Why Has Tax Lien Representation Become So Popular?

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Not knowing what you are doing can be dangerous. I’ve been doing collections work since I became license and it’s so easy to take $2,000 to do an Installment Agreement (IA), or even an Offer in Compromise (OIC). However, that isn’t why we are being hired.

The first time that you ever talk to a Revenue Agent (RA) or Revenue Officer (RO), you are asked if you understand your client’s rights. They will then go on to ask if you have explained those rights to your client.  That would have been helpful to this client that contacted me, if her previous preparers had done what they’re supposed to do.

About three years ago, I received a phone call from a potential client that was referred by someone.  She had been through two tax resolution firms before she came to me. They had basically taken her money and put her in IA’s that she couldn’t afford.  The client would default on their IA and eventually the IRS put a lien on her for $500,000.  While investigating the case, I called the RO that was assigned to it.  

The first question that I asked was why my client owed the money?  They told me that it was the result of an audit.  If you have worked collections for as long as I have, you know to do two things:  You get paid up front, and you do your own investigation, because the client will ALWAYS fail to tell you things.

I asked the RO for the number of the RA that performed the audit so I could get the audit report and their notes.  Then, I proceeded to call the RA and surprisingly enough, they sent me the taxpayer’s entire file, without me having to do a Freedom of Information Act (FOIA) request.  

I then called my client and asked for a copy of the three years of tax returns that had been audited.  Further, I got information about who prepared the returns and who represented my client at the audit.

I come to find out, the returns were prepared and the examination was conducted by an unenrolled preparer. Did the client know that?  Of course, not.  The amount owed stemmed from a pizza parlor that was owned by my client and her son.  

The pizza parlor was taxed as a partnership and the client lost her shirt.  The wife and son ran the pizza parlor and her husband was a physician.  The losses were disallowed because the husband, not the wife, was listed as the partner on the LLC’s tax return.  The loss was then considered passive because the husband was a full-time physician and didn’t spend at least 500 hours in the pizza parlor.  

Did the unenrolled preparer offer to amend the returns to correctly reflect the operating agreement of the LLC that clearly listed the wife as the 50 percent managing member? No. To add insult to injury, because the examination was conducted by an unenrolled preparer, she couldn’t appeal the audit.  The time for appeals and a Tax Court Petition had long passed by the time I came into the picture.

The client had a tax lien and had retained two tax resolution firms before she contacted me.  Each firm had taken about $6000 a piece just to set her up in an IA.  These firms, I presume, saw the same ad that I did, but just winged the representation.  

When I first met with my client, she didn’t even know why she owed the money.  The unenrolled preparer didn’t even explain that to her. 

The immediate concern was to stop the collections action.  The time had long passed for a Collections Due Process Hearing (CDP), and even asking for an equivalent hearing wouldn’t stop collections.  Knowing that my client didn’t qualify, I filed an OIC, which accomplished stopping collections.  

I knew that I had about nine to twelve months while the offer made its way through the system, so I asked for an audit reconsideration.  It was granted and I was off to Huntsville, Alabama.

My main office is in Orlando so it would have been about a ten-hour drive to Huntsville.  There are no direct flights from Orlando to Huntsville, either, and even if I had flown through a connecting flight, it would have been faster to drive.  

I then flew into Birmingham and drove the hour and a half to Huntsville. I arrived two days early because I wanted to meet with my client.  She lived in a small town about three hours from Huntsville and she drove to meet in Huntsville for lunch.

When representing a client in an audit, I take this approach; I focus on the big picture items and let the little ones go.  In this case, the big picture was active participation.  Before I went to Huntsville, I asked my client to reconstruct a calendar of the days and times that she spent in the pizza parlor.  

I then asked her for all of the canceled checks that she signed.  I was trying to prove that she had spent more than 500 hours working in the pizza parlor for the three years in question.  Proving active participation is hard for an owner because they don’t clock in and out.  There were other minor details that the auditor found that I chose to just let go.

At lunch, I explained to my client what was going on with her case, my approach, and what I was trying to prove.  I then asked her if anyone had ever explained her rights as a taxpayer, and no one had.  I then took about 15 minutes to explain them. During the meeting, she asked me why the other representatives didn’t see what I saw. I told her that I couldn’t answer that question.  

The day of the audit reconsideration came and I met with the RA. I basically threw myself on his mercy. I knew that the US Tax Court had ruled repeatedly that records needed to be kept contemporaneously. 

What I was presenting to him was a calendar made after the fact.  However, I backed that up with all fifty checks written for each month being signed by my client.  Proving that it would have taken substantial time to at least sort the bills and pay them each month.  

Just a word here: NEVER lie to an RA or an RO. I could have told him that the calendar was made by my client at the time in question, but I didn’t. I presented him with the logical argument that no one that is self-employed clocks in and clocks out.  When the audit was over, I met with the client again for dinner and explained to her that we had to wait for the auditor’s decision.

About two months later, we were presented with an adjusted audit report, showing that my client no longer owed $500,000.  They only owed $25,000. I did an IA, and my job was done.

When I am retained by a client to represent them in a collections matter, I am paid a nonrefundable retainer.  With that retainer, I pull transcripts to make sure they are in compliance, contact the RO assigned to the case if the case is in the field, and have the client fill out a 433-A to see what the collections options are.  After I determine what the problem is, I then figure out how to resolve it, explaining to my client what their rights are along the way.  

Representation is different than compliance work. There are different deadlines, rules, and rights that the client has.  If you don’t know them, then you shouldn’t be doing tax resolution.  Same with audit representation. 

If you don’t know the rules, don’t do audits. Tax resolution and IRS representation can be lucrative, but remember, you are being paid a lot of money to protect your client’s rights.

About Craig W. Smalley, EA

Craig Smalley

Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as representation before the IRS regarding negotiations, audits, and appeals. In his many years of practice, he has been exposed to a variety of businesses and has an excellent knowledge of most industries. He is the CEO and co-founder of CWSEAPA PLLC and Tax Crisis Center LLC; both business have locations in Florida, Delaware, and Nevada. Craig is the current Google small business accounting advisor for the Google Small Business Community. He is a contributor to AccountingWEB and Accounting Today, and has had 12 books published on various topics in taxation. His articles have also been featured in the Chicago Tribune, New York Times, Yahoo Finance, Nasdaq, and several other newspapers, periodicals, and magazines. He has been interviewed and been a featured guest on many radio shows and podcasts. Finally, he is the co-host of Tax Avoidance is Legal, which is a nationally broadcast weekly Internet radio show.

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