A Look at New York State Collection Issues
By YVONNE R. CORT, J.D., and KAREN J. TENENBAUM, J.D., LL.M. (Taxation), CPA
A representative of the New York State Department of Taxation and Finance has just dropped by for a little chat with one of your clients, the owner of a small retail store. It seems that the business hasn't been paying sales tax or withholding tax, and the State wants its money now. The phone rings and it is his personal real estate broker, who is setting up the closing on his house; it appears there are numerous outstanding New York State tax warrants against his property. Your client takes a deep breath, telephones you and wants to know what to do.
Later that day, another client telephones you, and there is a note of desperation in her voice. Her small company is the landlord of a commercial building, and the tenants have received notices of levy from the New York State Department of Taxation and Finance. The tenants refuse to pay any rent this month directly to her company. With no rental payments, there won't be enough money for the company to pay the mortgage.
How did your clients get into these situations, and what can be done to resolve these matters?
The State may take collection action against a business for unpaid taxes, including sales taxes, withholding taxes, and corporate income tax, among other taxes. Similarly, the State will pursue collection against individuals for personal liabilities, such as unpaid personal income tax, and responsible person assessments for trust taxes, most often sales or withholding tax. In the first scenario above, the owner apparently was deemed to be a person responsible for the payment of the withholding and sales taxes of his business. (A full analysis of responsible person assessments is beyond the scope of this article.) In the second example, the underlying liabilities could be any unpaid taxes owed by the corporation.
Your clients should have received correspondence from the State, advising them of their outstanding liabilities. A taxpayer has ninety days to challenge a Notice of Determination or Notice of Deficiency, by filing a request for a conciliation conference with the Bureau of Conciliation and Mediation Services (BCMS), or filing a petition for an ALJ hearing with the Division of Tax Appeals. It is only when the taxpayer does not respond to the State's communications, or the problem remains unresolved, that the State proceeds with more drastic collection measures.
Once an assessment is final, the State will issue a Notice and Demand for payment. This Notice begins the collection process. Now the State may use the tools at its disposal, including warrants, levies, income execution, and seizures and sales.
If the taxpayer does not pay the tax, interest and penalties within 21 days after the Notice and Demand (ten days for amounts of $100,000 or more), the State may issue a tax warrant. Although in some instances the State has up to six years from the date of assessment to issue the warrant, there is no such restriction with respect to sales tax assessments. A tax warrant is the equivalent of a legal judgment against the taxpayer, and falls within the procedural laws (Civil Practice Laws and Rules, or CPLR) for civil judgments. When filed, the warrant acts as a perfected lien, and is valid against real property for ten years, and against personal property for twenty years.
The tax practitioner should be aware, however, that the twenty year period can start anew each time a payment is made, including most involuntary payments, such as bank levies. This is a concern especially for elderly taxpayers, who thought their old tax problems were far behind them.
A filed tax warrant is a public record which may be viewed at the local County Clerk's office, and may be filed with the Secretary of State. It will adversely affect the taxpayer's credit rating, and must be dealt with if real estate is to be sold or refinanced.
In the hypothetical situations above, your clients may have received a Notice and Demand, and failed to pay within the time given; and a warrant was issued and filed. Of course, now your clients want you to get rid of the warrant. There are two ways to do this: the warrant can be vacated, or satisfied.
If the warrant was issued in error, the State should vacate it. If payment has already been made in full on the underlying liability, including interest and penalties, then the warrant is satisfied; and it is simply a matter of requesting the State to supply proof of satisfaction. If your client wants to pay in full, such as at a real estate closing, the State should be contacted to find out the current balance due on the assessments. The amount owed could be much higher or lower, as the warrant will not reflect interest and penalties accrued since the warrant was filed, nor any payments made on the liabilities.
While taxpayers may not be aware of a filed tax warrant on a day-to-day basis, when the State issues a levy, taxpayers usually know almost immediately. A levy is a legal seizure of the taxpayer's property, and is the method by which the State takes the taxpayer's money while it is held by third parties. Most commonly, levies are issued against bank or other money accounts.
Naturally, the first objective is to release the levy, if possible. The State should be contacted immediately to discuss ways to resolve the matter.
In some instances it may be to your client's benefit to arrange an installment payment agreement with the State, to pay the full amount over time, with interest and penalties continuing to accrue; or to submit an offer in compromise to pay a lesser amount. Indeed, an installment payment agreement or an offer in compromise may be a viable method of resolving your client's liabilities in any of the situations described here. (A full discussion of these remedies is beyond the scope of this article.)
If the taxpayer is a landlord, a third party levy may be issued to demand payment of rent from tenants of the taxpayer's real property. In the hypothetical above, your client, the landlord, is concerned because her tenants are not paying her any rent. Nevertheless, if the tenants have sent their payments to the State pursuant to a third party levy, the tenants are legally protected from an action by the landlord for those rent monies.
The State does not send a specific notice to the taxpayer prior to issuing a levy. This differs from the Internal Revenue Service, which has a series of notices, and opportunities for preventive action.
Another effective way the State obtains the money owed it is by taking up to 10% of the taxpayer's gross wages, assuming the taxpayer earns above a certain threshold based on the minimum wage. The State will send a notice to the taxpayer, ordering the taxpayer to send in the appropriate amount to the State; this is called First Service. If the taxpayer fails to comply, the State institutes Second Service, which is notification directly to the employer to take money out of the taxpayer's paycheck. The income execution would continue until the liabilities are paid in full.
Seizure and Sale
Perhaps most drastic is the State's ability to seize real or personal property and sell it, with the proceeds used to pay the outstanding liabilities. The State may padlock a business and deny access to the taxpayer. The State has the obligation to sell seized property for at least its fair market value. Seizure and sale must be approved by Albany. Any time before the sale begins, the taxpayer can stop the sale if he fully pays the outstanding liability, including tax, interest and penalties, and any expenses incurred by the State in preparing for the sale.
Now you know some of what the State can do, and possible ways to handle the collection problem and resolve the underlying issues. The best plan is to contact the State before the State approaches your clients. Just in case, though, make sure to tell your clients what they should do if New York State comes to the door - call you!