A taxpayer may be subject to tax liability before the Internal Revenue Service (IRS), or the state agencies such as the Employment Development Department (EDD), State Board of Equalization (SBOE), and Franchise Tax Board (FTB). The IRS is the federal government agency responsible for tax collections and tax law enforcements. The EDD is part of the Labor and Workforce Development Agency of California. It is a state agency that specifically handles audit and collection of payroll taxes, while maintaining employment records for all California workers. The SBOE is another state agency with authority over sales and use taxes, and property taxes. The last California agency, the FTB, collects state personal and corporate income taxes.

The agencies discover a taxpayer’s liability through auditing. An audit is an official inspection by these tax-collecting agencies to ensure information has been reported correctly and to verify the amount of tax due. If the agency audits a taxpayer, they will notify the corresponding taxpayer through mail or telephone. A problem usually occurs when the taxpayer ignores the audit’s request to file a past due return or pay the amount owed. Collection is enforced upon a taxpayer when the agency discovers that he or she owes money. Below is a summary of what the IRS can do and what the taxpayer’s options are. Other agencies follow a similar overall pattern but have different specific requirements.

When it comes to evading tax, the IRS may implement penalties and interest to increase the amount of tax owed. If a taxpayer receives a notice to file a due return, they should file the return regardless of whether or not they can pay in full. Otherwise the IRS will usually file a return on their behalf, which is also known as a substitute return. The IRS bases the substitute for return it prepares on information they have from other sources. This means, if a taxpayer received tax documents such as a W-2 or 1099, the IRS will receive a copy of it.  Often, this substitute return will not give the taxpayer credit for deductions and exemptions they are entitled to. The return prepared will most likely lead to a tax bill and, if unpaid, will trigger the collection process.

Once it shows that a taxpayer owes money, a collection process starts and may include: placing a levy on wages or bank accounts, or filing a tax lien against the taxpayer’s property. A levy is a legal seizure of a taxpayer’s property to pay their tax debt. The IRS may seize and sell any type of property a taxpayer owns or has an interest in. A lien is different from a levy. A lien is a claim used as security for the tax debt and protects the IRS’s interests in all the taxpayer’s property.

To avoid these ramifications, a taxpayer may choose to: (1) fully pay the liability; (2) settle the tax liability through an offer in compromise; (3) enter into an installment agreement and pay the liability off over the course of months or years; or (4) establish a current non-collectible status because of financial hardship. The taxpayer should also file his or her own correct tax return even after the agency has filed a substitute return.

Keep in mind that the law requires these tax-collecting agencies to assess, refund, credit, and collect taxes within specific time limits. These limits are known as the Statute of Limitations. Each Statute of Limitation has different time limits depending on the issue and the agency. Once the Statute of Limitations has run, the payment owed by the taxpayer has expired and the agencies cannot come after the taxpayer for the debt. However, if the Statute of Limitations has not run, the taxpayer has to work with the agencies to avoid the consequences mentioned above.

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Please keep in mind the information and advice presented in this blog is not intended to be used as formal legal advice. Contact a tax professional for personalized tax advice pertaining to your specific situation. While we try and answer all parts of the question when we write our blogs, sometimes there may be some left unanswered. If you have any questions about your problems with the IRS, SBOE, FTB, or BOE, or tax law in general, call RJS Law at (619) 595-1655.

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