How common are IRS mistakes in property seizures?

Posted on June 20, 2009
Filed Under IRS Collection Problems, IRS Seizures | Leave a Comment

The IRS appears to be human, and it makes legal and administrative errors when seizing property, says the Treasury Inspector General for Tax Administration (TIGTA).

TIGTA just completed a review of 50 IRS property seizures to determine if they complied with the requirements of Internal Revenue Code sections 6330 to 6344 and Internal Revenue Manual guidelines.

Here is what was found:

1.   IRC 6330(a) requires the IRS to issue a Notice of Intent to Levy and give taxpayers the right to a hearing and court review before issuance of an actual levy. The report found that the IRS issued an actual levy (Form 633B) to seize property for tax periods that were not on the Notice of Intent to Levy.

2.   IRC 6342(a) requires the proceeds of sale to be applied in the following order:  (1) expenses of the sale (2) to any unpaid tax due from the property (like an excise tax on a truck) and (3) to the liablity for which the property was sold. TIGTA found three instances where the proceeds were applied to a tax period not on the actual levy (Form 633B) and three cases where the proceeds were not posted to expenses.

3.   Other instances included failures to properly advertise the sale pursuant to IRC 6335(b) and not always providing Notices of Seizure with accurate liability balances or a correct accounting of the property seized as required by IRC 6335(a).

It should be noted that TIGTA did not identify any instances in which the taxpayers were adversely affected, but the report did state that not following the legal and internal guidelines could result in abuses of taxpayers’ rights. An example would be a property seizure without the issuance of a required Notice of Intent to Levy (like #1, above).

The IRS currently makes about 600 seizures a year - a small number compared to the 10,000 the IRS would annually make in the 1990s.  IRS seizures are usually the result of a lack of cooperation or failure to draw out substantial equity in property.  If you are this deep into it, it is important to understand your rights and how to protect them.l

Reopening IRS audits - are they really final?

Posted on June 14, 2009
Filed Under Audits, IRS Appeals, Tax Court | Leave a Comment

I have seen a stream of new calls from readers who went through an IRS audit and are receiving IRS collection notices for amounts they probably do not owe.

Although they disagreed with the audit, they did not understand the need to take the dispute to IRS appeals or Tax Court.  As a result, the audit became final, and IRS collections followed.  In many cases, there was a lack of understanding on how to deal with an IRS auditor and present documentation.

There is a solution to these frustrations:

It is called IRS audit reconsideration.  If you went through an audit that has become final, but you think the IRS did not adequately consider your arguments or you have additional information to submit, a request can be made for the IRS to reopen the audit so you pay the correct amount of taxes.

Authority for IRS audit reconsideration can be found in Internal Revenue Code 6404(a), which allows the IRS to abate a liability if it is erroneous, and in Internal Revenue Manual 4.13, “Audit Reconsideration.”  The IRS does not take any collection action while they are reconsidering the audit.

It is best to have all documentation compilied ahead of time and submitted with the audit reconsideration request.  For those situations where you are entitled to a deduction but your records may be lacking, the use of affidavits and documentation reconstruction is a strategy accepted by the IRS as a means to telling your story.

At the conclusion of the audit reconsideration, the IRS will either abate the liability or issue Letter 2726 (full disallowance) or Letter 2737 (partial disallowance).  If you still disagree, you will then have 30 days to file a request for a hearing with an IRS Appeals Officer for additional audit reconsideration.  See Internal Revenue Manual 4.13.4.7 and 4.13.6.1.

Although reopening the audit is discretionary with the IRS, they do have a public interest in collecting the correct amount of tax.  Audit reconsideration can be the avenue to not only stop IRS collections, but pay what is really owed.

Why does the IRS ask on Form 433A if you have lived out of the country six months in last 10 years?

Posted on June 7, 2009
Filed Under Collection Statute Expiration Dates, Form 433A, IRS Financial Statements | Leave a Comment

It is always important to understand what the IRS is asking, and why.

Resolution of most collection cases involves providing answers to IRS questions about you.  The questions are asked on an IRS financial statement, known as Form 433A.    

One question the IRS asks:  Have you lived out of the country for more than six months in the last 10 years?

Why does the IRS want to know that as part of its efforts to collect taxes?

Because it extends the statute of limitations on collection under Internal Revenue Code 6503(c).  The IRS has 10 years to collect - any continuous absence of six months or more suspends the collection timeframe. Internal Revenue Manual 5.1.19.3.7 summarizes the interest in this question: “The application of this paragraph can result in the CSED (collection statute expiration date) being suspended for a very long time.”

This is information that the IRS ordinarily would not know, so it is asked as part of the financial investigation into case resolution.       

Simple questions, big ramifications.  A “yes” answer may be called for, but it always helps to know how the other side thinks. 

IRS is hiring auditors and collection agents - enforcement to increase

Posted on June 6, 2009
Filed Under Audits, Criminal investigation, Revenue Officers | Leave a Comment

The IRS is hiring revenue agents (auditors), revenue officers (collectors), and special agents (criminal investigators).  This has been made public by the IRS, but I attended a joint conference with the IRS last week in which every IRS panelist - from IRS auditor managers to taxpayer advocates to senior IRS attorneys - confirmed the trend in their respective divisions.

Expect enhanced IRS enforcement in the coming years from the increased staffing.  Enforcement hires will be in training first, then be dispatched to the field and mentored by senior personnel.  Check out what is available at the IRS website. 

Having worked for the IRS as a trial attorney in the Office of Chief Counsel, it is a good place to be - I received great experience there and made many friendships that I still maintain.  You may just find that the IRS agents you fear are really not all that bad behind the scenes.  Sometimes, they have a job to do.

Four ways to handle disagreements with IRS auditors

Posted on June 4, 2009
Filed Under Audits, IRS Appeals, Tax Court | Leave a Comment

A common problem with IRS audits is not seeing eye to eye with the auditor. The auditor sees the case narrowly, while you see the big picture.  You know you incurred that expense or did not have unreported income, but the auditor’s criteria is difficult to satisfy.

Here are some ways to get problem IRS audits resolved:

1.   Try to work it out with the manager.  Every auditor has a manager. Sometimes, a call to the manager can resolve thorny issues.   

2.   Take the case to IRS appeals.  IRS Appeals Officers settle cases on what is known as the “hazards of litigation” - meaning if you went to Tax Court, what would an impartial judge say about your case?  Auditors rarely consider that, which is often the cause of the bottleneck.  

3.   Go directly to Tax Court.  If you are at a standstill, request that the auditor close the case out and issue a Notice of Deficiency so you can take your case directly to Tax Court.  

An advantage to going to Tax Court first and then conducting settlement negotiations is that the trial is real.  The “reality” of a pending trial can help negotiations, especially if the IRS evidence is weak. See my prior post “Tax Court - providing a level playing field in IRS audits.”

4.  If you already are getting billing notices from the IRS, request audit reconsideration.  If you did not take advantage of going to IRS Appeals or Tax Court and you are getting billing notices for an amount you do not owe, you can still request that the IRS reconsider the audit after the fact.  You do not need to overpay your liability if you have documentation that supports your position and it was not adequately considered during the audit.     

Bankruptcy as leverage in an offer in compromise

Posted on May 27, 2009
Filed Under Bankruptcy and the IRS, Chapter 7, Offer in compromise | Leave a Comment

On more than one occasion I have used the possibility of bankruptcy as leverage in reducing the value of a offer in compromise.  The possibility of bankruptcy can have a big impact on an IRS compromise. 

Here’s why:

1.     A Chapter 7 bankruptcy can “discharge” a tax liability.  

2.     Any taxes that could be discharged by a potential bankruptcy cannot be collected against the future income of the taxpayer.

3.      A critical component of an offer in compromise is an IRS calculation of how much can be collected from future income. 

4.     If bankruptcy is “Plan B” to an offer in compromise, the IRS may reduce the value of future income to account for the limited collection potential.  

The Internal Revenue Manual 5.8.5.6(5)) on reducing the value of a compromise from bankruptcy states as follows:

“Some situations may warrant placing a different value on future income than current or past income indicates…if a taxpayer will file a petition for a liquidating bankruptcy (Chapter 7)…consider reducing the value of future income.”

It is important to know when bankruptcy can discharge taxes to do this - it often will need to be explained in detail to the IRS offer investigator, who may not be familiar with taxes and bankruptcy.  The taxes being compromised would need to have been (1) due to be filed three years prior (2) filed two years prior and (3) the tax assessed 240 days prior to the potential bankruptcy filing.  

When properly inserted into the compromise negotiations, Internal Revenue Manual 5.8.5.6(5) can have a significant impact on the value of a compromise. It can also avoid a bankruptcy filing by pushing a compromise over the goal line.    

For more on taxes and bankruptcy, see my article in the Journal of the National Association of Enrolled Agents, presentation outlines and my other tax bankruptcy related posts.

Can I make the IRS an offer to pay tax only?

Posted on May 23, 2009
Filed Under Bankruptcy and the IRS, Chapter 13, Chapter 7, Interest and penalties, Offer in compromise | Leave a Comment

I received this question about using an offer in compromise on interest and penalties:

I owe $25,000 in tax, but the interest and penalties have made the amount I owe almost double.  Won’t the IRS be happy just to get the principal I owe back and forgive the interest and penalties?

In an offer in compromise, the IRS considers all of your liabilities – tax, penalty, interest – as being of equal stature.   The amount you owe in penalties is as equally important to the IRS in an offer in compromise as the tax.  Although it may seem logical to assume that the penalties and interest are “extras” and more easily forgiven, this is simply not true with the IRS. 

To the IRS, the tax, penalty and interest all bear equal weight.  There is no formula to abate interest and/or penalties in an offer in compromise.  It is purely a collection formula.  If the IRS believes they can collect it, they will not compromise it.  The IRS does not consider “tax only” offers unless for some reason that is the exact amount that can be collected.  

If you believe the IRS should not have charged you penalties, then the proper course is to request abatement outside of the compromise process.  This involves an administrative decision of the IRS to forgive penalties they have already determined you are responsible for.  Penalty abatement involves proving to the IRS factors that there were beyond your control that prevented timely payment or filing.  Interest can be abated if the IRS unreasonably fails to perform a ministerial or administrative function.  The additional interest can be abated during the period of delay. 

A better option on eliminating interest and penalties is often bankruptcy.  A Chapter 7 bankruptcy can completely eliminate tax, interest and penalties.   A Chapter 13 bankruptcy repayment plan can stop IRS interest accruals and force the IRS to accept a reduced amount of penalties by bankruptcy law, not tax law. An offer in compromise can result in the IRS forgiving tax, penalties and interest, but only if the collection is in doubt.

A Tax Court win for the good guys

Posted on May 17, 2009
Filed Under Tax Court | Leave a Comment

It really does happen - you can overturn an IRS audit in Tax Court.

My client disagreed with an IRS audit that determined she should pay a 10% tax on early distributions from her retirement account.  She had taken early retirement, and wanted to start taking withdrawals from her retirement account. Ordinarily, this would cause a 10% early distribution penalty.  But she chose to take the distributions in substantially equal amounts each year, an exception under Internal Revenue Code 72(t).

One year, in addition to the substantially equal distributions, she took additional money out of the retirement account as an early distribution to pay for her son’s college tuition.  Withdrawals to pay for college education are also not subject to the 10% early distribution tax.

The IRS audited the return and determined that the education withdrawal modified the substantially equal distribution.  The IRS argued that to avoid the 10% tax on the substantially equal payments no other distributions can be made from the retirement account.  The theory was that the college education withdrawal modified the other distributions so that they were no longer equal in amount every year.  If the IRS was correct, all the substantially equal distributions would have been modified and subject to the 10% tax.

We took the IRS audit decision to Tax Court.

The Tax Court’s decision -  Benz v. Commissioner, 132 T.C. 15 (2009) - overturned the IRS audit with some common sense - a permitted distribution (education) does not modify and disqualify another permitted distribution (substantially equal payments).  The substantially equal payments were not modified and were not subject to the 10% tax.

Tax Court can be a great equalizer in setting straight IRS administrative decisions.

The Tax Compromise Improvement Act of 2009

Posted on May 13, 2009
Filed Under Offer in compromise, Uncategorized | Leave a Comment

House Ways and Means Oversight Committe Chairperson Charles Lewis and Ranking Member Charles Boustany have introduced H.R. 2343, the Tax Compromise Improvement Act of 2009.

The bill would eliminate the requirement of IRC 7122(c) that lump sum offers must be accompanied by an upfront payment equal to 20% of the value of the compromise.  The bill would also eliminate the requirement that periodic payment offers must have the proposed payments made while the compromise is pending.  All of these payments are nonrefundable - meaning if the compromise is rejected, the money is lost. 

The offer in compromise program has had offer submissions declining 21% since the upfront payment requrement took effect in 2006.  The IRS Taxpayer Advocate conducted a study finding that 56% of these payments were borrowed from friends and family members. 

The proposed changes are a much needed first step to restore the offer in compromise program to viability and give deserving taxpayers who have had economic problems - usually through job loss, medical problems, divorce or business failure - a fresh start on their taxes.  

The bill was introduced from hearings the Ways and Means Oversight Subcommittee conducted on February 26, 2009 as to assisting taxpayers with economic difficulties.   IRS Taxpayer Advocate Nina Olsen submitted testimony to the Oversight Committee recommending the change - read it here.  You can read my written testimony to the Oversight Committee on helping taxpayers in distress here.

All of it, or just 15% - IRS manual and automated levies on social security benefits

Posted on May 9, 2009
Filed Under Automated Collection Service, IRS Collection Problems, IRS Levies, Property Exempt from Collection | Leave a Comment

A reader asks the following regarding IRS levies on social security benefits:

What is the difference between an automated federal levy on social security and a manual tax levy, and why does the IRS choose one over the other?

Here is my response:

1.     Automated Levy (15%).  Pursuant to section 6331(h) of the Internal Revenue Code, the IRS can continuously take, month after month, an automatic 15% of a taxpayer’s social security benefits.   All the IRS has to do is match its records of delinquent taxes to those of the government’s Financial Management Service, which indicate social security entitlement.  After a match is made, a notice is sent to the taxpayer from the IRS that the 15% levy will commence on his or her social security. Once the levy commences, the Financial Management Service sends a notice of confirmation to the taxpayer. 

The automated social security levy is one of the most readily used IRS collection tools.  It is simple, and provides immediate, continuing and quantifiable results.  It also causes the most financial hardship.  In 2007, the IRS received 1.74 million payments from automated levies on social security benefits.  The IRS Taxpayer Advocate estimates that 86% of those levies were in situations were social security was the primary or only source of taxpayer income.   

2.     Manual levy (100%).  The IRS is not limited by IRC 6331(h) to taking 15% of a taxpayer’s social security benefits.  The IRS can issue a manual levy that can continuously take all of the social security benefits under Internal Revenue Code section 6331(a), which permits levy on all wages, salary or other income (which would include social security).  The 15% automatic levy provision is a supplement to the manual levy power. The IRS can chose the manual approach if it deems fit and attempt to collect more than the automated 15%.

The manual levy requires the assignment of an IRS Revenue Officer, while the automatic levy is a paperless transmission.  The manual levy is usually made in extreme circumstances where there is a lack of cooperation.    

3.     Exemptions on a manual levy.  One last, and very important, point:  It is important to understand that although the IRS can manually levy up to 100% of social security benefits, the taxpayer has the right to claim an exemption against the levy.  This exemption - contained in IRC 6334(a)(9) - permits the taxpayer to receive a minimum amount of the social security payment and defeat all or part of the manual levy.

The IRS publishes a table of the amounts that can be claimed as exempt.  A single taxpayer getting a monthly social security benefit can currently claim $779.17 as exempt from a manual levy.  That means the IRS, although it can make a manual levy, will only get amounts over $779.17 if the exemptions can be claimed in response to the levy.    

The IRS has recently announced that they will attempt to be more reasonable in levy releases in hardship cases. If an automated or manual IRS social security levy does not leave sufficient funds to pay living expenses, the IRS should be contacted to demonstrate the hardship and to negotiate a release.  

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