So How Long Can the IRS Collect From Me?

One of the most frequent questions I am posed by clients is how long the IRS has to engage in collection activities.  Most clients are aware of the "10-year rule" but other than its name, have little to no knowledge as to how it actually works or how the collection statute relates to the IRS's ability to impose liens.

The keys to remember are the following:  First, the IRS generally has 10 years to begin collection activities from the date of the assessment.  However, this period can be extended (often unwittingly) if the taxpayer files for bankruptcy, applies for an offer in compromise or enters into an installment agreement, amongst other things.  Second, whenever there is an assessment against a taxpayer, an IRS tax lien is automatically created; however, in order for this lien to be public and to provide the IRS proper security, the IRS must actually file a Notice of Federal Tax Lien. Whenever such a lien notice is filed, it will indicate the date of the assessment and then the date that the IRS must re-file the tax lien--otherwise the lien will "self-release".  Generally, if the IRS is going to re-file the tax lien they must do so within 30 days after the end of the 10 year collection period.  Now, a federal tax lien remains in place for so long as the IRS has the ability to collect on the amount owed.  The tricky part for the IRS, however, is that if the IRS collection period is extended (say by way of an installment agreement) the IRS is supposed to refile the Notice of Federal Tax Lien so that its security interest is maintained and protected.  If the IRS doesn't re-file, the IRS will still be able to engage in collection activities and will still have a general tax lien in place, however, until re-filed the IRS will not have priority (and if re-filed late will only have priority over later creditors).


How to Revive Your Suspended Business Without Paying Back Taxes

For any business owner with tax problems, one of the most devastating things the government can do is to suspend the business entity's privileges. Essentially, the government considers the use of a corporation, LLC or limited partnership to be a privilege--one which can be taken away if the business owner gets behind on taxes. Thus, when California entity has not filed tax returns for several years or does not pay, the Franchise Tax Board will suspend that entity. 

The implications of a business's suspension can be devastating.  Suspension means that the entity is no longer granted the rights, powers and privileges of other business entities.  In short, your entity has become a sitting duck.  You can't defend any lawsuits while suspended, no matter how frivolous.  Even the contracts you sign while suspended can be ignored by the other contracting party.  The only way to remedy this is to lift the suspension.  Chances are, you or your tax advisor will go to the FTB website for more information.  Per their website the "only" thing you can do to revive your entity is to file all past due returns and pay ALL past due taxes, including penalties and interest.  In short, you are held hostage until you can come up with adequate funds to pay all amounts owed.

Fortunately, there are two other ways that you can lift your company's suspension that don't require you to make an immediate full payment of your past due tax debt.  While these techniques are not mentioned on the FTB's website they are clearly set forth in the Revenue & Taxation Code.

Under Section 23305b, the taxpayer can apply in writing for a determination that a certificate of revivor will "improve prospects for collection" of the full amount due.  In other words, the only way the taxpayer will be able to pay the FTB back is if the business is allowed to continue operating.  Note that a revivor, if granted under this theory, may be limited as to time and even its functionality.  In fact, the suspension may be reinstated if the FTB determines that the prospects for full payment have not improved.  This procedure, however, will not allow you to get relief from contract voidability until full payment has eventually been made.  

In addition, Section 23305.2 provides that the entity can be revived if the taxpayer provides the FTB with an assumption of liability, bond, deposit or other form of security that is acceptable to the FTB.

It is important to note, that the above to procedures will only lift the suspension.  A separate application is required if one wants to ensure that they will be able to have the contracts they signed during the suspension be retroactively considered unavoidable.  In addition, this procedure can be used to request that the contracts executed during suspension be retroactively considered unavoidable. 

In short, if your company has been suspended, there are other ways to revive your entity without having to full pay all amounts owed.    

Am I Liable for my New Spouse's Old Tax Debts?

I get this question a lot from recent newly weds.  Often, one of the spouses has racked up a massive tax bill and the "nonliable" spouse is worried that his or her assets will now be subject to IRS lien and levy procedures.

If you've just gotten married and your spouse's tax debts arose prior to marriage then you will have to work through a maze of California State and Federal rules to determine whether your assets can be attached by the IRS.

First, it is helpful to keep in mind that under federal law, the IRS (as a creditor) steps into the shoes of the taxpayer and that state law determines a taxpayer's property rights to property.  Because a federal tax lien against one spouse attaches to all of that taxpayer's property and rights to property in a community property state, the lien would attach to the liable spouse's one-half ownership interest in all items of community property. 

In addition, in California, often times a private creditor has the right to collect a debt from all or part of both spouses' interests in community property. (See Fam. Code 910.)  In other words, California is known as a 100% State, which means that the IRS (like other creditors) can collect from 100% of the community property for all the premarital tax debts of a spouse. 

California does make a key exception to the nonliable spouse's wages that are earned after the marriage.  As long as these wages are deposited into an account only in the nonliable spouse's name (and over which the liable spouse has no control or access and has not commingled funds), then these assets will not be subject to levy. (See Fam. Code 911.)   However, if these funds are then used to purchase real property or vehicles, then such assets would then be subject to potential IRS lien and levy.

One way to protect additional community property assets would be to have the couple enter into a post-nuptial agreement whereby the spouse with tax issues would waive any community property interest in the other spouse's future earnings or property.  Of course, this should only be done after careful consideration of all the relevant facts and circumstances and may be subject to challenge by the IRS as a fraudulent transfer.