Sam Brotman, JD, LLM, MBA July 8, 2020 43 min read

An Overview of Federal Tax Matters

Federal Tax Defense

Who is afraid of the big bad wolf? The IRS has long been an organization that has struck fear in the hearts of many people. Owing money to the government or being the subject of a government investigation conjures up images of agents in your home or raiding your office, hauling you away in front of your family, and throwing you into federal prison.

While some of these images are sensationalized and often tied to the actions of the criminal investigative division, the IRS and their agents do have a tremendous amount of power.

Our system is set up to maximize their ability to do their jobs, even sometimes at the expense of the individual taxpayer, so the IRS has broad power granted to them to investigate, subpoena, demand records, assess penalties, file liens, seize assets, and, yes, sometimes put people in jail.

So when faced with a situation where you are against the full force of the United States Government, you often times will want a skilled tax attorney who will stand up for your rights and get them out of your life as quickly as possible.

Not All Tax Firms Are Created Equal

Unfortunately, and perhaps even worse in some sense than the IRS themselves, there is a whole cottage industry that surrounds “tax resolution.” If you have ever watched those ads on late night TV that offer to settle your tax liability for pennies on the dollar, then you will know what we are talking about.

Even if you have not, a quick google search on owing money to the government, will reveal all sorts of bad actors. These firms are not law firms, but hold themselves up as experts at tax relief perhaps even stating that they have a team of tax attorneys and CPAs who will fight for you against the IRS.

Some of them use fear marketing to get your attention and others will dress themselves up with fake customers reviews, BBB ratings, and stock images of smiling people that you can imagine are now free from their tax debt.

These organizations tout their experience and credentialing, but are nothing more than fake lawyers (and are quick to identify that they are not a law firm to avoid getting sued).

In reality, many of these organizations engage in predatory tactics and are a thin disguise of slick marketing and high pressure sales teams that steal their customers money and often times get them into worse shape with the IRS then when they started (they can charge you more if the situation gets worse).

The problem is that they are not law firms and not subject to things like licensing requirements or state bar restrictions. Some of them are just lead generation companies who will sell your information or will transfer your live phone call over to the highest bidder. You are then sent to some sales person, who is being paid a commission for converting you, and pitched a tax resolution in multiple phases.

Sometimes there is a large vaguely defined but all-inclusive up-front fee for their services, sometimes they engage in “sucker pricing,” where is where they quote you a low fee to start and hit you with high fees through the process or when you need them most.

A lot has been written on these firms and the Federal Trade Commission and many state agencies are shutting them down one by one.

We mention this at the outset because we know how effective these organizations are and how dangerous they can be. They prey on people who are in a weakened position and will do or say just about anything to get you to pay them.

And it is amazing how many people fall for their tactics and how many messes we have to clean up for people who have been victimized by these companies. That is why, as a starting point, we just want you to know what is out there.

 

CPAs – Why Often Your First Line of Defense May Not Be Your Best One

First, we love CPAs. They are our channel partners and we rely on them every day in our practice. There are some who are excellent at resolving tax problems. They are often the first line of defense for many taxpayers because, well “why would you not go to the same person who prepares your taxes for help with a tax issue?”

There are sometimes a lot of problems with using your CPA to resolve a dispute with the IRS though and some CPAs will create more problems for their clients then they realize when trying to solve a tax issue (and they often do so in good faith).

The primary issue with CPAs is the unrealistic expectations that the general public places on them. Most people equate their accountant with their taxes, so for every tax issue that comes up, they use their accountant as the first line of defense.

The problem is that while CPAs may know a lot about tax law, they generally do not know a whole lot about tax procedure. See, people’s expertise is a function of what they do all day long and CPAs prepare tax returns vs. dealing with audits or helping people who owe more to the government than they can pay.

That is what “Certified Public Accountant” means. You are certified to prepare financial statements, including tax returns, that the public can trust in.

What hurts the situation is that CPAs are used to their role as the tax person in chief and are used to dealing with unfamiliar tax issues that their clients bring to them and ask for guidance. They are not used to consulting an attorney on a tax issue when they might need help and instead will try and solve the problem themselves.

The CPA uses the compliance style approach that they would use prepare a return with and will often times reach out to a government agent with the intent just to give them what they want. 

The problem is that many IRS agents in collections or examinations will take advantage of the situation to further their own objectives. Most CPAs do not realize that there is often a more client beneficial solution to a problem then just simply doing what the agent wants.

And, generally speaking, CPAs are not usually the most confrontational people in the world and are not trained in advocacy, so are frankly not used to the fight that comes sometimes with tax controversy matters.

Our firm prides ourselves on the relationship we have with the CPAs that we work with. Although collaboration in tax is not common, we think it should be, and encourage our CPA partners to reach out to us on tax dispute issues whenever possible (much like a general practitioner doctor would reach out to a specialist if you got sick).

They have their swim lanes and we have ours, but it is the collaborative process that is often best for the client. The point is: we may not know your CPA personally, we are sure they are a nice person, but you should make sure that they are the right person to handle your dispute with the IRS.

 

Why Our Federal Tax System is Often Unfair to Taxpayers

Yes, the deck is seemingly stacked against you when it comes to resolving things with the IRS. The reason the IRS does the things it does and the reason the system operates the way it does is because of something called the tax gap.

The tax gap is the concept that there is a “gap” between what would happen if all taxpayers did everything that they were supposed to (i.e. filing correctly and on-time and paying on-time) and the reality of the situation. And the last time that we checked, our US tax gap was somewhere around $485 billion dollars.

That is a HUGE number and, on the enforcement side, the IRS is essentially designed to do everything it can to close that tax gap. So what comprises that is 1) people who do not file, 2) people who do not pay (IRS Collections), and 3) people who underreport their proper tax obligations (IRS Examinations).

So, the IRS realizes that all of this is an issue and, therefore, has created a system designed to combat it as best it can. In reality, the IRS is an organization of limited resources, so it does not have the manpower to send an individual agent after everyone, but it does have experience combating these problems and does have some key advantages on its side.

Let’s start with IRS collections. First, the IRS has access to incredible amounts of information through its own systems, other government systems, and information sharing agreements with all the states.

Think about how much of our lives are public information: the IRS has our personal information, it has where we work (it actually knows exactly how we earn all of our money), and, if it wanted to, it could very easily send an agent to where you are right now to come and get you.

Or it could visit your bank or your employer, or talk to your neighbors, friends, and family members. Most people are not ghosts, so we are not hard to find if the government wants to come after us.

Second, the IRS has access to technology. With its internal resources becoming limited, the IRS is increasingly leaning on technology to accomplish its objectives (odd as it sounds for an organization that still uses fax machines).

However, the IRS can initiate all sorts of actions with a push of a button or, now, increasingly through automation. Have you been receiving threatening letters from the IRS? More than likely, those are the product of a computer and not a human. Equally, the IRS can zap all of your financial accounts with a few programmed instructions and some pieces of paper being sent out.

If Amazon can utilize technology to get stuff to your house in an hour, you really think that the federal government cannot use its technology to squeeze you if you owe money to the IRS? And the more technological we become as a society, the better the IRS becomes at shrinking that tax gap through technology.

What prevents the IRS from going nuclear on you is that we are a country that is built on laws and the IRS is bound to follow those laws. Internally, the IRS is also a massive organization that is dictated by processes and procedures.

With that said, while we do have a series of measures designed to protect us as taxpayers, you must also understand that our laws are principally written to facilitate tax collections, so that the government can collect the essential revenue that it needs to operate.

We need money to fund the military, build schools and keep the lights on in DC. Our laws facilitate the IRS being able to collect money from people and allow them to do it quickly and efficiently.

The size and scale of this system is designed to do this for everyone, so it should not come as a surprise that it does not address a lot of individual and business taxpayers concerns or take into consideration their individual situations.

Owe money to the IRS? The government’s position is “pay me and do it as quickly as possible, or I will bring consequences upon you.”

We do not mean to over sensationalize the situation, but we think it is equally fair to tell you that IRS policy gives little care for individual situations by instead administering our tax policy with broad brush strokes rather than individual situations.

So, for those that do not fit within the IRS’s perimeters, the system can come across as cold and uncaring. IRS payment terms or collections resolutions can seem unreasonable (struggling to deal with common life situations such as divorce, children in college, religious obligations, health issues, etc.) and taxpayers often deal with a high degree of frustration during the process.

 

The IRS and Businesses - A Bad Situation Gets Worse

The a tax problem with the IRS is even worse for businesses and their owners. In a nutshell, the IRS simply does not understand how businesses are run and, therefore, conflicts between a business with tax issues and the IRS happen all the time.

To the IRS, it would rather kill the business and looks toward liquidating assets, seizing accounts receivable, levying bank accounts, and otherwise disrupting operations. Particularly with businesses that are cyclical or those delays in payment between the performance of services/delivery of goods and payment, these routine issues will often translate into things the IRS does not understand.

For example, a revenue officer examining business operations in the summer when considering a payment plan, often does not take into account the seasonality of a business when mandating a payment amount. So, as you can imagine, conflicts between the IRS and businesses happen all the time.

Some of the worst situations involve businesses with single owners or that are controlled by small groups of people. For example, when a business has payroll tax issues, the IRS will seek to assess the officers personally for the amount of unpaid liability attributable to their employees (in what is called a Trust Fund Recovery Penalty).

This leaves both the business and the owners owing a liability to the IRS. The worst part though is then the IRS seeks to collect from both parties, not factoring in the fact that many business owners pay for their personal expenses through distributions.

Therefore, the IRS is essentially double dipping by trying to take it on both the business and the personal sides.

Payroll tax collection issues are by far the worst thing for a business and are something taken seriously by IRS. Assignment to a local agent happens much faster on the payroll tax side of things vs. on the income tax side.

A business could owe a quarter million dollars in income tax and not elicit attention, but the same business owing two quarters of payroll tax liability could bring about a visit from an agent.

The IRS also tends to go after the self-employed and other independent contractors. A self-employed person who is not filing then you will have a business that's operating off the radar and that is a larger source of revenue for the IRS.

Not surprisingly, the IRS pursues non-filers who are independent contractors and small businesses because that is more of lost revenue to the Service than a W2 filer who is going, working their job, filing every year, withholding taxes and submitting to the IRS. Non-filers are a really big issue for the government.

 

Payroll Tax Matters – Corporate Collections

Whether at the IRS or the state level, corporate collection issues are often the most challenging and most difficult matters to resolve. Both entities take a very aggressive approach toward corporate collections and often times will jeopardize the health of the business by being overly aggressive.

Even though it seems counterintuitive, the “killing the goose that lays the golden eggs” strategy is often the one that collection agents employ by levying business operating accounts and accounts receivable. Often times, they will show no remorse toward your business or your ability to generate a living and provide for you and your employees.

One of the hallmarks of our practice has been in defending businesses against the wrath of the federal and state governments. It takes a business owner to know a business owner and Brotman Law takes a “business first” approach to solving tax problems.

Recognizing that businesses are unique, we understand that the goal is not just to protect the business assets, but also to preserve cash flow and not let the tax authorities inhibit growth. We deal with any and all immediate threats to the business and then work to put together a plan that leads to long term business success as well as that will satisfy the taxing agencies.

 

Our IRS Collections Practice

So, to recap, the IRS policy when it comes to collections is to come after people who are either not filing or not paying. Because of this, what you will find with the IRS is a series of actions that speeds up locating delinquent taxpayers, putting pressure on them, and essentially forcing them into compliance by beating them into submission.

The laws and internal policies of the IRS are essentially written to help them facilitate that process, even above being particularly flexible to the taxpayer in any individual situation. The consequences are harsh and so an experienced advocate is often a good investment when fighting back against the IRS.

The IRS Collections department often takes a tough and unreasonable approach when you owe a liability to the government. Rather than express sympathy for your situation, they will use harsh standards and make unreasonable demands in order to get the most money out of you per month.

The sacrifices that they ask you to make are often too much for most taxpayers to bear. In addition, taxpayers who do not agree to their demands are often subject to forced collection action, wiping out bank accounts, garnishing wages, and generally making it extremely difficult for you to live and support yourself.

Brotman Law eliminates the threat and shifts the focus from the desires of the government to the needs and future goals of our clients.

We strategize and plan for financial and personal success, determining the cost of what it takes to maintain your standard of living and then working the IRS into that framework rather than the other way around.

Our strategy minimizes client contact with the Service and the intrusion of the IRS into their daily lives. We aim to preserve your standard of living and help you to keep the things which matter most.

 

Other Frequently Dealt With IRS Collections Issues:

IRS Offers in Compromise

There are times when a tax debt becomes insurmountable given a person’s financial circumstances or where there is a serious doubt as to the liability owed. Although the IRS has created a program to settle a person or business’s tax liability (Offer in Compromise), it has placed stringent restrictions on the criteria that it uses to determine offer acceptance.

In addition, IRS personnel are trained to screen offers in compromise and reject or modify offer amounts, which often times make them unworkable for the taxpayer. Taxpayers are often confused or angry at the Service for what seems like an unfair process and the fresh starts promised seem unobtainable.

Brotman Law helps to dispel the mystery from the offer in compromise process. In contrast to many firms, we prescreen offers using the same formulaic methods that the IRS collections divisions uses for acceptance and only submit offers in compromise that we feel have a high chance of acceptance.

If a client comes to us and presents circumstances that we do not believe will be approved, we formulate a strategy and work with them to present an offer in compromise that will be acceptable to the IRS. Additionally, we always strive to do what we can to maximize the client’s tax savings and provide with the fresh start that they deserve.

 

Innocent Spouse Relief

The IRS generally holds both husband and wife liable for the tax liability shown on their joint income tax return. Under normal collections protocol, since both spouses are held jointly and severally liable for the tax liability shown on the return, the IRS will take enforcement actions against both of them and they are held equally responsible for the liability.

Innocent spouse relief, although available through the Service, is the exception rather than the rule. This is true in circumstances where only one spouse earned the income associated with a tax liability or in cases of divorce where one spouse has agreed to accept liability for any taxes owed. IRS collections does not honor 3rd party divorce agreements.

You should not be punished for the mistakes or wrongful conduct of your spouse/current spouse. Innocent spouse situations are often very fact specific and

Brotman Law takes a deep analytical approach to solving the problem. We analyze the three available avenues of relief that are available through the innocent spouse program and determine which method is going to best meet your needs.

The goal is defense. We work hard to preserve your quality of life and your standard of living. Furthermore, we recognize the effect that divorce or marital separation situations affect your normal life and plan for short term needs as well as long term goals.

Penalty and Interest Abatements

If you have ever owed a balance to the IRS and received a statement from them reflecting the total that is owed, you know exactly how much that penalties and interest can add to that liability.

Many of our clients are perfectly agreeable to paying the tax that is owed; however, penalties and interest associated with the account can often double or triple that liability.

The IRS does not differentiate between the balance that is owed for tax and the balance owed for interest and penalties. It will take the same collection actions to make sure that the total liability is paid in full regardless of the taxpayer’s circumstances.

Brotman Law has had a great track record of success in getting interest and penalties abated through the Penalty Appeals Service Coordinator and through the IRS Office of Appeals. We understand the finer legal points and other criteria that go into the IRS’s determination on whether or not to abate penalties and interest and craft abatements that hit on several of these major issues.

Our background the case law as well the more recent court decisions and our knowledge of internal procedure allow us to go much further on the issues presented and we are often successful at getting abatements accomplished on the first attempt.

 

IRS Audits

Overwhelmingly, the biggest problem that the IRS faces is underreporting. While it is easier to deal with someone who owes you money, because you are at least aware of that fact, underreporting is much more complicated to detect and the IRS does not necessarily know the motivation behind it.

One one hand, we may have people who may be making an innocent mistake on one side of the fence, either through their own reporting error or an error that their CPA made (however, just because the CPA made the error, you are not completely absolved of consequences).

On the other end of the spectrum, we have people deliberately underreporting and are willfully not paying the correct amount in taxes. And then you have everyone else that just falls into the middle.

The key function of IRS examinations is to target tax returns that have a high propensity for error, or a high propensity for fraud. When dealing with IRS examinations and if you are a practitioner that has done any frequency of IRS audit work, you're going to start to notice patterns in the types of people that get audited.

For example, it's no surprise that cash businesses get audited, or that attorneys get audited, or that hair-salons and taxi-drivers and restaurants get targeted either. What we often see in our firm is that the same type of industries and businesses tend to get audited over and over and over again for various types of issues.

Receiving an audit notice in the mail or being contacted by an IRS Revenue Agent is a scary experience for many taxpayers. Audits are intrusive, time consuming, and often designed to maximize the revenue that the government receives.

The IRS audits those that it feels there is the biggest chance for an adjustment in their favor and can cost a taxpayer thousands, sometimes hundreds of thousands of dollars as a result. Additionally, some revenue agents will take advantage of taxpayers and use their knowledge of the tax code to trap you and/or open up multiple years. 

When you file your taxes, the IRS has developed two methods of scoring your return to determine whether or not you are going to get audited. These are called a DIF Score and a UI DIF Score. The DIF Score stands for discrete income function.

The score is a measurement of all of your information and what is the risk that your tax return is not accurate based on a variety of factors.

Think about it this way. When you file your tax return, your tax return is a treasure trove of information about you. It tells the government who you are, where you work, how much money you earn, how much you pay for the house that you own, etc…There’s a variety of information here that the IRS looks at and uses to create a statistical profile for you. Then that profile gets compared against others who are similar to you.

For example, if you're an attorney in San Diego, the IRS would look at you in comparison to other attorneys in San Diego (or who live in your zip code) and who make roughly the same amount of income that you do. You and these people will all end up plotted on a graph somewhere and scored based on all of the different factors.

With everyone scored, you will end up with people who have a high end score and those who have a low score. It is those people that are more likely to get audited or who may be flagged for manual examination by a person to determine whether or not they are going to be audited.

The reason for this is that these people are outliers and their story does not exactly make sense or fall within the “normal” as defined by everyone else.

Along with the DIF score, you have the UI DIF score which the UI DIF score is representative for unreported income. It looks at a taxpayer’s return and assesses the potential that they have for unreported income. Those numbers get scored and examined in a very similar fashion.

So, we have people ask us all the time “what can I do to make sure my return does not get audited?” And, you see, the answer is much more complex because it is not just about your return, but your return’s relationship to others in its peer category.

A lot of prospective clients get this wrong and will scale back on rightfully entitled to deductions in order to perceive less of an audit risk. “Well, they rationalize, “if I give the government back some money or am less generous with myself, then they won’t audit me.”

We hope you can see the fallacy in that logic now. People do not get audited because they are too aggressive or too conservative. In fact, being conservative often means that you are just paying more in tax to the IRS than you should reasonably be paying. Instead, people  get audited for the reason I just mentioned, is that they fall at the top or the bottom end of that DIF or UI DIF line.

A word of warning. We used to tell clients that audits were nothing to be afraid of. After all, an audit is just simple a routine check of the numbers on your return and you may have just ended up on the wrong side of the DIF score for one reason or another.

However, these days, audits mean something else entirely. Because of limited resources, the IRS is left to audit fewer returns in person, so they specially select the ones that they are going to choose for audit. That means, if you get an audit notice in the mail, you should know walking in that the IRS has a strong belief already that they are going to get some sort of an adjustment for one reason or another.

This may be a particular issue or just something general about the return, but the operative question to ask at the beginning of an audit is “why me” and to generally expect that you are not walking out of the situation unscathed without a fight.

There is nothing more that most agents dislike than to dedicate a ton of time to an audit and not get something out of it. They feel like they missed something or that not making an adjustment to the return means that they did not do their job as well as they should have.

Our firm immediately levels the playing field in an audit. During the initial consultation, we examine the return under audit along with any correspondence received and immediately work to come up with a game plan for effectively dealing with the auditor.

We identify categories or items that may be high risk and develop a strategy with our clients for minimizing their biggest issues and moving them out of examination as quickly as possible. Preparation and presentation are the keys to success in any audit. IRS auditors may appear to wield a lot of power, but they are often no match for an attorney with a superior legal knowledge base and a keen understanding of IRS procedure.

We utilize our tremendous experience in audits for the benefit of our clients and to yield exceptional results. Our knowledge is your power.

Payroll Tax Matters – Audits

For some businesses that rely heavily on contract labor, the threat of an IRS or Employment Development Department audit is serious and can be potentially crippling to a business. Because of the amounts in controversy, liabilities at the end of payroll tax or independent contractor audits can be in the hundreds of thousands if not millions depending on the size of the business.

For the taxation agency revenue agents, often these inquiries will span multiple years and investigations are conducted with the goal in mind of generating revenue for the federal government or the state. In addition, the penalties associated with these matters can be significant.

Determining payroll tax liability and whether a worker is an independent contractor or an employee is a multi-faceted inquiry. Luckily, Brotman Law understands the subtleties involved in the analysis and will work to present the facts in the light that is most favorable to the client.

Our knowledge of the law and of the federal/state audit procedure gives us the upper hand in the majority of cases with the tax agencies. We often know the direction of their investigation before they take action, which allows us to plan better and to navigate our clients through the audit process with as much ease and simplicity as possible.

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Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law

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