You may file April 15, but IRS works all year. How to deal with tax collectors
By Jeffrey L. Cohen
Special Atlanta Business Chronicle
William P. was a foreman, in a textile plant in South Carolina. He had been working with the company for a little over a month when his boss informed him that he had been appointed as vice president of the corporation with signature authority over the checking account. In fact, William signed very few checks and had no knowledge of the financial situation of his employer.
Two years after leaving that job, while living in Atlanta, William received a notice that he had been assessed with more than $28,000 in unpaid withholding taxes of the corporation. Known as the “100 percent penalty,” this Internal Revenue Service rule ensnared William because he was an officer of the corporation, and the owner of the company had never paid the IRS the taxes withheld from the company’s employees. When the owner could not be found, the IRS collected from William, despite his protestations of innocence.
William is one of a large number of real-life cases of innocent, tax-paying individuals and businesses that find themselves embroiled in tax controversies. Although this is the time of the year commonly associated with return filings and tax payments, the return filings and tax payments, the Examinations and Collections divisions of the IRS work year-round.
During 1988, IRS computers identified 18 million faulty tax returns, while auditors actually performed audits on approximately 1 million taxpayers. During that same year, the Collections Division, which takes over when a taxpayer does not pay upon receipt of a bill, collected more than $23 billion in past due taxes.
The Examinations Division of the IRS is charged with determining the correct tax due from every taxpayer. They match third-party reports such as W-2s and 1099s to amounts reported on tax returns, perform audits on particular returns, and hear appeals form taxpayers who disagree with the IRS position on proposed deficiencies.
The task is unquestionably complex, with more than 100 million tax returns and 1 billion third-party reports filed annually. Of the approximately 1 million returns that were audited during 1988, 74 percent were assessed additional taxes. The types of cases that result in assessed taxes and penalties include non-filing of returns, non-payment of taxes not forth on the return, “innocent spouse” cases where on spouses is responsible for a faulty return and the other spouse is ultimately saddled with the bill, 100 percent penalty cases involving unpaid withholding taxes, disallowance of deductions, omissions from income and tax shelter deductions.
No taxpayer, whether rich or poor, should assume that the IRS position with regard to his returns is automatically correct and therefore unassailable. The IRS, like any other large institution, makes mistakes when it assesses taxes and sends out bills.
But in 1997, only 12 percent of those who were audited appealed their assessments. Of these who did appeal, only 16 percent had the full assessment upheld by the Appeals Division. The remaining 84 percent had come or all of their tax bills reduced. That is why taxpayers should consult a tax professional immediately upon receiving a notice or tax bill from the IRS.
If a taxpayer ignores notices of proposed assessments, or does indeed appeal and lose that appeal, a bill will be sent. If that bill becomes delinquent, the dedicated corps of revenue officers of the Collections Divisions will use their arsenal of collections weapons to ensure the government is paid.
Although the Collections Division accounted for only 3.8 percent of all taxes paid during 1988, the $33 billion collected proves that the revenue officers earn their pay. Revenue officers have broad and awesome authority, including the power to subpoena records from employers, banks and other third parties, the power to place tax-liens on all property owned by a taxpayers, the poser to levy or seize bank accounts and paychecks of taxpayers, and the power to seize, without any court hearing or authorization, homes, possessions and entire businesses. Although the IRS typically makes a serious effect to avoid such draconian seizures and levies, these measures will be taken with respect to taxpayers who either refuse to corporate in payment or who persistently ignore communications from the IRS.
Whether due to a business downturn, economic layoffs in Georgia or other factors, there has been a noticeable increase in the number of clients who have IRS collection problems. No taxpayer should lose his home or business, have his paycheck seized or he forced into poverty as a result of a tax bill. Although every case is different, the only way most taxpayers can get relief is to communicate and cooperate with the IRS. The court system is virtually unavailable to taxpayers or their attorneys can deal with revenue officers.
The most common procedure is to enter into an installment agreement whereby the taxpayer signs a contract to pay off the taxes every month, much like a bank loan. Another procedure, much less frequently accepted by the IRS, is the Offer in Compromise. This arrangement is available only to taxpayers whose tax bills are so much higher than their assets and earning power that they cannot reasonably be expected to be paid off.
Additionally, the Internal Revenue Code provides methods by which tax liens can be discharged or released in order to permit the taxpayer to sell the property and raise funds, and by which certain property can be exempted from levies. When the particular taxpayer’s situation warrants, a bankruptcy petition can be filed, which will give the taxpayer time in which to pay all debts and may discharge certain taxes. Also, a taxpayer might be able to take advantage of the six-year statue of limitations on collections.
Although significantly watered down from the initial bill proposed in, Congress, the new Taxpayer’s Bill of Rights extends additional opportunity when dealing with the IRS. The new law provides that taxpayers may be represented in IRS matters by accountants and attorneys, tape recordings may be made of meetings with the IRS, and a problems resolutions officer or ombudsman will be empowered to issue “taxpayer assistance orders” to taxpayers who are about to suffer a significant hardship due to the administration of the Internal Revenue laws.
The Taxpayer’s Bill of Rights increases the amounts and types of property that will be protected from an IRS levy and provides that a taxpayer’s main residence will not be seized unless a high IRS official approves. Additionally, before a bank may pay the government on a levy upon a taxpayer’s bank account, the taxpayer is given 21 days in which to show that the levy is inappropriate or mistaken. For other levies, the time, period for payment has been extended from 10 to 30 days.
Finally, taxpayers who are victimized by IRS conduct that recklessly or intentionally disregards the law may sue for damages and court costs.
Conduct rules for taxpayers with problems
1. When you receive an IRS notice involving a tax return, discuss it with an accountant or whoever prepared the form before responding. Don’t ignore the IRS correspondence.
2. Do not speak at length with the IRS. (Anything you say can and will be used against you.)
3. Keep all notices and letters from the IRS.
4. Remember to file tax returns of any type on time, even if you can’t fully pay the tax. (Failure to-pay penalties are stacked onto non-payment penalties.)
5. Keep copies of every return filed and every letter sent to the IRS. (The IRS had your originals, but may not be able to find a copy in time for use in your case.)
6. Do not assume that the IRS position or computation is automatically correct. (Remember, this is the organization that interprets its own rules incorrectly a significant percentage of the time.)
7. Dishonesty is illegal. Do not try to give your assets away or hide them in someone else’s name or bank account. (You and your friend risk additional fraud penalties.)
8. Do not despair if you lose the first round with the IRS. (There are numerous avenues of appeal.)
9. Do not attempt to represent yourself or your business with an IRS auditor or collection agent.
10. Certain property is exempt from levy by the IRS. (No one should lose their business or home if the case is properly handled.)
11. Do not give up when the IRS demands full and immediate payment. (Installment payment agreements are not a statutory or constitutional right but can be arranged in many situations.)
12. Reduce your chances of overpaying and avoid the needless frustration involved with adverse collection activities by having an attorney experienced in IRS matters represent you. (The new Taxpayer’s Bill of Rights applies to you – but don’t expect the IRS to volunteer to be fair or impartial.)
– Jeffrey L. Cohen