- Personal Income Tax Preparation
- IRS Debt Collection Help
- IRS Tax Audits, Appeals & Tax Court
- Financial and Estate Planning
- Statute of Limitations | Back Taxes
- IRS Tax Penalties
- IRS Offer In Compromise
- Bankruptcy Planning
- Tax Crimes | Tax Evasion
- Independent Contractor Issues
- Trust Fund Taxes
- State Tax Help
- Student Loan Debt
Personal Income Tax Preparation
Income Tax Return Preparation
A large part of my practice is helping clients who have not filed an income tax return for many years and need help with personal income tax preparation. Non filer cases involve more than filling out forms. They may also include minimizing criminal exposure, completing accounting work for businesses, getting the client into compliance on an ongoing basis, and working out long term plans for satisfaction of amounts due.
Not filing an income tax return is a serious problem: it is a crime and you can go to jail for it. Care needs to be taken in preparing delinquent returns because we do not want to compound the criminal problems by taking overly aggressive positions on the return. When no return has been filed, there is a five year statute of limitations on the bringing of a criminal prosecution; however, there is no statute of limitations on the civil liability associated with an unfiled return. In cases where little tax has been paid, there are often large liabilities. There are solutions to the liability problems, but the critical first step is to work through the federal and state income tax returns to determine the extent of the problem. I prepare returns and work through all the related problems.
In many cases the IRS will have assessed taxes based on returns that it has made up (“substitutes for returns”). These returns are seldom accurate and the amounts claimed can often be reduced by preparing accurate returns and getting them processed.
IRS Debt Collection Help
The IRS has the power to take your bank accounts and pay checks and it can file notices of tax lien. These things can create chaos in your life and ruin your credit. If you owe money to the IRS, it is important to find debt collection help before said collection is enforced.
Many of my clients owe more to the Internal Revenue Service than they can ever pay. I start my collection cases with a review of filed returns for accuracy and with the preparation of any unfiled returns. I then prepare a detailed financial statement to understand the client’s financial condition, to develop a plan that best represents the client’s interests (not that of the IRS), and to be sure that only complete and accurate information goes to the IRS. Remedies available to the client include payment agreements, utilization of statutes of limitation, bankruptcy and offers in compromise.
Even the most difficult cases have solutions; most of the solutions require long-term planning.
Law schools and business schools do not put much emphasis on IRS collections. It is an area mostly learned by on-the-job training. I learned about IRS collections by spending 7 years working for IRS Chief Counsel in an area that advised IRS on the day-to-day legal problems that arise in the collection of taxes and by years of working collection cases in a practice limited to tax controversy matters. Additionally I focus on the continuing legal education required to maintain my Texas law license on tax controversy areas.
Liens and Levies
Let’s review some basic concepts and definitions. A lien is a charge on property created by law. Examples of liens are mortgages, uniform commercial code security interests, court judgments, and mechanics liens. In the tax area, when a taxpayer files a tax return and the IRS records the amount of the tax, the tax is said to have been “assessed”. Assessment coupled with an unsatisfied demand for payment creates a lien that attaches to all property and rights to property owned by the taxpayer. The lien created by assessment is a secret lien: it is not a matter of public record. Tax liens gain priority over other creditors only when a notice of the lien is recorded.
A “levy” is the seizure of property by the IRS to collect taxes. IRS can send a notice of levy to your bank and clean out your account. It can send a levy to your employer and take a portion of your pay check until the debt is paid.
IRS Tax Audits & Appeals
Taxpayers have a variety of contacts with the IRS and other taxing agencies for reasons such as tax audits or tax appeals. In cases where a return has not been filed, first contact will be a letter requesting that the return be filed. If there are discrepancies between amounts reported on tax returns and those reported to IRS, there may be a proposal for an adjustment based upon unreported income. Initial contacts in these cases are made by correspondence and without any face-to-face contact with IRS personnel.
If your return is audited, there will be face-to-face contact. Meeting with an IRS agent can be a traumatic experience. Your work and honesty are being questioned. You will be put in the position of telling the truth or lying about awkward issues and in either case the answer will not be advantageous. The taxpayer needs seasoned representation to assess the extent of the problem, put the best face on the situation and get it resolved as promptly as possible, preferably without the taxpayer ever talking with anyone from IRS.
The IRS is interested in reconciling income reported on your return with that reported to IRS and it is always looking for unreported income. It is also looking for a proof of expenses (usually itemized deductions, employee business expenses, and expenses reported on Schedule C and other business schedules).
It is important to start the audit process with an audit by the taxpayer of the taxpayer’s return. It is critically important to understand all of the facts about the return and the positions that may be taken with the IRS. Is the return defensible? What are the weaknesses? These questions need to be answered before talking with the IRS.
Appeals and the Tax Court
Several levels of appeal exist in any tax audit. If the matter cannot be worked out with the revenue agent, the agent’s determinations can be appealed to the group manager and then to IRS Appeals. If a resolution cannot be worked out at that level, the matter can be taken to the United States Tax Court without the necessity of first paying the tax that the government claims to be due. In my years of trying cases for IRS in the Tax Court I came to appreciate the need for thorough preparation that leads to early settlement.
Statute of Limitations | Back Taxes
What are the IRS statute of limitations on back taxes or unfiled tax returns? The principal time limitations associated with the IRS audit of tax returns are these: if no return has been filed or if the return is fraudulent, there is no statute of limitations. Once a return has been filed the government normally has three years in which to assess a deficiency. If there is a 25% omission of income on a filed return, the three year period is extended to six years.
In the collection area IRS has 10 years from the time of assessment to collect. The ten-year period is extended by the pendency of bankruptcy, offer in compromise and collection due process proceedings. It is also extended by a payment agreement.
California has no statute of limitations on collection of taxes. Other states vary.
Careful analysis and understanding of the statutes of limitations is important both in audit and collection cases.
IRS Tax Penalties
The Internal Revenue Service asserts penalties for filing returns late, for paying taxes late, for filing returns that are inaccurate, for fraud, and for a variety of other issues.
Penalties are almost all based upon deficiencies, that is, on amounts being owed to the IRS. If nothing is owed, there is no basis for the assertion of a penalty. Penalties can be abated if there is “reasonable cause” for what the taxpayer has done or not done. Reasonable cause is a very subjective standard.
Background facts need to be carefully examined to determine if there is a good excuse for what the taxpayer did or did not do. With proper facts we can explain and document the circumstance to the IRS in a way that will encourage IRS to not assert or to abate the penalties. I have been successful in getting penalties (and the interest on the penalties) abated for clients with post traumatic stress syndrome, dementia, alcoholism, and drug addiction. A third party representative can usually tell the story more persuasively than the embarrassed taxpayer.
The sophistication of a taxpayer is to be considered by the IRS in evaluating whether a penalty should be asserted or abated after assessment. The IRS Manual tells us that the following factors should be considered by the IRS:
- Efforts to report the proper tax liability
- Experience of the taxpayer
- Knowledge of the taxpayer
- Educational background
- Reliance on the advice of a tax advisor
- Nature and complexity of the investment generating a tax consequence
- Complexity of the tax issues
- Competence of the tax advisor and quality of the opinion relied upon
These factors need to be explored in detail and explained to the IRS in efforts to get penalties abated. In the area of reliance on tax advisor it is important to show what facts were disclosed to the tax advisor. Where the taxpayer raises reliance on a tax advisor, the IRS manual requires revenue agents to contact the preparer to confirm that the advice was provided and it will consider return preparer penalties against the advisor. This invariably leads to conflicts. Taxpayers who have a penalty problem related to advice by a preparer, generally should seek outside counsel as to how the matter should be managed.
The IRS manual says that penalties are not to be a bargaining point in resolving taxpayers’ other tax adjustments. That is an interesting theory, but difficult to apply in practice. I handled an audit several years ago in which the agent asked me in considerable detail why they should not be asserting a fraud penalty in an examination. I sent a letter back to the agent and to the agent’s manager saying I took offense at IRS using the fraud penalty as a negotiating item. The manager killed the issue and backed away from several other unrelated issues.
IRS Offer In Compromise
The Internal Revenue Service has statutory authority to compromise tax liability where there is doubt as to liability or collectibility or when it is indicated for the “effective administration of the revenue”. The IRS attitude toward compromises based upon collectibility has changed dramatically from time to time. When I worked for the IRS in the 1970s there were almost no IRS offer in compromise accepted based upon doubt about collectibility. Ten years ago, the IRS solicited offers in compromise based upon collectibility and it soon became flooded with offers, many of which were frivolous. In response to that, several years ago the IRS closed its window on offers and it now rarely accepts an offer. Don’t count on an IRS offer in compromise being the solution to your problem, and don’t believe the ads that say time is running out for the “pennies on the dollar” settlement.
The acceptance percentage of processable offers over time reflects the changing attitudes of the IRS toward offers.
The IRS is back in the business of accepting offers in compromise and they have become a much more attractive method for dealing with tax delinquencies. Several changes to the IRS procedure go a long way to making offers more attractive. These include:
- Taxpayers with income below 250% of the DHS poverty guidelines are exempt from paying a $150 application fee and from making 20% down payments on offers.
- There has been some liberalization in expenses that are regarded as allowable in computing disposable net income.
- Under the previous rules, the IRS wanted to see as a minimum offer payment of equity and assets plus what could be collected over 5 years under a payment agreement. These rules have been changed to provide that if the amount offered is paid in a lump sum, the IRS wants to get what could be collected over 12 months under a payment agreement. If the offer is to be paid through short-term payments the IRS wants to collect what could be paid under 24 months under a payment agreement. This is particularly attractive for taxpayers with high cash flow who can raise money for a lump sum payment.
Contrary to the popular belief, income taxes may be dischargeable with the help of a bankruptcy attorney and federal bankruptcy tax planning. The rules of discharge are that at the time of bankruptcy filing the tax year must be three years old; if the return was filed late, it must have been filed for two years; if there is a deficiency assessment, it must have been assessed for 240 days; and there must be no fraud associated with the return. The 240-day period may be extended by the pendency of prior bankruptcy proceedings, offers in compromise, or collection due process hearings.
The credit card industry in 2005 gave us a bankruptcy bill that uses means testing to force debtors having principally consumer debt and an ability to make a modest monthly payment into Chapter 13 arrangements. In a Chapter 13 the debtor pays creditors for a period of five years rather than obtaining an immediate discharge and getting a fresh start in a Chapter 7. With proper planning it may be possible to arrange a debtor’s affairs in a way that allows for a Chapter 7 discharge of income taxes.
High income debtors whose debts are not more than 50% “consumer debts” face the further challenge that the U.S. Trustee or the Court may move to dismiss a Chapter 7 case if granting a discharge would be an abuse of the bankruptcy system.
This is an extremely sophisticated area that requires detailed factual work up and multi-year planning. Paying debt is hard: payment of $1 in tax or credit card debt over 5 years requires about $2 in cash flow when the cost of interest, penalties, and income taxes on the income used to pay the debt are included. This places a high value on the ability to discharge the debt and get a fresh start. I do the planning working in this area but refer my clients to bankruptcy counsel for the execution of a bankruptcy case.
Tax Crimes | Tax Evasion
Let’s first define some of the players at the IRS. A Revenue Agent is an auditor and it is an auditor’s job to examine tax returns and to make civil adjustments to those returns. A Revenue Officer is a collector, and it is the job of a Revenue Officer to secure unfiled returns and to collect the balances owed. A Special Agent is a policeman who has the responsibility of investigating federal tax crimes. Tax crimes include not filing a return, filing a fraudulent return and willful tax evasion.
It is generally a bad idea for a taxpayer to talk with a Revenue Officer or a Revenue Agent. A taxpayer should never talk to a Special Agent.
If a Special Agent shows up on a taxpayer’s door step, he will have spent a long time developing a criminal case. His purpose in interviewing the taxpayer is to confirm facts, obtain admissions, and to catch the taxpayer in lies that can be used as additional counts in a criminal indictment. If a Special Agent hands you a card, say nothing and find a competent tax lawyer.
In the past the IRS would suspend collection and audit activity when a criminal case was being investigated. That is no longer the case. The IRS now conducts parallel audit and criminal cases. The auditors may be used to gather evidence for the criminal case, and the taxpayer may be unaware of the developing criminal investigation.
The following are the main points I take away from the NYU 5th Annual Tax Controversy Forum, presentation by Josh Ungerman.
- Offshore tax evasion is a dominant focus of the IRS Criminal Investigation Division.
- John Doe Summonses on U.S. branches of foreign banks and their correspondent banks produce huge volumes of information on U.S. taxpayer suing foreign banks to evade U.S. taxes.
- Identity thieves are using stolen identities to file false tax returns and get refunds. This exposes IRS to multiple payments and has the attention of the IRS. Improved internal procedures seem to be managing this problem.
- Criminal investigations of legal source tax crimes break down in the following categories:
– General tax fraud including skimming, keeping two sets of books, false entries, claiming personal expenses as business expenses, claiming false deductions and hiding assets.
– Refund fraud programs. In this area the IRS is focusing on tax preparers who falsify returns.
– Identity theft.
– Abusive tax themes. Principally the use of trust foreign corporations and partnerships for the purpose of appearing that the true owner of assets and income is someone other than the actual taxpayer.
– Non-filer investigations. Focus particularly on high income taxpayers.
– Employment tax. The focus is on pyramiding, employee leasing, payment of employees in cash, filing false payroll tax returns and failing to file payroll tax returns.
The IRS is very selective about cases it prosecutes. In 2012, IRS investigated 5,125 cases, 3,701 prosecutions were recommended, there were 2,634 convictions and of those 81.5% went to prison.
Independent Contractor Issues
Is a worker an employee for whom the employer must withhold taxes and cover with workman’s compensation insurance or is he an independent contractor for whom there is no such responsibility? What is an employee? For federal purposes there are complicated common law (court made) rules, but the bottom line is usually that if the engaging party has the right to control the details of the work being done, the worker is an employee. The other falls into the category of an independent contractor agreement.
In a competitive business environment there is strong temptation to treat workers not as employees, but as independent contractors. Payroll costs for an employee can be 50% higher for an employee than for an independent contractor because the business must pay payroll taxes and workman’s compensation insurance premiums for employees.
If competitors are not paying the payroll taxes and the workman’s compensation premiums, their labor costs will be 50% lower and work can be bid at much lower rates. The playing field is not level. The risk is that when a business fails without paying payroll taxes, its responsible officers (that includes anyone who participates in the decision not to pay taxes) are personally liable. That liability is not dischargeable in bankruptcy.
I worked on a case in which our bilingual client got contracts to do brick work for major homebuilders and subbed the work to brick masons who were treated as independent contractors. IRS took the position that the bricklayers were employees and that our client owed more than $2,000,000 in delinquent taxes. We settled on the second day of trial for $200,000 and an agreement to treat the workers as employees in the future.
Trust Fund Taxes
Trust fund taxes are taxes withheld from others to be paid to a taxing authority. They include income and payroll taxes withheld from employees, and state sales taxes collected from customers. Section 6672 of the Internal Revenue Tax Code provides that the responsible officers of a taxpayer is personally liable for any taxes that should have been withheld from employees and paid over to the IRS. If you are in the position of making spending decisions for a failing business, early planning is important to limit trust fund liability. This is not something that should be done without competent and disinterested advice. Trust fund liability cannot be discharged in bankruptcy.
CALIFORNIA STATE TAX HELP
Most states have income taxes and, in general, states follow patterns established by the IRS. However, various state legislatures have the power to write their own tax laws and they exercise those powers. The California tax systems is extremely complex, with many exceptions to the federal rules.
I work on state tax problems as they are presented and have yet to find one that couldn’t be worked out.
Student Loan Debt
Dealing with Student Loans. In 2016 there was in the United States $1.5 trillion in outstanding student loan debt. This is up from $500 billion in 2008. The average undergraduate leaves school with $35,000 owed in loans. The total number of delinquent borrowers in 2016 was 8.1 million and the number continues to grow. The schools do little, if anything, to control their costs. The Department of Education makes huge profits on its lending operations and stands with the banks and their lobbyists to maintain the status quo. It has abdicated responsibility to students and parents.
Bankruptcy. Student loan debt is exempt from discharge except on a showing of “undue hardship”. Most courts follow the Brunner test to determine dischargeability. Brunner requires proof of the following:
- The debtor will not be able to maintain a minimal standard of living, if forced to service the loan
- The financial hardship will continue
- The debtor has made a good faith effort to repay before resorting to bankruptcy
About 30% of debtors who sue for discharge (an adversary proceeding is necessary) succeed. Less than 1% of student loan debtors seek to obtain a discharge. With the proper workup we can determine whether a case is worth trying. With proper planning chances of obtaining a discharge increase materially. If we are going to use a bankruptcy to obtain a discharge of federal taxes in cases where student loan debt exists, we should also do a student loan workup to see what can be done about it.
Refinance. If you have a high interest rate and decent credit, shop for refinance opportunities. Top lenders quote rates between 2.2%–8%.
Deferments or Cancellation of Student Loans. Student loans may be deferred or cancelled under the following conditions:
- Borrower has died
- The borrower is suffering from a permanent total disability
- Borrower is suffering from a temporary total disability
- The borrower is enrolled in a rehabilitation program for a disability
- The borrower is unemployed
- Payment would cause economic hardship to the borrower
- The borrower is currently enrolled in school
- The borrower enters uniform service
- The borrower is teaching a needy population or serving a needy population or performing community service
- The borrower is working in health care field or law enforcement
- The borrower went to a trade school, which closed and made false representations
- The borrower is a victim of identity theft
- The borrower left school and never received a refund
A careful investigation and presentation of the facts will greatly increase chances of success in efforts to have debt deferred or cancelled.
Dealing with Default. There are two procedures for dealing with defaulted student loans. One is rehabilitation in which the borrower works with a collector to make nine low on time payments to clear the default and then switching to a traditional loan servicer with a flexible repayment program based on income. Multiple loans can be consolidated and shifted into a flexible repayment program. The problem with rehabilitation or consolidation is that if income levels do not stay high enough level to pay off the debt, the balances continue to accrue and the debtor may be permanently insolvent.
Forbearance. Forbearance is an arrangement with the lender to allow the debtor to stop making payments for a set period of time. Forbearance is negotiated by application and generally is granted in one-year increments based on medical or income problems.
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