By Stephen J. Dunn
To one of my posts warning of the perils of tax resolution schemes, reader Nick Sparagis commented: “Your article discusses what not to do. Can you tell people with tax issues what they should do? The IRS is horrible to deal with, so people need help.” This article responds to Mr. Sparagis’ request.
Never Ignore Correspondence from the IRS
If the IRS sends you a letter, there is a reason for it. Perhaps the IRS is proposing assessing additional tax or penalties against you. The IRS asks you to respond within a set time, generally 30 days, and if you do not the assessment becomes final.
Or maybe the IRS plans to levy (seize) your wages or bank account to collect a balance already assessed against you. By law the IRS must provide you a written notice of intent to levy before levying your property, though it only need issue a notice of intent to levy once as to a given assessment.
Or perhaps the IRS is writing to request a tax return which you have failed to file.
Or maybe the letter informs you that the IRS will examine one or more of your filed tax returns.
You should never ignore correspondence from the IRS unless you are certain that it is benign. You should discuss it with a tax attorney. Most tax attorneys, myself included, will not charge you to review IRS correspondence and advise you what you should do about it.
Secure Hold on Collection Action
I will assume that the tax issues concerning Mr. Sparagis were collection issues, as these are the most common tax issues of individuals.
Upon accepting an IRS collection matter, I have the client sign a Form 2848, Power of Attorney and Declaration of Representative, authorizing the IRS to communicate with me concerning the client’s accounts. Then I will call the IRS and accomplish two things: (1) secure a hold on collection against the taxpayer for as long as possible, to give me time to investigate the client’s IRS accounts; and (2) request transcripts of those accounts.
The taxpayer’s IRS account transcripts provide a wealth of information. Does the taxpayer have tax returns which need to be filed?
Has the IRS prepared and filed tax returns for the client? These are called “substitutes for returns.” Substitutes for returns resolve all doubts against the taxpayer, and produce the largest possible tax liability. The IRS will adjust the assessment to actual once the taxpayer files the delinquent return.
Perhaps the taxpayer has filed tax returns, but the returns reported excessive tax liability. This can be corrected with an amended return for each period in question.
Perhaps the assessment arises out of a joint income tax return for which the taxpayer should seek relief as an innocent spouse under Internal Revenue Code § 6015.
Perhaps the IRS has assessed penalties against the taxpayer for which the taxpayer should seek abatement.
The collection statute of limitations also warrants consideration. The IRS may act to collect tax, penalties, or interest for ten years after it is assessed or accrues, but not thereafter.
These are but a few of the reasons for challenging an assessment which the IRS is attempting to collect. The point is that a taxpayer should not agree to pay an assessment without first satisfying himself as to its validity.
Reach Agreement with IRS
To avert the threatened collection action, the taxpayer must reach agreement with the IRS on what to do about the assessed balance. This requires the taxpayer to complete and submit to the IRS Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and possibly Form 433-B, Collection Information Statement for Businesses. These will tell the IRS what the taxpayer can afford to pay by way of an installment agreement.
In determining how much a taxpayer can afford to pay under an installment agreement, the IRS considers the taxpayer’s actual gross income and payroll deductions. The taxpayer’s living expenses, however, are limited by collection financial standards developed by the IRS. National standards apply for food, clothing, and other personal expenses, and for out-of-pocket health care expenses. Local standards limit housing, utilities, and transportation expenses, including vehicle ownership as well as operating costs. The taxpayer should also inform the IRS of any other financial obligations he has each month, such as medical bills, legal bills, or extraordinary debts, as these may be allowed in the discretion of the IRS collection employee working the case. The taxpayer must prove her income and expenses by documentary evidence (recent pay stubs, bank statements, etc.) submitted to the IRS.
If the IRS collection employee refuses the taxpayer an installment agreement for a reasonable monthly payment, I ask to speak with the employee’s manager. If I am unable to resolve the matter with the manager, I exercise the taxpayer’s right to have the case reviewed by the IRS Appeals Office.
Most federal tax collection cases can be resolved in the IRS Appeals Office. Those that cannot may be litigated in U.S. Tax Court.
If the taxpayer cannot currently afford to pay the IRS anything, then her account(s) should be posted as currently not collectible. This means that the taxpayer will not have to pay anything on the balances for the time being, but notices of federal tax lien will remain of record against the taxpayer.
If the taxpayer cannot currently afford to pay anything on her IRS accounts, and her ability to pay in the future is in doubt, then she is a candidate for an offer in compromise. Lately the IRS has been more receptive to offers in compromise. In one case, a self-employed client was 73 years old and wished to retire. He had a house and a rental condominium, both seriously under water, and no other appreciable assets. The IRS accepted $7,600 in full satisfaction of his $200,000+ federal tax liability. I have even had the IRS accept an offer in compromise from an operating business.
Conversely, more than once I have seen a taxpayer whose bank statements revealed charges at casinos not get a break from an IRS collection officer.
Bankruptcy is almost never an effective means of dealing with IRS collection action. To qualify for immediate discharge in a chapter 7 bankruptcy case, the taxpayer must prove that he is unable to make periodic payments on his debts in a chapter 13 bankruptcy case. Income taxes are not dischargeable in bankruptcy if they are reportable on a tax return which has not been filed; reportable on a tax return which was last due with extensions less than three years before filing of the bankruptcy petition; or assessed within 240 days before filing of the bankruptcy petition. Even if the taxpayer’s tax debts are dischargeable in bankruptcy, tax liens which arose pre-petition in the taxpayer’s exempt property may survive discharge. Signing a stack of bankruptcy documents under oath, and submitting oneself to the scrutiny of a bankruptcy trustee, for little or no relief, doesn’t seem like a very good bargain.
It Comes Down to the Taxpayer
In the end, honesty, transparency, and sincerity best serve a taxpayer seeking the discretion of an IRS employee.