“I know I filed it, but the IRS tells me they never received it.”

Tax returns – lost.  Collection appeals – misplaced.  Innocent spouse claims – never processed.

The reality is that the IRS does lose incoming mail.  It is the exception, not the rule, but it happens.

And when it happens, it can be difficult to convince the IRS they are at fault without compelling evidence of filing.

The very best, indisputable way to file with the IRS:

Hand-file it.  Take your return, or your appeal or request, and drive it over to an IRS walk-in center.  Bring a copy with you.  When you file the original, ask the IRS to date stamp the copy as received.

I almost always recommend this for a series of unfiled returns.  Avoid mailing all the returns in the same envelope.  Putting each one in a separate envelope can result in 4 out of 5 being processed. You need 5 out of 5.

Lately, I have been hand-filing collection due process appeals by hand as well.  I have been challenged on more than one occasion by an IRS  Revenue Officer or Appeals Officer as to the timeliness of an appeal. Undisputed proof – a copy with an IRS date stamp – puts an end to these issues.

If you file with a post office proof of mailing certificate, be prepared:  On occasion, the IRS may question what was in the envelope.  Sometimes, I have seen the IRS take the unreasonable position that your mailing reciept only proves you mailed something to the IRS, not what you mailed.

When it is your word against the IRS records, you lose.  If it is important, hand-file it.

I will be on a panel seminar in Cincinnati on November 6 to address taxes and bankruptcy. My co-panelists include Bankruptcy Judge Jeffrey Hopkins and Bankruptcy Trustees Henry Menninger and Tom Geygan.

In addtion to IRS and bankruptcy, other topics that will be discussed include bankruptcy’s impact on divorce, real estate and understanding means testing.

The seminar is “Bankruptcy Forum: What Judges and Trustees Want You to Know.”   Take a look at the program brochure or register online.

What to expect from the IRS collection division in 2010:

1.     More aggressive IRS tax lien filing practices.

IRS Revenue Officers have been instructed to make decisions on the filing of Federal tax liens within 10 days of case assignment.   The IRS hit an all-time low for lien filings in 1999 of 167,000.  That has rebounded to 867,000 in 2008, still off the mark from of 1,400,000 in 1992.  Expect the IRS to continue to improve on securing its claims.

2.     Quick issuance of levies from Automated Collection Service.

The IRS Automated Collection Service has been issuing levies immediately upon expiration of their mandatory 30 day waiting period.  (The IRS cannot take levy action until 30 days after it mails you a Final Notice of Intent to Levy.  You have the right to stop this by filing a collection appeal during this waiting period).

This has caught many who have filed timely collection appeals off guard.  The IRS seems to be making quick matches on levy sources immediately upon expiration of the 30 day period, acting before it completes processing of the appeal.  This aggressiveness has resulted in clients who have timely filed a collection appeal receiving a wage or bank levy.  Be careful – file your collection appeal as soon as possible.

3.     Increased collection of the trust fund recovery penalty.

The IRS Taxpayer Advocate reports that between 2002 and 2007 the IRS collected only 13.5% on trust fund recovery penalty assessments. The IRS knows this has been a problem, and indications are it is being fixed.

In the past, I would often be retained by clients who are 7, 8 and 9 years past assessment of the trust fund penalty and have never heard from the IRS on collection. (This is important  - the IRS only has 10 years to collect after assessment).  That is changing.  Expect IRS Revenue Officers to seek collection of the trust fund penalty after they assess it.

4.     “Pyramiding” tax cases, owing year after year.

IRS will continue its focus on those that “pyramid” tax liabilities – that is, owe the IRS year after year.  This is especially true for nonfilers and employment taxes.  IRS Goal #1 is to stop the problem of not paying every year, every quarter.  Expect these cases to be high priority in the IRS collection queue.

5.     Areas involving fraud, including fraudulent 1099 OID.

An evolving issue the IRS is working to immediately clamp down on is the fraudulent use of 1099 OIDs (original issue discount).  Known as “OID Redemption” schemes, false forms are being filed claiming bogus 1099 OID credits and false withholding.  The Justice Department reports that a total of $3.3 trillion in false claims have been filed.

The IRS is now catching those claims before issuing the refunds, but millions have already gone out the door. High level IRS Revenue Officers are being assigned these cases as priorities.  They are receiving approval to issue immediate jeopardy levies to recoup the credits illegaly claimed.

With the tax gap at $300 billion and the budget deficit at 1.45 trillion, expect the IRS to continue its efforts to bring money back into the Treasury.

It can be tempting to use payroll tax withholdings as a source of operating capital for your business, especially in troubled times.  But this is dangerous – the IRS can penalize anyone in your business who took part in this decision with personal liabilty for the unpaid taxes.

This is known as the trust fund recovery penalty.  The amount of the penalty is equal to the amount of money deducted from employees paychecks but not paid to the IRS. 

But there are time limitations on the IRS pursuit of the trust fund recovery penalty.  If the IRS does not assign a Revenue Officer to your case and investigate you in a timely manner, they lose the right to do so.   Here’s an overview of when time is up on a trust fund recovery assessment:

Statute of Limitations Expiration Date  - Trust Fund Recovery Penalty.

The IRS timeframe for assessment of the trust fund recovery penalty against you is based on the filing date of your company’s employment tax returns (Form 941). 

The IRS has three years from the filing date of the employment tax returns to come to you with the trust fund penalty.  The term “filing date” is important here – it is defined by Internal Revenue Code 6501(b)(2), which states that employment tax returns filed for any period ending within a calendar year are considered filed on April 15 of the succeeding year.  

Examples:

941 return timely filed for quarter ended June 30, 2007.  The clock starts ticking on April 15, 2008, the date the return is deemed filed for trust fund assessment purposes.  Final assessment of the trust fund recovery penalty must be made before April 15, 2011, three years later.

941 return timely filed for quarter ended December 31, 2007.  The clock starts tickong on April 15, 2008, the date the return is deemed filed for trust fund assessment purposes.  Final assessment of the trust fund recovery penalty must be made before April 15, 2011, three years later.

If an employment tax return (Form 941) is filed late, the statute of limitations on assessment of the trust fund penalty expires three years from the late filing date, provided it is later than the statute expiration date if the return had been filed on time.

Once or twice a year I see time pass for clients without the IRS pursuing trust fund assessments.  It does happen, although the IRS is trying to close the gap.

The IRS is generally known to be prompt in processing offers in compromise.

But the IRS is also known for losing files and not processing claims. Sometimes, things get washed into the big bureacracy.

So, what if the IRS takes its time on your offer, or it slips through the cracks unattended without an answer?  Time can be on your side.

If the IRS does not make an initial decision on your offer within two years, the amount you offered is automatically accepted. Internal Revenue Code Section 7122(f) governs the offer “snooze and lose” timelines.

The IRS is considered to have made a decision on your offer if you receive an initial rejection, it is returned as nonprocessable, you withdraw it or it is you do not make upfront payments while it is pending.  The time the IRS considers your appeal of a rejected compromise is not part of the two year period as the rejection qualifies as the decision for purposes of the statute.

It is always best to have verification of your offer filing date if the IRS does sit too long on the offer (hand stamped copies are best).

Your knee-jerk reaction to not hearing from the IRS for a while on an offer may be to call and get that compromise on track.  Usually, the IRS makes a decision on an offer within six to nine months. But if time ticks away with no answer, having the offer sit quietly undisturbed should be factored into your strategy.

A funny thing happened to me on the way to my mailbox today.  There was a letter from the IRS.  Sure, I get plenty of IRS mail everyday – I am an IRS defense attorney.   But this one had my name on it.

I put myself in my clients’ shoes.  I understood their fears.

Deep down, I knew what it was.  But there was still an intimidating factor to an IRS letter.  Whatever was inside was not going to go away, and I thought through all the reasons to open it, not ignore it.

1.     Ignoring it does not make it go away.  While you are pretending it does not exist, the IRS is doing the exact opposite.  And claim your certified mail – if the IRS has the right address, failure to go pick it up is not a defense to what was inside.  What you don’t know can hurt you.

2.     You can lose your wages or bank accounts if you ignore IRS letters. Before the IRS can take your property, they must send you a Final Notice of Intent to Levy.  Ignore it, and the IRS can come after your assets.  Respond to it, and you have the right to stop IRS collection action and meet with an IRS appeals officer to resolve your case.

3.     If you are a nonfiler, the IRS could be inquiring about it.  If you do not respond, the IRS can file an estimated return against you.  This will overstate the amount you owe and the amount the IRS tries to collect. The IRS could owe you money, but if you wait too long to claim it and file your return, the IRS will not pay it to you.

4.     The IRS could be auditing your tax return.  If you do not respond, the IRS will find you owe them money, even if you don’t.  IRS collection letters will follow.  That makes it complicated – stopping the IRS collection machine while reopening an audit.

5.     Interest and penalties makes the amount you owe go up.  The longer you put it off and ignore the IRS, the deeper it gets.  The original amount you owe will double every five years.

Know that the IRS is often wrong.  You have defenses, and there are solutions. The earlier a plan is put in place, the sooner you can move on with life.

Oh, my IRS letter contained a password to use in accessing IRS transcripts for my clients.  It would have only hurt those around me to ignore it.

I do alot of IRS and bankruptcy work for my clients, and receive many questions about  it works.  Bankruptcy is a valuable tool to eliminate IRS liabilities.

To help in understanding taxes and bankruptcy, I thought it would be helpful to provide real life examples, starting here with a “bankruptcy timing” question I recieved from an enrolled agent on behelf of his client:

Howard, I have a client considering Chapter 7 bankruptcy on her IRS income tax debt.

2001 – owes $59,000.  Her return was due on 4-15-02, but she did not file it until 9-15-08.

2003 – owes $9,800.  Her return was due on 4-15-04, but she did not file it until 9-1-08.

2006 – owes $1,400.  Her return was due on 4-15-07, but she did not file it until 8-25-08.

She is in currently non-collectible status with the IRS.

When would she first be eligible for a Chapter 7 bankruptcy?

This illustrates Rule No. 1 in eliminating taxes in bankruptcy:  To be successful, tax returns must have (1) a due date that is three years before the bankruptcy is filed and (2) been actually filed two years before the bankruptcy starts.

In this example, it has been more than three years since the returns were due. But it has not been two years since they were filed.

The result: She could have all of the taxes discharged in a Chapter 7 bankruptcy on 9-15-10.  This is two years after the returns were filed.

If the returns were filed on time, then she would not have wait any longer – both the three year and two year rules would have been met – and bankruptcy could be filed immediately.

The non-collectible status will keep the IRS on hold while awaiting the bankruptcy filing date.

Stay tuned – I will be periodically posting more real examples of how bankruptcy, taxes and the IRS works.  You can also read my other blog entries on it and my articles.

It is common to feel like you are not getting a fair shake from an IRS auditor.   Frustration mounts with perceptions that the auditor is unreasonable.  No matter what you do, the auditor cannot be satisfied.  You are told you owe money to the IRS, and you know you don’t.

There is good news – IRS auditors are not the end of the road.

Before the IRS can finalize an audit, they are required by law to give you rights to dispute it in federal Tax Court and with an IRS appeals officer.

Before the audit becomes final, the IRS must notify you of your rights to dispute it.  This letter called a “Notice of Deficiency.” The Notice of Deficiency gives you a very important legal right – to take the IRS audit to Tax Court and have an independent judge review it.  You will have 90 days to file a “petition” to Tax Court after the IRS sends you the notice of deficiency. If the 90 days has already expired, you may qualify for audit reconsideration instead.

Before the IRS goes to trial, they will send your case to an IRS Appeals Officer for settlement.  The IRS Appeals Officer’s job is to settle the case based on how a judge would rule, not an auditor.  IRS Appeals Officers have flexibility not always shown by IRS auditors.  Most IRS examination cases settle this way with results not available from an auditor’s point of view.

Tax Court judges and IRS appeals officers perceive cases differently from IRS auditors.  If you are right, you can testify to it – summarize to the appeals officer what you will tell the judge. If the IRS – in preparation for trial – sees that their auditor was being unreasonable, they will most likely make attempts to settle the case on the basis of how an independent judge would rule.

The auditor often has a small view of your case and does not consider how outsiders would decide it; that changes when the final decision is not that of the IRS, but is put in the hands of the Tax Court.

If you find yourself in an IRS pickle, there are three IRS employees you are most likely to come face to face with.  Those are Revenue Officers, Revenue Agents and Special Agents.  Here is what to expect from each:

An IRS Revenue Officer is in collection enforcement. Often, the first contact you will receive from a Revenue Officer is an unannounced visit to your home or office.  Revenue Officer’s collect taxes and pursue nonfilers.   Revenue Officers work in your town.  They want financial information to determine the best way to collect the taxes (or not collect them, if it would create a hardship).  Revenue Officers carry badges and can take your wages, bank accounts and other personal and real property if there is a lack of cooperation.  The goal is case closure representing your ability to repay.

An IRS Revenue Agent audits tax returns for the IRS. Like Revenue Officers, Revenue Agents may want to meet you at your business, or ask that you come to an IRS office.  You will get notified of the audit by mail – no unannounced surprise visits.  Common audit triggers include Schedule C businesses and expense deductions not in reality with your stated income (like claiming $10,000 in charitable contributions on $40,000 in income). Audits are usually about finding money that you should owe on the return, but it can turn criminal if the Revenue Agent finds significant unreported income or fraudulent deductions.

IRS Special Agents are criminal investigators. In addition to criminal referrals from Revenue Agents (auditors), Special Agents can receive cases from Revenue Officers (collectors).  Examples of Revenue Officer collection referrals include lying about your finances and assets, or intentionally failing to pay employment taxes.  Special Agent priorities also include non-filers, concealing income off-shore, and tax returns prepared to obtain fraudulent refunds. If you are under criminal investigation you most likely will be the last to know, with Special Agents making an unannounced visit to question you.  They often know the answers to their questions.  Stop, state you wish to contact an attorney, and respectfully decline to answer.

Of course, you can come in contact with an IRS employee in the strangest of places and not know it.  When I worked for the IRS as a trial attorney, I was at dinner at Benihana, and at my table were two businessmen talking very loudly about how they cheated on their taxes.  You never know.

IRS tax liens are not forever.  They do expire – here is an overview of when:

For starters, the IRS has 10 years to pursue you for the unpaid taxes that caused the lien to be filed.  The 10 years starts on the date you began owing the IRS money.

After the 10 year collection timeframe expires, so does the IRS tax lien.

But beware:  Sometimes you might do something that gives the IRS more time to collect.  This can have an impact on a Federal tax lien.

Actions that can extend the IRS collection timeframe include the filing of bankruptcy, collection due process appeals or submitting an offer in compromise or innocent spouse claim.  These actions stop the IRS from collecting.  Because of that, this time is added back on to the collection statute.

The tax lien will still expire at the end of 10 years – even if the IRS has more than 10 years to collect - unless the IRS timely refiles the lien.

If the IRS timely refiles the tax lien, it is treated as continuation of the initial lien.

The refiled tax lien will be valid for the extended timeframe the IRS has to collect – it is good for the extra time you gave the IRS to collect.  It maintains any priority it has against liens of other creditors. See Internal Revenue Code 6323(g)(3) and Internal Revenue Manual 5.17.2.3.3.

However, if the IRS does not refile the tax lien within 30 days per IRC 6323(g)(3), the original lien expires and is no longer valid.

If the IRS refiles the tax lien after 30 days, then it is still a valid lien, but it is not considered a continuation of the original lien because it was filed late.  It is a new lien, and its priority against other creditors starts on the day it is filed.  The IRS will have lost any higher ground it had over other creditors.  Other creditor’s liens now jump ahead of the IRS.

For more on the IRS statute of limitations on collection, see my prior posts.