Home Healthcare Companies and Tax Liabilities: A Particularly Toxic Combination

Healthcare Tax LiabilitiesAs a tax attorney who deals exclusively with resolving tax debts, I see a disproportionately large number of home healthcare providers as clients.  Through the many home healthcare clients I have helped, I have learned that there are several aspects of the business model that put home healthcare businesses in grave danger of accruing a liability.  Worse, the nature of the home healthcare business model introduces some unique challenges in resolving a tax liability, once the business has fallen behind.

Home healthcare businesses are usually paid either by the patient’s insurance company or Federal Government healthcare programs like Medicare and Medicaid.  The insurance companies and the government have draconian billing and invoicing requirements that are often very difficult to navigate for the home healthcare business.  Worse, in many situations I have seen, once the home healthcare business has learned the correct billing and invoicing procedures, the insurance companies and government entities change the rules, requiring that the home healthcare providers start over again.  Even when the home healthcare business does everything right, the insurance companies and government entities will often delay payments, leaving the business in a serious bind.

Home healthcare providers help patients in their own homes by providing qualified medical professionals to meet their specific needs.  As such, the businesses are usually very decentralized.  Many of the companies who come to me as clients don’t have a central office.  Rather, they coordinate with their professionals through phone, email, and, in some cases, a central database.  This means that the businesses often have very few assets, and can offer no collateral for a loan to quickly bail them out of any financial difficulties, including unpaid taxes.  This lack of capitalization renders the business wholly dependent on payments from the patient’s healthcare coverage provider, even when those providers routinely delay payments.

On top of shaky collections from healthcare coverage providers, home healthcare companies tend to have a disproportionately large payroll tax obligation.  Healthcare professionals are well-paid, and rightly so.  After all, the provider may be a patient’s last line of defense against worsening illness, extended hospital stays or death.  For the home healthcare business, that means large payrolls, resulting in large payroll tax obligations.  Combine that situation with volatile, difficult cash flows from the insurance companies and government entities who are supposed to pay for their patients’ health expenses, and the home healthcare business may seem doomed from the outset.

Absolutely every home healthcare business I have had as a client has the same basic story about how they fell behind.  It was always caused by slow- or no-pays from accounts receivable, large payroll obligations, and the inability to pay the tax.  Most of my home healthcare clients have tried to borrow or to leverage future income in order to pay the IRS, but have been rejected by lenders, whose underwriters see the lack of capitalization as a red flag when reviewing a loan application.  Unpaid taxes certainly don’t help their plights.  This leaves my clients with nowhere to turn.

The first step to addressing any tax liability is to “stop the bleeding” and get current with tax deposits.  That means that the highest priority when I take a case from a home healthcare provider is developing a strategy to ensure that the taxes are paid in full and on time going forward, regardless of the problems collecting from the insurance companies and government entities.

Some of my clients consider factoring their receivables.  Factoring is not the worst idea, but the factoring company will end up taking a percentage of the business’s income, so it’s an idea that may be necessary albeit damaging to the bottom line of the business.  The best plan is often to do the hard work of budgeting, reducing as many expenses as possible, and looking at tax compliance as the non-optional requirement that it is.  With emphasis on efficiency, and prioritization of tax deposit compliance, my home healthcare clients have usually managed to clear the compliance hurdle, which puts us in a position to go on the offensive and begin negotiating with the IRS for a plan to resolve the debt.  Until the clients are in compliance, we are limited to a defensive posture where we will do everything within reason to prevent or postpone enforced collections.

Attaining current compliance, and beginning negotiations with the IRS quickly are extremely important to any taxpayer, but more so to a home healthcare business, because so much of the business’s income usually comes from Medicare and Medicaid, which are Federal Government programs.  If negotiation and resolution of the liability are delayed due to inaction or continued non-compliance, I have had several clients become the victim of the dreaded Federal Payments Automated Levy Program (FPALP.)  The FPALP is discussed in more detail here.

For the purposes of this article, suffice it to say that the FPALP is a continuous levy of all payments from the Federal Government to a taxpayer with a debt to the Federal Government, and that it is near-impossible to stop short of entering into a resolution agreement with the IRS.  Keep in mind that there can be no resolution agreement without current tax deposit compliance, which can be impossible to achieve due to the fact that most or all receivables are being sent to the IRS.  This is a vicious and potentially catastrophic cycle.  Indeed, FPALP can very easily force a home healthcare organization out of business, so I cannot overemphasize the urgency of addressing the situation as quickly as possible.

The best way to have the FPALP levy removed is to agree to an Installment Agreement with the IRS (or negotiate some other form of resolution such as an Offer in Compromise).  However, before an Installment Agreement can be approved, the taxpayer must be in filing and deposit compliance.  That means that the IRS expects a business to make all current tax deposits in full and on time, even when up to 90% of their income is being diverted by the FPALP to pay toward their back taxes.  There is no easy way to accomplish this, but I have managed to pull my clients out of this spiral.

Another problem that is common to many home healthcare businesses is low profitability.  When negotiating an Installment Agreement, the taxing authorities are constantly pushing for a higher monthly payment than the taxpayer can reasonably afford.  Home healthcare companies usually deal with a large volume of money, so their gross income is very high in many cases.  However, with the huge payroll obligations, there is not much money left over at the end of the month for payments toward the back taxes.  The taxing authorities often have a difficult time understanding this, but I have managed to negotiate Partial Pay Installment Agreements, or even Currently Not Collectible Status for many of my home healthcare clients.

Some of my favorite clients have been from the home healthcare industry.  They provide a very important service to a typically under-served group of patients, and they do it with caring and devotion.  It is definitely possible to navigate and resolve tax compliance problems for a home healthcare business, but it is important to be aware of the specific challenges and obstacles faced by the industry.  That is why, more than many industries, home healthcare businesses should seriously consider enlisting the help of a a tax attorney experienced in dealing with tax collection cases when they encounter a tax collector knocking on their door.  I would strongly encourage a home healthcare business to seek professional help immediately once its unpaid taxes exceed $10,000.

We have compassionate and knowledgeable tax professionals here at Fortress Financial Services who would be happy to evaluate your situation and recommend an appropriate and realistic resolution plan at no charge.  All you have to do is contact us.

About Peter R. Brantley, Esq.