Howard's IRS and the Law Blog

It is not unusual for my clients to find themselves indebted to two masters – the IRS and credit card companies.  Both want a piece of the pie, but there is not enough to go around.  So who do you pay first? How do you make both go away?

The IRS comes first.  Here’s why:

1.     Unpaid credit cards can be annoying – harassing debt collectors calling for money.  But it is important to remember that credit card companies and debt collectors cannot take your wages, bank accounts or property.  That can only be done by the filing of a lawsuit, which the debt collector cannot do (they are not lawyers).  Once we are retained, the debt collectors are directed to confirm that all calls are to be directed through our office, which they are obligated to follow by law.

2.     The only restriction that the IRS has in taking your wages or bank accounts is to issue a notice of intent to levy to you first. And have you ever seen a debt collector appear at your home or business demanding payment like the IRS does?

3.    In legal terms, IRS taxes are considered priority debts, while credit cards are categorized as lower unsecured general debts.  That means credit cards can be readily eliminated in bankruptcy.  Taxes can be eliminated in bankruptcy too, but the rules for taxes are much more stringent because of their “priority” status.

No one sets out to file bankruptcy, but when the IRS and credit card companies compete for limited cash, bankruptcy is often the complete solution.  A Chapter 7 bankruptcy eliminates the credit cards and older taxes if your budget does not permit monthly payments.  If you can pay a little bit back, a Chapter 13 can be the answer. Chapter 13 is a debt reorganization, where bankruptcy law determines who gets your cash flow.  It divides the pie by law, so you do not have to.  Chapter 13 can also stop the accrual of credit card interest and IRS penalties.  Anything you cannot afford to repay is eliminated by bankruptcy law.

The IRS appears to be human, and it makes legal and administrative errors when seizing property, says the Treasury Inspector General for Tax Administration (TIGTA).

TIGTA just completed a review of 50 IRS property seizures to determine if they complied with the requirements of Internal Revenue Code sections 6330 to 6344 and Internal Revenue Manual guidelines.

Here is what was found:

1.   IRC 6330(a) requires the IRS to issue a Notice of Intent to Levy and give taxpayers the right to a hearing and court review before issuance of an actual levy. The report found that the IRS issued an actual levy (Form 633B) to seize property for tax periods that were not on the Notice of Intent to Levy.

2.   IRC 6342(a) requires the proceeds of sale to be applied in the following order:  (1) expenses of the sale (2) to any unpaid tax due from the property (like an excise tax on a truck) and (3) to the liablity for which the property was sold. TIGTA found three instances where the proceeds were applied to a tax period not on the actual levy (Form 633B) and three cases where the proceeds were not posted to expenses.

3.   Other instances included failures to properly advertise the sale pursuant to IRC 6335(b) and not always providing Notices of Seizure with accurate liability balances or a correct accounting of the property seized as required by IRC 6335(a).

It should be noted that TIGTA did not identify any instances in which the taxpayers were adversely affected, but the report did state that not following the legal and internal guidelines could result in abuses of taxpayers’ rights. An example would be a property seizure without the issuance of a required Notice of Intent to Levy (like #1, above).

The IRS currently makes about 600 seizures a year – a small number compared to the 10,000 the IRS would annually make in the 1990s.  IRS seizures are usually the result of a lack of cooperation or failure to draw out substantial equity in property.  If you are this deep into it, it is important to understand your rights and how to protect them.l

I have seen a stream of new calls from readers who went through an IRS audit and are receiving IRS collection notices for amounts they probably do not owe.

Although they disagreed with the audit, they did not understand the need to take the dispute to IRS appeals or Tax Court.  As a result, the audit became final, and IRS collections followed.  In many cases, there was a lack of understanding on how to deal with an IRS auditor and present documentation.

There is a solution to these frustrations:

It is called IRS audit reconsideration.  If you went through an audit that has become final, but you think the IRS did not adequately consider your arguments or you have additional information to submit, a request can be made for the IRS to reopen the audit so you pay the correct amount of taxes.

Authority for IRS audit reconsideration can be found in Internal Revenue Code 6404(a), which allows the IRS to abate a liability if it is erroneous, and in Internal Revenue Manual 4.13, “Audit Reconsideration.”  The IRS does not take any collection action while they are reconsidering the audit.

It is best to have all documentation compilied ahead of time and submitted with the audit reconsideration request.  For those situations where you are entitled to a deduction but your records may be lacking, the use of affidavits and documentation reconstruction is a strategy accepted by the IRS as a means to telling your story.

At the conclusion of the audit reconsideration, the IRS will either abate the liability or issue Letter 2726 (full disallowance) or Letter 2737 (partial disallowance).  If you still disagree, you will then have 30 days to file a request for a hearing with an IRS Appeals Officer for additional audit reconsideration.  See Internal Revenue Manual and

Although reopening the audit is discretionary with the IRS, they do have a public interest in collecting the correct amount of tax.  Audit reconsideration can be the avenue to not only stop IRS collections, but pay what is really owed.

It is always important to understand what the IRS is asking, and why.

Resolution of most collection cases involves providing answers to IRS questions about you.  The questions are asked on an IRS financial statement, known as Form 433A.

One question the IRS asks:  Have you lived out of the country for more than six months in the last 10 years?

Why does the IRS want to know that as part of its efforts to collect taxes?

Because it extends the statute of limitations on collection under Internal Revenue Code 6503(c).  The IRS has 10 years to collect – any continuous absence of six months or more suspends the collection timeframe. Internal Revenue Manual summarizes the interest in this question: “The application of this paragraph can result in the CSED (collection statute expiration date) being suspended for a very long time.”

This is information that the IRS ordinarily would not know, so it is asked as part of the financial investigation into case resolution.      

Simple questions, big ramifications.  A “yes” answer may be called for, but it always helps to know how the other side thinks.

The IRS is hiring revenue agents (auditors), revenue officers (collectors), and special agents (criminal investigators).  This has been made public by the IRS, but I attended a joint conference with the IRS last week in which every IRS panelist – from IRS auditor managers to taxpayer advocates to senior IRS attorneys – confirmed the trend in their respective divisions.

Expect enhanced IRS enforcement in the coming years from the increased staffing.  Enforcement hires will be in training first, then be dispatched to the field and mentored by senior personnel.  Check out what is available at the IRS website.

Having worked for the IRS as a trial attorney in the Office of Chief Counsel, it is a good place to be – I received great experience there and made many friendships that I still maintain.  You may just find that the IRS agents you fear are really not all that bad behind the scenes.  Sometimes, they have a job to do.

A common problem with IRS audits is not seeing eye to eye with the auditor. The auditor sees the case narrowly, while you see the big picture.  You know you incurred that expense or did not have unreported income, but the auditor’s criteria is difficult to satisfy.

Here are some ways to get problem IRS audits resolved:

1.   Try to work it out with the manager.  Every auditor has a manager. Sometimes, a call to the manager can resolve thorny issues.

2.   Take the case to IRS appeals.  IRS Appeals Officers settle cases on what is known as the “hazards of litigation” – meaning if you went to Tax Court, what would an impartial judge say about your case?  Auditors rarely consider that, which is often the cause of the bottleneck.

3.   Go directly to Tax Court.  If you are at a standstill, request that the auditor close the case out and issue a Notice of Deficiency so you can take your case directly to Tax Court.

An advantage to going to Tax Court first and then conducting settlement negotiations is that the trial is real.  The “reality” of a pending trial can help negotiations, especially if the IRS evidence is weak. See my prior post “Tax Court – providing a level playing field in IRS audits.”

4.  If you already are getting billing notices from the IRS, request audit reconsideration.  If you did not take advantage of going to IRS Appeals or Tax Court and you are getting billing notices for an amount you do not owe, you can still request that the IRS reconsider the audit after the fact.  You do not need to overpay your liability if you have documentation that supports your position and it was not adequately considered during the audit.

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