The EIDL Time Bomb: How the Treasury Is Now Seizing Refunds Without a Court Order

David Wiener: Imagine you took a COVID era EIDL loan years ago. The business changed, maybe it even closed. You haven't thought about that loan for a long time. Then one day, your tax refund just doesn't show up. No warning letter you noticed, no lawsuit, no day in court. The federal government simply took it. That's not a hypothetical. That's happening right now to over a million business owners. Today we're going behind the scenes of what happens after the planning is done, after the deductions are taken, after the entity is set up, when the government comes to collect. This is the episode almost nobody in the tax content space is covering correctly. A few episodes back, we sat down with attorney Jason Wiggam We talked about how tax trouble can happen to anyone audits, notices, the shame spiral. Today's guest lives on that same battlefield, but with very specific and very timely targets. What happens when your EIDL loan defaults and the Treasury Department takes over collection? Before we get into it, if you or someone you know took a COVID-era EIDL loan, don't skip this episode. Stick around because what you don't know here can cost you your next tax refund. Let's get into it. Welcome back to the Tax Strategy Playbook, the show where we turn complex tax rules into practical cash flow strategies for real estate investors and business owners. I'm David Wiener, also known as

Phillip Zagotti: that is not going be problem. And so we're to to find some space that will take advantage of these challenges and find a way to get this done.

David Wiener: Mr. Cashflow. My job is to help you use the tax code as a tool, not something that eventually uses you. Joining me today is Philip Zagotti JD and CPA founder of North Star Law Firm in Houston. Philip is one of the rare practitioners who's both a licensed attorney and a CPA. He's admitted to the U.S. Tax Court, federal courts in Texas, and the California State Bar, and his entire practice is built around tax defense, tax resolution, and forensic accounting for people facing real IRS and Treasury pressure. He's also been quoted as a tax expert everywhere from Kiplinger to Yahoo Finance. Philip, welcome to the Tax Strategy Playbook.

Phillip Zagotti: Great to be here. Thanks.

David Wiener: I I heard something that stuck with me, that most tax content covers the planning side, but almost nobody covers what an actual exam or collection action looks like once things go wrong. Why do do you first of all, do you agree with that? And and if so, why do you think that gap exists?

Phillip Zagotti: Well, I think it does exist and the reason for that is because look who's doing the actual tax returns, right? Generally speaking, you're going to a CPA firm, they're doing the tax returns and they're very good at that. You know, have CPAs, EAs and they're doing that. But their job, generally speaking, is to prepare tax returns and to give you guidance. Most CPAs, most smaller CPA firms don't necessarily get into hardcore tax resolution kind of situations that they may help you write a letter here or there that kind of thing but But they really don't think with the end in mind as much as they do with you know getting the tax return done and doing it in a way that that that will most likely but not necessarily You know keep you from getting into an audit right? It's all about balancing and probability

David Wiener: That makes sense. Let's start with what's actually happening right now because most people have no idea that the ground just shifted underneath them. This isn't old COVID news. This is something that's going on right away. Walk us through what happened on March thirty first and why the government suddenly has new teeth here.

Phillip Zagotti: Right, so in March, late March, the SBA basically sent over 562,000, but who's counting, SBA loans. They were mainly EIDL and PPP-related loans. Most of them were non-performing. They sent them to Treasury for enhanced collections, which means the SBA wasn't getting any money directly from the borrowers. So yeah, it's now sitting with Treasury. Treasury in turn actually sent it off to some private collection companies to start pushing forward with, but Treasury also has some collections capabilities

David Wiener: What what kind of scale are we talking about here? How many loans? You said five hundred and how many? And how many how many billions

Phillip Zagotti: 562,000 loans.

David Wiener: of dollars are we talking about?

Phillip Zagotti: billions, billions. I don't remember the number off the top of my head, billions of dollars worth of loans. Some of the,

David Wiener: So they're serious about it.

Phillip Zagotti: right, well, some of the loans had 25, $35,000. Others had much more. On a daily basis, I talk to people who need help, who have loans in excess of a million dollars.

David Wiener: Wow. Cause the SBA's own inspector general found that they'd recovered less than one percent of what had been charged off. So what does that tell us about why Treasury and not the SBA is now driving the collection?

Phillip Zagotti: Well, actually under 31 USC, SBA has to, after a certain period of time, push those loans over to Treasury for collections. And the thing is SBA, in the past, what they've normally done is the banks make the loans, the banks do a little bit of collections. SBA, generally speaking, on say your 7A loan, for instance, will kind of act as a backstop if it goes bad. SBA will pay the bank for it and then it'll end up in treasury anyways. COVID was different, right? Because they were making loans directly to business owners. SBA doesn't really have a collections function that's actually built out. It's not like the IRS where the IRS has a system and process and place and rules for everything. So SBA was really the wrong place in my view in the first place to actually be doing the collections. on these outdated and unperforming loans. So it only made sense to get it over to Treasury because that was probably where it needed to be in the first place.

David Wiener: So what was the what was the exemption up until now that just expired?

Phillip Zagotti: Right, so they basically gave everybody a moratorium where you didn't necessarily have to pay. There's a lot of people that were also on payment plans, smaller payment plans. When I mean payment plans, I mean pittance, right? You could have somebody with like a $500,000 loan paying 25 bucks a month. They ended that,

David Wiener: Wow.

Phillip Zagotti: right, and sent them over as non-performers. They also turned around and anybody who wasn't paying, they sent those as well. If you were actually up to date and you were actually making your payments on time, you did not get sent over to Treasury, you're still good to go. And

David Wiener: As long as you don't fall behind, right?

Phillip Zagotti: I've had multiple clients that we've been able to kind of get it out of Treasury back over to SBA, make the payments to get them caught up, and then the answer to them is do not ever miss a payment ever again. or get this thing paid off sooner than later, which is hard to say for a loan that's 3.75%. A basic financial theory would say, at that thing right because you can probably make more money off of it by deploying it correctly in your business or in some kind of like a bond or something safe. But here, there's a lot of massive risk involved.

David Wiener: So if if somebody took an EIDL loan years ago and they just haven't thought about it ever since, what's the first thing they should go check today, like today?

Phillip Zagotti: I would say the first thing you need to do is get into that SBA portal. See what the status of that loan is. If it was sent over to Treasury, it will basically say so and your documents won't exist in the SBA portal anymore. So that's the first thing to do. If it is with SBA, I mean if it's not with SBA and it went to Treasury, the next thing to do is to call Treasury. They'll probably say they can't help you and to call some other company and that's probably the private collection firm that they've actually assigned the debt to.

David Wiener: So Treasury doesn't really do collections on their own, like the IRS

Phillip Zagotti: Nope.

David Wiener: does?

Phillip Zagotti: Yeah, they don't have a phone bank of people sitting there kind of calling you up and hounding you for the money and asking when the payment's coming in. They can do things to kind of enhance the collections, right? They can offset your tax return. They can go after your W-2 income and garnish that. If you're a business that owes the money and you're still in operations and the federal government or state governments are some of your vendors, they can actually offset the entire payment there. But they do not have a phone bank of people who are calling you up asking for the money. They subbed that out.

David Wiener: So the collectors are private. so the takeaway, I guess, so far from this is the exemption that was quietly protecting borrowers is gone. It's just expired. The government's already moved hundreds of thousands of loans into a more aggressive collection system.

Phillip Zagotti: you

David Wiener: And if you took one of these loans, you just can't assume that it's forgotten.

Phillip Zagotti: Absolutely correct. And most likely it's not. It's just sitting somewhere and either they haven't gotten to you or they don't have the correct address or the proper means of communicating with you. But that doesn't mean that it's out there and it doesn't mean that it won't kind of show up and t-bone you at the most inopportune moment when you least expect it.

David Wiener: So for my listeners, if this is landing for you, the best way to help help us get this show to keep reaching people who need to hear it is to leave us a rating and review on Apple Podcasts or Spotify if that's where you're listening, or head over to TaxstrategyPlaybook.com and leave us a review right on the site. Takes less than a minute. It's the single biggest lever for getting episodes like this one in front of more business owners. Okay, so let's get into the part everybody gets wrong. Who's actually personally on the hook and what the government can really take? Let's clear up the biggest point of confusion, and it's really two separate questions, I guess. The $200,000 threshold decides who signed a separate guarantee instrument, but that's not the same as who's personally liable. Walk us through why a sole proprietor or a general partner is on the hook for the full balance, no matter what the loan size is, since there's no entity standing between them and the debt.

Phillip Zagotti: Right, so here's how that worked, right? As a general kind of tier, anything over $25,000, the SBA took a lien on the property of your company. Just a lien, not affecting the individual business owner. Then as you said, over $200,000, it became a personal guarantee as part of the agreement. Over $500,000, many of them wanted an actual your house is collateral as well. So depending on the contract, those were the general rules. I have seen some SBA contracts where some of those clauses were not necessarily applied to those contracts. So every contract could be different. One of the things you need to understand is that when the SBA was doing this stuff back in the day, The people who were working there creating these docu-sign contracts, they were drinking from a fire hose. were going absolutely nuts. SBA were hiring these people who last week was a cashier at the grocery store and this week... is scrambling to try to put loan packages together and get signatures. So I've seen a lot of interesting kind of stuff. those are the general rules, but don't necessarily take that as a solid kind of set in stone rule that applies to you. You really need to go look at that contract to make sure exactly what it says because I've seen some funny stuff.

David Wiener: But it is possible that a sole proprietor or a general partner is liable for the full balance, right?

Phillip Zagotti: Correct, so like we were talking about the $200,000 is the threshold for personal liability, but that's assuming that you have an LLC corporation, something like that between you and the loan. What will happen is that if you're a sole proprietor, obviously you are the company and the company is you and you're 100 % responsible for that. I've also seen multiple situations where people have an LLC. They thought the loan was being made under the LLC, but then when we go back and we look at the paperwork, it has them in their personal capacity, not as the entity or the entities mislabeled in it is an LLC, but it was never labeled as that. And so it looks like it's their personal guarantee. And these collection companies are going after them as though it is. So yeah.

David Wiener: And a single owner L L C is basically the individual anyway.

Phillip Zagotti: Correct, but at least you have the LLC there to protect you on the state side.

David Wiener: Right.

Phillip Zagotti: But like, yeah, if it's a DBA, right, you know, if it's just a straight partnership, you know, that liability flows through. And so, yeah, you got to be so careful with that. You can't just make the assumption my loan was under $200,000, so I'm good. That is not the proper stance to take.

David Wiener: I also talked to somebody who said, well, I don't need to worry about it because I closed my business. So if someone's borrower entity is dissolved, no longer exists, does does the liability just disappear?

Phillip Zagotti: So no and yes, so obviously if it's under $200,000 that was an LLC that the liability doesn't flow through to the individual business owner Then the proper steps are really to contact SBA let them know that that the business is shut down and no longer operational You'll have to fill out a little bit of paperwork and give them some information. This is where people get into a lot of trouble here Because I get calls all day long for people who say well my business is shut down And it's kind of like, okay, that's great. But remember, over $25,000, the SBA got a lien on all the company's assets. So what did you do with those assets? Did you liquidate them? Where did they go? Did you actually pay the SBA? The one thing that I don't like seeing is many times you'll have people who say, well, this company A over here. It has the loan. This company over here, I just started it. And so I'm basically going to transfer all my customers and all my assets over to this company and just keep going from scratch. And that's a bad thing because that lien stays with the assets. So if that lien was in company A and you switched it over to company B, you're now in a situation where you've now transferred that liability to the new company, which you most likely didn't intend to do. So that's the first issue. But let's say that the business is shut down, you do everything correctly, and the SBA does the forgiveness, right? And you're a tax expert, you know where I'm about to go with this. Now you've got a 1099C, forgiveness of debt, that's going to pop up in a year or two and create potential income for the business owner on the back end, right? So you've got to be careful of this. And the other scenario that I find a lot is that the people who shut down the businesses with SBA loans. Maybe they're a little bit older. You know, it's amazing to say this COVID happened back in 2020. You and me, you know, we're six, seven years out from that. You know, some of these people who have these businesses, they're retiring now. And one of my warnings to them is, hey, you can shut down the company, get the forgiveness of the loan, get a 1099 C and a year or two. And now, you're on social security, Medicare, all that other stuff. And now that increased income could potentially turn around and create an IRMAA adjustment two years after that. So you could be going four years out and still be dealing with some of the after effects of shutting down your business and the forgiveness of this loan.

David Wiener: And that could hit really hard too.

Phillip Zagotti: So you really have to think this stuff through.

David Wiener: So let's talk a little bit about the difference between offset and cross servicing. Cause people lump them together

Phillip Zagotti: Mm-hmm. Yes.

David Wiener: and they're they're not really the same thing, right?

Phillip Zagotti: No, no, right. I mean, being able to take your money and being able to actually take your wages are two different things, right? They're both under 31 USC, but they are two different things. You can have somebody who has their tax refund taken from them, but doesn't necessarily have their W-2 garnished. So they're two different things and one's not necessarily correlated with the other. So all because you're not getting that 15 % garnishment on your wages doesn't necessarily mean that you're not going to get your taxes intercepted at the end of the year. You just got to be so careful with that.

David Wiener: Wow. You know, and we said almost nobody covers this correctly. What is an e

Phillip Zagotti: you

David Wiener: what does an actual exam or a collection action look like day to day for one of your clients once both are both of these are in motion?

Phillip Zagotti: Well, luckily, it's not the collections activity is not as bad as it would be for the IRS. The IRS can be quite brutal. And

David Wiener: Yeah.

Phillip Zagotti: some of my clients mistake that that that that continued stress that you get from an IRS exam, that it doesn't exist in the SBA collections world. The reality is this, the third party collections companies that are going after these people right now. have very limited power. And they have very limited options. They can offer a payment plan, Or payment in full are basically the two that they push. And there's a few reasons for that. Number one, treasury actually is the one that the offsets and intercepts and all that other stuff. The thing is this though. When that loan went from SBA to Treasury, there was a collections fee added to it, a 30 % collections fee. I say 30%, it's 28 to 30, it kind of depends, it's not an exact number. But here's the thing, that 30 % collections fee that they added to that for the joy and privilege of being collected on by Treasury, that money is actually the money that they're paying to that third party collection company to a very large extent. in order to provide the collections function. these third party collection companies, not interested in helping you get that 30 % taken off the fee. They're not interested in helping you too much because they're not going to give up the fee that they're going to get paid for getting you into that 10-year payment program. be very careful with that. You really need to be talking with Treasury, not with third party collection companies. But as a result of that, the letters, while a little bit threatening from the third party collection companies, there's not really hardcore collections going on. They can threaten stuff, right? But they can't really follow through on half of it. Treasury can. And they can ask Treasury to do it. again, even Treasury. I mean, outside of being able to take your tax return and, know, garnish your wages up to 15%. And even that has a little bit of a uniqueness to it because it's after tax. And if you have other things going on in that, in that W-2, like maybe child support and other stuff, that sits behind it. And Treasury will not allow that 15 % addition to reduce your overall W-2 check. by more than 25 % overall.

David Wiener: And a lot of it a lot of it comes down to basically the back end is a lot less painful when the front end was built correctly, right?

Phillip Zagotti: Right, right. It's amazing how it works as compared to taxes.

David Wiener: Well, I you know, I I work in the area of cost segregation and and R and D tax credits and those kinds of things. And it's the same thing. The front end matters so much how you structure your entity, how you document

Phillip Zagotti: Mm-hmm.

David Wiener: things like real estate professional status, how you plan for depreciation, knowing the end from the beginning, those kinds of things.

Phillip Zagotti: you

David Wiener: It applies to all of this.

Phillip Zagotti: Yes, absolutely. If your Ts are crossed and your Is are dotted, it makes life a lot easier. Most of the people who deal with these issues, a lot of them haven't filed tax returns in years, right? You know, a lot of them, like you said, the businesses are gone or they've shifted over to another business. And generally speaking, it's a little bit of a mess and it makes it worse. So if you have your... T's crossed, your I's dotted, if you've turned around and you have your loan documents and you actually know what happened with the businesses, it works out great. But that's not,

David Wiener: Much easier.

Phillip Zagotti: yeah, and it's not the average, you know, everyday person with a small business who was scrambling during COVID just to try to make ends meet and keep the doors open, right?

David Wiener: I I get that.

Phillip Zagotti: Yeah, and in some ways, you know, my heart goes out to them, right, because they were struggling. Correct.

David Wiener: It was just a matter of survival at the time, you know, just doing whatever you need to do to stay afloat long enough until the the crazy went by and we're able to get back to normal, such as it is.

Phillip Zagotti: Correct. Yep.

David Wiener: So the now we know what's actually coming. We know which regime we're dealing with. I want to turn this into an actual playbook. So I'm gonna I'm gonna list some some steps and tell me if you agree with these steps. Or if you'd add anything or change anything. And this is the action list. Five steps if you have an EIDL loan you're not fully sure about. And maybe one or two will surprise you. So step one I would

Phillip Zagotti: Mm-hmm.

David Wiener: say is find your status. What's the fastest way for somebody to find out exactly where their loan stands right now? They go to SBA first or they go to treasury first?

Phillip Zagotti: Go to SBA first, try to log into your portal. That will give you lot of information right off the bat. If you can't find anything there, then that means that your loan is off to Treasury.

David Wiener: Okay, I'd say step two is know your number and know your entity. once they know who to go to, they need to know two things, their number and their entity. How should somebody figure out whether they signed a guarantee or whether their business structure leaves them exposed either way?

Phillip Zagotti: Right, so as far as the loan documents themselves, if you don't have it, and I've had a lot of clients who don't, and Treasury, as we said, it's been shut down, right? Because they're no longer servicing your loan. You gotta go to Treasury, you gotta ask them for that. Sometimes Treasury will be nice and shoot that right on over to you. I've had other times where they don't know the loan number, right? And so it becomes a little bit harder. Sometimes they have multiple loans and they don't remember the loan numbers of every single one. Sometimes the loan numbers were spread out over multiple businesses. In that case, we've been doing FOIA requests, Freedom of Information requests, sending that to both SBA, Treasury, and the third party collections company that has their file, and literally doing FOIA requests for these documents just to be able to get them into our client's hands to better assess what actually is going on.

David Wiener: That makes sense. I'd say step three is knowing the deadlines. So walk us through briefly the deadlines. There's a written hearing right on wage garnishment and requesting it on time stops the garnishment from starting while it's pending, right?

Phillip Zagotti: Right, right. So here's what should have happened. And people get confused on these timelines. So let's go back to the very beginning. SBA should have sent a 60-day letter letting you know that they were going to send that to Treasury. I'm finding that many times those letters actually happened in 2024, 2023. Nobody paid attention to it. But this is the reason getting that file is so important, because if they didn't do that, if they missed that step, you can get it out of Treasury back to SBA and try to figure it out there, get the 30 % collections fee removed, and you have a better time trying to resolve it there. Once it went to Treasury, there should have been another letter kind of you know that the 30 day, a 30 day letter letting you know that the 30 % collections fee was going to be added. I found multiple times where that hasn't happened. And then after that, if they are going to garnish your wages, you have 30 days from the time that the... that you get that information to actually go fight it. And that is actually a very important date and you need to actually calendar that, make sure that you actually dispute it because you can't actually stop that from happening. And

David Wiener: Okay.

Phillip Zagotti: there's other things you can, like a lot of people, they're living hand to mouth, they're paycheck to paycheck, right? And so a 15 % reduction in their W-2 income, that,

David Wiener: That hurts.

Phillip Zagotti: That could be night and day, right? so if it creates financial hardship, you've got another reason to ask for that not to happen on top of everything. The other issue that I'm noticing now is that you've got a lot of that, small businesses that have, the office manager is also the accountant, also the HR person, and they don't know how to properly calculate that 15 % reduction. It's hitting on say, the full the full weekly or biweekly pay and not the after tax and other deduction amounts. And so I'm finding that's happening every so often as well.

David Wiener: you said that the letters should have been sent. I go back to the episode I did with Jason Wiggum and he said so many clients come into his

Phillip Zagotti: you

David Wiener: office with a bag full of unopened IRS letters just because they're

Phillip Zagotti: Mm-hmm.

David Wiener: afraid to open them up. So maybe the letters did go out and they just kind of didn't open or or they opened them and disregarded them. something you said, I think, is step four. Understand. that loans can get recalled back to SBA servicing. And that

Phillip Zagotti: Mm-hmm, mm-hmm. Just had that happen yesterday. And it's a bit of a celebration, right? Because

David Wiener: Yeah.

Phillip Zagotti: you're like, yes, success. But also understand that that's a temporary, that could be a temporary thing. It gives you an opportunity to kind of solve the issue in a more friendly venue, right? SBA versus Treasury. But the reality is, is that short-lived. If you do not take advantage of that within the 30 to 60 day window, Well, they're just going to turn around, resend that letter, and perfect the due process requirements. And then you'll end up right back where you are, right? So it's.

David Wiener: But that does open back up the the SBA's offer in compromise, right? So

Phillip Zagotti: Correct. Correct.

David Wiener: take advantage of it if you can, you know, before it goes back to Treasury, because on the

Phillip Zagotti: Mm-hmm. Yep.

David Wiener: Treasury side, I imagine it's a much harder animal to deal with.

Phillip Zagotti: You can still do it. It's a bit harder, right? And the other thing you need to understand if you decide to do something like an offer in compromise or something like that, any offer in compromise or any forgiveness over $100,000 gets reviewed by a Department of Justice because there's so much fraud involved in this. DOJ will actually review that file. So you need to be very careful because there's strategic

David Wiener: Yeah.

Phillip Zagotti: decision here, right? I've talked to a lot of people who, they bought sports cars, they did home improvements, they bought warehouses, they bought other businesses that they shouldn't have. They did a bunch of stuff with this money outside of using it as working capital inventory and payroll, which were contractually what you were actually supposed to be using that for, if you go look at the loan documents. And so there could be under some circumstances if you misused it and abused it, there could be potential criminal charges. So you've got to be very careful, not just about asking for forgiveness, but if it's over $100,000, you really do need to take a look at exactly what it was you spent that money on and what potential liability is out there. For most, it should be fine.

David Wiener: That's r that's really good to know. Yeah.

Phillip Zagotti: Yeah, for most it should be fine, but for some people, contact an attorney and get attorney client privilege and do the analysis. You do not want to take that to your CPA. You do not want to take that to your EA. That's where you really need to have counsel involved.

David Wiener: And if you don't know a good attorney, I know a few of them that I could refer you to. last one, and I think this may be the biggest surprise in the episode. It was a surprise to me. Most people assume that bankruptcy is off the table if the business is already dead. You've written about sub chapter V and the argument that

Phillip Zagotti: Mm-hmm.

David Wiener: a debtor doesn't have to still be operating the business in order to qualify, since window

Phillip Zagotti: Thank

David Wiener: and debt resolution work can count as commercial or business activities. So walk us

Phillip Zagotti: Mm-hmm.

David Wiener: through that and who that could actually help.

Phillip Zagotti: Right. bankruptcy is an option. Not my preferred option, but it is an option. And we do that on a regular basis. The reality is that, yeah, subchapter V for smaller companies can't allow them to actually get into the bankruptcy court. Even if the business is shut down, if there's still kind of wind down activities, right, you're still trying to collect on money, you still have money that you owe, you're still trying to, you know, get rid of assets and dissolve the company, those kind of things. Those are definitely activities that count as business activities. There's been some recent rulings in it in the Fifth Circuit and some of the other circuits, but it's not universal across the US. So you gotta be very careful about what exactly you have and what exactly the circuit that you're in. actually says when it comes to stuff like this, know, geography is destiny. So you really do want to make sure that you understand what the latest case law is out of your district's bankruptcy court. Otherwise...

David Wiener: And that's another reason for consulting with an attorney.

Phillip Zagotti: Yeah, absolutely, especially when comes to bankruptcy.

David Wiener: So so could could could still owing an EIDL loan and working to get that taken care of count as commercial or business activities?

Phillip Zagotti: Yeah, it's commercial loan. It's related to your business. Yes.

David Wiener: So you c you still have the availability of of sub chapter V if

Phillip Zagotti: Mm-hmm.

David Wiener: if you're owing an EIDL loan.

Phillip Zagotti: Depending on your jurisdiction. Yes, absolutely.

David Wiener: Depending on your jurisdiction, of course, yeah. So that's that's great information to know. So I think the playbook is this. Find out where your loan actually sits, know your number and your entity, respond inside the deadline windows because the clocks are real, understand whether recall to SBA is even possible before you assume there's an offer in compromise on the table, and don't rule out subchapter V because the business is gone. That's a much bigger toolkit than most people realize they have.

Phillip Zagotti: Correct.

David Wiener: So if you found this useful, again, hit follow or subscribe to the Tax Strategy Playbook so you can catch the rest of our series on what happens when tax planning meets real-world enforcement, and share this one directly with any business owner you know who took a COVID EIDL loan. So let's close with what actually is at stake here and where this is headed. What's the case that best illustrates what's at stake if somebody ignores this?

Phillip Zagotti: Well, if they ignore it, they get the 15 % taken off their W-2. They get their tax refunds garnished for the next umpteen years. If they're running a business that has a lot of government receivables, all that gets wiped out because the government will just offset that. and which is even worse than the 15 % W2 garnishment. And that's on the low end, right? if there was things you did wrong with the money, obviously DOJ could be looking into you, which you don't want that either. And so that gets really, really bad really quickly. If DOJ does get involved, they can go after your house, can put liens on your home, all kinds of other fun stuff. So you don't want that to happen. The other thing is if you're trying to get a home loan or something like that, obviously, if you're looking for Fannie Mae, Freddie Mac type products, again, you owe the government money. And so that's going to kind of show up there too. Plus the damage that it does to your credit rating overall. Because when SBA sends it to Treasury, it's a charge off and it does show up on your credit and it will destroy that absolutely. So even if you do need credit, simply because you're trying to buy new assets for your existing company, you're still in that situation where your funds just became quite limited.

David Wiener: I think the worst thing that somebody could do at that point is panic and do nothing.

Phillip Zagotti: Yeah, panicking and doing nothing is not the right idea. The other thing I tell people if they can't pay it, their company doesn't have cash flow and it's basically a non-performing asset. Don't take money out of your 401k, your IRA. Don't take home equity loans, anything like that to go pay this stuff off. Because as we talked about before, subchapter V, even chapter seven, chapter 13 are all available. And the reality is you're taking money that's protected from bankruptcy in some ways, and you're now making that, you're actually taking that and transforming it into money that now is now subject to bankruptcy. And the reality is that, like I said, Treasury can't go after you, can try to go after your home, but they're gonna have to get DOJ to do it. It's a much harder thing to do. But if I take a HELOC loan, right, now I'm getting somebody, you know, a mortgage on my property and if I miss those payments, yeah, they will absolutely go after my home long term, right? So be very careful. Don't flip out. Don't become panicked and turn around and start pulling money from protected areas of your finances that will long term harm you or will subject that money to secure credit versus unsecured credit.

David Wiener: I think that one tip is worth the entire episode. So we've just seen the beginnings of this collections wave. Do you see where do you see it going in the over the next year or so?

Phillip Zagotti: Well, I think it's going to get worse before it gets better. And the reason for that is twofold. Number one, you know, these collection companies, they want to make the money. Number two, there's a limited time. the statute of limitations for some of the stuff went out to 2031. Congress actually created a 10 year statute of limitations for this stuff, especially on the criminal side. What I foresee is that it's just like, with taxes, you know, we're going to get close to that 10 year statute limitations. The federal government kind of ramps up. That's when they start putting the liens on the homes and all that other kind of stuff. I think you're going to see possibly a bit of that here too, whereas they get closer and closer to that 10 year statute limitations. Department of Justice and Treasury will kind of become much more brutal, trying to collect And so they want to get everything they can. and lawyers, especially for the government, are notorious for waiting to the very last minute and then filing something, right?

David Wiener: Yeah.

Phillip Zagotti: And so I fully expect that 2029, 2030, 2031, those three years are gonna be very interesting from both the civil and criminal standpoint as it pertains

David Wiener: I would imagine so.

Phillip Zagotti: to these, yeah, these SBA loans.

David Wiener: If you could get one message to every business owner with a COVID EIDL loan sitting in the back of their mind, what would it be?

Phillip Zagotti: Don't sit on it. It's stressful, I know, but the stress is going to be compounded if you wait and you let it kind of fester and kind of blow up on its own. It's better to do things on your timeline while you still have options available. If it's with SBA, great, you have options. If it's with Treasury, then recognize that and start thinking about what your game plan is going to be, whatever that is. Be very careful what you're hearing from the mills online. They're out there and they're causing a little bit of stress and chaos that they don't need to. It's doable. It's something that can be addressed. I address it with people every day. You just have to kind of breathe in, breathe out. and just approach it, right? mean, they,

David Wiener: And get help.

Phillip Zagotti: right, get help. And the thing is, you you owned a business during COVID if you got these loans, right? And that was stressful and that sucked, right? This is nowhere near as stressful as that was. We're not talking life and death anymore, right? So you went out and you got the loans, right? And you took steps to try to save your business as you should have. And that's commendable. But, you know, this is not life and death in the same way. But it's still very important and it still can mean financial injury if you don't get ahead of it.

David Wiener: That's a great message. I think the message of the entire episode today is simple. This isn't old news. It isn't somebody else's problem. The government just got a lot more aggressive, and the fix starts with knowing exactly where you stand, not hiding your head in the sand and hoping it goes away. Philip, thanks for bringing the back end of this deal into light. This is exactly the kind of thing that our listeners need to hear before it becomes their problem. And and I like to make sure we see the front end and the back end on the Tax Strategy Playbook. If you want to reach out to Philip directly, I'm sure he's okay with that. All of his contact information will be in the in the show notes at Taxstrategyplaybook.com If an EIDL loan has been sitting in the back of your mind, don't wait for the letter. Go check your status today. See you next Tuesday.