Note: This is a guest post written by an attorney that formerly worked in the tax resolution industry, and later went on to work with the US Attorney’s Office. He has asked to remain anonymous, but wanted to share some personal insights about the IRS Collections process.
For those that don’t work much with the Collections Division of the Internal Revenue Service, there is a stigma attached to both the methods and people involved. On one side, the IRS is seen as bullying taxpayers, especially the “little old ladies” and the “working men.” On the other side, the taxpayers are seen as being inadequate business people and as “stealing” from the government. Is the IRS an evil organization created by bureaucrats to systematically take the wealth of it’s citizens? Are the individuals caught up in the system evildoers needing to brought to justice? Both statements are a little extreme.
In all reality, the Collections Division of the IRS does not care where the money goes. Sometimes, it does not even care if it gets it. It, like many administrative agencies, seems more caught up it’s own procedures. Anyone having worked with the IRS might wonder if they are on a fool’s errand, considering how many of the installment agreements entered into by the IRS default.
The Collections Division is concerned primarily about getting taxes that should have been paid, but were not (a.k.a. “the tax gap”). These can be personal income taxes, employment taxes, trust fund recovery penalties, corporate income taxes, etc… The majority of this collections is done in a civil (i.e. non-criminal) setting. Within this context, there are common dilemmas that rear their heads every day, especially with regards to employment (withholding and FICA) taxes.
Although there are many reasons for a business to fall behind on its employment taxes, a common scenario is as follows: Small business owner falls on hard times; bills must be paid, but there is not enough to go around. The IRS relies exclusively on voluntary compliance (at least at the outset), as do most creditors. However, the IRS probably has more debtors than any other creditor in the country. As such, they cannot detect and move fast enough to put the strong arm down on the taxpayers. Because there is only so much to go around for the taxpayer, they pay the bills that need immediate attention (i.e. payroll, rent, utilities) and the employment taxes go unpaid. They do this because their business is their only livelihood and paying the necessary bills is the only way to keep it a going concern and have a possibility of paying the back taxes.
After first missing a payroll tax payment, an amazing thing happens…nothing. The sky does not fall, the business is not overrun by men in black suits; there is not so much as a phone call or notice in the mail. However, of course, there a penalties and interest looming on the loan that that the taxpayer is taking from the federal government.
As always, these scenarios do not happen in a bubble and there are many other stresses and concerns for business owners going through a difficult time. To make matters worse, many small business owners are not sophisticated enough to run their companies from a “business” standpoint. They were simply good at what they did (e.g., plumbing, auto work, etc) and decided to start a business for themselves and their family. After missing a tax deposit and having no immediate repercussion, the taxpayer, many times, will continue on with their lives, trying to ignore the failure. If times are still tough, they will continue to miss tax deposits. Before they know it, they are operating the business at a loss and are racking up a massive tax debt (with both business and personal consequences). All of this happens without any word from the IRS.
At some point, oftentimes up to two years later, the taxpayer may begin to receive correspondence. Like a jilted ex-romance, the IRS starts to demand attention. At this point, it is only in writing. Having witnessed this first hand on many occasions, the taxpayer may read the first couple of notices and may even call the IRS with questions, but many times the problem goes unsolved, usually because the taxpayer does not have the money to handle it (especially with the penalties and interests that have been and will continue to be assessed). Sometimes, they are unable to reach anyone at the IRS who might be able to help them. Sometimes they do not even receive the notices. For any number of reasons, there are millions of cases that do not get handled by the notices mailed to taxpayers and, eventually, the cases end up “in the field” with a Revenue Officer.
If the taxpayer can catch the case in the “ACS” (Automated Collection System), they may be able to get on an installment agreement by providing a minimal amount of information. This is, of course, assuming that the IRS employee on the other end of the phone knows what they are doing, is friendly, and knows how to properly work the IRS’ proprietary computer system. More often than not, though, the people on the other end of the line are unhelpful, unknowledgeable and downright rude. To get into a repayment plan, the taxpayer must be current with all of their tax returns and tax deposits and must be able to prove that they are capable of repaying the debt while remaining current (there are some exceptions to this depending on the type of tax and amount owed). Many times, the IRS contact on the phone does not want to deal with the taxpayer (who can be surly and argumentative) and the phone conversation ends with both parties frustrated and no resolution intact. All of this is assuming that the taxpayer was able to get through to somebody before hanging up because they were on hold for longer than half an hour. Keep in mind that these people are small business owners and do not have the time necessary to deal with the IRS.
If the taxpayer is unable or unwilling to call the IRS, and even if they do but receive erroneous verbal advice, they may start trying to pay the back taxes without any sort of installment agreement. While this is in the spirit of what the IRS is hoping, many times it is done improperly and with money that should be being used to stay current. When the taxpayer does not remain current because they are paying off old debt, they simply create new quarters of debt that then get kicked into collections. The taxpayer who was hoping to climb out of the hole has only dug it deeper. (At this point, you should start to realize that this process is filled with pot holes and ways to make the situation worse).
If things continue to go unsettled, the taxpayer’s case is then sent to into the “field” and is assigned to a Revenue Officer. The Revenue Officer’s job is somewhat confusing. He or she must attempt to bring the taxpayer into compliance, get the debt repaid, follow due process procedures, protect the government’s interest, inform the taxpayers of their rights, please their group manager, withstand venom and vitriol, show sympathy where it is needed, climb the GS ladder, only work 40 hours a week, and represent an organization whose purpose may be, at some point, to close down the business of the taxpayer. They also might want to be pretty knowledgeable of the Internal Revenue Manual in case they run into a tax attorney along the way.
So, the Revenue Officer receives the case file and is set to make a visit to the taxpayer. If the taxpayer is not current and compliant, the conversation might not be a pleasant one. Many of the Revenue Officers (not all) use intimidation, lies, exaggerations, unreasonable deadlines and anything else that may brings results. On the flip side, some Revenue Officers are professional, reasonable and accommodating.
Let’s say the taxpayer wants to pay the debt back. However, the business is losing money and they are not current. The business is automatically not eligible for an official installment agreement (there may even be some tax returns outstanding). The Revenue Officer is put in a difficult position. The Revenue Officer will put the taxpayer on a deadline to get the missing returns in, for potential collections information, and make a demand that the taxpayer get current with its tax deposits.
As stated earlier, these situations do not happen in a bubble. As such, the massive amount of information that has just been requested by the Revenue Officer dauntingly hangs over the taxpayer’s head along with everything else that has been causing the business to fail. Even further, the taxpayer does not realize the deadline that has been set comes with very real consequences if it is missed (they have been told about this, but for some reason many taxpayer’s seem to call the government’s bluff).
So, the Revenue Officer has the case, has visited the taxpayer, has put them under a deadline for information, and has demanded that they get current. If the taxpayer cannot get current or if they miss the deadline for information, the Revenue Officer may move forward with “enforced collections action.” This can include bank levies, accounts receivable levies, etc… If the due process procedures have been followed (the notices mentioned earlier), these levies are legal. However, if the levy hits an operating account for the business, the government has just taken away any hope of the business being current. On top of that, the money taken does not get applied to the most recent quarter of taxes, but the oldest. Even further, the money is applied in the government’s best interest. Not only does the business lose hope of getting current, it loses its operating capital.
Any professional who has worked with taxpayers and Revenue Officers knows that, at this point in collections, the blame shifting begins. The Revenue Officer will not take any responsibility other than stating that it was within their right and that it was their job. It was the taxpayer’s fault for not following the rules of a game they did not understand in the first place. By levying, the Revenue Officer has sought to protect the government’s interest and to punish the taxpayer.
If the taxpayer is lucky enough to survive this, they may get hit again, depending on what information is outstanding and how much contact they have with the Revenue Officer. If things do continue in this manner, the IRS ends up kicking a taxpayer while they are down and the Revenue Officer begins assessing the taxpayer personally for the “Trust Fund” portion of the business debt (which may happen even if the taxpayer does attempt to pay the tax debt back).
Now, there are procedures in place to stop the IRS from causing a “hardship” for taxpayers and even a separate office within the IRS (“the Taxpayer Advocate”) to help with these situations, but they often move slow and many taxpayer’s do not know that they should contact them or what arguments to make. Oftentimes, proving a hardship with documentation is difficult and time consuming. In fact, the Taxpayer Advocate can only make “recommendations” to the IRS and does not have any real power. Even further, it seems to many that forcibly taking money from a business is, in and of itself, something that causes a hardship. If the taxpayer does know to file an appeal on the enforcement action, these appeals are only heard from a procedural perspective and rarely include equitable actions.
As may be clear from this summary of a collections case, the process is filled with many opportunities for the taxpayer to fall on bad terms with the IRS, including the method of paying taxes in the first place.
Although many flaws are going to be inherent in an administrative agency, it seems that the IRS has caused many of its problems (and, therefore, taxpayers’) by handling the issue of taxpayer delinquency in an inappropriate way. It is the hopes of many practitioners that the speed and efficiency of the IRS will be improved by moving employers on to the Electronic Federal Tax Payment System.
The consistent argument by any person who works for the IRS is that it is the taxpayer’s responsibility to pay taxes, and that, if they don’t, they deserve everything that comes at them. This may be true, but, to a certain extent, taxes are very different than any other governmental obligation. On top of that, the penalties and interest that accrue on an account (which are, conceivably, meant to prevent and punish late payment of taxes, although taxpayers rarely know the penalties exist to the extent that they do), are astronomical in many cases. The notice/penalty system currently in place to prevent and punish delinquency, in many ways, encourages the very thing it seeks to eliminate, and also wastes the very resources that taxes provide.
As can be seen by the proliferation of “Tax Representation” firms across the country, the problem with IRS collections is very real. The fact that there are businesses and professionals using the fear of the IRS to profit from the taxpayers means that they taxpayers now have to face attack from multiple sides. Oddly enough, the IRS controls the licenses held by Enrolled Agents and the Central Authorization Numbers of Attorneys and CPA’s. This, however, is a whole other issue.