Internal Revenue Service letters should receive careful attention instead of being ignored.
They are sent to the corporation or individual who is being notified that their assets are at risk of being seized because of unpaid taxes.
The due process of law also takes a different direction.
IRS seizures occur and attorneys need to understand what can happen to clients owing back taxes — and that they don’t have the same due process under the law as provided in civil court, said Rachel Pappy, a partner with the Roderick H. Polston Law Firm.
Typically in a civil or criminal case, there is a right to a trial in the familiar due process of the law, she said. Due process rights with the IRS doesn’t mean they are going to civil court.
Pappy discussed varied situations that lawyers might encounter at The Vault restaurant during a recent visit to Tulsa.
Problems begin when people get behind in taxes. The most vulnerable are the self-employed using the 1099 form or business owners taking the tax distribution and not paying taxes each quarter or at the end of the year. When tax time rolls around, they sometimes have no money to meet the obligation.
They ignore the “hundreds” of letters from the IRS about past due taxes, thinking the issue will go away or they eventually will pay the bill.
Ignoring the tax problem won’t make it go away and people often miss the critical part of the letter which says they “have the right to appeal,” Pappy said. “It doesn’t say you must appeal this or we will seize your assets.”
Every letter has the notice of intent to levy or seize.
“If a person doesn’t recognize that statement and fails to appeal within 30 days of the letter’s postmark, the IRS will take action,” she said.
That seizure might include sweeping a bank account to get the money. It could mean contacting customers and telling them to send the money to the IRS instead.
The IRS can obtain cell phone records and use that information to contact people asking if they know or do business with that company or person.
The appeal process must follow a specific route including the use of IRS Form 121253, Pappy said.
It is a procedural way to move forward and the handwritten heartfelt appeal letter won’t be accepted.
Pappy also discussed who is responsible for meeting the payroll tax obligation if a business fails, who is on the hook and how that responsibility can be mitigated.
She outlined how attorneys involved in divorces could unwittingly get their client into tax trouble.
Too often an attorney representing the wife in a divorce action will, in the filing, require the husband to pay all the taxes because this “is in her best interest.”
Reality sets in when both parties learn the IRS doesn’t care what the divorce document says. They filed jointly and the IRS will pursue both until the debt is paid in full.
Contract attorneys must structure those business documents so if the company falls into tax trouble, they know the best way to mitigate that liability and the company’s responsibility.
Income derived from criminal activity also is taxed.
There is a little box on the 1040 tax form asking about “other income,” Pappy said.
People, including attorneys, do not realize the IRS will come after profits from criminal activity. Lawyers must realize that even if their client goes to prison for selling drugs, prostitution or other criminal involvement, that brings income and they will owe for income earned on that activity when released from prison.
Pappy speaks frequently on tax issues and has made 45 presentations recently.
“Each time a handful of people will come up to me and say ‘I encountered this,’” she said. They didn’t know how the IRS procedure worked and was glad to have the explanation to help clients.”
Law school taxation classes don’t focus on IRS procedures, Pappy said. Procedures are constantly changing and every day is “a whole new game.”
Understanding that game makes it possible to help clients.
She spoke of a client unable to pay second quarter taxes. The revenue officer on the case could not make changes to provide a payment mechanism.
Pappy worked with the officer to send the notice of appeal letter even though both knew it would be appealed.
The purpose was to give the client time — three months — to recover from the current financial crisis and make both the second and third quarterly payments.
Attorneys need to understand the process in order to “squeeze out the time” for their clients, she said. It also is in the best interest of the government because it gets the past due taxes.
Appeals often are rejected because of a technicality, which can be a critical moment in the process.
“We have argued that the technicality should be overcome at the lower level because if we had to appeal again, then it would be that much longer before the government would get their money,” she said.
The Polston Law Firm has represented clients owing as little as $12,000 up to millions of dollars. Some wanted to turn land over to the IRS for the taxes, an offer that was rejected.
Attorneys must know the rules and how they work, Pappy said. Revenue officers will cooperate as long as one knows what to ask for.
“Everyone hates the IRS and the agency is a punching bag,” Pappy said. “I don’t feel that way because I realize they are doing their job. Someone has to collect the money for the government.
“They are doing the best they can with limited resources. The agency’s funding has been cut for the past five years and they have been underfunded consecutively for a decade compared to their requests for what they need.”