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IRS collections can be interesting paradox

Robert Teuber

Robert Teuber

There is an interesting paradox occurring in our federal government. While it appears that the IRS Collection Division is increasing its efforts to collect unpaid taxes, it is also increasing the use of tools that delay the collection of tax. This allows cases to be resolved even though the taxes are not currently paid and is terrific news for taxpayers who are currently unable to afford their past-due tax debts. If we look forward a few years, however, we may see the pendulum swing back the other way to hit these taxpayers hard.

Traditionally, to resolve a past-due tax liability, the most readily available options were (1) the full payment of the tax debt, (2) an offer in compromise to settle the debt for less, or (3) an installment agreement that would pay off the full liability over time. These days, however, our clients may be seeing an increased availability of a few lesser-used tools offered by the federal government: uncollectible status or partial payment installment agreements. Both of these tools punt the ultimate collection of the tax liability and implicate questions concerning the collection statute of limitations.

When a taxpayer’s financial circumstances are sufficiently tough as to prevent him from making any meaningful payments against an outstanding tax debt, the IRS may (upon review of submitted financial statements) agree that the taxpayer should be deemed uncollectible, at least for the time being. Such a classification is intended to give a taxpayer a break from paying down an outstanding tax debt. The temporary reprieve may fall between one and two years. The IRS is supposed to revisit the matter after the stay expires and can monitor the taxpayer’s financial status through any filed tax returns. If circumstances have changed so as to allow that taxpayer to begin making payments, the IRS will resume collection activities.

Similarly, the IRS is allowed to enter into partial payment installment agreements. These too take into account the taxpayer’s financial circumstances. These plans permit the IRS to enter installment agreements that, based on the amount of the installments, would not full-pay the outstanding liability within the time remaining on the collection statute of limitations. Such installment agreements are also intended to be temporary and may be revisited in a fashion similar to those cases in uncollectible status.

What the IRS has to watch out for is that, once a taxpayer is classified as uncollectible or put in a partial payment installment plan, the case is not forgotten. The IRS collection agents are currently overwhelmed and cases can fall through the cracks. Where a case does get forgotten, the fortunate taxpayer can receive a significant windfall when the 10-year collection statute of limitations expires on the tax debt.

Subject to certain events that can toll the limitations period, the IRS generally has 10 years from the date of assessment to collect an unpaid tax debt. It is not hard to imagine that with an increased use of partial payment installment plans and uncollectible status, more cases could brush up against or pass this 10-year mark. This does not mean, however, that crossing your fingers and hoping to be forgotten is a sound planning technique. In most cases the IRS will revisit the case at a later date and additional interest will have accrued on the debt.

If the IRS revisits the case shortly before the statute of limitations expires, it has another tool at its disposal which can extend the time for collecting an unpaid tax. If the tax debt is substantial enough, the government may bring an action in the federal District Court to reduce that tax liability to a judgment. By doing so, it effectively prolongs the statute of limitations by invoking the state statute of limitations on the collection of a judgment. In Wisconsin this will give the IRS an additional 20 years.

Given this apparent trend in the IRS, it is easy to anticipate an increase in such actions in the next 10 years. Due to the commitment of resources required to carry on a District Court action, it is not likely that the taxpayers with minimal tax debts will be pursued through judgment but many others could be. If the IRS does increase its collection efforts via judgment, those currently benefiting from these favorable resolutions could be looking at an effective 30-year collections period.

Robert Teuber is a tax attorney with Weiss Berzowski Brady LLP in Milwaukee. He works with individuals and businesses in resolving tax audits, appeals, litigation and collection actions brought by the IRS and Departments of Revenue. Rob can be reached at 414-270-2538 or rbt@wbb-law.com.

4 comments

  1. If the IRS wants to collect more taxes, it ought to check out 1600 Pennsylvania Avenue. Scores of Obama’s top appointees failed to pay any taxes at all for many years. Treasury secretary Tim Geithner is a poster-boy for not paying taxes while simultaneously claiming refunds for taxes he never paid. You would think that was illegal, but not in Washington. When our top leaders in Washington do not pay their taxes, what does that say about our government? It says that the law is for “little people” and not government officials. And people wonder why our country is so far off-track.

  2. “Treasury secretary Tim Geithner is a poster-boy for not paying taxes while simultaneously claiming refunds for taxes he never paid.” – Do you have a citation for that allegation? (I note that he does have tax issues: http://online.wsj.com/article/SB123187503629378119.html But, in the spirit of the Rally To Restore Sanity, let’s try to be accurate when we “go negative.”)

  3. This is a major story that can easily be found through any Google search. It was in the New York Times, Washington Post, dozens of other places. Google “Geithner fails to pay taxes.”

    http://www.cbsnews.com/stories/2009/01/21/politics/main4745567.shtml

    http://www.thewashingtonnote.com/archives/2009/01/what_the_right/

  4. http://latimesblogs.latimes.com/washington/2009/03/obama-kirk-taxe.html

    Enjoy this L.A. Times article on Ron Kirk, U.S. trade Representative, where they write: “Not sure if we have room to list every other would-be Obama appointee who turns out to have tax problems.” They then list six or seven people, including Geither, former US Senate Majority leader Tom Daschle, Rep. Hilda Solis, and U.S. Sen. Max Baucus.

    My point is not to pick on obscure people with tax problems who seek appointments to minor government jobs. These are people of immense power and privilege with huge staffs to ensure they comply with tax laws. Hilda Solis, for example, is now the Secretary of Labor. Kirk was Mayor of Dallas from 1995-2002. My point is the promise of “Hope and Change” was hollow and meaningless. Nothing has changed in Washington and probably never will.

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