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.

Not Cracking The Code

We have picked up two or three nonfiler clients this season. By itself, this does not overly concern me, although there are nasty tax traps concerning refunds and overpayments for nonfiled years. Did you know, for example, that – if you go long enough without filing – the IRS will not refund your overpayment? Nonetheless, one files, pays tax due with the IRS and carries on.

Then there is a subcategory of nonfilers that could be referred to as protestors. I have little patience for those. I recently picked up a corporate tax audit client, and it is proving to be a very difficult examination. There are several reasons, but I believe a key reason is that one of the owners may be walking this line.

I am looking at a Tax Court case decided last month: Waltner v Commissioner. This is a protestor case, and it is a bit unusual. In general, courts have given protestors short patience. This time the court took the time to go through the arguments and address them one by one.

Have you hear about Peter Hendrickson? He is a protestor himself, and he wrote a book titled Cracking the Code. It appears that Waltner studied Hendrickson closely, as the techniques he used follow the book’s recommendations.

The case concerns Mr. Waltner’s 2008 individual tax return, in which he reported zero wages, an IRA distribution, a student loan interest deduction and home mortgage interest. All in all, it came down to zero tax liability, which is understandable when you report zero wages.

Mind you, he received three W-2s, but Waltner submitted Forms 4852 (Substitute for Form W-2), reporting zero wages but showing income tax withheld. He also received a Form 1099-B (Proceeds from Broker), but crossed-out proceeds of $5,000 and inserted zero. He then wrote the following text:

This correcting Form 1099-B is submitted to rebut a document known to have been submitted by the party identified above as “Payer” and “Broker” which erroneously alleged a payment to the party identified above as …. of “gross proceeds” in connection with a “trade or business.” Under the penalty of perjury, I declare that I have examined this statement and to the best of my knowledge and belief, it is true, correct and complete.”

The IRS was having none of this and sent a letter requesting a corrected return. The IRS otherwise was going to assess a frivolous submission penalty of $5,000.

He didn’t. They did. Then they issued a notice of intent to levy.

Waltner requested a Collection Due Process hearing, submitting a 49-page brief.

COMMENT: Trust me, 49 pages is impressive.

So the Appeals officer got to read the following:

·       Waltner was not “an officer, employee or elected official of the United States”

·       He was “never an officer of a corporation”

·       He “did not receive Wages from any source”

·       He "did not work for or receive any pay from an Employer or American employer”

·       He “was not engaged in Employment”

·       He “was not an Employee”

·       He “was not engaged in Self-employment”

·       He “was not a citizen or resident of the District of Columbia or any territory or possession of the United States”

·       He “was never incorporated in Washington, D.C. or worked for any company who incorporated in Washington, D.C.”

·       He “was not a governmental unit or agency or instrumentality thereof, or a United States Person”

In addition to not understanding the rules for capitalization in the English language, he appears to be flying the tax protestor flag.

The Appeals officer warned him about frivolous arguments. Waltner did not back down. The IRS assessed him. Waltner then filed with the Tax Court.

It took months to go before the Court, during which time the two parties filed 24 motions, resulting in the Court issuing 22 orders. The maneuverings defy belief:

·       The IRS moved for admissions, meaning they wanted to know Waltner’s reasoning for the substitute W-2s. The Court, being a good sport, issued a 39-page order reviewing 44 requests for admissions and 83 supplemental requests.

·       Waltner responded with boilerplate language but not otherwise addressing the issues under discovery.

·       The IRS responded with a 993-page request for admissions.

·       Waltner filed a motion for protective order delaying discovery.

·       The IRS filed an objection. The Court accepted some and dismissed some.

·       Less than a month later Waltner filed a motion to compel stipulation. The motion was filed under an arcane procedure known as Rule 9(f).

·       The IRS responded, so the motion was discharged.

·       The IRS filed a motion to compel responses to interrogatories, which the Court granted.

·       Waltner filed a motion for reconsideration, which the Court denied.

·       Waltner sought an extension to respond to the interrogatories, which the Court granted.

·       Waltner never responded to the interrogatories. Instead he paid the $5,000 fine.

·       Waltner filed to have the IRS answer interrogatories, to which the IRS filed objection.

·       The IRS responded to the interrogatories. The Court found some acceptable and others not.

·       The IRS filed for supplemental information from Waltner.

·       Waltner filed a motion for reconsideration.

Do you see the game being played here? Rather than provide arguments, Waltner is neck-deep in Tax Court procedural minutiae. No wonder the Courts hate protest cases.

When all is said and done, Waltner lost and the IRS requested the Court to apply a $25,000 Section 6673 penalty.

The Court instead went on the discuss Cracking the Code, noting how Waltner’s arguments and techniques mirror the book. Here are some gems, for example: 

·       The federal government has legislative authority over only the District of Columbia and U.S. territories.

·       The Revenue Act of 1862 imposed a 3% tax only on federal employees.

·       Federal direct taxes which affect citizens of the several states must be apportioned (a position which predates the 16^th Amendmnet).

·       Remuneration for work is not profit and is therefore not taxable.

You get the idea.

The court could have assessed a $25,000 penalty for wasting its time, but it decided instead to impose a $2,500 penalty, adding:

Mr. Waltner has other matters pending in this Court in which he is asserting arguments similar to those presented in this case, and he has now been cautioned in both an order and this opinion. We hope that he will heed the warning.”

The Court is allowing Waltner to back down, although I am not optimistic that he will.

There are any number of reasons for not filing. There can be illness, death, emotional collapse, for example. The IRS will mitigate if not abate penalties in many cases. Protest is not one of them. This is a bad street late on a dark night, and nothing good will be found there.