PART III. COLLECTION CASES...1 OVERVIEW:...1 A. REASONABLE COLLECTION POTENTIAL... 1 B. CURRENTLY NOT COLLECTIBLE... 3 C. PARTIAL INSTALLMENT AGREEMENTS.... 3 D. INSTALLMENT AGREEMENTS... 4 E. PREPARING AND SUBMITTING AN OFFER IN COMPROMISE- UNDERSTANDING THE BASES FOR SUBMITTING AN OFFER.... 4 F. THE USER FEE.... 5 G. MAKING THE OFFER PROCESSIBLE... 5 H. COMMUNICATION AND PROMPT RESPONSES TO THE IRS IS KEY... 6 I. APPEALING A PROPOSED REJECTION OF AN OIC.... 6 Part III. Collection Cases Overview: Usually, a low-income taxpayer receives several notices (sometimes as many as 4) from the IRS before the IRS takes enforced collection- i.e., filing a lien or serving a levy. Attached in Appendix # are copies of these kinds of notices. Each time the client receives these notices is an opportunity to try to work out a payment plan or stop collection. Below in A. we will discuss the tools for determining how the IRS will determine your client's ability to pay and how to request a client be put in Currently Not Collectible. In some cases, either it makes more sense or the client insists that you help them compromise a tax debt. This is known as an offer-in-compromise. In B of this section we will teach you the terminology and the process for submitting an offer in compromise. A. Reasonable Collection Potential What the IRS determines your client is able to pay and what your client thinks he or she can pay are often very different. Unfortunately for you client, it is what the
IRS considers the client's ability to pay that will control. The term used by the IRS to determine how to compromise a tax liability or stop efforts to collect is called "reasonable collection potential." In very basic terms is consists of two amounts: (1) equity that you client has in assets, such as homes, cars, whole life insurance policies, pensions, IRAs, 401(k) plans, etc.; and (2) any positive difference between your client's monthly income and monthly expenses. For purposes of the first calculation, the IRS generally uses 80% of fair market value of assets to determine their value. From this, secured debt will be deducted. For purpose of the second calculation, what expenses are allowed for making this second calculation are listed in the Forms 433-A and Form 433-B. There is where your client's notion of ability to pay and the IRS notion of reasonable collection potential will probably differ. For example, the IRS will not count as an expense credit card debt or payments made to support people that are not specifically court ordered. The IRS will make an initial determination as to whether your client can "full pay" the tax liability. The IRS will multiply any positive net monthly income times the number of months equal to 60 (5 years) plus the remaining number of months left on the statute to collect the tax debt. This will be added to the equity in the assets, and the resulting amount will be considered the client's ability to pay. Low-income taxpayer advocates have voiced loud concerns at this procedure, but currently that is what is used. Example: Client has a tax debt for the year 1998 that was assessed in Oct. 1999. Assume that there are 5 more years (60 months) left on the statute of collection. Client owes Client owns a car with a Kelly Blue Book value of $5,000 and a loan payoff amount of $3,500. Client's monthly income consist of wages
totaling $1,350 per month and Client's allowed expenses are $1,250. Client's RCP is $1,500 of equity ($5,000*.8-$3,500) and the total net monthly income that the IRS will consider is $100 * 120months, or $12,000. If the Client's tax debt is equal to or less than $$13,500, the IRS will consider Client as being able to fully pay and will not accept an offer-in-compromise. B. Currently Not Collectible If the reasonable collection potential of a client is -0- or negative, then generally the IRS (through ACS, Automated Collection System) will agree to classify the taxpayer as Currently Not Collectible (Code 53). This means that the IRS will not take enforced collection against the taxpayer- that is will not levy accounts or payments, but may file a protective lien. While a taxpayer is in CNC the statute for collections (generally 10 years) will continue to run. Thus, for many low income taxpayers this is a good alternative. While there are no hard and fast rules for when the IRS might decide to change a taxpayer's status from CNC to collectible, generally if an individual is reporting less than $25,000 in gross income a year, the IRS will not disturb the status. The IRS will send yearly notices to a taxpayer in CNC updating the amount of tax, penalties and interest. Interest continues to accrue on the tax debt while a taxpayer is in CNC. Use a Form 433-F (See Appendix 5) to work with your low income taxpayer to determine his or her income and expenses. Generally, ACS will allow you to talk on the telephone under a Power of Attorney if you have the information listed on a Form 433-F to determine if your client is eligible for CNC. You should use due diligence in determining the accuracy of the information. C. Partial Installment Agreements.
Under recently passed legislation, Congress indicated that the IRS can accept partial payment under an installment agreement in cases where a taxpayer is able to make some payments but the payments he or she can make over the remaining period for collection would not fully pay off the tax debt. The process for entering into partial installment agreements is similar to the CNC, but the taxpayer will have to pay an installment agreement fee of $43, which can be worked into the installments. D. Installment Agreements The IRS tries very hard to get taxpayers to agree to pay tax debts over 60 months. The interest charged during this period is 8% and a fee of $43 is charged to set up an installment agreement. However, in entering into an installment agreement, the IRS can require a taxpayer to agree to extend the period for collection up to 5 years if that will assist the taxpayer in fully paying off the liability. If a taxpayer misses one month's payment, generally they will be contacted to see if the will be making the payment. If they do not respond or cannot be contacted, then the IRS will consider the installment agreement defaulted and may begin enforced collection. E. Preparing and Submitting an Offer in Compromise- Understanding the bases for submitting an offer. To begin with, an offer in compromise is purely discretionary on the part of the IRS. IRC Sec. 7122 and regulations thereunder. There are three bases for submitting an offer in compromise: 1. Doubt as to Liability- the client can prove that there is real doubt that s/he does not owe the tax. The client must submit some amount to compromise the liability. However, a client can also
submit an audit reconsideration to prove s/he did not owe the tax and will not need to offer any amount to compromise it. However, when an OIC is accepted as processible, all collection action must stop. While audit reconsideration is pending, the IRS may still take steps to collect the debt. 2. Doubt as to Collectibility- the client must prove through the submission of a financial statement (Form 433-A and/or Form 433- B) that s/he does not have sufficient equity in assets or excess monthly income sufficient to pay all or some of the debt. 3. Effective Tax Administration- the client has the ability to fully pay the tax debt, but can prove that either paying it would produce an economic hardship (i.e., s./he would not be able to pay for ordinary living expenses) or that public policy. supports the acceptance of the offer for less than the full amount. F. The User Fee. For all taxpayers whose income at the time the offer is submitted is expected to be greater than 100% of the federal poverty level, a $150 user fee must be submitted for all offers based on doubt as to collectibility and must be submitted with the offer. An offer will not be processed if the fee is not submitted. This fee will be applied to any offer that is accepted and will reduce the amount due. If the offer is submitted on the basis of effective tax administration, then the fee will be returned. G. Making the Offer Processible.
An offer is processible if the a taxpayers submits the correct forms (Form 656, 656-A (if the taxpayer qualifies for waiver of the user fee), Form 433-A or Form 433-B) and all supporting documentation. If no supporting documentation is attached, the offer will be returned as not processible and the taxpayer will not have any appeal rights. If the offer submits some documentation, but not enough for the offer to be evaluated, the IRS will request additional information with a deadline for submission. If the information is not submitted or the deadline is not met or an extension for submitting the documentation is not obtained, the offer will be returned and the fee may be retained. Again, in this case there are not any appeal rights. H. Communication and prompt responses to the IRS is key. Responding to written requests for information is crucial to helping your client get an offer considered. We have also found that calling the OIC office once the offer is processed and maintaining a constant and good working relationship with the OIC reviewer is also the key difference between getting an offer rejected and working out an acceptable offer. I. Appealing a proposed rejection of an OIC. If an offer is rejected after it has been processed, your client has a right to appeal the rejection to an Appeals Office of the IRS. It is our understanding that the IRS has established an Appeals Office at Brookhaven, the site of the centralized OIC. They might try to convince you to appeal it to that office, but then you are left with corresponding with the office and do not realistically have an opportunity for a face to face conference. We recommend that you make clear in your request for an appeal of a rejected offer that you want the appeal to be heard at your local appeals office. Statistics show that a very high percentage
of rejected offers are ultimately accepted at some figure when they are appealed to an appeals office.