Howard's IRS and the Law Blog

If you money to the IRS, you have taxpayer rights.

Your rights are in the the Internal Revenue Code, which has laws that limit the power of the IRS collection division to collect, levy and destroy.

An IRS collection agent cannot always do what he wants, when he wants.

These laws protect you from the collection enforcement powers of the IRS.

If you are facing an IRS Revenue Officer or an Automated Collection Service representative, IRS collection laws that are on your side can be golden.

For when you need it, here are the most important collection laws and rights in the Internal Revenue Code:

IRS must give you notice before levy and the right to appeal, Internal Revenue Code 6330 and 6331(d):

The IRS must send you a letter before they can take your property, and give you 30 day notice beforehand.  This letter is called a Final Notice of Intent to Levy.  After you receive a Final Notice, tax laws give you 30 days to file an appeal to dispute the IRS levy, stop it from happening, have a hearing with an IRS appeals officer to reach an alternative solution to levying, and, ultimately if all else fails, petition the US Tax Court for additional review.  This is called a collection due process appeal – and all IRS enforcement is on hold while you exercise your rights to appeal.

IRS cannot levy or seize your property unless it results in a recovery of money to them, Internal Revenue Code 6331(f) and 6331(j)(2)(c):

This is known as the no equity rule.  In other words, the IRS can only seize your property if it results in payment to them.  For example, if you have a F150 truck that is worth $5,000 and has a $5,000 loan on it, an IRS seizure will only get your bank paid on the loan.  There will be nothing left for the IRS as there is no equity in it for them.  Because of that, they legally cannot seize it.  Same is true for your house. The no equity law eliminates the vast majority of IRS seizures.

The IRS has 10 years to collect your unpaid tax debt, Internal Revenue Code 6502:

The good news is that Internal Revenue Code 6502 gives the IRS 10 years to collect tax debts.  After 10 years expires, the IRS must, by law, put a credit on your account for the amount that cannot be collected, and move your account balance to zero.  The time to collect begins when the IRS first puts a balance due on its books, and ends 10 years later.  The end is known as the IRS collection statute expiration date.  By law, owing the IRS is not forever.

It is unlikely that the IRS is going to take your personal belongings, household goods, furniture, and clothing, Internal Revenue Code 6334(a):

The Internal Revenue Code 6334 prevents the IRS from taking your everyday personal belongings.  In other words, you have the right to keep your essentials – the IRS cannot put you out on the street with no clothes, furniture, or household goods.  Like the no equity rule, this is another protection allowing you to keep your property and protect it from the IRS.

The IRS is required by law to consider settling your debt, Internal Revenue Code 7502:

You have heard it on the ubiquitous television and radio ads – settle your tax debts for pennies on the dollar.  The truth behind the ads is in Internal Revenue Code 7502, Compromise.  Yes, by law, the IRS is authorized to settle your tax debt for less than what you owe, known as an offer in compromise.  But be careful – not everyone qualifies for an offer in compromise.  However, the IRS has very rigid guidelines on examining an offer in compromise. The IRS will look at your household income, living expenses and asset values, and determine if they can collect the amount owed from you.  In most cases, to accept a compromise, the IRS has to be convinced that they will never collect the full amount owed from you. If so, then they can agree to settle for a lower amount, representing what can be paid and recovered.

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An offer in compromise is certainly appealing – forgiveness of your tax debt, tax liens released, freedom to use bank accounts and earn wages – all without looking over your shoulder for the IRS.

But an offer in compromise is not a quick fix.

This is about what they don’t tell you on those it-sounds-too-good-to-be true TV and radio ads.

Let’s illustrate with an example of how the IRS offer in compromise really works.

We will start with an OIC submitted at the beginning of a year, and do a month by month walk-through of the path that your offer will likely take:

Year 1 of the OIC:

January:    You file your offer in compromise.

June:     If you are lucky, your offer in compromise is assigned to an IRS OIC specialist for investigation within six months of submission.

August:     After the OIC specialist gets your offer in her inventory, you will receive a letter with a list of documents to provided, usually consisting of bank statements, recent paystubs, letters from your bank confirming your auto and mortgage loans, and verification of living expenses like health insurance, life insurance, utility bills and child support.

September:     As requested, you send in the requested documentation to the offer investigator.

October:     The offer investigator completes a review of your offer, and has three options: reject, counteroffer or accept your offer.

Let’s presume that you received either an outright rejection, or a counteroffer at a higher number, which is the most common outcome at this level of investigation.

Either way, your offer is not being accepted, and you disagree with that.  You have 30 days to file an appeal stating your disagreement, and to request a conference with an IRS appeals officer.

November:     You file your appeal stating your disagreement with the proposed rejection or counteroffer the IRS made to you.

Year 2 of the OIC:

March:    IRS Office of Appeals is ready to hear your appeal, and sends you a letter stating a date and time for the appeals conference.  You have the right to send in any additional or new information in advance of the appeals conference.

April:     You have your appeals hearing, the IRS appeals officer agrees with you, and you reach agreement to a settlement amount.

June:     The IRS appeals officer needs to get approval of the settlement from IRS attorneys. He gets the approval, and in June, Year 2, the IRS appeals sends you official notification that the settlement has been approved and your offer has been accepted.

Congratulations.  18 months later you have an accepted offer in compromise.  But you are still not done yet.

You have to pay the settlement to the IRS.

The IRS will give you terms on making the payment.

The IRS will allow you to either pay within five months of notice of acceptance.  If you cannot do that, the IRS will allow 24 months.  But, in most cases, the 24 month option usually results in the IRS charging you more in the settlement than the quicker five months.

Here is where the payment part of the offer process will leave you:

November, Year 2.   If you chose the five month option, it will November, Year 2 until the offer is complete (five months from the your offer acceptance letter in June).

June, Year 4.  Yes, we are really jumping forward here.  If you chose the 24 month payment option, it will be June, Year 4, until you get your fresh start from the IRS (24 months from the offer acceptance letter in June, Year 2).

One last matter of the fine print on an OIC:  All offers in compromise include a five year probationary period to remain current on the filing and payment of all taxes after offer acceptance.  If you default on future tax obligations, the offer could default, too, and all the taxes will come roaring back.

These timelines vary and are dependent on the IRS workflow at any given time.  I have seen offers take more than one year to get to the initial investigation stage.  Rarely will they get there within six months after submission.

Most every offer should go into Year 2 to be investigated, accepted and paid.

Also, bear in mind that the IRS has 10 years to collect a debt; after that, the IRS is barred by law from doing so.  And an offer in compromise, while it is pending, stops the clock from ticking.

Sometimes, it is better to hold tight than submit an OIC, especially if three years or less are left on the time the IRS to collect from you.

With an offer in compromise, it is important to look before you leap and make sure that jumping in is indeed the best course of action.

You are finally on good terms with the IRS – you agreed to a monthly payment plan, and have been filing and paying your taxes on time, as you are required to do.

With that, the IRS should leave you alone, right?

Not necessarily.

The IRS has the right to review an installment agreement, and to negotiate a new one to determine if your monthly payment could be changed.

And when we say changed, we mean increased.Preview

This will usually occur when your installment agreement payments are not enough to repay the IRS back in full.

Let’s say, for example, that you owe the IRS $100,000, but you are paying them $100/month.

The IRS is permitted by law to enter into installment agreements that will never pay them back. It’s okay that yours will not – the IRS has 10 years to collect from you, and after the 10 years expires, you will not owe them, and the remaining balance will be forgiven.

This is called a Partial Pay Installment Agreement.

But Internal Revenue Code 6159(d) requires the IRS to review Partial Pay Installment Agreements once every two years.

Chances are, if you have an agreement that does not full pay the IRS, the IRS made a notation in their computer system to review your agreement in two years.  That means they will want a new financial statement from you showing your income and living expenses to determine if your payment can be increased.

How do you know if the IRS is putting your agreement up for a two year review?

First, the IRS will usually finalize a payment plan by requesting that you sign Form 433D, Installment Agreement.

At the bottom left-hand corner of the Form 433D, there is a box that the IRS fills in (it states in bold letters FOR IRS USE ONLY).

The boxes to be checked include the following three options for future review of your payment plan:

  • No Further Review.
  • PPIA IMF Two Year Review.
  • PPIA BMF Two Year Review.
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When the IRS levies your wages or accounts, it is usually to get your attention.

There is something the IRS wants that you have not provided – it could be a financial statement, estimated tax payments, or getting in compliance on unfiled tax returns.

And to get the levy released, the IRS is usually going to condition it on, say, getting your unfiled tax returns in first.  The IRS tells you that they operate on a “compliance first, levy release second” basis.

But what if you cannot get the unfiled tax returns prepared quickly enough to get the levy released when you need it, which is now?

The levy is causing an economic hardship to you – preventing you from paying your bills – while you work to get the tax returns prepared.

But the IRS does not care – the are standing pat – all returns filed, no exceptions, no levy release.

There is help out of this bind.

The U.S. Tax Court, in the case of Vinatieri v. Commissioner, 133 T. C. 892 (2009), held that the IRS is required to release levies even if tax returns are not filed, provided it can be proven to the IRS that the levy is causing an economic hardship to you.

In the Vinatieri case, the IRS sent Kathleen Vinatieri a Final Notice of Intent to Levy, putting her on notice that they wanted to levy her assets.  Ms. Vinatieri responded by telling the IRS that any levy would prevent her from paying her bills. She requested a hearing with an IRS appeals officer, known as a Collection Due Process Appeal.

At the hearing, the Ms. Vinatieri provided financial information to the IRS verifying that if her income was levied, she would be in economic distress.  The IRS appeals officer agreed that Ms. Vinatieri could not afford a levy, or to make any payments to the IRS on her debt, and that a levy would create an economic hardship to her.  This qualified Ms. Vinatieri’s account to be placed in currently uncollectible status, with the IRS leaving her alone and not levying.

But IRS appeals officer sustained the levy – even though it was undisputed that it would cause an economic hardship – as Ms. Vinatieri had unfiled tax returns.

Ms. Vinatieri headed to Tax Court, and the court agreed with Ms. Vinatieri, ruling that the IRS must release a levy even if there are unfiled tax returns if the levy is causing an economic hardship and the account qualifies for currently uncollectible status.

The Tax Court’s decision was based on Internal Revenue Code 6343(1), which requires the IRS to release a levy if it will cause an economic hardship. The court found that there was no wording in the Internal Revenue Code conditioning the release on the filing of past due tax returns.  The Tax Court found the wording of the law to be clear – if a levy causes economic hardship, the IRS must release it, and cannot condition the levy release on getting in compliance with unfiled tax returns.

After the Vinatieri case was decided, two things happened at the IRS:

  1. The IRS Taxpayer Advocate announced that they would be assisting taxpayers who were being levied, had unfiled tax returns, and could demonstrate that the levy would cause them economic hardship.
  2. The IRS Office of Chief Counsel issued Notice CC 2011-005 to make sure that appeals officers followed Vinatieri when presented with cases where there was demonstrated economic hardship and unfiled returns.

What this means to you:

First, even though Vinatieri is law, do not expect all IRS agents to know and follow it.  That is not intentional – it is probably more because every IRS Revenue Officer or Automated Collection Service employee does not know about Vinatieri, or if they do know, they lose sight of it in their daily work flow.

In other words, change can be slow, and tax return filing as a condition to levy release – even if the account should otherwise be currently uncollectible – has long been an ingrained part of IRS culture.

That means you need to know the law and your rights under it, and be prepared to respectfully point it out to the IRS when necessary.

Second, it is important to understand that “economic hardship” is defined as qualifying for IRS currently uncollectible status.  This means that to be able to use Vinatieri we need to prove to the IRS that your income is enough to only pay your living expenses.  Bear in mind, though, that the IRS does have living expenses caps – meaning your hardship and living expenses has to match the IRS’s definition and guidelines.

Vinatieri means that Internal Revenue Code 6343(a) (1) gives you relief from a levy while we complete your unfiled returns if your are in economic hardship and qualify for IRS currently uncollectible status.  In that situation, the IRS cannot hold the returns over your head and condition levy release on the returns being filed.  But to finalize the uncollectible determination, the IRS will still need your tax returns – Vinatieri forces them to release the levy in the meantime.  It gives you relief while you prepare what is missing, and evens the playing field.

When all of your efforts at resolution with the IRS have failed, and your frustrations have reached a boiling point, intervention from the IRS Taxpayer Advocate can help.

The IRS Taxpayer Advocate Service is just that – an independent operation inside the IRS charged with solving taxpayer problems and advocating on their behalf to the IRS.

When your IRS situation is dire, when everything else has failed, when the IRS is not responding or listening, or are not following their own guidelines or legal procedures – that is the time to bring in the IRS Taxpayer Advocate.

In other words, the Taxpayer Advocate is your friend at the IRS, an ally on the inside.

If you can prove to the IRS that any of the following situations are impacting you, we can request that the IRS Taxpayer Advocate open a case and intervene to help get you relief:

1.     The problem you are experiencing with the IRS is about to put you in financial distress. This could include the likelihood that the IRS’s failures are about to result in a levy on your paycheck or bank account and you will not be able to pay your rent.  Or maybe you have received an IRS letter stating that you owe them money when you do not.  But no one at the IRS is listening to your protestations.

2.     The IRS has put you under an immediate threat of adverse action.  For example, an IRS Revenue Officer may have made a demand for financial records and not given you enough time to complete the request, and is getting ready to levy your paycheck as a result.  You simply need a little more time, and need the IRS Taxpayer Advocate to help slow the Revenue Officer down so you can comply.

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If you have a tax dispute with the IRS, expect negotiations to be different than what you may be accustomed to.

In most negotiations, both sides have something at stake, something to gain and lose. In other words, an element of risk.

That dynamic can change when you have to step up to the plate and negotiate with the the IRS.

You have a lot at stake. It can be an IRS auditor queuing up a report that your return is wrong and that you owe the IRS money. Or it can be a threat from an IRS Revenue Officer that there will be a seizure of your wages, accounts, or even your house.

The IRS employee is doing his job, but without the same risk of loss that you have.

Simply put, the skin in the game is different.

And the approach to negotiating is different, too.

This is an oversimplification, and it is not the fault of IRS employees. They have a job to do in ensuring compliance with our tax laws, to audit a tax return for errors, or collect an unpaid tax liability.

The point is to gain an understanding of the nature of negotiating with the IRS. You cannot approach negotiating with the IRS the same way you would in the private sector.

For example, in the private sector, if you owed a $5,000 debt to a neighbor, you might be able to say “I have owed you this money for quite sometime. I feel really bad about it. A family member will give me $2,500 to call it a day – does that make sense and work for you? Why don’t we move on.”

If that $5,000 was owed to the IRS, making sense and moving on would have little to do with it.

Making that deal would involve the IRS getting out their guidelines to determine if you qualified for an offer in compromise. Those guidelines are located in the Internal Revenue Manual. The IRS would need to review a financial statement from you, looking at your income, living expenses, your assets and your debts. The IRS would also require documentation to support your financial status: pay stubs, bank statements, written verification of your other debts, and proof of living expenses.

This process can take at least six to nine months.

So much for handshake settlements with the IRS, huh?

If the IRS, after reviewing your information, thinks they can get paid in full over the time remaining on the statute of limitations on collections (which is 10 years), they will say no thank you. They will wait and see.

If that debt was owed to your neighbor (or a friend or relative), they probably would not want to wait 10 years to see if they could get paid in full, and would rather get some money in now and call it a day.

Not so for the IRS – their settlement guidelines do not permit that.

In negotiating with the IRS, common sense is following their playbook, the Internal Revenue Manual. You need to know, understand, and follow their guidelines to have success in negotiating.

And it also important to understand the power of the IRS when negotiating. Threats get nothing, and usually will only make matters worse.

In negotiating with the IRS, remember: When your head is in he mouth of the bear, say nice bear.

And adjust your negotiating style to accommodate IRS rules and regulations.

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