Originally published on Forbes.com.
Three stories this month illustrate the brokenness of IRS collections. There are two decisions and an anecdotal story from Procedurally Taxing. Many tax practitioners, blessed with compliant solvent clients, are only dimly aware of collections. On the other hand, there are other practitioners and, to use the term loosely, taxpayers for whom the ]actual tax liability reported on returns as adjusted by audits is more in the nature of a sticker price, rather than something that will actually be paid.
The Ten Year Statute
The two cases are about taxpayers seeing the light at the end of the tunnel. That is beating the IRS entirely by waiting out the ten-year statute of limitations on collections. Neither succeeded, but they came quite close and that they went as long as they did is symptomatic of the dysfunction in IRS collections.
An Eight Year Break Before Collection Action
The decision in the case of Barbara Holmes concerned the estate of her mother Shirley Bernhardt, who died in 1997. The original Form 706 showed a liability of $700,024.34, which was timely paid. On audit the IRS challenged the valuation of some assets and was looking for an additional $1.2 million. After some back and forth, there was a stipulated Tax Court decision on June 8, 2004
On July 16, 2004, the IRS reassessed the estate tax deficiency reflecting a balance deficiency due of $223,309.20 and added interest in the amount of $108,703.62. It is undisputed that the IRS’s assessment was erroneous because it applied the state estate tax credit to the net deficiency instead of the balance deficiency due as stated in the stipulated order. Notice containing the erroneous assessment was sent to Barbara Holmes. On September 15, 2004, the Estate, through Kevin Holmes, responded to the assessment with its belief that it was inaccurate and requested a second determination.
Kevin Holmes is an attorney, CPA and Barbara Holmes’s husband. It seems pretty clear that he was primed to pay the correct amount. Instead of issuing a new bill, though, the IRS put the case in the collection queue to be assigned to a Revenue Officer. It finally got to the head of the line over eight years later.
Additional interest and late pay penalties now had the tab at over $550,000. In response to a Notice of Intent to Levy, Kevin Holmes filed Form 12153 Request for a Collection Due Process of Equivalent Hearing. I’m skipping the details a bit here, but apparently because of the government shutdown, the IRS lost the request. There was quite a bit of back and forth, but finally on June 11, 2014 (Note that date), the IRS admitted that there had been a timely request filed.
When you file a timely Form 12153 (i.e. within 30 days of a notice), the ten-year clock stops. So in response to the Government’s March 2015 suit against Barbara Holmes and the estate, Kevin Holmes, who had previously argued that the Form 12153 had been timely filed, argued that since the IRS lost the form, they could not establish that they had received it. Hence there was no stopping of the clock.
The argument failed because of the “duty of consistency” and “quasi estoppel”. I had a tough time deciding who to root for on this one. I’m thinking that if I had been Kevin Holmes I would have sent in a good chunk of the deficiency back in 2004 rather than hold up the whole payment over an incorrect interest computation. On the other hand, most of the problem comes from the IRS just ignoring the deficiency until the hot breath of the ten year statute was breathing on its neck.
There are other aspects of interest in the case, but we have more to cover.
Deficiencies Almost Thirty Years Old
Charles J Weiss v Commissioner is a regular Tax Court decision. According to the Tax Court the amount at stake “exceeded $550,000”, which perhaps is some sort of cosmic connection to the Hoffman case. The IRS was attempting to collect unpaid federal income tax for the years 1986 through 1991.
Mr. Weiss had filed his returns for those six years in 1994. I can’t tell from the decision whether he paid anything at all with the delinquent returns, but it is clear that he did not pay them in full. Mr. Weiss added half a decade to the ten year period by filing bankruptcy three times. The light at the end of the tunnel was in July 2009, when, in February 2009, a Revenue Officer sent him a notice of intent to levy. According to the Tax Court decision, on studying the accompanying material, Mr. Weiss hatched a brilliant scheme, which, if that is what he did do, wins the admiration of my inner villain.
If you file Form 12153 within a thirty day window, you get a Collection Due Process Hearing, that is subject to judicial review. If you miss the deadline, you still get an equivalent hearing, with no review. In the latter case, the ten year clock still keeps ticking. So Mr. Weiss, according to the Tax Court, deliberately filed his form a day late. Only, as it turns out, it was not a day late, because the RO had printed out the form three days before mailing it, making Mr. Weiss’s filing kind of accidentally on time.
Law 360 has a nice analysis of the case, if you want to read more about it. Lew Taishoff had a piece called Ya Can’t Make This Stuff Up.
Receivables Are Not Fine Wine
What intrigues me is that in both these cases the IRS was close to the ten-year statute when they started taking collection action. My experience with collecting receivables, which comes from my years as a CPA, confirms the observation of one of my managing partners that receivables do not improve with age. When we had occasional crusades to clean up receivables we would end up beating the same dead horses. It seems that the IRS might be doing that as a matter of policy.
Problem Is Getting Worse
According to the 2015 Databook (page 43), the number of delinquent accounts that the IRS has to contend with grew from 12.4 million to 13.4 million. The average account is a bit over $10,000. In FY 2014 $34.2 billion was collected on delinquent accounts and $35.6 billion was collected in FY 2015. The balance grew from $130.6 billion to $137.3 billion. What might slow it down at some point is a drop in the number of delinquency investigations from 3.5 million to 3.0 million. On Page 69, there are personnel statistics. The total number of employees working in Examinations and Collections went from 37,266 at the end of FY 2014 to 34,830 at the end of FY 2015 which brings us to the story in Procedurally Taxing.
Dropping The Low Hanging Fruit
In “Loading Installment Agreements”, Keith Fogg writes about resolving a collection case with an installment agreement that called for automatic debits from the taxpayer’s checking account. His work there done, he was able to go off on vacation. What happened next is troubling.
I returned from vacation in early August and called my client to see how the first withdrawal went. I was informed that there was no withdrawal and no communication of any kind from the IRS. I thought this odd but as I mentioned in the prior post I do not set up many installment agreements. To find out if it was odd, I contacted someone I knew at the IRS. I learned that the failure to withdraw the installment agreement amount from my client on the first date set for such a withdrawal happens to others as well because the IRS is behind in loading the installment agreements into its system. I have now learned that the IRS did not withdraw the money for the installment agreement in August either.
Apparently, many practitioners have had similar experiences as the follow-up by Steve Olsen shows. Some of these accounts that promised to be squared away will probably now be going delinquent.
Why Do People Not Pay?
A couple of observations here. There are numerous reasons why people are delinquent on tax payments. There are the people some of us call tax protesters who prefer to think of themselves as the ones who really understand the law, notwithstanding decades of losing in court. There are the war tax resisters, a fairly earnest, mostly harmless bunch. There are people who find themselves in severe hardship. But in my opinion, the largest group is people who would rather keep the money for themselves and think they can get away with it. Since the nineties, I think Congress has been overly solicitous of them which is really not fair to the majority who organize their lives to live on their after-tax income.
Blame It All On Lois Lerner
And then we have Congress punishing the entire agency for the sins of Lois Lerner and the Cincinnati gang that couldn’t sort straight. It has become an article of faith, that there was something really wicked going on in the IRS Scandal now on day 1204 by Tax Prof count. The ongoing litigation is sure to keep that matter alive, but it just does not seem like a logical response to have fewer agents working a growing number of delinquent accounts, but so it goes.