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Instructive Warning Cases


The recent case of Hugger v. Warfield (In re Hugger), 2019 WL 1594017 (9th Cir. BAP Apr. 5, 2019)(not officially published for citation)(http://cdn.ca9.uscourts.gov/datastore/bap/2019/04/08/Hugger%20-%20Memorandum%2018-1003.pdf), U.S. Bankruptcy Appellate Panel of the Ninth Circuit (the “BAP”) in an Appeal from the United States Bankruptcy Court for the District of Arizona, illustrates mathematically one of the harshest outcomes to occur when seeking tax debt relief. A debtor sought to discharge $40,000 in tax debt through a chapter 7 bankruptcy. The amount of non-tax debt totaled $569.

As is not untypical, the taxpayer in this case filed late tax returns for 2001, 2002, 2005, 2006, 2009, 2010, and 2012, all in September 2015. Under the bankruptcy discharge of taxes rules, the tax year due date must be at least three years old at the time of at the time of filing the return and as to this, all years qualified except for 2012. The second requirement is that at the time of filing the bankruptcy case, the tax filing date must have been at least two years old.

The September 2015 tax return filing date indicates that September 2017 would have normally been the earliest date that bankruptcy should have been filed. A decent temporal safety factor might have even been added, depending upon potential tolling activity after all taxpayer records were searched and analyzed. Even with no indicated tolling it would have probably have been better to file the bankruptcy October 2017 or later.

Debtors can face significant pressure and financial pain before taking action. However, a bankruptcy filing has significant negative effects and is not easy to undo, and in some cases is impossible to undo. Any bankruptcy filing that is dominated by a desire for tax debt relief should be investigated thoroughly to avoid the type of result that In re Hugger exemplifies.

The In re Hugger debtor filed a chapter 7 bankruptcy case on January 9, 2017, at least 9 months too early (even without tolling). On May 9, 2017, the U.S. Bankruptcy Court for the District of Arizona entered the Debtor’s discharge, and the bankruptcy case was closed a few days later. By September 2017 it was realized that the bankruptcy was filed too early and the debtor began action to re-open the case, undo the discharge, and ask that the bankruptcy case to be dismissed so that taxpayer could have a later “do over,” so to speak.

Requesting and receiving a chapter 7 case withdrawal of discharge followed by a dismissal is not as easily done as in a chapter 13 case. The main standard to be met is that the actions must be shown to benefit, and not harm the creditors. In this case the creditor was the United States. The premature bankruptcy filing benefited the United States, and to allow an unwind would be prejudicial to the creditor interests. Both the bankruptcy court and the BAP denied withdrawal of the discharge and dismissal of the case. The bankruptcy filing and discharge (which did not discharge the tax debt) stands.

Some factors to consider from this case are:

(1) The bankruptcy filing date was so premature that it may be likely that the statute of limitation rules were not understood.

(2) Even if the taxpayer was facing a garnishment, putting up with 9 or more months of garnishment would have been preferable to tossing away the right to discharge the balance.

(3) As in (2) above, any motivation to take quick, thoughtless action should be avoided. Tax debt based bankruptcy filings should be well thought out, carefully prepared, and absolutely complete.

(4) Another reason for a well thought out filing is to make as certain as possible that bankruptcy judges will have no reason to rule against the debtor. Where the IRS insolvency unit indicates that they will oppose a tax debt discharge, the court requires an adversary proceeding by the debtor. Getting IRS insolvency unit assent might encourage debtor’s counsel to forego an adversary proceeding (which still might be risky for the debtor).

(5) It is typical for IRS to simply determine nondischargeability of part or all of the tax debt, and then sit by while a debtor omits having an adversary, then once discharge and case closing occurs, simply re-start collection activities. This is somewhat of a trap as it forces a debtor to either accept the failure, or try and fix it, by re-opening the case for the purpose of filing an adversary proceeding that perhaps should have been filed to begin with.

(6) Where tax debt is greater than fifty percent of all debt (as it was in this case) the means test is not necessary. This might facilitate haste in filing rather than increase the quality of information in the schedules.

Aside from the limitation periods and tolling, the case of Ilko v. California State Board of Equalization (In re Ilko) 651 F.3d 1049 (9th Cir. 2011) (http://cdn.ca9.uscourts.gov/datastore/opinions/2011/06/27/09-60049.pdf) is instructive of dischargeability of derivative taxation before assessment. In Ilko, bankruptcy was filed based upon a contingent debt under California’s Rev. & Tax Code 6829. Debtor believed that a bankruptcy filing based upon a contingent (possible future) secondary debt would result in discharge.

The thought may have been to simply “list” potential creditors for contingent debts in the hope of getting an advance discharge. This case emphasizes that by contrast tax debt cannot be discharged in bankruptcy before it is assessed. What it means is that assuming a tax debt that meets the 3-year, 2-year, and 240 day rule in bankruptcy, that future assessments for that year are not dischargeable.

Thus, a taxpayer making it past the 3 year assessment statute, knowing that some fraudulent amounts have been omitted from the return, may have the added amounts assessed, and they will be nondischargeable unless a further bankruptcy filing occurs more than 240 days after the assessment. So, a bankruptcy filing at year 3.5 followed by later assessed debts based upon fraud will not discharge for at least 240 days after the assessment. So, the timing for filing bankruptcy within any limitations period should always consider the possibility of unassessed (or not yet assessed) tax debt liability potential.

For any later assessment, the prohibition on bankruptcy re-filing will provide an additional obstacle as there are time limits for filing a further bankruptcy that depending upon which chapters were chosen for the first and subsequent bankruptcies. Failure of discharge of tax is more often followed by an offer in compromise if there is a genuine inability to pay, rather than a second bankruptcy. Of course, most secondary assessments are based upon some sort of finding of “responsible person” liability so at least there may be some ability to avoid an assessment on that basis before considering bankruptcy, offers in compromise, etc.

Bankruptcy & Offer-In-Compromise – The Hot Dog Stand Paradigm

Have you ever walked down the street and made eye contact with a hot dog stand vendor? Did you notice that the vendor grabs his tongs and pulls out a square of hot dog wrap paper in preparation for you to complete an order even before you have had a chance to say one word? It can be awkward to ask the time, or to ask directions, once the vendor is armed with their “weapons of the trade.”

The next quick action is asking you what type bun and what type link you want. You might have been approaching the vendor to ask for marital advice. It doesn’t matter. The vendor scoops up his tools of the trade and positions to complete a hot dog assembly without having to look. Its such a smooth move, as if it were the billionth time this month.

Of course, if the vendor was asked to provide a “t-bone steak lunch,” all hell would break loose. “What do you think this is, a fancy restaurant?” The vendor expects that when the cart says “hot dogs,” that it can be read easily and that if you approach and make eye-contact, that you are “going to order a hot dog.” The irritation at a request to provide a “t-bone steak lunch,” will be greater than if you had asked the time of day or even to provide marital advice. The point is that asking about a service that is not along the same lines as “the usual” will provoke hostility and rejection. You would be lucky to get a “get out of here,” and “don’t come back”.

This “expected service” situation exists in the tax debt world. On one side there are large numbers of tax practitioners that can predominantly directly provide IRS based help, such as offer-in-compromise services. On the other side there are bankruptcy practitioners that can potentially provide tax debt relief through a bankruptcy filing. Two factors account for the rift between these two services.

First, the professionals that can provide the tax related services include enrolled agents, CPA’s, and Attorneys. CPA’s are the most numerous and have the closest connection with taxpayers by virtue of tax and accounting services. Next are the enrolled agents that provide tax preparation but not accounting services. Last and fewest in number are the attorneys that are specialized in tax and provide tax related services. As an example, the number of tax specialists attorneys in California is less than 310 at the time of this writing, although there are an unknown number of attorneys that predominantly practice tax law. The number of enrolled agents nationally is cited as 53,000 and if the distribution follows the population, California is 12% and thus 6330 enrolled agents in California.

NASBA (nasba.org) indicates that there are 654,375 actively licensed CPAs in California. So, even if tax practice attorneys were to number twenty times the 310 tax specialists, it can be easily seen that the non-attorney practitioners would be 99% of the tax practitioners available in California, excluding multiple license overlaps. This means that the overwhelming majority of the population of tax practitioners are generally unable or unwilling to apply their tax expertise to bankruptcy. Practice before IRS will involve all of the IRS actions and remedies, but bankruptcy is likely to be an unexplored mechanism for the vast majority of tax practitioners.

Bankruptcy, on the other hand, has practitioners that from a consumer (taxpayer) standpoint operate mostly with non-tax debt. Most bankruptcy lawyers know the main basic bankruptcy debt-related limitations rules relating to the 3 year from tax filing due date, 2 years from filing late return date, and 240 day from assessment date. Some may not know in-depth about the complexities of tolling, a mechanism that stops the normal day-to-day progress toward getting past a limitations date. Inaccurate and inconsistent IRS record keeping creates further difficulty in determining which of the lesser ranked events have been recorded as tolling and which are not.

Many bankruptcy practitioners, even those that understand tax debt may refrain from not ordering the taxpayer’s full records to match against transcripts to analyze tax dischargeability in detail.. In some cases this may be driven by urgency or the necessity for quick action. Often, the procrastinating public seeks help and perhaps even bankruptcy practitioners versed in the basic tax mechanism will not take the time to order a freedom-of-information act full IRS file in addition to a full set of tax account transcripts. The bankruptcy practice approach might be simply skewed toward immediate quick filing in response to some myopic impression of a focused threat.

A monolithic threat is what we humans have become most accustomed to. If we see a first hint of danger, we focus on that danger typically ignoring other dangers that may be more deadly. Many citizen taxpayers perceive a threat and only then approach either a tax practitioner or bankruptcy practitioner for the first time. The citizen taxpayer wants the matter to be resolved instantly. The problem is that the best solution for the taxpayer may be unknown in circumstances where the taxpayer demands immediate resolution.

To take one partial example from one of hundreds of possible configurations, what if a taxpayer hires a bankruptcy practitioner that computes the tax discharge eligibility based upon the 3-year/2-year/240-day computation? What if the client states that there are no tolling events, but in fact there were tolling events? What if the taxpayer transcripts have entries associated with tolling events, but they are incorrect? If there is an SFR (Substitute for Return), will it be investigated? Will the bankruptcy practitioner use the Freedom of Information Act and order the taxpayer’s whole file to verify the transcript, or simply ask the taxpayer to waive any possibility of nondischargeability of tax debt for all years?

To take that same partial example again, from one of hundreds of possible configurations, what if a taxpayer hires a tax practitioner that computes reasonable collection potential without analyzing the transcripts and testing for tolling? What if a tolling event was not reported on the transcripts? What if a tolling event was reported and was improperly entered from someone else’s records, or left open ended? Will the tax practitioner use the Freedom of Information Act and order the taxpayer’s whole file, or simply ask the taxpayer to waive any possibility of taking action before a tax year collection statute expires?

In both cases, I question whether the average taxpayer been presented with a more complete picture going forward, in order to see when milestone opportunities occur (such as the expiration of a collection statute). A taxpayer can blindly wait for a stressor, and then run to one side (bankruptcy) or the other (IRS remedies) and act, often without knowing the other side, the bankruptcy statutes, nor the tax statutes.
More importantly, the taxpayer may not have a view going forward into the future if a decision is made to take no immediate action at this time.

A taxpayer facing the need to take action now, might not know if a 2 week wait could result in substantial tax savings, and whether an eight week wait could produce even more savings. The taxpayer also needs to know that taking action will generally result in a tolling with respect to all the statutes of limitation as to other potential actions. An overly simplistic example is that a bankruptcy filing tolls the collection statute for later offer-in-compromise filings and later bankruptcy filings, just as an offer-in-compromise filing will also toll the collection statute for later offer-in-compromise filings and later bankruptcy eligibility filings.

Therefore, for any variety of reasons, a taxpayer might choose (in some cases wisely) to wait years before taking some form of action, if that taxpayer knew the approximate series of dates associated with a corresponding series of tax relief milestones going forward. Where a tax or bankruptcy practitioner is knowledgeable about statutes of limitation, its not unusual for the client to be informed about the next milestone, but usually not all the milestones extending into the future. Most practitioners don’t see themselves as having a duty to enable a “continue to monitor” outcome (which may be in the client’s best interest).

A knowledge of the nature of things going forward, what the future will look like without taking action and with triggering tolling, can be advantageous particularly where the client can’t know what exigency pressure they will face in future. The problem is that there is an extended list of actions that can toll the statute. Putting the taxpayer in control of continually monitoring future milestones while realizing that the driving impetus to take action should be a decision made perhaps at that future point in time.

Even further complicating the picture is that some tolling actions have a higher probability of being accurately recorded (or even recorded at all) than others. Actions may be recorded (accurately or inaccurately) in the IRS computer system and obtainable as transcripts, as well as a more complete total taxpayer record, possibly retrievable using the freedom of information act (FOIA). In instances where a taxpayer is taking an action that can only be justified based upon the ability to favorably compromise the tax debt it is extremely important to know as much about ALL the IRS records as is possible.

If a taxpayer is a step behind in knowledge, their efforts can create more problems for themselves than if they took no action at all. The IRS makes errors. IRS doesn’t always mean to make an error, but its something for which taxpayer should not have to suffer.

Errors in the record have to be discovered and advantageously addressed, always sooner rather than later. IRS is said to have a 40% error rate in computing the collection statute termination dates (dates where taxpayers no longer owe tax for a given tax years). If a taxpayer is past the termination of collection date, a taxpayer doesn’t owe any tax and should not be made to pay. IRS also uses substitute for returns (SFR’s) notices and “non-filer notices” to encourage taxpayers to file returns. This technique essentially depends upon the taxpayers to do tax error correction. 10-20% of SFR’s and other encouragements to file are sent in error with reliance on the taxpayer to fix the problem.

The error in SFR generation can stem from: (a) the issue of 1099 to a contractor that wrote your social security number by mistake, (b) making an inquiry to IRS and having the inquiry trigger a tolling period unexpectedly or without your knowledge (such as asking the taxpayer advocate’s office for help, as an example). For every correction response, other mailings may have been sent to a wrong address, or SFRs may be based upon errors in 1099s, social security numbers and many other bases for inaccuracy.

Even worse for bankruptcy filers, an SFR is treated as a first return filing, setting a threshold below which no amount for less than the SFR income amount can be discharged in bankruptcy. (See Chief Counsel Memo 2010-016(SFR)) (http://www.irs.gov/pub/irs-ccdm/cc_2010_016.pdf) For example, in a typical case of a taxpayer that normally receives $100,000 of revenue and a “cost of goods sold” of $80,000 would report (after reduction by the $12,000 standard deduction) a salary of $8,000 and pay a tax of about $1000. However, if IRS learns of receipt of $100,000 of revenue after receiving no return, an SFR having $88,000 of income ( $100,000 of revenue – $12,000 standard deduction revenue ) will be prepared and a tax of about $21,000 will be assessed against the taxpayer.

Even if the taxpayer submits a proper return to reduce the actual tax to $1000, any amount of tax under the threshold of $21,000 established on the initial SFR cannot be discharged. So, checking the SFR to the extent possible to determine if it was generated properly, could eliminate an impediment to discharge for the year it was wrongfully generated. It should be understood that not every non-filed return will result in an SFR, and that a proper SFR should have some verification that the basis upon which it was generated has significant legitimacy.

Given the above less-than-perfect state of affairs in discovering the correct state of the record regarding tax debt, it is important to consult with a practitioner that is interested in presenting a full and complete picture of the taxpayer’s future milestones, including (a) expiration of the 10 year collection statute of limitations for all years owing, (b) the limitation periods beyond which the tax debt is dischargeable in bankruptcy and (c) the tolling events for each tax year relating to (a) and (b), and much much more. The “professional” that is motivated to only serve up their standard fare regardless of the state of the client’s records and circumstances increase an unknown potential for harm.

A Tax Debt Only Comparison of Offer-In-Compromise and Chapter 7 Bankruptcy in California Graduating From a Homelessness Base Case

Introduction
Table 1 indicates some comparison of the conditions through which one may enter and take advantage of either offer-in-compromise or chapter 7 bankruptcy shown side by side for a partial comparison.


Table 2 involves a progression starting with an individual with tax debt only with additions to
property by category and with level income used only for fee waiver effects. Graduation of wealth going into either an offer-in-compromise or chapter 7 bankruptcy starts as a base case for one single person increases with three types of assets, each subsequent asset added to the prior asset, in this order: (money), (automobile), & (tools of the trade):
(A) Homeless, owns nothing, no income
(B) Individual with income lower than the lowest fee waiver threshold
(C) Individual, waiver ineligible with income slightly above the higher waiver threshold.
(D) Individual, waiver ineligible having Bank Cash $30,825
(E) Individual, waiver ineligible having Bank Cash $30,825 + automobile
(F) Individual, waiver ineligible having Bank Cash $30,825 + automobile + tools of the trade

Table 3 illustrates a magnitude of the advantage of either offer-in-compromise v. chapter 7 bankruptcy considering income only. Income drives the amount that must be repaid to IRS. Income also sets the cost of entry into either offer-in-compromise v. chapter 7 bankruptcy.
(G) Homeless, owns nothing, no income
(H) Individual, income between fee waiver threshold for bankruptcy and OIC
(I) Individual, income near the median income amount, computing an offer amount based solely on income.



(1) To best indicate the divergent nature of these two remedies, a starting point is $0 homelessness (which enables fee waivers), and thence to a low income in excess of the higher fee waiver limit, then cash in the bank, and then a car, and lastly tools of the trade. Under the wild card rules, some available cash property is sacrificed to cover the greater of two
exemptions.

(2) $30,825 was chosen as it is the sum of the maximum cash exemption under the highest cash
alone exemption available to non-cash bankrupts.

(3) Car equity that matches the bankruptcy exemption (greater of the two exemptions $4312.50 and $5850) illustrates that the $1537 shortfall means that the $1000 “Exempted” bank account money is essentially committed to the collection potential as well as an additional $537 will be added to the commitment to the offer. Overall $1537 additional is committed to Offer, regardless of whether low income is below a national standards threshold.

(4) The Lump Sum offer form of offer-in-compromise is the most beneficial to the taxpayer, and it can be seen that a taxpayer with assets above the $1000 bank deposit, $4312.50 FMV car and $4470 tools adds directly to the collection potential offer. If taxpayer lives frugally and below some of the national standards (that don’t involve subtraction for actual), such as Food, Clothing and Misc; Public Transportation; & Out of Pocket Health Cost, the above-threshold assets add directly to the reasonable collection potential.

The other part of the contribution to reasonable collection potential is income minus necessary business
expenses and extraordinary expenses, which is too diverse and unique in each case to meaningfully
discuss beyond the base cases treated here. We see that in each case of (a) cash, (b) car, and (c) tools;
that bankruptcy is more generous. Everyone has some cash, most people have a car, and not everyone has “tools of the trade” But, the bankruptcy exemptions allow the taxpayer to exempt more value in each of the cited cases and before going deeply enough to begin to counter personal property exemptions unrelated to making a living.


Because table 2 involves asset categories having different threshold values, those relatively lower exemption threshold values for offer-in-compromise quickly consume the value of the initial cash exemption of $1000 in the offer-in-compromise case for the higher value of item’s bankruptcy exemption compared to the exemption for offer-in-compromise.

(5) National Standards not subject to subtraction for actual expenses include Food, Clothing and Misc ($727); Public Transportation ($217); & Out of Pocket Health Cost ($55) totaling $999, leaving between
$562.25 and $1603.00/mo. The maximum housing for LA county is $2258. For a single person living
alone, housing and utilities actual expenses should easily cost at least the $1603.00/mo at the upper end of the range in the row example. If this is the case, a $1 offer should be acceptable assuming all other categories don’t contribute to a higher reasonable collection potential. In the range the bankruptcy cost is $0 while the offer-in-compromise cost is $186 + $1 offer. Based just upon tax debt, bankruptcy wins.


(6) Monthly national standards of $999 + local automobile standard $273 = $1272. Also, assume the
$2258 LA county housing and utilities Monthly excess reasonable collection potential is $4830- $1272-2258 = $1300. 12 months of this excess is 12 x $1300 = $15,600. The filing cost of the bankruptcy is $335 and the filing cost of the Offer-in-Compromise is $186 + 20% of Offer ($15,600) or $8,725 with a full cost if accepted of $15,786. This creates a break-even if $15,786 of tax is owed (no discharge advantage).

Table 3 illustrates that, as to California, where income is less than ($9 – $15/hr) that most tax debts are discharged in both the OIC and bankruptcy cases. For income (>$15-$24+/hr), bankruptcy’s cash exemptions predominate.

For bankruptcy, if all tax is eligible for discharge, then it is discharged. This does not depend
upon the amount of earnings nor the amount of tax. What this indicates, is that if tax debt is all
the debt involved, that bankruptcy might be the more advantageous option, and especially for California taxpayers earning over $15 per hour. In other states the results will vary based upon the level and configuration of that state’s bankruptcy exemptions.

How Far Can You Delay Paying Federal Tax Authorities Before Criminal Tax Evasion Charges are Filed?

A series of related cases illustrate the very bad results that can come from fighting the IRS in a non-direct way. We have heard informal rules of thumb regarding tax evasion. One rule of thumb might be that if you actually evade payment of tax for huge sum of money that you are more likely to be prosecuted for tax evasion. Another rule of thumb might be that if you are a well-known celebrity that evades payment of tax for a modest sum of money that you are also more likely to be prosecuted for tax evasion. Both ends of the well-known celebrity and high wealth parallel but oppositely oriented continua yield a less pronounced middle span largely due to the amount of approvals and signatures that must be obtained before launching a tax evasion case.

The potential criminal charges for tax evasion do not exist in a vacuum. Civil punishments can magnify the potential for criminal liability. The fundamental time period during which a taxpayer owes the government is either 10 years once tax has been assessed, or its an infinite number of years of no tax return is filed and no assessment has been made. Given a relatively slow pace of development for a non-celebrity, small dollar tax evasion prosecution, it doesn’t pay to arrange to be under the IRS microscope for an extended period of time. It helps even less to become more noticeable during such an extended period of time.

The typical taxpayer files a return on time triggering an assessment (debt owed to the government) that “exists” for 10-years. At the 10 year mark, if nothing has occurred to increase the 10 year “statute of limitations” period (known as “tolling”), the IRS is no longer owed the tax debt associated with the tax event. Also, from the time of assessment, the IRS has a 3-year period to challenge the return with an audit. If some understatement problem is found (from an audit or any other source), of a sufficient magnitude to be characterized a presumptive fraud, the 3-year potential audit period turns into a 6-year audit period (from assessment).

Stating this another way, the normal flow of the process is that a taxpayer gets (1) a chance to file a correct return on time, (2a) the government gets 3 years to challenge the return via audit if the taxpayer made a less than presumptively fraudulent attempt to file a correct return, or (2b) the government gets 6 years to challenge the return via audit if the taxpayer made a more than presumptively fraudulent attempt to file a correct return. (3) the government gets a full 10 year period (absent tolling) from the day after assessment to the tax collection statutory expiration date to collect the tax.

The 10 year collection is unfortunately extended, whenever the taxpayer takes an action which requires the government suspend its collection. Some of these actions include bankruptcy, offer-in-compromise, filing a tax court petition. There are many more actions that cause tolling of the collection statute of limitation to move forward into the future. The result is that the 10 year collection period might become a 15 year collection period, or even more.

In addition, when a taxpayer has been particularly problematic for the government, the IRS can file a civil suit and obtain a judgement for collection of the tax which extends the period for collection by an additional 20 years. The judgement is renewable before the end of the additional 20 years and for an additional 20 years. So, even if there was no tolling, the use of the civil suit to obtain judgement means a 50 year collection period during which the taxpayer still owes the money.

There is a general impression that the progression of tax evasion involves cheating, then filing, and then getting caught due to the cheating mechanism. People forget that you can evade taxes by simply not paying. An evader can take action to emit chaff in hopes of escaping IRS attention. This may be foolishly done thinking that the IRS will grow weary and forget about the debt. Mostly blind, reason-deficient, struggles simply create a fervor to collect. There are procedures and rules that govern the negotiation, should be followed for a quick resolution.

Fighting IRS collection in a desperate way that ignores the policies that enable settlement, appears very like an evasive action to delay and prevent payment. Couple a perceived unwillingness to cooperate with temporal expansion (due to tolling) of the collection statutes of limitation, and the taxpayers spend a much longer period of time during which they owe and don’t cooperate with the IRS. Even though the transaction of the tax year is long over, and the audit activities are probably long over, the collection period is extended, leaving the taxpayers under the collection microscope for an extended period.

IRS then has a much longer course of action with which to suspect and establish an evasion based upon non-payment and lack of cooperation. So even in cases in which the transaction and audit did not produce an evasion pattern, a long, drawn-out delay in cooperation can possibly supply the evasive elements needed to build a criminal case.

Any administrative inhibition due to the extended time required for criminal investigation and administrative approval will vanish when the taxpayer provides extension of time via statutory tolling.

Further, when the ire of the IRS has noticed activities of the taxpayer causing a value judgement that the taxpayer is problematic in delaying and misrepresenting efforts to bring the matter to a proper conclusion, it is much more likely that a judgement for collection of tax which extends the period for collection by an additional 20 years will be done. If owing tax debt to the government is painful, then extending that pain for an additional 20 years is tantamount to self-torture for what could be an additional one-third of a lifetime.

Imagine the following theoretical facts, and how they might appear to the IRS:

(1) Yr 0: Taxpayer avoids paying year capital gains on the sale of a business by using a tax shelter.

(2) Yr 3-10: IRS collection activities occur.

(3) Yr 10: Taxpayer files for bankruptcy in an attempt to discharge the tax owed, but the bankruptcy court denies discharge and finds that taxpayers willfully attempted to evade or defeat the collection of tax under 11 U.S.C. § 523(a)(1)(C). (which recently has been set by legal decision to carry the same standard of proof applicable to tax evasion).

(4) Yr 12: After tolling delay from the bankruptcy, IRS resumes collection activity.

(5) Yr 15: Taxpayer utilizes administrative due process procedures, including collection due process and offer-in-compromise and are unsuccessful.

(6) Yr 16: IRS refers The Justice Department to file suit to reduce the assessments to judgement and thus extend the period for collection for another 20 years (possibly to Yr 36, and possibly to Yr 56 if extended before Yr 36).

(7) Yr 18: Taxpayer files a complaint in federal district court against a number of federal workers, including a revenue officer, collection supervisor, an advisor, a settlement officer appeals officer, offer in compromise manager, tax examiner, offer specialist, group manager and the acting director for area collection, and other yet unknown tax and justice personnel in a “Bivens” action for “a conspiratorial plot to deny him his constitutional rights, purportedly on account of his alleged disability, at all relevant stages of the aforementioned tax collection effort.”
(8) Yr 19: The Bivens action was dismissed based upon the fact that because the Internal Revenue Code gives taxpayers meaningful protections against government transgressions in tax assessment and collection . . . Bivens relief is unavailable for plaintiffs’ suit. Establishment of evasion using the courses of action from the past can possibly be added to acts occurring in future to perhaps show a continuous course of dealing, an intent, establishment of a plan for tax evasion. Would YOU wish a quick resolution to this tax debt? What actions would YOU take begin such resolution?

(1) Would you start a stream of payment to IRS on a regular basis?
(2) Would you compute your reasonable collection amount and liquidate everything else and attempt a further offer-in-compromise without delay?
(3) Would you begin your own payment plan subject to a formula that was based upon the IRS cost of living standards?
(4) If your income was steady, would you set up and be willing to risk failure to try a long-term repayment plan?
(5) Given that a tax crime conviction would set up the tax debt owing as an even more onerous restitution payment, what acts and statements could you telegraph to IRS to show that steps are being taken to begin liquidation to an IRS living standards connected subsistence level?
(6) After liquidation to an IRS living standards connected subsistence level and achievement of a $0 further collection potential, would you consider asking to being placed on currently not collectible (CNC) status?
(7) Would you consider living overseas in order to possibly enable yourself to repay the tax debt more rapidly and efficiently through foreign earned income exclusion?
(8) What other actions would you consider to stave off criminal prosecution while paying off your tax debt?

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Taxpayer First Act Credit Card Trap

President Donald Trump signed the Taxpayer First Act on July 1, 2019. The Taxpayer First Act has a number of provisions, some of which will help IRS with its internal processes, and some of which are external and aspirational. As to one of the provisions, the IRS is about to embark on a relationship with credit card companies to allow taxpayers the ability to pay their taxes directly by credit card. As you may or may not be aware, one major possibility for a taxpayer to favorably resolve solve their IRS debt, when conditions permit is via bankruptcy. A resolution requires use of the 3-year, 2-year & 240 day limitation provisions with tolling.

Bankruptcy Code §523(a)(14) states that if a nondischargeable tax debt to the United States ( such as a nondischargeable tax or a customs duty) then any credit card debt incurred to pay such nondischargeable tax debt is excepted from discharge. As a practical matter this has been the rule for some time, but the possibility of paying federal tax debt directly with credit cards is expected to have a “short circuiting” effect, exposing what was has otherwise been an obscuring relationship between the credit card borrowing and its traceable application directly to a tax debt.

Currently, the use of credit cards to obtain money for use in paying taxes is difficult to trace because it probably involves a borrowing mechanism that uses currency as an intermediate, such as with an ATM machine. Only a few services allow transfer directly from credit card into a bank account, but the fees range from 10%-15%. Over the next few months, the IRS may be able to negotiate credit card transaction fees to 1-2% (not including interest). If and when this occurs, the use of direct credit card payment to the IRS will the greatly preferred in instances where credit cards are used as a source of tax payment funding.

This also will probably mean that tax transcripts can be expected to carry some indication to reflect the fact that a tax payment was accomplished with a credit card. Whether this indication shows up in taxpayer transcripts or is available internally at IRS, the tracing to verify the type of payment should be expected to be easy. Because the charging taxpayer is going to have to pay a publicly known credit card processing fee the records of the transactions may be even more identifiable in the bank credit card records, especially if the user fee is independently posted. In short, the fact of the direct use of a credit card to pay tax debt should be instantly and unambiguously available to both the IRS insolvency unit and to the credit card account creditor.

The combination of direct credit card use and an expected low initial transaction fee should make this option very popular, but once the option is used, it will work to the detriment of tax debtors and shift the possible remedy chosen as between bankruptcy, offer-in-compromise, and other alternatives. Worse still, if tax debt practitioners fail to ask about credit card tax payment, or discover and understand it on the account transcript, and take it into account for an analysis of the debtor’s options, unpleasant surprises will result. Also needed is a warning advisement to avoid the direct use of credit cards to pay tax debt as soon as possible, starting before this mechanism is fully implemented.

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