SOLUTIONS TO TAX COLLECTION PROBLEMS
Seven Major Solutions for Most Tax Collection Matters
1. Elimination of the tax liability because the assessment was defective, untimely, or the period for administrative collection has expired.
- Determine the tax return date, filing date, method of assessment, and assessment date. You can request a transcript of account from the Service Center, ACS, or the District Director's Office which will contain the needed information.
- If it appears that the assessment was invalid or improperly made, prepare a letter memorandum fully outlining the facts and law to support your conclusion.
- If dealing with ACS or the Service Center, hand deliver the memorandum with a Form 911 (Request for Taxpayer Assistance Order) to the District Director's Office.
- If the collection matter is already in the jurisdiction of the District Director's Office, send the memorandum to the contact person with a request that the assessment be abated immediately.
- Your memorandum will be sent to the Special Procedures Branch for evaluation and, if necessary, to the IRS District Counsel's Office for a legal opinion or review.
2. Installment Agreements.
Installment agreements for small amounts (less than $5,000) for periods of less than one year, or for larger amounts for periods of less than 90 days, can usually be obtained without a full submission of all of the taxpayer's financial data. See IRM §5330.
All other installment agreements will be granted only if:
- The taxpayer has made a full disclosure of all relevant financial information, preferably on the applicable Form 433.
- The taxpayer has made reasonable efforts to liquidate and pay over non-essential assets, such as bank accounts, stocks, and luxury personal property items.
- The taxpayer has tapped or attempted to tap without success, all available credit, including charge cards, lines of credit, and equity in real property. The IRS wants to be the bank of last resort. Documentation of at least one credit refusal should be obtained to establish that the taxpayer has no other available means of borrowing to pay the tax liability.
- The taxpayer has been current for at least one taxable period, or can show that no further tax liabilities will accrue during the current or any future taxable periods.
Attempts to negotiate an installment agreement without completing the above will generally not be successful and will alienate the collection officer.
An installment agreement can be set up to reflect changes in payments during the agreement period based on expected increases or decreases in allowable expenses. However, only two payment amount changes are possible for a systematically monitored installment agreement.
The collection agent should also consider substantiated and justified expenses which will be incurred within the time frame of the installment agreement. These possible expenses include, but are not limited to, the birth of a child, the necessary replacement of a vehicle or major appliance, or necessary home maintenance such as roof repair.
Lastly, if the taxpayer has previously defaulted on a past installment payment agreement, the collection agent is required to document his or her reasons for approving another installment payment agreement, and obtain group manager approval. Thus, the taxpayer must be able to demonstrate good cause for his/her past default and the absence of a potential default in the future.
Pursuant to the Taxpayer Bill of Rights 2, beginning in 1997, the IRS must notify taxpayers 30 days before altering, modifying, or terminating any installment agreement for any reason other than that the collection of tax is determined to be in jeopardy. The IRS must include in the notification an explanation of why the IRS intends to take this action. (TPBR2 §201. IRC §6159). Additionally, this new law requires the IRS to establish additional procedures for an independent administrative review of terminations of installment agreements for taxpayers who request a review. This provision is effective on January 1, 1997. (TPBR2 §202. IRC §6159(c)). Pursuant to the Restructuring and Reform Act of 1998, the IRS may not levy on property of the taxpayer (1) with a pending installment agreement; (2) during the 30 days following the rejection of the taxpayer’s request for an installment agreement; (3) during any time the rejection of such agreement is being appealed; (4) during any period during which such agreement is in effect; (5) during the 30 days after the termination of the agreement and (6) while such termination is being appealed.
Additionally, pursuant to the IRS Restructuring and Reform Act of 1998, taxpayers with individual income tax liabilities which do no exceed $10,000.00 (exclusive of penalties, interest and additions to tax), who have not failed to file a return, or failed to pay a tax shown on a return, or entered into another installment agreement with the preceding 5 taxable years are entitled to an installment agreement, if the Service determines that the taxpayer is financially unable to fully pay the tax liability when due, but the tax liability is paid within 3 years (arguably regardless of the other collection options available, although this is not specifically detailed in the statute).
3. Orderly liquidation of taxpayer's assets.
If the taxpayer has assets which can be liquidated to pay the tax, but a quick liquidation will produce financial disaster, an orderly liquidation plan can be negotiated. This course of action usually involves taxpayers with complex financial circumstances, and requires the services of an accountant to project the tax consequences of a quick liquidation as opposed to an orderly planned liquidation. In essence, the collection officer must be convinced that the potential recovery by the IRS will be maximized by the orderly liquidation. Orderly liquidation plans, however, can involve something as simple as the sale of a personal residence or luxury items.
4. Offer in Compromise.
The IRS has the authority to settle a tax debt pursuant to an offer-in-compromise. IRS regulations provide that such offers can be accepted if:
- The taxpayer is unable to pay the full amount of the tax liability and it is doubtful that the tax, interest, and penalties can be collected, or
- There is doubt as to the validity of the actual tax liability.
If the taxpayer can raise the funds to pay his, her, or its net asset value, an offer in compromise is a viable solution. The IRS is currently seeking to reduce its accounts receivable inventory by accepting all reasonable offers in compromise. Thus, when an analysis of a taxpayer’s financial condition shows that the liquidation of all assets and payments under an installment payment agreement will not result in full payment, an offer in compromise should be considered and discussed with the taxpayer. See IRM §57(10) and IRM §5323.6.
An offer in compromise is comprised of two components; the quick sale value of the taxpayer’s assets, and the present value of a five year payment agreement between the Internal Revenue Service and the taxpayer. Prior to the IRS Restructuring and Reform Act of 1998, when computing the future income component of an offer, the Service allowed only necessary expenses. All conditional expenses were disallowed and ignored in the computation of the present value of a future installment payment agreement. Following the passage of the Restructuring and Reform Act, the Service must now determine the applicability of the allowable expenses based on the facts and circumstances of each individual taxpayer. The Act also made the following additional changes to the offer in compromise procedures:
Offers from low income taxpayers cannot be rejected solely on the basis of the amount of the offer.
Taxpayer will no longer be required to wave the statute of limitations on collection.
Regulations will be expanded to provide additional basis for compromise.
Compromise of a joint liability that is defaulted because of the actions of a defaulting spouse can be reinstated upon application by the nondefaulting spouse.
Additional notices must be provided explaining taxpayer rights and the obligations of the Service with respect to offers in compromise.
Prior to the Taxpayer Bill of Rights 2, offers for liabilities exceeding $500 could only be accepted if the reasons for the acceptance were documented in detail and supported by an opinion of the IRS Chief Counsel. The new law increases from $500 to $50,000 the amount requiring a written opinion from the Office of Chief Counsel. Compromises below the $50,000 threshold must be subject to continuing quality review by the IRS. (TPBR2 §503. IRC §7122).
5. Currently Non-Collectible Status.
If the IRS is convinced that the taxpayer does not currently have the ability to pay the outstanding tax liability, then the account can be placed in a "53" status (taken from the Form 53 used to designate the account as currently uncollectible). All collection action will be suspended. However, interest and penalties continue to accrue, and the account will be reviewed periodically. For liabilities which are close to expiration of the statute of limitations on collection, this may be the best solution.
Conditional expenses will not be allowed if a case is closed as currently not collectible. However, if a taxpayer is able to modify his/her expenses within one year, such that an installment payment agreement can be entered into at the expiration of that year, cases should not be closed as currently not collectible and the taxpayer should be given the appropriate time to make the modifications to his/her expenses. See IRM §5323.63
6. Bankruptcy protection
An in depth discussion of bankruptcy is beyond the scope of this outline. However, since bankruptcy is often an extremely useful tool in dealing with tax liabilities, some discussion is essential. There are four types of bankruptcies that can be utilized by a troubled taxpayer, the appropriateness of each depending on the circumstances. The choices consist of a chapter 7,11,12 and 13 and the attributes of each one can be summarized as follows
CHAPTER 7
CHAPTER 11
CHAPTER 13
CHAPTER 12
Chapter 12 is somewhat a hybrid between chapter 11 and 13 and is only available to family farmers.
THE AUTOMATIC STAY
DISCHARGEABILITY
Whether a tax liability qualifies as a priority claim is a crucial question, both in determining order of distribution of estate assets and dischargeability of the liability. Section 507 (a) (8) sets forth the criteria in determining whether a tax claim qualifies for priority status. Although somewhat confusing, the section can be simplified as follows:
Income Tax
If an income tax liability is involved it will be a priority tax and thus nondischargeable, if any of the following apply:
- The tax relates to a tax period in which a return is due within 3 years of the date of the petition. For example, a 1994 tax liability would be due April 15, 1995. If the bankruptcy is filed before April 15, 1998, the tax is a priority. The statute also provides that in determining the relevant date, you must add the time of any return extension. If in the previous example, the debtor had an extension until August 15 to file his 1994 return, and the petition was filed before August 15 of 1998, the tax is a priority.
- The tax is assessed within 240 days of the bankruptcy. The term assessment is a term of art. It is the statutorily required administerial act that must be done by the Service in order for there to be an enforceable tax liability. The actual date in which the assessment is made is crucial and can be obtained from the Service. It should be noted that the 240 day period is extended by the amount of time an offer-in-compromise is pending with the service, plus 30 days.
- The tax has not yet been assessed but is still assessable at the time the petition is filed, unless the reason the tax is still assessable is failure to file, evasion or fraud. To understand this provision, one must know that under the Internal Revenue Code the Service normally has 3 years from the date the return is filed to make an assessment. There are various reasons why this period can be extended. For example, the period can be extended by agreement, by the pendency of a Tax court case, or from 3 years to 6 years if there is a 25% omission from gross income for that year. Also, the assessment period is extended indefinitely if there is fraud, a willful attempt to evade tax or a failure to file the return. However, in cases of fraud, willful evasion or failure to file, even though the tax is always assessable, Congress specifically excluded under this subsection, priority treatment for taxes that are still assessable for these reasons. The rationale for such exclusion is that Congress did not desire to penalize unsecured creditors by making tax liabilities priority as a result of the debtor's bad acts and/or the Service's lack of diligence in obtaining a delinquent tax return. Instead, Congress made tax liabilities falling under these situations non-dischargeable, at least in a chapter 7, individual 11 or 12. See § 523(a).
As can be seen, time elements are critical in determining dischargeability and therefore a misunderstanding of these provisions can and often does result in a mistimed bankruptcy. This may results in not discharging a liability that could have been discharged, an oversight that is tantamount to malpractice.
Trust Fund Tax-A Trust Fund Liability is Always a Priority Tax.
A trust fund tax liability, also referred to as a trust fund recovery penalty, is the liability assessed against a person deemed responsible for an employee's withholding tax and FICA, not properly turned over to the Government. Since this liability is always a priority, timing of the bankruptcy will not effect its status. Also, since priority taxes are non-dischargeable, a trust fund assessment can be a devastating liability.
CHALLENGING A TAX LIABILITY IN BANKRUPTCY
7. Payment of Tax and Filing of Claim for Refund to Dispute the Liability.
For divisible taxes, such as employment taxes or 100% penalty taxes, payment of the smallest allowable portion of the total tax liability, coupled with the filing of a claim for refund, will usually stop collection efforts on the unpaid portion of the tax until after the refund claim has been determined.
Temporary Relief
Temporary relief can be obtained by making a request for a Taxpayer Assistance Order through the Problem Resolution Office of the District Director's Office. Prior to the passage of the IRS Restructuring and Reform Act of 1998, the taxpayer could apply for a Taxpayer Assistance Order from the local office of Problem Resolution. To obtain a TAO, the taxpayer had to show that she/she faced “significant hardship” as a consequence of threatened action on the part of the IRS. Problem Resolution’s determination of “significant hardship” was fairly subjective. The IRS Restructuring and Reform Act of 1998 now provides for a National Taxpayer Advocate who can issue a TAO if it is determined that the taxpayer is or will suffer a significant hardship as a result of the Service’s administration of the tax laws or if the taxpayer meets other requirements to be contained in future regulations.
The following must be considered by the National Taxpayer Advocate in determining if there is a “significant hardship” and if a TAO should be issued:
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- Is there an immediate threat of adverse action?
- Has there been a delay of more than 30 days in resolving the taxpayer’s account problems?
- Will the taxpayer have to pay significant costs (including fees for representation) if relief is not granted?
- Will the taxpayer suffer irreparable injury, or a long-term adverse impact if relief is not granted?
Additionally, if an IRS employee to whom the TAO would be issued is not following applicable published administrative guidance (including the IRM), the National Taxpayer Advocate must construe the factors taken into account in determining whether to issue a TAO in the manner most favorable to the taxpayer, IRC §7811(a)(3).
Temporary relief can also be obtained by filing a collection appeal. The Collection Appeals Program was implemented by the Service in April of 1996, and provided for administrative appeals of liens, levies, and seizures. The IRS Restructuring and Reform Act of 1998 codified and expanded the Service’s administrative Collection Appeals Program. Under the new law, the IRS must notify any person subject to a lien of the existence of the lien within five days of the filing date of the lien. The notice must now be personally delivered to the taxpayer, delivered to the taxpayer’s home or place or business or sent to the taxpayer by registered or certified mail to the person’s last known address. The notice must inform the taxpayer of the following:
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- The amount of the unpaid tax.
- The person’s right to request a hearing during the 30 day period beginning on the sixth day after the lien is filed.
- The available administrative appeals and their procedures.
- Procedure for obtaining a release of lien.
If the taxpayer timely exercises his/her right to appeal a notice of lien or notice of intent to levy, a hearing will be held before an Appeals Officer of the IRS. The taxpayer is entitled to one hearing per tax period covered by the lien. The Appeals officer must consider whether the actions of the IRS are in compliance with all applicable laws and administrative procedures. The taxpayer may also raise the validity of the underlying liability at the hearing if the taxpayer did not receive a notice of deficiency for the liability in issue or did not otherwise have an opportunity to dispute the liability. The taxpayer should be prepared to argue any issue regarding the appropriateness of the Service’s actions, propose a less intrusive means of collection or raise any claim or defense to the collection action including a claim for innocent spouse status. It is the Appeals Officer’s responsibility to determine if the Service’s proposed collection action properly balances the taxpayer’s legitimate concerns regarding the IRS action.
The taxpayer is dissatisfied with the determination of the Appeals Officer, the taxpayer may file a request for judicial review of the Appeals Officer’s determination within 30 days of the determination. The Appeal should be made to the Tax Court if the Court would have jurisdiction of the underlying liability. If the Tax Court would not have jurisdiction of the underlying liability, the request for review should be made to the Federal District Court. If the taxpayer selects an incorrect forum, he/she has 30 days from notification of selection of an incorrect forum to file the appeal with the correct court. The statute of limitations under §§§6502 (collection), 6531 (criminal) and 6532 (other suits) is suspended during the period during which the hearing and appeals thereto are pending.
Bluestein & Muhlbauer, P.C.
333 International Drive
Williamsville, NY 14221
716.633.3200
