In general, the IRS imposes a penalty against any person who has the obligation to either collect, or pay over employment taxes that are withheld from an employee’s salary, when those monies are not paid to the IRS.  Often this happens, when a business is having financial difficulties and uses the payroll withholding to pay other expenses.

The Trust Fund Penalty is not a true penalty. It is the amount of monies that should have been paid to the IRS, that were taken from the employees wages (federal withholding taxes, and social security). Therefore, it is actually a portion of the the wages which were not paid, and not a true “penalty”.  Therefore, this penalty does not include interest and penalties charged against the employer for the failure to pay in the taxes owed. However, once the assessment is made against the person, interest will begin to accrue.

a7-300x150The IRS can collect from an officer, member, partner or other owner or operator of the business. It sometimes comes as a shock to a person that they are liable for the unpaid taxes since they may have been an owner of the business but not in charge of the financial affairs of the business. In addition, the penalty can be assessed against more than one person, but once it collects it from any other party your liability will also be reduced.

Every month I am contacted by a new client who has a tax issue from the 1990’s. You may wonder if it is even possible to have a tax issue going back that far in time. The answer is yes, I hate to say since if you did not a tax return, the IRS will not start the statute of limitations on that year, and its still an “open year” where they can assess taxes against you. The other scenario of when old tax debts are still relevant is where the State, such as New York, has 20 years to collect the tax. Therefore, they are chasing people for tax debts for these years since the twenty years may not have expired yet (since there is almost always a delay after the end of a tax year and when the tax return is audited) so this tax debt is still on the books.

Therefore, it is important to maintain good records, and to maintain them forever. This may seem harsh and a painful experience, but its better to keep good tax records than to pay a tax bill that is inflated greatly with interest if you made a mistake and did not file a tax return when you thought it was filed (which is easy to happen with e-filed tax returns) and need your tax records to file a new tax return.

a9-300x150The Lucky number is twenty three years. This is the number of years you should keep your tax records, since you are covered in case of some mistake, and need to prove what happened. This is not as bad as it seems since other permanent records (deeds, Wills) need to be kept forever. Often, it is less paperwork than you think if you get rid of the extra paperwork and envelopes that come along with the tax records. I am sure your still in shock. 26 years is not a short period of time, but it worth it when needed to prove that you paid the correct taxes.

A client who has unpaid IRS or State taxes is not without defenses to the IRS or State collection process of his or her outstanding income tax liability. In determining which defenses are available for their tax case,  the taxpayer and adviser will analyze many options to determine the best course of action.

  • Determine whether the income tax was properly assessed. While the IRS does not ordinarily does not assess an incorrect tax by not processing a tax return correctly, the IRS frequently will determine the tax owed of a taxpayer who has not filed an income tax return. In these cases, the IRS often computes an incorrect tax since they were not aware of any of the particulars of the taxpayer, such as the number of child they have, whether they are married, or if they had business expenses (which would offset business income).
  • Make sure that the statute of limitations (SOL) on collection of the tax debt has not expired. Normally the IRS has 10 years from when they assessed the tax to collect it. This period of time can be increased if you file an offer in compromise, or pending payment plan. Therefore, it makes sense to double check the IRS on the dates your tax debt expires since they sometimes miscalculate the date.

When the Internal Revenue Service analyzes a taxpayer’s ability to pay, they follow certain rules contained in the Internal Revenue Manual.  Depending on whether a revenue officer has been assigned to your case, either a form 433-F or 433-A will need to be completed. From the IRS’s perspective, these forms are used to compute the amount of money you can pay them each month. The problem with this approach from the taxpayers perspective, it that the IRS uses certain unrealistic expense standards that do not take into account such items as your child’s sports expenses, vacations, or regional food expenses. Therefore, it takes skill and effort to formulate a plan to “sell” to the IRS of the actual amount that is available to them each month.

a2-300x150Below are the relevant sections are of their manual:

Financial Analysis Handbook — IRM 5.15.1 Excerpts

Due to a law passed by the United States Congress in 2015, the Internal Revenue Service must hire third party tax debt collection firms when they have unpaid taxpayer tax accounts that are not being worked on by the IRS collection group. These private collection companies are hired to either create tax payment plan with the taxpayer, or to gather financial information of the taxpayer to assist with collection activities (levies, liens, etc.). The payment plan through a private vendor would be similar to the payment plans that the IRS enters into, and as such would either be tailored to the financial issues facing the taxpayer, or be a payment that is spread over a certain term, such as a sixty or eighty four months’ time period.

IRS-building-300x200The inactive tax accounts subject to these rules include taxpayer accounts that have 1) been removed from active IRS collection inventory (for instance, they cannot locate the taxpayer), 2) where there is no IRS employee assigned to the collection case, or 3) at least one year has passed since the IRS collection group obtained the case, and it was not assigned to a revenue officer or other field collection person (for cases over $250,000).

If you have filed an offer in compromise, or some other collection alternative, your account will not be transferred to a third-party collection firm. Therefore, innocent spouse claims, deceased taxpayers’ debts, or cases that are being litigated or part of an exam, will be excluded from these rules, and only be subject to the normal IRS collection rules.

Most taxpayers think because they are married, that they need to file a joint income tax return. That is not correct since they can file separate tax returns based upon their own income and expenses. In some cases when a couple divorces, and they filed jointly,  it is found out not all of the income was reported. For instance, take this example:

I recently reviewed tax returns jointly filed by Ms. and Mr. Soris for the tax years 2015 to 2017. During that time frame, Ms. Soris operated a business as a fitness coach. The majority of the income she earned was from cash transactions and PayPal. From a review of the records provided by PayPal, not all of Ms. Soris’s income was included in their joint income tax returns. My calculation showed $150,000 was missing from gross receipts, just looking at the PayPal data alone. The good news, both the Internal Revenue Service and the New York State tax department have formal written programs and policies where taxpayers can voluntarily report and disclose under-reported income with their tax returns. It is important to keep in mind that the main goal of the tax authorities is to collect tax, and not to prosecute people. Therefore, if the taxpayer cooperates and signals a clear desire to repay the taxes owed, they will usually avoid a criminal charge and prosecution.

a5-300x300The policy rules of the Internal Revenue Service, that is contained in their Internal Revenue Manual section 38.3.1 (08-11-2014), a taxpayer can correct problems with their tax returns that may be viewed as potentially criminal in nature by following specific voluntary disclosure steps. The steps are 1) communicating to the IRS the issue (normally through an amended tax return being filed providing the details of the issue, along with a letter demonstrating a willingness to cooperate with the IRS in determining their correct tax liability), and 2) making good faith arrangements to pay the IRS back.

When a client has a tax problem, that may also be a criminal tax problem since they crossed the line of mere negligence to civil fraud, extra steps are needed to protect the clients interests. As in all cases, there is not a bright line between civil and criminal tax cases, and many tax cases with the potential for criminal prosecution are resolved through civil proceedings.

a9-300x300A criminal tax case involved when the taxpayer willfully violated the tax laws. The most common examples of this is tax evasion or failing to file a tax return. Typically, the government must institute criminal charges within six years of the due date of the tax return. Criminal tax cases are typically investigated within the IRS by special agents. Many cases start of civil audits, and as information is uncovered that leans toward potentially criminal conduct, the audit can shift to the criminal investigation group within the IRS. Therefore, it is important to recognize the warning signs  that the person handling the civil audit, whether it is a compliance officer of revenue agent, is going to suspend the audit and refer the case to the criminal investigation unit. Since the IRS will not tell the taxpayer about the potential criminal investigation, the clearest indicator that the case was referred is it is difficult to reach the civil auditor after many attempts.   However, before that happens there are warning signs to look for that the case is headed in the direction of a criminal issue when during the course of the audit the auditor asks for many details related to omitted income, the audit is taking longer than normal, the auditor is issuing summons to third parties, or is making copies of all the relevant documents. Most seasoned tax professionals can spot this issue fairly easy.

The next issue therefore, is how to handle the case at that moment you suspect a criminal issue. A IRS special agent will normally want to visit the taxpayer at their home, as a surprise tactic to gather information. The  taxpayer should not let the agent into the home, and should tell the agent they are retaining council to assist with the matter.  Since this initial interview may be the most important event during the case, it has to handled with care. Many honest taxpayers believe that they can talk their way out of trouble, but then they start making admissions and factual misstatements that criminally hamper their case. In most cases, a tax attorney should be the person explaining to the IRS why certain items are missing from the tax returns, and the taxpayer should remain quiet.

When a taxpayer owes the Internal Revenue Service (“IRS), they can enter into a payment plan to pay the taxes owed. Often, under this scenario the IRS may file a federal tax lien to protect their interest in case the payment plan defaults. The federal tax lien is against the assets of the taxpayer, such as real property or personal property. Examples of assets that the lien would go against include the taxpayer’s vehicles, real property, and personal property. Just for clarity, a federal tax lien comes about when you have unpaid taxes. In cases where that unpaid tax amount reaches certain dollar amount thresholds, the IRS will file a notice of federal tax lien to establish its lien status against other creditors, such a mortgage on real property by a bank. Typically, this is important since it matters when the lien has been filed, since the liens typically have to be paid off in the order they were filed. Therefore, if you first first, you would be paid off before a lien filed after you.

From a practical perspective, if there is a notice federal tax lien, it most likley has it most negative impact on real property since its rare that a taxpayer would sell a vehicle or other personal property and the lien issue even be raised by the IRS or the purchaser. This is not the case for real perty since title insurance causes an analysis of the properties title, and tax liens would show up on the lien search, and would have to be paid off at closing.

Therefore, you might ask what do you do if the proceeds of the property sale are not sufficient to pay of the tax lien in full, but you still want to sell the property?  The answer to that question is that by filing Form 14135, Application for Certificate of Discharge of Property from Federal tax Lien,  which asks the IRS to discharge the tax lien from a particular piece of real property in exchange for the fair market value of the IRS’s interest in that real property.  T complete the application, you need to attach the deed to the property, an appraisal, county valuation, contract of sale, the title report, and proposed closing statement. Be careful with the appraisal since the IRS will use that report to justify the monies it receives in the sale. This can sometimes be problematic since if the appraisal was ordered for the bank to justify the loan amount, it will typically be appraised at a value very close to the contract price. When this is a problem is when the seller, in order to entice a buyer, offers a sellers concession by inflating the selling price and then the bank loan is paying for the closing costs which helps the buyer. From the IRS perspective, they sometimes see the higher selling price (over fair value) and want that amount. In most cases we can correct their misunderstanding on this issue, but it is a item to pay attention to if your are looking to discharge a tax lien and also offer a seller’s concession.

It is always better to file your tax returns, even though you can not pay the taxes owed since it lowers the failure to file penalty which can amount to about 25% fine. If the IRS owes you money, you will not receive the refund unless you file a tax return. If you do not file in three years from the tax filing date, your anticipated refund will be lost forever.

If you owe tax, the IRS will file a substitute tax return, at the highest tax rate possible. They will then take steps to collect the tax debt, even though it might be the wrong amount. The IRS often shares these calculations with the state tax authorities, and they charge a tax bill as well. The states also have the power to revoke drivers licenses for not paying your taxes, thus the penalties can be very harsh.

a5-300x300The penalties for not filing and not paying on time accrue until the tax is paid. There are limits, such as 25% of the tax owed for not filing on time at a rate of 5% a month, but overall the quicker you pay the taxes, the lower the tax penalties will be. Therefore, it best to reduce the tax penalties to avoid paying thousands more in taxes than what you would have owed.

There is no denying that a sales tax audit is not a pleasant encounter with the New York State Tax Department. I guess any interaction with the tax authorities is likely to produce an uncomfortable experience but going through a detailed sales tax audit is like going to the dentist. As a tax attorney who assists clients with providing guidance through all phases of the sales tax audit process the goal is to have the audit produce minimal pain and little financial loss.

a8-300x301-299x300Through many tax audits, I have gained an original perspective on the motivations on the State Tax Department to improve their taxing abilities by being aggressive with imposing taxes. As troubling as this may appear, it must be remembered that the best offense is a great defense. In many cases, a typical client does not spend the time to compile the necessary and sufficient documents to meet the needs of the auditors. This is a huge mistake, but you may ask why do we care about the tax auditors, and if they review the right records?  In a few words, they will make your life hell if your records are poor. Often, most taxpayers do not have the correct records, so the first step is to organize their records which will make the audit go much better, and reduce the cost of crazy wild guesses by the tax department in their quest to create a tax bill. Any time a client does not have ample tax records, the tax laws and regulations allow the state to start calculating the taxable sales, and they never come out on the low side.

Seeing that having good records can be so critical to a successful sales tax audit, I spend a lot of time with my clients to organize and improve their sales tax records before the audit begins. They are often shocked at the level of detail we make their records. When the actual audit starts, we (my client and I) sit along with the auditors and be available to answer questions and try to manage the process. Trying to influence the auditor is key, and honey works better than vinegar, if you know what I mean. Most clients are uncomfortable at first being at the sales tax exam, but after a while they understand the value in being there to help reduce their tax bill. Also, by showing our real human side and showing that we will not be bullied around, in all times in a friendly nonetheless productive manner, a positive difference can be had. If the sales tax auditor is being debilitating to constructive progress, then we can ask to speak to the persons supervisor and division group manager if we decide that would be productive. If all else fails, and where the client’s records have no value we try to reach a low tax settlement. In the conciliation conference, a mediation comes about between the taxpayer and tax department to come to a settlement. Often the results of this process are very good, and a reasonable result can be obtained to lower the tax bill to amount that can be paid all at once, or a reasonable payment plan can be established.

Contact Information