The state has a variety of collection tools at their disposure that they can utilize tax payers and in the manuals that the collection agent received what you’ll find is you’ll find a list of assets that they have and an appropriate designated action that the representative is supposed to take. For example, when they have a bank account or cash the state will mandate that the collection agent go after those assets first because those are the easiest to reach. Second to bank accounts and cash are wages that are reported consistently by the tax payer. From there they go towards accounts receivable, they go towards sources of independent contractor income and then finally moving on to physical assets or assets that may be a little bit more difficult to seize at a later day.
Key Takeaways
For example, when they have a bank account or cash the state will mandate that the collection agent go after those assets first because those are the easiest to reach.
Second to bank accounts and cash are wages that are reported consistently by the tax payer.
From there they go towards accounts receivable, they go towards sources of independent contractor income and then finally moving on to physical assets or assets that may be a little bit more diffic…
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So, briefly I’d like to talk a little bit about what procedures are in bound and out bounds for state collection agents. For the most part, state collection agents are expected to be courteous, they are expected to expeditiously move their cases through the state collections procedures and they are expected to try and work with the tax payer to facilitate a resolution. In practice, some agents are more difficult to deal with than others. It is often times a lot harder to work with an agent who is on a state level because a lot of times there’s not that face to face contact that you have with the IRS or you get a state collection agent who is under external pressures to collect revenue or to enforce the collection action much more severely, that coupled with the fact again, there are very few tax payer rights, makes things a little bit more difficult to do it.
Key Takeaways
So, briefly I’d like to talk a little bit about what procedures are in bound and out bounds for state collection agents.
However, there is a general standard for house state collection agents are supposed to behave. There is a published list of prohibited collection activities. All state collection agents are required to comply with the Federal Fair Debt Collection Practices Act.
So this is actually a very interesting subject and something that we as tax practitioners talk about quite frequently. So the first way that California tracks you is through any filings that you do with the state. So for example, everybody in California files a tax return with the Franchise Tax Board and you have an address on them. So they use the address based on your FTB returns and the addresses that are submitted to third parties like banks and credit institutions and things like that to track your current information. Number two is they pull your credit report. So the same credit report that you can pull through Experian or TransUnion the state of California has access to and they can use it to locate taxpayers and their assets. Number three is California gets data from the IRS. So the IRS has a much more expanded database of taxpayer information and particularly for taxpayers that have moved out of California or might be in other places. The federal government is often a much more reliable and more accurate source of information.
Key Takeaways
So this is actually a very interesting subject and something that we as tax practitioners talk about quite frequently. So the first way that California tracks you is through any filings that you do with the state.
The next thing they do if they’re serious is they use a program called accurate and accurate is a massive public records database. So as you think about it, you and I go through our daily life.
Income tax debt can be discharged in bankruptcy, but only when specific conditions are all met at the same time. This is one of the most misunderstood questions in tax law — the short answer is yes, under the right circumstances, but the conditions are strict and they all have to line up.
The rule is sometimes called the 3-2-240 test. To discharge income tax debt in a Chapter 7 or Chapter 13 bankruptcy, you need to satisfy all three of the following: the tax debt must be for a return that was due more than three years ago (counting extensions); you must have actually filed that return more than two years before you file for bankruptcy; and the IRS must have assessed the tax more than 240 days before your bankruptcy filing. Each of those is a separate, independent requirement. All three must be true for the same tax period or the debt does not qualify.
Two other conditions apply regardless. The return cannot have been fraudulent, and you cannot have willfully attempted to evade the tax. If either of those is true, discharge is off the table — period — under 11 U.S.C. § 523(a)(1). Fraud and willful evasion are separate from ordinary negligence or failure to pay. Most taxpayers with unpaid income tax do not have fraud or evasion issues; they simply ran out of money. But this is worth verifying before you file.
There are things this rule does not cover. Payroll taxes — the trust fund portion of FICA, the employer’s share, the amounts you withheld from employees’ paychecks — are not dischargeable in bankruptcy. Period. Neither are tax penalties that are punitive in nature. If your primary tax problem is payroll tax debt, bankruptcy will not solve it.
The three-year clock for the due date is measured from the original due date, not any extended due date. The two-year clock for when you filed runs from the actual filing date — a return filed the day before you petition for bankruptcy does not qualify. The 240-day assessment period can also be tolled if you were in an offer in compromise or a prior bankruptcy during that window.
Bankruptcy is one tool in a broader toolkit for resolving tax debt. It makes sense for some people. For others, an offer in compromise, installment agreement, or currently-not-collectible status is a better fit. The analysis depends on your specific numbers. Book a free 15-minute call at (619) 378-3138.
So high net worth clients present several challenges. From dealing with things from an IRS perspective, the first challenge that you’re going to have is that high net worth clients don’t fall within the IRS’ unusual guidelines for ordinary and necessary expenses. So take for example San Diego. For a single person living in San Diego, the local housing and utilities standard is about $2,500 a month, so the IRS allows you $2,500 a month as a single person for your housing and utilities. I always play a fun exercise to see where you can get housing for a single one-bedroom apartment for $2,500 a month in San Diego including your utilities and the reality of the situation is you can go to Oceanside which is 45 minutes north of here or you can go to Tijuana which is 45 minutes south. And those are about the only places where you’re going to find $2,500 a month rate including housing and utilities but for high net worth clients this presents a big problem because number one you’re dealing with income levels that are way above the IRS as ordinary standards so the fact of the matter is you may have somebody with an $8,000 mortgage or $10,000 mortgage or $25,000. Just because
Key Takeaways
the IRS disallows that $25,000 mortgage or at least a large chunk of it doesn’t mean the taxpayer isn’t actually paying that much for their mortgage.
I do in a whole year, why can’t they pay their taxes. The reality is that’s slightly insensitive to the particular person’s situation in my experience. When a client has more money their situation is more complicated.
When the FTB or EDD is deciding how much you can pay, they run a financial analysis — a structured review of your income, expenses, and assets to determine your ability to pay. This is not a general negotiation. It is a formulaic process, and the outcome depends heavily on how you document and present your financial picture.
Both agencies use collection financial standards that cap how much of your living expenses count in their favor. The FTB generally follows IRS Collection Financial Standards for housing, food, transportation, and other necessary living expenses — though they apply them under California’s own procedures. The basic structure is the same: take your gross monthly income, subtract allowable expenses using the published standards, and the remainder is your monthly ability to pay. That number drives everything.
There are two common outcomes from this analysis. The first is an installment agreement — a formal payment plan based on what the financial analysis says you can pay each month. If your ability to pay covers the full balance within the statutory collection period, you will be expected to pay it. If it does not, the second outcome becomes relevant: currently not collectible (CNC) status, sometimes called hardship status. CNC means the agency agrees that collection activity is currently unproductive because your allowable expenses equal or exceed your income. They do not forgive the debt — they suspend active collection and revisit periodically.
Assets matter as much as income. If you have equity in real estate, significant retirement accounts, or business assets, the agency will factor those into the analysis even if your current income is low. The FTB, like the IRS, can require you to liquidate assets before they will consider CNC status. This is where the analysis gets complicated, because the valuation of assets — especially partial interests in a business, encumbered real estate, or retirement funds with early withdrawal penalties — is genuinely contested territory.
The financial analysis is conducted using Form 3840 (FTB collection information statement) or the federal equivalents (Form 433-A or 433-B for the IRS). The numbers you put on those forms need to be accurate and supportable. Failing to claim legitimate expenses — because you did not know what the standards allow — means the agency calculates a higher ability to pay than is accurate.
If you want to understand what a realistic installment agreement looks like — or whether you qualify for CNC status — book a free 15-minute call or call us at (619) 378-3138.
A Tax lien is a security interest that the government has in any real or personal property that the taxpayer owns. So what does that mean? In reality if you owe an obligation to the IRS or to the state, then a lien is the government’s way of protecting its interest in case you were to liquidate any property. So let’s take a house because that is the example that we run into most commonly for taxes. If you own a house and if the house has equity and the government puts a lien against it then when you go to sell that house the government is going to take its share of what you owe before you get any proceeds. So a lien is just simply protecting the government’s interest saying “hey we’re the IRS, we’re the state of California, we have a right to the equity in this property prior to it being sold.” So what a lien does those two things: number one it protects the government’s interest and number two liens are a matter of public record so when a lien shows up, it has the tendency to either damage the taxpayer’s credit or it could be discoverable.
Key Takeaways
A Tax lien is a security interest that the government has in any real or personal property that the taxpayer owns. So what does that mean.
So anybody who’s applying for a government job or anything with security clearance or anything like that will have an issue with the lien.
California does have its own innocent spouse relief program, and it is separate from the federal one. Getting relief from the IRS does not automatically mean California will grant it. The California Franchise Tax Board administers its own program under Revenue and Taxation Code § 18533, and in practice the FTB is harder to convince than the IRS.
The federal program under IRC § 6015 gives you three routes: traditional innocent spouse relief, separation of liability, and equitable relief. California mirrors this structure but applies it independently. The FTB will not simply defer to an IRS innocent spouse determination — they conduct their own analysis, look at your California-specific tax situation, and make their own call. If the IRS granted you relief but California did not, you can still owe the FTB even though the underlying tax debt that caused the problem has been resolved at the federal level.
The core question in any innocent spouse case is the same regardless of jurisdiction: did you know or have reason to know about the understatement of tax at the time you signed the return? For traditional relief, you need to show you did not know and had no reason to know. Separation of liability, which allocates the understatement between spouses, is only available if you are divorced, legally separated, or have lived apart from your spouse for at least 12 months. Equitable relief is the catch-all for situations where neither traditional relief nor separation of liability applies — it requires showing that it would be inequitable to hold you responsible given all the facts and circumstances.
The FTB tends to scrutinize the “reason to know” standard closely. If you had access to financial records, managed household finances, or signed returns that reported income from a business you participated in, the FTB may conclude you had reason to know even if you did not actually review the return in detail. They also look at whether you benefited from the underreported income — whether it supported the lifestyle you were living at the time.
California community property law is a separate wrinkle. The default rule under community property is that both spouses are liable for all community income regardless of who earned it. Innocent spouse relief is an exception to that rule, and exceptions are construed narrowly. The time to request relief with the FTB is not after the collection process is fully underway — the FTB will generally not accept a claim after a final tax assessment has been paid in full.
If you were the non-earning or lower-earning spouse in a marriage where the other spouse’s business or investment activity created a tax problem, book a free 15-minute call or call (619) 378-3138. We handle innocent spouse relief at both the federal and California levels.
A levy is a forcible taking of property. So in the context of a collections case when the government levies you it takes your property in the satisfaction of your tax debt. The government can levy a variety of different things. They can levy bank accounts, they can levy brokerage accounts, they can levy retirement accounts in certain cases, anything that is a large cash asset they can take from it. So levies are the most common thing that the government uses in collection cases because it’s easy, it’s going after low-hanging fruit, it’s going after liquid assets and they’re very quick to execute. You don’t even need a person to execute them, you can have a computer do it so that’s what a levy is and you should be aware of them and take appropriate steps to mitigate them in the course of your collection.
Key Takeaways
A levy is a forcible taking of property.
So in the context of a collections case when the government levies you it takes your property in the satisfaction of your tax debt.
The government can levy a variety of different things.
Have a Tax Question or Notice?
If you’re dealing with an IRS audit, collection action, California state tax matter, or any other tax issue, we can review your situation in a free 15-minute consultation.
So IRS revenue officers are notoriously difficult to deal with.
So number one, IRS revenue officers only get involved in cases that the IRS feels are particularly serious.
How do you negotiate with a revenue officer? So IRS revenue officers are notoriously difficult to deal with. So number one, IRS revenue officers only get involved in cases that the IRS feels are particularly serious. For individual liabilities, usually that has to be a quarter million dollars or more. For payroll tax liabilities, the amount can be much smaller. If the business is continuing to accrue payroll tax liabilities, revenue officers will step in much sooner.
Revenue officers are not like other collection agents. Usually what happens with collections is collections is centralized into what’s called ACS, which is automated collection systems. There’s one in San Diego and it’s like a big, big call center and agents work out of there and are initiating collections and taking collection actions and getting taxpayers on installment agreements and so on and so forth.
A revenue officer is a local collection agent. They’re assigned to a particular region in San Diego, they’re across the street from us, and the revenue officers are charged with locating taxpayers, locating assets, and getting as much money as they can and satisfaction of those assets. So revenue officers are usually very senior. They’re usually trained. Some of them have accounting backgrounds, and they’re particularly good for finding taxpayers, locating their assets, and taking those from taxpayers.
Now, there are a variety of revenue officers. Some are revenue officers that work criminal cases, some are revenue officers that were principal in the businesses or who work with difficult assets to collect and so on and so forth. But when you’re dealing with a revenue officer, always know that you’re going to deal with somebody who has a very superior knowledge base when it comes to collections. This is what they do. They have 40, 50, sometimes more cases, and they’re dealing with collections issues all all day, every day. We’re just dealing with delinquent taxpayers over and over and over again. So not only do they understand a lot about tax, but they understand a lot about how this process goes. They’ve usually dealt with a variety of representatives and a variety of taxpayers, so they’re very knowledgeable.
So the trick to negotiating with a revenue officer is understanding what result you want to get at the beginning, so you start with the goal. Understanding, let’s say I have a client who wants to pay $500 a month on their IRS liability. I know that I’m working towards that end goal with the revenue officer. The first thing you do in a revenue officer case is contact the revenue officer and tell them that you can agree, you think you can agree to a solution and tell them what the solution is. You want to get a number in their mind and say look I know you have to work your case, I know you have to do your investigation, I know we have to go through the steps but here’s what my clients looking to pay. Five hundred dollars a month, I’ll get you everything to make your determination, so on and so forth. So right there what you’re doing is you’re setting a target. You’re setting an expectation with the revenue officer.
The second thing you do is you gather all the things the revenue officer is going to request. Revenue officer may send you a short list, and it’s a laundry list, but in working towards the financials and in developing your financial statement, you know what your target is. When you do the income minus expense analysis, you know you need to get it to about $500. And if it doesn’t work at $500, you’re going to have to figure out how to get it there. Taxpayer’s circumstances change all the time, but you at least have a target.
Hopefully at that point you’re producing financials and other information that’s consistent with the taxpayer having an ability to pay $500 a month. And then if you do that, and you show deference to the Revenue Officer, and you work through the motions, that’s the end goal. And so essentially what you’re trying to do when you present all the financial information is to gift wrap the Revenue Officers case form. You’ve stated that you’re trying to pay $500. You’ve given them consistent financials that show a $500 ability to pay. They’re well organized, they’re well presented, and you say, look, I know you got 50 cases, let me just go ahead and take care of this one for you. And so by putting together this package and negotiating with the revenue officers, it’s not going to work 100 % of the time, because Revenue officers are still people. You get good revenue officers, you get bad revenue officers, but you’ll have more success than not by taking this negotiation tactic. Because what you’re doing is you’re creating a goal, and then you’re leading the Revenue Officer along in satisfaction of the goal. The Revenue Officer goes off course, you show them more information and we get them back to that $500 a month payment.
And then if negotiations totally fail with the Revenue Officer, you want to exit in the best way possible. You can go to Appeals to negotiate an installment agreement or another collection’s resolution. You can submit an offer and compromise. You can talk to the revenue officer’s manager. But the goal is you’re trying to maintain a good and fluid relationship with them. You’re trying to get on their good side. You’re trying to make their life as easy as possible. And that will lead to the biggest avenue of success when you’re dealing with revenue officers.
Have a Tax Question or Notice?
If you’re dealing with an IRS audit, collection action, California state tax matter, or any other tax issue, we can review your situation in a free 15-minute consultation.
