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.