Notice(s) Of Intent To Seize And Levy

 

I received the following notice under power of attorney for a client.  

Another accountant at Galactic Command works with the client. I am the tax nerd should problems arise.

Yeah, we have a problem.

For more than one year, too.

Combine the two and I can get cranky. Just because I know the route doesn’t mean I want to revisit the site.

But back to our topic.

The notice seems terrifying, doesn’t it? The IRS is talking about seizing and levying and all matters of unkindliness.

Let’s go through the sequence of these notices.

First, you owe the IRS. There is a sequence of four notices, sometimes referred to as the “500” sequence.

• CP501         You have unpaid taxes somewhere.
• CP502         We have not heard from you about unpaid taxes.
• CP503         Hey, dummy! Are you there?
• CP504         We intend to levy if you do not do something.

This is the fourth notice in the sequence for our client for tax year 2022. As you can see, he/she/they are moving through the IRS machinery rather quickly. Then again, almost $225,000 in taxes and penalties buys you a better spot in line.

The CP504 is however not the final:final notice.

Let’s talk IRS procedure.

Before the IRS can go after your stuff (bank account, car, John Cena collectibles), it must (almost always) allow you a hearing. This is called a Collection Due Process (CDP) hearing, and it entered the tax Code with the 1998 IRS Restructuring and Reform Act. The Act was Congress’ response to IRS horror stories, including aggressive collection actions.

The IRS is not allowed to go after you until you have been offered that CDP hearing. You can turn it down, blow it off or whatever, but the IRS must provide the opportunity before it can unleash the tender attention of Collections.

 Except …

There is a short list of stuff the IRS can levy before a CDP. The list is uncommon air, except for:

Your state tax refund

That’s it. For most of us, the IRS can only go after our state tax refund – at this stage.

Then you have the FINAL BIG BAD notice: either the 1058 or LT11.The difference depends on whether you have been assigned to a Revenue Officer (RO).

LIFE TIP: Avoid having your own Revenue Officer.

 

If you get to a 1058 or LT11, you are at the end of the line. You will be dealing with Collections, and it is unlikely you will like the experience.

You may want an attorney or CPA, depending upon.

Not that having a CPA seems to matter – because clearly not - to our client.

A Current Individual Tax Audit

 

We have an IRS audit at Galactic Command. It is of a self-employed individual. The self-employeds have maintained a reasonable audit rate, even as other individual audit rates have plummeted in recent years.

I was speaking with the examiner on Friday, lining up submission dates for records and documents. We set tentative dates, but she reminded me that Congress was going into budget talks this weekend.  Depending on the resolution, she might be furloughed next week. No prob, we will play it by ear.

This is a relatively new client for us. We did not prepare the records or the tax returns for the two years under audit. We requested underlying records, but there was little there for the first year and only slightly more for the second. We then did a cash analysis, knowing that the IRS would be doing the same.

COMMENT: The IRS will commonly request all twelve bank statements for a business-related bank account. The examiner adds up the deposits for the twelve months and compares the total to revenues reported on the tax return. If the tax return is higher, the IRS will probably leave the matter alone. If the tax return is lower, however, the IRS will want to know why.

We had a problem with the analysis for the first year: our numbers had no resemblance to the return filed. Our numbers were higher across the board: higher deposits, higher disbursements, higher excess of deposits over disbursements.

Higher by a lot.

The accountant asked me: do you think …?

Nope, not for a moment.

Implicit here is fraud.

There are two types of tax fraud: civil and criminal. Yes, I get it: if you have criminal, you are virtually certain to have civil, but that is not our point. Our point is that there is no statute of limitations on civil fraud. The IRS could go back a decade or more - if they wanted to.

I do not see fraud here. I do see incompetence. I think someone started using a popular business accounting software, downloading bank statements and whatnot to release their inner accountant. There are easy errors to one not familiar: you do not download all months for an account; you do not download all the accounts; you fail to account for credit cards; you fail to account for cash transactions.

OK, that last one could be a problem, if significant.

The matter reminded me of a famous tax case.

It is easy to understand someone committing fraud on his/her tax return. Put too much in, leave too much out. Do it deliberately and with malintent and you might have fraud.

Question: can you be responsible for your tax preparer’s fraud?

Vincent Allen was a UPS driver in Memphis. He used a professional preparer (Goosby) for 1999 and 2000.  Allen did the usual: he gave Goosby his W-2, his mortgage interest statement, property taxes and whatnot. Standard stuff.

Goosby went to town on miscellaneous itemized deductions; He goosed numbers for a pager, computer, meals, mileage and so forth. He was creative.

The IRS came down hard, understandably.

They also wanted fraud penalties.

Allen had an immediate defense: the three-year statute had run.

The IRS was curt: the three years does not apply if there is fraud.

Allen argued the obvious:

How was I supposed to know?

Off to Tax Court they went.

The Court looked at the following Code section:

 § 6501 Limitations on assessment and collection

(c)  Exceptions.

(1)  False return.

In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time.

The Court noted there was no requirement that the “intent to evade” be the taxpayer’s.

The statute was open.

Allen owed tax.

The IRS - in a rare moment of mercy - did not press for penalties. It just wanted the tax, and the Court agreed.

The Allen decision reminds us that there is some responsibility when selecting a tax preparer. One is expected to review his/her return, and – if it seems too good …. Well, you know the rest of that cliche.

Do I think our client committed fraud?

Not for a moment.

Might the IRS examiner think so, however?

It crossed my mind. We’ll see.

Our case this time was Allen v Commissioner, 128. T.C. 37.

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.