On-Demand: IRS Collection Procedures
- Jun 16, 2021
We discussed best practices and procedures when representing taxpayers before the IRS Collection Division.
Dan Gibson:Hello everyone. Thank you for attending this event. This is Dan. I'm a partner in the New Jersey office of EisnerAmper, working in the private business services group, where I deal with mostly closely held businesses and owners and dealing with some of these tax controversy things that we're going to be talking about today.
Dan Gibson:Naveid is a senior manager in our Dallas, Texas office. And he's actually a specialist in this area and does this probably almost 100% of the time, this tax controversy work. A part of which we're going to be talking about today. And by the way, we have a great depth in a tax controversy area within the firm. So, I would urge anybody that whether you're a taxpayer in trouble or whether you're a practitioner and need some help, definitely give us a call if you think we can be of assistance.
But the IRS is probably one of the best and most powerful collection agencies in the world. But we as practitioners, we have our own agency to go up against the IRS. However, like a board game that you play, you need to know the rules and you need to know how to use these rules to leverage them and your contact with the IRS. That's what we're going to want to impart today.
We need to have a process for dealing with the collection issues. And then using the tools that Congress has provided us, yes, has provided us not just the IRS, with dealing with these issues and these are the keys that pick the lock to successful collection engagement.
Hopefully, this is an easy question for most. Steve Mnuchin was the secretary of treasury in the prior administration, Nina Olson was a taxpayer advocate, head of the Taxpayer Advocate office, which in a later series sometime this year, we'll talk about that department. She was actually a very good one, by the way, very active in that office. John Koskinen was the previous IRS Commissioner, and Charles Rettig, who often goes by Chuck, is the current IRS Commissioner and he is actually an attorney and he's actually a guy that did a lot of groundwork when it came to IRS controversy. He wasn't an Ivy tower guy. He was actually on the ground doing a lot of the sword work.
So, we're going to start off here. Got a packed slide presentation here. We'll try to get questions if we can. if we can't, well, obviously, we'll follow up after the program.
So, I'm going to start out going through the audit division. You may ask the question, why are you starting out in the auditors, we're talking about the collection procedures? Well, that's where everything starts. The IRS cannot do anything unless there is an assessment of tax in one way or the other.
There's normally three methods. There's a self-assessment and we're all familiar with that. That's where we're doing our own returns and we're filing those returns. If we don't file those returns, guess what? The IRS will file those for us in what's called a substitute for return or an SFR. The next is deficiency. Yeah, a lot of these we know when we go through our audits and examinations, we get our notices from the IRS. Maybe there's income missing, something of that nature, or they come and do a full blown audit. And that's another assessment that could be made. And then jeopardy and termination really, these are provisions that the IRS has been allowed when there's a real potential that an example would be a taxpayer who might be a flight risk, things of that nature.
Then the assessment, as I said, the assessment has to be made in order for the collection process to start. And that starting point, that assessment date is not necessarily the date that you actually file the return. It's actually maybe as much as a few days, maybe a couple of weeks later when the IRS actually gets it and puts it into their system.
And the one thing that you need to deal with and be able to assess is the statute of limitations when it comes to audits and collections, when the audits or assessments, meaning when you could either amend your return, or the IRS can actually look at the return. Normally, the statute starts when the return is filed, as I said before, and it's a three-year statute. So, the IRS normally has three years. However, there are exceptions to that. The statute can be told. I won't get into that now, which could extend it but for the most part, it's a three-year statute for collections.
Once the assessment is made, then the IRS then has 10 years to make that collection. It's an important to know these things and it's important to know where you are in both of these situations. Because you often have to manage the clock like you were in a football game or a basketball game. You got to know where you're at. And depending on where you're at, you may act one way as opposed to another.
If you have an unfiled return, taxpayers often believe that they can just stick their head in the sand because they haven't filed that nothing will happen. Well, this can be nothing further from the truth when that happens. The IRS will often take third party information and they will create a tax return, as I've mentioned before the SFR. Based off of that third party information will make certain assumptions, they'll assume you're single, not married. And if you have certain transactions, they stop transactions where they don't have the cost basis for, you could have a very ugly return that comes in and the IRS going after you.
If you haven't filed a return for a particular year, that year is basically tainted, you cannot get discharged in bankruptcy. If there was a possibility of being discharged from bankruptcy, if it's a year on which the IRS has filed a return, nothing going, you cannot get that return or get that year discharged in bankruptcy, even if you could turn around and filed an actual return to correct the SFR.
Number of returns, if they're not filed, the taxpayer actually has an opportunity if they've been, and I've had situations where taxpayers haven't filed return for 10 to 20 years. If the taxpayer in most cases can correct that by doing the current year and six prior years to be in compliance and a lot of that has to do with the IRS' systems in general, they can normally only go back that far.
I've had a number of clients who thought that would be rather cute if they didn't file their returns because they were overpaid anyway. And the surprise I get is if the further we go out, and if it's more than three years since the return should have been filed, if you have an overpayment, let's say you were filing, you went back, and you filed six years' worth the returns, that six year back and you had a big refund for that year or credit, guess what, you can't get the refund, and you can't carry that credit forward. So, that's often a big surprise to a lot of taxpayers who try to do that stuff.
I do see one question here about the 10-year statute. For the most part, the question is that after the 10 years, the IRS can't collect. And the answer for the most part is yes. I mean, they have the 10 years to collect the 10-year statute, unless you've told the statute. But if you could have been filing an offer and compromise, you could have contacted the say the Taxpayer Advocate was working with you, where the IRS is basically not allowed or has to basically pull the plug on collections for a certain period of time. So, if they couldn't do anything for six months, let's say, then your statute becomes 10 years and six months.
But when you get to the end of that, the IRS cannot collect at that point. I've been in situations where the IRS has gotten in very late in the game and maybe a year left on the statute. And the taxpayer cannot come up with, based on their financial and economic situation, they could only pay in so much on a payment plan. IRS obviously takes it. But at the end of the statute period, it's done. They just write it off.
Very good. Okay. So, going through this is really just more for the practitioners and any taxpayers who are engaging practitioners. It's going to go through some of the initial groundwork that you would go through. Later on in the program, these are going to go into some of the real, technical logistical, what happens during the whole process. But this first stage here, we're just going to go through some of the things that would happen between the taxpayer and the practitioner.
So, usually there's three main areas of notices that come in income tax, payroll tax, and sales tax. So, you really want to make sure you're getting a notice and you're looking at it, you want to know where you're at, go back to that question, where am I at? What are they going after here? Because especially if you're a practitioner, if you get a notice for a payroll tax and you don't do the payroll taxes, you need to be able to know that and be able to know what kind of situation you're in.
And by the way, in both of those situations, the payroll taxes and the sales and use tax, you want to be able to identify, we're not going to get that into the detail, but you want to be able to know the trust funds. Those things that you're collecting on behalf of the government like the employees' withholding, and FICA payments or sales tax where you're collecting sales tax for the state to remit to the state, those are trust funds. Those, you got to be very careful for about because even if you're set up in a corporation or a limited liability company, you could be personally responsible for these trust funds. So, you want to just be mindful of that.
So, on the initial call, when a taxpayer calls in the practitioner once they get or should be getting just a brief client assessment, maybe getting some information regarding the power of attorney, POA, if they have information authorization forms that need to be signed, get kind of get a feel for what the estimated net worth is of the individual, what their monthly cash flow is, which will be very important, and a collection case to know what strategy should be used as far as getting the government paid, need to know any deadlines that have been promised by the taxpayer.
So, you want to make sure that you know what those are and that initial call when you're talking to clients. You want to be able to get the appropriate tax return, so you could take a look at those and get any additional information if possible about the net worth or cash flow of the taxpayer that's having the controversy issue.
Actually, that would be the opening meeting that you'd have with the taxpayer. So, the taxpayer would go away, have some homework that they would have to do so that when you had really your initial meeting, you could go through and talk to the taxpayer about any contact that they've had with the IRS, try to be as productive as possible to know exactly what was said to the IRS.
Try to get more information about the network and cash flow, find out what actions have been taken or not taken by the taxpayer at that point, understand why the taxpayer is in trouble. How do we get there? Is this an isolated incident? Is this is something that's perpetual that's going on on a regular basis? Is there a more underlying issue here that we need to know, again, which might help our case, and then when we speak to the IRS.
Then as I said, it's not just treat the cause, but treat the symptoms to what the issues are. That maybe there's a financial planning opportunity here to help the taxpayer. Maybe it's a simple why don't you change your withholding or maybe we need to pay in estimated taxes.
And then hopefully at that point be able to give the taxpayer some realistic expectation of the outcome, letting them know that this is going to happen, that's going to happen. And letting them know, "Hey, listen, this is a team sport." The practitioner is not going to be able to do everything. There's going to be a lot of participation and coaching through this whole thing to get us through this situation.
And then, we start on what I call the road to the resolution in the initial meeting, which is really getting all the current old returns and all the current yearly payments up to date, starting to fill out Form 433, which is really a financial statement that's given to the IRS, which will be used for the purposes of determining what potential resolution alternatives you may have out there. You may be in a position where you can do an offer, maybe get an installment plan, maybe do a currently not collectible status, but you have to have the information. It's a numbers game.
You got to be able to put together financial information, which is probably not more complicated than filling out, say like a mortgage statement for a mortgage company. You're given all this information that you need to be able to have.
Obviously, the practitioner needs to make sure that they've got an engagement letter in place. Retainer need to be able to give some sort of idea as to what the fees are. And again, map out more clearly what the engagement is going to entail.
And then we go through the evaluation discovery phase, which is making sure that before contacting the IRS, we have a handle on any unfiled returns. Any unfiled returns in the prior year has got to be filed. IRS, I'm not sure you could even get the first base if you have unfiled returns. And you have to make sure that your current year tax, even though you have taxes that you owed for prior years, you need to make sure this current year taxes are paid and are paid and that's withholdings estimated payments.
You need to make sure that the IRS needs to feel comfortable and all those prior returns have been filed. And that at least for the current year, we're good to go. And given them some comfort that this is a past issue that we're going to deal with the taxpayer is going to be good to go going forward. As I said can't get anything done without those unfiled returns and unpaid current payments. IRS may have filed again or may have a file SFR substitute for return. If that's the case, that needs to be addressed.
Also, there may be certain information that you need to get, taxpayer doesn't have it and you talk to either the automated collection service or maybe even a revenue officer at that point. And sometimes they may be stingy. They may not want to give you certain information for whatever reason. And again, using the tools that Congress has provided us, we can submit Freedom of Information Act request and get a lot of that information that we can't get from them otherwise.
And then again, just determine the liability that probably goes without saying, looking at the returns for the year, or years in question and making sure that the liability is actually correct. And if it is, is it properly assessed.
And then, you need to get the other side, I call it the other side of the story. At this point, you've gotten everything from the hopefully from the taxpayer that you can, but there's always the other side of the story. You contact the IRS if there's some impending collection procedures going on. Usually the magic word when speaking with a revenue officer, the automated collection group is you want to do an installment payment.
Request transcripts. Look for the government's point of view on all this stuff. Ask if there were any other additional powers of attorneys to cover other years. Find out what actions have been taken by the taxpayer, whether they be good or bad. Ask for any pending deadlines or extensions that may be needed at that point. You want to give the IRS that general feeling that, okay, they may have had a rough patch here with the taxpayer. But as a practitioner, you've got things under control. You're going to get things straightened out. You just need time to get your arms around things.
And for the most part, you'll sense that the IRS feel more comfortable with a practitioner. Now you're speaking the same language with them. You kind of know where to go with all this stuff. When the IRS ask for something, they're more apt to get it from the practitioner. Sometimes the taxpayer maybe out of just ignorance, they just don't understand what the IRS is looking for at that point.
And again, as you get to the resolution phase, you want to be able to agree on what work has to be done for the taxpayer or arrange fees at that point and then just start working the collection issues. Hopefully, at that point, you'll have a pretty good idea as to what the resolution method will be at that point. And you can start filing the forms and doing the things that are necessary to get that done.
Engagement letter, very important. As most practitioners now, you want to be able to clearly outline what has to be done and the expectations. If you're dealing with an IRS issue and you get that all resolved, and now all of a sudden, a month later, the state of New Jersey calls up and says, "Hey, listen, now we want to get paid." And the taxpayer, if there's not a good clear engagement letter in place will think, "Well, gee, you're going to take care of all my collection problems now." You got to be able to make them understand that no, no, no, this engagement was only for the IRS issues. This is a whole new engagement. All right?
So, one of the things you want to make sure that's clear in the engagement letters for this type of work. Once you're engaged, the taxpayer should really have no more contacts with the IRS. And the IRS should be told that they were only to contact the practitioner. Taxpayer needs to provide all notices, not just the ones that they think that the practitioner wants, but all notices. And they shouldn't just assume that any notice that they've gotten they've hired the practitioner, the practitioner is getting also. Not always the case, usually is but not always the case.
Taxpayer must also discuss any other financial events that are happening that may not be disclosed at the point. Maybe there's a big inheritance out there or gift, that sort of stuff. Maybe there's some real estate out there somewhere they need to be able to disclose all that stuff.
And none of this stuff applies if you've all of a sudden you find out your clients has been committing criminal acts or fraud. At that point, the best thing to do is even if your attorney handling this case, you need to make sure that you have a criminal tax attorney involved in these cases. And I've been in some of those situations. And once you smell that, you really not doing yourself any good by doing it any further. You need to get a criminal attorney involved in those cases.
And again, the engagement letter you need to make sure that you get a retainer. You have a payment schedule in place to get paid for the work that you're doing.
Just looking at a couple more of these questions. Is it true the IRS is way behind in the processing returns. Our experience without even asking them is that they are. Refunds are way behind. We're finding that they're having a big issue. And they're still there, as far as we know.
Can appeals extend the 10-year collection period? Depends. It depends. If you're in appeals, and the IRS, if you're in a collection due process hearing in the collection case, the 10-year statute is told, if you miss the time requirement to get a collection due process hearing and you're in what's called an equivalent hearing, which is like a collection due process hearing but the IRS can still continue to go after the taxpayer, the 10-year collection period continues to go.
So, that's what's important. Is the IRS prohibited from going after the collections procedures against the taxpayer? If they are, that's normally the case, where that 10-year collection statute is extended or told at that point.
Perfect. So, I'm going to hand it over to Naveid at this point and take it away.
Naveid Jahansouz:Thanks, Dan. That was very informative. So, I'm going to walk you guys through the life of a collection case from the time that the tax is initially assessed until hopefully a resolution is achieved.
Step one, in order for there to be an IRS collections case, there obviously has to be a tax liability. That can happen a number of ways. The most common way like Dan mentioned earlier as a self-assessment. That means an individual files a tax return and then it shows a certain amount of tax do. Individual does not file a tax return then the IRS can do an SFR, like Dan mentioned, they can use 1099 is another information that they get reported to them by third parties.
Generally, that's not a good result for the taxpayer. They're not going to get all the deductions and credits that they're entitled to usually. So, it's always a better idea to file your own return and for the IRS to do it for you.
Another way for taxes to be assessed would be as a result of an audit. And also, it could be that no actual taxes are owed. But the IRS has assessed some kind of penalty against the taxpayer. An example would be the trust fund recovery penalty or an international information return penalty like not filing a 8938 or something.
Step two, the liability has to go unpaid. The taxes get paid, and obviously, there's no collections issue. If the taxes continue to go unpaid, then once the IRS sends the demand and the taxes are not paid, a statutory lien automatically arises under Section 6321. This happens automatically without the IRS even having to physically file anything. However, in order to perfect the lien and get priority over subsequent creditors, the IRS has to file a notice of federal tax lien.
If you owe taxes and you want to avoid a notice of federal tax lien, there are only a few ways to do that. Obviously, you could just go ahead and pay the taxes if that's an option, but it's not always an option. If the amount that you owe is less than 50,000 and you set up a direct debit installment agreement over 72 months, you can avoid a lien. If you're under 25,000, they won't file a lien. If you're between 25,000 and 50, 000 and you do a direct debit, they generally won't file a lien.
The other way would be if you can convince the IRS that foregoing the filing of a lien is both in your best interest and in their best interest. If you can convince them of that, then they won't file one. That's a tough argument to make. So, that's rare, but you can't commit to ever it's not the final one.
If you still haven't paid the taxes or gotten into some kind of payment arrangement, then you'll start receiving a series of notices, which we'll go over in the next slide. And if you ignore those notices, then the IRS can eventually start taking enforcement action such as bank levies, wage levies, and other types of seizures.
On this slide, you can see some of the collections notices that the IRS will send. As time has gone on, these notices have gotten more and more threatening. I think almost all of them contain some kind of language threatening to levy and these assets. But IRS can't actually do that until they issue a final notice of intent to levy. And that notice comes in several forms.
If the case is assigned to a revenue officer, then the final notice is probably going to be a letter 1058, which will say in big letters on the front final notice of intent to levy. If the case is not assigned to revenue officer, then there are a few different computer-generated versions of the final notice. The most common one is the notice LT 11.
And this is why, like Dan said, it's very important that your clients give you copies of any notices they received. If you have a POA on file, you're supposed to get copies of all the notices anyway. But things do slip through the cracks sometimes. So, I always tell my clients, "Send me any notices you get just to make sure that I have a copy of it." Because if it's a final notice, you don't want to miss that.
Once the IRS has issued a final notice of intent to levy, you have 30 days to request a collection due process hearing. This is very important. If you let that 30 days lapse, the IRS can start seizing assets. This 30-day deadline is set by law. So, it's set in stone, it can't be extended. Anytime you have something like this with a hard deadline, I recommend that you send what you need to send through a certified mail with a stamp green card, so that you can prove it was timely mailed to me and that push comes to shove.
To request a CDP hearing, you file a Form 12153 and this must be postmarked within the 30 days. If a client comes to you and the 30 days has already lapsed, then they cannot get a collection due process hearing. However, they can still submit the Form 12153 and they can get what's called an equivalent hearing. Either way, the case will be forwarded to an appeals officer to try to reach some kind of resolution. However, there are some key differences between a CDP hearing and an equivalent hearing.
I think Dan mentioned earlier, a CDP hearing stops the IRS from collecting for any of the taxpayers that are part of the CDP. So, the IRS can't do any levies or things like that while it's pending. With an equivalent hearing, the IRS is not required to stop collections while spending.
With the CDP hearing since the IRS cannot collect, the statute of limitations for collections also tolls during that time with an equivalent hearing since the IRS can continue collecting that they want, the clock continues to tick on the statute of limitations.
The other important difference is if you're unable to come to an agreement during a CDP hearing, the taxpayer has a right to go to tax court to appeal the result. With an equivalent hearing, there are no tax court rights, the decision at the hearing is final. And again, I can't stress enough how important it is to timely request the CDP hearing if there's a final notice to the deadline. You absolutely can't miss. If you miss it, the client is exposed and at the mercy of the IRS. You can still negotiate a resolution at that point. But you're kind of negotiating with your back against the wall and the client has no protection.
So, what's the point of a CDP hearing other than slowing the IRS down and buying time? The main purpose of the CDP hearing is to provide you with an opportunity to work out some kind of collections arrangement with the IRS rather than them levying and seizing your assets. There are a number of potential resolutions and you can see some of them on the slide. And I'll go through them quickly.
Obviously, again, one way to avoid levies is just to pay the liabilities. But that's not always going to be an option. The most common resolution is an installment agreement, which is an agreement between the taxpayer and the IRS to pay the liabilities in monthly installments over time. Depending on the amount you owe and the amount that you can afford to pay each month, there are different kinds of installment agreements.
Generally speaking, in order to even be eligible for an installment agreement, Dan mentioned that you can't have any unfiled tax returns. This is all about being in what's called current compliance. You need to have all your returns filed and you need to be in compliance with any payments that you're required to make for the current year.
So, if you're an employee and you have sufficient withholding, you're making payments for the current year. If you're self-employed, you need to be making your quarterly estimated tax payments. And the idea is that you want to show the IRS you're not going to just accrue a new liability when you file your next tax return because that was just the faulty agreement anyway.
A guaranteed installment agreement is for individuals who owe 10,000 or less who agree to pay the taxes within three years. A taxpayer is not eligible for a guaranteed installment agreement if they've already had an installment agreement in the last five years. But just because you're not eligible for a guaranteed installment agreement doesn't mean that you can't get an installment agreement. You just can't get a guaranteed one.
The next type of installment agreement is a streamlined installment agreement. And this is an easy way to get a payment plan if you owe less than 50,000. You can get a payment plan without having to jump through the hoops of providing all your financial information. If you owe 50,000 or less, you have up to 72 months to make the payment. So, if you owe right around 50,000, then your monthly payments going to be somewhere around 700 a month.
If the balance is 25,000 or less, you don't have to do a direct debit, and the IRS will file a lien. If you're between 25 and 50,000, then if you do a direct debit, the IRS generally will not file a lien. And that just means IRS automatically drops the payments from your account each month.
If you owe more than 50,000 or you just can't afford to pay the debt off within 72 months, then you will have to negotiate an installment agreement based on your ability to pay. You're going to have to provide your financial information to the IRS that includes information about your income and your expenses as well as your assets. And since you don't have a streamlined installment agreement, the IRS generally will file a notice of federal tax lien. Even if you have a payment plan and you're making all the payments and it's in good standing, they're still going to generally follow lien.
If you negotiate an installment agreement with the IRS and the monthly amount you agree to pay would not result in full payment of the taxes before the statute of limitations expires, then that's what's referred to as a partial pay installment agreement.
So, for example, let's say you owe half a million dollars, but you provide your financial information to the IRS. And it's determined that you can only afford to pay 300 a month. Well, 300 a month is not going to pay off half a million dollars within the life of the collection statute. That would be an example of a partial pay installment agreement. Once the collection statute expires, like Dan said, any remaining balance is going to be written off and you're not going to owe it any more.
An important thing to notice, to mention about a partial pay installment agreement is that the IRS can come back after a couple of years and revisit you and they can tell you to provide updated financial information to see if you're able to increase your monthly payment at that point. They don't always do this, especially since they're so overloaded right now with cases, but it is something that they might do.
Briefly, let's talk about innocent spouse relief. When married taxpayers file a joint return, they're both jointly and severally liable for the taxes due. But there is a possibility that one of the spouses can get relief from the liability. I'll give you a simple example. I had a client several years ago who separated with his wife during the year, but their divorce wasn't finalized until the following year. So, since they were still technically married as of December 31st, they filed a joint tax return for that year.
Unbeknownst to my client, after they separated, the wife withdrew a bunch of money from a retirement account. And this amount was not reported on their joint tax return. So, later, the IRS caught this and tagged them with the extra taxes. That the unreported income came from the wife's separate income item for retirement account and my client wasn't even aware of it. And he certainly did not benefit from those distributions. We were able to get him off the hook for those taxes. So, that's just a quick example of innocent spouse relief.
If you don't dispute the liability, but you just don't have the income or assets to pay anything to the IRS at this time, then you can get into what's called currently not collectible status, or CNC for short. To do this, you have to provide the IRS with your financial information and show them that you can't afford to pay anything right now.
If you're approved for CNC status, the IRS will suspend all collection efforts. But the statute of limitations will continue to run, it doesn't stop the clock. Just like with a partial pay installment agreement, after a couple of years, the IRS might come around again and tell you to give them updated financial information to see if you're able to start making some payments. And of course, if the statute of limitations expires while you're on CNC status, then you no longer owe the taxes and you're good to go.
Lastly, I'll briefly touch on the option that most people want when they come to me. And that's an offer and compromise. You've probably heard commercials on the radio saying you can settle tax debt for pennies on the dollar, what they're talking about is an offer and compromise, which is essentially an offer to settle the tax liabilities for less than the full amount that's owed. It's a settlement offer.
So, what the commercials don't tell you is that not everyone is eligible for this and eligibility depends on your financial situation. Long story short, if you can afford to pay the full amount, if you have the assets and income to pay the full amount over time, then IRS is going to want you to do that rather than settling it.
Calculating the amount of the offer is very formulaic. It's not like you can just follow up and say "Hey, I owe 500,000. So, if you'll accept the offer, or I'll pay 20% of it right now today." It doesn't work that way. The IRS is going to want to look at your monthly income and expenses. They're going to want to look and see how much equity you have in your assets.
And if it determined that they can collect more from you through a payment plan over the next six or seven or however many years is remaining on the collection statute, then they're going to want to do that instead of accepting a settlement.
So, if you're able to reach some kind of agreement with the IRS through the CDP process, then you're good to go. And you don't have to worry about the IRS levying or seizing anything, as long as that agreement is in good standing. If you're unable to reach an agreement, then the appeals officer will issue a notice of determination. And that gives a taxpayer 30 days to file a tax court petition if they don't feel like they got a fair shake during the CDP process.
I've mentioned several times that you might have to give the IRS financial information. Unless you're going to either write a check to pay the taxes in full or you're getting into some kind of streamlined installment agreement, you're generally going to have to provide the financials.
So, what does that mean? There are a few different versions of the Form 433-A, I'm sorry, the Form 433 that you will use to disclose your financials. If you're an individual, you're going to either be using a 433-A or a 433-F generally. The A is the longer and more detailed version. And if your case is assigned to a revenue officer, they're probably going to want to get the 433-A. I think it's about six pages long.
If you're dealing with automatic collections or ACS for short, then you can use the form 433-F. That's just a simple one page financial disclosure. You can even have the client fill out the Form 433-F and then you could call the IRS. If it's an automatic collections, you can call them and go over the financials with them over the phone and you can request an installment agreement that way.
If you're submitting an offer and compromise, then there is a Form 433-A, and then (OIC), which is a slightly different version of the Form 433-A that calculates the amount of an offer and compromise. The information that it asks for it is almost the exact same as the Form 433-A, but it's just in a slightly different format. For a business, the forms that you would use are the Form 433-B or if you're doing an offer a Form 433-B (OIC).
All these forms are going to ask questions about your assets, that includes bank account balances, retirement accounts, life insurance policies that have cash value, real estate, vehicles, and any other assets. The form will also ask you about your monthly income and expenses. The IRS has limits on how much they will allow you to claim as an expense for certain items.
On one of the later slides, I'll walk you through the standards that the IRS uses. If you have a mortgage payment that's five or 6000 a month, the IRS generally is not going to allow that, so that some of the categories have limits and we'll go over that.
So, what happens if you don't timely file a request for a collection due process hearing? The IRS can start taking your stuff. They can issue bank levies, which means that the bank will freeze the money in your account for 21 days. If the levy doesn't get released during that 21-day period, then the bank will send the money to the IRS.
They can also levy wages. They can send a notice of levy to an employer and the employer will have to send your wages to the IRS. Unlike a bank levy, a wage levy is a continuous levy, meaning that it continues until the IRS releases it. It's not just for one pay period.
IRS can also issue levies to third party payments. For example, they can send levy notices to your customers or other third parties that pay you money. And if those third parties owe you any money at that time, then they have to pay that money to the IRS. They can levy social security. Generally, that's limited to 15% of the social security benefits. Although it is possible for the IRS to get more in certain situations. They can also levy any other federal payments. For example, if you're a physician and you're getting payments from Medicare, it's very easy for the federal government to levy those payments.
Let's talk about the statute of limitations. And both Dan and I have already mentioned this multiple times. But generally, the IRS has 10 years to collect the taxes from the time that they're assessed. Usually the way that a tax gets assessed is by the taxpayer filing a return. So, if you filed your 2020 tax return in May of this year, then the 10 years is going to be about May of 2031. But the 10 years is just a starting point. There are certain events that we discussed that can extend the statute. And some of those are listed here on the slide.
For example, if you have a pending installment agreement or an offer-in-compromise, that would toll a statute. Pending CDP hearing is another example. A bankruptcy case would toll a statute. Dan mentioned tax for advocate service earlier. If they get involved, that could toll a statute. Kind of rule of thumb, if the IRS is not allowed to collect from you during a certain period of time, the collection statute is also tolled. That's a general rule.
The bottom part of the slide talks about when a lien should not be filed. Usually, the IRS will not file a lien against an individual who owes less than 10,000. They're not prohibited by law from doing it, but they generally won't. And so, even if you don't have any kind of payment plan in place, if you owe more than 10,000, then you might still be able to award a lien if you get into a streamlined installment agreement or something like that.
For a business that owes taxes, I've seen the IRS file liens, even for really small amounts. We actually had a case a couple of years ago, where one of our clients owed $17 in payroll taxes. And a revenue officer literally showed up in person at their place of business and said that they were about to go file a lien unless the client immediately paid the $17.
And in that case, the client wasn't even aware that they owed the money. But they went ahead and wrote the check for $17. So, the IRS, that just goes to show they really don't mess around when it comes to payroll taxes. If a business owes less than 25,000, they can generally avoid a lien if they get into a 24-month installment agreement to pay those balances.
For more information on liens, the main reason the IRS files liens in case a taxpayer sells some property. If that happens, IRS will be entitled to get the proceeds from the sale after any superior liens are paid. We talked about how you can avoid a lien by either going less than $10,000 or getting into a streamlined installment agreement if you're 150,000.
What's a lien discharge or subordination? In certain cases, even if you don't have grounds to avoid a lien altogether, you might be able to get the IRS to exclude a particular piece of property from the lien. For example, let's say you owe the IRS 200,000 and you got a piece of property worth 200,000 that's encumbered by a mortgage of 100,000, in that case, the government's interest in your property is worth 100,000. Even though the IRS is not going to get paid the full 200,000 that you owe, they're still going to want to let that sale go through because they'll get the 100,000, which is all their lien interest is really worth anyway.
So, if you've got a buyer lined up, the IRS, you can request a discharge at that property from the lien in order to facilitate the sale of that property because the buyer is not going to want to go through the transaction unless they can get free and clear title. That's a discharge.
A subordination is something slightly different. Let's stick with the same facts I just used in the previous example. But instead of selling the property, you've got a bank that's willing to lend you 100,000 as a home equity loan, which you'll use to pay the IRS. So, the 100,000 is not going to fully pay the liability to the IRS. So, they're not going to release a lien altogether. However, they can subordinate their lien to the new lien that's going to get filed by the bank so that they get priority over the IRS lien that's already been filed. Without the subordination, the bank would not be willing to approve the loan.
So, when there's a subordination, the lien remains in effect. But the IRS is basically allowing themselves to be leapfrogged by leader creditor, and that's to facilitate the loan that'll pay down the taxes. And this works out for everyone. The loan gets approved, and the IRS gets paid 100,000.
We talked about the types of levies and how they work. Again, they can do a bank levy, which gives you a 21-day window to work out some kind of arrangement with the IRS before the IRS gets the money. We talked about wage levies and how they're continuous and they remain in place until the IRS issues a levy release.
The IRS can also seize other assets. One misconception I've heard a lot of times is that the IRS cannot go after a taxpayer as homestead. This is not true. The IRS can seize a home even if it's a taxpayer as homestead. However, they have to jump through some hoops. They can't just show up one day and say this house is ours now. There's a long process they have to go through and they actually have to go to court if they want to seize your house. It's not done that often. And the IRS will give the taxpayer plenty of chances to work out some kind of arrangement before they seize the house. But they can and will do it in certain situations.
There's a bullet point here by getting into compliance. We mentioned this earlier. But in order to be eligible for any kind of payment plan, you need to be in current compliance. You've got to file your returns and make any payments you're supposed to make for the current period you're in.
We talked about an equivalent hearing. If you've already missed your chance for a CDP hearing, and we talked about some of the key differences between a CDP and an equivalent hearing as far as the IRS' ability to continue collections and tolling the statute and tax court rights and all of that.
Hopefully, no one's going to tell their clients to continue not filing.
And Dan mentioned this earlier, generally, you're going to want to make sure they follow through at least the six prior years. That happens to be the criminal statute of limitations.
And I'll go ahead and move on to the next slide. One of the tools that the IRS has at their disposal is a power to summons information or documentation. They're generally going to try to get the information from the taxpayer voluntarily before they issue a summons.
But if a taxpayer either is not cooperating, or otherwise, they can't get the information for whatever reason, the IRS can issue a summons to third parties or to the taxpayer. If the taxpayer is not providing their financials, the IRS can summons information from the taxpayer that they need in order to prepare the financials. They can summons bank statements directly from the bank.
If the IRS issued a summons to a taxpayer and the taxpayer refuses to comply, then the IRS can eventually go to court to enforce the summons. If that happens, the judge will generally order the taxpayer to comply. And if they continue to refuse and it could be held in contempt of court, and they could spend some time in jail.
There's another collections procedure that a lot of people don't know about. And that's the collection of appeal program, also known as filing a CAP. There are several situations where you can file a CAP and those include when the IRS terminates an installment agreement or proposes to terminate an installment agreement, when the IRS rejects a request for an installment agreement, if they threaten to levy or they've actually levied, or if they've either filed a notice of federal tax lien or they're threatening to do so.
Whenever you file a CAP, you get an opportunity to have a conference with the manager. If you're unable to work it out with a manager, then they forward the CAP to an appeals officer. That's all supposed to happen in a very short amount of time. Supposed to be within five days.
These days, it's not necessarily always happening that quickly. Everything is slower than usual right now with the IRS, including CAP. The IRS generally stops trying to collect while a CAP is pending, although they're not necessarily required to. CDP hearings and equivalent hearings are generally going to take several months. So, the turnaround on those is not nearly as quick as a CAP.
This slide shows some of the different collection alternatives that have discussed. One option I didn't discuss previously is bankruptcy. It's an option of last resort. If you're unable to work something out for whatever reason, either you're not eligible for a payment plan that you can live with or maybe you haven't filed all your tax returns, and so, you're not eligible for a payment plan.
If your backs against the wall and there's no other option, then one option might be bankruptcy. If there's a bankruptcy petition filed, there's an automatic stay on collection. So, the IRS must immediately stop all collections while the case is pending. Whether or not you can actually get any of the taxes discharged in the bankruptcy is another matter. You might be able to or you might not, depending on various factors. I'm not an expert on bankruptcy law. But I know that generally speaking, it's only possible to get taxes discharged in bankruptcy.
If you file the returns on time and it's been at least three years since the taxes were assessed, but it's a lot more complicated than that. But either way, the bankruptcy filing will force the IRS to at least stop collection efforts for the time being.
Let's talk about the collection financial standards. Whenever you provide financials to the IRS, they're going to want to see your monthly income and your monthly allowable expenses. And the keyword there is allowable. And I mentioned earlier that there are limits on how much the IRS will allow for certain expenses. For example, if you have a $10,000 a month mortgage on your million-dollar house, the IRS is not going to allow that.
On the slide, I have provided allowable amounts for various categories. And just so you can see how the allowable amounts vary depending on the cost of living in your area. I've included the numbers for both New York and Dallas. I'm located down here in Dallas. The allowable amounts vary depending on how many people are in your household. But on this slide, I'm providing the figures for just a single taxpayer with no dependents. So, a household of one.
One category on the 433-A is for food and clothing and miscellaneous expenses. This category is going to have the same allowable amount that regardless of where you live, but it just depends on the size of your household. So, for a single person household, anywhere in the country, you're going to get 723 a month for food, clothing and miscellaneous.
For out of pocket health care costs, the IRS will automatically allow each person $68 with no questions asked. It's 142 if that person is over 65. But this category has what I refer to as a soft CAP because the IRS will allow more than that if you can substantiate it. There's no actual hard CAP on how much you can claim as long as you can substantiate it.
For housing and utilities, the amount varies depending on the county you live in and the size of your household. For a household of one in New York County, the allowable amount is $3,073 a month. For a household of one in Dallas County, it's 1599. So, you can see how a cost of living comes into play. Housing is generally more affordable down here. Although our housing market has been on fire lately and prices are going up very quickly. But we're still much cheaper than New York City.
Vehicle ownership costs, that's your monthly car payment, whether it's a lease or loan payment. The IRS will allow you up to $533. If there's two married taxpayers, then they'll allow each of the taxpayers up to 533. Households cannot get more than two vehicle allowances. So, if you've got a third or fourth car, you don't get credit for that.
A lot of times, I have clients with children who are in high school and most kids have a car as well. Unfortunately, the IRS will only allow vehicle expenses for up to two vehicles, no matter how big the household is. Vehicle operating costs depend on what part of the county you live in. In the New York area, you get 355 a month. Down here in Dallas, it's 277 a month. You can get a monthly allowance for public transportation if you use it. But you can't claim both the vehicle expenses and public transportation. It's one of the other.
Health insurance premiums, there's no CAP in this category. The IRS will allow however much you're actually paying. Current monthly taxes, that's the amount that you're paying each month for the current year in taxes. That could be your withholding or your estimated tax payments. The IRS will allow that.
Federally backed student loans are another example of something that's allowed. Any payments on secure loans are allowed. Also, I didn't put this on there, but court order payments are allowed. That could be child support or alimony or any other court order payments. And if you have any delinquent state or local taxes and you have a payment plan for those that's allowed.
Some expenses that generally are not going to be allowed are on this slide. That includes support for an adult child or relative unless there's special needs, private school tuition for a child unless there's special needs, tithe to a church or religious organization, unless, there are certain situations where that could be allowed, but generally, they're not, unsecured debt payments like credit card payments, retirement contributions unless it's required as a condition of employment, expenses for a second home or third vehicle also will not be allowed.
Real quick, I'll talk about penalties and interest. The IRS is required by law to charge interest on delinquent taxes. So, you're generally not going to get out of interest unless there's some really rare circumstances where the IRS had an unreasonable delay.
Penalties on the other hand can be abated. There are a couple of ways to get out of penalties. One is if you have a reasonable cause for noncompliance, then the IRS should abate the penalties. That means the tax for exercise ordinary care and prudence but was nonetheless unable to comply. Common examples would be that debt or serious illness in the family, natural disasters, reliance on a professional things of that nature.
If you don't have reasonable cause, then you might still be able to get out of the penalties for at least one year, based on the first time abate policy, also known as the FTA. Under this policy, the IRS will abate penalties for a year if the taxpayer did not have any penalties for at least the three preceding years. So, if a client comes to you and they have penalties for 2016 through 2018, look at the transcripts and see if they had any penalties in 2013 through 2015. If they didn't have any penalties in those three prior years, then they can probably get the penalties abate for 2016 on this FTA policy.
So, we're right at one hour. So, I think we will follow up with any questions that were asked afterwards. I think we have everyone's contact information. Dan, you have anything else to add before we sign off?
Dan Gibson:No. The only other thing I would just emphasize with the folks that are dealing in this area, if there's one thing I'd want you to take away from this is that if you're brought into a collection case, again, it goes back to the one slide that the Naveid had up with the list of notices, you want to know where you're at. I mean, I keep saying that, you always want to know where you're at in the case.
And the best thing that I always found out is if I only had up to a certain amount of those notices issued at this point, they haven't gotten to that final notice, I feel like I'm in a good place. Because once I get that final notice, I can do a collection due process hearing.
And I will tell you that before you get there, you're dealing with automated collections, which is not a good place to be, quite frankly. I mean, Naveid, I don't know about your experience there, but every time you call, you're dealing with a different person, you got to update them, you spend an hour just-
Naveid Jahansouz:Assuming you can get through.
Dan Gibson:Exactly. Assuming you can get through, and then getting those people up to speed. Whereas when you get that final notice to levy, people are freaking out. But for me, that's my ticket.
I can now go to a collection due process and hearing. And it may sound worse than it is, but it's a nice place to be because then you're assigned to a really, they would call them a settlement officer.
So, where would you rather be? Would you rather be with someone whose main job is collecting everything they can? Would you rather deal with one person at that collection due process hearing whose title is settlement officer? I think I'd be much more comfortable I got one person and their objective is to get the case settled. So, that would be one thing that I hope everyone takes away from the presentation that we had.
Transcribed by Rev.com
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Daniel Gibson provides accounting, tax planning and consulting services to real estate and services industries and is a member of the AICPA and New Jersey Society of Certified Public Accountants.
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