TV TALK SHOW – SPECTACULAR CHICAGO
INTERVIEW with TAX ATTORNEY JEFFREY ANTON COLLINS
Interview with Jim Baltzer, host of Spectacular Chicago, and from the Naperville, Illinois area, Jeffrey Anton Collins, a tax lawyer, accountant, and former IRS agent. They discuss what to do involving serious IRS problems.
IRS Collection Notices
All right. So what happens when the IRS is contacting us asking us for money, we have a business and we are behind in payroll taxes, or some other issue, and IRS sends us a notice? What might next steps be?
Attorney: Well the first thing that should happen is that there has to be some reaction. We have to determine the situation.
It typically starts when someone receives a series of notices that show some amount owed. The letter might show some pending action that the government would take. So our first step is to determine what is the bottom line here? What is the situation? What do we need to do to resolve this tax liability? Do we have the ability to make it all go away?
One thing is for sure, a tax problem as serious as an IRS investigation does not go away by itself, by taking no action. By the time you receive notice in the mail, you can expect that something is in process, an action is underway and the IRS is looking for payment.
Most people who receive IRS notices already have some expectation of IRS action. There is less need to disprove what you owe. Instead, the priority is to really identify what is the correct tax liability, and then what should be the action taken.
I think most people who receive a letter from IRS already understand that there was a series of non-payments, or late payments to the government. So as it relates to a business, the notice is most often for income taxes, payroll taxes, or some related tax.
Often for businesses, the liability under collection is income tax. A lot of our smaller business owners have this tax problem. But also common are IRS problems with employment taxes, or payroll taxes.
In this type of situation where, as most businesses go through their cash flow cycle, sometimes they have more cash than at other times. What we see during those periods, where cash is slow, is that some payments go by the wayside. It’s usually not payments for the rent, the utilities, and the phone that are postponed. So instead, struggling businesses will cut costs by making net payroll payments.
For example, if you earn $100 and your paycheck is $90, then that $90 pay check is the net payroll payment. In this example, there is still $10 that was withheld from the paycheck. That smaller amount is withheld, and represents funds entrusted to be paid by your employer to the government.
What so many struggling business owners will do, while trying to meet payroll and other operating expenses, is fail to pay the amounts withheld from pay. They fail to pay over those taxes withheld (called “trust fund taxes”), to pay over to the government.
So these calls usually come from someone who is already very stressed, who needs solution, and some peace of mind. They have no peace at home. They will have no peace in the business until they get some tax relief or resolution. They also fear what’s going to happen next from the government.
As a tax attorney, I like to explain first what will happen if they take no action, and then propose appropriate action. The Internal Revenue Service actually has a series of steps that it has outlined in its rule book of how a revenue officer can collect tax.
I explain that, that yes, the IRS can possibly garnish, or “levy”, your bank account, and seize assets. IRS may even contact people who owe you money, for direct payment to IRS. Here, IRS says to your receivables, instead of sending that receivable to you, to send it to the IRS.
So after explaining that principle, people have an understanding that they should take some action, and the action is to seek a tax resolution or settlement with the IRS.
What does that resolution mean for the IRS? They just want to collect the money.
For the taxpayer, the potential client, it may not be that simple. Most of my clients don’t have sufficient funds in the bank, to just write to make the tax problem go away. If they did, they probably wouldn’t have received the notice in the first place.
Offer-In-Compromise and Collection Alternatives
So what is expected – what’s usually desired is some form of payment alternative, or collection alternative. Whether it’s a payment agreement. Or some deferral of the tax amount, that maybe we’ll pay later.
Or there is a very effective program called the IRS Offer-In-Compromise, or “OIC”. Here, a tax liability reduction deal is struck. For whatever the amount of liability, we demonstrate that we don’t have that much money to pay. And we’re not going to have that much money, certainly not for a long time. So we make this “offer” as a “compromise to the liability”.
IRS examines the taxpayer’s situation to determine whether this is your actual financial structure. The IRS agent wants to know the government’s likelihood of collection, both with and without the possible OIC arrangement.
Large-Dollar IRS Tax Liability
Therefore, it is the tax attorney’s job to create and present an effective financial profile for the client. I always advise clients not to attempt communication with IRS without representation, especially when the liability is very large, over $100,000. We call these large liabilities “high stakes tax debt” or “large dollar liability”.
Internal Revenue Service will compile a lot of information about your assets, your income, people who owe you money, your bank accounts, titles to your vehicles, your home, and your other real estate. If you own rental property, IRS identifies those who are your renters. Because IRS compiles quite a bit of information, you become extremely vulnerable to IRS. All related communications are extremely sensitive. For large IRS debt, communicating with IRS is done better with a tax attorney.
And what we are required to provide may be different information than you may think. I always caution clients, hire good representation so that you don’t make the mistake of “over disclosure”, or providing information that you were never required. A good tax lawyer can protect and buffer you against IRS’s collection power.
Consider a typical collection situation. Someone opens a credit card, fully charges up the balance, and then doesn’t pay. Certainly the credit card company wants to collect on that balance. Their process may require the finance company to sue you in a public court, to get a judgment against you, and then seek the court’s assistance for collection.
Well, with the Internal Revenue Service and for that matter, state governments, the collection process is a little different. Government tax authorities (like IRS, Illinois Department of Revenue, California Board of Equalization, etc.) are less limited. Because they have been empowered by our Congress, by our legislature, they have been given the powers to have their own process.
In fact, the Internal Revenue Service has its own Collections Division. IRS typically does not have to prove liability in court. And IRS has a specialty unit – the “Large-Dollar Unit”, within that Collection Division. For liability exceeding $100,000, make certain that the IRS taxes attorney has history with collections against the Large-Dollar Unit.
Why Petition the United States Tax Court?
On the other hand, sometimes there needs to be some review, by some tribunal. If there needs to be a day in court, then taxpayers, my clients, do have the ability to get their day in court. But it’s a little opposite, the person who is owed the money doesn’t have to petition the court. Instead, the person who owes the money may have to file Tax Court petition.
And that’s one of the options an IRS tax lawyer can provide. It is not always the best option, and may not be immediately available when dealing with the IRS. But it certainly is one option that you’d want preserved, if needed.
There’s actually a separate court system specific for the IRS. It’s called the United States Tax Court. This is the only venue where it’s permissible to go into the court and challenge an IRS’s determination, or a liability, or an assessment of tax, before the tax is actually paid. In other courts, the tax must be fully paid before the challenge in court is made.
And so there’s always a very small window to use the Tax Court. But after that window passes, the only opportunity venue is that “day in court” to fight the IRS is the U.S. District Courts. Basically, you’re suing the federal government. You can actually sue the Internal Revenue Service in the U.S. District Court. But again, the problem is, you have to pay the tax first, then sue for a refund.
I gave two situations, one was more extreme, the US Tax Court where you pay the tax and then sue for a refund.
When you have the access to the Tax Court and file for some action there, it certainly stops the collection activities that you’re contesting. Petition stops the examination or audit activity that you’re contesting. A tax lawyer’s ability to petition the U.S. Tax Court is a wonderful thing.
I have represented clients before the U.S. Tax Court and it’s a national court system actually, so my license to practice is actually throughout the United States and its territories. I have represented people in tax matters as far north as Alaska, as far south as Puerto Rico, both coasts, Midwest, East Coast, Pacific, and there have been some interesting cases. I can maybe share one or two stories.
These cases tend to be layered with other legal situations. This layering of other issues is what colors cases, and makes them interesting. The Tax Court really wants to hear the bottom line, is the money owed? Is there some evidence or proof to say that it’s not owed? Did the IRSs do what it was supposed to do? But, the other facts in those stories is what makes it really, really interesting.
There was one client, a most colorful character, who was a professional gambler. Well, he considered himself a professional gambler. This guy was full of personality – I liked him! He was actually contesting the $1.8 million of income tax from gambling that the government said he owed. We wanted the Tax Court to handle and deal with his situation.
Unfortunately, he missed that opportunity. The Tax Court case basically went away very quickly. However, through some planning and some structure, we were able to lay out a unique strategy for this individual.
But, in his situation, obviously at some point he was a very successful gambler, won a lot, he lost a lot. In the process, he accumulated a tax liability of $1.8 million. That was just the income tax. Imagine how much was his table winnings. Well apparently, his millions in winnings went back to the table. You win it, and it goes right back.
Still, we had a long-standing battle with the IRS over what was actually the correct amount of tax. At the end of the day, he paid about $200 of that tax liability.
And the $1.8 million went away. He was satisfied. The government was satisfied. And the entire strategy was all absolutely within the permission of the law.
Strategy is based according to the unique facts of the situation. It was this client’s unique facts of his lifestyle which enabled his problem, but then also his result. We actually tied in the US Tax Court system, but also the U.S. bankruptcy system, and the laws there (under United States Code Title 11 and Title 26). So there’s always a series of layers in everyone’s situation, it’s always driven by facts.
An IRS tax defense lawyer has to know which buttons to push. We were able to completely resolve his tax liability with $200. He was happy, and the government was satisfied.
What About Innocent Until Proven Guilty?
In civil tax matters, it’s not a matter of innocent until proven guilty. You have to kind of prove a negative, which is not typical in a civil proceeding. You have to prove that you don’t owe a liability, versus a claimant proving that you do owe it. But the burden is on you and your tax attorney to prove that negative.
And it seems on the surface that that’s very unfair, we’re in a society where we are innocent until proven guilty.
But with tax, it’s a little different situation. Here, a matter of tax liability, is not really a matter of innocence. Instead, the concern is determining the right number. What’s the actual liability? So the person who is best situated to prove he did not owe the money, is actually the taxpayer instead of the Internal Revenue Service. And that’s why you have that reversal.
More on Business Trust Fund Tax and Trust Fund Penalty
Most common IRS collection situations for business owners, whether the business is trades and construction, food and hospitality, trucking, professional services, whatever, are one of two types of liability.
One liability type is income tax, where you earn money, you’re taxed on the amount that you make, and you’re supposed to pay that tax when you file a tax return. Sometimes that payment happens. And as we know, sometimes it doesn’t happen.
For businesses, though, the other type of liability that we see is called employment tax. Just to explain how employment taxes work, for every dollar that’s withheld out of an employee’s paycheck, there’s a few different components, there is a state income tax, there’s federal income tax. There’s also a Social Security tax withheld. That same amount is matched by the employing business. So again, if $10 is withheld out of the employee’s pay check, she receives $90, and part of that $10 withheld is also matched by the employer.
So go back to our example a little earlier, where a business runs short on funds. The one thing that doesn’t get paid is that payroll tax liability. Well, that payroll tax liability contains all those mentioned components: the portions that were withheld from her pay check, as well as the portion that the company matches.
So as a matter of responsibility, in every one of those collection situations, there is at some point a finding, a determination of who is responsible party. And now the reason the determination. Certainly the IRS will seek collection from the employer company itself. However, the government makes that “responsible party” guarantee the collection of funds that were taken out of someone’s paycheck.
They are called the trust fund taxes. The reason is because of those funds were withheld, that is the $10 previously withheld from our example’s pay check, those funds were entrusted to be paid over to the government. So, the money doesn’t belong to the company, it belongs to the employee, to be held by the government. Funds held in trust. Trust funds.
So the IRS created what is called the “trust fund penalty” (or “TFP”) for that responsible person. If it was your job, your responsibility, your decision to withhold those funds, but instead you didn’t pay them over, well you may be responsible for that trust fund penalty. This is the portion that you withheld from someone’s pay check, but chose not to pay over to the government.
Note: That person identified as the “responsible person” has an unwelcome burden. He is required to also help pay the business’s Trust Fund Tax liability. A strong tax lawyer seeks to leverage various areas of law, to help the client avoid being assigned the “personal responsibility”.
Host: I wonder if that thought process should be applied to all the state officials who don’t properly pay their bills. Illinois you know we have quite a bit of challenges, fiscal incontinence I like to say. And if those public officials were charged with the responsibility of paying the bills and they don’t pay the bills, well maybe somebody should come after them in that same way. That would probably resolve quite a few issues.
Attorney: It probably would, but what I think would happen would be no one would run for elected office anymore. And the government would only cause a lot of homes to be foreclosed. That is because most of these elected officials never really stockpile as much cash as they do real estate and other assets. And so if we ever did that, it may be the country’s biggest fire sale on luxury homes and exotic cars. And maybe a few other amenities.
But back to that discussion about trust fund taxes.
This is what happens when a company that maybe had a shortfall in funds when it was time to meet payroll. This shortage on taxes tends not to be a single occurrence, but tends to happen repeatedly over a period of months and sometimes years.
And as you can imagine, if after every payroll there is some shortage, there’s some amount that should have been, but was not paid over to the government. That liability is going to accumulate into a very large amount.
And in fact, I think I mentioned this earlier, most of my clients have tax liabilities in excess of $100,000. The way that amount accumulates is not that the business made so much money that they amassed an income tax liability. It’s that that their payroll was so great, that they weren’t able to fully meet payroll. Therefore, they amassed a payroll tax liability and that accumulated over so many payroll periods, so many quarters, and so many years. I have represented clients with payroll tax liability of well over $1 million, even more.
Fresh Start Initiative – IRS’s Streamlined Collections Program
Now, I have seen clients with payroll tax liability of under $25,000. Those people I would love to give this bit of advice. If the liability is under $25,000, there are hundreds of “tax resolution” companies around that could help.
But you hear the ads. It sounds almost like hucksters, they’re trying to sell you something, rather than provide a service. Well, some of those companies are just very good salesman. Certainly, some of those companies will do a very good job.
But if the liability is under $25,000, you don’t always need them for a good result. The IRS’s process of collection has actually been streamlined for lower liabilities. In fact, IRS calls it the “streamlined collections program’, designed to assist those people who owe less than $25,000.
With one phone call, the IRS representative ushers the taxpayer right into an installment agreement (ie: payment plan), or some sort of tax payment deferral. This program helps the government collect the tax, and gets the taxpayer on some payment agreement. Payments may be pulled monthly out of a bank account or pay check, or even paid directly by check or credit card. Possibly, payments may even be deferred for a number of months or years, until that person is back on their feet and better able.
Again, this Fresh Start Initiative is for very small liabilities. For the much larger liabilities, the process is not one to do-it-yourself. It would be like somebody operating on themselves instead of going to a doctor for an appendectomy. It’s just not practical to attempt this as a do-it-yourself project without an experienced tax attorney.
Do All Tax Resolution Experts Do the Same Thing?
Let’s go back to the earlier point about those other tax resolution expert companies. Some of those companies will do a very good job. But it’s important to find representation that is going to fit the way that you really operate. We certainly hear a lot of tax resolution advertisements on the radio.
We have all heard the advertisements, “If you owe the IRS $10,000 and more, call our tax resolution experts.” And we’ve seen so many of those companies because at some point, entering into the IRS tax defense industry became very attractive. IRS tax representation became a very popular business to get into.
Now the problem is, not everyone does everything. So some companies are very good fit for a smaller liability.
There are very few tax attorneys that actually specialize in larger liabilities, with other surrounding legal problems, or with payroll tax related liabilities. These problems are usually layered with other problems, such as a pending divorce, real estate foreclosures, business collection disputes, or employee lawsuits. There have been so many other legal matters that have been sprinkled into our tax clients’ surrounding fact patterns.
Host: On that note I want to thank you, Mr. Collins, for joining us. We will list IRS tax attorney Collins’ contact information, for those who are interested in more information and have questions relating to their own IRS tax situations. Thank you.
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Attorney Jeffrey Anton Collins is a tax defense lawyer. Formerly with the IRS, he is now a principal with Tax Law Offices based in Naperville, Illinois. He is licensed to practice before the U.S. Tax Court, and serves clients throughout the U.S. and territories. He is a top contributor on Avvo, and a weekly, regular contributor for GooglePlus and LinkedIn tax groups.