Whom Should You Use For Help In A Tax Case?

“Tax Resolution” Firms

I have repeatedly posted on the perils of “tax resolution” firms.  These operators are nominally attorneys, CPAs, or Enrolled Agents.  Their business consists of inducing taxpayers suffering imminent or actual tax collection action to pay large retainers—$5,000 or more—for promised relief from the tax collection action.  Once the retainer is paid, the firm disappears.  They do nothing for the taxpayer.

These firms usually are located several states away from their victims, making legal pursuit of them uneconomic.  The Federal Trade Commission, state attorneys general, and private class actions have succeeded in shutting down the larger tax resolution scam operations.  But smaller ones remain.

Tax resolution firms get their business by hiring people to comb register of deeds’ offices for recorded tax lien notices.  They bombard taxpayers so identified with written solicitations to help with their tax collection matter.  The solicitations are made to appear as official as possible, as if they had come from the IRS itself.

Tax resolution operators also get business by falsely advertising on radio and television.  The ads urge troubled taxpayers to take advantage of supposed new relief programs of brief duration being offered by the IRS.  The ads make unrealistic, false claims of relief.  The program referred to in the ads, offer in compromise, has been around forever, and is not set to expire.  Some taxpayers can qualify for an offer in compromise, but doing so requires skill which the scam operators do not possess.

I cannot tell you how many people have come to me having been taken by a tax resolution firm.  These operators harm not only taxpayers, who get no relief for their money, but also the U.S. government, to which the money should have been paid on the taxpayers’ liability.

So, we are clear on who you should not retain to represent you in a tax collection matter.  I am often asked who should a taxpayer retain to represent them in a tax collection matter?

Certified Public Accountant

CPAs are trained to examine financial statements.  They learn income tax rules for purposes of proper reporting on income tax expense and income tax payable (refundable) in a company’s financial statements.  Accounting, preparation of tax returns, and tax planning are the forte of CPAs.   I regularly retain CPAs for accounting and tax returns for clients.

A CPA can handle a tax audit.  But tax litigation counsel, with input from the CPA, should represent the taxpayer before the IRS Appeals Office or in U.S. Tax Court.  Tax collection matters—levies and lien foreclosure proceedings—require a tax litigation attorney.

Enrolled Agent

An Enrolled Agent has taken an examination administered by the IRS.  They are qualified to prepare tax returns, and handle routine audits, for individuals and small businesses.

I am currently working an offer in compromise that was started—and handled very badly—by an Enrolled Agent.  The EA had the taxpayer, a corporation, file an offer to compromise about $90,000 in Federal employment taxes, penalties and interest for $40,000.  The EA had the taxpayer make a $8,000 deposit with the offer.  Since then the taxpayer has made monthly payments on the offer totaling $8,000.  The IRS Revenue Officer rejected the offer on the ground that the taxpayer could full-pay the balance due within the remaining period of the collection statute of limitations. That is when the matter came to me.

The Form 433-B submitted for the offer omitted significant expenses incurred by the taxpayer.  I asked the Revenue Officer to consider these, but she still rejected the offer.  On administrative appeal, the IRS Settlement Officer accepted my arguments, and determined that the taxpayer was able to pay only $20,000, of which it had already.  Accordingly, the Settlement Officer recommended that the IRS accept an additional $4,000 payment from the taxpayer in full compromise of the $90,000 of employment tax, penalties, and interest due.

The Settlement Officer noted that the taxpayer had $20,000 of Federal income tax and Social Security taxes which had been withheld from employees’ wages but not been paid over to the IRS.  The Settlement Officer sent the case back to the Revenue Officer for assessment of the trust fund recovery penalty against the taxpayer’s shareholder, as required by the Internal Revenue Manual.  Had the $16,000 in payments made on the offer been designated as to be applied against any trust fund obligation of the taxpayer, the trust fund taxes would not be an issue, as we can designate the remaining $4,000 payment as against the trust fund obligation.  But the $16,000 in payments which the EA had the taxpayer make on the offer had not been so designated.  As a result the taxpayer’s shareholder is liable for a $16,000 trust fund recovery penalty, which would not have been the case had the $16,000 in payments made on the offer been designated as against the trust fund taxes.  A trust fund recovery penalty is not dischargeable in bankruptcy, and the IRS can collect it for up to 10 years after it is assessed.

On the other hand, an Enrolled Agent I engaged to prepare tax returns for a client recently has proved quite capable.  On reviewing the taxpayer’s IRS account transcripts for one of the subject years, the Enrolled Agent noticed a tax return had already been filed for the taxpayer for that year—by fraudulent use of the taxpayer’s identity.  We then filed an identity theft claim for the taxpayer with the IRS, and had the fraudulent tax return cleared from the taxpayer’s account.  The IRS mailed the refund check produced by the fraudulent return to the taxpayer rather than to the identity thief who purported to file a joint tax return with him.  We voided the fraudulent refund check and returned it to the IRS.

An Enrolled Agent can handle a tax audit.  But tax litigation counsel, with input from the EA, should represent the taxpayer before the IRS Appeals Office or in U.S. Tax Court.  Tax collection matters—levies and lien foreclosure proceedings—require a tax litigation attorney.

Tax Litigation Attorney

Some, perhaps most, tax attorneys perform tax planning and even prepare tax returns, like a CPA.  A tax litigation attorney does not prepare tax returns, but engages CPAs and Enrolled Agents to prepare them.  CPAs and Enrolled Agents are equipped to do any necessary accounting and prepare tax returns, and I am not.  I do not want to be responsible for tax returns.

A tax litigation attorney is the gold standard in representing taxpayers in tax controversies.  When I am retained by a new client, I have the client sign a Form 2848 authorizing me to represent them before the IRS.  I then use the Form 2848 to procure transcripts of the taxpayer’s accounts from the IRS.  I review the account transcripts to determine the state of the taxpayer’s compliance.  Does the taxpayer have unfiled tax returns?  Has the IRS assessed penalties against the taxpayer?

Where a taxpayer has failed to file tax returns, often the IRS will file “substitute for returns” for the taxpayer.  These assume no deductions, no any personal exemption for anyone other than the taxpayer, and compute absolutely the highest tax possible for the taxpayer.  Upon the filing of actual tax returns by the taxpayer, the IRS will adjust its assessments against the taxpayer to the actual amounts per the actual tax returns.

If the taxpayer needs to file tax returns, I procure wage and income transcripts on the taxpayer from the IRS, to learn what income has been reported to the IRS for the taxpayer.

If the IRS is threatening to levy the taxpayer’s bank account or wages, I avert it, and if the IRS is actually levying the taxpayer’s property, I relieve it.  I do this by entering the taxpayer into an installment agreement with the IRS, or having the IRS post his Federal tax accounts as currently not collectible (“CNC”).  Where a taxpayer is posted as CNC, the IRS refrains from collection action against the taxpayer, and the collection statute of limitations continues running on the taxpayer’s assessments, but notices of Federal tax lien remain of record against the taxpayer.  This requires procuring a collection information statement—Form 433-A for an individual and Form 433-B for a business entity—from the taxpayer.

If the taxpayer is able to pay part but not all of the Federal tax assessments against him, I may recommend that the taxpayer submit an offer in compromise to the IRS.

If the IRS is prosecuting a lien foreclosure action against the taxpayer, I appear and represent the taxpayer in it.

There are many reasons why tax collection action may be wrongful.  The tax may not have been assessed against the taxpayer.  It may have been after expiration of the assessment statute of limitations.  The collection statute of limitations may have expired.   The taxpayer may not have been afforded proper due process in the assessment or collection of the tax.  The taxpayer may be entitled to innocent spouse relief from the assessment.

I seek whatever relief may be available for the taxpayer from the IRS or its Appeals Office. If necessary I pursue judicial relief for the taxpayer in U.S. Tax Court or U.S. District Court.   If we successfully contest tax collection action in District Court, the taxpayer is entitled to an award of attorney fees.

I advise businesses concerning unpaid employment taxes.  A business unable to pay its currently- accruing employment taxes should shut down.  A business able to pay its current employment taxes should do so, and negotiate an installment agreement with the IRS for the back taxes.  Voluntary payments of delinquent employment taxes by a business should, of course, be designated as against the trust fund portion or such taxes. I represent businesses principals concerning trust fund recovery penalty assessments.

I assist taxpayers in voluntarily disclosing to foreign financial accounts to the IRS.

I represent taxpayers in criminal tax investigations and prosecutions.

An attorney is subject to discipline by his or her sponsoring state bar.  CPAs, Enrolled Agents, and attorneys are all subject to discipline by the IRS Office of Practice, but such discipline is rare.

Securing A Representative

Once you determine the kind of representative you want to help you with your tax problem—Enrolled Agent, CPA, or tax litigation attorney—you can inquire among bankers, general practice attorneys, and others for a referral to such a representative.  Perhaps you know someone who had a good result with a particular representative.   You could also check with your state CPA society, the National Association of Enrolled Agents, or your state bar, as appropriate.

When you have some candidates, here are some questions you should ask them:

If an attorney or a CPA, in what state(s) are you licensed?

How long have you been in practice?

What is the primary area of your practice?

Have you had cases like this one?  With what results?

What do you propose to do to resolve my case, and how much will you charge to do it?

Before retaining a representative, you should check with the state bar or CPA licensing authority or the IRS Office of Professional Responsibility, as appropriate, and verify their current professional standing.  You should also consider requesting client references from them.

Whomever you select to represent you in your tax matter, you need an engagement agreement with them specifying what they will do for you, and how much they will charge you to do it.  You should not pay an advance retainer of more than half the total estimated total fee for the project.

A reputable representative will not mind this.  An engagement agreement protects me as much as it does the client.  For a tax collection matter, I take a retainer of $2,000-$3,000, as I do not like to hold a client’s money.

At bottom, you want a representative whose first concern is serving well taxpayers.

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