Much has been made of these 87,000 new armed tax agents waiting to seize your assets, including your home and small business, by force.
Only that’s not true. Thousands of new armed agents are not heading your way. And the IRS assessment and collection processes are far more complicated than storming the premises — the agency is required by law to follow specific procedures.
But what happens when, as taxpayers may fear, the IRS colors go out of line? There are also processes for this, which may include filing a complaint to redress the alleged harm. This is precisely what happened in a recent high-profile case involving risk assessment.
Valuation and recoveries
The IRS, like most creditors, wants to be paid. If you don’t pay all you owe, you will receive an invoice. The bill may be the result of a failure to pay the balance shown on your return, a balance calculated by the IRS after a superseded return, or due to an audit or proposed change in the tax resulting in an adjustment.
The invoice will explain the amount of tax due, along with any penalties and interest, and initiate the collection process. The IRS will continue to collect until you pay all of what you owe or until it can no longer legally collect the tax, usually when the collection period expires. You can learn more about IRS appraisals and collections here.
There are several ways to pay what you owe, from paying by credit card to entering into an installment agreement.
Privileges and royalties
If you ignore the notice or refuse to pay, the IRS may take your assets to settle your debt.
Do not confuse levy with privilege. A lien indicates that the government has a legal right to your property. In practice, a lien lets creditors know that they may not be first in line if you fail to pay other debts. Additionally, if and when you sell assets, you may be required to remit the proceeds to the IRS to settle your debt.
A levy is a legal seizure of your property to meet your tax obligations. Generally, before the IRS can take your property, they must send you a notice of levy. In most cases, you will receive a notice by certified mail at least 30 days before the collection, and you will have the right to appeal during this period.
Collection processes are in place to allow you several possibilities to settle your tax debt. Sometimes the IRS may believe there is a reason to circumvent the process to protect government interests. In this case, the IRS can proceed with an immediate assessment. This is called a risk assessment – and it means that tax, penalties and interest become immediately due and payable under Articles 6851 and 6861 of the Tax Code.
Generally, to perform a hazard assessment, one of the following conditions must apply:
- The taxpayer is considering or appears to be considering leaving the country or going into hiding;
- The taxpayer hides or appears to hide property; Where
- The taxpayer puts the asset out of the reach of the government by removing it from the country, dissipating it, transferring it to another person, or putting its financial solvency at risk.
Several factors can affect the IRS’s choice to conduct a risk assessment, including whether a taxpayer may be involved in illegal activity and whether they have a history of hiding assets offshore and selling or transfer of property for less than adequate consideration. Objective facts must support the determination that the collection is at risk – no guessing games. And the amount of the contribution must be justified.
After a danger assessment is made, the IRS must send a notice. The taxpayer has 10 days to pay in full or post a bond to suspend collections, as stated in the tax code in section 6863.
However, if the IRS believes that tax collection might be in jeopardy, it can bypass standard notification procedures and proceed with a levy.
Brockman v. United States
This brings us to the 2020 case in which Robert T. Brockman was charged in a 39-count indictment with various financial crimes, including tax evasion. The IRS alleged that Brockman owed more than $1.4 billion in taxes, fraud penalties and interest as a result of his actions, calling it “the largest tax burden ever imposed on a individual in the United States”.
The government accused Brockman of going to great lengths to keep the IRS from knowing about his assets. He even used code words to conceal his activities, calling the taxman “The House” and nicknaming his colleagues “Redfish” and “Permit” in their communications.
The contentious case began to wind its way through the courts, with Brockman’s lawyers filing paperwork suggesting he could not stand trial because he suffered from dementia. He was 79 at the time. Prosecutors, however, had “serious doubts” about the diagnosis, saying it could be a fake, noting that until the end of 2020 he ran a multibillion-dollar software company.
As the government built its case, it alleged that after Brockman learned of the investigation, he began taking steps to potentially avoid paying. This included, they say, the transfer, gift and sale of real estate, including property owned by an entity that was not disclosed to the IRS and did not file any tax returns. Brockman also sold millions of dollars of securities and other interests, including a yacht and a jet, and closed several bank accounts. He also transferred money to two newly created offshore trusts.
In response, the IRS conducted a risk assessment and levy. Brockman then filed a civil suit, challenging both, claiming they were unreasonable.
The remedies that are available in response to a danger assessment are largely the same as those available for all assessments, including recourse to the courts. The applicable law authorizing judicial review can be found in Section 7429(b) of the tax code, which permits reconsideration of the assessment in the federal district court. The review is limited to determining whether the valuation is reasonable and the amount valued is appropriate.
In his record, Brockman only raised the issue of whether the risk assessment was reasonable in the circumstances. To prove its burden, the court, relying on case law, concluded that the government “needed only to establish that the taxpayer’s situation appear jeopardize the collection of a tax – not if they do so permanently. And the standard is “reasonableness, not substantial evidence”.
The court found substantial evidence that Brockman had engaged in tax evasion and that the nature, sophistication and sheer scale of the alleged fraud met the reasonableness requirement. Additionally, the court determined that Brockman’s subsequent actions were sufficient to create the perception that the government’s ability to collect its taxes was in jeopardy. With that, Brockman’s motion to reduce the risk assessment and levy was denied, and the case was closed on September 30, 2022.
Brockman is dead a month before the dismissal, on August 5, 2022. Following his death, the criminal case against him ended. However, the IRS’ attempt to collect the taxes he should have owed will likely continue for years.
This is a regular column from Kelly Phillips Erb, the Taxgirl. Erb offers commentary on the latest tax news, tax law and tax policy. Look for Erb’s column each week in Bloomberg Tax and follow her on Twitter at @taxgirl.