Blogs by William Manchee
Defending the Small Business - Part 14 - Dealing With IRS Collections
11/12/2008 5:55:43 PM
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For the small business owner who hasn't been paying his taxes dealing with the IRS Revenue Officer can be quite daunting...
Any SBO who has dealt with a revenue officer from the IRS collection branch knows it isnít a pleasant experience. More importantly, itís very dangerous because, from the moment the conversation begins, the agentís primary purpose is to get information from the taxpayer that will help in collecting the taxes. Thatís why a small business owner should never meet with the IRS alone. The first thing they should do when they get a notice, phone call, or visit from a revenue officer, is to call their accountant or attorney.
Itís very easy for an unsuspecting taxpayer to give an agent incorrect or misleading information simply because of the pressure, anxiety, and anger the taxpayer may be feeling. The taxpayer is frequently so intimidated that the only thought on his mind is to give the agent what he wants and get rid of him. This can be disastrous, as agents often get evidence against you from material they never requested in the first place. Worse yet, they may find evidence pointing to problems in previous years.
If possible, the taxpayer should avoid the meeting entirely and let the tax professional handle it. After all, the ownerís time is best spent in sales, marketing, and production, and they should avoid distractions when professionals can be hired to deal with them. An owner has enough pressure and stress just operating the business without having unpleasant confrontations with revenue officers.
Once your tax professional determines what tax liabilities you have, there are numerous ways to deal with it. The most frequent is simple installment agreements. These can either be negotiated or unilateral agreements. A negotiated installment agreement is one that your tax professional works out with IRS for the payment taxes over a period of time, usually less than a year. For an agreed periodic payment, the IRS agrees to leave you alone. If you miss a payment or fail to fully comply with the tax laws in the future, the installment agreement will be terminated.
Many of my clients have suffered because of this rule. I can think of two clients who owed the IRS over a hundred thousand dollars and had somehow managed to get a revenue officer to agree to a $500 per month installment payout. This payment, of course, didnít even pay the interest on the amount due, but because the client convinced them that it was the best they could do, the revenue officer agreed to it.
Incredible as it may seem, both of these clients allowed their agreements to be terminated because they failed to timely file a subsequent tax return! Once the agreement was terminated, the IRS assigned new revenue agents who werenít nearly as generous as the former ones.
The first thing that is required in a negotiated installment agreement is the completion of a detailed financial questionnaire. You must disclose to the IRS your complete financial situation or they wonít even talk to you. Once this has been done there are formulas that determine what amount of money you must pay each month. This amount will invariably be much higher than you had expected and often is a very unrealistic number.
If you canít reach an agreement or you donít want to disclose all your finances to IRS, I often recommend a unilateral agreement. The way this works is you determine how much you can pay each month and just start making those payments. If the period is six months or a year, often IRS wonít take any enforcement action against you and youíve avoided close IRS scrutiny. This doesnít always work, but many times it will, simply because the IRS can see by your regular monthly payment that you are trying. Because they are so understaffed and overworked, it just stands to reason that the taxpayer who is making an effort to pay his or her taxes wonít be as high a priority as the one who is not.
If an installment payout is not feasible because of the amount of tax due or youíre assigned an unsympathetic revenue officer, the next possibility is an Offer in Compromise. This is a formal proposal to the IRS to pay them less than what is due. One advantage of an Offer in Compromise is that once it is properly submitted all enforcement action stops. That means if your wages have been garnished, your bank account attached, or property is about to be auctioned off, it will all be halted while the Offer in Compromise is being considered.
This is particularly advantageous as it often takes the IRS six months to a year to consider the offer. If the offer is rejected, you can appeal it and get another six months reprieve from paying the tax. And the chances are better at the appellate level that the offer will be accepted as the revenue officers assigned there are more sophisticated and objective.
Unfortunately, there are serious disadvantages to an Offer In Compromise: the interest continues to accrue, you must agree to extend the statute of limitations while the offer is being considered, and any failure to file future returns or subsequent taxes can cause the revocation of the agreement. So, unless you are very confident an Offer In Compromise will provide you the time you need to pay the taxes or that it will be accepted, itís not a wise move.
So, how do you know whether IRS will accept an offer or not? Thatís not an easy question. Much depends on whose hands the offer ends up in. Some revenue officers are very rational and reasonable. Others are unsympathetic and arbitrary. I have found that an offer will likely be accepted if: (1) itís unlikely the taxpayer will be able to pay the tax, (2) there is a question of whether the tax is really legitimate, or (3) the taxpayer offers to pay the tax over a period of time and obviously doesnít have the ability to pay it in a lump sum.
In the first instance, if the taxpayer is aged, permanently disabled, or incompetent the IRS will likely accept any reasonable Offer in Compromise because they know that it will be more than they would be likely to collect anyway.
Secondly, if the revenue officer considering the offer suspects the taxes werenít legitimate in the first place, he or she might agree to an offer that provides for the payment of the correct amount. A common example is when the taxpayer is assessed additional taxes based on erroneous information the IRS received from a third party, but fails to dispute it. If the revenue officer is provided proof that the information given them was wrong, he or she may agree to the offer even though it is too late to dispute the assessment.
This is one positive thing Iíve learned about the IRS. If you can convince them that the taxes shouldnít have been assessed in the first place, they will usually abate the tax even though legally itís too late to contest it. I donít think they have to do this, but I have found they usually will.
Finally, if the taxpayer acknowledges they owe the tax but just needs some time to pay it, usually an Offer In Compromise that provides for an installment payout of up to three years can be worked out. Whether interest continues to accrue during this time is negotiable. Sometimes even penalties can be knocked off as part of the agreement.
Although some tax practitioners advertise that they often are able to routinely negotiate payout of 25 to 33 cents on the dollar, I havenít been able to do that. Usually if a client is younger than 60, in good health, and employable, the IRS is not likely to accept an Offer In Compromise for less than what is owed. Perhaps the people advertising the ability to get large percentage reductions have connections in the IRS. I have found that former revenue officers or high officials in the IRS who retire into private practice often do have connections that give them an advantage over the rest of us. If you find someone like that, hire them and take advantage of their special relationship. I would ask for references though, to be sure they can really deliver the deal they say they can.
A final word about the IRS. Donít be intimidated by them. They are just another creditor. They have to abide by rules and regulations just like the rest of us. The key is to get professional help immediately and respond timely to whatever they throw at you. With the IRS, time is usually in your favor, so develop a long-term strategy to deal with your tax problem and stick with it.
Bankruptcy is often your best bet when it comes to dealing with a serious tax issue. Many taxes, such as income taxes, are dischargable if more than three years has elapsed since they were assessed. Even if the taxes are not dischargable, a Chapter 11 or 13 offers the ability to pay out whatever is owed over a period of three to six years. Chapter 13 even provides for the payment of the tax liability over a three-to five-year period without interest!
Whether a small business owner must file a Chapter 13 or 11 depends on several factors. If the business is a corporation, limited liability company, or partnership, a Chapter 11 would most likely be required. If the owner is operating as a sole proprietor, then a Chapter 13 would be appropriate unless his unsecured debt is over $250,000 or secured debt is over $1,000,000. In this case the sole proprietor would have to file Chapter 11.
What makes a bankruptcy attractive, beyond the ability to pay out the amount due, is the automatic stay. This is a court order which prohibits creditors, including the IRS and other taxing authorities, from taking any enforcement action against the person filing the bankruptcy, who is called ďthe debtor.Ē This relief is extremely important in that it allows the SBO debtor to get all his creditors off his back so he can concentrate on repairing his troubled business.
The downside with bankruptcy, of course, is the damage it does to a business ownerís credit. Many times, however, the credit has already been damaged if a tax lien has been filed, a car repossessed, or an account garnished. Whereas a bankruptcy may be on an SBOís record for up to ten years, some creditors will still give an SBO credit after the bankruptcy is over. As time goes on, more and more creditors will consider you for credit if you have a good job and havenít run up a lot of new debt. In fact, many bankruptcy clients are astounded when just several months after they file bankruptcy they start getting pre-approved credit card applications in the mail!
Bankruptcy doesnít carry the tremendous stigma that it did in years past. Several million people file bankruptcy each year, so many banks and financial institutions are tapping into this market. They are willing to take the risk of loaning to this segment of the population because the potential profits are so great. They will be restrictions of course, bigger down payments required, and higher interest rates, but at least there will be lenders out there willing to provide financing if it is really needed.
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