Phone Call About The Statute Of Limitations

Recently I received a call from another CPA. 

He is representing in a difficult tax audit, and the IRS revenue agent has requested that the client extend the statute of limitations by six months. The statute has already been extended to February, 2016, so this extension is the IRS’ second time to the well. The client was not that thrilled about the first extension, so the conversation about a second should be entertaining.

This however gives us a chance to talk about the statute of limitations.

Did you know that there are two statutes of limitations?

Let’s start with the one commonly known: the 3-year statute on assessment.

You file your personal return on April 15, 2015. The IRS has three years from the date they receive the return to assess you. Assess means they formally record a receivable from you, much like a used-car lot would. Normally – and for most of us – the IRS recording receipt by them of our tax return is the same as being assessed. You file, you pay whatever taxes are due, the IRS records all of the above and the matter is done.    

Let’s introduce some flutter into the system: you are selected for audit.

They audit you in March, 2017. What should have been an uneventful audit turns complicated, and the audit drags on and on. The IRS knows that they have until April, 2018 on the original statute (that is, April 15, 2015 plus 3 years), so they ask you to extend the statute.

Let’s say you extend for six months. The IRS now has until October 15, 2018 to assess (April 15 plus six months). It buys them (and you) time to finish the audit with some normalcy.

The audit concludes and you owe them $10 thousand. They will send you a notice of the audit adjustment and taxes due. If you ignore the first notice, the IRS will keep sending notices of increasing urgency. If you ignore those, the IRS will eventually send a Statutory Notice of Deficiency, also known as a SNOD or 90-day letter.

That SNOD means the IRS is getting ready to assess. You have 90 days to appeal to the Tax Court. If you do not appeal, the IRS formally assesses you the $10 thousand.

And there is the launch for the second statute of limitations: the statute on collections. The IRS will have 10 years from the date of assessment to collect the $10 thousand from you.

So you have two statutes of limitation: one to assess and another to collect. If they both go to the limit, the IRS can be chasing you for longer than your kid will be in grade and high school.

What was I discussing with my CPA friend? 

• What if his client does not (further) extend the statute?

Well, let’s observe the obvious: his client would provoke the bear. The bear will want to strike back. The way it is done – normally – is for the bear to bill you immediately for the maximum tax and penalty under audit. They will spot you no issues, cut you no slack. They will go through the notice sequence as quickly as possible, as they want to get to that SNOD. Once the IRS issues the SNOD, the statute of limitations is tolled, meaning that it is interrupted. The IRS will then not worry about running out of time - if only it can get to that SNOD.

It is late August as I write this. The statute has already been extended to February. What are the odds the IRS machinery will work in the time remaining?

And there you have a conversation between two CPAs.

I myself would not provoke the bear, especially in a case where more than one tax year is involved. I view it as climbing a tree to get away from a bear. It appears brilliant until the bear begins climbing after you. 

I suspect my friend’s client has a different temperament. I am looking forward to see how this story turns out.

Doctor Contests Whether He Had Cancellation Of Debt Income

I suspect that I am one of few people who know where Palatka, Florida is.

When I came out of graduate school I worked as an accountant in Tampa. The firm that I was with was quite aggressive in pursuing contracts for government audits, and one of the accountants there would go to Palatka on a routine enough basis. I remember him not being overly excited about it.

In case you are curious, draw a line from Gainesville (where the University of Florida is) to St Augustine and one (sort of) crosses Palatka.  

The reason we are talking about it is that I am reading a Tax Court decision about a doctor in Palatka. It is a “pro se” decision, which means that the taxpayer represented himself/herself before the Court. I can tell that the doctor tried to ramp up on IRS procedure, but he might have been better advised to hire a CPA experienced in this area.

MEMO: We have commented on this before, but many CPAs do not practice tax, and those who do may not necessarily practice IRS procedure (other than maybe answering the occasional tax notice). 

Dr Darrell Wyatt graduated from the University of Arkansas in 1978 and is board certified in obstetrics and gynecology.

He is a baby doctor.

In 2006 he was wooed by Putnam Medical Center to move to rural Florida.

Nice thing about being a doctor is that hospitals are willing to provide “incentive” payments for things, such as moving to Putnam county Florida. The hospital made a deal with the doctor - move here and we will subsidize (read: “loan”) your practice up to $32,953 per month. That will go on for one year, and then we stop subsidizing you. At that time we would like for you to stay here and work for another 3 more years. Every month that you stay we will forgive 1/36 of the loan. Stay for 3 years and we will forgive the entire loan. Leave before then and you have to pay back whatever is still due on the loan.

He spent the year, and then he easily spent 3 more years.

The loan was forgiven in monthly increments.

The deal with Putnam Medical Center started in July, 2006. Spot the doctor a year. The 36 month period would then run from August, 2007 through July, 2010. 

He filed his 2009 return. He reported the amount forgiven in 2009. He paid no estimated taxes. He owed the IRS a boat. The IRS came in and wanted taxes and several varieties of penalties.

Let talk a little procedure.

The IRS issued a Final Notice of Intent to Levy for 2009. 

OBSERVATION: The IRS had sent a lot of correspondence to the doctor, as this is pretty far along. Levy means that the IRS can go in and tap your bank account, among other things. It is a step up from a Lien and is not a good thing.

Dr. Wyatt in turn requested a Due Process Hearing.

NOTE: The taxpayer has 30 days from the issuance of the Final Notice of Intent to Levy to request an Appeals hearing. One is still inside the IRS, but one is moving the file from Collections to Appeals. This is important as Collections truly does not care whether you owe the tax or can pay the tax, it just wants money. Appeals might cut one some slack on the amount or period over which the tax can be paid.

So far I understand. He did not pay 2009 taxes, so I presume he was under some financial distress. Surely he wanted to propose some payment alternative, and he requested the hearing because the IRS machine was going to run him over otherwise.

Wrong. The doctor presented an offer in compromise based on doubt as to liability.

OBSERVATION: The common offer in compromise is based on collectability: one does not have two nickels to rub together and is trying to get the IRS to accept some greatly reduced amount. This second type is based on the assertion: “IRS, I do not owe you, period.”

This tells me the doctor has done some homework. He submitted amended tax returns and proposed to pay approximately what his tax would have been, excluding the loan forgiveness, for tax years 2007 through 2010. 

           COMMENT: He evidently did not pay tax for four years.

The doctor did not follow certain procedural formalities, which we will spare ourselves for the time being. 

The IRS did not accept his offer. The IRS issued its Statutory Notice of Deficiency (a/k/a “SNOD”) and off they went to Tax Court.

The IRS did not his accept his offer because he did not establish doubt as to liability. In and of itself that does not bother me, as convincing the IRS on that point is like expecting your dog to not want the leftovers from your T-bone steak. 

In Court the doctor leads off his argument with:

(1) The loan was nonrecourse.

Huh? 

He is hanging his hat on that fact that the hospital never reduced the employment incentive to a promissory note. No note equals no personal liability, right?

Wrong. You can be liable and not have a written note. Granted, the written note makes it easier to prove the existence of debt, but the absence of a note does not mean that there is no debt. Had he failed to stay for 36 months, the hospital would have had right to sue under the paperwork that did exist.

He had no argument (2). 

What was he thinking? Did he really believe …?

And then it dawned on me. 

The IRS proceeded against the doctor for one year only – 2009. He would have had debt discharge income in 2007 and 2008 also, but those years were not before the Court.

But there is a logical fallacy here: The absence of something does not necessarily mean the presence of something else. The Court was looking only at 2009, which does not mean that the IRS flubbed 2007 and 2008. 

However, consider the following language by the Court:

In his Form 12153 petitioner referenced three taxable years: 2007, 2008, and 2009. The record in the instant case does not include a copy of the final notice that prompted petitioner to file Form 12153, nor does the record include a transcript of account for any year other than 2009. As discussed infra in the text, the offer-in-compromise based on doubt as to liability that petitioner subsequently submitted referenced 2007 through 2010, i.e., the four taxable years for which amounts were forgiven and canceled by the hospital. However … the notice of determination upon which the instant case is based was issued solely in respect of petitioner’s outstanding liability for 2009.”

The doctor lost on all counts for 2009.

But I cannot help but wonder if the doctor was not so much practicing procedure for 2009 as much as running out the statute of limitations for 2007 and 2008.

Dealing With A Tax Levy

We recently spoke about IRS liens. Let’s continue the conversation and talk about levies.

A levy taps into our primal fear of the IRS. This is where they come and take your checking account, repossess your car and sell your house. You get behind on your taxes and you get to relive the Grapes of Wrath.

Rest assured that your fear of losing your car and your house are greatly overblown. Your fear of losing your checking account may not be, however.

How did you get to this point? 

Somewhere in the recent past, the IRS sent you a notice – actually, a series of escalating notices. An early one may have read something like:

According to our records, you have an amount due on your income tax.”

There will be several notices, increasing in intensity. It is likely that you ignored them. Perhaps you just knew that their numbers were wrong. Perhaps you were broke and had nothing to send. Whatever the case, the one thing you failed to do was talk to them. 

Eventually you will receive the CP 504 letter (“Intent to Seize Your Property or Rights to Property”), where the IRS says that they intend to intercept your state tax refund. The notice also allows IRS to increase your penalties, but it is the state refund that catches people’s attention. Not that much attention, though. I do not get too many calls on a 504. Chances are if you are behind on federal taxes, you are behind on state taxes too.

The 504 is the demarcation line when your account leaves Automated Collections. You are now moving to regular Collections. The 504 is also the last notice before the IRS sends Form CP 90 “Final Notice of Intent to Levy and Notice of Your Right to a Hearing.” 

If you have a CP 90, you have serious business. The IRS will send it certified mail to your last known address, so if you have moved – especially if you did not file returns – you may not even know that this notice went out. The IRS has to go through certain hoops before it can levy, and this notice is key. You have 30 days to claim a Collection Due Process Hearing. If the IRS moves against you without issuing a Final Notice, or before the 30 days are up, you can stop them. If you claim a CDP Hearing, you can present your side of the story.

What if the 30 days pass?

One thing the IRS can then do is levy your bank account. How do they know your bank account information? One way is pretty simple: you had your refunds electronically deposited to your bank account. They can still get to that information otherwise, but electronic transfer made things easier for them. A bank levy is a one-time shot. The IRS instructs the bank to turn over whatever you have in your account as of a given date. The bank has 21 days before they have to turn over the money. There are important points we should review:

·        It is 21 days from when the bank received the notice, not the date of the notice.

·        The levy amount is your balance when the bank received the notice. If you deposit money later, that later deposit will not go to the IRS.

·        If the IRS wants that later deposit, it will have to issue another levy.

My experience has been that banks may not be overly concerned with informing you about the levy. Odds are that you will have less than 21 days before you find out, unless you attempted to withdraw funds or some similar action shortly after the bank received the levy. I have had clients who learned about the levy after the 21 days ran off. Let me tell you, there is almost no chance of getting that money returned when that happens.

Another thing the IRS can do is a wage levy. The IRS contacts your employer and tells him/her to send money. IRS Publication 1494 has tables telling you and your employer how much of your money you get to keep. For example, if you are divorced with two kids and are paid monthly, you keep $1,720. The balance goes to the IRS. The upside is that the $1,720 is after taxes, health insurance and whatnot. The downside is that you and your two kids might not be able to live on $1,720 per month.

It gets worse. The wage levy is continuous. It need not be reissued like a bank levy. People have quit their jobs over a wage levy. There isn’t much an employer can do. If your employer refuses to remit the money from your paycheck, then he/she is personally liable to remit the money from his or her own funds. Good luck finding an employer who will do that for you.

Can the IRS levy monies you receive as an independent contractor? You bet. Can it levy your social security? Yes, up to 15 percent. Can it go after your PayPal? Surely, you jest. Of course they can.

What about your house and car? Not so much. Let’s go over some statistics to put your mind at ease. In 2011, the IRS issued almost 3.8 million third-party levies. The IRS seized less than 800 houses, cars and other personal property. The IRS does not want the hassle of taking and selling your property. It wants cash.  It does not want your car, unless your car is a late-model Ferrari or something of the sort. In fact, if you have minimal equity in the asset, the IRS is prohibited from taking the asset from you.

Alright, you have received a Final Notice. What do you do next?

First, be aware of time. Remember that you have 30 days. Use it.

File a collection appeal. This will temporarily pull you away from the part of the IRS that is trying to collect and puts you in another part that will hear your case. How long is temporary? Figure on about 4 to 6 months before your hearing. 

Be ready to talk about a payment at the hearing, though, because that is where Appeals will take the conversation. They will ask for full payment immediately, the same way my dog is always hopeful I have brought her home a hamburger or something similarly tasty. 

What if you are truly broke? Then the IRS may place your account on “cannot collect” status. This means that you are so broke that you cannot make a payment, any payment. How can that happen? Let’s say that you could not pay rent if the IRS wiped-out your checking account. Perhaps you could not pay for necessary prescriptions. The term is “hardship,” and they will consider this. 

What if the taxes belong to your ex-spouse from a year when you filed a joint tax return? An innocent spouse claim will get the IRS to stay collection.

What if you file an offer in compromise? An offer will get the IRS to stay collection.

What if the IRS assessed you without your knowledge? Let me give you an example. I represented a client whose wife passed away. He received IRS notices when she became gravely ill, and upon her death he retreated from the world for a year or more. The IRS – not hearing from him – made adjustments and assessed all kinds of taxes and penalties. What did we do? We requested a reconsideration, which is also a way to stay collection.

Then we get to a payment plan. The particular type of plan depends on how much you owe. If you owe less than $50 thousand, you can request a “streamlined” plan. You promise to pay the IRS over 6 years, which translates into a maximum of $694 per month ($50,000 divided by 72). It is called streamlined because you get to submit minimal information to the IRS. This is a big deal, as the normal paperwork can be a pain. 

Let’s say that you owe over $50 thousand. You will now be submitting financial information, including bank statements and copies of bills, to the IRS. The IRS will apply “standards” to your expenses, and if your expenses exceed those standards they may (and likely will) disallow the excess. I have been through this exercise many times, and I can assure you in advance that the IRS’ calculation of what you can pay is more than what you think you can pay. You likely will be saying goodbye to your I Phone data package, your satellite TV, the leased car you really cannot afford and so on. The IRS does not want to subsidize your lifestyle. 

There may be variations in your particular payment plan. A standard payment plan requires you to pay-off the IRS over time. What if you cannot? The IRS may agree to a “partial pay” plan, which means that the plan will not completely pay-off the IRS unless the plan payment or plan term is changed. In my experience, I have had to go to Appeals to get this plan, but I have gotten it. 

Another possibility is to file bankruptcy. Although a last resort, a bankruptcy results in a “stay” of all credit actions, including the IRS.

What if you miss the 30-day window on the Final Notice? Not all is lost. You can still request a hearing, now called an “equivalency” hearing. You still get Appeals involved, but the IRS does not have to delay collection action – including bank levy or wage garnishment - until the hearing.

Depending on your situation, consider a tax professional. You want an attorney or CPA who specializes in taxes. As a heads up, most CPAs and attorneys do not specialize in taxes. Another alternative is an Enrolled Agent, who – by definition – specializes in taxes. Be sure to clarify whether they have done tax representation before.  One can “do taxes” and have never represented. It really is two different things, and you do not need to pay someone while they learn the ropes.

The Collections Appeal and Pace

This past Tuesday I submitted financial and other information regarding a collections appeal with an IRS officer in California. We have several clients with unpredictable income streams, and this client is one of them. We are pursuing something called a “manually monitored installment agreement,” which allows for changes in an IRS payment plan as one’s income varies. It can be difficult to obtain. In fact, a revenue officer I often work with informed me that this type of agreement was “above his grade.” That comment struck me as odd and is something I intend to follow-up on.

Back to our client. I was concerned as time was running out, and the client did not seem to register the urgency of the matter. I am working within a compressed time period. To her credit, the IRS officer showed patience and goodwill. She was within her rights to be much stricter with me, but she agreed to move the file and hearing back to Cincinnati. I was greatly relieved, as Rick wanted the file here.

“How much more do they want?” “They have everything.” “What are they going to do if I don’t?” These are all common questions. So much so I should just post the questions and answers on my office wall to save time.   

Today let’s talk about this part of IRS representation: the collections appeal. Let’s also talk about Pace v Commissioner, who got himself into collections appeal and perhaps should have been less confrontational and more forthcoming.

Your entry into the IRS will likely be through Examinations. This step is what we consider the “audit”, although these days the whole matter may be handled through the mail. The IRS is becoming fond of computerized matching, for example, as Congress provides it with ever-more tax reporting for anything that you do. Such is the new audit, I guess.

If you owe money your file will be transferred to Collections. Collections will send you a bill, and you will be working with Collections if you want a payment program, a cannot-collect status or an offer in compromise. The problem with Collections is that they are not really interested in the how-and-whys of you getting there, but they are very interested in getting money from you. They can back this up by garnishing your wages, liening your assets, levying your bank account or terminating your installment plan. Collections appeal exists as a safety valve for these more-aggressive collection actions. It takes your file out of Collections and gives it to an appeals officer. You have a chance to present information – geared to writing the IRS a check, of course – to someone who may be less “eager” to separate you from your last dollar at the earliest possible chance.

Perhaps you are talking to the appeals officer about delaying payments while you look for work, about setting up a payment plan, or having the IRS restart a payment plan they decided to terminate. Understandably, that appeals officer is going to want to know your finances. You will be sending him/her a Form 433-A or B, which is a listing of your assets and your earnings and expenses for (at least) the last three months. He/she will also want copies of bank statements as well as of significant bills, like your mortgage or car payments. You may have to send them a copy of your broker statement, for example, if you have a few dollars invested in the market. None of this is surprising. What if you don’t provide what he/she wants? Well, he/she can stop working with you and throw you back into the Collections pool. For you to do this seems self-defeating, doesn’t it? With that, let’s talk about Pace.

Pace operated a chiropractic business through a corporation (Dauntless). Pace fell behind on his 2006 and 2007 taxes. The IRS sent a Final Notice of Intent to Levy.  Pace did the right thing and requested a collection due process (CDP) hearing to discuss a collection alternative. The appeals officer requested a 433-A and B. During this process the officer learns that Pace is associated with two more entities – Achievement Therapeutic Services LLC (Achievement) and Kenneth D. Pace LLC (KDP). The officer requests a 433-B for them, as well as evidence that they are up-to-date on their tax filings. Pretty routine.

Pace provides none of it. He does have an argument. Whereas he is the registered agent for both, he has derived no income from these two entities, and he does not think producing any information regarding them is appropriate.

NOTE: Me? I think I can still play linebacker for the Bengals this upcoming football season.

The collections appeal hearing takes place.  Tell me, if you were the appeals officer, what would you do?

The appeals officer threw Pace back into Collections for their tender mercies, that is what he did. Pace next goes to Tax Court.

My Take: Pace is bonkers. I would have provided the IRS with copies of tax returns for Achievement and KDP, if tax returns existed. If the entities were dormant, then I would have discussed that fact with the appeals officer and asked what he considered a reasonable next step.  By not doing so, the Tax Court decided that Pace was the one being unreasonable.  Being unreasonable, Pace lost his case.