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A 2017 case is a stark $300,000 reminder that the IRS is not bound by statements made by its employees, such as Revenue Officers. Tommy Weder was a responsible officer of a corporation which failed to pay its payroll taxes, and as a result, he was assessed a trust fund recovery penalty (TFRP) pursuant to IRC Section 6672. After he paid the $300,000, he filed suit in federal district court in Oklahoma requesting a refund. His theory was that the company had paid $300,000 towards the trust fund taxes, and that, therefore, his personal liability was reduced by that amount. In most cases, a taxpayer must pay any tax in full (not just a portion) before he or she can file a suit for a refund. However, under the so-called Flora rule, payroll taxes are divisible taxes, therefore, the taxpayer must only pay the tax due for one employee for one quarter.

The IRS took the position that the payment was not properly designated toward the trust fund, and that it was therefore entitled to, and did, apply the payment towards non-trust fund taxes owed by the company, which of course doesn’t reduce the trust fund recovery penalty. Weder didn’t dispute that there hadn’t been a written designation of tax. The payment had been made through the IRS’ EFTS system, and there was no designation. Weder argued, however, that the Revenue Officer that had been assigned to collection had met with representatives of the company, including its CPA, and that the Revenue Officer had demanded that the payment be made through EFTPS, and represented that the payment would be applied to the trust fund taxes.

The court ruled that absent a WRITTEN designation by the company, the IRS was free to apply the payment in the “best interest” of the government. The Court relied on Rev. Proc. 2002-26, which provides that absent written directions, the IRS “will apply payments to periods in the order of priority that the Service determines will serve the Service’s best interest.” It pointed out that prior to Rev. Proc. 2002-26 being promulgated, the prior IRS guidance was contained in Rev. Rul. 73-2. CB 43. That Revenue ruling only required that taxpayers give “directions.”

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Taxpayers and their accountants sometimes believe that tax evasion, especially criminal tax evasion, is reserved for “the big guys”. While the IRS likes to go after the big fish, even the minnows can get caught in the net. Take the case of Orlando Cardoso. He was a manager of the scallop division at an unnamed seafood processor in New Bedford, Massachusetts.

It appears from the indictment that something fishy was going on. Cardoso was receiving payments from his company’s supplier in 2012 and 2013. He deposited those payments, which came in the form of cash and checks, in his Bank of America account. Perhaps not surprisingly, he didn’t report those payments on his income tax returns.

The reasons why he didn’t report the payments is undisclosed, but any one or a combination of factors could have been at play.

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In a recent tax case, the U.S. Tax Court concluded that the IRS statutory Notice of Deficiency (a.k.a. “90-day letter”) issued more than three years after the tax return was filed was invalid, despite the omission of income from foreign assets. The taxpayer had timely filed his federal income tax returns for the years at issue, but he did not report income earned on a foreign account he held. The years at issue were 2006, 2007, 2008, and 2009. To obtain information related to the account of the taxpayer, and other similarly situated persons, the IRS had served a John Doe summons. The John Doe summons was resolved on November 16, 2010. However, the IRS did not issue a statutory Notice of Deficiency until December 8, 2014.

The taxpayer in this case timely filed his returns, which started the statute of limitations period. Absent circumstances that would toll or fail to initiate the statute of limitations, the IRS does not have an indefinite amount of time to assess tax. The IRS must issue timely Notices of Deficiencies and failure to do so can benefit the taxpayer.

When is a Notice of Deficiency Timely?

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The IRS has issued a notice stating it will begin the process of revoking passports of individuals with “seriously delinquent tax debts.” Seriously delinquent tax debts are those totaling more than $50,000 indexed for inflation. According to the Internal Revenue Manual the threshold is now $51,000. The amount includes not just the tax, but penalties and interest as well. However, the statute refers to “assessed” liabilities, and there are many instances where the IRS doesn’t assess all of the accrued interest and penalties so it is possible to owe the IRS more than $50,000, and still not meet the threshold. Notably, FBAR penalties are not counted towards the threshold.

Revocation of passports is not new. It was authorized by Congress in December of 2015 pursuant to new Internal Revenue Code Section 7345. However, the IRS has not implemented the program until now.

Although most tax attorneys and tax accountants refer to the IRS revoking passports, what actually happens is the IRS sends a certification to the State Department, and the State Department will take action to revoke the passport. The IRS will notify taxpayers in writing at the time of certification using IRS Notice CP 508C. The IRS will send the notice by regular mail to the taxpayer’s last known address. Since they will not be sending it by certified mail, there will be no way to prove that the IRS didn’t send it in cases where the notice is not received.

I Don’t Agree With the Findings of My IRS Examiner. Should I Appeal?
Appealing the results of an IRS examination is usually beneficial to a taxpayer if there is a basis for disputing the findings. The process doesn’t cost anything (although it’s highly recommended that you retain a tax audit attorney), and could potentially result in significant tax savings, making it a good investment for many taxpayers. You could go directly to Tax Court to resolve your issues instead, but this is a more costly procedure, and you can generally go to Tax Court after filing your IRS appeal if you still aren’t satisfied.

Keep in mind that you should have a legitimate reason for disputing the tax liability before filing an appeal. If your only issue is that you can’t pay the tax, you can file an Offer in Compromise or request an installment agreement that allows you to pay off your tax debt over time.

How to Request an Internal IRS Appeal

Is There Anything I Can Do to Stop an IRS Wage Garnishment?
It’s best to try to stop a wage garnishment before it happens. If you owe the IRS back taxes and do not have any arguments for why the tax assessment is improper or incorrect, you should consider entering into an installment agreement or negotiating an Offer in Compromise. This will prevent any collection actions—such as a wage garnishment or bank account levy—as long as you fulfill your end of the agreement.

However, you may reach the point where a wage levy is imminent and you don’t have much time to stop it from happening. Fortunately, the IRS is required to give you a Collection Due Process (CDP) notice before initiating a wage garnishment against you.

Stop Wage Garnishment at a Collection Due Process Hearing

When is Tax Debt Dischargeable in Bankruptcy?
Some types of tax debt can be discharged in a Chapter 7 bankruptcy, and a debtor may pay less than the full amount owed for some taxes in a Chapter 13 bankruptcy. The amount of tax relief that is available will depend on several  factors including:

  • The type of bankruptcy you are filing
  • If your tax debt is old enough to be discharged (explained in detail below)

How to Discharge Property From an IRS Tax Lien
The blanket IRS tax lien automatically applies to all of your property whenever you owe taxes to the IRS. This lien does not result in immediate collection of your tax debt like a bank account seizure or wage garnishment, but it does encumber your property, making it difficult to sell or refinance once the IRS files its Notice of Federal Tax Lien. If you need to sell your property or get rid of the lien, you need to request a discharge from the IRS.

How to Get a Tax Lien Discharged

Once the IRS records a lien, generally by filing it against your real property at the county recorder’s office, any subsequent purchaser takes the property subject to the lien. Since a buyer is not going to want to be responsible for your delinquent tax debt, you will likely need to negotiate a lien discharge before you can sell your home.