Menu

IRS Tax Problems

Why State Tax Authorities Should Scare You More Than the IRS  

by
Bob Mason
on
7/9/2017
Why State Tax Authorities Should Scare You More Than the IRS  

When people hear those letters, “IRS,” it usually doesn’t conjure up a very pleasant image or feeling. The very name strikes fear into the hearts of even the toughest Americans. No one wants to come home to find a letter from the IRS in the mail, and our various forms of media and entertainment have done a great job at making people incredibly scared of the IRS and our tax system in general.

However, as TV Tropes would put it, there is a massive deal of legal artistic license taking place with one very surprising twist ending. It’s not the IRS you should be afraid of if you’re facing tax troubles. It’s STATE tax departments! 

The Portrayal of the IRS in Media

Any given TV show, movie or book often gets the portrayal of tax problems completely wrong. After all, when writers do their fieldwork, the prospect of interviewing a tax professional or IRS employee isn’t as fun as interviewing more dangerous and rare professions. The IRS is also often considered an acceptable target as far as movie villains go. Hyperbole and artistic license are frequently taken and welcomed, so it’s common to see portrayals of IRS agents just showing up at someone’s doorstep because they didn’t file their tax returns or were late with payments. Softer depictions of tax problems include people getting letters from the IRS demanding full payment of six-figure tax bills within 30 days. Audits, and even tax fraud, often have this hyperbolic portrayal in our entertainment, and it hasn’t been very good PR for the IRS in that it gives people these deathly-afraid expectations of what it’s like to deal with the agency.

But as wildly inaccurate as our entertainment’s presentation of tax problems may be, it’s created the impression that the IRS is this fearsome and unforgiving force that will bludgeon your assets beyond recognition if you do so much as spell your name wrong on your tax return. People have fallen for this impression because, granted, the language of tax returns is complicated. Hiring a tax professional is the best thing you can do if you’re having tax problems, and you’d rather entrust them in dealing with this arcane entity everyone fears so much.

But to truly get why state tax authorities are so much scarier than the IRS, we need to examine how the IRS has been de-fanged over time.

The Internal Revenue Service Restructuring and Reform Act of 1998

Many older films’ portrayals of the IRS as this heartless, nefarious and unfeeling entity aren’t completely steeped in exaggeration. While the IRS never truly had carte blanche to just show up and empty your wallet, there weren’t as many safeguards against revenue agents bluntly abusing their power or trying to get blood from a stone, so to speak.

The tax code itself isn’t the only thing that changes all the time, but also the way that our tax laws are carried out and administrative procedures. Enough people felt like they were being hounded unfairly by the IRS and without any recourse, so, after years of voicing these complaints to their legislators and the involvement of other stakeholders such as tax professionals and tax fairness watchdog groups, Congress enacted the Internal Revenue Service Restructuring and Reform Act of 1998 (frequently referred to as the RRA informally in tax pro circles).

This piece of legislation doesn’t come up in everyday conversation outside of tax professional circles. But for people who resolve problems with the IRS for a living, the RRA presented a major shift in how peoples’ tax issues are taken care of. The RRA is what asserted taxpayers’ rights and set the due process for tax collection that the IRS still must adhere to and halt abusive behaviors of IRS employees to taxpayers.

The key provisions of the RRA include the following:

  • The IRS must provide you with communication in writing for all tax matters that require your attention. No IRS employee will ever show up at your home or place of work unannounced.
  • You have the option to settle your back taxes with an offer in compromise.
  • If you can’t afford to pay your taxes, there are remedies in place for low-income and/or temporarily distressed taxpayers, including the option to make your account currently uncollectible.
  • There are several steps to be taken before the tax lien process and subsequent levying of any assets or garnishing of wages begins.
  • You have the right to appeal decisions the IRS makes and escalate them to Tax Court.

Why State Tax Authorities Are Different (and Scarier)

States have the right to levy income taxes through their own tax code. A majority of states do this, as there are only seven states without an income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. (Tennessee and New Hampshire tax investment income but not wages, so they are often included in the list.)

However, states don’t have their own RRA and uniform due process like the IRS does. There is no uniform set of standards that state tax departments have to adhere to in order to ensure fair and effective tax administration. People don’t realize that it’s actually quite a jungle out there without the protections of the RRA that we take for granted. Here are some of the chief reasons why state tax authorities are far more deserving of those nightmare-inducing depictions we see on TV all the time.

There May Be Fewer Remedies if You Are Facing Financial Distress

Even if you have extenuating circumstances like job loss, poor health, domestic violence or other catastrophic events that would affect your ability to timely file your taxes and/or pay your tax bill, your state may lack the same due process the RRA grants at the federal level. This can also mean that the collection process is much shorter and less merciful. While the IRS will send multiple notices in writing if you haven’t paid your taxes, your state tax department may not be as generous and start enacting tax liens in as little as a few months after the tax filing deadline has passed.

Naming and Shaming

California publishes a list of its top 500 largest unpaid state income tax balances and who owes them, and Georgia publicly names and shames people with delinquent back taxes with a database that anyone can look up. Is it really right or fair to do that? The IRS isn’t allowed to publish tax return data, including delinquent balances. You may hear wild stories in the news about celebrities going to extreme circumstances to pay their onerous federal tax bills (it’s how we got “The Fresh Prince of Bel-Air”!), but only they or their PR teams can make such confidential information public.

Being publicly shamed for not paying your taxes, whether it was out of defiance or financial distress, can have serious consequences like not getting that dream job or home. Whether you think it’s wrong or not, some states do it. But the IRS cannot.

State Tax Departments Can Show Up When They Want

Like those frightening portrayals in the movies of IRS agents banging on your front door in the middle of the night because you couldn’t cough up your tax bill while you were unemployed, state revenue agents actually can show up unannounced. They are more likely to turn up in person for sales tax/cash register audits than income taxes. But the possibility remains that state tax departments have more leeway to show up unannounced if written notices or phone calls didn’t get them anywhere in collecting your balance. There’s no requirement or guarantee that your state will adhere to the same standards of conduct that revenue officers and agents at the IRS are held to.

You May Not Have the Option to Settle

The Obama Administration’s Fresh Start Initiative streamlined the offer in compromise process so that if there’s no hope of the IRS ever collecting your full tax debt load, you may settle and expedite the IRS processing your information. You also have the right to appeal a rejected offer in compromise.

States, however, might not offer this option. They are not obligated under federal law to provide you with the ability to settle your unpaid state income taxes, even if it’s doubtful they will ever collect that balance. They are also not obligated to offer different payment plans that the IRS offers if your tax bill and overall financial situation doesn’t warrant settling your back taxes for a lesser amount.

Your State May Lack an Oversight Committee

Thanks to the RRA and TIGTA (Treasury Inspector General for Tax Administration), the IRS is subject to intense oversight to prevent abuses of power, waste, fraud and other malfeasance. Your state may have a similar state-level agency, or it may be far less merciful with little to no oversight of how the tax department functions. This is critical for ensuring fairness as well as the rights of our most vulnerable populations who frequently lack representation in tax matters.

For example, the IRS will not waste resources sending field agents out to audit taxpayers who are not likely to yield much money or willful wrongdoing. But states that are particularly money-hungry and have sufficient resources to audit taxpayers of all stripes may do so. You could find yourself being more likely to face a desk or field audit for state-level income taxes just because of what you do for a living or how many dependents you have. And, of course, there’s no RRA that is establishing the guidelines for how this audit must be conducted or TIGTA telling them that they can’t use the agency’s resources this way.

So, TV and the movies got it all wrong. The IRS is an incredibly friendly and reasonable entity compared to state tax departments and what they are capable of, despite years of really bad PR. You should really be scared of your state’s tax department, not the IRS. Of course, you can mitigate that fear and be prepared for the absolute worst with a seasoned tax professional at your side who knows your state’s tax laws and department procedures.

Bob Mason, CPA writes for TaxBuzz, a tax news and advice website. Reach him at [email protected].

share this post
Search for matches...
Bob Mason

Bob Mason

Bob Mason is the founder of Coast Financial Services Inc. servicing both the Santa Cruz, and San Jose areas. Bob Mason is a skilled financial professional who is fully equipped to assist any of your accounting needs. Founding his firm in Santa Cruz, Bob understands the importance of small businesses and how they form the backbone of the area. Coast Financial Services, Inc. has been dedicated to the growth and profitability of businesses in Santa Cruz for 17 years. To learn more about Bob Mason and the rest of his team, visit their website.

COAST FINANCIAL SERVICES, INC.
★ ★ ★ ★ ★
1 review

California

Firm Profile

Recommended Professionals

In the face of economic uncertainty, TaxBuzz is the industry's most up-to-date tax information.

Join 60,000 who get our weekly newsletter. No spam.

We know tax and accounting issues are complicated.

Do you have additional questions on this topic for this author?

Related Posts

Latest Posts