Tax Debt

IRS Has Problems With Tax Liens

April 15, 2008 | by Dennis N. Brager

When the Internal Revenue Service (IRS) files a tax lien it is required by Internal Revenue Code § 6320 to notify taxpayers within 5 business days of the filing of the tax lien. In addition, under Internal Revenue Code § 6320(b) it must provide for a hearing before the Internal Revenue Service’s Appeals Division. According to a report by the Treasury Inspector General for Tax Administration (TIGTA), the IRS may not have complied with Internal Revenue Code § 6320in all cases. For example, the IRS is required to send the tax lien notice to the last known address of the taxpayer; yet in some cases it failed to do so. The TIGTA report noted that the failure to do so was a legal violation by the IRS.

The TIGTA report also noted that the IRS failed to follow its own internal guidelines for sending copies of the tax lien notices to the taxpayer’s representatives in 40% per cent of the cases it sampled. Tax attorneys must be alert to the possiblity, that the IRS is not sending copies of all tax lien notices and other required documents to them. Taxpayers need to send copies of all important notices to their tax lawyers even if they think the IRS should be sending the notices directly to their representatives.

If the IRS has filed a tax lien against you contact Los Angeles, California tax attorney Dennis Brager.

Court OKs Internal Revenue Service (IRS) Tax Levy on Couple’s Home

February 29, 2008 | by Dennis N. Brager

A district court in Michigan dismissed a complaint challenging an Internal Revenue Service (IRS) tax levy on a couple’s home. The couple owed income taxes of around $300,000 and payroll taxes of another $161,000. They filed a quite title action pursuant to 28 USC 2410, and they also filed an unauthorized collection action under Internal Revenue Code § 7433 seeking damages. The court held that it lacked jurisdiction to hear either claim. With respect to the quiet title action such actions are available if an IRS tax lien is filed, but not when a tax levy is served. As most tax problem attorneys know there is a big difference between a tax lien and a tax levy, and the court held that the proper method of fighting a tax levy is not through a quiet title action.

The court also dismissed the unauthorized collection action because the couple hadn’t exhausted their administrative remedies. Internal Revenue Code § 7433 allows a taxpayer to sue the IRS if it has engaged in unlawful collection actions such as an improper tax levy; however Treas. Reg. § 301. 7433-1(d) bars a suit until after a claim has been filed with the IRS. Even though the couple had notified the IRS of their claim the court held that the format they used was incorrect since they didn’t address the claim to the right individual at the IRS, list their current home address and telephone number, or meet several other formalities.

The results in this case were not particularly surprising. It does, however, once again point out the importance of completely understanding all of the IRS rules and tax procedures. It also once again illustrates that the IRS can and does seize taxpayers’ homes, and those who assume it can’t happen are mistaken.

Internal Revenue Service (IRS) Appeals Officer Not Impartial

February 15, 2008 | by Dennis N. Brager

The 10th Circuit Court of Appeals has reversed a decision of the United States Tax Court (Tax Court), and held that an Internal Revnue Service Appeals Officer was not impartial within the meaning of Internal Revenue Code (IRC) § 6330. Cox v. Commissioner, No. 06-9004 (2008), reversing, Cox v. Commissioner, 126 T.C. No.13 (2006). A taxpayer is generally entitled to a collection due process (CDP) hearing before an impartial Appeals Officer before the IRS may levy on his property. If the IRS files a tax lien the taxpayer is entitled to a hearing to contest the tax lien, but only after the tax lien has been filed. In Cox, the taxpayer had received a CDP hearing for the years 2000. In that hearing the Appeals Officer determined that he could not recommend an alternative to a levy since among other things the Coxes hadn’t paid their estimated taxes.

Subequently, the Coxes requested a CDP hearing with respect to the taxes they owed for 2001 and 2002. When the same Appeals Officer was assigned the CDP hearing the Coxes asked the case to be reassigned to a new Appeals Officer since, they argued, the Appeals Officer was not impartial because of his prior involvment. The IRS refused, and ultimately the Coxes appealed to the United States Tax Court. The Tax Court reviewed IRS Treas. Reg. § 301.6330-1(d)(2) which provides that even though an Appeals Officer has had prior involvement with the same taxpayers for a different tax year the Appeals Officer may still conduct the subsequent CDP hearing. The Tax Court upheld the IRS Regulation. On appeal, however, the 10th Circuit reversed. Arguably the 10th Circuit’s decision may be limited to the facts since in Cox the Appeals Officer had reviewed the 2001 and 2002 as part of his decision in the 2000 CDP hearing. In any event the Tax Court is not bound to follow the 10th Circuit’s ruling in cases that are not appealable to the 10th Circuit. Golsen v. Commissioner,54 T.C 742 (1970). It is not, however, unusual for the Tax Court to re-examine its decision where it has been reversed by a Circuit Court of Appeal even though it is not required to do so.

If you have IRS tax problems or California tax problems contact Los Angeles, California State Bar Certified Tax Specialist Dennis Brager.

Tax Lien Release Regulations Issued by Internal Revenue Service (IRS)

February 11, 2008 | by Dennis N. Brager

The Internal Revenue Service (IRS) has published final regulations on releases of federal tax liens and discharges of property. These regulations provide rules for how to go about obtaining the release of a federal tax lien after the tax debt has been paid, or in situations where the statute of limitations on collecting the tax liability has expired.

The regulations also provide rules for obtaining tax lien releases in other situations. For example the IRS may issue a certificate of discharge if the IRS interest in the specific property subject to the IRS tax lien is worthless. This can be useful if you own real property which you would like to sell, but is encumbered by an IRS tax lien. Say your property is worth $500,000, and there is a first mortage of $550,000, followed by an IRS tax lien for $300,000. You would like to sell the property, and the bank has agreed to a short sale. The title company will not issue title insurance, and therefore you want be able to close on the sale without a release from the IRS. The regulations allow for the issuance of a certificate of discharge in this circumstance because the value of the IRS lien is zero. However, it can take some persuasion to get the IRS to issue the certificate of discharge, and the IRS is not required to issue the certificate. Our experience is that the IRS can take 30 days or more to issue a discharge of the tax lien. We recommend applying for a certificate of discharge as soon as you know you want to sell the property.

An important change to the final regulations requires to issue a certificate of release of the tax lien in situations where only one year of a multi-year tax lien has been satisfied. For example, the IRS may have filed a tax lien for the years 2000 through 2004. If you paid the tax for the year 2000, the IRS would not issue a tax lien release for the 2000 year. Under the new regulations the IRS is required to do so.

Tax Audits by Internal Revenue Service (IRS) Up

January 30, 2008 | by Dennis N. Brager

The Internal Revenue Service (IRS) says that tax audits have increased during the fiscal year ended Sept. 30, 2007. For example the IRS audited 84% more returns of individuals with income of over $1 million dollars than the previous year. This amounted to a tax audit rate of almost 10%.Tax audits of individuals with income of $200,000 or more rose almost 30%. Overall the IRS conducted tax audits of more individuals than at any time since 1998.

Business also came in for an increased tax audit rate. S corporation tax audits were up 26%, and partnership tax audits were up by almost 25%.

Tax levies, and tax liens by the IRS were also a growth area, with the IRS filing 3.8 million tax levies and almost 700,000 tax liens during 2007

Internal Revenue Service (IRS) Payroll Taxes Collected from Sole Member of LLC

January 25, 2008 | by Dennis N. Brager

Small businesses which get behind on their debts also often fail to pay their payroll taxes resulting in payroll tax problems for the owners. Not paying payroll taxes is a big mistake since the Internal Revenue Service (IRS) can collect the trust fund portion of the payroll tax debt from responsible officers of a corporation under Internal Revenue Code § 6672. Not all corporate shareholders , however, are necessarily persons liable for trust fund taxes under Internal Revenue Code § 6672. For example, if the payroll tax problems were concealed from the owner he might not be personally liable. Some tax lawyers may have thought that an LLC would provide similar protection for its members, but that’s not always true.

According to the Second Circuit Court of Appeals in New York that’s not the case for a sole member of an LLC. McNamee v. IRS, 488 F. 3d 100 (2nd Circuit 2007). McNamee, who was apparently an accountant (I don’t know whether he was a CPA), represented himself in court, and didn’t have a tax lawyer. McNamee was the sole member of a limited liability company formed under Connecticut state law. Like most states, Connecticut provides that a member of a single owner LLC is generally not liable for its debts.

IRS regulations allow single-owner limited liability company to choose whether to be treated as a corporation–or to be disregarded as a separate entity. If an LLC elects to be treated as a corporation the owner is subject to double taxation–once at the corporate level and once at the individual shareholder level. On the other hand, the LLC may chooses not to be treated as a corporation, either by affirmative election or by the failure to make any election. In the later instance IRS regulations provide that the LLC is disregarded, and that the member is fully liable not just for the trust fund taxes, but all the payroll taxes including interest and penalties accrued on the overdue payroll taxes. The Second Circuit Court of Appeals found that the IRS regulations were valid, and in so doing hit McNamee personally with a large tax debt.

Wrongful Levy Claim Instructions Provided by Internal Revenue Service (“IRS”)

January 22, 2008 | by Dennis N. Brager

The Internal Revenue Service (IRS) has provided new instructions for persons who wish to file wrongful levy claims against the IRS pursuant to Internal Revenue Code § 6343(b). These instructions are set forth in IRS Publication 4528 (Rev. Nov. 2007). If the IRS were to take your property to pay taxes that someone else owed a wrongful levy claim is one of the ways to get your property back.

Why would the IRS seize your property to pay someone else’s taxes? Well it might just be a mistake, but that’s unlikely. One way it might happen is if a closely held corporation ran into IRS or California payroll tax problems. Perhaps the owner decided that rather than deal with this tax problem he would start another company; we will call it “Newco.” When the IRS gets wind of this if it determines that Newco is a transferee, nominee or alter ego of the original company (let’s call it “Oldco”) it will levy (that is seize) the assets of Newco to satisfy the payroll tax liability of Oldco.

Newco may have some defenses to the IRS levy. For example in some cases if Newco paid fair market value for the assets of Oldco it is possible that Newco may not be responsible for Oldco’s payroll taxes. In order to get the money back it would be appropriate to file a wrongful levy claim with the IRS. Another possible remedy is to file suit in United States District Court under Internal Revenue Code Section 7426(a)(1).

Internal Revenue Service (IRS) Extends Trust Fund Tax Express Installment Agreements Program

January 11, 2008 | by Dennis N. Brager

The Internal Revenue Service (IRS) has extended its policy of granting express installment agreements for in business trust fund taxes through at least June 6, 2008. See IRS Memo dated June 6, 2007 Express installment agreements are available to in-business taxpayers who have payroll tax problems of less than $10,000. These taxpayers may allowed to enter into installment agreements without providing a completed Collection Information Statement (IRS Form 433-B). An express installment agreement can’t last longer than 24 months. Taxpayers requesting express installment agreements must be in compliance with all IRS tax deposit and tax filing requirements as set forth in Internal Revenue Manual (IRM) 5.14.1.5.1. In addition if a taxpayer qualifies for an express installment agreement then:

• No Trust Fund Recovery Penalty determination is required; however the revenue officer must ensure that the Assessment Statute Expiration Date (ASED) is protected.

• No managerial approval is required.

Internal Revenue Service’s (IRS) Taxpayer Advocate Releases Annual Report

January 7, 2008 | by Dennis N. Brager

The Internal Revenue Service’s (IRS) Taxpayer Advocate Nina Olsen has released her 2007 Annual Report to Congress. It consists of two large volumes outlining:

• The Most Serious Problems Encountered by Taxpayers • Key Legislative Recommendations, and Additional Legislative Recommendations • Most Litigated Issues • Case and Systemic Advocacy.

The Taxpayer Advocate’s Report has a great deal to say, and we will be commenting on many of those items over the next months. Number 9 on the list is tax preparer penalties, and the bypass of taxpayer representatives including tax attorneys, and CPAs. The Taxpayer Advocate’s Report criticizes the IRS for not doing more to enforce tax preparer penalties. She notes that only $2.8 million in penalties were assessed for FYE Sept. 2007. However, this is about a 50% increase over the prior year.