In my years of representing clients before the IRS, I have been asked some common questions about the IRS, filing taxes and collections. The following is a compilation of my responses to some of the questions I hear the most from my clients. I hope that this Q&A section answers some of the questions that you may have. As always, if you have additional questions, please feel free to call me and I will do my best to answer them for you.
What do I do if I have not filed taxes for multiple years?
The first thing to do when you have not filed taxes is to get them filed so you know how much you owe the government and can begin fixing the problem. You need to establish your filing compliance as soon as possible.
In some cases, we have had situations where clients honestly do not remember what years they have and have not filed for. The appropriate solution in those cases is to call the IRS and to do what we refer to as an analysis.
An analysis is a comprehensive review of your account to determine what returns you filed, what returns you have not filed, what returns the government has filed for you, and any other pieces of information that you need in order to get into compliance. What information does the government have on record for you?
In doing the analysis, you are going to create a roadmap of everything that you need to do to get into filing compliance. Now, just because you have not filed a return in a particular year does not necessarily mean that you are going to do so.
We see this a lot with older tax years. If you have a return that is close to the statute of limitations on when collection expires and the government has filed for you, you do not want to file a return. Let the statute expire and let that liability wipe itself out.
When we do an analysis, it is not just handing you a list of what returns you need to file, it is going through and actually figuring out the solutions and the solution does not necessarily depend on the IRS claims, although they factor in. The solution is about what the goal is. Do you want to pay the liability? Do you not want to pay the liability? What are your goals for resolving them?
In order to get yourself in filing compliance, we give you that list. You file all your returns and then once the returns have been filed, you are going to get to a number. Once you have that number, you can determine what collection resolution is most appropriate for you. Even if you have not filed 20 years of returns, there is always a solution that you can put in place to make life easier for yourself.
Will I go to jail if I owe money to the IRS?
The answer is generally no. We do not have a debtors' prison in this country, so the IRS does not throw people in jail just because they owe money in taxes. Rather, the way the IRS deals with that is by taking an increasingly serious set of collection actions designed to get you back in compliance.
When people owe money to the IRS, jail time only comes into play when they are willfully avoiding their obligation to pay. As long as you are taking action to get in compliance and are not trying to do things to subvert the IRS, you are probably not going to go to jail for your liability.
However, even with jail off the table, civil collections is not a fun place to hang out. The IRS takes really, really harsh actions against taxpayers in an effort to force them into compliance. Just ask anybody who has ever been through the process. It is definitely not a place you want to stay long-term.
The best thing you can do from a civil compliance perspective is to move yourself quickly out of that process and into a collections resolution, so that you can operate and have room to breathe, earn income and not worry about the IRS.
Can tax debt get discharged in bankruptcy?
Yes, with an asterisk. Number one, it has to be a certain type of tax debt. For example, individual income tax debt can get discharged in bankruptcy. Number two is, it has to abide by certain rules.
Number one, you have to file a return and accurately list the debt and number two, you have to give the government a reasonable amount of time to collect that debt. Number three, there are certain circumstances where debt is not dischargeable.
Bankruptcy is a good option for distinguishing large tax debts or for debts where you are absolutely 100 percent you are not going to pay. Bankruptcy is also a good option if you are mixing in large tax debts with other forms of liability that you are never ever going to be able to pay.
However, generally speaking, again, if you have just tax debt, bankruptcy may not be the best option because the IRS has created administrative resolutions for dealing with tax debt that do not involve filing bankruptcy.
In our minds, bankruptcy is usually considered a nuclear option. While it does have its uses, it is definitely worth sitting down, discussing the situation with a tax attorney, and understanding whether or not you are a good candidate to file for bankruptcy and whether or not your tax debt can be taken care of using other methods.
How can you protect a new startup business from personal tax debt?
To be clear, people and corporations are separate. If I am sitting in front of you with a piece of paper right now, I can draw a circle that represents a person and another circle that represents a business. Those two are separate.
Once a business entity is created, the personal tax liability associated with somebody else should not impact that business. It is not like when you get assessed for tax liability. It can just skip over into an entity unless you have a pizza shop and you shut down the pizza shop and you open up another pizza shop. That would be what we call a transfer reliability or an alter ego.
In the case of a new business that does not have anything to do with a delinquent personal or business tax liability, liabilities just do not skip into businesses. The risk is when you have a situation where you have multiple partners and one of the partners has a delinquent tax liability.
The problem is when the IRS takes collection action against that person they generally put a lien on them. What a lien does in the context of somebody owning a business is it attaches, technically, to the shares of that business.
Now that does not necessarily have to prevent somebody who has a tax lien from owning a business, but it does potentially have consequences if and when that business is sold.
When you are dealing with this situation, it is obviously very fact-specific. It depends on the size of the business. It depends on the consequences and the nature of the partners. You want to make sure that you plan this out appropriately.
You, the person who has the tax liability, is appropriately dealing with it even if a lien is in place and the business can still be started. It just takes a little bit of time and effort and planning to get it done.
I would encourage anybody starting a business, and particularly anybody who has historical tax issues, to reach out to an attorney for a consultation.
They can usually be resolved very quickly, but it is important to do a little bit of planning work at the beginning so you understand what the impact would be on the corporation, if any, at a later point in time.
How do you deal with collections issues for high-net-worth clients?
High-net-worth clients present several challenges from dealing with things from an IRS perspective. The first challenge that you are going to have is that high-net-worth clients do not fall within the IRS's usual guidelines for ordinary and necessary expenses. Take, for example, San Diego. For a single person living in San Diego, the local housing and utility standard is about $2,500 a month.
For high-net-worth clients, this presents a big problem because you are dealing with income levels that are way above the IRS's ordinary standards. The fact of the matter is, is you may have somebody with an $8,000 mortgage or a $10,000 mortgage or $25,000 mortgage. Just because the IRS disallows that $25,000 mortgage or at least a large chunk of it, it does not mean the taxpayer is not actually paying that much for their mortgage.
There are a variety of complicated issues like that that go into representing a high-net-worth client. The trick with high-net-worth clients is being practical about the fact that they could probably pay the IRS liability in full if they are asked to. They may just be running into a temporary cash-flow situation or they may need long-term help to spread out their liability, however large it is, over a period of time.
This is a relatively simple math equation. It is just about managing cash flow and convincing the government to take less based on certain lifestyle choices. That is not a hugely complicated problem. Although depending on the income level of the person we are dealing with, it does get a little technical.
The harder part of the problem is factoring the human equation because a lot of times you are dealing with a revenue officer or with another IRS employee who makes less than $100,000 a year and living in California.
When you are dealing with somebody who makes under $100,000 a year and you are dealing with somebody who makes $100,000 or more a month, the income inequality and the wealth discrimination that occurs become really challenging.
The IRS agent may say, "This person makes more in a month than I do in a whole year. Why are they unable to pay their taxes?" The reality is that it is slightly insensitive to the particular person's situation.
In my experience, when a client has more money, their situation is more complicated. They have more moving pieces. They have more investments. They have more businesses.
From an IRS perspective, this creates a big challenge. The biggest issue for high-net-worth clients is protection. You want to protect a client and their assets against the imposition of the government or prevent the government from coming in and trying to kill the goose that lays the golden eggs.
A lot of government agents have not run businesses before. They do not have real estate investments. They do not have partnerships. They do not have a variety of things that high-net-worth clients have.
From their perspective, when they see large liabilities, when they see large amounts of income, the tendency is, "Well, why are they not able to pay us and pay us biw?" The biggest part of what we do at our firm is help translate the situation between the client and the IRS in terms the IRS can understand.
That is the challenge with high-net-worth clients. If you are a high-net-worth person, and a high-net-worth person can basically be described as anybody who has an income of $20,000 a month or more. If you fall within that category, then we are going to have to do some a little bit of complex defense when it comes to your collections matter. If not, the IRS will come in.
The IRS will mandate terms that there is no way that you can accept, and then there will not be an agreement between the solution that you propose and the solution the government proposes.
I would encourage you to sit down with either me or another tax attorney, address the situation, and try and find common ground. It does not have to be complicated.
It does not necessarily have to be expensive. By putting a plan in place and executing it, it is going to lead you on the path to better success and then navigating through your tax issue.
If I owe money to the IRS, how do they look at credit cards?
The IRS takes the position that they are not a bank, so if you owe tax debt they consider themselves to be the superior creditor. Anything that is an unsecured debt, including a credit card debt, the IRS considers itself to be more of a priority than that debt.
When negotiating an IRS payment plan, they will not allow you to write off your credit card expenses. This is a big shock for taxpayers because when going through income minus necessary expenses, a lot of people will list their credit card debt.
Unless that credit card debt was incurred for business expenses or for something else that the IRS considers necessary, they will not write in minimum credit card payments and will require you to pay a monthly installment agreement payment that is much higher because they are not including the credit card debt in that.
Just keep in mind that the credit card debt is not a saving grace. If you have a substantial amount of credit card debt and it is affecting your cash flow, you are going to want to speak with your attorney or qualified representative to help you.
If I owe money to the IRS, how will the IRS look at expenses for college-age children and private educational expenses?
Here is the bad news. When factoring in an IRS payment plan or when negotiating a collection resolution, the IRS does not include any expenses that you have for your college-age children or any private educational expenses.
The reason for this is that the government views those expenses as luxury items, even though most taxpayers in that situation would disagree. A lot of the pushback that we get from taxpayers is, "Well, if it is a choice between paying for taxes and sending my kids to college, I am going to send my kids to college."
While I understand that sentiment as a parent myself, you have to understand that the IRS employees that you are going to negotiate with often make a salary that is a lot less than yours, so you are dealing with somebody who would also view that expense as a luxury item.
This is particularly true for kids who are over the age of 18. The IRS considers those children to be adults and therefore kicks them out of the nest. Now, with that said, it does not mean that you cannot get an allowance for educational expenses or for supporting college-age children.
There are some tricks and tips for doing that. You are going to have to be very careful about how you list those expenses in the financial statement. Rather than go into that, what I recommend that you do is contact a qualified representative or a tax attorney and have us walk you through how to best include those expenses and how to get the resolution that you are ultimately seeking.
Will the IRS take my car?
The IRS had a long history of doing really nasty things to people in the early-to-mid '90s. One of the things that they would do to people is call them in for meetings and then, they would take their cars while they were in the meetings. They would tow and impound them.
Congress responded and implemented the IRS Reform and Restructuring Act, which does not say that the IRS cannot take your car, but generally speaking, there are protocols in place. The IRS is not just going to come by and sweep your car off the street. However, the IRS does view your car as a physical asset.
If there is value there, the IRS is going to want you to borrow against the car, or they are going to want you to sell that asset, but it is not like they are wandering around in tow trucks and they are just going to lift the car off, or out of your driveway. In addition, for a lot of people, their car is a necessary expense for them or a necessary asset, because it drives them to work.
Generally speaking, IRS agents look at cars as reasonable and ordinary living expenses, because they view them as a part of essential transportation. Yes, the IRS can technically take your car, but no, they are probably not going to.
While every IRS case is unique, many of them have common threads. That is why I included this chapter with some of the most frequently-asked questions and my responses. I hope that it provided you with the information you need to address your particular situation.
If your question was not answered here, give me a call. There is not much that I have not heard, but I am here to help you get to the bottom of what is going on and to find a viable solution.