Lessons from the Tax Clinic
by Mark Garner
Chastek Library Reference Desk Assistant and Gonzaga University School of Law 3L/Law Grad December 2018
[The following and all blog posts are for informational purposes only and not for the purpose of providing legal advice]
As the semester nears its end, and my academic career here at Gonzaga along with it, I have been thinking of the lessons I will take with me from the most impactful experiences I have had here. My two semesters with the Gonzaga University Legal Assistance Federal Tax Clinic have given me the most real-world, practical experience that I have received in law school.
In the Tax Clinic, students act as tax attorneys, supervised by licensed and practicing tax attorneys, to assist low-income taxpayers with their IRS conflicts. In this role, students do virtually everything licensed tax attorneys do. Students correspond with their clients and the IRS, negotiate settlements of tax debt, do tax law research, draft briefs and memoranda for court proceedings, and even represent clients at tax court.
Through dealing with many clients from many backgrounds and circumstances, I feel there are several very basic pieces of advice that would have benefited my clients if they had been so advised long before they contacted the Tax Clinic. I share these lessons in hopes that it might lead some taxpayer to find a better, quicker resolution to their tax problems in the future.
#1: Don’t Ignore It
Don’t put off dealing with your IRS problems. They do not magically go away on their own. In fact, they tend to get much, much worse the longer they are left unattended. They are also not just something to think about once per year in April.
I have helped several clients, and heard of many more, who refused to confront their tax issues as soon as they were aware of them and found themselves in a far worse situation than they otherwise would have been. These were not just irresponsible people running away from their problems. Often, they had very good reasons, such as the death of a spouse or other traumatic experience, extreme financial strain from loss of employment, injury, illness, or other struggle that left the client mentally and emotionally unable to deal with their tax issues.
However, as difficult as tax issues may be to deal with in the midst of a crisis, they won’t be any easier to deal with later. And often there are things that can be done to temporarily deal with the tax issue until after the crisis has passed, such as getting the IRS to place you in Currently Not Collectible (CNC) status until your financial situation improves. Long story short: I have not yet seen or heard of a tax issue that would not have been resolved more favorably for the client had they sought competent assistance from a tax professional at the first sign of trouble.
In a similar vein, taxpayers should not be oblivious to their tax situation throughout the year. Some taxpayers are aware only of their responsibility to file their personal taxes on time by April 15th each year, but are unaware that they also have a responsibility to pay whatever tax they owe by that date, even if they have an extension to file. If you are self-employed, you should be aware of your responsibility to submit periodic, usually quarterly, income and self-employment tax payments to the IRS and possibly to any state in which you reside or earn income.
Also, a less common issue, but one that brings severe penalties and other consequences, is failure to submit trust account payments. Employment and income taxes are withheld from employee paychecks, income taxes are set aside from the company’s income, and these taxes are placed in trust accounts until the next periodic payment date. If you are self-employed or do payroll or accounting work for your employer, you may be responsible for a trust account. If the trust account is mismanaged or the federal and state tax withholdings for income and employment taxes are not being properly withheld and remitted to the government, you could be personally liable for that money, plus severe penalties. And people don’t always realize they are the one responsible for the trust account.
So, think about your tax situation throughout the year, don’t ignore it. Be aware that changes in employment status (from employee to independent contractor or self-employed) can affect your tax filing and payment requirements. Be aware of your responsibilities for paying taxes, in any capacity, and ensure they are being paid. And don’t ignore a tax problem if one arises, no matter how difficult it may seem to deal with.
#2: Don’t Panic
When you receive a notice from the IRS regarding a tax deficiency, you have the right to have a Collection Due Process (CDP) hearing. This is your opportunity to explain and try to find a resolution to whatever tax issues the IRS raised in the notice. Your decision to exercise your right to a CDP hearing or waive that right carries consequences, so you should discuss the decision with a qualified tax law professional. But just know that you have the right to have your position heard before the IRS takes any collection action, and there is a time limit to how long that right is available.
Also keep in mind that the IRS generally has only three years to assess a tax liability against you for a given tax year, and ten years from the date of assessment to collect that debt. So, if you receive a notice regarding a debt on a tax year from two or three years ago, or you are still dealing with a tax issue from eight or nine years ago, remember that you have rights and may be able to get those debts written-off. Check with a qualified professional to know whether your situation fits the circumstances for a write-off.
Finally, remember that even if you have a legitimate tax debt, that does not mean you are going to jail or that the IRS will necessarily levy your bank accounts or repossess your car. You have several options for handling the collection of tax debt without leaving you bankrupt. And despite the popular misconception, there is no “tax prison” or “debtor’s prison” in the United States for failing to pay your taxes, unless you are engaged in criminal tax evasion.
If you have more monthly expenses than you have income, you may qualify for Currently Not Collectible (CNC) status. If the IRS places you in CNC status, it basically means they recognize you have insufficient income to pay your necessary expenses to live AND pay your tax debt. So, instead of forcing you to pay your tax debt, and then you end up on public assistance, they simply decide not to pursue collection activity on your debt until your financial situation improves.
If you have positive monthly cash flow, but not enough to pay off your tax debt for a long time, you may qualify to submit and Offer-in-Compromise (OIC). This allows you to pay less than your total tax liability, but usually requires you to pay money upfront. If you are able to make payments and those payments will pay off your tax debt within a reasonable amount of time, you can request an Installment Agreement (IA). There are fees to setup these arrangements and they will affect the IRS’s ten-year window for collection, so make sure you speak with a competent tax professional before pursuing these options.
Just keep in mind that you do have options for settling your tax debt. It should be taken seriously and not ignored, but don’t panic.
#3: Get Help
|Like this, but for taxes.|
The federal tax laws are very complicated, and the state tax laws are generally no simpler. Public accountants are an obvious first choice for assistance if you can afford one. If not, you are not necessarily on your own. Seek out a Low-Income Taxpayer Clinic, such as the one at the Gonzaga University Legal Assistance Clinic. These clinics provide tax resolution services, generally at no cost to you. However, they can only assist with tax problems after they arise; they cannot prepare current year tax returns. Volunteer Tax Clinics, usually sponsored by a non-profit organization such as the United Way, may also be available at little or no cost and can assist with current year tax return preparation. These organizations can make a tremendous difference in the resolution of your tax matter, most importantly because they can inform and advise you on your rights as a taxpayer, and help you avoid tax problems in the first place.
As a last resort, but a better option than trying to handle things on your own, is the Taxpayer Advocate Service (TAS). TAS is a division of the IRS that is separate and independent from the collection division. The mission of TAS is to ensure taxpayers have an advocate available to protect their rights and ensure timely resolution of tax matters. I have worked with several TAS agents and they have been competent and helpful advocates for my clients with the IRS. The contact information for TAS is on the IRS.gov website.
Whatever resource you use, make sure you seek competent assistance when dealing in the realm of tax law. I have seen too many times that simply trying to be honest and do the best you can to get your taxes done right on your own is often not enough to avoid serious trouble with the IRS. Honesty is crucial, but honesty without a knowledge of the constantly changing tax laws and regulations is how most people end up applying for assistance from the Tax Clinic.
Ideally, you will seek out tax assistance before the problem arises, even before it is time to prepare your tax returns. Tax professionals can help you plan for the future and make sure big changes, such as employment status changes, buying or selling a house or a business, or changes in family composition, don’t lead to an unexpected notice from the IRS in your mailbox.