IRS Collections Defense 101
Federal tax collections starts with tax assessments and notices.
IRS collections process starts with a tax assessment which begins the process of recording a tax liability. For some people, tax assessment leads to a tax refund. Tax assessment is a neutral term, it simply reflects how the IRS keeps its records. Filing tax returns, is really you doing your own assessment.
CSED: Collection Statute Expiration Date: the IRS collections statute of limitations is 10 years (unless the clock pauses/is tolled, which can happen for a variety of reasons).
The IRS notice and demand for payment is the first notice sent to the taxpayer upon taxes being assessed.
If the taxpayer does not file its own return, the IRS can file its own SFR - substitute for return - so it can begin the assessment process.
First Step in Representing Tax Payers is determining the correctness of the assessment.
- Did taxpayer owe the assessed tax, of not consider filing a refund claim or audit reconsideration.
- Did taxpayer validly consent to assessment - issue in joint return cases (innocent spouse cases).
- Did IRS sent notice of deficiency to taxpayer’s last known address….if not attack validity of assessment.
- Did IRS obtain proper penalty approval - Graev case says IRS must get penalty approval by examiner and supervisor to get a penalty approved.
Most taxpayers get four letters (usually 2-3 weeks between each letter)
- Notice and Demand (CP501)
- If the taxpayer doesn’t pay within 10 days of Notice and Demand, then Federal Tax Lien comes into existence through IRC Sections 6321 and 6322.
- 2nd and 3rd letters are not required by statute, but IRS finds that they increase compliance.
- Notice of Overdue Tax (CP503) follows the Notice and Demand.
- Urgent We Intend to Levy on Certain Assets (CP504)
- 4th letter is the Notice of Intent to Levy (Form LT11 or CP90)
- Provides taxpayer of their right to a collections due process hearing. Can use Form 12153 to request a CDP hearing, to list reasons for any disagreement and type of relief being sought. This form must be sent to the same office that sent the final notice of intent to levy.
- If appeal isn’t filed within 30 days, then must request an equivalency hearing, and taxpayer has no right to further appeal to tax court.
- The IRS must send this Final Notice of Intent to Levy to be permitted to levy wages, commissions, bank accounts, car, non-homestead real estate.
IRS Collections Defense Options
Just as it sounds - if the taxpayer has the ability to pay in full after a tax assessment is made. This avoids potential liens and IRS levies. The full payment can usually be made within 120 days.
All tax returns must be filed before the IRS will consider a request for an installment agreement.
Traditional Installment Agreement: Periodic payments are made over time until the tax liability is paid in full.
Partial Pay Installment Agreements: If liability isn’t paid in full (maybe because the statute of limitations is going to run), rest will be written off by the IRS. IRS may ask you to extend the CSED. IRS may request financial updates periodically to see if there is a change in circumstances that will now allow the taxpayer to pay in full.
Offer in Compromise
There are three types of offers in compromise that can be made (assuming all required tax returns have been filed). These are found are IRC 7122:
- Doubt as to Liability
- Doubt as to Collectibility - Primary Option
- Effective Tax Administration
Usually will make an offer with the primary reason of doubt as to collectibility and perhaps argue, secondarily that there is also a doubt as to liability or an issue that will cover an effective tax administration.
There are two payment options: lump sum or periodic payments.
The IRS is given expansive authority to decide whether accept an offer in compromise. There is NO AMOUNT TOO LOW for low income taxpayers.
No financial statements are required if the OIC is solely related to doubt as to liability.
When an offer in compromise is submitted, it suspends collections actions (while the submission is being considered), but also extends the statute of limitations.
IRS will not process an offer in compromise if a bankruptcy is pending.
Financial Analysis Handbook used by the IRS is: IRM 5.15.1 (to review assets and income)
Currently Not Collectible
If the taxpayer cannot pay the tax debt and reasonable living expenses, can apply for "currently not collectible" (CNC) status. But IRS can revisit the matter later (i.e. taxpayer gets an inheritance or a new job that shows the ability to pay). IRS can review income annually to see if financial situation has improved.
CNC does not extend the CSED - the 10 year collections period. So applying for CNC when there is only a year or so left in the CSED, can be incredibly valuable because once the CSED expires, the tax obligation is effectively extinguished, liens are released.
Overview of Collection Information Statements
These are the essential documents needed to be prepared before decided on an IRS plan of action. These are also sworn statements disclosing assets and income that the IRS reviews what the taxpayer can pay and used by the IRS defense attorney to determine what collections alternative has the best chance of success.
IRS double checks the data (asset searches, credit reports, etc…), so must be truthful.
Businesses: IRS Form 433-B
Gross income must be disclosed, even if not subject to levy (such as SSI or EBT/ food stamps, alimony or child support payments).
IRS is also looking at allowable expenses. IRS allowable expenses include:
National Standards: food, housekeeping supplies, clothing, personal care products, misc. Taxpayer may be able to document why a higher amount is necessary (e.g. expenses for someone with special needs).
Local Standards: housing/utilities and transportation.
Certain actual expenses: child care, life insurance (term, not whole), health insurance, current year taxes, payments on secured debts, delinquent local taxes, court ordered payments, other necessary payments (i.e. student loans).
IRS will not generally allow expenses for: credit card debt, unsecured debt, retirement contributions, charitable contributions, tuition for school .