Forbes Blog: IRS Relaxes Offer In Compromise Rules

IRS Relaxes Offer In Compromise Rules

Offers in Compromise

Offer In Compromise

Robert E. McKenzie ©2015

 

FRESH START INITIATIVE

2012- Fresh Start Initiative For offers in Compromise

1.10    On May 21, 2012 the Internal Revenue Service announced another expansion of its “Fresh Start” initiative by offering more flexible terms to its Offer in Compromise (OIC) program that will enable some of the most financially distressed taxpayers clear up their tax problems and in many cases more quickly than in the past.

 

Criticism of OIC Policies

1.20    Over the years the IRS offer in compromise program has been the subject of a great deal of criticism by Congress, the National Taxpayer Advocate and taxpayer representatives. The new initiative represents the most dramatic liberalization of IRS settlement policies ever announced. It represents a welcome change from an agency which has always placed substantial roadblocks to those seeking to compromise their tax obligations.

The announcement focused on the financial analysis used to determine which taxpayers qualify for an OIC. This announcement also enables some taxpayers to resolve their tax problems in as little as two years compared to four or five years in the past.

Changes

1.30    The changes announced included:

•           Revising the calculation for the taxpayer’s future income.

•           Allowing taxpayers to repay their student loans.

•           Allowing taxpayers to pay state and local delinquent taxes.

•           Expanding the Allowable Living Expense allowance category and amount.

 

Can Liability Be Paid

1.40    In general, an OIC is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed.  An OIC is generally not accepted if the IRS believes the liability can be paid in full as a lump sum or a through payment agreement. The IRS looks at the taxpayer’s income and assets to make a determination of the taxpayer’s reasonable collection potential. OICs are subject to acceptance on legal requirements.

 

Past Reluctance to Accept OIC’s

1.50    In the past they are strictly applied its rules with respect to taxpayers’ budgets and valuation of assets. As a result most taxpayers who sought a compromise received a rejection from the Internal Revenue Service. Below are the statistics for offer acceptances during the past several years:

Offers in compromise (thousands) [6]:

2012

 2013

 2014

Number of offers received

64

74

68

Number of offers accepted

24

31

27

Amount of offers accepted

195,652

195,379

179,354

% accepted

38%

42%

40%

 

 

Reasonable Collection Potential

1.60    Under the new policy when the IRS calculates a taxpayer’s reasonable collection potential, it will now look at only one year of future income for offers paid in five or fewer months, down from four years; and two years of future income for offers paid in six to 24 months, down from five years. All offers must be fully paid within 24 months of the date the offer is accepted. The prior policy resulted in IRS demands for very large compromise payments even when the taxpayer had few assets. The revisions will result in a 75% reduction in the amount required to settle tax obligations in five or fewer months. They will result in a 60% reduction in the amount required to be fully paid within 24 months.

Dissipated Assets

1.70    Other changes to the program include narrowed parameters and clarification of when a dissipated asset will be included in the calculation of reasonable collection potential. Over the past several years the IRS’s use the concept of dissipated assets to demand Supp substantial amounts in compromise of taxes even after the taxpayer had lost assets. For example in one matter a taxpayer had lost substantial amounts of money in the 2008 and 2009 stock market collapse. Notwithstanding that loss the IRS offer in compromise examiner took the position that the taxpayer would have to include the value of those losses in his total assets in order to receive a compromise. The IRS also aggressively claimed that taxpayers who lived and upper-middle-class lifestyle after their tax problems arose would be subject to its draconian dissipated asset theory.

Exclusion of Income Producing Property

1.80    The IRS also announced that equity in income producing assets generally will not be included in the calculation of reasonable collection potential for on-going businesses.

Allowable Living Expenses

1.90    When reviewing a taxpayer’s budget the IRS applies Allowable Living Expense standards to determine a taxpayer’s ability to pay.  The standard allowances impose strict budgets upon a taxpayer in collection determinations by incorporating average expenditures for basic necessities. Notwithstanding substantial criticism of the IRS over the years it is insisted upon applying the same standards for food and clothing in all areas of the country whether high cost locales likeAlaska,Hawaii, andNew York City or lower cost Midwestern areas. These standards are used when evaluating offer in compromise requests.

Expanded Allowable Expenses

1.100  In response to criticisms from the national taxpayer advocate and taxpayer representatives the IRS expanded the National Standard miscellaneous allowance to include additional items.  Taxpayers can use the miscellaneous allowance for expenses such as credit card payments and bank fees and charges.

In the past the IRS refused to recognize taxpayer obligations to pay student loans and state tax delinquencies. The new guidance now allows payments for loans guaranteed by the federal government for the taxpayer’s post-high school education.  In addition, payments for delinquent state and local taxes may be allowed based on percentage basis of tax owed to the state and IRS.

Expanding Universe of Eligible Taxpayers

1.110  The new offer in compromise policies should dramatically expand the universe of taxpayers eligible to compromise their outstanding tax obligations. In the past taxpayers generally had to pay the IRS the total value of all their assets plus 60 times their net monthly income after using the IRS strict allowable expense standards. The greater flexibility of the new policies will reduce the valuation of taxpayer assets and reduce the value of the future income component used to determine acceptable offers.

Offer in Compromise Forms

1.120  In 2012 the IRS issued a new offer in compromise form. 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 downpayment requirements taxpayers must submit Form 656-PPV with the required downpayment.

Offers in Compromise

1.130  In 2011 the IRS also expanded its 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.

TIPRA

1.140  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

1.150  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

1.160  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

1.170  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

1.180  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

1.190  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

1.200  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.


 

IRS OIC Low Income Guidelines

 

Size of family unit    48 contiguous states and D.C.      Hawaii            Alaska

1                                  $2,431                                    $2,796            $3,038

2                                  $3,277                                    $3,769            $4,096

3                                  $4,123                                    $4,742            $5,154

4                                  $4,969                                    $5,715            $6,213

5                                  $5,815                                    $6,688            $7,271

6                                  $6,660                                    $7,660            $8,329

7                                  $7,506                                    $8,633            $9,388

8                                  $8,352                                    $9,606            $10,446

For each

additional person, add        $ 846                                     $ 973             $1,058

 

Deemed Accepted

1.220  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

1.230  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

1.240  The IRS released a new Form 656 in 2015. The form requires that the taxpayer submit extensive forms 433A and 433B. All OIC’s are processed centrally at two Service Centers:Memphis for taxpayers most western states and Brookhaven for eastern states. All but the most complex offers will be worked from the centers.

Supporting Documents

1.250  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.

$186 Processing Fee

1.260  The Internal Revenue Service now charges a $186 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

1.270  All offers are submitted to a Service Center based upon address of the taxpayer.

 

 

If you reside in:                                                       Mail your application to:

AK, AL, AR, AZ, CO, FL, GA, HI, ID, KY,

LA, MS, MT, NC,  NM, NV, OK, OR, SC,

TN, TX, UT, WA, WI, WY                                        Memphis IRS Center

COIC Unit P.O. Box 30803,

AMC Memphis, TN 38130-0803

1-866-790-7117

 

CA, CT, DE, IA, IL, IN, KS, MA, MD,

ME, MI, MN, MO, ND, NE, NH, NJ,

NY, OH, PA, RI, SD, VT, VA, WV;

DC, PR, or a foreign address                                Brookhaven IRS Center

COIC Unit P.O. Box 9007

Holtsville, NY 11742-9007

1-866-611-6191

 

 


 

 

Prohibition Of Levy

1.280  RRA98 prohibits the IRS from collecting a tax liability by levy (1) during any period that a taxpayer’s offer in compromise for that liability is being processed, (2) during the 30 days following rejection of an offer, (3) during any period in which an appeal of the rejection of an offer is being considered, and (4) while an installment agreement is pending. ['2462(b)] [IRC '6331(k)]

Appeal Rights

1.290  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

1.300  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

1.310  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 5 or fewer installments or
  2. Periodic offer: Paid in 5 or more payments over up to 24 months).

NOTE: In both 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

1.320 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). The IRS will not charge interest on the offer amount from the acceptance date until it receives full payment. 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. The following paragraphs will discuss the Internal Revenue Service’s methodology for determining quick sale value and the present value of income.

Periodic Offer

1.330  This payment option requires you to pay the offer within two years of acceptance. 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

1.340  This payment was eliminated in 2012.

Future Income for Offers in Compromise

1.350  The Internal Revenue Service March 10, 2011 revised its guidance to employees on figuring the value of a taxpayer’s future income in evaluating an offer in compromise, with specific instructions to consider a variety of issues for unemployed or underemployed workers.  The memorandum (SBSE 05-0310-012) noted that future income is defined as an estimate of the taxpayer’s ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future.

As a general rule, the guidance said, the taxpayer’s current income will be used in the analysis of future ability to pay. “Consideration should be given to the taxpayer’s overall general situation, including such factors as age, marital status, number and age of dependents, level of education or occupational training, and work experience,” the document said.

Agency Notes Variety of Situations

1.360  IRS noted there are situations that may warrant placing a different value on future income than on current or past income. Such situations include those where income will increase or decrease, or current necessary expenses will increase or decrease, the agency said.

 

Other situations may include those where a taxpayer:

  • is temporarily or recently unemployed or underemployed,
  • is unemployed and is not expected to return to a previous occupation or previous level of earnings,
  • is long-term unemployed,
  • is long-term underemployed, has an irregular employment history or fluctuating income,
  • is in poor health and the ability to continue working is questionable,
  • is close to retirement and has indicated he or she will be retiring, or will file for bankruptcy.

 

Income Averaging Addressed

1.370  IRS told its field personnel that judgment should be used in determining the appropriate time to apply income averaging on a case-by-case basis. “All circumstances of the taxpayer should be considered” in making this decision, the agency said.

Further, IRS said, in situations where the taxpayer’s income does not appear to meet stated living expenses, the difference should not be included as additional income to the taxpayer. Such inclusion should only be done if there are clear indications that the taxpayer is receiving, and will continue to receive, additional income not included on the collection information statement, according to the document.

As a general rule, the guidance said, “Employees need to exercise good judgment when determining future income.” The history must be clearly documented and support the known facts and circumstances of the case, and include analysis of the supporting documents, IRS noted.

Facts and Circumstances Approach Directed

1.380  The memo directed IRS workers to evaluate each case on the facts and circumstances, and said the history “must clearly explain the reasoning behind our actions.”

The agency said there are cases where it may be appropriate to use the taxpayer’s current income and secure a future income collateral agreement, particularly in cases where the future income is uncertain, but where it is reasonably expected that the income will increase.

New more Onerous Allowable Expense Standards

1.390  In March, 2015 the IRS again revised the standards. 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 forHawaii andAlaska. 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 four types of necessary expenses:

  • National Standards
  • Out-of-Pocket Health Care
  • Local Standards
  • Other Expenses

 

National Standards: These establish standards for reasonable amounts for five necessary expenses. Four of them come from the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey: food, housekeeping supplies, apparel and services, and personal care products and services. The fifth category, miscellaneous, is a discretionary amount established by the Service. It is $116 for one person up to $235 for 4 persons. The IRS allows a total of $300 per month for each member of the household above 4.

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

Out-of-Pocket Health Care Expenses: Out-of-pocket health care expenses include medical services, prescription drugs, and medical supplies (e.g. eyeglasses, contact lenses, etc.). Elective procedures such as plastic surgery or elective dental work are generally not allowed. Taxpayers and their dependents are allowed the standard amount monthly on a per person basis, without questioning the amounts they actually spend. If the amount claimed is more than the total allowed by the health care standards, the taxpayer must provide documentation to substantiate those expenses are necessary living expenses. Generally, the number of persons allowed should be the same as those allowed as exemptions on the taxpayer’s most recent year income tax return. The out-of-pocket health care standard amount is allowed in addition to the amount taxpayers pay for health insurance.

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

  1. A.   Housing – Standards are established for each county within a state. When deciding if a deviation is appropriate, consider the cost of moving to a new residence; the increased cost of transportation to work and school that will result from moving to lower-cost housing and the tax consequences. The tax consequence is the difference between the benefit the taxpayer currently derives from the interest and property tax deductions on Schedule A to the benefit the taxpayer would derive without the same or adjusted expense. Housing costs include rent and/or house payments, taxes, repairs and utilities the IRM provides as follows:

 

The utilities include gas, electricity, water, fuel, oil, bottled gas, trash and garbage collection, wood and other fuels, septic cleaning, and telephone. Housing expenses include: mortgage or rent, property taxes, interest, parking, necessary maintenance and repair, homeowner’s or renter’s insurance, homeowner dues and condominium fees. Usually, this is considered necessary only for the place of residence. Any other housing expenses should be allowed only if, based on a taxpayer’s individual facts and circumstances, disallowance will cause the taxpayer economic hardship. [IRM  5.15.1.9

  1. B.   Transportation - The transportation standards consist of nationwide figures for loan or lease payments referred to as ownership cost, and additional amounts for operating costs broken down by Census Region and Metropolitan Statistical Area. Operating costs were derived from BLS data. 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 no car payment only the operating cost portion of the transportation standard is used to figure the allowable transportation expense. Under ownership costs, separate caps are provided for the first car and second car. If the taxpayer does not own a car a standard public transportation amount is allowed.

 

Vehicle insurance, vehicle payment (lease or purchase), maintenance, fuel, state and local registration, required inspection, parking fees, tolls, driver's license, public transportation. Transportation costs not required to produce income or ensure the health and welfare of the family are not considered necessary. Consider availability of public transportation if car payments (purchase or lease) will prevent the tax liability from being paid in part or full. Public transportation costs could be an option if it does not significantly increase commuting time and inconvenience the taxpayer.

Note: If the taxpayer has no car payment, or no car, question how the taxpayer travels to and from work, grocer, medical care, etc. The taxpayer is only allowed the operating cost or the cost of transportation. [IRM  5.15.1.9]

  1. C.   Other Expenses.  Other expenses may be considered if they meet the necessary expense test – they must provide for the health and welfare of the taxpayer and/or his or her family or they must be for the production of income. This is determined based on the facts and circumstances of each case. If other expenses are determined to be necessary and, therefore allowable, document the reasons for the decision in your history.

 

  1. D.   Conditional expenses. These expenses do not meet the necessary expenses test. However, they are allowable for installment agreements but not offers in compromise if the tax liability, including projected accruals, can be fully paid within five years.

 

  1. E.   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.

 

  1. F.    Generally, the total number of persons allowed for national standard expenses should be the same as those allowed as dependents on the taxpayer’s current year income tax return. Verify exemptions claimed on 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. G.   A deviation from the local standard is not allowed merely because it is inconvenient for the taxpayer to dispose of valued assets.

 

  1. H.   Length. Revenue officers should consider the length of the payments. Although it may be appropriate to allow for payments made on the secured debts that meet the necessary expense test, if the debt will be fully repaid in one year only allow those payments for one year. [ IRM 5.15.1.7 ]

 

Corporate Trust Fund Liabilities

1.400  Several years ago the IRS 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

1.410  Under this 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

1.420  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.

 

Encourage Compliance

1.430  The availability of an Effective Tax Administration (ETA) offer encourages taxpayers to comply with the tax laws because taxpayers will:

  • Believe the laws are fair and equitable, and
  • Gain confidence that the laws will be applied to everyone in the same manner.

 

The Effective Tax Administration (ETA) offer allows for situations where tax liabilities should not be collected even though:

  • The tax is legally owed, and
  • The taxpayer has the ability to pay it in full

 

Only Available If There Is No Doubt As to Liability Or Collectibility

1.440  An Effective Tax Administration (ETA) offer can only be considered when the Service has determined that the taxpayer does not qualify for consideration under Doubt as to Liability (DATL) and/or Doubt as to Collectibility (DATC). The taxpayer must include the Collection Information Statement (Form 433-A and/or Form 433-B) when submitting an offer requesting consideration under Effective Tax Administration (ETA). Economic hardship standard of § 301.6343-1 specifically applies only to individuals.  [IRM 5.8.1.1]

 

Rules for Evaluating Offers to Promote Effective Tax Administration

1.450  The determination to accept or reject an offer to compromise made on the ground that acceptance would promote effective tax administration within the meaning of this section will be based upon consideration of all the facts and circumstances, including the taxpayer’s record of overall compliance with the tax laws.

 

Factors

1.460  Factors supporting (but not conclusive of) a determination of economic hardship include:

 

  1. Taxpayer is incapable of earning a living because of a long term illness, medical condition, or disability and it is reasonably foreseeable that taxpayer’s financial resources will be exhausted providing for care and support during the course of the condition;
  2. Although taxpayer has certain assets, liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses; and
  3. Although taxpayer has certain assets, the taxpayer is unable to borrow against the equity in those assets and disposition by seizure or sale of the assets would have sufficient adverse consequences such that enforced collection is unlikely Temp Reg 301.7122-1T(b)(4)(iv)(B)]

Example 1. Taxpayer has assets sufficient to satisfy the tax liability. Taxpayer provides full time care and assistance to her dependent child, who has a serious long‑term illness. It is expected that the taxpayer will need to use the equity in her assets to provide for adequate basic living expenses and medical care for her child. Taxpayer’s overall compliance history does not weigh against compromise.

Example 2. Taxpayer is retired and his only income is from a pension. The taxpayer’s only asset is a retirement account, and the funds in the account are sufficient to satisfy the liability. Liquidation of the retirement account would leave the taxpayer without an adequate means to provide for basic living expenses. Taxpayer’s overall compliance history does not weigh against compromise.

Example 3. Taxpayer is disabled and lives on a fixed income that will not, after allowance of adequate basic living expenses, permit full payment of his liability under an installment agreement. Taxpayer also owns a modest house that has been specially equipped to accommodate his disability. Taxpayer’s equity in the house is sufficient to permit payment of the liability he owes. However, because of his disability and limited earning potential, taxpayer is unable to obtain a mortgage or otherwise borrow against this equity. In addition, because the taxpayer’s home has been specially equipped to accommodate his disability, forced sale of the taxpayer’s residence would create severe adverse consequences for the taxpayer, making such a sale unlikely. Taxpayer’s overall compliance history does not weigh against compromise.

 

Undermine Compliance

1.470  Factors supporting (but not conclusive of) a determination that compromise would not undermine compliance by taxpayers with the tax laws include:

  • Taxpayer does not have a history of noncompliance with the filing and payment requirements of the Internal Revenue Code;
  • Taxpayer has not taken deliberate actions to avoid the payment of taxes; and
  • Taxpayer has not encouraged others to refuse to comply with the tax laws.[Temp Reg. 301.7122-1T(b)(4)(iv)(C)]

 

Exceptional Circumstances

1.480  The following examples illustrate cases where exceptional circumstances exist such that collection of the full liability will be detrimental to voluntary compliance by taxpayers; and compromise of the liability would not undermine compliance by taxpayers with the tax laws:

Example 1.  In October of 1986, taxpayer developed a serious illness that resulted in almost continuous hospitalizations for a number of years. The taxpayer’s medical condition was such that during this period the taxpayer was unable to manage any of his financial affairs. The taxpayer has not filed tax returns since that time. The taxpayer’s health has now improved and he has promptly begun to attend to his tax affairs. He discovers that the IRS prepared a substitute for return for the 1986 tax year on the basis of information returns it had received and had assessed a tax deficiency. When the taxpayer discovered the liability, with penalties and interest, the tax bill is more than three times the original tax liability. Taxpayer’s overall compliance history does not weigh against compromise.

Example 2. Taxpayer is a salaried sales manager at a department store who has been able to place $2,000 in a tax‑deductible IRA account for each of the last two years. Taxpayer learns that he can earn a higher rate of interest on his IRA savings by moving those savings from a money management account to a certificate of deposit at a different financial institution. Prior to transferring his savings, taxpayer submits an E‑Mail inquiry to the IRS at its Web Page, requesting information about the steps he must take to preserve the tax benefits he has enjoyed and to avoid penalties. The IRS responds in an answering E‑Mail that the taxpayer may withdraw his IRA savings from his neighborhood bank, but he must redeposit those savings in a new IRA account within 90 days. Taxpayer withdraws the funds and redeposits them in a new IRA account 63 days later. Upon audit, taxpayer learns that he has been misinformed about the required rollover period and that he is liable for additional taxes, penalties and additions to tax for not having redeposited the amount within 60 days. Had it not been for the erroneous advice that is reflected in the taxpayer’s retained copy of the IRS E‑Mail response to his inquiry, taxpayer would have redeposited the amount within the required 60‑day period. Taxpayer’s overall compliance history does not weigh against compromise.

 

 

 

 

 

EXHIBITS

 

 

National Standards: Food, Clothing and Other Items

Expense One Person Two Persons Three Persons Four Persons
Food  $315 $588 $660 $821
Housekeeping supplies $32 $66 $65 $78
Apparel & services $88 $162 $209 $244
Personal care products & services $34 $61 $64 $70
Miscellaneous $116 $215 $251 $300
Total $585 $1,092 $1,249 $1,513
More than four persons Additional Persons Amount
For each additional person, add to four-person total allowance: $378

 

 

National Standards: Out-of-Pocket Health Care
The table for health care expenses, based on Medical Expenditure Panel Survey data, has been established for minimum allowances for out-of-pocket health care expenses.

Out-of-pocket health care expenses include medical services, prescription drugs, and medical supplies (e.g. eyeglasses, contact lenses, etc.). Elective procedures such as plastic surgery or elective dental work are generally not allowed.

Taxpayers and their dependents are allowed the standard amount monthly on a per person basis, without questioning the amounts they actually spend. If the amount claimed is more than the total allowed by the health care standards, the taxpayer must provide documentation to substantiate those expenses are necessary living expenses.

The out-of-pocket health care standard amount is allowed in addition to the amount taxpayers pay for health insurance.

 

 

 

Out-of-Pocket Costs

Under 65

$60

65 and Older

$144

 

Transportation

 

Public Transportation


National 
$185

 

  1. Ownership Costs
  One Car Two Cars
National  $517 $1,034
  1.  Operating Costs
  One Car Two Cars
Northeast Region $278 $556
Boston $277 $554
New York $342 $684
Philadelphia $299 $598
Midwest Region $212 $424
Chicago $262 $524
Cleveland $226 $452
Detroit $295 $590
Minneapolis-St. Paul $217 $434
South Region $244 $488
Atlanta $256 $512
Baltimore $250 $500
Dallas-Ft. Worth   $277 $554
Houston $312 $624
Miami $346 $692
Washington, D.C. $277 $554
West Region $236 $472
Los Angeles $295 $590
Phoenix $291 $582
San Diego $301 $602
San Francisco $306 $612
Seattle $192 $384

 

Florida Housing & Utilities

County

Family of 1

Family of 2

Family of 3

Family of 4

Family of 5

or more

Alachua

1,438

1,688

1,779

1,984

2,016

Baker

1,202

1,412

1,488

1,659

1,686

Bay

1,378

1,619

1,706

1,902

1,933

Bradford

1,159

1,361

1,434

1,599

1,625

Brevard

1,418

1,666

1,755

1,957

1,989

Broward

1,833

2,153

2,269

2,530

2,571

Calhoun

1,028

1,207

1,272

1,418

1,441

Charlotte

1,401

1,645

1,733

1,933

1,964

Citrus

1,152

1,353

1,425

1,589

1,615

Clay

1,470

1,726

1,819

2,028

2,061

Collier

1,842

2,163

2,279

2,541

2,582

Columbia

1,116

1,311

1,381

1,540

1,565

DeSoto

1,219

1,431

1,508

1,682

1,709

Dixie

1,024

1,202

1,267

1,413

1,436

Duval

1,425

1,673

1,763

1,966

1,997

Escambia

1,294

1,519

1,601

1,785

1,814

Flagler

1,456

1,710

1,802

2,009

2,042

Franklin

1,220

1,432

1,509

1,683

1,710

Gadsden

1,167

1,370

1,444

1,610

1,636

Gilchrist

1,079

1,267

1,335

1,489

1,513

Glades

991

1,164

1,227

1,368

1,390

Gulf

1,411

1,657

1,746

1,947

1,978

Hamilton

953

1,119

1,179

1,315

1,336

Hardee

1,126

1,322

1,393

1,553

1,578

Hendry

1,128

1,325

1,396

1,557

1,582

Hernando

1,244

1,461

1,540

1,717

1,745

Highlands

1,129

1,326

1,397

1,558

1,583

Hillsborough

1,604

1,884

1,985

2,213

2,249

Holmes

1,061

1,246

1,313

1,464

1,488

Indian River

1,474

1,731

1,824

2,034

2,067

Jackson

1,041

1,223

1,288

1,437

1,460

Jefferson

1,162

1,365

1,438

1,603

1,629

Lafayette

1,197

1,406

1,482

1,652

1,679

Lake

1,432

1,682

1,772

1,976

2,008

Lee

1,590

1,868

1,968

2,194

2,230

Leon

1,455

1,709

1,801

2,008

2,041

Levy

1,087

1,276

1,345

1,500

1,524

Liberty

1,042

1,223

1,289

1,437

1,460

Madison

1,018

1,196

1,260

1,405

1,428

Manatee

1,599

1,878

1,979

2,207

2,243

Marion

1,194

1,402

1,477

1,647

1,674

Martin

1,726

2,027

2,136

2,382

2,420

Miami-Dade

1,807

2,122

2,236

2,493

2,534

Monroe

2,292

2,692

2,837

3,163

3,214

Nassau

1,460

1,715

1,807

2,015

2,047

Okaloosa

1,500

1,761

1,856

2,069

2,103

Okeechobee

1,207

1,418

1,494

1,666

1,693

Orange

1,634

1,919

2,022

2,255

2,291

Osceola

1,561

1,833

1,932

2,154

2,189

Palm Beach

1,809

2,125

2,239

2,496

2,537

Pasco

1,405

1,650

1,739

1,939

1,970

Pinellas

1,516

1,780

1,876

2,092

2,126

Polk

1,318

1,548

1,631

1,819

1,848

Putnam

1,033

1,214

1,279

1,426

1,449

St. Johns

1,779

2,089

2,201

2,454

2,494

St. Lucie

1,484

1,743

1,836

2,047

2,080

Santa Rosa

1,419

1,667

1,756

1,958

1,990

Sarasota

1,577

1,853

1,952

2,177

2,212

Seminole

1,641

1,928

2,031

2,265

2,301

Sumter

1,205

1,415

1,491

1,662

1,689

Suwannee

1,023

1,201

1,266

1,412

1,434

Taylor

1,020

1,198

1,262

1,407

1,430

Union

1,194

1,402

1,477

1,647

1,674

Volusia

1,392

1,635

1,723

1,921

1,952

Wakulla

1,301

1,528

1,610

1,795

1,824

Walton

1,349

1,584

1,669

1,861

1,891

Washington

1,034

1,214

1,279

1,426

1,449

 

 


Attachment 1

IRM 5.8.5, Financial Analysis

 

IRM 5.8.5.5.1, Income-Producing Assets

 

(3) As a general rule, equity in income producing assets will not be added to the RCP of a viable, ongoing business unless it is determined the assets are not critical to business operations.  The following examples provide guidance in evaluating equity and income produced by assets.

 

Example (1) A business depends on a machine to manufacture parts and cannot operate without this machine.  The equity is $100,000.  The machine produces net income of $5,000 monthly.  The RCP should include the income produced by the machine, but not the equity.  Equity in this machine will generally not be included in the RCP because the machine is needed to produce the income, and is essential to the ability of the business to continue to operate.

 

Note: It is in the government’s best interest to work with this taxpayer to maintain business operations, particularly in a bad economy.

 

Example (2) The same business in the prior example, but the business can continue to operate without the machine, i.e. the equipment is not used in the process of generating the key product of the business. The machine generates only $500 net monthly income.   Consider including the equity in the RCP and remove $500 from the business income.

 

Example (3) A trucking company has ten trucks.  Eight are fully encumbered and two trucks have no encumbrances and $30,000 in equity.  The two trucks combined generate net income of $12,000 per year.  Add the net income from the trucks to the RCP and do not add the equity.

 

Example (4) The same trucks described in the previous example generate only $1000 per year in net income, but have $30,000 in equity. If the business can successfully operate without the two trucks, consider removing the income from the RCP and including the equity in the RCP.

 

Example (5) A real estate salesman has a vehicle with $30,000 in equity.  The vehicle is used to transport clients and assists in the production of income.  The taxpayer’s net monthly disposable income is $3000. The equity in the vehicle generally will not be included in the RCP.

 

Example (6) The same salesman in the previous example only has net monthly disposable income of $500 per month. Consider including the equity in the vehicle, yet allow for the impact the loss of the vehicle may have on the taxpayer’s income.

 

(4) When considering equity in income producing assets and the effect on income streams and expenses, you must exercise sound judgment consistent with the unique facts of each case.

 

(5) Each case must be thoroughly documented regarding equity decisions in income producing property.

 

 

IRM 5.8.5.6, Cash

 

(1) Use the amount listed on the Form 433-A (OIC) for the amount of cash in the taxpayer’s bank accounts.  Reduce the total amount listed by $1,000. If the total amount listed on the Form 433-A (OIC) is over $1,000 and you have reason to believe the money will be used to pay for the taxpayer’s monthly allowable living expenses, do not include it on the AET. Document the AOIC or ICS history with the findings.

 

(2) Review checking account statements over a reasonable period of time, generally three months for wage earners and six months for in-business taxpayers.  Look for any unusual activity, such as deposits in excess of reported income, withdrawals, transfers, or checks for expenses not reflected on the CIS. The OE/OS should discuss these inconsistencies, if appropriate, with the taxpayer.

 

Example: The taxpayer lists $10,000 on Form 433-A (OIC) The taxpayer’s allowable living expenses are $3,000. Include $6,000 ($10,000 less $1,000 less $3000) as an asset value on the AET.

 

Example: The taxpayer lists $3,000 on the Form 433-A (OIC) and his allowable living expenses are $2,700.  Do not include any amount on the AET since the $300 difference is less than $1000.

 

(3) Review savings account statements over a reasonable period of time, generally three months.

 

  • If the account has little withdrawal activity, use the ending balance on the latest statement, less $1,000, if not previously applied to other accounts, as the asset value for the AET.

 

  • If it is apparent that the account is used for paying monthly living expenses, treat it as a checking account and follow the instructions in paragraphs (1) and (2) above to determine its value.

 

(4) If analysis of the bank statement reveals large amounts of recently expended funds, see IRM 5.8.5.6 below for a full discussion of the treatment of dissipated assets.

 

(5) If the taxpayer offers the balances of accounts (for example, certificate of deposit, savings bonds, etc.) to fund the offer, allow for any penalty for early withdrawal and the expected current year tax consequence.

 

IRM 5.8.5.11, Motor Vehicles, Airplanes, and Boats

 

(2) Exclude $3,450 per car from the net equity valuation of vehicles owned by the taxpayer(s) and used for work, the production of income, and/or the welfare of the taxpayer’s family, up to two cars per household.

 

IRM 5.8.5.16, Dissipation of Assets

 

(1) Inclusion of dissipated assets in the calculation of the reasonable collection potential (RCP) is no longer applicable except in situations where it can be shown the taxpayer has sold, transferred, encumbered or otherwise disposed of assets in an attempt to avoid the payment of the tax liability or used the assets or proceeds (other than wages, salary, or other income) for other than the payment of items necessary for the production of income or the health and welfare of the taxpayer or their family, after the tax has been assessed or within six months prior to the tax assessment.

 

(2) Generally, a three year timeframe will be used to determine if it is appropriate to include a dissipated asset in RCP. Include the year of submission as a complete year in the calculation, For example, if the offer is submitted in 2012, any asset dissipated prior to 2010 should not be included.

 

  • If the tax liability did not exist prior to the transfer or the transfer occurred prior to the taxable event giving rise to the tax liability, generally, a taxpayer cannot be said to have dissipated the assets in disregard of the outstanding tax liability.

 

  • If a taxpayer withdraws funds from an IRA to invest in a business opportunity but does not have any tax liability prior to the withdrawal, the funds were not dissipated.

 

(3) If it is determined inclusion of a dissipated asset is appropriate and the taxpayer is unwilling or unable to include the value of the dissipated asset in the offer amount, the offer should be rejected as not in the government’s best interest.

 

NOTE: Even if the transfer and/or sale took place more than three years prior to the offer submission, it may be appropriate to include the asset in the calculation of RCP if the asset transfer and/or sale occurred either within six months prior to or within six months after the assessment of the tax liability.  In these instances, a determination on whether the funds were used for health/welfare of the family or production of income would be appropriate.

 

(4) See below for examples of the types of situations where it may be appropriate to include, or not include, the value of an asset in the calculation of RCP. The examples provided are not meant to be all inclusive as each case must be evaluated on its own merit.

 

(5) Examples of situations in which the value of an asset should be included in RCP include, but are not limited to:

 

Note: Each of the examples in paragraph (5) occurred within three years prior to the offer submission or during the offer investigation, and the taxpayer dissipated the assets after incurring the tax liability or within six months prior to the tax assessment.

 

  • The taxpayer dissolved an IRA or other investment account to pay for specific non-priority items, i.e. child’s wedding, child’s university tuition, extravagant vacation, etc.

 

  • The taxpayer refinanced their house and used the funds to pay off credit card and non-secured debt. The credit cards were NOT used for payment of necessary living expenses and/or the production of income.

 

  • The taxpayer inherited funds and used the funds for non-priority items (other than health/welfare of the family or production of income).

 

  • The taxpayer closed bank/investment accounts and will not disclose how the funds were spent or if any funds remain.

 

  • A taxpayer filed a CAP to avoid the filing of a NFTL and insisted the lien would impair his credit and his ability to successfully operate his business.  After the non-filing was granted, the taxpayer fully encumbered his assets, used the funds for non-priority items (items not necessary for the production of income or the health and welfare of the taxpayer and/or their family) and then submitted an OIC.

 

  • The taxpayer sold real estate and gifted the funds from the sale to family members.

 

(6) Situations may occur in which the transfer happened over 3 years prior to the offer submission, yet because of the timing of the transfer (within six months prior to or six months after the tax assessment), the inclusion of the asset in RCP may be appropriate.

 

Example: The taxpayer filed tax returns for five years (2001 – 2005) in February of 2007, which were assessed in March 2007. In January of 2007, the taxpayer transferred real property to a family member for no consideration. An offer was submitted in January 2012. In this instance, since the transfer was within six months of the tax assessments, it may be appropriate to include the value of the real property in RCP.

 

(7) Examples of situations in which the value of an asset should NOT be included in RCP, include but are not limited to:

 

  • When it can be shown through internal research or substantiation provided by the taxpayer that the funds were needed to provide for necessary living expenses, these amounts should not be included in the RCP calculation.

 

  • Dissolving an IRA during unemployment or underemployment. Review of available internal sources verified the taxpayer’s income was insufficient to meet necessary living expenses. In this case, do not include the funds up to the amount needed to meet allowable expenses in the RCP calculation.

 

  • Substantial amount withdrawn from bank accounts. Taxpayer provided supporting documentation that funds were used to pay for medical or other necessary living expenses. This amount will not be included in the RCP calculation.

 

  • Disposing of an asset and using the funds to purchase another asset that is included in the offer evaluation. Do not include the value of the asset disposed of as a dissipated asset.

 

(8) Prior to including the dissipated asset in the RCP, the taxpayer should be contacted by telephone and afforded the opportunity to explain or verify the dissipation of the asset.

 

(9) The case history must be clearly documented with the basis for your decision regarding the dissipated asset.

 

IRM 5.8.5.17, Retired Debt

 

(3) Do not retire the first $400 of a loan on a vehicle (limited to one vehicle for a single taxpayer and two vehicles for a joint offer)

 

Example:  If the taxpayer has a car payment of $750 per month and the maximum standard is $450, $50 would be retired beginning the date the loan is paid.

 

IRM 5.8.5.20.3, Transportation Expenses

 

(5) When the taxpayer owns a vehicle that is six years or older or has reported mileage of 75,000 miles or more, allow an additional operating expenses of $200 or more per vehicle.  The additional operating expense will be allowed on any vehicle meeting the criteria, up to two cars per household.

 

Example: The taxpayer who has a 1998 Chevrolet Cavalier with 50,000 miles will be allowed the standard of $231 per month plus $200 per month operating expenses for a total operating expense of $431 per month.

 

 

IRM 5.8.5.20.4, Other Expenses

 

(3) Minimum payments on student loans guaranteed by the federal government will be allowed for the taxpayer’s post-high school education.  Proof of payment must be provided. If student loans are owed, but no payments are being made, do not allow them, unless the non-payment is due to circumstances of financial hardship, e.g. unemployment, medical expenses, etc.

 

(7) When a taxpayer owes both delinquent federal and state or local taxes, and does not have the ability to full pay the liabilities, monthly payments to state taxing authorities may be allowed in certain circumstances.

 

a) Determine the disposable income on a Collection Information Statement (CIS), Forms 433-A (OIC or 433-B (OIC).  Do not include any amount that is being paid for outstanding state or local tax liabilities in the calculation of the future income value component (FIV) of the reasonable collection potential (RCP).  FIV is the difference between gross income and allowable living expenses.

 

Calculate the dollar amounts for IRS and state or local payments based on the total liability owed to each agency (including penalties and interest to date).

 

Example: The taxpayer owes the state $20,000 and owes the IRS $100,000, a total of $120,000 ($20,000/$120,000 = 17%; $100,000/$120,000 = 83%). The taxpayer has disposable income of $300 per month.  A monthly payment to the state taxing authority of $51 may be allowed until the debt is retired.  See the If/Then table below for examples.

 

  • Seventeen percent (17%) of $300 = $51
  • Eighty-three percent (83%) of $300 = $249

 

b) To determine allowable payments for delinquent state or local tax debts follow the procedures below:

 

If… And… Then…
(1) The taxpayer does not have an existing agreement for payment of the delinquent state or local tax debts, Provides a complete CIS and verification of state or local tax debts, Follow procedures in paragraph (a) above to establish the calculated percentage amount that will be determined as the allowable monthly payment for delinquent state or local taxes.
(2) The taxpayer has an existing agreement for delinquent state or local tax debts, which was established after the earliest IRS date of assessment, The payment amount on the state or local agreement is less than the calculated percentage amount, The monthly amount due on the existing state or local agreement will be listed as the allowable delinquent state or local tax payment.

 

Example: The calculation based on the example in paragraph (a) above shows the taxpayer should pay $51 but the State agreement is for $50.  Allow the State agreed payment of $50.

 

The payment to IRS will be increased by the amount allowed for the monthly state or local payment with the state or local liability is scheduled to be full paid.

(3) The taxpayer has an existing agreement for delinquent state or local tax debts, which was established after the earliest IRS date of assessment, The payment amount on the agreement is more than the calculated percentage amount, The amount allowed as the delinquent state or local tax payment will be the calculated percentage amount. Advise the taxpayer that he/she can use the amount IRS allows for Miscellaneous expenses under National Standards to pay the additional amount due for the delinquent state or local tax payment.

 

Example: The calculation based on the example in paragraph (a) above shows the taxpayer should pay $51 but the State agreement is for $52.  Allow the calculated payment of $51.

 

The payment to IRS will be increased by the amount allowed for the monthly state of local payment when the state or local liability is scheduled to be full paid.

(4) The taxpayer has an existing agreement for delinquent state or local tax debts, which was established prior to the IRS earliest date of assessment The payment is not greater than the taxpayer’s net disposable income Allow the state or local tax agreement.

 

IRM 5.8.5.23, Calculation of Future Income

 

(2) Future income is defined as an estimate of the taxpayer’s ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future.  The number of months used depends on the payment terms of the offer.

 

If… Then…
The offer will be paid in 5 or fewer installments in 5 months or less Use the realizable value of assets plus the amount that could be collected in 12 months.
The offer will be paid in more than 5 installments or more than 5 months up to a maximum of 24 months Use the realizable value of assets plus the amount that could be collected in 24 months.

 

Note: The deferred payment option which allows payment over the life of the statute is no longer available. With implementation of the multipliers, the maximum number of months for a deferred payment cannot exceed 24 months.


 















 

 


 

 

 

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 2015

 

Custom Search

 

Number of Offers

1.10    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

Offers accepted

228,975

200,103

157,261

129,668

 

1.15    Securing an Offer in Compromise

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.

 

 

1.16    Taxpayer Advocate Report

The Taxpayer Advocate’s report to Congress for 2009 was highly critical of the IRS offer program.  She pointed out five factors that she believes prevent offers in compromises:

Daunting application process

Centralization causes bottlenecks

Internal perceptions and attitudes that slow

New rules and legislation have made it more difficult and expensive for taxpayers to submit an OIC

Public perception that OIC’s are not viewed as a viable collection alternative.

The TAS complete report on OIC’s is included as an exhibit to this class material.

1.17    Offer in Compromise Forms

In 2011 the IRS issued a new offer in compromise form. 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 downpayment requirements taxpayers must submit Form 656-PPV with the required downpayment.

Offers in Compromise

1.18    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.

1.20    TIPRA

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.”

1.30    Payments With Offers

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.

1.40    Failure to Make Deposit

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).

1.50    Not Refundable

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)).

1.60    Specify Payments

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.

1.70    Failure to Make Installment Payments

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.

1.80    Low Income Taxpayers

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.

 

IRS OIC Low Income Guidelines

Size of Family Unit

48 Contiguous States and D.C.

Hawaii

Alaska

1

$2,256

$2,596

$2,819

2

$3,035

$3,492

$3,794

3

$3,815

$4,388

$4,769

4

$4,594

$5,283

$5,744

5

$5,373

$6,179

$6,719

6

$6,152

$7,075

$7,694

7

$6,931

$7,971

$8,669

8

$7,710

$8,867

$9,644

For each additional person, add

$779

$896

$975

 

1.85    Interim Guidance Released for Low-Income Cases

The Internal Revenue Service March 1 posted to its website a memorandum (SBSE-05-0210-006) that provides reissued interim guidance for low-income processability procedures. The original guidance explained that the revised procedures will require a review of the Form 433-A, Collection Information Statement, on any offer that is received without a Form 656-A, Income Certification for Offer in Compromise Application Fee and Payment, and meets certain criteria. Based upon a review, if the offer meets IRS low-income guidelines, the offer will be considered processable.

1.90    Deemed Accepted

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.

1.100  Background

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.

1.110  Offer In Compromise Procedures

The IRS released a new Form 656 in 2009. The form also requires that the taxpayer submit extensive forms 433A and 433B. All OIC’s are processed centrally at two Service Centers:Memphisfor taxpayers most western states and Brookhaven for eastern states. All but the most complex offers will be worked from the centers.

1.120  Supporting Documents

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.

1.130  $150 Processing Fee

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.

1.140  Addresses

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 Wyomingmust be filed as follows:

Wage earner or self employed without employees Other than wage earner or self employed without employees
Then mail to: Then mail to:
MemphisInternal Revenue ServiceCenter COIC UnitPO Box 30803, AMCMemphis,TN38130-0803 MemphisInternal Revenue ServiceCenter COIC UnitPO Box 30804, AMCMemphis,TN38130-0804

 

All other states submit offers as follows:

Wage earner or self employed without employees Other than wage earner or self employed without employees
Then mail to: Then mail to:
Brookhaven Internal Revenue ServiceCenter COIC UnitPO Box 9007Holtsville,NY11742-9007 Brookhaven Internal Revenue ServiceCenter COIC UnitPO Box 9008Holtsville,NY11742-9008

 

1.150  Prohibition Of Levy

RRA98 prohibits the IRS from collecting a tax liability by levy (1) during any period that a taxpayer’s offer in compromise for that liability is being processed, (2) during the 30 days following rejection of an offer, (3) during any period in which an appeal of the rejection of an offer is being considered, and (4) while an installment agreement is pending. ['2462(b)] [IRC '6331(k)]

1.160  Appeal Rights

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.

1.170  Doubt as to Liability Offers

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.

1.180  Computation of Offer Amount

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.

1.190  Cash Offer

You must pay cash offers within 90 days of acceptance. 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 IRS will charge interest on the offer amount from the acceptance date until it receives full payment. 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. The following paragraphs will discuss the Internal Revenue Service’s methodology for determining quick sale value and the present value of income.

1.200  Short-Term Deferred Payment Offer

This payment option requires you to pay the offer within two years of acceptance. 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.

1.210  Deferred Payment Offers

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. You may however propose to pay an amount in installments for a period more than 24 months but less than period remaining to the end of the statute of limitations.

1.215  Future Income for Offers in Compromise

The Internal Revenue Service March 10 revised its guidance to employees on figuring the value of a taxpayer’s future income in evaluating an offer in compromise, with specific instructions to consider a variety of issues for unemployed or underemployed workers.The memorandum (SBSE 05-0310-012) noted that future income is defined as an estimate of the taxpayer’s ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future.

As a general rule, the guidance said, the taxpayer’s current income will be used in the analysis of future ability to pay. “Consideration should be given to the taxpayer’s overall general situation, including such factors as age, marital status, number and age of dependents, level of education or occupational training, and work experience,” the document said.

 

1.220  Agency Notes Variety of Situations

IRS noted there are situations that may warrant placing a different value on future income than on current or past income. Such situations include those where income will increase or decrease, or current necessary expenses will increase or decrease, the agency said.

 

Other situations may include those where a taxpayer:

  • is temporarily or recently unemployed or underemployed,
  • is unemployed and is not expected to return to a previous occupation or previous level of earnings,
  • is long-term unemployed,
  • is long-term underemployed, has an irregular employment history or fluctuating income,
  • is in poor health and the ability to continue working is questionable,
  • is close to retirement and has indicated he or she will be retiring, or will file for bankruptcy.

1.225  Income Averaging Addressed

IRS told its field personnel that judgment should be used in determining the appropriate time to apply income averaging on a case-by-case basis. “All circumstances of the taxpayer should be considered” in making this decision, the agency said.

Further, IRS said, in situations where the taxpayer’s income does not appear to meet stated living expenses, the difference should not be included as additional income to the taxpayer. Such inclusion should only be done if there are clear indications that the taxpayer is receiving, and will continue to receive, additional income not included on the collection information statement, according to the document.

As a general rule, the guidance said, “Employees need to exercise good judgment when determining future income.” The history must be clearly documented and support the known facts and circumstances of the case, and include analysis of the supporting documents, IRS noted.

1.230  Facts and Circumstances Approach Directed

The memo directed IRS workers to evaluate each case on the facts and circumstances, and said the history “must clearly explain the reasoning behind our actions.”

The agency said there are cases where it may be appropriate to use the taxpayer’s current income and secure a future income collateral agreement, particularly in cases where the future income is uncertain, but where it is reasonably expected that the income will increase.

1.235  New more Onerous Allowable Expense Standards

In October, 2007 the IRS the IRS revised its allowable expense standards to make them more onerous. In March, 2009 the IRS again revised the standards. 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 forHawaiiandAlaska. 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 four types of necessary expenses:

  • National Standards
  • Out-of-Pocket Health Care
  • Local Standards
  • Other Expenses

 

National Standards: These establish standards for reasonable amounts for five necessary expenses. Four of them come from the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey: food, housekeeping supplies, apparel and services, and personal care products and services. The fifth category, miscellaneous, is a discretionary amount established by the Service. It is $87 for one person up to $235 for 4 persons. The IRS allows a total of $262 per month for each member of the household above 4.

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

Out-of-Pocket Health Care Expenses: Out-of-pocket health care expenses include medical services, prescription drugs, and medical supplies (e.g. eyeglasses, contact lenses, etc.). Elective procedures such as plastic surgery or elective dental work are generally not allowed. Taxpayers and their dependents are allowed the standard amount monthly on a per person basis, without questioning the amounts they actually spend. If the amount claimed is more than the total allowed by the health care standards, the taxpayer must provide documentation to substantiate those expenses are necessary living expenses. Generally, the number of persons allowed should be the same as those allowed as exemptions on the taxpayer’s most recent year income tax return. The out-of-pocket health care standard amount is allowed in addition to the amount taxpayers pay for health insurance.

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

  1. A.     Housing – Standards are established for each county within a state. When deciding if a deviation is appropriate, consider the cost of moving to a new residence; the increased cost of transportation to work and school that will result from moving to lower-cost housing and the tax consequences. The tax consequence is the difference between the benefit the taxpayer currently derives from the interest and property tax deductions on Schedule A to the benefit the taxpayer would derive without the same or adjusted expense. Housing costs include rent and/or house payments, taxes, repairs and utilities the IRM provides as follows:

 

The utilities include gas, electricity, water, fuel, oil, bottled gas, trash and garbage collection, wood and other fuels, septic cleaning, and telephone. Housing expenses include: mortgage or rent, property taxes, interest, parking, necessary maintenance and repair, homeowner’s or renter’s insurance, homeowner dues and condominium fees. Usually, this is considered necessary only for the place of residence. Any other housing expenses should be allowed only if, based on a taxpayer’s individual facts and circumstances, disallowance will cause the taxpayer economic hardship. [ IRM  5.15.1.9

  1. B.    Transportation - The transportation standards consist of nationwide figures for loan or lease payments referred to as ownership cost, and additional amounts for operating costs broken down by Census Region and Metropolitan Statistical Area. Operating costs were derived from BLS data. 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 no car payment only the operating cost portion of the transportation standard is used to figure the allowable transportation expense. Under ownership costs, separate caps are provided for the first car and second car. If the taxpayer does not own a car a standard public transportation amount is allowed.

 

Vehicle insurance, vehicle payment (lease or purchase), maintenance, fuel, state and local registration, required inspection, parking fees, tolls, driver's license, public transportation. Transportation costs not required to produce income or ensure the health and welfare of the family are not considered necessary. Consider availability of public transportation if car payments (purchase or lease) will prevent the tax liability from being paid in part or full. Public transportation costs could be an option if it does not significantly increase commuting time and inconvenience the taxpayer.

Note: If the taxpayer has no car payment, or no car, question how the taxpayer travels to and from work, grocer, medical care, etc. The taxpayer is only allowed the operating cost or the cost of transportation. [ IRM  5.15.1.9 ]

  1. C.    Other Expenses.  Other expenses may be considered if they meet the necessary expense test – they must provide for the health and welfare of the taxpayer and/or his or her family or they must be for the production of income. This is determined based on the facts and circumstances of each case. If other expenses are determined to be necessary and, therefore allowable, document the reasons for the decision in your history.

 

  1. D.    Conditional expenses. These expenses do not meet the necessary expenses test. However, they are allowable for installment agreements but not offers in compromise if the tax liability, including projected accruals, can be fully paid within five years.

 

  1. E.     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.

 

  1. F.     Generally, the total number of persons allowed for national standard expenses should be the same as those allowed as dependents on the taxpayer’s current year income tax return. Verify exemptions claimed on 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. G.    A deviation from the local standard is not allowed merely because it is inconvenient for the taxpayer to dispose of valued assets.

 

  1. H.    Length. Revenue officers should consider the length of the payments. Although it may be appropriate to allow for payments made on the secured debts that meet the necessary expense test, if the debt will be fully repaid in one year only allow those payments for one year. [ IRM 5.15.1.7 ]

 

1.240  Corporate Trust Fund Liabilities

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.

1.250  Pursuit of Officers After Compromise.

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.

1.260  Promote Effective Tax Administration

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.

1.270  Encourage Compliance

The availability of an Effective Tax Administration (ETA) offer encourages taxpayers to comply with the tax laws because taxpayers will:

  • Believe the laws are fair and equitable, and
  • Gain confidence that the laws will be applied to everyone in the same manner.

 

The Effective Tax Administration (ETA) offer allows for situations where tax liabilities should not be collected even though:

  • The tax is legally owed, and
  • The taxpayer has the ability to pay it in full

 

1.280  Only Available If There Is No Doubt As to Liability Or Collectibility

An Effective Tax Administration (ETA) offer can only be considered when the Service has determined that the taxpayer does not qualify for consideration under Doubt as to Liability (DATL) and/or Doubt as to Collectibility (DATC). The taxpayer must include the Collection Information Statement (Form 433-A and/or Form 433-B) when submitting an offer requesting consideration under Effective Tax Administration (ETA). Economic hardship standard of § 301.6343-1 specifically applies only to individuals.  [IRM 5.8.1.1]

1.290  Rules for Evaluating Offers to Promote Effective Tax Administration

The determination to accept or reject an offer to compromise made on the ground that acceptance would promote effective tax administration within the meaning of this section will be based upon consideration of all the facts and circumstances, including the taxpayer’s record of overall compliance with the tax laws.

1.290  Factors

Factors supporting (but not conclusive of) a determination of economic hardship include:

  1. Taxpayer is incapable of earning a living because of a long term illness, medical condition, or disability and it is reasonably foreseeable that taxpayer’s financial resources will be exhausted providing for care and support during the course of the condition;
  2. Although taxpayer has certain assets, liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses; and
  3. Although taxpayer has certain assets, the taxpayer is unable to borrow against the equity in those assets and disposition by seizure or sale of the assets would have sufficient adverse consequences such that enforced collection is unlikely Temp Reg 301.7122-1T(b)(4)(iv)(B)]

Example 1. Taxpayer has assets sufficient to satisfy the tax liability. Taxpayer provides full time care and assistance to her dependent child, who has a serious long‑term illness. It is expected that the taxpayer will need to use the equity in her assets to provide for adequate basic living expenses and medical care for her child. Taxpayer’s overall compliance history does not weigh against compromise.

Example 2. Taxpayer is retired and his only income is from a pension. The taxpayer’s only asset is a retirement account, and the funds in the account are sufficient to satisfy the liability. Liquidation of the retirement account would leave the taxpayer without an adequate means to provide for basic living expenses. Taxpayer’s overall compliance history does not weigh against compromise.

Example 3. Taxpayer is disabled and lives on a fixed income that will not, after allowance of adequate basic living expenses, permit full payment of his liability under an installment agreement. Taxpayer also owns a modest house that has been specially equipped to accommodate his disability. Taxpayer’s equity in the house is sufficient to permit payment of the liability he owes. However, because of his disability and limited earning potential, taxpayer is unable to obtain a mortgage or otherwise borrow against this equity. In addition, because the taxpayer’s home has been specially equipped to accommodate his disability, forced sale of the taxpayer’s residence would create severe adverse consequences for the taxpayer, making such a sale unlikely. Taxpayer’s overall compliance history does not weigh against compromise.

 

1.300  Undermine Compliance

Factors supporting (but not conclusive of) a determination that compromise would not undermine compliance by taxpayers with the tax laws include:

  • Taxpayer does not have a history of noncompliance with the filing and payment requirements of the Internal Revenue Code;
  • Taxpayer has not taken deliberate actions to avoid the payment of taxes; and
  • Taxpayer has not encouraged others to refuse to comply with the tax laws.[Temp Reg. 301.7122-1T(b)(4)(iv)(C)]

1.310  Exceptional Circumstances

The following examples illustrate cases where exceptional circumstances exist such that collection of the full liability will be detrimental to voluntary compliance by taxpayers; and compromise of the liability would not undermine compliance by taxpayers with the tax laws:

Example 1.  In October of 1986, taxpayer developed a serious illness that resulted in almost continuous hospitalizations for a number of years. The taxpayer’s medical condition was such that during this period the taxpayer was unable to manage any of his financial affairs. The taxpayer has not filed tax returns since that time. The taxpayer’s health has now improved and he has promptly begun to attend to his tax affairs. He discovers that the IRS prepared a substitute for return for the 1986 tax year on the basis of information returns it had received and had assessed a tax deficiency. When the taxpayer discovered the liability, with penalties and interest, the tax bill is more than three times the original tax liability. Taxpayer’s overall compliance history does not weigh against compromise.

Example 2.Taxpayer is a salaried sales manager at a department store who has been able to place $2,000 in a tax‑deductible IRA account for each of the last two years. Taxpayer learns that he can earn a higher rate of interest on his IRA savings by moving those savings from a money management account to a certificate of deposit at a different financial institution. Prior to transferring his savings, taxpayer submits an E‑Mail inquiry to the IRS at its Web Page, requesting information about the steps he must take to preserve the tax benefits he has enjoyed and to avoid penalties. The IRS responds in an answering E‑Mail that the taxpayer may withdraw his IRA savings from his neighborhood bank, but he must redeposit those savings in a new IRA account within 90 days. Taxpayer withdraws the funds and redeposits them in a new IRA account 63 days later. Upon audit, taxpayer learns that he has been misinformed about the required rollover period and that he is liable for additional taxes, penalties and additions to tax for not having redeposited the amount within 60 days. Had it not been for the erroneous advice that is reflected in the taxpayer’s retained copy of the IRS E‑Mail response to his inquiry, taxpayer would have redeposited the amount within the required 60‑day period. Taxpayer’s overall compliance history does not weigh against compromise.

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2014 IRS Representation Update

 

2014 IRS REPRESENTATION UPDATE ©2014

By: Robert E. McKenzie

1.  A CHANGING IRS

 

IRS Workforce

1.10    Because of Congressional cuts in IRS budgets its workforce continued to shrink until 2008. In 2009 and 2010 the IRS had its budgets grow and its workforce grew. In 2011 the IRS budget was frozen and its workforce shrank. In 2012 and 2013 Congress stupidly cut the IRS budget and its workforce shrank again.

 

IRS Staffing for Key Enforcement Personnel

 2006  2007  2008  2009  2010  2011  2012 2013
Revenue Officers

5,627

5,662

5,492

5,451

6,042

5,619

5,186

4,746

Revenue Agents

12,778

12,816

12,599

12,958

13,888

13,867

13,021

12,234

Special Agents

2,780

2,709

2,631

2,650

2,780

2,698

2,661

2,549

Total

21,185

21,187

20,722

21,059

22,710

22,184

20,868

19,531

 

 

 

 

Preparer Regulation

1.20    In January of 2010, based on the results of the Return Preparer Review, the IRS recommended several steps it planned to implement for future filing seasons. These steps were not in effect for the 2010 filing season.  As of the 2011 filing season, all paid preparers had to register for a PTIN.

 

IRS’ Tax Preparer Regulation Overruled By Courts

1.30    In 2011, the IRS began its new regulations mandating certain tax-return preparers—those who were not licensed attorneys, CPAs, enrolled agents, enrolled actuaries, or enrolled retirement plan agents—complete 15 hours of continuing education each year and pass an initial qualifying exam before they may lawfully prepare and file federal income tax returns for clients.  However, a recent court decision out of the United States District Court for the District of Columbia, Loving v. IRS, No. 12-385 (JEB) (D.D.C. Jan. 18, 2012), threatens the IRS’ ability to continue preparer regulation.

 

IRS Barred From Enforcing Preparer Regulation

1.40    The court in Loving enjoined the IRS from enforcing this specialized education mandate because the United States Department of the Treasury (the administrative body that oversees the IRS) did not have the statutory authority to create such a regulation.  The IRS had justified its new examination and education requirements through a statute that allows the IRS to “regulate the practice of representatives of persons before the Department of the Treasury.”  31 U.S.C. § 330(a)  This statute allows the IRS to require such representatives to meet certain levels of character, reputation, qualifications, and competence.  Id.  The IRS’ position was that “practice” included “preparing and signing tax returns and claims for refund.”  See, e.g., 31 C.F.R. §10.3(f); id. § 10.2(a)(4) (noting that “practice” includes preparing and filing documents).  Yet the Loving court turned that approach on its head by concluding tax preparers do not “practice” before the IRS by filing, signing, and sending tax returns.  The court reasoned that applicable statutes themselves insist the term “practice” cannot include simply preparing tax returns; the court found the above statutory language not permissive of the IRS’ education requirements Loving, No. 12-385 (JEB), *10-12.

 

Additional Opinion

1.50    The Loving court issued an additional opinion and order on February 1, 2013, clarifying and modifying its previous injunctionLoving v. IRS, No. 12-385 (JEB) (D.D.C. Feb. 1, 2013)  This order denied the IRS’ attempt to stay the injunction pending its appeal; however, the court modified the injunction such that the PTIN application and assignment system, at its core, is not implicated (citing 26 U.S.C. § 6109(a)(4) for support that the IRS’ preparer numeration system is congressionally supported), and that the injunction has no relation to tax preparers not previously required to complete the IRS education requirements.

 

 Appeal

1.60    In February, 2014 an appeals court upheld the Loving decision. As it stands today, the IRS’ “registered tax return preparer” regulatory scheme developed by Circular 230 of 76 Fed. Reg. 32,286 is invalid because the IRS lacks the statutory authority to create it, and the IRS is also permanently enjoined from enforcing the scheme against any tax preparers.  Loving, No 12-385 (JEB), *21-22. The decision focused only on the regulations over tax preparers required to complete continuing education credits, but the court’s reasoning suggests that aspects of the IRS’ regulation overall tax preparers might be invalid.  The Loving decision suggests that anyone, by simply preparing and filing tax returns, is not “practicing” before the Department of the Treasury such that the IRS can require application or fee requirements before that individual may submit tax returns, which means aspects of the PTIN application and renewal process could be at risk.

 

E-file Mandate

1.70    Tax return preparers who prepare 100 or more individual or trust returns in 2011 will be required to e-file. Tax return preparers who prepare 10 or more individual or trust returns in 2012 will be required to e-file. The IRS has created Form 8948, Preparer Explanation for Not filing Electronically, to state reasons a form must be filed in paper format.

 

 

 

 

2.  TAXPAYER ADVOCATE

 

National Taxpayer Advocate Releases Report to Congress

2.10    In January 2014 National Taxpayer Advocate Nina E. Olson released a report to Congress. Internal Revenue Code (IRC) § 7803(c)(2)(B)(ii)(III) requires the NTA to describe at least 20 of the most serious problems encountered by taxpayers. Each of the most serious problems includes the NTA’s description of the problem, the IRS’s response, and the NTA’s final comments and recommendations. This format provides a clear picture of which steps have been taken to address the most serious problems and which additional steps the NTA believes are required. The problems described in the report are:

1.  TAXPAYER RIGHTS: The IRS Should Adopt a Taxpayer Bill of Rights as a Framework for Effective Tax Administration

2.  IRS BUDGET: The IRS Desperately Needs More Funding to Serve Taxpayers and Increase Voluntary Compliance

3.  EMPLOYEE TRAINING: The Drastic Reduction in IRS Employee Training Impacts the Ability of the IRS to Assist Taxpayers and Fulfill its Mission

4.  TAXPAYER RIGHTS: Insufficient Education and Training About Taxpayer Rights Impairs IRS Employees’ Ability to Assist Taxpayers and Protect Their Rights

 

5.  REGULATION OF RETURN PREPARERS: Taxpayers and Tax Administration Remain Vulnerable to Incompetent and Unscrupulous Return Preparers While the IRS is Enjoined from Continuing its Efforts to Effectively Regulate Return Preparers

 

Problems Facing Vulnerable Taxpayer Populations

 

 6.  IDENTITY THEFT: The IRS Should Adopt a New Approach to Identity Theft Victim Assistance that Minimizes Burden and Anxiety for Such Taxpayers

7.  HARDSHIP LEVIES: Four Years After the Tax Court’s Holding in Vinatieri v. Commissioner, the IRS Continues to Levy on Taxpayers it Acknowledges Are in Economic Hardship and Then Fails to Release the Levies

8.  RETURN PREPARER FRAUD: The IRS Still Refuses to Issue Refunds to Victims of Return Preparer Misconduct Despite Ample Guidance Allowing the Payment of Such Refunds

9.  EARNED INCOME TAX CREDIT: The IRS Inappropriately Bans Many Taxpayers from Claiming EITC

10.  INDIAN TRIBAL TAXPAYERS: Inadequate Consideration of Their Unique Needs Causes Burdens

 

Problems Relating to IRS Collection Policies and Practices

 

 11.  COLLECTION STRATEGY: The Automated Collection System’s Case Selection and Processes Result in Low Collection Yields and Poor Case Resolution, Thereby Harming Taxpayers

12.  COLLECTION PROCESS: IRS Collection Procedures Harm Business Taxpayers and Contribute to Substantial Amounts of Lost Revenue

13.  COLLECTION STATUTE EXPIRATION DATES: The IRS Lacks a Process to Resolve Taxpayer Accounts with Extensions Exceeding its Current Policy Limits

14.  COLLECTION DUE PROCESS HEARINGS: Current Procedures Allow Undue Deference to the Collection Function and Do Not Provide the Taxpayer a Fair and Impartial Hearing

Problems Causing Increased Taxpayer Burden

 

 15.  EXEMPT ORGANIZATIONS: The IRS Continues to Struggle with Revocation Processes and Erroneous Revocations of Exempt Status

16.  REVENUE PROTECTION: Ongoing Problems with IRS Refund Fraud Programs Harm Taxpayers by Delaying Valid Refunds

 

17.  ACCURACY-RELATED PENALTIES: The IRS Assessed Penalties Improperly, Refused to Abate Them, and Still Assesses Penalties Automatically

18.  ONLINE SERVICES: The IRS’s Sudden Discontinuance of the Disclosure Authorization and Electronic Account Resolution Applications Left Practitioners Without Adequate Alternatives

19.  IRS WORKER CLASSIFICATION PROGRAM: Current Procedures Cause Delays and Hardships for Businesses and Workers by Failing to Provide Determinations Timely and Not Affording Independent Review of Adverse Decisions

 

Problems Facing International Taxpayers

 

 20.  INTERNATIONAL TAXPAYER SERVICE: The IRS Is Taking Important Steps to Improve International Taxpayer Service Initiatives, But Sustained Effort Will Be Required to Maintain Recent Gains

 

21.  INDIVIDUAL TAXPAYER IDENTIFICATION NUMBERS (ITINS): Application Procedures Burden Taxpayers and Create a Barrier to Return Filing

 

22.  OFFSHORE VOLUNTARY DISCLOSURE: The IRS Offshore Voluntary Disclosure Program Disproportionately Burdens Those Who Make Honest Mistakes

23.  REPORTING REQUIREMENTS: The Foreign Account Tax Compliance Act Has the Potential to Be Burdensome, Overly Broad, and Detrimental to Taxpayer Rights

Problems Requiring Additional Guidance

 

24.  DIGITAL CURRENCY: The IRS Should Issue Guidance to Assist Users of Digital Currency

25.  DEFENSE OF MARRIAGE ACT: IRS, Domestic Partners, and Same-Sex Couples Need Additional Guidance

 

The Most Litigated Tax Issues

2.20    IRC§7803(c)(2)(B)(ii)(X) requires the NTA to identify the ten tax issues most often litigated in the federal courts and to classify those issues by the category of taxpayer affected. The following is a table the most litigated in 2013 as determined by TAS:

TABLE 3.0.2, Outcomes For Pro Se and Represented Taxpayers

                                                              Pro Se Taxpayers                              Represented Taxpayers

Pro Se Taxpayers

Represented Taxpayers

Most Litigated Issue

Total Cases

Taxpayer Prevailed in Whole or in Part

Percent

Total Cases

Taxpayer Prevailed in Whole or in Part

Percent

Accuracy-Related Penalty

100

20

20%

78

19

24%

Trade or Business Expenses

86

19

22%

48

16

33%

Gross Income

71

12

17%

46

5

11%

Summons Enforcement

91

1

1%

26

5

19%

Collection Due Process

70

7

10%

35

10

29%

Failure to File, Failure to Pay, and Estimated Tax Penalties

53

7

13%

32

8

25%

Charitable Deductions

18

1

6%

22

7

32%

Frivolous Issues Penalty (and related appellate-level sanctions)

35

12

34%

1

1

100%

Civil Actions to Enforce Federal Tax Liens or to Subject Property to Payment of Tax

18

0

0%

15

3

20%

Joint and Several Liability

11

6

55%

20

5

25%

Total

553

85

15%

323

79

24%

 

            Source: IRS


 

3.  ENFORCEMENT

 

Highlights of 2013 Enforcement

3.10    Fiscal Year 2013 Enforcement Results

 

Enforcement Revenue Collected

(Dollars in Billions)

 2006

 2007

 2008

 2009

 2010

 2011

 2012

2013

Collection

$28.20

$31.80

$31.10

$26.90

$29.10

$31.10

$30.44

$31.40

Examination

$13.00

$15.20

$15.80

$12.60

$16.90

$12.40

$10.20

$9.83

Appeals

$4.30

$8.30

$4.80

$4.80

$6.70

$6.50

$4.20

$6.83

Document Matching

$3.30

$3.90

$4.70

$4.60

$4.90

$5.20

$5.27

$5.29

Total

$48.70

$59.20

$56.40

$48.90

$57.60

$55.20

$50.20

$53.35

Individual Enforcement

3.20    The total number of audits of individual returns decreased in 2013. Those who earned less than $200,000 had less than a 1 percent chance of being audited. Those with incomes of $200,000 and more had more than a 3 percent chance of being audited.

 

Table 9b.  Examination Coverage:  Individual Income Tax Returns Examined, by Size of Adjusted Gross Income,
Fiscal Year 2013

Size of adjusted gross income [1]

Returns filed in Calendar
Year 2012 (percent of total) [2]

Examination coverage
in Fiscal Year
2013 (percent) [3]

All returns [4]

100.00                  

0.96                  

No adjusted gross income [5]

2.08

6.04

$1 under $25,000

39.91

1.00

$25,000 under $50,000

23.55

0.62

$50,000 under $75,000

13.02

0.60

$75,000 under $100,000

8.12

0.58

$100,000 under $200,000

10.09

0.77

$200,000 under $500,000

2.60

2.06

$500,000 under $1,000,000

0.41

3.79

$1,000,000 under $5,000,000

0.19

9.02

$5,000,000 under $10,000,000

0.01

15.98

$10,000,000 or more

0.01

24.16

 

Collection Enforcement

3.30    Overall, some of our most common enforcement tools at the IRS also showed decreases.

Table 16.  Delinquent Collection Activities, Fiscal Years 2012 and 2013

[Money amounts are in thousands of dollars]

Activity

2012

2013

Returns filed with additional tax due:

Total yield from unpaid assessments [1]

$44,613,336

$47,152,648

Less: Credit transfers

13,509,257

14,687,867

Equals: Net total amount collected

31,104,079

32,464,781

Taxpayer delinquent accounts (thousands):

Number in beginning inventory

10,809

11,464

Number of new accounts

8,115

7,788

Number of accounts closed

7,461

7,530

Ending inventory:

Number

11,464

11,721

Balance of assessed tax, penalties, and interest [2]

124,304,282

120,734,098

Returns not filed timely:

5

Delinquent return activity:

5

Net amount assessed [3]

$18,034,976

$15,161,841

Amount collected with delinquent returns

1,690,318

1,763,523

Taxpayer delinquency investigations (thousands) [4]:

Number in beginning inventory

3,862

3,937

Number of new investigations

1,973

1,598

Number of investigations closed

1,897

1,876

Number in ending inventory

3,937

3,659

Offers in compromise (thousands) [5]:

Number of offers received

64

74

Number of offers accepted

24

31

Amount of offers accepted

195,652

195,379

Enforcement activity:

Number of notices of Federal tax liens filed [6]

707,768

602,005

Number of notices of levy served on third parties [7]

2,961,162

1,855,095

Number of seizures [8]

733

547

 

Criminal Enforcement

3.40    Criminal enforcement went up even though the IRS had fewer Special Agents.

Criminal Investigation

FY 2011

FY 2012

FY 2013

Investigations Initiated

4720

5125

5314

Prosecution Recommendations

3410

3701

4364

Informations/Indictments

2998

3390

3865

Convictions

2350

2634

3311

Sentenced*

2206

2466

2812

Percent to Prison

81.7%

81.5%

80.1%

State Information Sharing

3.50    The IRS is engaged in extensive information sharing with state tax authorities which allows it to more effectively discover nonfilers and other tax omissions. The IRS Fed/State Program saves government resources by partnering with state government agencies to enhance voluntary compliance with tax laws. This includes facilitating the exchange of taxpayer data, leveraging resources, and providing assistance to taxpayers to improve compliance and communications.

 

Federal Tax Returns and Return Information.

3.60    “Tax returns” include Form 1040, U.S. Individual Income Tax Return, and other income tax and information returns, such as Form 941, Employer’s Quarterly Federal Tax Return; Form 730, Tax on Wagering; Form 1120, U.S. Corporation Income Tax Return; various Forms 1099, U.S. Information Returns; and Form W-2, Wage and Tax Statement. The states share similar return information with the IRS. States have extensive information on business revenue from sales tax returns, which is a valuable resource to the IRS for discovering non-filing and underreporting.

 

Return Information

3.70    “Return information” includes everything else that has anything to do with a person’s potential tax liability. Examples are any information extracted from a return like names of dependents, business location, or bank account information; the taxpayer’s name, mailing address, or identification number; information on whether a return has been or will be examined or subject to any other investigation; information on transcripts of accounts or on IRS computer systems; the fact of filing a return; and whether a taxpayer has a balance due account.

 

IRS Study Provides Tax Gap Estimate

3.80    Internal Revenue Service officials previously announced their estimates of the Tax Year 2001 tax gap based on the National Research Program (NRP). The estimate of the overall gross tax gap for Tax Year 2001 – the difference between what taxpayers should have paid and what they actually paid on a timely basis – comes to $345 billion

 

On January 6, 2012, the Internal Revenue Service released a new set of tax gap estimates for tax year 2006.  The tax gap is defined as the amount of tax liability faced by taxpayers not paid on time.

 

The new tax gap estimate represents the first full update of the report in five years, and it shows the nation’s compliance rate is essentially unchanged from the last review covering tax year 2001.

 

The tax gap statistic is a helpful guide to the scale of tax compliance and to the persisting sources of low compliance, but it is not an adequate guide to year-to-year changes in IRS programs or to year-to-year returns on IRS service and enforcement initiatives.

 

 

Study Summary

3.90    The following table summarizes the new estimates released in 2011, as compared to the 2001 estimates, with the total tax liabilities in each year.

 

Tax Year 2001

(billions)Tax Year 2006

(billions)Total Tax Liabilities$2,112$2,660Gross Tax Gap$345 (83.7% compliance)$450 (83.1% compliance)Enforcement and Late Payments$55$65Net Tax Gap$290 (86.3% compliance)$385 (85.5% compliance)

 

The voluntary compliance rate – the percentage of total tax revenues paid on a timely basis — for tax year 2006 is estimated to be 83.1 percent. The voluntary compliance rate for 2006 is statistically unchanged from the most recent prior estimate of 83.7 percent calculated for tax year 2001.

 

In Line With Total Tax Liabilities

3.100  Relatively, the tax gap is largely in line with the growth in total tax liabilities.  Some growth in the tax gap estimate is attributed to better data and improved estimation methods. For example, the IRS developed a new econometric model for estimating the tax gap attributable to small corporations which was then applied to newer operational data. Also, large corporation tax gap estimates for 2006 are based on improved statistical methods and updated data. Finally, the data related to individual income taxpayers continues to improve based on improved estimation techniques and newer data.

 

Tax Gap Components

3.110  The tax gap can be divided into three components: non-filing, underreporting and underpayment.

 

As was the case in 2001, the underreporting of income remained the biggest contributing factor to the tax gap in 2006. Under-reporting across taxpayer categories accounted for an estimated $376 billion of the gross tax gap in 2006, up from $285 billion in 2001. Tax non-filing accounted for $28 billion in 2006, up from $27 billion in 2001. Underpayment of tax increased to $46 billion, up from $33 billion in the previous study.

 

Overall, compliance is highest where there is third-party information reporting and/or withholding.  Most wages and salaries are reported by employers to the IRS on Forms W-2 and are subject to withholding. A net of only 1 percent of wage and salary income was misreported. But amounts subject to little or no information reporting had a 56 percent net misreporting rate in 2006.

 

 

 


Table 1: Tax Gap Statistic, Tax Year 2006 Compared to Tax Year 2001
[Money amounts are in billions of dollars]

Tax Gap Component

TY2006

TY2001

Estimated Total Tax Liability

$2,660

$2,112

Gross Tax Gap

450

345

Overall Voluntary Compliance Rate

83.1%

83.7%

Net Tax Gap *

385

290

Overall Net Compliance Rate

85.5%

86.3%

Nonfiling Gap

28

27

Individual Income Tax

25

25

Estate Tax

3

2

Underreporting Gap

376

285

Individual Income Tax

235

197

Non-Business Income

68

56

Business Income

122

109

Adjustments, Deductions, Exemptions

17

15

Credits

28

17

Corporation Income Tax

67

30

Small Corporations (assets under $10M)

19

5

Large Corporations (assets of $10M or more)

48

25

Employment Tax

72

54

Self-Employment Tax

57

39

FICA and Unemployment Tax

15

15

Estate Tax

2

4

Underpayment Gap

46

33

Individual Income Tax

36

23

Corporation Income Tax

4

2

Employment Tax

4

5

Estate Tax

2

2

Excise Tax

0.1

0.5

* Net tax gap is defined as tax liabilities, incurred in that year, that remain outstanding after IRS enforcement efforts.

 

2013 Budget

3.120  The Administration’s Fiscal Year (FY) 2013 Budget request for the IRS was approximately $12.8 billion, a $944.5 million increase (8%) over the FY 2012 enacted level but only a $639.3 million increase (5.3%) from the level enacted for FY 2011. A significant portion of the increase from FY 2012 represented the Administration’s request to restore lost revenue resulting from reductions in IRS funding made over the past two years. Since we have an ineffective Congress, no 2013 budget was enacted and the IRS had cutbacks as a result of the sequester. Because of Congressional incompetence, the IRS once was unable to engage in as much enforcement.

 

2014 Budget

3.130  The Internal Revenue Service was one of the biggest losers in the 2014 budget deal agreed to by House and Senate negotiators. Under the agreement, the service would get just $11.3 billion, which is $526 million below its 2013 budget and $1.7 billion less than President Obama requested. Those ill-advised cuts have led IRS to cease assisting taxpayers with their returns, reduced telephone service and fewer enforcement activities directed at non-compliant taxpayers. Most commentators have suggested that the cuts would reduce IRS collections by $5.2 million.

 

According to the House Appropriations Committee, the funding level would be lower than agency spending in 2009. The agreement would also require the IRS to spend more time and energy reporting to Congress on a range of activities

 

 

 

 

 

 

 

 

 

 

 

Overview – Abusive Return Preparer

3.140  The IRS continues to expand and enhance its abusive preparer program. The program was developed to enhance compliance in the return-preparer community by engaging in enforcement actions and/or asserting appropriate civil penalties against unscrupulous or incompetent return preparers. Bad preparers are a significant problem for both the IRS and taxpayers.

 

Return preparer fraud involves the preparation and filing of false income tax returns by preparers who claim inflated personal or business expenses, false deductions, unallowable credits or excessive exemptions on returns prepared for their clients. This includes inflated requests for the special one-time refund of the long-distance telephone tax. Preparers may also fraudulently manipulate income figures to obtain tax credits, such as the Earned Income Tax Credit.

 

Abusive Preparer Prosecutions

3.150

FY 2013

FY 2012

FY 2011

Investigations Initiated

309

443

371

Prosecution Recommendations

281

276

233

Indictments/Informations

233

202

176

Convictions

207

178

163

Sentenced

186

172

163

Incarceration Rate*

78.0%

84.3%

87.1%

Average Months to Serve

27

29

25

 

Audits of 30 Clients

3.160  Another aspect of the IRS preparer program is identifying suspect preparers and auditing their clients. If, during an examination, a revenue agent suspects that some deficiencies on a return were caused by the preparer, he/she can refer the matter to an area coordinator. After review the coordinator can initiate a project on the preparer. The preparer is sent a letter notifying her that she has been selected for a project and 30 of her client’s returns are audited. If significant deficiencies are found, then the IRS may choose one of several courses of action including:

 

  • Referral to Criminal investigation
  • Referral to the IRS Office of Professional Responsibility
  • Preparer penalties
  • Referral to Department of Justice to seek an injunction ordering the preparer to cease filing tax returns.

 

Promotion of Form to Report Abusive Preparers

3.170  The IRS website now directs taxpayers and others who spot abusive preparers to file Form 3949-A with the Service.

 

4.  EXAMINATION

 

Examination Using Social Media

4.10    News outlets reported in the spring of 2010 that the IRS is now training its revenue agents to gather information on Facebook and other social media sites. The IRS documents state that employees may not use false identities to scour social networking accounts while conducting a probe into a taxpayer. Social networks can also be used to “provide location information,” to “prove and disprove alibis” or to “establish crime or criminal enterprise.” Some people disclose a surprising amount of information about their finances on the sites including employment and income info.

 

IRS Guidelines

4.20    The IRS has set up the following guidelines for internet research on taxpayers:

 

You are required to conduct internet searches to determine taxpayer ecommerce activities.

 

Generally, you are allowed to review information from publicly accessible, unrestricted websites.

 

You are not permitted to:

 

Disclose sensitive information, such as a TlN, without authorization from your manager.

 

Misrepresent your identity or obtain information from a website using a fictitious identity to register.

 

Sign contracts on behalf of the government by assenting to online agreements.

IRS Use of Correspondence Exams

4.30    The IRS has significantly increased the use of correspondence exams over the last decade. It has achieved its higher audit rate of individual taxpayers primarily through expansion of correspondence exams. Between fiscal year (FY) 2000 and FY 2011, face-to-face audits increased by 56 percent, from 251,108 to 391,621. Correspondence exams increased by 220 percent, from 366,657 to 1,173,069.

 

Impact of ACE on Individual Tax Return Examinations

                                                          Note: ACE stands for Automated Correspondence Exam.

 

 

Campus Correspondence Examination (CCE)

4.40    Tax professionals responding to Campus Correspondence Examination (CCE) telephone calls and/or correspondence can take advantage of a new service which began on April 2, 2013. Tax professionals can access the CCE Practitioner Priority Service by calling the PPS toll-free number and selecting the Correspondence Examination option.

 

Additional prompts, based on the telephone number on the letter they are calling about, will direct the call to the Small Business/Self Employed Examination or Wage & Investment Examination line.  CCE PPS will address up to five clients per call and transfer or refer issues outside the CCE scope to the appropriate IRS functions.

 

The PPS prioritizes calls to improve tax professionals’ experiences.

 

CCE PPS toll-free number: (866) 860-4259

Small Business/Self-Employed:  M – F, 7:00 a.m. – 7:00 p.m., local time

Wage & Investment:     M – F, 8:00 a.m. – 8:00 p.m., local time

Alaska and Hawaii – Pacific time

 

The CCE PPS number is for tax professional use only.

 

The Dirty Dozen

4.50    Each year the IRS announces its Dirty Dozen and urges people to avoid these common schemes: The 2014 list is:

 

  1. 1.    Identity Theft

Tax fraud through the use of identity theft tops this year’s Dirty Dozen list. Identity theft occurs when someone uses your personal information, such as your name, Social Security number (SSN) or other identifying information, without your permission, to commit fraud or other crimes. In many cases, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund.

The agency’s work on identity theft and refund fraud continues to grow, touching nearly every part of the organization. For the 2014 filing season, the IRS has expanded these efforts to better protect taxpayers and help victims.

 

  1. 2.    Pervasive Telephone Scams

The IRS has seen a recent increase in local phone scams across the country, with callers pretending to be from the IRS in hopes of stealing money or identities from victims.

 

These phone scams include many variations, ranging from instances from where callers say the victims owe money or are entitled to a huge refund. Some calls can threaten arrest and threaten a driver’s license revocation. Sometimes these calls are paired with follow-up calls from people saying they are from the local police department or the state motor vehicle department. Characteristics of these scams can include:

 

  • Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
  • Scammers may be able to recite the last four digits of a victim’s Social Security Number.
  • Scammers “spoof” or imitate the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
  • Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
  • Victims hear background noise of other calls being conducted to mimic a call site.

After threatening victims with jail time or a driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

 

In another variation, one sophisticated phone scam has targeted taxpayers, including recent immigrants, throughout the country. Victims are told they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, they are then threatened with arrest, deportation or suspension of a business or driver’s license. In many cases, the caller becomes hostile and insulting.

 

If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), then call and report the incident to the Treasury Inspector General for Tax Administration at 800-366-4484.

 

  1. 3.    Phishing

Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft.

 

If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov.

 

  1. 4.    False Promises of “Free Money” from Inflated Refunds

Scam artists routinely pose as tax preparers during tax time, luring victims in by promising large federal tax refunds or refunds that people never dreamed they were due in the first place.

 

Scam artists use flyers, advertisements, phony store fronts and even word of mouth to throw out a wide net for victims. They may even spread the word through community groups or churches where trust is high. Scammers prey on people who do not have a filing requirement, such as low-income individuals or the elderly. They also prey on non-English speakers, who may or may not have a filing requirement.

 

Scammers build false hope by duping people into making claims for fictitious rebates, benefits or tax credits. They charge good money for very bad advice. Or worse, they file a false return in a person’s name and that person never knows that a refund was paid.

 

Scam artists also victimize people with a filing requirement and due a refund by promising inflated refunds based on fictitious Social Security benefits and false claims for education credits, the Earned Income Tax Credit (EITC), or the American Opportunity Tax Credit, among others.

 

While honest tax preparers provide their customers a copy of the tax return they’ve prepared, victims of scam frequently are not given a copy of what was filed. Victims also report that the fraudulent refund is deposited into the scammer’s bank account. The scammers deduct a large “fee” before cutting a check to the victim, a practice not used by legitimate tax preparers.

 

Taxpayers should take care when choosing an individual or firm to prepare their taxes. Honest return preparers generally: ask for proof of income and eligibility for credits and deductions; sign returns as the preparer; enter their IRS Preparer Tax Identification Number (PTIN); provide the taxpayer a copy of the return.

Beware: Intentional mistakes of this kind can result in a $5,000 penalty.

 

  1. 5.    Return Preparer Fraud

About 60 percent of taxpayers will use tax professionals this year to prepare their tax returns. Most return preparers provide honest service to their clients. But, some unscrupulous preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft.

 

Remember: Taxpayers are legally responsible for what’s on their tax return even if it is prepared by someone else. Make sure the preparer you hire is up to the task. You report abusive tax preparers to the IRS on Form 14157, Complaint: Tax Return Preparer.

 

  1. 6.    Hiding Income Offshore

Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities and then using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.

 

The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. The IRS works closely with the Department of Justice (DOJ) to prosecute tax evasion cases.

 

  1. 7.    Impersonation of Charitable Organizations

Another long-standing type of abuse or fraud is scams that occur in the wake of significant natural disasters. Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Scam artists can use a variety of tactics. Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.

 

They may attempt to get personal financial information or Social Security numbers that can be used to steal the victims’ identities or financial resources. Bogus websites may solicit funds for disaster victims. The IRS cautions both victims of natural disasters and people wishing to make charitable donations to avoid scam artists by following these tips:

 

  • To help disaster victims, donate to recognized charities.
  • Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. IRS.gov has a search feature, Exempt Organizations Select Check, which allows people to find legitimate, qualified charities to which donations may be tax-deductible.
  • Don’t give out personal financial information, such as Social Security numbers or credit card and bank account numbers and passwords, to anyone who solicits a contribution from you. Scam artists may use this information to steal your identity and money.
  • Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift.

 

  1. 8.    False Income, Expenses or Exemptions

Another scam involves inflating or including income on a tax return that was never earned, either as wages or as self-employment income in order to maximize refundable credits. Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions. This could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution.

 

Additionally, some taxpayers are filing excessive claims for the fuel tax credit. Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit. But other individuals have claimed the tax credit although they were not eligible. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.

 

  1. 9.    Frivolous Arguments

Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid. These arguments are wrong and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or disregard their responsibility to pay taxes.

 

10. Falsely Claiming Zero Wages or Using False Form 1099

Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.

 

Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any variations of this scheme. Filing this type of return may result in a $5,000 penalty.

 

Some people also attempt fraud using false Form 1099 refund claims. In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS. In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return.

 

11. Abusive Tax Structures

Abusive tax schemes have evolved from simple structuring of abusive domestic and foreign trust arrangements into sophisticated strategies that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions.

 

IRS Criminal Investigation (CI) has developed a nationally coordinated program to combat these abusive tax schemes. CI’s primary focus is on the identification and investigation of the tax scheme promoters as well as those who play a substantial or integral role in facilitating, aiding, assisting, or furthering the abusive tax scheme (e.g., accountants, lawyers). Secondarily, but equally important, is the investigation of investors who knowingly participate in abusive tax schemes.

 

12. Misuse of Trusts

Trusts also commonly show up in abusive tax structures. They are highlighted here because unscrupulous promoters continue to urge taxpayers to transfer large amounts of assets into trusts. These assets include not only cash and investments, but also successful on-going businesses. There are legitimate uses of trusts in tax and estate planning, but the IRS commonly sees highly questionable transactions. These transactions promise reduced taxable income, inflated deductions for personal expenses, the reduction or elimination of self-employment taxes and reduced estate or gift transfer taxes. These transactions commonly arise when taxpayers are transferring wealth from one generation to another. Questionable trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.

 

5.  APPEALS

 

Appeals Judicial Approach and Culture Project

5.10    On July 18, 2013, the IRS director of Policy, Quality and Case Support issued a memorandum (Control No. AP-08-0713-03) to Appeals employees regarding the first phase of the implementation of the Appeals Judicial Approach and Culture (AJAC) Project. The goal of this project is to promote a quasi-judicial approach in how the Appeals office handles its cases. It is part of an effort to improve internal and external customer perceptions of a fair, impartial, and independent Appeals office.

 

The memo provides interim guidance to Appeals employees on implementing the AJAC Project and is effective for actions taken after July 18. It contains updated Internal Revenue Manual (IRM) provisions related to the various work flows within Appeals, including examination cases, Collection Due Process (CDP), offers in compromise (OICs), and the Collection Appeals Program (CAP). Although many of the AJAC changes have already taken effect, the memo states that updated provisions not yet incorporated in the IRM will be incorporated within a year. Although the guidance contains numerous changes to the IRM, the most significant change is the updated general policy statement in the IRM. Policy Statement 8-2 (formerly P-8-49) provides:

 

  • New issues are not to be raised by Appeals.
  • Appeals will not raise new issues.  Appeals also will not reopen an issue on which the taxpayer and the IRS are in agreement.

 

Significant Change

5.20    This updated policy marks a significant change from the previous policy, under which Appeals officers could raise a new issue if the grounds were substantial and the potential impact on the tax liability was material.

 

The memo provides updated IRM provisions related to various Appeals functions. One example is in Conference and Issue Resolution—General Guidelines:  “Appeals will not raise new issues and will focus dispute resolution efforts on resolving the points of disagreement identified by the parties. The Appeals process is not a continuation or an extension of the examination process.”  IRM §8.6.1.6.2.

 

Although Appeals may not raise new issues, it may consider alternative or new legal arguments that support the parties’ positions for purposes of hazards-of-litigation analysis. The new guidance also provides that the discussion of new or additional cases (or other authorities) that support a previously raised theory or argument does not constitute a new issue. However, Appeals may only use evidence within the case file to evaluate such theories. It should be noted that this new policy does not preclude a taxpayer from raising new issues.

 

The following summaries highlight some of the modifications to various case assignments within Appeals that taxpayers and practitioners should be aware of.

 

Examination

5.30    Although Appeals is prohibited from raising new issues in docketed tax cases, IRM Section 8.4.1.15.3 provides that Appeals will consider new issues that the government raises in its formal pleadings and may consider new evidence developed by Compliance or the Office of Chief Counsel to support the government’s position. Additionally, if Counsel determines that Appeals may consider a new issue without formal amendment to the proceedings or the petitioner raises a new issue in a formal amendment to the proceedings, the Appeals officer may refer the issue to Compliance for review and to make a determination.

 

IRM Section 8.6.1.6 provides that although Appeals may not raise new issues, Appeals officers may notify their managers of systemic issues that may affect more than one taxpayer. The memo provides:

 

A systemic issue is an issue that requires a change or modification to an established procedure, process or operation (e.g., training issues, computer program, campus procedure for processing claims).

 

Although these issues may be identified, they cannot be raised in the disposition of the pending case.

 

Reopening a Closed Case

5.40    Regarding the reopening of closed cases by Appeals, IRM Section 8.6.1.6 now provides that mutual concession cases will not be reopened based on action initiated by the IRS except when the disposition involved fraud, malfeasance, concealment, or misrepresentation of a material fact; or an important mistake in mathematical calculations or discovery that a return contains unreported income, unadjusted deductions, credits, gains, losses, etc. resulting from the taxpayer’s participation in a listed transaction. Any reopening initiated by the IRS based on these exceptions will still require the approval of the Appeals director.

 

New Issues

5.50    Furthermore, the definition of a “new issue” has been updated. IRM Section 8.6.1.6.1 provides that the restrictions on raising new issues or reopening a closed case do not apply to new issues raised by taxpayers. It also states that the term means issues identified by Appeals in non-docketed cases. The IRM makes clear that a new issue is one not raised during Compliance consideration and that a new theory or alternative argument is not a new issue.

 

IRM Section 8.6.1.6.2, which provides general guidelines for the Appeals process, has been substantially revised. It states that the Appeals process is not a continuation or an extension of the examination process but focuses on resolving disputes. Appeals may consider new theories and/or alternative legal arguments that support the parties’ positions when evaluating the hazards of litigation in a case. However, the Appeals officer should not develop evidence that is not in the case file to support the new theory or argument.

 

Collection Due Process and Equivalent Hearing Cases

5.60    IRM Section 8.22.4.2.1 has been updated to provide that in CDP cases, Appeals is responsible for making a determination based upon the facts and the law known to it during the time of the hearing, as a judge would do in a court of law. Furthermore, files sent to Appeals in CDP cases should contain sufficient documentation for Appeals to make a determination. If the file does not contain sufficient documentation, Appeals cannot return the case to Collection due to statutory requirements, and instead, the Appeals officer must decide whether to request relevant information from the taxpayer, issue an appeals referral investigation for Collection to secure or verify information, or make a determination based on the available information.

 

Offers in Compromise

5.70    Updated IRM Section 8.22.7.10.6.5 directs Appeals in making a final determination on an OIC not to investigate to identify new assets but to consider only assets documented by Collection and to accept previously agreed-upon values. Appeals cannot revise the value of an asset to an amount higher than determined by Collection, unless the taxpayer voluntarily provides new information to Appeals, and may only correct errors in determining reasonable collection potential that are strictly computational in nature. The IRM also is being updated to make it clear that an Appeals OIC case is not an extension of the Collection OIC process. The memo emphasizes that the role and mission of Appeals are different from those of Collection and that the role of Appeals is not to rework the offer that Collection rejected. Appeals, however, will consider the items that were in dispute at the time of the rejection. For example, updated IRM Section 8.23.2.4 provides that appeals will not return a case as a premature referral where Collections did not fully develop the case. Instead, Appeals is directed to weigh Collection’s development of the issue against the taxpayer’s information and testimony to make a decision on the case.

 

Additionally, updated IRM Section 8.23.3.3 provides that in OIC cases, Appeals may no longer attempt to identify additional taxpayer assets or revise any asset values from what Collection had previously determined.

 

Collection Appeals Program

5.80    The memo clarifies case procedures related to the CAP and states that Appeals will not consider alternatives to the issue under appeal, only the appropriateness of that issue. New IRM Section 8.24.1.1.1(9) provides several examples. Taxpayers and practitioners should be aware of the changes relating to Appeals cases and their potential impact on various Appeals activities. Taxpayers and practitioners who have, or may have, issues in front of Appeals should look to the memo for interim guidance on the first phase of implementation. It is anticipated that the IRS will continue to implement changes under the AJAC Project and that additional guidance from Appeals will be forthcoming.

 

 

 

 

 

 

 

 

Table 21.  Appeals Workload, by Type of Case, Fiscal Year 2013

Type of case

Cases
received

Cases
closed

Cases pending
September 30, 2013

(1)

(2)

(3)

Total Cases [1]

123,113                

131,176                

59,346                 

Collection Due Process [2]

44,684

48,192

21,099

Examination [3]

38,306

41,729

23,715

Penalty Appeals [4]

10,336

11,061

2,695

Offers in Compromise [5]

9,695

9,857

4,228

Innocent Spouse [6]

4,284

3,617

2,739

Industry Cases [7]

2,153

2,241

2,242

Coordinated Industry Cases [8]

98

237

271

Other [9]

13,557

14,242

2,357

 

Campus Appeals Program

5.90    The campus appeals program diminishes taxpayer rights. Any appeal from a compliance generated notice is assigned to the campus appeals program. The campus appeals personnel are poorly trained and lack field experience. Their incompetence starkly contrasts with the well trained experienced former revenue agents and revenue officers assigned to the local appeals offices. When your client receives a notice from a campus allowing an appeal your protest should always request your client be given a face to face conference in your local office.

 

In October, 2010 TIGTA issued the following findings:

 

Campus Strategies – The shifting of work from field operations to campus operations appears to affect the quality of Appeals decisions due to the reduced number of face-to-face conferences, a campus environment is less conducive to a careful, candid assessment of the case, and taxpayers assigned to Appeals campus sites might perceive they are receiving second-class treatment.

 

Arbitration

5.100  Arbitration is available for certain cases within Appeals jurisdiction that meet the operational requirements of the program. This program is available for cases in which a few factual issues remain unresolved following settlement discussions in Appeals. Appeals and the taxpayer will be bound by the arbitrator’s findings. The arbitration procedure uses the services of an arbitrator either from Appeals or from an outside organization.

 

Refer to the following for more information:

 

IRS Formalizes Appeals Arbitration Process

Revenue Procedure 2006-44

Announcement 2008-111

IRM 8.26.6

IRM 35.5.5

Publication 4167 – Appeals – Introduction to Alternative Dispute Resolution

 

6.  USEFUL INFORMATION FOR PRACTITIONERS

 

Whistleblower Reforms

6.10    The IRS Whistleblower Office pays money to people who blow the whistle on persons who fail to pay the tax they owe. If the IRS uses information provided by the whistleblower, it can award the whistleblower up to 30 percent of the additional tax, penalty and other amounts it collects.

 

Who can get an award?

6.20    The IRS may pay awards to people who provide specific and credible information to the IRS if the information results in the collection of taxes, penalties, interest or other amounts from the noncompliant taxpayer. The IRS is looking for solid information, not an “educated guess” or unsupported speculation. The IRS is also looking for a significant Federal tax issue – this is not a program for resolving personal problems or disputes about a business relationship.

 

What are the rules for getting an award?

6.30    The law provides for two types of awards. If the taxes, penalties, interest and other amounts in dispute exceed $2 million, and a few other qualifications are met, the IRS will pay 15 percent to 30 percent of the amount collected. If the case deals with an individual, his or her annual gross income must be more than $200,000. If the whistleblower disagrees with the outcome of the claim, he or she can appeal to the Tax Court. These rules are found at Internal Revenue Code IRC Section 7623(b) – Whistleblower Rules.

 

Awards for Lower Dollar Amounts

6.40    The IRS also has an award program for other whistleblowers – those who do not meet the dollar thresholds of $2 million in dispute or cases involving individual taxpayers with gross income of less than $200,000. The awards through this program are less, with a maximum award of 15 percent up to $10 million. The awards are discretionary and the informant cannot dispute the outcome of the claim in Tax Court.  If you submit information and seek an award for doing so, use IRS Form 211.

 

Largest Award Ever

6.50    In fiscal 2012, the last year for which the tax agency made data public, it collected $592.5 million from taxpayers under the whistleblower program and paid a record $125.3 million to 128 informants who helped break cases. The largest of these awards went to Bradley Birkenfeld who received an award of $104 million. Birkenfeld provided crucial evidence against UBS, a Swiss bank that entered into a plea bargain in 2009 that resulted in it paying a $780 million fine for its illegal assistance to Americans hiding money in secret Swiss accounts. . It also admitted to assisting 17,000 clients evade their taxes through the use of offshore accounts between 2000 and 2007. In July 2009, to avoid additional fines, UBS agreed to provide the names of 5,000 Americans who had offshore accounts with UBS. On June 19, 2008, Birkenfeld pleaded guilty to a single count of conspiracy to defraud the United States. On August 21, 2009, although the prosecution recommended 30 months, Birkenfeld was sentenced by U.S. District Judge William Zloch to 40 months in prison. He served his sentence on January 8, 2010. According to Reuters, Birkenfeld was released from prison in August 2012. Soon after his release the IRS announced its whistleblower award.

 

Whistleblower Submissions

Pre-2007

2007

2008

2009

2010

2011

2012

2013

Total

Total Claims Received

1,177

1,463

1,923

6,991

13,155

8,084

9,239

9,268

5,1390

Claims Open

799

1,373

1,060

2,025

6,253

2,308

3,095

5,417

22,330

 

All Amounts Collected and Awards

Paid under 7623 FY 2009-2013

2009

2010

2011

2012

2013

Awards Paid

110

97

97

128

122

Collections over $2,000,000

5

9

4

12

6

Total Amount of Awards

Paid

$5,851,608

$18,746,327

$8,008,430

$125,355,799

$53,054,302

Amounts Collected

$206,032,872

$464,695,459

$48,047,500

$592,498,294

$367,042,420

Awards paid as a percentage of amounts collected.

2.8%

4.0%

16.7%

21.2%

14.6%

 

Misclassified Workers

6.60    Employees working for employers who failed to withhold Social Security and Medicare taxes should use new Form 8919 to report and pay their share of these taxes. This includes section 530 employees — that is, people who work for employers claiming relief from federal payroll taxes under section 530 of the Revenue Act of 1978. It also includes employees treated as independent contractors but who have received a determination letter from the IRS which states they are employees.

 

Workers who believe they are misclassified as independent contractors can file Form SS-8 with the IRS and request a determination of their worker classification. For employees, the Social Security tax rate is 6.2 percent and the Medicare tax rate is 1.45 percent. Normally, employers withhold these taxes from workers’ pay, match these amounts and turn over the combined amounts to the IRS. Workers, properly classified as independent contractors, should not use Form 8919 but instead, continue to use Schedule SE. IRS Publication 1779 has further details on employee versus independent contractor status.

 

NRP Audits

6.70    In February 2010, the Internal Revenue Service began its first Employment Tax National Research Project in 25 years. Business practices regarding employment tax issues may have changed significantly since the last IRS employment tax study in the 1980s, necessitating the need for this study. Examinations comprising the study were conducted to collect data that will allow the IRS to understand the compliance characteristics of employment tax filers. The results will allow the IRS to gauge more accurately the extent to which businesses properly comply with employment tax law and related reporting requirements. When completed, this information will help the IRS select and audit future employment tax returns with the greatest compliance risk.

The main goals for the ET NRP:

 

  • To secure statistically valid information for computing the Employment Tax Gap, and
  • To determine compliance characteristics so IRS can focus on the most noncompliant employment tax areas.
  • To determine the level of employment tax compliance by businesses

 

Under the program, the IRS randomly selected 2,000 taxpayers to audit each year for three years. The examinations were comprehensive in scope. The IRS reviewed employee compensation issues, employee and executive benefits, backup withholding and the proper characterization of employees versus independent contractors.

 

Voluntary Classification Settlement Program

6.80    The Voluntary Classification Settlement Program (VCSP) is a voluntary program described in Announcement 2011-64 (PDF) that provides an opportunity for taxpayers to reclassify their workers as employees for employment tax purposes for future tax periods with partial relief from federal employment taxes. To participate in this new voluntary program, the taxpayer must meet certain eligibility requirements, apply to participate in VCSP by filing Form 8952, Application for Voluntary Classification Settlement Program, and enter into a closing agreement with the IRS.  The VCSP allows eligible taxpayers to obtain relief similar to that available through the Classification Settlement Program for taxpayers under examination.

 

Eligibility

6.90    The VCSP is available for taxpayers who want to voluntarily change the prospective classification of their workers. The program applies to taxpayers currently treating their workers (or a class or group of workers) as independent contractors or other nonemployees and wants to prospectively treat the workers as employees.

 

A taxpayer must have consistently treated the workers as nonemployees, and must have filed all required Forms 1099 for the workers to be reclassified under the VCSP for the previous three years to participate in VCSP. The taxpayer cannot currently be under audit by the IRS and the taxpayer cannot be under audit concerning the classification of the workers by the Department of Labor or by a state government agency.

 

If the IRS or the Department of Labor has previously audited a taxpayer concerning the classification of the workers, the taxpayer will be eligible only if the taxpayer has complied with the results of that audit.

 

Exempt organizations and Government entities may participate in VCSP if they meet all of the eligibility requirements.

 

VCSP Agreements

6.100  A taxpayer participating in the VCSP will agree to prospectively treat the class or classes of workers as employees for future tax periods. In exchange, the taxpayer:

 

  • Will pay 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, determined under the reduced rates of section 3509(a) of the Internal Revenue Code. See Instructions to Form 8952;

 

  • Will not be liable for any interest and penalties on the amount; and

 

  • Will not be subject to an employment tax audit regarding the worker classification of the workers being reclassified under the VCSP for prior years.

 

As part of the VCSP program, taxpayer will agree to extend the period of limitations on assessment of employment taxes for three years for the first, second and third calendar years beginning after the date on which the taxpayer has agreed under the VCSP closing agreement to begin treating the workers as employees.

 

Applying for VCSP

6.110  To participate in the VCSP, a taxpayer must apply using Form 8952, Application for Voluntary Classification Settlement Program. The application should be filed at least 60 days prior to the date the taxpayer wants to begin treating its workers as employees.

 

Eligible taxpayers accepted into the VCSP will enter into a closing agreement with the IRS to finalize the terms of the VCSP, and will simultaneously make full and complete payment of any amount due under the closing agreement.

 

December 2012 Modifications

6.120  The VCSP, originally released in Announcement 2011-64, has been modified in Announcement 2012-45 to:

 

•Permit a taxpayer under IRS audit, other than an employment tax audit, to be eligible to participate in the VCSP

•Clarify the current eligibility requirement that a taxpayer who is a member of an affiliated group within the meaning of section 1504(a) is not eligible to participate in the VCSP if any member of the affiliated group is under employment tax audit

•Clarify a taxpayer is not eligible to participate if the taxpayer is contesting in court the classification of the class or classes of workers from a previous audit by the IRS or Department of Labor; and

•Eliminate the requirement that a taxpayer agree to extend the period of limitations on assessment of employment taxes as part of the VCSP closing agreement with the IRS.

 

Announcement 2012-45 (2012-51 I.R.B. 724) provides notice and information about the revised program.

 

Offshore Accounts

6.130  On February 18, 2009, UBS AG, Switzerland’s largest bank, IRS announced it had entered into a deferred prosecution agreement on charges of conspiring to defraud the United States by impeding the IRS.  The IRS investigation into hidden foreign bank accounts has exploded since that time, reaching many other countries which are now cooperating with the United States in ongoing investigations.

 

Agreement

6.140  As part of the deferred prosecution agreement and in an unprecedented move, UBS, based on an order by the Swiss Financial Markets Supervisory Authority (FINMA), has agreed to immediately provide the United States government with the identities of, and account information for, certain United States customers of UBS’s cross-border business. Under the deferred prosecution agreement, UBS agreed to expeditiously exit the business of providing banking services to United States clients with undeclared accounts. As part of the deferred prosecution agreement, UBS further agreed to pay $780 million in fines, penalties, interest and restitution.

 

Many Taxpayers and Bankers Criminally Charged

6.150  Since the announcement of the UBS plea bargain, the IRS has indicted many taxpayers from all parts of the country for not reporting their offshore accounts. Most have pleaded guilty and been sentenced. Taxpayers with unreported foreign accounts continue to face prosecution absent a voluntary disclosure of the accounts to the IRS. Latest IRS reports assert that over 80 individuals have been indicted as a result of the new offshore enforcement initiative.

 

Offshore Voluntary Disclosure Initiative

6.160  Since 2009, 47,000 individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to bring their money back into the U.S. tax system and resolve their tax obligations. And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore will become increasingly more difficult.

 

2012 Offshore Voluntary Disclosure Program (OVDP)

6.170  At the beginning of 2012, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. IRS has collected over $7 billion through the programs.

 

In June, 2014, changes and new guidelines for disclosure were put into place by the IRS.  The implication of these changes is still under consideration.  See, Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers, at IRS.gov, updated June 18, 2014.

 

Avoid Criminal Charges

6.180  In exchange for participating in the OVDP, taxpayers with undisclosed offshore accounts avoid criminal prosecution for their unpaid taxes and were required to pay significant penalties. [Generally, the civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign account per violation. See 31 U.S.C. § 5321(a)(5).]

 

Penalties

6.190  Under the 2012 OVDP, taxpayers are subject to a 27.5 percent penalty on the highest aggregate account balance on their undisclosed account(s) between the 2004 and 2011. If the value of the undisclosed account(s) was less than $75,000 at all times during the tax years in question, the penalty is reduced to 12.5 percent.  In limited situations, a penalty of 5% may be imposed.  Taxpayers who believed they could establish they were not willful may opt out of the penalty regime but if their arguments are not accepted by the IRS they face higher penalties.

 

Opt Out Option

6.200  A taxpayer who opts out of OVDP will be taking a risk. Upon opting out of OVDP the taxpayer’s case will be assigned to another unit of the IRS. That unit will review the taxpayer’s explanation of her failure to file and report foreign accounts. If the IRS finds the taxpayer was merely negligent in her failure to report the accounts, it will assert a much lower negligence penalty. If it finds that the taxpayer willfully failed to report the account the IRS will assert a much higher 50% fraudulent failure to file FBAR penalty. It might also assert the 75% fraud penalty on the underreported income taxes due on the return. Therefore a taxpayer should not opt out without first reviewing all of the facts and circumstances that gave rise to her omission with your tax professional. If there is any danger that the IRS might assert fraud the taxpayer should not opt out.

 

Eligibility

6.210  The OVDP is open to taxpayers, including individuals, corporations, partnerships and trusts. Taxpayers under examination or under criminal investigation, however, are ineligible to participate in the program. Unlike its two prior disclosure programs the IRS has not set a deadline for the 2012 OVDP.

 

Quiet Disclosures

6.220  Taxpayers that have made “quiet disclosures” by filing amended returns and paying related tax and interest for previously unreported offshore income without otherwise notifying the IRS are encouraged to participate in the OVDI. Taxpayers that make quiet disclosures without seeking the protection of the OVDI risk being examined and potentially criminally prosecuted for all applicable years.

 

 

 

Streamlined Program for Non-Resident U. S. Nationals

6.230  The Service has announced a streamlined procedure for current non-residents including, but not limited to, dual citizens who have not filed U.S. income tax and information returns to file their delinquent returns. This procedure went in to effect on September 1, 2012.

 

Description of Streamlined Procedure

6.240  Taxpayers utilizing the procedure must file delinquent tax returns, with appropriate related information returns, for the past three years and to file delinquent FBARs for the past six years. All submissions are reviewed, but, the intensity of review will vary according to the level of compliance risk presented by the submission. For those taxpayers presenting low compliance risk, the process is expedited and the IRS will not assert penalties or pursue follow-up actions. Submissions that present higher compliance risk are not eligible for the procedure and are subject to a more thorough review and possibly a full examination, which sometimes may include over three years, in a manner similar to opting out of the Offshore Voluntary Disclosure Program. Tax, interest and penalties, if appropriate, are imposed under U.S. federal tax laws based on a review of the submission.

 

Compliance Risk Determination

6.250  The IRS will determine the level of compliance risk presented by the submission based on certain information provided on the returns filed, and based on certain additional information required as part of the submission. Low risk determinations are predicated on simple returns with little or no U.S. tax due. Absent high risk factors, if the submitted returns and application show less than $1,500 in tax due in each of the years, they are treated as low risk. The risk level will rise as the income and assets of the taxpayer rise, if there are indications of sophisticated tax planning or avoidance, or if there is material economic activity in the United States. Additional risk factors include any additional history of noncompliance with United States tax law and the amount and type of United States source income. Additional information regarding the specific factors the IRS will use to assess the level of compliance risk, and how information regarding those factors should be in the submission, are released prior to the effective date of the new procedure.

 

Procedure for Streamlined Program

6.260  Taxpayers wishing to use the procedure must submit:

 

(1)  delinquent tax returns, with appropriate related information returns, for the past three years,

 

(2)  delinquent FBARs for the past six years, and

 

(3)  any additional information regarding compliance risk factors required by future instructions. Payment of any federal tax and interest due must accompany the submission. More information about the application process including where submissions should be sent, are provided prior to the effective date.

 

Any taxpayer claiming reasonable cause for failure to file tax returns, information returns, or FBARs must submit a dated statement, signed under penalties of perjury, explaining why there is reasonable cause for previous failures to file. See IRS Fact Sheet FS-2011-13 (December 2011) for examples of reasonable cause. Any taxpayer seeking relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by relevant treaty must submit:

 

a statement requesting an extension of time to make an election to defer income tax and identifying the pertinent treaty position;

 

for relevant Canadian plans, a Form 8891 for each tax year and description of the type of plan covered by the submission; and a statement describing:

 

  • the events that led to failing to make the election,
  • the events that led to the discovery of the failure, and
  • if the taxpayer relied on a professional advisor, the nature of the advisor’s engagement and responsibilities.

 

Other Considerations:

6.270  Taxpayers in a situation where they are concerned about the risk of criminal prosecution should be advised this new procedure does not provide protection from criminal prosecution if the IRS and Department of Justice determine that the taxpayer’s particular circumstances warrant such prosecution. Taxpayers concerned about criminal prosecution because of their particular circumstances should be aware of and consult their legal advisers about the Offshore Voluntary Disclosure Program (OVDP), announced on January 9, 2012. Taxpayers ineligible to participate in OVDP are also ineligible to participate in this procedure.

 

Identity Theft

6.280  Identity theft is becoming a huge problem for the tax system. The IRS has established additional screening to reduce identity theft. Many taxpayers’ refunds were delayed. The IRS has established an office for reporting identity theft using stolen SSN’s. Their employers report that income to the IRS on W-2’s and the income is attributed to the theft victim.  Two scenarios are most common:

 

  • The taxpayer receives an audit notice from the IRS showing he is working several jobs in many states or;
  • The taxpayer attempts to file a return and it is rejected by the IRS because someone has already filed a return using the taxpayers SSN.

 

The IRS website now gives taxpayers who are the victims of identity theft the following advice:

 

Identity Theft and Your Tax Records

The IRS does not initiate communication with taxpayers through e-mail. Before identity theft happens, safeguard your information.

 

What do I do if the IRS contacts me because of a tax issue that may have been created by an identity theft?

 

If you receive a notice or letter in the mail from the IRS that leads you to believe someone may have used your Social Security number fraudulently, please respond immediately to the name, address, and/or number printed on the IRS notice.

 

Be alert to possible identity theft if the IRS issued notice or letter:

 

  • states more than one tax return was filed for you, or
  • indicates you received wages from an employer unknown to you.
  • An identity thief might also use your Social Security number to file a tax return to receive a refund. If the thief files the tax return before you do, the IRS will believe you already filed and received your refund if eligible.

 

If your Social Security number is stolen, it may be used by another individual to get a job. That person’s employer would report income earned to the IRS using your Social Security number, making it appear you did not report all of your income on your tax return.

If you have previously been in contact with the IRS and have not achieved a resolution, please contact the IRS Identity Protection Specialized Unit, toll-free at 1-800-908-4490.

 

What do I do if I have not been contacted by IRS for a tax issue but believe I am a victim of identity theft?

 

If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost/stolen purse or wallet, questionable credit card activity, credit report, or other activity, you need to provide the IRS with proof of your identity.

 

Submit a copy, not the original documents, of your valid Federal or State issued identification, such as a social security card, driver’s license, or passport, etc, with a copy of a police report or Federal Trade Commission Identity Theft Affidavit. If the FTC Affidavit is not notarized, a witness (non-relative) must sign it.

 

Please send these documents using one of the following options:

 

Mailing address:

Internal Revenue Service

P.O. Box 9039

Andover, MA 01810-0939

 

FAX: Note this is not a toll-free FAX number

1-978-247-9965

 

Use Form 14039 as a cover sheet for submitting your documentation.

 

You may also contact the IRS Identity Protection Specialized Unit, toll-free 1-800-908-4490 for guidance.

 

Hours of Operation: Monday – Friday, 8:00 a.m. – 8:00 p.m. your local time (Alaska & Hawaii follow Pacific Time).

 

Redress number

6.290  Taxpayers who report an identity theft will be given a redress number by the IRS to be used with filing future tax returns.

 

More Resources Dedicated to Identity Theft

6.300  By late 2012, the IRS assigned over 3,000 IRS employees — over double from 2011 — to work on identity theft-related issues. IRS employees are working to prevent refund fraud, investigate identity theft-related crimes and help taxpayers victimized by identity thieves. The IRS has trained 35,000 employees who work with taxpayers to recognize identity theft indicators and help people victimized by identity theft.

 

IRS Hotlines and Toll-Free Numbers

IRS Telephone Lines and Hours of Operation

 Service Telephone number Hours of operation
Practitioner Priority Service (866) 860-4259 M–F, 8:00 a.m.–8:00 p.m., local time
IRS Tax Help Line for Individuals (800) 829-1040 M–F, 7:00 a.m.–10:00 p.m., local time
Business and Specialty Tax Line (800) 829-4933 M–F, 7:00 a.m.–10:00 p.m., local time
e-Help (Practitioners Only) (866) 255-0654 M–F, 6:30 a.m.–6:00 p.m., CT
(non-peak period)M-F, 6:30 a.m.–10:00 p.m, CT (1/12/2007 – 4/27/2007) and Saturdays 6:30 a.m. – 4:00 p.m., CT (1/12/2007 – 4/27/2007)
Identity Protection Specialized Unit 1-800-908-4490 M – F, 8:00 a.m. – 8:00 p.m. local time
Refund Hotline (800) 829-1954 Automated service is available 24/7
Forms and Publications (800) 829-3676 M–F, 7:00 a.m–10:00 p.m., local time
National Taxpayer Advocate Help Line (877) 777-4778 M–F, 7:00 a.m.–10:00 p.m., local time
Telephone Device for the Deaf (TDD): Forms, Tax Help, TAS (800) 829-4059 M–F, 7:00 a.m.–10:00 p.m., local time
Electronic Federal Tax Payment System (800) 555-4477 24/7
Government Entities (TEGE) Help Line (877) 829-5500 M–F, 8:30 a.m. – 4:30 p.m., ET
TeleTax Topics and Refund Status (800) 829-4477 24/7
Forms 706 and 709 Help Line (866) 699-4083 M–F, 7:00 a.m.–7:00 p.m., local time
Employer Identification Number (EIN) (800) 829-4933 M–F, 7:00 a.m.–10:00 p.m., local time
Excise Tax and Form 2290 Help (866) 699-4096 M–F, 8:00 a.m.–6:00 p.m., ET
Information Return Reporting (866) 455-7438 M–F, 8:30 a.m.–4:30 p.m., ET

 

 

8938 Statement of Specified Foreign Financial Assets

6.310  Form 8938 (Statement of Specified Foreign Financial Assets) must be filed by taxpayers with specific types and amounts of foreign financial assets or foreign accounts. It is important for taxpayers to determine whether they are subject to this new requirement because the law imposes significant penalties for failing to comply.

The Form 8938 filing requirement was enacted in 2010 to improve tax compliance by U.S. taxpayers with offshore financial accounts. Individuals who may have to file Form 8938 are U.S. citizens and residents, nonresidents who elect to file a joint income tax return and certain nonresidents who live in a U.S. territory.

Form 8938 is required when the total value of specified foreign assets exceeds certain thresholds.  For example, a married couple living in the U.S. and filing a joint tax return would not file Form 8938 unless their total specified foreign assets exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.

The thresholds for taxpayers who reside abroad are higher. For example in this case, a married couple residing abroad and filing a joint return would not file Form 8938 unless the value of specified foreign assets exceeds $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

Preparer Complaint Form

6.320  In 2011IRS released a preparer complaint Form 14157.

 

7.  COLLECTION

 

Higher User Fees

7.10    Prior to 2014, the fee for an Installment Agreement was $105, a reduction to $52 for a direct debt agreement, and $45 to restructure or reinstate a defaulted agreement.  The new fees beginning January 1, 2014, are:  $120 for an installment agreement and $50 to restructure/reinstate a defaulted agreement.  The direct debit agreement fee does not change.

 

Prior to 2014 the fee for an Offer in Compromise was $150. The new fee beginning January 1, 2014, for an Offer in Compromise is $186.  The “no fee” for low-income taxpayers continues to apply.

 

Revisions to Collection Procedures

7.20    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, as well as the IRS Advisory Council in its annual report to the Commissioner.

 

More Flexible Attitude

7.30    The newly announced policy represents a more flexible attitude by the IRS. The IRS has made 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 issued, resulting in fewer tax liens.

 

  • Making it easier for taxpayers to obtain lien withdrawals after paying a tax bill.

 

  • Withdrawing liens 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.

 

Higher Lien Thresholds

7.40    The IRS stated it will significantly increase the dollar thresholds when liens are 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 new lien thresholds raise the amount from $5,000 to $10,000.

 

Easier Lien Withdrawals

7.50    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 this approach is in the best interest of the government. To speed the withdrawal process, the IRS will also streamline its internal procedures to allow collection personnel to withdraw the liens.

 

Direct Debit Installment Agreements and Liens

7.60    The IRS is making other fundamental changes to liens 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 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

7.70    The IRS will also provide streamlined Installment Agreements 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.  Previously, 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.

 

Offers in Compromise

7.80    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. 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. .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 determine the taxpayer’s ability to pay.

 

IRS Revised Rules for Streamlined Installment Agreements

7.90    In January 2012, the IRS relaxed its rules for payment of smaller tax liabilities. The revised procedures now allow taxpayers up to 72 months to pay their tax obligations. The new procedures also increase the maximum amount subject to the relaxed streamlined agreements from $25,000 to $50,000.

You could request a monthly installment plan by submitting Form 9465-FS if your liability was greater than $25,000 but not more than $50,000. The Form 9465-FS was meant to be used by taxpayers with liabilities greater than $25,000 but not more than $50,000.  It could be used by all taxpayers to request an installment agreement for any amount less than $50,000. A taxpayer may request up to 72 months to pay. In certain circumstances, you can have longer to pay or your agreement can be approved for an amount less than the tax you owe.

In April, 2013 the IRS eliminated Form 9465-FS and replaced it with a revised Form 9465 for any liability less than $50,000. If you have already filed your return and you are sending in Form 9465 on its own, mail it to the address shown below for the type of return filed. However, before requesting an installment agreement, consider other less costly alternatives, such as getting a bank loan or using available credit on a credit card.

Applying Online For a Payment Agreement.

7.100  If your balance due is not more than $50,000, you can also apply online for a payment agreement instead of filing Form 9465. To do that, go to IRS.gov and click on “More…” under Tools.

 

The new rules for revised Form 9465 only to individuals who:

7.110

  • Who owes income tax on Form 1040,
  • Who may be responsible for a Trust Fund Recovery Penalty,
  • Who was self-employed and owes self-employment or unemployment taxes and is no longer operating the business,
  • Who is personally responsible for a partnership liability and the partnership is no longer operating, or
  • Owner who is personally responsible for taxes in the name of a limited liability company (LLC) and the LLC is no longer operating.

Do not use revised Form 9465 if:

7.120

  • If you can pay the full amount you owe within 120 days, call 1-800-829-1040 to establish your request to pay in full. If you can do this, you can avoid paying the fee to set up an installment agreement. Instead of calling, you can apply online.
  • You want to request an online payment agreement

 

Guaranteed installment agreement

7.130  Your request for an installment agreement cannot be turned down if the tax you owe is not more than $10,000 and all three of the following apply.

  • During the past 5 tax years, taxpayer (and their spouse if filing a joint return) have timely filed all income tax returns and paid any income tax due, and have not entered into an installment agreement for payment of income tax.
  • The IRS determines that the taxpayer cannot pay the tax owed in full when it is due and she gives the IRS any information needed to make that determination.
  • Taxpayer agrees to pay the full amount owed within 3 years and to comply with the tax laws while the agreement is in effect.

Caution

7.140  A Notice of Federal Tax Lien may be filed to protect the government’s interests until you pay in full.

 

How the Process Works

7.150  IRS will usually let you know within 30 days after IRS receive your request whether it is approved or denied. However, if this request is for tax due on a return you filed after March 31, it may take us longer than 30 days to reply. If IRS approves your request, IRS will send you a notice detailing your agreement and requesting a fee of $120 ($52 if you make your payments by electronic funds withdrawal). However, you may qualify to pay a reduced fee of $50 if your income is below a certain level. The IRS will let you know whether you qualify for the reduced fee. If the IRS does not say you qualify for the reduced fee, you can request the reduced fee using Form 13844, Application For Reduced User Fee For Installment Agreements.

You will also be charged interest and may be charged a late payment penalty on any tax not paid by its due date, even if your request to pay in installments is granted. Interest and any applicable penalties will be charged until the balance is paid in full. Current interest rates are 3% per annum and you also will be charged a late payment penalty of ¼% per month.

By approving your request, IRS agrees to let you pay the tax you owe in monthly installments instead of immediately paying the amount in full. In return, you agree to make your monthly payments on time. You also agree to meet all your future tax liabilities. This means you must have enough withholding or estimated tax payments so your tax liability for future years is paid in full when you timely file your return. Your request for an installment agreement will be denied if all required tax returns have not been filed. Any refund due you in a future year will be applied against the amount you owe. If your refund is applied to your balance, you are still required to make your regular monthly installment payment.

Payment Methods

7.160  You can make your payments by check, money order, credit card, or one of the other payment methods shown next. Beginning January 1, 2014, the fee for each payment method is also shown.

 

Payment method Applicable fee
Check, money order, or credit card

$120

Electronic funds withdrawal

$ 52

Payroll deduction installment agreement

$120

Restructure

$50

 

After IRS receives each payment, IRS will send you a notice showing the remaining amount you owe, and the due date and amount of your next payment. But if you have your payments automatically withdrawn from your checking account, you will not receive a notice. Your bank statement is your record of payment. IRS will also send you an annual statement showing the amount you owed at the beginning of the year, all payments made during the year, and the amount you owe at the end of the year.

 

If you do not make your payments on time or do not pay any balance due on a return you file later, you will be in default on your agreement and IRS may take enforcement actions, such as filing a Notice of Federal Tax Lien or an IRS levy action, to collect the entire amount you owe. To ensure your payments are made timely, you may make them by electronic funds withdrawal

 

Requests to Modify or Terminate An Installment Agreement.

7.170  After an installment agreement is approved, you may submit a request to modify or terminate an installment agreement. This request will not suspend the statute of limitations on collection. While the IRS considers your request to modify or terminate the installment agreement, you must comply with the existing agreement. An installment agreement may be terminated if you provide materially incomplete or inaccurate information in response to an IRS request for a financial update.

 

Past Promises

7.180  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. 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.

 

Help for People Who Owe Taxes

7.190  With many people facing additional financial difficulties, in February 2009, the IRS took several additional steps to help people who owe back taxes.

 

On a wide range of situations, IRS employees have flexibility to work with struggling taxpayers to assist them with their situation. Depending on the circumstances, taxpayers in hardship situations may adjust payments for back taxes, avoid defaulting on payment agreements or possibly defer collection action.

 

Flexibility

7.200  Among the areas where the IRS can provide assistance:

 

Postponement of Collection Actions: IRS employees will have greater authority to suspend collection actions in certain hardship cases where taxpayers cannot pay. This includes instances when the taxpayer has recently lost a job, is relying solely on Social Security or welfare income or is facing devastating illness or significant medical bills. If an individual has recently encountered this type of financial problem, IRS assistors may suspend collection without documentation to minimize burden on the taxpayer.

 

Added Flexibility for Missed Payments: The IRS is allowing more flexibility for previously compliant individuals in existing Installment Agreements who have difficulty making payments because of a job loss or other financial hardship. The IRS may allow a skipped payment or a reduced monthly payment amount without automatically suspending the Installment Agreement. Taxpayers in a difficult financial situation should contact the IRS.

 

Additional Review for Offers in Compromise on Home Values: The equity taxpayers have in real property can be a barrier to an OIC being accepted. With the uncertainty in the housing market, the IRS recognizes that the real-estate valuations used to assess ability to pay may not be accurate. So where the accuracy of local real-estate valuations is in question or other unusual hardships exist, the IRS is creating a new second review of the information to determine if accepting an offer is appropriate.

 

Prevention of Offer in Compromise Defaults: Taxpayers unable to meet the periodic payment terms of an accepted OIC can contact the IRS office handling the offer for available options to help them avoid default.

 

Expedited Levy Releases: The IRS will speed the delivery of levy releases by easing requirements on taxpayers who request expedited levy releases for hardship reasons. Taxpayers seeking expedited releases for levies to an employer or bank should contact the IRS number on the notice of levy to discuss available options. When calling, taxpayers requesting a levy release due to hardship should be prepared to provide the IRS with the fax number of the bank or employer processing the levy.

 

2010 IRS Outlined Additional Steps to Assist Unemployed Taxpayers and Others

7.210  The Internal Revenue Service announced on March 9, 2010, several additional steps it was taking to help people having difficulties meeting their tax obligations because of unemployment or other financial problems.

 

Online Payment Agreement (OPA)

7.220 The Internal Revenue Service introduced several new features to the interactive Online Payment Agreement application, which will make it easier for taxpayers and their authorized representatives to change existing installment agreements.

The system now permits:

 

  • Individuals to revise their payment due dates and/or amounts on existing agreements.
  • Individuals to revise existing extensions to regular installment agreements and direct debit installment agreements.
  • Individuals to revise existing regular installment agreements to a payroll deduction installment agreement or a direct debit installment agreement.

 

Practitioners with valid authorizations to use the signature date found on their approved Form 2848, Power of Attorney and Declaration of Representative, or the caller ID as an alternate way to authenticate when requesting agreements for clients.

 

http://www.irs.gov/individuals/article/0,,id=149373,00.html

 

Onerous Allowable Expense Standards

7.230  In March, 2012, the IRS again revised the standards. 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 must live.

 

There are four types of necessary expenses:

 

  • National Standards
  • Out-of-Pocket Health Care
  • Local Standards
  • Other Expenses

 

National Standards: These establish standards for reasonable amounts for five necessary expenses. Four of them come from the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey: food, housekeeping supplies, apparel and services, and personal care products and services. The fifth category, miscellaneous, is a discretionary amount established by the Service. It is $116 for one person up to $300 for 4 persons. The IRS allows $281 per month for each member of the household above 4.

 

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

 

Out-of-Pocket Health Care Expenses: Out-of-pocket health care expenses include medical services, prescription drugs, and medical supplies (e.g. eyeglasses, contact lenses, etc.). Elective procedures such as plastic surgery or elective dental work are not allowed. Taxpayers and their dependents are allowed the standard amount monthly on a per person basis, without questioning the amounts they spend. If the amount claimed is more than the total allowed by the health care standards, the taxpayer must provide documentation to substantiate those expenses are necessary living expenses.  The number of persons allowed should be the same as those allowed as exemptions on the taxpayer’s most recent year income tax return. The out-of-pocket health care standard amount is allowed besides the amount taxpayers pay for health insurance.

 

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

 

  1. A.   Housing – Standards are established for each county within a state. When deciding if a deviation is appropriate, consider the cost of moving to a new residence; the increased cost of transportation to work and school that will result from moving to lower-cost housing and the tax consequences. The tax consequence is the difference between the benefit the taxpayer derives from the interest and property tax deductions on Schedule A to the benefit the taxpayer would derive without the same or adjusted expense. Housing costs include rent and/or house payments, taxes, repairs and utilities the IRM provides as follows:

 

The utilities include gas, electricity, water, fuel, oil, bottled gas, trash and garbage collection, wood and other fuels, septic cleaning, and telephone. Housing expenses include: mortgage or rent, property taxes, interest, parking, necessary maintenance and repair, homeowner’s or renter’s insurance, homeowner dues and condominium fees. Usually, this is considered necessary only for the place of residence. Any other housing expenses should be allowed only if, based on a taxpayer’s individual facts and circumstances, disallowance will cause the taxpayer economic hardship. [IRM  5.15.1.9]

 

  1. B.   Transportation - The transportation standards comprise nationwide figures for loan or lease payments called ownership cost, and additional amounts for operating costs broken down by Census Region and Metropolitan Statistical Area. Operating costs were derived from BLS data. 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 no car payment, only the operating cost portion of the transportation standard is used to figure the allowable transportation expense. Under ownership costs, separate caps are provided for the first car and second car. If the taxpayer does not own a car, a standard public transportation amount is allowed.

 

Vehicle insurance, vehicle payment (lease or purchase), maintenance, fuel, state and local registration, required inspection, parking fees, tolls, driver’s license, public transportation. Transportation costs not required to produce income or ensure the health and welfare of the family are not considered necessary. Consider availability of public transportation if car payments (purchase or lease) will prevent the tax liability from being paid in part or full. Public transportation costs could be an option if it does not significantly increase commuting time and inconvenience the taxpayer.

 

Note: If the taxpayer has no car payment, or no car, question how the taxpayer travels to and from work, grocer, medical care, etc. The taxpayer is only allowed the operating cost or the cost of transportation. [IRM  5.15.1.9]

 

  1. C.   Other Expenses.  Other expenses may be considered if they meet the necessary expense test – they must provide for the health and welfare of the taxpayer and/or his or her family or they must be for the production of income. This is determined based on the facts and circumstances of each case. If other expenses are determined to be necessary and, therefore allowable, document the reasons for the decision in your history.

 

  1. D.   Conditional expenses. These expenses do not meet the necessary expenses test. However, they are allowable if the tax liability, including projected accruals, can be fully paid within five years.

 

  1. E.   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.

 

  1. F.    The total number of persons allowed for national standard expenses should be the same as those allowed as dependents on the taxpayer’s current year income tax return. Verify exemptions claimed on 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. G.   A deviation from the local standard is not allowed merely because it is inconvenient for the taxpayer to dispose of valued assets.

 

  1. H.   Length. Revenue officers should consider the length of the payments. Although it may be appropriate to allow for payments made on the secured debts that meet the necessary expense test, if the debt will be fully repaid in one year only allow those payments for one year. [ IRM 5.15.1.7 ]

 

Five Year Test

7.240  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, Installment Agreements) [IRM 5.15.1.10]

 

8.  OFFER IN COMPROMISE

 

2012- New Fresh Start Initiative For Offers in Compromise – Higher User fee

8.10    The 2013 fee for an Offer in Compromise was $150.  IRS has determined that the full cost of processing an Offer in Compromise is $2,718.  The new fee beginning January 1, 2014, for an Offer in Compromise is $186.  The “no fee” for low-income taxpayers continues to apply.

 

Expansion – Fresh Start Initiative

8.20    On May 21, 2012, the Internal Revenue Service announced another expansion of its “Fresh Start” initiative by offering more flexible terms to its Offer in Compromise (OIC) program that will enable some of the most financially distressed taxpayers clear up their tax problems and often more quickly than in the past. In 2013, the IRS created a new website for taxpayers and their representatives to review and compute eligibility for an OIC.  The IRS’s new Offer in Compromise Pre-qualifier tool helps tax professionals determine a taxpayer’s eligibility for an offer in compromise and calculates a preliminary offer amount before they start on the paperwork.  It is at:

http://irs.treasury.gov/oic_pre_qualifier/faces/OIC_Screen4_IntroQuestions.jsp

 

Criticism of OIC Policies

8.30    Over the years, the IRS offer in compromise program has been the subject of much criticism by Congress, the National Taxpayer Advocate and taxpayer representatives. The new initiative represents the most dramatic liberalization of IRS settlement policies ever announced. It represents a welcome change from an agency which has always placed substantial roadblocks to those seeking to compromise their tax obligations.

The announcement focused on the financial analysis used to determine which taxpayers qualify for an OIC. This announcement also enables some taxpayers to resolve their tax problems in as little as two years compared to four or five years in the past. IRS announced that its 2013 OIC acceptance rate was over 40%.


 

Changes

8.40    The changes announced included:

•           Revising the calculation for the taxpayer’s future income.

•           Allowing taxpayers to repay their student loans.

•           Allowing taxpayers to pay state and local delinquent taxes.

•           Expanding the Allowable Living Expense allowance category and amount.

 

Can Liability Be Paid

8.50    In general, an OIC is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the amount owed.  An OIC is not accepted if the IRS believes the liability can be paid in full as a lump sum or a through payment agreement. The IRS looks at the taxpayer’s income and assets to determine the taxpayer’s reasonable collection potential. OICs are subject to acceptance on legal requirements.

 

Past Reluctance to Accept OIC’s

8.60    In the past, IRS strictly applied its rules regarding taxpayers’ budgets and valuation of assets. Most taxpayers who sought a compromise received a rejection from the Internal Revenue Service. Below are the statistics for offer acceptances during the past several years:

 

Offers in compromise (thousands) 2012 2013
Number of offers received   64   74
Number of offers accepted   24   31
Amount of offers accepted 195,652 195,379

 

Reasonable Collection Potential

8.70    Under the new policy, when the IRS calculates a taxpayer’s reasonable collection potential, it will now look at only one year of future income for offers paid in five or fewer months, down from four years; and two years of future income for offers paid in six to 24 months, down from five years. All offers must be fully paid within 24 months of the date the offer is accepted. The prior policy resulted in IRS demands for large compromise payments even when the taxpayer had few assets. The revisions will cause a 75% reduction in the amount required to settle tax obligations in five or fewer months. They will cause a 60% reduction in the amount required to be fully paid within 24 months.

 

Dissipated Assets

8.80    Other changes to the program include narrowed parameters and clarification of when a dissipated asset will be included in the calculation of reasonable collection potential. Over the past several years, the IRS has used the concept of dissipated assets to demand substantial amounts in compromise of taxes even after the taxpayer had lost assets. For example, in one matter, a taxpayer had lost substantial amounts of money in the 2008 and 2009 stock market collapse. Notwithstanding that loss the IRS offer in compromise examiner claimed that the taxpayer would have to include the value of those losses in his total assets to receive a compromise. The IRS also aggressively claimed that taxpayers who lived an upper-middle-class lifestyle after their tax problems arose would be subject to its draconian dissipated asset theory.

 

Exclusion of Income Producing Property

8.90    The IRS also announced that equity in income producing assets generally will not be included in the calculation of reasonable collection potential for on-going businesses.

 

Allowable Living Expenses

8.100  When reviewing a taxpayer’s budget the IRS applies Allowable Living Expense standards to determine a taxpayer’s ability to pay.  The standard allowances impose strict budgets upon a taxpayer in collection determinations by incorporating average expenditures for basic necessities. Notwithstanding substantial criticism of the IRS over the years it is insisted upon applying the same standards for food and clothing in all areas of the country whether high cost locales like Alaska, Hawaii, and New York City or lower cost Midwestern areas. These standards are used when evaluating offer in compromise requests.

 

Expanded Allowable Expenses

8.110  In response to criticisms from the national taxpayer advocate and taxpayer representatives the IRS expanded the National Standard miscellaneous allowance to include additional items.  Taxpayers can use the miscellaneous allowance for expenses such as credit card payments and bank fees and charges.

In the past, the IRS refused to recognize taxpayer obligations to pay student loans and state tax delinquencies. The new guidance now allows payments for loans guaranteed by the federal government for the taxpayer’s post-high school education.  In addition, payments for delinquent state and local taxes may be allowed based on percentage basis of tax owed to the state and IRS.

 

Expanding Universe of Eligible Taxpayers

8.120  The new offer in compromise policies should dramatically expand the universe of taxpayers eligible to compromise their outstanding tax obligations. In the past, taxpayers had to pay the IRS the total value of all their assets plus 60 times their net monthly income after using the IRS strict allowable expense standards. The greater flexibility of the new policies will reduce the valuation of taxpayer assets and reduce the value of the future income component used to determine acceptable offers.

 

Future Income for Offers in Compromise

8.130    The Internal Revenue Service on March 10, 2011, revised its guidance to employees on figuring the value of a taxpayer’s future income in evaluating an offer in compromise, with specific instructions to consider a variety of issues for unemployed or underemployed workers. The memorandum (SBSE 05-0310-012) noted future income is defined as an estimate of the taxpayer’s ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future.

As a general rule, the guidance said, the taxpayer’s current income will be used in the analysis of future ability to pay. “Consideration should be given to the taxpayer’s overall general situation, including such factors as age, marital status, number and age of dependents, level of education or occupational training, and work experience,” the document said.

 

Agency Notes Variety of Situations

8.140    IRS noted some situations may warrant placing a different value on future income than on current or past income. Such situations include those where income will increase or decrease, or current necessary expenses will increase or decrease, the agency said.

 

Other situations may include those where a taxpayer:

 

  • is temporarily or recently unemployed or underemployed,
  • is unemployed and is not expected to return to a previous occupation or previous level of earnings,
  • is long-term unemployed,
  • is long-term underemployed, has an irregular employment history or fluctuating income,
  • is in poor health and the ability to continue working is questionable,
  • is close to retirement and has indicated he or she will be retiring, or will file for bankruptcy.

 

Income Averaging Addressed

8.150    IRS told its field personnel that judgment should be used in determining the appropriate time to apply income averaging on a case-by-case basis. “All circumstances of the taxpayer should be considered” in making this decision, the agency said.

 

Further, IRS said, where the taxpayer’s income does not appear to meet stated living expenses, the difference should not be included as additional income to the taxpayer. Such inclusion should only be done if there are clear indications that the taxpayer is receiving, and will continue to receive, additional income not included on the collection information statement, according to the document.

 

As a general rule, the guidance said, “Employees need to exercise good judgment when determining future income.” The history must be clearly documented and support the known facts and circumstances of the case, and include analysis of the supporting documents, IRS noted.

 

Facts and Circumstances Approach Directed

8.160    The memo directed IRS workers to evaluate each case on the facts and circumstances, and said the history “must clearly explain the reasoning behind our actions.” The agency said there are cases where it may be appropriate to use the taxpayer’s current income and secure a future income collateral agreement, particularly where the future income is uncertain, but where it is reasonably expected that the income will increase.

 

Tax Increase Prevention and Reconciliation Act of 2005

8170   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

8.180  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

8.190  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 cause the IRS returning the offer to the taxpayer as nonprocessable (IRC §7122(d)(3)(C) as amended by TIPRA).

 

Not Refundable

8.200  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)).

 

Failure to Make Installment Payments

8.210  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 below the required 20 percent threshold will be deemed processable. However, the taxpayer will be asked to pay the remaining balance 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 to meet the processability criteria. Otherwise, the IRS will deem the offer as unprocessable and will return the application to the taxpayer with the $150 fee.

 

Low Income Taxpayers

8.220  Under TIPRA, 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 taxpayer seeking a waiver must submit Form 656-A with the offer. The monthly income levels to qualify are listed below:

 

IRS OIC Low Income Guidelines

 

Size of family unit

48 contiguous states and D.C.

Hawaii

Alaska

1

$2,327

$2,679

$2,910

2

$3,152

$3,627

$3,942

3

$3,997

$4,575

$4,973

4

$4,802

$5,523

$6,004

5

$5,627

$6,471

$7,035

6

$6,452

$7,419

$8,067

7

$7,277

$8,367

$9,098

8

$8,102

$9,315

$10,129

For each additional person, add

$825

$948

$1,031

 

Background

8.230  An offer in compromise is a settlement of a delinquent tax account for less than the 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

 

Supporting Documents

8.240  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 decide without field verification.

 

$150 Processing Fee

8.250  The Internal Revenue Service now charges a $150 application fee for the processing of offers in compromise. 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.

 

Computation of Offer Amount

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


  • Cash (paid in 5 installment or less), or

 

  • Deferred Payment (paid in over 5 installments

 

NOTE: In all 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

8.270  You must pay cash offers in 5 installments or less after acceptance. Offer the realizable value of your assets (quick sale value) plus the total amount the IRS could collect over twelve months of payments represent value of income). When the ten-year statutory period for collection expires in less than twelve months, you must use the Deferred Payment Chart 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 present value of the taxpayer’s ability to pay. It aggregates the two numbers to arrive at an Offer in Compromise amount.

 

Show Deferred Payment Offer

8.280  This payment option requires you to pay the offer within two years of acceptance. The offer must include the realizable value of your assets besides the total amount the IRS could secure over twenty four 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.

 

Corporate Trust Fund Liabilities

8.290  The IRS has recently changed its rules regarding 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.

 

Promote Effective Tax Administration

8.300  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 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.

 

Encourage Compliance

8.310  The availability of an Effective Tax Administration (ETA) offer encourages taxpayers to comply with the tax laws because taxpayers will:

 

  • Believe the laws are fair and equitable, and
  • Gain confidence that the laws will apply to everyone in the same manner.

 

The Effective Tax Administration (ETA) offer allows for situations where tax liabilities

 

  • The tax is legally owed, and
  • The taxpayer has the ability to pay it in full

 

Rules for Evaluating Offers to Promote Effective Tax Administration

8.320  The determination to accept or reject an offer to compromise made because acceptance would promote effective tax administration within the meaning of this section will be based upon consideration of all the facts and circumstances, including the taxpayer’s record of overall compliance with the tax laws.

 

Factors

8.330  Factors supporting (but not conclusive of) determining economic hardship include:

 

  • Taxpayer is incapable of earning a living because of a long term illness, medical condition, or disability and it is reasonably foreseeable that taxpayer’s financial resources will be exhausted providing for care and support during the course of the condition;
  • Although taxpayer has certain assets, liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses; and
  • Although taxpayer has certain assets, the taxpayer is unable to borrow against the equity in those assets and disposition by seizure or sale of the assets would have sufficient adverse consequences such that enforced collection is unlikely Temp Reg 301.7122-1T(b)(4)(iv)(B)]


Undermine Compliance

8.340  Factors supporting (but not conclusive of) a determination that compromise would not undermine compliance by taxpayers with the tax laws include:

 

  • Taxpayer does not have a history of noncompliance with the filing and payment requirements of the Internal Revenue Code;

 

  • Taxpayer has not taken deliberate actions to avoid the payment of taxes; and

 

  • Taxpayer has not encouraged others to refuse to comply with the tax laws.[Temp Reg. 301.7122-1T(b)(4)(iv)(C)]

 

 

 

 

 

 

 

 

EXHIBITS

 


 


 

 

 

 




 

 




 




 



 

 


 

 


 

National Standards: Food, Clothing and Other Items

Expense

One Person

Two Persons

Three Persons

Four Persons

Food

$315

$588

$660

$794

Housekeeping supplies

$30

$66

$65

$74

Apparel & services

$88

$162

$209

$244

Personal care products & services

$34

$61

$64

$70

Miscellaneous

$116

$215

$251

$300

Total

$583

$1,092

$1,249

$1,482

More than four persons

Additional Persons Amount

For each additional person, add to four-person total allowance:

$298

 

 

 

National Standards: Out-of-Pocket Health Care
The table for health care expenses, based on Medical Expenditure Panel Survey data, has been established for minimum allowances for out-of-pocket health care expenses.

Out-of-pocket health care expenses include medical services, prescription drugs, and medical supplies (e.g. eyeglasses, contact lenses, etc.). Elective procedures such as plastic surgery or elective dental work are generally not allowed.

Taxpayers and their dependents are allowed the standard amount monthly on a per person basis, without questioning the amounts they actually spend. If the amount claimed is more than the total allowed by the health care standards, the taxpayer must provide documentation to substantiate those expenses are necessary living expenses.

The out-of-pocket health care standard amount is allowed in addition to the amount taxpayers pay for health insurance.

 

 

 

Out-of-Pocket Costs

Under 65

$60

65 and Older

$144

 

 

Transportation

Public Transportation

National

$184

Lease or Car Payments

One Car

Two Cars

National

$517

$1,034

Ownership Costs

One Car

Two Cars

Northeast Region

$278

$556

Boston

$277

$554

New York

$342

$684

Philadelphia

$299

$598

Midwest Region

$212

$424

Chicago

$262

$524

Cleveland

$226

$452

Detroit

$295

$590

Minneapolis-St. Paul

$217

$434

South Region

$244

$488

Atlanta

$256

$512

Baltimore

$250

$500

Dallas-Ft. Worth

$277

$554

Houston

$312

$624

Miami

$346

$692

Washington, D.C.

$277

$554

West Region

$236

$472

Los Angeles

$295

$590

Phoenix

$291

$582

San Diego

$301

$602

San Francisco

$306

$612

Seattle

$192

$384

Utah Housing Standards

County

Family of 1

Family of 2

Family of 3

Family of 4

Family of 5

or more

Beaver

1,086

1,275

1,344

1,499

1,523

Box Elder

1,225

1,439

1,516

1,690

1,718

Cache

1,277

1,500

1,581

1,763

1,791

Carbon

1,098

1,290

1,359

1,516

1,540

Daggett

1,125

1,321

1,392

1,552

1,577

Davis

1,500

1,761

1,856

2,069

2,103

Duchesne

1,201

1,411

1,487

1,658

1,685

Emery

994

1,167

1,230

1,371

1,394

Garfield

1,039

1,220

1,286

1,434

1,457

Grand

1,173

1,378

1,452

1,619

1,645

Iron

1,266

1,487

1,567

1,747

1,775

Juab

1,192

1,400

1,475

1,645

1,671

Kane

1,108

1,301

1,371

1,529

1,553

Millard

1,047

1,230

1,296

1,445

1,468

Morgan

1,588

1,865

1,965

2,191

2,226

Piute

1,009

1,185

1,249

1,393

1,415

Rich

1,224

1,438

1,515

1,689

1,716

Salt Lake

1,509

1,773

1,868

2,083

2,116

San Juan

1,040

1,221

1,287

1,435

1,458

Sanpete

1,172

1,376

1,450

1,617

1,643

Sevier

1,082

1,270

1,338

1,492

1,517

Summit

2,014

2,366

2,493

2,780

2,825

Tooele

1,359

1,596

1,682

1,876

1,906

Uintah

1,362

1,600

1,686

1,880

1,910

Utah

1,501

1,763

1,858

2,072

2,105

Wasatch

1,717

2,017

2,125

2,369

2,408

Washington

1,497

1,758

1,852

2,066

2,099

Wayne

1,150

1,350

1,423

1,587

1,612

Weber

1,315

1,545

1,628

1,815

1,845

 

 

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 2014

Robert E. McKenzie 2015 Speaking Engagements

 

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7 Million Taxpayers Fail To File Their Income Taxes

7 Million Taxpayers Fail To File Their Income Taxes