Howard's IRS and the Law Blog

Your business owes the IRS employment taxes, and an IRS Revenue Officer has just called you and requested that you come down to his office for a meeting to discuss the debt.

Chances are, the meeting will include the IRS agent requesting to interview you using IRS Form 4180, Report of Interview with Individual Relative to Trust Fund Recovery Penalty.

You do not know it, but the real focus of the meeting is you, not the business.

That’s right, the IRS can collect an unpaid employment tax liability from not just your business, but you, too.

The IRS calls this a trust fund recovery penalty interview, and it is designed to sniff out who in the business made the decisions not to pay employee withholding taxes to the IRS.

A trust fund recovery penalty interview and investigation permits the IRS to collect the unpaid taxes not only from the business, but from the assets of the individuals involved in the finances of the business.  This is because the employment taxes belonged to the employees, and were to be held in trust by the business for payment to the IRS.

The culprits the IRS is looking for include owners, shareholders, officers, and anyone who signed, or could have signed, bank checks and paid creditors (which often includes employees of the business).

You got it – the IRS takes employment taxes debts seriously.

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It makes sense on the surface:  You are unemployed, owe the IRS money, and are considering an offer in compromise to settle your tax debt.

Before you jump in, it is important to know that being unemployed is not always enough for success in an OIC.

You are correct that the starting point is that you have no income and cannot currently pay the IRS.  Nothing from nothing is nothing, right?

But by law the IRS usually has 10 years to collect a tax debt.  In an offer in compromise, the IRS wants to know how much could you pay over the time they have to collect (10 years). Your current circumstances of unemployment are relevant only if it can be extrapolated into the future.

In other words, in an offer in compromise, the IRS will look at the now, but will also look forward to determine what your future income will be.

This potential unknown – your unemployment – must be quantified for the IRS.  The key is proving if your employment is short-term or long-term, how long you will be unemployed, if you will return to work, and if so, what your income will be.

The rules in valuing your future income when you are unemployed are laid out in the Internal Revenue Manual 5.5.8.20, and are as follows:

1.    You are short-term unemployed and will return to work at your previous level of income, then expect the IRS to use the level of income expected if you were fully employed.

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If you owe the IRS money, chances are they are going to want a collection information statement from you to determine how they can be repaid.

The IRS does not make completing the collection information statement easy on you.  For starters, there are five different financial statements that the IRS collection division uses.

How do you know which one is the right one to use?

  • IRS Form 433F.  If you are working with the IRS Automated Collection Service, you will likely be requested to use IRS Form 433F.
  • IRS Form 433A.  If a local IRS collections Revenue Officer has contacted you, he will require that you completed IRS Form 433A.  The 433A is used if you personally owe taxes to the IRS (you are the taxpayer).
  • IRS Form 433B.  Conversely, an IRS Revenue Officer will request that you complete a Form 433B if you have a business that owes taxes to the IRS (i.e., you are not the taxpayer, but your business is).
  • IRS Form 433A (OIC) and Form 433B (OIC).  If you want to settle your tax debt with an offer in compromise, the IRS has two different financial statements, Form 433A (OIC) or 433B (OIC), that they use.

Let’s go through the differences in the financial statements used in an IRS collection investigation, either by Automated Collection Service or a Revenue Officer – Forms 433F, 433A and 433B.

To begin with, the 433F is a more streamlined, simplified form, requiring fewer and simpler disclosures.

To illustrate, the 433F is two pages.

By comparison, the 433A and 433B are six pages.

The IRS is asking much fewer questions on the 433F.

Do you want the IRS to ask you more questions, or less?

Here are a few questions that are on the 433A and 433B that are not on the 433F:

  • Are you a party to a lawsuit?
  • Have you have ever filed bankruptcy (and details as to the filing)?
  • In the past 10 years, have you lived outside of the U.S. for more than six months?  (If you have, the time away extends the IRS collection statute of limitations.)
  • Are you the beneficiary of a trust, estate, or life insurance policy?
  • Are you a trustee, fiduciary or contributor of a trust?
  • Do you have a safe deposit box, and if so, where is it and what are the contents?
  • In the past 10 years, have you transferred any assets out of your name for less than their full value?
  • Any increase or decrease in income anticipated (asked on 433B only)?

The Form 433A also asks for your date of birth, driver’s license number, and your employer’s phone number.

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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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