In this blog, I’m going to talk about situations that I truly hope you don’t find yourself in. I’m going to talk about the narrow circumstances under which the IRS can force you in front of a court of law, or even put you in jail.
Knowing what kinds of behaviors could trigger the wrath of a federal judge and put you in prison is crucial to avoiding it. I hope, too, that by laying out these rare circumstances, I will assuage the fear in some of the readers of this blog, who may be under the mistaken impression that the arrival of an IRS Revenue Officer means jail is imminent. It’s not.
In most cases, the taxpayers I’ve represented who have come close to finding themselves in a federal courtroom or jail have been business owners. These businesses usually fail to pay payroll taxes (e.g. Form 941) repeatedly, and they often fail to file tax returns as well, for years.
The most common scenario is this: A taxpayer – let’s call him Bob – has failed to make payroll tax deposits repeatedly. The IRS, unable to collect the balance due merely by mailing notices, assigns a field Revenue Officer to collect from Bob’s company, Bob’s Burgers. Bob, out of fear or in philosophical defiance, ignores the requests of the Revenue Officer. The Revenue Officer (in addition to likely issuing bank levies against Bob’s Burgers) then instructs Bob to appear before the Revenue Officer. If Bob refuses, the Revenue Officer might mail (or post to his door) an “administrative summons.”
An administrative summons is essentially an official demand from a Revenue Officer, wherein the Revenue Officer is typically demanding documents from the taxpayer or 3rd parties. The most common summons I see are those issued to a taxpayer’s bank. In that scenario, Bob has no duty to do anything in response to that summons, and the bank sends all the info. A summons is different from a subpoena, which is an order from a judge to appear before her court and testify or produce documents.
That being said, the failure to heed a summons can lead to a subpoena. If Bob ignores the summons, then the IRS can ask their legal counsel to present Bob’s refusal to a federal judge, who can then order Bob to appear and provide the documentation, or else demand that Bob explain why he will not, or cannot, provide it.
If Bob then takes the ill-advised step of ignoring the Revenue Officer and the judge, a bench warrant can be issued for Bob’s arrest, and he can be placed in the back of a paddy wagon, headed for jail.
Note the number of opportunities Bob had to do the right thing. Bob could have responded when the Revenue Officer first called/visited with a list of documents she needed. Bob could have responded to the summons by providing everything that was necessary. Bob could have then decided to give in and show up to court when asked. Heck, Bob may have been able to avoid facing the judge if Bob had simply given everything to the Revenue Officer that she had asked for after the court order arrived. Sometimes Revenue Officers are so forgiving (and dreading a court date as much as you) that they’ll ask IRS counsel to ask the judge to rescind the subpoena, provided Bob has supplied all the documents requested. Finally, Bob could have sought legal counsel in an effort to quash the subpoena, but there are very few, narrow circumstances under which this will be successful.
Assuming Bob had not committed massive fraud, the revelation of which would result from providing bank statements, avoiding the Revenue Officer in this manner is ill-advised. Even if Bob had committed fraud, the IRS is likely to find out from an investigation of the bank statements, financial statements, or testimony of third parties anyway, so cooperation is almost always the right way to go. I should mention that, if Bob actually did commit fraud, he ought to consult with a criminal defense attorney experienced in tax fraud as early as possible.
Another way the IRS can get the courts involved is if Bob’s business refuses to make employment tax deposits for years, and the IRS cannot seem to collect the tax due by levying Bob’s Burgers’ bank account, or attempting to seize Bob’s business assets (I chose the example of a burger joint because burger joints don’t tend to have a huge amount of equity in tangible assets, or the assets may be encumbered by a superior lender, such as a landlord or a bank).
For the sake of discussion, let’s assume that Bob’s Burgers is the 3rd or 4th business that Bob has opened, and in each business, Bob has refused to pay payroll tax deposits timely. Bob has then closed the prior businesses when the IRS was hot on his tail, and then opened a new business somewhere else, sometime later.
In cases like this, the Revenue Officer is likely to seek a civil injunction against the business. An “injunction” is an order from a court that either compels someone to do something or compels someone to stop doing something. In the case of Bob, the Revenue Officer is seeking an injunction to compel Bob to stop operating his business, and thereby accruing federal taxes. Once again, Bob will have faced many warning signs before he would receive an injunction. The Revenue Officer will tell Bob to make deposits, or face levy action. The IRS will levy bank accounts, credit-card merchant accounts, or attempt to find other assets to seize. If Bob has no assets to seize, is non-communicative or non-cooperative, and Bob doesn’t awake to his misbehavior once he’s levied, an injunction is a likely next step.
Keep in mind that injunctions are rare, and the IRS usually requests them only if people like Bob display a pattern and practice of avoiding taxes, no matter what administrative remedies the IRS tries to employ. The injunction could be in effect against “Bob’s Burgers” (and not Bob himself, who could be free to open more businesses), or it could be operative against Bob himself. The IRS could tell Bob that he must notify the IRS if he opens another business, anywhere, within the next 5 years (or some other time period they deem appropriate).
If Bob then refuses to follow the order spelled out in the injunction, he could be held in “contempt of court” by the court issuing the injunction. What happens then? Well, the government could force the business into bankruptcy, or total liquidation, and a trustee could be assigned to oversee the orderly dissolution of the business. Finally, Bob could also be stuck in the back of a paddy wagon once more.
Again, these scenarios were not put forth to scare you, but rather to illustrate the many escape valves you, or Bob, could use to avoid facing a federal court, forced liquidation, forced bankruptcy, or federal prison. I’m sure you’d agree that the irritation caused by the nagging requests of a Revenue Officer pale in comparison to handcuffs and concrete walls.