Michigan Back Tax Collection’s Crippling Effect on the Spirit of Entrepreneurship
Some people dream their whole lives about opening their own business. Some will work hard to achieve it, and some do nothing at all. Any business requires risk. Most business entrepreneurs know that. Most people who take a shot at owning their own business and miss, fall severely behind on their Michigan taxes. They are crushed with a massively inflated tax bill to deal with, all because for whatever reason, their business plan didn’t work out.
A Hypothetical, But Common Scenario
It’s 2006, and a husband and wife own a retail business. Let’s call them Mr. & Mrs. Carson. It’s a small mom-and-pop store that they have owned for many years, let’s call it Carson’s. The owners never really got rich off of the business, but it always managed to pay the bills and support a comfortable lifestyle for their family, and maintain a handful of steady jobs for the community. 2008 happens, and the economy suffers a decline. Everybody’s losing their jobs and cutting spending where they can. Unfortunately, what that means for Carson’s is that many of its customers have cut that shop and its products out of their family budgets. Carson’s, in turn, is forced to cut its budget. Because they have the optimistic, risk-taking type of personality that it takes to own their own business, throughout the process, Mr. & Mrs. Carson always thought that better days were just around the corner. However, because the banks wouldn’t lend money, especially to a struggling business in a down economy, Mr. & Mrs. Carson have no choice but to use their savings to try and keep the company afloat. Before long, they have spent everything they’ve accumulated throughout their lives trying to save Carson’s. Now, they are faced with a tough choice: close Carson’s and lose the only source of income they know during a time when nobody’s hiring, or pick and choose which debts to pay, and which ones to hold off on. During this period of desperation, the only way for our hypothetical couple to stay in business is for them to pay the bills that they have to in order to keep the doors open, and not pay the ones that don’t have immediate consequences. While it’s never a good idea to not pay your taxes on time, this is a completely understandable and logical decision for the optimistic, risk-seeking entrepreneur. However, this type of behavior starts a downward spiral towards the path of financial ruin that can follow you around for the rest of your life. The sad truth is, more often than not, the taxpayer never gets caught up, especially in our current economic state. All the while, the business is continuing to accrue more and more tax debt, which in turn is adding massive piles of penalties and interest. Before long, Mr. & Mrs. Carson have lost everything trying to hang on to their business. Their money is all gone. Their home is in foreclosure, retirement accounts wiped out, and it still wasn’t enough to save Carson’s. Eventually, they close the store, walking away with no money, no income, and no hope for ever having a financially stable future again. Because Carson’s is a corporation, they are able to walk away from all of the business debts and not have them hanging over their heads, and they are free to pick up the pieces and start rebuilding their lives. That is, at least, until the tax collectors come knocking.
When The State Comes Knockin’
Sooner or later, the state contacts the former business owners to make a corporate officer liability determination. This generally takes place at least a year after the first payment was missed, but could take up to three years. Any officer or manager of the company that the Treasury determines was responsible for filing the returns or paying the tax will be held personally responsible. Once the taxpayer is determined to be personally responsible, they are on the hook for the full balance, including penalties and interest and all. Next come tax bills and notices. Once the corporate officer liability determination is made, the taxpayer gets a bill, followed by several notices. Once the bill is issued, the taxpayer is pretty much stuck with the majority of it. The biggest state taxes applicable to businesses are payroll and sales tax, neither of which are dischargeable in bankruptcy, so not even the federal bankruptcy courts have the power to help you. Eventually, the account is transferred to MARCS (in most cases). Since MARCS is a private, for-profit debt collection agency, they tend to be hyper-aggressive with collections. Since they are collecting debt on behalf of the state, they are given many of the state’s powers to collect, and are not subject to the same rules as other private debt collection agencies. For example, they are able to issue levies and/or wage garnishments directly without a court order, and in some cases, even 100% of your paycheck. For the many people who find themselves the position of owing a tax bill they cannot possibly pay in full, there are only three realistic options on dealing with this debt, all of which will effectively prevent that person from ever starting a business again. First, you should get on an installment agreement. The state has guidelines in place to allow you to get a payment plan for your past-due taxes. The amount of the monthly payments depends on your ability to pay. Essentially, the way the payment plans work are: the state looks at how much money you make, compared with how much you need for necessary living expenses and will make you pay the difference. This is because, once the state finds out about your additional income, they will want larger and larger payments. This will last pretty much forever for many taxpayers. Because of the way the State’s statute of limitations on collecting taxes works—it restarts every time you make a voluntary payment, so it will never expire as long as you are on the payment plan. I’ve seen some people set up payment plans so low that they don’t even cover the penalties and interest on the amount they owe, and the balance keeps growing, and they will have to continue paying every disposable dollar they have to the state for the rest of their lives. The second thing you can do is get on Non-Collectible Status. If the taxpayer truly cannot afford to pay the debt, they may qualify for non-collectible status. This essentially puts everything on hold, and the state won’t try to collect the money until the taxpayer has the financial ability to pay. As a condition on getting placed on this status, the state will require you to re-affirm the debt, which resets the six year statute of limitations for them to collect. The last option is to simply do nothing. This may seem like a non-option to many people, but sometimes it is the best option. By doing nothing, the statute of limitations will continue to run, and, after six years, the debt generally will go away. This is the only way to be free of the debt without paying it all, including penalties and interest. However, while trying to let the statute run, MARCS will aggressively try and collect their debt. For entrepreneurs, every additional dollar they make past a subsistence-level living standard would go to the Treasury and applied toward their tax debt. If our economy is ever going to get better in this state, it will be because of entrepreneurs who are willing to take a risk, like Mr. and Mrs. Carson.
What Needs to Change
The most obvious way to fix this broken system is to implement an offer-in-compromise program at the state level. This would give taxpayers the opportunity to put the failures of their past behind them and move on to a new chapter in their lives. However, because this would require a constitutional amendment, it is also the most difficult change to implement. Abolish MARCS. No private company should be allowed to wield the powers of State to carry out its profit motive. Enact a Statue of Limitations on Collecting Tax Debts. Because there is no specific statute of limitations applicable to the collection of tax debts, it is controlled by the State’s general catch-all statute of limitations. According to MARCS, debts don’t expire. After some point, the debt should be forgiven. It is apparent that we need to pass a fixed statute of limitations that does not renew every time someone takes any action to try and address their problems. It should only be tolled (not renewed) in certain limited circumstances, such as filing bankruptcy or appealing a debt. Repeal and Reform Corporate Officer Liability Statute. I understand (and agree with) the position that, if you collect a tax from your employees or customers on behalf of the state, and fail to turn that money over to the Treasury, you should be held personally responsible to pay that amount back regardless of the structure of your business. The problem with this lies in the fact that all business tax debts, including penalties and interest, are 100% assessable against the responsible parties. This is just not fair. Some debts are inherently that of the business, and should only be collected from the business. Pretty much every other creditor of a business loses the amount due to them the day the business closes its doors without any assets. The state should be no different when it comes to debts accrued by the business, as opposed to the business’s employees or customers. This statute should mirror IRC §6672, which only imposes personal responsibility for those taxes that were collected from a third party yet not paid to the IRS: all other federal tax debts die with the business. Reform the Taxpayer Advocate’s Office. The taxpayer advocate should be given more authority to ask questions other than “is what the State did legal?” when deciding the appropriate course of action in any given case. They should be instructed to look at the taxpayer’s current position and any special circumstances that cause an undue hardship for that person if the law were to be strictly applied in their case. The system should not be a ‘one-size-fits-all’ treatment. Some people need a break—not all succeed in everything they do. One business mistake should set them back for the rest of their lives. The State of Michigan needs to take this into consideration when they are going to people’s homes and taking everything from them. If you are a business owner in the State of Michigan and owe back taxes, give us a call or send us an email here—before it’s too late! Give us a call or send us an email here. [author] [author_image timthumb=’off’]https://www.ayarlaw.com/wp-content/uploads/2013/02/venar-about-sm.jpg[/author_image] [author_info]Michigan tax lawyer, Venar R. Ayar, founder of Ayar Law Group, holds ten years of experience as an accounting specialist and tax lawyer. He earned his Juris Doctor at the University of San Diego School of Law, receiving a Master of Laws in Taxation—the highest degree available in tax. His main focus has become Michigan tax resolution as well as IRS tax resolution, including individual and business tax matters; tax planning, tax compliance and white-collar criminal defense. His business background has helped him to become personable and understanding in his work. Representing clients before the IRS, Ayar’s practice and experience has proved him as an honest and dedicated leader in the realm of Michigan tax lawyers. Click here to contact your Michigan tax lawyer, Venar Ayar. [/author_info] [/author]