Howard's IRS and the Law Blog

Negotiating with the IRS can be frustrating for the uninitiated.  Intimidating.  Overwhelming. Stressful.  Not the best way to feel when entering into a negotiation, much less when the party on the other side has the power of the IRS.

When I was an IRS trial attorney, I negotiated on behalf of the IRS.   Since moving into private practice over 20 years ago, I have spent most waking moments of my professional career negotiating with them, rather than for them.

And one thing is very clear:  Negotiating with the IRS has its own unique, unstated rules of engagement.

Here are a few tips I recommend that you keep in mind for the best results for when you face an IRS audit, or an IRS Revenue Officer, or a call on an IRS 1-800 line:

1.     Don’t rely on logic to carry the day.  IRS decisions are not always made from common sense, or logic.  Your way of thinking about a solution to a problem – options that would be successful in the private sector – do not apply to solving IRS problems.

The IRS process is primarily governed by their own internal rules and regulations.  This guidebook is called the Internal Revenue Manual (IRM).   The IRM contains chapter after chapter, page after page, of IRS procedures on handling most every conceivable situation – from audits to collections, and from levies and seizures to tax court litigation.

That’s the good news – there are guidelines for IRS negotiations.  But is very important to know the rules, and recognize how to apply the Internal Revenue Manual to a given situation.

Success with the IRS starts with knowing what they know – getting into their playbook – the Internal Revenue Manual – and applying it to negotiations.

2.      Loosening the grip is better than tightening the noose.   Respect the power of the IRS.  Do not understate it.  Their hammer is most likely bigger than yours.

IRS problems are best solved from building a position of credibility.  Credibility is gained from a show of respect to the IRS employee you are working with, whether you like it or not.  There are certainly times to take off the gloves, but that should be a last approach.

And this is where the Internal Revenue Manual comes into play.  Knowing the IRS rules, and when they are not being applied, or not being applied properly, is a powerful tool to loosen the grip.

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Proceeding blindly is something that you rarely want to do with the IRS.

If you owe back taxes, or have unfiled returns, or are in any way concerned about an IRS problem, it’s best to first find out what the IRS knows about you.

What is the IRS doing on your account?  What can they can do to you?  What is the current status?

This information about you can be obtained from an IRS account transcript.

An IRS account transcript can tell us:

1.    If the IRS can levy your bank accounts and wages, or seize your property.

The IRS cannot levy your income or seize your property unless you have first been given written notice.  This notice is called a Final Notice of Intent to Levy.  The IRS will send it to you by certified mail, or a local Revenue Officer could hand-deliver it to you at your home or place of business.

IRS account transcripts will tell us if the Final Notice of Intent to Levy has been issued – there will be a line item on the transcript confirming that is was issued, and stating when.

If the IRS has sent the Final Notice, you have important rights to dispute the intent to levy and put a stop to IRS collection.  By law, you have 30 days to file an appeal.  And by IRS administrative rule, that 30 days is extended to one year in most cases.

If the account transcripts do not have a Final Notice indicator, then you will have the peace of mind knowing that the IRS cannot take your wages or your property.

2.     How long the IRS has left to collect your debt.

The IRS has ten years, starting from you filed your tax return, to collect a tax liability.  After that, in most every situation, they are barred by law from taking any action to enforce the debt.  After the 10 years expires, the IRS must forgive what you owe.  This is known as the statute of limitations on collection.

The IRS account transcript has information to calculate when you will be done with the IRS.  This includes when the statute of limitations clock started, and if anything has happened that gave the IRS more than 10 years to collect.

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You’ve made it – reached account resolution with the IRS by entering into an installment agreement to repay your taxes.  You may have had to negotiate with a local IRS Revenue Officer, or over the phone with the IRS automated collection service.  Maybe, you had minimal negotiations, made possible by qualifying for a streamlined installment agreement, which the IRS will automatically grant if you owe under $50,000 and can repay it in 72 months.

Make your payment every month, and the IRS will leave you alone.

But there are conditions to the installment agreement – it is not enough just to make your monthly payment.  You need to take one more step to keep the IRS off your back.  You have to stay in compliance on all future tax liabilities – filing on time, and paying on time.  Future compliance is a condition of your installment agreement.  To be perfectly clear, the IRS takes future compliance extremely seriously.

And this is real important:   Any future bill for any balance due can (and probably will) default your agreement.  And “balance due” does not just mean taxes; it also means penalties.

Here’s an example:  Let’s say you send in a check to the IRS to pay your taxes on October 15 when the return is due (with an extension).  The IRS does not consider this paying on time – your taxes were due on April 15; October 15 is an extension to file, not to pay.  What happens next?  The IRS cashes your check, determines that you paid your taxes but paid late, and sends you a bill for a late payment penalty.

This simple penalty bill for a late-payment penalty can be considered by the IRS as a new balance due and a basis for terminating your installment agreement (even though you paid your taxes).  And it does not matter how much the late-payment penalty is $100.00 or $10,000, either way, it is a new balance due.

The IRS computers should recognize the new penalty balance, and send you Notice 523, Notice of Intent to Terminate Your Installment Agreement.

To prevent new balances, here are two steps to take to ensure that your IRS installment agreement stays in good standing:

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You owe the IRS and would like to put past mistakes behind you and get a fresh start.  You may have heard a lot about the IRS offer in compromise program – popularized by those deep-voiced TV and radio advertisements that makes it sound like you just call the IRS, offer a number, they say yes, and your done.  Simple, right?

The IRS offer in compromise program is legitimate, and it works, but it’s not that simple. The IRS has a formula that they use in analyzing an offer in compromise.  The IRS looks at two pools of money in an offer in compromise: (1) How much does the IRS think you can pay them monthly if they put you on an installment agreement? and (2) What is the value of the equity in your assets?

In this post, we will focus on how the IRS values the equity in your assets.

Let’s start by defining the asset-equity formula the IRS uses in an offer in compromise, then apply it to four examples:  your house, your car, your household goods, and your bank accounts.

The IRS Formula in valuing assets in an Offer in Compromise.  The IRS’s goal is to arrive at what the net equity is in your assets.

Net equity is defined by the IRS to be the fair market value of the asset, (1) reduced by 20% to arrive at what is known as quick sale value, (2) reduced by any mortgages or bank loans against the asset and (3) reduced by any property exclusions available in the Internal Revenue Manual or Internal Revenue Code.  Let’s break that down, step by step.

Reduction to quick sale value.  The IRS uses the 20% reduction to quick sale value to arrive at the price you would receive if you sold an asset under duress and without time to get the best price.

Reduction for mortgages and bank loans.  If there are liens, mortgages, or encumbrances on the asset – say, a mortgage on your house or a loan on your your car – the value of the mortgage or loan is subtracted from the quick sale value.  They do not use the fair market value, but rather the lower quick sale value.

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The IRS has two main sources of carrying out its work in collecting taxes:  local Revenue Officers and its Automated Collection Service.

When you get that call or letter from IRS collections, it’s important to know who you are dealing with – and what to expect.

The IRS Automated Collection Service – commonly known as “ACS” – is a series of IRS call centers staffed by IRS collection employees. You will never see or meet an ACS employee face-to-face; all of their work is conducted by telephone.  And the vast majority of telephone work conducted by ACS is responding to inbound calls, not making outbound calls.  The inbound calls are the result of collection notices the IRS sends out.

These ACS collection notices are computer-generated, bearing names like:

Reminder – You Have a Balance Due (CP 501)

Important – Immediate Action is Required (CP 503)

Urgent – We Intend To Levy on Certain Assets – Please Respond Now (CP 504)

Final Notice Of Intent to Levy and Notice of Your Right to a Hearing (CP 90)

Of these notices, the Reminder (CP 501), Important (CP 503) and Urgent (CP 504) are going to be sent by ACS, by computer, with no real human element involved.  The IRS is looking at you, but no single person is – everything is coming from a computer.  The notice exception is the Final Notice of Intent to Levy (CP 90) – which can be issued by either ACS or a local Revenue Officer.

You get one of these collection notices, and you call the IRS Automated Collection Service 1-800 number in response.  That is what ACS is set-up for – sending out automated collection notices, and then handling the phone calls that result.

Remember, when you call ACS, there is not one person assigned to your case.  The person you speak with today – and let’s say that person gives a one week deadline to call back with financial information – will be different than the person you speak with the next week if you call back with the information requested.  This can result in inconsistencies in the way you are treated and your case is handled.

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If you owe the IRS money and are dealing with an IRS Revenue Officer, or even IRS Automated Collection Service, expect deadlines.  Deadlines to provide financial information, deadlines to provide unfiled returns, and deadlines for a plan for account resolution.

These deadlines are serious – failure to timely comply is usually reason enough for the IRS to send a levy to your employer, your bank, or your customers.

But what if you run into trouble meeting an IRS collections deadline?

Fear not – here are seven solutions to an impending deadline with IRS collections that you may not be able to meet:

1.     Good communication is essential.  An IRS Revenue Officer wants to hear from you.  Do not let a deadline pass without a call in advance to ask for more time.  Briefly explain the effort you have made to comply, and that you would like a little more time.  Most Revenue Officers will be reasonable and readily provide more time if you they believe you are making effort.  Remember, the Revenue Officer is doing a job – show him that you respect it.

2.     If the Revenue Officer gives you a deadline that you know you will not be able to meet, let him know then that you anticipate not being able to meet it on the front end, but you will call him on set dates to give your progress.  When you call, let him know what steps you have taken, and your progress, and set a follow-up date.  Don’t expect months between calls; this may be an every 7-10 day process.  Continue staying in contact and providing information and updates.

3.     Provide part of the information requested, what you do have available.  If you have six years of unfiled returns, and you cannot possibly get them all done within the timeframe provided, start with one year, and provide at least that as evidence of good faith.  If financial information is requested, provide what you can – if listing assets is simple, but you are self-employed and do not yet have an accurate picture of your income (profit and loss), give the Revenue Officer your assets.  Knowing what your assets are – where you bank, the value of your house, etc. – should evidence your good faith and, in a sense, give the Revenue Officer collateral for more time for you to prepare an accurate profit and loss statement.

4.     If the Revenue Officer is being unreasonable and won’t give you more time, ask to speak with his Group Manager.  Sometimes the manager will back up her employee; sometimes she will be able to work out a solution.   Either way, call the manager.  (Your plea for time to a Group Manager is better made when you have already been in good communication and have already taken Steps 1-3, above.)

5.    Call the IRS Taxpayer Advocate and request that they open a case file.  You will need to show to the IRS Taxpayer Advocate that the Revenue Officer time limitations will result in some degree of hardship to you.  It will help your case if you can show the Taxpayer Advocate that the need for time is based on a systemic problem in the IRS – for example, the  IRS has the information you need to prepare a tax return and you have not received it yet. If the Taxpayer Advocate accepts your case, they will contact the IRS Revenue Officer and lobby on your behalf.  Understand, however, that the IRS Taxpayer Advocate does not have an unfettered ability to force the IRS to do something – they, too, must rely on the power of persuasion.

6.     Know your rights.  A Group Manager’s decision to stand by her Revenue Officer and not provide you more time can be appealed and reviewed by the IRS Office of Appeals.  While the appeal is pending, the IRS cannot take any collection action against your bank accounts, wages, etc.  Your case will be sent to an independent IRS appeals officer, where you will have another opportunity to make your case for time.  (And while the appeal is pending, you have a little more time to pull together the information requested.)

7.     Know what the IRS can (or cannot) do if the deadline is not met.  Understand what noncompliance means in your situation.  Sometimes, not meeting an IRS deadline will not result in a levy on your property.  This is because the IRS is required by law to give you notice before they levy.  This notice is called a Final Notice of Intent to Levy.  If the IRS has not sent this to you, or only sent it to you within the last 30 days, the Revenue Officer cannot enforce the deadline by levy.ing against you.  (And make sure you file an appeal of the Final Notice – it puts a longer-term hold on IRS levy action – as much as 6-9 months – while you gather your records.)  If you are unsure if a Final Notice of Intent to Levy has been sent, the IRS can be contacted and account transcripts obtained to verify.

IRS negotiations are fraught with deadlines – it is an essential part of how the IRS manages their case inventory.  Handling and complying with IRS deadlines – reasonable ones and those that seem unfair – is important to not only good results, but protection of your property from IRS levys.

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