TAX COLLECTION
The IRS Collection Division attempts to collect delinquent taxes as inexpensively and rapidly as possible. To accomplish this task the IRS makes extensive use of computers. Only when automated methods have failed to collect a tax is the matter assigned to an individual for collection.
Four-Level System
To effectuate this policy the IRS utilizes a four-level system of collection. It begins its collection efforts on each account by generating computer notices from a Regional Service Center. If the efforts of the Service Center do not secure payment, the account is then assigned to the Automated Collection System (ACS). The Automated Collection System attempts to collect the tax liability by initiating telephone calls to the taxpayer and others. During the time that an account is assigned to Service Center and ACS, accounts may also be resolved by Collection Support Staff assigned to handle "walk-ins" in local IRS offices. If none of these levels of the system are successful in collecting the account, it is eventually assigned to a Revenue Officer for a field investigation. Obviously, it is much less expensive for the IRS to collect a tax by mailing a notice or placing a telephone call than it is to visit the taxpayer personally. For the taxpayer, however, personal negotiation is much more effective than dealing with an automated system.
SERVICE CENTER
The IRS has ten Regional Service Centers which process all tax returns filed with the IRS. Service Centers are extensively automated. The information on each tax return filed is encoded into the IRS computer at a Service Center. That IRS computer system will determine if computational errors are contained on the return and issue notices regarding errors. The computer also will analyze each return to determine its DIF score (the score which determines whether it will be audited). The Service Center is also responsible for initiating notices to taxpayers to collect balances due on tax returns.
Reorganization of Service Centers
The Internal Revenue Service is now reorganizing its ten Regional Service Centers. The IRS will consolidate the returns processing operations now done in ten Service Centers into five Submission Processing Centers (SPC). These SPC's will receive, control and process paper tax returns, information documents, W-2's and correspondence. They will also resolve errors that do not require taxpayer contact. The remaining five Service Centers will become Customer Service Centers (CSC) which conduct telephone operations. The Submission Processing Centers will also conduct telephone operations.
Start of Collection Action
The starting point for all collection action by the Service Center is the receipt of a document showing a tax liability. That document could be a tax return showing a balance due, an audit closing agreement, an audit deficiency that was not contested or a Tax Court judgment. Collection action should not be initiated if an appeal of an audit is pending or if a Tax Court petition is pending.
1040 Notice Procedure
Upon receipt of a tax return or other document showing a balance due, the following process takes place in the Internal Revenue Service Center. Within several weeks after receipt of the document, the information is placed on the computer system. That system will then initiate a series of notices. The first notice issued is a document titled "Request for Payment," which informs the taxpayer that there is a balance due on the return, states the amount of tax, interest and penalties due, and requests payment within ten days. This is the notice statutorily required for the creation of a valid Federal Tax Lien. If the liability is for individual income taxes, and the liability is relatively small, the taxpayer will normally receive four subsequent notices before the IRS proceeds to take any administrative collection measures. If the liability is not paid after the initial notice, the taxpayer will receive a second notice, "Reminder," Notice 501. The IRS will issue Notice 503, "Urgent, Immediate action is required ", five weeks after the first notice. The taxpayer will receive Notice 504, "Urgent, We intend to levy on certain assets. Please respond NOW.", in the mail five weeks after issuance of Notice 503 if payment is not made after that notice. Notice 504 is the nastiest of the IRS letters. If the taxpayer fails to pay after Notice 504 the matter will be referred for collection by the Automated Collection System (ACS). If ACS is unsuccessful in collecting or resolving the matter the IRS will then issue Letter 1058, "FINAL NOTICE, NOTICE OF INTENT TO LEVY AND NOTICE OF YOUR RIGHT TO A HEARING . PLEASE RESPOND IMMEDIATELY." If the taxpayer exercises her appeal rights, collection will be held. If the taxpayer fails to appeal the IRS will levy after expiration of 30 days from the notice. One unusual convention of the IRS is that each notice will bear a date which falls on Monday.
Business Taxpayers
1-2.40 In the case of business taxes (either corporate income or withholding taxes), the IRS will send three notices period prior to initiating enforcement measures. The total time from first notice to enforcement action is normally at least 16 weeks. The taxpayer will receive a first notice and a Notice 504 five weeks subsequent to the first notice. The account will then be referred to ACS or a Revenue Officer for issuance of Letter 1058 if the taxpayer fails to resolve the liability.
Accelerated Issuance
Taxpayers with a history of delinquency or who already owe taxes will receive fewer notices. The IRS computer categorizes persons with a delinquency within 12 months as repeaters. Repeaters and persons with other liabilities due will receive as few as two notices, the first notice and Notice 504. The IRS may also accelerate issuance of large dollar cases. Usually taxpayers assessed with a trust fund recovery penalty receive only two notices. An IRS employee may also request that the computer accelerate issuance of notices.
Early Intervention Program
The Internal Revenue Service has experimented with an Early Intervention Program. Some taxpayers with large balances will receive less than the normal five notices. After one or two notices, the selected taxpayers will be forwarded to the Telephone Contact Sites where telephone efforts will begin. As the IRS reorganizes its Service Centers and Telephone Contact Sites, it has stated that more taxpayers will be included within the Early Intervention Program. [LRM 5451.11]
Notice of Levy
If the Service Center has computerized sources of income or assets of the taxpayer, such as wages, bank accounts, certificates of deposit or accounts receivable, all of which can be seized administratively from the taxpayer, it will issue a Notice of Levy against the taxpayer's assets approximately six weeks after the Letter 1058. If the Service Center does not have sources of income or other assets to levy upon, it will either assign the case to the Automated Collection System (ACS) or issue a Taxpayer Delinquent Account (TDA) to a local area office for collection, several weeks subsequent to the final notice.
Automation
From the time the first notice is issued by the Service Center the collection system is fully automated. Human intervention is not needed to cause the issuance of each succeeding notice. In fact, the only way that notices and/or levy action may be stopped is if someone inputs information to the computer. If a payment is received by the Service Center and misposted to another account, the notices will continue until levies are issued to banks and employers. Absent an intervention to stop the computer, the process continues to its ultimate terrible conclusion, even when the IRS is wrong.
CORRESPONDENCE WITH SERVICE CENTER
Normally, it is ineffective to write to a Service Center. It may take some Service Center six weeks or more to process correspondence. For example, if your client receives a Notice 504 even though he paid the tax upon receipt of the Notice 503, a letter to the IRS will not stop assignment to ACS. The IRS will not process your letter for six weeks, yet the computer continues to automatically refer the matter to ACS on a set cycle. You must speak with someone at the IRS and request that the computer process be stopped while the IRS searches for the lost payment. Even when the Service Center does process your correspondence, the response can be useless. You might receive a postcard acknowledging your letter but failing to identify the client. If you have written several recent letters, you will have no way of determining to whom the postcard refers.
Small Dollar Payment Plans
A taxpayer may be able to secure a 60-month payment plan for 1040 liabilities of less than $25,000. The IRS Restructuring and Reform Act of 1998 requires the IRS to grant a payment plan to individual taxpayers who owe less than $25 thousand. The taxpayer should respond to the IRS on the first notice by writing to the Service Center requesting 60 months to pay the tax liability. Your request for a payment arrangement on small dollar accounts could also be made by transmitting the new IRS Form 9465. On many occasions the taxpayer has been granted a payment plan, but the IRS failed to confirm the plan. If subsequent notices cease from the Service Center, the taxpayer should assume that the Service has granted a plan. If the Service Center continues to issue subsequent notices, the taxpayer should assume that her plan has been improperly processed by the Service and contact either Collection Support Staff or a Revenue Officer.
Priority Case Program
1-3.20 In 1989, in response to complaints by practitioners, the IRS developed a Priority CaseProgram. The program is designed to allow practitioners to circumvent the cumbersome Service Center mail system. When a taxpayer receives an erroneous notice, his practitioner may direct her response to the Priority Case Program at the Service Center. Specially trained, technicians are assigned to that program to assist practitioners with problems. The author has found that the personnel assigned to the program will personally telephone upon receipt of an inquiry. The personnel are responsive and in most cases successfully resolve erroneous notices. Each priority program has a telefax which allows rapid communication.
EXAMPLE 1. The author's client agreed to a $5,000 tax deficiency for 1986 taxes during 1990. The Service Center subsequently issued an erroneous notice indicating in excess of $13,500 interest. The author responded to the Priority Case Program. Within several days a Service Center technician telephoned to discuss the problem. Within weeks a corrected notice was issued to the taxpayer. Without the Priority Case Program, the Service Center would have generated a succession of erroneous notices.
QUALITY OF SERVICE CENTERS
Service Centers are of varying efficiency. The Philadelphia Service Center is generally acknowledged to be the worst in the country. Fresno, Austin, Holtsville and Atlanta are usually in close competition to be the second worst center. Ogden is the best Service Center. Inefficient Service Centers can create tremendous problems for your clients. The Philadelphia Service Center once lost the records of federal tax deposits of 10,000 businesses and then proceeded to bill the companies.
Integrated Data Retrieval System
From the date of the first notice, local area offices have computerized information concerning the delinquent account of each taxpayer on the computer system known as Integrated Data Retrieval System (IDRS). Therefore, if a taxpayer or his representative wishes to speak to a district representative of the IRS, the Service can gain access to any account for which a notice has been issued. The author recommends that problems be resolved at the local offices given the inefficiency of Service Centers.
Practitioner Hotlines
In an effort to allow practitioners to avoid some of the problems caused by the IRS computer systems, the IRS has created special Hot Lines in each District. There are also Hotlines available in each Service Center. These Hotlines allow practitioners to circumvent the bureaucratic maze and try to correct problems before they result in adverse action against the client. The author has utilized the Hotline to correct improper notices, secure payoff amounts for taxpayers who wish to pay the total liability and to secure a temporary hold on the account while a problem was resolved.
TELEPHONE COLLECTION EFFORTS
If an account cannot be collected by a Returns Processing Center by using notices and/or levies upon the taxpayer's wages or bank account, the matter will then be transferred to a Customer Service Center for telephone collection efforts. Each Customer Service Center, including the Return Processing Center, has a computerized telephone collection system. The IRS is in the process of consolidating its prior forty-five geographical locations for telephone operations into twenty-three Customer Services Centers. All ten current Service Centers will serve as Customer Service Centers, and thirteen additional sites spread across various regions of the country. In the past, the accounts would have been sent to twenty-one regional Automated Collection Sites (ACS). The Internal Revenue Service has closed several of its ACS sites and converted the remainder into Customer Service Centers (CSC).
Telephone Numbers
The IRS has purchased listed and unlisted telephone numbers from local telephone companies. The IRS computers match these telephone numbers with the taxpayer's name and address. This information is then used to make calls to the taxpayer demanding payment of her tax liability.
THE POWER OF THE IRS TO COLLECT TAXES
The IRS has the power to collect taxes by levying on taxpayers' property as a result of the Federal Tax Lien. When a person owes taxes, the IRS gains a lien on all that person's assets after meeting certain statutory requirements. The lien attaches to all rights, title and interest of the taxpayer wherever it may be situated. [IRC § 6321] Once the IRS has a lien on all of a taxpayer's assets, it may enforce that lien by administratively levying his or her assets. The Director of Practice is now under the Appeals Division and reports to the National Director of Appeals.
PRACTICE TIP
The IRS has revised its Circular 230, and it allows direct-mail solicitation. Therefore, many practitioners send solicitations for service to individuals against whom the IRS has recorded federal tax liens.
Lien Rights
An example of lien rights would be the lien created when a person buys a car and finances the purchase through a bank. The purchase price for the car is $10,000. The purchaser pays a down payment of $2,000 and signs a note with a bank giving it a lien on the car. The bank then lends the buyer $8,000 to complete the purchase. If the buyer defaults on the note, the bank may repossess the car. In the case of the IRS it gains a lien on all of a taxpayer's assets and therefore it has the right to seize most of those assets to satisfy unpaid taxes.
CREATION OF LIEN
The liability of a taxpayer for Internal Revenue taxes is personal in nature and, except for the taxes imposed under subtitle E of the Code relating to distilled spirits, wines, and beer, does not directly attach to his or her property. In this respect the liability is analogous to a simple debt and, without anything more, could be enforced only by a court action. To protect the revenue, Congress has provided an administrative means by which collection of assessments may be effected. Congress also has statutorily provided for a lien which attaches to a taxpayer's property. The lien is often referred to as the "statutory" or the "general" lien. The following requirements for establishing the lien are contained in the Code:
(1) An assessment must have been made;
(2) A notice and demand for payment must have been made (the first IRS notice meets this requirement); and
(3) The taxpayer must have neglected or refused to pay.
[IRC § 6321]
Meeting Statutory Requirements
It is surprisingly easy for the IRS to meet the statutory requirements. An assessment occurs when the IRS encodes the return information to its system of records and an assessment officer signs a certificate of assessment. A machine now automatically imposes a signature on assessment documents when return information is posted to the IRS computer system. The notice and demand requirement is met by sending the taxpayer a notice requesting payment. [See Chapter 2] If the taxpayer doesn't pay in the time specified in the notice, he or she has "neglected or refused to pay the tax." Partial payment does not prevent a lien arising for the remaining balance.
Liens on All Taxpayer Property
The effect of the Federal Tax Lien statute is that when any person fails to pay any assessment of tax, plus interest, penalties, or costs, a lien in favor of the United States arises upon all property and rights to property, whether real or personal, tangible or intangible, belonging to the taxpayer. Even if the taxpayer makes partial payment, a lien will arise for the balance of the tax.
EXTENT AND DURATION OF LIEN
The statutory lien for Federal taxes arises at the time the assessment is made, which is the date the summary record of assessment (Form 23-C) is signed by an assessment officer. [IRC § 6322] The Code further provides that the tax lien shall continue until the liability for the amount so assessed (or a judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of a lapse of time. [IRC § 6322]
STATUTE OF LIMITATIONS
The term "unenforceable" as used in the Code means unenforceable because of the expiration of the statutory period for collection. Prior to 1990 the Statute of Limitations for collection was six years from the date of assessment plus such suspended, extended or postponed period of time as may, by law, be applicable. [IRC § 6502] The Revenue Reconciliation Act of 1990 extended the Statute of Limitations for collection to ten years. [Revenue Reconciliation Act of 1990, § 1131(a)] This period was extended for all tax liabilities upon which the Statute of Limitations was still open at the time the bill was passed by Congress and signed by the President. The reporting of an account as uncollectible does not affect the statutory period for collection. However, a distinction must be made between accounts that are administratively uncollectible and those that may not be collected by operation of law, i.e., the lapse of time, discharge in bankruptcy, court order, etc.
NOTICE OF LIEN
IRC § 6323(a) modifies IRC § 6321 by providing that the Federal Tax Lien is not valid against purchasers, holders of security interests, mechanics' lienors, and judgment lien creditors until a Notice of Lien has been filed. The filing of the Notice of Lien is constructive notice to these persons that the lien, provided for by the Code, exists. The tax lien becomes valid, with certain exceptions, against competing creditors at the time Notice of Lien is filed. In most jurisdictions, state law requires a deed of real property be entered in a public index to be valid against a purchaser. Where this is the case, and an adequate system for public indexing is available, a Federal Tax Lien must be recorded in the public index to be valid with respect to real property.
Notice Five Days After filing
The Internal Revenue Service Restructuring and Reform Act of 1998 established formal procedures designed to ensure due process where the IRS seeks to impose a lien. The due process procedures apply after notice of a Federal tax lien has been filed. The IRS is required to notify the taxpayer of the filing a Notice of Lien within five days of its filing. During the 30-day period beginning with the mailing or delivery of this notification, the taxpayer may demand a hearing before an appeals officer who has had no prior involvement with the taxpayer's case. These provisions became effective January 19,1999. [Act § 3401; IRC § 6320]
RRA Section 3401
An overview of the Due Process Procedures
RRA Section 3401, Due Process in IRS Collection Actions
Effective date is after January 18, 1999
Creates new IRC sections 6320 and 6330
Requires new notice to taxpayers (CDP Notice)
Provides the taxpayer with new procedural rights when the Service files a Notice of Federal Tax Lien (NFTL) and when it intends to levy upon the taxpayer's property or right to property
The purpose of section 6320 is to provide a taxpayer with notification that a Notice of Federal Tax Lien has been filed and to provide the taxpayer with the opportunity to request a Collection Due Process hearing ("CDP hearing") with the IRS Office of Appeals ("Appeals") with respect to the tax liability for the taxable period or periods to which the lien relates. New section 6330 similarly requires the IRS to give, in non-jeopardy situations, the taxpayer whose property or rights to property, other than a State tax refund, are to be levied, the right to a CDP hearing with Appeals at least 30 days prior to levy, with respect to the tax liability for the taxable period or periods for which the levy is intended to be made. For levies on State tax refunds, the right to a CDP hearing will be given within a reasonable time after money is received from the State.
If the taxpayer timely requests a CDP hearing, Appeals will consider the case and render a written determination concerning the appropriateness of the lien filing or proposed levy. If the taxpayer does not agree with Appeals' determination, the taxpayer has the opportunity to seek judicial review. Through this section, the taxpayer may have the opportunity to challenge administratively and in court the taxpayer's liability for the tax years stated on the NFTL or levy, raise any additional defenses with respect to that liability, challenge the appropriateness of the filing of the NFTL or proposed levy, and offer collection alternatives. Because the taxpayer will only have one opportunity for a CDP hearing and subsequent judicial review, the taxpayer is required to raise all relevant substantive and collection issues at that hearing.
IRC Section 6320, Notice and Opportunity for Hearing Upon Filing of Notice of Lien
Requirements of Notice
Applicable to any Notices of Federal Tax Lien filed after January 18, 1999.
A taxpayer is entitled to notice of the filing of an NFTL not more than five business days after the date of any filing.
This notice describes the taxpayer's right to request a Collection Due Process hearing with respect to any taxable periods described on the NFTL, within the 30-calendar day period beginning on the day after the 5-day period for notification
has expired. The taxpayer is entitled to only one CDP hearing with respect to each taxable period to which the unpaid tax relates.
The determination made by Appeals may be appealed to either the United States Tax Court ("Tax Court") or a United States District Court ("district court"). The rules for determining to which court an appeal from the CDP hearing will be directed will be more specifically addressed below.
The running of the periods of limitations for collection after assessment, for criminal prosecutions, and for suits described under IRC § 6532 are suspended for the periods in which the CDP hearing and any appeals are pending. (Suspensions will be more specifically addressed below).
If a taxpayer does not request a CDP hearing within the 30-day period, a taxpayer can still request a hearing at a later date and the IRS will provide a hearing equivalent to a CDP hearing. However, the taxpayer will not be entitled to judicial review of that later hearing. ("Equivalent hearings" are more specifically addressed below).
Notification is not required for any refilling of NFTLs. However, a taxpayer may still seek administrative review of a refiling with IRS Collection, Appeals, or the National Taxpayer Advocate.
Notification is not required to be given to any known nominees of the taxpayer. However, any person named on a filed NFTL other than the taxpayer may seek administrative review with IRS Collection, Appeals, or the National Taxpayer Advocate.
Notification
Written notification that an NFTL has been filed must be given to the taxpayer in person, or left at the taxpayer's dwelling or usual place of business, or sent by certified or registered mail to the taxpayer's last known address, not more than five days after the date of filing of the NFTL.
This notification will include the amount of unpaid tax, state the taxpayer's right to request a CDP hearing within the 30-day period, the administrative appeals available to the taxpayer with respect to such lien, and Code provisions and procedures pertaining to release of liens on property.
Properly given or mailed notice is deemed to be received by the taxpayer. Actual receipt by the taxpayer is not a prerequisite to the taxpayer's right to a CDP hearing.
Right to Collection Due Process Hearing
A taxpayer to whom IRS has properly delivered or mailed notice of the CDP hearing is entitled to a CDP hearing if requested within the 30-calendar day period following the five business day period within which the IRS is required to give that notice.
If the IRS determines that it did not properly deliver notice of the CDP hearing, a substitute notice will be sent. The taxpayer will be entitled to request a CDP
hearing within 30-calendar days of the date of the substitute notice. The validity of the NFTL is not impacted by the IRS's failure to provide section 6320 notice.
A taxpayer's request for a CDP hearing must be in writing. No specific format is required for the written request. However, a Form 12153 has been developed for this purpose. The request must set forth the taxpayer's name, address, daytime phone number, type of tax, taxable period, taxpayer's TIN, a statement that the taxpayer requests a CDP hearing concerning the NFTL and the reasons the taxpayer disagrees with the NFTL filing. The request must be signed and dated by the taxpayer or the taxpayer's representative.
The location for sending the request for a CDP hearing is the office of the IRS that issued the CDP notice. The IRS hopes that many cases can be settled informally by the office filing the lien or Appeals prior to the need for a CDP hearing. However, the taxpayer will still be required to request a hearing within the 30-day period to preserve his or her right to the Appeal and subsequent judicial review.
Conduct of Collection Due Process Hearings
The taxpayer is entitled to one CDP hearing with respect to each unpaid taxable period shown on an NFTL filed after January 18, 1999.
To the extent possible, all CDP hearings under section 6320 and 6330 (which will be further addressed below) will be combined.
The CDP hearing must be before an employee or officer of Appeals who has had no prior involvement with respect to the taxable period or periods involved in the CDP hearing, unless the taxpayer waives this requirement (in writing).
Matters Considered at Collection Due Process Hearing
Appeals Division has the authority to determine the validity, sufficiency, and timeliness of any CDP hearing notice or request for a hearing by the taxpayer.
At the CDP hearing, the hearing officer is required to obtain verification from IRS Collection that the requirements of any applicable law or procedure have been met.
At the CDP hearing, the taxpayer is entitled to raise any relevant issue relating to the unpaid tax, including any appropriate spousal defenses, challenges to the appropriateness of the NFTL filing, offers of collection alternatives, and merits of liability, if appropriate.
The taxpayer is not entitled to raise an issue that was raised and considered at any previous CDP hearing or other previous administrative or judicial
proceeding, if the taxpayer participated meaningfully in such hearing or proceeding.
The taxpayer may raise challenges to the existence or amount of the underlying tax liability for any period listed on the NFTL if and only if the taxpayer did not receive a statutory notice of deficiency for that tax liability or did not otherwise have an opportunity to dispute that tax liability.
(1) If the underlying liability is subject to the deficiency procedures (for example, an income tax deficiency), then the taxpayer will be entitled to challenge the merits of that deficiency in the CDP hearing only if the taxpayer did not receive the notice of deficiency. A common situation is one where the taxpayer defaulted on the statutory notice and now wants to challenge the merits of the deficiency in a CDP hearing. The taxpayer's ability to do so will depend on whether he or she received the statutory notice.
(2) If the underlying liability is not subject to the deficiency procedures (for example, trust fund recovery penalty), then the taxpayer will be entitled to challenge the merits of the liability only if the taxpayer can show that he or she did not otherwise have an opportunity to dispute the liability. A taxpayer who was previously offered, and chose to decline, a conference with Appeals concerning the underlying liability will not be entitled to challenge the merits of the liability at the CDP hearing.
The taxpayer must raise all relevant issues in the CDP hearing. The rule of variance that applies in refund litigation will apply here.
Judicial Review of Collection Due Process Hearing
The taxpayer may appeal the determination made in the CDP hearing within 30 calendar days to the Tax Court or a District Court, as appropriate. The 30-day period runs from the date of the Appeals determination and is not extended because the taxpayer is out of the country.
The Tax Court is the proper forum for judicial review of a CDP hearing determination if the underlying tax liability is the type of liability over which the Tax Court would otherwise have jurisdiction (for example, income, gift, and estate taxes). This is true even if the only issues raised by the taxpayer are collection related.
District Court is the proper forum for judicial review of a CDP hearing determination if the underlying tax liability is not the type of liability for which the Tax Court would otherwise have jurisdiction (for example, trust fund recovery penalty, certain excise taxes).
If the taxpayer files a timely appeal, but to the incorrect court, the taxpayer will have 30 calendar days within which to file an appeal with the correct court.
The taxpayer is precluded from raising "new issues" upon judicial review. In other words, the taxpayer cannot raise any issues for the first time upon judicial review, but is required to raise all relevant issues in the CDP hearing.
The courts will review Appeals' determination concerning the validity of the tax liability on a denovo basis. (This includes determinations concerning spousal defenses.) Appeals' determination concerning any other matters will be reviewed using an abuse of discretion standard of review.
The Tax Court has issued interim rules to implement the due process provisions. These are number 330 through 334.
Effect of Request for CDP Hearing and Judicial Review on Periods of Limitation
Any levy actions with respect to the applicable tax period are suspended during the pendency of a section 6320 CDP hearing. Note, however, that all collection action is not suspended-i.e., this is not like the automatic stay.
The periods of limitation for collection after assessment, criminal prosecutions, and suits under IRC § 6532 are suspended while the CDP hearing and appeals therefrom are pending. In no event shall any of those periods of limitation expire before the 90th day after the day on which there is a final determination in such hearing.
The suspension period runs from the time that a hearing is requested until the determination or court proceeding is final.
Retained Jurisdiction of IRS Office of Appeals ("Appeals")
The Appeals office that makes the determination at a CDP hearing retains jurisdiction over that determination, including any subsequent hearings and collection actions taken with respect to that determination. Where a taxpayer has exhausted all administrative remedies and alleges a change in circumstances which affects the original determination, Appeals may consider issues previously raised and considered in any prior administrative or judicial proceeding, whether or not the taxpayer participated meaningfully in the prior proceeding.
These subsequent hearings are not subject to judicial review and do not suspend the periods of limitations.
Equivalent Hearings
Taxpayers who fail to timely request a CDP hearing may later request an "equivalent hearing" with Appeals concerning the NFTL and tax liabilities for the tax periods shown on that NFTL. The equivalent hearing will be substantially similar to the CDP hearing, but will not be subject to judicial review.
The taxpayer is not entitled to the same suspensions for limitation periods in the equivalent hearing, but collection action may be suspended as a matter of policy during the pendency of an equivalent hearing.
IRC Section 6330
Notice and Opportunity for Hearing Before Levy
The focus of this section will be on the distinctions of the section 6330 CDP hearing from the section 6320 CDP hearing just discussed. Many of the issues discussed above are equally applicable under section 6330-i.e., the issues which can be raised at a CDP hearing, contents of notice, opportunities for judicial review, retained jurisdiction of Appeals, "equivalent hearings," etc.
Operational/conceptual distinctions between 6320 and 6330: IRC 6320's key date is the date the NFTL is filed. 6330's key date is the date of the CDP hearing notice (FINAL NOTICE) or if SITLP or Jeopardy situations, the date of levy.
Interplay between 6331(d) and 6330.
Overview
Notice is given of a right to a CDP hearing at least 30 days prior to levy on property or rights to property, other than a State tax refund, in non-jeopardy situations.
CDP hearing is with respect to the tax liability for the taxable period or periods for which the levy is intended to be made.
In jeopardy situations, and in cases where a levy is made on a State tax refund, notification to the taxpayer of a right to a hearing is not required to be given until after the levy action has occurred.
The section 6330 notice of the right to a CDP hearing can be combined with the Notice of Intent to Levy in IRC section 6331 (d), or issued separately. This will be addressed further below.
The section 6330 notice should set forth the amount of unpaid tax, the right to a hearing, and a statement that the IRS intends to levy and the taxpayer's rights with respect to the levy action.
The statement should also set forth the Code provisions and procedures pertaining to levy and sale, the administrative appeal procedures with respect to levy and sale, alternatives available to the taxpayer that could prevent levy, and the Code provisions and procedures pertaining to redemption and release of liens.
Notice is to be given in the same manner as a section 6320 notice EXCEPT that it must be sent return receipt requested if sent by certified or registered mail.
Requirements of Notice
As with the section 6320 notice, a person whose property or rights to property may be levied upon must be given notice of his or her rights to a CDP hearing. These requirements do NOT apply in the case of jeopardy levies and levies on State tax refunds.
This notice must be given not less than 30 days prior to the date of the first levy with respect to the unpaid tax liability for the taxable period for which the levy may be made.
Section 6330 notice need only be given to the liable taxpayer. The IRS is not required to give section 6330 notice to nominees.
The taxpayer must request the section 6330 hearing within the 30-day period from the date of the CDP hearing notice, or will lose the right to a CDP hearing, court review, and retained jurisdiction of Appeals. The taxpayer will get equivalent hearing if a hearing is requested after the 30 day period.
Notification
Notice is generally given in the same manner as for section 6320 notice, EXCEPT that where notice is sent by certified or registered mail, it must be sent return receipt requested.
Notice must be given not less than 30 days before the IRS intends to levy on taxpayer's property or rights to property (except for State tax refunds and jeopardy levies)
If the taxpayer did not receive the notice because the IRS did not mail the notice to the taxpayer',s last known address or deliver that notice to the taxpayer, and, therefore, did not timely request a section 6330 hearing, the IRS will cease collection activity with respect to the tax liability for the taxable period shown on the notice.
Right to CDP Hearing
Must be requested within 30-day period.
Format of request is same as for section 6320 hearing.
As with a section 6320 hearing, attempts may be made for informal resolution prior to a section 6330 hearing. However, the taxpayer must still request a section 6330 hearing within the 30-day period to preserve his or her right to the hearing if the matter cannot be resolved informally.
Effect of Request for CDP Hearing and Judicial Review on Statutes of Limitation
Levy actions are suspended during the pendency of a section 6330 hearing if they are "levy actions which are the subject of the requested hearing." Same suspensions apply as previously addressed with respect to the section 6320 hearing.
Jeopardy Levies, State Tax Refund Levies1 and Required Notices
As discussed above, the section 6330 procedures do not entitle the taxpayer to a section 6330 hearing prior to a jeopardy levy or a levy upon a State tax refund.
Jeopardy levies-The taxpayer will be entitled to a post-levy section 6330 notice and will be entitled to a post-levy section 6330 hearing and court review.
State tax refund levies-The taxpayer will receive pre-levy section 6331(d) notice (URGENT NOTICE), post-levy section 6330 notice, and will be entitled to a post-levy section 6330 hearing and court review.
In other cases, as previously discussed, a combined section 6331 (d)/6330 notice will be sent, entitling the taxpayer to a pre-levy section 6330 hearing. {FINAL NOTICE}
LEVY EXEMPTIONS
The Act substantially increases the exemptions from levy available to taxpayers under §6334 of the Internal Revenue Code. The Exemption for personal effects rises from $2500 to $6,250 and books and tools of trade goes from $1350 to $3125. The increases will have the practical effect of preventing seizure of books and tools in trade and personal effects from many lower income taxpayers. The prior exemptions were diminished and allowed an opportunity for the IRS to take cars and other personal belongings from individuals with limited means. New exemptions will allow taxpayers to at least retain modest vehicles, personal items, books and tools of trade with reasonable value. [Act §3431] [IRC §6334(a)]
PROCEDURES FOR SEIZURE OF RESIDENCES AND BUSINESSES
The Act prohibits the IRS from seizing any real property used as a residence by the taxpayer or any nonrental real property of the taxpayer used by any other individual as a residence to satisfy an unpaid liability of $5,000 or less, including penalties and interest. The Act requires the IRS to exhaust all other payment options before seizing the taxpayer's business assets or principal residence. For this purpose, future income that may be derived by a taxpayer from the commercial sale of fish or wildlife under a specified State permit must be considered in evaluating other payment options before seizing the taxpayer's business assets. A levy is permitted on a principal residence only if a judge or magistrate of a United States district court approves (in writing) of the levy. The provision is effective on the date of enactment. [§3445] [IRC §6334(a)(13)]
Residential Seizure
No seizure of a dwelling that is the principal residence of the taxpayer or the taxpayer's spouse, former spouse, or minor child would be allowed without prior judicial approval. Notice of the judicial hearing must be provided to the taxpayer and relevant family member. At the judicial hearing, the Secretary would be required to demonstrate (1) that the requirements of any applicable law or administrative procedure relevant to the levy have been met, (2) that the liability is owed, and (3) that no reasonable alternative for the collection of the taxpayer's debt exists. The provision is effective for collection actions initiated more than 180 days after the date of enactment. [§3445(b)] [IRC §6334(e)]
Residences and Tangible Business Assets
This provision imposes substantial constraints upon the seizure of residences and business assets. The Internal Revenue Service is specifically prohibited from seizing the taxpayer's residence when there is a tax liability of less than $5,000. The provision also enhances taxpayer protections for seizure of personal residences and business assets. Under prior law the Internal Revenue Service could seize a personal residence from the taxpayer with approval of the District Director or Assistant Director. The requirement for approval by the District Director or Assistant Director was enacted with the Taxpayer Act of Rights of 1988. §3455 provides additional protections from seizure of personal residences by providing the Internal Revenue Service may only take a personal residence with approval of a judge or magistrate. The provision also provides for protection of tangible personal property or real property used in trade or sale of business from levy by the Internal Revenue Service. The District Director or Assistant Director must approve prior to seizing tangible business related assets. The IRS must exhaust all other payment options before seizing the taxpayer's business assets or principle residence. The provisions should substantially reduce the number of Internal Revenue seizures of residences and business assets. [§3445(b)] [IRC §6374(e)]
Rights in Context with §6330 of the Act
The protections provided by §3445 should also be viewed in context of the new protections regarding levy provided in §6330. The taxpayer now has the right to seek judicial review prior to any type of levy action by the Internal Revenue Service. But if we assume the taxpayer neglected to protest pursuant to §6330 when first given notice, the Internal Revenue Service would then be allowed to seek authority to seize the personal residence or District Director approval to seize business assets of a taxpayer. The practitioner must be alert to take all steps to protect the taxpayer's rights pursuant to §6320 and §6330 at the first instance to avoid the potential that the IRS might later seek to exercise its authorities under §3445.
NEGOTIATION TACTICS
SECURING YOUR FEE
The first negotiation you must engage in prior to representing a client is assuring payment of your fees. Clients with IRS collection problems are not good credit risks. You must get a substantial retainer in advance or you may never be paid. The best way to assure that the fee arrangement is fully understood by the client is to put it in writing. During the initial interview make it very clear that you expect to be paid and that you will withdraw as his/her representative if payments are made late.
Establishing a Retainer
In establishing your retainer, request an amount sufficient to cover the time you expect it will take to achieve a resolution of a client problem. Even relatively simple installment arrangements can take ten to twelve hours of your time. An Offer in Compromise will probably consume in excess of forty hours on your first attempt, but time requirements should decrease as you become more experienced in the process.
POWER OF ATTORNEY
The IRS will only deal with taxpayer representatives who have a written Power of Attorney. Form 2848 is the IRS power of attorney form. Prior to attempting and negotiating with the IRS prepare this form and have it signed by your client. The taxpayer has the right to be represented in negotiations with the IRS. [IRC § 7520(b)(2)]
NEGOTIATING ATTITUDE
Negotiations with the Collection Division call for great restraint on the part of the practitioner. Because of the great power to harm your client delegated to Collection employees, personalities play an important role in their decisions. The author's initial approach to Collection employees is deferential. Be polite! Make the employee aware that you understand his or her tremendous powers! As you utilize this approach, however, continue to point out the factors which favor forbearance of adverse measures against your client. Be tolerant of the arrogant manner of some IRS employees; remember the great potential for harm to your client. Try to hold your temper even when the employee proves to be totally unreasonable. Only escalate your rhetoric when in your considered opinion the deferential approach has failed. At such times, the author uses whatever rhetorical excesses are necessary to express indignation at the attitude of the IRS employee.
Prolonging Negotiations
Most negotiations point toward two objectives: securing additional time for your client to pay, and preventing the IRS from seizing your client's assets. Because of these objectives, a prolonged negotiation process is advantageous to your client. If you cannot reach an agreement with the first employee you negotiate with, ask to speak with his superior. Everybody at the IRS has a boss. Maybe that boss will prove more reasonable than his subordinate. As you appeal through each level of the bureaucracy, continue to maintain the attitude of a supplicant, although a certain amount of shocked indignation may help with some managers. You, of course, may escalate the level of advocacy if the supervisor also proves unreasonable.
Appeal Procedure
Despite the caveats with respect to a deferential attitude, make sure the IRS is fully informed of your client's reasons for forbearance and that you are aware of your client's rights. Some matters are resolved just because the practitioner proves to be an unwanted bother to the Revenue Officer. If a Revenue Officer threatens levy action and you fail to appeal, the levy will occur. If you fail to demand a conference with a supervisor, the IRS employee will take the adverse actions, such as Letter 1058 NOTICE OF INTENT TO LEVY, which she has threatened. The author has occasionally had to appeal to the District Director to resolve a matter.
Appeals to Management
Not every dispute should be appealed to the top of the bureaucracy. Remember, some clients may deserve the actions which the IRS has taken against them. The level of your appeal should be determined by the nature of the threatened action and your client's past and present tax conduct. If you appeal every case to the top, you may gain a reputation as "the little boy who called wolf." If you gain that reputation within the local district, you will become a less effective advocate.
Collection Appeals Program
The Internal Revenue Service Restructuring and Reform Act of 1998 established formal procedures designed to insure due process where the IRS seeks to collect taxes by levy (including by seizure). The due process procedures also apply after notice of a Federal Tax Lien has been filed. The IRS is required to notify the taxpayer prior to filing a Notice of Lien. During the 30-day period beginning with the mailing or delivery of this notification, the taxpayer may demand a hearing before an appeals officer who has had no prior involvement with the taxpayer's case. These provisions become effective January 20,1999. [Act § 3401; IRC § 6320]
IRC § 6320 provides statutory appeal rights to taxpayers who are subject to Federal Tax Liens. The provision specifically provides for an impartial hearing officer (which may not have been the case in the past). In the past, the Internal Revenue Service Collection Division engaged in substantial ex parte discussion with the Appeals Officer. Now, there are specific statutory protections available to the taxpayer and specific guarantees of independence by the Appeals Officer. Because taxpayers will also have the right to seek judicial review of any determination of the Appeals Officer, the taxpayer is guaranteed to have better consideration at the appeals level. In the past, if an Appeals Officer ruled against you, the matter was referred back to the Collection Division and it proceeded to file the lien without further rights to the taxpayer. As case law develops in this area, Appeals Officers will also have guidelines from the courts as to appropriate reasons for foregoing liens and releasing liens.
Levy Appeal Rights
Before the IRS can levy against a taxpayer's property, it is required to provide the taxpayer with a "Notice of Intent to Levy," similar to that currently required under IRC § 6331(d). The notice would not be required to itemize the property the Secretary seeks to levy on. Service by registered or certified mail, return receipt requested, would be required. [Act § 3401(b); IRC § 6330]
Notice of Intent To Levy
3-3.80 Subject to the exceptions noted below, no levy can occur within the 30-day period beginning with the mailing of the "Notice of Intent to Levy." During that 30-day period, the taxpayer may demand a pre-levy hearing before an Appeals Officer who generally has had no prior involvement with the taxpayer's case.
Post Notice Hearing
3-3.90 If a return receipt is not returned, the Secretary may proceed to levy against the taxpayer 30 days after the Notice of Intent to Levy was mailed. The Secretary must provide a hearing equivalent to the pre-levy hearing if later requested by the taxpayer. However, the Secretary is not required to suspend the levy process pending the completion of a hearing that is not requested within 30 days of the mailing of the Notice. The IRS also will not allow the taxpayer to litigate adverse determinations from an equivalent hearing.
Exceptions
3-3.100 An exception to the general rule prohibiting levies during the 30-day period would apply in the case of state tax offset procedures and in the case of jeopardy or termination assessments.
Amount of Liability
The Internal Revenue Service Restructuring and Reform Act of 1998 also authorizes the taxpayer to challenge the existence or the amount of the underlying tax liability for any tax period that the taxpayer did not receive statutory notice of deficiency for tax or did not otherwise have an opportunity to dispute such tax liability. The Appeals Officer is specifically directed to consider the following factors when considering a Collection Appeal: the verification presented, the issues raised by the taxpayer and whether any proposed collection action balances the needs for collection of taxes with the legitimate concerns of the person that any collection action be no more intrusive than necessary. [IRC § 6330(c)(2)(B)]
Judicial Review of Liens and Levies
The rights of taxpayers with respect to liens and levies are greatly extended by the waiver of sovereign immunity contained in IRC § 6330(d). A taxpayer who has exercised her rights to appeal under IRC § 6320 and/or IRC § 6330 with respect to liens and levies now has specific authority to seek judicial review of an adverse IRS decision. This provision represents a huge expansion of taxpayer rights. A basic presumption of all prior collection proceedings was the right of the IRS to take summary levy and lien actions without judicial intervention. The Tax Court has now been granted specific jurisdiction to hear matters concerning taxes under its jurisdiction. Generally, those taxes would include income taxes, gift taxes, excise taxes and with the advent of Taxpayer Act of Rights 3, IRC § 6672 penalties. Other taxes including employment tax liabilities would be subject to judicial review by a U.S. District Court. If the taxpayer chose the wrong jurisdiction then the taxpayer will be allowed 30 days to seek review of an appeal before the proper court. During the pendency of a judicial appeal the appeals officer will retain jurisdiction of the matter. [IRC § 6330(d)(2))
Suspension of Collection in Statute Limitations
If a taxpayer exercises rights pursuant to the Collection Appeals process the Internal Revenue Service is precluded from taking levy or lien action during the pendency of the proceeding except in the event of a jeopardy or a levy upon a state tax refund.
PAYMENT AGREEMENTS
Prior to the passage of the Taxpayer Bill of Rights, effective November 10, 1989, there was no specific statutory authority for allowing a taxpayer to make installment payments.2 The Code now specifically authorizes the Service to grant installment payment plans. [IRC § 6159) Even before passage of this provision the IRS granted thousands of payment agreements per year. Payment agreements are allowed on any type of tax including employment taxes. It is much more difficult to secure a payment agreement for employment taxes than income taxes.
Guaranteed Availability of Installment Agreements
The Internal Revenue Service Restructuring and Reform Act of 1998 requires the Secretary to grant an installment agreement, at the taxpayer's option, if:
(1) the liability is $10,000, or less (excluding penalties and interest);
(2) within the previous 5 years, the taxpayer has not failed to file or to pay, nor entered an installment agreement under this provision;
(3) if requested by the Secretary, the taxpayer submits financial statements, and the Secretary determines that the taxpayer is unable to pay the tax due in full;
(4) the installment agreement provides for full payment of the liability within 3 years; and
(5) the taxpayer agrees to continue to comply with the tax laws and the terms of the agreement for the period (up to 3 years) that the agreement is in place.
[Act § 3467; IRC § 6159)
Prior Administrative Rights
Prior to the passage of the Internal Revenue Service Restructuring and Reform Act of 1998, LRM 5331.31 authorized IRS employees to grant installment payment agreements of up to three years to taxpayers who owe individual income taxes of less than $10,000. Internal Revenue Service Restructuring and Reform Act of 1998 § 3467 imposes a specific statutory requirement that the Internal Revenue Service grant an installment agreement to taxpayers who owe less than $10,000 of individual income taxes including penalties and interest. Any agreement may be defaulted if the taxpayer fails to meet any subsequent tax obligations during the pendency of the installment agreement. The provision creates statutory rights, when in the past installment agreements for small liabilities were merely policy.
Long ago, the Internal Revenue Service, recognized that the same factors that prevented a taxpayer from remitting payment for tax liability with his or her return may exist at the time that demands for payment are sent to him or her from the Service Center and pragmatically adopted the approach for granting payment agreements. Briefly stated, the mission of the employees of the IRS Collection Division is to collect delinquent taxes as quickly and with as little effort as possible.
Modifications of Installment Agreements
The Taxpayer Bill of Rights 2 requires the IRS to give a notice of proposed action not later than thirty days prior to the proposed date before termination or modification of an installment agreement. The IRS is also required to include an explanation as to why the agreement is being modified or terminated. This provision become effective January 20,1997. Prior to the effective date the Internal Revenue Service is required to establish procedures for an independent administrative review of terminations of installment agreements. [IRC § 6159(b)]
Collection Information Statements
For larger dollar liabilities (income tax liabilities in excess of $25,000) the starting point for analysis is the Service's Collection Information Statement (CIS). The preparation of this document, more often than not, determines which way the Service will proceed with its collection activity. Copies of the CIS's currently used by the Service for individuals and for businesses are provided in the appendices at the end of this chapter. The IRS will not give extended payment plans on unpaid tax liabilities unless a CIS has been submitted by the taxpayer.
COLLECTION INFORMATION STATEMENTS
The IRS utilizes three basic types of Collection Information Statements (CIS's). The Form 433-A and Form 433-F are secured from individuals. The Form 433-B is secured from businesses. If the taxpayer is self employed the Service will normally require both a 433-A and 433-B.
Dangers of Submitting a CIS
A review of each of the forms will indicate that most of the information requested on the first page of each is potentially harmful to the client. The IRS requires disclosure of real estate, employers, motor vehicles and bank accounts. Each of these assets may be seized by the IRS.
FORM 433-A
Form 433-A is utilized by Revenue Officers to gather financial data from taxpayers. The first 2 pages are almost entirely dedicated to gathering Levy sources. An exception is contained on Line 26 of the form. If your client has any illnesses, disclose them. The Service will consider your client's bad health to be a basis for granting an extension. Page 3 of the form is a balance sheet. The IRS will normally demand immediate payment if your client indicates substantial equity on the balance sheet. Be conservative in valuing assets, but do not omit assets or misrepresent value.
Amount of Payments
Page 4 is a monthly income and expense analysis. The IRS will not grant a Payment Plan for less than the amount shown on Line 53 in the Claimed column. That figure represents the difference between income and claimed expenses. Unfortunately, as one will note, page 4 contains a second column for Allowed Expenses. The IRS utilizes information from the Bureau of Labor Statistics to establish allowable expenses for certain items like transportation, food, clothing and housing. Those allowable expenses might be less that the amount actually being paid by the taxpayer. [See Section 3-9].
Documentation
Practitioners should supply substantial documentation with Collection Information Statements. Supply documents for any expense that is amenable to proofs. Provide payment books, canceled checks, leases, receipts and other documents, and you will secure a more realistic payment plan for your client.
F0RM 433-F
Form 433-F is utilized by Collection Support Staff and ACS to gather financial data from individuals with smaller tax liabilities. It is not normally used by Revenue Officers.
The IRS will normally require the taxpayer to pay an installment equal to his or her net income less "reasonable" expenses. The individuals assigned to negotiate payment agreements in CSS and ACS are not well trained in financial analysis. Many of the author's clients who have negotiated on their own behalf have been required to hire a representative because of unreasonable payment demands after submission of a 433-F. If you don't agree with the payment requested by a CSS or ACS employee, request to speak with his or her supervisor.
PRACTICE TIP
AVOID NEGOTIATING WITH ACS. When you submit a 433-F to ACS, it is normally reviewed by an employee other than the one with whom you spoke on the telephone. Do not submit financial data to ACS. Go directly to a local IRS office and negotiate with Collection Support Staff (CSS). You will normally secure a more favorable payment plan, because face-to-face negotiations are more effective than telephone conferences.
3-8 F0RM 433-B
The IRS utilizes Form 433-B to gather information from businesses. Page 2, block 15, requests that your client disclose each of its accounts receivable. The author believes that such a disclosure is foolhardy at the initial negotiating session. If disclosure is made and the negotiations fail, the IRS will levy your client's accounts receivable, thereby destroying its business.
PRACTICE TIP
Accurately reflect the value of your client's accounts receivable on Form 433-B at the first interview but don't list each account. The Revenue Officer may demand a list during the first interview. If you believe that she is acting in good faith, you should request time to submit the data. If you believe that she is acting in bad faith, appeal to the group manager.
Substantial Net Worth
The IRS will seldom grant extended payment plans to a business with a substantial net worth indicated on page 3 of Form 433-B. Have your client borrow the money to pay tax liabilities if he can. If your client has a substantial net worth, commercial loans are much less expensive than the IRS interest and penalties. If a loan is not possible, take a conservative approach when valuing assets on the balance sheet.
Cash Flow Statement
Page 4 is the determinative part of Form 433-B.
Note: Page 4 is a cash flow statement, not a profit and loss statement. The IRS will seldom grant a payment plan if the client indicates a large positive cash flow. The IRS believes such businesses should secure a private loan. On the other hand, the Service will seldom grant a payment plan to a company with a negative cash flow which does not have excess funds to make payments to the IRS. Therefore, a taxpayer with a small positive cash flow has the best chance of securing a payment agreement. If your client's Form 433-B reflects a negative cash flow, submit a cash flow projection which establishes that your client has the potential to generate positive cash flow.
PRACTICE TIP
Where you do not agree with the payment demanded by the IRS employee or where you feel the employee is acting in bad faith, ask to speak to her manager. There is no formal appeals process, and you will be granted a conference with a manager only if you make a specific request.
CRITERIA FOR GRANTING AN INSTALLMENT AGREEMENT
The Collection Division employee is trained to analyze the Collection Information Statement (CIS) for ways to liquidate the delinquent account:
If a taxpayer has cash equal to or in excess of the tax liability, the IRS will demand immediate payment.
Assets are reviewed to identify those which may be pledged or readily converted to cash such as stocks, bonds, loan value of life insurance policies, equity in real estate, etc.
The Collection Division employee will consider the taxpayer's ability to make an unsecured loan based upon the taxpayer's earning potential.
If the taxpayer has available credit on a bank charge card, the IRS may demand that the taxpayer draw on the full cash credit line and submit the proceeds to the Service.
If there appears to be no borrowing or liquidation ability, the Service may ask the taxpayer to defer payment of other debts in order to pay the tax liability as a first priority.
Completion of Page 4 of CIS
When all else fails, and an examination of the Collection Information Statement has given no obvious solution for liquidating the liability, the IRS employee will complete the income and expense analysis portion of the Collection Information Statement for the purpose of determining the maximum installment amount the taxpayer can pay. The IRS will review the claimed expenses of the taxpayer in relation to allowable expenses as determined by the IRS (see Section 3-9.30 et seq. for further discussion). The Service often states that installment agreements are the exception rather than the rule; that is not true. Notwithstanding such statements, the IRS regularly grants payment plans on employment taxes. In the area of trust fund taxes, i.e., Federal Income and FICA taxes withheld by an employer from employees' wages, negotiations are much more difficult, but the IRS does grant extended payment plans for such taxes.
Allowable Expenses
As of August 29,1995, the Internal Revenue Service adopted new policies with respect to expenses which would be allowed for taxpayers on Forms 433-A and 433-F. The new allowable expenses created two categories: Necessary Expenses and Conditional Expenses. Taxpayers who establish necessary expenses based on national and local standards are allowed these expenses for consideration of any installment agreement or Offer in Compromise. Conditional expenses would be those expenses that the IRS did not consider to meet the necessary tests, but which it would allow if the taxpayer can pay the outstanding taxes with an installment agreement within the three years. If the taxpayer could not pay within three years, she would be allowed one year to adjust her conditional expenses.
Necessary Expenses
The new IRS procedures provide that a necessary expense will be allowable if it meets the necessary expense test: "Provide for a taxpayer's and his or her family's health and welfare and/or the production of income." The Internal Revenue Service requires that the expense must be reasonable. The IRS believesthat the total necessary expenses establish the minimum a taxpayer and family need to live. The IRS has created three necessary expense categories:
(1) National Standards. These provisions establish standards for reasonable amounts for five necessary expenses. For four of them the standard comes from the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey 1995-1996: food, housekeeping supplies, apparel and services, and personal care products and service. For the remaining one, the standard has been established by the Service: miscellaneous. Any amount above the national standards may be considered excessive necessary expenses. Alaska and Hawaii have been allowed some upward adjustment because of their high cost of living.
(2) Local Standards. Local standards have been established for two necessary expenses: housing and transportation. All utilities are included in the housing category. The IRS has established a housing category for each county in the United States. Housing standards are extremely parsimonious. The transportation standards are established for regions with additional amounts allowed for particular metropolitan areas.
(3) Other. Other expenses may be allowed if the IRS believes they meet the necessary expense test. All such expenses must be reasonable in amount in the eyes of the IRS. Since there are no national or locally established standards for determining reasonable amounts, the Service employee is given discretion to determine whether an expense is necessary and the amount is reasonable. The practitioner obviously may aggressively represent his client's interest with respect to other necessary expenses.
Conditional Expenses
The second category of expenses which the IRS may choose to allow are those which do not meet the IRS Necessary Expense Test. However, conditional expenses are allowable if the taxpayer has the ability to pay the tax liability, including projected accruals, within three years. The requirements for conditional expenses are as follows:
(1) Three-Year Rule. This rule establishes a time limit for any expense determined to be excessive, necessary, and/or conditional expenses. They will be allowed if the tax liability, including projected accruals, can be paid in full within three years.
(2) One-Year Rule. This rule establishes a time limit. It provides the taxpayer up to one year to modify or eliminate excessive necessary or not allowable conditional expenses if the tax liability, including projected accruals, cannot be fully paid within three years.
(3) Reasonable Amount. For certain specified expenses where reasonable amounts are not provided by the national standards and by the local standards, an IRS employee has discretion. If the reasonable amount is not provided by one of these two standards, then the Service employee responsible for the case is allowed to determine it. If the tax liability, including projected accruals, can be fully paid within three years, the Internal Revenue Service may allow a taxpayer's claimed expenses if substantiated.[LRM 5323.12(1)(b)]
Expenses Which Will Not Require Substantiation
The IRS will no longer require substantiation of those expenses specified in the national standards. The IRS will allow the total national standards amount for the taxpayer's income level. Taxpayers making more than the highest income level shown in the national standards will be limited to the maximum amount allowed by the national standards unless they can substantiate and justify a larger amount. [LRM 5323.432] The manner in which the taxpayer chooses to spend the national standards is up to the taxpayer. For example, the IRS manual specifies that the taxpayer could allocate less for clothing and spend more for entertainment; or more for food and less for clothing. If the taxpayer spends more than the total amount allowed by the national standards, the taxpayer will be required to justify that expense. For example, a taxpayer with special dietary needs will be required to establish the justification for additional food expense. In summary, if the taxpayer claims more than the national standards, she will be required to submit substantiation and justification, but if she claims an amount equal to the national standards, no substantiation will be required by the Internal Revenue Service.
Housing Expense
When applying the local housing standards the IRS employee is allowed to consider other factors which might justify an expense in excess of the local housing standard. For example, the IRS employee can consider the following factors:
(1) The increased cost of transportation to work and school which would result from moving to a lower cost housing;
(2) The tax consequences which would result from selling a home;
(3) Som
