By Stephen J. Dunn
I have often posted on “tax resolution” firms, which prey upon taxpayers facing IRS collection action. They reach taxpayers in various ways. Most notoriously, they purchase taxpayers’ names and addresses from “bird dogs” who glean the information from Notices of Federal Tax Lien (“NFTL”) recorded in local Recorder of Deeds’ offices. The recording of an NFTL is part of a battery of collection action which includes threats to levy (seize) the taxpayer’s bank accounts, brokerage accounts, wages, and other property, and actual levy of that property. These are troubled taxpayers. Such use of recorded NFTLs was never intended by Congress. Rather, Congress provided for the public recording of NFTLs to put potential purchasers and lenders on notice of the United States’ claim in the taxpayer’s property, preventing them from claiming an interest in the property as bona fide purchasers for value, superior to the United States’ interest.
Tax resolution firms bombard taxpayers whose names and addresses they have purchased with written solicitations to resolve their tax collection cases. The solicitations urge fast action to avail of nonexistent special programs, said to be available for only a brief time, to compromise tax liabilities on especially favorable terms.
When a taxpayer calls a tax resolution firm, the firm promises what he must to induce the taxpayer to pay the firm’s retainer—$5,000 or more. Once the retainer is paid, the firm generally consumes the retainer as quickly as possible, doing nothing to help the taxpayer, and sometimes affirmatively harming the taxpayer. If, as is likely, the taxpayer refuses to pay anything more to the tax resolution firm, the firm withdraws from engagement, claiming nonpayment of its fees. When the taxpayer realizes that he has been taken, he also realizes that legal action against the tax resolution firm is uneconomic, as the tax resolution firm is located several states away.
I can’t tell you how many people have come to me having been taken by tax resolution firms. In a recent case, the IRS was threatening to levy the property of a New York City taxpayer. The taxpayer operates his business from a Manhattan cooperative apartment which he owns. The taxpayer lives in the Manhattan co-op during the week, and commutes back to his family home in Pennsylvania on weekends. The IRS recorded an NFTL against the taxpayer and, as a result, the taxpayer was bombarded with solicitations from tax resolution firms. The taxpayer called one of them, an Enrolled Agent (“EA”) with t tax resolution firm in the western United States. The EA told the taxpayer that he could resolve the IRS collection action against him by entering him into an installment agreement requiring him to pay $191.65 per month to the IRS. This sounded good to the taxpayer. The taxpayer retained the EA’s firm, paying the firm $2,500 down on a $5,000 retainer. The EA made a half-hearted attempt to enter the taxpayer into an installment agreement with the IRS; it is unclear whether he actually submitted an installment agreement request for the taxpayer to the IRS. The EA told the taxpayer that he would have to pay $1,500-$2,000 under an installment agreement with the IRS, which the taxpayer could not afford. Rather than attempt to negotiate a lower installment payment, or appeal the refusal to accept a reasonable installment agreement from the taxpayer, the EA withdrew from the engagement, claiming nonpayment of his fees. The taxpayer’s Federal tax accounts unresolved, the IRS collection action progressed to the filing of a judicial proceeding to foreclose the Federal tax lien in the taxpayer’s Manhattan co-op apartment. That’s right—the taxpayer now faces the very real spectre of losing the place where he lives and conducts his business. We are representing the taxpayer in the lien foreclosure proceeding. We are also seeking a reasonable installment agreement for the taxpayer from the IRS. We are helping the taxpayer even though he cannot currently pay us.
Who are these people? The IRS allows three kinds of representatives to practice before it—a Certified Public Accountant (“CPA”), an EA, or an attorney. CPAs and EAs are not trained in law. They cannot litigate. CPAs are trained not in tax practice and procedure, but to audit financial statements. Preparing tax returns is the domain of a CPA. EAs pass a test administered by the IRS. They have at best a peripheral understanding of tax practice and procedure—they know enough to be dangerous. And what self-respecting lawyer would work for a tax resolution firm?
Many taxpayers have come to me having been poorly served by a certain tax resolution firm here in Michigan. The firm’s letterhead touts CPAs, EAs, as well as J.D.s and LL.M.s. A taxpayer came to me last year after a nightmarish experience with this firm. The firm entered the taxpayer into an installment agreement with the IRS. The firm also prepared the taxpayer’s tax returns. The taxpayer’s 2012 Federal income tax return reported a balance due, which the taxpayer did not pay with the return. Under the terms of the installment agreement, this defaulted the installment agreement. But the tax resolution firm did not contact IRS and fold the 2012 balance due into a new installment agreement for the taxpayer. And the firm neglected the ensuing collection notices from the IRS. As a result, the IRS levied the taxpayer’s income source a traumatic event for the taxpayer. We succeeded in having the levy released, and in entering the taxpayer into a new installment agreement. We are now exploring an offer in compromise for the taxpayer.
In the course of representing the taxpayer mentioned in the preceding paragraph, we contacted the Michigan tax resolution firm and requested a copy of its file on the taxpayer. The firm resisted providing us anything from its file. This was ill-advised, exposing the firm to malpractice liability if a ball got dropped because of inattention to the client’s matters. I reminded the tax resolution practitioner, a J.D. and member of the Michigan Bar, that, under the Code of Professional Responsibility for lawyers promulgated by the Supreme Court of Michigan, his files concerning the client are the client’s property, and must be relinquished as directed by the client. The response I received was that “We are a CPA firm not a law firm.” The firm did nonetheless send me a copy of its file on the taxpayer, or at least much of its file.
The Michigan tax resolution firm’s website says, “[M]any attorneys lack the resources and knowledge to deal with the IRS and many other tax matters.” The firm’s website further says, “Attorneys are not Certified Public Accountants and are not necessarily versed in the many aspects of tax and accounting issues.” Indeed, why would a taxpayer entrust their tax collection matters to a tax lawyer, rather than an accountant? Let’s see, a tax lawyer has been subjected to the rigors of law school, has been tested by the fires of advocacy, has “lived the law,” and is professionally accountable to the State Bar. Tax resolution practitioners, in contrast, are unregulated, of uncertain education and training, and cannot practice law or litigate. Tax resolution firms are not bound by an attorney’s code of professional responsibility, which proscribes, most notably, conflicts of interest. Moreover, everything a client tells a lawyer is protected by the attorney-client privilege—it is sacrosanct. It is inadmissible in court. The lawyer cannot be compelled to divulge his client’s confidences, and is forbidden by law and by the code of professional responsibility from divulging them. In contrast, a tax resolution practitioner can be summoned to appear before the IRS, be placed under oath, and required to answer questions about the taxpayer.
Yeah, why would anyone opt for a tax lawyer over a tax resolution firm, anyway?