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Ages ago I read a nice story that sounds quite reasonable, but might be complete nonsense. Here it goes:

A private detective in the USA has lots of lawyers as customers. And they are notoriously bad at paying their bills. As a result, the detective owes money to the IRS. He talks to the IRS on the phone, and explains that he would love to pay his tax bill, but can't because so many of his customers are not paying their bills.

The tax officer says "I'll come to your office on Monday morning. Please have your 20 largest unpaid bills ready".

Monday morning, the tax officer arrives, takes the first unpaid bill to a lawyer, and calls: "Hi, this is John Smith. I'm informed that you owe private detective X an amount of $Y. Is that true?" Then the story explains (whether true or false I don't know) that in the USA it is quite possible to delay a payment legally, but it is illegal to falsely claim that you don't owe a debt. So when the lawyers office confirms, he says "I'm John Smith from the IRS, and I would ask you to pay the amount you owe to the IRS. Today. " And two hours later, the detectives tax bill is paid.

Question 1: Is it indeed illegal to lie about owing money?

Question 2: Would a company owing someone money that is past due payment be obliged to send the money to the IRS to pay the person's tax bill, assuming that the tax officer and the person owed state that this should happen?

Or is this story not reasonably possible?

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    Seems like a bogus story. A private detective will likely use the "cash method" for accounting and so there is no tax due until he actually gets the money. And the likelihood of the IRS actually intervening is close to zero.
    – Hilmar
    May 26, 2019 at 21:20
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    This could be something for skeptics.stackexchange if you find a source of the story.
    – NoDataDumpNoContribution
    May 27, 2019 at 9:20
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    Is the tax officer the brother (or other near relative) of the detective?
    – EvilSnack
    May 27, 2019 at 21:08
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    No statement about the IRS debt being linked to the PI's current financial situation- he could easily owe thousands of dollars. He spent the money he should have paid in tax.
    – user2617804
    May 28, 2019 at 9:46
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    @phoog Even then, highly unlikely. The PI would then book the income and take a deduction for bad debt. Also, if you can't pay, there is a process to work out a payment plan that is nothing at all like what is described. There are financials to fill out and a proposed payments to submit.
    – ohwilleke
    May 28, 2019 at 17:57

1 Answer 1

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  1. There is no general law making it illegal to lie about debts, or anything else. It is illegal to lie to a law enforcement officer in the course of an investigation. (And of course it is illegal to lie in court testimony or when otherwise under oath.) But it is in no way unlawful to decline to answer, unless a proper court order has been obtained, or other lawful means of compelling an answer. I would expect any law office to respond to such a question with something like "Am I/we being investigated? If so, send the appropriate notice and our lawyer will consider what we should tell you. If not, tell us what information you want, and we will consider and provide a written response in due course."

  2. If a taxpayer has been found to be delinquent in paying taxes, in some cases a court order may be obtained seizing assets, including unpaid debts. But no IRS agent can make such a claim on the spot, and indeed for a client to make such a payment without such a court order, or the order of an IRS tribunal (or the creditor's written consent) would itself be unlawful and would subject the lawyer to a suit by the PI (Private Investigator).

When the lawyer pays a service provider, a 1099 must be filed with the IRS. If the PI is a corporation, a different form is used, but a record of payment is still required. As failure to timely file such a form is a violation of the tax code, an accusation of paying without filing would permit the lawyer to decline to answer under the Fifth amendment. If the lawyer did pay and did file a 1099 or other documentation, the IRS would know what had been payed, and would not need to confront the PI.

Also, as the comment by Hilmar points out, a PI would be likely to use the cash accounting method, and so would own no tax on work performed but unpaid (as yet). So unless the IRS agent thinks the PI was paid "off-the books" and is intentionally failing to report the payment, there would be no point to such a question. And if that were he case, the lawyer would be very likely to decline to answer.

I find the story quite implausible.

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    It's a shame. I liked the story :-) The point about cash accounting (it's only income and you only owe tax if/when the bill is paid) is something I completely missed.
    – gnasher729
    May 26, 2019 at 22:35
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    @gnasher729 Yes, but to me the point more telling is that an IRS agent just doesn't have the power to say "do this" and have people, esp lawyers, comply rather than say "where's your warrant / court order"
    – David Siegel
    May 26, 2019 at 22:53
  • A 1099 is usually not required when paying a corporation or LLC, and a PI would be insane not to be using one for all variety of reasons.
    – chrylis -cautiouslyoptimistic-
    May 27, 2019 at 9:47
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    @chrylis The answer says: "If the PI is a corporation, a different form is used, but a record of payment is still required." Do you think that is incorrect?
    – David Siegel
    May 27, 2019 at 11:03
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    The lawyer (like any business) is required to keep its internal books, but the payment is not usually reported directly to the IRS.
    – chrylis -cautiouslyoptimistic-
    May 27, 2019 at 21:07

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