2000px-Seal_of_the_United_States_Department_of_Justice_svgFollowing a relentless flurry of press releases announcing criminal charges against tax evaders in the run up to today’s tax filing deadline (see here, here, and here), the Justice Department wasted no time in turning its attention to its next target:  employers and individuals who violate the federal employment tax laws. In a press release entitled “Justice Department Continues To Sue, Prosecute Delinquent Employers,” the Justice Department emphasizes that it is continuing its employment tax “enforcement push” by bringing civil and criminal enforcement actions against employers and individuals who violate employment tax laws:

Many Americans associate April with “Tax Day” and the annual deadline for filing individual income tax returns. But the end of April is also the first deadline for employers to file quarterly employment tax returns. Those who do not comply with filing requirements or who fail to pay the taxes withheld from their employees’ wages face civil lawsuits or criminal prosecutions as part of the Department of Justice’s ongoing focus to enforce employment tax laws using all tools available.

By way of background, employers in the United States are required to collect, account for, and pay over to the Internal Revenue Service tax withheld from employee wages, including federal income tax and social security and Medicare taxes. Employers also have an independent responsibility to pay their matching share of social security and Medicare taxes.

“Employers who willfully fail to comply with their employment tax obligations are cheating the U.S. Treasury at the expense of taxpayers, such as law-abiding employers and employees, who pay their taxes on time and in full,” said Acting Assistant Attorney General David A. Hubbert of the Justice Department’s Tax Division. “The Department is committed to holding employers that willfully fail to pay their employment taxes accountable with, as appropriate, criminal prosecution, bringing these offenders into compliance through civil injunctions, and working with the IRS to collect what is owed.”

“Employment taxes are a critical part of the tax system, generating more than $1 trillion a year in payments to the government, and the IRS works closely with employers and the payroll community to help ensure compliance in this area,” said IRS Commissioner John Koskinen. “We want to help employers avoid problems in the employment tax area. When problems do arise, we use civil enforcement tools and, when appropriate, work closely with the Justice Department in the pursuit of criminal cases. The collection of employment taxes is a priority area for the IRS and helps ensure fairness for employers and taxpayers. Employers who fail to pay or withhold these taxes enjoy an unfair economic advantage over those who comply with the tax laws.”

The Justice Department’s press release serves as a reminder that an individual’s willful failure to comply with employment-tax obligations is not simply a civil matter. Employers whose business model is based on a continued failure to pay employment tax, who use withheld employment taxes as a slush fund to pay personal expenses or other creditors, who pay employees in cash to avoid employment tax obligations, or who file false employment tax returns can subject themselves to prosecution, imprisonment, monetary fines, and restitution.

Aggressive criminal and civil enforcement of the federal employment tax laws has been a top priority of both the Justice Department and the IRS for the past several years. Amounts withheld from employee wages represent nearly 70% of all revenue collected by the IRS. According to a recent report from the Treasury Inspector General for Tax Administration (TIGTA), as of December 2015, 1.4 million employers owed approximately $45.6 billion in unpaid employment taxes, interest, and penalties. The Justice Department’s Tax Division reports that as of June 30, 2016, more than $59.4 billion of taxes reported on quarterly federal employment tax returns remained unpaid. Employment tax violations represent more than $91 billion of the “Tax Gap,” which measures the difference between the total amount of tax owed to the U.S. Treasury and the amount actually paid. During fiscal year 2016, employment tax investigations were one of the few categories of tax crimes for which IRS-Criminal Investigation initiated more investigations than in the prior fiscal year.

Employment tax schemes can take a variety of forms. Some of the more common schemes include employee leasing, paying employees in cash, filing false employment tax returns, failing to file employment tax returns, and “pyramiding.” Pyramiding refers to the practice of withholding taxes from employee wages, but failing to remit such taxes to the IRS. After the employment tax liability accrues, the business owner starts a new business and begins to accrue employment tax liabilities anew.

Today’s press release highlights recent examples of employment tax enforcement in both the criminal and civil arenas, starting with the following examples of employers who engaged in “pyramiding” taxes by opening successive businesses:

In January, Napoleon Robinson of Lauderhill, Florida, was sentenced to serve 18 months in prison for evading more than $500,000 in employment taxes. Robinson owned and operated a series of ship welding and repair businesses in Virginia and New York. Robinson was not paying over employment taxes and would close down one company and open a new one in the name of a nominee owner, while continuing to run the company, making its financial and personnel decisions and controlling the businesses’ bank accounts. He was also ordered to pay restitution to the IRS.

In January, two West Virginia business owners, Michael and Jeanette Taylor, were sentenced to serve 21 and 27 months in prison for failing to pay over more than $1.4 million in employment taxes. The Taylors owned a construction business that transported steel and sold gravel and concrete. They changed the name of their business several times, though the operations of the business remained the same. Both were responsible for collecting, accounting for and paying over the employment taxes withheld from their employees’ wages. Instead of paying over the taxes that they collected, the Taylors used the funds to purchase property and finance their horse farm. They were also ordered to pay restitution to the IRS.

The following cases demonstrate examples of employers who used withheld employment taxes to pay personal expenses, or to pay other creditors:

In January, Paul Harvey Boone of Hillsborough, North Carolina, was sentenced to serve 15 months in prison for failing to pay over employment taxes. Boone owned and operated Boone Audio Inc. From 2008 through 2011, Boone used company funds for personal expenses while failing to pay over the employment taxes withheld from his employees’ wages. He was also ordered to pay restitution to the IRS.

In December 2016, Sreedar Potarazu, a Maryland surgeon and entrepreneur, pleaded guilty to failing to account for and pay over $7.5 million in employment taxes and to shareholder fraud. Potarazu founded VitalSpring Technologies Inc., a corporation that provided data analysis and services related to health care expenditures. Potarazu was responsible for collecting, truthfully accounting for and paying over VitalSpring’s employment taxes. Instead of paying over the employment tax, Potarazu spent millions on personal expenses including transferring funds to himself and others, travel, car service and the publication of a book.

In January, Steven Lynch, a tax attorney and owner of the Iceoplex in Pittsburgh, Pennsylvania, was sentenced to serve 48 months in prison, fined $75,000 and ordered to pay restitution to the IRS of more than $793,000, after being convicted of failing to collect, account for and pay over employment taxes. Lynch co-owned and operated the Iceoplex, a recreational sports facility which included a fitness center, ice rink, soccer court, restaurant and bar. He controlled the finances for these businesses and was responsible for collecting, accounting for and paying over tax withheld from employee wages and timely filing employment tax returns. Lynch failed to pay over more than $790,000 in employment taxes withheld.

In June 2016, Muzaffar Hussain of Pleasanton, California, pleaded guilty to failing to account for and pay over employment taxes for Crossroads Home Health Care Inc. Hussain was the CFO and was responsible for filing the company’s employment tax returns and paying over the employment taxes. Hussain transferred funds in an amount equal or close to the amount of employment taxes from the business bank account into other accounts and used the money to fund other business and personal expenses.

In the following case, the Justice Department prosecuted an employer who paid employees in cash to avoid paying employment taxes:

In September 2016, Phillip Hui of Sicklerville, New Jersey, was sentenced to serve 15 months in prison for conspiring to evade payroll taxes on cash wages paid to illegal immigrants employed at his dry cleaning business. Hui hired foreign nationals from Mexico and Guatemala who did not have legal status in the United States and paid them in cash. Their wages were not reported on the quarterly employment tax returns filed with the IRS. He was also ordered to pay restitution to the IRS.

Employers who file false employment tax returns are also subject to prosecution, as the following cases demonstrate:

In March, Richard Tatum, a Houston, Texas, business owner of an industrial staffing company, pleaded guilty to failing to pay more than $18 million in employment taxes. Tatum filed false employment tax returns that did not report the majority of his employees and did not pay over the taxes he withheld from his employees. Instead, he used the money for luxury travel and to make payments on his ranch.

In January, Janis Ann Edwards, an Oklahoma City, Oklahoma, business owner, pleaded guilty to evading more than $3.5 million in employment taxes. Edwards was the sole owner of Corporate Resource Management Inc. and a number of related companies that operated as professional employer organizations. Edwards directed her employees to alter quarterly employment tax returns to reflect less payroll tax liability than was actually owed.

The Justice Department’s Tax Division is also aggressively pursuing civil enforcement action against those who fail to meet their employment tax obligations. Since 2003, the Division has permanently enjoined more than one hundred employers and obtained tens of millions of dollars in money judgments. Civil injunctions are court orders requiring the employer and principal officers to timely deposit and pay employment taxes to the U.S. Treasury. These court orders also impose various other requirements and prohibitions, including the obligation to provide notice of each deposit to the IRS, as well as restrictions on opening and operating new businesses and transferring or dissipating assets.

In recent years, the Tax Division increased the number of civil actions brought against employers who violate employment tax laws. In 2016, the Tax Division obtained employment tax injunctions against 38 employers—more than double the number of injunctions obtained in 2015. The injunctions obtained in the past year include court orders against employers throughout the United States, such as a St. Louis concrete business, a Florida restaurant, an Iowa lawn care business and a Michigan custom kitchen company.

Since January 1, 2017, the Tax Division filed 17 suits, collectively seeking more than $10 million in unpaid employment taxes, against tax-delinquent medical-care providers who, despite IRS notices and efforts to collect, have been non-compliant for three or more quarters, despite persistent attempts by the IRS to remind them of their obligations and to collect the unpaid taxes.

These 17 suits collectively seek more than $10 million in unpaid employment taxes and are part of an ongoing effort by the Justice Department and the IRS focusing on employment tax compliance. Among these cases is a suit filed in federal court in Minnesota to enjoin Dawda Sowe and Nurse Staffing Solutions Health Care from failing to pay employment taxes and to obtain a $2 million judgment against the business for employment taxes the business allegedly failed to pay over an eight-year period. Also, this month the Tax Division filed suit in federal court in Texas to obtain a court order requiring Jeanna Smith to timely file employment and unemployment tax returns for her business and pay those taxes in full, amongst other requirements. In this suit, the government also seeks a judgment for unpaid employment taxes and alleges that Smith incorporated several home-health care businesses, such as Paris Senior Care Group Inc., which accumulated more than $1.3 million in unpaid employment taxes.

Finally, those who violate an injunction can be charged with civil and criminal contempt and face being shut down, paying compensation for the damage the contempt caused and incarceration of the principal corporate officers. For example, a federal court in Washington held Dr. James Hood and his wife, Karen Hood, in contempt of court for a consistent pattern of failing to meet their tax obligations. The court later ordered the two to close their dental care businesses, cease operating as employers, and barred them from opening any new businesses where the Hoods would serve as employers by June 8, 2017.

Any individual who is responsible for ensuring that employment taxes are collected, truthfully accounted for, and paid over to the IRS, and willfully fails to do so or willfully attempts to evade or defeat paying employment taxes may be subject to a civil penalty equal to the amount of the unpaid withholdings. This civil penalty, referred to as the Trust Fund Recovery Penalty (TFRP), may be imposed even if the individual uses the employment tax to pay other creditors or keep the business afloat. Individuals subject to these penalties include, but are not limited to, corporate officers, treasurers, managers, and, in some circumstances, bookkeepers. In fiscal year 2015, the IRS assessed the TFRP against approximately 27,000 responsible individuals.

Since January 2013, the Tax Division has obtained tens of millions of dollars in money judgments against individuals subject to these penalties. For example, in July 2016, a Florida jury found the CEO and owner of a professional employer organization personally liable for more than $4.2 million due to his failure to pay his company’s employment taxes. In addition, in December 2016, the U.S. Court of Federal Claims found that the CFO of an Internet-marketing platform was responsible for his company’s failure to pay its employment taxes and entered a judgment of more than $500,000 against him. And in April, a federal court found the co-manager of an architectural woodwork installation company personally liable for $1.9 million due to his failure to pay his company’s employment taxes.

In contrast to the Justice Department’s press release touting its successes in the employment tax field, a TIGTA report issued less than 30 days ago painted a considerably less rosy picture of the government’s efforts to ensure employment tax compliance. In a report entitled “A More Focused Strategy Is Needed to Effectively Address Employment Tax Crimes,” TIGTA concluded that the IRS needs a better strategy to enhance the effectiveness of the agency’s efforts to address, and punish, egregious employment tax violators:

Employment tax noncompliance is a serious crime. Employment taxes finance Federal Government operations plus Social Security and Medicare. When employers willfully fail to account for and deposit employment taxes, which they are holding in trust on behalf of the Federal Government, they are in effect stealing from the Government. As of December 2015, 1.4 million employers owed approximately $45.6 billion in unpaid employment taxes, interest, and penalties. The TFRP is a civil enforcement tool the Collection function can use to discourage employers from continuing egregious employment tax noncompliance and provides an additional source of collection for unpaid employment taxes. In FY 2015, the IRS assessed the TFRP against approximately 27,000 responsible persons – 38 percent fewer than just five years before as a result of diminished revenue officer resources. In contrast, the number of employers with egregious employment tax noncompliance (20 or more quarters of delinquent employment taxes) is steadily growing—more than tripling in a 17-year period. For some tax debtors, assessing the TFRP does not stop the abuse. Although the willful failure to remit employment taxes is a felony, there are fewer than 100 criminal convictions per year. In addition, since the number of actual convictions is so miniscule, in our opinion, there is likely little deterrent effect.

TIGTA recommended that the IRS should use data analytics to better target egregious employment tax noncompliance, including identification of high-dollar cases and individuals with multiple companies that are noncompliant. In addition, TIGTA recommended that the IRS Collection Division expand the criteria used to refer potentially criminal employment tax cases to IRS-CI to include any egregious cases (not only those where a firm indication of fraud is present).

Notwithstanding TIGTA’s recent criticism, it is readily apparent that employment tax enforcement is a top priority for both the Justice Department and the IRS.  With the massive amounts of unpaid employment taxes that remain outstanding, we can undoubtedly expect to see vigorous enforcement in this area, both criminal and civil, in the coming months and years.

2000px-Seal_of_the_United_States_Department_of_Justice_svgWith only four days remaining until “Tax Day,” the Justice Department’s well-publicized campaign to deter potential tax evaders continues with more stern warnings to taxpayers. In a bleak press release entitled “With the Individual Income Tax Filing Deadline Approaching, Justice Department Warns Willful Violations of Tax Laws Are Criminal,” the Justice Department sounds the warning once again that taxpayers who attempt to violate the federal tax laws that they face prosecution, jail, restitution and significant monetary penalties.

“Most Americans follow the tax law and rightfully expect that each of their fellow citizens will do the same,” said Acting Deputy Assistant Attorney General Stuart M. Goldberg of the Justice Department’s Tax Division. “Yet every year some taxpayers try to take a different path – they hide money offshore, declare only a small portion of their income, make up bogus deductions and lie to the IRS if they are caught. With this year’s filing deadline approaching, these taxpayers should stop, reverse course and simply pay what they owe. As the Justice Department’s recent criminal prosecutions make clear, the consequences for willful violations are severe: jail time and substantial monetary penalties.”

“The majority of Americans file their taxes without issue and they would tell you that they want strong enforcement of the tax laws to ensure that we are all paying our fair share,” said Chief Richard Weber of IRS Criminal Investigation. “For those thinking about intentionally evading the tax laws – IRS-CI has the finest financial investigators and are trained to follow the money trail wherever it may lead.”

The press release then proceeds to summarize recent tax prosecutions, starting with the following examples of individuals prosecuted for “garden variety” tax evasion or filing false tax returns:

  • In March, Denver Nichols, a Labadie, Missouri roofing contractor, pleaded guilty to filing false 2007 and 2008 income tax returns. Nichols operated his roofing business under the name Eagle Roofing Co. He late filed false 2007 and 2008 returns that underreported his business’s gross receipts by approximately $959,500 and $794,680.
  • In March, Stephen Leib, a Philadelphia, Pennsylvania tech business owner, pleaded guilty to tax evasion. Leib owned New Wave Logistics Inc. He evaded more than $800,000 in taxes by cashing a significant amount of his business’s gross receipts at a check cashing facility, lying to his accountant about the total amount of income he earned and filing false tax returns.
  • In March, Jeffrey Nowak, a Las Vegas, Nevada liquor storeowner, was sentenced to serve 41 months in prison for tax evasion and conspiring to defraud the United States. Nowak conspired with Ramzi Suliman, with whom he jointly owned and operated liquor stores in Las Vegas. Nowak and Suliman skimmed cash receipts and provided their accountant with a phony set of books that omitted nearly $4 million in cash receipts.
  • In February, Jose Echeverria, a Chelan Falls, Washington businessman, pleaded guilty to filing a false individual income tax return. Echeverria owned and operated a produce sales business. He underreported his income by approximately $564,292.
  • In December 2016, James and Mardeen Perin, former owners of Sully’s Pub in West Des Moines, Iowa, pleaded guilty to aiding and assisting in filing a false tax return. The Perins filed a false 2013 tax return that did not report cash that they earned through their business.

Individuals who fail to file returns are also subject to prosecution, as the Justice Department points out with the following examples:

  • In March, James Burton and Lucretia Pecantte-Burton, two Louisiana attorneys, pleaded guilty to failing to file individual income tax returns. Burton and Pecantte-Burton were partners of the law firm Pecantte-Burton & Burton (PB&B) and regularly received cash payments. They also had a partnership interest in a tax return preparation business. Burton and Pecantte-Burton did not file 2007 through 2009 income tax returns.
  • In February, Samuel Frazier, a Gulfport, Mississippi businessman, was sentenced to serve 12 months in prison for failing to file an individual income tax return. Frazier owned two companies in Gulfport: Frazier Fire Systems LLC and EZ Haul Demolition and Construction LLC. Frazier failed to file a 2009 tax return despite earning more than $618,253 in income.
  • In December 2016, John Raschella, a former Parma, Ohio resident, was convicted at trial for failing to pay more than $1 million in income taxes, interest and penalties for 1995, 1996 and 1998 through 2012 on income earned as an insurance salesman. He also failed to timely file income tax returns between 1989 and 2012.
  • In June 2016, Carlos Cortes, a San Antonio, Texas artist, was sentenced to serve 12 months in prison for failing to file an individual income tax return. Cortes did not file tax returns for 2006 through 2009, despite earning more than $1.3 million in income during this time.

One of the Justice Department’s top priorities in tax cases is prosecuting individuals who employ nominee entities and offshore bank accounts to hide assets and income, as the following cases demonstrate:

  • In March, Casey Padula, a Port Charlotte, Florida owner of Demandblox, a marketing and information technology business, pleaded guilty to conspiracy to commit tax and bank fraud. Padula conspired to move more than $2.5 million to offshore accounts in Belize and disguised them as business expenses in the corporate records. Padula used the funds to pay for personal expenses and purchase significant personal assets.
  • In March, Masud Sarshar, a Los Angeles, California businessman, was sentenced to serve 24 months in prison for hiding more than $23.5 million in offshore bank accounts. Sarshar maintained several undeclared bank accounts at Israeli banks, both in his name and in the names of entities that he created. Between 2006 and 2009, Sarshar diverted more than $21 million in untaxed gross business income to those undeclared accounts and earned more than $2.5 million in interest income. Sarshar reported none of this income on his individual and corporate tax returns.
  • In January, three Orange County, California residents pleaded guilty to hiding millions of dollars in secret foreign bank accounts. Dan Farhad Kalili, David Ramin Kalili and David Shahrokh Azarian, willfully failed to file legally required reports, commonly known as FBARs, disclosing their bank accounts in Switzerland and Israel.
  • In January, Peggy and John DeYoung, a Missoula, Montana couple, pleaded guilty to conspiring to defraud the United States. The DeYoungs had not filed an income tax return since 1998. Peggy DeYoung earned income through her ownership interest in two companies that owned Southern California mobile home parks. The DeYoungs also established a number of purported trusts. They owned bank accounts in the names of these trusts using fabricated taxpayer identification numbers and paid personal expenses from the accounts, causing a tax loss of $376,350.

The Justice Department also prosecutes individuals who engage in obstruction of IRS efforts to assess and collect taxes:

  • In November 2016, Richard Thomas Grant, a Point Richmond, California man, was sentenced to serve 33 months in prison. Grant stopped filing income tax returns and paying income taxes despite earning significant income as a partner with an engineering company. Grant attempted to frustrate IRS collection and audit efforts by filing lawsuits against the IRS. To conceal his income, Grant used prepaid debit cards and money orders to pay personal expenses.
  • In November 2016, Steven Headden Young of St. Petersburg, Florida, was sentenced to serve 21 months in prison. Young evaded a substantial portion of his individual income taxes for 2007 through 2011 and interfered with an IRS audit. He fabricated a letter from the IRS to a bank directing the bank to send subpoenaed records to a bogus address.
  • In October 2016, Henti Lucian Baird, a Greensboro, North Carolina resident and former IRS revenue officer, pleaded guilty. Baird filed tax returns each year but has not paid since at least 1998. Baird created nominee bank accounts to hide hundreds of thousands of dollars from the IRS, submitted false information to the investigating IRS officer regarding these accounts and transferred funds from nominee accounts to avoid impending IRS levies.
  • In June 2016, Paul Tharp, a North Carolina man, was sentenced to serve 21 months in prison. Tharp failed to file tax returns for 2003 through 2006, and the IRS assessed income tax against him for those years. Tharp attempted to evade payment of his tax debt by filing false disclosures with the IRS, omitting businesses that he owned as well as bank accounts and rental income.

Ironically, the Justice Department’s press release touting its successes in prosecuting tax crimes comes at a time when the Criminal Investigation Division of the Internal Revenue Service – which is responsible for investigating potential tax crimes – finds itself more resource-constrained than at virtually any other time in its history.  IRS-CI’s most recent annual report for FY2016 reveals that the agency has only 2,217 criminal investigators, its lowest point in two decades.  During FY2016, only 889 criminal tax cases were authorized for prosecution, a substantial decrease and the lowest number of authorizations in a decade.  Of all the myriad categories of crimes investigated by IRS-CI, only four — employment tax, public corruption, healthcare fraud, and offshore tax evasion — reflected an increase in the number of investigations initiated as compared to FY2015.  In every other category, the number of investigations initiated by IRC-CI during FY2016 decreased.  A substantial decrease in the number of tax investigations initiated by IRS-CI during the past year will have a lasting impact, as such cases typically require several years of investigation followed by prosecution, if approved.  As a result, we can expect to see fewer and fewer criminal tax prosecutions in the coming years.  And only if Congress agrees to fully fund the IRS will IRS-CI be able to hire new special agents to replace the hundreds of agents who have left the agency over the last 10 years without being replaced.

irsThe Internal Revenue Service announced earlier this week that its private debt collection program is starting now.  Beginning this week, the IRS will start sending letters to taxpayers whose overdue federal tax debts are being assigned to one of four private-sector collection agencies. At the same time, the IRS is warning taxpayers that they must be vigilant to guard against scammers posing as legitimate tax collectors.

The new private tax collector program, authorized under a federal law enacted by Congress in December 2015, enables these designated contractors to collect, on behalf of the IRS, unpaid tax debts. Usually, these are unpaid individual tax obligations that are not currently being worked by IRS collection employees and often were assessed several years ago.

According to the IRS, taxpayers whose tax debts are being assigned to private collectors would have had multiple contacts from the IRS in previous years and still have an unpaid tax bill. “The IRS is taking steps throughout this effort to ensure that the private collection firms work responsibly and respect taxpayer rights,” said IRS Commissioner John Koskinen. “The IRS also urges taxpayers to be on the lookout for scammers who might use this program as a cover to trick people. In reality, those taxpayers whose accounts are assigned as part of the private collection effort know they have a tax debt.”

The program will begin this month with a few hundred taxpayers receiving mailings and subsequent phone calls, with the program growing to thousands a week later in the spring and summer. Taxpayers with overdue taxes will always receive multiple contacts, letters and phone calls, first from the IRS, not private debt collectors.

The IRS will always notify a taxpayer before transferring their account to a private collection agency (PCA). First, the IRS will send a letter to the taxpayer and his/her tax representative (if any) informing them that their account is being assigned to a PCA and giving the name and contact information for the PCA. (See prior coverage here.) This mailing will include a copy of Publication 4518, entitled “What You Can Expect When the IRS Assigns Your Account to a Private Collection Agency.”

There are four private firms that are participating in this collection program: CBE Group of Cedar Falls, Iowa; Conserve of Fairport, N.Y.; Performant of Livermore, Calif.; and Pioneer of Horseheads, N.Y. The taxpayer’s account will only be assigned to one of these agencies, and never to all four. No other private group is authorized to represent the IRS.

Once the IRS letter is sent, the designated private collection firm will send its own letter to the taxpayer and his/her representative (if any) confirming the account transfer. To protect the taxpayer’s privacy and security, both the IRS letter and the collection firm’s letter will contain information that will help taxpayers identify the tax amount owed and assure taxpayers that future collection agency calls they may receive are legitimate.

The private collectors will identify themselves as contractors of the IRS collecting taxes. Employees of these collection agencies will be required to follow the provisions of the Fair Debt Collection Practices Act, and like IRS employees, must be courteous and must respect taxpayer rights.

The private firms are authorized to discuss payment options, including setting up payment agreements with taxpayers. But as with cases assigned to IRS employees, any tax payment must be made, either electronically or by check, to the IRS. A payment should never be sent to the private firm or anyone besides the IRS or the U.S. Treasury. Checks should only be made payable to the “United States Treasury.”

Private firms are not authorized to take enforcement actions against taxpayers. Only IRS employees can take these actions, such as filing a notice of Federal Tax Lien or issuing a levy.

The IRS announcement also warned taxpayers to be on the lookout for scammers posing as private collection firms. “Here’s a simple rule to keep in mind. You won’t get a call from a private collection firm unless you have unpaid tax debts going back several years and you’ve already heard from the IRS multiple times,” Koskinen said. “The people included in the private collection program typically already know they have a tax issue. If you get a call from someone saying they’re from one of these groups and you’ve paid your taxes, that’s a sure sign of a scam.” If taxpayers are unsure if they have an unpaid tax debt from a previous year – which is what the private collection firms will handle – they can go to IRS.gov and check their account balance at www.irs.gov/balancedue.

Whether or not a taxpayer’s account is assigned to a private collection agency, the IRS warns taxpayers to beware of scammers pretending to be from the IRS or an IRS contractor. Here are some things the scammers often do but the IRS and its private contractors will never do.

  • Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. Generally, the IRS will first mail a bill to any taxpayer who owes taxes, and if a case is assigned to a PCA, both the IRS and the authorized collection agency will send the taxpayer a letter. Payment will always be to the United States Treasury.
  • Threaten to immediately bring in local police or other law-enforcement groups to have the taxpayer arrested for not paying.
  • Demand that taxes be paid without giving the taxpayer the opportunity to question or appeal the amount owed.
  • Ask for credit or debit card numbers over the phone.

“Unexpected and threatening calls out of the blue from someone saying they’re representing the IRS to collect a tax debt is a warning sign people should watch out for,” Koskinen said.

 

With less than two weeks until the April 18 deadline for filing individual federal income tax returns, the Justice Department and Internal Revenue Service are issuing stern warnings to potential tax cheats. Today the U.S. Attorney for the Western District of North Carolina and the Special Agent in Charge of the IRS Charlotte Field Office issued a joint press release entitled “Federal Prosecutors Warn Potential Tax Cheats: Tax Crimes Result In Criminal Prosecution, Lengthy Prison Sentences, And Fines.” Their press release announced recent tax fraud prosecutions and sentencings, and is intended to “deliver a powerful warning to those who are thinking about breaking the law by committing tax crimes.”

“As tax filing season reaches its peak, we are putting would-be tax cheats on notice: My office will prosecute those who try to cheat the tax system at the expense of honest taxpayers who file their returns on time and pay the taxes they owe. Our tax system is built on voluntary compliance and tax criminals who do not pay their fair share increase the tax burden on law-abiding taxpayers,” said U.S. Attorney Jill Westmoreland Rose.

“The 2017 income tax filing season is soon coming to a close, however, special agents of the IRS – Criminal Investigation work year-round to combat criminal violations of the Internal Revenue Code and related financial crimes. Agents in the Charlotte Field Office have pursued, and will continue to pursue, those who prepare returns fraudulently, steal and misuse identities, and those who take extraordinary measures to conceal their income in an effort to evade their tax responsibility,” said Special Agent in Charge Thomas J. Holloman, III. “To build faith in our nation’s tax system, honest taxpayers need to be reassured that everyone is paying their fair share and we will work vigorously to pursue those who do not.”

The press release proceeds to highlight recent successes in prosecuting tax evaders and those who file false tax returns:

Matthew Moretz, 31, of Taylorsville, N.C., pleaded guilty to one count of filing a false tax return. From April 2010 to March 2011, Moretz collected unemployment income from the North Carolina Division of Employment. However, beginning in or about March 2010 and continuing through in or about 2013, Moretz was self-employed as the owner of MJM Recycling, a scrap metal business. From tax year 2010 through tax year 2013, Moretz earned additional personal income totaling approximately $529,622.44 that Moretz failed to report on his U.S. Individual Income Tax Returns Form 1040 filed with the IRS. As a result of the unreported taxable income, Moretz had additional tax due and owing of approximately $116,409.38 from 2010 to 2013. Moretz is currently awaiting sentencing.

Patrick Emanuel Sutherland, 48, of Charlotte, was convicted of filing false tax returns and obstructing a federal grand jury investigation. Court documents and trial evidence showed that, from at least 2007 to 2015, Sutherland was an actuary, and the owner and operator of numerous companies in the insurance and financial industries. Between 2007 and 2010, Sutherland engaged in an elaborate scheme to conceal a substantial amount of income, including filing false tax returns with the IRS which underreported business receipts and personal income of approximately $2 million in income received from an offshore bank account in Bermuda, as well as from domestic sources. Sutherland is currently awaiting sentencing.

Reuben T. DeHaan, 44, of Kings Mountain, N.C., was sentenced to 24 months in prison for tax evasion and possession of an unregistered firearm. DeHaan owned a holistic medicine business, which he operated out of his residence in Kings Mountain under the names Health Care Ministries International Inc. and Get Well Stay Well. During the years 2008 through 2014, DeHaan earned more than $2.7 million in gross receipts from his holistic medicine business, but failed to file income tax returns for those years and evaded approximately $678,000 in income taxes due and owing. DeHaan was also ordered to pay 567,665 in restitution to the IRS and $110,449 to the state of North Carolina.

Another area of focus for the Justice Department and IRS are unscrupulous return preparers and those who perpetrate stolen identity refund fraud:

Ramos, formerly of Lincolnton, N.C., was previously sentenced to 48 months in prison for her role in a false claims conspiracy. The conviction stemmed from Ramos’s role in a conspiracy to defraud the government by filing fraudulent tax returns seeking refunds totaling more than $5 million, by using stolen identity information of individuals in Puerto Rico. Ramos fled the United States and failed to report to federal prison after the sentencing. She is awaiting sentencing on charges of obstruction of justice and failure to report and faces additional jail time and fines.

Cara Michelle Banks, Carmichael Cornilus Hill, and Priscilla Lydia Turner conspired with Senita Dill and Ronald Jeremy Knowles, and others, to file false federal and state tax returns using stolen personal identifying information. From 2009 to 2012, this conspiracy defrauded the United States Treasury of over $3.5 million. Banks, Hill, Turner and others stole personal identifying information and then provided it to Dill to file the false returns in exchange for payment. Dill and Knowles used stolen personal information to file over 1,000 false tax returns. Court records show that Hill provided approximately 26 percent of the stolen identifications used to file the fraudulent returns. In 2016, Banks and Hill were sentenced to 70 months and 75 months in prison, respectively. In November 2016, Turner pleaded guilty to aggravated identity theft and is currently awaiting sentencing. Senita Dill was sentenced to 324 months and Knowles to 70 in prison for their roles in the conspiracy.

Finally, an area of recent intensity for the Justice Department and IRS is employment tax fraud:

Frank Alton Moody, II, 57, of Arden, the co-founder and former Chairman of the Board of CenterCede Services, Inc., a payroll services company, was ordered to serve 30 months in prison, two years in supervised release, and to pay $2,146,380.97 as restitution, for conspiring to steal over $2 million from client companies. Moody’s co-conspirators, Jerry Wayne Overcash and John Bernard Thigpen, were previously sentenced to 46 months and 21 months in prison, respectively. The three men used the more than $2 million they stole from client companies to fund their exorbitant salaries. Overcash and Thigpen were also ordered to jointly pay $1.3 million as restitution to the victim client companies.

The press release concludes with a reminder to taxpayers to exercise caution during tax season to protect themselves against a wide range of tax schemes ranging from identity theft to return preparer fraud. Illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice to shutdown scams and to prosecute the criminals behind them. The IRS has issued its annual “Dirty Dozen” which lists common tax scams that taxpayers may encounter, particularly during filing season. Taxpayers are urged look out for, and to avoid, the following common schemes:

  • Phishing
  • Phone Scams
  • Identity Theft
  • Return Preparer Fraud
  • Fake Charities
  • Inflated Refund Claims
  • Excessive Claims for Business Credits
  • Falsely Padding Deductions on Returns
  • Falsifying Income To Claim Credits
  • Abusive Tax Shelters
  • Frivolous Tax Arguments
  • Offshore Tax Avoidance

As we have written previously, it is well-known that the IRS and Justice Department typically increase the frequency of their press releases announcing enforcement activity in the weeks leading up to the filing deadline. In fact, academic research confirms that these agencies issue a disproportionately large number of tax enforcement press releases as “Tax Day” approaches:

Every spring, the federal government appears to deliver an abundance of announcements that describe criminal convictions and civil injunctions involving taxpayers who have been accused of committing tax fraud. Commentators have occasionally suggested that the government announces a large number of tax enforcement actions in close proximity to a critical date in the tax compliance landscape: April 15, “Tax Day.” These claims previously were merely speculative, as they lacked any empirical support. This article fills the empirical void by seeking to answer a straightforward question: When does the government publicize tax enforcement? To conduct our study, we analyzed all 782 press releases issued by the U.S. Department of Justice Tax Division during the seven-year period of 2003 through 2009 in which the agency announced a civil or criminal tax enforcement action against a specific taxpayer identified by name. Our principal finding is that, during those years, the government issued a disproportionately large number of tax enforcement press releases during the weeks immediately prior to Tax Day compared to the rest of the year and that this difference is highly statistically significant. A convincing explanation for this finding is that government officials deliberately use tax enforcement publicity to influence individual taxpayers’ perceptions and knowledge of audit probability, tax penalties, and the government’s tax enforcement efficacy while taxpayers are preparing their annual individual tax returns.

Joshua D. Blank and Daniel Z. Levin, When Is Tax Enforcement Publicized?, 30 Virginia Tax Review 1 (2010).

As “Tax Day 2017” approaches, expect to see similar announcements intended to deter would-be tax cheats from filing false tax returns.

In recent IRS summons litigation, a Federal District Court in New Mexico has ruled that the IRS may seek information from a bank, the New Mexico Department of Health – Medical Cannabis Program, and the Public Service Company of New Mexico, which was requested in order to determine whether the taxpayer was subject to Section 280E.  The taxpayer filed a motion to quash the summons on the basis that the IRS was engaging in a criminal investigation and did not have the authority to determine whether the taxpayer was violating the Controlled Substances Act (“CSA”).

The Court ruled that the summonses satisfied the Powell test and therefore should be enforced.  In response to the taxpayer’s allegation that the IRS is abusing its civil audit authority and is conducting a criminal investigation, the Court relied on the Revenue Agent’s statements that there was no criminal investigation.  The Revenue Agent stated that the IRS was enforcing the tax code and, in order to do so, needed to determine whether there were violations of the CSA.

The Court quoted the Alpenglow Botanical case (discussed here) in ruling that a criminal investigation is not required for the IRS to make a determination that the CSA was violated.  The Court stated that Section 280E “does not first require a determination by a non-IRS government official conducting a criminal investigation that the party claiming a deduction is trafficking in controlled substances.”  In short, Section 280E applies even if the taxpayer has not been charged or prosecuted for violating Federal law.

The opinion is available here: HDR NM Summons case.

 

 

 

 

Recently, a Colorado business protested the IRS’ disallowance of their business expenses.  The IRS alleges that the taxpayer was a Colorado medical marijuana dispensary to which Section 280E applies, as a result the IRS asserted that the taxpayers owed additional tax.  The taxpayers paid the tax and sued for a refund in Federal Court.  In a motion for summary judgment, the taxpayer asserted that the IRS did not have the authority to investigate whether the taxpayer violated the Controlled Substances Act (“CSA”), that Section 280E violates the Sixteenth Amendment, that the taxpayer properly deducted its expenses, and that the IRS did not produce evidence that Section 280E applies to the taxpayer.  The taxpayer also asserted that the application of Section 280E violated their Fifth Amendment rights and that Section 280E violates the Eighth Amendment prohibition against excessive fines and penalties.

The District Court ruled that:

  • the IRS application of Section 280E to a business it determined was selling marijuana was within its authority to apply the Internal Revenue Code;
  • the IRS’ application of Section 280E was a “purely tax-based determination” that did not violate the taxpayer’s Fifth Amendment rights;
  • the taxpayer did not allege that the IRS disallowed costs other than cost of goods sold and therefore the court could not determine that the Sixteenth Amendment was not violated;
  • the taxpayer did not allege enough facts for the court to determine whether Section 280E is an excessive fine and penalty in violation of the Eighth Amendment; and
  • the taxpayer did not allege any facts to show that the IRS lacked evidence to show that the taxpayer was violating the CSA.

The taxpayer has filed a motion for reconsideration and an amended complaint to add allegations necessary to support its claims, so the case may move forward based on those new allegations.   However, the taxpayer’s attempt to stop the IRS from enforcing Section 280E was not successful under the facts of this case.

The case is Alpenglow Botanicals, LLC v. U.S., Colorado Dist. Ct. Case No. 16-cv-00258-RM-CBS.  Opinion and Order Continue Reading Colorado District Court: IRS Enforcement of Section 280E Is Not A Criminal Investigation

On January 20, 2017, the White House issued a Memorandum freezing all new regulations (former President Obama issued a similar freeze at the start of his administration).  In addition, on January 30, 2017, the President issued an Executive Order requiring federal agencies to eliminate two prior regulations for every new regulation issued.  The regulatory freeze and reduction order may hamper the IRS’s ability to implement recently enacted legislation (the IRS’s 2016-2017 Priority Guidance Plan listed 281 projects it planned to tackle through June 2017). While recent comments by the IRS Commissioner indicate that the IRS plans to begin issuing sub-regulatory guidance, the guidance surrounding the regulatory reduction order has done little to clarify the IRS’s ability to issue new regulations.

Regulatory Freeze

The Memorandum prohibits agencies from submitting new regulations to the Office of the Federal Register (OFR) until they have been reviewed and approved by a department or agency head appointed by the President.  Regulations that were sent to the OFR but not published in the Federal Register by January 20th are required to be withdrawn from the OFR for review and approval.  For those regulations that were published in the Federal Register but were not in effect on January 20, 2017, the order calls for their effective date to be temporarily postponed for 60 days.

At the time the Memorandum was issued, the IRS had issued several important sets of regulations that had not been published in the Federal Register, including the following:

  • Final, temporary, and proposed dividend equivalent regulations.
  • Final regulations on the treatment of certain types of income as “qualifying income” to publicly traded partnerships.
  • Proposed regulations on the new centralized partnership audit regime.

Nevertheless, the recently issued dividend equivalent regulations and the publicly traded partnership regulations were published in the Federal Register on January 24, 2017, seemingly avoiding the regulatory freeze. The IRS withdrew the partnership audit regulations in accordance with the Memorandum.

The Memorandum specified that the term “regulation” applies to any “regulatory action” including all “guidance documents” suggesting the applicability of the regulatory freeze to sub-regulatory guidance, like notices, revenue procedures, and revenue rulings.  Indeed, the IRS has not released any sub-regulatory guidance since January 20th, aside from most routine items (including revenue rulings on applicable federal rates). The IRS has continued to release private letter rulings and chief counsel advice memoranda.  However, recent comments by IRS Commissioner John Koskinen make clear that the IRS plans to begin issuing sub-regulatory guidance.  On March 21st, speaking at the 67th Midyear Conference sponsored by Tax Executives Institute Inc., Commissioner Koskinen stated that after conversations with the Treasury Department and the Office of Management and Budget (OMB), there is an understanding that much of the guidance the IRS publishes is not part of the regulatory process targeted by the President, because, the guidance issued is for the benefit of taxpayers.

Regulatory Reduction

On February 2, 2017, the OMB issued a memorandum providing interim guidance on how government agencies can implement the two-for-one executive order that seeks to streamline the regulatory burden on taxpayers.  The interim guidance says that the agencies must issue two deregulatory actions for each new significant regulatory action that imposes a cost.  A deregulatory action is any action that that produces verifiable savings, streamlined reporting and reduced record keeping and disclosure requirements.  For these purposes, cost is defined as the opportunity cost to society as discussed in OMB Circular A-4.

How the IRS will choose two regulations that meet the order’s cost-benefit analysis is still unclear.  But, the IRS has pushed back and Commissioner Koskinen stated that in accordance a 1983 memorandum of agreement with the OMB, IRS guidance and Treasury regulations have historically been exempt from such executive orders because they interpret the tax law and provide help that taxpayers need, rather than imposing additional burdens and costs.  He noted that the burden imposed on taxpayers exists by virtue of the statute Congress passed and not by the IRS regulations and guidance, which are intended to provide certainty and clarity to taxpayers.

passportThe Internal Revenue Service is moving forward with implementation of a new law requiring the State Department to deny, or revoke, the U.S. passports of individuals who owe the IRS more than $50,000. The passport revocation measure became law in December 2015, when President Obama signed a five-year, $305 billion highway funding bill that included several controversial tax measures designed to help fund the legislation, including authorizing the revocation of passports in the case of unpaid taxes and the use of private debt collectors to collect taxes.

A new provision of the Internal Revenue Code now authorizes the Treasury Secretary to certify, to the Secretary of State, that a taxpayer has a “seriously delinquent tax debt.” According to the IRS website, certifications to the State Department will begin in early 2017. Upon receipt of certification from the IRS, the Secretary of State is authorized to revoke the taxpayer’s passport or impose restrictions on the use of such passport, such as limiting its use to return travel to the U.S. only. The Secretary of State is also prohibiting from issuing a new passport to any individual who has a “seriously delinquent tax debt,” with limited exceptions provided for emergency circumstances or humanitarian reasons. Taxpayers who are serving in combat zones are granted relief from the law’s provisions.

Passport Revocation as a Tax Collection Tool

The threat of passport revocation provides the IRS with a powerful tool to force tax compliance, particularly for non-residents or dual citizens who regularly travel to or from the United States. Until Congress enacted this new law in December 2015, the State Department had no authority to restrict the issuance of passports to individuals because they owed back taxes. In contrast, other federal laws authorize the State Department to deny or revoke the issuance of passports in certain circumstances, such as in the case of individuals with delinquent child support obligations.

Several years ago, the Government Accountability Office studied the potential for using passport issuance/revocation to increase collection of unpaid federal taxes. As part of that study, the GAO found that during fiscal year 2008, the State Department issued passports to more than 224,000 individuals who collectively owed the IRS in excess of $5.8 billion in back taxes. The GAO concluded that even this amount was likely substantially understated, as it did not include amounts owed by taxpayers who did not file a tax return or by businesses associated with such taxpayers.

“Seriously Delinquent Tax Debt”

Under the new law, individuals with “seriously delinquent tax debt” may have their passports revoked or applications for passports denied. “Seriously delinquent tax debt” is defined as a federal tax liability that been assessed and is greater than $50,000 (including interest and penalties), and for which the IRS has either filed a lien or levy. The dollar threshold will be adjusted for inflation every year.

Taxpayers who have entered into installment agreements or offers-in-compromise, or have requested collection due process hearings or innocent spouse relief, are not considered to have “seriously delinquent tax debt” even if they owe the IRS more than $50,000.

New Taxpayer Notifications

The law includes certain safeguards to protect taxpayer rights. Taxpayers who are certified to the Secretary of State as having a “seriously delinquent tax debt,” or whose certifications are subsequently revoked, are entitled to prompt written notice. The IRS will mail “Notice CP 508C” to the taxpayer’s last known address notifying the taxpayer of his or her certification to the State Department for having “seriously delinquent tax debt.”

In addition, the new law amends existing Internal Revenue Code provisions to ensure that taxpayers are warned in advance that they could be subject to U.S. passport denial, revocation or limitation. For example, notices of federal tax lien and notices of intent to levy must now include language advising the taxpayer that they may be certified to the Secretary of State as having a “seriously delinquent tax debt” with attendant passport consequences. The specific language that now appears on IRS levy notices is as follows:

Denial or Revocation of United States Passport
On December 4, 2015, as part of the Fixing America’s Surface Transportation (FAST) Act, Congress enacted section 7345 of the Internal Revenue Code, which requires the Internal Revenue Service to notify the State Department of taxpayers certified as owing a seriously delinquent tax debt. The FAST Act generally prohibits the State Department from issuing or renewing a passport to a taxpayer with seriously delinquent tax debt. Seriously delinquent tax debt means an unpaid, legally enforceable federal tax debt of an individual totaling more than $50,000 for which a Notice of Federal Tax Lien has been filed and all administrative remedies under IRC § 6320 have lapsed or been exhausted, or a levy has been issued. If you are individually liable for tax debt (including penalties and interest) totaling more than $50,000 and you do not pay the amount you owe or make alternate arrangements to pay, we may notify the State Department that your tax debt is seriously delinquent. The State Department generally will not issue or renew a passport to you after we make this notification. If you currently have a valid passport, the State Department may revoke your passport or limit your ability to travel outside of the United States. Additional information on passport certification is available at www.irs.gov/passports.

Before denying a passport application as a result of a certified tax debt, the State Department will hold such application for a period of 90 days to allow the applicant to either pay the tax liability in full or enter into a payment arrangement with the IRS. Note, however, that the State Department will not grant a similar grace period before revoking a passport as a result of a tax debt.

Taxpayer Options If Certified to the State Department

Once a taxpayer has been certified to the State Department as having “seriously delinquent tax debt,” such certification will only be reversed if (1) the tax debt is fully satisfied or becomes legally unenforceable (such as when the 10-year statute of limitations for collection expires); (2) the tax debt is no longer considered “seriously delinquent”; or (3) the original certification was erroneous. The IRS will provide notice as soon as practicable if the certification is erroneous by mailing “Notice CP 508R” to the taxpayer’s last known address. The IRS will provide notice within 30 days of the date the debt is fully satisfied, becomes legally unenforceable or ceases to be seriously delinquent.

A previously certified debt is no longer considered to be “seriously delinquent” when any of the following occur:

  • the taxpayer enters into an installment agreement with the IRS allowing payment of the debt over time;
  • the IRS accepts an offer-in-compromise to satisfy the debt;
  • the Justice Department enters into a settlement agreement to satisfy the debt as a result of litigation;
  • collection is suspended because the taxpayer requests innocent spouse relief; or
  • the taxpayer submits a timely request for a collection due process hearing in connection with a levy to collect the debt.

The IRS will not reverse certification where a taxpayer requests a collection due process hearing or innocent spouse relief on a tax debt that is not the basis of the certification. Also, the IRS will not reverse the certification simply because the taxpayer makes a payment that brings the debt below $50,000, but not to zero.

Judicial Review

A taxpayer whose debt has been certified to the State Department has the right to challenge such certification by filing suit in the U.S. Tax Court or a federal district court to challenge the certification. A taxpayer may also file suit to challenge an IRS refusal to reverse a certification. If the court determines that the certification was erroneous or should have been reversed, it can order reversal of the certification. The law does not require a taxpayer to exhaust any administrative remedies before filing suit.

Conclusion

The ability to cause passport revocation or denial provides the IRS with powerful leverage over individuals who are delinquent in their tax debts. Taxpayers who owe the IRS more than $50,000 and are concerned about the possibility of passport revocation must take immediate steps to address their outstanding tax liabilities, by either paying such debt in full or seeking to negotiate a collection alternative such as an installment agreement or offer-in-compromise. In addition, because the IRS will mail certification notices to the taxpayer’s last known address, it is critically important that taxpayers ensure that the IRS has an up-to-date address on file so notices are timely received and can be addressed promptly. Individuals who owe the IRS more than $50,000 and fail to heed these warnings will face dire consequences with respect to their ability to travel to and from the United States.

For questions or more information about this alert, please contact Matthew D. Lee at 215.299.2765 or any member of the firm’s Tax Controversy and Litigation practice.

irsOur colleagues Mark McCreary and Kevin Dermody have published an excellent article entitled “Don’t Get Caught in ‘Phishing Season’” on their Privacy Compliance & Data Security blog.  Their article warns of the very real dangers that tax season brings to companies, which are increasingly being targeted by “phishing” or “spear phishing” cyberattack scams.  The goal of such scams is to steal employees’ Form W-2 information during tax season.  This data (which includes employee names, addresses, and Social Security numbers) can then be used by criminals to commit identity theft.

Every year the Internal Revenue Service compiles its “Dirty Dozen” list of common scams that taxpayers may encounter during the annual tax filing season.  For 2017, “phishing” schemes topped the “Dirty Dozen” list.

Previously, we discussed Congress’s enactment of the FAST Act requiring the IRS to use private debt collection agencies to recover inactive tax receivables. In September, the IRS announced that it had contracted with four collection agencies to begin private collection, and last week, the IRS posted to its website a sample of the letter it will send to some taxpayers to notify them that their overdue account has been assigned to a private collection agency (Notice CP40). A copy of the letter can be found here.

The letter contains the name, address and phone number of the private collection agency and notes the following:

  • The private collection agency will explain payment options.
  • The private collection will provide the taxpayer with a payment plan if the taxpayer can’t pay the full amount.
  • Taxpayers should go to www.irs.gov/payments for information about how to pay an account that was transferred to a private collection agency.
  • The private collection agency is required to maintain the security and privacy of the taxpayer’s tax information. To do this, it will ask the taxpayer to provide their name and address of record before assisting the taxpayer in resolving his account. Also, it will perform two-party verification by asking the taxpayer for the first five numbers of their taxpayer authentication number at the top of the CP40. The private collection agency will then provide the subsequent five numbers.

The letter also suggests that the taxpayer refer to Publication 4518, What You Can Expect When the IRS Assigns Your Account to a Private Collection Agency. Publication 4518 can be found here and provides answers to questions taxpayers may have when their account has been assigned to a private collection agency including:

  • What will the private collection agency do?

The private collection agency assigned to your account is working on behalf of the IRS. They will send you a letter confirming assignment of your unpaid tax liability and then contact you to resolve your account. They will explain the various payment options and help you choose one that is best for you.

  • How can I be sure it is the private collection agency calling me?

The private collection agency will send you a letter confirming assignment of your tax account. The letter will include the same unique taxpayer authentication number that is on the letter sent to you from the IRS.

  • Who do I make my payments to?

Make all payments to the IRS. The private collection agency can provide information on ways to pay.

Helpful Tips

The private collection agencies must abide by the consumer protection provisions of the Fair Debt Collection Practices Act (the “FDCPA”) and have agreed to be courteous and respectful of taxpayer rights. Under the FDCPA, if a taxpayer sends the private collection agency a letter stating that it does not want to work with the private collection agency and requests that the case be handled by the IRS, the private collection agency must honor the request.

In addition, it is important for taxpayers to be on the lookout for scams, especially around this time of year. Taxpayers should only make payments to the IRS, not the private collection agency. There are electronic payment options for taxpayers on IRS.gov and payments by check should be payable to the U.S. Treasury and sent directly to the IRS, not the private collection agency.