dealing with the irs _ collections

DA N G I BS O N 7 3 2 - 2 4 3 - 7 3 0 3

DEALING WITH THE IRS*COLLECTIONS*

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Tax Resolution Decision Tree

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POLLING QUESTION #1

Have you ever, personally, been audited by the IRS?

1 – Yes2 - No

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HELPFUL HINTS

• Notices• e.g. DON’T Ignore, know your TP rights, IRS Never

emails• Taxpayers’ Rights• Ten rights

• Contacting the IRS by Phone (Agent’s name/#)• e.g. Notes, Before ending call - Follow-ups, Manage

Expectations, POA• IRS Web Services• e.g. Where’s my refund? Transcripts? • E-Services

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HELPFUL HINTS (CON’T)• Issues Best Dealt With in Writing (certified mail)• e.g. ACS Matching issues, Penalty Abatement

• Be Prepared Before you Contact IRS• e.g. Interview TP, Develop Facts, Review Information

(Transcripts), POA, Statute of limitations, financial information, Identify the Issues

• IRS Levels of Authority (Know who you are dealing with)• e.g. ACS, Agents (RA/RO), TP Advocate, Appeals, Settlement,

Chief Counsel• REP Level of Authority• e.g. Providing info to IRS, Obtaining Info (8821),

Representation (2848).

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IRS LEVELS OF AUTHORITY

• ACS• Tax Examiners• TCO• RA (A for Audit)• RO (O for Owes)• Offer Specialists• Taxpayer Advocates• Appeals Officer (E)/Settlement Officer (C)• Manager• Group• Territory

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REP LEVEL OF AUTHORITY

• Providing info to IRS (one-way only)• Anyone

• Obtaining info from IRS• Need 8821 (anyone can use)

• Exam representation – 2848 POA• Enrolled: CPA/EA/JD• Others: Unenrolled preparer, company employee

(limited)• Collection representation – 2848• Must be enrolled

• POA can sign a 8821 for a TP• Can send 2848/8821 to agent, then fax to CAF

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PUB 4019

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CAF Units

IRS Practitioner Hotline866-860-4259

Handle up to 3 cases/CallMust be Ind or Biz, no mixingBetter to call IRS, then writeAsk for ASED, CSED. TP Right #6

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POLLING QUESTION #2

Have you ever used the web-based services described in the previous slides?

1 – Yes2 - No

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AUDIT DIVISION – STARTING POINT

• 3 Methods of Assessment• Self Assessment (Return filing)• Deficiency (Upon audit or examination)• Jeopardy

• Assessment• Needed for Collection Purposes• Not necessarily date return is filed

Critical: Making a distinction between Assessment and Collection. Audit - 3 years to add on. Collection – 10 years to collection

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AUDIT DIVISION(CONT)

Extending the Statute of LimitationsYour rights:• Refuse• Limit to particular issues• Limit the extension to a particular period (Keep to 6 mos)

Criminal Investigation Division (CID) Contact• Always request to know – Am I a ….?• Target• Subject• Person of Interest

• Request a “friendly” summons if POI. • Tread light. Seek counsel, if appropriate – Target/Subject

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AUDIT DIVISION(CONT)

Reason for Audits• CP 2000 – Matching• Inter – jurisdiction Exchange• National Research Program• DIF Scores• Whistleblower

Watch for the “F” word• Once suspected, STOP, Contact a Tax Atty.• Eggshell Audit.• Kovel Letter

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POLLING QUESTION #3

On average, how has your experience with the IRS been when you have spoken to them over the phone?

1 – Just wonderful2- OK3 - Awful4 - Never spoke to IRS on the phone

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COLLECTION DIVISION

Two main areas

• Income Taxes

• Payroll Taxes

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COLLECTION DIVISION(CONT)Sequence of Events in a Collection CaseMeet the Taxpayer (telephone or in-person)

Identify and define the issuesDiscuss process and expectationsEstimate Fees

Prepare DocumentsEngagement LetterPOA

Fees (Retainer should be paid up front)Streamline Installment ($2,500)Negotiated Installment ($5,000)OIC ($10,000)

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COLLECTION DIVISION(CONT)Sequence of Events in a Collection Case (Cont)Engagement Letters

Clearly outline Work to be done Expectations

TP must disclose all information relevant to the caseTP is to have no IRS contactTP is to provide all notices when receivedTP must discuss all significant financial events Specify fee structure

Retainer Payment schedule

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COLLECTION DIVISION(CONT)Sequence of Events in a Collection Case (Cont)Contact Government

Fax POA – To Person, then to CAF UnitRequest and Review Transcripts – Figure out CSED and ASEDCall government representative

Request collection holdDetermine expectationsMay need to request Internal Transcripts

Assess TP situationIs the assessment proper and correct?Determine what needs to be preparedCollect informationPrepare and submit (Make sure Collection on Hold!)

Make sure all returns are filed!Make sure CY Estimates are up-to-date!

Negotiate a SettlementFocus IRS on Resolution and away from Disposition

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COLLECTION DIVISION (CONT)• Dealing with ACS or RO• All returns must be filed/CY Payments up-to-date

• In order to be collected, IRS must• Assess the Tax• Provide proper notice to the TP

• Without Assessment & Proper Notice• IRS barred from collection activity• Liens• Levies

• Form 433 – Collection Info Statement – F, A, B, A(OIC), B(OIC)• List of Assets and Liabilities (Net Worth)• Document value and prove liabilities

• List of Monthly Income and Expenses (Cash Flow)• At least 3 months of Documents

• More if Income or Expenses fluctuates during the year.D

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COLLECTION DIVISION(CONT)

• Ten Year Statute of Limitations on Collections.• Tolling Events (Be careful if closing in on 10 years)• Consideration of IA or OIC.• From date of CDP request through Letter of Determination.• From the date TP seeks Tax Court Review until final

decision.• For period of bankruptcy stay, plus 6 months.• For time out of country beyond 6 month continuous

absence.

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COLLECTION DIVISION(CONT)

• IRS – Powerful Collection Agency• But easiest to stiff!

• CP Notice Series – on Unpaid Balances• CP14: Polite reminder• CP501: Nudge• CP 503: Still have not heard• CP 504: We are (IRS) getting upset, seizing state refund• L1058(RO)/LT 1(ACS): Final Notice of Intent to Levy and

Notice of Hearing Right – 30 days to respond (CDP) – Not extendable• TP letter date may not equal practitioner’s• Always use TP when calculating the 30 days

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COLLECTION DIVISION (CONT)

Collection Activity• Lien (2 kinds) – all owned or after-acquired assets• Silent: Upon assessment• Recorded: Valid against other creditors• Notification to TP within 5 days.

• Lien withdraw/release• Certificate of Release of Lien (Quick way – Local office

w/certified check.)• Forward release to recording clerk in county• Send copy of release to credit bureaus.

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Avoiding Liens• File Form 1127 for 120 day extension to pay• Normally, no Lien for balance of $10K or less• Normally, no Lien for balances of $50K or less• Allow direct debit $25K to $50K• There may be a probationary period

• Lien withdrawal once full paid• Lien withdrawal is better for credit report than release.

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Lien Expiration and Enforceability• Remember 10 year Collection Statute• Tax lien expires earlier of Statute or 10

years• Watch statute extenders – CDP, OIC, etc.• If lien expires before statute• IRS must refile within 30 days of

expiration• If not, lien valid, but….• they lose priority standing

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Levies and Seizures• Levies – Against intangibles (bank, wages, etc.)• Bank Account (one time/upon receipt) – 21 days Window• Wages (continuous)

• Seizures – Against tangibles (Car, home, etc.)• Get Compliant/Contact IRS/Say “Installment Plan”Request CDP or Equivalent Hearing (Notice of Levy)• 30 days from notice• Stops all collection activity(CDP)• IRS not required to stop for a Equivalent, but often do.• Good time to submit:• IAs• OIC• Innocent Spouse

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COLLECTION REMEDIESWHEN THINGS ARE JUST NOT WORKING OUT.

1. Collection Appeal Program (CAP)• Quick turn around (5 business days)• No appeal after this or judicial review• Use if IRS is abusing discretion/System has broken down

2. Collection Due Process Hearing (CDP) – 1998 Law• Takes longer to get the meeting than CAP.• Can discuss alternative with one person (Be ready for meeting!)• Allows petition for Tax Court after completion, if needed• Tolls Statute

3. Equivalent Hearing• Available if you miss a CDP deadline• No judicial review• Statute is not tolled• By policy, no collection action. But…not required.

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COLLECTION ALTERNATIVES• Full Pay• Do Nothing• Extended Full Pay (Form 1127)• Do upfront to avoid liens/levies• 120 days

• Installment(Equal Pay/Stop Enforce) – Current w/Filings (2012)• Guaranteed: <$10K of tax /payable over 3 years• Streamline ($ amounts include tax/penalties/interest)• <$25K/Earlier of CSED or Payable in 6 years (72 months)• <$50K /Earlier of CSED Payable over 6 years (72 months) [Direct]

• PPIA : Need to submit 433/update every 2 years• Variable Payment – 1 year/5 years (Need 433)• Negotiated Installment – Form 433 needed Start Payments Up as Soon as Possible. Before Settlement Mtg.

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COLLECTION ALTERNATIVES(CONT)• Abatement of Penalties & Associated Interest• Reasonable cause/IRM Chapter 20• Document the reason/Ordinary biz care & prudence• Who/What/Where/When/How• Condition Preventing Payment/When did it stop?• Were periodic payments made? Compliance history?• Saves on interest!

• Abatement of Interest on Tax• Difficult due to Statutory• If any caused by IRS delay or ministerial act• Good reason to keep chronology of the case

Consider checking calculations for P& I !

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COLLECTION ALTERNATIVES(CONT)

• OIC (Pennies on the Dollars! )• Reasons to consider• Liability • Collectability• Effective tax admin

• Eligibility Review (Done up front to determine qualifications)• Net worth• Future cash flow stream• Is it in the IRS’ interest to compromise?

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Offers-in-Compromise (Fresh Start Revised) - (2012)• Reasonable Collection Potential (RCP)• Net Equity (Non-cash discounted by 20%), Plus

• Net income• Gross Income, less• Allowable Monthly Expenses X 12(5 or less), 24 (6 to 24)

• Multipliers were 48 and 60.

Downside: The lower multiplier may show an amount that can be paid over the collection statute period to full pay.• May cause a rejection.

Lower multiplier requires payment = 20% of tax upon submission.Best to do higher multiplier on the initial request.• Pay $100/month with lump sum paid in 24th month.• Switch to lower multiplier once OIC is accepted.

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Allowable Expense Standards• Defined as expenses necessary for:• TP and family’s health and welfare• Production of Income

• Four types• National Standards• Out-of-Pocket Health Care• Local Standards• Other Expenses

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National Standards (From Bureau of Labor Stats)• Food• Housekeeping supplies• Apparel and services• Personal care• Discretionary ($87/person up to $235/family of 4)

Normally provided as one lump number

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Out-of-Pocket Health Care

• Relatively lenient • Includes necessary expenses – services, drugs,

supplies• Standard provided with documentation, plus • Excess - normally needs to be documented

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Local Standards - Lesser of std or what is paidHousing

Standards set for each countyRent/mortgage int/taxes/repairs/utilities/home insurance/dues/feesUtilities = heating/electricity/water/garbage/telephone

TransportationOwnership costs - Allowed nationwide std for loan/lease payOperating costs – Std based on Census Region/Metro statsNormally can get up to 2 cars/family – Both Spouses WorkIf no car – Uses std commuting costs

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Other Expenseso Discretionary amounto Very difficult to includeo Must be well documentedo IRM allows deviation from standardso Must be needed for production of income or welfare of

the TP or family.

Total Number of persons allowed for standardso Normally number of persons claimed on tax return

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Fresh Start Changes to Equity for an OIC

1. Equity in cash (avg 3 mos) reduced by $1,000 plus allowable monthly expenses.

2. Equity in vehicles (less 20%, less debt) reduced by $3,450.1. Up to 2 per household2. Vehicle must be used for work/prod of income/family welfare.

3. Exclude income producing asset for biz TPs1. Eliminates double-dip when considering biz income2. IRS has discretion to consider

1. Equity or income, but not both.

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Fresh Start Changes to Net Income for an OIC

1. Monthly payments for student loans allowed as long as paid.

2. Monthly installment payments of SALT allowable (Proportion to Federal Payments)

3. Charge Card minimum payments allowed4. Cars: Six Years+ or with Mileage of 75K

1. Allowable additional $200 in operating expenses5. No longer only allowing auto payments to projected payoff.6. Income multiplier changed to 12 (from 48) and 24(from

60)7. Offers must be fully paid in 24 months 8. Stay “clean” for 5 years thereafter.

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Dissipated Assets in a OIC under Fresh Start• Not considered unless asset dissipated within 6 mos

of the tax assessment (before or after).• Look back limited to 3 years prior to OIC submission.• Not considered :

• IRA account used for necessary living expenses, no other source.• Paying for medical expenses• Disposing of an asset, using funds to buy another asset included

in offer.• Used to preserve an asset or income producer (i.e. you) that is

necessary or offered up in the offer.

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Other OIC Fresh Start Items• Use of Standard Expenses• You have the right to argue higher expenses

• Income Averaging• Stopped using 3 year averaging, when not appropriate• Use TP current income/potential future income

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COLLECTION ALTERNATIVE(CONT)

• CNC (53 Status) – Vinatieri case• Can’t make monthly payments• Suspends collection efforts/releases levies• Liens stay in place• Form 433 is required/updates required (normally every 2 yrs)• Does not toll Statute of Limitation

• Bankruptcy (major changes in 2005)• Trust Funds will survive - Don’t Fall Behind – Criminal Potential• SFR returns cannot be discharged• 3-year rule from tax due date(incl ext), 2-year rule from actual

filing[late returns], 240 day rule from additional assessment• Watch Tolling Events!!!!• Watch amended returns that didn’t get done!!!!

• Income tax of corporations or other business entities not dischargeable. Only personal taxes dischargeable

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BANKRUPTCY EXAMPLES 3 Year RuleExample: 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). If on extended return, it would be October 15, 2012.2 Year RuleExample: Jill’s 2008 income taxes were due on April 15, 2009. She did not get around to filing her tax forms until June 1, 2010. If Jill wants to discharge her 2008 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).240 Day RuleExample: Joe filed his 2008 taxes on April 15, 2009. His taxes are assessed by the IRS on the same day. Joe meets the requirements of the 3-2-240 rules on April 15, 2012. However, if the IRS assesses additional tax on January 1, 2012, the 240-day clock starts . Therefore, he cannot file for bankruptcy until August 28, 2012 (January 1, 2012, plus 240 days), if he wants to discharge these taxes. In this case, beware of other jurisdictions needing amend.

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COLLECTION ALTERNATIVE(CONT)

Types of Bankruptcies1. Chapter 7 - Liquidation2. Chapter 13 - Reorg

Bankruptcy Effects

3. Stops Seizure and Levy Action4. Reduces amount to be paid5. Shorten Collection Time Frame6. Stop the Accrual of Penalties and Interest7. Make uncollectible status permanent8. Use as leverage in an offer-in-compromise9. Alternative to OIC – Eliminate Collection Stds10.Takes out ROs and ACS

Liens can survive bankruptcy.Trust Funds (Payroll or Sales Tax) survive bankruptcy.

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COLLECTION ALTERNATIVES(CONT)• Audit Reconsideration – Disagree with assessment• TP must have filed return• Must ID assessment under dispute• Provide information supporting disagreement• Can also be done as part of the CDP hearing• If unsuccessful, can be appealed

• Taxpayer Advocate• Must work the system before using them.• Financial hardship, not difficulties, allow you to use them• Normal channels not working• Cannot make problems go away• Steer around obstacles/Cut red tape• Don’t be afraid to elevate it, if case is not advancing

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POLLING QUESTION #4

Have you ever dealt with the Taxpayer Advocate?

1 – Yes2 - No

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APPEALS

• Most cases can be appealed• AO: Audit/Exam Determination• SO: Collection Determination

• Audit/Exam• Exam and then 30 day letter

• Collection• Administrative• CAP (Final decision, no judicial review)

• Statutorily• CDP (Request within 30 Days)/Appeal to Tax Court/Toll

• Judicial review available• Equivalency Hearing (Request in 1 year)/No TC/No Tolling

• No judicial review• Don’t be afraid to elevate a case to a supervisor!

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AFTER APPEALS?Tax Court• No requirement to pay the tax before hearing• No jury• Tends to be less formal• Especially small cases involving $50K or less

• Many TP represent themselves. • Normally, judges very helpful to pro se petitioners(TP)

• File petition and pay a $60 Fee• Collection cases• Normally will only look to see if there is an abuse of discretion.

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THANKS FOR ATTENDING!

Any Questions?

Dan Gibson [email protected]

mailto:[email protected]