THE IRS COLLECTION PROCESS: WHAT YOU NEED TO KNOW TO ADVISE YOUR CLIENTS

Transcription

1 THE IRS COLLECTION PROCESS: WHAT YOU NEED TO KNOW TO ADVISE YOUR CLIENTS Presented by the American Bar Association Section of Taxation, Criminal Justice Section, Government and Public Sector Lawyers Division and Center for Professional Development

2 American Bar Association Center for Professional Development 321 North Clark Street, Suite 1900 Chicago, IL CDs, DVDs, ONLINE COURSES, DOWNLOADS, and COURSE MATERIALS ABA self-study products are offered in a variety of formats. Find our full range of options at Discuss This Course Online Visit to access the discussion board for this program. Discussion boards are organized by the date of the original program, which you can locate on the preceding page of these materials. The materials contained herein represent the opinions of the authors and editors and should not be construed to be the action of the American Bar Association Section of Taxation, Criminal Justice Section, Government and Public Sector Lawyers Division or Center for Professional Development unless adopted pursuant to the bylaws of the Association. Nothing contained in this book is to be considered as the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. This book and any forms and agreements herein are intended for educational and informational purposes only American Bar Association. All rights reserved. This publication accompanies the audio program entitled The IRS Collection Process: What You Need to Know to Advise Your Clients broadcast on August 5, 2014 (event code: CET4DFD).

3 TABLE OF CONTENTS 1. Presentation Slides 2. How is the IRS Doing? According to Taxpayer Advocate Reports Frances D. Sheehy 3. The Collection Due Process Hearing and Appeal Sara G. Neill 4. Unpaid Federal Tax Liabilities The Bankruptcy Option (The Taxpayer Controls!) Wm. Robert ( Bob ) Pope, Jr. 5. Survey of 2013 CDP Cases Updated January 1, 2014 (112 Cases Reviewed) Frances D. Sheehy Survey of Dischargeability Recent Cases 2013 (176 Cases Reviewed) Frances D. Sheehy

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5 The IRS Collection Process: What You Need to Know to Advise Your Clients Tuesday, August 5, :00 3:30 PM Eastern Sponsored by the ABA Section of Taxation, Business Law Section, Criminal Justice Section, Government and Public Sector Lawyers Division and the ABA Center for Professional Development The Panel Wm. Robert Pope, Jr. ( Bob ) Dennis Brager Frances D. Sheehy (Moderator / Bankruptcy) (Appeals Judicial Approach and Culture ) (Taxpayer Advocate Review and White & Reasor, PLC Brager Tax Law Group Late Filed Return in Bankruptcy) One American Center, Suite Wilshire Blvd., Suite 880 Law Offices of Frances D. Sheehy 3100 West End Avenue Los Angeles, CA Wiles Road, No. 502 Nashville, TN dbrager@bragertaxlaw.com Coconut Creek, FL (615) (310) fsheehy@att.net (954) Sara G. Neill Christin Bucci (CDP Hearing OICs and Installment Agreement) (CDP Hearing OICs and Installment Agreement) Capes Sokol Goodman & Sarachan P.C. Bucci Law Offices, P.A Forsyth Blvd., 12 th Floor 2600 North Andrews Avenue St. Louis, MO Ft. Lauderdale, FL neill@capessokol.com christin@buccilawoffices.com (314) (954)

6 OBJECTIVE: IRS Collection Options How to Use and How to Litigate! Only two IRS Collection Options Without any Judicial Review Uncollectible Status: 53 the Transaction Code CAP Hearing Request to Not File Notice of Tax Lien OBJECTIVE: IRS Collection Options How to Use and How to Litigate! Innocent Spouse: Tax Court Review Offers-in-Compromise and Installment Agreements Tax Court Review: Appeal -- Only After Collection Due Process Hearing 2

7 How is the IRS Doing? According to: Taxpayer Advocate Reports Currently 3

8 2011 Collection Issues Lien Filing Personal TP contact Levy on Social Security 2012 Collection Issues: Improve Telephone & Correspondence Online Services Delays in 2848 processing RO role not being used effectively ACS increase service and effectiveness Lien Filing policies Early intervention for victims of failed payroll services 4

9 2013 Objectives Improve small business fresh start Improve criteria in lien filing Use collection resources (RO s) prudently Re-evaluate focus of collections field oper Objectives Collection policies & procedures SB TP Safeguards for TP facing foreclosure Improve federal levy program re: hardship Eliminate procedural barriers to IA & OIC 5

10 2013 Good News Lien filing and withdrawal Small business IA s Streamlined OIC s and IA s Fresh start OIC terms- Student loans, state tax debt, unsecured pmts 2013 Bad News Small business IA s declined Identify barriers to SB IA s and OIC s Liens based on facts/circumstances Meaningful, fair, realistic lien criteria Train employees on new lien rules Inadequate resources for fresh start Focus of collection field operations 6

11 2014- Good News OIC s higher acceptance rate Fewer liens filed More liens withdrawn New safeguards for judicial foreclosures Hardship levy release even if unfiled returns 2014 Bad News Collection philosophy training IA s declined Few IA s and OIC s Identify barriers to new policies ACS not effective with SB Levies on social security if unfiled returns IRS procedures narrow use of IA and OIC 7

12 Offer-in-Compromise and Installment Agreements: Collection Due Process Hearing And The Appeal Taxpayer s Right to Notice and a Collection Due Process Hearing I.R.C and 6331 The CDP Hearing Request Practical tips for completing Form What should be attached? Offer in Compromise? Installment Agreement request? Other? Suspension of collections and statute of limitations 8

13 The CDP Hearing Face to face or in person? Materials submitted? Recorded? Client attend? Can witnesses be subpoenaed/examined? The benefit of having two representatives present AJAC Notice of Determination NOD issued at conclusion of the CDP hearing advises taxpayer of right to seek judicial review of decision Tax Court has exclusive jurisdiction over CDP appeals Can you work with the Settlement Officer to define the issues in the Notice of Determination? Do you work with the Settlement Officer when you are having the hearing to decide how you want the Notice of Determination to read? NOTE: Tax Court will only consider an issue that was properly raised in the CDP hearing 9

14 Tax Court Review of the NOD Standard of review Abuse of discretion Dalton v. Commissioner De Novo Scope of review Practical considerations at and subsequent to the CDP hearing with litigation in mind Results: Best Do Over? 10

15 BANKRUPTCY TAX MYTHS #1 Must have a bankruptcy purpose other than tax claim NO #2 Bankruptcy Judges do not like or understand tax cases NO BANKRUPTCY TAX MYTHS #3 Bankruptcy Lawyers do not understand tax issues, or tax litigation! NOT A MYTH Your Job! #4 Tax Lawyers do not understand bankruptcy tax litigation NOT A MYTH My Job! 11

16 Bankruptcy Objectives A. Discharge: Full Absolution!! Exception: Notice of Federal Tax Lien ERISA Qualified Not Property of Estate COMPLICATED Bankruptcy Objectives B. Deferred Payment: Ch Years Automatic (2 more if you ask) Ch Years -- Prepare 12

17 Bankruptcy -- Tax Objectives C. Bankruptcy Court Tax Litigation Objection to Claim (11 U.S.C. 502(b) And FRBP 3007) Motion to Determine Liability (11 U.S.C. 505) Complaint to Determine Dischargeability (11 U.S.C. 523) TAXES DISCHARGEABLE IN BANKRUPTCY (Applicable in 7, 11 or 13) Timing Rules (Bankruptcy Filing After) 11 USC 523(a)(1) And 507(a)(8) 3 Year Rule: Due date of return 507(a)(8)(A)(i) (as Extended) December 12, and earlier GONE 2 Year Rule: Late filed returns, 523(a)(1)(B)(ii) (After date of filing) 240 Day Rule: New assessments, 507(a)(8)(A)(ii) (Not on return) 13

18 Bankruptcy Discharge Prohibited BANKRUPTCY DISCHARGE Made a Fraudulent Return; or ( 523(a)(1)(C)) Willfully attempted, in any manner, to evade or to defeat to pay ( 523(a)(1)(C)) Trust Fund Taxes ( 507(a)(8)(C)) Not Assessed but assessable taxes ( 507(a)(8)(A)(iii)) Collection After Bankruptcy? Secured Tax Liability [Even if Discharged] Only if Notice of Federal Tax Lien filed before bankruptcy. IRC 6321, 6322 Limited to pre-petition assets (including appreciation) Not Discharged Of Course! 14

19 When Does the Debtor Get a Discharge? 1. Chapter 7 When the court enters the discharge order, 727. [3 to 6 months after petition filed] 2. Chapter 13 After the last plan payment is made, unless there is hardship, [3 to 5 years] 3. Chapter 11 After the last plan payment is made. [Or Plan confirmed provides otherwise] CHAPTER 7 Individual Assume Discharge ADVANTAGES a. Certainty:?* b. Short timeframe pre-petition assets c. Post-Petition: New Income and assets Not subject to tax claim/or lien DISADVANTAGES a. Pass means test b. Tax Lien: Remains on (only matters if exempt) c. Lose all assets Not Exempt 15

20 Debt Limits CHAPTER 13 BEST USE: Cannot discharge all tax (or significant lien problem), but can pay out non-dischargeable portion. ADVANTAGES a. Certainty -- YES b. Keep property c. Lien: Value Capped d. Interest does not accrue post-petition on dischargeable DISADVANTAGES a. Plan payments 3-5 yrs. b. Lien remains c. All post-bankruptcy income goes to plan d. Possible default All tax stays Restructure Debt The Plan CHAPTER 11 USE: Extended Pay Out Orderly Liquidation Deal with Creditors ADVANTAGES a. Certainty b. Pay % unsecured c. Keep property d. No debt limits e. Debtor is Trustee f. Flexibility of Plan DISADVANTAGES a. Expensive b. Substantial Reporting c. Post-Petition: Income assets of the estate d. Plan Defaults Tax Remains e. Non-Taxpayer f. Creditors More Active, including IRS 16

21 GOLD MINE Lawyer and Client Individual Tax Only CHAPTER 11 ADVANTAGES a. Certainty b. Keep property c. Keep tax attributes d. Pay portion of unsecured e. Lien released at end f. Automatic stay stops levy g. Lien value capped DISADVANTAGES a. Plan payments 3-5 yrs. b. Lien stays until end c. Post-bankruptcy income goes to plan d. If default all tax stays e. Debt limits f. SOL suspended g. Defend objections to Plan, discharge, and exemptions Late-Filed Returns -- Discharged in bankruptcy? Or Not Discharged in bankruptcy? 17

22 Code Sections I. 11 U.S.C. 523(a)(1)(B)(i) 2 Year Rule II. 11 U.S.C. 523(a)(19) hanging para. Return = satisfying non-bankruptcy law requirements, including filing requirements Returns prepared pursuant to I.R.C. 6020(a), stipulation to judgment, final order NOT return made pursuant to I.R.C. 6020(b) Case Law Part One In re Colson, 446 F.3d 836 (8 th Cir. 2006) Returns filed after IRS assesses under 6020(b) Are dischargeable if they meet certain criteria U.S. v. Hindenlang, 164 F.3d 1029 (6 th Cir. 1999) Returns filed after IRS assesses under 6020(b) Are not dischargeable because they serve no tax purpose 18

23 Case Law Part Two Creekmore v. IRS, 401 B.R. 748 (Bankr. N.D. Miss. 2008) After-filed return is non-dischargeable unless late 6020(a) return McCoy v. Mississippi State Tax Comm n, 666 F.3d 924 (5 th Cir. 2012) Any late return is non-dischargeable IRS Re-Thinks Position Chief Counsel Notice CC : Late-filed return filed 2 years before bankruptcy Dischargeable Return filed by IRS pursuant to 6020(b) Non-Dischargeable Return filed by TP after IRS assesses pursuant to 6020(b) Dischargeable only as to tax greater than IRS assessment 19

24 Still Confusion States are following McCoy late = non-dischargeable IRS is usually following CC Except: Perry v. US, (Bankr. M.D. Ala. 2012) Some courts don t follow McCoy Smythe v. US, (Bankr. W.D. Wash. 2012) Late returns can be dischargeable Conclusion Timely returns filed 3 yrs. before bankruptcy Dischargeable Late returns filed 2 yrs. before bankruptcy Dischargeable Late returns filed 2 yrs. before bankruptcy after IRS assesses Dischargeable to extent of additional tax May be dischargeable Unfiled returns Non-dischargeable 20

25 Appeals Judicial Approach and Culture (AJAC) DENNIS N. BRAGER CERTIFIED TAX SPECIALIST STATE BAR OF CALIFORNIA BRAGER TAX LAW GROUP A PROFESSIONAL CORPORATION WILSHIRE BLVD, SUITE 880 LOS ANGELES, CA (310) FAX (310) Appeals Mission Resolve tax controversies, without litigation, on a basis which is fair and impartial to both the government and the taxpayer and in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the Internal Revenue Service. 21

26 Appeals Independence Section 1001 (a) of the IRS Restructuring and Reform Act of 1998 (RRA 98) specifies that the IRS reorganization plan must Ensure an independent appeals function within the Internal Revenue Service, including the prohibition in the plan of ex parte communications between appeals officers and other Internal Revenue Service employees to the extent that such communications appear to compromise the independence of the appeals officers. 43 Appeals Judicial Approach and Culture (AJAC) History Project initiated several years ago in response to concerns raised by internal and external stakeholders, including Appeals employees. Policy Changes December 2012: two Trust Fund Recovery Penalty (TFRP) related changes. July 2013: Interim Guidance issued on 12 policy changes (see AP ). November 2013: Interim guidance rescinded, and incorporated into various IRM August 11, 2014: AJAC Phase II effective. 22

27 Appeals Judicial Approach and Culture Overview Procedural changes are being implemented to improve efficiency and perceptions of Appeals independence. Returns Appeals to a quasi-judicial approach in case management so it can fulfill its mission of resolving disputes in an impartial manner without performing Compliance roles. Appeals hearing officers are not investigators or examiners. Instead, Appeals hearing officers are tasked with weighing the merits of each parties positions and litigation prospects. AJAC: No New Issues Appeals will not raise new issues - Policy Statement 8-2 Nondocketed cases A "new issue" is any issue identified by Appeals, i.e., not raised during Compliance's consideration. See IRM ( ). Only exception in non-docketed cases is if the taxpayer raises new issues. Revised policy marks a significant change from the previous policy, under which Appeals could raise a new issue if the grounds were substantial and the potential impact on the tax liability was material. IRM : "Appeals will not raise new issues and will focus dispute resolution efforts on resolving the points of disagreement identified by the parties. The Appeals process is not a continuation or an extension of the examination process." 23

28 Appeals Judicial Approach and Culture Changes to TFRP Case Procedures - IRM effective 12/02/12 Appeals will limit consideration of facts supporting the Government s position to the contents of the TFRP administrative file Appeals employees will not perfect, solicit, or prepare an IRS Form 4180 (Report of Interview with Individual Relative to TFRP Penalty or Personal Liability for Excise Taxes). If relevant new information is submitted that requires investigative analysis then Appeals will give SB/SE 45 days to investigate, and inform Appeals of their findings. IRM (6) (effective Aug. 10, 2014). 47 Collection Appeal Program No Judicial Review!! IRM Actions that Can be Appealed by a taxpayer, or a third party. Levy or seizure action that has been or will be taken. A Notice of Federal Tax Lien (NFTL) that has been or will be filed. The filing of a NFTL against an alter-ego or nominee's property. Denials of requests to issue lien certificates, such as subordination, withdrawal, discharge or non-attachment. Rejected, proposed for modification or modified, or proposed for termination or terminated installment agreements. A modification of an installment agreement can involve a proposal by the IRS or the taxpayer. Disallowance of taxpayer's request to return levied property under IRC 6343(d). Disallowance of property owner's (third party's) claim for return of property under IRC 6343(b) (request for return of wrongfully levied property). For more information, see Pub

29 CAP Appeals does not consider collection alternatives under CAP E.g. Taxpayer requests a levy release on the basis of economic hardship, but has an unfiled return. If Appeals determines under IRC Section 6343(a)(1)(D) that the levy should be released; however it will not consider further case resolutions such as CNC or an IA. Collection Due Process Cases IRM Appeals Policy 1. Resolve fair and impartial to the Government and the Taxpayer... based on the facts and law known to Appeals during the time of the hearing. 2. Statement of Tax Court s Standard of Review for non-liability CDP Cases Are the factual and legal conclusions [in Appeals Notice of Determination] reasonable, not whether those conclusions are correct. Dalton v. U.S. --!! Appropriateness of Appeals ultimate decision 25

30 Collection Due Process Cases IRM Appeals Policy 3. CDP Files: Should contain sufficient information for determination Not sufficient : Cannot be returned as premature referral Appeals Options: Inadequate Information Request from Taxpayer Issue an ARI (Appeals Request for Information) to Collection to secure and verify information Collection Due Process Cases The Dalton Standard* Administrative Procedure Standard of Review: Deference to Appeals Burden of Proof: Taxpayer must show that Notice of Determination arbitrary and capricious to overcome deference to Appeals reasonableness. *Dalton v. U.S., 682 F.3d 149 (1 st Cir. 2012). Tax Court s review of CDP Hearing reversed. Tax Court did not limit review as to whether IRS position in Notice of Determination was reasonable. 26

31 Collection Due Process Cases A Practitioner s View: Appeals CDP determination on the information available subject to Dalton standard of review Can Settlement Officer act arbitrarily and capriciously by failing to request additional information? Practitioner must submit information before hearing to set up arbitrary or capricious Collection Due Process Cases How Do You Use The Dalton Standard: What would be arbitrary and capricious? Ignoring financial information submitted by the Taxpayer Practitioner must assure complete record before Appeals before CDP hearing 27

32 Offers in Compromise Appeals review of non-cdp OICs: Recurring Themes No new financial statements: Appeals will not contact the taxpayer to secure an updated financial statement if the information is less than 12 months old (as of the date received in Appeals), or if the information has become outdated as a result of IRS delay. If Appeals needs updated financial information from the taxpayer, an updated Form 433-A and/or 433-B is not necessary. "Pen-and-ink" changes to the existing Form 433-A/B are sufficient. IRM (7) Appeals will not search for new assets: Only assets documented by Collection will be considered. IRM (5) Offers in Compromise Appeals will not value an asset in excess of value determined by Collection (4). A case will not be returned as a premature referral where Collection did not fully develop certain issues. Weigh Collection s development of the issue versus information and testimony provided by the taxpayer, and make the decision based upon those factors. IRM (5). Only review the appeal for the specific issues that are in dispute. The taxpayer may present new issues during Appeal. IRM (effective Aug. 10, 2014). If new information submitted is complex it may be necessary to request an ARI; however, many items such as new household bills, account statements, and paystubs can be reviewed by Appeals without the use of an ARI. Id. 28

33 IRM Section (2) Non-CDP-OIC Appeals Primary Obligations Include: Advise the taxpayer of what is needed in order for the offer to be properly evaluated and/or accepted and provide a reasonable opportunity to submit supplemental information or documentation that the taxpayer or the Appeals hearing officer believes is necessary to properly evaluate the offer and/or make the offer acceptable. If an offer cannot be accepted, communicate the reason(s) why and discuss alternatives (such as installment agreements and CNC status) that can be pursued with Compliance, including explaining any forms or documentation required for consideration of these alternatives. Appeals Responsibilities Differ between Collection Due Process (CDP) and Non-CDP Offer in IRM Section In a non-cdp Offer case, Appeals should not re-work the offer rejected by Compliance. Appeals will consider those items in dispute at the time of rejection. IRM Section (3). The Appeals process in an OIC case is not an extension of the Compliance OIC process. The role and mission of Appeals are different from that of Compliance. Appeals' personnel must employ Appeals' standard conference and settlement practices for all work streams, including OICs. IRM Section (1). Appeals may not close a non-cdp offer case rejecting an OIC without first offering the taxpayer an opportunity for a conference without regard to whether or not the taxpayer is in current compliance. IRM Section

34 Appeals Responsibilities Differ between Collection Due Process (CDP) and Non-CDP Offer in IRM Section (Cont.) Appeals must also strive to accommodate a taxpayer's reasonable request for an in-person conference. IRM Section However, if the review shows that the taxpayer is not in compliance with filing or payment requirements or the entire liability is clearly collectible and the taxpayer presents no special circumstances, the offer's rejection may be sustained without transfer. IRM Section However, Appeals is not required to reject an OIC because a previously unfiled or delinquent IMF return produces a new liability. IRM Section In the case of a taxpayer who is not in filing or payment compliance, if an opportunity has not been given to the taxpayer to correct the issue of noncompliance, then an opportunity should first be given to the taxpayer to resolve the matter. IRM Section (5). Appeals Responsibilities Differ between Collection Due Process (CDP) and Non-CDP Offer in IRM Section (Cont.) IRM Section states that a processable DATC offer must be returned by Compliance when the investigation reveals the taxpayer does not have sufficient estimated tax paid or income tax withheld to cover the current year estimated tax due. Compliance is required to give the IMF taxpayer an opportunity to make up the missed estimated tax payment(s) or withholding underpayment before returning the offer. If Compliance failed to give the taxpayer this opportunity the case must be returned to Compliance for solicitation of the payment. Appeals should attempt to get the taxpayer into compliance with estimated tax payments only in certain circumstances. IRM Section

35 Appeals Responsibilities Differ between Collection Due Process (CDP) and Non-CDP Offer in IRM Section (Cont.) Appeals employees will only consider assets documented previously by Collection in the offer case file. Appeals will not identify and value any additional assets. Appeals will only consider Items in dispute where the Taxpayer and Collection did not reach an agreement. IRM Section (5). Appeals employees will not revise the value of an asset to an amount that is higher than the value previously determined by Collection, unless the taxpayer voluntarily provided such information to Appeals. IRM Section (6). General Factors to be Considered by Appeals in All OICs IRM Section (6) The success, or lack thereof, of prior collection efforts against the taxpayer. The advantage of the taxpayer's future compliance, secured through acceptance of an OIC. Such factors are not stand-alone bases of acceptance of compromise, but should be considered in developing a frame of mind that is open to compromise. 31

36 Consider Potential Bankruptcy If the taxpayer states an intent to file bankruptcy if the offer is not accepted, consider whether any of the tax liability can be discharged. A hazards approach may be used, based upon the degree of risk determined to exist that the taxpayer would file bankruptcy. IRM Section The value of future income is an asset that may be lowered based upon the perceived degree of risk of the taxpayer filing a Chapter 7. Consider Potential Bankruptcy (Cont.) Some general determinations to make are as follows: which liabilities are dischargeable if the taxpayer has dischargeable non-tax debts if the taxpayer has any prior history of bankruptcy filing the overall age of the liabilities the success of the Service's prior collection efforts against the taxpayer any assets that would be excluded from a bankruptcy estate and encumbered by the statutory lien does the taxpayer qualify for a Chapter 7 discharge based upon the "means test" any NFTLs already filed on assets that would be exempted from a bankruptcy estate 32

37 Clarifications and Standards Applicable to All OICs The taxpayer is not required to make periodic payments on either a regular basis or in equal amounts. IRM Section (5). The IRS no longer requires that installment agreements in effect prior to receipt of an OIC remain in effect while an offer is being considered. IRM Section (11). Clarifications and Standards Applicable to All OICs (Cont.) If an amended Periodic Payment Offer is secured, the 24-month period during which the taxpayer must pay the Periodic Payment Offer begins the date the amended offer is accepted. The taxpayer is still required to make the proposed periodic payments while the amended offer is being considered, but the 24-month period to make such payments doesn't begin until the date the offer is accepted. IRM Section (3). 33

38 Clarifications and Standards Applicable to All OICs (Cont.) There may be situations based on the facts and circumstances of an individual taxpayer in which the local and national standards would result in the taxpayer not having adequate means to provide for basic living expenses. In such cases Appeals may allow for additional amounts. IRM Section (7). It is appropriate to ensure accruals of interest and penalties are taken into consideration when considering whether or not the liability can be paid in full. IRM Section (2). Clarifies Appeals authority to accept an OIC even if Counsel disagrees. IRM Section AJAC (Phase II) Set forth in IRS memo AP (Release date July 10, 2014) Effective for collection cases, collection information statements, and significant information received by Appeals after August 10, To be incorporate into the IRM Mostly very detailed procedural changes Bob Pope White & Reasor, PLC Dennis Brager Brager Tax Law Group, A.P.C. 34

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40 FRANCES D. SHEEHY, ESQ. LAW OFFICE OF FRANCES D. SHEEHY 5481 WILES ROAD, Suite 502 COCONUT CREEK, FLORIDA FAX: Board Certified Tax Lawyer 2014 IRS COLLECTION WEBINAR August 5, 2014 HOW IS THE IRS DOING? ACCORDING TO TAXPAYER ADVOCATE REPORTS 2013 Annual Report with Respect to Collections: In 2013, five of the 25 Most Serious Problems Encountered by Taxpayers were collection-related issues: A.Hardship Levies, 4 Years After Vinatieri v. Commissioner, IRS Still Levies on Taxpayers it Acknowledges are in Economic Hardship and then Fails to Release Levies. IRS uses automatic levy on social security even though Tps are earning less than 250% of poverty level and are presumed to be experiencing economic hardship. Then fails to release them. IRS should consider hardship issue prior to levy. B. ACS Case Selection and Case Processes Result in Poor Collection Yields and Poor Case Resolution, Harming Taxpayers. With 47% fewer levies than 2012, ACS collected slightly more, but transferred 3 times what it collected to other functions. IRS should segment taxpayers, train some ACS personnel to resolve small business cases, require all to advise taxpayers of all alternatives. C. IRS Collection Procedures Harm TP and Cause Lost Revenue. ACS failed to resolve 85% were not resolved in the notice process, causing delay in resolution. IRS should assign TF cases to employees with power to resolve them, use conditional IA s for business taxpayers not in compliance. D. The IRS Lacks a Plan to Resolve TP Accounts with SOL Extensions Exceeding Policy Limits. IRS required CSED extensions beyond the 5 years inappropriately, due to IRS 1991 wavier policy. IRS should abate all affected accounts by June 15, E. CDP Hearings: Current Procedures Allow Undue deference to Collections, and do Not Provide Fair and Impartial Hearings. TP s don t get to work with collections to resolve their case prior to CDP hearing. If they do, they must waive their CDP rights. Appeals doesn t understand the purpose of CDP -1-

41 and there are independence concerns. Appeals has no IRM guidance for CDP and uses Collections, rather than balancing rights and weighing litigation risks. IRS should try to resolve collection prior to issuing the CDP notice, if TP resolves with collection after notice, Appeals should retain jurisdiction and enter into the agreement with TP. IRM should be updated, Appeals should get training re: balancing test and hazards of litigation. The Legislative Recommendations, included: None collection specific. The Most Litigated Issues were: A. Appeals from Collection Due Process Hearings Under IRC Sections 6320 and Substantive issues as well as sanctions in 3 cases for CDP used to delay. B. Frivolous Issues Penalties Under IRC Section cases, TP many times escaped liability but were warned of future sanctions. Cases illustrate what conduct the courts will/will not tolerate. C. Civil Actions to Enforce Federal Tax Liens or to Subject Property to Payment of Tax Under IRC Section IRS prevailed in 30 of 34 cases. Number of cases declined by 31 percent from prior year. (Due to lack of equity because of economy?) D. Relief from Joint and Several Liability Under IRC Section These included standard of review issues, jurisdiction of District Courts, 6015(f) proposed guidelines Fiscal Year 2015 Objectives of the Annual Report with Respect to Collections: Areas of Focus: A. Collection Update: IRS Collection of Delinquent Taxes: IRS Should Improve Collection and Maximize Compliance 1. IRS prioritizes collections based on amount rather than how old the tax is, uses ACS to file liens and issue levies without personal TP contact, with heavy handedness (liens/levies) rather than IA s and OIC s. 2. IRS should use timely interventions, personal contact, which would enhance long term voluntary compliance. B. Civil Tax Penalties: Create task force to review penalties in the Code. 1. Application of automatic penalties lowers voluntary compliance. 2. IRS should review penalty policies to ensure application of penalties is based on TP information as to applicability of penalty and whether it will enhance voluntary compliance, rather -2-

42 than be strictly punitive. C. Implementation of Taxpayer Bill of Rights 1. June 14, 2014, IRS adopted Taxpayer Bill of Rights (TBOR) 2. TBOR has been added to the IRS website 3. TAS will work with IRS to implement TBOR and integrate it into IRS operations the Good News: a had 47% fewer levies than 2012 (?sequester?) b. Suits to reduce liens to judgment and/or foreclose decreased by 31% from 2012 c. IRS adopted the Taxpayer Bill of Rights the Bad News: a. IRS levies on Social Security and doesn t release levies even when hardship b. ACS failed to resolve 85% of cases c. IRS failed to abate tax where CSED extended beyond the 5 year IRS policy d. IRS still sends CDP notices without trying to resolve with TP, and require TP to waive CDP rights. e. Appeals has no IRS guidance for CDP s -3-

43 THE TAXPAYER BILL OF RIGHTS The Right to Be Informed Taxpayers have the right to know what they need to do to comply with the tax laws. They are entitled to clear explanations of the laws and IRS procedures in all tax forms, instructions, publications, notices, and correspondence. They have the right to be informed of IRS decisions about their tax accounts and to receive clear explanations of the outcomes. The Right to Quality Service Taxpayers have the right to receive prompt, courteous, and professional assistance in their dealings with the IRS, to be spoken to in a way they can easily understand, to receive clear and easily understandable communications from the IRS, and to speak to a supervisor about inadequate service. The Right to Pay No More than the Correct Amount of Tax Taxpayers have the right to pay only the amount of tax legally due, including interest and penalties, and to have the IRS apply all tax payments properly. The Right to Challenge the IRS s Position and Be Heard Taxpayers have the right to raise objections and provide additional documentation in response to formal IRS actions or proposed actions, to expect that the IRS will consider their timely objections and documentation promptly and fairly, and to receive a response if the IRS does not agree with their position. The Right to Appeal an IRS Decision in an Independent Forum Taxpayers are entitled to a fair and impartial administrative appeal of most IRS decisions, including many penalties, and have the right to receive a written response regarding the Office of Appeals decision. Taxpayers generally have the right to take their cases to court. The Right to Finality Taxpayers have the right to know the maximum amount of time they have to challenge the IRS s position as well as the maximum amount of time the IRS has to audit a particular tax year or collect a tax debt. Taxpayers have the right to know when the IRS has finished an audit. The Right to Privacy Taxpayers have the right to expect that any IRS inquiry, examination, or enforcement action will comply with the law and be no more intrusive than necessary, and will respect all due process rights, including search and seizure protections and will provide, where applicable, a collection due process hearing. The Right to Confidentiality Taxpayers have the right to expect that any information they provide to the IRS will not be disclosed unless authorized by the taxpayer or by law. Taxpayers have the right to expect appropriate action will be taken against employees, return preparers, and others who wrongfully use or disclose taxpayer return information. The Right to Retain Representation Taxpayers have the right to retain an authorized representative of their choice to represent them in their dealings with the IRS. Taxpayers have the right to seek assistance from a Low Income Taxpayer Clinic if they cannot afford representation. The Right to a Fair and Just Tax System Taxpayers have the right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay, or ability to provide information timely. Taxpayers have the right to receive assistance from the Taxpayer Advocate Service if they are experiencing financial difficulty or if the IRS has not resolved their tax issues properly and timely through its normal channels. -4-

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45 THE COLLECTION DUE PROCESS HEARING AND APPEAL Sara G. Neill Capes Sokol Goodman & Sarachan, P.C. Saint Louis, Missouri I. INTRODUCTION A common response of taxpayers with tax collection problems is to ignore the IRS and all of its computer-generated notices. Many taxpayers simply add unopened notices to the growing pile of notices which were previously received; other taxpayers throw the notices directly into the trash can. The certified notices may never be signed for or picked up at the post office. Ignoring the IRS is not a recommended strategy for dealing with a federal tax collection problem. Eventually the IRS can and may file federal tax liens, levy bank accounts and wages, and/or seize physical assets including retirement accounts, and personal property. The taxpayer who chooses to ignore the IRS for too long will relinquish his/her collection due process rights. Under the collection due process provisions of the Internal Revenue Code, a taxpayer has the right to request a hearing with the IRS Appeals Division which may suspend certain collection efforts by the IRS. Such hearing is commonly known as a CDP hearing. The Code requires the taxpayer to be notified of the right to request a CDP hearing in two separate instances: (1) After the IRS files a notice of federal tax lien ( NFTL ) with respect to the taxpayer s property and (2) before the IRS levies on the property. 1 The CDP hearing may be used to challenge an underlying tax liability in circumstances where the taxpayer has not had a prior opportunity to dispute the liability, the amount of tax and even the existence of tax after a bankruptcy. 2 The taxpayer may also raise spousal defenses, and/or propose collection alternatives. 3 The most commonly accepted collection alternatives are to persuade the IRS that the taxpayer is currently not collectible, enter into an installment agreement, or negotiate an offer in compromise. The IRS appeals officers who hear CDP cases usually are former revenue officers and must follow the same guidelines as a collection officer; however, they have resolution as their main focus. Of great significance, if the taxpayer is unable to resolve the collection matter 1 I.R.C. 6320(a)(1), 6330(a)(1). 2 I.R.C. 6330(c)(2)(A),(B); Becker v. Commissioner., TC Memo ; Johnson v. Commr., TC Summ.Op ; Mueller v. Commissioner, TC Memo ; Barnes v. Commissioner, TC Memo I.R.C. 6320(c), 6330(c)(2). 7

46 with the IRS through the CDP hearing, he or she will have the opportunity to file an appeal to the U.S. Tax Court. 4 The Tax Court s jurisdiction over CDP matters provides the taxpayer with some leverage in negotiating with the IRS. It can therefore be advantageous for the taxpayer who desires to enter into an Offer in Compromise or Installment Agreement with the IRS to wait to request it until the CDP notices have been received. This outline will describe the taxpayer s CDP rights, and explain the CDP appeal process and the various collection alternatives which may be used by the taxpayer and the IRS to reach a resolution of the tax collection matter. II. THE TAXPAYER S RIGHT TO NOTICE AND OPPORTUNITY FOR A HEARING Two separate collection actions give rise to the requirement that the IRS notify the taxpayer of his or her right to request a CDP hearing: (1) filing a NFTL and (2) levying of the taxpayer s property. 5 The IRS must notify the taxpayer in writing after the filing of the NFTL and before the IRS levies on any property of the taxpayer. 6 The CDP notice is required to be: 1) Provided to the taxpayer; 2) Left at the dwelling or usual place of business of the taxpayer; or 3) Sent by certified or registered mail to the taxpayer s last known address. 7 Actual receipt is not required in order for the CDP notice to be valid. 8 If the IRS fails to deliver the CDP notice as required by section 6320(a)(2), the validity and priority of the NFTL will not be affected. 9 If the IRS determines that it failed to properly deliver the CDP notice to the taxpayer, it is supposed to provide a substitute CDP notice. 10 The taxpayer s refusal to accept the CDP notice does not render it invalid. 11 The IRS must send the post-nftl CDP notice within 5 business days after the day of the filing of the NFTL. 12 The pre-levy CDP notice must be sent at least 30 days before the first levy. 13 There are a few exceptions to requirement that the IRS send the CDP notice to the taxpayer before levy action which include: State tax refunds; when there has been a determination that the collection of tax is in jeopardy; disqualified employment tax levy; and 4 I.R.C. 6320(c), 6330(d)(1). 5 I.R.C. 6320(a)(1), 6330(a)(1). 6 Id. 7 I.R.C. 6320(a)(2), 6330(a)(2). 8 Treas. Reg (a)(2) Q&A-A11, (a)(3) Q&A-A9. 9 Treas. Reg (a)(2) Q&A-A Treas. Reg (a)(2) Q&A-A12, (a)(3) Q&A-A Treas. Reg (a)(2) Q&A-A12, (a)(3) Q&A-A9. 12 I.R.C. 6320(a)(2)(C). 13 I.R.C. 6330(a)(2). 8

47 federal tax liabilities of federal contractors. 14 Post levy procedures will apply in these circumstances. 15 The taxpayer will receive a post-levy CDP notice of the right to a CDP hearing within a reasonable time after the levy has occurred. 16 The CDP notice is in the form of a letter which includes a Form 12153, Request for a Collection Due Process Hearing. To be valid, the CDP notice issued after the filing of a NFTL must include the following information: 1) The amount of tax which remains unpaid; 2) the right of the taxpayer to request a hearing within a 30-day period; 3) the administrative appeals and procedures relating to such appeals available to the taxpayer; and 4) the procedures relating to the release of liens on property. 17 Similarly, the CDP notice issued before the initiation of levy action must include the following information: 1) The amount of tax which remains unpaid; 2) the right of the taxpayer to request a hearing within 30-days; and 3) the IRS s proposed action and the rights of the taxpayer with respect to that action including a statement which sets forth several additional items pertaining to levy and sale procedures which are set forth in section 6330(a)(3). 18 It is common for the IRS to file a NFTL at more than one recording office. In such cases, the IRS will provide separate CDP notices for each filing. 19 The IRS will not send the taxpayer a new CDP notice when a NFTL is refiled, but will send the taxpayer notification when a subsequent NFTL is filed for the same period or periods. Not all such notices will give rise to a right to a CDP hearing. 20 A taxpayer is only allowed one CDP hearing with respect to the tax and tax period(s) covered by the CDP notice. 21 When there has been an additional assessment of tax for a period (not including interest or penalty accruals) or an additional accuracy-related of delinquency penalty, a taxpayer may receive more than one CDP hearing for the same period. 22 With respect to a post-nftl CDP hearing, the taxpayer has 30 days to request the CDP hearing. The 30 days begins to run on the day after the 5 th business day subsequent to the filing of the NFTL. 23 The taxpayer has 30 days from the date of the pre-levy CDP notice to request a hearing I.R.C. 6320(c), 6330(f); Treas. Reg (a)(2). 15 Id. 16 Id. 17 I.R.C. 6320(a)(3); Treas. Reg (a)(2) Q&A-A9, Q&A-A I.R.C. 6330(a)(3). 19 Treas. Reg (a)(2) Q&A-A4. 20 Treas. Reg (a)(2) Q&A-A6, Q&A-A8, (b)(1). 21 I.R.C. 6320(b) and 6330(b)(2); Treas. Reg (b)(1); (b)(1). See Investment Research Associates, Inc. v. Commissioner, 126 T.C. No. 7 (2006) (upholds regulations which only allow for hearing after filing of first NFTL). 22 Treas. Reg (d)(2) Q&A-D1, (d)(2) Q&A-D1. 23 Treas. Reg (b)(1). 24 Treas. Reg (b)(1). 9

48 The IRS may not waive the statutory period in which a taxpayer must request an administrative hearing under sections 6320 and If the taxpayer is in negotiations with the IRS Collection Division these discussions do not suspend the running of (or otherwise extend) the 30-day period during which taxpayers may request a CDP hearing. However, if the Collection Division may be amenable to holding a timely and properly filed CDP request to allow a Revenue Officer and taxpayer to continue trying to reach a resolution before forwarding the CDP request to the Appeals Division. If the taxpayer and/or his or her practitioner has a good rapport with the Revenue Officer, it may be a good strategy to try to resolve the matter right then as opposed to risking that the matter be assigned to a less favorable IRS employee. III. THE TAXPAYER S CDP HEARING REQUEST In order for a CDP request to be valid, it must be made in writing and state the grounds for the requested hearing. 26 The Treasury Regulations require that a request for a CDP hearing include: 1) The date of filing; 2) The taxpayer s name, address, daytime telephone number (if any), and taxpayer identification number; 3) The type of tax involved; 4) The tax period(s) at issue; 5) A statement that the taxpayer requests a hearing concerning the filing of the NFTL; 6) The reasons why the taxpayer disagrees with the NFTL and/or proposed levy; and 7) The signature of the taxpayer or the taxpayer s authorized representative. 27 While the IRS encourages the taxpayer to use Form 12153, Request for a Collection Due Process Hearing, in requesting a CDP hearing, this is not a requirement for the request to be valid. If the taxpayer requests a hearing on a frivolous basis the IRS may treat the request as if it were never submitted. 28 Notice provides a list of positions the IRS considers to be frivolous. Section 6702(b) provides for a penalty of $5,000 if any portion of a request for a hearing is based on a specified frivolous position, or reflects a desire to delay or impede the administration of federal tax laws. 29 While the IRS views intentional delay by the taxpayer as grounds for sanction, after the taxpayer files the hearing request, it may take several months or longer before the taxpayer receives notification that a hearing has been scheduled with the IRS Appeals Division. IV. SUSPENSION OF COLLECTIONS AND STATUTES OF LIMITATION One drawback of the CDP appeal is that while it is pending beginning on the day the IRS receives the CDP hearing request, the statute of limitations for collections, criminal prosecutions, and other suits is suspended. 30 It continues to be tolled until the date the IRS 25 See Kennedy v. Commissioner, 116 T.C. 255, 262 (2001). 26 I.R.C. 6320(b)(1), 6330(b)(1). 27 Treas. Reg (c)(2) Q&A-C1, (c)(2) Q&A-C1. 28 I.R.C. 6330(g). 29 See Schlabach v. U.S., 101 Fed. Cl. 678, 684 (2011). 30 I.R.C. 6320(c), 6330(e)(1). 10

49 receives the taxpayer s written withdrawal of the CDP hearing request or the determination becomes final. 31 On a more positive note, while the statute of limitations is suspended, certain collection activities by the IRS such as bank levies and asset seizures are generally suspended during the pendency of the CDP appeal. 32 Circumstances when collection activities may not be suspended include: a court determines the IRS has shown good cause; the taxpayer raises only frivolous arguments; and the IRS determines that collection of tax is in jeopardy. 33 During the pendency of the CDP appeal period the IRS may file NFTLs. V. EQUIVALENT HEARING If a taxpayer s request for a CDP hearing is untimely, the taxpayer has the option to request an equivalent hearing with the IRS Office of Appeals. 34 A taxpayer has one year to submit a written request for an equivalent hearing. The one-year period begins to run the day after the end of the five-business-day period following the filing of the NFTL or, in the case of a pre-levy CDP notice, within one-year commencing the day after the date of the CDP notice was issued. 35 The taxpayer must specifically request an equivalent hearing: the IRS does not automatically treat a late CDP hearing request as an equivalent hearing request. 36 There is no requirement that the IRS suspend collection activity while the equivalent hearing is pending. Whether to suspend collection activity is determined on a case-by-case basis. 37 The procedures which apply in an equivalent hearing are generally the same procedures which apply in a CDP hearing, except that instead of a issuing a Notice of Determination, Appeals will issue a Decision Letter. 38 I.R.C does not authorize judicial review of an equivalent hearing decision; however, the Tax Court may review denials regarding innocent spouse relief under section Id. 32 I.R.C. 6330(e)(1). 33 I.R.C. 6330(e)(1), (2), Treas. Reg (g)(1). 34 Treas. Reg (i)(1). 35 Treas. Reg (i)(2) Q&A-17, (i)(2) Q&A I.R.M Treas. Reg (i)(2) Q&A-I4. 38 Treas. Reg (i)(1). 39 Treas. Reg (i)(2) Q&A-I6. 11

50 VI. THE CDP HEARING CDP hearings are informal in nature and may occur either over the telephone or in person, though the IRS is not required to give the taxpayer an in-person hearing. 40 If a taxpayer wants a face-to-face conference, it will most likely be held at the Appeals office closest to the taxpayer s residence. If the taxpayer is a business, the conference will be held at the Appeals office closest to the taxpayer s principal place of business. 41 The taxpayer does not have the right to subpoena and examine witnesses at the hearing. 42 The CDP hearing must be conducted by an Appeals Officer who has had no prior involvement with respect to the unpaid tax at issue. 43 At the conclusion of the CDP hearing, the Appeals Officer will issue a Notice of Determination. The Notice of Determination must discuss all issues raised by the taxpayer and should state why arguments and collection alternatives raised by the taxpayer were rejected. 44 Either before or during the hearing, the Appeals Officer who is assigned to the matter is required to verify from the Secretary that the requirements of any applicable law or administrative procedure have been met, consider the merits of the taxpayer s claims; and confirm that the issues were not raised and considered at a previous hearing or in any other previous administrative or judicial proceeding. 45 During the hearing the taxpayer may raise any relevant issues relating to the unpaid tax including: (1) spousal defenses; (2) whether collection action is proper; (3) collection alternatives; and (4) [c]hallenges to the existence or amount of the underlying tax liability if the person did not receive any statutory notice of deficiency for such liability or did not otherwise have an opportunity to dispute such tax liability. 46 VII. COLLECTION ALTERNATIVES a. Currently not collectible If the taxpayer has no assets or ability to pay, the IRS may determine the outstanding liabilities to be currently not collectible ( CNC ). 47 Before making this determination, the IRS Appeals Officer will usually require that the taxpayer provide either a completed Form 433A or 433F, financial statements for individuals, and, if appropriate a Form 433B, financial statement 40 Treas. Reg (d)(2) Q&A-D6. 41 Treas. Reg (d)(2) Q&A-D7, (d)(2) Q&A-D7. 42 Treas. Reg (d)(2) Q&A-D6. 43 I.R.C. 6320(b), 6330(b)(3). 44 See Robinette v. Commissioner, 439 F.3d 455, (8 th Cir. 2006). 45 I.R.C. 6320(c), 6330(c)(1)-(4). 46 I.R.C. 6320(c), 6330(c)(2)(A), (B). 47 I.R.M ; Policy Statement P