Earlier this year in Farmer v. Commissioner of Internal Revenue, the U.S. Tax Court ruled on a husband’s request for innocent spouse relief after his wife obtained relief years earlier.  According to the court’s opinion, the petitioner and his wife filed a joint tax return in 2015 and 2016. Subsequently, the IRS identified deficiencies related to unreported income that were attributable to the petitioner.

By 2018, the petitioner and his wife had divorced in what appears to be a rather messy ordeal.  The petitioner’s wife sought innocent spouse relief from the couple’s tax obligations from 2015 and 2016, which she received.

Suddenly receiving a surprise tax bill in the mail is not something anyone looks forward to. However, taxpayers who face financial difficulties paying their back taxes may be able to settle the total amount due for less than the amount owed through the Offer in Compromise (OIC) program.

To be eligible for an OIC, a taxpayer must have filed all previous years’ tax returns and made all necessary estimated tax payments for the most recent tax year. Taxpayers who are currently involved in a bankruptcy proceeding are also ineligible for an OIC.

Tax Liens vs. Tax Levies

The terms “lien” and “levy” sound somewhat similar, and people sometimes get them confused with one another. The two processes are related, but they are also very different from one another. Understanding the difference is very important.

Federal Tax Liens

A lien is a type of legal right over someone’s property, which creates a security interest for a creditor. In order to acquire a lien over a taxpayer’s property, the IRS must send a notice to the taxpayer informing them of the amount of tax they owe and making a demand for payment. Ten days after the IRS demands payment, the lien attaches to the taxpayer’s property if they have not paid the amount demanded.

If the IRS files a notice of tax lien with the county clerk where the taxpayer resides, their lien takes priority over any other liens in effect at the time. This means that the tax debt owed to the IRS gets paid before any other creditor with a lien. The IRS must notify the taxpayer of the filing within five days.

Federal Tax Levies

While a lien is simply a legal instrument that affects the taxpayer’s ownership interest in their own property, a tax levy allows the IRS to take property and apply its value to the taxpayer’s debt. The IRS must give notice and demand payment at least ten days before executing a levy. This could involve garnishment of wages or bank accounts or seizure of personal property. Federal law exempts many types of property from seizure for a tax levy.

Liens and Levies During the Pandemic

The COVID-19 pandemic began in the U.S. in early 2020, with widespread efforts to contain the spread of the virus beginning in March. The IRS announced its People First Initiative, intended to assist people who had lost their jobs or were experiencing other financial hardships due to the pandemic. The annual tax deadline, usually on April 15, was moved to July 15. Payment deadlines for taxpayers with installment agreements were extended. The IRS also announced that it would suspend enforcement activities, including liens and levies.

This initiative mostly ended in July, but the IRS has announced other measures that take the economic impact of the pandemic into account. The Taxpayer Relief Initiative, announced in November, extends the dates for many installment agreements and allows for delays in liens, levies, and other collection activities.

Brandywine Tax Resolution represents Pennsylvania taxpayers, helping them with local, state, and federal tax problems. A tax attorney can advise you of your legal rights and options, advocate for you in court if necessary, and find solutions for your particular needs. To schedule a confidential consultation with a skilled and proficient taxpayer advocate, please contact us today, online or at (610) 235-7577.

What Is the Trust Fund Recovery Penalty?

Section 6672 of the IRC allows the IRS to assess and collect a penalty from anyone who is obligated to collect and pay trust fund taxes when they “willfully” do the following:
– Fail to collect the required tax;
– Fail to “truthfully account for and pay over such tax”; or
– Try “to evade or defeat any such tax or the payment thereof.”
The penalty is equal to the total amount of tax that the person failed to collect, failed to account for and pay, or attempted to evade.

What Taxes Are Covered by the Trust Fund Recovery Penalty?

Trust fund taxes commonly include personal income tax and the taxes that go towards Social Security and Medicare under the Federal Insurance Contributions Act (FICA). Employers must withhold an estimated amount of each employee’s wages for federal income tax, based on information provided on Form W-4. FICA requires employers to withhold 7.65 percent of an employee’s wages from each paycheck — 6.2 percent for Social Security and 1.45 percent for Medicare. Most employers must submit withheld amounts every month, and file quarterly returns with the IRS.

Employers are responsible for matching each employee’s FICA taxes, so while an employee is only liable for 7.65 percent, the total amount paid to the government under FICA is 15.3 percent of the employee’s pay. The employer’s share of FICA taxes is not necessarily considered to be a trust fund tax, but the IRS will still use vigorous means to collect it. For self-employed individuals, the Self-Employed Contributions Act (SECA) requires payment of what would otherwise be both the employee and employer’s share of payroll taxes.

Who Is Responsible for Payroll Taxes?

The TFRP is notable because it allows the IRS to pursue individuals, not just business entities. This could include any officer, partner, manager, board member, or other person with official responsibility for collecting and paying trust fund taxes. The only exception made by the statute is for nonprofit board members who work as volunteers.

How Does the CARES Act Affect Payroll Taxes?

The Coronavirus Aid, Relief, and Economic Security (CARES) Act provided a wide range of economic stimuli earlier this year. Section 2202 provides a deferral of employer payroll taxes under SECA and FICA. This only applies to the employer’s share of FICA taxes, meaning employers are still obligated to withhold and pay their employees’ portion by the deadlines set by the IRS.

Brandywine Tax Resolution is dedicated to representing Pennsylvania taxpayers. If you are dealing with a trust fund penalty or other tax problem, a tax attorney can advise you of your legal options, go to court on your behalf if necessary, and help you find solutions tailored to your particular circumstances. Please contact us today, online or at (610) 235-7577, to schedule a confidential consultation with a skilled and proficient taxpayer advocate.

For individuals, some common examples of taxes owed are: Wage Tax, Earnings Tax, Net Profits Tax, School Income Tax, and Real Estate Taxes. In order to be accepted into the Department of Revenue Voluntary Disclosure Program the following requirements must be satisfied:

• The taxpayer cannot have been contacted by the City of Philadelphia Revenue or Law Departments, or any collection agency engaged by the City regarding the unpaid taxes.
• The taxpayer must make a full disclosure of all Philadelphia taxes owed for the past six years.
• Taxpayers that require an installment agreement to pay off their tax debt are not eligible for the Voluntary Disclosure Program.
• The taxpayer must pay one hundred percent of the tax and interest owed within 60 days of receiving billing from the Department of Revenue.

Taxpayers that are accepted into the Voluntary Disclosure Program and meet its terms will not be audited by City or assessed for taxes covered by the Disclosure Program for any period prior to the six-year disclosure period.  Additionally, the taxpayer will not be assessed for any penalties for the tax years within the disclosure period.

The Voluntary Disclosure Program is an excellent opportunity for significant tax savings.  Wise taxpayers will take advantage of the Disclosure Program while it remains available.

Fortunately, for those taxpayers whose noncompliance was non-willful, the Streamlined Offshore Compliance Procedures (“Streamlined Procedures”) offer substantially reduced penalties and the avoidance of criminal prosecution. On June 18, 2014, the Internal Revenue Service announced Streamlined Procedures. There are two sets of Streamlined Procedures, one for U.S. taxpayers residing in the United States, and the other for U.S. taxpayers residing outside the United States.

Streamlined Procedures For Taxpayers Residing In The United States

What Is Exempt?

The Pennsylvania Department of Revenue has defined the extraction of natural gas as an excluded mining activity.  Pennsylvania law defines mining to include exploration, drilling, extracting and refining of natural resources such as natural gas.  The actual mining process is considered to begin with the drilling of the wellbore and ending with last physical change of the gas prior to being sold and transferred.

The following processes have been considered mining activities:

• Cementing.  Cementing involves pumping cement slurry (a blended mixture of dry powder cement, water and various additives) to bond casing or piping to the wall of the bore hold.

• Fracturing.  Fracturing is a well stimulation process used to improve the natural flow of oil gas.  Fracturing begins with the use of a fluid, a mixture of water and chemicals, to crack the rock formation.  Then, proppants such as sand and ceramic material are injected into the cracks to create open channels through which the gas flows.  Once the proppants are in place, the fluid is drained from the well.

• Acidizing.  Acidizing involves the injection of acid below rock fractures to create flow channels within the rock formation.  The acid is specially blended based on a well’s bottom temperature, depth, fluid characteristics, and nature of formation.

• Drilling

 The following equipment items have been defined as exempt by the Department of Revenue:

• Acid Pumper (equipment used to pump specially blended acid)

• Batch Mixer (equipment used at the well site to mix cement slurry)

• Frac Pumps (equipment that injects fluid into a formation)

• Manifold Trailer (equipment that attaches piping lines to the well head to facilitate the pumping operation)

• Pump down acid equipment (a positive placement pump with boost pump for prime up.  Positive placement pump is used to expand a cavity.  Boost pump is used to increase the system pressure of the operation.  The pump down acid equipment is the pumping equipment used to perform the fracturing)

• Twin cement unit.  (a system located at the well site that mixes cement to be added to the batch mixer)

• Drilling rig and repair parts, drilling head, drilling extensions

• Cutting bits

• Casing, Pump, Pump rod, Pump Jack

• Blasting and dislodging equipment and supplies, such as air compressors, compressed air tubes and dynamite or other explosives

• Rock dust and rock-dusting equipment

• Trolley and mine telephones used predominantly in mining activities, other than for managerial direction and supervision, such as for dispatching purposes on mine railways and work coordination among production employees of equal authority.

Petition For Refund

For those improperly assessed with sales tax for items subject to the Mining Exemption, a petition for refund should be filed with the Board of Appeals.  A petition for refund of a sales tax payment must generally be made within three years of the payment.  However, a petition for refund of sales tax monies paid as a result of an assessment, determination, or settlement must be filed within six months of the actual payment.

Why Me?

The Internal Revenue Service utilizes several examination techniques to determine the accuracy of tax returns.  Computers are utilized to verify computations shown on each return.  If it is determined that the computations are incorrect on a return, a notice is issued to the Taxpayer adjusting the amount of taxes on the return.  Correspondence audits are initiated by the issuance of letters to the Taxpayer requiring verification of deductions and/or examinations shown on a return.  Office audits are conducted in local Internal Revenue Service offices.  Field examinations are conducted by Revenue Agents of more complex returns.

Correspondence Audits

The use of correspondence audits by the IRS has increased substantially over the past ten years.  Correspondence audits are used by the IRS to obtain additional information from the Taxpayer about a few limited issues on a return.  The correspondence audit is most often focused on narrower issues than a traditional office audit and is conducted by mail or other written communications, making them less expensive for the IRS.  Some examples of the kinds of items that can which can be verified by a correspondence audit are itemized deductions such as interest, taxes, charitable contributions, medical expenses, and simple miscellaneous deductions.  Issues other than itemized deductions may be examined if they are a single matter which would not be appropriate for an office audit or field examination.

Office Audits

In an office audit, the IRS interviews the Taxpayer and inspects the Taxpayer’s records at an IRS office.  The office audit commences with a notice to the Taxpayer requesting his or her appearance at an IRS office on a certain date.  The letter will typically list a series of documents which the Taxpayer must bring to the audit.  When the letter arrives for an office audit, the Taxpayer may request that a proposed audit date be changed to a more convenient date.  The most frequently examined items in an office audit include casualty and theft loss, charitable contributions, employee business expense, interest expense, medical expense, miscellaneous expenses, moving expense and rental income and expense.

Field Audits

Field audits are normally initiated by a telephone call or a letter from a Revenue Agent.  Unannounced visits from Revenue Agents are rare.  The field audit is generally known as such because the examination is conducted at the Taxpayer’s place of business rather than an IRS office.  There may be circumstances under which a Taxpayer may request a transfer of the place of examination from one place to another, including the office of the Taxpayer’s tax attorney.

The Tax Attorney’s Role

The IRS and other tax agencies have broad powers to examine the Taxpayer’s financial papers and records.  Accordingly, it is imperative that the Taxpayer be prepared, organized and thorough in her or his response.  By consulting with a tax attorney at the outset of an audit, the Taxpayer can learn what to expect from the IRS and be best prepared to answer or not answer the questions of the auditor.  Learning the complex tax law related to a tax audit is not always possible, the tax attorney will be able to provide counsel in this area.  An attorney can go to an IRS audit in the place of the Taxpayer.  Representation by a tax attorney rather than an accountant provides includes the additional advantage of the attorney-client privilege.  Generally, statements that you make to your tax attorney cannot be revealed to the IRS, or anyone else without permission.  While there is a limited federal accountant client privilege, it doesn’t apply if the IRS decides to bring a criminal tax case against you.

Income taxes are generally dischargeable if the Taxpayer meets all of the following conditions:

• A nonfraudulent tax return was filed for the year(s) in question.  If the Internal Revenue Service filed a Substitute For Return which the Taxpayer neither signed nor consented to the return is not considered filed.

• The tax liability in question is for a tax return filed at least two years before the bankruptcy filing date.

• The tax return for the tax liability in question was due at least three years before the bankruptcy filing date.

• The Internal Revenue Service has not assessed the liability in question within 240 days of the bankruptcy filing date.  The aforementioned 240 day period is extended by the period of time collection activity was suspended by matters including an Offer In Comprise or another bankruptcy case.

If all of the above requirements are met, the Taxpayer’s personal liability for the relevant taxes should be discharged.  However, a lien placed on the Taxpayer’s property by the Internal Revenue Service or other taxing authority will remain after the bankruptcy case is closed.

Property taxes aren’t dischargeable unless they became due more than a year before the bankruptcy filing date.  As discussed above, any tax lien will remain on the property.  Accordingly, bankruptcy is typically not a viable solution for property tax issues.

Taxes that generally are not dischargeable in bankruptcy include employment taxes, trust fund penalty, sales taxes, excise taxes and customs duties.

Finally, it is important to note, that the initiation of a bankruptcy case will generally stop all collection activity by the Internal Revenue Service.  Levies against wages must be released by the Internal Revenue Service upon receipt of a Notice of Bankruptcy Filing.  Taxpayers requiring the immediate release of a levy against their paycheck should seriously consider an emergency bankruptcy filing.