Volume 14 Issue 6 -- November/December 2010
Volume 14 Issue 6 -- November/December 2010
In an earlier newsletter for September/October 2006, "Primer on Liens, Levies, and Garnishments," we lightly touched on wage garnishments. This newsletter will explore garnishments more deeply.
Suppose Nell Glect worked for a large food chain and failed to file tax returns for approximately 10 years. As often happens in such cases, the IRS does not move with much speed in attempting to collect the tax liability. Nell's income was modest, so she was not put on a priority collection list. Eventually, the IRS decided that it would do a substitute for return (SFR) for Nell. The SFR is a tax assessment by the IRS against those who fail to file. Such assessments usually result in substantially higher tax than would a filed return, because SFRs ignore potential deductions, such as medical expense deductions, home mortgage interest, and other things which may be available if Nell prepared a return. Incidentally, Nell also had glaucoma and was running the risk of going blind without proper medical treatment, which factored into the relief which is eventually obtained.
To collect on the tax it assessed, the IRS served a garnishment on the payroll department of the company where Nell worked. The payroll staff receives schedules showing the amount which must be remitted to the IRS based on the number of dependents which Nell has, if any. In all cases the amount of money remaining is intended to be minimal. The goal of the IRS is to make sure that the wage garnishment "hurts" so that there will be compliance.
Garnishments of wages are a continuing action. In other words, as long as Nell receives compensation, the employer's payroll department is required to withhold.
In most cases of this type, the garnishees, like Nell, are out of funds and usually have no savings. In order to assist people like Nell it is necessary for relatives, boyfriends, and others to come up with money to cover professional fees incurred in getting relief from the wage garnishments.
In Nell's case the IRS prepared SFRs for 5 of the first 10 years. Nell had tax returns prepared, and they showed minimal or no tax liability for all tax years. Unfortunately in some of the older years Nell actually overpaid her tax, but she could not receive a refund because more than 3 years had passed since the due date for the return. It is common for people like Nell to forgo refunds they could have received had they filed on a timely basis. Also, such refunds that are lost cannot be applied to tax liabilities for other tax years.
After filing all of the returns, it was possible to get Nell's garnishment substantially reduced so that only a small amount of each paycheck had to be remitted to the IRS. Eventually, it is usually possible to get all of the liabilities reduced to the amounts shown on the returns, assuming that the taxpayer is not audited. Surprisingly, late returns for taxpayers who are wage earners like Nell, are not usually audited when they file late returns.
It is a common misconception among many taxpayers that all late filed returns are audited. Over the past 20 years, Newland and Associates has filed late returns for many taxpayers, and probably no more than 3 or 4 of these late filed returns were audited. The fact that so many late returns are not audited is probably attributable to the inability of the IRS to do all of the things it would like to do. Another possible explanation is that returns for wage earners do not have high enough income to warrant the administrative costs of auditing.
In any event, Nell's situation was successfully resolved. Her monthly garnishment was reduced, and she was able to get her eyes treated. Eventually, after the IRS processes all of the tax years, Nell will likely be put on an Installment Payment Agreement (IPA). After she gets the IPA in place, it is the policy of the IRS that as long as the taxpayer continues to make the payment required by the IPA, no further collection action, such as garnishments or levies, will take place.
While many find attempting to help people like Nell to be nearly impossible, relief for such people can be obtained. One challenge is paying for the assistance needed to obtain this sort of relief. Hence the need for relatives and friends to help taxpayers like Nell.
If you have problems with a wage garnishment and need help, call Newland and Associates, PLC.
Published by the law firm of Newland & Associates, PLC
9835 Business Way
Manassas, VA 20110
Call us at (703) 330-0000 for a full range of business law and tax-related services.
While designed to be accurate, this publication is not intended to constitute the rendering of legal, accounting, or other professional services or to serve as a substitute for such services.
Redistribution or other commercial use of the material contained in Newland's Business Notes is expressly prohibited without the written permission of Newland & Associates, PLC.
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