Internal Revenue Manual: IRS collection procedures at your fingertips
You do not have to be in the dark about internal IRS collection and audit procedures.
The IRS makes its playbook, the Internal Revenue Manual, available to the public. In fact, all you really wanted to know about the IRS can be found online in the IRM at the IRS’ website.
Sometimes, though, the IRS may not follow its own playbook, or even be aware of its own rules. This is rarely with bad intent; the Internal Revenue Manual contains a vast amount of procedures to follow – an IRS agent may realistically not know every one, or maybe details get lost in the everyday workflow.
To get the best results in IRS negotiations, it can be necessary at times to remind the IRS of their own overlooked or forgotten Internal Revenue Manual guidelines.
Deep in the Internal Revenue Manual are provisions that can put the brakes on the IRS, including getting a wage or bank levy released, or getting the IRS allow all of your living expenses when negotiating a payment agreement. The IRM details how the IRS values and investigates an offer in compromise, and the IRS’ views on seizing assets like retirement accounts and personal residences. How about knowing when the IRS Taxpayer Advocate help you? What about filing bankruptcy on the IRS? What are the IRS tax return examination techniques?
All can be found in the Internal Revenue Manual.
Knowing the IRS’ own guidelines can make all the difference in resolving your IRS problem.
The IRM is broken down into multiple chapters, including sections on IRS audits, IRS collections, IRS appeals and criminal investigations.
Let’s focus on three IRS collection issues that the Internal Revenue Manual can help you solve – limitations on the the IRS’ power to levy, lowering the value of your offer in compromise, and preventing an IRS levy on an retirement account.
First, what limitations does the Internal Revenue Manual place on the IRS’ ability to place a levy on your wages and bank accounts or seize your personal property?
The IRS can’t just do what it wants, when it wants. There are limitations on the IRS’ power to levy – and this is recognized in the Internal Revenue Manual.
When considering enforcement action, IRS collection agents should abide by Internal Revenue Manual Section 5.10.1, Pre-Seizure Considerations. This limits the IRS in the following ways:
1. The IRS cannot levy you when you are in an installment agreement, including the time the payment plan is pending, and during any appeal of a rejected or terminated installment agreement.
2. If you do not have any equity in your property, the IRS cannot take it. For example, the IRS can’t take your house if it’s worth $150,000 and you owe $150,000 on it – there is no equity. Same for your car worth $15,000 secured by a $15,000 loan.
3. If you have filed an Offer in Compromise, the IRS cannot levy or seize your assets while it is pending, and during any appeal of an OIC rejection.
4. The Internal Revenue Code prevents the IRS from taking your clothing, household goods, and certain business tools and equipment. IRM 5.10.1 recognizes that the IRS cannot seize these specific assets.
5. The IRS cannot take your house unless the government first sues you in court and receives a judge’s approval to take it. (That’s right, the IRS just cannot show up and take your personal residence, unannounced, without filing a lawsuit in court, sending you a copy of it, and giving you the change to be heard by the judge.) A threatening Revenue Officer will not explain this process to you, and may make the seizure appear more imminent and likely than it really may be. Although any IRS threat of seizure should be taken seriously, the Internal Revenue Manual contradicts the immediacy of a Revenue Officer’s posturing.
6. If you have an innocent spouse claim filed with the IRS, they cannot collect until a decision is made on whether you should be held responsible for your spouse’s taxes.
7. If you disagree with the IRS on a collection decision, you have the right to appeal it and have the IRS Office of Appeals reconsider. This includes Collection Due Process Appeals and Collection Appeals Program 911 emergency appeals. The Internal Revenue Manual prevents the IRS from levying while your appeal is pending.
8. When you are in bankruptcy, IRS collection is put on hold. Bankruptcy law has an Automatic Stay, which automatically stops the IRS from seizing and levying, and in fact will release a levy. This, too, is recognized by the Internal Revenue Manual.
9. The IRS cannot levy unless they give you notice 30 days ahead of time. This is called a Final Notice of Intent to Levy. Once the IRS sends this notice, you have additional rights to file an appeal and stop the levy from occurring. Ask the IRS if they have sent you the required Final Notice, and verify it by viewing an IRS account transcript, which will show if the notice was sent.
When was the last time an IRS Automated Collection Service employee told you his limitations in levying or seizing your property? When you need to know the reality of your situation, reference the Internal Revenue Manual 5.10.1, and defend yourself if the IRS wants to act when it can’t.
You may be curious about an offer in compromise to settle your taxes with the IRS. How can the Internal Revenue Manual help?
The best compromise is negotiated by having advance knowledge of the IRS settlement valuation procedures.
The IRS has very specific methods for determining whether to accept your offer in compromise.
That’s where Internal Revenue Manual 5.8.5, Offer in Compromise, Financial Analysis, comes into play. This is the IRS’ playbook in investigating offers in compromise.
Here are a few tips from IRM 5.8.5 to help you get the best deal with the IRS:
1. If you do not have a car payment, and your car is over six years old and has over 75,000 miles, the IRS will subtract $200 from your monthly cash flow, up to two vehicles per household. This can reduce the value of your settlement by up to $4,800. See IRM 220.127.116.11.3, Transportation Expenses.
2. Speaking of your car, the Internal Revenue Manual also allows you to take up to $3,450 off the value of your vehicle in calculating the value of your offer in compromise. Make sure the IRS offer investigator reduces equity in your car by $3,450 – after all, it’s in their guidelines to do so. See IRM 18.104.22.168, Motor Vehicles, Airplanes & Boats.
3. You can also exclude up to one month’s living expenses held in your bank account from the value of your settlement. The IRS guidelines require them to allow you subtract one month’s living expenses to reduce your cash on hand or in a bank account. The living expenses must be reasonable, though, and within IRS collection guidelines. I have seen IRS offer examiners omit this value exclusion. This can be a significant reduction in the value of your offer – if you have $5,000 cash in your bank account, and $5,000 of monthly living expenses, cite the IRS offer examiner to Internal Revenue Manual 22.214.171.124, Cash, which permits you to exclude the cash from your settlement.
Lastly, if the IRS threatens to take your retirement account, what section of the Internal Revenue Manual should you use in your defense?
It’s not necessarily as easy as you may be led to believe for the IRS to wipe-out your retirement account.
Internal Revenue Manual 126.96.36.199, Funds in Pension or Retirement Plans, puts restrictions on the IRS when it comes to taking your retirement savings. If an IRS Revenue Officer is threatening to levy your retirement account, or is leaning on you to liquidate it, know that the IRS has an internal four-step process to analyze before it can take your retirement.
Here is what you want to demonstrate to the IRS to have them leave your retirement alone:
1. Determine if you can even get to the money. The IRS has the same rights to your property as you. If you can’t get to it, neither can the IRS. Specifically, you cannot access a 401(k) until you leave your employment. If you are still employed, that 401(k) is beyond your reach and the IRS’. Being able to borrow is not enough, you have to be able to withdraw it for the IRS to have any right to levy it.
2. Next, tell the IRS that sure, you made some regrettable mistakes in not paying your taxes, but in no way where your mistakes intentional and designed to take advantage of the IRS and the tax system. The Internal Revenue Manual guidance is for the IRS to take retirement accounts only in flagrant situations of nonpayment. The IRM provides examples of what’s flagrant, including tax evasion, tax fraud, failure to cooperate with an IRS investigation, placing assets out of the IRS’ reach, illegal income, and pyramiding tax liabilities (meaning you keep owing the IRS and will not comply with requests to at least not owe in the future). In other words, the IRS prefers to take retirement accounts from those with intentionally bad acts, not those who simply made a life mistake, like you. This needs to be demonstrated to the IRS for them to back off your retirement.
3. The IRS must then consider if there are any better alternatives to collect than taking your retirement. The IRS does not like taking retirement accounts, and prefers installment agreements or non-retirement assets as a source of payment. The IRS won’t necessarily tell you this, but it is in the Internal Revenue Manual, and is part of your defense to your retirement is simply to offer another, less severe solution.
4. Do you, or will you, need the funds in the retirement account to pay your bills in the near future? If so, the IRS would create a financial hardship by taking your retirement funds, preventing you from paying your bills upon retirement. Cite to the IRM, and demonstrate to the IRS that you will not be able to pay your expenses if the retirement is lost.
Understandably, you cannot rely on the IRS Revenue Officer that is interested in your retirement account to point you to these Internal Revenue Manual provisions. We must know them, and then develop the facts around the IRM to show the IRS that their intended act is not appropriate.
The Internal Revenue Manual is full of defenses and solutions to IRS problems. When you owe the IRS, they are on offense, and you are on defense. The rules of defense are in the IRS playbook – the IRS isn’t going to tell you those rules, but they are readily available. They do share their playbook. But we have to read it, know it, and apply it to get the results. Do not overlook the value of the Internal Revenue Manual when formulating your defense and settlement approach.