Howard's IRS and the Law Blog

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.

It is possible to get an IRS installment agreement to repay your taxes without ever disclosing where you work, what car you drive, what your house is worth, or even what you can actually pay.

No IRS Form 433A, Form 433B or 433F.  No application of the IRS Collection Financial Standards that can put a cap on your living expenses.

The IRS calls these payment plans direct debit installment agreements.  Sometimes, they are also referred to as streamlined installment agreements.

No managerial approval is required with direct debit installment agreements, and the IRS probably will not even file a tax lien against you and damage your credit if you qualify.

But qualifying for a simple IRS plan of resolution with the direct debit installment agreement is not always so simple.

The IRS bases qualifications for the direct debit installment agreement on a technical term called your “assessed balance.”

An assessed balance is what you originally owed the IRS when you filed your return.

Your assessed balanced has to be under $50,000 to qualify for the direct debit installment agreement.  That begs the question:  What is my assessed balance?

Here’s how the IRS calculates your assessed balance:

When you filed your return, the IRS made a bookkeeping entry on its books for the amount of tax you owed. This entry is called an assessment.

At the same time, the IRS probably charged you penalties.  These penalties could be for not paying your tax on time when you filed the return, for filing the return late, or not making estimated tax deposits.

When you file your return, the IRS will add a bookkeeping entry calculating the amount of penalties you owe at that time.  This is also an assessment.

The IRS will also make a calculation of any interest you owe on the unpaid balance when your return is filed, and place that amount on its books as an assessment.

Most penalties are charged over time.  For example, the late fling penalty is calculated at 5% for every month the return is filed late, maxing out at 25%.  The late payment penalty is 1/2 of 1% per month, maxing out at 25%. Interest also continues to accrue over time after the initial assessment.

Both the penalties and interest will continue to grow in an amount that is more than what was assessed when you filed your return.  After assessment, the IRS will continue to charge you for the penalties and interest.  The continued compounding of penalties and interest after the initial assessments are made are called accruals.

With our definitions (assessment and accruals) out of the way, let’s pull this all together.

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You have tried and failed at settling your tax debt with the IRS – your offer in compromise was rejected – and are now considering bankruptcy for relief from the taxman.

But before you jump in with the bankruptcy filing, it is important to understand how your offer in compromise could have complicated success with your bankruptcy discharge.

The bankruptcy code has several rules that must be followed to discharge a tax debt.  Most of the timing rules are based on the passage of time, including the time an offer in compromise was pending with the IRS.

An offer in compromise can upset the timing rules and delay your bankruptcy filing.

There are three primary timing rules when it comes to filing bankruptcy after an offer in compromise was submitted.

The first timing rule requires that your bankruptcy must be filed more than three years after your tax return was due to be filed.  This is known as the Three Year Rule.

The second bankruptcy timing rules involves the date you actually filed your tax return.  If you filed your tax return late, the bankruptcy must also be filed more than two years after the return was filed.  We call this the Two Rule.

The third rule is that bankruptcy must also be filed more than 240 days after the IRS placed your tax debt on its books (called an “assessment”).  This is the 240 Day Rule, and is where your offer in compromise comes into play and could trip up your bankruptcy filing.

If you filed your offer in compromise within those first 240 days after the IRS placed your tax debt on its books (“assessment”), the clock stops, and the 240 days stops running. That’s not a good thing, because the passage of time is essential to discharging taxes in bankruptcy.

That’s right, the bankruptcy code has specific language that limits the dischargeability of taxes if an offer in compromise was filed within 240 days of assessment.

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