IRS Collection-2011

By: Robert E. McKenzie ©2011

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1.  COLLECTION IRS PROCESSING OF NOTICES OF DELINQUENT TAXES DUE

Tax Collection

1.10     The IRS Collection Division attempts to collect delinquent taxes as inexpensively and rapidly as possible. To accomplish this task the IRS makes extensive use of computers. Only when automated methods have failed to collect a tax is the matter assigned to an individual for collection.

Collection Stats

[amounts are in thousands of dollars.]

       
Activity 2007 2008 2009 2010
Enforcement activity:        
Number of notices of Federal tax liens filed 683,659  768,168  965,618  1,096,376 
Number of notices of levy served on third parties 3,757,190  2,631,038  3,478,181  3,606,818 
Number of seizures 676  610  581  605 

 

Four-Level System

1.20     To effectuate this policy the IRS utilizes a four-level system of collection. It begins its collection efforts on each account by generating computer notices from a Regional Compliance Center. If the efforts of the Compliance Center do not secure payment, the account is then assigned to the Automated Collection System (ACS). The Automated Collection System attempts to collect the tax liability by initiating telephone calls to the taxpayer and others. During the time that an account is assigned to Compliance Center and ACS, accounts may also be resolved by Collection Support Staff assigned to handle “walk-ins” in local IRS offices. If none of these levels of the system are successful in collecting the account, it is eventually assigned to a Revenue Officer for a field investigation. Obviously, it is much less expensive for the IRS to collect a tax by mailing a notice or placing a telephone call than it is to visit the taxpayer personally. For the taxpayer, however, personal negotiation is much more effective than dealing with an automated system.

Compliance Center

1.30     The IRS has ten Regional Compliance Centers which process all tax returns filed with the IRS. Compliance Centers are extensively automated. The information on each tax return filed is encoded into the IRS computer at a Compliance Center. That IRS computer system will determine if computational errors are contained on the return and issue notices regarding errors. The Compliance Center is also responsible for initiating notices to taxpayers to collect balances due on tax returns.

1040 Notice Procedure

1.40     Upon receipt of a tax return or other document showing a balance due, the following process takes place in the Internal Revenue Compliance Center. Within several weeks after receipt of the document, the information is placed on the computer system. That system will then initiate a series of notices. The first notice issued is a document titled “Request for Payment,” which informs the taxpayer that there is a balance due on the return, states the amount of tax, interest and penalties due, and requests payment within ten days. This is the notice statutorily required for the creation of a valid Federal Tax Lien. If the liability is for individual income taxes, and the liability is relatively small, the taxpayer will normally receive four subsequent notices before the IRS proceeds to take any administrative collection measures. If the liability is not paid after the initial notice, the taxpayer will receive a second notice, “Reminder,”   Notice 501. The IRS will issue Notice 503, “Urgent, Immediate action is required “, five weeks after the first notice. The taxpayer will receive Notice 504, “Urgent, We intend to levy on certain assets. Please respond NOW.” in the mail five weeks after issuance of Notice 503 if payment is not made after that notice. Notice 504 is the nastiest of the IRS letters. If the taxpayer fails to pay after Notice 504 the matter will be referred for collection by the Automated Collection System (ACS). If ACS is unsuccessful in collecting or resolving the matter the IRS will then issue Letter 1058, “FINAL NOTICE, NOTICE OF INTENT TO LEVY AND NOTICE OF YOUR RIGHT TO A HEARING.  PLEASE RESPOND IMMEDIATELY.” If the taxpayer exercises her appeal rights, collection will be held.  If the taxpayer fails to appeal the IRS will levy after expiration of 30 days from the notice.  One unusual convention of the IRS is that each notice will bear a date which falls on Monday.

Business Taxpayers

1.50     In the case of business taxes (either corporate income or withholding taxes), the IRS will send three notices period prior to initiating enforcement measures. The total time from first notice to enforcement action is normally at least 16 weeks. The taxpayer will receive a first notice and a Notice 504 five weeks subsequent to the first notice. The account will then be referred to ACS or a Revenue Officer for issuance of Letter 1058 if the taxpayer fails to resolve the liability.

Notice of Levy

1.60     ACS has computerized sources of income or assets of the taxpayer, such as wages, bank accounts, certificates of deposit or accounts receivable, all of which can be seized administratively from the taxpayer, it will issue a Notice of Levy against the taxpayer’s assets approximately six weeks after the Letter 1058. If the ACS does not have sources of income or other assets to levy upon, it will either research other sources or issue a Balance Due (Bal Due) to a local area office for collection, several weeks subsequent to the final notice.

Correspondence to Compliance Center

1.70     Normally, it is ineffective to write to a Compliance Center. It may take some Compliance Center six weeks or more to process correspondence. For example, if your client receives a Notice 504 even though he paid the tax upon receipt of the Notice 503, a letter to the IRS will not stop assignment to ACS. The IRS will not process your letter for six weeks, yet the computer continues to automatically refer the matter to ACS on a set cycle.

Small Dollar Payment Plans

1.80     A taxpayer may be able to secure a 60-month payment plan for 1040 liabilities of less than $25,000. The IRS Restructuring and Reform Act of 1998 requires the IRS to grant a payment plan to individual taxpayers who owe less than $10 thousand.

Telephone Collection Efforts

1.90     If an account cannot be collected by a Returns Processing Center by using notices a upon the taxpayer’s wages or bank account, the matter will then be transferred to a ACS for telephone collection efforts. Each ACS, including the Return Processing Center, has a computerized telephone collection system. The IRS has twenty-three ACS sites.

2.  IRS COLLECTION PROCEDURES

The Power of the IRS to Collect Taxes

2.10     The IRS has the power to collect taxes by levying on taxpayers’ property as a result of the Federal Tax Lien. When a person owes taxes, the IRS gains a lien on all that person’s assets after meeting certain statutory requirements. The lien attaches to all rights, title and interest of the taxpayer wherever it may be situated. [IRC § 6321] Once the IRS has a lien on all of a taxpayer’s assets, it may enforce that lien by administratively levying his or her assets.

Lien Rights

2.20     An example of lien rights would be the lien created when a person buys a car and finances the purchase through a bank. If the buyer defaults on the note, the bank may repossess the car. In the case of the IRS it gains a lien on all of a taxpayer’s assets and therefore it has the right to seize most of those assets to satisfy unpaid taxes.

Creation of Lien

2.30     The liability of a taxpayer for Internal Revenue taxes is personal in nature and, does not directly attach to his or her property. In this respect the liability is analogous to a simple debt and, without anything more, could be enforced only by a court action. The lien is often referred to as the “statutory” or the “general” lien. The following requirements for establishing the lien are contained in the Code:

  • An assessment must have been made;
  • A notice and demand for payment must have been made (the first IRS notice meets this requirement); and
  • The taxpayer must have neglected or refused to pay.  [IRC § 6321]

Liens on All Taxpayer Property

2.40     The effect of the Federal Tax Lien statute is that when any person fails to pay any assessment of tax, plus interest, penalties, or costs, a lien in favor of the United States arises upon all property and rights to property, whether real or personal, tangible or intangible, belonging to the taxpayer.

Statute of Limitations

2.50     Prior to 1990 the Statute of Limitations for collection was six years from the date of assessment plus such suspended, extended or postponed period of time as may, by law, be applicable. [IRC § 6502] The Revenue Reconciliation Act of 1990 extended the Statute of Limitations for collection to ten years. [Revenue Reconciliation Act of 1990, § 1131(a)] This period was extended for all tax liabilities upon which the Statute of Limitations was still open at the time the bill was passed by Congress.

Notice of Lien

2.60     IRC § 6323(a) modifies IRC § 6321 by providing that the Federal Tax Lien is not valid against purchasers, holders of security interests, mechanics’ lienors, and judgment lien creditors until a Notice of Lien has been filed. The filing of the Notice of Lien is constructive notice to these persons that the lien, provided for by the Code, exists.

Notice Five Days After Filing

2.70     The RRA 1998 established formal procedures designed to ensure due process where the IRS seeks to impose a lien. The due process procedures apply after notice of a Federal tax lien has been filed. The IRS is required to notify the taxpayer of the filing a Notice of Lien within five days of its filing. During the 30-day period beginning with the mailing or delivery of this notification, the taxpayer may demand a hearing before an appeals officer. [Act § 3401; IRC § 6320]

3.  RRA SECTION 3401 – AN OVERVIEW OF THE DUE PROCESS

RRA Section 3401, Due Process in IRS Collection Actions

3.10     Provides the taxpayer with procedural rights when the Service files a Notice of Federal Tax Lien (NFTL) and when it intends to levy upon the taxpayer’s property or right to property

Purpose of Section 6320

3.20     The purpose of section 6320 is to provide a taxpayer with notification that a Notice of Federal Tax Lien has been filed and to provide the taxpayer with the opportunity to request a Collection Due Process hearing (“CDP hearing”) with the IRS Office of Appeals (“Appeals”) with respect to the tax liability for the taxable period or periods to which the lien relates.

Requesting a CDP Hearing

3.30     If the taxpayer timely requests a CDP hearing, Appeals will consider the case and render a written determination concerning the appropriateness of the lien filing or proposed levy. Through this section, the taxpayer may have the opportunity to challenge administratively and in court the taxpayer’s liability for the tax years stated on the NFTL or levy, raise any additional defenses with respect to that liability, challenge the appropriateness of the filing of the NFTL or proposed levy, and offer collection alternatives. The taxpayer is required to raise all relevant substantive and collection issues at that hearing.

4.  IRC SECTION 6320, NOTICE AND OPPORTUNITY FOR HEARING UPON FILING OF NOTICE OF LIEN REQUIREMENTS OF NOTICE

Applicable to any Notices of Federal Tax Lien filed after January 18, 1999.

4.10

  • A taxpayer is entitled to notice of the filing of an NFTL not more than five business days after the date of any filing.
  • This notice describes the taxpayer’s right to request a Collection Due Process hearing with respect to any taxable periods described on the NFTL, within the 30-calendar day period beginning on the day after the 5-day period for notification has expired. The taxpayer is entitled to only one CDP hearing with respect to each taxable period to which the unpaid tax relates.
  • The determination made by Appeals may be appealed to either the United States Tax Court (“Tax Court”).
  • The running of the periods of limitations for collection after assessment, for criminal prosecutions, and for suits described under IRC § 6532 are suspended for the periods in which the CDP hearing and any appeals are pending. (Suspensions will be more specifically addressed below).
  • If a taxpayer does not request a CDP hearing within the 30-day period, a taxpayer can still request a hearing at a later date and the IRS will provide a hearing equivalent to a CDP hearing. However, the taxpayer will not be entitled to judicial review of that later hearing. (“Equivalent hearings” are more specifically addressed below).

Notification

4.20     Written notification that an NFTL has been filed must be given to the taxpayer in person, or left at the taxpayer’s dwelling or usual place of business, or sent by certified or registered mail to the taxpayer’s last known address, not more than five days after the date of filing of the NFTL.

Right to Collection Due Process Hearing

4.30

  • A taxpayer to whom IRS has properly delivered or mailed notice of the CDP hearing is entitled to a CDP hearing if requested within the 30-calendar day period following the five business day period within which the IRS is required to give that notice.
  • A taxpayer’s request for a CDP hearing must be in writing. A Form 12153 has been developed for this purpose. The request must set forth the taxpayer’s name, address, daytime phone number, type of tax, taxable period, taxpayer’s TIN, a statement that the taxpayer requests a CDP hearing concerning the NFTL and the reasons the taxpayer disagrees with the NFTL filing. The request must be signed and dated by the taxpayer or the taxpayer’s representative.
  • The location for sending the request for a CDP hearing is the office of the IRS that issued the CDP notice.

Conduct of Collection Due Process Hearings

4.40

  • The taxpayer is entitled to one CDP hearing with respect to each unpaid taxable period shown on an NFTL filed after January 18, 1999.
  • To the extent possible, all CDP hearings under section 6320 and 6330 (which will be further addressed below) will be combined.
  • The CDP hearing must be before an employee or officer of Appeals who has had no prior involvement with respect to the taxable period or periods.

Matters Considered at Collection Due Process Hearing

4.50

  • Appeals Division has the authority to determine the validity, sufficiency, and timeliness of any CDP hearing notice or request for a hearing by the taxpayer.
  • At the CDP hearing, the hearing officer is required to obtain verification from IRS Collection that the requirements of any applicable law or procedure have been met.
  • At the CDP hearing, the taxpayer is entitled to raise any relevant issue relating to the unpaid tax, including any appropriate spousal defenses, challenges to the appropriateness of the NFTL filing, offers of collection alternatives, and merits of liability, if appropriate. The taxpayer must raise all relevant issues in the CDP hearing. The rule of variance that applies in refund litigation will apply here.

Judicial Review of Collection Due Process Hearing

4.60

  • The taxpayer may appeal the determination made in the CDP hearing within 30 calendar days to the Tax Court. The taxpayer is precluded from raising “new issues” upon judicial review. In other words, the taxpayer cannot raise any issues for the first time upon judicial review, but is required to raise all relevant issues in the CDP hearing.
  • The court will review Appeals’ determination concerning the validity of the tax liability on a de novo basis. (This includes determinations concerning spousal defenses.) Appeals’ determination concerning any other matters will be reviewed using an abuse of discretion standard of review.

Equivalent Hearings

4.70     Taxpayers who fail to timely request a CDP hearing may later request an “equivalent hearing” with Appeals concerning the NFTL and tax liabilities for the tax periods shown on that NFTL. The appeal must be filed within 1 year of the original CDP notice.

5.  EXTENSIONS OF TIME TO PAY

Granting of Extensions

5.10     Extensions of time to pay provide a specific date by which full payment of taxes is expected. Extensions may be granted for up to120 days for all taxpayers.  Extensions of time to pay are not installment agreements and do not provide for periodic payments. No forms are required. Form 433‑D is not be used.

  • The IRS will not file a lien.
  • The IRS will not issue Notices of Intent to Levy, Notice of Hearing (LT 11 or Letter 1058DO) nor levies during granted extension periods, unless collection is in jeopardy or at risk.

NOTE:  This applies even if taxpayers are given deadlines within the extension period and these deadlines are not met.

EXAMPLE: A revenue officer gives the taxpayer a 60 day extension of time to pay and 30 days to have all federal tax deposits current. The taxpayer has not made all the current tax deposits by the 31st day. Enforcement is not appropriate until after 60 days pass, unless collection is in jeopardy or at risk.  [IRM 5.14.1.4]

Guaranteed Availability of Installment Agreements

5.20     The Internal Revenue Service Restructuring and Reform Act of 1998 requires the Secretary to grant an installment agreement, at the taxpayer’s option, if:

  • the liability is $10,000, or less (excluding penalties and interest);
  • within the previous 5 years, the taxpayer has not failed to file or to pay, nor entered an installment agreement under this provision; [Act § 3467; IRC § 6159)

<$25,000 Liabilities

5.30     The IRS has chosen to create a more liberal system that allows installment agreements of up to 5 years for balances of less than $25,000.

5.40     The IRS is making other fundamental changes to liens in cases where taxpayers enter into a Direct Debit Installment Agreement (DDIA). For taxpayers with unpaid assessments of $25,000 or less, the IRS will now allow lien withdrawals under several scenarios:

  • Lien withdrawals for taxpayers entering into a Direct Debit Installment Agreement.
  • The IRS will withdraw a lien if a taxpayer on a regular Installment Agreement converts to a Direct Debit Installment Agreement.
  • The IRS will also withdraw liens on existing Direct Debit Installment Agreements upon taxpayer request.

Liens will be withdrawn after a probationary period demonstrating that direct debit payments will be honored. Taxpayers can use the Online Payment Agreement application on IRS.gov to set-up with Direct Debit Installment Agreements.

Relaxed Rules For Installment Agreements For Small Businesses

5.50     The IRS will also make streamlined Installment Agreements available to more small businesses. The payment program will raise the dollar limit to allow additional small businesses to participate. Small businesses with $25,000 or less in unpaid tax can participate. Currently, only small businesses with under $10,000 in liabilities can participate. Small businesses will have 24 months to pay.

The streamlined Installment Agreements will be available for small businesses that file either as an individual or as a business. Small businesses with an unpaid assessment balance greater than $25,000 would qualify for the streamlined Installment Agreement if they pay down the balance to $25,000 or less.

6.  COLLECTION INFORMATION STATEMENTS

CIS's

6.10     For larger dollar liabilities (income tax liabilities in excess of $25,000) the starting point for analysis is the Service's Collection Information Statement (CIS). The preparation of this document, more often than not, determines which way the Service will proceed with its collection activity. Copies of the CIS's currently used by the Service for individuals and for businesses are provided in the appendices at the end of this chapter. The IRS will not give extended payment plans on unpaid tax liabilities unless a CIS has been submitted by the taxpayer.

Types of Collection Information Statements

6.20     The IRS utilizes three basic types of Collection Information Statements (CIS's).  The Form 433-A and Form 433-F are secured from individuals. The Form 433-B is secured from businesses. If the taxpayer is self employed the service will normally require both a 433-A and 433-B.

Amount of Payments

6.30     Page 4 is a monthly income and expense analysis. The IRS will not grant a Payment Plan for less than the amount shown as the net available income. That figure represents the difference between income and claimed expenses. Unfortunately, as one will note, page 4 contains a column to the right of the claimed column for Allowed Expenses. The IRS utilizes information from the Bureau of Labor Statistics to establish allowable expenses for certain items like transportation, food, clothing and housing.  

Substantial Net Worth

6.40  The IRS will seldom grant extended payment plans to a business with a substantial net worth indicated on page 3 of Form 433-B.

New more Onerous Allowable Expense Standards

6.50     In October, 2007, and again in February, 2009, the IRS revised its allowable expense standards to make them more onerous. Instead of establishing national standards which recognized the need for higher living expense for higher income families it began a system of one size fits all. It continued to fail to recognize the varying cost of living in different regions and communities and eliminated differentials for Hawaii and Alaska. It also added a new category of expenses for out-of-pocket health care expenses.

Total allowable expenses include those expenses that meet the necessary expense test. The necessary expense test is defined as expenses that are necessary to provide for a taxpayer's and his or her family's health and welfare and/or production of income.  The expenses must be reasonable. The total necessary expenses establish the minimum a taxpayer and family needs to live.

There are three types of necessary expenses:

  • National Standards
  • Local Standards
  • Other Expenses

National Standards: These establish standards for Food, Clothing and Other Items and Out-of-Pocket Health Care Expenses.  Food, Clothing and Other Items - These establish reasonable amounts for five necessary expenses: food, housekeeping supplies, apparel and services, personal care products and services, and miscellaneous. These standards come from the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey. Taxpayers are allowed the total National Standards amount monthly for their family size, without questioning the amounts they actually spend.

Note:   All five standards are included in one total national standard expense.

Out-of-Pocket Health Care Expenses: These establish reasonable amounts for out-of-pocket health care costs including medical services, prescription drugs, and medical supplies (e.g., eyeglasses, contact lenses). The table for health care allowances is based on Medical Expenditure Panel Survey data. Taxpayers and their dependents are allowed the standard amount monthly on a per person basis, without questioning the amounts they actually spend.

Local Standards: These establish standards for two necessary expenses: housing and utilities and transportation. Taxpayers will normally be allowed the local standard or the amount actually paid, whichever is less.

  1. Housing and Utilities - Standards are established for each county within a state and are derived from Census and BLS data. The standard for a particular county and family size includes both housing and utilities allowed for a taxpayer’s primary place of residence. Housing and Utilities standards include mortgage (including interest) or rent, property taxes, insurance, maintenance, repairs, gas, electric, water, heating oil, garbage collection, telephone and cell phone.
  2. Transportation - The transportation standards consist of nationwide figures for loan or lease payments referred to as ownership costs, and additional amounts for operating costs broken down by Census Region and Metropolitan Statistical Area. Operating costs include maintenance, repairs, insurance, fuel, registrations, licenses, inspections, parking and tolls. If a taxpayer has a car payment, the allowable ownership cost added to the allowable operating cost equals the allowable transportation expense. If a taxpayer has a car, but no car payment only the operating cost portion of the transportation standard is used to figure the allowable transportation expense. [Unless the taxpayer owns a vehicle that is more than 6 years old or has more than 75,000 miles, in which case an ownership cost of $200 is allowed in lieu of a loan/lease payment]  There is a single nationwide allowance for public transportation for taxpayers with no vehicle. [If the taxpayer owns a vehicle and uses public transportation, actual expenses incurred may be allowed if necessary for the health and welfare of the individual or family, or for the production of income.]

Note: Vehicle Operating standards are based on actual consumer expenditure data obtained from the United States Bureau of Labor Statistics (BLS) which are adjusted with Consumer Price Indexes (CPI) to allow for projected increases throughout the year. (These CPI are used to adjust all ALE standards.) Vehicle operating standards are not based on average commuting distances. Fuel costs, which are part of Vehicle Operating Costs, have a separate fuel price adjustment which is based on Energy Information Administration (EIA) data which allows for projected fuel price increases. 

  1. National and local expense standards are guidelines. If it is determined a standard amount is inadequate to provide for a specific taxpayer’s basic living expenses, allow a deviation. Require the taxpayer to provide reasonable substantiation and document the case file.

 

Note:   If the taxpayer or the Service believes reviewing the last three months of expenses are not reflective of the actual yearly expenditures additional months, up to one year, may be reviewed.

  1. Other – Other expenses may be allowed if they meet the necessary expense test. The amount allowed must be reasonable considering the taxpayer’s individual facts and circumstances.
  2. Conditional expenses. These expenses do not meet the necessary expense test. However, they are allowable if the tax liability, including projected accruals, can be fully paid within five years.
  3. Generally, the total number of persons allowed for national standard expenses should be the same as those allowed as exemptions on the taxpayer’s current year income tax return. Verify that exemptions claimed on the taxpayer’s income tax return meet the dependency requirements of the IRC. There may be reasonable exceptions. Fully document the reasons for any exceptions. For example, foster children or children for whom adoption is pending.
  4. A deviation from the local standard is not allowed merely because it is inconvenient for the taxpayer to dispose of valued assets or reduce excessive necessary expenses.
  5. Revenue officers should consider the length of loan payments. Although it may be appropriate to allow for payments made on a secured debt that meets the necessary expense test, if the debt will be fully repaid in one year only allow those payments for one year.

 

Five Year Test

6.60     The amount allowed for necessary or conditional expenses depends on the taxpayer’s ability to full pay the liability within five years and on the taxpayer’s individual facts and circumstances. If the liability can be paid within 5 years, it may be appropriate to allow the taxpayer the excessive necessary and conditional expenses. If the taxpayer cannot pay within 5 years, it may be appropriate to allow the taxpayer the excessive necessary and conditional expenses for up to one year in order to modify or eliminate the expense. (See IRM 5.14.1, Installment Agreements) [IRM 5.15.1.10]

Other Expenses

6.70     The IRM provides the following chart regarding other expenses:

Expense Item Expense is Necessary: Notes/Tips
Accounting and legal fees. If representation before the Service is needed or meets the necessary expense test. Amount must be reasonable. Disallow accounting or legal fees that are not related to remaining current, solving the current liability or do not meet the necessary expense test.
Charitable contributions (Donations to tax exempt organizations) If it is a condition of employment or meets the necessary expense test. Example: A minister is required to tithe according to his employment contract. Disallow any other charitable contributions that are not considered necessary. Example: Review the employment contract.
Child Care (Baby-sitting, day care, nursery and preschool) If it meets the necessary expense test. Only reasonable amounts are allowed. Cost of child care can vary greatly. Do not allow unusually large child care expense if more reasonable alternatives are available. Consider the age of the child and if both parents work.
Court-Ordered Payments(Alimony, child support, including orders made by the state, and other court ordered payments) If alimony and child support payments are court ordered, reasonable in amount, and being paid, they are allowable. If payments are not being made, do not allow the expense unless the non-payment was due to temporary job loss or illness. Review the court order. Payments that are included in a state court order are not necessarily allowable (such as a child’s college tuition that would not otherwise be allowable as a necessary expense). See Exhibit 5.15.1-1, Question 16.
Dependent Care (For the care of the elderly, invalid, or handicapped.) If there is no alternative to the taxpayer paying the expense.  
Education If it is required for a physically or mentally challenged child and no public education providing similar services is available. Education expenses are also allowed for the taxpayer if required as a condition of employment. Example: An attorney must take so many education credits each year or they will not be accredited and could eventually lose their license to practice before the State Bar. A teacher could lose their position or in some states their pay is commensurate with their education credits.
Involuntary Deductions If it is a requirement of the job; e.g., union dues, uniforms, work shoes. To determine monthly expenses, the total out of pocket expenses would be divided by 12.
Life Insurance If it is a term policy on the life of the taxpayer only. If there are whole life policies, these should be reviewed as an asset for borrowing against or liquidating. Life insurance used as an investment is not a necessary expense.
Secured or legally perfected debts If it meets the necessary expense test. Taxpayer must substantiate that the payments are being made.
Unsecured Debts If the taxpayer substantiates and justifies the expense, the minimum payment may be allowed. The necessary expense test of health and welfare and/or production of income must be met. Except for payments required for the production of income, payments on unsecured debts will not be allowed if the tax liability, including projected accruals, can be paid in full within 90 days. Examples of unsecured debts which may be necessary expenses include: Payments required for the production of income such as payments to suppliers and payments on lines of credit needed for business and payment of debts incurred in order to pay a federal tax liability.
Taxes If it is for current federal, FICA, Medicare, state and local taxes. Current taxes are allowed regardless of whether the taxpayer made them in the past or not. Delinquent state and local taxes are allowable depending on the priority of the FTL and/or Service agreement with the state and local taxing agencies.
Optional Telephones and Telephone Services (Pager, Call waiting, caller identification or long distance) If it meets the necessary expense test.  
Student Loans If it is secured by the federal government and only for the taxpayer’s education. Taxpayer must substantiate that the payments are being made.
Internet Provider/E-mail If it meets the necessary expense test – generally for production of income.  
Repayment of loans made for payment of Federal Taxes If the loan is guaranteed by the taxpayer’s assets when those assets are of reasonable value and are necessary to provide for the health and welfare of the family.  

 

7.  VARIATIONS ON INSTALLMENT AGREEMENTS

Payroll Deduction

7.10     IRS employees are allowed by their Internal Revenue Manual to offer a payroll deduction option to a taxpayer being granted an installment agreement.

Withholding by Employer

7.20     The Service’s manual provides for installment payments to be sent directly to the Service from the taxpayer’s employer if and when the employer agrees.

Direct Debit Installment Agreements

7.30  IRS employees may also grant Direct Debit Installment Agreements (DDIA’s) where payments are automatically debited from a taxpayer’s bank account for the agreed upon amount. The bank may transfer the payment via electronic funds transfer to the IRS. The taxpayer will be required to sign a Direct Debit Installment Agreement, Form 433-G. There will be a default if the client has insufficient funds in the account on the debit date. The author utilizes this method only when the IRS refuses to grant an agreement without a DDIA.

8.  RECENT RULES CHANGES

8.10     New Collection Procedures Announced

On February 24, 2011 IRS announced new policies and programs to help taxpayers pay back taxes and avoid tax liens. IRS’s stated goal is to help individuals and small businesses meet their tax obligations, without adding an unnecessary burden to taxpayers.

Over the past several years as taxpayers have endured the Great Recession the IRS has escalated the number of federal tax liens filed against delinquent taxpayers. The IRS aggressive use of liens has been criticized by the National Taxpayer Advocate in her annual report to congress and the IRS Advisory Council in its annual report to the Commissioner.

8.15     More Flexible Attitude

The newly announced policy represents a new, more flexible attitude by the IRS. The IRS making important changes to its lien filing practices that will lessen the negative impact on taxpayers. The changes include:

  • Significantly increasing the dollar threshold when liens are generally issued, resulting in fewer tax liens.
  • Making it easier for taxpayers to obtain lien withdrawals after paying a tax bill.
  • Withdrawing liens in most cases where a taxpayer enters into a Direct Debit installment Agreement.
  • Creating easier access to Installment Agreements for more struggling small businesses.
  • Expanding a streamlined Offer in Compromise program to cover more taxpayers.

8.20     Higher Lien Thresholds

The IRS stated that it will significantly increase the dollar thresholds when liens are generally filed. The new dollar amount is in keeping with inflationary changes since the number was last revised. Currently, liens are automatically filed at certain dollar levels for people with past-due balances. The IRS did not publicly disclose the new lien thresholds. The IRS plans to review the results and impact of the lien threshold change in about a year.

8.25     Easier Lien Withdrawals

The IRS will also modify procedures that will make it easier for taxpayers to obtain lien withdrawals. Liens will now be withdrawn once full payment of taxes is made if the taxpayer requests it. The IRS has determined that this approach is in the best interest of the government. In order to speed the withdrawal process, the IRS will also streamline its internal procedures to allow collection personnel to withdraw the liens.

8.30     Direct Debit Installment Agreements and Liens

The IRS is making other fundamental changes to liens in cases where taxpayers enter into a Direct Debit Installment Agreement (DDIA). For taxpayers with unpaid assessments of $25,000 or less, the IRS will now allow lien withdrawals under several scenarios:

  • Lien withdrawals for taxpayers entering into a Direct Debit Installment Agreement.
  • The IRS will withdraw a lien if a taxpayer on a regular Installment Agreement converts to a Direct Debit Installment Agreement.
  • The IRS will also withdraw liens on existing Direct Debit Installment Agreements upon taxpayer request.

 

Liens will be withdrawn after a probationary period demonstrating that direct debit payments will be honored. Taxpayers can use the Online Payment Agreement application on IRS.gov to set-up with Direct Debit Installment Agreements.

8.40     Relaxed Rules For Installment Agreements For Small Businesses

The IRS will also make streamlined Installment Agreements available to more small businesses. The payment program will raise the dollar limit to allow additional small businesses to participate. Small businesses with $25,000 or less in unpaid tax can participate. Currently, only small businesses with under $10,000 in liabilities can participate. Small businesses will have 24 months to pay.

The streamlined Installment Agreements will be available for small businesses that file either as an individual or as a business. Small businesses with an unpaid assessment balance greater than $25,000 would qualify for the streamlined Installment Agreement if they pay down the balance to $25,000 or less.

8.45     Offers in Compromise

The IRS is also expanding a new streamlined Offer in Compromise (OIC) program to cover a larger group of struggling taxpayers. This streamlined OIC is being expanded to allow taxpayers with annual incomes up to $100,000 to participate. In addition, participants must have tax liability of less than $50,000, doubling the current limit of $25,000 or less.

OICs are subject to acceptance based on legal requirements. Generally, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement. The IRS looks at the taxpayer’s income and assets to make a determination regarding the taxpayer’s ability to pay.

8.50     Past Promises

In 2009, the IRS announced lien relief for people trying to refinance or sell a home. In 2010, the IRS announced new flexibility for taxpayers facing payment or collection problems. Unfortunately those announced changes did not result in a relaxation of IRS enforced collection efforts. During both 2009 and 2010 the IRS increased the number of liens and levies it served against taxpayers.

9.  OFFER IN COMPROMISE

Number of Offers

9.10     The total number of proposed offer has more than halved from 128,000 in FY 2001 to 52,000in FY 2009. The number of proposed offers rose from about 42,000 in 2008. The number of OICs accepted declined from 38,643 (or 34 percent) in FY 2001, 12,000 in FY 2007 (or 24%):10,677in 2008 (or 24%). and went down to 10,665 (about 20%) in 2009. In 2010 the number of accepted offers rose for the first time in a decade to 14,000 acceptances. The increased number of acceptances resulted primarily from an increase in submission and not as a result of any increased flexibility by the IRS.

Offers in compromise (thousands) 2007  2008  2009  2010 
Offers received 46  44  52  57 
Offers accepted 12  11  11  14 
         

 

Securing an Offer in Compromise    

9.15     The IRS has made it so difficult to secure an offer in compromise that many taxpayers and their representative no longer choose to propose a compromise.

Offer in Compromise Forms

9.20     In March, 2011the IRS issued new offer in compromise forms which apply the provisions of TIPRA 2005 discussed below. Taxpayers proposing compromises based upon doubt as to collectibility of effective tax administration must submit revised Form 656. Taxpayers proposing an offer based upon doubt as to liability must now submit Form 656-L and a narrative setting forth defenses to the liability. To comply with the new down payment requirements taxpayers must submit Form 656-PPV with the required down payment.

TIPRA

9.30     The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), section 509, made major changes to the IRS OIC program. These changes affect all offers received by the IRS on or after July 16, 2006. TIPRA section 509 amends IRC section 7122 by adding a new subsection (c) “Rules for Submission of Offers-in-Compromise.”

Payments With Offers

9.40     A taxpayer filing a lump-sum offer must pay 20% of the offer amount with the application (IRC 7122(c)(1)(A)). A lump-sum offer means any offer of payments made in five or fewer installments.

A taxpayer filing a periodic-payment offer must pay the first proposed installment payment with the application and pay additional installments while the IRS is evaluating the offer (IRC section 7122(c)(1)(B)). A periodic-payment offer means any offer of payments made in six or more installments.

Failure to Make Deposit

9.50     Taxpayers can avoid delays in processing their OIC applications by making all required payments in full and on time. Failure to pay the 20 percent on a lump-sum offer, or the first installment payment on a periodic-payment offer, will result in the IRS returning the offer to the taxpayer as nonprocessable (IRC section 7122(d)(3)(C) as amended by TIPRA).

Not Refundable

9.60     The 20 percent payment for a lump-sum offer and the installment payments on a periodic-payment offer are “payments on tax” and are not refundable deposits (IRC section 7809(b) and Treasury Regulation 301.7122-1(h)).

Specify Payments

9.70     Taxpayers may specify in writing when submitting their offers how to apply the payments to the tax, penalty and interest due. Otherwise, the IRS will apply the payments in the best interest of the government (IRC section 7122(c)(2)(A)).  For most taxpayers it is in their best interest to apply the payment to their newest income tax liabilities as they may have already reached the maximum late pate payment penalty of 25% on older liabilities.

The OIC application fee reduces the assessed tax or other amounts due. A taxpayer still must also submit a $150 application fee and may not specify how to apply the fee.

Failure to Make Installment Payments

9.80     Taxpayers failing to make installment payments on periodic-payment offers after providing the initial payment will cause the IRS to treat the offer as a withdrawal. The IRS will return the offer application to the taxpayer (IRC section 7122(c)(1)(B)(ii)).A lump-sum offer accompanied by a payment that is below the required 20 percent threshold will be deemed processable. However, the taxpayer will be asked to pay the remaining balance in order to avoid having the offer returned. Failure to submit the remaining balance will cause the IRS to return the offer and retain the $150 application fee.

Taxpayers filing periodic-payment offers must submit the full amount of their first installment payment in order to meet the processability criteria. Otherwise, the IRS will deem the offer as unprocessable and will return the application to the taxpayer along with the $150 fee.

Low Income Taxpayers

9.90     Under the new law, taxpayers qualifying as low-income or filing an offer solely based on doubt as to liability qualify for a waiver of the new partial payment requirements. Taxpayers qualifying for the low-income exemption or filing a doubt-as-to- liability offer only are not liable for paying the application fee, or the payments imposed by TIPRA section 509.

A low-income taxpayer is an individual whose income falls at or below poverty levels based on guidelines established by the U.S. Department of Health and Human Services (HHS). Taxpayers claiming the low-income exception must complete and submit the Income Certification for Offer in Compromise Application Fee worksheet, along with their Form 656 application package.

Deemed Accepted

9.100 The IRS will deem an OIC “accepted” that is not withdrawn, returned, or rejected within 24 months after IRS receipt. When calculating the 24-month timeframe, the IRS will disregard any time periods during which a liability included in the OIC is the subject of a dispute in any judicial proceeding (IRC section 7122(f) as amended by TIPRA).

Background

9.110 An offer in compromise is a settlement of a delinquent tax account for less than the full amount due.  Sec. 7122 states that the IRS may compromise any civil or criminal case arising under the Internal Revenue Laws prior to reference to the Department of Justice for prosecution or defense. In the past very few offers were accepted because the standards were almost impossible to meet and the IRS really did not encourage them. But in 1992, the IRS decided that they had a major problem with accounts receivable inventory and a growing number of cases reported as currently not collectible.  The new policy espoused by the IRS was that they would accept an OIC when it was unlikely that the tax liability could be collected in full and the amount offered reasonably reflected collection potential.

$150 Processing Fee

9.120 The Internal Revenue Service now charges a $150 application fee for the processing of offers in compromise. The IRS expects that this fee will help offset the cost of providing this service, as well as reduce frivolous claims. The law authorizes federal agencies to charge fees to defray the costs of providing certain services. Guidelines encourage such fees for benefits beyond those provided to the general public. The IRS anticipates the fee also will reduce the number of offers that are filed inappropriately — for example, solely to delay collection — enabling the agency to redirect resources to the processing of acceptable offers. Offers based solely on hardship may seek a fee waiver.

Rejections

9.130 RRA98 required that the IRS implement procedures to review all proposed IRS rejections of taxpayer offers in compromise and requests for installment agreements prior to the rejection being communicated to the taxpayer.  RRA98 provides that the IRS will adopt a liberal acceptance policy for offers in compromise to provide an incentive for taxpayers to continue to file tax returns and continue to pay their taxes.

Appeal Rights

9.140 Although the Internal Revenue Service had previously provided for administrative review of Offers in Compromise by the Appeals Division there was no specific statutory requirement for such review. RRA98 provided specific rights of independent review of Offers in Compromise by the Internal Revenue Service Office of Appeals.

Doubt as to Liability Offers

9.150  Another protection provided by RRA98 is with respect for Offers in Compromise based on doubt as to liability.  In the past the Internal Revenue Service has occasionally rejected offers with respect to doubt as to liability solely because it could not find its administrative file.  The Internal Revenue Service is now prohibited from taking such action.  The Internal Revenue Service has imposed additional duties upon taxpayers seeking compromise liabilities solely on the basis of doubt as to liability by requiring those taxpayers to submit financial statements The Internal Revenue Service is now specifically prohibited from requiring financial statements when offers are submitted based solely on doubt as to liability.

Computation of Offer Amount

9.160 The IRS uses three different methods for determining the adequacy of an offer depending on the period of time the taxpayer proposes for payment of the offer amount.  The methods are:

  1. Cash (paid in 90 days or less), or
  2. Short-Term Deferred Payment (more than 90 days, up to 24 months), or
  3. Deferred Payment (offers with payment terms over the remaining statutory period for collecting the tax.).

NOTE: In all three cases, the IRS  will release any filed Notice of Federal Tax Lien once you have fully paid the offer amount and any interest that has accrued.

Cash Offer

9.170 You must pay cash offers in 5 installments of less. You should offer the realizable value of your assets (quick sale value) plus the total amount the IRS could collect over forty-eight months of payments represent value of income). When the ten-year statutory period for collection expires in less than forty-eight months, you must use the Deferred Payment Chart shown in the instructions to Form 656. The Internal Revenue Service’s method of determining the adequacy of an offer could be best expressed by:

Quick Sale Value Plus Present Value of Income Equals Offer In Compromise    (QSV + PVI = OIC)

In applying this formula, the IRS determines the Quick Sale Value of all of the client’s assets and then adds the amount of the present value of the taxpayer’s ability to pay. It aggregates the two numbers to arrive at an Offer in Compromise amount.

Short-Term Deferred Payment Offer

9.180 This payment option requires you to pay in 6 payments or more. The offer must include the realizable value of your assets in addition to the total amount the IRS could secure over sixty months (or the remainder of the ten-year statutory period for collection, whichever is less) through monthly payments.  The IRS may file a Notice of Federal Tax Lien on tax liabilities compromised under short-term payment offers.

Deferred Payment Offers

9.190 This payment option requires you to pay the offer amount within the remaining statutory period for collecting the tax.  The offer must include the realizable value of your assets plus the amount the IRS could collect through monthly payments during the remaining life of the collection statute. The deferred payment option itself has three payment options:

Option One is:  Full payment of the realizable value of your assets within 90 days from the date the IRS accepts your offer and Your future income in monthly payments during the remaining life of the collection statute;

Option Two is:  Cash payment for a portion of the realizable value of your assets within 90 days from the date the IRS accepts your offer and Monthly payments during the remaining life of the collection statute for both the balance of the realizable value and your future income;

Option Three is:  The entire offer amount in monthly payments over the life of the collection statute. Just as with short-term deferred payment offers, the IRS may file a Notice of Federal Tax Lien.

Corporate Trust Fund Liabilities

9.200 The IRS has recently changed its rules with respect to in business offers in compromise. It now requires that each potentially responsible officer of the company sign an agreement to assessment of the trust fund recovery penalty in advance of consideration of any corporate or LLC offer. The new system is extremely unfair because the IRS is requiring even those who should not be held liable for the TFRP to agree to liability and assessment. Only after the liability has been assessed against a non-responsible person may she file a claim for refund and defend against the penalty. The system is extremely unfair and represents an attempt to deprive officers of their statutory due process rights. 

Pursuit of Officers After Compromise

9.210 Under this new system the IRS could compromise with the corporate entity based upon its ability to pay and then continue to pursue responsible officers for the remaining trust fund liability. The owners and officers would face continuing economic risk. The system also makes it impossible for a company that had a change in leadership to propound an offer in compromise. Prior officers would probably refuse to consent to the demands of the IRS that they waive their TFRP appeal rights thereby negating any opportunity for the company to have its offer considered by the IRS.

Promote Effective Tax Administration

9.220 As part of the IRS Restructuring and Reform Act of 1998 (RRA 98), Congress added section 7122(c) to the Internal Revenue Code. That section provides that the Service shall set forth guidelines for determining when an offer in compromise should be accepted. Congress explained that these guidelines should allow the Service to consider:

  • Hardship,
  • Public policy, and
  • Equity

 

Treasury Regulation 301.7122-1 authorizes the Service to consider offers raising these issues.  These offers are called Effective Tax Administration (ETA) offers.