Howard's IRS and the Law Blog

I will be on a panel seminar in Cincinnati on November 6 to address taxes and bankruptcy. My co-panelists include Bankruptcy Judge Jeffrey Hopkins and Bankruptcy Trustees Henry Menninger and Tom Geygan.

In addtion to IRS and bankruptcy, other topics that will be discussed include bankruptcy’s impact on divorce, real estate and understanding means testing.

The seminar is “Bankruptcy Forum: What Judges and Trustees Want You to Know.”   Take a look at the program brochure or register online.

What to expect from the IRS collection division in 2010:

1.     More aggressive IRS tax lien filing practices.

IRS Revenue Officers have been instructed to make decisions on the filing of Federal tax liens within 10 days of case assignment.   The IRS hit an all-time low for lien filings in 1999 of 167,000.  That has rebounded to 867,000 in 2008, still off the mark from of 1,400,000 in 1992.  Expect the IRS to continue to improve on securing its claims.

2.     Quick issuance of levies from Automated Collection Service.

The IRS Automated Collection Service has been issuing levies immediately upon expiration of their mandatory 30 day waiting period.  (The IRS cannot take levy action until 30 days after it mails you a Final Notice of Intent to Levy.  You have the right to stop this by filing a collection appeal during this waiting period).

This has caught many who have filed timely collection appeals off guard.  The IRS seems to be making quick matches on levy sources immediately upon expiration of the 30 day period, acting before it completes processing of the appeal.  This aggressiveness has resulted in clients who have timely filed a collection appeal receiving a wage or bank levy.  Be careful – file your collection appeal as soon as possible.

3.     Increased collection of the trust fund recovery penalty.

The IRS Taxpayer Advocate reports that between 2002 and 2007 the IRS collected only 13.5% on trust fund recovery penalty assessments. The IRS knows this has been a problem, and indications are it is being fixed.

In the past, I would often be retained by clients who are 7, 8 and 9 years past assessment of the trust fund penalty and have never heard from the IRS on collection. (This is important  – the IRS only has 10 years to collect after assessment).  That is changing.  Expect IRS Revenue Officers to seek collection of the trust fund penalty after they assess it.

4.     “Pyramiding” tax cases, owing year after year.

IRS will continue its focus on those that “pyramid” tax liabilities – that is, owe the IRS year after year.  This is especially true for nonfilers and employment taxes.  IRS Goal #1 is to stop the problem of not paying every year, every quarter.  Expect these cases to be high priority in the IRS collection queue.

5.     Areas involving fraud, including fraudulent 1099 OID.

An evolving issue the IRS is working to immediately clamp down on is the fraudulent use of 1099 OIDs (original issue discount).  Known as “OID Redemption” schemes, false forms are being filed claiming bogus 1099 OID credits and false withholding.  The Justice Department reports that a total of $3.3 trillion in false claims have been filed.

The IRS is now catching those claims before issuing the refunds, but millions have already gone out the door. High level IRS Revenue Officers are being assigned these cases as priorities.  They are receiving approval to issue immediate jeopardy levies to recoup the credits illegaly claimed.

With the tax gap at $300 billion and the budget deficit at 1.45 trillion, expect the IRS to continue its efforts to bring money back into the Treasury.

It can be tempting to use payroll tax withholdings as a source of operating capital for your business, especially in troubled times.  But this is dangerous – the IRS can penalize anyone in your business who took part in this decision with personal liabilty for the unpaid taxes.

This is known as the trust fund recovery penalty.  The amount of the penalty is equal to the amount of money deducted from employees paychecks but not paid to the IRS.

But there are time limitations on the IRS pursuit of the trust fund recovery penalty.  If the IRS does not assign a Revenue Officer to your case and investigate you in a timely manner, they lose the right to do so.   Here’s an overview of when time is up on a trust fund recovery assessment:

Statute of Limitations Expiration Date  – Trust Fund Recovery Penalty.

The IRS timeframe for assessment of the trust fund recovery penalty against you is based on the filing date of your company’s employment tax returns (Form 941).

The IRS has three years from the filing date of the employment tax returns to come to you with the trust fund penalty.  The term “filing date” is important here – it is defined by Internal Revenue Code 6501(b)(2), which states that employment tax returns filed for any period ending within a calendar year are considered filed on April 15 of the succeeding year.


941 return timely filed for quarter ended June 30, 2007.  The clock starts ticking on April 15, 2008, the date the return is deemed filed for trust fund assessment purposes.  Final assessment of the trust fund recovery penalty must be made before April 15, 2011, three years later.

941 return timely filed for quarter ended December 31, 2007.  The clock starts tickong on April 15, 2008, the date the return is deemed filed for trust fund assessment purposes.  Final assessment of the trust fund recovery penalty must be made before April 15, 2011, three years later.

If an employment tax return (Form 941) is filed late, the statute of limitations on assessment of the trust fund penalty expires three years from the late filing date, provided it is later than the statute expiration date if the return had been filed on time.

Once or twice a year I see time pass for clients without the IRS pursuing trust fund assessments.  It does happen, although the IRS is trying to close the gap.

The IRS is generally known to be prompt in processing offers in compromise.

But the IRS is also known for losing files and not processing claims. Sometimes, things get washed into the big bureacracy.

So, what if the IRS takes its time on your offer, or it slips through the cracks unattended without an answer?  Time can be on your side.

If the IRS does not make an initial decision on your offer within two years, the amount you offered is automatically accepted. Internal Revenue Code Section 7122(f) governs the offer “snooze and lose” timelines.

The IRS is considered to have made a decision on your offer if you receive an initial rejection, it is returned as nonprocessable, you withdraw it or it is you do not make upfront payments while it is pending.  The time the IRS considers your appeal of a rejected compromise is not part of the two year period as the rejection qualifies as the decision for purposes of the statute.

It is always best to have verification of your offer filing date if the IRS does sit too long on the offer (hand stamped copies are best).

Your knee-jerk reaction to not hearing from the IRS for a while on an offer may be to call and get that compromise on track.  Usually, the IRS makes a decision on an offer within six to nine months. But if time ticks away with no answer, having the offer sit quietly undisturbed should be factored into your strategy.

A funny thing happened to me on the way to my mailbox today.  There was a letter from the IRS.  Sure, I get plenty of IRS mail everyday – I am an IRS defense attorney.   But this one had my name on it.

I put myself in my clients’ shoes.  I understood their fears.

Deep down, I knew what it was.  But there was still an intimidating factor to an IRS letter.  Whatever was inside was not going to go away, and I thought through all the reasons to open it, not ignore it.

1.     Ignoring it does not make it go away.  While you are pretending it does not exist, the IRS is doing the exact opposite.  And claim your certified mail – if the IRS has the right address, failure to go pick it up is not a defense to what was inside.  What you don’t know can hurt you.

2.     You can lose your wages or bank accounts if you ignore IRS letters. Before the IRS can take your property, they must send you a Final Notice of Intent to Levy.  Ignore it, and the IRS can come after your assets.  Respond to it, and you have the right to stop IRS collection action and meet with an IRS appeals officer to resolve your case.

3.     If you are a nonfiler, the IRS could be inquiring about it.  If you do not respond, the IRS can file an estimated return against you.  This will overstate the amount you owe and the amount the IRS tries to collect. The IRS could owe you money, but if you wait too long to claim it and file your return, the IRS will not pay it to you.

4.     The IRS could be auditing your tax return.  If you do not respond, the IRS will find you owe them money, even if you don’t.  IRS collection letters will follow.  That makes it complicated – stopping the IRS collection machine while reopening an audit.

5.    Interest and penalties makes the amount you owe go up.  The longer you put it off and ignore the IRS, the deeper it gets.  The original amount you owe will double every five years.

Know that the IRS is often wrong.  You have defenses, and there are solutions. The earlier a plan is put in place, the sooner you can move on with life.

Oh, my IRS letter contained a password to use in accessing IRS transcripts for my clients.  It would have only hurt those around me to ignore it.

I do alot of IRS and bankruptcy work for my clients, and receive many questions about  it works.  Bankruptcy is a valuable tool to eliminate IRS liabilities.

To help in understanding taxes and bankruptcy, I thought it would be helpful to provide real life examples, starting here with a “bankruptcy timing” question I recieved from an enrolled agent on behelf of his client:

Howard, I have a client considering Chapter 7 bankruptcy on her IRS income tax debt.

2001 – owes $59,000.  Her return was due on 4-15-02, but she did not file it until 9-15-08.

2003 – owes $9,800.  Her return was due on 4-15-04, but she did not file it until 9-1-08.

2006 – owes $1,400.  Her return was due on 4-15-07, but she did not file it until 8-25-08.

She is in currently non-collectible status with the IRS.

When would she first be eligible for a Chapter 7 bankruptcy?

This illustrates Rule No. 1 in eliminating taxes in bankruptcy:  To be successful, tax returns must have (1) a due date that is three years before the bankruptcy is filed and (2) been actually filed two years before the bankruptcy starts.

In this example, it has been more than three years since the returns were due. But it has not been two years since they were filed.

The result: She could have all of the taxes discharged in a Chapter 7 bankruptcy on 9-15-10.  This is two years after the returns were filed.

If the returns were filed on time, then she would not have wait any longer – both the three year and two year rules would have been met – and bankruptcy could be filed immediately.

The non-collectible status will keep the IRS on hold while awaiting the bankruptcy filing date.

Stay tuned – I will be periodically posting more real examples of how bankruptcy, taxes and the IRS works.  You can also read my other blog entries on it and my articles.

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