Frequently Asked Questions
© David A. Sprecace
The following is not intended to, and does not, constitute legal advice or legal opinion. It is offered solely for general informational and educational purposes. Do not act or rely upon the information in this question-and-answer portion of our website. As with any legal problem, consult a tax attorney if you have legal problems similar to those described below.
1. I owe payroll taxes.
Needless to say, payroll taxes are an important part of running a business. If they are not paid, the IRS (and a state taxing agency) is quick to enforce collection of the taxes due—sometimes collection action will occur within two quarters of nonpayment. This can cause some undercapitalized businesses to “pyramid” in the nonpayment of taxes, which only makes an IRS Revenue Officer more determined to get the business into compliance, or to shut it down.
The IRS considers the nonpayment of payroll taxes equivalent to making the United States an unwilling business partner or lender. Unlike debts to a business partner or lender, though, Trust Fund Recovery Penalties assessed against “responsible persons” who “willfully fail” to collect and pay payroll taxes are not dischargeable in bankruptcy. Arguably, paying payroll taxes is more important than paying vendor bills.
If your company owes payroll taxes, it is time to take a serious look at the cash flow of the business, and any management and marketing problems that may be causing your company to fail at this integral part of the business. We can objectively evaluate the causes of this problem, provide guidance, and let you know what options would most likely lead to future success from a tax perspective.
2. I didn’t file my tax returns for a couple of years.
Find a good accountant or CPA if needed, prepare your returns as accurately as possible, make copies for yourself, and file them by certified mail. By federal statute, we each have an obligation to file our income tax returns. Tax protesters, arguing that individual people are their own sovereign entities and therefore not subject to federal taxes, routinely receive judgments against them in Tax Court and U.S. District Court. More frequently these days, judges in those courts assess costs and attorney fees against tax protesters.
Besides the obligation to file returns, the 3-year assessment statute of limitations does not begin to run until you file your return. If you file your return on time, the IRS generally has three years to assess additional tax against you; it has six years if you underestimate your tax by more than 25%, and it has an unlimited amount of time to assess if it thinks you attempted to defraud the government in the nonpayment. So, if you fail to file your tax return, the IRS can file a return for you (based on information it receives from entities that pay you) several years from now, and assess not only the tax, but years of penalty and interest. You may end up owing much more that you would have if you had filed your return on time.
Even if you can’t pay the amount of tax owed by the return-filing deadline, you can eliminate failure-to-file penalties—5% per month, up to 25%—just by filing your return. You will also eliminate the possibility of criminal prosecution by filing your tax returns. Contact us soon, so we can guide you through what could become a sticky situation.
3. The IRS is garnishing my paycheck. Can they really do that?
In a word, yes. By federal statute, the IRS has the ability to levy (garnish) a certain amount of your pay—as well as your property (house, car, bank account)—once the tax has been assessed, or you file a return and fail to pay the tax. The IRS must, however, comply with federal statutes permitting you to protest the amount of tax due and/or their collection procedures. For example, after 1998, the IRS must give you notice of its intent to levy your property, and an opportunity to appeal it administratively within the IRS.
In relatively rare circumstances, the IRS will refuse to withdraw or release a wage levy if a taxpayer agrees to a payment plan to pay the taxes. Depending on the amount of tax owed, though, the IRS may attempt to make you pay more than you think you can pay per month. If you owe more than $25,000.00 of tax, penalty, and interest, you will have to complete an IRS collection information statement, in which you provide your income, expenses, assets, credit, and banking information. Call us. We can lead you through this maze.
4. My company is in trouble with the IRS.
Am I liable if I’m the accountant?
If the trouble relates to payroll taxes, you may be held personally liable for the “trust fund” portion of the taxes not paid by your company. The “trust fund” portion is usually about 50% of the total amount of payroll taxes owed by a company.
The IRS assesses the Trust Fund Recovery Penalty (“TFRP”) against “responsible persons” who “willfully fail” to collect, truthfully account for, and pay payroll taxes. We have successfully handled many TFRP cases. These cases are inherently fact-oriented, and cause business partners, shareholders, and co-workers to become adversarial with each other in a relatively short period of time because the IRS casts a wide net when determining who is “responsible” and “willful”. Frequently, those being examined by the IRS will have to point the finger at others in the company in order to attempt to mitigate their damages.
There are too many factors and variables involved in TFRP cases to describe in detail here. For a detailed explanation of payroll taxes and the TFRP, see our Employment Tax Brief on this website. If you have any reason to believe you may be liable for the TFRP, call us for a consultation.
5. I’ve had a lien filed against me by the IRS.
If you fail to pay your taxes, the IRS has the right (by federal statute) to file a lien against your property and rights to property, real and personal, tangible and intangible, in order to put others on notice of the tax liability and to facilitate collection of the tax. This creates obvious problems for those with property held jointly with spouses, and in community-property states. State law determines what property and rights to property one has. Once it comes into existence, the lien extends automatically to all property then owned, and subsequently acquired, by the taxpayer.
Under certain very specific circumstances, the IRS may withdraw a Notice of Tax Lien Filing, but it cannot release the lien until the tax is fully paid. The circumstances for withdrawing a Notice of Lien are as follows:
(A) the filing of such notice was premature or otherwise not in accordance with administrative procedures of the Secretary,
(B) the taxpayer has entered into an agreement under section 6159 to satisfy the tax liability for which the lien was imposed by means of installment payments, unless such agreement provides otherwise,
(C) the withdrawal of such notice will facilitate the collection of the tax liability, or
(D) with the consent of the taxpayer or the National Taxpayer Advocate, the withdrawal of such notice would be in the best interests of the taxpayer (as determined by the National Taxpayer Advocate) and the United States.
Note that the “agreement” referred to in (B) above must have been entered into before the Notice of Lien is filed, according to the policy of the IRS. Requesting an installment agreement after a Notice of Lien is filed will not normally result in withdrawal of the lien.
There is a multitude of case law interpreting the above circumstances. Call us if you want to dispute the filing of a federal tax lien.
6. I received an audit notice and I’m panicked!
In order to ensure that you are not surprised during the audit, and to prepare in the event the audit leads to real problems like a Tax Court Petition or U.S. District Court litigation, you should hire a capable tax attorney to represent you. The IRS has a few different types of audits depending on certain factors, including the way you were picked for an audit.
IRS audits will increase in the near future, thanks to recent hiring of Revenue Agents. Audits are not uncommon, and large companies are audited daily by an IRS agent who is stationed in the accounting department. The IRS will sometimes select specific segments of the economy to audit for a period of time, in order to ensure compliance of federal tax laws by those in the segment. These are usually in-depth audits (examinations).
Sometimes filing a return showing a large refund due will trigger an audit. These audits are usually done through correspondence, with the IRS Revenue Agent requesting proof that you are properly entitled to a refund. As long as you can back up your expenses with proper documentation, you should have no problem, and may not even have to go to an IRS office.
Some audits are triggered by an ex-spouse, a disgruntled employee, or another person with an ax to grind against you. The IRS will not undertake an audit based on unsubstantiated accusations or allegations of those individuals, though.
The most important things to do upon receiving an audit notice—if you decide to represent yourself—are to read it carefully, and to provide the examiner the documentation he or she requests. If your tax return was prepared correctly, you will be able to substantiate your income and expenses. If not, or you have reason to think your spouse or tax preparer prepared a return that you cannot justify, call us.
7. I owe the IRS but I am unable to pay. What can I do?
Unlike some state taxing agencies, the IRS is willing to work with taxpayers who cannot pay the tax in full, provided the taxpayers follow certain basic requirements. The IRS will establish an installment agreement (“IA”), and will consider an Offer in Compromise (“OIC”), for taxpayers who presently cannot pay their tax liabilities in full. Under certain specific circumstances, the IRS will put a taxpayer in Currently-Not-Collectible (“CNC”) status, and monitor the taxpayer for months or even years.
The first requirement for an IA or OIC is that you be “in compliance” with federal tax laws, which means you must file all tax returns that are due. For example, if you owe tax for your 2004 tax return (each year stands on its own) but have not filed your 2003 tax return, the IRS will require you to prepare and file your 2003 tax return before establishing an installment agreement with you. This requirement makes sense, because if you owe tax for 2003 as well, you may be able to roll those taxes into the installment agreement with 2004.
The second requirement is that you complete a collection information statement, detailing your income, expenses, assets, credit, and banking information. As with levies, above, you should obtain capable representation for this requirement. While you may think you have very little money left at the end of the month with which to pay the IRS on an IA or an OIC, the IRS will probably see it differently. For example, the IRS usually does not consider ay credit card payments to be an expense more important than paying your taxes, and will disallow these debt payments in determining how much you can pay. Also, the IRS will allow only a certain amount of housing, living, and auto expenses—amounts that may be significantly lower than your actual expenses.
Dealing with the IRS is a serious matter. Taxpayers who “go it alone” usually get into more trouble, then end up hiring a tax lawyer anyway. Don’t take the chance of increasing your IRS troubles. Call us for representation before the IRS.
Contact David A. Sprecace today for an evaluation of your tax issues.