Bill And The Gig Economy

I am inclined to title this post “Bill.”

I have known Bill for years. He lost his W-2 job and has made up for it by taking one or two (or three) “independent contractor” gigs.

However, Bills get into tax trouble fast. Chances are they burned through savings upon losing the W-2 job. They turned to that 1099 gig when things got tight. At that point, they needed all the cash they could muster, meaning that replenishing savings had to wait.

The calendar turns. They come to see me for their taxes.

And we talk about self-employment tax for the first time.

You and I have FICA taken from our paycheck. We pay half and our employer pays half. It becomes almost invisible, like being robbed while on vacation.

Go self-employed and you have to pay both sides of FICA – now called self-employment tax – and it is anything but invisible. You are paying approximately 15% of what you make – off the top - and we haven’t even talked about income taxes.

You find yourself in a situation where you probably cannot pay – in full, at least – the tax from your first contractor/self-employment year.

We need a payment plan.

But there is a hitch.

What about taxes on your second contractor/self-employment year?

We need quarterly estimated taxes.

You start to question if I have lost my mind. You cannot even pay the first year, so how are you going to pay quarterly taxes for the second year?

And there you have Bill. Bills are legion.

We arrange a payment plan with the IRS.

You know what will likely blow-up a payment plan?

Filing another tax return with a large balance payable.

All right, maybe we can get the first and second year combined and work something out.

You know what will probably blow-up that payment plan?

Filing yet another tax return with a large balance payable.

Depending upon, the IRS will insist that you make estimated tax payments, as they have seen this movie too.

A taxpayer named Allen ran into that situation.

Allen owed big bucks – approximately $93,000.

The IRS issued an Intent to Levy.

He requested a CDP (Collections Due Process) hearing.

COMMENT: The CDP process was created by Congress in 1998 as a means to slow down a wild west IRS. The idea was that the IRS should not be permitted to move from compliance and assessment (receive your tax return; change your tax return) to collection (lien, levy and clear out your bank account) without an opportunity for you to have your day.  

Allen submitted financial information to the IRS. He proposed paying $500 per month.

The IRS reviewed the same information. They thought he could pay $809 per month.

COMMENT: You would be surprised what the IRS disallows when they calculate how much you can repay. You can have a pet, for example, but they will not allow veterinarian bills.

There was a hitch. Monthly payments of $809 over the remaining statute of limitations period would not sum to $93,000. The IRS can authorize this, however, and it is referred to as a partial-pay installment agreement (PPIA).

EXPLANATION: Any payment plan that does not pay the government in full over the remaining statutory collection period is referred to as a “partial pay.” The IRS looks at it more closely, as they know – going in – that they are writing-off some of the balance due.

The IRS settlement officer (SO) read the Internal Revenue Manual to say that a taxpayer could not receive a partial pay if he/she was behind on their current year estimated taxes. Allen of course was behind.

Allen said that he could not pay the estimate.

The SO closed the file.

Allen filed with the Tax Court.

Mind you, Allen was challenging IRS procedure and not the tax law itself. 

He had to show that the IRS “abused” its discretion.

It would be easier to get a rhinoceros on a park swing.

I get it, I really do. Take two SO’s. One denies you a partial pay because you are behind on estimated taxes; the other SO does not. That however is the meaning of “discretion.”

Did Allen’s SO “abuse” discretion?

The Tax Court did not think so.

Allen lost.

But there is something here I do not understand.

Why didn’t Allen make the estimated tax payment, revise his financial information (to show the depletion of cash) and forward the revised financials to the SO?

I presume that he couldn’t: he must not have had enough cash on hand.

If so, then abuse of discretion makes more sense to me: someone in Allen’s situation could NEVER meet that SO’s requirement for a payment plan.

Why?

Because he/she could never make that estimated tax payment.

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.

What Can The IRS Do To You For Ignoring That Wage Or Levy Request?

What happens if the IRS sends you a levy (say on an employee, but it could also be your account payable to a vendor) and you ignore it?

You can guess that it is not going to be good.

I am looking at U.S. v 911 Management.

Daniel Dent was the sole manager of 911 Management, a limited liability company. The company must have been successful, as it was distributing $5,700 monthly to Kathy Weathers, one of its members. In 2007, the company further entered into an agreement with Kathy to operate two hotels owned by her, from which it would pay her 3% of the monthly gross proceeds.

In 2007, the IRS served levy against the bank accounts of 911 Management. That action wound up in litigation.

In February 2008, the IRS served Notice of Levy on 911 Management. It wanted both the $5,700 and 3%, as the Weathers had fallen behind on taxes for 1996 and from 1998 through 2006. Turns out that Tom and Kathy Weathers were convicted of tax fraud. Tom was serving 60 months at Club Fed, and Kathy received two years of probation.

OBSERVATION: Tom Weathers went to prison in October 2005. Coincidentally, 911 Management was formed the same month. The Company was paying Kathy $5,700 monthly, and that amount increased when she added the management of two hotels into the mix. The IRS was fairly confident that the transaction was a sham and a way to provide monies to her while her husband was in jail.

There were technical issues with the levy notice, and the previous levy effort by the IRS was in litigation. Dent contacted his business advisor as well as an attorney, and he in turn received two separate but not conflicting responses. The business advisor informed him that a bond had been posted, satisfying all the back taxes for the Weathers. It was therefore not necessary to honor the Notice of Levy, as the matter had been resolved.

COMMENT: The Revenue Officer informed Dent otherwise and that monies were still due. This must have alerted Dent that not all the facts were in.

Dent also contacted an attorney, who had reservations about the levy procedure itself. The attorney believed that the levy did not apply, because the levy was for salaries and wages and the payments to Mrs. Weathers were neither.

OBSERVATION: Thus began a high-stakes gambit. There are tax practitioners who play a heavy-procedural game, waiting if not stoking the IRS to make a procedural mistake. For the most part, I have found this to be the arena of the tax attorneys rather than tax CPAs, and I have been on the listening end of some scathing anecdotes by IRS revenue agents over the years. The IRS catches on, of course, and will commonly assign more experienced agents when such a practitioner surfaces. Still sometimes the tactic works, and the tete a tete continues another day.

Dent informed the revenue officer that the levy did not apply. He of course did not remit the $5,700 or the 3%. The revenue officer vociferously disagreed. Dent did not remit anything, relying upon his attorney’s advice that the levy was erroneous.

Remember that I mentioned the IRS had levied in 2007, a year before? That case was decided, and both 911 Management and Dent were held personally liable for the levy request. That is what happens when one ignores a levy: one steps into the shoes of the delinquent taxpayer. It is the levy equivalent of the “responsible person” taxes, which apply when one does not remit withheld payroll taxes.

So Dent was held personally responsible. Can it get worse?

You bet.

There is another penalty: the Section 6632(d)(2) penalty, which is 50% for failure to honor the levy. The IRS wanted this penalty against Dent. Remember, the IRS believed 911 Management to be a sham, so they were going to go the extra mile against Dent for participating in the sham and resisting the levy.

There is a “reasonable cause” exception to the penalty, and the Court decided that Dent had reasonable cause. How? Apparently, there was enough smoke on the water over IRS procedure in pursuing the levy that the Court accepted Dent’s reliance on his attorney as reasonable cause.

Mind you, they accepted his reliance on an attorney as reasonable cause to not levy another 50%. Dent was already personally responsible.

Another “win” like that and Dent might bankrupt himself.

COMMENT: 911 Management came into existence when Mr. Weathers went to jail in 2005 for five years. When did 911 Management cease doing business? Five years later – 2010 – when Mr. Weathers was released from jail. Coincidence? Just saying.

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.