The IRS, by policy in its Internal Revenue Manual, ceases collection activity against taxpayers whose debt is deemed “currently not collectible.”  See Section 5.16 of the IRM regarding uncollectible accounts here.

The IRS will categorize a taxpayer as having an inability to pay and stop efforts to collect if it determines that collecting the debt would impose a financial hardship (see my blog post on IRS financial hardship here).  IRS debts can also be put in uncollectible status if it cannot locate the taxpayer or if it determines the amount owed is below IRS tolerance levels (i.e., amount owed, age of account).

The IRS Taxpayer Advocate has repeatedly recommended in her Annual Reports to Congress and in testimony that the IRS review its collection model to correct the imbalance between the amount of bad debt it carries and collects.  View her most recent testimony here. 

The IRS is trying to collect on employment taxes from a company that has been out of business for several years. As an officer, I have already been held liable.  Can the IRS continue to go after a company that has no assets even though it has already filed for the same tax liability against an officer?

First, it is unlikely the IRS has much interest in the business.  It is closed, and in the world of the IRS, the account is probably deemed not collectible.  If the business closed in an orderly fashion and did not transfer any of its assets to nominees to continue its operations as a sham, there is probably little interest from the IRS.  If the IRS is sending notices, they are probably computer generated.  

The IRS has assessed a trust fund recovery penalty against you the employment taxes that were withheld from employee paychecks.  The IRS can come after those that were in charge of the decisions not to pay the IRS employment taxes – the IRS had some belief that included you.  

The IRS can collect these “trust fund” taxes from both you and the business, but probably has no ability to collect from a business that is closed and uncollectible.  For practical purposes, it is just you, and any other owners, officer or managers of the business that were tagged with personal liability. 

It is a joint and several liability, so if the IRS collects 100% of the liability from someone else, you are relieved of the obligation.  It can be collected from the individuals in any manner the IRS deems fit, not to exceed 100% of what is owed.   

For what its worth, the IRS Taxpayer Advocate reported that from 2002-2007, the IRS collected only 13.5% of the trust fund assessments it made against owners, officer and managers.  That percentage is to your advantage.

• When the timeframe to collect the liability has expired.  The IRS has 10 years to collect a liability from the date it puts the liability on its books. When the 10 years is up, the tax is cleared from the IRS’s books and can longer be collected.  More on that here at “When does the collection of IRS debt expire?”

• When you are in bankruptcy.   Section 362 of the Bankruptcy Code creates what is known as an “automatic stay” that prevents creditors, including the IRS, from pursuing collection of a debt. Bankruptcy is also an extremely effective way of releasing IRS seizures and garnishments.   Properly done, it can also eliminate tax liabilities.  More on that here at “But I thought you can’t eliminate taxes in bankruptcy.”

• When seizure of a personal residence is being considered, the IRS must first bring an action in U.S. District seeking court approval.  The IRS cannot do take your house on their own.  Incidentally, IRS seizures of personal residences are very rare (676 total of personal and real property across the country in 2007).  More on that here at “IRS by the numbers.”

• When a Final Notice of Intent to Levy has not been sent to you.  The IRS cannot take collection action until they first send you a notice telling you so.  After the notice is sent, action is barred for 30 more days.  More on that here at “What do all these different IRS collection letters mean?”

• When a Collection Due Process appeal is pending. After the IRS sends its Final Notice of Intent to Levy, you have the right to dispute and stop the collection action by filing a request for an appeals hearing. Provided the request is filed timely (within 30 days), while this hearing is pending, the IRS cannot take action to collect.  

Stay tuned, there is more coming…Part III will be next.

My clients usually are very interested in the compromise program, but the first thing I do is set them straight that this is not a “freebie” program.

The numbers speak for themselves.  Compare:

-     In 2001, the IRS accepted 38,643 offers.

-     In 2007, the IRS accepted 11,618 offers.  

That is a 70% decline.  Pretty significant.  

With over 2 million active balance due accounts in 2007, the IRS arguably should be as welcoming as the advertisements lead one to believe.    

Think about it:  2 million balance due accounts, 11,618 offers accepted.  

The reality is that this is anything but a “loose” program.  In certain situations it can be very helpful, but a hard analysis of income and expenses under the strict IRS financial guidelines is essential to success. 

1.     779,000 taxpayer accounts were assigned to the IRS collection queue.

2.     The number of offers in compromises accepted by the IRS declined by 70% from 2001 (38,643) to 2007 (11,618).

3.     40% of withdrawn and rejected offers in compromise are ultimately written off as uncollectible.   

4.     The number of IRS levies against wages and bank accounts increased from just over 500,000 in 2000 to 3.7 million in 2007.

5.     The number of IRS seizures against property like real estate, automobiles and business equipment increased from 74 in 2000 to 676 in 2007.  

Source:  Annual Report of the IRS Taxpayer Advocate Service