Your Day in Court…

When a Notice of Deficiency (NOD) is issued by the Internal Revenue Service, you have 90 days to file a United States Tax Court Claim.  A NOD is issued for many reasons.  Usually a NOD is issued after an audit or an appeal of an audit.  For instance, if you were audited by the IRS, and you disagreed with a position the auditor took, you would have 30 days to appeal the decision.   If your position is not agreed to in appeals, the IRS will issue a NOD.  Once the NOD is issued, you have 90 days to petition the United States Tax Court to hear your case.  In order to petition the United States Tax Court, you need to fill out a petition, enclose your NOD, request where you want your trial to be heard, and pay a $60 filing fee.  Most cases that go to U.S. Tax Court are pro se, meaning the taxpayer represents themselves.  Only an attorney or someone that has been granted permission by the U.S. Tax Court can represent you.  That isn’t to say that your accountant can’t go with you to court.  In fact, the court applauds this.  They just can’t represent you without you being present, and they cannot negotiate or agree to terms on your behalf.

A taxpayer must meet three requirements for filling a petition in Tax Court:

  • The IRS must determine a deficiency, a tax balance due that does not include interest and penalty. If it assesses only interest and penalties, but no additional tax (or after tax payments and credits there is no additional tax due), the case does not qualify for Tax Court.
  • The IRS must issue a deficiency notice, a 90-day letter. (This is easily recognized by the wording, “This letter is a NOTICE OF DEFICIENCY….you have 90 days…to file a petition with the United States Tax Court…” on the IRS notice.) Without a deficiency notice, the taxpayer has no admission ticket for taking the case to Tax Court.
  • The taxpayer must file a timely petition, within 90 days of the deficiency notice’s date (150 days, if the deficiency notice is addressed to a taxpayer outside the U.S.), giving some indication that he contests the deficiency. The taxpayer must attach the deficiency notice to the petition.

A taxpayer may elect the “small tax case” procedure, known as S case procedures, for cases involving up to $50,000 in deficiency per year (including penalties and other additions to tax, but excluding interest). In rare instances, the Tax Court, on its own or in granting the Service’s motion, can remove S case designation.

Special trial judges hear S cases. The cases can be found at the Tax Court’s web site Taxpayers cannot cite them as precedent (Sec. 7463(d)). S cases have advantages; they are less formal, and can be heard in many more cities than regular cases.

S cases also have disadvantages; they are final, without appeal. Further, taxpayers lose S cases more often than regular cases. This is attributable to the nature of cases brought, as well as the lack of solid support to overcome the “burden of persuasion” imposed on the taxpayer. Of 99 Tax Court Summary decisions for S cases issued between January and June 2001, taxpayers were pro se in 88 cases, and won only five outright (none with attorney representation).

When filing a Tax Court petition, the taxpayer should be aware of the differences among venues. The Tax Court may be preferred over the District Court or Court of Federal Claims because it is the only court in which a taxpayer does not have to pay a deficiency prior to filing a petition. Other courts have discovery rules that can make litigating cases expensive and time-consuming. Despite this, there are times when taxpayers should avoid Tax Court.

For certain types of cases, Tax Court can be a hostile forum, while District Court or Court of Federal Claims can be “friendlier” Claims Court is only appealable to the Federal Circuit, which can be an advantage when the regional Appeals Court is known to be hostile to a taxpayer’s case. Trial by jury is available only in District Court.

Typically, a taxpayer would avoid Tax Court S case status if his case involved contingent fees withheld by an attorney as income to his client. The Tax Court consistently rules against taxpayers on that issue. The taxpayer would have no appeal rights.

The IRS District Counsel’s office handles Tax Court cases. Paralegals usually handle S cases. The Tax Division of the Department of Justice or the United States Attorney’s office handles District Court and Claims Court cases, an advantage when a completely new team reviews a marginal government case. Appeals does not observe the prohibition against ex-parte communication with other Service employees in docketed Tax Court cases.

When there is a possibility that the IRS can raise new issues, the Tax Court may not be the proper venue. The statute of limitations (SOL) is suspended while a case is pending in Tax Court. Therefore, the Service can raise new issues, which may increase the deficiency. In addition, after litigation is over, the limitations period is still open for certain assessments. Further, except for S cases, the Tax Court can determine a deficiency in excess of the amount the IRS claims. Filing a petition after expiration of the SOL is possible when the case is in District Court or Claims Court, where new issues are limited to reducing the refund claim.

We have filed about a hundred Tax Court petitions for our clients, and have gone with them when they have had their case heard, and represented their interests.  Typically, before the case goes to court there is a pre-trial conference where most issues are settled.  All of the cases I have taken to court have been settled in this pre-trial conference.  All of the court’s decisions are public record, so everyone will know what is going on with your case, so you have to know that going in.

All in all, going to court is not a bad option only if you have to go.  It is not something that you go to first.  Typically, you should go through the proper channels of appeals first.  In appeals the IRS is more apt to settle a case because they weigh something called the “Hazards of Litigation.”

Who is Ultimately Responsible for Paying Payroll Taxes?

IRC §6672 states the following:

 (a)  General rule.

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. No penalty shall be imposed under section 6653 or part II of subchapter A of chapter 68 for any offense to which this section is applicable.

Now we enter the case of William R. Shore v. U.S.  A district court has denied a refund of a responsible person penalty that had been paid by the owner of a company who had delegated duties to a manager who ended up embezzling funds from the company. While the court sympathized with the owner, it found him liable for the penalty because he was a responsible person and he paid unsecured creditors after learning of the manager’s failure to pay IRS.

In determining whether an individual is a responsible person, courts consider factors including such as whether the taxpayer served as an officer of the corporation or a member of its board of directors, owned a substantial amount of stock in the company, participated in day-to-day management of the company, determined which creditors to pay and when to pay them, had the ability to hire and fire employees, or possessed check writing authority. Not every factor must be present, instead, a court must consider the totality of the circumstances to determine whether the individual in question had the effective power to pay the taxes owed.

William Shore (Shore) owned real property (the property) that he leased to Countryside Repair & Equipment (Countryside), a farm equipment seller, until late 2004 when Countryside closed. At the time Countryside ended its lease with Shore, a representative for McCormick Tractors, a line of tractors sold by Countryside, proposed that Shore start his own business on the property and become a McCormick dealer. Shore was initially uninterested because he was retired and lived far away. The McCormick dealer then suggested the manager of Countryside, Tom Lewis (Lewis), had 25 years of experience buying and selling tractors and could run the business for Shore.

Shore met with Lewis and ultimately decided to form Bear River Equipment, Inc. (BRE). Shore and Lewis verbally agreed that Lewis would run the business and have the option to purchase it at any time by repaying Shore’s initial $150,000 investment in the company with interest. Both parties believed that Lewis would eventually purchase BRE.

Pursuant to their verbal agreement, Shore hired Lewis to manage every aspect of the business, including day-to-day operations, financial management, purchasing of product lines, paying all of BRE’s bills, and other duties required to run an equipment sales business. Lewis was responsible for supervising, hiring and firing employees, as well as for submitting all tax forms for BRE and paying its payroll taxes. Shore viewed his role in BRE as an investor, and essentially treated the company as if it belonged to Lewis. Lewis and his wife also treated BRE as their own company and held themselves out to others, such as an accountant they hired to work for BRE, as the owners of the company. However, Lewis never exercised the option to purchase BRE.

Shore played a very limited role in the operation of BRE. But he signed the Articles of Incorporation as President of BRE, owned all of its shares, signed various contracts on its behalf as its president, and personally guaranteed an operating line of credit eventually obtained by BRE from a bank. Shore spoke by phone with Lewis once or twice a month to discuss operations and made quarterly visits to BRE to check inventory and generally assess the business. Shore also reviewed balance sheets and annual statements Lewis sent him for BRE.

Shore eventually noticed unpaid payroll obligations from 2005 and directed Lewis to pay them. Shore ensured Lewis paid the payroll obligations from 2005 by the January 2006 deadline. Shore had authority to sign checks on the bank account, though he did not write any checks on the account, and was listed on the check signature card as owner of BRE.

In August 2007, Shore received notice from IRS that there were serious issues with BRE’s employment taxes for 2006 and 2007. This was the first time Shore became aware that BRE’s 2006 and 2007 payroll taxes had not been paid. Shore subsequently learned that Lewis had been embezzling from BRE, failing to pay creditors or pay BRE’s taxes, and stealing BRE’s assets. Upon discovering Lewis’ fraud, Shore fired him and took over management of BRE. Shore ultimately decided to close BRE because he believed he could not pay all of the liabilities and contribute sufficient working capital to keep the company going. Before doing so, however, he allowed more than $120,000 from BRE’s checking accounts to be paid to unsecured creditors other than the U.S. Although Shore believed he should not be held liable for BRE’s unpaid payroll taxes because he was not a responsible party and did not willfully ignore tax obligations, he paid $101,583 in trust fund recovery penalties to the U.S. and later filed the instant suit to obtain a refund.

Here is the law, if you have a business and you have control of that business as an officer, shareholder, or make day to day decisions for a business, and you don’t pay payroll taxes, the IRS can access a Trust Fund Penalty against you personally.  Not paying your payroll taxes, is in fact embezzling money from the United States Treasury Department.  Because a corporation can go out of business, and wipe its debts clean, the IRS will issue a Trust Fund Penalty to protect the government’s interest and make sure that the amount will be paid back to the government.

The mistake that Shore made was that when he learned of the embezzlement of funds and the nonpayment of the payroll taxes, he paid unsecured creditors instead of paying the IRS.  The court concluded that the undisputed evidence established that Shore was a responsible person under Code Sec. 6672 . First, he was BRE’s president and signed contracts on its behalf as its president, including inventory agreements BRE needed in order to obtain the farm equipment it sold, and Shore also personally guaranteed such contracts. Shore also signed on BRE’s behalf and as its president when BRE opened a line of credit, which Shore personally guaranteed. Further, Shore was BRE’s sole shareholder. He thus had the effective power to change the company’s employees and thereby direct the business of the corporation. Shore also possessed, but did not utilize, check writing authority on BRE’s account with Ireland Bank.

Shore didn’t manage the day-to-day operations of the company or, at least while Lewis served as manager of BRE, determine which creditors to pay and when to pay them. However, Shore had monthly telephone calls with Lewis to discuss the business, made unannounced visits to BRE to assess inventory, and reviewed BRE’s financial statements.

When he learned that Lewis had not satisfied payroll liabilities in 2005, Shore called Lewis and ensured such liabilities were paid. Shore thus had the authority to order the payment of delinquent taxes. Thus, despite delegating his authority to Lewis and permitting him to run BRE’s daily affairs, Shore remained a responsible person because he had effective control of the corporation and the effective power to direct the corporation’s business choices, including the withholding and payment of trust fund taxes.

Shore was also ultimately responsible for hiring and firing Lewis.

The undisputed facts conclusively established that Shore possessed the status, duty, and authority necessary to be a responsible person under Code Sec. 6672 , as evidenced by his title, stock ownership, check writing authority, his ability to ensure that the 2005 payroll taxes were paid upon learning they had not been remitted, his authority to force the Lewis’s out of the business, and, perhaps most importantly, the fact that Shore ultimately took complete control over BRE once he learned of the tax liability. Therefore, the court found Shore was a responsible person as a matter of law.  Even if you have directed an employee to make the payments to the IRS and they fail to do so, you could be held liable like Mr. Shore.

The question would arise: why doesn’t the IRS go after Lewis for his failure to pay the payroll taxes?  Very simply, they determined that they could get the money out of Shore and not Lewis.  Does Lewis have some responsibility?  Yes he does.  If this had happened where Shore never had any idea of what was going on, and the IRS came in to assess the Trust Fund Penalty, they would have probably assessed the penalty against Lewis as Shore had no idea that the taxes had not been paid.

When dealing with payroll taxes, the IRS doesn’t play around.  Be very careful.  If you find yourself in a similar situation, give us a call at 1-855-IRS-2-911.

Taxpayer Advocate – Our Secret Weapon

In 1998, Congress held hearings in regards to the collections practices of the Internal Revenue Service.  The agency was under heavy scrutiny because they were using questionable collections tactics, which were, as some Congresspersons said, worse than the Mafia.  These practices included wrongfully seizing assets, wrongfully levying accounts, and horrendous harassment.  Out of these hearings came the Taxpayer Bill of Rights, and an independent agency called the Taxpayer Advocate.  The Taxpayer Advocate (TPA) is basically the police of the IRS.  When the IRS oversteps their boundaries or does not follow protocol, us practitioners go to the TPA.  I have a true story to tell you about a case I just has resolved.

A client of mine was a victim of identity theft.  It is rampant with the IRS right now, and is a major hot button issue.  My client filed his 2010 tax return in 2011.  In 2012, he went to file his 2011 tax return and learned that his return had already been filed by someone that stole my client’s identity.  My client had never filed his 2011 return so he called the IRS, and sure enough his tax return had been filed.  His official address with the IRS had been changed to an address in New York City.  He worked for a year to get this cleared up with the IRS.

In the meantime, my client’s tax return from 2010 was selected for audit.  It was a correspondence audit (meaning the audit happens where a tax examiner asks for information to be mailed in).  Because of the ID Theft, and the client’s address officially being changed to New York, my client never got the audit notice.  The IRS never received any documentation, and closed the case disallowing all of the deductions that they had questioned.  By the time the IRS assessed the tax, my client finally has his address changed back to his home in Florida, and he gets a letter stating that he owes $8,000 in additional tax from 2010.  Very confused, my client calls the IRS and finds out that he was audited, and the bill was the result of the audit.

Here is where I get got hired.  When a taxpayer is audited, he has a right to produce evidence to defend the claims that they made on their tax return.  The examiner can either accept these or not except these.  The examiner will send the taxpayer a formal notice of the changes that are being made to the tax return, and why they are being made.  A right of the taxpayer, is to appeal the decision of the examiner by asking for a formal appeal based on the Internal Revenue Code, or other reasons.  The taxpayer does not sign the change form, and has 30 days to ask for the case to go to appeals.  The Appeals Division of the IRS is a separate independent division.  When a case goes before them they weigh something called the “Hazards of Litigation.”  What that means is that they weigh the cost of the IRS fighting their position in Tax Court versus the amount of tax that is owed, and they either side with the taxpayer or the IRS.  If they side with the IRS, then they issue a 90 day letter, stating that the taxpayer has 90 days to petition the United States Tax Court.  Since my client missed all these notices, because they were going to the address in New York, he lost all of his basic rights.  Tax Crisis Center®, LLC’s trademarked slogan is Let YOUR Voice Be Heard®.  I am very big on client rights.  I am hired to preserve these rights.  The only available right that my client had at the time that I was hired was to appeal the collection of tax.  I appealed the collection of the tax, and my case was sent to an appeals officer, and all collections actions stopped.

At the appeal hearing I explained the entire story and I asked for the case to be sent back into audit so my client could get all of his rights back.  The Appeals Officer explained to me that I could ask for an Audit Reconsideration, and that if we didn’t like the outcome, we could appeal it, but we didn’t have Tax Court Rights.  I knew that already, but my thoughts were, that it wasn’t my client’s fault that the IRS was sending notices to the wrong address, so they deserved ALL of their rights back.  The Appeals Officer took all of my evidence and stated that she would make a decision in the next couple of weeks.  Three weeks later, I got a letter from Appeals stating that my client WAS NOT a victim of ID Theft, and they were disallowing my request.

I immediately filed Form 911 with the TPA Office.  A week later, I spoke with the TPA, and explained the situation.  They got the clients file from the IRS and the advocate and I worked on the case.  I am happy to say that not only did my client’s case get put back into audit, where they have ALL of their rights restored, the TPA, also fixed the ID Theft issue that was still unresolved.

When hiring a tax professional to handle an IRS issue, make sure that they know what they are doing, and will fight for you no matter how long the case goes on.  Too often in the Tax Resolution Business, these companies will take your hard earned money and do the bare minimum to resolve the case.  Be careful who you hire.

Let YOUR Voice Be Heard®

When Not Paying Your Taxes Can Land You in Prison

For the most part, the Internal Revenue Service views the nonpayment of a tax obligation as a civil matter.  The IRS will take everything you own to satisfy the debt, and they typically cannot pursue the matter criminally.  However not paying payroll taxes is a different story.  If you willingly did not pay your payroll taxes, the IRS can pursue criminal action against you.  This week we will discuss why payroll taxes are different than other taxes, recent case law, and what you can do to avoid criminal action.

My company Tax Crisis Center®, LLC deals with a lot of businesses that fail to pay their payroll taxes.  Typically these taxes are not paid because of cash flow issues that small businesses have.  My advice to my clients is always to pay your payroll taxes first before you pay anything else.

During these economically troubled times there exists great economic pressure on businesses of all types and sizes. Cash flow short falls are increasingly common. One of the temptations, and indeed common business practices for businesses, is to reduce and defer the payments to some creditors in a desperate attempt to keep the business operational. Officers, directors, and other employees of a corporation are generally not liable for the legal obligations, including tax obligations, of their corporation. This is known as the “corporate shield” defense for such individual.  In a corporation or limited liability company, you are generally only liable up to your investment in the company.  That is one of the benefits to incorporating. Nevertheless, there is an exception to this general rule where an employer fails to properly withhold and remit the employee’s share of income taxes and employment taxes to the IRS and the officer or director, as the case may be, was in a position to prevent this from occurring. The failure to remit such Payroll Taxes to the IRS most often occurs when the corporation decides to use the Payroll Taxes as, in effect, a short‐term loan to pay off other creditors before the IRS.

Payroll taxes withheld from employee paychecks are the property of the U.S. government, and are held in trust by employers until such time as they are deposited with the government. If a business fails to deposit payroll taxes, the IRS will seek to recoup them from any “responsible person” of the employer, including officers, directors, owners, or bookkeepers with signature authority over a bank account. The personal liability of such individuals can be substantial, and can include criminal liability under IRC § 7202 of the Internal Revenue Code for “willful” failures to “collect, account for, and pay over” payroll taxes.  Not paying over the taxes to the IRS is embezzling money from the United States Treasury.

Employers are required by law to withhold from their employees’ paychecks the employee’s share of Payroll Taxes. When this occurs, the employer is deemed to hold the withheld Payroll Taxes “in trust” for the IRS until such Payroll Taxes are remitted to the IRS. IRC § 6672, also known as the “Trust Fund Recovery Penalty,” subjects those persons considered responsible for the collection and payment of Payroll Taxes to personal liability when their employer fails to pay over the Payroll Taxes to the IRS. Although technically a penalty provision, the Trust Fund Recovery Penalty is used solely as a device to collect the amount of unpaid Payroll Taxes, not as a means of imposing an additional penalty over and above the outstanding corporate tax liability.

The Trust Fund Penalty is typically imposed by the IRS to secure the government’s interest they will assess the Trust Fund Penalty against ANYONE that was responsible for the payroll taxes not being paid.  Typically this would be corporate officers, but could also be the bookkeeper of the corporation.

The IRS frequently chooses to pursue collection of unpaid “trust fund” taxes from officers and directors of a business. These individuals are the most likely to meet the two‐part culpability test that is required by the Trust Fund Recovery Penalty, including “responsibility” and “willfulness.” Accordingly, liability for the Trust Fund Recovery Penalty can occur only when an individual is determined to be a “responsible person” and his or her actions as it relates to the Payroll Taxes are considered “willful.”

The term “responsible person” is very broadly defined and includes employees, board of directors, shareholders, and others outside the formal corporate organization. The responsible person is, in general, any person who can effectively control the finances of the corporation or determine which bills should or should not be paid and when. The responsible person usually has the ability to sign checks on behalf of the corporation. Factors such as knowledge, delegation of authority, and the relative responsibility of others have little or no bearing on the finding of “responsibility.” As such, the “least” responsible person is no less liable for the unpaid trust fund taxes than the “most” responsible person.  Consequently, the IRS can attempt to collect from any deemed responsible person it chooses.

Recovery Penalty is civil rather than criminal. Accordingly, it is not necessary for the IRS to prove that the failure to remit the Payroll Taxes resulted from an individual’s bad purpose or evil motive. Generally, the willfulness requirement is met if a responsible person: (1) knowingly pays other creditors (or allows creditors to be paid) instead of the IRS; or (2) recklessly disregards the obligation to pay the trust fund Payroll Taxes to the IRS.

IRC § 7202 is the criminal counterpart to the Trust Fund Recovery Penalty. IRC § 7202, entitled, “Willful failure to collect or pay over tax,” provides that “[a]ny person required under this title [26 of IRC] to collect, account for, any pay over any tax imposed by this title who willfully fails to collect or truthfully account for and pay over such tax shall . . . be guilty of a felony”

In a significant recent case, United States v. Easterday, 564 F.3d 1004 (9th Cir. 2009), the defendant, Jack E. Easterday, operated a chain of nursing homes in Northern California through a corporation and subsidiaries. Although the corporation’s payroll tax returns filed with the IRS accurately stated its tax liabilities, the defendant, through the corporation, repeatedly failed to payover to the IRS the full amount of Payroll Taxes due. When the corporation did not pay the outstanding payroll tax liability to the IRS, the IRS filed liens against the corporate accounts and eventually filed criminal charges.

The defendant, Mr. Easterly, did not dispute that he failed to pay the Payroll Taxes when due. Instead, Mr. Easterly’s defense was simply that under long established Ninth Circuit law in United States v. Poll, 521 F.2d 329 (9th Cir. 1975), the criminal element of “willfulness” did not exist (and, therefore, could not be proven by the government) because the corporation lacked the financial ability to comply with the corporation’s Payroll Tax obligations as a result of the trust fund taxes being used to pay other corporate bills in order to keep the nursing homes operational.

The Ninth Circuit in Easterly held, however, that the government is not required to prove the taxpayer defendant had sufficient funds to pay the taxes due in order to establish the “willfulness” element of an offense of willfully failing to pay employee Payroll Taxes in violation of IRC § 7202. In so holding, the Ninth Circuit overruled its prior decision in Poll (and relied upon by the defendant), which held that willfulness requires a showing that, at the time payment was due, the taxpayer had sufficient funds to enable him to meet his obligations or that the lack of sufficient funds on the date was created by, or was the result of, a voluntary and intentional act without justification in view of all the taxpayer’s financial circumstances. As a result, the defendant in Easterly was convicted of a felony for failing to remit Payroll Taxes to the IRS.

Employers experiencing cash flow problems sometimes fail to pay over the withheld taxes, choosing instead to use the cash attributable to those taxes to fund operations. BIG MISTAKE. If an employer’s business ultimately fails and cannot pay the IRS the withheld taxes, the IRS will seek to collect them from any “responsible person” of the employer (e.g., an officer, director, shareholder (or other owner), or bookkeeper with signature authority over a bank account). This personal liability for the “responsible person” can be substantial. Moreover, in rare cases the IRS may seek criminal prosecution.

Mr. Easterday was the principal of a corporation that operated a number of nursing homes throughout Northern California. Between 1998 and 2005, the corporation and its subsidiaries accumulated a nearly $45,000 payroll tax liability, approximately $25,000 of which was paid. The corporations’ tax returns accurately stated their tax liability, but the corporations failed to pay over the actual taxes to the IRS. Mr. Easterday admitted that the companies in question had failed to pay over their payroll taxes, but claimed that he and his companies lacked the financial capacity to meet their tax obligations.

In response to the companies’ and Mr. Easterday’s failure to pay over their payroll taxes, the IRS charged Mr. Easterday with 109 counts of failure to pay over payroll taxes in violation of Section 7202 of the Internal Revenue Code. Each count represented a different quarter in which the payroll taxes went unpaid. At trial, Mr. Easterday’s witnesses testified that the companies’ did not pay their payroll taxes because those funds were needed to keep the nursing homes at issue operational. In light of this testimony, Mr. Easterday asked the court to instruct the jury that it had to find that his violation of Section 7202 had not been willful if the jury found that he lacked the ability to pay the payroll taxes due to the IRS. The trial court declined to give requested instruction, and the jury convicted Mr. Easterday.

On appeal, the Ninth Circuit affirmed the decision not to provide the jury instruction Mr. Easterday requested. The Court held that, although the statute requires a person to willfully violate the statute to be guilty of a Section 7202 offense, willfulness does not require the defendant to have the ability to pay the payroll taxes in question. Instead, the Court concluded that the willfulness required by Section 7202 merely constitutes a knowing and voluntary violation of one’s obligation to pay over payroll taxes to the IRS. In addition, the Court noted that Mr. Easterday’s position did not make sense when he could simply escape liability for paying over funds owed to the Government by claiming that they had been spent on something else. Thus, the Court recognized that the payroll taxes in question were the property of the United States and were simply being held in trust by Mr. Easterday until such time as they were to be disbursed to the IRS.

Pursuing payroll tax criminal penalties is becoming more and more common with the IRS.  If you find yourself in a pickle and owe employment taxes, you will need a professional to take care of the issue with the IRS before it gets to a criminal status.

What Exactly is Tax Resolution?

Tax resolution seems to be the new buzz word in the tax industry.  You have probably heard it, and wondered what tax resolution was.  This article will delve directly into exactly what tax resolution is, the primary companies that do this kind of work, and the usefulness of the industry.  In 2013, I formed a company named Tax Crisis Center®, LLC.  Tax Crisis Center® is a tax resolution company.  I got into the tax resolution business because it is a very nasty business and it doesn’t need to be.  Many companies owners have gone to prison and been stripped of their licenses for taking people’s money and never doing anything.  In this article we will run the gambit of this business and explore it inside and out.

We should begin with the definition of tax resolution.  Tax resolution is to resolve someone’s tax debt.  A taxpayer owes the IRS or the State money, and a tax resolution firm specializes in representing a taxpayer’s interest before the IRS or the State to resolve the debt in the most advantageous way for the taxpayer.  Owing the IRS is worse than owing the mafia.  The IRS can take EVERYTHING that you own to satisfy a debt, and they scare and intimidate most people.  People that have either a tax lien filed against them, wage garnishment, or bank levy know all too well what the IRS can do, and what they can’t do.

Let’s talk about how people get into these situations to begin with.  In April taxpayers all over the country file their tax returns.  In my experience as a tax professional, if you have waited to file your tax return until April, you have been putting it off because you know that you owe the IRS money.  Some people will put it off even longer by filing an extension in April, prolonging their fate until October.  Nevertheless, when a tax return is filed, and an amount is due, the IRS will assess the tax owed.  The date of assessment is very important.  The IRS has ten years from the date of assessment to collect the tax that is owed.  This is known as the Statute of Limitations.  There are many things that you can do as a taxpayer to extend this time that the IRS has to collect the tax, but for now let’s discuss the ten year time frame.  Once the tax is assessed, the IRS will send an initial notice to the taxpayer stating that an amount is due.  If a payment isn’t made, then 30 days later, the IRS will send a more serious notice stating that an amount is due.  If payment isn’t made the IRS will send a certified letter called an Intent to Levy Notice.  This notice states that the IRS will levy the taxpayer’s assets if arrangements are not made to pay the tax.  If nothing is done after that the IRS will send a notice 30 days later stating that they will levy the taxpayer’s State Refund.  If nothing is done, 30 days later the IRS will send a Final Intent to Levy.  This is the serious letter, and if not answered within 30 days, the IRS will place a lien on the taxpayer.

When is lien is placed on the taxpayer it does a couple of things.  First it effects the taxpayer’s credit rating.  Secondly, it allows the IRS to begin forcible collection of the tax that is due.  The IRS can levy your bank account, meaning that the IRS will send notice to your bank stating that you owe them money and they want the bank to take that amount out of your account.  The bank will place a hold on your funds for a period of 21 days.  After 21 days the IRS will then collect their claim.  The IRS can garnish your wages.  What this means is that the IRS will send your employer a letter stating that each time you get paid they will take a certain amount of money for a specific period of time.  If you are self-employed the IRS can seize your accounts receivable, and notify your clients or customers that you have a tax lien and they will need to make payments to them instead of you.  The IRS can show up at your home, and go through your assets in your house, and can have a public auction to sell your furniture, and other assets that you have in your home.  Depending on the State that you live in, the IRS can also seize you home and sell it at auction to satisfy your debt.  A tax lien is nothing to play around with.

Back in the 60’s, 70’s, 80’s and most of the 90’s the IRS abused their power so much that in 1998 there were Congressional Hearings that were held.  Out of these hearings came the Taxpayer Bill of Rights.  You have rights now.  Probably the most important right you have is the right to appeal the IRS’s collection of taxes, and the outcome of an audit.  For example, when the IRS sends the Final Intent to Levy Notice, you have 30 days to appeal the collections actions.  Most people don’t know that.  Even after the 30 days, you have limited appeal rights, and you have a right to a Collections Due Process Hearing.  At this hearing you can protest the amount you owe, come up with payment alternatives, if the collection of the tax resulted from a tax audit that you didn’t agree to, you can ask for the case to be thrown back into audit.  There are a number of things that you can do.  This is what Tax Resolution Companies specialize in.

In order to be in the Tax Resolution business you have to be licensed.  To prepare a tax return, you don’t need a license, but to represent a taxpayer, in most cases you do.  An Enrolled Agent, Certified Public Accountant, or Attorney can represent your interests, without restrictions before the IRS.  Some Enrolled Agents and CPA’s can even represent your interests before the United States Tax Court.

Tax Resolution is a nasty business to be in.  From the professional’s side you are dealing with different clientele than you normally do.  For instance, my tax practice caters to clients that have a high net worth.  Dealing with them, is completely different than dealing with a tax resolution client.  Now, before I say this I do want to state that about 1 percent of the tax resolution clients that I have dealt with are just people that found themselves in this situation by accident.  The other 99 percent just simply ignored the IRS when they were asking for money.  They won’t pay the most notorious collection agency in the world, so you have to get a majority of your money upfront in this business or you won’t get paid.  However, there are many unethical professionals in this business.  Since a lot of money is taken upfront, some companies will just steal the money from the client.  They will promise that they will help, but at the end of the day they just steal client’s money.  A lot of them get shut down because of this.  There are hundreds of tax resolution companies, which is why if you find yourself in a situation where you need one, do your homework before you hire them.  Their famous pitch to every potential client is that they can settle their debt for pennies on the dollar.  In all reality, what they are talking about is something called an Offer in Compromise.  18 percent of all offers are accepted.  That’s it.

This was the main reason why I formed Tax Crisis Center®, LLC a year ago.  For 19 years I was a partner in an accounting practice.  In 2013, I went out on my own.  Tax Crisis Center® was an idea that I pitched over and over again to my partner, but he wanted nothing to do with it.  The concept behind Tax Crisis Center® is to be an honest firm in the midst of all of these other firms that just basically promise clients the world, and then steal from them.  I have lost potential clients, because I tell them the truth.  If I don’t think they are a candidate for an offer, I don’t file one.  Filing an offer you have to give the IRS a lot of personal information like bank account numbers.  So, if the offer isn’t accepted, you have just told the IRS where the money is so they can seize it whenever they want.  You have told them the assets that you have, so they can take those as well.  For me it isn’t about the money, it is helping clients.  Our trademarked slogan is Let YOUR Voice Be Heard™.

Now you know what Tax Resolution is, and if you ever need help resolving a tax debt, put Tax Crisis Center® to work, for you.

Be VERY Careful Who You Hire

I just got back from Alabama.  I was representing a client before the Internal Revenue Service.  I am going to tell you the story of this client, but change all the names of the real people involved.  What you are about to read will be EYE OPENING for you.

Let’s open this article with a fact.  There is really no oversight of tax preparers in the United States.  Anyone can open a business to prepare tax returns for a fee.  There is no license that you have to obtain.  No competency exam that you have to pass, and no continuing education that you have to take every year to be a tax preparer.  No educational requirements, nothing qualification that you have to meet to prepare tax returns for a fee.  However, it gets worse…an unlicensed person can represent a client before the Internal Revenue Service on a tax return that they prepared, without the taxpayer present.  They cannot agree or negotiate on the taxpayer’s behalf, but they can certainly go without the taxpayer to an audit conference, and discuss the tax return that they prepared.  So you reading this article could open up a tax preparation business, prepare returns for a fee, and represent your client on the tax return that you prepared for another fee.  I’ll let that sink in for a second…I am an Enrolled Agent.  I am licensed by the Internal Revenue Service to represent taxpayer’s interests through all levels of the IRS, including United States Tax Court.  I took a two day four part examination on tax law and ethics.  I passed a rigorous background check, and I am required to take 30 hours of continuing professional education every year to keep my license active.  I would charge more money to prepare your tax return and represent your interests before the Internal Revenue Service then you would to do the same thing.  But that is a story for another day.

Today I want to tell you about the story of Raquel (name changed).  Raquel lives in Mussel Shoals Alabama.  Her husband is a professional, and she is a housewife.  In 2007 her daughter, Tina decides that she is going to open an Indian Restaurant in Mussel Shoals.   Tina knows that Raquel has a lot of money saved.  Raquel decides to give over $300,000 to Raquel to open this restaurant.  Tina tries to run the restaurant alone, but a month into business, she asks her mother to come and help her run the restaurant.  Raquel is a great mother and loves her kid, so she starts working six days a week in the restaurant.

You have to understand the small town of Mussel Shoals, Alabama for a second.  Everyone, knows everyone.  Raquel is originally from Los Angeles, and is not southern.  The people in Mussel Shoals don’t really like outsiders very well.  Especially those from LA.  Raquel and Tina work really hard, but they end up losing all of the $300,000 that they invested in the restaurant and have to close the doors.

Raquel and Tina have never been in business before, so they seek out an accountant.  Not knowing the aforementioned licensing requirements at the beginning of this article they hire an accountant to file their business and personal tax returns.   William is an unlicensed accountant in Mussel Shoals, and he prepares the Federal and State of Alabama tax returns for the business and Raquel and her husband’s tax returns.  William makes up deductions that neither the business nor Raquel and her husband have.  Raquel and her husband’s tax return gets examined for 2007.  Raquel, still not knowing the licensing requirements hires William to represent them at the tax audit.  The tax audit reveals that Raquel and her husband owe an additional $84,000 in taxes.  2007’s return was so poorly prepared that the IRS opens 2008’s return and examines that as well.  The result of that audit is that they owe an additional $100,000 in tax for a total of $184,000 in taxes.  William doesn’t tell Raquel of the outcome of the audit, and every time Raquel gets an IRS Notice she calls William, and he tells her that he is taking care of it.  Because, William is not licensed, he could not appeal the IRS’s audit findings, and William allows the case to close as unagreed.  Six months later, the IRS exchanges this information with the State of Alabama, who audits 2007 – 2012.  William represents Raquel and her husband at that audit as well.  Raquel and her husband end up owing $75,000 to the State of Alabama.  A few months later the Internal Revenue Service and the State of Alabama file tax liens against Raquel and her husband.  Raquel and her husband end up losing their house to the State of Alabama to satisfy their tax lien.  When the IRS files a tax lien against Raquel, I send her a letter offering her my services.  In December I am engaged by Raquel to resolve the tax matter.

When I am retained, I look over the tax returns, and they are the worst prepared returns that I have ever seen.  I have been in business for twenty years mind you, and I have seen some messes in my time, but this one is the worse.  There are deductions that are taken by the husband on the tax return that wouldn’t be possible because of the line of work he is in.  William shows on their return expenses for a pension plan that Raquel never had, repairs and maintenance expenses that never happened, rent expenses for an office he didn’t have, and that was just the tip of the iceberg.

Being unfamiliar with how to represent a taxpayer before the IRS, William does not appeal the tax audits findings.  He also doesn’t request a hearing from the Unites States Tax Court.  He lets all of Raquel and her husband’s rights expire.  By the time I get on the case, the only thing to do is try to resolve the tax debt.  However, I have been doing this for so many years that I have a few tricks that I know.  I immediately file an order to have the collections actions stopped against Raquel and her husband.  When I was retained the IRS was garnishing Raquel’s husband’s wages.  Now, in the middle of this Raquel’s husband has a heart attack due to all of the stress that this was causing.

While the collections have been stopped, I order a copy of the audit report from the IRS, and go through it with a fine toothed comb to see if there is ANYTHING I could do to help her.  I find that William didn’t argue two basic points that the IRS made, because he either didn’t know that they were wrong, or just didn’t care.  All of my client’s rights as to appeals and Tax Court or gone, so I have two options.  I can ask for something called an audit reconsideration, which has a 1 percent chance of being considered, or I can go to the Taxpayer Advocate, who is the police of the IRS, and beg them to get involved.  I spend the better part of a week looking up the Internal Revenue Code and United States Tax Court cases, which support my position.  I sit down for what turns out to be three hours and I make my case and ask for an audit reconsideration.  I send the 15 page document to the IRS, and I wait.  Six months later I get a call from the Huntsville Alabama office of the IRS letting me know that they will reconsider the case.  I just got back from representing my client last week, and it looks good for Raquel.  The point I am trying to make with this article is if Raquel would have gone to someone that was licensed in the first place, probably none of this would have ever happened.

As it turns out, William in known all throughout the IRS, in Alabama to not know what he is doing.  The IRS has tried to get rid of him for years now, and the auditor asked me to complain, and I am going to.  This man should NEVER prepare another tax return again.

When you are looking for an accountant ask to see their license.  When I met with Raquel the first time in person, I showed her mine.  Do some due diligence on who you hire.  You are looking for an Enrolled Agent, or a Certified Public Accountant that specializes in taxation.  Look at your tax return before you sign it and send it.  YOU ARE ULTIMATELY RESPONSIBLE FOR WHAT IS ON YOUR RETURN.  If you don’t understand something ASK.  I spend a lot of time going over tax returns with my clients.

Don’t end up like Raquel is the moral to this story.