Category: IRS Collection Practices

Learn what tools the IRS uses to collect debts, what assets are fair game and new trends in IRS collection practices.

The Importance of Timely Communication with the IRS: Demonstrating Good Faith

When dealing with the IRS, timely communication is key. This is especially true when it comes to demonstrating good faith. No one likes being ignored, including the IRS. While the government’s response times can be glacially slow, they still appreciate and take note of taxpayers who communicate promptly and transparently.

1. Building Trust with the IRS

Demonstrating good faith is about building trust. When you respond promptly to IRS notices, inquiries, or requests for information, you show that you are serious about fulfilling your tax obligations. This proactive approach shows the IRS that you are willing to cooperate and not trying to evade your responsibilities. This can lead to more favorable treatment, as the IRS is more likely to work with you to resolve any issues.

2. Avoiding Aggressive Collection Actions

If the IRS doesn’t hear from you, they may assume you’re unwilling to pay your taxes. This can trigger aggressive collection actions like liens, levies, or wage garnishments. These actions can severely impact your financial stability and credit score. However, communicating with the IRS early and showing good faith can often prevent these actions. The IRS is more likely to grant additional time or negotiate a payment plan if they see that you are trying to resolve your tax issues.

3. Potential for Penalty Abatement

Another advantage of demonstrating good faith is the potential for penalty abatement. The IRS may waive penalties if you have a reasonable cause for not paying your taxes on time or filing late. This is more likely if you have a timely communication and cooperation history. Showing you’ve been responsive and proactive can strengthen your case when requesting penalty relief.

4. Facilitating Better Communication

Timely responses help facilitate better communication between you and the IRS. This can be especially important if your tax filings have misunderstandings or errors. By responding quickly, you can clarify discrepancies and ensure your records are accurate. This can prevent minor issues from escalating into more significant problems.

5. Enhancing Your Negotiating Position

You enhance your negotiating position with the IRS when you demonstrate good faith. If you need to negotiate an Installment Agreement or an Offer in Compromise, showing that you’ve been responsive and cooperative can work in your favor. The IRS is more likely to consider your proposal seriously if they see that you have a good faith communication track record.

In conclusion, demonstrating good faith through timely communication with the IRS is crucial in managing your tax affairs effectively. While it’s true that the government’s idea of a timely response can be slow, your proactive approach can make a significant difference. By staying responsive and transparent, you build trust, avoid aggressive collection actions, potentially qualify for penalty abatement, facilitate better communication, and enhance your negotiating position. So, if you receive any correspondence from the IRS, make it a priority to respond promptly – your financial health and peace of mind may depend on it.

Options for Challenging a Bad Tax Assessment

If you’re in collections and facing a tax assessment you believe is incorrect, all is not lost. The IRS provides several options to challenge the assessment and manage your tax debt. Here are five key avenues to explore:

  1. Audit Reconsideration

Audit reconsideration is an option if you disagree with the results of an IRS audit. This can be particularly useful if you didn’t attend the audit, didn’t present certain facts during the audit, or have new information that could change the outcome.

  • How to Apply:
    • Submit a written request to the IRS office that conducted the audit.
    • Provide new documentation or information that supports your position, such as receipts or bank statements.
  • Outcome:
    • The IRS will review your request and may adjust your tax liability if they agree with your new evidence.
  1. Doubt-as-to-Liability Offer

A Doubt-as-to-Liability Offer in Compromise allows you to settle your tax debt for less than the full amount if there is genuine doubt about the accuracy of the tax liability.

  • Eligibility:
    • You must have filed all required tax returns and cannot dispute a tax liability already finally determined by a court.
  • Outcome:
    • If accepted, you settle your tax debt for the agreed-upon amount.
  1. Collection Due Process (CDP) Hearing

If you receive a Notice of Federal Tax Lien or a Notice of Intent to Levy, you have the right to request a CDP hearing to dispute the collection action.

  • How to Request:
    • Submit Form 12153, Request for a Collection Due Process or Equivalent Hearing, within 30 days of the notice.
  • During the Hearing:
    • Present your case and any supporting documentation to an independent IRS Appeals Officer.
  • Outcome:
    • The Appeals Officer will review your case and make a determination, which could result in the removal of the lien or levy.
  1. Pay and Refund

If you disagree with the tax assessment but cannot resolve it through other means, you can pay the disputed amount and then file a claim for a refund.

  • How to Proceed:
    • Pay the full amount of the disputed tax.
    • File Form 1040X, Amended U.S. Individual Income Tax Return, or Form 843, Claim for Refund and Request for Abatement, to request a refund.
  • Outcome:
    • If the IRS denies your refund claim, you can file a lawsuit in a U.S. District Court or the U.S. Court of Federal Claims to seek a judicial review.
  1. Bankruptcy

In some cases, discharging tax debt through bankruptcy might be an option, although this is generally a last resort and has specific criteria.

  • Eligibility:
    • The tax debt must be at least three years old, and you must have filed the tax returns at least two years before filing for bankruptcy.
    • Other conditions, such as passing the “240-day rule,” also apply.
  • Outcome:
    • If successful, your tax debt may be discharged, relieving you of the obligation to pay it.

Conclusion

Challenging a bad tax assessment while in collections is possible through several IRS mechanisms, including audit reconsideration, Doubt-as-to-Liability offers, Collection Due Process hearings, the pay and refund method, and bankruptcy. Understanding these options and following the appropriate procedures can help you effectively manage and potentially reduce your tax debt.

Navigating IRS Payment Plans: Finding the Right Fit for Your Tax Situation

Dealing with tax debt can be a real headache, but guess what? The IRS would rather make a deal with you over the expense of sending Collections people to make threats. The IRS offers some pretty flexible payment plans to help you out. Let’s break down your options:

Short-Term Payment Plans

Who’s It For?
  • Perfect if you can knock out your tax debt in 180 days or less.
  • Available if you owe less than $100,000 in combined tax, penalties, and interest.
What’s the Deal?
  • There is no setup fee, but keep in mind that interest and penalties will still accrue until you pay in full.
How to Apply:
  • You can do it online, over the phone, by mail, or in person at an IRS office.

Long-Term Payment Plans (Installment Agreements)

Who’s It For?
  • If you need more than 180 days to clear your debt.
  • Available if you owe less than $50,000 in combined tax, penalties, and interest.
What’s the Deal?
  • Setup fee: $31 for online applications (direct debit), $149 for other methods, with discounts for low-income applicants.
  • Pay it off over up to 72 months.
How to Apply:
  • Same deal: online, by phone, mail, or in-person.
  • Pro tip: Go for direct debit to dodge extra fees and avoid missed payments.

Streamlined Installment Agreements

Who’s It For?
  • Owe $50,000 or less and can pay off within 72 months.
What’s the Deal?
  • Same fees and process as long-term plans.
  • No need for a financial disclosure, so it’s less hassle.

Partial Payment Installment Agreements (PPIA)

Who’s It For?
  • Can’t pay your full tax debt within the usual 10-year limit.
What’s the Deal?
  • Payments are based on what you can afford after covering your necessary living expenses as determined by various rules.
  • Requires detailed financial info and regular reviews to adjust payments if your situation changes.
How to Apply:
  • Submit Form 9465 (Installment Agreement Request) with a financial statement (Form 433-F or Form 433-A).

Wrap-Up

Picking the right IRS payment plan can save you a lot of stress and hassle. Here’s some quick advice:

  • Don’t agree to a monthly payment that you can’t live with. Defaulting can make the IRS way harder to deal with.
  • If you’re looking at a long-term or partial payment plan, getting some professional help can make a big difference. Doing a financial analysis beforehand, using the IRS formula to figure out your reasonable living expenses, can help you organize your finances so you qualify for a lower monthly payment.

So there you have it! Knowing your options and picking the right plan can make dealing with the IRS much easier.

What to Do If Your Offer-in-Compromise (OIC) Is Rejected

The IRS rejects 60-70% of Offers in Compromise (OIC) submitted by taxpayers. Receiving a rejection for your OIC can be disheartening, but it’s not the end of the road. Here’s what to do next:

Understand the Reason for Rejection: Carefully review the rejection letter. Common reasons include discrepancies in your financial information or the IRS determining you can pay the full amount through a payment plan.

Consider Appealing: If you believe the rejection was unjustified, you can appeal within 30 days. Use Form 13711, Request for Appeal of Offer in Compromise, to start the process. Be ready to provide additional documentation. The IRS does not publish official statistics on OIC appeal success rates, but many tax professionals report high acceptance rates for well-prepared appeals.

Evaluate Alternative Options: If an appeal isn’t viable, explore other avenues. You might qualify for an Installment Agreement to pay off your debt in monthly installments. If you’re experiencing financial hardship, you could request Currently Not Collectible (CNC) status. This temporarily pauses collection efforts.

Remember, a rejected OIC doesn’t mean you’re out of options. By understanding the reasons, exploring alternatives, and seeking expert advice, you can find a viable solution to manage your tax debt.

Understanding the IRS Fresh Start Program: Evolution and Current Misconceptions

As a CPA who handles IRS collection issues, it’s ironic and revealing when marketing firms call me, offering to “rescue” me from tax debts through the IRS Fresh Start Program. These unsolicited calls miss the mark and show a deep misunderstanding of my professional role and the program they tout.

This common confusion highlights a bigger problem: widespread misinformation about tax relief programs. Anyone with tax debts needs to understand the true nature and evolution of the Fresh Start Program.

The IRS Fresh Start Program: A Brief Overview

Introduced in 2011, the Fresh Start Program aimed to help taxpayers struggling financially by simplifying the process of paying back taxes and avoiding liens. Despite being advertised as ongoing, the program’s special initiatives have become standard IRS procedures. Here are the key changes:

  • Lien Thresholds: The program raised the liens automatically filed on tax debts from $5,000 to $10,000.
  • Installment Agreements: These agreements allowed more taxpayers to set up installment plans for debts up to $50,000 without detailed financial disclosure.
  • Offers in Compromise: The program introduced more flexible terms, enabling some taxpayers to settle their debts for less than the full amount owed.

Evolution of the Program

The Fresh Start Program started as a pilot project introducing more forgiving methods for managing tax debt. Its success resulted in these methods being permanently adopted into the IRS’s regular procedures. This transition from a temporary measure to standard practice often leads to misunderstandings due to the program’s initial marketing.

Misleading Advertisements

Today’s advertisements can mislead taxpayers by portraying the Fresh Start Program as either still running or as a special relief effort. In reality, the beneficial changes introduced are now just routine IRS procedures.

Understanding these details about the Fresh Start Program can help taxpayers manage their responsibilities more effectively and avoid confusion and scams.

IRS Levies and Social Security Benefits

The IRS can levy social security benefits. Even worse, that levy can continue even though the statute of limitations has expired. The question is how often does the IRS levy social security payments? And what can you do if it does?

The IRS annual statistics report does not drill down anywhere close to the level needed to answer the first question. But it does seem to be exceedingly rare and only applied to tax protestors. This is in alignment with IRM 5.11.6.2(1) “Use discretion in determining if retirement income should be levied“. And more specifically, IRM 5.11.6.2.1(4) “Use discretion in determining whether a levy on Social Security benefits is appropriate under the circumstances.”

However rare, what can you do about it? If the levy was correctly applied before the statute of limitations runs, then the levy will continue after the expiration. The authority for this is Treas. Reg. § 301.6343-1(b)(1)(B)(ii) which provides that “a levy reaches all property rights at the time the levy is made, including the right to receive payments at some point in the future, and will not be released under this condition unless the liability is satisfied.” This regulation leaves you with only one option, you must make a deal. Specifically, an Offer-In-Compromise proving that the seizure of your retirement income places you in the category of “Economic Hardship”.

Economic hardship cases are usually hard to get through at the collections level. Expect a trip to Appeals.

Strategy 6 – Taxpayer Advocate Service

What do you do when you know the IRS is wrong and creating a financial hardship as a result? The cheapest answer is the Taxpayer Advocate Service also known as the TAS. You can file, an appropriately numbered form, Form 911 to explain the situation. A TAS representative will give you a call back within 48 hours to discuss your issues.

The TAS does require that you make every effort to resolve the situation before contacting them. This means you must have already done the following:

    1. Spoken with the Collection Division
    2. Spoken with the Group Manager
    3. Excised your appeals rights for a CDP or Equivalent Hearing
    4. Used the Collection Appeals Process

The best-case result from contacting the TAS is that they will cut through red tape and go straight to the right people. The worst-case result is that you will receive great advice on your options to proceed. This is an easy and worthwhile step when you can’t seem to get the IRS to recognize they are in error.

Strategy 3 – Prove that you are Currently Not Collectable

The previous posts talked about the strategies of making an offer-in-compromise and payment agreements. These strategies work for people who can either fully or partially pay their IRS debt. But what about people whose financial picture is so bleak that they cannot make any payments? Are they doomed to forever harassment by government agents?

 

The answer is no, all is not lost. The government does not want to waste their resources chasing people who cannot pay when they have lots of cases for big bucks in inventory just waiting to get worked. The catch here is that you must prove to them that you are in the first group and not the second.

 

The way this works is that you must provide information about your equity in things you own and your cash flow. The IRS will review this information to verify that it is adequate and correct. The numbers are then plugged into a formula known as the “Reasonable Collection Potential”. If the result shows that you have no excess cash to contribute to the Treasury, the IRS changes your status to Currently Not Collectable and you get a pass from collection actions for approximately 2 years.

 

Besides getting the IRS off your back for 2 years or more, there is another huge benefit of proving your Currently Not Collectable status. The 10-year Statute of Limitations continues to run. Get across the 10-year line and the debt is no longer collectable by the IRS.

Strategy 2 – Make a Payment Agreement

There are several strategies to consider when it comes to dealing with IRS debt. Making an online Payment Agreement to full-pay the debt over time is the easiest way to get the IRS off your back.

Online Payment Plan Basics
  • Individuals, including sole practitioners and independent contractors, have two choices.
    • Long-term payment plan – total tax, penalties, and interest is $50,000 or less.
    • Short-term payment plan – total tax, penalties, and interest is $100,000 or less and can be paid in 180 days or less
  • Business Payment Plan comes in only one flavor – the total liability must be $25,000 or less.
  • The wonderful thing about these plans is that you do not have to submit financial information.
  • Approval or disapproval will be almost instantaneous.
  • Go to https://www.irs.gov/payments/online-payment-agreement-application
Paper Payment Plan Basics
  • These plans are a lot harder. You must submit financial information about assets that you own and your cash flow so that the IRS can determine what they think your monthly payments should be.
  • The IRS will suspend counting days on the 10-year Statute of Limitations while they consider the request. This process will probably add a minimum of six months to your time in purgatory.
  • The IRS will reluctantly accept payment plan requests that are less than full-pay provided your financial information supports the lower payment.
The Good and Bad of Payment Plans
  • IRS will suspend collection activities if the plan is approved.
  • A majority of payment agreements end up in default. The more plans that you default, the harder it gets to make future deals. The golden rule here is to call them if you can’t make your payments. Do not wait for them to call you.

Payment Agreements are great if you can afford to make payments. My next post will be about what to do when you cannot afford to pay anything.

Non-Filers and Refunds – The Medical Exception

Previously I detailed that there was a statute of limitations on when you could file a claim for refund and get credit for any overpayments. That limit is 3 years from the due date or 2 years from the date of payment whichever is later. There are exceptions to this law and one of those is for medical reasons.

Sometimes it’s not laziness that produces a non-filer situation. Medical problems can also result in non-filer status. Congress carved out an exception for this in the tax code and the IRS issued Rev. Proc. 99-21 to cover this situation. The statute of limitations is suspended when the taxpayer is determined to have a mental or physical impairment that can be expected to result in their death or last for a period of at least 12 months.

There are two major requirements to use this exception:

    1. No person was authorized to act on behalf of the taxpayer, including their spouse, during the disability period, and
    2. There must be a written statement from a qualified physician as to the disability. This statement must be detailed and specifically state that the taxpayer was prevented from managing his or her affairs.

There are lots of ways to get the physician’s statement wrong, so pay attention to Rev. Proc. 99-21 if you are going to use this exception.