By Roger Russell
New guidance recently issued by the Internal Revenue Service has changed the way practitioners represent their clients in collection cases.
One of the changes is where each kind of collection case is initially assigned, according to Cheryl Sherwood, director of payment compliance for the Small Business/Self-Employed Division of the IRS.
“We have changed our system so that, generally speaking, cases involving delinquent employment taxes are expedited to our field function, to our field revenue officer,” she said. “We think that’s really important because employment taxes involve trust fund taxes. The part of the employment tax liability that’s withheld from employees’ paychecks is held in trust to pay over to the government. When it’s not paid over, it’s considered a very serious issue.”
A second change in approach is a greater focus on face-to-face interaction between the revenue officer and the taxpayer.
“Revenue officers, after all, are field employees, and they’re expected to be in the field. They’re expected to make the initial contact in the field at the taxpayer’s place of business,” said Sherwood.
To be sure, practitioners said that the changes are not really new, but represent a recommitment to what the IRS stopped doing a number of years ago.
“What’s happening is that the IRS has a new initiative on trust fund taxes,” said Phil Baker, CPA, co-managing member and tax officer for Bethesda, Md.-based Regardie, Brooks and Lewis. “They don’t want people who are delinquent to keep pyramiding their trust fund liability.”
“That being the case, they want revenue officers to go back to the procedures they had a number of years ago,” he explained. “They want them to go out to the taxpayer’s place of business and look around as part of the start of the collection process.”
“It’s a refocus on what they had gotten away from,” said Gary C. Rohrs, an enrolled agent and president of A. Clyde Rohrs and Associates in Independence, Mo.
“It may seem new because the IRS hasn’t applied it for awhile,” he said.
The collection issues were discussed at a forum hosted by the IRS-sponsored Tax Talk Today.
Revenue officers would still work on individual tax liabilities, according to Sherwood, but their primary emphasis will be on employment tax.
“The portion of employment tax held by the employer on behalf of the employee is technically not the employer’s funds. He only gets to hold on to them because the law says he doesn’t have to make a deposit for a given amount of time,” noted Rohrs.
“The rules actually work the opposite of what is the beneficial interest,” he said. “The big taxpayer generally has enough to pay the tax, and makes a payment virtually with every payroll. The smaller taxpayer may only have to make a payment once a quarter. If you leave it in the checkbook, it’s going to be spent.”
“I encourage my small business clients to get it out of their bank account immediately. Generally when you write payroll they have the money to make the payment, but when they hold on to it I guarantee at some time it’s going to be used to pay bills.”
The most recent changes emphasize involving the revenue officer manager with the revenue officer early in the process, according to Anita M. Babb, territory manager for Compliance Area 3 in Cherry Hill, N.J.
“The manager’s involvement is key,” she said. “Early on in the process, after the first appointment, the manager, in consultation with the revenue officer, is required to determine where the revenue officer is in the process and to assure that the case is timely and effectively moved towards resolution.”
“An important part of the manager’s involvement is to ensure the revenue officer is making sure that the taxpayer is fully aware of the consequences for failing to comply, and also ensuring the taxpayer understands that they need to get current,” Babb said. “They need to ensure that their deposits are made, and that they do not pyramid while the case is in inventory with the revenue officer.”
“Being current” is an important concept because the taxpayer needs to be current in order to be eligible for an extension of time to pay, or to have an installment agreement considered, according to Sherwood.
“What we mean by that is, all past-due tax returns have to be filed, and any federal tax deposits that become due after the initial contact have to be paid.”
If the taxpayer’s power of attorney is on file with the IRS, the revenue officer will contact the practitioner first. In cases where there is no power of attorney on file, however, there is no requirement that the revenue officer contact the taxpayer before he pays them a visit.
“A lot of times there’s no power of attorney because the taxpayer hasn’t gone to his accounting representative and brought him up to date on the matter, or he may not even have representation. Many small businessmen are in for a rude awakening when the revenue agent shows up at their door and wants to speak to the ‘responsible person,’” said Baker. “Professionals need to know that the IRS now has emphasis on the revenue officer going to see the taxpayer’s business not just on employment tax issues, but audit and other issues as well. They’ll go to the business address on the return, even if it’s the taxpayer’s home, and see what kind of assets are there.”
“In the case of a trust fund,” he continued, “they’re going there to collect as many dollars as possible as quickly as possible. They want to see what kind of assets are there to put a lien on.”
Many small businessmen and their employees aren’t aware of the provision that makes “responsible persons” at risk for the 100 percent trust fund penalty, according to Rohrs. The penalty, equal to 100 percent of the taxes due, can be levied against any “responsible person,” including corporate officers and directors, partners in a partnership, and even payroll clerks, attorneys or accountants who may have a duty to collect and pay the tax.
“People are living from check to check, spending what they get and not saving but coming up short on the wrong thing,” said Rohrs. “They think they can get a loan from the government by paying their suppliers first. They don’t realize that the corporate structure doesn’t insulate them — they’re personally liable for the penalty.”
“At the end of the day,” he said, “I’d rather owe my supplier than the IRS.”
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