The Ohio tax assessment and collection process can be overwhelming and incomprehensible to a taxpayer. There can be an overload of correspondence, or very little. Letters can be from the Ohio Department of Taxation, the Ohio Attorney General’s Office, private lawyers (Special Counsel) hired by the State, or private collection agencies. Then there can be letters from Ohio Bureau of Worker’s Compensation, Job and Family Services, or Ohio Common Pleas Court judgments/tax liens that suddenly appear on one’s credit report. Little known is that Ohio law has been amended to create a shorter collection statute of limitations period (7 years) for wage garnishments and bank levies for a limited number of Ohio tax assessments who have not been contacted by an Ohio collection representative. However, Ohio tax lien filings (Common Pleas Court judgments) remain at a 15 year duration but can be refiled and extended. A Common Pleas Court judgment/tax lien filing can still be effective to tie up real estate parcels for up to 40 years. The adverse impact of tax liens on credit scores is a common problem.
This website will attempt to clarify the complexity of Ohio tax matters.
THE OHIO ASSESSMENT/COLLECTION PROCESS
But for straight-forward filed but unpaid Ohio IT-1040 taxes (Ohio Individual Tax Return), the Ohio assessment process can turn out to be a nightmare to comprehend. Even with Ohio personal income taxes, the process can be mystifying if the taxpayer has not filed all required individual or related business income tax returns. Other Ohio assessments, such as sales tax, unpaid Ohio income tax withholding, Workers’ Compensation assessments and certified judgments are difficult to understand.
The following information will help in understanding Ohio’s complex tax system and shed light on the various correspondence received during the Ohio assessment/certified court judgment/collection process.
TAX ASSESSMENT PROCESS
An Ohio due and owing tax assessment will result when an Ohio tax return is filed without full payment. Ohio assessments can also appear if a business failed to close out its reporting requirements for Ohio employee payroll accounts as well as sales tax (vendor’s license accounts). Incorrect post business closure tax assessments are common. Additionally, an Ohio tax assessment can occur for a filed or unfiled tax return as a result of the Internal Revenue Service/Ohio Department of Taxation information-sharing program reflecting an Ohio/federal adjusted gross income discrepancy. In the latter instance the IRS may have audited a taxpayer’s federal tax return or created a substitute federal return based upon unreported taxpayer income identified by the IRS. The state is notified of a taxpayer’s annual federal adjusted gross income. Notification will result in an Ohio tax assessment.
Payroll tax judgments can simply appear against a company that has missed filing payroll tax returns or upon business closure without canceling state return compliance, e.g., canceling a vendor’s sale license or a state employer income tax withholding number. Obtaining a corporate or limited liability company Ohio Certificate of Dissolution has become difficult because of 2012 legislation requiring state tax releases be obtained as a condition of issuing a dissolution certificate. The state will estimate payroll taxes for subsequent non-business years if Ohio was not properly notified of a closed business. Tax collection letters can keep coming for years.
Usually a taxpayer will know about an adverse IRS tax result; however, because of changes of address or poorly understood Ohio correspondence or a lack of correspondence, Ohio tax assessments can take place without a taxpayer’s knowledge. Ohio tax assessments historically are collectible through levies for as long as 40 years. 2012 legislation alters Ohio collection authority, in certain cases, to as little as 7 years. But Ohio tax liens (Common Pleas Court judgments) can exist for 40 years and remain roadblocks to real estate transactions and loan qualification.
CHALLENGING AN OHIO ASSESSMENT
An Ohio tax assessment becomes due and payable shortly after notice of assessment unless the Ohio taxpayer takes action and files a Petition for Reassessment with the Ohio Tax Commissioner, by registered mail, within 60 days after receiving the notice of a proposed Ohio tax assessment (ORC § 5747.13). In objecting to the assessment the taxpayer must state reasons and objections in an Ohio Petition for Reassessment. The Department of Taxation reviews the arguments as well as documentation and issues a corrected assessment (or a no change) called a “final determination” of tax assessment. Even with an adverse decision on the petition process, a Board of Tax Appeals review is available. Clients often complain, however, that they never received notice of assessment and their 60 day appeal rights – the judgment lien simply appeared pursuant to a credit check.
It is a rare taxpayer who understands the Ohio notice process and timely files for a hearing within the 60 day period. Most Ohio taxpayers are faced with post assessment issues rather than pre-assessment opportunities to challenge an Ohio notice of proposed tax assessment. Post Ohio assessment challenges to an assessed liabilities present taxpayer difficulties in lowering or voiding Ohio certified judgments. Missed notice deadlines by Ohio taxpayers are the norm.
OHIO TAX LIENS
The existence of Ohio tax liens (also called judgment liens or certified judgments) can come as a surprise to Ohio taxpayers. Unless a taxpayer responds to the 60-day notice letter, the Ohio Department of Taxation, through the Ohio Attorney General’s office, quickly moves to a Common Pleas Court judgment.
Ohio Department of Taxation assessments are certified (post 60-day notice) to the Attorney General’s Office who, in turn, files a certification of the tax assessment with the Clerk of the Common Pleas Court in the county of the taxpayer’s residence or, in some instances, in Franklin County (City of Columbus), Ohio. The Clerk of Common Pleas Court will enter a judgment against the Ohio taxpayer which, in turn, is reported by the credit bureaus. The certified judgment allows for collection action such as a levy or garnishment and may include a required taxpayer appearance at a “debtor’s hearing” in Common Pleas Court (ORC § 5747.13). Collection agencies or private lawyers (called Special Counsel of the Attorney General’s Office) are hired by the state to follow up on collecting taxes with Special Counsel authority broad enough to issue wage garnishments and levies. Ohio collection correspondence is often from various Ohio representatives, unlike the IRS which acts as tax assessor, tax auditor, as well as tax collector.
Ohio Revised Code Sections 2329.07(A) and (B) as well as 2305.26 provide that the Ohio Attorney General’s Office need only refile a tax lien/judgment every 15 years in Common Pleas Court to keep the Ohio judgment lien operative against a tax debtor. This presents the Ohio debtor with credit problems and real estate transaction problems. A Common Pleas Court judgment lien must be canceled after 40 years.
OHIO STATUTE OF LIMITATIONS ON COLLECTION
The statute of limitations for collection of Ohio tax debt varies. Some Ohio statutes are 7 years while other limitation periods are as long as 40 years. Unlike the clear 10-year collection statute for federal taxes, Ohio collection authority will vary with the type of tax and historical fact pattern. Ohio judgment liens and Ohio collection levy authority are controlled under different statutes. Judgment liens encumbering real estate and collection levies are distinctly different procedures.
The Ohio collection statute of limitations is now 7 years from the date of the tax assessment. Ohio Revised Code Section 131.02(F)(3). But see caveats below. A taxpayer will not be advised of this favorable statute from Ohio collection representatives. The 7 year limitation period does not start with unfiled return due dates – rather with the tax assessment date itself – if filed on time or later if filed/assessed after the original filing date.
Ohio places a time limit within which the state must begin enforcement “action” to collect taxes. For purposes of collection authority law, a court action must be initiated within the 7 year period from the date of assessment. A “court action” is defined, not as the filing of the judgment certification by the Attorney General’s Office, but as “any” collection action, such as a debtor’s hearing, wage garnishment, bank levy, or Special Counsel collection correspondence in an attempt to collect the tax.
The Ohio Senate Ways and Means and Economic Development Committee, in the period the legislature was working on the Bill (House Bill 390) considering the 7 year rule, stated: “For the purposes of the bill, a court proceeding (action) is deemed to begin when any court action is initiated after the final tax assessment is filed in the appropriate common pleas court clerk’s office (including an action in aid of execution).” In other words, if a court filed certified judgment lies dormant for 7 or more years after the earlier assessment date, Special Counsel cannot begin an action to collect on the judgment. The key is 7 years from the date of the assessment itself.
Therefore, Ohio Special Counsel threats to Ohio taxpayers 7 years after assessment may not be enforceable in Common Pleas Court if Ohio Special Counsel is initially requesting action on a Common Pleas Court judgment. Taxpayers should be leery of signing agreements giving consent to extend the Ohio collection statute of limitations. That extension is now commonly requested.
Unfortunately, the 7 year rule is generally ignored by Ohio Special Counsel. The reason seems to be that the favorable taxpayer legislation of Ohio Revised Code Section 131.02(F) has not made its way into the courts for interpretation and case ruling. Ohio Special Counsel seem to be conveniently ignoring the 7 year rule or choosing their own interpretation of this taxpayer friendly legislation. There exists no judicial interpretation of the 7 year collection rule.
A 10 year old IRS tax debt (as well as a federal tax lien recorded in the taxpayer’s county of residence) expires under the 10 year statute of limitations provision written into the federal tax lien. The IRS relies on an active collection arm and quickly moves to levies and garnishments. The Ohio system is confusing to most taxpayers and many tax professionals because of distinct differences in Ohio collection law and Ohio tax lien law. Poorly written Ohio correspondence is also a factor. The IRS may, but seldom does, refile a federal tax lien in the final months of the federal tax lien expiration date.
The State of Ohio relies on recertification of tax liens/judgments for many years. Ohio taxpayers can be surprised and first become aware of an old Ohio tax judgment lien 20 years after the Ohio lien was initially filed. However, the tax lien judgment itself may have become dormant as a collection tool and not a legal lien if the Attorney General’s Office has not recertified the judgment (refiling every 15 years) under the requirements of Ohio Revised Code Section 2329.07(B). A Common Pleas Court judgment recertification does not change the 7 year requirement of allowable enforced collection action. The remaining lien, however, continues to be a credit score problem and a valid lien on real property within the county of filing.
OHIO PROBLEM RESOLUTION OFFICE
The Department of Taxation has created a Problem Resolution Office (PRO) pursuant to the Ohio Taxpayer Bill of Rights at Ohio Revised Code Section 5703.51. The PRO serves as a liaison between the Department of Taxation and taxpayers when tax issues remain unresolved after attempts by a taxpayer to mitigate a tax issue through regular inquiries such as phone conferences, document submission, and hearings. Taxpayers make a request to the PRO by writing to the Ohio Department of Taxation, Problem Resolution Office, P. O. Box 530, Columbus, Ohio 43215. A problem resolution finding is considered a final hearing order and cannot be appealed to the Ohio Board of Tax Appeals.
This office has used the Problem Resolution Office and particularly the Ohio Attorney General’s office to settle Ohio tax issues. We have also worked with private law firms hired by the Attorney Generals Office to collect unpaid Ohio tax debt. With proper taxpayer documentation, old Ohio tax assessments can be reduced and, in some cases, zeroed out. The key is hardcopy historical documentation. This can be a real challenge for a taxpayer when an Ohio assessment is 20 years old and the judgment is still active in a Common Pleas Court with a recertified judgment.
PERSONAL LIABILITY FOR UNPAID BUSINESS ENTITY TAXES
Unpaid sales tax of a corporation can result in a personal liability assessment against owners/officers. Likewise, employee income tax withholding unpaid by a corporation can result in personal liability. The same is true for a business owner with a limited liability company which has not paid certain taxes (income withholding taxes and sales taxes).
Taxes such as this are called “trust fund taxes,” that is, customer sales tax or employee income withholding tax that is collected by a business taxpayer for the State of Ohio but not paid over to the Department of Taxation under tax reporting and payment requirements. “Trust fund taxes” or “trust fund penalties” are Ohio taxpayer assessments against responsible individuals made in an attempt to recover unpaid business tax assessments that have not been paid by a noncompliant corporation or limited liability company.
Ohio Revised Code Section 5747.07 allows the Ohio Tax Commissioner to assess a responsible individual in business entity cases where the business entity withheld taxes but did not pay over the sales taxes/employee Ohio income taxes to the Department of Taxation. Corporate and LLC officers can be surprised by a personal liability assessments resulting from a failed business entity which has not paid over all of its so called “trust fund” taxes into the Ohio system. The IRS has a similar personal liability assessment process (Internal Revenue Code Section 6672) for business owners who were responsible for a company not paying over the employees’ portion of Social Security taxes, Medicare taxes and federal income tax withholding.
Unfortunately, the state has a tendency to add unwelcome complexity when a business does not pay over employer taxes. Rather than press the business for payment of back withholding and sales taxes, Ohio has, on occasion, immediately assessed the owner/employee with a Form IT 1040 individual tax assessment, advising the taxpayer of nonpayment of his/her Ohio W-2 income tax. This can drag the spouse of an owner taxpayer into tax assessments he/she knew nothing about and who should be totally free of the spouse’s liability under the law. Ohio Revised Code Sections 5747.06(B) and 5747.13(A). The state has even claimed incorrectly that the innocent spouse is also liable for Form IT 1040 taxes because the state classifies a husband and wife as one taxable entity. This is not supported by case law involving the husband’s failure to pay Ohio income tax withholding through his business entity. Tieflet v. Gillian at 40 Ohio App.2d 491, 321 N.E.2d 249.
Important Information Regarding Personal Liability
for Unpaid Business Taxes
The State of Ohio aggressively notifies business entity “statutory agents” of unpaid corporate or LLC taxes. Ohio tax notices do not clearly distinguish between a business entity, its statutory agent and an individual business owner “trust fund” liability assessment. Personal liability is allowed only in limited instances under the Ohio Revised Code. This office has seen hundreds of cases over the years where an Ohio client mistakenly believes that an Ohio Attorney General letter is holding him personally liable for unpaid Ohio corporate and LLC business entity taxes. Oftentimes the statutory agent of a company receives correspondence which is incorrectly interpreted to mean that the individual statutory agent (often times the business owner) is personally liable for a company tax debt. This is not necessarily the case. An understanding of the Ohio tax assessment is critical to avoid or remove Ohio personal tax liens and tax debt obligations for those individuals who are not responsible company officers under the Ohio Revised Code. Additionally, I have seen statutory agents and owners of a now-closed business improperly pay company tax assessments for which they are not personally liable. Collection agencies and Ohio Special Counsel will not volunteer this information.
This office has seen numerous cases wherein credit bureaus, title companies, the Ohio Board of Tax Appeals and even Common Pleas Court judgments have misinterpreted fact and law to incorrectly find personal liability for unpaid business entity taxes. An Ohio Department of Taxation tax notice or Ohio Special Counsel letter delivered to a personal residence does not necessarily mean that an owner/officer of the business entity is personally liable for the taxes of the company. Only a professional in tax matters can accurately make an appropriate determination and convince the Ohio Attorney General’s Office or privately hired lawyers (Special Counsel) that they are without statutory authority to levy a taxpayer’s personal assets. Removal of incorrect or fully paid negative credit bureau entries can also be an important concern to Ohio taxpayers.
THE OHIO OFFER AND COMPROMISE PROGRAM
The Ohio Department of Taxation has an Offer in Compromise (OIC) program (settlement program) similar only in name to the IRS Offer in Compromise program but with vast differences in execution. Here are the ground rules for settlement of Ohio tax debts:
- Doubt as to collectibility of the tax.
- Economic hardship (rarely granted).
- Doubt as to liability of the correctness of an underlying tax assessment. An Ohio taxpayer cannot question an underlying tax assessment more than 60 days after being notified of the assessment (or final determination) by the state unless the disputed tax bill has been prepaid. In essence the Ohio OIC program becomes a claim for tax refund in doubt as to liability cases.
- The state favors lump sum payments in settlement offers rather than payments over time.
- The decision of the Ohio Offer in Compromise unit is not subject to appeal as in the federal system.
- This office has found the Ohio Offer in Compromise administrative process frustratingly difficult.
- The Ohio Offer in Compromise program may only place a collection hold on levies for a short time – collection holds during an Offer in Compromise are not available when Special Counsel is presently active pursuing tax collection against an Ohio taxpayer.
- Ohio Offer in Compromise rules were changed to allow an Offer in Compromise submission without a lump sum payment up front.
- The Offer in Compromise Unit also handles innocent spouse issues similar in nature to well-established innocent spouse principles of Internal Revenue Code Section 6015. Relief may be available for an innocent spouse when the State of Ohio has made a tax assessment on a previously filed married filing joint return through an Ohio audit or the IRS information sharing program. An innocent spouse is generally liable for the tax represented by a filed tax return signed by both the non-innocent spouse and the innocent spouse. Post-filing variance assessments are subject to innocent spouse relief proceedings if the additional assessed tax liability was caused by the underreported income of the non-innocent spouse. If the IRS has ruled in favor of innocent spouse relief, then there is a presumption that innocent spouse relief will be granted in Ohio.
- The Ohio OIC program is not a recommended approach for dealing with Ohio assessments except for innocent spouse issues. The Ohio OIC process tends to be an exercise in frustration.
PENNIES ON THE DOLLAR PROMOTERS
There are national companies who routinely send “we can help” letters to those individuals and businesses who have recorded Ohio tax liens and Ohio judgments. These firms also advertise on radio, television and in local newspapers.
These firms are operating from offices in California, Washington, Texas, Washington D.C. and locations throughout the country. Over the years clients have come to this office stating that they initially wasted money employing national companies as these firms did not achieve any measure of success for Ohio taxpayers. The usual complaints were that promoters did not deliver on promises and charged high upfront fees.
Ohio taxpayers should check the Better Business Bureau or Dunn & Bradstreet before hiring any tax assistance firm. Taxpayers are also referred to Internal Revenue Service Bulletin IR-2004-130 which states that taxpayers need a “qualified tax professional” and should contact “enrolled agents, CPAs or attorneys in their geographic area with education and experience to assist them” with tax problems.