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Collection Action -- The Proper Balance

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April 22, 2015

Gibson_New(1)By Dan Gibson, CPA

In speaking to most IRS collection officers, you would be under the impression that the IRS can file a lien against a taxpayer’s property whenever the taxpayer owes money to the government. However, a recent Tax Court decision, James B Budish v. Commissioner, showed that may not always be the case.

Mr. Budish owed the Service over $200,000. He attempted to enter into an installment agreement. However, as a condition of the agreement, the IRS insisted on filing a lien based on their interpretation of the Internal Revenue Manual (IRM) Section This section states that the IRS “In general, should” file a notice of lien when there is a balance of $5,000 or more.

The Tax Court held that the wording, “In general”, meant there could be instances when the government should not be filing a lien. In fact, the taxpayer argued just that point. Under IRC 6330(c)(3)(C), the government must legitimately balance and weigh the interests of efficient government collections against the taxpayer’s legitimate concern that the collection action be no more intrusive than necessary. Mr. Budish argued that the notice of lien would do irreparable harm to his vendor and customer relationships, rendering him unable to do his work and deny him with his only source of income.

The Court held for the taxpayer, stating that:

  1. The IRS incorrectly concluded that a lien filing was required.
  2. There was no consideration in balancing the government’s needs for collection against the taxpayer’s concern that the collection action be overly intrusive.

The case was then remanded back to the Appeals Office of the IRS with instructions to hold a supplemental Collection Due Process hearing with the taxpayer. However, for this hearing they would be required to balance the factors noted in IRC 6330(c)(3)(C).   

Back in the System

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January 19, 2015

By Dan Gibson, CPA

Gibson_New(1)So you haven’t filed a tax return for a while. In fact, it’s been several years. So many years that, frankly, the thought of filing them is overwhelming.

You ask yourself: How many years do I have to go back and where do I start-- 5 years, 10 years, 20 years?

The fact of the matter is that the Internal Revenue Service requires you to file, in most cases, the last 6 years of tax returns. This also includes making arrangements to pay all taxes, penalties and interest. The 6-year enforcement period for delinquent returns is found in IRS Policy Statement 5-133 and Internal Revenue Manual

Why would the IRS be so merciful? To a large extent, the IRS does not have the manpower or infrastructure to easily process unfiled returns that go back 10 or 20 years. Believe it or not, the IRS is looking to be practical, so it draws a line in the sand that can be supported by its internal resources—and they have determined that this line be 6 years.

Filing the returns is actually the easy part; for most of us, the payments are what really hurt. However, the Service does provide several programs to help with this. These include installment payment programs, offer-in-compromise settlements and a program known as ‘currently no collectible.’ In some cases bankruptcy is an option, but make sure you see my blog dated 10/17/2014 and, of course, speak to an experienced bankruptcy attorney first.

If you are currently a non-filer, don’t continue to ignore the problem. Consider a fresh start by filing the last 6 years of returns and setting up a payment plan with the IRS. There is no need to continue to live in a state of fear and inaction. Taking the few steps to help you move on can actually be easier than you think.

Be sure to check out our upcoming webinar, “Dealing with the IRS, Part II”, which will be hosted by myself and Tim Schuster on January 21, 2015 at Noon EST. Register here

IRS Warns of Refund Delays Due to Budget Cuts

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Daniel GibsonAfter absorbing a $346 million budget cut, IRS officials are warning taxpayers not to expect their phone calls to get answered or their refunds to be delivered as quickly as in the past. Employees shouldn't count on overtime pay, or for empty staff slots to be filled. And lawmakers seeking to reduce the deficit should assume the agency will collect far less revenue than it could have. The warning includes something that will affect many taxpayers – tax refunds from the 2015 tax filing season may be delayed.

IRS Commissioner John Koskinen is saying everything from taxpayer services to enforcement efforts could be affected.

He assured the public that "Everybody's return will get processed. But people have gotten very used to being able to file their return and quickly getting a refund. This year we may not have the resources, the people to provide refunds as quickly as we have in the past."

In recent years, the IRS says it was able to issue most tax refunds within 21 days, if the returns were filed electronically. Koskinen wouldn't estimate how long they might be delayed in the upcoming filing season, which begins in just a few weeks.

The cuts come at the same time that the IRS is starting its significant role in implementing President Obama's health care law. For the first time, taxpayers will have to report on their tax returns whether they have health insurance. Koskinen said the IRS is required to enforce the law, so other areas will have to be cut, including taxpayer services and enforcement.

Budget cuts will mean less people to do more work. "In some ways, these budget cuts are really a tax cut for tax cheats," Koskinen said. "Because to the extent we have fewer people to audit and enforce the tax code, that means some people cutting corners on their taxes or not complying are going to get away with it, and that is a decision that Congress has made."

In all, the IRS is operating with roughly $1.2 billion less than it did in 2010, when the agency's budget reached its high-water mark of roughly $12.1 billion.

The $10.9 billion the agency is slated to receive for 2015 is a 3% cut from last year and the IRS smallest budget since 2007. Adjusted for inflation, the IRS budget is roughly equivalent to what Congress gave it in 1998 — an era when the agency processed about 30 million fewer returns in a given year.

Defending your Retirement Account

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November 21, 2014

By Dan Gibson, CPA

Gibson_NewIf an IRS Revenue Officer is threatening to levy your retirement account, know that the IRS has an internal four-step process in their Internal Revenue Manual (IRM) to use for analysis. The Service must follow this process before it can take your account.

  1. Determine if you can even get to the money.  If you can’t get to it, neither can the IRS.  Being able to borrow is not enough; you have to be able to withdraw it for the IRS to have any right to levy it.
  2. The IRM’s guidance states that the IRS can take retirement accounts only in flagrant situations of nonpayment. In other words, the IRS prefers to take retirement accounts from those with intentionally bad acts, not those who simply made a life mistake. 
  3. The IRS must then consider if there are any better alternatives to collect than taking your retirement.  The IRS prefers installment agreements or non-retirement assets as a source of payment.  The IRS won’t necessarily tell you this, but it is in the Internal Revenue Manual: As a part of your defense you can simply offer another, less severe solution.
  4. Are the funds in the retirement account needed to pay your bills in the near future?  If so, the IRS would create a financial hardship by taking your retirement funds, preventing you from paying your bills upon retirement.  Show the IRS that you will not be able to pay your expenses if the retirement is lost and this will cause them slow down.

The IRM is full of defenses and solutions to IRS problems.  When you owe the IRS, they are on offense, and you are on defense.  The rules of defense are in the IRM playbook – the IRS officer isn’t going to tell you those rules, but they are readily available.  They do share their playbook.  But we have to read it, know it, and apply it to get the results.  Do not overlook the value of the Internal Revenue Manual when formulating your defense and settlement approach.

Can the IRS Just Take My Stuff?

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October 29, 2014

By Daniel Gibson, CPA

Gibson_New(1)When you are going up against the competition, wouldn’t it be nice if you could get the other guy’s playbook? Well, when you are dealing with the IRS, you can actually do just that. The IRS issues an Internal Revenue Manual (IRM) to its employees, and the manual is available to the public. When you are dealing with the IRS’ Collection Division, this can be quite helpful. The manual is easily accessible here.   In particular, Internal Revenue Manual Section 5.10.1, Pre-Seizure Considerations, can assist you in determining how far the IRS can go. Here are just a few things noted in this section of the IRM:

  1. The IRS cannot levy you when you are in an installment agreement, including the time the payment plan is pending, or during any appeal of a rejected or terminated installment agreement.
  2. If you do not have any equity in your property, the IRS cannot take it. For example, the IRS can’t take your house if it’s worth $250,000 and you owe $250,000 on it – there is no equity.  
  3. If you have filed an Offer in Compromise, the IRS cannot levy or seize your assets while it is pending, or during any appeal of an OIC rejection.
  4. The Internal Revenue Code prevents the IRS from taking your clothing, household goods, and certain business tools and equipment. IRM 5.10.1 recognizes that the IRS cannot seize these specific assets.
  5. The IRS cannot take your house unless the government first sues you in court and receives a judge’s approval to take it.  
  6. If you have an innocent spouse claim filed with the IRS, they cannot collect until a decision is made on whether you should be held responsible for your spouse’s taxes.
  7. If you disagree with the IRS on a collection decision, you have the right to appeal it and have the IRS Office of Appeals reconsider. This includes Collection Due Process Appeals and Collection Appeals Program. The Internal Revenue Manual prevents the IRS from levying while your appeal is pending.
  8. When you are in bankruptcy, IRS collection is put on hold. This, too, is recognized by the Internal Revenue Manual.
  9. The IRS cannot levy unless they give you notice 30 days ahead of time. This is called a Final Notice of Intent to Levy. Once the IRS sends this notice, you have additional rights to file an appeal and stop the levy from occurring. Don’t lose this right by ignoring this notice. You are given 30 days to appeal the levy and the 30 days is not extendable.

When you need to know what the IRS cannot do in a collection matter, reference the Internal Revenue Manual 5.10.1, and defend yourself under the Service’s own rules.


The Tax Discharge Timeline for Bankruptcy

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October 17, 2014

By: Dan Gibson, CPA


Gibson_New(1)There is a common misconception that all income tax debt is dischargeable in bankruptcy. In fact, you can discharge your back federal, state, and local income tax debt in Chapter 7, Chapter 13, and Chapter 11 if certain criteria are met. That’s where determining which back tax debt is dischargeable can be a little complex.

The 3-Year, 2-Year, and 240-Day Rules

The Bankruptcy code sets out specific time periods that determine if you can discharge your taxes, often called the 3-year, 2-year, and 240-day rules (or the 3-2-240 rules). Under these rules, you can discharge taxes that came due 3 years before filing for bankruptcy, as long as it has been at least 2 years since you filed the tax forms and 240 days since the taxes were assessed. These rules are often misunderstood. However, the important thing to understand is that you must meet the requirements of all three rules to discharge your taxes.

The 3-Year Rule: This rule states that to discharge your back income taxes, they must become due at least three years before you file for bankruptcy. Typically, your federal and most state income taxes become due on or around April 15 of each year. In most cases, it is simply a matter of adding three years to this due date to determine the earliest date you can file for bankruptcy and still discharge your taxes.

Example: Joe’s 2008 federal income taxes are due on April 15, 2009. If Joe owes taxes for that year and wants to discharge them, the earliest he can file for bankruptcy is April 15, 2012 (April 15, 2009, plus 3 years).

The 2-Year Rule: Under the 2-year rule, your income tax returns must have been filed at least two years before filing your bankruptcy petition. This requirement allows you to discharge your taxes, even if you filed your tax forms late, as long as you file them at least two years before filing for bankruptcy.

Example: Jill’s 2008 income taxes were due on April 15, 2009. However, she did not get around to filing her tax forms until June 1, 2010. If Jill wants to discharge her 2009 taxes, she cannot file for bankruptcy until June 1, 2012 (two years from the date she filed her taxes AND more than three years from the date the taxes were due).

What if you did not file? If you did not file an income tax return in a given tax year, any taxes assessed by the IRS for that year are not dischargeable. If the tax debt is significant, you might be advised to go ahead and file the tax forms, then wait to file for bankruptcy.

The 240-Day Rule: Taxes must be assessed at least 240 days before you file for bankruptcy under this rule. As a practical matter, the date of assessment is typically on or near the date you filed your income tax form (assuming the IRS and you agree on the amount of taxes owed). However, if you file a correction or a change results from an IRS audit, the assessment date may be substantially later.
Example: Jill files her 2008 taxes on time on April 15, 2009. The IRS audits Jill’s taxes and finds that Jill made a mistake. She actually owes a few hundred dollars more than shown on her original tax form. The IRS assesses the new amount on March 1, 2011. To discharge these taxes, Jill will have to wait until October 27, 2011 to file for bankruptcy (240 days from the IRS’s new assessment).

If back taxes are an issue, it may be necessary to order an IRS “account transcript” for the tax years in question. The account transcript typically includes the assessment date. You can order an account transcript from the IRS over the phone or online, or using IRS Form 4506T. 
Other actions can add additional time to some or all of the 3-2-240 time requirements, including (a) making an offer in compromise, (b) having filed for bankruptcy previously, or (3) obtaining a taxpayer assistance order.  However, simply entering into a payment arrangement with the IRS does not toll the statute of limitations.

If you have any questions on this issue or any other bankruptcy matters, please do not hesitate to contact your tax or bankruptcy professional.

If you want to learn more about this topic and other issues when working with the IRS, please join Tim Schuster and myself in a one hour webinar titled  “Dealing with the IRS: What You Need to Know”  October 23  at Noon E.T.  - See more

New ACA Draft Forms Released

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September 19, 2014

By Dan Gibson, CPA

Gibson_New(1)The IRS has released preliminary, unofficial drafts of forms that the Affordable Care Act (ACA) compels employers, plan administrators and employees to file to certify coverages offered and provided to employees in 2015. These forms are:

Form 1095-A (Health Insurance Marketplace Statement) – Form 1095-A is filed by the ACA Exchange to the IRS and to those who enrolled in coverage through the Exchange. This will be used by enrollees in preparing Form 8962(see below).

Form 1095-B (Health Coverage) – This will be filed by health insurance issuers and employers that sponsor self-insured health plans that provide individuals with “minimum essential coverage” to report to the IRS and to enrollees information concerning the type and period of coverage offered for the purposes of administering the ACA’s individual shared responsibility provisions.

Form 1095-C (Employer-Provided Health Insurance Offer and Coverage) – Large employers will file Form 1095-C to provide information to the IRS and to employees about the type of health coverage offered to their employees for purposes of the large employer “pay or play” mandate. The form provides information on the coverage provided, and on to whom and when the coverage was offered. The IRS will use Form 1095-C to determine whether the employer owes payments under the employer shared responsibility provisions.

As part of an effort to streamline the reporting process, applicable large employers that sponsor self-funded health plans are to report the information required of them for both the individual (1095-B) and employer mandates (1095-C) on a single combined form using Form 1095-C.

Form 8962 (“Premium Tax Credit”) – Using information from Form 1095-A, subsidized exchange purchasers will file Form 8962 with Form 1040 to determine the amount of premium tax credits they should be reporting on their Form 1040. If they took advanced credits (reduction of insurance premiums purchased on Exchange), this form will calculate whether they need to take additional credits on their Form 1040 (because not enough advanced credit was taken) or pay back amounts for taking more advanced credits than should have been taken.

Form 8965 (“Health Coverage Exemptions”) – Individual mandate exemptions are claimed on Form 8965. This form is prepared by taxpayers and will be filed with Form 1040.

The IRS release suggests that further mandate enforcement delays are not under consideration.  Though the official forms and instructions for their use will not be available for months, this early look should help employers and their benefit administration partners assess the significant administrative burdens to come.

And yes, it is true: A draft of the 2014 Form 1040 reveals that the individual mandate has been covered by way of a query on Line 61.

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