That was the question that I posed to retired IRS agent Wayne Vinson. We have all heard horror stories about the treatment of tax payers that have tried to dodge the IRS and have been caught. There are at the minimum huge penalties on the delinquent taxes to be paid, and in some cases even criminal proceedings that can result in jail time. One of the most famous cases being actor Wesley Snipes, who managed to score himself a 3 year ‘all expenses paid’ vacation at Club Fed.
Obviously the Wesley Snipes case was a little unusual. If you are not aware of the story, Forbes published a great summary of it, you can read it here.
What though are the ‘moving parts’ for the IRS when dealing with a tax situation? Veteran IRS agent Wayne Vinson had this to say:
It depends on why they’re on your back. Lets start with an undisputed fact: you owe the government back taxes. For the IRS to do anything to you it has to have an unpaid assessment. Normally, a tax assessment is caused by the filing of a federal tax return by a taxpayer. The tax return is taken in by the IRS and at some point it is assessed; that means it is put on the books of the IRS, for a particular amount, on a particular day. If the tax is not paid, it is now a collectible debt.
On the date of assessment a Federal lien arises by act of law. There is no paper filed in the courthouse where liens and mortgages are usually filed, not yet, but there is a statutory lien in existence. This unfilled, secret lien is not good against legitimate sales, mortgages, or judgment creditors. It is good against fraudulent transfers and the like. But a written lien will probably be filed with the county Recorder soon.
The date of assessment is important for another reason; the collection statute arises on the assessment date and goes for 10 long years. It can be extended by such things as bankruptcy–IRS cannot try to collect while the taxpayer is in bankruptcy so the collection statute is suspended. The statute is extended by the amount of time the taxpayer was under the protection of the bankruptcy court.
Over a few months the IRS sends a series of bills to the taxpayer. If the tax isn’t paid, a tax account is made up and sent to a group of IRS people who try to collect it by phone. IRS collection policy has softened dramatically since I was hired by the IRS in 1959. This has been caused in part by the fact that there are far fewer tax collectors than previously; in part by a lessening of IRS powers to protect taxpayers from bullies in IRS (there were some);in part by a huge reliance on the effectiveness of computers in collecting taxes.
In any case, even taxpayers who owe large tax liabilities and who are cooperative may never deal directly with IRS personnel. They can request an online payment agreement, or use form 9465 to request a more traditional agreement. Field people take far fewer hard collection actions than previously—like seizure and sale.
I want to distinguish here between income and employment tax cases as to the options that taxpayers have. Employment taxes are income tax and Social Security tax that are withheld by employers from the wages of their employees. There are strict rules for turning these taxes in to the government and big penalties for being late or not turning them in at all. Employment tax delinquencies usually arise when businesses are losing money or failing. In those cases the employers don’t turn the withheld taxes in to IRS: they use the tax money for other expenses to keep their doors open or, they really never had the tax money—they barely scraped enough money together to pay their employees net pay.
IRS looks on situations where the employer does not turn the tax money in to the government, as tantamount to embezzlement. If the employer is still in business, IRS will often take hard actions to close the business up, including seizure.
If the employer is out of business IRS mops up, selling assets if there are any. If the taxpayer was a corporation, the revenue officer will assess the 100% penalty as an individual liability against those people who should have caused the tax to be paid. The amount of the 100% penalty is the total of the unpaid, withheld tax—all of the income tax and half of the Social Security.
If you are an in business taxpayer who owes employment taxes, your options are few. An exception to this is where a large business employing lots of people in a small town or rural area, goes delinquent. In that case IRS will really work with the taxpayer to avoid closing it down. IRS would work with the business as long as it stayed current on current taxes. That is a really hard situation for the revenue officer who has the case.
Back to income taxes and defunct business taxes—options. If the tax accounts are not too large, present procedure will probably let you make a payment agreement if the agreement isn’t too long. This liberalized collection procedure came in after I retired and I don’t know the details.
One option is to pay in full if you have the ability to do that. That is probably the least expensive way to do it. IRS has a late payment penalty of ½% changing to 1% at some point.
But what if you cannot now pay anything on the tax—a true hardship. The revenue officer can investigate and report the account as uncollectible. This requires supervisory approval.. The account is removed from active inventory and IRS gets off the taxpayers back. I talked about this earlier, I think. The case can be reactivated and collection resumed. All tax refunds from later filed returns are applied to the old taxes. The collection statute continues to run.
An Offer in Compromise is an interesting option and one which is increasingly used. If you cannot pay the tax you owe before the collection statute runs out, and the value of your assets is way less than the tax, maybe an offer in compromise would be accepted. There are 2 kinds of offers: one payment and its done and the deferred payment offer, where you would have to pay something from income.
IRS used to have a firm rule; if the value of your assets exceeded the tax due, no offer would be accepted. But there are too many cases where you have equity in a house and a car…and the house is full of your kids (one of whom is in an iron lung and never leaves the house) and the car is necessary for you to get to work, and your aged mother lives with you, and she has no medical insurance… and the equity in the house and car exceeds the tax due by $9,000 . You are just barely making enough to feed and clothe all your kids and your poor old mom. You are cooperating.
IRS sure as heck will not take distrait action of any kind against you., even though you owe $10,000.
And you have a well to do uncle who is willing to give you $5,000 if it will settle the case once and for all. He knows he’ll never get a penny back but he wants to help. I think an offer might be an excellent option for you. IRS can collect $5,000 instead of nothing—the revenue officer is ready to report it as noncollectable.
The bottom line as I see it, is to not get on the wrong side of the IRS in the first place.Wayne Vinson’s comments have raised a number of questions. I plan on following those up in some future articles.
Wayne Vinson was an IRS agent for 33 years and the author of a real thriller, Tax Collectors and Other Sinners, the story of a psycho killing tax collectors. It is available at amazon.com as an E-book or soft cover.