NAEA. NATIONAL TAX PRACTICE INSTITUTE LEVEL 1 Introduction to Collections. August 7, David F. Miles, EA

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1 NATIONAL TAX PRACTICE INSTITUTE LEVEL 1 Introduction to Collections August 7, 2012 David F. Miles, EA David F. Miles, EA is a consultant with 20/20 Tax Resolution, Inc. with over 14 years of representation experience. He works nationally as a taxpayer representative focusing on state and IRS collections. He holds a Bachelor's degree in Small Business Administration from the University of Vermont. Mr. Miles is a frequent instructor and has been published in the EA Journal, most recently in the July/August 2012 edition. He has been interviewed relating to a range of tax topics for various news articles as well as Denver television. He serves as a Level 1 instructor.

2 TABLE OF CONTENTS Intro to Collections I. INTRODUCTION 1 OPENING REMARKS 1 OVERVIEW 2 CIRCULAR 230, OPR AND ENROLLED AGENTS 3 THE NUMBERS 3 II. THE START OF COLLECTIONS 4 HOW A TAXPAYER ENDS UP IN COLLECTIONS 4 COMPLIANCE 5 REPRESENTATIVE GUIDANCE 5 SECOND CHANCES 6 COLLECTIONS STATE OF MIND 6 III. IRS NOTICES AND FORMS 7 A. CP 14 8 B. CP 501 CP C. CP D. FORMS 668-A & 668-W 8 E. LETTER 1058, LT-11, CP F. LETTER 1153 AND FORM G. LETTER H. FORMS 433-F, 433-A, 433-B 9 H. NOTICE OF INSTALLMENT AGREEMENT ACCEPTANCE / 433-D 9 IV. CONTACTING THE IRS 9 A. PRIORITY PRACTITIONER SERVICE 10 B. E-SERVICES 10 C. IRS CUSTOMER SERVICE 10 D. AUTOMATED COLLECTION SYSTEM 10 E. LARGE DOLLAR COLLECTION SYSTEM (ABANDONED 2011) 11 F. REVENUE OFFICER 11 G. QUESTIONS ABOUT AGREEMENTS IN PLACE/DEFAULT 12 V. WHO THE IRS WILL CONTACT 12 VI. INTEREST AND PENALTY 13 A. INTEREST 13 B. PENALTY 13 VII. NOTICE OF FEDERAL TAX LIEN 13 D. Miles i Intro To Collections, 2012

3 VIII. ENFORCEMENT 14 A. LEVY 15 B. SEIZURES 15 C. INJUCTIVE RELIEF 15 IX. DEBT RESOLUTIONS 15 A. EXTENSION OF TIME TO PAY 15 B. INSTALLMENT AGREEMENT GUARANTEED STREAMLINED TRADITIONAL PART PAY DIRECT DEBIT INSTALLMENT AGREEMENT IN-BUSINESS EXPRESS TRUST FUND AGREEMENT 17 PENDING STATUS 18 C. OFFER IN COMPROMISE 18 D. CURRENTLY NOT COLLECTIBLE 19 E. COLLECTION STATUTE EXPIRATION 19 F. BANKRUPTCY 20 X. APPEALS 20 A. COLLECTION DUE PROCESS 20 B. COLLECTION APPEALS 21 XI. PREPARING FOR A COLLECTION CASE 21 A. WHAT YOU NEED FROM A TAXPAYER TO BEGIN A COLLECTION CASE 21 B. WHAT TO CONSIDER DURING YOUR INITIAL CASE ANALYSIS 22 C. WHAT THE FINANCIALS TELLING YOU 22 D. TAKING ACTION 22 XII. RESOURCES 23 A. TAXPAYER ADVOCATE 23 B. STAKEHOLDER LIAISON 23 C. IRS COLLECTION CHAIN OF COMMAND 23 D. AND ITS LOCAL AFFILIATES 23 XIII. HINTS FOR SUCCESS WITH COLLECTIONS 23 APPENDIX D. Miles ii Intro To Collections, 2012

4 APPENDIX A FORM 433-A, COLLECTION INFORMATION STMT FOR INDIVIDUALS APPENDIX B FORM 433-F, COLLECTION INFORMATION STMT APPENDIX C FORM 433-B, COLLECTION INFORMATION STMT FOR BUSINESSES APPENDIX D PUB. 1, YOUR RIGHTS AS A TAXPAYER APPENDIX E PUB. 594, THE COLLECTION PROCESS APPENDIX F PUB. 1660, COLLECTION APPEAL RIGHTS APPENDIX G CP 501 APPENDIX H CP 504 D. Miles iii Intro To Collections, 2012

5 Intro to Collections I. Introduction: Opening Remarks: This class is intended to focus on the basics of the Internal Revenue Service (IRS) collection process also known as Collections. More specifically, the term Collections refers to the IRS attempts to collect on a balance due account or gain cooperation with a nonfiler account. There is a noted distinction between Collections as a process and the Collection Division of the IRS. A debt can be in notice status, part of the collection process, but not assigned to the Collection Division where enforcement is more likely to occur. In this class we are not going to focus on the distinction between the two. Instead, we are going to examine the fundamentals of the collection process, including elements of the Collection Division and other information necessary to navigate the resolution of a balance due account. In years past my lectures on collections work have not included many significant changes to procedure. But over the past eight months anyone engaged in regular collection work has noticed some of the most dramatic changes to collection procedure since the 1998 IRS reformation. For those of you that do not know or remember the specifics of the Restructuring and Reform Act of 1998 (RRA 98) it created and defined today s collection practices. In addition to defining many of the collection policies that we as representatives have come to rely on in our practice, such as codifying the Offer in Compromise, granting statutory rights to certain installment agreements and granting taxpayers appeal rights before enforcement action it also notably authored a non-retaliatory policy in Section 1203 (b)(6) stating that: Violations of the Internal Revenue Code of 1986, Department of Treasury regulations, or policies of the Internal Revenue Service (including the Internal Revenue Manual) for the purpose of retaliating against, or harassing, a taxpayer, taxpayer representative, or other employee of the Internal Revenue Service is an act or omission requiring termination. Because of the recent changes I am forced to reconsider a central premise of last years lecture. At that time I stated that Collections is concerned only with a specific debt of record and how that debt is going to be repaid by the taxpayer. And although that is still basically the mission of Collections because of the recent changes this is not so simply true. Collections appears to be moving towards a better balance of enforcing the IRC, collecting unpaid revenue and considering taxpayer issues. But for many of those on the front lines of IRS collections the change to the IRS underlying philosophy does not appear to have settled in yet it is likely only a matter of time. The changes now being introduced by the IRS to collection procedure after a decade of Taxpayer Advocate encouragement appear to be signaling a shift to the IRS treating collections with a better sense of business rather than bureaucracy. Still, anyone dealing with Collections will find D. Miles 1 Intro To Collections, 2012

6 the issues of long phone hold times, varying levels of capabilities and inexplicable decisionmaking prevalent. Furthermore, the IRS resolution programs are available to many more taxpayers; however, in typical IRS fashion it is not often that the new programs are advertised as available in each case. But, the introduction of the Commissioner s Fresh Start initiative demonstrates a better appreciation of what is needed by taxpayers while at the same time balancing maximizing collection with the IRS limited resources. Having sufficiently congratulated the IRS for some long overdue changes it is important to note that many of you engaged in collection work will have cases that do not qualify for consideration under any of the new rules. Employment tax cases are precluded from some of the most touted of the Fresh Start initiatives, as are large dollar personal income tax cases. Overview: Enrolled Agents (EAs) have varying degrees of experience with Collections and with this lecture it is my goal to ensure the proper knowledge base. The first thing to be aware of is that IRS collections is unlike other interactions with the IRS. All too often I see tax professionals approach Collections with the same mindset that goes in to preparing returns or facing audits. However, Collections is not concerned with preparation issues such as depreciation or Section 179 deductions nor are they concerned with audit issues such as your basis for handling revenue in a certain manner. Collections is concerned only with a specific debt of record and how that debt is going to be repaid by taxpayer. Similarly, I see taxpayers that want to deal with IRS Collections as though it is a general creditor by asking me to, see what the IRS will take to settle this debt. Collections is not, however, a general creditor. The rules and procedures that IRS Collections uses are rigid. Accordingly, it is vital to understand what the nuances are in order to operate within them to accomplish a taxpayer s goals. Certainly there are issues that arise in the progression of a Collection case that are extremely relevant, such as amending returns or the filing of returns to replace Service Prepared Returns (SFR or 6020B returns). Filings original returns is obviously very important to a collection case because they may reduce or even resolve the balance due account. Simply remember that the duty to amend or correct a service prepared return belongs to a taxpayer and is not the primary function of Collections. In this class I will also touch on topics that deserve much more attention than we can give them in this lecture. Yet, these topics are so closely interwoven with the subject of IRS Collections that they must be addressed in this class in order to understand Collections and how to best navigate the system. Topics such as representation, appeals, the Taxpayer Advocate and how to best communicate with the IRS will all be touched on in the course of this discussion. The mission of the IRS Collection function is to collect Federal taxes that are reported or assessed but not paid, and to secure tax returns that have not been filed (IRS Data Book 2010). The collection process begins when a taxpayer files a return and does not pay the balance due in full. The process will continue until the debt is paid in full, the IRS loses the right to collect through the expiration of the collection statute, or the taxpayer proposes and sets up an alternate collection resolution. The IRS has a 10-year statue of limitations to collect the debt. D. Miles 2 Intro To Collections, 2012

7 Initially it is important to understand what type of taxpayer the IRS is attempting to collect against. The reason is that the collection rules differ for individuals and businesses and based on the amount of tax owed. Individual cases are referred to as IMF (Individual Master File) whereas business cases are referred to as BMF (Business Master File). The IRS uses several techniques for collecting the debts it is owed including the filing of tax liens, issuing levies on wages, bank accounts and other sources of equity or revenue, and even offsetting money that a taxpayer may be due from another government agency such as Social Security or state income tax refunds. During the course of its collection efforts the IRS responsibility is to use the last known information on file to locate and contact the taxpayer. Therefore, it is critical that taxpayers regularly ensure that the IRS has their most recent contact information on file. This can be done when filing a return or filing form Taxpayers can also call the customer service line to do the same. Not receiving IRS notices is generally not an acceptable reason to excuse lack of contact. Circular 230, OPR and Enrolled Agents: The rules for practice before the IRS are outlined in IRS Circular 230. Yet for practitioners in representation work it has not always been that clear. For many years the IRS did not consider collection work as practice before the IRS. That began to change slowly after 2000 then more aggressively with the appointment of the current Director of the Officer of Professional Responsibility, Karen Hawkins. The most recent revisions to Circular 230 more clearly define the scope of the OPR s authority over practitioners in collection work. There is considerable buzz in the industry about both the Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB) role in regulating collection work. In response to some of that discussion Ms. Hawkins, in a recent discussion with tax resolution companies, made clear that she believes the authority to regulate collection work falls to OPR. Yet, she remains in contact with both agencies to ensure that policies, if needed, are created to protect taxpayers as well as practitioners. Her recent webinar on Circular 230 and many recent interviews highlight her thoughts on the subject. The Numbers: The voluntary tax system still collects the lion s share of the tax revenue in the United States. In fiscal year 2011 enforcement accounted for only 2 percent of the tax revenue received by IRS. It is the position of the National Taxpayer Advocate that the IRS needs to improve its voluntary tax compliance even more and not narrowly on increasing the amount collected by Collection. In national Taxpayer Advocate Nina Olson s June 28, 2011 Hearing on Complexity and the Tax Gap: Making Tax Compliance Easier and Collecting What s Due, she stated: Taxpayers pay about 84% of taxes voluntarily and timely. The IRS will collect roughly another 3% through late payments and enforcement. The numbers suggest that most non-compliance is not intentional but rather a high percentage may be inadvertent. D. Miles 3 Intro To Collections, 2012

8 However, maximizing national revenue is one of the IRS main goals and that means collecting unpaid monies as well as ensuring that compliance with the voluntary system does not waiver. The collection process is an important component of doing both. Every spring the IRS issues the IRS Data Book. The report details the IRS activities for its past fiscal year (Oct. 1 Sept. 30). The Data Book includes a section about Collections and penalties. This is an excellent tool for staying abreast of many details of the collection process such as the total amount collected by Collections, the number of tax liens and levies filed, and even the number of Offers in Compromise received and accepted IRS Data Book: Returns Filed with Additional Tax Due: Number in beginning inventory 10,391,000 Number of New Accounts 8,011,000 Number in Ending Inventory 10,809,000 Balance of Unpaid Assessments 116,262,380,000 Net amt. Collected by Collection (offsets, etc. not incl.) 31,009,074,342 Returns not Filed Timely: Amount Assessed from Returns Secured by Collection 28,404,660,000 Amount Collected with Delinquent Returns 1,933,279,000 Taxpayer Delinquency Investigations at end of ,862,000 *Arrows reflect FY 2011 compared to FY 2010 As you can see the numbers illustrating what is owed and what is collected are impressive. Although there remains an unpaid balance of over 116 billion the IRS managed to IRS to collect almost 27% of its unpaid assessments. In addition to the broader collection numbers listed above the IRS assessed 31 billion of civil penalties of which 15.5 billion was assessed on individuals and estate and trust income tax returns. Employment taxes in fiscal year 2011 made up the next highest amount of penalty assessments with 5.3 billion with business income tax a distant third with 1.5 billion. It is difficult to quantify but it must be assumed that much of the IRS unpaid assessments is money that the IRS may never collect, which seems to dictate that the IRS must keep up its collection efforts on the money that it can collect in order to maintain its contribution to revenue. Furthermore, although voluntary tax compliance is clearly the most successful component of our system Collections, through securing returns and direct enforcement, generates enough revenue to maintain its importance to the IRS. II. The Start of Collections How a Taxpayer Ends Up in Collections: A taxpayer can reach Collections through a number of different situations although they all result in one common theme and that is an underpayment of tax. They are (not necessarily all-inclusive): D. Miles 4 Intro To Collections, 2012

9 1. Non-payment or underpayment of tax. In representation work you will commonly see this result from form 1040 for individuals. For companies this generally relates to employment taxes, forms 941 and 940, although income tax issues also arise. 2. Audit; 3. IRS correction such as a refund being given in error; 4. Misapplied or returned payments for insufficient funds; 5. Math Errors; 6. Unfiled returns or returns filed late. Compliance: The term compliance as the IRS uses it means that a taxpayer is paying current taxes and has filed all of its returns due at that point in time, including valid extensions to file. Compliance is required both to qualify for a resolution and to maintain a resolution plan. It should always be a taxpayer s first priority. It is important to note that while an unfiled return is not often an issue that triggers the start to a collection case it is very common for the IRS to send filing inquiry notices. A key component of Collections role is to ensure that taxpayers file returns. And because during the collection process the IRS will look closely at a taxpayer s filing compliance when it begins to collect against a balance due filing returns and paying current taxes are almost inseparable in terms of importance. In fact, in our voluntary tax system, filing compliance is of such importance to the IRS that Revenue Officers can actually be assigned a filing inquiry when notice inquiries do not elicit a taxpayer response. This is usually the case only when the IRS has information that would point to the taxpayer having a filing requirement. This is not a collection case but rather a field call, to verify if a return should have been filed for a particular period. This is rare and typically seen in business employment tax cases. When dealing with a collection case it is vital to ensure that a taxpayer is paying current taxes regardless of the issues that exist. Paying current taxes means paying into whatever tax period is currently open and not yet due to be filed. It is never too late to bring a taxpayer into compliance therefore your first recommendation to anyone facing a collection case for past due taxes is to begin paying current taxes. If a return is not filed by its due date a taxpayer risks the IRS filing one in their place. This can happen for individuals and businesses. These are typically referred to as SFRs or Substitute for Return with respect to 1040s and 6020bs (the code section that permits the IRS to take this action) for employment tax returns. Keep in mind that service prepared returns will almost never result in anything but a tax liability much higher than what the taxpayer truly owes. Taxpayers may file an original return at any time, but the IRS will seek to collect on their own balance until an original is filed. Representative Guidance: The authority to collect taxes due is outlined in general terms in Internal Revenue Code (IRC) sections 6301 through Because most of us, I hope, are not focused on arguing the constitutionality of this authority I find that the more useful reference for collection work is the Internal Revenue Manual (IRM). D. Miles 5 Intro To Collections, 2012

10 The IRM is Collections practical guidance. It serves to outline the specific procedures, policies, and law that must be adhered to by both representatives of the IRS and taxpayers, including taxpayer representatives. EAs should be comfortable with navigating the IRM, which can be found at paying particular attention to Part 5, Collecting Process, and Part 8, Appeals. These sections do a very good job of outlining a taxpayer s rights and requirements. IRS representatives make mistakes and in some cases may not even know some of the material contained in the IRM. Hence it is important to understand the IRM in order to protect taxpayer rights. In addition to the IRM, EAs should be familiar with Circular 230 as outlined above as well as Publications 1, 594 and I suspect that most practicing EAs are already intimate with 230 but because it is our governing authority for practice you should review it periodically as a refresher. And every initial interaction with a Revenue Officer should begin with a question about your familiarity with publications 1, 594 and Updates to the IRM occur frequently. Circular 230 also changes but not as often as the IRM. The is very good at staying abreast of the updates in real time. This is important because many updates occur by IRS memorandum and are instituted practically before they are published in the IRM and Circular 230. Second Chances: The collection process can be intimidating, terribly uncomfortable and time consuming. However, it actually begins rather tamely, which leaves some to say the IRS could collect more quickly if it was more aggressive from the start. Yet, the collection process has many statutory aspects to it that are necessary to protect taxpayer rights and to allow the system to work through its incredible volume. One such step is the early notice phase. This is what I call a taxpayer s second chance. The IRS generally has to wait until a taxpayer notifies it of a debt through the filing of a return before collections can begin. There are situations in which the IRS can prepare a return when one has not been filed but that is not the typical situation. When a return is filed and subsequently processed the IRS begins its notice phase. Balance due reminder letters and letters specifically requesting payment of a balance due are the essence of the early collection process. The most common notices a taxpayer will see at the very start are the CP 14 or the CP 161. These notices outline the specifics of the balance due and politely request payment. If a taxpayer does not or cannot heed the IRS advice to remit full payment of a tax debt the collection process moves along. And at this point it gets much more serious. Taxpayers usually take note of this transition with the issuance of the IRS CP 501 through the CP 504 letters. These letters take on a more urgent tone, a new look and even begin to discuss adverse action. After the final letter, CP 504, a case will move to the Collection Division and likely face enforcement. This is the time in most cases that a collection representative, more commonly known as a Power of Attorney, gets involved. Collections State of Mind: This is a topic that I consider to be very important. If a debt remains unpaid after the second chance letters Collections will begin to be aggressive about making D. Miles 6 Intro To Collections, 2012

11 arrangements for the full payment of a debt. IRS Collections has a set of guidelines or road map to follow in each case. As much as the circumstances with each case are likely different Collections will try to work each case in the same manner. Collections will first make a request for full payment and/or returns to be filed. If full payment is not possible Collections will ask if any payment is possible that day. If payment is not possible Collections will request financial information about the taxpayer. If you are not prepared to provide the information, and there should be no rush to do this, Collections will then make arrangements for a deadline to provide information about the taxpayer s financial condition and any unfiled tax returns in order to work towards a collection determination. A collection determination is the IRS decision about what resolution is best for the case. The IRS initial collection determination in many circumstances is not the plan that is best suited for the IRS or the taxpayer. There is not necessarily anything that can be done to prevent the IRS from coming to its own decision. In fact, sometimes this helps define where one stands with Collections. What is important is to understand how that proposed resolution suits the taxpayer and if there are ways to argue for a different plan. Making a payment to the IRS on the date you or the taxpayer is contacted by the IRS is not necessary. It certainly can benefit a taxpayer from the perspective of limiting interest and penalty accruals but typically immediate payments should not shape the outcome of a case. Recent changes to IRS rule, however, has changed that assumption slightly by providing thresholds of debt at 10,000, 25,000 and 50,000 at which point taxpayers may qualify for certain plans. When speaking with Collections it is not necessary to explain what led to the debt. Although the origin of the debt may be asked of you this should not be misinterpreted as a question that will impact how the case is handled. This question is commonly used to identify the underlying cause of the debt for the purpose of ensuring that no new debt accrues. For example, if there is no reasonable explanation for the debt, Collections will likely be very concerned with the accrual of new debt. However, if a taxpayer experienced an isolated event such as a tax on capital gain, Collections may feel more comfortable with making arrangements for repayment. Collections will most likely be polite by listening to an explanation of what led to the tax debt. Collections may also grant some extension of time to pay (up to 120 days) or an extension to provide information based on a taxpayer s situation. But Collections willingness to listen to an explanation should not be misconstrued as it weighing in on the resolution. Collections protocol does not allow for consideration of why a debt accrued when evaluating resolution options. III. IRS Notices and Forms: IRS notices are critical to the collection process. They can explain exactly where a taxpayer stands in the process. Collection letters, amongst various other topics, explain why a debt is owed, penalty and interest accruals, appeal rights and the acceptance or denial or resolution proposals. D. Miles 7 Intro To Collections, 2012

12 When reviewing IRS notices or recommending action to a taxpayer based on a specific notice it is important for one to remember that each period of debt requires its own series of statutory notices. Therefore, commenting on what action to take based on one notice may not be the best action with respect to other periods of debt. One must know where each period of debt is in the notice phase. Some important notices and forms to take note of are: A. CP 14/CP 161 Notice of tax due that requests payment rather politely. This should be carefully reviewed to ensure that the amount stated as being owed is in fact what is owed. Enforcement is not a consequence for not responding. B. CP 501 CP This series of notices begins when there is no response to CP 14 or CP161. These letters have an escalating sense of urgency both in IRS language and consequences for failure to respond. The taxpayer is not likely to have reached the Collection Division until just after the CP 504 but certainly a call to the IRS should be an immediate priority when beginning a collection case if this series of letters has begun. C. CP 523 Notice that the IRS intends to terminate an installment agreement. The newest form details the reason for the default such as a missed payment, an unfiled return, or a new balance due. This letter is an excellent resource for knowing that an agreement is in jeopardy, however, the system IRS has in place to handle responses to the letter needs work. There are times that the stated reason is incorrect. Also, the letter states a date for the agreement to be terminated. The date often has no relationship to the actual default date. D. Forms 668-A & 668-W These are notices of levy. The 668-A is typically issued to bank accounts and is one-time levy. This means that the money in the account is frozen on the day that the financial institution receives the levy. The money is set aside by the bank for a period of 21 days in order to allow a taxpayer to make arrangements for its release or payment of the tax due. Aside from the frozen or set aside funds the account is open to be used by the taxpayer during the 21 days. Subsequent deposits will not be taken or held unless a new levy is issued. Although a new levy is technically possible it is very rare in today s collection process. A release is also possible but is becoming more difficult. A hardship needs to be established for a release. A 668-W is most often issued as a wage garnishment. An employer will receive the levy and according to the taxpayer s pay scale and frequency the employer will garnish a certain percentage of the check and remit it to the IRS. These levies generally do not self-satisfy, as is the case with the 668-A. A release must be obtained from the IRS if the debt cannot be satisfied. A release is best accomplished by establishing a hardship that the levy is causing to the taxpayer. One should expect to prove the hardship. D. Miles 8 Intro To Collections, 2012

13 E. Letter 1058, LT 11, and CP 297 Each of these letters is a final notice before the IRS takes enforcement action and each offers appeal rights. The appeal offered is a Collection Due Process (CDP) Hearing. The appeal rights must be exercised within 30 days of the notice date. Enforcement action will almost certainly follow any of these letters if they are ignored. If any of these notices are issued carefully consider filing a CDP appeal because it will prevent enforcement against the taxpayer. F. Letter 1153 and Form 2751 A letter and form proposing that an individual is responsible for a company s trust taxes. This is going to be seen only during business collection cases and is an advanced collection topic because of the various nuances that go along with it. G. Letter 3174 Commonly referred to as the refresher letter. It is similar to a 1058 in language but does not offer specific appeal rights. However, a taxpayer can respond through the use of a Collection Appeal Request (CAP) or an Equivalent Hearing (EH) if within one year of the period s original This letter is issued if it has been six months since a taxpayer has faced collection action, received a Notice of Intent to levy or otherwise been advised of the IRS intent to take enforcement action. Contact the IRS should be made immediately. The generally accepted time before levy is 15 days although it is not specifically stated in the IRM and that time can change if a taxpayer is given a formal deadline to respond. Collection is imminent. H. Forms 433-F, 433-A and 433-B IRS Collection Information Statements (CIS). These forms are the foundation to almost every resolution option outside of full payment. They show what a taxpayer owns and owes and makes and spends. The 433-F is more of a short form and is commonplace with ACS cases whereas Revenue Officers always use Forms 433-A & B. I. Notice of Installment Agreement Acceptance or 433-D - These are also used interchangeably. In years past the IRS issued 433-Ds that required taxpayer signature and outlined the periods of debt and the installment agreement terms. The 433-D is most commonly seen now when a Revenue Office wants to set up a direct debit installment from the onset of the agreement. Today, the IRS is issuing less formal looking notices of agreement acceptance. The new notice does not require a taxpayer signature for the agreement to begin however it still has all the same rights and obligations of the 433-D. IV. Contacting the IRS: Contacting the IRS in a collection case is absolutely critical. It is the first step that should be taken by a representative immediately after securing form 2848, Power of Attorney, from a taxpayer and filing it with the IRS. Be prepared to share basic taxpayer information and establish dates for follow up with additional information the IRS may require. If a question cannot be answered simply tell the representative you will need time to call back. Contact with the IRS can be made in the following manner: D. Miles 9 Intro To Collections, 2012

14 A. Priority Practitioner Service (PPS )(p: ) The PPS is not Collections. It is used to gather facts about a case. I recommend doing a call to PPS at the start of each new case. Do not expect to set up agreements or stay enforcement with PPS if the case is in Collections. PPS can set up agreements in simple cases at an early stage of the debt. For cases in collection PPS is excellent for finding out the amount owed, unfiled return issues, and to whom the collection case is assigned. B. E-Services The E-Services system is also not Collections but is an effective way to interact with the IRS. Like PPS, it is not a substitute for communicating with the Collection Division. Representatives can, however, use the system to file Powers of Attorney, get transcripts of an account, and even propose installment agreements. I have found it most effective for its transcript delivery system (TDS), which allows almost instant access to each period of tax. E-Services is accessible for Circular 230 practitioners. A Power of Attorney for a particular taxpayer must already be on the IRS system or filed at that time in order to use E-Services. C. IRS Customer Service Customer Service is typically whom you will reach if calling just after a CP 14 or other preliminary notice has been received. It is possible to propose a resolution at this stage although this is not a collection contact. Representatives at this level may not understand the entire collection process but they most certainly should be able to take information and relay what is needed to implement a resolution plan. 1. Individuals p: Businesses p: D. Automated Collection System (ACS)(Collection Division)(p: ) The last and most serious step in the automated collection process. This is a collection contact and where a case will be assigned after the CP 504 has been issued. ACS takes enforcement action. Enforcement is most common when a taxpayer does not make contact or when a scheduled call back or deadline is missed. An ACS representative will request current banking and employer information. You will also likely be asked if the taxpayer is prepared to pay the debt and alternatively how the taxpayer proposes to resolve the debt. The answers to these questions can have serious consequences and for that reason it is important not to comment with specifics unless you are prepared to do so. Most any call to ACS should end with a scheduled call back. It is important to ensure that until the call back date there will not be enforcement action. During the call a practitioner should be sure to: 1. Take detailed notes including the name and identification number of the representative as well as the time of the call. These calls are recorded and can be referenced back to by IRS management if the need arises. 2. Find out exactly where the case stands in the collection process and if there are any deadlines already established. D. Miles 10 Intro To Collections, 2012

15 3. Find out if there are any obstacles, such as unfiled tax returns, to the taxpayer qualifying for an installment agreement or other resolution option. 4. Establish a deadline for follow up with an assurance that no enforcement action will take place during that timeline. Specifically, request a hold of enforcement action. 5. Propose a resolution if you are prepared to do so. E. Large Dollar Cases in ACS (Collection Division)(Abandoned, Fall 2011) Debts of over 100,000 used to be handled by this unit of Collections. Presumably in an effort to realign its resources, better collect debt and better serve taxpayers debts of this size are now automatically assigned to Revenue officers. I have continued to include mention of this unit because it was only recently abandoned. In fact, some in collection still refer to it as though it exists. F. Revenue Officer (RO)(Collection Division) The highest level of case assignment in the collection process. According to a 2010 audit by the Treasury Inspector General for Tax Administration, Revenue Officers comprise one of the core competencies of the IRS and have a direct impact on the IRS ability to meet its mission. The report goes on to state that although the SB/SE Division added 1,515 Revenue Officers over a recent nine month period it struggles to keep pace with attrition and workload potentially creating an unfair burden on the majority of taxpayers who fully pay their taxes on time. Compliance with current tax payments and return filings will absolutely be the first and highest priority of this individual. An RO is usually local to the taxpayer but some ROs cover large jurisdictions. This is common in more rural settings. At this phase there is no question that enforcement action has a very real probability of occurring. One should immediately reach out to an RO if it is determined that an RO is assigned to the case and follow the same steps as listed above in the ACS section. It is important to remember that Revenue Officers are people. When dealing with a Revenue Officer, respect and a professional attitude do well beginning a case positively. Like with ACS, do not give an RO information that you are not confident is accurate. You will have to explain the information later if you attempt to provide something different in the future. It can be easier to simply ask for time to respond to an inquiry. Every Revenue Officer has a boss, also known as a Group Manger. If there is a problem, whether it is a personality issue or a disagreement about a technical issue you should feel comfortable asking the Revenue Officer for that person s contact information. Note: If you are engaging in a representation case in which a taxpayer has already spoken to the IRS you must determine if there are deadlines or meetings scheduled and the consequences of each if missed. IRM section details taxpayer contact rights. If needed, request a reasonable D. Miles 11 Intro To Collections, 2012

16 extension (10 days) of any deadline to allow you to become familiar with the case (see Preparing for a Collection Case). G. Questions about Agreements in place or in default It is not uncommon for cases that have been given agreements to face some setbacks. Whether the taxpayer causes the problem or the IRS is sometimes determined only from contacting the IRS directly. If a taxpayer receives a notice call the number on that notice. If the taxpayer is on an installment agreement consider the following telephone numbers to answer questions that may arise. Business Individual, Self-Employed Individual, Wage Earner Manual Monitoring Installment Agreement (MMIA) V. Who the IRS Will Contact: The IRS relies on a strong mail campaign to compel taxpayer action. Balance due reminders and letters requesting payments of a balance due are the essence of the early collection process. The IRS will send a copy of each letter to a valid Power of Attorney. However, the filing of a Power of Attorney will not stop the letters that are sent to the taxpayer. Historically, there is very little effort made by ACS though outbound phone call. In fact, even when I am told that I will receive a call back from ACS I remain skeptical that it will happen. The early collection process centers on taxpayers making inbound calls and thus that should remain your expectation anytime you are dealing with ACS. Having said that, the IRS appears to be making an effort to improve on this issue. At a 2011 practitioner walk-through of the COIC facility in Memphis, Cheryl Cordero, Director of Filing & Payment Compliance, noted that outbound phone calls, especially ACS manager callbacks are an absolute focal point of ACS and is being closely monitored for improvement. From a practical perspective most recently a change has been noted in cases being worked by ACS. In a situation in which information has already been provided to the IRS it is becoming more commonplace for ACS to make an outbound call in order to clarify information that has been submitted or request additional information. This call can also be used as an opportunity to propose a resolution. Not until a Revenue Officer is assigned to a case should one expect face-to-face contact. Revenue Officers aggressively seek out direct contact with taxpayers. When there is direct contact by the IRS by phone or in-person, regardless if it is by ACS or a Revenue Officer, it should be made with a taxpayer representative if there is a valid Power of Attorney on file. When beginning a case, a representative should instruct their client that if for any reason the IRS calls them directly, to politely inform the IRS representative that there is a Power of Attorney and ask that person to call the POA. D. Miles 12 Intro To Collections, 2012

17 VI. Interest and Penalty: Penalties and interest (P&I) continue to accrue throughout the collection process for as long as there is a balance due. It is possible for a taxpayer to qualify for relief from penalty if the circumstances surrounding the accrual qualify for relief due to reasonable cause. In addition to qualifying for relief due to reasonable cause relief recently Collections appears to be more willing to recommend one-time relief of penalty for those taxpayers with an excellent history of compliance. Relief from penalty must always be requested in writing. Interest will not be waived except in very special circumstances such as a national disaster or documented IRS erroneous advice. Please refer to IRM Part 20. VII. A. Interest The IRS interest rate changes. It consists of the federal short-term rate plus 3% and it compounds daily. B. Penalty: 1. Late Payment ½% will be assessed per month from the return s due date until the debt is paid in full or it reaches 25%. The ½% goes to 1% 10 days after a Final Notice of Intent to Levy is issued. If the return was filed timely the ½% goes to ¼% during the time the debt is on an installment agreement. 2. Late Filing 5% of the tax due will be assessed each month up to five months. The minimum late filing penalty was increased in 2008 to 135 or 100% of the tax due. Notice of Federal Tax Lien: According to the 2011 IRS Data Book there were almost 1,042,230 Notice of Federal Tax Liens (NFTL) filed in fiscal year This is a decrease of more than 50,000 liens as compared to 2010 and may represent greater leniency with the filing of NFTLs. It is important to note that a NFTL differs from a statutory lien. A statutory lien secures the government s interest in taxpayer property automatically10 days after a demand for payment is made whereas the NFTL is used primarily to secure the government s interest in taxpayer property with respect to third party debts such as mortgages. A Notice of Federal Tax Lien filing is done by the IRS to put a taxpayer s general creditors on notice of the existence of a federal tax debt. It is not a step that is required by the IRS to enforce collection against a taxpayer. And although the filing of liens is commonly listed by the IRS statistically amongst enforcement activity the IRS, specifically Collections, is adamant that a NFTL is not an enforcement tool. Therefore, the NFTL does not fall under the same guidelines as other enforcement measures of when it may be used. The IRS exercises complete control and discretion over lien filing. It can and will usually file liens quickly and with few exceptions beyond those outlined by public rule such as with debts under 2,500. In the modern collection era historically the filing of a federal tax lien is the IRS first line of defense. In other words, the IRS traditionally files a NFTL very soon after it is established that a taxpayer has an unpaid assessment that cannot be immediately paid in full. The lien is so important to the IRS, that should a case make it to a Revenue Officer (a rare occurrence) without D. Miles 13 Intro To Collections, 2012

18 a tax lien a decision of whether to file one must be made within 10 days. At the time of this class last year it was announced that the timeframe for Revenue Officers to decide on a NFTL would be extended but practically I have not noticed any less emphasis or urgency put on the lien determination. Taking an even greater step in the recognition of the issues that come with the filing of a NFTL the IRS Commissioner announced on February 11, 2011 its Fresh Start initiative. Although most collection professionals have already heard of the Fresh Start it is a fairly landmark initiative for Collections. The Fresh Start introduced major changes to lien filing guidelines that had not changed in over 30 years. The program increased the threshold for filing a lien from 5,000 to 10,000 (aggregate balance due) and said that under very few circumstances should a lien be filed on a balance due of under 2,500. The IRS devoted a page of its web site in 2011 to publicizing the fresh start program: The program also broadened the circumstances under which the IRS may consider a lien withdrawal after a debt is paid and introduced the lien withdrawal/direct Debit installment agreement (DDIA) program. VIII. Enforcement: Enforcement is the IRS most aggressive form of collecting money. The IRS has the power to levy or take many sources of money and income as defined in IRC section 6331 and discussed in IRM parts 5.10 and This includes, but is not limited to, wages, funds in bank accounts, accounts receivable, IRAs, Social Security, the cash value of life insurance and state income tax refunds. Although there is no legal distinction between levy and seizure there are different procedures that must followed by the IRS. Therefore, there is a distinct difference between levy and seizure when dealing with Collections. Seizure proceedings are used to take cars, land and home, and business property. The National Taxpayer Advocate noted in her written statement to Congress titled, Hearing on Complexity and the Tax Gap: Making Tax Compliance Easier and Collecting What s Due, that between 2008 and 2010 the ratio of levies to taxpayer case receipts in ACS was 86 percent. She goes on to note that ACS personnel used less than three percent of direct time to contact taxpayer s by making outbound phone calls. Clearly then, one can see that if the IRS levies in a majority of cases while at the same time making almost no outbound phone calls it is especially important to be proactive in your contact with IRS. Initiating contact with ACS or Revenue Officers will help avoid enforcement and should be one of your first steps in a collection case. Contrary to what many taxpayers think the IRS is not omnipotent when it comes to enforcement. There is no magic button that the IRS uses to find where a taxpayer banks or works. The IRS is simply resourceful in using information taxpayers or their employers have provided to it in the D. Miles 14 Intro To Collections, 2012

19 past or found through credit bureau checks to take enforcement action against bank accounts and wages. When it comes to locating assets, however, the IRS has more resources such as access to states Department of Motor Vehicles. To my knowledge the IRS maintains its use of Lexis Nexis Accurint as its asset locator tool. IX. A. Levy Without question the most widely used of enforcement tactics. In 2011 there were over 3.75M levies issued by the IRS to third parties. B. Seizures With only 776 seizures in 2011 you can see that this is clearly a last resort of the IRS. Note, however, that this number is up by nearly 30% from the 605 seizures in C. Injunctive Relief Used to prevent business taxpayers from continuing in operation. Without any definitive numbers it is very difficult to tell how often this is used by the IRS but as a practitioner specializing in business representation I can tell you that it is rare that you will see this occur. Debt Resolutions: There are very few sources of income exempted from IRS levy. Exemptions include unemployment compensation, workers compensation, and judgments for the support of minors and certain military disability and public assistance payments and assistance under the Job Training Partnership Act. It is important to note that with the exception of an accepted and paid Offer in Compromise the IRS has the right to request to review financial information at almost any time to determine the appropriate resolution to a debt. This is true even when a taxpayer is already on an agreement. Practically, however, this is not often done except in cases where the debt will not be paid within the collection statute. A. Extension of Time to Pay In many cases the IRS will grant up to 120 days to resolve a balance due. Although still used by ACS I have learned recently that Revenue Officers have been advised not to use this tool. Too often taxpayers interpret this plan as some type of extension or follow up date. Do not be confused. The IRS considers this a formal plan for resolution. If a taxpayer cannot meet the 120 days it is likely that the taxpayer case will be noted as a defaulted agreement. B. Installment Agreement IRM section The installment agreement (IA) is the IRS most popular resolution tool. Although the IRS own statistics show that almost half of all installment agreements default it is still a tool both requested by taxpayers and granted by the IRS. Installment agreements are best suited for taxpayers that have an ability to make monthly payments and do not qualify for an Offer in Compromise. With almost any IA, Form 433-F, 433-A, or 433-B must be provided before a decision will be rendered on a proposal. In business employment tax cases it is not D. Miles 15 Intro To Collections, 2012

20 uncommon for the IRS to request both a 433-A and a 433-B because of the relationship and ultimate responsibility of the owners of the company for the company debt. A Revenue Officer will always require form 433-A but when dealing with ACS be sure to clarify if a 433-F or a 433-A is being requested since it is important to provide only the form requested. All installment agreements require that a taxpayer be in compliance with filing and taxes prior to the IA being granted as well as remaining compliant with ongoing taxes and filing on time. Failure to do so even while remitting timely installment payments will default the plan. Generally speaking taxpayers on installment agreements cannot be enforced upon and liens will not be released until the agreement is concluded (with the recent exception of the (DDIA). 1. Guaranteed - Taxpayers having an aggregate balance of 10,000 or less (excluding penalty and interest). Does not apply to employment taxes. a. Cannot have failed to file or owed tax in any of the preceding five years. b. Will pay in full within three (3) years. c. Have not entered into an installment agreement in the past five years. d. Can be granted even if taxpayer has ability to pay in full. 2. Streamlined (under 25k) Taxpayers having an aggregate balance of 25,000 or less (total balance due). Does not apply to employment taxes unless business is closed. a. The debt must be paid in 72 months. b. Lien determination not required. c. No managerial approval. d. No financial statements required. e. Taxpayers may pay down the debt to qualify. f. Can be granted even if the ability to full pay exists. g. IMF, BMF (income tax) and out of business BMF. 3. Streamlined (25,001 50,000) The criteria become more specific in this new program. a. The debt must be paid in 72 months. b. The CSED must be protected. c. No lien determination or managerial approval. d. IMF or out of business Sole Proprietors. e. Must be a DDIA. f. Debt may be paid down to qualify. g. Verify ability to pay through a Collection Information Statement (CIS) or the Streamlined IA Calculator (SLIAC). The SLIAC is intended to verify the ability to support the proposed payment. It will not be used to demand a higher payment. 4. Traditional Pays the entire tax liability (over the streamlined threshold) within 72 months. D. Miles 16 Intro To Collections, 2012