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IRS and State tax problem resolution is a special area of tax practice. Broadly, there are two divisions of the Internal Revenue Service. These are the Examination Division and the Collection Division.

The Examination function of the IRS is responsible for insuring that taxpayer have accurately reported their taxable income to the Service. Generally, the tax liability reported by the taxpayer on the filed return is accepted as being accurate. On this basis, the taxes are assessed.

However, there are occasions in which the IRS determined that the return filed does not accurately report the taxpayer’s tax liability; thus, the IRS will audit the return. If the IRS finds that there is an understatement of income or an overstatement of deductions, it will propose additional tax, interest and penalties.

Most tax practitioners are very good at preparing accurate income tax returns. Also, they are good at defending against additional assessments proposed by the IRS.

Few tax practitioners understand the intricacies of representing taxpayers before the IRS Collection Division. Attorneys, CPAs and Enrolled Agents may represent taxpayers before the Collection Division; few can effectively represent the taxpayer because they lack the knowledge.

STATUTES OF LIMITATIONS

The IRS has three years from the due date of the tax return to “assess” the tax. If the return is filed late, the period for assessment is three years from the date filed.

The IRS then has 10 years from date of assessment in which to collect the taxes.

If the tax is improperly assessed, the IRS cannot collect the taxes.

The taxpayer is entitled to receive an account transcript which shows all activity recorded by the IRS to the taxpayer’s account. From this transcript the taxpayer is able to determine whether the IRS has properly assessed his/her tax liability. We always order a transcript for all out engagements.

Your IRS File

The IRS maintains an account transcript for every taxable year on all taxpayers. These transcripts show all the activities for that year recorded by the IRS. Oftentimes an examination of the transcript show errors or omitted information. Payments not posted to the account, improper assessment are made, etc. The transcript also is used to determine how much time remains on the statute of limitation to collect the taxes. When we are engaged by the taxpayer, the first thing we do is order an account transcript for all tax years at issue.

Information may also be obtained by requesting a copy of your file under the Freedom of Information’s Act.

Audit Reconsideration

Audit reconsideration allows taxpayer an opportunity to have their audit results reviewed. Many times, particularly in correspondence audits, the IRS ignores or loses document submitted by taxpayers. Oftentimes taxpayers do not respond to IRS request for information.

Audit reconsideration requests are useful to correct audits in which documents were ignored or not submitted to the IRS at the initial audit.

We are on the alert for situations in which an audit consideration is the correct approach to save taxpayer money.

Unfiled Tax Returns

We file back years tax returns for taxpayers who have fallen behind regarding complying with their tax filing responsibilities.

We file individual, fiduciary (estate and trust income tax returns), partnership, corporation, both regular and S-Corporation returns, and returns required to be filed by employer qualified retirement plans.

Penalty Abatement

Under certain circumstances, the IRS is authorized to “abate” (i.e., forgive, eliminate, or cancel) a tax, interest or penalty that has been incorrectly assessed.

Also, the IRS may abate any penalty that is attributable to written erroneous advice furnished to the taxpayer by an employee of the IRS. The taxpayer must have first made a written request for and reasonably relied on the advice.

When the penalty is due to reasonable cause rather than willful neglect, the IRS will abate the penalty. An example of reasonable cause is reliance on professional advice of an attorney, CPA or Enrolled Agent. Taxpayer illness, death in the family, inability to obtain records, failure to file resulting from fire, casualty, natural disaster, etc. are other examples of reasonable cause. THE TAXPAYER MUST REQUEST ABATEMENT BEFORE THE IRS will grant it.

Innocent Spouse Relief

There are three situations in which an innocent spouse may be granted relief from joint liability arising from a jointly filed return.

  1. Complete or partial relief from certain deficiencies. In the case of spouses still married, there must be a deficiency (i.e., understatement of tax due to erroneous items). Erroneous items include both omitted income and inflated expenses. The innocent spouse must not have had knowledge of the erroneous items nor had reason to know of the items. Additionally it must be shown that it would be inequitable to hold the spouse responsible.
  2. Separation of liability for deficiencies. In this case, the couples are no longer married or have lived apart for 12 months prior to filing for relief. The innocent spouse must not have known about the erroneous item. Each spouse tax liability is computed as if they were single. The joint tax liability is then allocated proportionately to their separately calculated tax liability.
  3. Equitable Relief. To obtain relief under “3”, the spouse may not qualify for relief under either “1” or “2”. It must be shown that it would be inequitable under the circumstances to hold the innocent spouse responsible for taxes arising from the other spouse’s erroneous items. Again, the spouse did not know nor had no reason to know of the erroneous items.

Collection Due Process Hearing

The IRS offers relief to taxpayers who find themselves dealing with the Collections Division. Taxpayers may appeal an adverse decision made by Collections to the Collections Appeal office. The hearing known as “Collection Due Process or Equivalent Hearing” is conducted by a “settlement officer” that is independent of the Collections Division. The settlement officer will first determine whether or not proper procedures have been followed by the IRS in making the adverse decision. Often these procedures have not been followed. To request a Collection Due Process or Equivalent Hearing, the taxpayer must receive one of the following notices:

  • Notice of Federal Tax Lien Filing and your Right to a Hearing under IRC 6320.
  • Notice of Intent to Levy and Notice of your Right to a Hearing
  • Notice of Jeopardy Levy and Right to Appeal
  • Notice of Levy on Your State Tax Refund
  • Notice of Levy and Notice of your Right to a Hearing

The taxpayer has 30 days from the date on the notice to request a Collection Due Process Hearing. Taxpayer has one year from the date on the Notice to Request an Equivalent Hearing. An Equivalent Hearing does not stop IRS collection activities. Neither can the Equivalent Hearing decision be appealed to the Tax Court. The CDP hearing stops collection activities and may be appealed to the Tax Court.

At the hearing, taxpayers may negotiate for the following settlement options:

Federal Tax Lien-subordination, withdrawal or discharge

  • Alternatives to Levy or Proposed Levy
  • Alternatives to seizure
  • Rejection of Installment Agreement
  • Termination of Installment Agreement
  • Modification of Installment Agreement

TAXPAYER MUST ACT WITHIN 30 DAYS OF NOTICE DATE TO RECEIVE CDP HEARING

Installment Agreements

The IRS is authorized to enter into an agreement which allows the taxpayer to pay taxes, interest and penalties over time. There are four different types of installment agreements available to taxpayer depending on the amount owed, the time left on the statute of limitation for collection, and the taxpayer’s ability to pay within a shorter period of time than that which remains on the limitation period.

  1. Guaranteed: If taxpayer can extinguish the tax liability within three years, the agreement is automatic. The tax liability must be no more than $10,000. Taxpayer has filed tax returns and paid the taxes looking back for five years. The taxpayer should be able to work with the IRS on this type of arrangement without the assistance of a tax professional. No collection information agreement is required.
  2. Streamlined Agreement: Taxpayer owes less than $50,000 and is able to extinguish tax liability with 72 months. Taxpayer has not entered into an installment agreement within the last five years. Businesses that owe no more than $25,000 and are able to fully pay within 24 months may enter into this type of arrangement. Neither individuals nor business file Collection Information Statements for the streamlined arrangement.
  3. Regular Agreements: Taxpayer able to fully pay taxes, penalties and interest over the remaining time left on the Statute of Limitation for Collection will enter this type of agreement. A Regular Agreement requires the taxpayer to file a Collection Information Statement. A CIS matches monthly gross income and allowable living expenses to determine excess income over expense. This excess is added to taxpayer’s net equity in assets. The combination is the Reasonable Collection Potential (RCP).
  4. Partial Installment Agreement: Taxpayer is unable to fully pay liability within the time remaining on the Limitation period. This is evident by the Reasonable Collection Potential. The taxpayer may be required under this arrangement to submit Collection Information Statements every two years.

Offers in Compromise

Misinformation as far as working with the IRS to resolve taxpayer’s problems is more prevalent in offers in compromise than any other area. The amount of offer the IRS will accept in a function of the Taxpayer’s Reasonable Collection Potential. The RCP is determined by adding excess monthly income to taxpayer equity in assets. The offer is driven by the numbers. Avoid those who claim “pennies on the dollar” without first running the numbers.

There are three types of Offers in Compromise:

  1. Doubt as to Collectability: If the excess of monthly income over allowable expenses and net asset equity (RCP) times the remaining time on the Statute of Limitations for collection is less than the amount owed the IRS, the offer amount is the RCP. Allowable expense is calculated by reference to IRS national and local guidelines which are published from time to time. The excess of liability over the RCP is the amount forgiven. The taxpayer is given a “fresh start”. Collection Information Statements must be submitted to IRS to validate the RCP.
  2. Doubt as to Liability: There is a doubt as to whether the taxpayer owes the amount asserted by the IRS. This situation is common as a result of a correspondence audit. Often times the taxpayer is confused as to the IRS assertion or becomes frustrated with inefficiency inherent in the way correspondence audits are conducted. A tax professional is able to sort correspondence through the maze and insure the taxpayer only pays the correct amount of taxes owed. Doubt as to liability offers are made without the requirement of Collection Information Statements being submitted.
  3. Effective Tax Administration “Exceptional Circumstances”: Even if the RCP indicates that the taxpayer can fully pay within the time remaining of the limitation period, the IRS will enter into a compromise if equity is served by doing so. Elderly, seriously ill, unemployed or others in desperate situations may convince the IRS to compromise some or all of the unpaid tax liability. Collection Information Statements must be submitted for Effective Tax Administration compromise offers.

Federal Tax Liens

Federal tax lien attaches to all property or rights to property owned or later acquired at the time of assessment. Most taxpayers self-assess their liability when they report the correct tax liability on the return. These taxpayers are either entitled to a refund or pay the balance due at time of filing. Thus, Federal Tax Liens are not an issue.

Federal tax liens may be recorded or “silent”. A lien that is recorded gives the government priority over most other creditors. A “silent lien” attaches to property and rights to property but does not take priority over secured creditors.

Taxpayers receive a letter entitled “Notice of Federal Tax Lien Filing and Your Right to a Hearing under § 6320” when the lien is recorded. Taxpayer has 30 days from the day on the letter to file for a Collection Due Process Hearing. The hearing is conducted by a settlement officer who is independent of the Collection Division.

Taxpayers may request one of three actions at the CDP hearing.

  1. Subordination: The IRS will agree to subordinate its priority when taxpayer has a buyer for the property or wishes to refinance a mortgage. The IRS will require any cash available at closing or the amount of reduction in monthly payments resulting from the refinancing to be applied against the tax liability.
  2. Discharge: Taxpayer will request discharge of lien on one or more properties to sell the properties. The IRS will require that proceeds from sale be used to pay down the tax liability.
  3. Withdrawal: A lien to be valid must meet three requirements:
    1. There must be a valid tax assessment;
    2. A Notice and Demand for payment must be issued:
    3. Taxpayer has failed to pay the taxes. If these procedures have not been followed, taxpayer may request that the lien be withdrawn. There are other reasons for request for withdrawal. In the withdrawal case, there is no record on taxpayer’s credit report that lien ever existed. When the tax liability is paid, the IRS is required to “release” the lien within 30 days. It seldom does, thus, taxpayer should make a formal request for release of the lien.

Levies and Garnishees

A levy is different from a lien in that a levy divest the taxpayer’s interest in the property (i.e., the IRS owns the property even though it is in the procession of a third party or the taxpayer).

They are two types of levies:

  1. Regular- Only the property being held at the time of the levy, usually a bank or other financial institution, is subject to seizure by the IRS.
  2. Continuing- Wages, certain pensions, workers compensation benefits and other regular payments received by taxpayer remains in place until released.

Before the levy, the IRS must issue:

  1. A Notice and Demand for payment
  2. Notice of Intent to Levy and Notice of Your Right to a Hearing
  3. Taxpayer provides requested collection information

The taxpayer of course desires that the levy be released. What steps to take to have that happen?

  1. Contact the IRS
  2. Come into current compliance (i.e., pay estimated tax payments for current year, make payroll tax deposits for current quarter, etc.)
  3. Promptly provide to the IRS requested collection information.

If these steps fail to stop levy proceedings, consider a CAP appeal by filing Form 9423.

Payroll Tax Issues

The Internal Revenue Code requires that employers collect, account for, and pay over payroll taxes withheld from its employees. Failure to do so raises to high levels the ire of the IRS.

Taxes withheld from employees’ wages are held in trust by the employer for the benefit of Federal and State Revenue Departments. These are referred to as “trust funds”. The IRS will vigorously go after, first the employer, and then the “responsible persons” that oversee or are responsible to collect, account for, and pay over the taxes withheld from employees’ paycheck (i.e., FICA, Medicare and Federal income taxes).