Tax Lawyer's Blog

In a story that’s been getting a lot of attention in the taxosphere, Bob Shallit of the Sacramento Bee tells about a car wash business that was visited by two IRS agents demanding payment of 4 cents of delinquent taxes:

It was every business person’s nightmare.

Arriving at Harv’s Metro Car Wash in midtown Wednesday afternoon were two dark-suited IRS agents demanding payment of delinquent taxes. “They were deadly serious, very aggressive, very condescending,” says Harv’s owner, Aaron Zeff.

The really odd part of this: The letter that was hand-delivered to Zeff’s on-site manager showed the amount of money owed to the feds was … 4 cents.

Inexplicably, penalties and taxes accruing on the debt – stemming from the 2006 tax year – were listed as $202.31, leaving Harv’s with an obligation of $202.35.

Zeff, who also owns local parking lots and is the president of the Midtown Business Association, finds the situation a bit comical.

Now he’s trying to figure out how penalties and interest could climb so high on such a small debt. He says he’s never been told he owes any taxes or that he’s ever incurred any late-payment penalties in the four years he’s owned Harv’s.

“It’s hilarious,” he says, “that two people hopped in a car and came down here for just 4 cents. I think (the IRS) may have a problem with priorities.”

Like most people who don’t traffic in IRS notices on a daily basis, Mr. Shallit is, quite understandably, confused by the IRS’s collection notice.

The fact that the tax portion of the outstanding debt shown on the IRS notice is only 4 cents doesn’t mean that it was always only 4 cents. What probably happened was that Harv’s Car Wash paid the tax portion of the debt except for the 4 cents, but failed to calculate and pay the penalties and interest that had accrued on the original tax debt.

Let me illustrate how this might have happened:

Assumptions:

Let’s assume Harv’s Car Wash filed its 2008 income tax return three months late showing a balance due of $651.04. Let’s further assume that when Harv’s filed the return it enclosed a check payable to the Department of Treasury in the amount of $651.00.

Based on these assumptions, the IRS would have sent Harv’s a computer generated notice thanking it for the filing of the return and assessing taxes, late filing penalties, late payment penalties and interest as follows:

Conclusion:

Mr. Shallit may be excused for assuming that the penalties and interest included on the IRS notice had been calculated on the $ .04 remaining balance of taxes owed. But, as we see from the hypothetical, that would be incorrect. The penalties and interest are based on the original tax due of (in our hypothetical) $651.04, but because Harv’s had already paid $650 of these taxes only the remaining balance of 4 cents shows up on the notice.

Now, was it necessary for the IRS to send two of its agents to the taxpayer’s place of business to collect a $200 debt? Probably not, which is why I am relatively confident that it did so for one of the following reasons:

• The visit was part of a training exercise for a rookie collection agent; or
• The IRS has reason to believe that the taxpayer is not complying with other tax laws, including, but not limited to, the proper classification of employees and the accurate and timely depositing of payroll taxes.

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