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 many Ohio tax assessments. However, Ohio tax lien filings remain the same. A Common Pleas Court judgment/tax lien filing can still be effective to tie up real estate parcels for up to 40 years. Credit scores are adversely impacted.
This website will attempt to clarify the complexity of Ohio tax administration.
THE OHIO ASSESSMENT/COLLECTION PROCESS
But for straight-forward unpaid but filed Ohio IT-1040 taxes (Ohio Individual Tax Return), the Ohio assessment process can turn out to be a nightmare to comprehend. Even with Ohio income taxes, the process can be mystifying if the taxpayer has not filed all required individual or business tax income returns. The following information will help in understanding Ohio taxpayer rights and shed light on the various correspondence received during the Ohio assessment/certified court judgment/collection process.
TAX ASSESSMENT PROCESS
An Ohio 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. Incorrect post business closure tax assessments are common. Alternatively, an Ohio tax assessment can occur for a filed or unfiled tax return when the Internal Revenue Service/Ohio Department of Taxation information-sharing program results in 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. This will result in an Ohio tax assessment.
Payroll tax judgments can simply appear against a company that has not filed all required payroll tax reports upon business closure without finalizing required state dissolution and notice paperwork. Obtaining a corporate or limited liability company Ohio dissolution has become difficult because of 2012 legislation requiring state tax releases be obtained. The state will estimate payroll taxes for subsequent non-business years if not properly notified of a closed business, and 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 awareness. Ohio tax assessments historically were collectible through levies for as long as 40 years. Legislation alters Ohio collection authority to as little as 7 years with offsets to tax refunds and roadblocks to real estate judgment problems being the state’s only remaining tools after levy and garnishment authority has lapsed.
An Ohio tax assessment becomes due and payable upon notice 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.
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 fight a notice of proposed tax assessment. Administrative appeals hearings are limited to issues relating to proposed tax assessments and tax return adjustment matters and cannot be utilized to resolve Ohio collection issues. Missed notice deadlines by Ohio taxpayers are the norm.
OHIO TAX LIENS
The existence of Ohio tax liens (also called judgment liens) 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 tax certification and a Common Pleas Court filing of a judgment. It is very common for Ohio taxpayers to first become aware of an Ohio tax lien/judgment when trying to sell, buy or refinance a residence or other financial activity requiring a credit check.
Proposed Ohio taxes 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. The Clerk of Common Pleas Court will enter a judgment against the Ohio taxpayer. The judgment allows for collection action such as a levy or garnishment and may include the occasionally required “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. Multiple party Ohio correspondence is 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 judgment lien must be canceled after 40 years.
OHIO STATUTE OF LIMITATIONS ON COLLECTION
The statute of limitations for assessment and collection of Ohio tax debt varies. Some Ohio statutes are 7 years while other statutes are as long as 40 years. Unlike the clear 10-year collection statute for federal taxes, Ohio collection authority will vary with the tax and historical fact pattern. Ohio judgment liens and Ohio collection levy authority are controlled under different statutes. Judgment liens and collection levies are distinctly different procedures.
The Ohio collection statute of limitations is now seven (7) years from the date of the tax assessment. Ohio Revised Code Section 131.02(F)(3). A taxpayer will not hear this from Ohio collection representatives. The seven (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 judicial proceedings to collect taxes. For purposes of the law, a court action must be initiated within the seven (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 any collection action judgment such as a creditor’s hearing, wage garnishment, bank levy, or other attempt by Ohio Special Counsel to collect on the tax assessment.
The Ohio Senate Ways and Means and Economic Development Committee, in the period the legislature was working on the Bill (House Bill 390), 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 seven (7) or more years, Special Counsel cannot begin an action to collect on the judgment. The key is seven (7) years from the assessment date rather than the date of the judgment.
Therefore, Ohio Special Counsel words to Ohio taxpayers may not have the backup of the Common Pleas Court if Ohio Special Counsel is initially requesting action on a Common Pleas Court judgment which is seven (7) years from the date of assessment. 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 seven (7) year rule is generally ignored by Ohio Special Counsel. The reason may be that favorable taxpayer legislation of Ohio Revised Code Section 131.02(F) has not made its way into the courts for interpretation. Ohio Special Counsel seem to be conveniently ignoring the seven (7) year rule or choosing their own interpretation of this taxpayer friendly legislation.
The seven (7) year collection statute of limitations date can be increased by taxpayer actions by certain taxpayer Ohio administrative actions or by bankruptcy.
A 10-year-old IRS tax debt (as well as a federal tax lien recorded in the taxpayer’s county of residence) expires under 10 year statute of limitation provisions in the federal system. 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 distinctly different collection law and tax lien law. Poorly written correspondence is also a factor.
The State of Ohio relies on recertification of tax liens/judgments for many, many years. Ohio taxpayers can be surprised and first become aware of an old Ohio tax lien 20 years after the Ohio lien was initially filed. However, the tax lien judgment itself may become dormant and not enforceable if the Attorney General’s Office has not recertified the judgment (refiling every 15 years) under certain benchmarks required under Ohio Revised Code Section 2329.07(B). A Common Pleas Court judgment recertification does not change the seven (7) year requirement for enforced collection action to begin within seven (7) years of the tax assessment.
OHIO PROBLEM RESOLUTION OFFICE
The Department of Taxation has created a Problem Resolution Office (PRO) pursuant to the Ohio Taxpayer Bill of Rights at ORC 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 even zeroed out. The key is hardcopy 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.
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. Personal assessments against business owners can also take place with limited liability companies which have not paid certain Ohio income and/or 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 but not paid over to the Department of Taxation under sales tax and income tax reporting and payment requirements. “Trust fund taxes” or “trust fund penalties” are Ohio taxpayer assessments against individual taxpayers 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 a business entity in cases where the business entity withheld taxes but did not pay over the sales taxes/employee Ohio income taxes to the Department of Taxation. Responsible 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 back withholding and sales taxes, Ohio has, on occasion, assessed the owner employee with an individual tax assessment on his individual income tax return (Form IT 1040) advising the taxpayer of nonpayment of his/her Ohio income tax. This can drag the spouse of an owner taxpayer into tax assessments he/she knew nothing about and which should be totally free of liability under the law. Ohio Revised Code Sections 5747.06(B) and 5747.13(A). The state can incorrectly claim that the innocent spouse is also liable because the state classifies a husband and wife as one taxable entity. This is incorrect in cases involving the failure to pay Ohio income tax withholding by the spouse’s 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 notices do not clearly distinguish between a business entity tax assessment and a personal “trust fund” liability tax 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 Ohio Attorney General letters are holding them 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 is personally liable for a company tax debt. This is not necessarily the case. An understanding of Ohio tax law is critical to avoid or remove personal tax liens and tax debt obligations for those individuals who are not responsible company officers under the Ohio Revised Code. Collection agencies and Ohio Special Counsel will not necessarily volunteer this information.
This office has seen numerous cases wherein credit bureaus, title companies, and even Common Pleas Court judgments have misinterpreted fact patterns to incorrectly conclude personal liability lies for 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 lien and seize a taxpayer’s personal assets. Removal of 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 states 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”.