IRS enforcement: what do they look for, what are their tactics, and how can you avoid poking this bear? Today, we look for the answers.
Greetings, this is Kelly Coughlin, CPA, and CEO of EveryDayCPA providing tax accounting and revenue solutions to individuals and businesses throughout the U.S. In today’s podcast I am going to interview a former IRS enforcement specialist, what we sometimes call a grizzly bear. Yep! In a former life, for 30 years, he was a grizzly bear who took the shape of an IRS Enforcement Officer, seizing assets and pursuing DOJ tax lien foreclosures. If you have done business with this man, that is, if you poked this bear, you probably were having a bad day. He has proved my analogy that the IRS can be either a black bear or a grizzly bear, but regardless, a bear. And do you know how to tell the difference between the two? If you climb a tree to escape the black bear climbs up the tree to eat you. The grizzly bear simply rips the tree out by the roots and eats you. Regardless, don’t poke the bear. Please welcome David Ronquillo.
David Ronquillo began his career as a revenue officer in 1980 in Seattle. He has held positions as Field Collection Group Manager and Senior Collection Policy Analyst. Currently, he is helping tax professionals increase their knowledge and skills representing clients who are dealing with the IRS Collection operations. David, I want to welcome you to the EveryDay CPA Podcast and want to first ask you, in your past work, did you prefer climbing the tree or ripping the tree out by the roots?
David: Well, Kelly, I have never had it described that way as that grizzly bear but it’s certainly a lot easier to just simply rip the tree out by its roots because you will bring down the taxpayer out of the tree to do what you need to do.
Kelly: Well done, alright. So, you prefer the rip the tree out method?
David: Yes, it’s always more effective. IRS enforcement tries to be effective!
Kelly: So, is it fair to say, David, that you have done your fair share of ripping the tree out?
David: Very much so because the Austin district was one of the top districts in the country that did seizures and my group happened to do a lot of them. So, that’s what we were focused on, it was the enforcement and the collections. So, yeah, there is a lot of trees that I ripped out.
Kelly: Great! Alright, let me just ask a handful of questions here David and if you want to go a certain direction, feel free. But I am going to ask some questions that I think are kind of practical real-life issues that taxpayers that have poked the bear, I suppose, that they have to deal with. Let’s talk about LLCs, for instance, does running your business revenues and expenses through a single-member LLC offer the taxpayer, that single member, any protection from IRS collection?
David: Not really, not to any great degree. The IRS, they have various procedures for dealing with LLCs and I would always recommend to a tax practitioner, if his client is an LLC, to read the internal revenue manual procedures. There are a number of pages to it as to how revenue officers should be dealing with the LLC. The single member, it depends on what type of tax that is owed. Generally, what IRS enforcement sees is that the LLC will have employees and they will run up employment tax. Back in January of 2009 the IRS council came out with an opinion that effective after January 1, 2009, the trust fund recovery penalty would be used against the single member, against the individual to collect the trust fund portion of the employment tax. Prior to that the IRS just said that the individual and the LLC were one and the same, whereby, the individual would have to pay the full amount of the employment tax, both the trust fund and the non-trust fund.
Kelly: Well, that kind of applies to seed corps too, it is that the executive team, maybe not shareholders but board members, for employment tax they look through to everybody for that, correct?
David: Exactly. With the seed corporations, they look at the individuals that are responsible for making sure that the employment tax was paid and then who basically did nothing to see that it was paid. On the trust fund recovery penalty there is two standards the IRS has to meet. One is responsibility and the second is called willfulness. So with the individual responsible for ensuring that the employment tax was paid, and if they weren’t then were they willful? Did they know about the tax and what did they do or not do to ensure that the tax was paid? And when you look at a business entity, corporation or an LLC, the IRS is to look to all the individuals that may have had a place in dealing with the employment tax. So, it doesn’t necessarily have to be a corporate officer, it could be somebody that they just hired, the chief accountant, for example, who is responsible for making payments, paying the employment tax, making the FCDs. They could go after that individual. I like to use an example in my teaching, it is that if you had two corporate officers, a president, and a vice president, it was a construction company, and one of them spent nearly 100 percent of their time in the field, you know, managing construction projects, even though they may be an officer, if they were not aware of the employment tax or they really had no control over the funds they would not be held liable for the trust fund recovery penalty.
Kelly: Okay. Well, the whole topic of employment tax is one of almost a subject of a separate podcast which we could focus on but if we continue on that, let’s say that you have outsourced. With many small businesses, they outsource to, say, I’ll mention some names, QuickBooks, being the top one, and then Gusto, and a couple of these other ones that are in the payroll tax area, if you have outsourced it to them, how deep do you have to get in to first make processes to get assurance that, let’s just pick on QuickBooks for instance, Turbo Tax or Intuit, I should say, that they actually have made the distributions and payments of employment tax or once we outsource that, is it kind of not in the employer’s risk category at this point?
David: The Corporation or the individuals running the corporation, they cannot outsource the responsibility for making sure the employment tax is paid. What the IRS would expect them to do is that if the FCD is due on a Wednesday that the officers, whoever is responsible for ensuring the employment tax to be paid, would check their bank statements or get some verification from, QuickBooks for example, that in fact the FCD was made. And if it’s not made then the expectation is that individual would take some action to contact, QuickBooks, in this example, to find out, well, why didn’t they get paid, you know. If the company had money in the bank account, well, why wasn’t it paid? So, they can’t outsource their responsibility.
Kelly: Alright, so they should go through one additional kind of review monitoring to make sure that (a) the funds came out of the account, which they most likely did. The question is, where did those funds go, and maybe check online to see if the FCD got paid and if there is any balance too; maybe not every time but maybe the first couple times, every disbursement, but then maybe quarterly. You develop some procedures around that activity. Is that a fair statement?
David: Exactly right. Have some procedures developed to verify that if somebody else is making your FCDs, that in fact they are being made.
Kelly: Okay, so that’s enough on payroll. But, my initial question was really not on employee tax, it was more about income tax, due. Because your question was, well, it depends on the type, whether it be LLC, it does appear true. So, we agree that there really is no protection for anybody on the payroll tax thing. But on the income tax side, LLC versus not LLC, is there any protection in asset recovery, when you were in that business, if the business activity and the tax liability created was created by an LLC, single-member LLC, versus just a schedule C – sole proprietor?
David: On an income tax situation where the individual owes this 1040 tax, well, the LLC is considered a separate entity from the individual so any assets owned by the LLC are protected from any type of action by IRS enforcement. What the individual has is an interest in that LLC, that’s what he owns, so what the IRS would have to look at is, what is the individual’s personal assets? So, for example, the residence, vehicles, bank accounts – personal, not LLC, but personal, okay? To get at the LLC, they would have to go after his member interest in that LLC, and that’s for income tax.
Kelly: Right, so if there is no financial assets in that LLC, let’s say there is $10,000 tax due, there is no financial assets in there, there is only property, plant and equipment or let’s just say equipment, but the sole member has $100,000 in cash, can they seek recovery from that $100,000 in cash?
David: If the $100,000 in cash is in the LLC’s bank account…
Kelly: No, it’s in the individual.
David: Yeah, they can go after that. Yeah, if it’s in their personal account, yes, IRS enforcement can go after that, LLC regardless, they can go after that, the individual’s personal bank account. You’ve got a bank account, a Bank of America, where he writes checks to pay the mortgage and pay for groceries, yeah, the IRS can go after that.
Kelly: What about if it’s a dual member or more than one member LLC?
David: Then here that gets a little bit more tricky and, quite frankly, I would have to go back and read the rules on that.
David: It’s almost, you know, they would be filing a 1065, a partnership, and with a partnership, the general partners are equally liable for the debt of the partnership. But going the other way, the partnership is not liable for the debts of the individual if they owe 1040 tax. I would have to go back and look at the IRM on that.
Kelly: Okay, but you are saying when you would seek recovery from assets it really didn’t make any difference whether that was an LLC or a single-member LLC or not. You would order the owner of those assets, regardless, is that what you are saying?
David: Exactly, exactly. There are ways that the IRS can, you know, if there are the indicators of not everything is being run above board, the IRS can go after the LLC or go after the individual, okay?.