“Taxes are paid in the sweat of every man who labors. If those taxes are excessive, they are reflected in idle factories, tax-sold farms and in hordes of hungry people, tramping the streets and seeking jobs in vain.”
After a taxpayer receives a Notice of Federal Tax Lien or a Final Notice of Intent to Levy, he/she/it has the right to challenge the collection action in a Collection Due Process Hearing (a CDP hearing). In a Collection Due Process hearing, the taxpayer may raise issues such as:
1) The validity of procedural steps leading to the hearing.
2) Issues related to unpaid tax liabilities.
3) Challenges to the proposed collection action (i.e. liens or levies).
4) Alternate collection action.
5) Issues related to the intrusiveness/efficiency of the collection action.
The right to a Collection Due Process hearing only arises after the filing of a Federal Tax Lien, however, the right to the hearing arises before the IRS actually levies on the assets of a taxpayer.
The result of a Collection Due Process hearing may be the avoidance of the forced collection action. However, the result of the hearing can be the IRS’ determination that the collection action (lien or levy) is appropriate and then the IRS will move forward on that action.
Take note, however, that if a taxpayer plans to challenge collection in a Collection Due Process hearing, he/she/it must have a non frivolous reason for doing so. Additionally, a hearing cannot be requested if it is simply a means to delay collection of the tax. Using a Collection Due Process hearing to make a frivolous argument or as a delay tactic can result in monetary penalties.
When a business or individual owes unpaid taxes, the IRS will eventually seek to collect the tax through forced means. The first step is usually contacting the taxpayer to encourage payment, the second step is to file a lien on the taxpayer’s property and the third step is to levy on bank accounts, garnish wages or seize assets (all known as a levy).
When the IRS issues a Notice of Federal Tax Lien or a Final Notice of Intent to Levy, the taxpayer has the right to challenge the collection action in a Collection Due Process hearing (also known as a CDP hearing). Note: while it is called a hearing, there is no court proceeding or formalized hearing. Rather, a Collection Due Process hearing is simply a meeting or a phone conference in which the issues are discussed.
It is now all over the news. President-Elect Barrack Obama’s pick for the Treasury Secretary, Timothy Geithner, failed to pay more than $34,000 in taxes over the 2001 through 2004 tax years. The brewing controversy has apparently postponed his confirmation hearing until next Wednesday, one day after Obama’s inauguration.
The issue first arose for Geithner in 2006 when the IRS audited his 2003 and 2004 tax returns. The audit revealed that he failed to pay Social Security and Medicare taxes while working for the International Monetary Fund. The same issue existed for the years 2001 and 2002, however, Geithner did not correct those errors at the time of the audit. Eventually, after he was chosen by Obama to serve as the Treasury Secretary, Mr. Geithner paid the additional tax that should have been paid in 2001 and 2002.
Did Geithner Do Something Wrong?
In deciding whether to fault Geithner for the late payment of the 2001 and 2002 taxes, the Statute of Limitations on the assessment of additional tax should be considered. Depending on the circumstances, the Statute of Limitations may have expired on the 2001 and 2002 tax years by the time the IRS audited his 2003 and 2004 tax returns (in 2006). [Generally, the Statute of Limitations on assessment of additional tax is ordinarily 3 years from the date the return is filed. The limitations period increases to 6 years where a return omits from gross income more than 25% of the gross income.] If the Statute of Limitations had expired, the IRS would have been prohibited by law from increasing Geithner’s taxes for these earlier years. This assumes, of course, that Geithner did not fraudulently understate the tax he owed. When fraud is present, the Statute of Limitations is unlimited. (Note, I am not saying fraud…I’m just saying “if”.)
If Geithner is determined to have deliberately underpaid the tax, then he should not be confirmed as Treasury Secretary. Obviously, that would send a terrible message to the taxpaying public. The news reports tell us that the error on Geithner’s return is somewhat common for employees of international bodies. The news also tells us that the IMF repeatedly wrote to Geithner telling him that he would owe Social Security and Medicare tax. Yet, as I understand it, the IRS waived any penalties due on his underpayments. This means that the IRS has already, in some sense, exonerated him from any deliberate wrongdoing.
If, as Geithner claims, the underpayment was a mistake, then it would not be unusual for someone to leave the earlier tax years alone. If the Statute of Limitations on assessing additional tax for 2001 and 2002 had expired, (which is probably the case), he could no longer be legally compelled to pay the missed tax. I do not believe that anyone in his situation would have done differently. I leave it up to the readers to decide if he should be given any “moral credit” for eventually paying the 2001 and 2002 taxes that he should have paid but could no longer be forced to pay.
Was it a mistake? Possibly. Apparently, Mr. Geithner had hired an accountant to prepare his 2004 tax return. Allegedly that accountant told him that he did not owe employment taxes. On the other hand, Geithner is reported to have prepared his own returns for the years 2001 and 2002. If Mr. Geithner truly missed the fact that additional tax was due, the error could serve as strong evidence that the tax laws are much too complicated. After all, if a man qualified to serve as the Treasury Secretary can’t get it right, how can we expect anyone else to?
So Now What?
When all is said and done, whether Geithner made a mistake or tried to get away with something, may be immaterial. It is the perception that the prospective Treasury Secretary didn’t pay his taxes that creates the problem. It is easy to imagine in the homes of many Americans on April 14, people will be preparing their tax returns and thinking “if the Treasury Secretary didn’t pay his fair share, why should I?” Obviously, this is a terrible perspective (and an illegal perspective) but should we really allow for a situation where the Treasury Secretary’s confirmation raises the question?
I have written a number of posts that discuss 30-Day Letters and 90-Day Letters (Statutory Notices of Deficiency) an how they may be appealed to the IRS Appeals Division. This post discusses what happens at the end of an appeal of a 90-Day Letter.
When a taxpayer receives a 90-Day Letter and Petitions the Tax Court for a reconsideration of the asserted deficiency, the IRS Counsel’s Office will first prepare an Answer in the Tax Court case denying most or all of the positions the taxpayer takes in the Petition.
Following the filing of the Answer to the Petition (and any necessary Reply), if the case has not already been to Appeals via 30-Day Letter, the IRS Attorney will refer the case to Appeals for settlement. Currently, when a case is referred to the Appeals Division, an Appeals Officer will have jurisdiction over the case for 4 months beginning at the time Appeals receives the case.
An Appeals conference should be arranged within 45 days of receipt of the case. If a settlement is reached, Appeals will forward the stipulations and computations back to IRS attorneys who will prepare the settlement documents for filing in the Tax Court. The stipulated settlement will become part of the Tax Court proceeding and then become a judgment in the case.
If at the expiration of the 4 months during which Appeals has jurisdiction over the case a settlement is substantially likely, the IRS attorneys may extend the Appeals Division’s jurisdiction for a period of 60 days (subject to the placement of the case on the Tax Court trial calendar).
[Proposed regulations would extend this authority for such time as there is a reasonable likelihood of settlement but not beyond the date that the case appears on the trial calendar]
If no settlement is reached, the case will be sent to IRS attorneys and formal preparation for a Tax Court trial will begin. Once the case is with IRS attorneys, there is still the possibility of settlement, however, it will be amidst the trial preparation process (i.e. discovery requests, stipulations of fact, preparation of expert reports, etc.).
I have written a number of posts that discuss 30-Day Letters and 90-Day Letters (Statutory Notices of Deficiency) and how they may be appealed to the IRS Appeals Division. This post discusses what happens at the end of an appeal of a 30-Day Letter.
Where 30-Day Letter cases are settled in appeals, the settlement will be documented and the Appeals Officer will ask the taxpayer to waive restrictions on assessment and the collection of any deficiency. That is, the taxpayer will be asked to agree to the immediate “assessment” (a term of art in tax practice) so that the IRS may quickly move forward on the collection of the agreed tax, penalty and interest.
Where no agreement, or only a partial agreement, is reached, a 90-Day Letter (Statutory Notice of Deficiency) will be issued with respect to the disagreed issues. This gives the taxpayer the right to continue a challenge of the disagreed issues in the Tax Court.
In a move that recognizes that a down economy is making it more difficult for taxpayers to pay their taxes, the IRS says they will be showing leniency in the collection of past due taxes. The IRS announced today that it is taking steps to help those with outstanding tax obligations. In the announcement, IRS Commissioner Doug Shulman explained:
“We need to ensure that we balance our responsibility to enforce the law with the economic realities facing many American citizens today … We want to go the extra mile to help taxpayers, especially those who’ve done the right thing in the past and are facing unusual hardships.”
Some of the programs in which leniency will be shown are outlined below. It will be interesting to find out what other programs will develop. However, the trick will be in communicating the leniency programs to the public. Those with unpaid taxes should note that we can only expect leniency for those who are actively engaged in sorting out their debts. We shouldn’t expect to see much leniency for those that ignore IRS contact.
Postponement of Collection Actions: IRS employees will have greater authority to suspend collection actions in certain hardship cases where taxpayers are unable to pay. This includes instances when the taxpayer has recently lost a job, is relying solely on Social Security or welfare income or is facing devastating illness or significant medical bills. If an individual has recently encountered this type of financial problem, IRS assistors may be able to suspend collection without documentation to minimize burden on the taxpayer.
Added Flexibility for Missed Payments: The IRS is allowing more flexibility for previously compliant individuals in existing Installment Agreements who have difficulty making payments because of a job loss or other financial hardship. The IRS may allow a skipped payment or a reduced monthly payment amount without automatically suspending the Installment Agreement. Taxpayers in a difficult financial situation should contact the IRS.
Additional Review for Offers in Compromise on Home Values: An Offer in Compromise (OIC), an agreement between a taxpayer and the IRS that settles the taxpayer’s tax debt for less than the full amount owed, may be a viable option for taxpayers experiencing economic difficulties. However, the equity taxpayers have in real property can be a barrier to an OIC being accepted. With the uncertainty in the housing market, the IRS recognizes that the real-estate valuations used to assess ability to pay may not be accurate. So in instances where the accuracy of local real-estate valuations is in question or other unusual hardships exist, the IRS is creating a new second review of the information to determine if accepting an offer is appropriate.
Prevention of Offer in Compromise Defaults: Taxpayers who are unable to meet the periodic payment terms of an accepted OIC will be able to contact the IRS office handling the offer for available options to help them avoid default.
Expedited Levy Releases: The IRS will speed the delivery of levy releases by easing requirements on taxpayers who request expedited levy releases for hardship reasons. Taxpayers seeking expedited releases for levies to an employer or bank should contact the IRS number shown on the notice of levy to discuss available options. When calling, taxpayers requesting a levy release due to hardship should be prepared to provide the IRS with the fax number of the bank or employer processing the levy.
In its December 29, 2003 edition, the Wisconsin Law Journal included an article on a discussion that has come up more than once recently. The article addresses a potential movement by the Wisconsin legislature to do away with the sales tax exemption on legal services. Frankly, this is a terrible idea. I’m not saying this as a Wisconsin lawyer, but rather, based on an analysis of tax policy. The only way that a sales tax on legal services would likely bother me is if I needed to hire a lawyer myself.
In Wisconsin, the sale of tangible personal property is subject to the sales tax. Services are not subject to the sales tax unless the specific service is directly identified in the Wisconsin Statutes. So, to be clear, there is no special exemption from the sales tax for legal services. Rather, legal services are treated just like any other service in the state.
Interestingly, it is possible that the movement to tax legal services could gain momentum based on the often negative perception that people seem to have of lawyers. After all, lawyers make lots of money right? So why not tax legal services? This argument is what us lawyer types call a "non-sequitur." Meaning, the conclusion (to tax legal services) has nothing to do with the argument (that lawyers make lots of money). Here is why: a tax on legal services would be paid by the clients, not the lawyers. The only role for the lawyers here would be to collect the sales tax from the client and send it to the state.
If Wisconsin were to tax legal services, it would only hurt those in need of those legal services. Lawyers are not inexpensive and to add another 5+ percent on top of that cost could make legal representation unaffordable. To tax legal services would be nothing more than a tax increase on a segment of society that is already facing some sort of trouble. Regardless or whether the legal trouble is deserved, adding a sales tax to the mix flies in the face of making representation available.
With a sense of irony, the Milwaukee Business Journal reported on December 26th, that more and more law firms are accepting credit card payments from their clients because those clients are otherwise unable to pay for legal representation. If there is to be a sales tax on legal fees, the current economic turmoil dictates that now is not the time.
On the heels of the New Year comes the Tax Law Forum's first birthday. Yep, its been a year. Happy Birthday.
During this time, we have discussed a host of Federal tax law issues including, audits, appeals, collections, the United States Tax Court and current events. (I've had particular fun with the number of articles about celebrities with tax trouble.)
As a Wisconsin tax lawyer, I have also spent a reasonable amount of time discussing Wisconsin sales tax, income tax and employment taxes. The point of doing so, is to provide a forum in which these issues can be discussed. Others, hopefully, will be able to turn to The Tax Law Forum as a source of information to reduce the fear that comes along with tax troubles.
I hope you have enjoyed and found useful most, if not all, of these posts. I look forward to continuing these discussions through 2009.
Welcome to 2009! As I look forward to the new year, I think of the many people gathering this morning to start the year with a brisk dip into the great lakes. Whether a new member to the Polar Bear Club or a returning veteran, I hope it brings a fresh start to the new year; enjoy your morning. To everyone, enjoy your year.