September 30, 2010

Unpaid Sales And Use Taxes In California Is A Serious Tax Problem

The Los Angeles Times ran an article on September 27, 2010 which discussed delinquent sales taxes in California owed to the State Board of Equalization.

The article said that the total of uncollected sales- and use-tax revenue — including unpaid penalties and interest — stood at $1.4 billion as of June 30, according to the Board of Equalization figures obtained by The Times. Much of that money was paid by consumers but not turned over to the state by retailers, although it also includes some transactions in which the debt is in dispute.

About a third of the largest defaults come from auto dealers and related businesses, according to a Times review of state records.

For help with your delinquent tax payments, call tax attorney Mitchell A. Port at 310.559.5259 to solve your tax problem.

September 27, 2010

Revoking An Installment Agreement

The California Franchise Tax Board can revoke the installment agreement it has made with you and your business if:

New liabilities accrue.

Payments are dishonored.

A business entity repeatedly fails to make I/A payments.

Your business can enter an installment agreement if you cannot pay your total balance in 90 days due to a financial hardship. Under this program, you would agree to pay a specified amount on a specified day each month.

The requirements to meet when you request an installment agreement are:

You must file any delinquent tax returns.

You may need to complete a financial condition form and then send it to the Franchise Tax Board. If necessary, the FTB may require other financial documentation to process your installment agreement request.

FTB staff will determine if an account qualifies for an installment agreement and the time period allowed.

Even if you enter an installment agreement, the FTB may need to file a lien to secure your tax debt. Applicable penalties, fees, and interest accrue until the balance is paid. This increases your balance due.

If you need tax help, contact Mitchell A. Port at (310) 559-5259.

September 23, 2010

IRS Can Lien Your Pension

Everyone knows pensions are exempt assets that are safe from creditors, right? Nope. A recent U.S. Tax Court case (Wadleigh v. Commissioner) says that this is not always true.

Vance Wadleigh filed a 2001 federal income tax return on August 16, 2002, reporting a balance due but did not pay the tax. The IRS assessed a tax liability and issued a timely notice and demand for payment on September 16, 2002.

The assessment caused a section 6321 lien (the so-called “secret” lien) to attach to all of Wadleigh’s property, including an ERISA pension he had from his employer. Although the pension was fully vested, it would not be in payout status until November 2007. A Notice of Federal Tax Lien (NFTL) was filed in 2002, but was later withdrawn. As a result, the IRS had only a section 6321 lien with respect to the taxpayer’s 2001 tax liability.

In 2005, Wadleigh and his wife filed a voluntary Chapter 7 bankruptcy petition, listing the pension as an excluded asset. They were discharged in bankruptcy that included the 2001 federal income tax liability.

Despite the discharge, in 2006 the IRS issued a notice of intent to levy on the pension income.
After an appeal was denied, Wadleigh brought an action in the Tax Court, making three arguments:

1. His liability for the unpaid tax was discharged in bankruptcy,

2. The levy was invalid because it was made before he was in payout status, and

3. The proposed levy was invalid because a previous levy on his pension was released.

The Tax Court rejected all three arguments.

When a taxpayer fails to pay tax upon notice and demand, a section 6321 lien arises by operation of law and continues until the liability is satisfied or becomes unenforceable by lapse of time. The lien attaches to all property and rights to property belonging to the taxpayer from the moment the tax is assessed.

The IRS ordinarily follows up on the section 6321 lien by filing a Notice of Federal Tax Lien (NFTL) (1) to give it priority over judgment creditors, mechanic’s lienors and bona fide purchasers and (2) to prevent the lien from being discharged in bankruptcy.

If a taxpayer files for bankruptcy, the bankruptcy estate includes all legal or equitable interests of the debtor in property except assets excluded under section 541 of the bankruptcy code. As interpreted in Patterson v. Shumate, the section 541 exclusion includes interests in ERISA-qualified pension plans.

It is important to distinguish between excluded property and exempt property, however. Excluded property is never subject to the jurisdiction of the bankruptcy court at all, while exempt property is included in the bankruptcy estate but cannot be used to satisfy creditors’ claims.

When a debtor is discharged in bankruptcy, he is discharged from personal liability, but liens and other secured interests may survive. Exempt property can be subject to an IRS lien following discharge in bankruptcy if (1) the federal tax liability is not dischargeable or (2) the liability is dischargeable but the IRS filed a pre-petition NFTL.

Here, the IRS lien was not discharged in bankruptcy because the pension plan was an excluded asset under 26 U.S.C. 541(c)(2) and the trustee in bankruptcy had no power over it. Note, however, that only ERISA pensions are excluded under section 541(c)(2).

Thus, if Wadleigh had a non-ERISA pension like an IRA instead of the ERISA pension, it would have been an exempt asset rather than an excluded asset and could have been discharged in bankruptcy.

This suggests that a taxpayer with an ERISA pension subject to a secret section 6321 lien could convert the pension to an IRA before filing for bankruptcy and have the lien on the IRA discharged in bankruptcy. However, this planning strategy may have limited application though because it works only if the IRS fails to file a NFTL.