IRS COLLECTION: DON T HAVE A SEIZURE

Transcription

1 IRS COLLECTION: DON T HAVE A SEIZURE by ROBERT E. McKENZIE, EA, ATTORNEY ARNSTEIN & LEHR SUITE SOUTH RIVERSIDE PLAZA CHICAGO, ILLINOIS (312) [email protected]

2 TABLE OF CONTENTS 1. IRS LIEN Levying Taxpayer Property... 1 Lien Rights... 1 Liability of Taxpayer... 1 Meeting Statutory Requirements... 1 Effect of Federal Tax Lien... 2 Statutory Lien... 2 Unenforceable Statutory Period... 2 Filing Notice of Lien... 2 Restructuring and Reform Act SEIZURE OF ASSETS In General Approval Process For Liens, Levies, And Seizures Automated Collection Taking Assets Residential Seizure Business Assets Collection Due Process Rights Impartial Hearing Levy Appeal Rights Notice of Intent to Levy What must a Pre-levy CDP Notice Include? What must a Taxpayer Do to Obtain a CDP Hearing? Form Equivalent Hearings TYPES OF NOTICE OF LEVY In General Levy Appeal Rights Notice Requirements Jeopardy Levies, State Tax Refund Levies Approval Prior To Jeopardy Assessment Accounts Receivable Benefit Income Levy on Lump Sum of IRA or Pension Plan Waiver of Early Withdrawal Tax Levy on IRAs and 401K plans Cash Loan Value Of Insurance Social Security Benefits Notice of Levy on Bank Accounts... 9 i

3 3.13 Levy on Wages Child Support Payments Take Home Pay Levy Of Independent Contractor Release Of Levy On Wages Requesting Release Criteria For Release Release Of Levy When Amount Is Uncollectible Currently Not Collectible Criteria For Release Of Levy Release of Notice of Levy Requesting Conference Taxpayer Assistance Order Practical Considerations Negotiating Tactics Erroneous Levy Joint Bank Accounts LEVY EXEMPTIONS Exemptions Available SEIZURE AND SALE Taxpayer s Physical Property Approval Service of Seizure Documents Residential Seizure Residences Tangible Business Assets Private Areas And Writs Of Entry Consent or Court Order No equity Seizures Seizure Of Trade Or Business Release Of Seized Property Return Of Seized Property Redemption of Property Friendly Bidder Purchase by Spouse Purchase by Corporate Shareholders Redemption of Property Negotiation Tactics Post-Seizure Payment Plans Public Pressure Bankruptcy Option EXTENSIONS OF TIME TO PAY ii

4 6.1 Extensions <$50,000 Liabilities In-Business Trust Fund Express Installment Agreements COLLECTION INFORMATION STATEMENTS CIS's Types of Collection Information Statements Amount of Payments Form 433-B Substantial Net Worth New more Onerous Allowable Expense Standards Five Year Test Other Expenses EXHIBIT iii

5 IRS COLLECTION: DON T HAVE A SEIZURE by ROBERT E. McKENZIE, IRS LIEN 1.1 Levying Taxpayer Property The IRS has the power to collect taxes by levying on taxpayers property because of the Federal Tax Lien. When a person owes taxes, the IRS gains a lien on all that person's assets after meeting certain statutory requirements. The lien attaches to all rights, title and interest of the taxpayer wherever it may be situated. [IRC 6321] Once the IRS has a lien on all of a taxpayer's assets, it may enforce that lien by administratively levying his or her assets. 1.2 Lien Rights An example of lien rights would be the lien created when a person buys a car and finances the purchase through a bank. The purchase price for the car is $10,000. The purchaser pays a down payment of $2,000 and signs a note with a bank giving it a lien on the car. The bank then lends the buyer $8,000 to complete the purchase. If the buyer defaults on the note, the bank may repossess the car. With the IRS it gains a lien on all of a taxpayer's assets and therefore it has the right to seize most of those assets to satisfy unpaid taxes. 1.3 Liability of Taxpayer The liability of a taxpayer for Internal Revenue taxes is personal and, except for the taxes imposed under subtitle E of the Code relating to distilled spirits, wines, and beer, does not directly attach to his or her property. In this respect the liability is analogous to a simple debt and, with nothing more, could be enforced only by a court action. To protect the revenue, Congress has provided an administrative means by which collection of assessments may be effected. Congress also has statutorily pro-vided for a lien which attaches to a taxpayer's property. The lien is often referred to as the "statutory" or the "general" lien. The following requirements for establishing the lien are in the Code: An assessment must have been made; A notice and demand for payment must have been made (the first IRS notice meets this requirement); and The taxpayer must have neglected or refused to pay. [IRC 6321] 1.4 Meeting Statutory Requirements It is surprisingly easy for the IRS to meet the statutory requirements. An assessment occurs when the IRS encodes the return information to its system of records and an assessment officer signs a certificate of assessment. A machine now automatically imposes a signature on assessment documents when return information is posted to the 1

6 IRS computer system. The notice and demand requirement is met by sending the taxpayer a notice requesting payment. [See Chapter 2] If the taxpayer doesn't pay in the time specified in the notice, he or she has "neglected or refused to pay the tax." Partial payment does not prevent a lien arising for the remaining balance. 1.5 Effect of Federal Tax Lien The effect of the Federal Tax Lien statute is that when any person fails to pay any assessment of tax, plus interest, penalties, or costs, a lien in favor of the United States arises upon all property and rights to property, whether real or personal, tangible or intangible, belonging to the taxpayer. Even if the taxpayer makes partial payment, a lien will arise for the balance of the tax. 1.6 Statutory Lien The statutory lien for Federal taxes arises when the assessment is made, which is the date the summary record of assessment (Form 23-C) is signed by an assessment officer. [IRC 6322] The Code further provides that the tax lien shall continue until the liability for the amount so assessed (or a judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by a lapse of time. [IRC 6322] 1.7 Unenforceable Statutory Period The term "unenforceable" as used in the Code means unenforceable because of the expiration of the statutory period for collection. Prior to 1990 the Statute of Limitations for collection was six years from the date of assessment plus such suspended, extended or postponed period of time as may, by law, apply. [IRC 6502] The Revenue Reconciliation Act of 1990 extended the Statute of Limitations for collection to ten years. [Revenue Reconciliation Act of 1990, 1131(a)] This period was extended for all tax liabilities for which the Statute of Limitations was still open when the bill was passed by Congress and signed by the President. The reporting of an account as uncollectible does not affect the statutory period for collection. However, a distinction must be made between accounts that are administratively uncollectible and those that may not be collected by operation of law, i.e., the lapse of time, discharge in bankruptcy, court order, etc. 1.8 Filing Notice of Lien IRC 6323(a) modifies IRC 6321 by providing the Federal Tax Lien is not valid against purchasers, holders of security interests, mechanics lienors, and judgment lien creditors until a Notice of Lien has been filed. Filing the Notice of Lien is constructive notice to these persons that the lien, provided for by the Code, exists. The tax lien becomes valid, with certain exceptions, against competing creditors when Notice of Lien is filed. In most jurisdictions, state law requires a deed of real property be entered in a public index to be valid against a purchaser. Where this is the case, and an adequate system for public indexing is available, a Federal Tax Lien must be recorded in the public index to be valid with respect to real property. 2

7 1.9 Restructuring and Reform Act The Internal Revenue Service Restructuring and Reform Act of 1998 established formal procedures designed to ensure due process where the IRS seeks to impose a lien. The due process procedures apply after notice of a Federal tax lien has been filed. The IRS must notify the taxpayer of the filing a Notice of Lien within five days of its filing. During the 30-day period beginning with the mailing or delivery of this notification, the taxpayer may demand a hearing before an appeals officer who has had no prior involvement with the taxpayer's case. 2. SEIZURE OF ASSETS 2.1 In General The IRS has collection tools available to it which are the envy of every commercial 601lection agency. Because the IRS has a lien on a delinquent taxpayer's property it may take that property to satisfy taxes. The IRS can, administratively, take actions that, any other creditor could take only after extensive court litigation including: initiating a lawsuit; prevailing on that suit; having a judgment entered; possibly conducting a citation proceeding in order to discover assets; and having a levy issued for service by the sheriff's department to seize and sell the assets of the debtor. 2.2 Approval Process For Liens, Levies, And Seizures The IRS Restructuring & Reform Act of 1998 requires the IRS to implement an approval process under which any lien, levy or seizure would, when appropriate, be approved by a supervisor, who would review the taxpayer's information, verify a balance is due, and affirm that a lien, levy or seizure is appropriate under the circumstances. Circumstances to be considered include the amount due and the value of the asset. The provision became effective for collection actions commenced after July 22, 1998, except that in any-action under the Automated Collection System (ACS), the provision applied to actions initiated after December 31, [Act 3421] 2.3 Automated Collection Most notices of levy arid liens are served by Automated Collection Systems (ACS). Over the years, more hardships have been visited upon taxpayers by the ACS system then Revenue Officers. One must be alert to exercise the rights under Section 6330 to protect clients from potential abuses by ACS. 2.4 Taking Assets Revenue Officers and ACS are empowered to seize assets in the hands of third parties such as wages, deposits in bank accounts, certificates of, deposits, accounts receivable, and other items of intangible personal property belonging to the taxpayer, such levies are routinely issued by the IRS computer system. A Revenue Officer may seize, with proper approval, items of tangible personal property such as automobiles, 3

8 any and all business assets, contents of a safe deposit box, items of jewelry or wearingapparel of significant worth, stamp collections, and.any other salable items of personal property. 2.5 Residential Seizure No seizure of a dwelling that is the principal residence of the taxpayer or the taxpayer's spouse, former spouse, or minor child is allowed without prior judicial approval. Notice of the judicial hearing must be provided to the taxpayer and relevant, family member. At the judicial hearing, the Secretary would be required to demonstrate: (1) that the requirements of any applicable law or administrative procedure relevant to the levy have been met, (2) that the liability is owed, and (3) that no reasonable alternative for the collection of the taxpayer's debt exists. The provision is effective for collection actions initiated after January 20, [Act 3445(b); IRC 6334(e)] 2.6 Business Assets The IRS Restructuring & Reform Act of 1998 provided for protection of tangible personal property or real property used in trade or sale of business from levy by -the Internal Revenue Service. Area Manager or Assistant Area Manager must' approve prior to seizing tangible business' related assets. It must exhaust all other payment options before seizing the taxpayer's business assets or principal residence. The provisions should substantially reduce the number of Internal Revenue seizures of business assets. [Act 3445(b); IRC 6374(e)] 2.7 Collection Due Process Rights RRA 98 established formal procedures designed to insure due process where the IRS seeks to collect taxes by levy (including by seizure). The due process procedures also apply after notice of a Federal tax lien has been filed. The IRS is required to notify the taxpayer five days after filing a Notice of Lien or before any levy action. During the 30-day period beginning with the mailing or delivery of this notification, the taxpayer may demand a hearing before an appeals officer who has had no prior involvement with the taxpayer's case. These provisions became effective January 18, [3401] [IRC 6320] 2.8 Impartial Hearing IRC 6320 provides statutory appeal rights to taxpayers subject to federal tax liens. The provision provides for an impartial hearing officer (which may not have been the case in the past). In the past the Internal Revenue Service collection division engaged in substantial ex parte discussion with the Appeals Officer. Now there are specific statutory protections available to the taxpayer and specific guarantees of independence by the Appeals Officer. Because taxpayers will also have the right to seek judicial review of any determination of the appeals officer, the taxpayer is guaranteed to have better consideration at the appeals level. In the past, if an Appeals Officer ruled against you the matter was referred back to the collection division and it filed the lien without further rights to the taxpayer. As case law develops, Appeals Officers will also have guidelines from the courts as to appropriate reasons for foregoing liens and releasing liens. 4

9 2.9 Levy Appeal Rights Before the IRS can levy against a taxpayer's property, it would be required to provide the taxpayer with a "Notice of Intent to Levy," similar to that currently required under 6331(d). The notice would not be required to itemize the property the Secretary seeks to levy on. Service by registered or certified mail, return receipt requested, would be required. ['3401(B)] [IRC '6330] 2.10 Notice of Intent to Levy Subject to the exceptions noted below, no levy could occur within the 30-day period beginning with the mailing of the "Notice of Intent to Levy." During that 30-day period, the taxpayer may demand a pre-levy hearing before an appeals officer who has had no prior involvement with the taxpayer's case What must a Pre-levy CDP Notice Include? Under section 6330(a)(3), a pre-levy CDP Notice must include, in simple and nontechnical terms: Amount the unpaid tax. Notification of the right to request a CDP hearing. A statement that the IRS intends to levy. The taxpayer's rights regarding the levy action, including a brief statement that sets forth (a) The statutory provisions relating to the levy and sale of property; (b) The procedures applicable to the levy and sale of property; (c) The administrative appeals available to the taxpayer regarding the levy and sale and the procedures relating to those appeals; (d) The alternatives available to taxpayers that could prevent levy on the property (including installment agreements); and (e) The statutory provisions and the procedures relating to the redemption of property and the release of liens on property What must a Taxpayer Do to Obtain a CDP Hearing? The taxpayer must make a request in writing for a CDP hearing. A written request in any form which requests a CDP hearing will be acceptable. The request must include the taxpayer's name, address, and daytime telephone number, and must be signed by the taxpayer or the taxpayer's authorized representative and dated. The CDP Notice should include, when appropriate, a Form 12153, Request for a Collection Due Process Hearing, that can be used by the taxpayer to request a CDP hearing. The Form requests the following information: 1. The taxpayer's name, address, daytime telephone number, and taxpayer identification number (SSN or TIN). 2. The type of tax involved. 5

10 3. The tax period at issue. 4. A statement that the taxpayer requests a hearing with Appeals concerning the proposed collection activity. 5. The reason or reasons the taxpayer disagrees with the proposed collection action. Taxpayers are encouraged to use a Form in requesting a CDP hearing so the request can be readily identified and forwarded to Appeals. Taxpayers may obtain a copy of Form by contacting the IRS office that issued the CDP Notice or by calling, toll-free, The taxpayer may perfect any timely written request for a CDP hearing, which otherwise meets the requirements set forth above and which is made or alleged to have been made on the taxpayer's behalf by the taxpayer's spouse or any other representative, by filing, within a reasonable time of a request from Appeals, a signed written affirmation that the request was originally submitted on the taxpayer's behalf Form Set forth all defenses to levy a) b) c) d) e) f) Offer in compromise Amount of the liability Spousal defenses Penalties Report account currently not collectible Request for installment agreement 2.14 Equivalent Hearings If a taxpayer does not request a CDP hearing within the 30-day period, a taxpayer can still request a hearing at a later date and the IRS will provide a hearing equivalent to a CDP hearing. However, the taxpayer will not be entitled to judicial review of that later hearing. A request for an equivalent hearing must be within one year of the original notice. 3. TYPES OF NOTICE OF LEVY 3.1 In General Notices of Levy are used to reach intangible assets in the hands of third parties. Two forms are commonly encountered by the practitioner. Form.668-A, Notice.of Levy, is used by Revenue Officers to attach any item of intangible personal property held by a third party. It is also used with a seizure of any items of tangible personal property held by a third party. Form 668-W, Notice of Levy on, Wages and Other Income, is used by the Service to attach wages or other income of the taxpayer. 3.2 Levy Appeal Rights Before the IRS may levy against a taxpayer's property, it must provide the taxpayer with a notice giving him- or her 30 days to appeal the proposed levy. The IRS complies with 6

11 the notice requirements by issuing Letter 1058, "FINAL NOTICE, NOTICE OF INTENT TO LEVY AND NOTICE OF YOUR RIGHT TO A HEARING. PLEASE RESPOND IMMEDIATELY." The IRS is not required to itemize the property which it seeks to levy. The notice must be served by registered or certified mail return receipt requested or in person upon the taxpayer. [Act 3401; IRC 6330]: The CDP hearing is regarding the tax liability for the taxable period or periods for which the levy is to be made. In jeopardy situations, and where a levy is made on a state tax refund,' notification to the taxpayer of a right to a hearing is not required to be given until after the levy action has occurred. 3.3 Notice Requirements The Section 6330 notice of 'the right to a Collection Due Process hearing can be combined with the Notice of Intent to Levy in IRC 6331(d), or issued separately. The Section 6330 notice must set forth the amount of unpaid tax, the right to a hearing, and a statement that the IRS intends to levy and the taxpayer's rights regarding the levy action. The statement must also set forth the Code provisions and procedures pertaining to levy and sale, the administrative appeal procedures regarding levy and sale, alternatives available to the taxpayer that could prevent levy and the Code provisions and procedures pertaining to redemption and release of liens. Subject to the exceptions noted below in 3:114 of this work no levy may occur within the 30-day period beginning with the mailing of the Letter If the taxpayer files a timely appeal the IRS may not levy during the pendency of the appeal and subsequent litigation. 3.4 Jeopardy Levies, State Tax Refund Levies The Section 6330 procedures do not entitle the taxpayer to a Section 6330 hearing prior to a jeopardy levy or a levy upon a State tax refund. Jeopardy levies The taxpayer will be entitled to a post-levy Section 6330 notice and will be entitled, to a post-levy Section 6330 hearing and court review. State tax refund levies The taxpayer will receive pre-levy Section 6331(d) CP 504 notice (URGENT NOTICE), post-levy Section notice, and will be entitled to a post-levy Section 6330, hearing and court review. In other cases, as previously discussed, a combined Section 6331(d)/6330 notice Letter 1058 will be sent, entitling the taxpayer to a pre-levy Section 6330 hearing (FINAL NOTICE). 3.5 Approval Prior To Jeopardy Assessment Due to the urgency involved in jeopardy assessments, the file will be given the highest priority of handling within and between various divisions. Refer to Delegation Order No. 219 for delegation authority. Because of the enactment of the IRS Restructuring and Reform Act of 1998 on July 21, 1998, it is now a statutory requirement that the Chief Counsel or his/her delegate must approve all jeopardy and termination assessments and all jeopardy levies. This authority has been redelegated to Regional Counsel, who may redelegate the authority no lower than Assistant Area Counsel and to the Associate Chief Counsel (International) who may redelegate the authority no lower than Territory Manager. Approval is now required by Counsel in ALL cases, not just where time permits. [IRM ] 7

12 3.6 Accounts Receivable Accounts receivable, notes receivable and other assets owed to a taxpayer may be levied upon. Any receivable that is due in a single payment (rather than installments) may ordinarily be reached by one Notice of Levy. If the taxpayer has an unqualified right to receive installments on a debt, one Notice of Levy would reach all such installments. Where the right to receive installments does not exist or where there is doubt as to the taxpayer's right to future payments, the IRS will serve a 668-A as each installment becomes due. 3.7 Benefit Income The Taxpayer Relief Act of 1997 allows the IRS to serve a continuous levy which attaches to 15% of the following payments: 1. any benefit payment for which eligibility is based on a payee's income or assets (or both), 2. the minimum exempted amount of wages in salary, 3. worker's compensation payments, 4. annuity or pension payments under the Railroad Retirement Act and benefits under the Railroad Unemployment Insurance Act, and 5. unemployment benefits and certain means-tested public assistance payments. [IRC 6331(h)(2)] 3.8 Levy on Lump Sum of IRA or Pension Plan The standard Form 668-A states: "This levy will not attach to any Individual Retirement Account (IRA), retirement plan benefiting self-employed individuals and any other qualified pension, profit sharing, and stock bonus plan in your possession or control." With Group Manager approval, a Revenue Officer may cross out the word "not" on the 668-A. [IRM 5.11:1.2.4] The IRS may not force distribution from a pension plan if the employee does not have a right to a lump-sum payment if the taxpayer has the right to withdraw a lump sum from an IRA, the IRS may levy that lump sum. When the IRS levies an IRA, the owner must report that lump sum as income for the year that the funds were taken from the account. 3.9 Waiver of Early Withdrawal Tax The IRS Restructuring & Reform Act of 1998 provided an exception from the 10% early withdrawal tax for amounts withdrawn from an employer-sponsored retirement plan or an IRA that are subject, to a levy by the IRS. The exception applies only if the plan or. IRA is levied; it does not apply, for example, if the taxpayer withdraws funds to pay taxes absent a levy, to release a levy on other interests. The provision is effective for withdrawals after July 22, [Act 3436; IRC 72(t)(2)(A)(vii)] 3.10 Levy on IRAs and 401K plans The Internal Revenue Service retains the right to levy upon IRAs, Keoghs, and 401K plans, but now when it takes such action, it may not assert an excise penalty on the 8

13 involuntarily converted funds. Taxpayers still must pay the income taxes due as a result of-the involuntary conversion Cash Loan Value Of Insurance The cash loan value of insurance may be levied upon without surrender of the policy. [IRC 6332(b)] As a general rule, the IRS will not levy cash loan value if the taxpayer has few assets, a small income and/or the policies have a face value of less than $1,000. [IRM ] 3.12 Social Security Benefits The Internal Revenue Service may seize social security benefits. With management approval, a 668-W is issued to the Social Security Administration. Prior to passing the Taxpayer Relief Act of 1997, the IRS had to serve a new levy each month since it did not have a prospective levy similar to that on wages. With passing the Act, the IRS may now seize 15% of social security benefits on a continuing basis. [IRC 6331(h)(1); IRM ] 3.12 Notice of Levy on Bank Accounts When a bank or financial institution is served with a Notice of Levy, it must hold the monies in escrow for at least 21 days after service. [IRC 6332(c)] This provision was placed in the Internal Revenue Code to allow the taxpayer time to correct erroneous levies. The 21 days also allows time to negotiate with the Service regarding the tax liability and release of the levy. The monies held in escrow are not available to the taxpayer or the Service during the 21-day period. The Bank may not clear outstanding checks from the escrowed funds. Practice Tip: The practitioner should immediately telephone the bank when he/she learns a Notice of Levy has been served upon the bank. Explain to the bank officers the requirement that the funds be held for 21 days. Having spoken with the bank, the practitioner should then call the revenue officer who served the levy and begin discussions in an effort to secure a release of levy. If the levy was issued by the Service Center or ACS, go to your local IRS office and bargain with the Customer Service Representatives (CSR). Don't call the ACS number on the Notice of Levy unless you enjoy being verbally abused by poorly trained ACS personnel. You can accomplish much more for your client by personal, face-to-face negotiations Levy on Wages The levy authority is far reaching. It permits a continuous attachment of the nonexempt portion of the wage or salary payments due the taxpayer and the seizure and sale of all of the taxpayer's assets except certain property exempted by law. The IRS effectuates a levy of wages by serving a Form 668-W, Notice of Levy on Wages and Other Income, upon the employer. The Service is not bound, as are other creditors seeking to enforce their judgments, by the exempt property provisions provided for by state law. The exemptions for levies on wages or salary are on a form served upon the taxpayer's 9

14 employer when the Notice of Levy is served. The weekly exemption is 1/52 of the sum of the standard deduction plus the aggregate personal exemptions allowed for the taxpayer that year. [IRC 6334(d)(2)(A)] For example, if the taxpayer were single with a $4,000 personal exemption and a $6,000 standard deduction, he could take home $ per week. Should the taxpayer fail to fill out the form furnished to his employer, the employer must compute the exemption as if the taxpayer were married filing separately with one exemption. [IRC 6334(d)(2)(B)] The balance of the taxpayer's net pay is remitted to the Internal Revenue Service. The statutory allowance for dependents is increased to the extent of court ordered child support payments. The IRS will not recognize noncourt ordered support arrangements Child Support Payments When you have a client under an obligation to make child support payments under a court order, who receives a levy on his wages, immediately contact the employer and the IRS Collection Division employee responsible for the levy and notify them of the additional exemption Take Home Pay The IRS has a policy of limiting its levy to "take home pay;" that means the IRS will allow the usual deductions from the employee's check for pension, health insurance, etc. Only where the IRS determines the taxpayer is voluntarily allotting his or her pay if it would defeat the purpose of the levy will it object to the "take home pay" concept. [Policy' Statement P-5-29] 3.16 Levy Of Independent Contractor At least one court has held that independent contractors may be levied in the same manner as payments to employees." The court refused to look at an alternative construction of IRC 6331 and instead looked at the construction placed upon that provision by the Internal Revenue Service. The author suggests that the court erred in its consideration and that the plain language of the statute indicates that a levy on other than wages should not be ongoing. Notwithstanding the author's interpretation, however, the IRS now has case law which supports its interpretation, and there is no question that it will aggressively assert it may levy upon realtors and insurance salesman on an ongoing basis. Notwithstanding the IRS interpretation, aggressively assert the plain language of the notice of levy on wages statute Release Of Levy On Wages Immediately upon notification that a client's wages have been levied contact the employer and request it not immediately send the monies to the IRS for a few days. Then call the person who served the Notice of Levy on Wages. Determining the source of the Notice of Levy can prove difficult since they are issued by ACS and Revenue Officers. Generally notices issued by ACS will Indicate Form 668-W(C) or Form 668-W (ACS) in the upper left hand corner. Each of these notices is signed with a machine 10

15 generated signature. Notices served by Revenue Officers will bear an actual signature and may be typed on a regular typewriter or handwritten Requesting Release If a Revenue Officer signed the 668-W, request an appointment to discuss the matter. If the notice was generated by the Service Campus, visit a local IRS office to negotiate for a Release of Levy. If the notice was served by ACS, you may call the number on the notice, but be prepared to get a run-around. The author no longer negotiates with ACS personnel, but immediately visits a local IRS office. Although local offices are reluctant to deal with ACS matters, if you insist an action be taken at that office they are required to negotiate with you. [IRM ] 3.19 Criteria For Release The IRS has authority to release a Notice of Levy on Wages if it is in the interest of the Service. A Levy may also be released if it creates an economic hardship due to the financial condition of the taxpayer. [IRC 6343(a)(1)(D)] Normally propose an installment payment plan as an alternative to the levy. Be prepared to provide a financial statement. If the IRS agrees to release the levy you will receive a Form 668-D Release of Levy/Release of Property from Levy. If the IRS refuses to release the Notice of Levy and you believe it creates a significant hardship for your client, you may apply to the Taxpayer Advocate for a Taxpayer Assistance Order. [IRC 7811] The process is begun by submitting a Form 911 to the Taxpayer. Advocate. That office has authority to order that the Collection Division release a levy Release Of Levy When Amount Is Uncollectible The IRS Restructuring & Reform Act of 1998 requires the IRS to immediately release a wage levy upon agreement with the taxpayer that the tax is not collectible, effective for levies imposed after December 31, [Act 3432; IRC 6342(e)] 3.21 Currently Not Collectible IRM allows the IRS to declare' an account currently not collectible. The IRS takes this step if, after reviewing the taxpayer's financial statement, it determines he or she cannot pay any tax liability at this time. Over the years, the Internal Revenue Service has occasionally declared accounts uncollectible while continuing to levy upon a taxpayer s wages. IRG 6842 will prevent such action. If the IRS determines the account is uncollectible it may not continue-to take a taxpayer's wages. The provision imposes a statutory mandate upon the IRS. In the past, it was inconsistent for the Internal Revenue Service to determine the taxpayer could not pay a tax liability while continuing, to seize that taxpayer's salary Criteria For Release Of Levy Levy should be released whenever any of the following conditions apply: A. A levy was issued prior to the expiration of the taxpayer's 30 day notice period in a non-jeopardy situation. B. Liability is no longer owed (or a pending adjustment will fully satisfy liability). 11

16 C. FPLP levy is creating an economic hardship (Form 911 or hardship CNC). D. The CP 90/297 (or equivalent) was sent, but not to the most recent taxpayer confirmed address available to us when we requested the letter. E. Release facilitates the collection of the liability. The IRS, not the taxpayer, makes the determination that a release facilitates collection. F. Statutory collection period has expired. G. The taxpayer makes an installment agreement. H. The taxpayer indicates that bankruptcy has been filed. I. Wrongful levy or erroneous levy conditions apply. J. The taxpayer makes an Offer in Compromise. K. Entity is a limited liability company (LLC) that we are told has one owner and is a disregarded entity, i.e., it is not taxed as a corporation. Accept the taxpayer's word about the LLC. [IRM ] 3.23 Release of Notice of Levy Immediately contact the bank if your client has advised you his account has been levied and: 1. seek the banker's forbearance in honoring the levy for the full 21 days provided to them by law to respond while you Attempt to negotiate with the Service; 2. advise the banker that any deposits coming in after the levy was received are not subject to the levy and should not be remitted to the Internal Revenue Service, and 3. advise the banker that the Notice of Levy specifies it does not attach to IRAs and Keoghs Requesting Conference The next step you should take is to call the person who served the 668-A and request a conference. If the notice was served by ACS or the Service Center, go to your local IRS office and negotiate with a Customer Service Representative. You might be.able to negotiate a full release of the bank account or a partial release of the bank account. The IRS may grant either. [IRC 6343] Many releases are granted because the practitioner aggressively pleads for forbearance. If a release is.granted the IRS will prepare Form 668-D Release of Levy/Release of Property from Levy. EXAMPLE The IRS levied the Bank account of a restaurant and attached the balance of $17,000. The author negotiated a partial release of $7,000 so outstanding payroll checks could be cashed. If the IRS had not released those funds the employees' checks would have been returned for nonsufficient funds. A fair Revenue Officer granted a partial release to protect innocent employees Taxpayer Assistance Order If the IRS employee refuses to release a levy, you may apply for a Taxpayer Assistance Order (TAO). [IRC 7811] A request for a TAO is initiated by submitting a Form 911 to the District Problem Resolution Office. The taxpayer must establish that the Notice of 12

17 Levy will cause significant hardship. The IRS Restructuring & Reform Act of 1998 expanded the definition of "significant hardship" by including the following circumstances: 1. The existence of an immediate threat of adverse action; 2. A delay of more than 30 days in resolving the taxpayers account problems; 3. The payment by the taxpayer of significant cost (including fees for professional services) if relief is not granted; or 4. Irreparable injury or a long standing adverse impact, if relief is not granted. The list is not intended to be exclusive. A TAO may also be issued in any case in which the taxpayer meets other requirements are spelled out in regulation. [IRC 7811(a)(1)(B)] The ranks are to be based in consideration of equity. If the Internal Revenue Service has failed to follow published guidance, including the Internal Revenue Manual, the Taxpayer Advocate must construe the facts considered in a manner most favorable to the taxpayer. [IRC 7803(c)(2)(B)(ii)] 3.26 Practical Considerations The service of a Form 668-W, Levy on Wages, Salary, and Other Income, is prospective. The levy remains in full force and effect until the obligation recited on the levy is paid off. [IRC 6331(e)] Interest and failure to pay penalty continue to accrue on the liability while under levy. Levies made with the Form 668-A are not prospective. They are "one-shot deals." Further deposits to a bank account after that account has been levied, for example, are not subject to the levy. Many banks are not aware of this and unwittingly remit to the IRS funds to which the Service is not entitled Negotiating Tactics Begin negotiations for release of a levy by speaking with the frontline IRS employee responsible for issuing the levy. If the levy was served by a Revenue Officer or ACS, emphasize the hardship 'caused by the levy and suggested alternatives to the levy. The alternatives you might suggest are installment agreement, reporting the account currently not collectible or an offer compromise. If the IRS employee refuses to release the levy, then request to speak to his or her manager. If your appeal is rejected then you have the right to exercise your client's- collection and appeal rights under IRC: Essentially, the practitioner and taxpayer must convince the Service it is better off (i.e., that the IRS will realize more revenue in the long run) by releasing its 'levy. This is particularly true with levies made on items of personal property used in a business where factoring arrangements are jeopardized by a lien and/or levy, or where the taxpayer may be able to dispose of an item levied or seized for greater proceeds than the Service would realize at forced sale. Be persistent! Insist on your client's rights! 3.28 Erroneous Levy Because many Notices of Levy are issued by IRS computers, some levies are improperly issued. If the IRS erroneously levies a bank account, the taxpayer may request a reimbursement of bank charges. A claim for reimbursement is made on Form 8546.The claim must be made within one year and the following criteria must be met: 13

18 1. The error was caused by the Service; 2. The taxpayer must not have contributed to the continuation or compounding of the error; and 3. Prior to the levy, the taxpayer must have timely responded to any contact from the Service and have timely provided the Service with any requested documentation sufficient to establish his/her position. [Policy Statement 5-39] 3.29 Joint Bank Accounts The Service may levy on property in which the taxpayer's interest is unclear. For example, the Service may issue a Notice of Levy to a financial institution at which the taxpayer has an account in joint ownership with another party. The Service takes the position that if the taxpayer or innocent third party can show the origin of funds in the account was other than the taxpayer, they will release those funds from the effects of the levy. In other words, the burden of proving the levy was improper is on the account holder. The Supreme Court has upheld the IRS position regarding joint accounts. The innocent joint owner must initiate a wrongful levy suit if the Service and/or financial institution refuse to release his respective funds. 4. LEVY EXEMPTIONS 4.1 Exemptions Available The Act substantially increases the exemptions from levy available to taxpayers under 6334 of the Internal Revenue Code. The Exemption for personal effects rises to $8,790 in 2013 and books and tools of trade goes to $4,400 in The increases have the practical effect of preventing seizure of books and tools in trade and personal effects from many lower income taxpayers. The pre-1998 exemptions were di minimus and allowed an opportunity for the IRS to take cars and other personal belongings from individuals with limited means. The current exemptions allow taxpayers to at least retain modest vehicles, personal items, books and tools of trade with reasonable value. [Act 3431] [IRC 6334(a)] 5. SEIZURE AND SALE 5.1 Taxpayer s Physical Property IRC 6331 authorizes the Internal Revenue Service to take physical property belonging to the taxpayer. Except when seizing a personal residence, the IRS is not required to seek judicial approval prior to seizing property. The IRS must give a 30-day notice under IRC 6330 and 6331(d) in jeopardy cases, notice and demand for payment of the tax (usually an estimate made by the Internal Revenue Service) is made contemporaneously with seizure of the taxpayer's assets. 5.2 Approval All collection seizures will require a minimum approval level of the Territory Manager. Approval must be written. A Revenue Officer must complete an extensive checklist and submit the entire case file to management when proposing a seizure. [IRM ] 14

19 5.3 Service of Seizure Documents The seizure process begins with the Revenue Officer appearing before the taxpayer and serving a Levy (Form 668-B) upon him. The seizure is fully effectuated by delivering a Form 2433, Notice of Seizure, to the taxpayer. The Notice of Seizure will describe the property seized. In the case of real property, the legal description of the property is listed on the Form Regarding personal property, the IRS will inventory the property and list it with an evaluation on the Notice of Seizure. 5.4 Residential Seizure The IRS Restructuring & Reform Act of 1998 provides that no seizure of a dwelling that is the principal residence of the taxpayer or the taxpayer's spouse, former spouse, or minor child would be allowed without prior judicial approval. Notice of the judicial hearing must be provided to the taxpayer and relevant family member. At the judicial hearing, the Secretary must demonstrate: (1) that the requirements of any applicable law or administrative procedure relevant to the levy have been met, (2) that the liability is owed, and (3) that no reasonable alternative for the collection of the taxpayer's debt exists. [Act 3445(b); IRC 6334(e)] 5.4 Residences This provision imposes substantial constraints upon the seizure of residences and business assets. The Internal Revenue Service is specifically prohibited from seizing the taxpayer's residence when there is a tax liability of less than $5,000. The provision also enhances taxpayer protections for seizure of personal residences. Under prior law, the Internal Revenue Service could seize a personal residence from the taxpayer with approval of the District Director or Assistant Director. The requirement for approval by the District Director or Assistant Director was enacted with the Taxpayer Bill of Rights of IRC 6334(e) provides additional protections from seizure of personal residences by providing the Internal Revenue Service may only take a personal residence with approval of a judge or magistrate. The provisions have substantially reduced the number of IRS seizures of residences. [Act 3445(b); IRC 6334(e)] 5.5 Tangible Business Assets The IRS Restructuring & Reform Act of 1998 provided for protection of tangible personal property or real property used in trade or sale of business from levy by the Internal Revenue Service. The Internal Revenue Service must secure the signature of the Area Manager or Assistant Area Manager prior to seizing tangible business property. It must exhaust all other payment options before seizing the taxpayer's business assets. The provisions should substantially reduce the number of Internal Revenue seizures of business assets. [IRC 6334] 5.6 Private Areas And Writs Of Entry Although the Service has the right to levy on property, how they affect the seizure has been limited by a 1977 United States Supreme Court decision, the IRS Restructuring & Reform Act of 1998 and internal IRS guidelines. The Supreme Court has held that a warrantless entry and search of a private premises (i.e., one in which the taxpayer had 15

20 a reasonable expectation of privacy and in which the public was not customarily allowed) to seize and inventory property violated the taxpayer's Fourth Amendment rights." 5.7 Consent or Court Order Prior to entering such areas the Service must secure either the permission of the taxpayer or a court order. The Service has adopted a policy of not attempting to enter a taxpayer's residence to seize assets. However, seizures of the contents of taxpayer residences have been made in some extraordinary circumstances. The effect of the Supreme Court decision," is that the Service must make a determination whether business assets are in a "public area" or a "private area" of the taxpayer's business. If they are in a "private area," the Service must either secure the written consent of the taxpayer to enter that premises for the purpose of making the seizure and taking an inventory or the Service must secure a Writ of Entry from the local U.S. District Court authorizing such entry. 5.8 No equity Seizures The Code prohibits levy on property if the expenses of sale would exceed the fair market value of the property. [IRC 6331(f)] The IRS Restructuring & Reform Act of 1998 enacted as statutory authority specific rules' for determination of taxpayer equity in property. It also imposes a prior-restraint upon a seizure where there is no equity. The IRS-manual -now provides: -No equity seizures are prohibited There must be sufficient net proceeds from the sale to provide funds to apply to the taxpayer's unpaid tax liabilities. [IRM ] 5.9 Seizure Of Trade Or Business If the IRS levies assets which could prevent the taxpayer from carrying on his trade or business, the taxpayer may request an expedited consideration of a Release. [IRC 6343(a)(2)] A Levy may be released if: The liability is satisfied or becomes unenforceable by lapse of time; or Release of the Levy will facilitate collection of the liability; or The taxpayer enters into a payment agreement; or The Service determines the Levy will create.an economic hardship due to the financial condition of the taxpayer; or 5. The fair market value of the property exceeds the liability and a release of part of the property could be made without hindering collection. [IRC 6343(a)(1)] 5.10 Release Of Seized Property At any time prior to sale the IRS may release a seizure of property. [IRC 6343; A Levy may be released if: 1. The liability is satisfied or becomes unenforceable by lapse of time; or 2. Release of the Levy will facilitate collection of the liability; or 3. The taxpayer enters into a payment agreement; or 16

21 4. The Service determines the Levy will create an economic hardship due to the financial condition of the taxpayer; or 5. The fair market value of the property exceeds the liability and a release of part of the property could be made without hindering collection Return Of Seized Property TBR2 authorizes the IRS to return levied properties in certain instances if: the levy was premature or otherwise not under administrative procedures; the taxpayer has entered into an installment agreement; the return of the property would facilitate collection of tax; or with the consent of the taxpayer or Taxpayer Advocate the return of the property would be in the best interest of the taxpayer (as determined by the Taxpay6r Advocate) and the United States. [IRC 6343(d)] 5.12 Redemption of Property Prior to the sale, the taxpayer may redeem his seized property by payment of an amount negotiable with the Service, generally calculated to be the value of the government's interest by virtue of its lien on the property. As the sale procedure involves an -extensive amount of paperwork, and the Revenue Officer has pressures created by other cases in his inventory, the practitioner should attempt to negotiate redemption of the seized property. A significant number of seizures made by Collection Division personnel do not go to sale but rather are redeemed or released to the taxpayer. By insisting upon the Revenue Officer's strict adherence thereto, the practitioner increases his bargaining position if in no other way than by creating a certain "nuisance value" for which the Revenue Officer may grant concessions Friendly Bidder Any party may bid at a sale and if successful receive a certificate of sale. A person friendly to the taxpayer may bid at an IRS sale. A friend of the taxpayer is more familiar with the value of property. The taxpayer could bid at a sale, but if she were the high bidder, the IRS could reseize the property. If the IRS could establish a successful bidder was merely a "nominee" or "strawman" for the taxpayer, it might reseize the property from the buyer. If the friendly buyer had a source of funds other than the taxpayer, the sale would be valid Purchase by Spouse In noncommunity property states, a spouse not jointly liable for the taxes in question could purchase his spouse's property from the IRS. The acquiring spouse would gain good title if she was not acting as the "nominee" or "strawman" of the taxpayer Purchase by Corporate Shareholders When corporate assets are being, sold by the IRS, corporate shareholders or officers may bid on their own behalf. They could also form a new corporation to buy the property. The sale could only be set aside if the buyer acted as a strawman, nominee or used the taxpayer's funds to purchase the property. Such purchases should only be 17

22 considered after a thorough discussion with an attorney of the "corporate opportunity doctrine." Practice Tip: Friendly bidders can thwart an IRS safe. A purchase by a party friendly to the taxpayer could leave open the possibility he could reacquire his property subsequent to resolution of his tax liabilities Redemption of Property The taxpayer has no right to redeem personal property subsequent to sale. Subsequent to the sale of real property, the taxpayer has redemption rights. The Code provides that the taxpayer has the right to redeem his or her real property from the successful bidder by paying the bid price plus interest at the rate of 20% per annum within 180 days of sale. [IRC 6337] This redemption right may be assignable. [IRM ] 5.17 Negotiation Tactics Although we have discussed the seizure and sale procedures in detail it should be emphasized most seizure situations are resolved by negotiation and do not go to sale. The Revenue Officers making these seizures, despite laws to the contrary, had been expected to and were put under pressure to make such seizures. Once the seizure is made, the disposition of the seized assets is a Secondary consideration often. The service of the Levy and Notice of Seizure have accomplished what the Revenue Officer set out to do, i.e., generate a seizure statistic. The taxpayer and the practitioner should not adopt an "all is lost" attitude upon seizure of the taxpayer's assets by the Revenue Officer. Ironically, the taxpayer and-the practitioner may be in the best negotiating position since the initiation, of their, dealings with the IRS Post-Seizure Payment Plans. The author has -found that proposed payment plans that were rejected by the IRS prior to a seizure were later accepted subsequent to seizure. On one occasion the author's client offered -a $5,000 down payment and $2,000 a month toward a- $20,000 employment tax liability. The Revenue Officer rejected the offer and seized the client's business. Within hours of the seizure the Revenue Officer accepted the same proposed payment plan and released the seizure Public Pressure If the IRS is totally unreasonable after a seizure and your client is a person for whom the public would feel sympathy, notify the media of the seizure. The author successfully saved a wheelchair-bound client's home by aggressive use of publicity. The IRS sought accommodation to avoid continuing adverse publicity. Not every client would garner a sympathetic public response. High income professionals are not the type of clients to bring to the attention of the media Bankruptcy Option The taxpayer also has the option of seeking the protection of a bankruptcy court. If the taxpayer files for bankruptcy, the IRS will be stayed from selling property which it has 18

23 seized. If the bankruptcy is filed prior to a seizure the IRS will be stayed from seizing property unless the bankruptcy judge lifts the stay. 6. EXTENSIONS OF TIME TO PAY 6.1 Extensions Extensions of time to pay provide a specific date by which full payment of taxes is expected. Extensions may be granted for up to120 days for all taxpayers. Extensions of time to pay are not installment agreements and do not provide for periodic payments. No forms are required. Form 433-D is not be used. 1. The IRS will not file a lien. 2. The IRS will not issue Notices of Intent to Levy, Notice of Hearing (LT 11 or Letter 1058DO) nor levies during granted extension periods, unless collection is in jeopardy or at risk. NOTE: This applies even if taxpayers are given deadlines within the extension period and these deadlines are not met. EXAMPLE: A revenue officer gives the taxpayer a 60 day extension of time to pay and 30 days to have all federal tax deposits current. The taxpayer has not made all the current tax deposits by the 31st day. Enforcement is not appropriate until after 60 days pass, unless collection is in jeopardy or at risk. Extensions may be granted in person, by telephone or by correspondence. [IRM ] 6.2 <$50,000 Liabilities The IRS has created a more liberal system that allows installment agreements of up to 6 years for balances of less than $50, In-Business Trust Fund Express Installment Agreements ACS and Service Centers may grant Express installment agreements if pre-assessed liabilities plus the unpaid balance of assessments is $25,000 or less. 1. Taxes are fully paid in 24 months, or before the CSED, whichever is earlier. 2. If accounts qualify for IBTF Express agreements: (a) No financial statement is required. (b) No lien determination is required. Liens may be filed if they will protect the government's interest (such as if a property sale is imminent). [IRM ] 19

24 7. COLLECTION INFORMATION STATEMENTS 7.1 CIS's For larger dollar liabilities (income tax liabilities over $50,000) the starting point for analysis is the Service's Collection Information Statement (CIS). Preparing this document, more often than not, determines which way the Service will proceed with its collection activity. The IRS will not give extended payment plans on unpaid tax liabilities unless a CIS has been submitted by the taxpayer. 7.2 Types of Collection Information Statements The IRS utilizes three basic types of Collection Information Statements (CIS's). The Form 433-A and Form 433-F are secured from individuals. The Form 433-B is secured from businesses. If the taxpayer is self-employed the service will normally require both a 433-A and 433-B. 7.3 Amount of Payments Page 4 is a monthly income and expense analysis. The IRS will not grant a Payment Plan for less than the amount shown as the net available income. That figure represents the difference between income and claimed expenses. As one will note, page 4 contains a column to the right of the claimed column for Allowed Expenses. The IRS utilizes information from the Bureau of Labor Statistics to establish allowable expenses for certain items like transportation, food, clothing and housing. 7.4 Form 433-B The IRS utilizes Form 433-B to gather information from businesses. Page 2, block 15, requests your client disclose each of its accounts receivable. The author believes that such a disclosure is foolhardy at the initial negotiating session. If disclosure is made and the negotiations fail, the IRS may levy your client's accounts receivable, thereby destroying its business. 7.5 Substantial Net Worth The IRS will seldom grant extended payment plans to a business with a substantial net worth indicated on page 3 of Form 433-B. 7.6 New more Onerous Allowable Expense Standards In October, 2007 the IRS the IRS revised its allowable expense standards to make them more onerous. In February, 2010 the IRS again revised the standards. Instead of establishing national standards which recognized the need for higher living expense for higher income families it began a system of one size fits all. It continued to fail to recognize the varying cost of living in different regions and communities and eliminated differentials for Hawaii and Alaska. It also added a new category of expenses for out-ofpocket health care expenses. Total allowable expenses include those expenses that meet the necessary expense test. The necessary expense test is defined as expenses that are necessary to provide for a taxpayer's and his or her family's health and welfare and/or production of income. 20

25 The expenses must be reasonable. The total necessary expenses establish the minimum a taxpayer and family needs to live. There are four types of necessary expenses: National Standards Out-of-Pocket Health Care Local Standards Other Expenses National Standards: These establish standards for reasonable amounts for five necessary expenses. Four of them come from the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey: food, housekeeping supplies, apparel and services, and personal care products and services. The fifth category, miscellaneous, is a discretionary amount established by the Service. Note: All five standards are included in one total national standard expense. Out-of-Pocket Health Care Expenses: Out-of-pocket health care expenses include medical services, prescription drugs, and medical supplies (e.g. eyeglasses, contact lenses, etc.). Elective procedures such as plastic surgery or elective dental work are generally not allowed. Taxpayers and their dependents are allowed the standard amount monthly on a per person basis, without questioning the amounts they spend. If the amount claimed is more than the total allowed by the health care standards, the taxpayer must provide documentation to substantiate those expenses are necessary living expenses. The number of persons allowed should be the same as those allowed as exemptions on the taxpayer s most recent year income tax return. The out-of-pocket health care standard amount is allowed besides the amount taxpayers pay for health insurance. Local Standards: These establish standards for two necessary expenses: housing and transportation. Taxpayers will be allowed the local standard or the amount paid, whichever is less. A. Housing - Standards are established for each within a state. When deciding if a deviation is appropriate, consider the cost of moving to a new residence; the increased cost of transportation to work and school that will result from moving to lower-cost housing and the tax consequences. The tax consequence is the difference between the benefit the taxpayer derives from the interest and property tax deductions on Schedule A to the benefit the taxpayer would derive without the same or adjusted expense. Housing costs include rent and/or house payments, taxes, repairs and utilities the IRM provides : The utilities include gas, electricity, water, fuel, oil, bottled gas, trash and garbage collection, wood and other fuels, septic cleaning, and 21

26 telephone. Housing expenses include: mortgage or rent, property taxes, interest, parking, necessary maintenance and repair, homeowner's or renter's insurance, homeowner dues and condominium fees. Usually, this is considered necessary only for the place of residence. Any other housing expenses should be allowed only if, based on a taxpayer's individual facts and circumstances, disallowance will cause the taxpayer economic hardship. [IRM B. Transportation - The transportation standards comprise nationwide figures for loan or lease payments called ownership cost, and additional amounts for operating costs broken down by Census Region and Metropolitan Statistical Area. Operating costs were derived from BLS data. If a taxpayer has a car payment, the allowable ownership cost added to the allowable operating cost equals the allowable transportation expense. If a taxpayer has no car payment only the operating cost portion of the transportation standard is used to figure the allowable transportation expense. Under ownership costs, separate caps are provided for the first car and second car. If the taxpayer does not own a car a standard public transportation amount is allowed. Vehicle insurance, vehicle payment (lease or purchase), maintenance, fuel, state and local registration, required inspection, parking fees, tolls, driver's license, public transportation. Transportation costs not required to produce income or ensure the health and welfare of the family are not considered necessary. Consider availability of public transportation if car payments (purchase or lease) will prevent the tax liability from being paid in part or full. Public transportation costs could be an option if it does not significantly increase commuting time and inconvenience the taxpayer. Note: If the taxpayer has no car payment, or no car, question how the taxpayer travels to and from work, grocer, medical care, etc. The taxpayer is only allowed the operating cost or the cost of transportation. [IRM ] C. Other Expenses. Other expenses may be considered if they meet the necessary expense test - they must provide for the health and welfare of the taxpayer and/or his or her family or they must be for the production of income. This is determined based on the facts and circumstances of each case. If other expenses are determined to be necessary and, therefore allowable, document the reasons for the decision in your history. 22

27 D. Conditional expenses. These expenses do not meet the necessary expenses test. However, they are allowable if the tax liability, including projected accruals, can be fully paid within five years. E. National and local expense standards are guidelines. If it is determined a standard amount is inadequate to provide for a specific taxpayer's basic living expenses, allow a deviation. Require the taxpayer to provide reasonable substantiation and document the case file. F. Generally, the total number of persons allowed for national standard expenses should be the same as those allowed as dependents on the taxpayer's current year income tax return. Verify exemptions claimed on taxpayer's income tax return meet the dependency requirements of the IRC. There may be reasonable exceptions. Fully document the reasons for any exceptions. For example, foster children or children for whom adoption is pending. G. A deviation from the local standard is not allowed merely because it is inconvenient for the taxpayer to dispose of valued assets. H. Length. Revenue officers should consider the length of the payments. Although it may be appropriate to allow for payments made on the secured debts that meet the necessary expense test, if the debt will be fully repaid in one year only allow those payments for one year. [ IRM ] 7.7 Five Year Test The amount allowed for necessary or conditional expenses depends on the taxpayer's ability to full pay the liability within five years and on the taxpayer's individual facts and circumstances. If the liability can be paid within 5 years, it may be appropriate to allow the taxpayer the excessive necessary and conditional expenses. If the taxpayer cannot pay within 5 years, it may be appropriate to allow the taxpayer the excessive necessary and conditional expenses for up to one year to modify or eliminate the expense. (See IRM 5.14, Installment Agreements) [IRM ] 7.8 Other Expenses The IRM provides the following chart regarding other expenses: Expense Item Expense is Necessary if: Accounting and Representation before the legal fees Service is needed or meets the necessary expense tests. Amount must be reasonable. If it is a condition of Charitable contributions employment or meets the (Donations to tax necessary expense tests. 23 Notes/Tips Disallow any other accounting or legal fees. Disallow costs not related to solving current liability. Disallow any other charitable contributions that are not considered necessary. Example: Review the

28 Expense Item exempt organizations) Expense is Necessary if: Example: A minister is required to tithe according to his employment contract. Child Care It meets the necessary (Baby-sitting, day expense test. Only care, nursery and reasonable amounts are preschool) allowed. Notes/Tips employment contract. Cost of child care can vary greatly. Do not allow unusually large child care expense if more reasonable alternatives are available. Consider the age of the child and if both parents work. If court ordered and being Review the court order. paid, they are allowable. If payments are not being made, do not allow the expense. Child support payments for natural children or legally adopted dependents may be allowed. If there is no alternative to the taxpayer paying the expense. Court-Ordered Payments (Alimony, child support, including orders made by the state, and other court ordered payments) Dependent Care (For the care of the elderly, invalid, or handicapped.) Education It is required for a physically or mentally challenged child and no public education providing similar services is available. Also allowed only for the taxpayer and only if required as condition of employment. Health Care Involuntary Deductions Life Insurance Required for the health and welfare of the family. Elective surgery would not be allowed such as plastic surgery or elective dental work. The taxpayer must provide proof of excessive out of pocket medical expenses. If it is a requirement of the job; i.e. union dues, uniforms, work shoes. If it is a term policy on the life of the taxpayer only. Secured or legally If it meets the necessary perfected debts expense test. Unsecured Debts If the taxpayer substantiates 24 Example: An attorney must take so many education credits each year or they will not be accredited and could eventually lose their license to practice before the State Bar. A teacher could lose their position or in some States their pay is commensurate with their education credits. To determine monthly expenses, the total out of pocket expenses would be divided by 12. The Schedule A may also be used to determine the yearly expense. Ensure that the amount used is out of pocket after insurance claims are paid. Substantiate that payments are being made. To determine monthly expenses, the total out of pocket expenses could be divided by 12. If there are whole life policies, these should be reviewed as an asset for borrowing against or liquidating. Life insurance used as an investment is not a necessary expense. Taxpayer must substantiate that the payments are being made. Examples of unsecured debts which

29 Expense Item Taxes Expense is Necessary if: and justifies the expense, the minimum payment may be allowed. The necessary expense test of health and welfare and/or production of income must be met. Except for payments required for the production of income, payments on unsecured debts will not be allowed if the tax liability, including projected accruals, can be paid in full within 90 days. It is for current federal, FICA, Medicare, state and local taxes. Notes/Tips may be necessary expenses include: Payments required for the production of income such as payments to suppliers and payments on lines of credit needed for business and payment of debts incurred in order to pay a federal tax liability. Current taxes are allowed regardless of whether the taxpayer made them in the past or not. Delinquent state and local taxes are allowable depending on the priority of the FTL and/or Service agreement with the state and local taxing agencies. Optional It must meet the necessary Telephones and expense test. Telephone Services (Cell phone, pager, Call waiting caller identification or long distance) Student Loans If it is secured by the federal Taxpayer must substantiate that the government and only the payments are being made. taxpayer s education. Internet If it meets the necessary Provider/ expense test generally for production of income. Repayment of If the loan is secured by the loans made for taxpayer s assets when those payment of Federal assets are of reasonable value Taxes and are necessary to provide for the health and welfare of the family. 25

30 EXHIBITS

31 26

32 27

33 28

34 29

35 30

36 31

37 32

38 33

39 34

40 35

41 36

42 37

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44 39

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46 Attachment to Form Request for a Collection Due Process Hearing Laurence L. Owesalot Vaughan K. Owesalot 1. The taxpayers are elderly, and have limited income and assets. They request that their account be placed in uncollectable status. 2. The taxpayers disagree with the amount of the liability. They believe they are entitled to abatement of all penalties assessed against them because they had reasonable cause for failure to pay the taxes at issue. The taxpayers demand proof of the nature and extent of any penalties. Alternatively: 3. The taxpayers are entitled to an Offer in Compromise, based on doubt as to collectability, doubt as to liability regarding the penalties, and effective tax administration. 4. If the taxpayers are not granted an Offer in Compromise, they should be granted an Installment Agreement under IRC

47 ATTACHMENT TO FORM Request for Equivalent Hearing ABC Limited Partnership EIN: Final Notice, Notice of Intent to Levy: 1. The Service levied significant funds from the taxpayer during the last several months. The taxpayer believes that part of the levied funds were used to satisfy the liability. The taxpayer demands an accounting of all levied funds, and updated transcripts to track where payments were applied. 2. The taxpayer is a nursing facility that cares for ill and infirm individuals unable to care for themselves. The facility provides food, medication, and staffing to these individuals. Any overly intrusive collection action such as a levy will hinder the taxpayer's ability to care for its patients. 3. The taxpayer disagrees with the amount of the liability. It believes it is entitled to abatement of all penalties assessed against it because it had reasonable cause for failure to pay the taxes at issue. The taxpayer demands proof of the nature and extent of any penalties. 4. The taxpayer cannot pay its tax obligation in full and is entitled to an Offer in Compromise based on doubt as to collectibility, and doubt as to liability regarding the penalties. 5. The taxpayer is entitled to an installment agreement under IRC

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57 National Standards: Food, Clothing and Other Items Expense One Person Two Persons Three Persons Four Persons Food $301 $537 $639 $765 Housekeeping supplies $30 $66 $65 $74 Apparel & services $86 $162 $209 $244 $55 $63 $67 Personal services care products & $32 Miscellaneous $116 $209 $251 $300 Total $565 $1,029 $1,227 $1,450 Additional Persons Amount More than four persons For each additional person, add to four-person total allowance: $281 National Standards: Out-of-Pocket Health Care The table for health care expenses, based on Medical Expenditure Panel Survey data, has been established for minimum allowances for out-of-pocket health care expenses. Out-of-pocket health care expenses include medical services, prescription drugs, and medical supplies (e.g. eyeglasses, contact lenses, etc.). Elective procedures such as plastic surgery or elective dental work are generally not allowed. Taxpayers and their dependents are allowed the standard amount monthly on a per person basis, without questioning the amounts they actually spend. If the amount claimed is more than the total allowed by the health care standards, the taxpayer must provide documentation to substantiate those expenses are necessary living expenses. The out-of-pocket health care standard amount is allowed in addition to the amount taxpayers pay for health insurance. 52

58 Out-of-Pocket Costs Under 65 $60 65 and Older $144 Transportation Public Transportation $182 National Ownership Costs One Car Two Cars $496 National $992 Operating Cost Metropolitan Area One Car Two Cars Northeast Region $265 $530 Boston $250 $500 New York $342 $684 Philadelphia $299 $598 Midwest Region $210 $420 Chicago $251 $502 Cleveland $226 $452 Detroit $294 $588 Minneapolis-St. Paul $207 $414 South Region $239 $478 Atlanta $234 $468 Baltimore $250 $500 53

59 Metropolitan Area One Car Two Cars Dallas-Ft. Worth $270 $540 Houston $307 $614 Miami $320 $640 Washington, D.C. $270 $540 West Region $236 $472 Los Angeles $283 $566 Phoenix $262 $524 San Diego $274 $548 San Francisco $306 $612 Seattle $192 $384 The data for the Operating Costs section of the Transportation Standards are provided by Census Region and Metropolitan Statistical Area (MSA). The following table lists the states that comprise each Census Region. Once the taxpayer s Census Region has been ascertained, to determine if an MSA standard is applicable, use the definitions below to see if the taxpayer lives within an MSA (MSAs are defined by and city, where applicable). If the taxpayer does not reside in an MSA, use the regional standard. Maximum Monthly Allowance California County Alameda Alpine Amador Butte Calaveras Colusa Contra Costa Del Norte El Dorado Fresno Glenn Humboldt Imperial Inyo Kern Kings Family of Family of 1 Family of 2 Family of 3 Family of 4 5 or more 2,489 2,923 3,080 3,435 3,490 2,175 2,555 2,692 3,002 3,050 1,742 2,046 2,155 2,403 2,442 1,530 1,797 1,894 2,112 2,146 1,748 2,053 2,164 2,413 2,452 1,649 1,937 2,041 2,276 2,312 2,528 2,970 3,129 3,489 3,545 1,426 1,675 1,765 1,968 1,999 2,191 2,574 2,712 3,024 3,073 1,600 1,879 1,980 2,208 2,244 1,477 1,735 1,828 2,038 2,071 1,520 1,785 1,881 2,098 2,132 1,531 1,798 1,895 2,113 2,147 1,530 1,797 1,894 2,112 2,146 1,517 1,781 1,877 2,093 2,127 1,501 1,763 1,857 2,071 2,104 54

60 Family of County Family of 1 Family of 2 Family of 3 Family of 4 5 or more Lake 1,604 1,884 1,986 2,214 2,250 Lassen 1,499 1,761 1,855 2,069 2,102 Los Angeles 2,235 2,625 2,766 3,084 3,134 Madera 1,630 1,915 2,018 2,250 2,286 Marin 3,069 3,604 3,798 4,235 4,303 Mariposa 1,573 1,848 1,947 2,171 2,206 Mendocino 1,836 2,156 2,272 2,534 2,574 Merced 1,620 1,903 2,005 2,236 2,272 Modoc 1,166 1,370 1,444 1,610 1,636 Mono 1,830 2,149 2,265 2,525 2,566 Monterey 2,242 2,633 2,775 3,094 3,144 Napa 2,399 2,818 2,969 3,310 3,364 Nevada 1,975 2,320 2,444 2,725 2,769 Orange 2,448 2,875 3,029 3,378 3,432 Placer 2,244 2,636 2,778 3,097 3,147 Plumas 1,525 1,791 1,888 2,105 2,139 Riverside 1,998 2,347 2,473 2,757 2,802 Sacramento 1,904 2,236 2,357 2,628 2,670 San Benito 2,484 2,917 3,074 3,427 3,483 San Bernardino 1,831 2,150 2,266 2,526 2,567 San Diego 2,277 2,674 2,818 3,142 3,192 San Francisco 2,856 3,355 3,535 3,941 4,005 San Joaquin 1,988 2,334 2,460 2,743 2,787 San Luis Obispo 2,099 2,465 2,597 2,896 2,943 San Mateo 2,874 3,375 3,557 3,966 4,030 Santa Barbara 2,224 2,612 2,753 3,069 3,119 Santa Clara 2,779 3,264 3,439 3,835 3,897 Santa Cruz 2,525 2,966 3,125 3,484 3,541 Shasta 1,566 1,840 1,939 2,162 2,197 Sierra 1,387 1,629 1,717 1,914 1,945 Siskiyou 1,353 1,590 1,675 1,868 1,898 Solano 2,150 2,525 2,661 2,967 3,015 Sonoma 2,264 2,659 2,802 3,124 3,174 Stanislaus 1,793 2,106 2,219 2,474 2,514 Sutter 1,655 1,944 2,048 2,284 2,321 Tehama 1,375 1,615 1,702 1,898 1,928 Trinity 1,315 1,544 1,627 1,814 1,843 Tulare 1,428 1,678 1,768 1,971 2,003 Tuolumne 1,674 1,966 2,072 2,310 2,348 Ventura 2,395 2,813 2,965 3,306 3,359 Yolo 2,033 2,388 2,516 2,806 2,851 Yuba 1,651 1,939 2,043 2,278 2,315 55

61 PORTIONS REPRINTED WITH PERMISSION OF THOMSON WEST, INC. FROM REPRESENTATION BEFORE THE COLLECTION DIVISION OF THE IRS BY ROBERT E. McKENZIE ARNSTEIN & LEHR 120 SOUTH RIVERSIDE PLAZA, SUITE 1200 CHICAGO, ILLINOIS (312)