Robert E. McKenzie highlights new IRS policies and programs aimed at helping taxpayers pay back taxes and avoid tax liens. By Robert E.

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1 Robert E. McKenzie is an attorney with Arnstein & Lehr LLP in Chicago R.E. McKenzie December 2011 January 2012 Fresh Start Tax Collection Tips for Your Client in a Struggling Economy: A Collection Update and Review of the New Voluntary Classification Settlement Program By Robert E. McKenzie Robert E. McKenzie highlights new IRS policies and programs aimed at helping taxpayers pay back taxes and avoid tax liens. New Collection Procedures Announced Over the past several years as taxpayers have endured the Great Recession, the IRS has escalated the number of federal tax liens filed against delinquent taxpayers. The IRS s aggressive use of liens has been criticized by the National Taxpayer Advocate in her annual report to Congress and the IRS Advisory Council in its sannual report to the Commissioner. On February 24, 2011, the IRS announced its Fresh Start t initiative of new policies and dprograms ram sto help ptaxpayers aye pay back taxes and avoid tax liens. The IRS s stated goal is to help individuals and small businesses meet their tax obligations, without adding an unnecessary burden to taxpayers. More Flexible Attitude The newly announced policy represents a new, more flexible attitude by the IRS. The IRS is making important changes to its lien filing practices that will lessen the negative impact on taxpayers, which include: significantly increasing the dollar threshold when liens are generally issued, resulting in fewer tax liens; making it easier for taxpayers to obtain lien withdrawals after paying a tax bill; withdrawing liens in most cases where a taxpayer enters into a Direct Debit Installment Agreement; creating easier access to Installment Agreements for more struggling small businesses; and expanding a streamlined Offer in Compromise program to cover more taxpayers. Higher Lien Thresholds and Easier Lien Withdrawals The IRS stated that it will significantly increase the dollar thresholds when liens are generally filed. The new dollar amount is in keeping with inflationary changes since the number was last revised. Currently, liens are automatically filed at certain dollar levels for people with past-due balances. The IRS did not publicly disclose the new lien thresholds. The IRS plans to review the results and impact of the lien threshold change in about a year. The IRS will also modify procedures that will make it easier for taxpayers to obtain lien withdrawals. Liens will now be withdrawn once full payment of taxes is made if the taxpayer requests it. The IRS has determined that this approach is in the best interest of the government. In order to speed the withdrawal process, the IRS will also streamline its internal procedures to allow collection personnel to withdraw the liens. JOURNAL OF TAX PRACTICE & PROCEDURE 45

2 Fresh Start Tax Collection Tips for Your Client in a Struggling Economy Direct Debit Installment Agreements and Liens The IRS is making other fundamental changes to liens in cases where taxpayers enter into a Direct Debit Installment Agreement (DDIA). For taxpayers with unpaid assessments of $25,000 or less, the IRS will now allow lien withdrawals under several scenarios: Lien withdrawals for taxpayers entering into a Direct Debit Installment Agreement. The IRS will withdraw a lien if a taxpayer on a regular Installment Agreement converts to a Direct Debit Installment Agreement. The IRS will also withdraw liens on existing Direct Debit Installment Agreements upon taxpayer request. Liens will be withdrawn after a probationary period, demonstrating that direct debit payments will be honored. Taxpayers can use the Online Payment Agreement application on irs.gov to set-up with Direct Debit Installment Agreements. Caveat A direct debit is not without risks to the taxpayer. If the IRS should make an error in placing a direct debit, the taxpayer will find that it is almost impossible solve problems via the IRS 800 numbers. The National Taxpayer Advocate has noted in her last several lreports to Congress that many taxpayers are placed on hold for interminable na e times and many calls are dropped. Even those lucky enough to navigate through IRS voic hell find that those answering the phone are less than helpful. Therefore, even with the new relaxed rules for liens for those accepting a direct debit alternative, one must balance that benefit with the potential that an IRS error may prove almost impossible to resolve. The only thing that could be worse than the current IRS help lines would be if it contracted its phone services to India like many large American corporations. Relaxed Rules for Installment Agreements for Small Businesses The IRS will also make streamlined Installment Agreements available to more small businesses. The payment program will raise the dollar limit to allow additional small businesses to participate. Small businesses with $25,000 or less in unpaid tax can participate. Currently, only small businesses with 46 under $10,000 in liabilities can participate. Small businesses will have 24 months to pay. In-Business Trust Fund Express Installment Agreements Small businesses who currently have employees can qualify for an In-Business Trust Fund Express Installment Agreement ( IBTF-Express IA ). These installment agreements generally do not require a financial statement or financial verification as part of the application process. The criteria to qualify for an IBTF-Express IA are: $25,000 or less at the time the agreement is established; if debt is more than $25,000, the taxpayer may pay down the liability before entering into the agreement in order to qualify; the debt must be full paid within 24-months or prior to the Collection Statute Expiration Date (CSED), whichever is earlier; must enroll in a DDIA if the amount owed is between $10,000 and $25,000; and the taxpayer must be compliant with all filing and payment requirements. To request an IBTF-Express IA, taxpayers can visit their local IRS office or call (800) They can also complete IRS Form 9465, Installment Agreement Request, and send it to the address on the bill. If they do not have a bill, the form can be sent to the address on page 2 of Form t Offers in Compromise The IRS is also expanding a new streamlined Offer in Compromise (OIC) program to cover a larger group of struggling taxpayers. This streamlined OIC is being expanded to allow taxpayers with annual incomes up to $100,000 to participate. In addition, participants must have tax liability of less than $50,000, doubling the current limit of $25,000 or less. OICs are subject to acceptance based on legal requirements. Generally, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement. The IRS looks at the taxpayer s income and assets to make a determination regarding the taxpayer s ability to pay. New Form In March, 2011 the IRS issued a new Form for collection due process appeals. It is formatted to assist

3 December 2011 January 2012 Figure 1. taxpayers with determining defenses to IRS enforced collection measures. Taxpayer Advocate s Report on Enforced Collection The Taxpayer Advocate has issued the following report toc Congress: While the history of the partial-payment installment nt agreement program is much briefer, the aggregate e data a indicate that it, too, is not widely utilized. Figure 2. Indeed, most taxpayers and many practitioners are not even aware it exists. What has the IRS done instead with respect to taxpayers with delinquent accounts? In FY 2008, it placed one million taxpayers into currently not collectible status meaning that the IRS is collecting nothing at all and it took traditional enforcement actions about 3.4 million times, imposing 2,631,038 levies, placing 768,168 liens and conducting 610 property seizures. In 2009, it imposed 3,478,361 levies, placed 965,618 liens and conducted 581 seizures. Those numbers rose once more in 2010 to 3,606,376 levies, 1,096,376 liens and 605 seizures. IRS data show that greater use of traditional enforcement tools like liens and levies does not have a significant impact on overall collection. IRS collection yield has risen on a slow, relatively consistent and gradual path over that period of time with no discernable revenue loss resulting from the post Restructuring and Reform Act of reduction in levies, as shown in Figure 1 and Figure 2. Help for People Who Owe Taxes With many people facing additional financial difficulties, in February 2009, the IRS took several additional steps to help people who owed back taxes. JOURNAL OF TAX PRACTICE & PROCEDURE 47

4 Fresh Start Tax Collection Tips for Your Client in a Struggling Economy On a wide range of situations, IRS employees have flexibility to work with struggling taxpayers to assist them with their situation. Depending on the circumstances, taxpayers in hardship situations may be able to adjust payments for back taxes, avoid defaulting on payment agreements or possibly defer collection action. Flexibility Among the areas where the IRS can provide assistance are discussed further below. Postponement of Collection Actions IRS employees will have greater authority to suspend collection actions in certain hardship cases where taxpayers are unable to pay. This includes instances when the taxpayer has recently lost a job, is relying solely on Social Security or welfare income, or is facing devastating illness or significant medical bills. If an individual has recently encountered this type of financial problem, IRS assistors may be able to suspend collection without documentation to minimize burden on the taxpayer. Added Flexibility for Missed Payments The IRS is allowing more flexibility for previously compliant individuals in existing Installment Agreements who have edi difficulty making gpayments because of a job loss or other financial ial hardship. The IRS may allow a skipped payment or a reduced d monthly payment amount without automatically atic suspending the Installment Agreement. Taxpayers in a difficult financial al situation should contact the IRS. Additional Review for OIC on Home Values The equity taxpayers have in real property can be a barrier to an OIC being accepted. With the uncertainty in the housing market, the IRS recognizes that the realestate valuations used to assess ability to pay may not be accurate. So in instances where the accuracy of local real-estate valuations is in question or other unusual hardships exist, the IRS is creating a new second review of the information to determine if accepting an offer is appropriate. Prevention of OIC Defaults Taxpayers who are unable to meet the periodic payment terms of an accepted OIC will be able to contact the IRS office handling the offer for available options to help them avoid default. Expedited Levy Releases The IRS will speed the delivery of levy releases by easing requirements on taxpayers who request expedited levy releases for hardship reasons. Taxpayers seeking expedited releases for levies to an employer or bank should contact the IRS number shown on the notice of levy to discuss available options. When calling, taxpayers requesting a levy release due to hardship should be prepared to provide the IRS with the fax number of the bank or employer processing the levy Additional Steps to Assist Unemployed Taxpayers and Others The IRS announced on March 9, 2010, several additional steps it is taking this tax season to help people having difficulties meeting their tax obligations because of unemployment or other financial problems. The steps an expansion of efforts that began more than a year ago include additional flexibility on OIC for struggling taxpayers, a series of Saturday open houses offering taxpayers extra opportunities to work out tax problems face to face with the IRS, special outreach with partner groups to unemployed taxpayers and the availability of more information on a special section of the IRS website. New Flexibility for OIC For some taxpayers, an OIC an agreement between a taxpayer and the IRS that settles the taxpayer s debt for less than the full amount owed continues to be a viable option. IRS employees will now have additional flexibility when considering OIC from taxpayers facing economic troubles, including the recently unemployed. Specifically, IRS employees will be permitted to consider a taxpayer s current income and potential for future income when negotiating an OIC. Normally, the standard practice is to judge an offer amount on a taxpayer s earnings in prior years. This new step provides greater flexibility when considering OIC from the unemployed. The IRS may also require that a taxpayer entering into such an OIC agree to pay more if the taxpayer s financial situation improves significantly. These immediate steps are part of an ongoing effort by the IRS to ensure the availability of the OIC program for taxpayers. 48

5 Special Outreach Efforts to Unemployed The IRS is working and coordinating with state departments of revenue and state workforce agencies to help taxpayers who are having problems meeting their tax liabilities because of unemployment or other financial problems. These coordinated efforts may include opportunities for taxpayers to make payment arrangements and resolve both federal and state tax issues in one place. Other Options Available for Taxpayers The IRS will continue to offer other help to taxpayers, including: assistance of the Taxpayer Advocate Service for those taxpayers experiencing particular hardship navigating the IRS; postponement of collection actions in certain hardship cases; added flexibility for missed payments on installment agreements and OIC for previously compliant individuals having difficulty paying; additional review of home values for OIC in cases where real-estate valuations may not be accurate; and accelerated cele era levy releases for taxpayers facing economic hardship. In addition, the IRS will accelerate lien relief for homeowners if a taxpayer cannot refinance or sell a home because of a tax lien. As previously yannounced, nounce ata taxpayer seeking to refinance or sell a home may request that the IRS make a tax lien secondary to the lien by the lending institution that is refinancing or restructuring a loan. The taxpayer may also request that the IRS discharge its claim if the home is being sold for less than the amount of the mortgage lien under certain circumstances. Online Payment Agreement The Internal Revenue Service introduced several new features to the interactive Online Payment Agreement (OPA) application, which will make it easier for taxpayers and their authorized representatives to make changes to existing installment agreements. The system will now permit individuals to revise: their payment due dates and/or amounts on existing agreements; existing extensions to regular installment agreements and direct debit installment agreements; and December 2011 January 2012 existing regular installment agreements to a payroll deduction installment agreement or a direct debit installment agreement. Practitioners with valid authorizations to use the signature date found on their approved Form 2848, Power of Attorney and Declaration of Representative, or the caller ID as an alternate way to authenticate when requesting agreements for clients. More than 75 percent of those eligible for an installment agreement can establish one using the online application, according to the IRS. Since launching in October 2006, more than 30,000 taxpayers have successfully used it to set up a payment agreement. Eligible taxpayers who owe $25,000 or less in combined tax, penalties and interest can self-qualify, apply and receive immediate notification of approval for installment agreements, including preassessed agreements on tax year 2008 Form 1040 liabilities and paperless direct debit agreements. Note: For security purposes, you will automatically be logged out of OPA after 20 minutes of inactivity per page. Be sure to gather all the necessary information so that you are not automatically logged out of OPA before completing the required information. If you have difficulty entering the data required, please call the IRS at the number listed under When should I call the toll-free number. Access the Online Payment Agreement Application online at article/0,,id=149373,00.html. Guaranteed Availability of Installment Agreements x G t The IRS Restructuring and Reform Act of 1998 requires the Secretary to grant an installment agreement, at the taxpayer s option, if: the liability is $10,000, or less (excluding penalties and interest); within the previous five years, the taxpayer has not failed to file or to pay, nor entered an installment agreement under this provision; if requested by the Secretary, the taxpayer submits financial statements, and the Secretary determines that the taxpayer is unable to pay the tax due in full; the installment agreement provides for full payment of the liability within three years; and the taxpayer agrees to continue to comply with the tax laws and the terms of the agreement for the period (up to three years) that the agreement is in place. 2 JOURNAL OF TAX PRACTICE & PROCEDURE 49

6 Fresh Start Tax Collection Tips for Your Client in a Struggling Economy Liabilities Less than $25,000 The IRS has chosen to create a more liberal system that allows installment agreements of up to five years for balances of less than $25,000. New More Onerous Allowable Expense Standards In March 2011, the IRS again revised the standards. Instead of establishing national standards which recognized the need for higher living expenses for higher income families, it began a system of one size fits all. It continued to fail to recognize the varying cost of living in different regions and communities and eliminated differentials for Hawaii and Alaska. In 2009, it added a new category of expenses for out-of-pocket health care expenses. Total allowable expenses include those expenses that meet the necessary expense test. The necessary expense test is defined as expenses that are necessary to provide for a taxpayer s and his or her family s health and welfare and/or production of income. The expenses must be reasonable. The total necessary expenses establish the minimum a taxpayer and family needs to live. There are four types of necessary expenses: National standards Out-of-pocket health care Local standards Oh Other expensesenses National Standards These establish standards ards for reasonable amounts sforfiv five necessary expenses. Four of them come from the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey: food, housekeeping supplies, apparel and services, and personal care products and services. The fifth category, miscellaneous, is a discretionary amount established by the IRS. It is $87 for one person, up to $235 for 4 persons. The IRS allows a total of $262 per month for each member of the household above four. (Note: All five standards are included in one total national standard expense.) Out-of-Pocket Health Care Expenses Out-of-pocket health care expenses include medical services, prescription drugs and medical supplies (e.g., eyeglasses, contact lenses, etc.). Elective procedures such as plastic surgery or elective dental work are generally not allowed. Taxpayers and their dependents are allowed the standard amount monthly on a per person basis, without questioning the amounts they actually spend. If the amount claimed is more than the total allowed 50 by the health care standards, the taxpayer must provide documentation to substantiate that those expenses are necessary living expenses. Generally, the number of persons allowed should be the same as those allowed as exemptions on the taxpayer s most recent year income tax return. The out-of-pocket health care standard amount is allowed in addition to the amount taxpayers pay for health insurance. Local Standards These establish standards for two necessary expenses: housing and transportation. Taxpayers will be allowed the local standard or the amount actually paid, whichever is less. Housing Standards are established for each county within a state. When deciding if a deviation is appropriate, consider the cost of moving to a new residence, the increased cost of transportation to work and school that will result from moving to lower-cost housing, and the tax consequences. The tax consequence is the difference between the benefit the taxpayer currently derives from the interest and property tax deductions on Schedule A to the benefit the taxpayer would derive without the same or adjusted expense. Housing costs include rent and/or house payments, taxes, repairs and utilities the Internal Revenue Manual (IRM) provides as follows: The utilities include gas, electricity, water, fuel, oil, bottled gas, trash and garbage collection, wood and other fuels, septic cleaning, and telephone. Housing expenses include: mortgage or rent, property taxes, interest, parking, necessary maintenance and repair, homeowner s or renter s insurance, homeowner dues and condominium fees. Usually, this is considered necessary only for the place of residence. Any other housing expenses should be allowed only if, based on a taxpayer s individual facts and circumstances, disallowance will cause the taxpayer economic hardship. 3 Transportation The transportation standards consist of nationwide figures for loan or lease payments referred to as ownership cost, and additional amounts for operating costs broken down by Census Region and Metropolitan Statistical Area. Operating costs were derived from BLS data. If a taxpayer has a car payment, the allowable ownership cost added to the allowable operating cost equals the allowable transportation expense. If a taxpayer has no

7 December 2011 January 2012 car payment, only the operating cost portion of the transportation standard is used to figure the allowable transportation expense. Under ownership costs, separate caps are provided for the first car and second car. If the taxpayer does not own a car, a standard public transportation amount is allowed. Vehicle insurance, vehicle payment (lease or purchase), maintenance, fuel, state and local registration, required inspection, parking fees, tolls, driver s license, public transportation. Transportation costs not required to produce income or ensure the health and welfare of the family are not considered necessary. Consider availability of public transportation if car payments (purchase or lease) will prevent the tax liability from being paid in part or full. Public transportation costs could be an option if it does not significantly increase commuting time and inconvenience the taxpayer. Note: If the taxpayer has no car payment, or no car, question how the taxpayer travels to and from work, grocer, medical care, etc. The taxpayer is only allowed the operating cost or the cost of transportation. 4 Other Expenses Other expenses may be considered if they meet the necessary essa expense ense test; they must provide for the health and welfare e of the taxpayer and/or his or her family or they must be for the production of income. This is determined based on the facts and circumstances cu ces of each case. If other expenses es are determined erm to be enecessary and, therefore allowable, document the reasons for the decision in your history. Conditional Expenses These expenses do not meet the necessary expenses test. However, they are allowable if the tax liability, including projected accruals, can be fully paid within five years. National and Local Expense Standards Are Guidelines If it is determined a standard amount is inadequate to provide for a specific taxpayer s basic living expenses, a deviation is allowed. Require the taxpayer to provide reasonable substantiation and document the case file. Generally, the total number of persons allowed for national standard expenses should be the same as those allowed as dependents on the taxpayer s current year income tax return. Verify exemptions claimed on a taxpayer s income tax return meet the dependency requirements of the Internal Revenue Code (the Code ). However, there may be reasonable exceptions. Fully document the reasons for any exceptions; for example, foster children or children for whom adoption is pending. A deviation from the local standard is not allowed merely because it is inconvenient for the taxpayer to dispose of valued assets. Length Revenue officers should consider the length of the payments. Although it may be appropriate to allow for payments made on the secured debts that meet the necessary expense test, if the debt will be fully repaid in one year, only allow those payments for one year. 5 Five-Year Test The amount allowed for necessary or conditional expenses depends on the taxpayer s ability to fully pay the liability within five years and on the taxpayer s individual facts and circumstances. If the liability can be paid within five years, it may be appropriate to allow the taxpayer the excessive necessary and conditional expenses. If the taxpayer cannot pay within five years, it may be appropriate to allow the taxpayer the excessive necessary and conditional expenses for up to one year in order to modify or eliminate the expense. 6 Offer In Compromise Number of Offers The total number of proposed offers has more than halved from 128,000 in FY 2001 to 52,000 in FY The number of proposed offers increased from about 42,000 in The number of OICs accepted declined from 38,643 (or 34 percent) in FY 2001, 12,000 in FY 2007 (or 24 percent),10,677 in 2008 (or 24 percent) and went down to 10,665 (about 20 percent) in In 2010, the number of accepted offers rose for the first time in a decade to 14,000 acceptances. The increased number of acceptances resulted primarily from an increase in submission and not as a result of any increased flexibility by the IRS. Securing an OIC The IRS has made it so difficult to secure an OIC that many taxpayers and their representative no longer choose to propose a compromise. The IRS relaxed standards are having a positive impact on acceptance levels for the first six months of fiscal year Compare IRS Figures 3 and 4, below. JOURNAL OF TAX PRACTICE & PROCEDURE 51

8 Fresh Start Tax Collection Tips for Your Client in a Struggling Economy Limited Liability Companies A limited liability company (LLC) is an entity created under state law that has characteristics of both a partnership and a corporation. It is similar to a: corporation in that the owners have limited personal liability for negligent acts and LLC debts, and partnership in that it provides management flexibility and may provide the benefit of passthrough taxation of income. Classification of LLCs An LLC may own property, enter into contracts and otherwise conduct business in its own name. Property ownership is governed by state law. The classification of the LLC under applicable Treasury Regulations will determine the LLC s treatment for federal tax purposes and, correspondingly, the entity against which administrative collection actions may be taken. Classification for Tax Purposes There is no separate LLC entity type for Federal tax purposes. Treatment of the LLC entity for federal taxes is governed by the provisions of Reg and -3. Liability for income, employment and excise taxation tio is determined by the classification of the entity under applicable plica regulations. To properly address s various collection on questions, you must first understand dhow an LLC is classified. Revised Regulations Revised regulations changing the treatment of certain LLCs for employment and excise tax liabilities were issued on August 16, The changes are not retroactive; they do not change the tax treatment of employment and Figure excise taxes that accrued prior to their effective dates. The applicability of these regulations must be considered when determining liability for employment and excise taxes incurred both before and after the effective dates of these regulations. Revised regulations under Reg (as amended by T.D ), provide that after the effective dates of the changes, a single member LLC that is otherwise disregarded as an entity, separate from its owner, is treated as a corporation for employment and certain excise tax purposes. For employment taxes, the regulations changes apply to wages paid on or after January 1, For certain excise taxes, the regulations changes apply to liabilities imposed and actions first required or permitted in periods beginning on or after January 1, These changes are not retroactive. Liabilities for employment and excise taxes incurred by a disregarded entity, prior to the effective dates of these regulations, are subject to collection procedures for disregarded entities specified above. Examples of Classification Changes by Ownership Or Election For employment taxes on wages paid prior to January 1, 2009, the identity of the liable taxpayer may change under a variety of circumstances: Example 1. Emma Eagle was the sole owner of Eagle Enterprises LLC, which made no election. On January y1, 2008, Timothy Hawk acquired a partial ownership interest in the LLC. The employment tax liabilities were reported on Forms 941 in the name of Eagle Enterprises LLC for all quarters of 2007 and For the 2007 Forms 941, Eagle Enterprises LLC was a single member LLC, classified as a disregarded entity; Emma Eagle was the employer and liable taxpayer. When Timothy Hawk became a member on January 1, 2008, Eagle Enterprises LLC became a multi-member LLC, classified as a partnership. Eagle Enterprises LLC was the employer and the liable taxpayer for 2008 Forms 941. Example 2. Perry Parrot and Robert Raven owned Birdfeeders LLC, which made no election. Birdfeeders LLC was classified as a partnership, and the LLC was the employer and liable taxpayer. On January

9 December 2011 January , 2008, Mr. Raven sold his interest in the LLC to Mr. Parrot, and it became a single member LLC, classified as a disregarded entity. Employment taxes were reported in the name and EIN of Birdfeeders LLC for all quarters of 2007 and Birdfeeders LLC was the employer and the liable taxpayer for Forms 941 for 2007 liabilities. Perry Parrot was the employer and liable taxpayer for Forms 941 for Example 3. Judy Goldfinch was the sole owner of Goldie s Garage LLC, which made no election and was classified as a disregarded entity for 2006 and The LLC filed a Form 8832, Entity Classification Election, electing to be treated as an association taxable as a corporation, effective January 1, Employment taxes were reported in the name and EIN of Goldie s Garage LLC for all quarters in 2006, 2007 and Ms. Goldfinch is the employer and liable taxpayer for Forms 941 for 2006 and Goldie s Garage LLC is the employer and liable taxpayer for 2008 Forms 941. Example 4. Margie Mockingbird and Thomas Osprey formed Mockingbird LLC on January 1, 2006, and made no election. On January 15, 2007, the LLC filed a Form 8832, electing to be classified as an association taxable as a corporation, effective January 1, On October 1, 2007, Ms. Mockingbird purchased Mr. Osprey s interest in the LLC. Employ- ment ttaxes were reported in the name and EIN of Mockingbird LLC LC for alll quarters in 2006, and Mockingbird LLC Cw was classified sifi das ap partnership for 2006 and was classified as an association taxable as a corporation beginning January 1, Mockingbird LLC is the employer and liable taxpayer for Forms 941 for all quarters of 2006, 2007 and Because the LLC is classified as an association taxable as a corporation beginning January 1, 2007, the change in ownership on October 1, 2007 did not affect its classification. Figure 4. Example 1. Barbara Sparrow is the sole owner of Sparrow LLC, which made no election. Employment taxes were reported in the name and EIN of Sparrow LLC for all quarters in 2007, 2008 and Sparrow LLC is a disregarded entity, so Barbara Sparrow is the employer and liable taxpayer for 2007 and 2008 employment taxes. For employment tax periods beginning on or after January 1, 2009, the LLC is treated as an entity separate from its owner; Sparrow LLC is the employer and the liable taxpayer. Sparrow LLC continues to be disregarded as an entity separate from its owner for Federal income tax purposes. Example 2. Bridgette Bluebird is the sole owner of Bluebird LLC, which has made no election. She reports employment taxes in her own name and EIN for all quarters in calendar year Under Notice 99-6, 8 as modified by T.D. 9356, she does not have to seek permission from the Commissioner to switch her method of reporting employment taxes. She begins reporting employment taxes in the name and EIN of Bluebird LLC for all quarters in calendar year Because Bluebird LLC is a disregarded entity, Bridgette Bluebird is directly liable for employment taxes on wages paid prior to January 1, Even though the 2007 liability was reported in the name and EIN of Bridgette Bluebird, and the 2008 liability was reported in the name and EIN of Bluebird LLC, Bridgette Bluebird is the liable taxpayer for 2007 and 2008 employment tax periods. Bluebird LLC is the liable taxpayer for employment tax periods beginning on or after January 1, Bluebird LLC continues to be disregarded as an entity separate from its owner for Federal income tax purposes. 9 Post-2008 For a single member LLC that made no elections, the identity of the liable taxpayer changed for employment tax periods beginning on or after January 1, 2009: JOURNAL OF TAX PRACTICE & PROCEDURE 53

10 Fresh Start Tax Collection Tips for Your Client in a Struggling Economy Voluntary Classification Settlement Program The Voluntary Classification Settlement Program (VCSP) is a voluntary program described in Announcement that provides an opportunity for taxpayers to reclassify their workers as employees for employment tax purposes for future tax periods with partial relief from federal employment taxes. To participate in this new voluntary program, the taxpayer must meet certain eligibility requirements, apply to participate in VCSP by filing Form 8952, Application for Voluntary Classification Settlement Program, and enter into a closing agreement with the IRS. The VCSP allows eligible taxpayers to obtain relief similar to that currently available through the Classification Settlement Program for taxpayers under examination. Eligibility The VCSP is available for taxpayers who want to voluntarily change the prospective classification of their workers. The program applies to taxpayers who are currently treating their workers (or a class or group of workers) as independent contractors or other nonemployees and want to prospectively treat the workers as employees. A taxpayer must have consistently treated the workers asno nonemployees, and must have filed all required Forms f for the workers to be reclassified under the VCSP for the previous three years to participate in VCSP. Additionally, the taxpayer cannot currently be under audit by the IRS, and the taxpayer cannot be currently under audit concerning gthe classification sificati of the eworkers rs by ythe Department of Labor or by a state government agency. If the IRS or the Department of Labor has previously audited a taxpayer concerning the classification of the workers, the taxpayer will be eligible only if the taxpayer has complied with the results of that audit. Exempt organizations and government entities may participate in VCSP if they meet all of the eligibility requirements. VCSP Agreements A taxpayer participating in the VCSP will agree to prospectively treat the class or classes of workers as employees for future tax periods. In exchange, the taxpayer will: pay 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, determined under the reduced rates of Code Sec. 3509(a); 11 not be liable for any interest and penalties on the amount; and not be subject to an employment tax audit with respect to the worker classification of the workers being reclassified under the VCSP for prior years. In addition, as part of the VCSP program, taxpayer will agree to extend the period of limitations on assessment of employment taxes for three years for the first, second and third calendar years beginning after the date on which the taxpayer has agreed under the VCSP closing agreement to begin treating the workers as employees. Applying for VCSP To participate in the VCSP, a taxpayer must apply using Form 8952, Application for Voluntary Classification Settlement Program. The application should be filed at least 60 days from the date the taxpayer wants to begin treating its workers as employees. Taxpayers who want to begin treating a class or classes of workers as employees for the fourth quarter of 2011 should file Form 8952 as soon as possible. Eligible taxpayers accepted into the VCSP will enter into a closing agreement with the IRS to finalize the terms of the VCSP, and will simultaneously make full and complete epayment of any amount due under the closing agreement. ENDNOTES 1 IRS Restructuring and Reform Act of 1998 (P.L ). 2 Act Sec of P.L ; Code Sec IRM IRM IRM See IRM 5.14, Installment Agreements; IRM T.D. 9356, CB Notice 99-6, IRB , 12, CB IRM (Revised ). 10 Announcement , IRB , See instructions for Form This article is reprinted with the publisher s permission from the JOURNAL OF TAX PRACTICE & PROCEDURE, a bimonthly journal published by CCH, a Wolters Kluwer business. Copying or distribution without the publisher s permission is prohibited. To subscribe to the JOURNAL OF TAX PRACTICE & PROCEDURE or other CCH Journals please call or visit All views expressed in the articles and columns are those of the author and not necessarily those of CCH.

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