What to Do When the IRS Comes to Collect
Do Not Ignore the IRS
If you receive a letter from the IRS, they have a reason for it.
a) Perhaps the IRS is proposing assessing additional tax or penalties against you. The IRS asks you to respond within a set time, generally 30 days, and if you do not the assessment becomes final. It is much easier to deal with a proposed assessment within the 30 days as opposed to later.
b) Another reason that the IRS may be sending a letter is that it plans to levy (seize) your wages or bank account to collect a balance already assessed against you. The IRS must provide you a written notice of intent to levy before levying your property, though it only need issue a notice of intent to levy once as to a given assessment. The IRS will usually send three notices of intent to levy with the final notice stating that you have 30 days to protest/appeal the collection action.
c) Another reason for a letter is that the IRS is requesting a tax return which you have failed to file.
d) Another reason for a letter is that it may inform you that the IRS will examine one or more of your filed tax returns.
You should never ignore correspondence from the IRS. You should discuss it with a tax attorney.
Call the IRS and Secure Hold on Collection Action
Upon accepting an IRS collection matter, I have the client sign a Form 2848, Power of Attorney and Declaration of Representative, authorizing the IRS to communicate with me concerning the client’s accounts. Then I will call the IRS with the goal of accomplishing a couple of things that usually include: (1) secure a hold on collection against the taxpayer for as long as possible, to give me time to investigate the client’s IRS accounts; and (2) request transcripts of those accounts.
1) Has the IRS prepared and filed tax returns for the taxpayer? These are called “substitutes for returns.” Substitutes for returns resolve all doubts against the taxpayer, and produce the largest possible tax liability. The IRS will adjust the assessment to actual once the taxpayer files the delinquent return.
2) Perhaps the taxpayer has filed tax returns, but the returns reported excessive tax liability. This can be corrected with an amended return for each period in question.
3) Perhaps the assessment arises out of a joint income tax return for which the taxpayer should seek relief as an innocent spouse under Internal Revenue Code § 6015.
4) Perhaps the IRS has assessed penalties against the taxpayer for which the taxpayer should seek abatement.
5) The collection statute of limitations also warrants consideration. The IRS may act to collect tax, penalties, or interest for ten years after it is assessed or accrues, but not thereafter.
These are but a few of the reasons for challenging an assessment which the IRS is attempting to collect. The point is that a taxpayer should not agree to pay an assessment without first satisfying himself as to its validity.
Reach Agreement with IRS
To prevent the threatened collection action, the taxpayer must reach agreement with the IRS on what to do about the assessed balance. This requires the taxpayer to complete and submit to the IRS Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and possibly Form 433-B, Collection Information Statement for Businesses. These will tell the IRS what the taxpayer can afford to pay by way of an installment agreement.
In determining how much a taxpayer can afford to pay under an installment agreement, the IRS considers the taxpayer’s actual gross income, payroll deductions and reasonable living expenses. The taxpayer’s living expenses, however, are limited by collection financial standards developed by the IRS. National standards apply for food, clothing, and other personal expenses, and for out-of-pocket health care expenses. Local standards limit housing, utilities, and transportation expenses, including vehicle ownership as well as operating costs. The taxpayer should also inform the IRS of any other financial obligations he has each month, such as medical bills, legal bills, or extraordinary debts, as these may be allowed in the discretion of the IRS collection employee working the case. The taxpayer must prove her income and expenses by documentary evidence (recent pay stubs, bank statements, etc.) submitted to the IRS.
If the IRS collection employee refuses the taxpayer an installment agreement for a reasonable monthly payment, I ask to speak with the employee’s manager. If I am unable to resolve the matter with the manager, I exercise the taxpayer’s right to have the case reviewed by the IRS Appeals Office. Most federal tax collection cases can be resolved in the IRS Appeals Office. Those that cannot may be litigated in U.S. Tax Court.
If the taxpayer cannot currently afford to pay the IRS anything, then her account(s) should be posted as currently not collectible. This means that the taxpayer will not have to pay anything on the balances for the time being, but notices of federal tax lien will remain of record against the taxpayer.
If the taxpayer cannot currently afford to pay anything on her IRS accounts, and her ability to pay in the future is in doubt, then she is a candidate for an offer in compromise.
Bankruptcy is another means of dealing with IRS collection action. To qualify the tax debt must meet the following five requirements:
1. The due date for filing a tax return is at least three years ago.
2. The tax return was filed at least two years ago.
3. The tax assessment is at least 240 days old.
4. The tax return was not fraudulent.
5. The taxpayer is not guilty of tax evasion.
Before a Chapter 7 or Chapter 13 bankruptcy can be granted, the bankruptcy petitioner is required to prove that the four previous tax returns have been filed with the IRS. The four previous tax returns must be filed no later than the date of the first creditors' meeting in a bankruptcy case. Additionally, bankruptcy petitioners are required to provide a copy of their most recent tax return to the bankruptcy court. Creditors can also request a copy of the tax return, and petitioners must provide a copy to them.
Even if the taxpayer’s tax debts are dischargeable in bankruptcy, tax liens which arose pre-petition in the taxpayer’s exempt property may survive discharge.
It Comes Down to the Taxpayer
In the end, honesty, transparency, and sincerity best serve a taxpayer seeking the discretion of an IRS employee.