State Back Tax Collection: A Striking Contrast to the IRS

My clients are always surprised. They hear about the big, bad IRS and their ability to take their money in order to collect back taxes.

The reality is that the approach of state governments is often far more aggressive than that of the Internal Revenue Service and has far-reaching implications for taxpayers.

State Tactics: License Suspensions and Beyond

The case of my client in Louisiana is a telling example. After accruing a tax debt, he had his driver's license revoked. This is not unusual. I've had many clients find themselves in the same situation.

This practice, while intended as a deterrent for tax evasion, can severely hamper the lives of those affected, especially in places where driving is essential in everyday life.

It's so pervasive in Louisiana that tax debts as low as $1,000 can lead to your license being revoked.

Taking away taxpayers' licenses extends far beyond Louisiana.

In at least nine states, driver's licenses can be suspended or not renewed over unpaid taxes.

The impact of these policies is significant. Not only do states revoke your driver's license, but also professional licenses, which puts them immediately out of work. Interestingly, this approach contrasts with the policies of the IRS, which does not revoke licenses for unpaid tax debt.

IRS vs. State Collection Policies

The IRS is known for its ten-year limit statute of limitations on collecting federal income tax debt, after which the debt is typically written off and forgiven. This statute of limitations provision stands in contrast to almost every other state.

The states, to varying degrees, pursue state income tax debts for much longer periods of time, sometimes indefinitely. Many states have a stated statute of limitations that can be extended significantly and more than once.

Although the IRS appears to charge high interest rates on tax debts, it actually does so at a lower rate than many states, which helps keep tax debts at lower, more manageable numbers.

Another key difference is in the resolutions available. The IRS offers more comprehensive programs for taxpayers facing financial hardships.

Many states seemingly just don't care if you're in no financial condition to make payments at the rate their requesting. You have to pay special attention to how to work that particular state's tax debt collection administrative laws to create a resolution that gives the taxpayer the best possible chance to succeed.

Consequences of Aggressive State Policies

The aggressive nature of state tax collection policies places a significant burden on their taxpayers. Revoking licenses not only affects individual taxpayers but can also hinder their economic contributions and their ability to pay their tax debts which is the exact opposite of what these states want.

The states' aggressive policies lead to financial distress for taxpayers and mounting penalties and interest, making it challenging to ever break free and put their debts in the rearview mirror. There's a real need for changes that balance the need for the states to collect back taxes with the realities of taxpayers' circumstances and their ability to pay back their tax debts..

Takeaway for Accountants

The comparison between state and federal tax collection practices highlights the need for a more balanced and compassionate approach at the state level. Having extensive knowledge about the differences between state and federal tax collection methods is vital for tax professionals. Understanding these differences is crucial to providing accurate advice and advocating for your client.

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