This is obvious but, with all the dread, resentment, and busywork that frequently comes along with the chore and expense of preparing tax returns and paying taxes, it is all too often overlooked:

if you’re paying taxes it means you made money.

Not owing (and so, paying) taxes generally means you aren’t making money. And that’s worse. (Let’s leave aside, for the moment, the issues surrounding “tax haven” countries like Leichtenstein, the Caymen Islands, Andorra, Monaco, etc., where we’ve been reading in the news recently that profitable companies avoid taxes through foreign subsidiaries incorporated in one of these offshore places).

It is a where-there’s-smoke-there’s-fire causal connection (or putting it into achievement test comparison: Income taxes are to making money as smoke is to fire (and again, following the metaphor, we leave aside the smokeless fires of off-shore tax havens for the moment).

The basic reality is, again, if your paying taxes, you’re making money, and that’s a good thing. (Thank you, Martha Stewart.)

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Post Script:  At risk of blowing a punch line (not that this is funny), this paying-taxes-because-you’re-making-money-and-that’s-a-good-thing message makes me think to mention that I recently started a second blog, on a completely different topic, which is relevant here:  the other blog is called “Marketing and PR Lab” and, instead of discussing law or the government or taxes, it instead focuses on ways of improving one’s business and so, income, by improving your marketing methods and getting known.

So as you think of ways to have the “smoke and fire” problem described above, that is: “I have to pay taxes, Dang! But that means I made money — Great!” you might want to go to http://marketingandprlab.com to see if there are things there that can push your business and income-earning forward, or leave a comment to share your experiences, or both.

In the wake of the unravelling of uber-Ponzi schemer Bernard Madoff’s scam, the IRS has announced new guidance on how it will handle the tax consequences of being a victim of a Ponzi scheme — whether Madoff’s or any one else’s.

Yesterday, March 17th, IRS Commissioner Doug Shulman described the agency’s position in testimony before the Senate Finance Committee:

• The investor is entitled to a theft loss, which is not a capital loss. In other words, a theft loss from a Ponzi-type investment scheme is not subject to the normal limits on losses from investments, which typically limit the loss deduction to $3,000 per year when it exceeds capital gains from investments.

• The revenue ruling clarifies that “investment” theft losses are not subject to limitations that are applicable to “personal” casualty and theft losses. The loss is deductible as an itemized deduction, but is not subject to the 10 percent of AGI reduction or the $100 reduction that applies to many casualty and theft loss deductions

• The theft loss is deductible in the year the fraud is discovered, except to the extent there is a claim with a reasonable prospect of recovery. Determining the year of discovery and applying the “reasonable prospect of recovery” test to any particular theft is highly fact-intensive and can be the source of controversy. The revenue procedure accompanying this revenue ruling provides a safe-harbor approach that the IRS will accept for reporting Ponzi-type theft losses.

• The amount of the theft loss includes the investor’s unrecovered investment – including income as reported in past years. The ruling concludes that the investor generally can claim a theft loss deduction not only for the net amount invested, but also for the so-called “fictitious income” that the promoter of the scheme credited to the investor’s account and on which the investor reported as income on his or her tax returns for years prior to discovery of the theft.

Some taxpayers have argued that they should be permitted to amend tax returns for years prior to the discovery of the theft to exclude the phantom income and receive a refund of tax in those years. The revenue ruling does not address this argument, and the safe-harbor revenue procedure is conditioned on taxpayers not amending prior year returns.

• A theft loss deduction that creates a net operating loss for the taxpayer can be carried back and forward according to the timeframes prescribed by law to generate a refund of taxes paid in other taxable years.
  

A taxpayer searching around the internet asked this question. It is a very good question because it asks about the reach — and the limits — of the IRS’s power to reach into our lives whether we like it or not.

Liens 101: What is a Lien, Anyway?

For those unfamiliar with the term, a “lien” is essentially a claim — someone claims you owe them money.

In certain situations, the person (or business, or government agency) making the claim can file a document announcing this claim with the County Clerk or other public records authority.

By filing a lien with the County Clerk, the claimant announces to the world (and especially to credit reporting agencies) that the claimant says you owe it money.

It’s like taking a private debt (or claimed debt) and shouting from the rooftops to everyone around: “you owe me money!”

And Why Should I Care?

This can have the real and negative effect on your life by damaging or even ruining your credit score, making it harder, more expensive, or even impossible to get a loan, mortgage or other credit. It can also make you ineligible for certain jobs.

The IRS uses the federal tax lien as part of its set of tools to make sure it collects taxes it says are owed. The IRS files a lot of liens. For example, in the last month, in New York City, on the island of Manhattan alone, the IRS filed 580 liens. That’s almost 27 liens filed every business day.

Don’t You Have to Owe a Lot to Have an IRS Lien Filed?

How much do you have to owe for the IRS to file a lien?

It is amazing how little it can take: it took owing as little as $41.06 to get the IRS to publicly file a federal tax lien. This $41 dollar lien, by the way was filed today (the date of this writing), February 12th, 2009.

The largest lien filed in Manhattan in the last month was for over $8 million dollars.

So, with that background, getting back to the reader’s question, putting it into Q & A form:

Q: Can the IRS file a lien without going to court?

A: Yes. The IRS does not have to go to court to file a federal tax lien.

One of the things that makes owing money to the IRS (and most or all state taxing authorities) so dangerous to taxpayers, whether they are individuals or businesses, is that the IRS has powers to compel payment that reach far beyond the powers of ordinary creditors.

If you owe the IRS back taxes, first, think of the IRS, the government as your creditor, like a department store, or a credit card company, your car company, your landlord, your bank that gave you a mortgage on your house.

Then, second, notice the difference between the IRS and your banker, your landlord, your car company: the IRS does not have to sue you and get a money judgment against your to file a lien against you.

For the IRS, It’s as Easy as 1-2-3, A-B-C, Do-Re-Mi

Apologies to the Jackson 5.

But, seriously, all the IRS has to do to be able to file a lien is (1) determine that you owe money, (2) tell you that you owe it and ask you to pay it, and (3) wait ten days. If you have not paid in full by the time those 10 days are up, the IRS has the power and authority to file a piece of paper — a notice of federal tax lien — with the local public recording authority, be it the County Clerk or other.

While, generally, the IRS does not file a notice of federal tax lien on the eleventh day, it certainly does have the power to do so, or to do so at any time after those three standards are met.

The filing of a notice of federal tax lien makes what was the extremely private matter of your taxes very, very public. And the IRS is empowered to do all this by only meeting the three criteria described above. The IRS simply does not have to walk through even a single door of a single courthouse to do this (unless the County Clerk is in the court house). No law suit needs to be filed, litigated, or won.

Where other creditors have to prove their case and persuade a judge, a jury or both, all the IRS needs is, by contrast, the stroke of a pen.

In the IRS’s own words:

Once these requirements are met, a lien is created for the amount of your tax debt. By filing notice of this lien, your creditors are publicly notified that we have a claim against all your property, including property you acquire after the lien is filed. This notice is used by courts to establish priority in certain situations, such as bankruptcy proceedings or sales of real estate.

The lien attaches to all your property (such as your house or car) and to all your rights to property (such as your accounts receivable, if you are a business).

This power and ease to file a lien is enormously different from pretty much all other creditors. It is one of many reasons why you don’t want to owe money to the IRS, and why you probably would be better off owing money to almost anyone else. And, why if you do owe money to the IRS you want to take action to change that.

You can find out more about avoiding trouble with the IRS (or starting to get out of trouble, if tax trouble is already here) by getting my free special report, “7 Big Mistakes Taxpayers Make and How to Avoid Them to (Legally) Keep the IRS OUT of Your Wallet, OUT of Your Bank Account, and OUT of Your Paycheck,” by clicking here.

When hearing the news that former masters-of-the-universe bankers are getting billions in federal aid – bailouts from their failures – who among us has not wished to receive our own personal bailout?

After all, almost none of us have been as irresponsible, reckless, even profligate as the banks and bankers whose wastrel ways have brought down the economy. What about the rest of us who try to make a living, pay our bills, make ends meet? Times are tough for all of us now.

While it is unlikely that any of us will be invited to testify before Congress to explain why the government should write a huge check to help out on our personal finances or the finances of our small businesses (personally, if Congress did invite me, I’d skip the private jet the first time, and fly commercial or take a train or drive) , the IRS – of all government agencies – is promising relief for taxpayers and particularly taxpayers who have fallen behind in paying taxes.

The IRS is now trying to make things easier? This, the agency that just thinking about can make some of us break out in hives, seeing an envelope in the mail with the IRS’s return address can make a persons stomach turn or start a cold sweat, the agency we often hate and fear, the agency with tremendous power to disrupt our lives? These guys are now trying to make things easier?

According to a January, 2009 news item published by the IRS, new IRS Commissioner Doug Shulman talked about how the downturn in the economy is affecting taxpayers who owe back taxes. “We need to ensure that we balance our responsibility to enforce the law with the economic realities facing many American citizens today.”

Commissioner Shulman added that the IRS wants “to go the extra mile to help taxpayers, especially those who’ve done the right thing in the past and are facing unusual hardships.”

According to the IRS, it’s agents have the ability ease the burden on taxpayers by doing things like postponing collection actions (i.e., things like levying bank accounts, garnishing wages, filing tax liens), avoiding marking taxpayers as being in default when a payment on a payment plan or offer in compromise is missed (if you have one of these deals, you really do not want to default!), re-evaluating offer in compromise applications to take into account reduced home values, and expediting levy releases.

These steps, which the IRS describes as a change in policy, suggest that it is attempting to strike a delicate balance between it’s responsibility to raise money for the United States Government, and to work with taxpayers so that the burden of paying taxes, or catching up on unpaid back taxes, is not unbearably heavy.

This is always balancing act, but is even more so now. The United States government has needed more and more money in recent years, since the historic budget surplus of the late 1990s was transformed in the 2000s to the historic, largest deficit, and the IRS has responded by increasing its collection efforts every year since the early 2000s. Meanwhile, now, economic times are the worst they’ve been since the Great Depression.

While some policy watchers and tax practitioners question whether the IRS will actually do anything differently than before Commissioner Shulman’s recent remarks, the IRS is now stressing its newly stated policy of flexibility in collecting back taxes.

Though this is not quite the multi-billion dollar bailout of the major banks and car companies, if the IRS really does what the Commissioner says, it could still be a real life-saver to a lot of taxpayers.

When the more than 100,000 boots-on-the-ground IRS employees who carry out the work of the IRS and execute its policies, assuming they actually put into practice the new policies of greater flexibility, now could be a better time than any in recent years for taxpayers who have lingering, nagging back tax problems to come in from the cold and get to work on solving those problems.