Booker T. Washington said, “Nothing ever comes to one that is worth having, except as a result of hard work.” There is no easy solution to resolving tax debts. Anyone who claims to be able to eliminate tax debts quickly for pennies on the dollar is either a huckster or a fool. This is especially true for long-term non-filers. A professional with experience, knowledge and sound judgment can help a client face the reality of what can and cannot be accomplished. Then, a course of action can be determined to stop digging and begin to climb out of the tax hole.
I receive many inquiries from people who have tax troubles related to unfiled returns. The great majority I feel want me to tell them what they want to hear. They want to hear that there is a simple, inexpensive painless solution to their problem. They want action to immediately relieve anxiety.
In a not unusual case the non-filer client comes to me who’s not filed returns in many years. He or she will bring in a garbage bad filled with unopened tax notices. The notices may reveal that IRS has prepared substitute returns, assessed tax and levied on a bank accounts for a substantial sum, but not nearly approaching what I am able surmise will ultimately be due(the amount may be less or more than the assessment). Many expenses have been paid with cash and a very complex tax return profile is presented with multiple rental properties, some of which have been personally used, and multiple casualty losses, all of which suggest proof and legal issues. There may also be unfiled pass-thru entity returns with large Schedule K-1 income or gains.
The client wants to stop the levy but it is apparent that the levy is a symptom, not the disease, habitual non-filing. The levy although psychologically painful does not impose a severe hardship. The client may have adequate income and assets on which to live and pay bills. In that case, spending time and fees to fight the levy will likely be pointless and counterproductive.
A Collection Due Process Hearing will may no purpose and will have the negative effect of tolling the collection statute of limitation. Requesting a hearing without merit may be deemed frivolous or unethical. The debt may be too large for a reasonable Installment Agreement payment plan and the client may have assets too substantial for an acceptable Offer in Compromise. Bankruptcy will not be an option due to the unfiled returns. In other words the tax debt may be collectible. Moreover, the large cash payments will raise a concern about where income is coming from. I may surmise this is not a case for The Charge of the Light Brigade or acting first and finding out the unpleasant facts later.
Before taking any action or attempting to contact IRS I may want to be certain that no tax crime had been committed. I may want to review the current and prior year’s tax information to determine, for example:
- Whether there are badges of fraud present or overt acts committed.
- If tax crimes may have been committed, what non-privileged witnesses or documents exist that could hurt or help the client.
- Whether accurate returns can be filed; or, at least for the current year.
- How much tax the client will actually owe upon audit reconsideration (I may be able to extrapolate the number from the current year if similar to each of the other delinquent return years). The client often will owe less than is indicated on the substitute returns but may owe more, especially if there are unfiled pass thru entity returns.
- Whether there may be innocent spouse defenses if joint returns have been filed and whether they have been already litigated.
- Having satisfied these questions, to determine through transcript review the dates of assessment for all outstanding tax liabilities and periods of tolling, if any.
Many tax resolution firms and even CPAs say to me, “I’ve never had a client charged with a tax crime.” It may seem ironic today that the Titanic sank on April 15, 1912 with many wealthy, well-known passengers on board (Astor, Levi Straus (Macy’s), Guggenheim). But, actually the sinking happened a little over one year before the Sixteenth Amendment was ratified on February 3, 1913, authorizing congress to levy a direct tax on income. Towards the end of the film about the tragedy, “A Night to Remember” (1958), Second Officer Charles Herbert Lightoller, a heroic survivor says, “We were so sure…Even though it’s happened, it’s still unbelievable! I don’t think I’ll ever feel sure again, about anything!” Tax crimes are rarely charged but to ignore the possibility is to risk hitting an iceberg. When the consequences are dire, one should never ignore outlier events. They occur rarely but with regularity. So, don’t sail merrily along on that blissfully ignorant ship of arrogance because one can be absolutely certain of nothing in this life
J. K. Harris was CEO of a prominent tax resolution firm that advertised heavily on TV and in other media outlets. His firm promised tax magic but all gimmicks are ultimately shown to be just that, gimmicks. The firm went belly up leaving unhappy taxpayers who’d paid up front fees and even less happy creditors. The bankruptcy court had him arrested and he was reported to have been jailed for being in contempt of court. There are many other tax resolution firms with names like “Tax Barracuda” or “Tax Wizard” (these are made up names and using them is not directed at any company that might happen to be similarly named). Many of these tax resolution firms are attempting to distinguish themselves from J.K. Harris. Some highlight excellent BBB ratings. Many are volume operations and work on a template, or, formula, for quick resolution of the easy cases. Non-professionals will quickly file delinquent returns and request a CDP Hearing. Speed is sometimes necessary to protect rights, but blindly rushing ahead full throttle can turn a small civil tax problem into a criminal matter of Titanic proportions.
Today, all those who practice before the IRS are subject to regulation by the IRS Office of Professional Responsibility under Circular 230. Thus, all are subject to ethical standards of practice. But, taxpayers should understand that a wide canopy covers this group. Lawyers and CPAs are members of highly regulated and watch-dogged professions that are monitored not only by IRS but by self-policing and state courts or Boards of Accountancy. Attorneys enter a special relationship with clients that accords privilege to communications made in the course of legal representation. CPAs and certain authorized tax return preparers have a limited tax advice privilege but not in criminal matters. Thus, the privilege of return preparers evanesces when most needed. Criminal tax cases turn on whether the government can prove every element of its charges beyond a reasonable doubt. Privileged communications and documents that the government cannot access may create an insurmountable roadblock to a criminal case going forward no less resulting in a conviction. The non-privileged preparer becomes the prime government witness. An attorney return preparer may carefully segregate non-return information and thereby protect communications or documents not going into the return even if a tax matter turns criminal. Similarly, information received by an attorney for legal analysis may be privileged even if some of that material eventually appears in a return prepared by another. Others have no privilege whatsoever in a criminal tax matter.
But, the ship is unsinkable, so why worry?
© 2012 by Robert S. Steinberg, Esquire
All rights reserved