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Tax Controversies and Litigation

Friday, July 19, 2013

Fighting the IRS

You're fighting the IRS, but you are uneasy and don't know what to do. This all depends upon the type of tax and how long you have waited.

In general, fighting the IRS about income taxes and estate taxes is much easier than fighting the IRS about employment taxes.

In the case of income and estate taxes, the IRS will conduct an audit and then send you a letter asking you to agree to the results of the audit. If you do not agree to the results of the audit, you will have a chance to file an appeal (with the IRS) contesting the audit. You think that filing an appeal with the IRS sounds somewhat ridiculous, but it is actually quite useful. The IRS employee handling the appeal has much authority not to pursue the various proposed changes to your income and deductions (usually detrimental to you) than the IRS employee who conducted the audit.

You move forward with the appeal ,and the IRS completes the appeals process and asks you to agree or disagree to the results of the appeal.  If you do not agree to the results of the appeal, a notice of deficiency (more commonly known as a 90 day letter) will be sent to you. The 90 day letter gives you 90 days from its date to file a petition with the U. S. Tax Court in Washington, D.C. to contest the results of the appeal (or, if you did not file an appeal, the results of the audit).  The good thing about filng a petition with the U. S. Tax Court is that  you do not have to pay the tax before filing your petition.

Unfortunately, you are not diligent and allow the 90 days to pass without filing a petition with the U. S. Tax Court. Upon the expiration of the 90 day period, the amount, as determined by the appeals office (or, in the audit, if you did not file an appeal) becomes a liability payable to the IRS.

You are not out of options, however.  You can pay the tax and file a claim for refund.  If your claim for refund is denied, you can file suit in federal district court for the district in which you reside, or in the United  States Court of Federal Claims.  It is important to remember, however, that if you litigate in the federal district court for the district in which you reside or in the United States Court of Federal Claims, you must pay the tax and sue for a refund.  On the other  hand, if  you had been diligent and filed a petition with the U.S. Tax Court within the 90 day period, you would not have been required to pay the amount of the tax before litigating.

You are not sure, but you think you also have some potential liabilities for employment taxes.  You were an officer of a corporation that is no longer in business, and it had a substantial amount of unpaid employment taxes at the time that it ceased operations.  You were an officer of the corporation from the time of its inception until it ceased business operations. Your control of corporate disbursements by the corporation varied while the corporation was in business.

You have always heard about corporations providing limited liability and you wonder if it applies in this situation. While limited liability continues to apply, in this situation, federal tax law preempts state law. Under the Internal Revenue Code, control persons can be held personally liable for taxes withheld from the salaries of employees of corporations and other types of entities. This is commonly known as the 100 percent penalty even though it is not a penalty and this is not an accurate description of the provision. 

You want to know whether this makes you personally liable for all of the unpaid taxes of your corporation.  It does not. You can be held liable for the taxes withheld during the period that you were a control person, but you are not personally liable for the employer's share of social security and medicare taxes.  Furthermore, you are not personally liable for any penalties and interest owed by the corporation.

You mention that the IRS has not yet sought to recover any of these taxes from you, and  you want to know the procedures the IRS must follow to recover these taxes.  The IRS will send you a letter claiming that you are a control person and will seek to impose liability upon you for the amount of any withheld taxes, including income tax withholding, social security tax withholding and medicare tax withholding.  You will then have an opportunity to file an appeal to contest the claims of the IRS.  If you do not file an appeal or if the appeal is unsuccessful, the amount of liability asserted by the IRS becomes a liability payable to the IRS.

Even after there is a liability payable to the IRS, you still have an opportunity to contest your liability by paying the tax and suing for refund in federal district court in the district in which you reside or in the United States Court of Federal Claims.


Wednesday, July 17, 2013

Off to a "Fresh Start" - Offers in Compromise Under IRS' "Fresh Start" Program

The following is an article by N. Dean Hawkins appearing in the August, 2013 edition of Headnotes published by the Dallas Bar Association

 

OFF TO A “FRESH START”

OFFERS IN COMPROMISE

UNDER

IRS’ “FRESH START” PROGRAM

By

N. Dean Hawkins

972-934-2830

Fax 972-934-2825

www.ndeanhawkins.com

E-mail:  ndh@ndeanhawkins.com

 

The recent economic downturn significantly increased the number and amounts of outstanding tax liabilities.  As a result, many taxpayers are interested in submitting an offer in compromise, particularly if they know about the IRS’ “Fresh Start” program.  Under this program, major changes have been made to the manner in which the amount of an offer in compromise is determined, thereby making submission of an offer in compromise a viable option for more taxpayers.

Before submitting an offer in compromise on Form 656, taxpayers and their counsel need to understand the effect of an offer in compromise, as opposed to entering into an installment payment agreement, and when its use is appropriate.  Unlike an installment payment agreement which only allows the taxpayer to pay the full amount of his or her tax liability in installments over a period of time, an offer in compromise is a settlement of the taxpayer’s tax debt for less than the amount of the currently outstanding liability.  Contrary to many radio and TV ads, this procedure is not new and has been statutorily authorized for many years in IRC §7122 (or its predecessor provision).

Determining whether to submit an offer in compromise or enter into an installment payment agreement is a logical process.  After all, the taxpayer is attempting to settle his or her tax debt for less than the actual amount of the debt.  Thus, it is logical that an offer in compromise would be appropriate only when the taxpayer’s “reasonable collection potential” (i.e., the taxpayer’s resources) is less than the actual amount of the taxpayer’s outstanding tax liability.  The taxpayer does not qualify to submit an offer in compromise if his or her resources exceed the amount of the debt.  However, many taxpayers who previously would not have qualified to submit an offer in compromise now qualify due to the “Fresh Start” program.

In general, the taxpayer’s resources are the taxpayer’s net equity plus the amount that the taxpayer can afford to pay to the IRS over a future period of time.  The taxpayer’s total resources are computed on Form 433-A (OIC).  There are, however, special rules that must be followed in computing the taxpayer’s resources and, ultimately, the amount of the offer in compromise. 

The taxpayer’s net equity is generally computed by valuing assets other than cash at a liquidation value of 80% of estimated fair market value (70% for retirement assets such as 401k’s and IRA’s) and only taking into account loans against the asset accounts (e.g., investment accounts) and secured debt in computing the taxpayer’s net equity.  Unsecured debt (e.g., credit card debt) is not considered in computing the taxpayer’s net worth.

The second element of the taxpayer’s resources is the monthly amount that the taxpayer can afford to pay to the IRS over a future period of time.  This available monthly amount is determined using the IRS Collection Financial Standards, which are available at www.irs.gov. 

The “Fresh Start” program made changes that are beneficial to the taxpayer to the expense limitation rules, but the major changes of the “Fresh Start” program are the substantial reductions in the number of months taken into account for purposes of calculating the amount of the offer, thereby substantially reducing the required offer amounts.  These changes were announced in IR-2012-53 on May 21, 2012. 

Now, in determining the amount of an offer:

  1. If the offer will be paid in 5 or fewer months, the IRS will consider 1 year of income, rather than 4 years of income; and
  2. If the offer will be paid in 6 to 24 months, the IRS will consider 2 years of income, rather than 5 years of income.

As illustrated by the following example, the effect of these changes can be quite dramatic.  Assume the following:

  1. The taxpayer has an outstanding liability of $225,000;
  2. Under the IRS rules, the taxpayer’s net worth is $90,000 and the taxpayer has monthly income of $3,000 to apply towards the debt; and
  3. The taxpayer is considering submitting an offer in compromise pursuant to which the taxpayer will make payments over a period of 5 months (using borrowed funds). 

Prior to the issuance of IR-2012-53, the taxpayer would not qualify to submit an offer in compromise because the taxpayer’s total resources would be $234,000 ((48 x $3,000) + $90,000 = $234,000).  Under the “Fresh Start” rules in IR-2012-53, the taxpayer qualifies to submit an offer in compromise in the amount of $126,000 ((12 x $3,000) + $90,000 = $126,000).




N. Dean Hawkins & Associates, Inc. assists clients throughout the Dallas metropolitan area, including Dallas, Collin, Denton, Kaufman and Rockwall counties.



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| Phone: 972.934.2830

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