, or 1099s, we can readily obtain them from the IRS.

If you are not current in paying your taxes, or in filing your returns, the IRS will desire to take matters into their own hands, and levy your wages and bank accounts.  It doesn’t have to be that way, and in fact, the IRS prefers communication and compliance to levying.

3.     Financial information on how you can – or cannot – repay the taxes.  You owe the IRS money, and they want to know how they can collect it.  And that does not mean that they can collect it – the IRS has numerous programs available to you if you are unable to pay.  The IRS has a debt settlement program, known as an offer in compromise.  The IRS also has a program to prevent you from being put in a state of economic hardship from a wage or bank levy, known as currently uncollectible.  (When you are currently uncollectible, the IRS agrees to not take any action to collect your debt.)  Or you may qualify for a payment agreement.

But the IRS will not know what option you qualify for if communication is poor and if we do not tell them.

Without financial information on how you can – or cannot – repay the taxes, the IRS will take matters into its own hands and levy your bank accounts and wages to get paid.

Communication, compliance and financial information gets levies on wages and bank accounts released.

That’s all the IRS wants – is to hear from you, and to see that you will pay and file your taxes going forward, and will work arrangements to pay – or even not pay – what is owed.  Providing that information not only stops them from levying, but gets levies released.

What if you have not filed your taxes in years, but have paid taxes to the IRS all the while? In other words, you have unfiled taxes, but probably do not owe the IRS much of anything because your employer took taxes out of your paycheck. How much trouble could you be in with the IRS?

The good news is you likely are not in much trouble at all if you have not filed and do not owe any money to the IRS.

Here’s why:

  • You are not going to jail for not filing the tax returns.  The IRS likes to prosecute people who do not pay their taxes.  That’s not you.  You paid your taxes, but just did not file your returns.  There is a difference, and the difference takes you out of any IRS criminal exposure.
  • No IRS any penalties for not filing your returns. Common penalties are for late-filing, late-payment, and not making estimated tax payments. The amount of the penalties can be as much as 20-25% of the tax owed on the return. The key here is the phrase tax owed on the return.  You had withholding, paid your taxes, and do not owe any tax on your returns.  Since the penalties are calculated on money owed, you will not owe the IRS any penalties – even for not filing the return on time.
  • There will be no interest charged to you.  The IRS likes to charge interest – but it needs money owed to calculate the interest charges on.  If you do not owe the IRS, and have a refund on the returns, regardless of how long it has been since they were to be filed, you will not owe the IRS any interest.
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It’s an old story that the IRS combats everyday:  When a business struggles and cash flow is tight, when there is not enough money to pay both rent and employment taxes, the IRS takes a back seat, and the business uses employee withholding taxes to keep the lights on.

The result is that the IRS is made an unwilling lender to fund operations.   Your hope is that the tide will turn and the IRS can be repaid before they come calling.  Your business is your baby, but this is can be a dangerous bet, and as we will see, it is especially dangerous in employment tax cases.

Liability for employment taxes does not just stay with the business; rather, the IRS spreads it to you, too – the business owners, officers, and even employees – anyone who had decision-making power over the company’s finances can be personally liable for a part of the unpaid taxes.  This is called a trust fund recovery penalty investigation.

Simply put, unpaid employment withholding taxes are a cancer.

As the IRS casts a wide net to collect employment taxes, a three-tiered defense is usually required:  to the initial collection of the employment taxes from the business (Tier-1); to the ensuing trust fund recovery penalty investigation into who in the company made the decisions not to pay the IRS (Tier-2); and to the eventual collection of the trust fund taxes from those in the business who were responsible for the decisions not to pay the IRS (Tier-3).

The best employment tax defense will recognize each step the IRS will pursue in advance, will see what is coming, and will prepare for it.   With that background, here is the IRS’s step-by-step game plan in a civil employment tax investigation.

STEP 1.     ASSIGNMENT OF AN IRS REVENUE OFFICER TO COLLECT THE TAXES FROM THE BUSINESS.

The IRS considers employment tax liabilities to be a serious matter, and as a result, will assign an employment tax case to its highest level collection personnel, a Revenue Officer.

Chances are, the first move the Revenue Officer will make is to have an unannounced visit your business.  Expect the Revenue Officer to drop off her business card, along with (1) ) Form 9297, Summary of Taxpayer Contact and (2) Letter 1058, Final Notice of Intent to Levy and Notice of Your Right to a Hearing.

The Revenue Officer’s initial knock on the door is to collect the employment taxes from your business.  That will soon change.

You do not know it yet, but the Revenue Officer does not intend to just investigate collection of the employment taxes from your business.  The Revenue Officer will also be launching an investigation into the operations of the business.  The investigation will be focused on control over company finances:  Who had the decision-making authority that resulted in the employee withholding taxes not being paid to the government?  That could be you, that could be your CEO, a co-owner, or your spouse.

This is called a trust fund recovery penalty investigation.  It permits the IRS to collect part of the unpaid employment taxes personally from the individuals who were in control of the business and were able to make financial decisions to not pay the IRS.

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