Florida Department of Revenue Harasses Taxpayer

Some states have a very poor record with regard to collecting taxes via legal means. The State of Florida is one of those states. In the recent In re: Omine case the Eleventh Circuit Court of Appeals details the Florida Department of Revenue’s illegal collection activities.

The Omine opinion states that:

Gregg and Michele Omine filed for Chapter 13 bankruptcy protection in 2001. The Florida DOR then filed a proof of claim seeking to recover public assistance money Hawaii paid to Gregg Omine’s former wife and children, who resided there. This Hawaii debt was included among those to be paid in the Omines’ Chapter 13 plan. The Omines filed a motion for contempt and sanctions, contending that the Florida DOR had continued debt-collection efforts after the filing of the bankruptcy petition, in violation of the automatic stay. The Omines withdrew the motion in January 2002 after the Florida DOR assured them that no further actions would be taken against them, but that assurance proved illusory.

The court opinion goes on to say:

The following year, Gregg Omine’s employer received a letter from the Florida DOR directing the employer to garnish Omine’s wages in connection with the Hawaii debt. n1 After counsel for both sides conferred, the Florida DOR agreed to cease this garnishment, but then, a week later, Omine received a letter threatening him with various penalties if he failed to pay the Hawaii debt. Again, after the parties’ counsel conferred, the collection efforts were halted, albeit only temporarily.

and

The Florida DOR soon directed Omine’s employer to begin garnishing Omine’s wages again to pay the Hawaii debt, and counsel for each side again conferred and resolved to halt the collection effort. A few days later the Omines received a notice that their 2002 tax refund had been offset against the Hawaii debt. The Omines then filed a motion for sanctions that alleged the Florida DOR repeatedly violated the automatic stay.

The bankruptcy judge discharged the remainder of the Hawaii debt and awarded the Omines $1,000 in actual damages, plus $1,600 in attorney’s fees and costs. This monetary award, in my opinion, is very low given the State of Florida’s intentional and repeat violations of our laws. It sounds as if the Florida Department of Revenue has forgotten that its job is to administer our tax laws, not break them.

May 14th, 2007 | No Comments »

Prepayment: to Deduct in Year 1 or Year 2?

Say you hire someone to provide a service to you in year one, the service is to be provided to you over a twelve month period, and you prepay the person for this yet to be provided service. When can you claim a deduction for this prepayment? The IRS Office of Chief Counsel recently said that accrual method taxpayers cannot deduct any portion in year one.

Accrual method taxpayers are generally entitled to a deduction when “all events” with respect to the liability have occurred and the amount of the liability is relatively certain. “All events” occur with regard to service contracts when the services are performed. There are two exceptions to this general rule, namely the taxpayer can deduct the expense if the services will likely be rendered in three and one half months or, if the payment is a recurring payment, if the services will be provided by September 15th.

The question then is can you deduct a portion of the expense for the three or nine month periods in the first year if the services will be rendered over a period that is beyond these time periods? In other words, must all services be rendered before these periods in order for taxpayers to deduct the prepayment expense?

According to the IRS, yes, all services must be rendered before these periods or else taxpayers cannot deduct the expense. The IRS attorneys held that the time periods are strict.

So if taxpayers want to claim a deduction in year one for a prepayment on a service agreement, taxpayers must structure the governing legal contract to fit within these time periods. Of course, the same rules apply (in reverse) for taxpayers who receive prepayments pursuant to a service agreement and who want to delay recognizing the income and paying tax on the income….

May 13th, 2007 | No Comments »

Tax Blog URL Has Changed!

Our tax blog URL has changed!  Please take a second to update any reference to our tax blog.  Our tax blog can now be found at: http://www.irstaxtrouble.com/category/tax-blog/ and the RSS feed can be found at: http://www.irstaxtrouble.com/category/tax-blog/rss .
We are sorry for the inconvenience, but our website was long overdue for a makeover….

May 12th, 2007 | No Comments »

Offer in Compromise: The Coming Storm?

The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) makes substantial changes to the IRS offer in compromise program. Most notably, TIPRA includes a provision in which taxpayer submitted offer in compromises are “deemed” accepted by the IRS.

The offer in compromise or OIC program for compromising tax debts for less than is actually owed. Taxpayers often refer to this program as the process of settling tax debts for pennies on the dollar.

The IRS offer in compromise process is notoriously slow, with the IRS appeals officer not even being assigned to a taxpayer submitted offer in compromise for upwards of six months.

Pursuant to TIPRA, subsection (f) was added to IRC 7122. This subsection indicates that the IRS is deemed to have “accepted” an offer in compromise if the offer in compromise is not withdrawn, returned or rejected within 24 months after the IRS received the offer in compromise. This new law is effective for offer in compromises submitted two months after May 2006. This means that we are one year away from the time when the first “deemed” accepted offer in compromises will start to show up.

Here are some general thoughts about this coming “deemed” offer in compromise scenario:

The offer in compromise process is a bargaining process. Taxpayers often submit an initial offer in compromise and then either amend or submit a new offer in compromise at the instruction of the IRS appeals office. It is not unusual for a taxpayer to submit two or three offer in compromises to the appeals office in this process.

The appeals office, in my experience, has and continues to only continue processing the one final offer in compromise. The others merely disappear. Apparently, the appeals office is not concerned about these other offer in compromises being “deemed” accepted – but it should be.

Also, the courts have said that the offer in compromise is a legal contract that is governed by state contract laws. This means that we will probably see some state law based litigation for these “deemed” offer in compromises. The issues could be very complex. Here are some examples:

If a first offer in compromise is ignored but then a second offer is accepted in the negotiating process, does the first offer then trump the second offer after the 24 month period? What if only the second offer is rejected, does that rejection apply to the first offer? What if there is confusion as to which offer was accepted, rejected, etc.?

What happens if the IRS and/or the taxpayer cannot establish the date on which the offer was received, rejected, withdrawn, or returned? Who has the burden to make that showing and, if it is the taxpayer, how does the taxpayer show that the IRS failed to issue a rejection letter or return the offer to the taxpayer? When is an offer in compromise withdrawn? Is it when the taxpayer calls the appeals office and says “I withdraw my offer in compromise,” when the taxpayer faxes or mails a letter to the IRS saying this, or when the IRS actually receives the fax or letter?

What state law applies if the taxpayer resides in State A at the time the tax obligation arose, moved to State B and negotiated the offer in compromise, moved to State C by the time the offer is “deemed” accepted and the IRS appeals officer is located in State D and the IRS center that received the offer is in State E (Tennessee)?

Also, there are significant federal tax law issues that remain to be resolved.

For example, how does a taxpayer tell the IRS collections function that the tax is not owed and that any future collection activities are illegal? What about getting a lien lifted because the tax debt is no longer enforceable because an offer in compromise was “deemed” accepted?

Taxpayers currently run into this situation where the IRS has let the collections statute expire (i.e., the CSED lapses). Taxpayers who are in this situation have no immediate way of telling the collection branch to stop its illegal collections activities and they have to write letter after letter and just hope that collection activity stops. In most cases the issue is beyond the grasp of IRS employees, who are merely able to read the CSED that shows up on their computer screen and assume that it is THE correct answer.

If collections doesn’t stop, then the taxpayer has to appeal the collection activity after the fact. Is this how “deemed” accepted offers will start showing up in the system? Is that the best way to handle them? Maybe the Advocates Office will start handling these cases?

The IRS has issued Notice 2006-68, which fails to address any of these “deemed” accepted issues. In fact, this Notice raises even more questions.

Even more disturbing, what if every taxpayer decided to start mailing in $1 lump sum offer in compromises every day for the next two years? Would the IRS be able to reject and keep track of each and every one of those offer in compromises?

Sure the taxpayer would have to worry about the new frivolous submission penalty, but that is just a civil penalty and it is only a very nominal amount and taxpayers could withdraw any submission that they were notified by the IRS that it was frivolous, thereby avoiding the penalty on the offer in compromises that the IRS caught.

Of course, I would never recommend something like this to any taxpayer. I merely point out the issue, as there very well could be a storm on the horizon with regard to “deemed” offer in compromises — a storm that could cost the US Treasury quite a bit of tax revenues.

May 9th, 2007 | 1 Comment »

“We the People Foundation” Loses Court Battle, Wins Publicity

“We the People Foundation” recently lost yet another tax-related court case, but, perhaps wining in court is not really what the group is after.

According to the court record, We the People have:

engaged since 1999 in “a nationwide effort to get the government to answer specific questions” regarding what plaintiffs view as the Government’s “violation of the taxing clauses of the Constitution” and “violation of the war powers, money and ‘privacy’ clauses of the Constitution.”

…

and they contend:

that the President, the Attorney General, the Secretary of the Treasury, the Commissioner of the Internal Revenue Service, and Congress neglected their responsibilities under the First Amendment to respond to plaintiffs’ petitions.

As a result, We the People brought suit claiming:

that government officials-by seeking to collect unpaid taxes-have retaliated against plaintiffs’ exercise of First Amendment rights.

We the People then asked:

the District Court to enjoin the Internal Revenue Service, the Department of Justice, and other federal agencies from retaliating against plaintiffs’ exercise of their constitutional rights (in other words, to prevent the Government from collecting taxes from them).

The district court held that the First Amendment does not provide plaintiffs with the right to receive a government response to or official consideration of their petitions. We the People then appealed this decision, arguing that:

they have a First Amendment right to receive a government response to or official consideration of their petitions. Second, plaintiffs argue that they have the right to withhold payment of their taxes until they receive adequate action on their petitions.

The court of appeals dismissed We the People’s claims. While the group lost the court case, it did get some excellent publicity for its “cause.”

May 8th, 2007 | No Comments »

Tax Overpayments in Bankruptcy

Taxpayers who owe taxes and who are thinking of filing bankruptcy should be aware of the Ninth Circuit’s recent Nichols v. United States case.

The taxpayers in the Nichols case overpaid their 2001 state and federal tax liability. The court opinion says that:

Sixteen days later, on February 5, 2002, the Debtors filed for bankruptcy. The [Bankruptcy] Trustee demanded that the Debtors turn the deposits over to the Trustee, but this was not done. In February of 2003, the Debtors signed their 2002 federal and state income tax returns and applied the deposits (resulting from the overpayment of their 2001 taxes) to their 2002 tax liabilities.

The Bankruptcy Court held that the overpayment was an asset of the bankruptcy estate; therefore, the taxpayers had to deliver an amount equal to the tax overpayment to the trustee.

The taxpayers appealed the decision, arguing that their inability to get the funds back from the IRS and the irrevocable nature of their election prevents the bankruptcy estate from asserting any right to the funds.

The court rejected the taxpayer’s argument, saying:

As a result of the election, the Debtors were left with a credit with the IRS that provided a dollar-for-dollar tax reduction in the following year. If the Nichols had not elected to prepay their taxes, those funds would have been refunded to them and would likely have been available for the bankruptcy estate when they voluntarily filed for bankruptcy just 16 days later. The fact that the election, once made, was irrevocable, does not change the analysis. In light of the expansive definition of property contained in the Bankruptcy Code and our broad interpretation of “property” …, we hold that this credit toward future taxes constituted estate property at the time the Debtors filed for bankruptcy.

Perhaps the result would have been different if the taxpayers had relinquished any rights in IRS and state tax deposits prior to filing for bankruptcy.

May 8th, 2007 | No Comments »

Part 2: One Tax Attorney’s Opinion on How the IRS Could Improve

In the prior blog post I provided a few suggestions for how the IRS could improve. This post was in response from a question posted to me by a fellow Denver tax attorney.

The prior post suggested that the Treasury Inspector General for Tax Administration take a more proactive approach to auditing the IRS, the IRS should provide more and better online tools for tax practitioners, the IRS should be more forthcoming with taxpayer records, and the Taxpayer Advocate Office should play a more active role were intra-agency failures leave taxpayers with no recourse.

Here are some additional suggestions (which are again in no particular order):

1. The collection due process hearing plays a vital role in our system of tax administration. The collection due process hearing is often the only way taxpayers can prevent the IRS from undertaking illegal collections activities. As important as it is, the collection due process (CDP) process is broken.The CDP process starts when a taxpayer submits a Form 12153 Collection Due Process Hearing Request. The Internal Revenue Code specifies that the IRS must suspend (most) of its tax collection efforts if the taxpayer submits a timely CDP hearing request.

   The main problem with the CDP hearing process is that the IRS does not check the Form 12153 in to its computer system for several weeks or, in some cases, several months. The average time to check in a Form 12153 is about three to four weeks, with an additional one to two weeks for the CDP hearing request to be delivered by the postal system.

   During this period of time the IRS collection function, not knowing that a CDP hearing request has been filed, often continues its collections efforts. These efforts are 100% illegal and in many cases the resulting damage cannot be undone after the fact (i.e., taxpayers cannot un-bake the cake).

   Yet, the IRS will not permit taxpayers to have a CDP hearing (and its associated benefits) where the taxpayer missed the 30-day deadline for filing the request (for example, where a taxpayer mails in a CDP hearing request one day late). I can’t help but wonder why the IRS takes such a strict approach in these cases when the IRS takes so long to even check taxpayer CDP hearing requests in to its computer system. This is yet another instance where the IRS policy is “do as I say, not as I do.”

   I would suggest that the IRS flag each and every taxpayer account on the very day that the IRS receives the CDP hearing request – regardless of whether the CDP hearing request was valid or timely (perhaps technology could provide a solution, such as allowing taxpayers to submit the forms electronically?). That way the IRS collection function would know that it should halt its collections efforts, pending the IRS determination of whether the CDP hearing request is appropriate.

   As an alternative, the IRS should adequately staff the CDP hearing request review teams so that it can, in a timely manner, determine whether the CDP hearing request is timely and valid and update its computer accordingly.

   I would go even further by setting up an administrative procedure whereby taxpayers can obtain relief and damages should the IRS undertake illegal collection activity after a CDP hearing request was filed (perhaps Congress should add this provision to Sections 6330 and 6320). This is going to become more and more important as the IRS ramps up its tax collections efforts.

   As a side note (in support of another suggestion), the IRS takes the position that the 30-day period for taxpayers to submit CDP hearing requests starts to run from the date that the first (lien or levy) notice is sent by the IRS to the taxpayer. So if the IRS sends out a subsequent notice that tells the taxpayer that they have 30-days to request a CDP hearing, the IRS will not honor the second letter – assuming that the letter does not benefit the IRS.

   Here is a common fact pattern: the IRS sends a first (lien or levy) notice letter to taxpayer in year one and the IRS sends a second notice letter to the taxpayer in year five. The taxpayer has a copy of the first notice letter, but he or she would not be able to successfully argue that the second letter (and any collection action based on the second letter) is invalid because the IRS had already sent a first notice letter – but why not, if the IRS refuse to honor their second letter when it is convenient for the IRS to do so?

   I would suggest that the IRS implement a policy whereby it stands by what it says in its letters in these cases, so that taxpayers are entitled to CDP hearings as set out in second or later letters from the IRS – regardless of whether the IRS letter is not convenient for the IRS (maybe Congress should add something to this effect to the Code as well).

   An even better approach would be for Congress to amend the law to specify that the IRS cannot undertake collection activity unless it sends the taxpayer a new notice letter (i.e., that a letter sent five or nine years prior will not do the trick), perhaps the law could provide that the letter has to go out 30-days prior to renewed collection activity….

2. The “equivalency hearing” provides taxpayers with the ability to get in front of the Appeals Office in cases where the taxpayer missed the 30-day period for filing a CDP hearing request.Taxpayers cannot appeal equivalency hearing results (as the IRS is always quick to point out) and IRS collection activity is not suspended by requesting such a hearing.

   The IRS does not have to grant taxpayers equivalency hearings. In fact, the New Form 12153 specifies that the IRS will ONLY grant taxpayers equivalency hearings if the hearing is requested within one year of the first collection action (This is a new policy that I have found no reference to in anything other than the new Form 12153. Does anyone know how or who was responsible for this? Assuming that there is no authority for this, does this mean that a clerk who designs a IRS form has the power to set IRS policy? Maybe I don’t want to know the answer to the last question.).

   IRS employees do not give taxpayers fair consideration in equivalency hearings. In fact, in many cases the IRS uses the equivalency hearing for the sole purpose of gathering additional ammunition to use against the taxpayer. This is unfortunate because all taxpayers who come forward to resolve their tax liabilities should be afforded due consideration.

   I would suggest that the IRS implement a policy granting taxpayers CDP hearings, even though it is not required by Congress to do so (technically, such a hearing would not be appealable to court, but the IRS could at least suspend collections activities). I know that this is asking the IRS go to beyond the mere minimum that is required (which it basically never does), but it is the right thing to do.

There are two more suggestions for improvement. Perhaps I will suggest a few more changes in future blog postings.

April 20th, 2007 | No Comments »