Guide to IRS Collections

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1 CPE/CE 1 Credit Hour Guide to IRS Collections Tax Payment Options and Solutions 2012 Tax Year Interactive Self-Study CPE/CE Course

2 Course Overview Program Content: Publication Date: September Expiration Date: Field of Study: Program Level: Recommended Participants: Prerequisites: Advance Preparation: Type of Delivery Method: CPE/CE Credit Hours: Passing Grade: Record Retention: Content describes the IRS collection process, including options for payment, installment agreements, progression from billing to collection activity, federal tax liens, and levies. Information about statutes of limitations, appeals, and Offers in Compromise is also included with this course. This course provides continuing professional education (CPE/CE) to enhance a preparer s competence in advising clients who are unable to pay or question an amount due the IRS and satisfies education requirements for one hour of federal tax law. The Final Exam must be completed online within one year from your date of purchase or shipment. See the Final Examination Instructions on the next page for information regarding final exam completion. Taxes. Overview. This course provides a general overview of the subject area from a broad perspective. It is appropriate for tax professionals at all organization levels. This course is recommended for tax professionals who advise clients on the best manner of dealing with the IRS in matters of past-due tax liability. None. No advanced preparation is needed to complete this course. Interactive self-study. 1 Credit Hour. One 50-minute period equals one CPE/CE Credit Hour. Participants who answer a minimum of 70% correct on the final exam will be sent a Certificate of Completion via . See the Final Examination Instructions on the next page for further information regarding passing requirements and acquiring the Certificate of Completion. As an IRS-approved provider of continuing education, Tax Materials, Inc. will report successful completion of this course to the IRS. According to the IRS, at some point in the future, you will be able to view your completed continuing education credits through your online PTIN account. Complaint Resolution Policy: Please contact our customer service department toll-free at Refund Policy: Guide to IRS Collections Self-Study CPE/CE 30-day money-back guarantee. For information about our refund, complaint, and/or program cancellation policies, visit our website at Tax Materials, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: National Registry of CPE Sponsors ID Number Tax Materials, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a Quality Assurance Service (QAS) sponsor of continuing professional education. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding QAS program sponsors may be submitted to NASBA through its website: Our sponsor number is 054 In accordance with the standards set forth in Circular 230, section 10.6, CPE/CE credits have been granted based on a 50-minute hour. IRS Program Number is 7VT8K-T S Tax Materials, Inc. has been approved by the California Tax Education Council to offer the Guide to IRS Collections Self-Study CPE/CE Course 6193-CE-0020, which provides 1 hour of federal credit and 0 hours of state credit towards the annual continuing education requirement imposed by the State of California. A listing of additional requirements to register as a tax preparer may be obtained by contacting CTEC at P.O. Box 2890, Sacramento, CA, , toll-free by phone at , or on the internet at CTEC Course ID Number 6193-CE-0020 Copyright 2012 Tax Materials, Inc. All Rights Reserved TheTaxReview Guide to IRS Collections i

3 Guide to IRS Collections Self-Study CPE/CE Course Completion Instructions Helpful Hint: Attempt to relate your tax preparation experience with the information you are studying. By doing so, you will increase retention and maximize your results. Also, utilize the Notes sections to jot down reminders and information that will be helpful to you in your tax practice. Follow the instructions below: 1) Start each chapter by reading the Learning Objectives. 2) Read the course materials in the chapter. Pay close attention to: a) Key Facts: Information that is particularly pertinent to the Learning Objective. b) Examples: Review the examples to associate the information to real-world application. c) Notes: Many of the main points of the chapter are highlighted. Review the notes and try to relate the content with your experience. 3) Complete the Self-Quiz at the end of the chapter. The questions are broken out by Learning Objective. Review the Learning Objectives before completing each set of questions. Determine your progress by comparing your answers to the correct ones on the pages that follow. 4) After all chapters have been studied, and each Self-Quiz has been taken, complete the Final Exam located at the back of this instruction booklet. Final Examination Instructions Expiration Date Reminder: The Final Exam must be completed online within one year from your date of purchase or shipment. CPE/CE credits are not available when you complete the final exam more than one year after your date of purchase or shipment. All Final Exams are administered online at It is recommended that you review the Final Exam at the end of the course before taking it online. Final Exams mailed in will not be graded. Follow the instructions below: 1) Go to 2) Click on Take CPE/CE Final Exams, where you will find a location to log in to the Final Exam. 3) Enter your User Name in the self-study CPE/CE login location. The address associated with your account at Tax Materials, Inc. is your User Name. If you do not have an address, or have not provided one, please call our toll-free number at to be assigned a User Name. 4) Enter your Password. The zip code associated with your account is your password. If you are having difficulty logging onto the Final Exam, please call our toll-free number at ) Click the Get My Exams button. 6) You will be taken to the list of Final Exams. Select the Guide to IRS Collections CPE/CE Exam. First enter your First Name and Last Name. This is how your name will appear on your Certificate of Completion should you achieve a score of 70% or higher. Next enter your address. This is where the Certificate of Completion will be sent. Take the Final Exam. Read the questions carefully and answer them to the best of your ability. At the bottom of the exam, click on Submit when finished. You will instantly know if you have passed the test. If you failed, you are able to log on again and retake the test. If you passed, you will be ed the Certificate of Completion. Complete Evaluation Form Please provide suggestions and feedback regarding this CPE/CE course. The last page contains an Evaluation Form. After completion, please mail to: Tax Materials, Inc Minnetonka Ind. Rd., Ste. 221 Minnetonka, MN Thank you for helping us improve our CPE/CE course offerings! ii TheTaxReview Guide to IRS Collections

4 Learning Objectives / Table of Contents Learning Objective A Learning Objective A Apply for an Offer in Compromise for an eligible taxpayer. B Learning Objective B Assist a taxpayer with appealing the filing of a tax lien or levy. C Learning Objective C Establish an installment agreement for a taxpayer who is unable to pay the tax by the due date. D Learning Objective D Determine an innocent spouse s eligibility to apply for relief from joint and several liability on a joint return. Final Exam Course Evaluation TheTaxReview Guide to IRS Collections iii

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6 Guide to IRS Collections CPE/CE Learning Objectives Successful completion of this course will enable the participant to: A Apply for an Offer in Compromise for an eligible taxpayer. B Assist a taxpayer with appealing the filing of a tax lien or levy. C Establish an installment agreement for a taxpayer who is unable to pay the tax by the due date. D Determine an innocent spouse s eligibility to apply for relief from joint and several liability on a joint return. Glossary Terms Offer in Compromise (OIC). An OIC is an offer made by a taxpayer to the IRS to settle a tax liability for less than the full amount owed. Federal tax lien. A legal claim against all of a taxpayer s current and future property, such as a house or car, and rights to property, such as wages and bank accounts. A lien automatically comes into existence if the taxpayer doesn t pay the amount due after receiving the first tax bill. Levy. A legal seizure of property or rights to property to satisfy a tax debt. When property is seized or levied it will be sold to help pay the tax debt. If wages or bank accounts are seized, the money will be applied to the tax debt. Learning Objective A Apply for an Offer in Compromise for an eligible taxpayer. Summary of an Offer in Compromise (OIC) An OIC is an offer made by a taxpayer to the IRS to settle a tax liability for less than the full amount owed. The IRS will usually accept an OIC if it is unlikely that the tax liability can be collected in full, and the amount offered reasonably reflects collection potential. The goal of the OIC program is to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the government. The goal of the OIC program is to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the government. Conditions for Compromise Key Fact Submitting an offer application does not ensure that the IRS will accept a taxpayer s offer. The submission of an OIC begins a process of evaluation and verification by the IRS, taking into consideration any special circumstances that might affect the taxpayer s ability to pay. Generally, the IRS will not accept an offer if the taxpayer can pay the tax debt in full via an installment agreement or a lump sum. TheTaxReview Guide to IRS Collections 1

7 NOTES Reasons to submit an OIC include: 1) Doubt as to liability. This condition applies if there is a doubt as to the existence or amount of the tax liability. An offer based on this condition will be considered acceptable if it reflects the amount that the IRS would expect to collect through litigation. Doubt as to liability does not exist where the liability has been established by a final court decision or judgment concerning the existence of the liability. A taxpayer wishing to file a doubt as to liability OIC must complete Form 656-L, Offer in Compromise (Doubt as to Liability), instead of Form 656, Offer in Compromise. 2) Doubt as to collectibility. If the taxpayer s assets and income are less than the full amount of the assessed liability, there is doubt as to collectibility of the tax owed. In determining the ability to pay, the taxpayer must be permitted to retain sufficient funds to pay basic living expenses. 3) To promote effective tax administration. This condition exists if the taxpayer has no doubt the tax is correct and there is no doubt that the full amount of tax due could be collected, but an exceptional circumstance exists that would allow the IRS to consider the offer. To be eligible for this compromise, the taxpayer must demonstrate the collection of the tax would create an economic hardship or collection would be unfair and inequitable. For example, a long-term illness or medical condition that may be expected to exhaust the financial resources of the taxpayer could leave the taxpayer unable to meet basic living expenses. Eligibility to Process an OIC Eligibility. In addition to the applicable fees, payments, and applications, a taxpayer must not have an open bankruptcy proceeding to be eligible for the OIC evaluation. Key Fact Application process. The application for an OIC involves sending: Form 656, Offer in Compromise, or Form 656-L, Offer in Compromise (Doubt as to Liability), whichever form is applicable, Completed Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, if applicable, Completed Form 433-B (OIC), Collection Information Statement for Businesses, if applicable, $150 application fee, unless the taxpayer meets low-income certification, and Initial offer payment, unless the taxpayer meets low-income certification. Initial offer payment. The initial payment will vary based on the taxpayer s offer and the payment option chosen. Lump sum cash. An initial payment of 20% of the total offer amount must be submitted with the application. The remaining balance of the offer in five or fewer payments will be due within 24 months of the date the offer is accepted. 2 TheTaxReview Guide to IRS Collections

8 Periodic payment. An initial payment is submitted with the application. The taxpayer must continue to pay the remaining balance in monthly installments while the IRS considers the offer. If the offer is accepted, the taxpayer continues to pay monthly until it is paid in full within 24 months. The taxpayer must continue to make all subsequent payments while the IRS is evaluating the offer. Failure to make payments will cause the offer to be returned. Nonrefundable deposit. All deposits and fees are nonrefundable. Deposits are applied to the amount of tax due. If the offer is rejected, the deposit will not be returned to the taxpayer. Low-income certification. To qualify as a low-income taxpayer, the taxpayer s gross monthly household income must be less than, or equal to, the amount shown in the chart on Form 656. The amount is based on family size and where the taxpayer lives. Low-income taxpayers are not required to submit the fee or initial offer payment. The taxpayer must complete Form 656-A, Income Certification for Offer in Compromise Application Fee and Payment, and attach it to the front of Form 656. NOTES All deposits and fees are nonrefundable. Deposits are applied to the amount of tax due. If the offer is rejected, the deposit will not be returned to the taxpayer. Requirements for Evaluation of an OIC Key Fact In order for an OIC to be fully evaluated by the IRS, the taxpayer must have completed the following steps prior to submitting the offer. 1) File all tax returns legally required to be filed, 2) Make all required federal employment tax deposits, if applicable, and 3) Make all required estimated payments for the current tax year. Evaluation. During an evaluation of an OIC, the IRS considers the taxpayer s unique set of facts and circumstances including: Ability to pay, Income and expenses, and Asset equity. Court Case The taxpayers submitted Form 656, Offer in Compromise, based on doubt as to collectibility of a federal tax liability for tax year 2007 in the amount of $75,157. The amount of the offer was $12,000. In addition, the taxpayers submitted Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, detailing monthly income and expenses, as well as assets and liabilities. The IRS Settlement Officer adjusted the monthly expenses to allow only the amount for the local standards. In doing so, the offer in compromise was rejected because the new calculation of disposable income, along with asset values, gave the taxpayers the ability to pay the entire amount due. The Tax Court upheld the IRS calculations stating that the Settlements Officer did not abuse her discretion in making the adjustments. (Drakes and Taylor, T.C. Memo ) TheTaxReview Guide to IRS Collections 3

9 NOTES The IRS will not consider offers received on outdated forms or without the required information statements included. Fresh start initiative. The analysis for financially distressed taxpayers has changed. If eligible, the taxpayer may be able to resolve tax problems in as little as two years. Financial analysis changes include: Revising the calculation used to determine a taxpayer s future income. Allowing taxpayers to repay student loans. Allowing taxpayers to pay delinquent state and local taxes. Expanding the allowable living expense allowance category and amounts. Current forms only. The offer must be made using the current forms. The IRS will not consider offers received on outdated forms or without the required information statements included. Learning Objective B Assist a taxpayer with appealing the filing of a tax lien or levy. If a Notice of Federal Tax Lien is filed against a taxpayer, it s often reported by consumer credit reporting agencies. Federal Tax Lien A lien is a legal claim against all of a taxpayer s current and future property. When a taxpayer doesn t pay the first bill for taxes due, a lien is created by law and attaches to the taxpayer s property. It applies to property, such as a home and car, and to any current and future rights the taxpayer has to property. Notice of Federal Tax Lien. A Notice of Federal Tax Lien gives public notice to creditors. The IRS files the Notice of Federal Tax Lien to establish the priority of claim versus the claims of other creditors. The Notice of Federal Tax Lien is filed with local or state authorities, such as county registers of deeds or the Secretary of State offices. If a Notice of Federal Tax Lien is filed against a taxpayer, it s often reported by consumer credit reporting agencies. This can have a negative effect on the taxpayer s credit rating and make it difficult to receive credit. Employers, landlords, and others may also use this information and not favorably view the fact that a Notice of Federal Tax Lien has been filed against the taxpayer. Key Fact What to do if a Notice of Federal Tax Lien is filed. Taxpayers should pay the full amount owed immediately. The Notice of Federal Tax Lien only shows the assessed balance as of the date of the notice. It doesn t show the payoff balance or include IRS charges for filing and releasing the lien. Taxpayers should contact the IRS for the full payoff balance. Appealing a Notice of Federal Tax Lien. Within five business days of filing the Notice of Federal Tax Lien, the IRS will send the taxpayer a Notice of Your Right to a collection due process hearing. The taxpayer will have until the date shown on the notice to request a collection due process hearing with the Office of Appeals. For more information, see Form 12153, Request for a Collection Due Process or Equivalent Hearing. 4 TheTaxReview Guide to IRS Collections

10 After the collection due process hearing, the Office of Appeals will issue a determination on whether the Notice of Federal Tax Lien should remain filed or whether it should be withdrawn, released, discharged, or subordinated. If the taxpayer disagrees with the determination, he or she has 30 days after it s made to seek a review in the U.S. Tax Court. A taxpayer must file for a hearing request within 30 days or he or she won t be entitled to a collection due process hearing. However, a taxpayer may be entitled to an Equivalent Hearing. The request for an Equivalent Hearing, however, doesn t prohibit the IRS from seizing and doesn t suspend the 10-year period for collecting tax. In addition, taxpayers aren t entitled to a judicial review of the decision from the Equivalent Hearing. In addition to any collection due process rights a taxpayer may have, he or she may also appeal a proposed or actual filing of a Notice of Federal Tax Lien under the collection appeals program. Release a federal tax lien. A release of a federal tax lien means that the IRS has cleared both the lien for the debt and the public Notice of Federal Tax Lien. This is done when the IRS files a Certificate of Release of Federal Tax Lien with the same state and local authorities with whom the IRS filed the Notice of Federal Tax Lien. The IRS will release the lien if: The debt is fully paid, Payment of the debt is guaranteed by a bond, or The period for collection has ended. (In this case, the release is automatic.) Withdrawal of a Notice of Federal Tax Lien. A withdrawal removes the Notice of Federal Tax Lien from public record. The withdrawal tells other creditors that the IRS is abandoning their lien priority. This doesn t mean that the federal tax lien is released, or the taxpayer is no longer liable for the amount due. The IRS will withdraw a Notice of Federal Tax Lien if: The taxpayer entered into an installment agreement to satisfy the tax liability, unless the agreement provides otherwise. For certain types of taxes, the IRS routinely withdraws a Notice of Federal Tax Lien if the taxpayer entered into a direct debit installment agreement and meets certain other conditions, It will help the taxpayer pay the taxes more quickly, The IRS didn t follow procedures, It was filed during a bankruptcy automatic stay period, or It s in the taxpayer s best interest (as determined by the Taxpayer Advocate) and in the best interest of the government. For example, this could include when the debt has been satisfied and the taxpayer requests a withdrawal. Key Fact Applying for a discharge of a federal tax lien from property. A discharge removes the lien from specific property. There are several circumstances under which the federal tax lien can be discharged. For example, the IRS may issue a Certificate of Discharge if the taxpayer is selling property and a Notice of Federal Tax Lien has been filed. The taxpayer may be able to remove or discharge the lien from that property through the sale. NOTES A taxpayer must file for a hearing request within 30 days or he or she won t be entitled to a collection due process hearing. However, a taxpayer may be entitled to an Equivalent Hearing. TheTaxReview Guide to IRS Collections 5

11 NOTES The IRS can t seize property if the taxpayer has a current or pending Installment Agreement, Offer in Compromise, or if the IRS agrees that the taxpayer is unable to pay due to economic hardship, meaning seizing the property would result in the taxpayer s inability to meet basic, reasonable living expenses. If the IRS serves a levy under one of these exceptions, a letter is sent to the taxpayer explaining the seizure and appeal rights after the levy is issued. Subordinating a federal tax lien. A subordination is where a creditor is allowed to move ahead of the government s priority position. For example, if the taxpayer is trying to refinance a mortgage on his or her home, but aren t able to because the federal tax lien has priority over the new mortgage, the taxpayer may request the IRS to subordinate its lien to the new mortgage. Appeal rights for withdrawal, discharge, or subordination. If the IRS denies the taxpayer s request for a withdrawal, discharge, or subordination, he or she may appeal under the Collections Appeals Program. IRS Levy While a federal tax lien is a legal claim against a taxpayer s property, a levy is a legal seizure that actually takes the property (such as a taxpayer s house or car) or the taxpayer s rights to property (such as a taxpayer s income, bank account, or Social Security payments) to satisfy a tax debt. The IRS can t seize property if the taxpayer has a current or pending Installment Agreement, Offer in Compromise, or if the IRS agrees that the taxpayer is unable to pay due to economic hardship, meaning seizing the property would result in the taxpayer s inability to meet basic, reasonable living expenses. IRS seizure of property. If taxes are not paid or arrangements are not made to settle the tax debt, the IRS could seize and sell the taxpayer s property. Property is usually seized only after the following things have occurred. The IRS assessed the tax and sent the taxpayer a bill, The taxpayer neglected or refused to pay the tax, and The IRS sent a Final Notice of Intent to Levy and Notice of Your Right to a Hearing at least 30 days before the seizure. Exceptions. There are exceptions for when the IRS doesn t have to provide a 30-day notice before seizing the property. These include situations when: The collection of the tax is in jeopardy, A levy is served to collect tax from a state tax refund, A levy is served to collect the tax debt of a federal contractor, or A Disqualified Employment Tax Levy (DETL) is served. A DETL is the seizure of unpaid employment taxes and can be served when a taxpayer previously requested a Collection Due Process appeal on employment taxes for other periods within the past two years. If the IRS serves a levy under one of these exceptions, a letter is sent to the taxpayer explaining the seizure and appeal rights after the levy is issued. Property that can be seized. Examples of property the IRS can seize include: Wages, salary, or commissions held by someone else. If the IRS seizes a taxpayer s rights to wages, salary, commissions, or similar payments that are held by someone else, a levy will be served only once, not each time the taxpayer is paid. The one levy continues until the debt is fully paid, other arrangements are made, or the collection period ends. Other payments the taxpayer receives, such as dividends and payments on promissory notes, are also subject to seizure. However, the seizure only reaches the payments due or the right to future payments as of the date of the levy. 6 TheTaxReview Guide to IRS Collections

12 Bank account. Seizure of the funds in a taxpayer s bank account will include funds available for withdrawal up to the amount of the seizure. After the levy is issued, the bank will hold the available funds and give the taxpayer 21 days to resolve any disputes about who owns the account before sending the money to the IRS. After 21 days, the bank will send the money to the IRS, plus any interest earned on that amount, unless the taxpayer has resolved the issue in another way. Federal payments. As an alternative to the levy procedure used for other payments, such as dividends and promissory notes, certain federal payments may be systemically seized through the Federal Payment Levy Program in order to pay tax debt. Under this program, the IRS can generally seize up to 15% of federal payments. This amount is up to 100% of payments due to a vendor for goods or services sold or leased to the federal government. The levy will be served once, not each time the taxpayer is paid. The one levy continues until the debt is fully paid, other arrangements are made, the collection period ends, or the IRS releases the levy. The federal payments that can be seized in this program include, but aren t limited to, federal retirement annuity income from the Office of Personnel Management, Social Security benefits, and federal contractor/vendor payments. Taxpayer s house and personal property. If the IRS seizes a taxpayer s house or other property, the property will be sold and the net proceeds applied to the tax debt. Prior to selling the property, the IRS will calculate a minimum bid price. The taxpayer will be provided with a copy of the calculation and given the opportunity to challenge the fair market value determination. The taxpayer is provided with the notice of sale and the pending sale is announced to the public. The sale generally takes place 10 days after the public notice. Money from the sale pays for the cost of seizing and selling the property and, finally, the tax debt. If there s money left over from the sale after paying off the tax debt, the IRS will inform the taxpayer and instruct him or her on how to get a refund. NOTES Key Fact Property that cannot be seized. The following property cannot be seized. Unemployment benefits, Certain annuity and pension benefits, certain service-connected disability payments, Workers compensation, Certain public assistance payments, Minimum weekly exempt income, Assistance under the Job Training Partnership Act, Income for court-ordered child support payments, Necessary school books and clothing, Undelivered mail, Certain amounts worth of fuel, provisions, furniture, personal effects for a household, and Certain amounts worth of books and tools for trade, business, or professions. TheTaxReview Guide to IRS Collections 7

13 NOTES The IRS cannot seize property unless it is expected that the net proceeds from the liquidation of the property help pay off the tax debt. In addition, a levy on wages or salary must be released as soon as possible if it is determined that the tax isn t collectible. The levy will also be released if it was issued improperly. The IRS cannot seize property unless it is expected that the net proceeds from the liquidation of the property help pay off the tax debt. Appealing a proposed levy. Taxpayers can request a Collection Due Process (CDP) hearing within 30 days from the date of the Notice of Intent to Levy and Notice of Your Right to a Hearing. A request must be sent to the address on the notice. For more information, see Form 12153, Request for a Collection Due Process or Equivalent Hearing. At the conclusion of the hearing, the Office of Appeals will provide a determination. The taxpayer will have 30 days after the determination to challenge it in the U.S. Tax Court. If a hearing request is not filed within 30 days, the taxpayer is not entitled to a CDP hearing. However, the taxpayer may be entitled to an Equivalent Hearing. The request for an Equivalent Hearing, however, doesn t prohibit the IRS from seizing and doesn t suspend the 10-year period for collecting tax. In addition, the taxpayer is not entitled to a judicial review of the decision from the Equivalent Hearing. Court Case The taxpayers submitted Appeals Form to appeal an IRS levy which was based on unpaid federal tax liability of $75,157. The taxpayers stated that levying the taxpayers property would create financial hardship and that other collection alternatives were available. The IRS officer determined the taxpayers were able to pay $5,664 per month toward the unpaid liability. In addition, it was determined that a 401(k) account balance of $38,570 was reachable by levy because the taxpayer did not need the funds to provide for necessary living expenses. The Court upheld the IRS determination, stating that the proposed levy was not more intrusive than necessary because the taxpayers would be able to pay necessary monthly living expense. (Drakes and Taylor, T.C. Memo ) Release of levy. The Internal Revenue Code specifically provides that a levy must be released if it is determined that: The taxpayer paid the amount owed, The period for collection ended prior to the levy being issued, It will help the taxpayer pay the taxes, The taxpayer enters into an installment agreement and the terms of the agreement don t allow for the levy to continue, The levy creates an economic hardship on the taxpayer, meaning the taxpayer is unable to meet basic, reasonable living expenses, or The value of the property is more than the amount owed and releasing the levy won t hinder the ability to collect the amount owed. In addition, a levy on wages or salary must be released as soon as possible if it is determined that the tax isn t collectible. The levy will also be released if it was issued improperly. For example, the levy will be released if it was issued: 8 TheTaxReview Guide to IRS Collections

14 Against property exempt from seizure, Prematurely, Before the required notice was sent to the taxpayer, While the taxpayer is in bankruptcy and an automatic stay is in effect, Where the expenses of seizing and selling the levied property would be greater than the fair market value of the property, While an installment agreement request, innocent spouse relief request, or offer in compromise is being considered or had been accepted and is in effect, or While the Office of Appeals or Tax Court is considering certain appeals and the levy wasn t a DETL to collect employment taxes, a state refund, or jeopardy levy. NOTES Key Fact Return of seized property. Property may be returned if: Its seizure was premature, Its seizure was in violation of the law, Returning the seized property will help the collection of the debt, An installment agreement is entered into that doesn t allow a levy, IRS procedures were not followed, or It s in the taxpayer s best interest (as determined by the Taxpayer Advocate) and in the best interest of the government. If property that is to be returned has already been sold, the taxpayer will receive the money from the sale. Property can be returned generally up to nine months after the seizure. Recovering seized property that s been sold. To recover real estate, anyone with interest in the property may recoup it within 180 days of the sale by paying the purchaser what they paid, plus interest at a rate of 20% annually. Property seized to collect tax owed by someone else. A taxpayer may appeal under the collection appeals program or file a timely claim under IRC section 6343(b) or may file a suit under IRC section 7426 for the return of the wrongfully seized property. Recovering economic damages. If the seizure was in error, the tax payment was lost or misplaced, or there was a direct debit installment agreement processing error and the taxpayer incurred bank charges, the IRS may reimburse the taxpayer for charges paid. If the claim is denied, the taxpayer can sue the federal government, but not the IRS employee, for economic damages. If the IRS intentionally or negligently didn t follow Internal Revenue Service law while collecting the tax, or the taxpayer is not the taxpayer liable for the tax, and the property was wrongfully seized, the taxpayer may be entitled to recover economic damages. TheTaxReview Guide to IRS Collections 9

15 NOTES Learning Objective C Establish an installment agreement for a taxpayer who is unable to pay the tax by the due date. Extension of Time for Payment of Tax An extension of time for payment of tax requires the taxpayer to prove financial hardship if the tax would be paid by the due date. The maximum extension period is six months. Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship, must be submitted by the due date of the return. If the extension to pay is approved, interest is still charged, but not the late payment penalty. Installment Agreement Installment plan. Taxpayers who cannot pay the amount due on the tax return should file Form 9465, Installment Agreement Request, to request a monthly installment plan. Taxpayers select the payment method and pay the applicable fee. Payment Method One-Time Fee Check, money order, credit card, payroll deduction...$105 Electronic funds withdrawal...$ 52 Key Fact Taxpayers who meet low-income guidelines, may be able to pay a reduced user fee. For more information, see Form 13844, Application for Reduced User Fee for Installment Agreements. If the balance can be paid within 120 days, an installment plan should not be set up. Interest and penalties are charged on the unpaid portion of the debt. Interest and penalties can be reduced by making voluntary payments according to the proposed plan s terms until the taxpayer is notified whether the IRS has accepted the payment plan request. Taxpayers generally have up to 72 months to pay on an installment agreement. This agreement allows the taxpayer to pay the full debt in smaller, more manageable amounts. Installment agreements generally require equal monthly payments. The amount of the installment payments and the number of payments will be based on the amount owed and the taxpayer s ability to pay within the time the payments can legally be collected. Interest and penalties are charged on the unpaid portion of the debt. Interest and penalties can be reduced by making voluntary payments according to the proposed plan s terms until the taxpayer is notified whether the IRS has accepted the payment plan request. Acceptance of interim payments doesn t mean the request has been approved. If the request is approved, interest and penalties will still be charged until the amount or balance due is paid in full. A Notice of Federal Tax Lien may still be filed. If the installment agreement request is rejected, the taxpayer can request that the Office of Appeals review the case. Eligibility. To be eligible for an installment agreement, taxpayers must file all required tax returns. Prior to approving an installment agreement request, the IRS may ask the taxpayer to complete a Collection Information Statement, Form 10 TheTaxReview Guide to IRS Collections

16 433-F, Collection Information Statement, 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, and/or Form 433 B (OIC), Collection Information Statement for Businesses, and provide proof of financial status. NOTES Key Fact Guaranteed installment agreement. A request for installment agreement cannot be turned down if the tax owed is not more than $10,000 and all three of the following apply. During the past five tax years, the taxpayer (and spouse if filing a joint return) have timely filed all income tax returns and paid any income tax due, and have not entered into an installment agreement for payment of income tax. The IRS determines the taxpayer cannot pay the tax owed in full when it is due and the taxpayer gives the IRS any information needed to make that determination. The taxpayer agrees to pay the full amount owed within three years and agrees to comply with the tax laws while the agreement is in effect. Learning Objective D Determine an innocent spouse s eligibility to apply for relief from joint and several liability on a joint return. Innocent Spouse When a joint tax return is filed, both taxpayers are jointly and individually liable for the tax and any interest or penalty due on the return even if they later divorce. This is true even if a divorce decree states that a former spouse will be responsible for any amounts due on a previously-filed joint return. One spouse may be held responsible for payment of all tax due even if all the income was earned by the other spouse. Key Fact An innocent spouse seeking relief from joint tax liability must meet all the following conditions. 1) The tax must be based on a joint return for the year for which relief is sought, 2) The return must have understatement of tax due to erroneous items of the taxpayer s spouse, 3) The spouse seeking relief did not know of the understatement of tax, and 4) It would be unfair to hold the spouse seeking relief liable for the understatement of tax. Relief from liability. Relief from joint liability can be requested by filing Form 8857, Request for Innocent Spouse Relief. Requests for separation of liability must be made within two years of the first collection action by the IRS. Requests for equitable relief are not subject to a statutory time limitation. TheTaxReview Guide to IRS Collections 11

17 NOTES Under equitable relief, the taxpayer may be relieved of liability for underpayment of tax, as well as understatement of tax, unlike the other provisions where relief may be granted only for understatement. Exception to the 2-year limitation. Circuit courts previously held the 2-year limitation applied to equitable relief even though the Tax Court has stated the limitation did not apply (Lantz, 7th Cir., June 9, 2010 and Mannella, 3rd Cir., January 19, 2011). Treasury and the IRS have revised the regulations, no longer requiring requests for equitable relief to be submitted within two years of IRS collection activity. Requests for equitable relief on or after July 25, 2011 are considered without regard to when the first collection activity was taken. Requests previously denied because they were outside the 2-year limitation can be resubmitted to the IRS for consideration. Timing of request for innocent spouse relief. A taxpayer can apply for relief under innocent spouse rules as soon as a deficiency is asserted, rather than needing to wait until the statutory Notice of Deficiency is sent. Relief by separation of liability. This type of relief applies to understatement of tax and is requested by filing a statement, along with Form 8857, showing the total amount of understatement of tax and an explanation for each item as to whether the tax is attributable to the spouse seeking relief. For example, unreported income earned by a spouse, plus any related SE tax, would be allocated to that person. In order to request relief by separation of liability for a prior joint tax return, the following requirements must be met. The spouses are divorced, legally separated, or one has died, and During the 12-month period ending on the date Form 8857 was filed, the spouses were not members of the same household. Equitable relief. If the taxpayer seeking relief does not qualify for innocent spouse relief or relief by separation of liability, the taxpayer may still be eligible for equitable relief. Under equitable relief, the taxpayer may be relieved of liability for underpayment of tax, as well as understatement of tax, unlike the other provisions where relief may be granted only for understatement. Conditions the IRS considers in granting equitable relief include: The taxpayer has an understated or underpaid tax liability, The taxpayer is not eligible for relief from liability arising from community property laws, The taxpayer has not paid the tax, The taxpayer establishes, based on all facts and circumstances, it is unfair to be held liable for the understatement or underpayment of tax, The taxpayer and spouse or former spouse did not transfer assets between each other as part of a fraudulent scheme, The taxpayer s spouse or former spouse did not transfer property to the taxpayer for the main purpose of avoiding tax or payment of tax, The taxpayer did not file or fail to file a tax return with fraudulent intent, and The income tax liability for which relief is sought is attributable to the taxpayer s spouse or former spouse, with certain exceptions. 12 TheTaxReview Guide to IRS Collections

18 Court Case During 1996, the taxpayer and spouse were separated and remained so for several years, but never divorced. In 2006, the spouse died, leaving unpaid taxes for tax years 1997 through During the years in question, the taxpayer and spouse filed joint returns and the taxpayer assumed the spouse was paying the tax from income from his insurance business. In 2000, the spouse became ill and retired from his business. The taxpayer became aware that the taxes were, in fact, not paid for tax years 1997 through In January 2001, the taxpayer and spouse submitted an offer in compromise for the tax debt. In June 2001, the taxpayer and spouse signed the 2000 tax return. The IRS denied the taxpayer s request for relief from liability. The court ruled in favor of the taxpayer for tax years 1997 through 1999, stating that the taxpayer had no reason to know the taxes were not paid. However, for tax year 2000, the court upheld the IRS decision. The offer in compromise submitted in January 2001 was acknowledgement that the past due taxes existed. This, along with the fact that the spouse retired from his business, was reason for the court to believe that the taxpayer had reason to know the taxes for 2000 would not be paid by the spouse. (Torrisi, T.C. Memo ) NOTES TheTaxReview Guide to IRS Collections 13

19 NOTES Self-Quiz True/False 1) To be eligible for an offer in compromise, a taxpayer must meet the conditions of doubt as to liability, doubt as to collectibility, and to promote effective tax administration. True False 2) An IRS lien allows the IRS to take property from a taxpayer. True False 3) A Notice of Federal Lien will not be filed if a taxpayer is approved for an installment agreement. True False 4) Under equitable relief, a taxpayer may be relieved of liability for underpayment of tax. True False Multiple Choice 1) Which of the following is a taxpayer who is filing for an offer in compromise based on low income required to submit with the application? a) A lump-sum payment of 20% of the offer. b) $150 processing fee. c) Form 656-A attached to the front of Form 656. d) Only Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals. 2) The following cannot be seized by an IRS levy. a) Bank account. b) Primary residence. c) Dividends d) Unemployment income. 3) Which of the following taxpayers would be eligible to file for innocent spouse relief? a) Newly divorced spouse seeking relief from a return filed as Married Filing Separately. b) The taxpayer filing for relief based on an error he or she made on the return. c) The taxpayer who was the sole income earner for the tax year in question. d) The spouse of a taxpayer who took deductions from self-employment income without the taxpayer knowing of the deductions. 14 TheTaxReview Guide to IRS Collections

20 4) Which of the following payment plans would result in the lowest fees for a taxpayer making payments on past due taxes? a) Payment within 120 days of date tax is due. b) Payment by credit card. c) Electronic funds withdrawal. d) Payment by check. NOTES TheTaxReview Guide to IRS Collections 15

21 NOTES Self-Quiz Answers True/False 1) To be eligible for an offer in compromise, a taxpayer must meet the conditions of doubt as to liability, doubt as to collectibility, and to promote effective tax administration. True Incorrect. A taxpayer may qualify for an offer in compromise based on doubt as to liability, doubt as to collectibility, or to promote effective tax administration, but is not required to meet all three conditions to be eligible. False Correct. To apply for an offer in compromise, a taxpayer must indicate one of the three conditions for compromise on Form 656 or Form 656-L. 2) An IRS lien allows the IRS to take property from a taxpayer. True Incorrect. An IRS levy allows the IRS to take property or to take the taxpayer s rights to property. False Correct. An IRS lien is a legal claim against property. 3) A Notice of Federal Lien will not be filed if a taxpayer is approved for an installment agreement. True Incorrect. A Notice of Federal Lien can be filed even if a taxpayer is approved for an installment agreement. False Correct. The approval of an installment agreement does not guarantee that the IRS will not file a Notice of Federal Lien. 4) Under equitable relief, a taxpayer may be relieved of liability for underpayment of tax. True Correct. Under equitable relief, a taxpayer may be relieved of liability for underpayment of tax, as well as understatement of tax. False Incorrect. Under other provisions of relief, a taxpayer may be granted relief only for understatement of tax. Multiple Choice 1) Which of the following is a taxpayer who is filing for an offer in compromise based on low income required to submit with the application? a) A lump-sum payment of 20% of the offer. Incorrect. Low-income taxpayers are not required to submit an initial offer payment when applying for an offer in compromise. b) $150 processing fee. Incorrect. Low-income taxpayers are not required to submit the fee when applying for an offer in compromise. 16 TheTaxReview Guide to IRS Collections

22 c) Form 656-A attached to the front of Form 656. Correct. A taxpayer applying for low-income certification must complete Form 656-A, Income Certification for Offer in Compromise Application Fee and Payment, and attach it to the front of Form 656, Offer in Compromise. NOTES d) Only Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals. Incorrect. While Form 433-A is required with the application for an offer in compromise for a low-income taxpayer, it is not the only form required. 2) The following cannot be seized by an IRS levy. a) Bank account. Incorrect. The bank will send the money to the IRS from a taxpayer s bank account 21 days after an unresolved levy has been placed on the account. b) Primary residence. Incorrect. The IRS may seize a taxpayer s house and sell the property. The proceeds from the sale will be applied to the tax debt. c) Dividends Incorrect. Payments the taxpayer receives, such as dividends and payments on promissory notes, are subject to seizure. d) Unemployment income. Correct. Unemployment benefits cannot be seized through an IRS levy. 3) Which of the following taxpayers would be eligible to file for innocent spouse relief? a) Newly divorced spouse seeking relief from a return filed as Married Filing Separately. Incorrect. The tax must be based on a joint return for the year for which relief is sought. b) The taxpayer filing for relief based on an error he or she made on the return. Incorrect. The return must have an understatement of tax due to erroneous items of the taxpayer s spouse. c) The taxpayer who was the sole income earner for the tax year in question. Incorrect. The spouse seeking relief must not know of the understatement of tax. A taxpayer who is the sole income earner of the jointly filed return would be aware of the income upon which the tax is assessed. d) The spouse of a taxpayer who took deductions from self-employment income without the taxpayer knowing of the deductions. Correct. The spouse seeking relief must not know of the understatement of tax. If a taxpayer is taking deductions that create an understatement of tax, and the spouse is not aware of this, the spouse would be eligible to file for relief. TheTaxReview Guide to IRS Collections 17

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