POTENTIALS WAYS TO DEAL WITH INTERNAL REVENUE SERVICE REGARDING COLLECTION PROBLEMS

A.  Pay the Tax / Minimize the Tax

In most situations, this is not an option.  Most taxpayers we see  simply do not have the money nor the assets, and even if they did, they could not liquidate their assets or pay the liability without hurting their business or financial circumstances.  If it is an option, then consideration can be given to minimizing the tax through a penalty abatement, offer - in - compromise based upon doubt as to liability, additional deductions claimed through an amended return, request for audit reconsideration, etc.

B.  Non-Cooperation / "Hard Ball"

Not cooperating with the Internal Revenue Service is an approach that is rarely used and is only appropriate in limited circumstances.  A failure or refusal to cooperate with Internal Revenue Service usually results in immediate enforcement collection action such as filing Notices of Levy on bank accounts or on wages, seizure of assets with equity, closure of business, etc. Accordingly, this option is generally only available to those individuals who have little assets at risk and have the ability to easily change employers or go from job to job by the nature of their employment.

C.  Currently Uncollectible  

In IRS terminology, having an account "53'd" means that the account is temporarily written off as currently uncollectible. In the event a taxpayer does not have any ability to make payments to Internal Revenue Service under an Installment Payment Agreement, then he or she may be eligible to have her account temporarily written off for re-evaluation in the future.  Typically, IRS will re-evaluate his or her situation one (1) or two (2) years later.

D.  Installment Payment Agreements

                       Historically, an Installment Payment Agreement is the most common type of arrangement with Internal Revenue Service for those individuals who cannot full pay a federal tax liability.  For smaller dollar amounts, an Installment Payment Agreement may be reached without providing detailed income or financial information to Internal Revenue Service.  For larger dollar cases, the Internal Revenue Service will generally insist on receiving a Collection Information Statement detailing your assets, liabilities, income sources, and expenditures. 

 

In October of 1995 the IRS changed  its procedures with respect to Installment Payments Agreements.  These changes included standardizing or capping the amount of expenses one may claim for certain types of living expenses, for transportation costs, and for housing and utilities costs.  In many, if not most situations, these standardized amounts are unfavorable to the taxpayer.  In our opinion, the standardized amounts are unworkable for higher income individuals, and should either be substantially modified or abandoned by Internal Revenue Service. In the interim, it is our impression that these rigid requirements are forcing more individuals into filing bankruptcy.  For those taxpayers who cannot fully pay their back taxes, the IRS now accepts Partial Pay Installment Agreements ("PPIA").  These are automatically reviewed, supposedly on a priority basis, within two (2) years.

E.  Wait Out Statute of Limitations

In general, there is a ten (10) year statute of limitations on Internal Revenue Service collecting the amount of an assessed tax.  This is referred to as the Collection Statute Expiration Date ("CSED").  The ten (10) years starts running from the time of the tax assessment, not the time the taxpayer files the return, sets up an installment payment, a Notice of Federal Tax Lien is filed, or any other date.  There are certain events such as filing bankruptcy, filing an Offer - in - Compromise, filing a Collection Due Process Appeal, filing a formal request for an Installment Payment Agreement, or being outside of the country for a period exceeding six (6) months which toll or suspend the statute of limitations.  A precise determination of when the statute of limitations expires cannot be made until a review of the transcript of account and interview of the client.  Also, the Internal Revenue Service may request that the taxpayer extend the statute of limitations for up to an additional five (5) years from when the statute would normally expire.  For some taxpayers, there are certain techniques or procedures which can be used to protect themselves if they choose to refuse to extend the statute of limitations.   Even for those taxpayers who cannot necessarily protect themselves, there are still certain strategies or techniques to be considered or employed to minimize the consequences (or at least which should be discussed in making a decision on whether to extend or not).

F.  Innocent Spouse Relief

The Internal Revenue Service Restructuring & Reform Act of 1998 greatly expanded spousal relief for taxpayers who filed joint Federal Income Tax returns.  Although a complex area, in general, three (3) separate types of relief may be granted depending upon whether the tax liability arose because of an audit assessment, as part of a jointly filed return with a balance shown as due and owing, and based upon the current marital status of the parties.  The three (3) categories are:

Innocent Spouse Relief - Tax liability is a result of a tax understatement by non-innocent spouse due to an erroneous item on the return.  A spouse may be entitled to relief if she either did not know of a substantial understatement of income or overstatement of expense or did not understand the nature or extent of such understatement of income or overstatement of expense.

Separation of Liability Relief - Tax liability is a result, in part, of a tax understatement by non-innocent spouse due to an erroneous item on the return.  A spouse may make an election to have the liability allocated between spouses (the individuals must be no longer married or legally separated or living apart for at least twelve (12) months).

 

"Fairness" or Equitable Relief - Tax liability is a result of either a tax understatement or an underpayment and innocent spouse does not qualify for two (2) other forms of relief.  The Internal Revenue Service determines that it is unfair to hold the innocent spouse liable for the payment of tax (partially or in whole) taking into account all the facts and circumstances.

G.  Offer - in - Compromise

An Offer - in - Compromise is a formal vehicle available to taxpayers to compromise or settle their liability.  It generally works where the taxpayer owes a large liability, it is unlikely the liability could ever be paid, and the taxpayer has an "independent" source of funding for the Offer - in - Compromise.  For IRS to even process an Offer - in - Compromise, the taxpayer must offer an amount equal to or exceeding (1) the net equity in assets (realizable value) plus (2) a mathematical amount calculated on a monthly installment payment or "ability to pay."  The mathematical computation may be estimated by taking your monthly payment amount as disclosed by the collection information statement times 48 plus adding the net value of the assets.  By way of illustration, if taxpayer has $3,000.00 in realizable value in various assets and his proper monthly installment payment were $100.00, then the minimum amount which must be offered for the Offer - in - Compromise to be processed is $7,800.00.  This is calculated by taking the $100.00 monthly payment amount times 48 and adding to it the $3,000.00 net equity in assets.  Unfortunately, the Jacksonville District has historically had one of the  lowest acceptance rates of Offer - in - Compromises in the country, which we heard for one (1) year in the 1990s was only eleven (11%) percent.  We have heard the current acceptance rate is approximately twenty (20%) percent of legitimate offers.

The IRS also implemented a deferred payment Offer - in - Compromise which is essentially a combination of an old lump sum offer with an Installment Payment Agreement.  Under this situation, the taxpayer must amortize (or pay during the life of the installment) the realizable value (equity) in his or her assets.  If amortized, this figure must be added to the monthly ability to pay.  Unfortunately, those taxpayers who have substantial equity in assets may find the monthly payment unacceptable or unrealistic.  The Service also has Effective Tax Administration ("ETA") offers, which apply in  special situations.

H.  Bankruptcy

Many people, even some bankruptcy attorneys, believe that all federal taxes are nondischargeable in bankruptcy.  This is not true. Whether a particular liability is dischargeable or not depends upon numerous factors including whether the IRS is secured, the type of liability, and the age of the liability.  After an evaluation of their various options, some people find that their ultimate goals are best accomplished through filing bankruptcy.


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