IRS Collection Procedures-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 

 

Table 16.  Delinquent Collection Activities, FY 2007–2010
Activity 2007 2008 2009 2010
(1) (2) (3) (4)
Returns filed with additional tax due:        
Total yield from unpaid assessments [1] 43,318,830  46,446,261  40,520,516  44,173,492 
Credit transfers 11,366,431  17,980,613  13,324,478  14,343,418 
Net total amount collected 31,952,399  28,465,648  27,196,038  29,830,074 
Taxpayer delinquent accounts (thousands):        
Number in beginning inventory 7,074  8,240  9,232  9,667 
Number of new accounts 7,146  7,099  6,821  7,994 
Number of accounts closed 5,980  6,107  6,385  7,269 
Ending inventory:        
Number 8,240  9,232  9,667  10,391 
Balance of assessed tax, penalties,

and interest [2]

83,488,988   94,357,717  103,241,178  114,235,064 
Returns not filed timely:        
Delinquent return activity:        
5



Net amount assessed [3]

30,287,802  24,888,918  33,413,470  29,108,690 
Amount collected with delinquent returns 3,968,163  3,773,528  3,204,391  2,353,832 
Taxpayer delinquency investigations    (thousands) [4]:        
Number in beginning inventory 3,874  3,732  3,433  3,530 
Number of new investigations 2,587  1,972  2,211  2,273 
Number of investigations closed 2,729  2,271  2,113  2,103 
Number in ending inventory 3,732  3,433  3,530  3,700 
Offers in compromise (thousands) [5]:        
Number of offers received 46  44  52  57 
Number of offers accepted 12  11  11  14 
Amount of offers accepted 228,975  200,103  157,261  129,668 

 

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 With 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.

Retained Jurisdiction of IRS Office of Appeals (“Appeals”)

4.70    The Appeals office that makes the determination at a CDP hearing retains jurisdiction over that determination, including any subsequent hearings and collection actions taken with respect to that determination.

Equivalent Hearings

4.80    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.  IRC SECTION 6330

  

Notice and Opportunity for Hearing Before Levy

5.10 The focus of this section will be on the distinctions of the section 6330 CDP hearing from the section 6320 CDP hearing just discussed. Many of the issues discussed above are equally applicable under section 6330-i.e., the issues which can be raised at a CDP hearing, contents of notice, opportunities for judicial review, retained jurisdiction of Appeals, “equivalent hearings,” etc.

  • Operational/conceptual distinctions between 6320 and 6330: IRC 6320′s key date is the date the NFTL is filed. 6330′s key date is the date of the CDP hearing notice (FINAL NOTICE) or if SITLP or Jeopardy situations, the date of levy.

Overview

5.20

  • Notice is given of a right to a CDP hearing at least 30 days prior to levy on property or rights to property, other than a State tax refund, in non-jeopardy situations.
  • CDP hearing is with respect to the tax liability for the taxable period or periods for which the levy is intended to be made.

In jeopardy situations, and in cases where a levy is made on a State tax refund, notification to the taxpayer of a right to a hearing is not required to be given until after the levy action has occurred.

  • The section 6330 notice of the right to a CDP hearing can be combined with the Notice of Intent to Levy in IRC section 6331 (d), or issued separately. This will be addressed further below.
  • The section 6330 notice should set forth the amount of unpaid tax, the right to a hearing, and a statement that the IRS intends to levy and the taxpayer’s rights with respect to the levy action.

The statement should also set forth the Code provisions and procedures pertaining to levy and sale, the administrative appeal procedures with respect to levy and sale, alternatives available to the taxpayer that could prevent levy, and the Code provisions and procedures pertaining to redemption and release of liens.

  • Notice is to be given in the same manner as a section 6320 notice EXCEPT that it must be sent return receipt requested if sent by certified or registered mail.

Requirements of Notice

5.30

  • As with the section 6320 notice, a person whose property or rights to property may be levied upon must be given notice of his or her rights to a CDP hearing. These requirements do NOT apply in the case of jeopardy levies and levies on State tax refunds.
  • This notice must be given not less than 30 days prior to the date of the first levy with respect to the unpaid tax liability for the taxable period for which the levy may be made.
  • Section 6330 notice need only be given to the liable taxpayer. The IRS is not required to give section 6330 notice to nominees.
  • The taxpayer must request the section 6330 hearing within the 30-day period from the date of the CDP hearing notice, or will lose the right to a CDP hearing, court review, and retained jurisdiction of Appeals. If the taxpayer requests a hearing after the 30 day period, but within 1 year of the CDP hearing notice, they will receive an equivalent hearing.

Notification

5.40

  • Notice is generally given in the same manner as for section 6320 notice, EXCEPT that where notice is sent by certified or registered mail, it must be sent return receipt requested.
  • Notice must be given not less than 30 days before the IRS intends to levy on taxpayer’s property or rights to property (except for State tax refunds and jeopardy levies)
  • If the taxpayer did not receive the notice because the IRS did not mail the notice to the taxpayer’s last known address or deliver that notice to the taxpayer, and, therefore, did not timely request a section 6330 hearing, the IRS will cease collection activity with respect to the tax liability for the taxable period shown on the notice.

Right to CDP Hearing

5.50

  • Must be requested within 30-day period.
  • Format of request is same as for section 6320 hearing.
  • As with a section 6320 hearing, attempts may be made for informal resolution prior to a section 6330 hearing. However, the taxpayer must still request a section 6330 hearing within the 30-day period to preserve his or her right to the hearing if the matter cannot be resolved informally.

Disqualified Employment Tax Levies

5.60    The Small Business and Work Opportunity Tax Act of 2007 provided for modification of the collection due process procedures for employment tax liabilities. The new CDP tax law change amended I.R.C. §6330(f) to permit levy to collect employment taxes without first giving a taxpayer a pre-levy CDP notice if the levy is a “disqualified employment tax levy.” This amendment became effective for levies served on or after September 22, 2007. A “disqualified employment tax levy” (DETL) as described in new section 6330(h), is a levy to collect a taxpayer’s employment tax liability if that taxpayer or a predecessor requested a CDP hearing under section 6330 for unpaid employment taxes arising in the two-year period prior to the beginning of the taxable period for which the levy is served. If a DETL is served, then the taxpayer shall be given an opportunity for “the hearing described in this section within a reasonable period of time after the levy.” The taxpayer may seek judicial review in the Tax Court of the determination resulting from the section 6330(f) post-levy hearing.

DETL

5.70    The IRS has published the following guidance regarding DETL’s in the IRM.

DISQUALIFIED EMPLOYMENT TAX LEVIES AND POST-LEVY CDP RIGHTS

  1. A DETL is discretionary. The Service has the option to issue a pre-levy CDP notice for DETL periods, if the situation warrants.

 

Example: The issuance of a pre-levy notice might be advisable if no IRC 6331(d) notice has been issued or there has been no contact with the taxpayer within the last 180 days.

Note: Although a DETL can be issued if a predecessor of the taxpayer requested a CDP hearing that meets the criteria, successor liability will not be pursued until further guidance is issued.

  1. Prior Request for CDP Hearing – The prior request refers to a timely, processable CDP hearing request. Refer to IRM 5.1.9 for information regarding the timeliness and processability of CDP hearing requests. Even if the request is subsequently withdrawn, it qualifies as a prior hearing request. The following can be used to determine if the taxpayer requested a prior CDP levy hearing involving unpaid employment taxes:

 

  1. Case history.

 

  1. A TC 971 AC275 on prior modules indicates a prior timely lien or levy hearing request, although AC275 does not identify whether a request is for a lien or levy hearing. Contact the appropriate ACS CDP Coordinator to determine if the levy hearing was requested. A list of ACS CDP Coordinators can be located on SERP WHO/WHERE.

 

  1. Effective March 17, 2008 a new TC 971 AC630 will be used to identify timely levy hearing requests. This code will be generated when the hearing request is added to the CDP tracking system.

 

Note:  Requests for an equivalent hearing or untimely requests for CDP hearings do not satisfy the requirement of having had a prior hearing request.

  1. A post-levy request for a CDP hearing made in response to a post-levy CDP notice also can constitute a prior CDP hearing request as a basis for a DETL.

 

  1. The period(s) listed by the taxpayer on the CDP hearing request to be used as a basis of a DETL must be listed on a CDP levy notice preceding the request. There should be an unreversed TC 971 AC069 dated within about 30 days of the prior CDP levy hearing request.

 

  1. Two-Year Look Back Period – The two-year look back period is measured from the beginning of the period for which the DETL is served. If the taxpayer requested a CDP levy hearing for employment taxes arising during a calendar quarter that ended during the two-year period, the module meets the criteria for a DETL. 

 


Examples:  

5.80   

Example 1:

  • Taxpayer owes for 4th quarter 2005 (quarter ended 12/31/2005)
  • Taxpayer requested a timely CDP levy hearing
  • Taxpayer accrues additional employment tax liability for the quarter ended 06/30/2006
  • Additional liability qualifies for DETL levy because the taxpayer requested a prior levy hearing for a quarter that ended (12/31/2005) within the two-year look back period (04/01/2004 thru 04/01/2006)

Example 2:

  • Taxpayer owes for 1st quarter 2006 (quarter ended 03/31/2006)
  • Taxpayer requested a timely CDP levy hearing
  • Taxpayer assessed additional employment tax liability for the quarter ended 12/31/2005
  • Additional liability does not qualify for DETL levy because the taxpayer requested a prior levy hearing for a quarter that ended (03/31/2006) outside the two-year look back period (10/01/2003 thru 10/01/2005)

Example 3:

  • Taxpayer owes for 1st quarter 2004 (quarter ended 03/31/2004)
  • Taxpayer requested a timely CDP levy hearing.
  • Taxpayer accrues additional employment tax liability for the quarter ended 06/30/2006
  • Additional liability does not qualify for DETL levy because the taxpayer did requested a prior levy hearing for a quarter that ended (03/31/2004) outside the two-year look back period (04/01/2004 thru 04/01/2006)

Example 4:

  • Taxpayer owes for 4th quarter 2005 (quarter ended 12/31/2005)
  • Taxpayer requested an equivalent levy hearing
  • Taxpayer accrues additional employment tax liability for the quarter ended 06/30/2006
  • Additional liability does not qualify for DETL levy. The taxpayer requested a prior levy hearing for a quarter that ended (12/31/2005) within the two-year look back period (04/01/2004 thru 04/01/2006). However, it was not a timely CDP levy hearing request.

Levy Procedures on DETL’s

5.90    The IRS has published the following guidance for its collection employees on the methods for levy on DETL’s.

DETL Levies

  1. When warranted, the Service may exercise its discretion to issue a pre-levy CDP notice for DETL periods; i.e., even where a taxpayer’s employment tax liabilities meet DETL criteria.

 

Example:  The issuance of a pre-levy notice might be advisable if no IRC 6331(d) notice has been issued or there has been no contact with the taxpayer within the last 180 days.

  1. A pre-levy DETL CDP notice should be issued if the prior CDP hearing request was made by the taxpayer’s predecessor. Predecessor hearing requests should not be used as a basis of a DETL until the term predecessor is defined in the CDP regulations.

 

  1. If the tax period meets the criteria for issuing a DETL and levy action is determined to be appropriate:

 

  • Make sure the IRC 6331(d), Notice of Intent to Levy, was properly issued.

 

Note: This is the CP 504 notice or the “Status 58″ notice. If the CP 504 notice was not issued, issue the pre-levy CDP notice, L1058. This meets the IRC 6331(d) and IRC 6330 requirement. If the CP 504 notice was not issued the DETL can only be issued 30 days after issuance of the L1058 per IRC 6331(d).

  • Document the ICS case history regarding the DETL determination, and

 

Example: DETL to be issued for tax periods 01-200606 and 01-200609. TP qualifies for a DETL based on CDP levy hearing requested on 07/27/2007 for tax periods 01-200512 and 01 200603.

  • Prepare and issue the DETL

 

Note: ICS will block revenue officer issuance of the DETL. The revenue officer group manager will need to initiate the DETL action on ICS by answering yes when ICS prompts with the following: “Final Notice Date is not 30 days prior to levy. Jeopardy Levies Require Additional Approval. Continue (Yes or No)?” This is a requirement because there is no TC 971 AC 069 on the module.

  1. If a DETL is served, send the post-levy CDP notice with the taxpayer’s copy of the levy. Letter 1058-D, “Notice of Levy and Notice of Your Right to a Hearing” is used to provide post-levy CDP rights.

 

Caution: If the taxpayer received a pre-levy CDP notice (L1058) for the employment tax period(s) being levied, do not issue a post-levy CDP notice (L1058-D).

  1. Both the post-levy and/or pre-levy CDP notice must be:

 

  1. Given in person,

 

  1. Left at the taxpayer’s home or business, or

 

  1. Sent to the taxpayer’s last known address by certified or registered mail.

 

Note: Use registered mail only if the taxpayer is outside the United States. There is no international certified mail.

Note: Refer to IRM 5.11.1.2.1.1(1)(2)(3), Last Known Address, for last known address definition and actions.

Exception: Where L1058-D has been correctly sent to the taxpayer’s last known address and another address is subsequently found, do not send an additional L1058-D, relating to the same employment tax liability, to the new address.

Exception: If L1058-D is mistakenly sent to an address other than the last known address, immediately send a new L1058-D to the correct last known address.

  1. Include a copy of the levy, Publication 594, Publication 1660 and Form 12153 with the L1058-D.

 

  1. If the L1058-D is issued more than 10-days after issuing the DETL, document the reason in the ICS history.

 

  1. DETL post-levy hearing requests are processed similar to other hearing requests. Refer to IRM 5.1.9, Collection Appeal Rights, for guidance in processing hearing requests.

 

Note: A DETL may be served during a timely requested pre or post-levy CDP hearing or judicial review of such hearing to collect employment tax liabilities (DETL tax periods) subject to the hearing.

Example: Collection is a risk (e.g., taxpayer’s business is deteriorating or taxpayer is pyramiding).

Note: See IRM 5.1.9.3 (7), Disqualified Employment Tax Levy, for help in determining actions or new information items that may affect the decision to levy.

 

Jeopardy Levies, State Tax Refund Levies and Required Notices

5.100

  • As discussed above, the section 6330 procedures do not entitle the taxpayer to a section 6330 hearing prior to a jeopardy levy or a levy upon a State tax refund.
  • Jeopardy levies-The taxpayer will be entitled to a post-levy section 6330 notice   and will be entitled to a post-levy section 6330 hearing and court review.
  • State tax refund levies-The taxpayer will receive pre-levy section 6331(d) notice (URGENT NOTICE), post-levy section 6330 notice, and will be entitled to a post-levy section 6330 hearing and court review.
  • In other cases, as previously discussed, a combined section 6331 (d)/6330 notice will be sent, entitling the taxpayer to a pre-levy section 6330 hearing.

 

6.  EXTENSIONS OF TIME TO PAY

Granting of Extensions

6.10    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

6.20    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

6.30    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.

6.40    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

6.50    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.

7.  COLLECTION INFORMATION STATEMENTS

CIS's

7.10    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

7.20    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

7.30    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.

Form 433-B

7.40    The IRS utilizes Form 433-B to gather information from businesses. Page 2, block 15, requests that your client disclose each of its accounts receivable. The author believes that such a disclosure is foolhardy at the initial negotiating session. If disclosure is made and the negotiations fail, the IRS may levy your client's accounts receivable, thereby destroying its business.

Substantial Net Worth

7.50  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

7.60    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.

 

  1. 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.

 

  1. 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.

 

  1. 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.

 

  1. 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.

 

  1. 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

7.70    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

7.80    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.  

 

8.  VARIATIONS ON INSTALLMENT AGREEMENTS

Payroll Deduction

8.10    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

8.20    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.

Bargaining Tactics

8.30    For a client who has defaulted on previous payment agreements, and/or who has suffered a Notice of Levy on his or her wages, the Payroll Deduction Agreement gives the IRS the assurances it may need to grant or reinstate a payment plan. The practitioner should be aware of this alternative and, if necessary, be the one to propose such a plan to the Service when encountering a hard-nosed employee who refuses to release a Notice of Levy because of the taxpayer’s prior track record.

Direct Debit Installment Agreements

8.40  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.

Collection Appeals Program

8.50    Along with a rejection of an installment agreement request, taxpayers must be immediately notified of their appeal rights. Taxpayers, whose requests are rejected, as well as those whose agreements are in default or have been terminated, must follow the procedures in IRM 5.1.9.4.1 “Request for CAP Appeal.” Taxpayers may appeal rejections, defaults, proposed terminations, and terminations within 30 days. The time frame to request these types of appeals cannot be extended. [IRM 5.14.9.4]

Levy Restrictions and Installment Agreements

8.60    No levy may be made on taxpayer accounts:

  • while requests for installment agreements are pending;
  • while installment agreements are in effect;
  • for 30 days after requests for agreements are rejected;
  • for 30 days after agreements are terminated; and
  • while an appeal of a default, termination or rejection is pending or unresolved.

 

Levies may be served during the periods described above:

  • if taxpayers waive the restriction in writing;
  • if collection is in jeopardy (i.e. if a condition allowing a jeopardy assessment exists.) Unless notice of the right to appeal was previously provided, taxpayers must be notified of their appeal rights after jeopardy levies. (See Policy Statement P-4-88. See also IRM 5.11.1.3.9 and Exhibit 1-1 of IRM 5.11 for approval levels for jeopardy levies. Approval level depends on whether notices described in IRM 5.11.1.2.1 were sent, and if required waiting periods have passed);
  • for bal due accounts not included in current installment agreements. (The new tax periods are not affected by the appeal period for defaulted installment agreements.)[IRM 5.14.1.5 ]

 

Partial Payment Installment Agreements

8.70    The IRS publishes the following guidance for collection employees regarding Partial Payment Installment Agreements:

  1. No Asset/No Equity Cases: A PPIA may be granted if a taxpayer has no assets or equity in assets; or has liquidated available assets to make a partial tax payment.

 

  1. Asset Cases: A PPIA may be granted if a taxpayer does not sell or cannot borrow against assets with equity because:

 

  1. the assets have minimal equity or the equity is insufficient to allow a creditor to loan funds;

 

Example: some lenders require equity of greater than 20% of property value in order to grant the loan.

  1. the taxpayer is unable to utilize equity;

 

Example: the property is held as a tenancy by the entirety when only one spouse owes the tax and the non-liable spouse declines to go along with the attempt to borrow, and the property does not appear to have been transferred into the tenancy to avoid the tax collection.

  1. the asset has some value but the taxpayer is unable to sell the asset because it is currently unmarketable;

 

Example: the business taxpayer owns a vacant lot in a high-value area, but the lot cannot be sold until it meets certain environmental regulations

  1. the asset is necessary to generate income for the PPIA and the government will receive more from the future income generated by the asset than from the sale of the asset;

 

  1. it would impose an economic hardship on the taxpayer to sell property, borrow on equity in property, or use a liquid asset to pay the taxes. Economic hardship is defined in 26 C.F.R. 301.6343-1 as not meeting reasonable basic living expenses.

 

Example: the taxpayer is on a fixed income, such as social security, and has the ability to make small monthly payments. The only other asset is the taxpayer’s primary residence and there is equity in the property. The revenue officer does a risk analysis and determines that seizing the property would cause an economic hardship because the taxpayer cannot find suitable replacement housing and meet necessary living expenses if the property would be seized.

  1. The taxpayer’s loan payment would exceed the taxpayer’s disposable income and they would not qualify for a loan.

 

  1. The taxpayer will normally be required to make a good faith attempt to utilize equity before the Service will approve a PPIA. This includes applying normal business standards when applying for loans using equity as collateral. Taxpayers will also be required to submit copies of all documents that are used in the loan application process.

 

  1. If the taxpayer does not comply with the requirement of making a good faith attempt to use equity in assets or is not willing to make monthly payments consistent with ability to pay, the taxpayer will be considered a “won’t pay” and seizure/levy action may be appropriate. If enforcement action is appropriate, a PPIA will not be granted. If the taxpayer is in pending IA status, follow rejection procedures in sections 5.14.1.3 and 5.14.9.3. The case history should be documented with a statement as to why the PPIA was not granted.

 

  1. If the taxpayer is unable to secure a loan or liquidate an asset following a good faith attempt to do so, the revenue officer will need to make a seizure/levy determination (See IRM 5.10.1.3).

 

  1. If it has been determined that enforcement action is not appropriate, a PPIA can be granted. The case history should be documented as follows: “Seizure (or levy) of (name of asset) has been considered, but it is not the appropriate resolution because (provide reason)” .

 

Collection Statute Expiration Date

8.80    Consideration will be given to extending the Collection Statute Expiration Date.  By policy, the IRS will now only extend the CSED if an asset will come into the possession of the taxpayer after the expiration of the CSED and liquidation of that asset offers the best case resolution. [IRM 5.14.2.1.3]

9.  RECENT RULES CHANGES

9.10    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.

9.15    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.

9.20    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.

9.25    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.

9.30    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.

9.35    Taxpayer Beware

A direct debit is not without risks to the taxpayer. If the IRS should make an error in placing a direct debit the taxpayer will find that it is almost impossible solve problems via the IRS 800 numbers. The National Taxpayer Advocate has noted in her last several reports to Congress that many taxpayers are placed on hold for interminable times and many calls are dropped. Even those lucky enough to navigate through IRS voicemail Hell find that those answering the phone are less than helpful. Therefore even with the new relaxed rules for liens for those accepting a direct debit alternative one must balance that benefit with the potential that an IRS error may prove almost impossible to resolve. The only thing that could be worse than the current IRS help lines would be if it contracted its phone services to India like many large American corporations.

9.40    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.

9.45    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.

9.50    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.

10.  TAXPAYER ASSISTANCE ORDERS

Right to Apply for Assistance

10.10  The taxpayer has the right to apply for assistance from the Taxpayer Advocate if he or she is suffering or is about to suffer significant hardship. Taxpayers have the statutory right to appeal unreasonable decisions by collection officers. If your request for an agreement is unreasonably denied, you may request a Taxpayer Assistance Order (TAO) which may require collection personnel to release property levied upon or to cease any actions or refrain from any action with respect to the taxpayer. [IRC § 7811(b)] A request is initiated by filing form 911 with the Taxpayer Advocate. The mere existence of these rights tends to mitigate the unreasonableness of some collection personnel. Do not continually threaten to appeal a TAO, but beware of your rights. You must establish that the collection actions will cause your client significant hardship to receive a Taxpayer Assistance Order.

Taxpayer Assistance Orders

10.20  The Internal Revenue Service Restructuring and Reform Act of 1998 expanded the definition of “significant hardship” by including the following circumstances:

  • The existence of an immediate threat of adverse action;
  • A delay of more than thirty (30) days in resolving the taxpayers account problems;
  • The payment by the taxpayer of significant cost (including fees for professional services) if relief is not granted; or
  • Irreparable injury or a long standing adverse impact, if relief is not granted. [Act§1102; IRC§7811]

Nonexclusive

10.30  The list is not intended to be exclusive. A TAO may also be issued in any case which the taxpayer meets other requirements that will be spelled out in regulations. [IRC § 7811 (a)(1)(B)] The ranks are to be based in consideration of equity. If the Internal Revenue Service has failed to follow published guidance, including the Internal Revenue Manual, the Taxpayer Advocate is required to construe the facts taken into account in a manner most favorable to the taxpayer. [Conf. Rept. 1 05-599(Pub. L. 105-206) p. 216]

TBR2

10.35  TBR2 expanded the authority of the Taxpayer Advocate to issue taxpayer assistance orders. The Taxpayer Advocate may now “order the IRS to take any action as permitted by law” as opposed to simply ordering an IRS employee “to cease any action.”  A taxpayer assistance order may no longer be revoked by an Area Director. That authority now rests solely with the Commissioner of Internal Revenue Service or the Deputy Commissioner and only if a written explanation listing the reasons for modification is provided to the Taxpayer Advocate (Problem Resolution Officer). [IRC § 7811(c)]

Extension of Statute of Limitations

10.40  The submission of a Form 911 extends the statute of limitations for the duration of the time the matter is under consideration. The statute begins to run again on the date the Problem Resolution Officer makes a determination on the application. [IRC § 7811(d)]

11.  OFFER IN COMPROMISE

Number of Offers

11.10  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        

11.15  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

11.20  In February, 2007 the 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

11.30  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

11.40  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

11.50  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

11.60  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

11.70  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

11.80  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

11.90  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

11.100 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

11.110 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.

Offer In Compromise Procedures

11.120 The IRS released a new Form 656 in 2007. The form also requires that the taxpayer submit extensive forms 433A and 433B. All OIC’s are processed centrally at two Service Centers: Memphis for taxpayers in most western states and Brookhaven for eastern states. All but the most complex offers are worked from the centers.

Supporting Documents

11.130 The financial statements require the proponent to supply documentation for each item on the forms, i.e. pay stubs, car payment book, mortgages, pay stubs, charge account statements, and bank statements. The IRS considers smaller liability offers without conducting a field investigation, therefore it is requiring the proponent to supply all the info to make a decision without field verification.

$150 Processing Fee

11.140 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.

Addresses

11.150 All offers from taxpayers living in Alaska, Alabama, Arizona, California, Colorado, Hawaii, Idaho, Kentucky, Louisiana, Mississippi, Montana, Nevada, New Mexico, Oregon, Tennessee, Texas, Utah, Washington, Wisconsin, or Wyoming must be filed as follows:
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Portions Reprinted from

 

“REPRESENTING THE AUDITED TAXPAYER BEFORE THE IRS”

 

AND

 

REPRESENTATION BEFORE THE COLLECTION DIVISION OF

THE IRS

 

by

 

Robert E. McKenzie

 

WITH PERMISSION FROM

 

THOMSON WEST

Rochester, NY

 

All Rights Reserved

 

COPYRIGHT 2011

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