Originally published on Forbes.com.
One of the earlier responses of the IRS to the COVID-19 crisis was IR-2020-59– IRS unveils new People First Initiative; COVID-19 effort temporarily adjusts, suspends key compliance programs. Ironically, one practitioner sees the IRS suspension of collection activity as an opportunity for non-filers to get their compliance affairs in order. We should start with some background.
About IRS Collections
There is one aspect of IRS compliance that many people are only vaguely aware of – Collections. You generally will only encounter Collections if you entirely fail to file or fail to pay a tax that is no longer being effectively disputed.
When your return is being audited you are not dealing with Collections. That is Examination. Failure to appreciate this distinction can lead to bad choices. One of those choices is to expect someone who focuses solely on compliance to help you deal with collections. Another example is joint returns.
When You Don’t Want To File Jointly
The right decision to minimize your taxes is generally to file a joint return. If the resulting tax is more than you can ever pay, that is the wrong decision, because at some point the correct tax becomes a matter of merely academic interest. What matters with Collections is your RCP (reasonable collection potential).
“ The RCP is how the IRS measures the taxpayer’s ability to pay. The RCP includes the value that can be realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property. In addition to property, the RCP also includes anticipated future income less certain amounts allowed for basic living expenses.”
A joint return means joint and several liability which can mean a larger RCP. Reilly’s Tenth Law of Tax Planning – Once the tax is more than you can pay, it might not matter how much more.
What Can Collections Do To You?
If you have an assessed liability that has not been satisfied, there are a number of things that Collections might do. They can send you annoying mail. They can turn your case over to a collection agency that will make annoying phone calls. (You can hang up on them, just like you should hang up on the fraudsters – see Reilly’s Fifteenth Law of Tax Planning).
And after properly warning you, they can issue liens which will louse up your credit and they can levy – actually take your stuff. It is more likely bank accounts and the like or garnishing of wages. They don’t go after physical stuff as much anymore, although it is still possible.
None Of The Nasty Stuff For A While
Well here is the good news for the less than fully compliant. They won’t be doing any of those things for a while. The People First Initiative suspends liens and levies until July 15. People with existing installment agreements can suspend payments.
Interest will continue to accrue. Whether that matters depends on whether your installment agreement will pay off the tax in full before the statute runs out. If you have an installment agreement that is not full pay, your total liability has in effect been reduced, thanks to the ten-year statute of limitations on collection.
You will not be defaulted on your installment agreement for not having filed your 2018 return until July 15. Come on. That is how you got in the pickle in the first place probably.
Your case will not be sent over to the private collection people, which actually is not such a bad thing to happen.
There is more to the People First Initiative but those are the important things for delinquent taxpayers. Essentially, IRS Collections is standing down till July 15.
Expert Observations
I asked E. Martin Davidoff, a CPA and attorney, who is the Partner-in-Charge of National Tax Controversy for Prager Metis for his thoughts on the People First Initiative.
Overall he thinks it is great. He sees it a well-thought out plan and gives a lot of credit to IRS Commissioner Chuck Rettig. Mr. Davidoff attributes Rettig’s sound instincts in the initiative to his long experience as tax controversy attorney.
On the payment suspension, he recommends that people on a full pay installment plan might just want to carry on. But if there is a compelling need for the cash in the next couple of months, suspending might be just the thing. Unfortunately, it was not clear at first how you were supposed to suspend automatic debits. Mr. Davidoff has been recommending to his clients that they contact their banks to not honor the IRS debits.
The IRS has confirmed that contacting the bank is the way to go.
Time To Clean Up Your Act?
Mr. Davidoff’s most interesting recommendation is that this may be an ideal time for non-filers to clean up their act:
This is a great opportunity for non-filers to file their returns. Why? They may have the time to do it? Often lack of time is an excuse for non-filers. We may find the IRS to be more generous in terms of penalties. And, we know for sure the IRS won’t get aggressive on collections for some time. Furthermore, with audits generally on hold, the odds of examination are likely reduced now than at any other time and the good feeling of just getting it done.
He offers a caution, though:
However, non-filers should get counseling. Filing too quickly can lead to missing out on opportunities, such as the voluntary disclosure programs of New York and New Jersey. Also, there is a strategy to approach the non-filing of federal returns that should be considered.
More time to get a resolution is offered here, which is rare. People should take advantage of coming forward with a resolution of their tax issues without threatened collection actions becoming like a “gun to their head”
The point on New York and New Jersey is of course applicable to other states. Reilly’s Fifth Law of Tax Planning – A tax plan that ignores SALT or AMT is not much of a tax plan.
Conclusion
If you do want to use this time to clean up your past non-compliance, try to find someone experienced in working with delinquent taxpayers. Don’t find them by watching television. At the moment I believe most compliance-oriented accountants have become emergency loan officers thanks to the Paycheck Protection Program, but that should die down in a couple of weeks. Things may be slower for people who focus on collections though.