A DPN, the ATO’s weapon of choice!

Given the American Taxation Office (ATO) paused most outbound debt recovery in April 2020 it is no surprise that many business owners may have inadvertently allocated funds that should ideally have been distributed to the tax office, for business operations or personal expenses. Those days of the ATO not chasing debtors are most certainly over. With near $60B of outstanding tax debt obligations burning a hole in the tax offices pocket, they need to collect, and the Country needs them to in order to help the government pay for the debt accrued during COVID.

It has been said that the ATO is spitting out up to 120 Director Penalty Notices (DPN’s) per day at the moment in an effort to start collecting outstanding tax debts. This came after issuing circa 52,000 warning letters to debtors back in April 2022. The chickens have most certainly come home to roost. Pre COVID the standing play book for the ATO was to look at winding up an entity in an attempt to collect tax, however in many cases this can result in the ATO – being an unsecured creditor – collecting cents in the dollar and the expense of administrators being involved. It now appears, in 2022, that the preferred option, in most cases, is the issuing of a DPN first. A DPN issued to a director can convert previously ‘company’ debts to become a personal liability of the director(s). There are two types of DPN’s a director can receive, one is a 21 day notice allowing the director up to 21 days to deal with the notice and debt therefore resolving the request under the demand, the other is a Lockdown DPN, normally issued when returns are lodged over 3 months late and unpaid, this immediately makes the director personally liable.

Becoming personally liable for a debt that was unsecured and a liability of the company may cause directors significant financial problems and stress, this may also jeopardise their personal asset position as even though the debt at this time remains technically unsecured, by the director becoming personally liable it may open them up to bankruptcy proceedings if they do not comply and therefore any assets they own come into question. So, what’s the way around a DPN and is it the end of the road if you or your client receives one?

To deal with it, well, the number one solution is to pay your tax on time, then you never have to worry about a DPN but obviously that isn’t always possible with the ups and downs of running a business. Talking to the ATO about active debts is a much better outcome than ignoring them and hoping the debt will go away. Generally speaking, the ATO are very good to deal with if you are upfront and have an intent to pay, so this is the second-best course of action. If neither of the two prior options have occurred and a DPN has been issued, you must deal with this debt, no more time for head in the sand business, you may need to source financial assistance.

There are some top-quality tax negotiation and consulting firms, you could arguably be seeking their advice at any stage of the tax debt cycle not just when it gets late in the piece. These tax and consulting firms may be able to help negotiate workable terms to pay the debt and help keep the ATO at bay. Financing out the tax debt is potentially another option from step 1 all the way to DPN and wind up’s etc. Thompson Financing may be able to assist you as we specialise in paying out tax debts, and quickly. For Thompson Financing to lend, you must have property assets but there are other firms out there that can also assist in lending against debtors of the company etc.

The main take away from this is that DPN’s are an incredibly powerful tool, that work very well for the ATO. At the end of the day, tax debts need to be paid, it is just the way the world works, but there are plenty of professionals that specialise in dealing with them when things have taken a turn. You may need to look outside of your incumbent accountant as for some accountants, a tax debt that is spiralling out of control including wind ups being issued or DPN’s, may be out of their field of detailed knowledge. You may then need to engage a specialist to deal with the matter and with it, the stress, so you can get back to what you do best, running a business and making a living.