Since March of 2020, the IRS and state tax collectors have shown an unprecedented level of leniency to tax debtors in response to the pandemic. However, the sleeping giant has awoken.
If you or your business have unresolved tax liabilities, the time to act is now—before you fall victim to the aggressive enforcement that has recently come roaring back to life. In this article I’ll explain the dangers to watch out for, how to avoid them, and how to take advantage of the current tax environment (hint: screaming deals can still be found for tax debtors).
The COVID-19 pandemic threw the world a curveball over the past year, and the taxing authorities were not spared some troubles. Many states and the IRS house the majority of their tax collection employees and resources on large, centralized campuses. Those campuses could not operate at full capacity, due to social distancing guidelines, and many were forced to close completely for months during 2020 and early 2021. This has led to headaches for those of us trying to file, negotiate, and work with the authorities on time-sensitive cases.
Governments also recognized the strain that the pandemic put on taxpayers, as businesses were not allowed to operate at normal capacities, individuals lost jobs, and the general economic health of the country declined. As a result, most of the tax collections departments loosened the rules regarding acceptable resolutions to tax debts.
One of the authorities’ main tools in collecting tax debts is levying (seizing) or garnishing the delinquent taxpayer’s income, bank accounts, accounts receivables, real estate, etc. In April 2020, the IRS announced that it would not enforce collections against delinquent taxpayers indefinitely. Many state collectors enacted similar moratoriums for state tax liabilities. Eventually, in about July of 2020, that enforcement hold ended. However, during the months following July of 2020, I still did not see anywhere near the frequency of levies issued by any taxing authority.
This has changed. In the past two months, all the taxing authorities have begun issuing levies and garnishments with much more frequency against both businesses and individuals. So, I think it is safe to say that the reprieve from aggressive tax collection enforcement due to the pandemic has come to an end. To help illustrate this, I’ll provide some examples of aggressive enforcement that some of my clients have faced as of late.
My first client to be garnished by the IRS for a personal liability subsequent to the temporary pandemic tax collections reprieve received the levy notice in February 2021. This client owes a very large liability to the IRS, about $500,000, and, during the worst of the pandemic, they kept their job and did not experience much of a loss of income. Throughout the time leading up to February I repeatedly warned my client that the prohibition on enforcement against individuals would not last forever, and that they should use the extra time to make serious inroads toward resolving their debt. They disregarded my instructions, and they made no progress with the IRS.
As soon as the Revenue Officer could levy, she did, and I was unable to negotiate a release due to the lack of progress in the previous year (note that the clients who follow my instructions almost never fall victim to aggressive enforcement like this). While this client makes a considerable income, the IRS is now garnishing 100% of payments from one of their customers on an accounts receivable levy. This is diverting approximately $20,000.00 per month in revenues away from my client. The client let a great opportunity slip by, and they are now paying a crippling price for neglecting the tax debt.
My first business client to receive a “post-pandemic” levy from the IRS was in April 2021. They had been distracted by the complexities of the pandemic along with the need for lien negotiations with the IRS on a piece of property they were selling.
Despite my repeated admonishments to get into filing compliance, and despite my warnings of the consequences for continued non-compliance, this business failed to file employment tax returns or make employment tax deposits to the IRS for several months after hiring me. The Revenue Officer issued levies based on that lack of current compliance. The levies attached to over $130,000.00 in the business’ bank accounts, and they put my client in danger of going out of business.
I had some very serious conversations with this client about current compliance and the end of the relative safety from collections during COVID lockdowns, but the client was certain that he was doomed. Fortunately, I was able to get the levies released entirely. However, it was an extremely stressful week for my client (having $130k frozen by the IRS tends to have this effect), and it took me a lot of time and effort to convince the Revenue Officer to release the levies.
Are the Favorable Tax Relief Agreements Given During Covid-19 Still Available?
Tax collections departments are traditionally focused on collecting debts as quickly as possible. They institute rules and guidelines about how long they will allow a taxpayer to take in resolving a tax debt. Typically, if a taxpayer cannot pay within the timeframe allowed by the taxing authority, the negotiation can become longer and more complicated, and the threat of levies or garnishments can increase significantly. During the COVID-19 lockdowns, most of the authorities relaxed the timeframes they would allow taxpayers to pay their debts off. This led to easier payment plan negotiations, and more favorable terms for many of my clients.
Generally, the taxing authorities will not agree to halt collections against a business taxpayer (unless the business is actively working towards resolving the debt and the business is complying with the tax laws) no matter how bad their financial condition is. In 2020, I was able to get the IRS and a few states to consider business debts uncollectible (meaning that the businesses were not required to make any payments towards their tax debts). This was pretty much unheard of prior to the pandemic, and it was completely the result of the relaxed rules.
Similarly, the authorities try very hard to keep monthly payments from tax debtors as high as possible so that they will pay off the entire liability within the shortest timeframe. They will very rarely agree to a monthly payment that will not pay off the debt within the statute of limitations on collections or their preferred timeframe.
During the pandemic, most of the installment agreements I negotiated of behalf of my clients were not sufficient to pay off the liability within the normal parameters. The relaxed rules will not last once the collections departments return to full staffing and get caught up from their hiatus, and longer-term payment plans and tax resolution strategies will, again, be much more difficult to negotiate.
Due to lack of staff, the taxing authorities have also had problems processing returns and other correspondence that they receive from taxpayers. Again, the authorities recognized this problem, and began allowing longer holds on collections cases while their processing departments worked through backlogs of correspondence received during lockdowns.
While, in many cases, the employees have not returned to the campuses yet, that will happen in the next few months, and correspondence will begin being processed again. The backlog will continue, though, but the authorities will begin expecting faster responses from taxpayers even if they are still digging out from the lockdowns. I expect this situation will complicate all work with the taxing authorities for many more months, but without the additional flexibility currently being offered.
All of this additional flexibility and relaxed attitude toward tax collections will be coming to an end soon. Now is the time to resolve your tax debts before the rules and practices return to normal–and before the taxing authorities issue levies and garnishments against you.
Another reason to act now to resolve a tax debt is that you will most likely still be able to get an unusually favorable resolution plan approved (i.e. better terms that you will likely get if you wait). The taxing authorities base their calculations of acceptable resolution strategies on the current financial situation of the indebted taxpayer. Over the past year, many businesses and individuals have struggled financially.
An installment agreement or offer in compromise (tax settlement) based on those recent financial struggles has a much better chance of being approved by the taxing authorities than it will once the taxpayers’ financial condition begins to return to normal. At this time last year, the authorities were accepting offers in compromise, allowing hardship determinations to halt collections, and granting currently not collectible status (an arrangement whereby the tax debtor pays nothing) to many of my clients.
Exceptional Results During Pandemic May Continue for Those Who Act Now
Last year, the IRS accepted offers in compromise from two of my long-term business clients. Both cases had been exceedingly difficult to negotiate right up until the IRS lost its ability to aggressively collect from those clients and relaxed the rules about acceptable tax settlement offers. In total, those two accepted settlement offers alone saved those two clients well over $500,000.00.
I don’t think these offers would have been accepted with nearly as favorable terms under normal circumstances. The current trend is away from those types of resolution, but there is still time to use the struggles of the past year to reach a more favorable plan for your tax debt (e.g. lower monthly payments, lower settlement amounts, etc.).
Not every taxing authority or office within that authority will return to business-as-usual at the same time. I have already experienced inconsistent application of the temporary rules within some of the authorities themselves. This has always been true, as the IRS and State taxing authorities are large bureaucracies where different offices, managers, collectors, and agents have different outlooks and practices in their collection functions.
The frequent rule changes and new guidance from the government over the past year has only exacerbated those inconsistencies. With the country reopening at different rates, it is important to stay a step ahead of the more aggressive tax collectors, and to understand what to expect from the IRS and state revenue departments in tax liability negotiations.
Due to the inconsistencies, the ever-changing rules, and the varied pace of re-openings around the country, it is more important than ever to have an experienced ally in your corner when dealing with a tax debt. To take full advantage of the current flexibility before it is gone, and to keep ahead of the increased collection risks that are in place right now, consider hiring a tax relief professional to protect you from enforcement, and to help you exploit the unique opportunities that are still available.
We attorneys at Fortress Tax Relief have had some amazing successes on behalf of our clients in the past year, and we are ready to use our expertise to help you through the terrifying, confusing tax collection landscape.
We have caring and knowledgeable professionals on staff who would be happy to outline a solution tailored to your specific circumstances, and there is no charge for a telephone consultation. Procrastination will only make matters worse, so pick up the phone and give us a call now!
