What were
you doing 31 years ago?
Me? I was
living in South Florida. I probably had a nice tan.
Let’s return
to tax talk: do you think that the IRS can chase you down after 31 years?
One wouldn’t
think so. There is a three-year statute of limitations on assessment, which
generally means that the IRS has three years to audit you. If there is tax due,
the IRS will then “assess” the tax, which means that they post the tax due to your
master account. They have ten years (after assessment) to lien, levy or
otherwise collect from you. The ten years is the statute of limitations on collection.
NOTE: You can see there are two statutes at play: one on
assessment and another on collection. The two can – and frequently – overlap,
so that many times the effective statute of limitations is ten years.
There are
specialized situations where tax representation involves exhausting the
ten-year period. I had a client from Florida, for example, who inherited a
nasty tax problem from her deceased husband.
Exhausting the collection period was part of our strategy.
Let’s talk about Beeler, which the Tax
Court decided last month.
There used
to be a company called Equidyne Management, Inc, which failed to remit payroll
taxes thirty-one years ago. That would be 1982.
Skipping out
on payroll taxes is a bad idea. Somebody will not only be responsible for the
taxes, interest and penalties but also for a 100 percent penalty to
boot. This is the “responsible person” penalty, and this is one case where you
do not want to be responsible.
NOTE: We have previously called this the “big-boy” penalty.
It is one of the most gruesome penalties in the tax Code, as it imposes
personal liability for a business debt.
Equidyne had
three responsible persons: Beeler, Ross and Liebmann.
Ross filed
for bankruptcy almost right away – in 1983. During his bankruptcy, he sent
$80,860 as part of a “global settlement” with the IRS. “Global” means that he
was paying off various taxes, not just the responsible person penalty.
Per the
statute of limitations, the IRS had three years to assess. Right on schedule, in
1985 the IRS assessed the responsible person penalty against the three Equidyne
officers. It could not assess against the company, as Equidyne itself had gone
out of business.
Beeler
lawyers up and contests the penalty.
OBSERVATION: Litigation will “toll” the statute. This means
that the ten-year period is suspended until the toll comes off.
The
litigation is not resolved until 1995 - 10 years later. Beeler loses.
Beeler
contacts the IRS in 1997. The IRS fails to list the big boy penalty on his
transcript.
In 2001 the
IRS releases liens on Beeler’s properties in New York and Sarasota.
Even better, the IRS makes entry in Beeler’s master account that the statute of limitations on collections had expired.
Beeler
wonders what is going on. More likely, Beeler’s tax CPA wonders what is going
on. What the IRS did could be
correct. The trust fund penalty is “joint and several.” The IRS could go
against any of the three officers, but it does not have to go against the three
proportionally. If the IRS had collected from one of the other two officers,
then Beeler would be off the hook. The IRS cannot collect the penalty more than
once, regardless of the number of responsible persons.
In 2005 an
IRS employee reviewing Beeler’s account notices that a “pending” code had been
entered into the master file when Beeler litigated in 1986. This is standard
procedure, and it indicates the “tolling” of the account. Problem is that the
IRS failed to remove the code when the litigation ended in 1995.
The IRS
corrects the file. The judgment against Beeler is recorded.
NOTE: One way to override the collection period is for the
IRS to obtain a judgment, which requires the IRS to go to Court. Beeler was
considerate enough to do this on his own power.
Beeler is
hopping mad. Wouldn’t you be? He sues the IRS - again. He has two arguments:
(1) The lien release discharged his trust
fund obligation.
COMMENT: It did not. The lien secures a debt; it does not pay
a debt. Relinquishment of a lien has nothing to do with the enforceability of
the underlying debt.
(2) The big-boy penalty had been satisfied
by payment.
COMMENT: This caught the Appeals Court’s attention,
especially since the file went back to when some of the judges were probably
entering law school. The Appeals Court sent the case back to the Tax Court to
look into this matter.
The Tax
Court determined the following:
(1) Equidyne never paid anything.
(2) Liebmann never paid anything.
(3) Beeler never paid anything.
(4) Ross paid $80,860 as part of a global
settlement.
Beeler argues
that Ross paid another $64,000. The Court finds record of a $64,000 but it believes
that this was a bookkeeping entry reflecting a transfer among bankruptcy
trustees and not a payment to the IRS.
But there was an IRS entry for $60,773. There was some
dispute as to what it meant, as decades have gone by. The Court concluded that
the IRS was correcting a prior entry, that this was not cash received and
therefore not the $64,000 payment Beeler wanted.
Since there
is no better information, the Court assumes that all of the $80,860 was paid
toward the responsible person penalty and reduces Beeler’s liability
accordingly. But Beeler
is still on the hook for the balance.
Let us
speculate. What if Beeler had not litigated the big-boy penalty? There would have
been no judgment, and the statute of limitations would have eventually expired.
Would the IRS have let that happen? Who knows? Sometimes the IRS will send a
90-day notice (called a “SNOD”) to get the case into Tax Court before the
statute expires. You know what the IRS wants, of course: it wants the Court to
transmute the assessment into a judgment. The IRS does not always send a SNOD,
though. Perhaps it decides the likelihood of payment is low, or the amount due is
inconsequential, or maybe the file just gets lost in the system.
If he could
go back, I wonder if Beeler would have litigated the penalty. It is the reason
he is still on the hook, thirty- one years later.
