How The IN Department Of Revenue Enforces Tax Collection

Once a demand is made, the Indiana Department of Revenue (“DOR”) expects a reply in 10 days.  DOR has very powerful options at that point: if the taxpayer has not responded, DOR can cause liens to be placed on the property of the corporation or  individual. Of course, this affects credit ratings and the ability to borrow money.  The ability to sell titled properties is also hampered.  In short, a bad situation will rapidly get worse.

Many interesting possibilities are provided for by Indiana laws, specifically Indiana Code 6–8.1–8 –1 and following sections up to 6–8.1– 8–17.  These are the collection provisions for “trust fund” taxes in the Indiana code.  The first enforcement action from the Indiana Department of Revenue is the issuance of a demand notice. If the demand is not paid within 10 days, the Department of Revenue may issue a tax warrant, and add 10% to the unpaid tax as a collection fee. That warrant may be filed with the circuit court clerk in the county where property is owned, 20 days after the demand is mailed to the taxpayer.  It becomes an enforceable judgment at that point.

These “automatic judgments” can be entered without a trial before the circuit court.  This is a streamlined procedure that allows the state to garner a judgment fairly quickly. And these judgments are valid for 10 years from the date that judgment is filed  The judgment may be “renewed” for an additional 10 years, simply by filing an “alias” tax warrant at the end of the initial judgment’s 10 year effective period.

These tax judgments may be enforced by ordinary means, such as foreclosure and sale of real or personal property, with that sale by the sheriff or an auctioneer. Further, the sheriff keeps a part of the additional collection fee of 10%.  Thus, he has an incentive to conduct sales of property where warrants have been issued.

In addition, the state will often employ a collection agency to collect on unsatisfied tax warrants. In these cases, additional penalties may be assessed against the taxpayer, for the cost of private collection.  A restraining order may be issued by the courts of the county where the taxpayer does business, to restrain him from conducting business. In addition, the state may ask that a receiver be appointed, to manage the business so that those taxes can be paid over to the state.

The most significant power that the state has regarding a tax assessment is the mentioned automatic enforcement.  Note that this is without the normal legal protections of serving a complaint, waiting for a trial before the Circuit Court judge, and then obtaining a judgment.  The “normal” process for collecting on debt takes a number of months, and allows a full hearing of the facts before an impartial judge, before any lien or garnishment.  DOR can bypass that normal process.

The department may, without judicial proceedings, place a lien on monies of the taxpayer which are held by a financial institution, and require that the financial institution place a 60 day hold on funds. This includes not only funds the taxpayer has on deposit at that time, but also those that he subsequently deposits. In addition, DOR can garnish his wages by sending notice to his employer, without judicial proceedings as are normally required for garnishment. Further, the DOR can lien and sell property, or take it to a storage facility and require a bond before returning the goods.  The DOR can initiate a debtor’s exam, to inquire (under oath) about all assets that the debtor owns. Obviously, all of these requirements under the law are very powerful investigation tools for the DOR.  Of course, as the situation becomes rather grave, the use of seasoned counsel is recommended.

Retail Merchant Employees Can Be Responsible To Collect Taxes!

Not everyone in a retail business realizes it, but whatever goods are sold, taxes must be collected for the state by the business.  This applies to both sales and payroll taxes. Of course, some in the middle of a cash flow pinch will choose to ignore this responsibility, or pay the taxes “when they get around to it”. What happens in these cases?

Many don’t realize that the individual who runs the corporation, and those who cut the payroll checks for the corporation, can also be liable for payment of the taxes. The theory is that the taxes are held “in trust”, which means that the individual working for the corporation, and the corporation itself, are holding funds for the state.

It’s similar to how the bank holds funds for an individual in an ordinary checking account.  In this way of looking at it, the “bank account” which the business holds for the benefit of the state (which is the 7% sales tax and employee state income taxes withheld) cannot be drained of funds. It is the duty of the business, and the chief financial officer, to make sure that “bank account” is maintained for the state, and that those funds are paid over to the state. If those funds are not maintained, it’s considered embezzlement.

This theory can result in significant problems for the retail merchant.  Officers of the corporation who are considered responsible for its money affairs, are often unaware that they can be held personally liable. Of course, if the corporation goes broke, the liability does not go away; responsible officers can and will be pursued by the state for the trust fund tax liabilities, including both sales tax and state payroll tax withholdings.  Even if those officers move on to other employment, they can find that they owe significant liabilities due to their activities as past corporate officers.

All of these unpleasant possibilities can be avoided, if the taxes are paid on time. Nevertheless, where this is not possible, it is appropriate to consider the effects of delinquent tax payment, and how the corporation’s business or the assets of the responsible officers may be affected.

It should be noted that one of the more harsh but frequently neglected provisions of the Indiana code regarding taxes concerns the priority of payment, or how payments are credited against monies owed. When a taxpayer is behind, the partial payment is first applied towards penalties, then to interest, and last to the tax liability. This means that partial payments do not have a strong effect to reduce the original tax liability, until penalties and interest are paid in full.

In addition, the corporation which is struggling but which has not yet gone out of business may find that its registered retail merchant certificate (RRMC) will be revoked. In this case, the Department of Revenue will place signs on the taxpayer’s place of business, informing customers that the corporation can no longer conduct retail sales at that location. If those signs are removed or retail sales are continued, there is a risk of additional fines (or even imprisonment) as these offenses are considered a class a misdemeanor according to Indiana Code 6–2.5–4.

Of course, as long as monthly tax reports are submitted, along with appropriate payments, there will be no problems. But if those reports are not submitted on a timely basis, the state will investigate, and issue a demand notice for payment.  My next blog post will explain the problems that can arise in such a situation.

All About Short Sales: Why They Can Be Beneficial to Both Lenders and Borrowers

The most frequent way used to work out a settlement between lenders and borrowers in real estate is the short sale. In this type of transaction, the borrower wants to sell the property, and satisfy the majority of debt to the lender. However, since his mortgage amount exceeds the amount that can be realized from the sale of the property, it is referred to as a “short” sale.

When property is in foreclosure and a loan modification isn’t on the horizon, a short sale may be the most efficient way to solve the problem. Often, federal regulations give the borrower a release of liability on the remainder of the debt, once the short sale is approved by the lender and a closing occurs. Of course, the lender has to accept less than the full amount of the debt; in this sense, the sale is “short” to him.

Here’s an example. Suppose you own a property worth $100,000 and the debt on the property is $120,000. In this case, if the property sells for $100,000 and selling expenses are 10%, only $90,000 will be realized to pay off the lender, who is owed $120,000. Of course, the practical lender will weigh his alternatives: is receiving $90,000 better than receiving nothing in the short-term and going into foreclosure? Clearly sometimes the best choice is to accept the short sale.

Just as is true with a deed in lieu of foreclosure, these transactions can be complicated by second mortgages, judgment liens, homeowner’s association liens, and other impediments to conveying a clear title. In addition, beyond the problems with liens, there may be repairs needed to the home, which means the property sells for even less. Still, in all of these cases, the lender will benefit from a short sale, as a “bird in the hand” is better than waiting for a very uncertain price at  a foreclosure sale down the road.

When clients want a mortgage modification, they are faced with an uncertain future: if the lender does not approve the modification, they may not be able to hold onto the property. It these cases, sometimes a short sale can be very useful. The property is sold, and the lender is paid something.  The debtor often gets a release on the debt.  In this way he can avoid having to file bankruptcy, with the ensuing credit report damage.

Short sales are becoming more and more popular in the current economy, as mortgage modifications do not always work to get relief for the borrower. In these cases, a short sale can be a great advantage to resolve the situation. Obviously, in working with an attorney for mortgage modification, you want to make sure that he is familiar with short sales, and works with them on a regular basis. I personally have found them to be a highly effective tool, giving more options to the overburdened borrower.

What is a “Deed in Lieu of Foreclosure”?

In the real estate world, when foreclosure is imminent, many real estate owners will consider the “deed in lieu of foreclosure”. Because of the complexity that often surrounds real estate transactions, let me explain exactly what a “deed in lieu of foreclosure” is.

Before the 1980s, a deed in lieu of foreclosure was often used to resolve a situation where the owner of real estate could not pay for the real estate. Because real estate loans were always made for only 4/5 of the value of the real estate, and prices were stable, a lender never lost money when accepting a deed back in place of a foreclosure.

But over the last 30 years, real estate transactions have involved far less money put down by fewer purchasers, and  lenders are often faced with taking back properties where they will have a loss. In these cases, when a lender has a property worth not much more than the loan amount, it’s easy for him to lose money.

Here’s an example. Suppose the borrower buys a property for $100,000 and puts $10,000 down. In this case, he has a “loan to value ratio” of 90%, and the amount of value in the property is 10%. This 10% is known as his “equity” in the property. In a case where he can no longer make payments, the property has not escalated in value, and there has been very little paid down on the loan, the lender who has to take the property back is in a difficult position.

While the foreclosure occurs, the lender will have carrying costs for at least six months (perhaps as long as a year), and will lose money. Further, if the property needs to be fixed up before it can be sold, the lender loses money again. In addition, the cost of a realtor and other miscellaneous closing costs can create another loss.

Obviously, lenders like to make real estate loans where 1) a substantial equity exists in the property, 2) the property does not lose value due to use or market conditions, and 3) the borrower will not impede the lender in moving forward to repossess the property. In a perfect world, this can be done. In the real world, unfortunately, it doesn’t happen all that often.

For these and other reasons (including federal regulations), lenders do not take back deeds in lieu of foreclosure very often nowadays. Problems such as judgment liens, second mortgages, homeowner’s association liens, and other miscellaneous title issues complicate the matter further. In addition, federal regulations often demand that the lender foreclose before attempting to collect from the debtor, in order to get as much value as possible out of the property.

And so we come to the principal advantage of the deed in lieu of foreclosure.  If and when a lender is willing to accept one, in most cases there is a release on the debt.  This is the reason the borrower seeks to have the lender take back the property: so that he can be get rid of his debt. However, these kinds of transactions have not been very frequent in the last few decades, due to lack of equity in properties being foreclosed.

If you can get a deed in lieu of foreclosure accepted when you wish to give the property back to the lender, it is often the quickest and most efficient way to resolve what can be substantial debt involved in owning real estate. If problems arise, a good lawyer can help sort them out.