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Introduction to Collection Representation
by
ROBERT E. MCKENZIE
ARNSTEIN & LEHR
SUITE 1200
120 SOUTH RIVERSIDE PLAZA
CHICAGO, ILLINOIS 60606
(312) 876-6927
REMCKENZIE@ARNSTEIN.COM
http://www.mckenzielaw.com
TABLE OF CONTENTS
1. COLLECTION IRS PROCESSING OF NOTICES OF DELINQUENT TAXES DUE... 1
Tax Collection .............................................................................................................. 1
Four-Level System....................................................................................................... 1
Compliance Center ...................................................................................................... 1
1040 Notice Procedure ................................................................................................ 1
Business Taxpayers .................................................................................................... 2
Notice of Levy .............................................................................................................. 2
Correspondence With Compliance Center .................................................................. 2
Small Dollar Payment Plans ........................................................................................ 2
Telephone Collection Efforts........................................................................................ 2
2. IRS COLLECTION PROCEDURES ........................................................................... 3
The Power of the IRS to Collect Taxes........................................................................ 3
Lien Rights................................................................................................................... 3
Creation of Lien ........................................................................................................... 3
Liens on All Taxpayer Property.................................................................................... 3
Statute of Limitations ................................................................................................... 3
Notice of Lien............................................................................................................... 4
Notice Five Days After Filing ....................................................................................... 4
3. RRA SECTION 3401 - AN OVERVIEW OF THE DUE PROCESS ............................ 4
RRA Section 3401, Due Process in IRS Collection Actions......................................... 4
Purpose of Section 6320 ............................................................................................. 4
Requesting a CDP Hearing ......................................................................................... 4
4. IRC SECTION 6320, NOTICE AND OPPORTUNITY FOR HEARING UPON FILING
OF NOTICE OF LIEN REQUIREMENTS OF NOTICE.................................................... 4
Applicable to any Notices of Federal Tax Lien filed after January 18, 1999. ............... 4
i
Notification ................................................................................................................... 5
Right to Collection Due Process Hearing..................................................................... 5
Conduct of Collection Due Process Hearings.............................................................. 6
Matters Considered at Collection Due Process Hearing.............................................. 6
Judicial Review of Collection Due Process Hearing .................................................... 6
Retained Jurisdiction of IRS Office of Appeals ("Appeals") ......................................... 6
Equivalent Hearings..................................................................................................... 7
5. IRC SECTION 6330 ................................................................................................... 7
Notice and Opportunity for Hearing Before Levy ......................................................... 7
Overview...................................................................................................................... 7
Requirements of Notice ............................................................................................... 7
Notification ................................................................................................................... 8
Right to CDP Hearing .................................................................................................. 8
6. EXTENSIONS OF TIME TO PAY............................................................................... 8
Granting of Extensions ................................................................................................ 8
Guaranteed Availability of Installment Agreements ..................................................... 8
<$25,000 Liabilities...................................................................................................... 8
Changes to Liens......................................................................................................... 8
New Collection Procedures Announced ...................................................................... 9
More Flexible Attitude .................................................................................................. 9
Higher Lien Thresholds.............................................................................................. 10
Easier Lien Withdrawals ............................................................................................ 10
Direct Debit Installment Agreements and Liens ......................................................... 10
Relaxed Rules For Installment Agreements For Small Businesses ........................... 10
Offers in Compromise................................................................................................ 11
New Form 12153 ....................................................................................................... 11
ii
IRS Revised Rules for Streamlined Installment Agreements..................................... 11
Applying Online For a Payment Agreement............................................................... 11
The new rules for Form 9465-FS only to individuals who: ........................................ 11
Do not use Form 9465-FS if: ..................................................................................... 12
Guaranteed installment agreement............................................................................ 12
Caution ...................................................................................................................... 12
How the Process Works ............................................................................................ 12
Payment Methods...................................................................................................... 13
Requests to Modify or Terminate An Installment Agreement..................................... 13
Where to File ............................................................................................................. 14
IRS Offers New Penalty Relief and Expanded Installment Agreements to Taxpayers
under Expanded Fresh Start Initiative........................................................................ 15
Penalty Relief ............................................................................................................ 15
Income Limits ............................................................................................................ 16
New Form 1127A....................................................................................................... 16
Failure to Pay Penalty................................................................................................ 16
7. COLLECTION INFORMATION STATEMENTS ....................................................... 16
CIS's .......................................................................................................................... 16
Types of Collection Information Statements .............................................................. 16
Amount of Payments ................................................................................................. 17
Allowable Expense Overview .................................................................................... 17
Five Year Test ........................................................................................................... 20
8. TAXPAYER ASSISTANCE ORDERS ...................................................................... 20
Right to Apply for Assistance..................................................................................... 20
Taxpayer Assistance Orders ..................................................................................... 20
9. OFFER IN COMPROMISE....................................................................................... 20
Number of Offers ....................................................................................................... 20
iii
Securing an Offer in Compromise.............................................................................. 21
Future Income for Offers in Compromise................................................................... 21
Agency Notes Variety of Situations............................................................................ 21
Income Averaging Addressed.................................................................................... 22
Facts and Circumstances Approach Directed............................................................ 22
Offer In Compromise Forms ...................................................................................... 22
Tax Increase Prevention and Reconciliation Act of 2005........................................... 22
Payments With Offers................................................................................................ 22
Failure to Make Deposit............................................................................................. 23
Not Refundable.......................................................................................................... 23
Taxpayer Advocate Research ................................................................................... 23
Failure to Make Installment Payments....................................................................... 23
Low Income Taxpayers.............................................................................................. 24
Interim Guidance Released for Low-Income Cases................................................... 24
Supporting Documents .............................................................................................. 24
$150 Processing Fee................................................................................................. 24
Computation of Offer Amount .................................................................................... 25
Cash Offer ................................................................................................................. 25
Short Term Deferred Payment Offer.......................................................................... 25
Deferred Payment Offers........................................................................................... 25
Promote Effective Tax Administration........................................................................ 26
Encourage Compliance ............................................................................................. 26
Exhibits
27-56
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Introduction to Collection Representation
By Robert E. McKenzie ©2012
1. COLLECTION IRS PROCESSING OF NOTICES OF DELINQUENT TAXES DUE
Tax Collection
1.10 The IRS Collection Division attempts to collect delinquent taxes as inexpensively
and rapidly as possible. To accomplish this task the IRS makes extensive use of
computers. Only when automated methods have failed to collect a tax is the matter
assigned to an individual for collection.
Four-Level System
1.20 To effectuate this policy the IRS utilizes a four-level system of collection. It
begins its collection efforts on each account by generating computer notices from a
Regional Compliance Center. If the efforts of the Compliance Center do not secure
payment, the account is then assigned to the Automated Collection System (ACS). The
Automated Collection System attempts to collect the tax liability by initiating telephone
calls to the taxpayer and others. During the time that an account is assigned to
Compliance Center and ACS, accounts may also be resolved by Collection Support
Staff assigned to handle "walk-ins" in local IRS offices. If none of these levels of the
system are successful in collecting the account, it is eventually assigned to a Revenue
Officer for a field investigation. Obviously, it is much less expensive for the IRS to
collect a tax by mailing a notice or placing a telephone call than it is to visit the taxpayer
personally. For the taxpayer, however, personal negotiation is much more effective than
dealing with an automated system.
Compliance Center
1.30 The IRS has ten Regional Compliance Centers which process all tax returns filed
with the IRS. Compliance Centers are extensively automated. The information on each
tax return filed is encoded into the IRS computer at a Compliance Center. That IRS
computer system will determine if computational errors are contained on the return and
issue notices regarding errors. The Compliance Center is also responsible for initiating
notices to taxpayers to collect balances due on tax returns.
1040 Notice Procedure
1.40 Upon receipt of a tax return or other document showing a balance due, the
following process takes place in the Internal Revenue Compliance Center. Within
several weeks after receipt of the document, the information is placed on the computer
system. That system will then initiate a series of notices. The first notice issued is a
document titled "Request for Payment,” which informs the taxpayer that there is a
balance due on the return, states the amount of tax, interest and penalties due, and
requests payment within ten days. This is the notice statutorily required for the creation
of a valid Federal Tax Lien. If the liability is for individual income taxes, and the liability
is relatively small, the taxpayer will normally receive four subsequent notices before the
IRS proceeds to take any administrative collection measures. If the liability is not paid
1
after the initial notice, the taxpayer will receive a second notice, “Reminder,” Notice
501. The IRS will issue Notice 503, "Urgent, Immediate action is required ", five weeks
after the first notice. The taxpayer will receive Notice 504, "Urgent, We intend to levy on
certain assets. Please respond NOW." in the mail five weeks after issuance of Notice
503 if payment is not made after that notice. Notice 504 is the nastiest of the IRS letters.
If the taxpayer fails to pay after Notice 504 the matter will be referred for collection by
the Automated Collection System (ACS). If ACS is unsuccessful in collecting or
resolving the matter the IRS will then issue Letter 1058, “FINAL NOTICE, NOTICE OF
INTENT TO LEVY AND NOTICE OF YOUR RIGHT TO A HEARING. PLEASE
RESPOND IMMEDIATELY.” If the taxpayer exercises her appeal rights, collection will
be held. If the taxpayer fails to appeal the IRS will levy after expiration of 30 days from
the notice. One unusual convention of the IRS is that each notice will bear a date which
falls on Monday.
Business Taxpayers
1.50 In the case of business taxes (either corporate income or withholding taxes), the
IRS will send three notices period prior to initiating enforcement measures. The total
time from first notice to enforcement action is normally at least 16 weeks. The taxpayer
will receive a first notice and a Notice 504 five weeks subsequent to the first notice. The
account will then be referred to ACS or a Revenue Officer for issuance of Letter 1058 if
the taxpayer fails to resolve the liability.
Notice of Levy
1.60 ACS has computerized sources of income or assets of the taxpayer, such as
wages, bank accounts, certificates of deposit or accounts receivable, all of which can be
seized administratively from the taxpayer, it will issue a Notice of Levy against the
taxpayer's assets approximately six weeks after the Letter 1058. If the ACS does not
have sources of income or other assets to levy upon, it will either research other
sources or issue a Balance Due (Bal Due) to a local area office for collection, several
weeks subsequent to the final notice.
Correspondence With Compliance Center
1.70 Normally, it is ineffective to write to a Compliance Center. It may take some
Compliance Center six weeks or more to process correspondence. For example, if your
client receives a Notice 504 even though he paid the tax upon receipt of the Notice 503,
a letter to the IRS will not stop assignment to ACS. The IRS will not process your letter
for six weeks, yet the computer continues to automatically refer the matter to ACS on a
set cycle.
Small Dollar Payment Plans
1.80 A taxpayer may be able to secure a 60-month payment plan for 1040 liabilities of
less than $25,000. The IRS Restructuring and Reform Act of 1998 requires the IRS to
grant a payment plan to individual taxpayers who owe less than $10 thousand.
Telephone Collection Efforts
1.90 If an account cannot be collected by a Returns Processing Center by using
notices a upon the taxpayer's wages or bank account, the matter will then be transferred
2
to a ACS for telephone collection efforts. Each ACS, including the Return Processing
Center, has a computerized telephone collection system. The IRS has twenty-three
ACS sites.
2. IRS COLLECTION PROCEDURES
The Power of the IRS to Collect Taxes
2.10 The IRS has the power to collect taxes by levying on taxpayers’ property as a
result of the Federal Tax Lien. When a person owes taxes, the IRS gains a lien on all
that person's assets after meeting certain statutory requirements. The lien attaches to
all rights, title and interest of the taxpayer wherever it may be situated. [IRC § 6321]
Once the IRS has a lien on all of a taxpayer's assets, it may enforce that lien by
administratively levying his or her assets.
Lien Rights
2.20 An example of lien rights would be the lien created when a person buys a car
and finances the purchase through a bank. If the buyer defaults on the note, the bank
may repossess the car. In the case of the IRS it gains a lien on all of a taxpayer's assets
and therefore it has the right to seize most of those assets to satisfy unpaid taxes.
Creation of Lien
2.30 The liability of a taxpayer for Internal Revenue taxes is personal in nature and,
does not directly attach to his or her property. In this respect the liability is analogous to
a simple debt and, without anything more, could be enforced only by a court action. The
lien is often referred to as the "statutory" or the "general" lien. The following
requirements for establishing the lien are contained in the Code:
•
An assessment must have been made;
•
A notice and demand for payment must have been made (the first IRS notice
meets this requirement); and
•
The taxpayer must have neglected or refused to pay. [IRC § 6321]
Liens on All Taxpayer Property
2.40 The effect of the Federal Tax Lien statute is that when any person fails to pay
any assessment of tax, plus interest, penalties, or costs, a lien in favor of the United
States arises upon all property and rights to property, whether real or personal, tangible
or intangible, belonging to the taxpayer.
Statute of Limitations
2.50 Prior to 1990 the Statute of Limitations for collection was six years from the date
of assessment plus such suspended, extended or postponed period of time as may, by
law, be applicable. [IRC § 6502] The Revenue Reconciliation Act of 1990 extended the
Statute of Limitations for collection to ten years. [Revenue Reconciliation Act of 1990, §
1131(a)] This period was extended for all tax liabilities upon which the Statute of
Limitations was still open at the time the bill was passed by Congress.
3
Notice of Lien
2.60 IRC § 6323(a) modifies IRC § 6321 by providing that the Federal Tax Lien is not
valid against purchasers, holders of security interests, mechanics’ lienors, and judgment
lien creditors until a Notice of Lien has been filed. The filing of the Notice of Lien is
constructive notice to these persons that the lien, provided for by the Code, exists.
Notice Five Days After Filing
2.70 The RRA 1998 established formal procedures designed to ensure due process
where the IRS seeks to impose a lien. The due process procedures apply after notice of
a Federal tax lien has been filed. The IRS is required to notify the taxpayer of the filing a
Notice of Lien within five days of its filing. During the 30-day period beginning with the
mailing or delivery of this notification, the taxpayer may demand a hearing before an
appeals officer. [Act § 3401; IRC § 6320]
3. RRA SECTION 3401 - AN OVERVIEW OF THE DUE PROCESS
RRA Section 3401, Due Process in IRS Collection Actions
3.10 Provides the taxpayer with procedural rights when the Service files a Notice of
Federal Tax Lien (NFTL) and when it intends to levy upon the taxpayer's property or
right to property
Purpose of Section 6320
3.20 The purpose of section 6320 is to provide a taxpayer with notification that a
Notice of Federal Tax Lien has been filed and to provide the taxpayer with the
opportunity to request a Collection Due Process hearing ("CDP hearing") with the IRS
Office of Appeals ("Appeals") with respect to the tax liability for the taxable period or
periods to which the lien relates.
Requesting a CDP Hearing
3.30 If the taxpayer timely requests a CDP hearing, Appeals will consider the case
and render a written determination concerning the appropriateness of the lien filing or
proposed levy. Through this section, the taxpayer may have the opportunity to
challenge administratively and in court the taxpayer's liability for the tax years stated on
the NFTL or levy, raise any additional defenses with respect to that liability, challenge
the appropriateness of the filing of the NFTL or proposed levy, and offer collection
alternatives. The taxpayer is required to raise all relevant substantive and collection
issues at that hearing.
4. IRC SECTION 6320, NOTICE AND OPPORTUNITY FOR HEARING UPON FILING
OF NOTICE OF LIEN REQUIREMENTS OF NOTICE
Applicable to any Notices of Federal Tax Lien filed after January 18, 1999.
4.10
•
A taxpayer is entitled to notice of the filing of an NFTL not more than five
business days after the date of any filing.
4
•
This notice describes the taxpayer's right to request a Collection Due Process
hearing with respect to any taxable periods described on the NFTL, within the
30-calendar day period beginning on the day after the 5-day period for
notification has expired. The taxpayer is entitled to only one CDP hearing with
respect to each taxable period to which the unpaid tax relates.
•
The determination made by Appeals may be appealed to either the United
States Tax Court ("Tax Court").
•
The running of the periods of limitations for collection after assessment, for
criminal prosecutions, and for suits described under IRC § 6532 are
suspended for the periods in which the CDP hearing and any appeals are
pending. (Suspensions will be more specifically addressed below).
•
If a taxpayer does not request a CDP hearing within the 30-day period, a
taxpayer can still request a hearing at a later date and the IRS will provide a
hearing equivalent to a CDP hearing. However, the taxpayer will not be
entitled to judicial review of that later hearing. ("Equivalent hearings" are more
specifically addressed below).
Notification
4.20 Written notification that an NFTL has been filed must be given to the taxpayer in
person, or left at the taxpayer's dwelling or usual place of business, or sent by certified
or registered mail to the taxpayer's last known address, not more than five days after
the date of filing of the NFTL.
Right to Collection Due Process Hearing
4.30
•
A taxpayer to whom IRS has properly delivered or mailed notice of the CDP
hearing is entitled to a CDP hearing if requested within the 30-calendar day
period following the five business day period within which the IRS is required to
give that notice.
•
A taxpayer's request for a CDP hearing must be in writing. A Form 12153 has
been developed for this purpose. The request must set forth the taxpayer's
name, address, daytime phone number, type of tax, taxable period, taxpayer's
TIN, a statement that the taxpayer requests a CDP hearing concerning the NFTL
and the reasons the taxpayer disagrees with the NFTL filing. The request must
be signed and dated by the taxpayer or the taxpayer's representative.
•
The location for sending the request for a CDP hearing is the office of the IRS
that issued the CDP notice.
5
Conduct of Collection Due Process Hearings
4.40
•
The taxpayer is entitled to one CDP hearing with respect to each unpaid taxable
period shown on an NFTL filed after January 18, 1999.
•
To the extent possible, all CDP hearings under section 6320 and 6330 (which will
be further addressed below) will be combined.
•
The CDP hearing must be before an employee or officer of Appeals who has had
no prior involvement with respect to the taxable period or periods.
Matters Considered at Collection Due Process Hearing
4.50
•
Appeals Division has the authority to determine the validity, sufficiency, and
timeliness of any CDP hearing notice or request for a hearing by the taxpayer.
•
At the CDP hearing, the hearing officer is required to obtain verification from IRS
Collection that the requirements of any applicable law or procedure have been
met.
•
At the CDP hearing, the taxpayer is entitled to raise any relevant issue relating to
the unpaid tax, including any appropriate spousal defenses, challenges to the
appropriateness of the NFTL filing, offers of collection alternatives, and merits of
liability, if appropriate. The taxpayer must raise all relevant issues in the CDP
hearing. The rule of variance that applies in refund litigation will apply here.
Judicial Review of Collection Due Process Hearing
4.60
•
The taxpayer may appeal the determination made in the CDP hearing within 30
calendar days to the Tax Court. The taxpayer is precluded from raising "new
issues" upon judicial review. In other words, the taxpayer cannot raise any issues
for the first time upon judicial review, but is required to raise all relevant issues in
the CDP hearing.
•
The court will review Appeals' determination concerning the validity of the tax
liability on a de novo basis. (This includes determinations concerning spousal
defenses.) Appeals' determination concerning any other matters will be reviewed
using an abuse of discretion standard of review.
Retained Jurisdiction of IRS Office of Appeals ("Appeals")
4.70 The Appeals office that makes the determination at a CDP hearing retains
jurisdiction over that determination, including any subsequent hearings and collection
actions taken with respect to that determination.
6
Equivalent Hearings
4.80 Taxpayers who fail to timely request a CDP hearing may later request an
"equivalent hearing" with Appeals concerning the NFTL and tax liabilities for the tax
periods shown on that NFTL. The appeal must be filed within 1 year of the original CDP
notice.
5. IRC SECTION 6330
Notice and Opportunity for Hearing Before Levy
5.10 The focus of this section will be on the distinctions of the section 6330 CDP
hearing from the section 6320 CDP hearing just discussed. Many of the issues
discussed above are equally applicable under section 6330-i.e., the issues which can
be raised at a CDP hearing, contents of notice, opportunities for judicial review, retained
jurisdiction of Appeals, "equivalent hearings,” etc.
•
Operational/conceptual distinctions between 6320 and 6330: IRC 6320's key
date is the date the NFTL is filed. 6330's key date is the date of the CDP hearing
notice (FINAL NOTICE)
Overview
5.20
•
Notice is given of a right to a CDP hearing at least 30 days prior to levy on
property or rights to property, other than a State tax refund, in non-jeopardy
situations.
•
CDP hearing is with respect to the tax liability for the taxable period or periods for
which the levy is intended to be made.
Requirements of Notice
5.30
•
As with the section 6320 notice, a person whose property or rights to property
may be levied upon must be given notice of his or her rights to a CDP hearing.
These requirements do NOT apply in the case of jeopardy levies and levies on
State tax refunds.
•
This notice must be given not less than 30 days prior to the date of the first levy
with respect to the unpaid tax liability for the taxable period for which the levy
may be made.
•
The taxpayer must request the section 6330 hearing within the 30-day period
from the date of the CDP hearing notice, or will lose the right to a CDP hearing,
court review, and retained jurisdiction of Appeals.
7
Notification
5.40 Notice is generally given in the same manner as for section 6320 notice,
EXCEPT that where notice is sent by certified or registered mail, it must be sent return
receipt requested.
Right to CDP Hearing
5.50 Must be requested within 30-day period.
6. EXTENSIONS OF TIME TO PAY
Granting of Extensions
6.10 Extensions of time to pay provide a specific date by which full payment of taxes
is expected. Extensions may be granted for up to120 days for all taxpayers. Extensions
of time to pay are not installment agreements and do not provide for periodic payments.
No forms are required. Form 433-D is not be used.
•
The IRS will not file a lien.
•
The IRS will not issue Notices of Intent to Levy, Notice of Hearing (LT 11 or
Letter 1058DO) nor levies during granted extension periods, unless collection is
in jeopardy or at risk.
NOTE: This applies even if taxpayers are given deadlines within the extension
period and these deadlines are not met.
EXAMPLE: A revenue officer gives the taxpayer a 60 day extension of time to
pay and 30 days to have all federal tax deposits current. The taxpayer has not
made all the current tax deposits by the 31st day. Enforcement is not appropriate
until after 60 days pass, unless collection is in jeopardy or at risk. [IRM 5.14.1.4]
Guaranteed Availability of Installment Agreements
6.20 The Internal Revenue Service Restructuring and Reform Act of 1998 requires the
Secretary to grant an installment agreement, at the taxpayer's option, if:
•
the liability is $10,000, or less (excluding penalties and interest);
•
within the previous 5 years, the taxpayer has not failed to file or to pay, nor
entered an installment agreement under this provision; [Act § 3467; IRC § 6159)
<$25,000 Liabilities
6.30 The IRS has chosen to create a more liberal system that allows installment
agreements of up to 5 years for balances of less than $25,000.
Changes to Liens
6.40 The IRS is making other fundamental changes to liens in cases where taxpayers
enter into a Direct Debit Installment Agreement (DDIA). For taxpayers with unpaid
8
assessments of $25,000 or less, the IRS will now allow lien withdrawals under several
scenarios:
• Lien withdrawals for taxpayers entering into a Direct Debit Installment
Agreement.
• The IRS will withdraw a lien if a taxpayer on a regular Installment
Agreement converts to a Direct Debit Installment Agreement.
• The IRS will also withdraw liens on existing Direct Debit Installment
Agreements upon taxpayer request.
Liens will be withdrawn after a probationary period demonstrating that direct debit
payments will be honored. Taxpayers can use the Online Payment Agreement
application on IRS.gov to set-up with Direct Debit Installment Agreements.
New Collection Procedures Announced
6.50 On February 24, 2011 IRS announced its “Fresh Start” initiative of new policies
and programs to help taxpayers pay back taxes and avoid tax liens. IRS's stated goal is
to help individuals and small businesses meet their tax obligations, without adding an
unnecessary burden to taxpayers.
Over the past several years as taxpayers have endured the Great Recession the IRS
has escalated the number of federal tax liens filed against delinquent taxpayers. The
IRS aggressive use of liens has been criticized by the National Taxpayer Advocate in
her annual report to congress and the IRS Advisory Council in its annual report to the
Commissioner.
More Flexible Attitude
6.60 The newly announced policy represents a new, more flexible attitude by the IRS.
The IRS making important changes to its lien filing practices that will lessen the
negative impact on taxpayers. The changes include:
• Significantly increasing the dollar threshold when liens are generally issued,
resulting in fewer tax liens.
• Making it easier for taxpayers to obtain lien withdrawals after paying a tax bill.
• Withdrawing liens in most cases where a taxpayer enters into a Direct Debit
Installment Agreement.
•Creating easier access to Installment Agreements for more struggling small
businesses.
• Expanding a streamlined Offer in Compromise program to cover more
taxpayers.
9
Higher Lien Thresholds
6.70 The IRS stated that it will significantly increase the dollar thresholds when liens
are generally filed. The new dollar amount is in keeping with inflationary changes since
the number was last revised. Currently, liens are automatically filed at certain dollar
levels for people with past-due balances. The IRS did not publicly disclose the new lien
thresholds. The IRS plans to review the results and impact of the lien threshold change
in about a year.
Easier Lien Withdrawals
6.80 The IRS will also modify procedures that will make it easier for taxpayers to
obtain lien withdrawals. Liens will now be withdrawn once full payment of taxes is made
if the taxpayer requests it. The IRS has determined that this approach is in the best
interest of the government. In order to speed the withdrawal process, the IRS will also
streamline its internal procedures to allow collection personnel to withdraw the liens.
Direct Debit Installment Agreements and Liens
6.90 The IRS is making other fundamental changes to liens in cases where taxpayers
enter into a Direct Debit Installment Agreement (DDIA). For taxpayers with unpaid
assessments of $25,000 or less, the IRS will now allow lien withdrawals under several
scenarios:
• Lien withdrawals for taxpayers entering into a Direct Debit Installment
Agreement.
• The IRS will withdraw a lien if a taxpayer on a regular Installment Agreement
converts to a Direct Debit Installment Agreement.
• The IRS will also withdraw liens on existing Direct Debit Installment Agreements
upon taxpayer request.
Liens will be withdrawn after a probationary period demonstrating that direct debit
payments will be honored. Taxpayers can use the Online Payment Agreement
application on IRS.gov to set-up with Direct Debit Installment Agreements.
Relaxed Rules For Installment Agreements For Small Businesses
6.100 The IRS will also make streamlined Installment Agreements available to more
small businesses. The payment program will raise the dollar limit to allow additional
small businesses to participate. Small businesses with $25,000 or less in unpaid tax can
participate. Currently, only small businesses with under $10,000 in liabilities can
participate. Small businesses will have 24 months to pay.
The streamlined Installment Agreements will be available for small businesses that file
either as an individual or as a business. Small businesses with an unpaid assessment
balance greater than $25,000 would qualify for the streamlined Installment Agreement if
they pay down the balance to $25,000 or less.
10
Offers in Compromise
6.110 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.
New Form 12153
6.120 In March, 2011 the IRS issued a new Form 12153 for collection due process
appeals. It is formatted to assist taxpayers with determining defenses to IRS enforced
collection measures.
IRS Revised Rules for Streamlined Installment Agreements
6.130 In January 2012 ihe RS 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 may request a monthly installment plan by submitting Form 9465-FS to if your
liability is greater than $25,000 but not more than $50,000. Though Form 9465-FS is
meant to be used by taxpayers with liabilities greater than $25,000 but not more than
$50,000, it can be used by all taxpayers to request an installment agreement. Generally,
you can have up to 72 months to pay. In certain circumstances, you can have longer to
pay or your agreement can be approved for an amount that is less than the amount of
tax you owe.
If you use 9465-FS you must file it on paper mailing it to the address shown below for
your respective address. . If you have already filed your return and you are sending in
Form 9465-FS on its own, mail it to the address shown below for the type of return filed.
However, before requesting an installment agreement, you should 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.
6.140 If your balance due is not more than $50,000, you can also apply online for a
payment agreement instead of filing Form 9465-FS. To do that, go to IRS.gov and click
on “More...” under Tools.
The new rules for Form 9465-FS only to individuals who:
6.150 Who owes income tax on Form 1040,
•
Who may be responsible for a Trust Fund Recovery Penalty,
11
•
•
•
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 Form 9465-FS if:
6.160 You can pay the full amount you owe within 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
6.170 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, you (and your 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 you cannot pay the tax owed in full when it is due and
you give the IRS any information needed to make that determination.
You agree to pay the full amount you owe within 3 years and to comply with the
tax laws while the agreement is in effect.
Caution
6.180 A Notice of Federal Tax Lien may be filed to protect the government’s interests
until you pay in full.
How the Process Works
6.190 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 the terms of your agreement and
requesting a fee of $105 ($52 if you make your payments by electronic funds
withdrawal). However, you may qualify to pay a reduced fee of $43 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.
12
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 that you must have enough withholding or estimated tax
payments so that 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.
6.200 You can make your payments by check, money order, credit card, or one of the
other payment methods shown next. The fee for each payment method is also shown.
Payment method
Applicable fee
Check, money order, or credit card
$105
Electronic funds withdrawal
$ 52
Payroll deduction installment agreement $105
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 choose
to 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 the filing of a Notice of Federal Tax Lien or an IRS levy action, to
collect the entire amount you owe. To ensure that your payments are made timely, you
may consider making them by electronic funds withdrawal
Requests to Modify or Terminate An Installment Agreement.
6.210 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.
13
Where to File
6.220 Attach Form 9465-FS to the front of your return and send it to the address shown
in your tax return booklet. If you have already filed your return or you are filing this form
in response to a notice, file Form 9465-FS by itself with the Internal Revenue Service
Center using the address in the table below that applies to you.
For all taxpayers except those filing Form 1040 with Schedule(s) C, E, or F for any
tax year for which this installment agreement is being requested.
IF you live in . . .
THEN use this address . . .
Department of the Treasury
Alabama, Florida, Georgia, Kentucky, Louisiana, Internal Revenue Service
Mississippi, North Carolina, South Carolina, Texas, P.O. Box 47421
Virginia
Stop 74
Doraville, GA 30362
Alaska, Arizona, Colorado, Connecticut, Delaware,
Department of the Treasury
District of Columbia, Hawaii, Idaho, Illinois, Maine,
Internal Revenue Service
Maryland, Massachusetts, Montana, Nevada, New
310 Lowell St.
Hampshire, New Jersey, New Mexico, North Dakota,
Stop 830
Oregon, Rhode Island, South Dakota, Tennessee,
Andover, MA 01810
Utah, Vermont, Washington, Wisconsin, Wyoming
Department of the Treasury
Arkansas, California, Indiana, Iowa, Kansas,
Internal Revenue Service
Michigan, Minnesota, Missouri, Nebraska, New York,
Stop P-4 5000
Ohio, Oklahoma, Pennsylvania, West Virginia
Kansas City, MO 64999–0250
A foreign country, American Samoa, or Puerto Rico
(or are excluding income under Internal Revenue Department of the Treasury
Code section 933), or use an APO or FPO address, Internal Revenue Service
or file Form 2555, 2555-EZ, or 4563, or are a dual- 3651 South I-H 35, 5501AUSC
status alien or nonpermanent resident of Guam or the Austin, TX 78741
Virgin Islands*
* Permanent residents of Guam or the Virgin Islands cannot use Form 9465-FS.
For taxpayers filing Form 1040 with Schedule(s) C, E, or F for any tax year for
which this installment agreement is being requested.
IF you live in . . .
THEN use this address . . .
Alabama, Arkansas, Georgia, Illinois, Indiana, Iowa, Department of the Treasury
Kansas, Kentucky, Louisiana, Michigan, Minnesota, Internal Revenue Service
Mississippi, Missouri, Nebraska, New Jersey, North P.O. Box 69
14
Dakota, Ohio, Oklahoma, Pennsylvania, South Stop 811
Dakota, Tennessee, Texas, West Virginia, Wisconsin Memphis, TN 38101–0069
Department of the Treasury
Alaska, Arizona, California, Colorado, Hawaii, Idaho, Internal Revenue Service
Montana, Nevada, New Mexico, Oregon, Utah, P.O. Box 9941
Washington, Wyoming
Stop 5500
Ogden, UT 84409
Department of the Treasury
Internal Revenue Service
Connecticut, Maine, Massachusetts, New Hampshire,
P.O. Box 480
New York, Rhode Island, Vermont
Stop 660
Holtsville, NY 11742–0480
Department of the Treasury
Delaware, Florida, Maryland, District of Columbia, Internal Revenue Service
North Carolina, South Carolina, Virginia
Stop 4–N31.142
Philadelphia, PA 19255–0030
A foreign country, American Samoa, or Puerto Rico
(or are excluding income under Internal Revenue Department of the Treasury
Code section 933), or use an APO or FPO address, Internal Revenue Service
or file Form 2555, 2555-EZ, or 4563, or are a dual- 3651 South I-H 35, 5501AUSC
status alien or nonpermanent resident of Guam or the Austin, TX 78741
Virgin Islands*
* Permanent residents of Guam or the Virgin Islands cannot use Form 9465-FS.
IRS Offers New Penalty Relief and Expanded Installment Agreements to
Taxpayers under Expanded Fresh Start Initiative
6.230 On March 7, 20012 the Internal Revenue Service announced a major expansion
of its “Fresh Start” initiative to help struggling taxpayers by taking steps to provide new
penalty relief to the unemployed and making Installment Agreements available to more
people. Under the new Fresh Start provisions, part of a broader effort started at the IRS
in 2008, certain taxpayers who have been unemployed for 30 days or longer will be able
to avoid failure-to-pay penalties. In addition, the IRS is doubling the dollar threshold for
taxpayers eligible for Installment Agreements to help more people qualify for the
program.
Penalty Relief
6.240 The IRS announced plans for new penalty relief for the unemployed on failure-topay penalties, which are one of the biggest factors a financially distressed taxpayer
faces on a tax bill.
15
To assist those most in need, a six-month grace period on failure-to-pay penalties will
be made available to certain wage earners and self-employed individuals. The request
for an extension of time to pay will result in relief from the failure to pay penalty for tax
year 2011 only if the tax, interest and any other penalties are fully paid by Oct. 15, 2012.
The penalty relief will be available to two categories of taxpayers:
•
Wage earners who have been unemployed at least 30 consecutive days
during 2011 or in 2012 up to the April 17 deadline for filing a federal tax return
this year.
•
Self-employed individuals who experienced a 25 percent or greater reduction
in business income in 2011 due to the economy.
Income Limits
6.250 This penalty relief is subject to income limits. A taxpayer’s income must not
exceed $200,000 if he or she files as married filing jointly or not exceed $100,000 if he
or she files as single or head of household. This penalty relief is also restricted to
taxpayers whose calendar year 2011 balance due does not exceed $50,000.
New Form 1127A
6.260 Taxpayers meeting the eligibility criteria will need to complete a new Form 1127A
to seek the 2011 penalty relief.
Failure to Pay Penalty
6.270 The failure-to-pay penalty is generally half of 1 percent per month with an upper
limit of 25 percent. The penalty rises to 1% per month after the IRS issues a notice of
intent to levy. Under this new relief, taxpayers can avoid that penalty until Oct. 15, 2012,
which is six months beyond this year’s filing deadline. However, the IRS is still legally
required to charge interest on unpaid back taxes and does not have the authority to
waive this charge, which is currently 3 percent on an annual basis.
Even with the new penalty relief becoming available, taxpayers should file their returns
on time by April 17 or file for an extension. Failure-to-file penalties applied to unpaid
taxes remain in effect and are generally 5 percent per month, also with a 25 percent
cap.
7. COLLECTION INFORMATION STATEMENTS
CIS's
7.10 For larger dollar liabilities (income tax liabilities in excess of $25,000) the starting
point for analysis is the Service's Collection Information Statement (CIS). The
preparation of this document, more often than not, determines which way the Service
will proceed with its collection activity. Copies of the CIS's currently used by the Service
for individuals are provided in the exhibits at the end of this material.
Types of Collection Information Statements
7.20 The IRS utilizes three basic types of Collection Information Statements (CIS's).
The Form 433-A and Form 433-F are secured from individuals. The Form 433-B is
secured from businesses. If the taxpayer is self employed the service will normally
require both a 433-A and 433-B.
16
Amount of Payments
7.30 Page 4 is a monthly income and expense analysis. The IRS will not grant a
Payment Plan for less than the amount shown as the net available income. That figure
represents the difference between income and claimed expenses. Unfortunately, as one
will note, page 6 contains a column to the right of the claimed column for Allowed
Expenses. The IRS utilizes information from the Bureau of Labor Statistics to establish
allowable expenses for certain items like transportation, food, clothing and housing.
Those allowable expenses might be less that the amount actually being paid by the
taxpayer.
Allowable Expense Overview
7.40 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 for Hawaii and Alaska. It also added a new category of expenses for out-ofpocket 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
17
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.
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]
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.
18
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]
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.
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.
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.
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.
G. A deviation from the local standard is not allowed merely because it
is inconvenient for the taxpayer to dispose of valued assets.
H. Length. Revenue officers should consider the length of the
payments. Although it may be appropriate to allow for payments
19
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
7.50 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. TAXPAYER ASSISTANCE ORDERS
Right to Apply for Assistance
8.10 The taxpayer has the right to apply for assistance from the Taxpayer Advocate if
he or she is suffering or is about to suffer significant hardship. Taxpayers have the
statutory right to appeal unreasonable decisions by collection officers. If your request for
an agreement is unreasonably denied, you may request a Taxpayer Assistance Order
(TAO) which may require collection personnel to release property levied upon or to
cease any actions or refrain from any action with respect to the taxpayer. [IRC §
7811(b)] A request is initiated by filing form 911 with the Taxpayer Advocate. The mere
existence of these rights tends to mitigate the unreasonableness of some collection
personnel.
Taxpayer Assistance Orders
8.20 The Internal Revenue Service Restructuring and Reform Act of 1998 expanded
the definition of "significant hardship" by including the following circumstances:
•
The existence of an immediate threat of adverse action;
•
A delay of more than thirty (30) days in resolving the taxpayers account
problems;
•
The payment by the taxpayer of significant cost (including fees for professional
services) if relief is not granted; or
•
Irreparable injury or a long standing adverse impact, if relief is not granted.
[Act§1102; IRC§7811]
9. OFFER IN COMPROMISE
Number of Offers
9.10 The total number of proposed offer has more than halved from 128,000 in FY
2001 to 59,000 in FY 2011. 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, It
went down to 10,665 (about 20%) in 2009. In 2010 the number of accepted offers rose
20
for the first time in a decade to 14,000 acceptances and in 2011 it rose to 20,000
acceptances. The increased number of acceptances indicates increased flexibility by
the IRS.
Offers in compromise (thousands)
2007
2008
2009
2010
2011
Offers received
46
44
52
57
59
Offers accepted
12
11
11
14
20
Offers accepted
228,975 200,103 157,261 129,668 154,092
Securing an Offer in Compromise
9.15 The IRS has made it so difficult to secure an offer in compromise that many
taxpayers and their representative no longer choose to propose a compromise.
Future Income for Offers in Compromise
9.20 The Internal Revenue Service on March 10, 2010 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.
Agency Notes Variety of Situations
9.30 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.
21
Income Averaging Addressed
9.40 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
9.50 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.
Offer In Compromise Forms
9.60 In 2011 the IRS issued new offer in compromise forms which apply the
provisions of TIPRA 2005 discussed below. Taxpayers proposing compromises based
upon doubt as to collectibility of effective tax administration must submit revised Form
656. Taxpayers proposing an offer based upon doubt as to liability must now submit
Form 656-L and a narrative setting forth defenses to the liability. To comply with the
new downpayment requirements taxpayers must submit Form 656-PPV with the
required downpayment.
Tax Increase Prevention and Reconciliation Act of 2005
9.70 The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), section
509, made major changes to the IRS OIC program. These changes affect all offers
received by the IRS on or after July 16, 2006. TIPRA section 509 amends IRC section
7122 by adding a new subsection (c) “Rules for Submission of Offers-in-Compromise.”
Payments With Offers
9.80 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.
22
A taxpayer filing a periodic-payment offer must pay the first proposed installment
payment with the application and pay additional installments while the IRS is evaluating
the offer (IRC section 7122(c)(1)(B)). A periodic-payment offer means any offer of
payments made in six or more installments.
Failure to Make Deposit
9.90 Taxpayers can avoid delays in processing their OIC applications by making all
required payments in full and on time. Failure to pay the 20 percent on a lump-sum
offer, or the first installment payment on a periodic-payment offer, will result in the IRS
returning the offer to the taxpayer as nonprocessable (IRC section 7122(d)(3)(C) as
amended by TIPRA).
Not Refundable
9.100 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)).
Taxpayer Advocate Research
9.110 In 2007, the Taxpayer Advocate Service conducted a research study to assess
the impact of the down payment requirement.29. The study analyzed a representative
sample of more than 400 offers that the IRS accepted in the months just before the 20
percent requirement took effect. Among the principal findings were that 56 percent of
taxpayers whose offers were accepted and who made lump-sum payments obtained the
funds from family members and friends. While family and friends may be willing to help
a taxpayer get straight with the IRS, they are probably much less willing to provide
funds for taxpayers to make down payments on offers that are unlikely to be accepted –
and fewer than one in four offers is, in fact, accepted. Thus, not surprisingly, the
number of offers received by the IRS fell by 21 percent from FY 2006 to FY 2007 as the
down payment requirement took effect.
Failure to Make Installment Payments
9.120 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.
23
Low Income Taxpayers
9.130 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-toliability 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
1
2
3
4
5
6
7
8
For each additional person, add
48 Contiguous States and D.C.
$2,256
$3,035
$3,815
$4,594
$5,373
$6,152
$6,931
$7,710
$779
Hawaii
$2,596
$3,492
$4,388
$5,283
$6,179
$7,075
$7,971
$8,867
$896
Alaska
$2,819
$3,794
$4,769
$5,744
$6,719
$7,694
$8,669
$9,644
$975
Interim Guidance Released for Low-Income Cases
9.140 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.
Supporting Documents
9.150 The financial statements require the proponent to supply documentation for each
item on the forms, i.e. pay stubs, car payment book, mortgages, pay stubs, charge
account statements, and bank statements. The IRS considers smaller liability offers
without conducting a field investigation, therefore it is requiring the proponent to supply
all the info to make a decision without field verification.
$150 Processing Fee
9.160 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.
24
Computation of Offer Amount
9.170 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:
•
•
•
Cash (paid in 5 installment or less), or
Deferred Payment (paid in more than 5 installments), or
Deferred Payment (offers with payment terms up to the remaining
statutory period for collecting the tax.).
NOTE: In all three cases, the IRS will release any filed Notice of Federal
Tax Lien once you have fully paid the offer amount and any interest that
has accrued.
Cash Offer
9.180 You must pay cash offers in 5 installments or less after 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 Internal
Revenue Service's method of determining the adequacy of an offer could be best
expressed by:
Quick Sale Value Plus Present Value of Income Equals Offer In
Compromise
(QSV + PVI = OIC)
In applying this formula, the IRS determines the Quick Sale Value of all of the client's
assets and then adds the amount of the present value of the taxpayer's ability to pay. It
aggregates the two numbers to arrive at an Offer in Compromise amount.
Short Term Deferred Payment Offer
9.190 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
9.200 This payment option requires you to pay the offer amount up to 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:
25
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 up to the
life of the collection statute.
Promote Effective Tax Administration
9.210 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
9.220 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
•
•
The tax is legally owed, and
The taxpayer has the ability to pay it in full
26
EXHIBITS
27
28
Notice CP501, Page 1
29
Notice CP503, Page 1
30
Notice CP504, Page 1
31
32
33
Notice CP523, Page 1
34
35
36
37
Attachment to Form 12153
Request for a Collection Due Process Hearing
Laurence L. Owesalot
Vaughan K. Owesalot
1. The taxpayers are elderly, and have limited income and assets at this time. They
request that their account be placed in uncollectable status.
2. The taxpayers disagree with the amount of the liability. They believe that they are
entitled to abatement of all penalties assessed against them because they had
reasonable cause for failure to pay the taxes at issue. The taxpayers demand
proof of the nature and extent of any penalties.
Alternatively:
3. The taxpayers are entitled to an Offer in Compromise, based on doubt as to
collectability, doubt as to liability with respect to the penalties, and effective tax
administration.
4. If the taxpayers are not granted an Offer in Compromise, they should be granted
an Installment Agreement pursuant to IRC § 6159.
38
39
40
41
42
43
44
45
46
47
National Standards: Food, Clothing and Other Items
Expense
Food
One
Person
Two
Persons
Three
Persons
Four
Persons
$301
$537
$639
$765
Housekeeping supplies
$30
$66
$65
$74
Apparel & services
$86
$162
$209
$244
Personal care products & services
$32
$55
$63
$67
Miscellaneous
$116
$209
$251
$300
Total
$565
$1,029
$1,227
$1,450
Additional Persons
Amount
More than four persons
For each additional person, add to four-person total allowance:
$281
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
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Transportation
Public Transportation
National $182
Ownership Costs
One Car Two Cars
National $517
$1034
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 $216
$432
South Region
$244
$488
Atlanta
$256
$512
Baltimore
$250
$500
Dallas-Ft. Worth
$277
$554
Houston
$312
$624
Miami
$346
$692
Washington, D.C.
$270
$540
49
One Car Two Cars
West Region
$236
$472
Los Angeles
$295
$590
Phoenix
$291
$582
San Diego
$301
$602
San Francisco
$306
$612
Seattle
$192
$384
California Housing & Utilities
County
Family of 1 Family of 2 Family of 3 Family of 4 Family of 5 or more
Alameda
2,489
2,923
3,080
3,435
3,490
Alpine
2,175
2,555
2,692
3,002
3,050
Amador
1,742
2,046
2,155
2,403
2,442
Butte
1,530
1,797
1,894
2,112
2,146
Calaveras
1,748
2,053
2,164
2,413
2,452
Colusa
1,649
1,937
2,041
2,276
2,312
Contra Costa
2,528
2,970
3,129
3,489
3,545
Del Norte
1,426
1,675
1,765
1,968
1,999
El Dorado
2,191
2,574
2,712
3,024
3,073
Fresno
1,600
1,879
1,980
2,208
2,244
50
51
52
53
54
55
56
Portions Reprinted from
REPRESENTATION BEFORE THE COLLECTION DIVISION OF
THE IRS
by
Robert E. McKenzie
WITH PERMISSION FROM
THOMSON WEST
Rochester, NY
All Rights Reserved
COPYRIGHT 2012