Answers to 20 Questions on
By Peter A. Karl, III
Armed with the Answers
The author has prepared 20 questions and answers on dealing with IRS collections covering the following topics:
What to do when Uncle Sam asks for his money
1. What is the statute of limitations applicable to tax collections?
The normal period is ten years from the date the return was filed or the liability was assessed. This period is extended by filing--
2. What type of documentation is available from the IRS to provide verification of amounts owed by a taxpayer?
In addition to filing Form 4506, Request of Tax Return Information, to obtain a copy of a tax return, the most commonly requested items to obtain specific information concerning an individual or business taxpayer are--
3. How can IRS penalties and interest be abated?
Under a "reasonable cause" standard, a penalty can be abated for the following reasons:
In connection with the failure to deposit penalty, IRSRRA permits a waiver for a penalty assessment with respect to the taxpayer's first deposit after there has been a change in deposit frequency.
Interest, on the other hand, is only forgiven if a delay resulted from the IRS "performing their ministerial acts."
4. What repayment options exist when a taxpayer owes taxes?
The taxpayer may--
Pursuant to IRSRRA, an individual taxpayer whose tax liability (without regard to interest and penalties) is less than $10,000 can require the IRS to enter into an installment agreement for a period not to exceed three years provided that within the preceding five taxable years the taxpayer and spouse have--
5. Is it beneficial for a taxpayer to designate (in the case of a voluntary repayment to the IRS) where an amount being repaid is to be applied?
6. What is the difference between an innocent spouse and an injured spouse?
The concept of an innocent spouse was liberalized by IRSRRA. An Innocent Spouse Election may be made within two years of the IRS commencing collection activities by an individual who filed a joint return in which--
Besides providing for innocent spouse relief, newly revised Form 8857 includes an allocation of the original joint and several tax liability by an electing spouse who is divorced, separated, or not living with the other spouse. If a taxpayer does not qualify for the innocent spouse benefits or for an allocation of liability, this form also has a provision for the application of equitable relief (under a facts and circumstances standard) when a taxpayer feels that it would be unfair to be held liable for any understatement or underpayment of tax that is attributable to a spouse (or former spouse).
An Injured Spouse designation is used to obtain a refund of monies retained by the IRS as a result of the other spouse's debt. When a refund is owed to one taxpayer but there is a past-due tax, child/spousal support, or Federal nontax debts (such as student loans), all or part of the joint filers' overpayment of tax may be used to pay the debt. An injured spouse can obtain a refund for the share of the overpayment that was used to pay the other spouse's past-due debt by filing Form 8379, Injured Spouse Claim
and Allocation, with the original return. Alternatively, the form can be submitted upon the notification of a withheld refund.
To be considered an injured spouse, the taxpayer must have--
7. What is the approximate schedule of the issuance of various notices by the IRS from the time of initial assessment to an IRS levy?
As shown in the Exhibit, the CP notification number (as reflected on the upper right hand corner of the notice near the date) has specific timelines generated by the IRS's computer system. That time allotment is shorter for business taxes. It may be noted that different CP notices are used for nonfilers of Form 1040; CP 515 and 518 provide eight weeks and then six weeks, respectively, before the IRS can initiate the Substitute for Return (SFR) process.
As a result of IRSRRA, a tax lien may be filed as long as the taxpayer is provided written notice by certified or registered mail of the IRS's intention to file a notice of lien. A levy, which follows the lien, requires a final 30-day Notice of Intent to Levy via certified mail. A levy can either be continuous, in the case of one filed against wages, or "one time," such as a confiscation of a bank account. The minimum bid price
for the sale of a levied asset based on IRS Form 4585 is approximately 60% of net equity.
Pursuant to IRSRRA, a taxpayer must be provided an opportunity for a hearing before the IRS Appeals Office in the 30 days following the mailing of a Notice of Lien (or a subsequent issuance of a Notice of Intent to Levy). With the exception of jeopardy assessments (i.e., where assessment or collection would be hindered by delays such as the taxpayer leaving or removing property from the United States), collection activities are suspended during the hearing and appeals process. It should be noted that while an offer in compromise or installment agreement is pending, the IRS is also prohibited from issuing a levy, and, if either is rejected, there is an additional 30-day prohibition.
8. What differences are there between an IRS seizure/sale of levied realty versus personal property?
In the case of certain realty, IRSRRA prohibits levies on a--
Following an IRS auction for realty, there is a 180-day post-sale redemption period in which the levied taxpayer (or any other party having an interest in the real property) can redeem the property upon the payment of the bid price plus 20% interest; no similar right exists for personal property.
At the IRS auction the successful bidder is given, in the case of personalty, a certificate that is tantamount to a bill of sale; in the case of realty, the certificate is not equivalent to a deed. That document is executed by the IRS only after the 180-day redemption period.
In the case of a bank account, a 21-day rule exists to allow the taxpayer an opportunity to contest the seizure.
9. When is a court order required for the IRS to enter the premises with respect to a realty seizure?
A court order is needed by the revenue officer who wishes to enter a house, garage, or carport (or even a gated or fenced driveway). However, a motor vehicle parked outside the residence on an unobstructed driveway may be seized.
In the case of a business, the cash register and the portion of the premises not available to the general public require a court order for entry by an IRS representative. Further, IRSRRA dictates that tangible personal property and real property used in a trade or business (i.e., not for investment purposes) may only be seized after all other collection options by the IRS (such as levy of other nonexempt assets) and proposals of the taxpayer (e.g., offer in compromise or installment agreements) have been exhausted; such a levy requires the signature of the IRS District Director or her assistant, unless a jeopardy assessment applies.
10. Are any creditors protected subsequent to the filing of an IRS lien?
Under the concepts of super priority and super super priority, certain creditors who advance money after the IRS lien recording are given special status. Examples include the following:
* For a 45-day period following the filing of the IRS lien, a financial institution that has a floating lien on the accounts receivable or inventory of a taxpayer is protected for advances made during this time.
11. What other provisions exist for the release of a lien on a specific piece of property other than by full payment?
IRC section 6325 contains the following four provisions providing for lien release:
12. What is the difference between necessary and conditional living expenses when preparing a financial statement Form 433-A?
In IRS publication 1854, the IRS issues national standards for necessary expenses that are revised periodically and are based on family size. These include clothing, food, and personal or miscellaneous items. Local standards may be established for other expenditures such as housing, taxes, utilities and transportation.
Conditional expenses include the following:
Classification as a conditional expense has the following ramifications:
It should be noted that, based on the mandates of the IRSRRA, the IRS is expected to be more flexible and liberal in its acceptance of offers in compromise.
13. How is the amount of the offer determined for an offer in compromise?
It is a combination of both--
14. What are the disadvantages of filing an offer in compromise?
15. What procedures are available in the event a taxpayer's representative is dissatisfied with the actions of a collections revenue officer?
By filing either a Collection Appeal Request (Form 9423) or an Application for Taxpayer Assistance Order (Form 911), an internal administrative review can be accomplished.
In addition, IRSRRA allows for an early referral to the IRS office or appeals office on disputed collection (and audit) issues, permitting opportunities for binding arbitration and nonbinding mediation.
As a last resort, the IRS has established a new toll-free number, (877) 777-4778, for assistance from
the National Taxpayer Advocate Office when taxpayers are unable
to resolve a matter through previous IRS contacts.
16. What other major changes in IRS collections procedures were enacted under IRSRRA?
For the next five years, the IRS will have 18 months to assess interest and penalties (such as those for a math error) on a timely filed individual income tax return from the later of the due date of the return (without considering any available extensions) or the date the return was filed. Beginning in 2004, the period for assessment will be reduced to 12 months.
The Federal Fair Debt Collection Practices Act applicable to the actions of private creditors against debtors has been extended to cover the operations of the IRS.
17. How are income taxes
discharged under a Chapter 7 bankruptcy?
Whether or not income taxes will
be forgiven under the liquidation
provisions of Chapter 7 will depend upon whether the IRS has secured
If no lien has been filed or the lien is insufficient to cover the tax liability, the position is unsecured. Income taxes and accompanying interest and penalties will be discharged if no tax fraud or evasion was involved, and--
The three-year, two-year, and 240-day rules are extended under Chapter 7 during the applicable period for a prior Chapter 13 bankruptcy (the extension equals the time from filing of the original wage earner's reorganization to its dismissal, plus an additional six months) or a prior offer in compromise (the extension of time is from the submission of the offer until it is rejected or withdrawn, plus 30 days).
The IRS will be able to collect secured income taxes to the extent of the value of (and based on their position on) the security. In other words, any lien recorded before the bankruptcy filing still exists on that liened property that can be foreclosed upon after bankruptcy.
18. How are taxes treated in a Chapter 13 bankruptcy filing?
This bankruptcy provision allows for the repayment of creditors, including the IRS, over a period of 36 to 60 months from disposable income (a more
liberal definition than the IRS's). With respect to taxes, it is a form of a forced installment agreement with the IRS.
Taxes fall into the following two categories under Chapter 13:
Interest and penalties on unsecured taxes accrue up to the date of filing, at which time they cease.
19. What alternative bankruptcy options exist in dealing with taxes in arrears?
The following two unconventional strategies are available:
20. What initial recommendations to taxpayers (initially and at the time of IRS problems) can be made in addition to those outlined in Question 5?
For individual taxpayers:
In the case of business taxpayers:
Peter A. Karl, III, JD, CPA, is with the law firm of Paravati, Karl, Green & DeBella in Utica, N.Y., and an associate professor with the State University of New YorkInstitute of Technology (UticaRome).
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