Date:     June 1, 2019            

Attendee and Guest:   Kelly Coughlin, CEO, EveryDay CPA – David Ronquillo – PART 2

Greetings, this is Kelly Coughlin, CPA, and CEO of EveryDay CPA 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 grizzly bear.  Yep!  In a former life, for 30 years, he was a grizzly bear who took the shape of an IRS Officer, seizing assets and pursuing DOJ tax lien foreclosures.

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:

Kelly:               What about access to retirement assets, is that fairly standard operating procedure – Look for retirement assets, grab these, customer pays, taxpayer pays income tax and a penalty on that or are they exempt from the payment?

David:              Levying retirement accounts is one of the last things the IRS wants to do.  They will do it in what they call egregious cases.  That’s where you have a taxpayer that’s just really isn’t cooperating, yet, the internal revenue manual gives some examples of how to identify egregious, you know, one of the other things is that they continue to make contributions to their retirement account.  The big thing about retirement accounts is whether the taxpayer has access to it or not.  So, for example, if the taxpayer can take the money out of the retirement account, IRS can levy, if they can borrow against it, IRS can levy.  But in some situations where the taxpayer cannot do anything with that retirement account, you know, the way the plan is set up they have no access, they basically have no interest in that retirement plan, the IRS cannot get it.  To get a retirement account, an IRA, for example, that has to go up to three levels of management for approval.  There has to be a good reason why the revenue officer wants to levy it.  Only revenue officers can levy retirement accounts.  The automated collections system, the telephone call sites cannot, it has to come up to a revenue officer.  So, they have to justify,  you know, write up a memo justifying why they want to levy the retirement account, they send that up the management chain, up to the area director who, if everybody agrees, they sign off on it and then the levy is served on the retirement plan.  So, it’s a lot of work that the revenue officer has to go through.  It’s a last end of the line procedure to do.  The revenue officer knows that his or her stuff is going to get reviewed and so they have to have a good justification as to why they want to do it.  So, it doesn’t happen very often but, yes, it can happen. And it comes down to the manner of cooperation that the taxpayer gives the revenue officer. But IRS changes its procedures last summer where now a taxpayer can ask the IRS to levy their retirement account. I have had two clients that have one of that done, because what it does, it avoids that 10 percent early withdrawal penalty, but it’s convincing the revenue officer to do it.  In these particular cases, the individuals had like $200,000 in their retirement accounts that would fully pay the tax.  So, it’s the matter of going to the revenue officer, basically, make the case for them to do the levy, they run it up the line, levy, tax gets paid.

Kelly:               Why are they so hesitant to want to go after retirement assets, for the obvious reason,   don’t want to put retirement in jeopardy?

David:              Yeah, exactly.  The national taxpayer advocate has made a big issue over it, IRS going after retirement accounts, because of it jeopardizing an individual’s retirement, and that’s basically it. So, in fact, she is somewhat opposed to the fact that a taxpayer can go in and ask the IRS for a levy. I have read in the last report, or maybe it’s the last two years report where they were hesitant to do that, but as I said, these two clients that I had, that’s what they wanted, that’s how they sort to rid of their tax liability.  And they had the ability to make a lot of money so they weren’t that concerned about them taking the money.

Kelly:               Okay. Would the IRS force taxpayers to sell their home to recover tax liability?

David:              They may, it depends.  The first thing you have to look on, on a resident’s personal residence, how much equity is in there.  For IRS to seize an asset generally what they do is take 60 percent of the fair market value and then they will look at any encumbrance against it.  So, for example, with a home, let’s say, for example, it’s worth $100,000, they would start with 60 percent of that which would be $60,000, then the next question is, how much is the mortgage against it? And if the mortgage is more than 60 percent, in this case, more than $60,000, there is no equity for the IRS to seize.  But if it’s less, let’s say, for example, the mortgage was $20,000, you have got a $40,000 difference there between the $60,000 and the $20,000 then they would look at it.  What they would do is ask the taxpayer to go borrow against the equity, go refinance the house.  And sometimes the revenue officer may ask for the taxpayer to go to attempt to borrow from three different lending sources to get, if they are not approved, at least get the denial letters,  the loan denial letters, okay?  In those instances, if they are not approved for a loan the revenue officer may decide, well, you know, they are not approved, we are not going to take the house and we are just going to let it go, and put them on a payment agreement. In other cases, the revenue officer may decide, no, there is sufficient equity in there so we are going to go after the home. If they decide to pursue seizure of the residence, again, they have to go all the way up to the area director, three levels of management, to get approval, then the case goes over to the Department of Justice, Civil Tax Division, who then takes the case before a federal district court judge to get approval.  So, residential seizures have to be approved by a federal district court judge. Once they get the approval then they can go in and seize the residence and put it up for sale.

Kelly:               Is it easier for the IRS to get retirement assets or to get personal residence, generally speaking?

David:              Oh, retirement assets.

Kelly:               Are easier?

David:              Very easier. They are easier to get.

Kelly:               Okay.

David:              So, you know, it comes down to how egregious the case is.  How much equity are they looking at? What kind of cooperation are they getting from the taxpayer?

Kelly:               Hey, when you say egregious, are you talking about the liability, size of the liability, or the reason for the liability, you know, civil fraud, that sort of thing?

David:              It’s the reason for the liability and the level of cooperation that they are getting from the taxpayer.  You know, we have had taxpayers that they don’t cooperate at all.  They don’t contact, they wouldn’t contact us.  You get in touch with them, they are argumentative, you know, they are not going to do what you ask them to do.  And you could be in a situation where really the only thing you can get is their personal residence, and there is sufficient equity in there that’s going to make a significant dent in how much they owe.  And you look at the background and say, well, how did they run up the tax, you know?  It could be a trust fund recovery penalty where they had a company that they ran up, you know, a million dollars’ worth of employment tax.  So, all of the taxes the IRS has to take into consideration.

Kelly:               Okay.   How much of the individual IRS representative personality influences the outcome and direction of a case, or, another way of putting it, if you are not getting along well with this particular agent, can you get a different one assigned to it?

David:              The simple answer is no. There would have to be some facts and circumstances on how the interaction is going between the taxpayer and, let’s say, the revenue officer for IRS management to move the case.  Simply disagreeing with the decision that the revenue officer made is not going to move it.  The revenue officer would have to be doing something whether violating policies or procedures or they may be harassing the taxpayer or just really totally out of bounds with the taxpayer.  The taxpayer can go to the group manager and ideally they would have documentation to that effect, you know, maybe quotes of what the revenue officer said to them, maybe what they proposed to the revenue officer to resolve the case, and why the revenue officer is rejecting it.  That type of instance, you know, the manager would consider, maybe we should move the case, but generally, it’s very very, very difficult.

Kelly:               Give us some background on how and where cases are assigned.

David:              IRS has different stages.  When a tax return is filed and there is tax due on the case it goes through what’s called the notice stream where, issues, on income tax, for example, four notices will be sent out to taxpayer.

Kelly:               What notices, form?  F-O-R-M?

David:              No, four, F-O-U-R.

Kelly:               Okay.

David:              Four notices, and generally, the notices get a little bit stronger as they go down the line.  They generally come out four to six weeks apart, but I have seen instances where a taxpayer would get a second notice and they never get a third notice and never get a fourth notice. The third notice is called a CP504.  If you look in the upper right-hand corner of the letter it will say CP504, saying intent to levy. And the paragraph will state that the IRS can levy basically on state income tax refund. So, in states that don’t have income tax, really the notice is meaningless, nothing can be done.   So, for example, here in Texas we don’t have state income tax when our client gets that notice we just know, well, we are probably going to get the final notice here, another four to six weeks from now, but basically, we can ignore that notice.  In California, for example, with the state income tax, the IRS can levy the state refund if the taxpayer is due one.  The final method can be what they called LP11, and that comes out of ACS or it can be LP1058 which comes from the revenue officer, it will say on it in big bold letters, FINAL NOTICE OF INTENT TO LEVY.  The taxpayer has appeal rights with that.  They can file what’s called the collection due process request within 30 days of that notice which will stop all enforcement.  The IRS cannot levy unless it’s a jeopardy situation, and those are rare.   And what happens with filing the notice is, you request a hearing with the appeals division and in the meantime you can get your financial statement together, a case resolution proposed, and you are supposed to be able to work still with the revenue officer but what we have seen is a lot of revenue officers just take that and send that up to appeals.  If there is no response then we are talking about going back to the notice stream where an auditor does not have the case, if the case is large enough in dollar-wise, and generally it’s $100,000 or more, it may be assigned out to the field to a field collection group, to the revenue officers group, okay?  IRS has algorithms where they score cases, and they look at, they classify cases, high risk or medium risk or low risk, and they look at the probability of collecting what is owed. Their algorithms can figure this out. The case is scored, it is sent out to a revenue officer group.  When it gets into a revenue officer group, it goes into what’s called a queue, like a holding file.  So, as revenue officers need cases, because their inventory is limited to a certain number of cases that didn’t work, as they need cases the group manager would pull the case out of the queue and assign it to the revenue officer to work.  That’s basically how the cases are assigned from the very beginning where the return is filed all the way where it gets out to the revenue officer.   The permutations in-between, you know, different things can happen, but generally, that’s the way it works.

Kelly:                So, you said they are scored, give me some ideas on the algorithm, if you will, some of the calculus that goes into that? Does it get a high score if there are assets to be recovered and it’s more likely to recover those things   and then those get elevated and accelerated and get the attention and then if it gets  a low score, does it go down the path of, currently not collectible, that kind of thing, is that how that works?

David:              Yeah.   But say for example we have an individual that earns $200,000 a year in W-2 income or even 1099 income, the IRS knows about that.  Say, for example, they have mortgage interest on their tax returns, the IRS knows about that.  So, based on what’s on the tax return and other data that the IRS will pull they will look at that type of data and generate a score.  Probably, in this case, a high score because there is a source of income and they have assets.  So, conversely, if you have an individual that, let’s say they make, I don’t know, $30,000 a year, and that’s all they got, they file a 1040EZ, they may owe tax, they may have accumulated tax over a number of years, but if you are choosing between who you are going to go after to collect, you go after the individual that’s making $200,000 a year versus the one making $30,000.  There are instances where they can never get to the person that is making $30,000 a year and they may owe, let’s say they owe $100,000 that has accumulated over a number of years, that case will just simply sit in the general IRS, queue and the statue will continue to run and when the 10 year statute is over the tax is wiped out.  So, there is millions of dollars that are written off every year because the IRS simply can’t get to the case, it’s not scored high enough and they don’t have the resources to get to it.

Kelly:               Yeah.  Now, in that $30,000 income situation, the IRS would most likely file a lien just in case there were some assets that appeared that they could then sort of collect from that.  Is that a fair statement?

David:              Yeah, generally, I think it is a pretty safe statement. Filing the tax lien is automatically generated by the computer system.  The threshold for filing a tax lien is like $10,000, even you have instances, and I have seen them, where the tax lien is filed but then nothing else happens, there is no further collection action.  There is no levies, there is no other notices but the tax lien sits there.   But, notice that several tax liens collect millions and millions of dollars every year without the IRS doing anything, just file the tax lien and then, you know, a few years later after it’s filed, the taxpayer goes and sells a piece of real estate and, boom, that tax lien is there and the sale isn’t going to go through once that tax lien is dealt with.

Kelly:               Dude, Is there a statute of limitation on that lien?

David:              No, it’s 10 years, ten years to the date of assessment.

Kelly:               Yeah, right.   Because it appears, as you have seen on TV, a lot of these companies are out there Optima Tax and there are others out there that are really aggressively pursuing this tax resolution business.  I assume that they are targeting these tax liens that are on file.  That’s about the only public record of a federal tax lien, correct?

David:              Yes, from what I understand, there are other companies out there that would generate lists you can get of people that have tax lien filed against them that they can break it down by counties, cities, state, you know, and they can break it down by dollar amounts and then these companies buy these lists and then do their marketing to them, you know, direct mailing, postcards, letters, things like that.  How effective that is? I don’t know if it’s that effective or not. We have had clients come in and say, yeah, I got all these letters from all these different tax resolution companies, how did they get my name?  And I said, well, the tax lien filed against you, that’s how they get it.