Howard's IRS and the Law Blog

In the vast majority of cases, you will not lose any of your stuff to the IRS.  Most clothing and personal household belongings are beyond the scope of the IRS collection power.  Here’s why:

Section 6334(a)(1) of the Internal Revenue Code allows you to keep all of your clothing.  Bear in mind that the tax code uses the words “necessary” in describing the clothing that is exempt from IRS collections, meaning that the IRS can technically take clothing that is not necessary, like designer shoes, handbags, etc. (click here for some fancy clothing that the IRS did see fit to seize, and note that this is type of activity is highly unusual). 

Section 6334(a)(2) of the tax code protects your furniture and household effects up to $7,900 in value from the IRS.  The IRS is not taking your television, or your bed, or lawnmower.

The Internal Revenue Manual, at Section 5.17.3.4.7, Property Exempt from Levy, restates these exemptions in guidance to IRS employees.

It is important to remember these exemptions when completing IRS financial statements, like Form 433A. Claim the value of these everyday items as exempt.  And in an offer in compromise, make sure that these assets are not included in the value of the offer as they are off limits to the IRS – again, claim it as exempt. 

In tough economic times, hard-working entrepreneurs protect their business by first paying the vendors, suppliers and employees that are necessary to operations, and delaying payment to the IRS.   This is because the vendors and employees are at the door, waiting for payment, and there can be no tomorrow without them. The IRS is more distant.  The plan is to catch up later with the government.  

This year, I have seen the IRS take significant steps to get more aggressive on employment taxes. Revenue Officers are appearing at my clients’ place of business earlier than ever, after only a quarter or two of employment tax delinquencies. Many of the cases in involve balances due –  $15,000 and under – that are relatively small compared to other accounts the IRS is carrying and would usually be more focused on.  The message I am getting is clear:  The IRS is seeking to stop employment tax problems earlier than in the past, and it is a priority.

Final Notices of Intent to Levy, which must be issued by the IRS before assets can be garnished or seized, are being issued upfront, immediately, and upon first contact in employment tax cases.  In the past, Revenue Officers would often use some discretion to see if the case could be solved before turning to possible enforced collection measures.  This aggression is forcing quick appeals of the Final Notice of Intent to Levy.  The appeal stops IRS collection action and puts negotiations in the hands of an Appeals Officer, without risk of IRS collection action.       

Employment taxes pose a significant threat not only to the business, but to owners and management.  Even if the business is incorporated, the owners and key employees who control financial decision making will be pursued individually by the IRS for the part of the unpaid employment taxes.  This is called a trust fund recovery penalty, and puts the personal assets of management into play for collection of the unpaid taxes.

The new IRS approach is actually somewhat of a benefit to business owners.  The early wake-up call makes recovery for the business more possible as the employment tax liability is not yet at the point of no return. And it minimizes the extent of personal liability of management.  I have seen employment tax cases go out of control to where the business cannot recover from it, must close, and management is saddled with the trust fund penalty.

The IRS is forcing a harsh reality, but it is a good reality nonetheless.  But great care needs to be taken in defending the aggression of the IRS in these cases against the business and its management.  

1.     Be courteous and respectful.  You will get nowhere with an angry or condescending attitude, and will just give the IRS reason to come down harder on you.  When your head is in the mouth of the bear, say nice bear.

2.     Abide by deadlines, or call for more time if one can’t be met.  Don’t let it pass.  The IRS will assume the worst if there is no contact, but usually will be forgiving if a call is placed with a reasonable explanation

3.     Do not give false or misleading information.  Hard questions may require some thought for good answers that are both correct and in your best interest, but false information is always a no-no.  It is not worth turning a civil collection or audit matter into a potential criminal one.

4.     Open your mail.  It is intimidating to get IRS letters in the mail.  But those letters are often very important, and give you legal rights that will lapse if not attended to.  Ignorance to what the IRS is sending you is not a defense.  It will only complicate matters and make it harder to dig out later.

5.     Stay current on your taxes.  File and pay on time while you are negotiating and thereafter.  There will be no negotiations if you are not current, and any success in the negotiations will ultimately fail if you later default. 

Tax Court judges have experience either as former government lawyers or in the private sector at law firms. Of the thirty-two Tax Court judges, thirteen previously worked for the government as IRS lawyers; four were employed by the Department of Justice’s Tax Division.  

The remaining judges have legal experience in the private sector (with the exception of two who were counsel to the Senate Finance Committee, and another judge who served as counsel to the House Ways and Means Committee).  Sixteen have advanced masters degrees in tax law (LL.M).

Tax Court judges are appointed by the President for 15 year terms.      

The judges travel to designated cities to decide the trials of the cases set to be heard during that visit – it is a “traveling court.”  There are no jury trials in Tax Court; all cases are decided by the judge.

Tax Court judges are essential to due process – they provide an independent review of IRS actions (like audits and collection cases) when administrative attempts at resolution fail.

I often have new clients come in who owe the IRS under $25,000 and have the ability to repay the debt with monthly installment agreements.  If we determine they can repay the debt within 60 months, we secure from the IRS a repayment that is called a “streamlined installment agreement.”  The Internal Revenue Manual makes these agreements simple and straightforward.       

Benefits of streamlined installment agreements include:

-     No financial disclosures are required to the IRS (bank accounts, source of income, assets, etc.) as would be necessary in other IRS collection cases.

-     No negotiation is necessary with the IRS – they will set up the agreement automatically at the 60 month repayment rate with interest.

-     The agreement can be established either by phone or online at the IRS website.

Streamlined installment agreements are creatures of Section 4.20.4.3 of the Internal Revenue Manual. These agreements are available only on income tax liabilities, not employment taxes.  As is the case with any installment agreement, remaining current on all tax filings and payments is necessary. 

I received this referral this week about eliminating taxes in bankruptcy:

I was audited for my 2005 taxes and owe $55,000 to the IRS as a result.  I owe other debt in addition to the IRS liability, and was considering bankruptcy even before an IRS Revenue Officer came to my house and left her card in my door. Can I include the IRS in my bankruptcy?

Yes, a Chapter 7 bankruptcy can “discharge” taxes from IRS audits if certain “timing” rules from the bankruptcy code are followed. Those rules are:

1.     The bankruptcy must be filed 3 years after your 2005 return was due to be filed (the return was due to be filed on 4-15-06, so three years is 4-15-09); and

2.     The bankruptcy must be filed 2 years after your 2005 return was actually filed (the return was filed on time, on 4-15-06, so two years is 4-15-08); and

3.     The bankruptcy must be filed 240 days after your audit result became final (the audit was finalized on 10-15-07, so 240 days later is 6-15-08).

To determine our bankruptcy filing date to wipe out the audit result, we look for the latest of these three dates.  The latest of 4-15-09, 4-15-08 and 6-15-08 is 4-15-09.  That is the date when the audit liability would be eliminated in bankruptcy.

Until then, we will cooperate and negotiate with the Revenue Officer, which most likely means providing financial statements to her, to prevent any IRS levy action until next spring (4-15-09) when bankruptcy will eliminate the liability.

For more detail on discharging taxes in bankruptcy, see my recent article in the Journal of the National Association of Enrolled Agents, “But I Thought You Can’t Eliminate Taxes in Bankruptcy.

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