Howard's IRS and the Law Blog

With tax season in full bloom, a little reminder to avoid making false or fraudulent claims on your tax return is in order.   

If you want to see what a criminal tax case looks like, the IRS makes it easy – here are the fact patterns and sentencing results of over 50 criminal tax cases from the last six months – business owners, physicians, public officer holders, ministers, and accountants included.

A primary purpose of criminal investigations is to protect the integrity of the tax system – like those listed, you will be exposed to deter others.  

Overall, the IRS does not undertake a significant amount of criminal investigations – in 2008, there were 3,749 investigations initiated.  But make no mistake, this is serious territory.  Once the IRS digs in, there is a 75% chance you will be referred for prosecution.  You do not want to go there.   

Having two IRS criminal investigators make an unannounced visit to you, flash a badge and request to sit down and ask you questions will make your world spin. 

If an IRS Special Agent contacts you, stop.  State that you do not wish to answer any questions without retaining professional representation.  There is a right time and way to properly respond to this type of IRS investigation, and answering alone, on the spot, without understanding the implications of what is transpiring is dangerous.  The IRS may know more than you think at this point. There is no benefit to letting them compare notes.  

An IRS criminal investigation can bring financial and social ruin, loss of career and incarceration.  The perceived gain from the act is simply not worth it.  

The IRS has updated its handbook on Collection Due Process appeals (Chief Counsel Notice 2009-10). Included in the handbook is internal IRS guidance on issues such as disqualified employment tax levies, levies on single member limited liability companies, ex parte communications between appeals/collection and equivalent hearings.  

Guidance for Tax Court procedures is also discussed, including District Counsel’s propensity for filing motions for summary judgment in CDP litigation, motions to permit levy and motions for 6673(a) penalties in CDP cases filed for delay purposes.

By definition, a Collection Due Process appeal is filed to dispute to an IRS Final Notice of Intent to Levy or the filing of a Federal tax lien.  Before the IRS can levy on bank accounts, or make seizures of real or personal property, it must first provide a taxpayer the Final Notice of Intent to Levy.  After the notice is sent, there is a 30 day window to file a request a meeting with an IRS appeals officer, which can be followed by Tax Court review of the intended IRS collection action.  In most cases, all IRS collection action stops while the appeal and Tax Court case is being resolved. This is known as collection due process.

IRS problems and divorce often come bundled together.  Here is my response to a question I recieved about how a divorce decree impacts the IRS in the collection of an unpaid tax liablity:

My ex was self-employed when we were married, and he never paid his taxes. I made the mistake of signing joint returns. When we got divorced, we signed papers stating he would pay our back taxes, but the IRS coming after me.  Will my divorce decree help?

The decree may have value to you if you believe you are an innocent spouse. The IRS does consider the decree as one of several factors in reviewing your claim.  Those factors include abuse, what you knew about the unpaid taxes, involvement in family finances, and whether you benefited from the unpaid taxes.

Bear in mind that your divorce decree does not, standing alone, bind the IRS. When you signed the return, the liability became “joint and several.”  You became responsible for the accuracy of the return and for the payment of the liability on it, even if it was not yours.  The decree will not automatically make it go away or cause the IRS to shift their attention to your ex.  

If you can prove to the IRS your signature on the joint return was forged or you signed the return under fraud or duress, the IRS will convert your joint liability to a separate one.  This relieves you of paying your ex’s taxes.

You may also have solutions to the collection of the liability against you: Bankruptcy, offer in compromise, uncollectible, or the statute of limitations on collection.

All recent indications are that the IRS is plowing ahead in its collection efforts under a weakening economy.  Revenue Officers continue to push hard, and there are no signs that Automated Collection Service has backed off its levy and lien filings.

The unfortunate result of this pressure is that more and more clients are turning to a tax bankruptcy to resolve IRS problems.  The advantages of a tax bankruptcy are often significant.  Here are a few:

     1.     Bankruptcy stops the IRS and releases levies and seizures

     A tax bankruptcy immediately secures the release of an IRS levy on bank accounts and wages, and stops seizures of assets like houses, cars and business equipment.  This is absolute under bankruptcy law – once bankruptcy is filed, all collection actions must stop, including those of the IRS (this is referred to as a “stay”).  In most cases, bankruptcy frees property from the IRS the same day it is filed.

     2.     Bankruptcy ends IRS discretion in its case handling.

     Once bankruptcy is chosen, it is no longer just up to the IRS.  IRS personalities and procedures yield to bankruptcy law.  Installment agreements that could not be agreed to under IRS standards may be obtained in a Chapter 13 repayment plan.  Chapter 13 adds the benefit of stopping the accruals of interest and penalties while payments are made, a virtual impossibility with direct IRS negotiations.  Taxes that could not be solved by an administrative IRS offer in compromise can be eliminated in a Chapter 7. 

     3.     Bankruptcy eliminates taxes, interest and penalties.

     Income taxes owed on returns that were actually filed with the IRS more than 2 years before the bankruptcy and were due to be filed with the IRS more than 3 years before the bankruptcy can be wiped out in a Chapter 7.  Bankruptcy is a powerful means of IRS resolution on these older income taxes.  If the bankruptcy rules are met, all the taxes, interest and penalties will be gone after a Chapter 7 bankruptcy is completed (usually 4-6 months).  

     4.     Bankruptcy is an alternative to an offer in compromise

     The IRS is accepting only 25% of compromises.  The IRS offer in compromise program has historically been an good source for resolving unpaid taxes.  With the current low acceptance rate, the reality is the IRS offer program is now broken.  Because of that, filing a tax bankruptcy on the government has become a viable option for a fresh start with the IRS.   

     5.     Bankruptcy is a complete solution to all debt problems.

      A tax bankruptcy solves IRS problems, but it also can eliminate state taxes, overwhelming credit card debt, well-intentioned medical bills, debt from a failed business – and it stops foreclosures.  With the present state of the economy, a comprehensive “all in one” solution to financial problems can take priority.

More details on handling taxes in bankruptcy can be found in my recent article for the Journal of the National Association of Enrolled Agents.

Retirement accounts are considered to be an investment that is protected from creditors.  But here is an interesting question from a reader about a big exception to that rule (yes, it is the IRS): 

Several years ago, I liquidated all of my retirement money to pay for gambling trips to the casinos.  My husband and I had a fairly substantial amount of tax due from the early withdrawal penalties. Now, I have been contacted by an IRS Revenue Officer, who is demanding that my husband liquidate his retirement money to pay our taxes.  It is the only savings we have, and I thought it was safe.  My question is: Can the IRS seize retirement accounts?

The IRS can seize retirement accounts, including 401k plans, IRAs, and self-employed plans like SEP-IRAs and Keogh plans.  There are no prohibitions in the Internal Revenue Code against it.      

The key to defending retirement accounts from IRS seizure is to understand that the IRS stands in your shoes, and can only get what you can get.  This means that if you cannot get to the retirement money, the IRS cannot get to it either

Many retirement plans do not provide for present rights to the money, allowing access only at separation from service, retirement or death/disability. If you are still employed, you likely have no ability to withdraw the retirement money, and the IRS has no ability to seize it.  Reference is found in Internal Revenue Manual 5.11.6.2, which governs IRS seizures of retirement accounts.

If you do have rights to the money and the IRS can get to it, it becomes important to understand (1) whether your conduct leading to the liability was flagrant and (2) whether you depend on the money in the retirement account, or will in the near future. Flagrant conduct includes tax evasion, fraud or making contributions to the account while the unpaid taxes were becoming due.  If it can be developed that your conduct was not flagrant or that you will depend on the retirement money, Internal Revenue Manual 5.11.6.2 specifically states that the retirement account is not to be levied.    

I have seen the IRS readily back off when it is established that there are no rights to the money.  I have also seen aggressive IRS Revenue Officers agree not to take a retirement account, but decide to put pressure on as to a levy on wages if the retirement money is not voluntarily withdrawn. 

The IRS is generally reluctant to take retirement accounts, and many times they cannot take action (such as when there are no rights to the money), but proper handling, negotiation and an understanding of the process is extremely important as to defending this very sensitive asset. 

After conducting an extensive review of their use of outside private debt collectors, the IRS has decided to eliminate the program in its entirety.  The program lasted for all of 30 months.  

But the IRS is not standing still.  This is not a downsizing mode. The IRS is beefing up collection efforts.

Significantly, the IRS will replace the private debt collectors with a hire of over 1,000 new internal collection officers.  This is significant as the private debt collectors had no ability to take any enforcement action against taxpayers.  They were used as what amounted to an outsourced IRS call center.

By comparison, internal IRS collection officers have access to a wide range of enforcement tools – levy, lien, seizure and the power to summons – as well as the ability to conduct detailed investigations and visit a taxpayer’s home and business.

In announcing the new collection hires, IRS Commissioner Doug Shulman stated “I believe this work is best done by IRS employees, and I believe we have strong support from the Administration and the Congress for increased IRS enforcement resources going forward.”  So much for kinder and gentler in a troubling economy.  

As the year progresses, time will tell how these hires are disbursed – into local enforcement efforts (Revenue Officers) or centralized processing (Automated Collection Service).

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