Private Debt Collectors to Chase Delinquent Taxes?

As Washington DC legislators in the U.S. Congress consider the provisions of what would become part of the EXPIRE Act of 2014, they are mulling over the institution of a twice failed program to collect past due tax debts – the use of private debt collection agencies.  In each of the last two decades the attempts to use private debt collectors to chase tax liabilities have defied projections and lost more money than was collected.  Recently, the National Taxpayer Advocate has written a letter to the senate (found here) to reiterate that problem and to outline the numerous other concerns with any such program.  These are:

1.  The private debt collection initiative is premised on the mistaken belief that the IRS does not collect taxes on cases that are inactive or awaiting assignment.
2. The private debt collection program will require the IRS to incur significant start-up costs, jeopardizing taxpayer service and other IRS operations that are already suffering from budget cuts. 
3. The government’s objective of maximizing long-term compliance without causing financial hardship for taxpayers is fundamentally different from the profit-maximizing objective of a private collection agency.
4. The provision appears to target low income taxpayers.
5. Providing taxpayer identifying information to private companies creates risks that taxpayer data will be misused.
6. Strict penalties on IRS collection employees who are abusive to taxpayers do not apply to private collection agency employees who are abusive to taxpayers.
7. IRS employees are openly instructed to be straightforward in dealing with taxpayers, while employees of private collection agencies confidentially instruct their employees to use “psychological” techniques to pressure taxpayers to agree to payments.
8. Use of “psychological” tactics often results in financially struggling taxpayers feeling pressured into making commitments they ultimately cannot keep.
9. The proposal would require IRS to send taxpayer cases to private collection agencies where the sole or primary reason for the liability is the Patient Protection and Affordable Care Act (ACA) (either the penalty for not getting coverage or owning back an advance premium credit), which, in turn, could make it more difficult for the IRS to administer the ACA.
10. The private debt collection program will raise little revenue and is more likely to be another revenue loser.
11. The proposal would require the IRS to continue the program even if it loses money and does not give the IRS sufficient discretion to make modifications.
12. The National Taxpayer Advocate is uncertain about what the proposal is intended to accomplish.

It is my hope that this potential program does not make its way into any form of final legislation.  A program that has previously proven to cost more than it makes is simply a bad idea.  Moreover, the Taxpayer Advocate outlines the clear problems that are likely to arise.  The targeted low income taxpayers are less likely to know what their legal options are in contesting asserted liabilities.  Those that do may not be able to afford to hire adequate representation to assist them.  Given the significant budget cuts faced by the IRS, agents are already unable to spend enough time on a file to make sure all rights are protected.  An unrepresented low income taxpayer will be at a greater disadvantage because they may not even know that these rights exist. 

To read the full text of the Taxpayer Advocate’s letter objecting to the use of Private Debt Collectors, click here.  

How Social Security Could Have Promoted Job Growth

This month I am the "Alumni Guest Blogger" for the Marquette University Law School Faculty Blog.  Its a pretty good blog even without my participation and I encourage you to check it out.

In my first guest post, I write about how the new tax legislation has chosen an indirect route to job growth through the Social Security Tax cut for employees.  Giving the tax break to employers rather than employees could have done a lot more.  Don't get me wrong, anyone who pays Social Security Tax will be happy to see the impact that the one year reduction in the tax will provide in their paychecks.  However, if the new tax law is really supposed to be about job growth (as suggested by its title: Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010), it could have done more with the Social Security Tax cut.

To read about how the Social Security Tax cut really could have directly promoted job growth, read my post entitled: The Social Security Tax Cut And A More Direct Route To Job Growth.

While you are there, stick around to read more about what the school is up to (i.e. bringing on Russ Feingold as a visiting professor) and to consider interesting legal analysis.

THE IRS IS NOT JUST ABOUT TAXES

The recent National Taxpayer Advocate’s mid-year report observes that the IRS has, over the past several years, developed into a dual role agency. The report identifies that the IRS’ roles are now:

 

1.          To encourage tax compliance and

 

2.          To deliver social benefits and programs.

Most taxpayers are familiar with the IRS role of ensuring the filing of tax returns, the auditing of those returns and the collection of tax due. The Taxpayer Advocate report also appropriately identifies that the IRS resources are largely being diverted by the administration of social programs such as:

 

 Administering billions of dollars to millions of taxpayers in economic stimulus payments.

 

 Making work pay credits.

 

 First time home buyer credits.

 

 Hybrid car credits.

 

Without regard to the politics of these credits and social programs, there is a certain sense of logic to having the IRS administer these kinds of programs. The IRS has an existing infrastructure for managing and tracking the credits and payments. However, the significant observation by the Taxpayer Advocate is that the dual role of the IRS as it has evolved should receive a formalized acknowledgement in order to allow it to operate effectively.

 

Only by acknowledging the dual role of the IRS is it likely that additional resources will be provided to the IRS. This is necessary due to the substantial diversion of IRS resources to activities other than ensuring tax compliance. While the role of the IRS has increased, the resources allocated to it have not increased correspondingly. This is bad.

 

While it may be perceived as a bit counterintuitive that a tax attorney who is regularly engaged in disputes with the IRS would suggest that the IRS requires additional funding, this is exactly what the organization needs. Without adequate funds and staff, the IRS cannot function properly.

 

The Taxpayer Advocate’s report observes that the IRS is failing to consider all programs in place for resolving existing tax issues. This is largely due to the workload currently burying the IRS. Given the resources the agency has, its employees simply cannot be bothered to consider each taxpayer’s situation to find the best resolution. As a result, it holds fast to the “one-size fits all” approach to the majority of tax disputes.

 

Perhaps by accepting the social role that the IRS has grown into could lead to additional and adequate funding to prevent the current resources of the tax authority from being further overwhelmed. I withhold my opinion as to whether it is appropriate for the IRS to administer social programs in addition to ensuring tax compliance. However, I note that if the IRS is to serve multiple purposes, it should be funded and staffed to a level at which it can in fact serve the dual role.

THE TAXPAYER ADVOCATE SAYS THAT THE IRS IS UNDERMINING TAX COMPLIANCE

The office of the National Taxpayer Advocate, an independent government watchdog over the Internal Revenue Service, has issued its 2010 mid-year report evaluating the Internal Revenue Service’s practices. The overall theme of this report (as in prior reports) is that the IRS’s collection practices are in grave need of overhaul.

Some of the highlights of the report include the following comments concerning the particularly onerous collection practices of the IRS:

It is increasingly difficult for taxpayers whose circumstances do not fit into checklist parameters to find someone able to address their problems.

The IRS is failing to address the needs of taxpayers who are experiencing economic difficulties and has not revised collection policies that harm taxpayers, thereby undermining its goal of increasing voluntary compliance.

The IRS has failed to utilize the significant collection alternatives available to it to resolve taxpayer debts, thus, leading to increasing accounts receivable on the IRS books, while taxpayers face staggering accruals of penalties and interest that impact their future compliance.

There is a general and extremely unfortunate perception in parts of the IRS that taxpayers who fall behind on their tax payments are “bad” taxpayers who deserve what they get.

What do these comments mean? They mean that the National Taxpayer Advocate, charged with oversight of the IRS, has observed the same thing that taxpayers across the country have experienced first hand.

What else does this mean? Probably very little. The onerous collection practices of the IRS and the failure to adequately consider collection alternatives based on a taxpayer’s circumstances, is something that has been reported in several of the reports. Until we see corrective action by the IRS or mandated by Congress, we have to consider that the tax authority will conduct “business as usual.” We should expect the IRS will do so in spite of these observations by the Taxpayer Advocate. This will likely result in additional unpaid taxes and greater non-compliance by the American public.

IRS to Undertake Review of Tax Return Preparers

The IRS has announced that it plans to undertake a review of tax return preparers in an effort to improve compliance with the tax laws and ensure the ethics of tax return preparers. It plans to make recommendations on a new regulatory structure to President Barack Obama and Treasury Secretary Timothy Geithner by the end of 2009. In doing so, the IRS plans to solicit input from the community and tax practitioners (lawyers, CPAs, accountants and enrolled agents), as well as unlicensed tax preparers and software vendors.

There has been a need for revision to the regulatory structure governing practice before the Internal Revenue Service for many years. In its most recent attempt in 2005, the Treasury modified the existing Circular 230 that governs tax practice. Those regulations were met with resistance by the tax practitioner community on the basis that the language was overly broad and could inadvertently drive up the cost of tax representation to the public. The revisions in 2005, by its language, appeared to impose burdensome requirements on even the most straight-forward tax advice. As such, almost all correspondence from tax practitioners began to carry a Circular 230 disclaimer prohibiting clients from relying on the tax advice to avoid penalties. Hopefully, this new initiative by the government will result in better a regulatory scheme for tax practitioners.

Revisions to the 2005 version of Circular 230 are long overdue. However, any professionals that bump up against the tax law should note that the Internal Revenue Service’s definition of tax return preparer is quite broad and can include any person that gives advice that, in some fashion, finds its way onto a tax return. So, any new regulations are likely to be rather broad in the definition of tax return preparer.

The IRS will hold public meetings to solicit information and will announce those dates in the future. Readers can come back to this blog for updates on when those meetings will take place.

To read the entire IRS announcement, click here.

Wisconsin Lawmakers Propose Beer Tax Increase

As reported in the Journal-Sentinel:

"Madison - The last time Wisconsin's beer tax was raised, Neil Armstrong was walking on the moon. But now's the time for another increase, Rep. Terese Berceau (D-Madison) said Wednesday." (Read full article)

To this, we can only respond:

“When in the Course of human events it becomes necessary for one people to dissolve the political bands which have connected them with another and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, — That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn that mankind are more disposed to suffer, while evils are sufferable than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security. — Such has been the patient sufferance of these Colonies; and such is now the necessity which constrains them to alter their former Systems of Government. The history of the present King of Great Britain is a history of repeated injuries and usurpations, all having in direct object the establishment of an absolute Tyranny over these States. To prove this, let Facts be submitted to a candid world…”

-John Hancock. In Congress, July 4, 1776. The unanimous Declaration of the thirteen united States of America. (Read full text)

Attribution of Idea: Janet Marie Tierney

Stimulus Package Becomes Law

Today, President Obama signed the newest stimulus package into law. The result is that we have a host of new tax laws (or at least modifications to the existing tax law). Over the next several weeks I will be discussing some of the provisions of the American Recovery and Reinvestment Tax Act of 2009.

Hopefully, together with the balance of the stimulus package spending, these new tax provisions will help put the economy back on track.

To read the full text of the stimulus bill signed into law click here.

IRS To Show Leniency On Past Due Taxes.

In a move that recognizes that a down economy is making it more difficult for taxpayers to pay their taxes, the IRS says they will be showing leniency in the collection of past due taxes. The IRS announced today that it is taking steps to help those with outstanding tax obligations. In the announcement, IRS Commissioner Doug Shulman explained:

“We need to ensure that we balance our responsibility to enforce the law with the economic realities facing many American citizens today … We want to go the extra mile to help taxpayers, especially those who’ve done the right thing in the past and are facing unusual hardships.”

The full announcement can be found here.

Some of the programs in which leniency will be shown are outlined below. It will be interesting to find out what other programs will develop. However, the trick will be in communicating the leniency programs to the public. Those with unpaid taxes should note that we can only expect leniency for those who are actively engaged in sorting out their debts. We shouldn’t expect to see much leniency for those that ignore IRS contact.

Announced programs:

Postponement of Collection Actions: IRS employees will have greater authority to suspend collection actions in certain hardship cases where taxpayers are unable to pay. This includes instances when the taxpayer has recently lost a job, is relying solely on Social Security or welfare income or is facing devastating illness or significant medical bills. If an individual has recently encountered this type of financial problem, IRS assistors may be able to suspend collection without documentation to minimize burden on the taxpayer.

Added Flexibility for Missed Payments: The IRS is allowing more flexibility for previously compliant individuals in existing Installment Agreements who have difficulty making payments because of a job loss or other financial hardship. The IRS may allow a skipped payment or a reduced monthly payment amount without automatically suspending the Installment Agreement. Taxpayers in a difficult financial situation should contact the IRS.

Additional Review for Offers in Compromise on Home Values: An Offer in Compromise (OIC), an agreement between a taxpayer and the IRS that settles the taxpayer’s tax debt for less than the full amount owed, may be a viable option for taxpayers experiencing economic difficulties. However, the equity taxpayers have in real property can be a barrier to an OIC being accepted. With the uncertainty in the housing market, the IRS recognizes that the real-estate valuations used to assess ability to pay may not be accurate. So in instances where the accuracy of local real-estate valuations is in question or other unusual hardships exist, the IRS is creating a new second review of the information to determine if accepting an offer is appropriate.

Prevention of Offer in Compromise Defaults: Taxpayers who are unable to meet the periodic payment terms of an accepted OIC will be able to contact the IRS office handling the offer for available options to help them avoid default.

Expedited Levy Releases: The IRS will speed the delivery of levy releases by easing requirements on taxpayers who request expedited levy releases for hardship reasons. Taxpayers seeking expedited releases for levies to an employer or bank should contact the IRS number shown on the notice of levy to discuss available options. When calling, taxpayers requesting a levy release due to hardship should be prepared to provide the IRS with the fax number of the bank or employer processing the levy.

Sales Tax on Legal Services?

In its December 29, 2003 edition, the Wisconsin Law Journal included an article on a discussion that has come up more than once recently. The article addresses a potential movement by the Wisconsin legislature to do away with the sales tax exemption on legal services. Frankly, this is a terrible idea. I’m not saying this as a Wisconsin lawyer, but rather, based on an analysis of tax policy. The only way that a sales tax on legal services would likely bother me is if I needed to hire a lawyer myself.

In Wisconsin, the sale of tangible personal property is subject to the sales tax. Services are not subject to the sales tax unless the specific service is directly identified in the Wisconsin Statutes. So, to be clear, there is no special exemption from the sales tax for legal services. Rather, legal services are treated just like any other service in the state.

Interestingly, it is possible that the movement to tax legal services could gain momentum based on the often negative perception that people seem to have of lawyers. After all, lawyers make lots of money right? So why not tax legal services? This argument is what us lawyer types call a "non-sequitur." Meaning, the conclusion (to tax legal services) has nothing to do with the argument (that lawyers make lots of money). Here is why: a tax on legal services would be paid by the clients, not the lawyers. The only role for the lawyers here would be to collect the sales tax from the client and send it to the state.

If Wisconsin were to tax legal services, it would only hurt those in need of those legal services. Lawyers are not inexpensive and to add another 5+ percent on top of that cost could make legal representation unaffordable. To tax legal services would be nothing more than a tax increase on a segment of society that is already facing some sort of trouble. Regardless or whether the legal trouble is deserved, adding a sales tax to the mix flies in the face of making representation available.

With a sense of irony, the Milwaukee Business Journal reported on December 26th, that more and more law firms are accepting credit card payments from their clients because those clients are otherwise unable to pay for legal representation. If there is to be a sales tax on legal fees, the current economic turmoil dictates that now is not the time.

The Next President: Barack Obama

Barack Obama has won the 2008 U.S. Presidential Election. Congratulations are certainly in order. He has certainly accomplished something that few before him have been able to do.

As a tax lawyer, I am most interested in what the Obama administration will bring to the tax laws, tax policy and tax administration. Throughout his campaign he has made promises about certain changes in tax policy that he would like to see in place. With the democrats in control of both the legislative and executive branches, I expect that we’ll see some swift changes (including to the tax laws) in his first 100 days. I am looking forward to seeing how those changes take shape.

The IRS Announces the Economic Stimulus Payment Schedule.

Whether people are calling them Economic Stimulus Payments, tax rebates, tax refunds, or whatever, the fact is, the IRS will start sending them out soon. If you qualify, your stimulus payment should be deposited into your account or mailed to you between May 2 and July 11. (Click here to read a blog post on whether you qualify.) The deposit/mailing schedule is outlined in the image below.

If you have already filed and told the IRS to direct deposit any refund into your bank account, you should expect that the stimulus payment will be deposited between May 2 and May 16. If you filed and told the IRS to mail the refund to you, it could be as late as July 11 that the IRS mails the payment. The message? When you file your tax return, tell the IRS to direct deposit your refund. That should get the stimulus payment to you sooner.

The payment schedule depends on the last two digits of your Social Security Number. The lower that number, the sooner you will get the payment. This is the same way that the government sent out the rebate checks last time. Maybe sometime they’ll go in reverse numerical order.

A caveat on these payments, however, is that if you owe back taxes, delinquent student loans or child support, don’t expect a stimulus payment. The IRS will apply the stimulus payment against these outstanding debts. Also, if the IRS has trouble processing your return (for whatever reason) your stimulus payment will be delayed. For this reason, make sure that your return is correct. Don’t inadvertently delay your payment by transposing figures in your child’s Social Security Number.

If you are interested in more information, you can check out the podcast that the IRS prepared on the Economic Stimulus Payments by clicking here.

The IRS has also created a handy on-line calculator to help those who have filed returns, determine the amount of their stimulus payment. The calculator can be found by clicking here.

The IRS Sends An Economic Stimulus Payment Notice.

The images above are from the recent notice that the IRS is sending out to taxpayers to tell them about the Economic Stimulus Payments that most people will qualify to receive. If you qualify for the stimulus payments, all you need to do to get the payment is file a 2007 tax return. Ordinarily, certain taxpayers are not required to file a tax return if their income falls below a certain amount. The notice serves to tell these people that even if they are not required to file for 2007, they should file a 2007 tax return if they want to receive the payments. The message? If you do not file a 2007 tax return, the IRS will not know that you are entitled to a payment and you will not get one.

Generally, to qualify for the payments a person must have $3,000 or more in earned income, Social Security benefits, and/or certains veterens' payments. People may be able to receive up to $600 ($1,200 for those married and filing a joint return). A taxpayer may also get a $300 payment for each child. The payments will be phased out and eliminated for those with an adjusted gross income in excess of $75,000 ($150,000 for married filing jointly).

Once a return is filed, the IRS will sort out the amount of payments that you should receive. If you want to read the full notice on the Economic Stimulus Payments, just click on the above image for a full screen view.

What is Circular 230?

That anyone would ask the question “what is Circular 230” might be surprising to tax lawyers and accountants. However, that is because Circular 230 provides a set of ethical rules that tax lawyers and accountants must constantly observe or be faced with the prospect of being prohibited from practicing before the Internal Revenue Service. That is, if us tax types do not follow the rules outlined by the IRS, they can kick us out of the club and prohibit our involvement in tax matters.

This brings us to the real question that I am periodically asked: “What is that Circular 230 disclaimer that regularly appears at the foot of a lawyer/accountant’s email and letters?” An example of such a disclaimer is:

“IRS CIRCULAR 230 DISCLOSURE: IRS regulations require that we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. If you would like an opinion that can be used for such purposes please contact the sender.”

Another example of the disclaimer can be found if you scroll down to the bottom of this blog site. The reason that these disclaimers appear all over the place is because of changes in the provisions of Circular 230’s ethical standards. The changes became effective as of June 21, 2005 and required that certain raised standards of diligence be used when providing written tax advice.

Unfortunately the time/work required to comply with these additional requirements made the cost of complying with the rules too expensive for many clients to tolerate. Therefore, tax practitioners sought to “legend out” of the new requirements where possible (i.e. see the disclaimer) to keep their services affordable. Tax types also sought to avoid inadvertently becoming subject to the heightened standards when giving run of the mill tax advice and started attaching the disclaimers to everything as a matter of course. Because the new ethical provisions were written so broadly, almost every written communication that you will see from a tax practitioner will include the Circular 230 disclaimer.

The disclaimer does not mean that the written advice is incorrect or should not be relied upon; it simply means that without going through the expanded diligence, you cannot avoid penalties by relying on the advice. Moreover, the disclaimer is a demonstration that the person you are working with is cognizant of the ethical rules that the IRS has issued and that he or she wants to continue working on tax matters for you and other clients.

The IRS Outlines its Plan for Distributing Economic Stimulus Tax Rebates.

The IRS has announced how it will distribute the economic stimulus tax rebates to taxpayers. To receive a rebate, eligible taxpayers must file a 2007 income tax return. This is true even if a person is not otherwise required to file a tax return. Essentially, if you do not file a tax return, the IRS will not know that you are supposed to receive a rebate or in what amount.

Most people that file their tax returns will receive $600 per person ($1,200 for those married filing jointly). Additional rebates will be given to those with children. Individuals with Adjusted Gross Income over $75,000 and joint filers with AGI of over $150,000 will receive smaller rebates. These people will have their rebates reduced by 5% of the amount by which their AGI exceeds the thresholds. This means that those with incomes exceeding the AGI thresholds will see significant declines in the amount of their rebate quickly. For every $100 by which your AGI exceeds the threshold, your rebate will be decreased by $5.

The IRS has yet to determine the payment schedule, yet it expects to start sending rebate checks in May. Those persons that have chosen direct deposit for any refund on their tax return will have their stimulus rebate directly deposited into their bank accounts. Therefore, filers will want to make sure that their account numbers and routing numbers are correct.

It is important that if you move after filing your 2007 income tax return, you should file a Form 8822 Change of Address with the IRS. (The form can be found at: http://www.irs.gov/pub/irs-pdf/f8822.pdf). If the form is not filed, people may miss out on the rebates entirely as the IRS will only be sending the economic stimulus tax rebate payments until December 31, 2008. If the IRS doesn't know where you are before then, you shouldn't expect to see the money.

Economic Stimulus Bill Goes To President Bush

On February 7, 2008, the House of Representatives and the Senate agreed on and passed the seemingly embattled economic stimulus package. The bill that passed is relatively stripped down from what had been debated over the past several weeks. As passed, the package includes a combination of business tax incentives and the much anticipated tax rebates. The package is substantially similar to that which President Bush previously approved and therefore, we can assume that he will sign it when it reaches the Oval Office.

For businesses, the incentives include: a 50 percent bonus depreciation deduction on most equipment placed in service in 2008 and doubles allowable section 179 deductions for both new and used tangible property (for 2008 expenditures).

For individuals, rebates would be given to individuals in an amount of $600 per person and an additional rebate of $300 for each child. The rebates equal $1,200 for married persons. The rebates are not, however, for everyone. There is a gradual faze out of the rebates for taxpayers with gross income exceeding $75,000 ($150,000 for married couples). The bill would also send rebates to social security and veterans disability recipients.

The purpose of this package is to stimulate the economy. The best way for the package to work is for businesses to invest in new property and for individuals to spend their rebate checks in the private sector. Of course, the best thing for the individual may be to save the money or pay down existing debt. However, if you choose not to do the best thing for you, when you spend the money, you can always tell yourself that you are spending it for the good of the U.S. economy. Personally, I think I’ll upgrade my iPod.