How To Forfeit an IRS Collection Due Process Hearing

I am looking at a Tax Court case.

I presume it was an act of desperation by the taxpayer, otherwise it makes no sense.

Let’s say that you get yourself into a quarter million dollars of tax debt.

You know the Collection bus is coming. You probably should get ahead of it, but it escapes your attention.

You receive IRS notice LT-11.

You are in the Collections sequence.

Let’s talk about the general order of tax collection notices.

   CP-14      Balance Due

   CP-501    Reminder Notice 

   CP-503    Reminder Notice

   CP-504    Notice of Intent to Levy

   LT-11       Notice of Intent to Levy and Notice of Your 

                   Right to a Hearing

Some observations:

First, you are deep into the machinery at this point. There were at least 4 notices sent to you before you received this one.

Second, a levy means that someone is going to take your stuff. This is different from a lien. The IRS can put a lien on your house, as an example. The lien will sit there, damaging your credit along the way, but it will not spring to action until you sell the house. A levy is not so nice. The IRS can drain your bank account with a bank levy, or it can divert (some of) your paycheck with a wage levy.

Third, you have taxpayer rights in response to receiving a LT-11, but there is a time limit. If you respond within 30 days you have full rights; respond after 30 days and you have lesser rights.  Granted, depending on the situation, it may be that both the 30 and 30-plus varieties will have all the rights you need.

You may wonder what the difference is between the CP-504 Notice of Intent to Levy and the LT-11 Notice of Intent to Levy. It is confusing. I wish the IRS used different wording on these notices, but it is what it is.

The difference is the type of Collections rights the taxpayer has. Both the CP-504 and LT-11 give you rights, but the rights under the LT-11 are more expansive.

An appeal under a CP-504 is referred to as Collection Appeal Program (CAP). An appeal under a LT-11 is referred to as Collection Due Process (CDP). There are differences between the two, and a huge difference is that the CAP is non-appealable whereas the CDP is.

If you want the safety net of a possible appeal, you are waiting until the LT-11.

BTW do not assume that all CPAs know this notice sequence and its significance. All CPAs have had some tax education, but not all CPAs practice tax or – more importantly – practice tax procedure to any meaningful extent. Tax procedure is rarely taught in school, and – to a great extent – it is learned through mentoring and practice.  

Our protagonist (Ramey) had several businesses, and he used the same address for all of them. There were other businesses at this address, so I presume we are talking about a shared office space facility. Anyway, the IRS sent the LT-11 notice, return receipt requested. The notice was delivered and someone signed the receipt, but that someone was not Ramey’s employee.

At this point, I am thinking: no big deal.

There is a 30-day time limit if one wants to request a CDP. The 30 days lapsed.

Oh, oh.

Mind you, there is a fallback option if one exceeds 30 days, but the downside is that any decision under the fallback is non-appealable.

Ramey wanted the option to appeal.

He figured he had a card left to play.

The IRS notice has to meet several requirements under Section 6330 before the IRS can actually levy. The notice has to be:

(1)  Given in person;

(2)  Left at the dwelling or usual place of business; or

(3)  Sent by certified or registered mail, return receipt requested, to such person’s last known address.

Ramey argued that he had not signed for the mail, and the person who did sign did not have authority to sign on his behalf.

Seems like weak tea.

The Court agreed:

Mr. Ramey’s chief complaint appears to be that multiple businesses use that address, so mail might be accepted by the wrong person. But, even if that is so, Mr Ramey does not explain how the IRS could have taken this fact into account. Mr Ramey is free to organize his business affairs as he sees appropriate, including by choosing to share a business address with other businesses. But, having made that choice, and having provided the IRS an address shared by multiple businesses, he cannot properly complain when the IRS uses that very address to reach him.”

Ramey blew the 30- day window. He failed to protect his right to appeal to the Tax Court.

The Court correctly pointed out that Ramey still had options. He could, for example, pay the underlying tax, request a refund, and appeal the denial of that refund request in District Court, for example.

So why the fuss about the 30 days?

One does not have to pay the tax before being allowed to file in Tax Court. One however does have to pay the tax in order to file with a District Court or the Court of Federal Claims.

Ramey owed a quarter of a million dollars.

Our case for the home-gamers was Ramey v Commissioner 156 T.C. No. 1.

Small Business Health Care Tax Credit Redux

We’ve been looking again at the small business health care tax credit. Truthfully, I have been less than impressed with this credit, at least for our clients. It seems quite heavily engineered to accomplish so little.

There are three key steps to this credit:

(1)    How many employees do you have?

(2)    How much do you pay them?

(3)    Do you have a “qualifying” insurance arrangement?

Let’s go through them.

HOW MANY EMPLOYEES DO YOU HAVE?

To be fair, the credit does not address the number of employees. It instead addresses “full time equivalents.” This makes sense, as it may require two (or three) part-time employees to have one “full-time equivalent” employee.

The first thing to do is count the number of employees. This requires a definition of “employee” (remember, this is the tax code). The term “employee” does NOT include the following:

·         a sole proprietor

·         a partner in a partnership

·         a more-than-2% shareholder in an S corporation

·         a more-than-5% owner in any other business

Wait, there is more:

·         a family member of the above, including spouses, lineal family (ancestor/descendent) and in-laws.

So, you start with your year-end payroll summary. You eliminate the owners and their family. That leaves you with “employees’ for purposes of this credit.

Next you add-up the hours worked for those who remain. You stop counting at 2,080 hours per employee. After you adding-up all the hours, you divide by 2,080 to arrive at the number of FTEs. If this number is less than 25, you are still in the hunt.

The magic number is 10 or less FTEs. Above that number you will start to phase-out. By 25 you have phased-out completely.

HOW MUCH DO YOU PAY THEM?

We are talking Medicare wages, not income-taxable wages. The key difference will be contributions to 401(k)s, as those are Medicare-taxable but not income-taxable.

Fortunately you get to exclude the wages for the people left out above: the owners, their spouses and other family.

This can get you into an odd factual situation. You can have a workforce over 25 people – all full-time – and still qualify for this credit. The reason is that you have to eliminate the owners, their spouses and family. For some of our clients, that eliminates a sizeable part, if not the majority, of the workforce.

The key number here is $25,000 per FTE.  Above that amount you will start to phase-out.  By $50,000 you have completely phased-out. 

DO YOU HAVE A “QUALIFYING”INSURANCE ARRANGEMENT?

The insurance we are discussing is what you would anticipate: traditional insurance, HMO, PPO and hospital indemnity. It also includes specified illness (think cancer insurance) as well as some dental and vision insurance.

What it doesn’t include is an HSA.

The key requirement is that you – the employer - have to pay at least 50% of the cost of the insurance. There are some tweaks around the edges (such as if the insurance company does not charge the same premium for all employees in single coverage).

If you do not pay at least 50% of the health insurance, there is no point in even starting the calculation.

There is also a “ceiling” test: your insurance can only be so expensive for purposes of this calculation. The government will publish state-specific amounts for “small group market average premiums.” Your insurance cannot exceed that amount for your state.

AN INTERIM STEP

Add-up your cost of premiums for “qualifying” insurance for your “FTEs.”

WHAT IS THE AMOUNT OF THE CREDIT

If you are for-profit, the credit is 35% of the interim step.

ARE WE DONE?

Of course not. If you have too many employees – or the right number of employees but pay them too much – your credit gets phased-out, eventually to zero. No credit for you.

There are two phase-outs, which means that you cannot do this in your head.

(1)    If you have more than 10 FTE’s you start to phase-out. The phase-out is

(FTE – 10)

15

                                So, at 25 FTE’s you are completely phased-out.

(2)    If your average wage is more than $25,000, you start to phase-out.

(average annual wage - 25,000)

25,000

                                So, at $50,000 you are completely phased-out.

HOW ABOUT AN EXAMPLE?

Let’s say that you have 9 FTEs with an average wage of $23,000.

4 are single coverage and 5 are family coverage. You pay 50% of the single rate.

The premiums are $4,000 for singles and $10,000 for family. The state limits are $5,000 for singles and $12,000 for family.

Here is the calculation.

                                $2,000 times 9 equals                     18,000

The credit is 35% times 18,000 or $6,300.                      

LET’S CHANGE AN ASSUMPTION

What if the employer pays 50% whether of single or family coverage?

Here is the calculation:

                                $2,000 times 4 equals                     8,000

                                $5,000 times 5 equals                   25,000

                                                                                           33,000

The credit is 35% times 33,000 or $11,550.                    

HOW ABOUT ANOTHER EXAMPLE?

Let’s say you have 40 part-time employees. They total 20 FTEs. The average wage is $25,000. To keep this easy, let’s say that your cost of the health insurance is $240,000

(1)    First phase-out

20 FTE - 10                           equals 66.6% phase-out

15

(2)    Second phase-out

$25,000 - $25,000              equals 0% phase-out (that’s good!)

$25,000

The credit is (35% times $240,000) times (100% minus 66.6%) times (100% minus 0%) - or $28,000.

MISCELLANEOUS

The credit is part of the general business credit, which means that you get to carry it over if you cannot use it in a given tax year. In addition, the credit is allowed for AMT, which is good. You do have to reduce your deductible insurance by the amount of the credit.

As I said, we have been less than impressed. It is, however, a great way for Congress to increase someone’s tax preparation fees.