Solving IRS Problems Jae K. Shim
Table of Contents About the Author... vii Preface... viii Chapter 1 IRS Overview and Taxpayer Rights... 1 Learning Objectives... 1 Introduction... 1 The Mission of the IRS... 1 IRS Operating Divisions... 1 Areas and Territories... 2 Appeals... 2 The Office of Chief Counsel... 2 Criminal Investigation Division... 2 Taxpayer Advocate... 2 The Taxpayer Advocate... 2 Taxpayer Assistance Orders... 3 Taxpayer Rights... 3 Original Taxpayer Bill of Rights... 3 Taxpayer Bill of Rights II... 3 Taxpayer Bill of Rights III... 4 When Is the Confidentiality Privilege Extended to Taxpayer Communications?... 4 IRS Employee Contacts... 4 Listing of Local IRS Telephone Numbers and Addresses... 4 Ten Deadly Sins... 4 The Practitioner Priority Service... 5 Freedom of Information Requests... 5 Working With the IRS To Resolve the Taxpayer s Problem... 5 Review Questions... 7 Review Answers... 8 Chapter 2 Which Option is Best? Alternatives to an Offer in Compromise... 9 Learning Objectives... 9 Introduction... 9 Full Pay the Tax Owed... 9 Filing Unfiled Tax Returns and Replacing Substitute for Returns... 9 Dispute the Tax on Technical Grounds... 10 Currently Not Collectible Status... 10 Installment Agreements... 10 Offers in Compromise... 10 Penalty Abatement... 11 Discharging Taxes in Bankruptcy... 11 Innocent Spouse... 11 Expiration of the Collection Statute... 11 Review Questions... 12 Review Answers... 13 Chapter 3 How to Determine When a Taxpayer Needs Professional Help... 14 Learning Objectives... 14 Can the Taxpayers Handle Their Own Case?... 14 i
How To Select the Best Tax Consulting Firm... 14 Areas of concern... 15 How to Save on Professional Fees... 15 Tax Professionals To Consider... 16 Attorneys... 16 Certified Public Accountants... 16 Enrolled Agents... 16 Full-Service Tax Resolution Specialists... 16 How To Find a Tax Professional... 17 Review Questions... 18 Review Answers... 19 Chapter 4 Statutes of Limitations... 20 Learning Objectives... 20 Two Perspectives of the Statute of Limitations... 20 Three-Year Statute of Limitations... 20 Timely Mailing of a Return... 20 Is There a Bright Line Test for Assessment Purposes?... 20 Special Statute of Limitations Rules... 21 Six-Year Statute of Limitations... 21 No Statute of Limitations... 21 Statute of Limitations on Collection... 21 The Date of Assessment... 21 The IRS Can Use Administrative or Judicial Methods to Collect Delinquent Taxes... 22 When is the Statute of Limitations on Collections Suspended for an Installment Agreement?... 22 When is the Statute of Limitations on Collections Suspended for an Offer in Compromise?... 22 When is the Statute of Limitations on Collections Suspended for Bankruptcy?... 22 What is the Authority for Appeals Officers to Resolve the Tax Issue?... 22 Collection Appeals Program... 22 Assessments... 23 Summary Assessment and Deficiency Assessment... 23 Review Questions... 24 Review Answers... 25 Chapter 5 Liens and Levies... 26 Learning Objectives... 26 Liens and Levies... 26 IRS Bank Levies... 26 Federal Tax Liens... 26 Certificate of Release of Paid or Unenforceable Lien... 27 Levying the Taxpayer s Property... 27 Effect of a Levy... 27 Notice of Intent to Levy... 27 Notice of Seizure... 27 Bank Account 21-Day Waiting Period... 28 Seizure of a Taxpayer s Residence or Business... 28 Wage Garnishments... 28 Fair Debt Collection Practices... 28 The Collection Information Statement... 28 Analysis of Taxpayer s Financial Condition... 29 Review Questions... 30 Review Answers... 31 ii
Chapter 6 Filing Unfiled Returns and Replacing Substitute for Returns... 33 Learning Objectives... 33 Introduction... 33 Review Questions... 34 Review Answers... 35 Chapter 7 Installment Agreements... 36 Learning Objectives... 36 IRS Payment Plans... 36 Installment Agreements... 36 User Fees for Installment Agreements... 37 Interest Does Not Stop With an Installment Agreement... 38 How Best to Make Timely Installment Payments... 38 Fees to Set-up an Installment Agreement... 38 How to Set-up an Installment Agreement... 38 What Information Do I Need to Use the Online Payment Agreement (OPA)?... 39 Enforced Collection Actions... 39 Payments Should Be Made Timely... 39 Annual Statements of Balance Due... 39 Meeting the Terms of an Installment Agreement... 39 Why an Installment Agreement Will Cost You More... 40 Review Questions... 41 Review Answers... 42 Chapter 8 Delayed Collection and Currently Not Collectible Status... 43 Learning Objectives... 43 Delayed Collection... 43 Accounts Currently Not Collectible Stop Collection By Becoming Uncollectible... 43 Collection Due Process Hearing (CDP)... 45 Review Questions... 46 Review Answers... 47 Chapter 9 Offers in Compromise... 48 Learning Objectives... 48 Introduction... 48 Why the Taxpayer Needs An Expert in Their Corner... 48 The Importance of the Firm s Track Record... 49 Can I File an Offer in Compromise to Delay Collection Action?... 49 What is an Offer in Compromise User or Application fee?... 49 Processing Your Offer in Compromise... 52 Offer in Compromise Determinations... 53 Financial Analysis... 55 Verification... 55 Internal Sources... 55 Taxpayer Submitted Documents... 56 Equity in Assets... 58 Net Realizable Equity... 58 Jointly Held Assets... 59 Income-Producing Assets... 59 Assets Held By Others as Transferees, Nominees or Alter Egos... 60 Cash... 60 Securities... 61 iii
Life Insurance... 61 Retirement or Profit Sharing Plans... 62 Furniture, Fixtures, and Personal Effects... 63 Motor Vehicles, Airplanes and Boats... 63 Real Estate... 63 Accounts and Notes Receivable... 64 Inventory, Machinery and Equipment... 64 Business as a Going Concern... 64 Dissipation of Assets... 65 Future Income... 65 Allowable Expenses... 67 Conditional Expenses... 67 Shared Expenses... 68 Calculation of Future Income... 69 Payment Terms... 69 Collateral Agreements... 71 Co-Obligor Agreements... 72 Other Collateral Agreements... 72 Future Income... 73 Adjusted Basis of Specific Assets... 74 Waiver of Losses... 74 Net Operating Loss... 74 Capital Loss... 75 Passive Loss... 76 Multiple Agreements... 76 Waiver of Refunds... 77 Possible Actions on Accepted Offers... 79 Rescission of Accepted Offers... 79 Rescission Procedures... 80 Potential Default Cases... 80 Compromise of a Compromise... 80 Authority to Compromise Under a Compromise Contract... 81 Receipt and Processing... 81 Consideration of Proposal... 81 Processing Completed Investigations... 82 Overlooked Periods... 82 Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) Section 509... 85 Review Questions... 86 Review Answers... 87 Chapter 10 How to Complete Form 656 (Offer in Compromise)... 88 Learning Objectives... 88 Introduction... 88 What is an OIC offer?... 88 Three Types of OICs... 88 Offer in Compromise Payment Options... 89 Payments and Application Fees... 90 Other Important Facts... 90 Are You Eligible?... 91 Paying for Your Offer... 91 Application fee... 91 Payment Options... 91 Future tax obligations... 91 iv
How To Apply... 92 Application Process... 92 Completing the Application Package... 92 Important Information... 93 Review Questions... 113 Review Answers... 114 Chapter 11 Innocent Spouse Defense... 115 Learning Objectives... 115 Introduction... 115 Innocent Spouse Rules... 115 Factors for Determining Whether To Grant Equitable Relief... 117 Relevant Factors... 117 Factors Weighing in Favor of Equitable Relief... 118 Refunds... 119 Proof Required... 119 Refunds Under Equitable Relief... 119 Limit on Amount of Refund... 119 Relief.... 121 Review Questions... 122 Review Answers... 123 Chapter 12 Other Options... 124 Learning Objectives... 124 Bankruptcy... 124 Will Bankruptcy End Your Tax Worries?... 124 Payroll Tax Problems... 125 IRS Audits... 125 Penalty Abatement... 126 How to Abate Your Penalties or Interest... 126 Collection Appeals... 127 IRS Appeals... 127 Review Questions... 128 Review Answers... 129 Chapter 13 Frequently Asked Questions (FAQs)... 130 Learning Objectives... 130 Introduction... 130 Review Questions... 142 Review Answers... 144 Chapter 14 Recent IRS Tax Cases... 147 Learning Objectives... 147 Cases... 147 Tax Lien Filed Against Actor Nicholas Cage for $6 Million Tax Debt Owed to the IRS... 147 An Illinois Woman Faces Up To 16 years for Evasion and Embezzlement... 147 Louisiana Doctor Guilty of Not Filing Return... 147 Mayor Guilty of Tax Evasion and Corruption... 147 Massachusetts Businessman Receives 15 Months... 148 Computech President Receives 15 Months... 148 New Hampshire Man Sentenced To Probation for $57,000 in Tax Evasion... 148 Texas Lawyer Guilty of Not Filing Tax Returns... 148 v
Former Minnesota State Senator Found Guilty... 148 Plumbers Indicted for Tax Charges... 149 Former Massachusetts Resident Charged with Filing False Tax Returns... 149 Denver Man Sentenced for Tax Fraud... 149 Massachusetts Man Pleads Guilty to Tax Evasion... 149 Georgia Woman Receives 16 Months for Tax Fraud... 150 Connecticut Businessman Pleads Guilty to Tax Fraud... 150 Massachusetts Man Charged with Filing False Tax Returns... 150 Delaware Man Charged with Tax Evasion... 150 Baseball Great Pete Rose Owes $1 Million... 150 Sales Executive Gets Prison for Evasion... 150 New York Racing Official Sentenced for Tax Evasion... 151 Washington, DC, Man Sentenced for Making False Claims to IRS... 151 New Jersey Lawyer Charged with Tax Evasion... 151 Former Mayor in Arizona Pleads Guilty to Tax Evasion Charges... 151 North Carolina Women Sentenced for Roles in Tax Refund Scheme... 151 Bookie Pleads Guilty to Gambling, Tax Evasion Charges... 151 Tribal Chair Sentenced on Tax Charges... 152 Florida Man Gets Jail Time for Evasion... 152 Connecticut Executive Punished for Tax Fraud... 152 Baltimore Police Commissioner Sentenced for Tax Fraud... 152 Alabama Fast-Food Manager Gets Prison for False Returns... 152 North Carolina Man Convicted of Two Felony Counts... 153 Connecticut Man Receives Probation for Failing to Pay Income Taxes... 153 Delaware Man Indicted for Not Reporting $500,000... 153 Tucson Man Receives 189 Days in the Can for Filing False Tax Form... 153 Inventor Convicted of Tax Fraud... 153 INS Agent Sentenced on Tax Charges... 154 Dallas Man Gets 15 Months in Jail... 154 Village Official Indicted for Tax Charge... 154 Delaware Man Pleads Guilty to Tax Evasion... 154 Phoenix Man Indicted for False Returns... 154 Ohio Man Tried to Conceal More Than $4 Million in Income... 155 Arizona Man Pleads Guilty to Not Filing Returns... 155 Review Questions... 156 Review Answers... 157 Appendix A Declaration of Taxpayer Rights... 158 I. Protection of Your Rights... 158 II. Privacy and Confidentiality... 158 III. Professional and Courteous Service... 158 IV. Representation... 158 V. Payment of Only the Correct Amount of Tax... 158 VI. Help With Unresolved Tax Problems... 158 VII. Appeals and Judicial Review... 158 VIII. Relief From Certain Penalties and Interest... 159 Examinations, Appeals, Collections, and Refunds... 159 Examinations (Audits)... 159 Appeals... 159 Refunds... 160 Appendix B Record of Account Transaction Codes... 161 Glossary... 163 Index... 168 vi