When Michigan Treasury wishes to assess a penalty, it sends the taxpayer notice of its intent to do so.  The taxpayer then has 30 days to file a written protest of the proposed assessment.  If the taxpayer fails to file a written protest, the assessment becomes final.  If the taxpayer files a written protest, Michigan Treasury allows the taxpayer a hearing on his objection.  It is a good idea for the taxpayer to be represented by counsel at such a hearing.   If at the hearing the taxpayer fails to persuade Treasury  to grant relief from the penalties, the assessment becomes final.

Once an assessment of Michigan penalties becomes final, the taxpayer can sue Michigan Treasury in Circuit Court asserting that Treasury abused its discretion in refusing to grant relief from the penalties.  Such litigation holds little usually holds little promise, as the case is decided without a jury, by a judge who is an employee of the State of Michigan.

Governor Granholm recently signed into law a Michigan tax amnesty act, the first such law since 2002.  The new law provides that, from May 15, 2011 through June 30, 2011 (“Amnesty Period”), Michigan Treasury shall waive all criminal and civil penalties with respect to a taxpayer’s failure to file a Michigan tax return or pay Michigan tax on time, provided that, by the end of the Amnesty Period, the taxpayer (1) makes a written request for waiver on a form prescribed by Michigan Treasury,  (2) files any unfiled tax returns or an amended returns, pays all tax owing with respect to the return, and (3) makes full payment of the tax and interest due.  As of November 26, 2010, Treasury had not yet prescribed any procedures for applying for amnesty under the new law.  The new amnesty law does not apply to penalties on tax accruing after December 31, 2009.

The new amnesty law is an opportunity not to be missed by taxpayers owing Michigan tax penalties.  Taxpayers should take care to follow rules when they are issued by Michigan Treasury for seeking amnesty.

Generally it is advisable for taxpayers to allocate their payments to Michigan Treasury as first against tax and then against interest owing.  This is especially true for payments made before or during the upcoming Amnesty Period.  Payments applied to penalties leave less penalties to be abated, and more tax, which cannot be abated.  A taxpayer allocates a payment first to tax and then to interest by writing on the memo line of the check, “See binding allocation on reverse,” and then writing the following on the back of the check, above where the check will be endorse:

This check must be applied first against tax and then against interest owing to the State of Michigan by [name of taxpayer], Michigan Treasury Account No. [taxpayer’s Michigan Treasury account. no.].

Stephen J. Dunn litigates Federal and Michigan tax cases, counsels corporations and entrepreneurs, and plans estates.  He is Of Counsel to the Demorest Law Firm, PLLC.  Reach him at steve@demolaw.com.

Individual taxpayers who itemize their deductions for 2009 may deduct on their 2009 income tax return cash contributions to qualifying charities for Haitian earthquake relief made after January 11, 2010 and before March 1, 2010.  A “qualifying charity” for this purpose is a charity which is (1) based in the United States, and (2) is either (a) listed in IRS Publication 78 or (b) a bona fide church.

Publication 78 lists charities which have applied for, and been granted, IRS recognition that contributions to them are deductible as charitable contributions for Federal income tax purposes.  An online version of Publication 78 can be found at http://www.irs.gov/app/pub-78/.

To designate that a contribution is for Haitian earthquake relief, you should specify on the memo line of the check or otherwise in the documentation for the contribution that the contribution is for Haitian earthquake relief.

If you have any question about making a qualifying contribution, please feel free to contact us.

[1] IR 2010-12, Jan. 25, 2010.

This article was written by Stephen J. Dunn, Of Counsel to Demorest Law Firm.

Click here to download a PDF.

This article was written by Stephen J. Dunn, Of Counsel to Demorest Law Firm.

This article was written by Stephen J. Dunn, Of Counsel to Demorest Law Firm. Click here to view his professional resume.

Mr. Dunn suggests that legislation should be passed to outlaw false or misleading statements in the marketing of tax resolution services.   Private civil actions against tax scammers are often impractical, though class-actions make more economic sense.  In addition, the IRS can seek an injunction against a tax resolution scammer, and U.S. attorneys can prosecute tax scammers for wire and mail fraud, among other offenses.

Click here to download a PDF of the article.

This article was written by Stephen J. Dunn, Of Counsel to Demorest Law Firm. Click here to view his professional resume.

Stephen J. Dunn

Mr. Dunn explains why a tax preparer should not allow spouses to sign a joint income tax return if there is substantial unpaid tax liability on the return with respect to only one of the spouses.  Nor should a preparer allow the spouses to sign a joint income tax return if there are disallowable deductions or unreported income attributable to one of the spouses.

If the spouses have already filed a joint income tax return with substantial unpaid tax liability attributable to only one of the spouses, the prepared should consider filing a Form 8857 seeking relief under IRC Sec. 6015(f) for the innocent spouse.  The Form 8857 may also assert IRC Sec. 6015(b) as an alternative for innocent spouse relief.  This action could accomplish a great result for the innocent spouse.

The full article is now available for download in PDF format by clicking the link below.

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This article was written by Stephen J. Dunn, Of Counsel to Demorest Law Firm. Click here to view his professional resume.

When a company fails to pay its Federal employment taxes, the trust fund portion of those taxes can and will be assessed personally against the business’s “responsible persons” (such an assessment is called a “trust fund recovery penalty”).  “Trust fund” taxes are those that the employer is required to withhold from employees’ wages and pay over to the IRS.    They include withheld income tax, Social Security tax, and Medicare tax.  Many states, including Michigan, also impose a trust fund recovery penalty for state income tax withheld from employees’ wages but undeposited with the state taxing authority.

A responsible person is one who decides how the company uses its available cash. In the IRS’ view, one who has the right to determine how a company uses its cash, even though he or she does not exercise that right, can be a responsible person.   Signature status over a company’s bank accounts is a telling indicia of responsible personhood.  A company’s chief executive officer is nearly always deemed a responsible person.

Nearly every company has at least one responsible person; it is a rare company that does not have a responsible person.  Heroic efforts to prevent assessment of a trust fund recovery penalty usually are not worth it.  It is much more worthwhile to endeavor to confine assessment of a trust fund recovery penalty to one, truly responsible, person, and to start the collection statute of limitations running on the assessment.

Within about six months after a company fails to file an employment tax return, or fails to deposit employment taxes with the IRS, an IRS Revenue Officer will contact the company and attempt to bring it into compliance with the law.  If that doesn’t work, the Revenue Officer will initiate a trust fund recovery penalty assessment, beginning with interviews of suspected responsible persons.  It is critically important that such persons immediately retain qualified counsel, and that the interviews not take place.  A target’s representative can instead complete a questionnaire for the target and submit it to the Revenue Officer.

If a target disagrees with a proposed trust fund recovery penalty assessment against him, he or she can appeal the proposed assessment to the IRS Office of Appeals.  If that is unsuccessful, the trust fund recovery penalty will then be assessed.  Upon assessment, a tax lien in the amount of the trust fund recovery penalty arises in favor of the IRS on all of the taxpayer’s property.  The IRS will record notice of the tax lien in the local register of deeds’ office, disabling the assessed target from selling or mortgaging real property.

The statute of limitations on collection is 10 years from the date of assessment for a Federal trust fund recovery penalty, and six years from the date of assessment for a Michigan trust fund recovery penalty.  Neither Federal nor state trust fund recovery penalties are dischargeable in bankruptcy.

A target against whom a trust fund recovery penalty has been assessed can litigate the assessment by paying trust fund tax for at least one employee for at least one calendar quarter   (this is called a “divisible portion” of the assessment), and then filing a claim for refund of it with the IRS.  Once the IRS denies the claim, or six months pass without IRS action on the claim, the target may sue in U.S. District Court, challenging the trust fund recovery penalty assessment.

The IRS can criminally prosecute a failure to deposit withheld trust fund taxes, and in the present economy it is doing so with increasing frequency.  A well-known Michigan restauranteur recently pleaded guilty in U.S. District Court in Detroit to a prosecution for failing to deposit trust fund taxes withheld from his employees’ wages.

Several things can and should be done to protect a company’s principals from trust fund recovery penalty assessments:

* The company’s CEO should monitor the company’s trust fund obligations and determine that they are being paid on a current basis.

* As soon as the company determines that it may not be able to fully pay its employment tax obligations as they accrue, the company should─

• prepare to cease operations as soon as possible; and
• specifically allocate any further payments of employment taxes as against the company’s trust fund obligations.

This article was written by Stephen J. Dunn, Of Counsel to Demorest Law Firm. Click here to view his professional resume.

When the Internal Revenue Service (“IRS”) conducts an examination and determines to make an assessment, it must issue to the taxpayer 30 days’ written notice of  its intent to make the assessment.  If the taxpayer appeals the proposed assessment within the 30-day window, the assessment will not become final until the IRS Appeals Office has completed its review of the case.  If the taxpayer files a timely petition with the U.S. Tax Court, the assessment does not become final, if at all, until the Tax Court renders its decision on the case.  In addition, a taxpayer can gain jurisdiction to litigate a civil tax case in the U.S. District Court or the U.S. Court of Federal Claims by paying at least part of the assessment and then suing for a refund.  Though we’ve litigated in all of these courts, we find that litigation of civil tax cases is usually unnecessary.  We enjoy an excellent working relationship with the IRS Detroit Appeals Office, and we find that we can successfully resolve most of our civil tax cases there.

Once an assessment is made, and it remains unpaid, a lien arises by operation of law in favor of the IRS in all property interests which the taxpayer then owns or thereafter acquires.  The lien remains in effect until the assessment, including penalties and interest, is paid in full, or the collection statute of limitations expires on it.  The IRS records  written notice of the lien in the Register of Deeds’ office for the county of the taxpayer’s residence, thereby clouding title to the taxpayer’s real property, and impairing the taxpayer’s credit standing.  But if the taxpayer arranges with the IRS to pay the assessment within one year, the IRS may refrain from recording the tax lien notice.

If the taxpayer does not enter into an installment agreement satisfactory to the IRS to pay the assessment, the IRS will periodically levy (seize) the taxpayer’s property, until the assessment is paid in full.  The IRS prefers levying liquid assets, such as bank and brokerage accounts and wages.  In unusual circumstances the IRS levies real property.  Before levying, the IRS must issue written notice of its intent to do so to the taxpayer, but the IRS need only  issue a notice of intent to levy once as to a given assessment.

When a client comes to us owing a balance to the IRS, we call the IRS and have a hold placed on collection action against the client.  Then we secure transcripts of the client’s Federal tax accounts. We analyze the transcripts and determine whether the client has been penalties abatable for “reasonable cause.”  Examples include errors in tax returns, or  failure to timely file tax returns or pay tax,  attributable to malfeasance by the taxpayer’s accountant or attorney, embezzlement perpetrated against the client by an employee, or economic factors beyond the taxpayer’s control.  Denial of a request to abate penalties can be appealed to the IRS Appeals Office, often with favorable results.

Once we have satisfied ourselves as to the propriety of the assessment, and if the client is unable to pay the balance in full, we seek to enter the client into an installment agreement with the IRS.  This requires gathering financial information on the client and submitting it to the IRS.  If the financial information indicates that the client is unable to pay anything to the IRS, the IRS will post the account as “not currently collectible,” and leave the client alone for the time  being.

An offer in compromise is rarely in the client’s best interests.  The IRS almost always rejects them.  The making of an offer in compromise extends the 10-year statute of limitations on collection of an assessment for the pendency of the offer, plus six months.  Plus the client is out the fees incurred to prepare and submit the offer.  If the IRS determines that an offer is “frivolous,” then the client is subject to a $5,000 penalty, as is the preparer.

This article was written by Stephen J. Dunn, Of Counsel to Demorest Law Firm. Click here to view his professional resume.