10 Tax Law Myths About The IRS, Tax Debts, Audits and More
Taxes may be a certainty but understanding all the pieces of the tax code can quickly get confusing. It may seem that for every rule, there are qualifications and exceptions. Even after you think you understand what laws apply in your situation, being able to get the right result can be difficult.
It is essential to talk to an attorney who understands tax law and who can advocate for the best possible solution for your situation. The Law Offices of Robert T. Leonard can answer your questions and help you figure out how you can move forward.
Table of Contents
- Myth 1: My taxes are not dischargeable in bankruptcy
- Myth 2: My wife and I are married but filing separate so she will not be responsible for my tax debt
- Myth 3: My corporation has payroll tax debt, but the IRS cannot pursue me individually
- Myth 4: The Employment Development Department (EDD)/IRS decided my workers are independent contractors, so the other agency must accept this result
- Myth 5: I make too much money to consider an offer in compromise
- Myth 6: I will get as good a result handling my IRS audit then a tax attorney
- Myth 7: It has been 10 years since the tax year so the IRS can no longer collect
- Myth 8: I owe a significant amount to the California Franchise Tax Board. They cannot revoke any license
- Myth 9: I owe money to the IRS. I have a constitutional right to travel throughout the world. The IRS cannot revoke my passport
- Myth 10: I have a written agreement with my independent contractor so the EDD cannot rule that they are an employee
Myth 1: My taxes are not dischargeable in bankruptcy.
After a challenging time of compounding debt, bankruptcy can be a way to get relief and wipe your financial slate clean. Tax debt, especially, can feel like a heavy burden to bear.
While some debts cannot be discharged in bankruptcy, more often the answer to whether they can, depends. Certain circumstances will allow you to discharge your tax debt through bankruptcy.
This can be a very complicated analysis. I am going to keep it simple in this article.
Basic Rule For Discharging Income Taxes In Bankruptcy
Income taxes, both state and federal, can be discharged in Chapter 7 and 13 if the following requirements are met:
- The return for the year was due more than three years prior to the date of the filing of the bankruptcy;
- The return was actually filed at least two years prior to the date of the filing of the bankruptcy (and before the IRS filed a substitute return); and
- There was no new assessment of tax in the 240 days prior to the filing of the bankruptcy.
There, a nice simple rule, right? Well, we all know that nothing is truly simple with taxes. (But, it’s not that tricky in most cases.)
Tax Return Due Date
Income tax returns are normally due April 15 of each year. However, if April 15th falls on a Saturday or Sunday, the due date might be April 16 or April 17. A debtor must keep this in mind when calculating the “due date”. You do not want to miss the discharge date by filing one day too early! Also, if the taxpayer has filed an extension to file the tax return, the “due date” for the return is moved out six months to October 15, 16 or 17.
Tax Return “filed” Date
A debtor seeking to have an income tax discharged has to have filed their return at least two years prior to the filing date of the bankruptcy petition. The idea is that a taxpayer has to give the taxing authority at least two years notice of the tax due by filing a return. This gives them at least two years to pursue you to collect the tax. Be aware that there are important court decisions that say that if the IRS or other taxing authority files a “substitute return” for you before you file a return, then your subsequent filing of a tax return does not count. In other words, if you wait too long to file a return and they file one for you, then you can file a return BUT it will not count AND you can NEVER meet this requirement. In short, you might choose to FILE your return on time even if you cannot pay the tax if you want a chance to discharge the tax in bankruptcy.
New Tax Assessed In The 240 Days Prior To Filing
If the reason you are filing bankruptcy is because the IRS just told you they disallowed a tax deduction and you owe more tax, then this rule matters for you. In short, any tax assessed in the 240 days prior to filing is nondischargeable. For example, if you claimed your adult child as a dependent and the IRS notified you that your adult child filed their own tax return and you owe tax because you cannot claim them as a dependent, then the tax due as a result of this is nondischargeable if you file before 240 days have passed.
Some Events Toll The Running Of Time
Generally, income taxes are dischargeable in bankruptcy as long as they meet the above requirements. However, sometimes the time requirements do not run if the debtor has a pending “offer in compromise” under review with the taxing authority. Also, having filed a previous bankruptcy may have also tolled (stopped the running of) the time requirement(s). (Note: Just entering into a payment arrangement / installment agreement with the taxing authority will not toll the passing of a time requirement.)
Complicated Bankruptcy Tax Rules
I have shared with you the basic rule for the discharge of income taxes. The key point is that income taxes can be discharged in bankruptcy. Sometimes penalties and interest are dischargeable even if the tax is not. If your taxes are not income taxes (e.g. trust fund or sales taxes) the rules are different. There ARE ways to manage those taxes in bankruptcy.
Contact me to determine if your tax debt might be discharged in a bankruptcy proceeding.
Myth 2: My wife and I are married but filing separate so she will not be responsible for my tax debt.
California and Nevada are community property states. It is often the case in a marriage where one spouse has tax debts, but the other does not, that the husband and wife decide to file separate returns. The strategy behind this is to protect the innocent spouse from the spouse with tax debts.
This strategy does not work in a community property state. In a community property state, during the time they live together, each spouse gets one half of the income, deductions, credits and withholding of the other when they file married filing separately.
The form the taxpayers should use is IRS Form 8958. This form allocates the income, deductions, credits and withholding to each taxpayer in accordance with community property law. Notwithstanding that many accountants and enrolled agents are unfamiliar with this Form an reporting requirements does not relieve you of this problem. The IRS will recognize that your returns are incorrect and force you to file corrected amended returns.
You may attach your own spreadsheet bifurcating or splitting the allocation. Community property law is foreign to most IRS computers and many IRS personnel at the Service Center. Failure to use IRS Form 8958 may trigger many months of endless correspondence with the IRS Service Center.
Community property law has other adverse consequences to tax debtors. When two people marry, one may have tax debt and the other may not. The innocent spouse is not legally liable for the pre-marital tax debt of the spouse with tax debt.
However, the IRS may and will collect from the innocent spouse’s income for the other spouse’s pre-marital tax debt! Under community property law, to extent the innocent spouse’s income is used to pay the community expenses, the IRS will levy the innocent spouses W-2 income or social security income to collect the pre-marital tax debt.
If you are faced with this situation please contact my office to discuss some strategies, including innocent spouse relief, to resolve the tax debt.
Myth 3: My corporation has payroll tax debt, but the IRS cannot pursue me individually.
There are situations where having a corporation can shield you from personal liability. Unfortunately, that is not the case with payroll tax debt. The IRS will hold you personally responsible if they determine you are a responsible person. The Internal Revenue Code is notoriously complex, particularly for rules governing business taxes. It is easy for business owners to run afoul of the IRS when trying to calculate and pay its payroll taxes.
Civil penalties and interest are imposed if the employer fails to file returns or to file them timely or to pay over all or the correct amount of employment taxes. If the employer who owes these taxes has no assets, the IRS is unable to collect the tax or the penalties and interest from that employer. But, despite this fact, the employees still get credit for the amount of income and FICA taxes withheld, even if employer withheld taxes are never turned over to the government. Similarly, where an employer has withheld FICA and withholding taxes but failed to pay them to the IRS, the employee is credited with the amount withheld; and if the government does not recover this tax from the employer or employer’s responsible person, the tax is lost. For this reason, the IRS may get especially aggressive in its collection efforts of payroll taxes.
If an employer fails to turn over the withheld taxes to the government, the IRS has the power to impose the Trust Fund Recovery Penalty (TFRP) against certain individuals who are determined to be “responsible persons” of the employer. The amount of the liability is equal to the amount of the delinquent trust fund taxes which consist of the employee’s portion of the FICA taxes and all of the withholding taxes. The Trust Fund Recovery Penalty is a collection device; it is a method by which the Internal Revenue Service assesses personal liability against an individual and “pierce the corporate veil” without the necessity of any prior judicial determination.
The determination of whether an individual or individuals will be liable for the Trust Fund Recovery Penalty is a two-part test. The first part is whether the individual(s) is a responsible person, as discussed above, and the second part is whether that person failed to perform the required acts “willfully.”
A person subject to the Trust Fund Recovery Penalty includes “an officer, or employee of a corporation, or member or employee of a partnership, who … is under a duty to perform the act in respect of which the violation occurs.” See IRC § 6671(b). A person other than a corporate employee or officer may be found to be a responsible person for purposes of the penalty. On the other hand, it is not necessary to assess a Trust Fund Recovery Penalty against a sole proprietor. In sole proprietorships, the individual owners are fully liable for the full amount of the taxes (including non-trust fund taxes), all penalties and interest.
The IRS assesses whether a person was a “responsible person” for paying payroll taxes on a case-by-case basis. The IRS looks at the totality of the circumstances to determine whether a person had the authority in a business to pay taxes. Some of the factors the court considers include whether a person:
- Was an officer, director, principal shareholder, partner or member of the business
- Had signature authority on checks
- Handled payroll disbursements
- Controlled financial affairs of the company
- Determined which creditors were paid or exercised authority to pay creditors
- Controlled the voting stock of a corporation
- Signed employment tax returns
The employees who are performing ministerial tasks without exercising independent judgment are not generally named as “responsible persons” by the IRS. A non-owner employee who is being supervised, and who does not have the authority make independent decisions on behalf of the employer, will not be asserted the Trust Fund Recovery Penalty (TFRP). Likewise, TFRP is not generally assessed against any volunteer members of any board of trustees or directors of a charitable organization to the extent such members are serving in an honorary capacity, do not participate in the day-to-day or financial operations of the charitable organization, and do not have knowledge of the failure on which such penalty is imposed.
Generally, the IRS will not recommend the assertion of TFRP against an individual if sufficient information is not available to demonstrate that he or she was actively involved in the corporation at the time the tax liability was not being paid. However, this general rule does not apply if the individual intentionally makes information unavailable to impede the investigation. The IRS Revenue Officers conduct field investigations to determine the trust fund recovery penalty liability. The determination of who is the responsible person is a question of fact.
Thus, the Revenue Officers generally determine whether the person in question had the authority to decide to what bills should or should not be paid and when. No TFRP should be assessed where the person does not sign checks, or handle payroll or does not participate in the day-to-day activities of the business. On the other hand, the IRS considers the ability to sign checks and the actual signing of the company’s checks as a significant factor in holding an individual responsible for TFRP. Simply put, the IRS is determining who, realistically, ran the business and paid bills on behalf of the employer. This is not necessarily the shareholders and it is not necessarily the board of directors. It may be an employee who had a signature authority on the company’s bank account and who signed checks on behalf of the company, for example.
If you are concerned that you might be considered a responsible person for unpaid payroll taxes then you should contact my tax law office for a complete evaluation. There might be strategies available to diminish or eliminate the responsible person but they might be time-sensitive and waiting until you are contacted by the IRS might prove to be an unwise decision.
Myth 4: The Employment Development Department (EDD)/IRS decided my workers are independent contractors, so the other agency must accept this result.
Because the IRS and the California Employment Development Department (EDD) have somewhat different approaches when examining worker classification for independent contractors, it is important to understand where the similarities between the two examinations end. In a nutshell, federal law is more generous in limiting IRS reclassification of independent contractors and in options to reduce potential liability than offered by the EDD, but requires diligence in either event to assert rights. On the appeals side, businesses may overlook the necessity to affirmatively pursue cases. With EDD appeals businesses may not realize that ALJ proceedings are not before a court and require at the ALJ level full pursuit of rights as the CUIAB does allow new document production as permitted before the Tax Court.
Commonality of IRS and EDD
Businesses hire an outside contractor rather than an employee for many reasons. Special expertise is one reason. Another related reason is limited resources make more cost effective to contract for an outside service as needed, rather than to have permanent staffing. On the other hand, both the IRS and the EDD are concerned whether businesses are trying to avoid the costs of employment, including avoiding employer payroll tax liability1. Compounding this is the fact that a worker’s classification is not always clear.
In determining a worker classification, while the tests are slightly different – the IRS has a 20-factor test, and the EDD’s analysis is based on a 10-factor test, they both share in common the fundamental question whether a business has the right to control the detail over method and manner of the worker’s services – thus making the worker an employee. This is not always self-apparent and therefore taxpayers and IRS/EDD auditors do not always agree with each other.
For example, assume an outside software engineer is hired to develop a software module that will regulate air intake for a carburetor. That module is critical to the overall function of a soon-to-be completed software program to operate the vehicle electronic system. To assure that the module fits into the program, the auto maker may require a particular program language be used, that it be compatible with other software components and that the module works correctly. However, for purposes of worker classification views may differ as to whether the auto maker’s exacting requirements control the method and manner of the worker’s performance – indicate that the worker is a controlled employee, or in the alternate, that the business, in setting parameters, is only seeking a working result, and is not supervising the worker. While in Detroit, an auto maker’s specifying highly exacting parts requirements from suppliers will not turn suppliers into employees, within nearly the same context, the IRS and EDD may disagree as to services.
Section 530 Safe Harbor
Given these uncertainties, for nearly 40-years, Section 530 of the Revenue Act of 1978 (Section 530) mandates that the IRS may not retroactively reclassify independent contractors as employees or impose federal employment taxes, penalties and interest if the hiring business:
- Consistently treated the workers (and similarly situated workers) as independent contractors;
- Complied with the Form 1099 reporting requirements with respect to the compensation paid the workers for the tax years at issue;2 and
- Had a reasonable basis for treating the workers as independent contractors.
Accordingly, for federal employment tax purposes only, the IRS will not reclassify a worker as an independent contractor where the original classification had a reasonable basis. Such a basis may include reliance upon a previous audit examination, a custom of practice in the industry, the advice of a diligent accountant/attorney or another reasonable basis shown to the IRS.
Interestingly, a custom of practice does not require that all workers in the industry be treated the same. For example, certain sports coaches may be considered independent contractors, and not employees, wherein the community is split on their classification. Under the Small Business Job Protection Act, it is substantial if 25% of the community can be shown to be treating workers as independent contractors. In determining the reasonable basis, the fact that workers are employees for state unemployment tax or wage and hour law requirements will not make section 530 inapplicable.
By contrast, the EDD provides no such Section 530 safe harbor. This means that even where legal advice was rendered or the practice has been to treat workers as independent contractors, the EDD may still reclassify workers as employees. In addition, the IRS and EDD may share information, wherein the outcome by the EDD may differ from that of the IRS.
Even where a worker is classified as an employee, there are provisions where the IRS grants reduced liability. Under Internal Revenue Code Section 3509, the employer liability for a misclassification error is partly reduced. While there is no direct abatement of the employer portion, as to the employee withheld portion, under Section 3509, the liability is reduced to 20% of the 7.65 percent employee withheld social security liability. The effective rate is then only 1.53%. In addition, the employer liability for failure to withhold is reduced to 1.5% of wages. However, the employer portion of taxes is not reduced. Because these reductions are significant, Section 3509 relief is often the preferred choice and is permitted provided that the employer is no to found to have intentionally disregarded the requirement to deduct and withhold tax.
While federal law also provides for the opportunity by workers to assist the deemed employer by completing consents to disclose that they have already paid their income taxes – thereby there is no withholding liability,
By contrast, the EDD provides no statutory reductions. There is no reduction to the employer liability for failure to withhold where an individual was reclassified as an independent contractor. However, the EDD allows businesses to claim a credit or to eliminate liability for failure to withhold wages where reclassified workers voluntarily submit a Form DE938P, permitting the EDD auditor to review and confirm that all wages were reported by the worker on his or her return and personal income taxes were paid. This closes out payroll withholding liability for state income taxes. Liability is then limited to the remaining state payroll taxes imposed, namely taxes otherwise withheld or charged for state unemployment insurance, state disability insurance and the employee training tax.
In addition, the EDD is not alone in issuing penalties. Under Section 226.3, the California Labor Commissioner may issue a $250/payment penalty, initially, and $1,000/payment penalty thereafter for failure on each payment to a worker for failure to provide a proper wage statement. In addition, with respect to worker misclassification, under Labor Code Section 226.8, the Labor Commissioner may further impose a penalty under Labor Code Section 226.8 for each will instance between $5,000 and $55,000 per instance in a civil penalty, which increases to $10,000 to $25,000 per instance if the agency believes the company in question followed a pattern of behavior over time. Furthermore, with California having adopted the Secure Choice Retirement Plan, to be implemented starting in 2019, and in 2022 for employers with 5 or more employees, a reclassification may result in either/both $250 and $500 fines per reclassified worker for not participating in the state’s Secure Choice IRA contribution program.
Compliance Settlement Program
In addition, the IRS provides two additional provisions for relief, the Compliance Settlement Program and the Voluntary Compliance Settlement Program. Each of these programs was updated in December 2017, to provide for greater relief.
The Voluntary Compliance Settlement Program is available to taxpayers to obtain relief without an audit examination, wherein, in addition to Section 3509 relief, liability will be limited to one tax year – and where there is possibly a custom of practice in the industry, to reduce liability to 10% of what otherwise might be assessed, provided that the workers are prospectively treated as employees. Taxpayers must meet certain eligibility requirements and apply to participate in the VCSP by filing Form 8952, Application for Voluntary Classification Settlement Program, and enter into a closing agreement with the IRS. Eligibility obviously includes not being under an employment tax audit – for itself or any affiliate (as defined under section 1504(a) and is not contesting in court the classification of the class or classes of workers from a previous audit by the IRS or Department of Labor.
The application should be filed at least 60 days prior to the date the taxpayer wants to begin treating its workers as employees. The IRS will make every effort to process Form 8952 with sufficient time to allow for the voluntary reclassification on the requested date.
The regular Compliance Settlement Program is available to taxpayers to obtain relief during an audit examination. The business must have filed timely 1099s and may fall under one of several options. First, if the taxpayer is entitled by custom to classify workers as independent contractors, the program is optional because the IRS cannot assess a tax. If it is uncertain – and it often that where custom of practice is asserted and shown in part, then the offer will be made to pay just 25% of one year’s payroll tax found due after applying Section 3509 and entering into a closing agreement. Second, if custom of practice is denied, then the offer will be made to pay just 1 year’s payroll tax found due after applying Section 3509 and entering into a closing agreement.
If as auditors may not be completely aware of this program – and the process of entering into a closing agreement is complicated, it should be brought to the immediate attention of the auditor (and his or her supervisor) if an assessment is proposed, including the terms of December 2017 revised Internal Revenue Memorandum Section 4.23.6 Classification Settlement Program (CSP). While the program is not for all taxpayers (such as those who are out of business), it should not be assumed that the auditor understands the full scope of these procedures.
By contrast, the EDD provides no such relief. If found to be an employee during the audit period, then adjustments will be proposed for all audit years under examination.
It is not unusual for the IRS and EDD auditors to reach a different conclusion than from the business. Where the IRS is involved, the next avenue is to file a protest with the IRS’s protest unit, and endeavor to have the appeals unit reach a different conclusion. The IRS’s protest unit may reach a different conclusion from the auditor, giving greater weight to a reasonable basis under Section 530 or other facts ignored by the auditor. Alternatively, if the appeals unit is unfavorable, since 1997, the Tax Court has had jurisdiction to determine whether or not a worker is properly classified, as an alternative to payment of taxes and seeking a refund through the U.S. District Court or U.S. Court of Federal Claims.
Again, by contrast, the process with respect to the EDD upon receiving a final Notice of Assessment is to file within 30 days from the date of the Notice a petition with the CUIAB. Upon filing a petition, there is then, and only then, the opportunity to request a prehearing settlement. Otherwise the matter will be heard before an ALJ at the Office of Tax Petitions. It is critical at this stage to get all critical evidence before the ALJ. Differing judges take different approaches and may complicate right for a second appeal before the CUIAB. If matters do not work in favor during administrative appeals, then the remedy of overturning the decision requires payment of tax and seeking a suit for refund in California superior court.
Given the differences between the two agencies, it is important to carefully consider worker classification and the differences between the IRS and EDD. Opportunities may be lost not only during the audit examination process, but also in missing circumstances where it is necessary to push during the appeals process to get a proper determination. Getting a knowledgeable representative involved as early as possible is important to protect worker classification.
Myth 5: I make too much money to consider an offer in compromise.
There is a compelling reason why the IRS is so willing to wipe out a significant amount of tax debt through its offer in compromise program. It is not because they want to help taxpayers. Instead, it’s the requirement that the taxpayer must be in current compliance for five years following the accepted offer. There are too many taxpayers that pyramid their tax liabilities one year after another and for the right amount the IRS is more than willing to write off tax debt because it forces the taxpayer to stay current with their tax liabilities (and filing of their tax returns) for the next five years. It’s a payoff the IRS cannot refuse.
Another payoff the IRS cannot refuse is the threat of bankruptcy. In fact, the Internal Revenue Manual has an entire chapter just devoted to the taxpayers threat of bankruptcy. Why does the IRS care if the taxpayer files bankruptcy? Because under certain circumstances the IRS debt is dischargeable in a bankruptcy proceeding and the IRS will surely collect less from a bankruptcy proceeding than an offer in compromise when the threat of a bankruptcy is valid. For that reason the IRS is required to consider the threat of bankruptcy and will reduce the minimum accepted amount for the offer in compromise based upon the threat of bankruptcy. It does not matter if your income is substantial because bankruptcy proceedings only analyze your assets, not your income, to determine what you might have to give up in the bankruptcy. If your taxes are dischargeable in bankruptcy (individual income tax liabilities are; payroll taxes and trust fund taxes are not); then an offer in compromise is a valid means to negotiate your tax debt despite the fact that income might be substantial.
Myth 6: I will get as good a result handling my IRS audit then a tax attorney.
No, you won’t. Facing an IRS audit alone is not something anyone should do, especially a taxpayer without experience in the field. The fact that you will be interviewed by the IRS revenue agent and have no idea the likely questions to be asked and how those answers could trigger penalties or opening up other years for examination is reason alone to hire an experienced tax attorney. Here are a few others.
Tax Attorneys have experience when it comes to audits. They have witnessed and handled so many that they can do it in their sleep. You on the other hand, may be very new to this. It may even be your first time. Chances are, you may contradict yourself during the questioning and end up looking guilty even when you are not. An experienced Attorney will make the whole process easy and less strenuous on your side. The Attorney will also inform you of the places where the IRS targets the most and show you how to protect them.
Did you know your CPA can testify against you? That is true. If you are suspected of tax fraud, your most trusted accounting assistant can be compelled to testify against you in court. If you actually are a fraudster, you will definitely end up behind bars despite the fact that there is CPA-client privilege. The good news is your tax attorney cannot testify against you. With him or her, your tax defense is rock solid. You can share with them all your secrets and private information so that he can understand your situation better. Never do that with your CPA.
Handle Disputes and Court Cases
You may be able to file taxes like a pro on your own but how well do you handle disputes? It is usually very scary when you start receiving letters you can’t make heads or tails of. With a tax attorney by your side, all those worries are put to rest. They have seen it all and know the right course of action to take. Better yet, the tax attorney can communicate with the IRS officials on your behalf and handle the audit.
When great complications arise during your audit and you can’t account for past returns, then you will definitely need a lawyer as the case will go to court. It is better to have one beforehand. Who knows, he might even prevent the case from going to court in the first place.
Do you know how time consuming a tax audit is? The IRS has to comb through all your record books dating back several years ago and scrutinize every single detail. A series of questions are then asked for the sake of verification. Since you are no expert, you will waste even more time preparing and wondering what to do. A tax attorney already knows what needs to be done.
You cannot go through an audit on your own. You need somebody on your side who understands how the whole process works. Make sure you have a reliable and experienced tax attorney.
Myth 7: It has been 10 years since the tax year so the IRS can no longer collect.
Collection Statute Expiration Date
The statute of limitations for collection is a time limit on the Internal Revenue Service (“IRS”) in which to collect delinquent taxes against a taxpayer for a particular tax year. In general, the IRS has ten (10) years, after the date of assessment, in which to collect. This ten (10) year deadline is referred to as the collection statute expiration date (“CSED”). The ten (10) year clock begins as of the day of assessment. The CSED provides finality to the IRS and to the taxpayer after the IRS has had a reasonable opportunity to collect.
The CSED can be extended. Since the CSED is timed against the date of assessment, anything that extends the date of assessment correspondingly extends the CSED. The CSED can also be extended by written agreement between the IRS and the taxpayer. The IRS must advise the taxpayer of his right to refuse to extend the CSED.
The CSED can be suspended for a variety of reasons. If the CSED is suspended, then the remaining time on the CSED is tacked on to the end of the suspension period in order to determine the adjusted CSED. Some of the more common reasons for the suspension of the CSED are as follows.
Bankruptcy – the CSED is suspended for the time period of the automatic stay plus six (6) months.
Offer In Compromise (“OIC”) – the CSED is suspended for the time period that the IRS does not take collection action since the IRS is generally prohibited from taking any collection action during a pending OIC.
Installment Agreement (“IA”) – the CSED is suspended for the time period that the IRS does not take collection action since the IRS is generally prohibited from taking any collection action during a pending IA.
Collection Due Process Hearing (“CDP”) – the CSED is suspended for the time period that the IRS does not take collection action since the IRS is generally prohibited from taking any collection action during a pending CDP.
If you believe that your tax debt might soon expire and what to know what the CSED is then contact our office.
Myth 8: I owe a significant amount to the California Franchise Tax Board. They cannot revoke any license.
Under the Business and Professions Code Section 494.5, if you have an unpaid state tax obligation and your name appears on a certified list, you could lose any of the licenses you hold, including your driver’s license. This includes professional licenses and certifications. The collection officers of the FTB has been extremely aggressive in its collection action including wage garnishments and revoking professional licenses and certifications. If you have significant tax liability with the FTB then please contact my office and avoid your professional licenses, or even drivers license, from being suspended.
Myth 9: I owe money to the IRS. I have a constitutional right to travel throughout the world. The IRS cannot revoke my passport.
If you owe the Internal Revenue Service money, your passport could be at risk right now and you might not even know it. Whether you already have your passport or you have just applied for one, if you travel abroad for any reason then you need to know if your delinquent taxes are about to become an even bigger problem. Don’t get stuck without a passport!
It is important to understand what lead to the IRS being able to impact your passport status, whether or not you are impacted, and what you can do about it if you are. This article will cover those issues and give you some idea what to expect.
Congress Passes the FAST Act
In 2015, Congress passed what was known as the FAST Act, or Fixing America’s Surface Transportation Act. As I explained in a previous tax article, the FAST Act included provisions instructing the IRS to take certain actions in order to assist in paying for the cost of the Act.
One such provision is that, beginning in 2018, the IRS is instructed to identify “seriously delinquent taxpayers” and certify them to the United States State Department. The State Department is then required to deny an individual’s passport application. It is also then allowed to revoke or limit an individual’s existing passport.
What Does “Seriously Delinquent Taxpayer” Mean?
How do you know if your passport is at risk? The following are the elements required to be considered a “seriously delinquent taxpayer” to the IRS:
- Individual taxes amounting to $51,000 or more, including penalties and interest, have been assessed; and
- A Notice of Federal Tax Lien has been filed and all appeals rights have been exhausted, or a levy has been issued.
Once the IRS identifies an individual as “seriously delinquent,” the Service certifies that fact to the State Department. At the same time the IRS makes the certification to the State Department, the IRS also issues a notice to the taxpayer that they have been certified. Thus, the taxpayer has no real opportunity to contest the certification before it occurs, aside from eliminating the tax balance in the first place. In other words, once you have met the qualifications to be certified a “seriously delinquent taxpayer,” it may be too late to avoid any consequences with your passport.
Before going any further, it is important to note that if you are overseas at the time your passport is revoked or suspended, the State Department can still issue you a limited validity passport good only for direct return to the United States.
Important Exceptions to “Seriously Delinquent” Certification
Even if you meet the criteria outlined above, there is a chance to avoid any impact on the status of your passport or passport application. The six standard ways to avoid having the IRS certify your debt to the State Department as seriously delinquent are:
- Pay the tax debt in full;
- Pay the tax debt timely in an approved installment agreement;
- Pay the tax debt timely in an accepted offer in compromise;
- Pay the tax debt timely according to the terms of a settlement agreement with the Department of Justice;
- Request a timely collection due process appeal for a levy notice; or
- Make an innocent spouse election or request innocent spouse relief and have collections suspended accordingly.
Bear in mind, these things need to have occurred prior to the IRS certifying the debt to the State Department as seriously delinquent. This is true for all existing passports. For any application or request for renewal there is, however, a 90-day window of time to resolve the problem.
When applying for a new passport or renewal of an existing passport, the State Department will hold your application up to 90 days to allow you to resolve the tax debt problem. Within that 90 days you must sufficiently prove to the State Department that: the debt is not legally enforceable, the certification was in error, you have paid the balance in full, or you have entered into an acceptable form of resolution. If any of those circumstances exits, the IRS will change the status of the certification within 30 days.
Additional Exceptions to “Seriously Delinquent” Certification
Aside from the exceptions noted above, a passport will not be in jeopardy for any taxpayer who:
- Is deceased;
- Is in bankruptcy;
- Is identified by the IRS as a victim of tax-related identity theft;
- Has had their account placed into a “not-collectible” status by the IRS due to hardship;
- Is located within a federally-declared disaster area;
- Has a pending installment agreement request with the IRS;
- Has a pending offer in compromise under review at the IRS; or
- Has had the IRS accept an adjustment to be made that will satisfy the debt in full.
If any of these things is true before the IRS certifies your debt to the State Department, then your passport is safe.
On a lighter note, it is nice of the government to make a passport exception for deceased taxpayers!
What Should You Do?
Considering this program is so new, very few people even know the problem exists, let alone whether they know how to resolve the problem before they lose their passport.
In fact, the majority of people that qualify as “seriously delinquent” have already received the notices the IRS is required to issue in order to inform them of their rights. Because they were issued before this program began, those notices came without any language explaining the threat of denial, revocation, or suspension of their passport. Worse, the IRS is not going to be issuing any additional notices to those taxpayers as the FAST Act does not require it. So, it is entirely likely that someone who is considered “seriously delinquent” could lose their passport before they even know it is a possibility to lose it.
Considering the serious implications in losing your passport, and given the timing issues in getting your case resolved, it is now even more important to consider seeking assistance from a tax resolution professional to assist in getting your case negotiated before it is too late.
Time is clearly of the essence in resolving your tax debt. If you do not get it resolved in a timely fashion, you may lose your passport or be rejected when you apply for one. This is additional pressure on taxpayers which may result in feeling compelled to accept an installment agreement they cannot afford. Thus, having a professional intervene and handle the negotiations may avoid the urge to cave when an IRS agent is urging you to accept a monthly amount you cannot afford.
If you are concerned that a tax debt may affect your passport or if you simply owe back taxes and need help, we have caring and knowledgeable professionals on staff here at Fortress who will be happy to discuss your situation and how to get it resolved. Just pick up the phone and ask for a free consultation.
Myth 10: I have a written agreement with my independent contractor so the EDD cannot rule that they are an employee.
Not all workers are employees as they may be volunteers or independent contractors. Employers oftentimes improperly classify their employees as independent contractors so that they, the employer, do not have to pay payroll taxes, the minimum wage or overtime, comply with other wage and hour law requirements such as providing meal periods and rest breaks, or reimburse their workers for business expenses incurred in performing their jobs. Additionally, employers do not have to cover independent contractors under workers’ compensation insurance, and are not liable for payments under unemployment insurance, disability insurance, or social security.
The state agencies most involved with the determination of independent contractor status are the Employment Development Department (EDD), which is concerned with employment-related taxes, and the Division of Labor Standards Enforcement (DLSE), which is concerned with whether the wage, hour and workers’ compensation insurance laws apply. There are other agencies, such as the Franchise Tax Board (FTB), Division of Workers’ Compensation (DWC), and the Contractors State Licensing Board (CSLB), that also have regulations or requirements concerning independent contractors. Since different laws may be involved in a particular situation such as a termination of employment, it is possible that the same individual may be considered an employee for purposes of one law and an independent contractor under another law. Because the potential liabilities and penalties are significant if an individual is treated as an independent contractor and later found to be an employee, each working relationship should be thoroughly researched and analyzed before it is established.
There is a rebuttable presumption that where a worker performs services that require a license pursuant to Business and Professions Code Section 7000, et seq., or performs services for a person who is required to obtain such a license, the worker is an employee and not an independent contractor. Labor Code Section 2750.5
There is no set definition of the term “independent contractor” and as such, one must look to the interpretations of the courts and enforcement agencies to decide if in a particular situation a worker is an employee or independent contractor. In handling a matter where employment status is an issue, that is, employee or independent contractor, DLSE starts with the presumption that the worker is an employee. Labor Code Section 3357. This is a rebuttable presumption however, and the actual determination of whether a worker is an employee or independent contractor depends upon a number of factors, all of which must be considered, and none of which is controlling by itself. Consequently, it is necessary to closely examine the facts of each service relationship and then apply the law to those facts. For most matters before the Division of Labor Standards Enforcement (DLSE), depending on the remedial nature of the legislation at issue, this means applying the “multi-factor” or the “economic realities” test adopted by the California Supreme Court in the case of S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989) 48 Cal.3d 341. In applying the economic realities test, the most significant factor to be considered is whether the person to whom service is rendered (the employer or principal) has control or the right to control the worker both as to the work done and the manner and means in which it is performed. Additional factors that may be considered depending on the issue involved are:
- Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
- Whether or not the work is a part of the regular business of the principal or alleged employer;
- Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
- The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers;
- Whether the service rendered requires a special skill;
- The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
- The alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
- The length of time for which the services are to be performed;
- The degree of permanence of the working relationship;
- The method of payment, whether by time or by the job; and
- Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.
Even where there is an absence of control over work details, an employer-employee relationship will be found if (1) the principal retains pervasive control over the operation as a whole, (2) the worker’s duties are an integral part of the operation, and (3) the nature of the work makes detailed control unnecessary. (Yellow Cab Cooperative v. Workers Compensation Appeals Board (1991) 226 Cal.App.3d 1288)
Other points to remember in determining whether a worker is an employee or independent contractor are that the existence of a written agreement purporting to establish an independent contractor relationship is not determinative (Borello, Id.at 349), and the fact that a worker is issued a 1099 form rather than a W-2 form is also not determinative with respect to independent contractor status. (Toyota Motor Sales v. Superior Court (1990) 220 Cal.App.3d 864, 877)
If you have received an EDD notice of audit examination or are concerned that your independent contactors might be reclassified as employees then you should contact my office for a free consultation.
Speak With A Trusted Tax Attorney Today
Having an advocate for your tax concerns can be critical. Some opportunities have limited time frames, so it is essential to take action as soon as possible. To make an appointment in our Woodland Hills office, contact us online or call 818-224-7935 or 888-408-9486. We serve clients in Orange, Ventura, San Bernardino, Riverside counties and other communities throughout California and across the country.