Howard's IRS and the Law Blog

You negotiated a payment plan with the IRS, and they have been leaving you alone.  As long as you make that payment, IRS letters and calls are on hold, and things are OK.

But what if you have a sudden, unexpected expense.  Or an unexpected reduction in income? What if you simply get to the point where you can’t make the payment?

You have options.

1.     Call the IRS and ask for a breather.  Believe it or not, the IRS is usually very accommodating if your situation is short-term.  A call with a request to miss a month’s payment should get an IRS “yes.”  Usually, for a one month breather, the IRS will barely require a reason.  Make sure you make this call in advance of when your payment is due.  Calling after the due date could be too late, putting your account in default.

Simple rule of thumb:  The more time you request, the more the IRS will require.  A change lasting more than a month may require more from you, such as an IRS collection information statement.  (For example, if you had an unexpected car repair that drains you cash flow for two months, the IRS may want a copy of the repair bill.)

2.     Update the IRS with information that you need the payment permanently reduced.  This will likely require disclosure of your new financial situation.  The IRS will need a new collection information statement – either Form 433A or 433F – showing your reduction in income or increase in living expenses.  Be ready to provide the IRS with proof of the changes – paystubs with lower income, unemployment compensation, or on the expense side, items like higher medical expenses, car payment, or utility costs.

With the new financial statement, the IRS can reduce your payment, and even place your account in uncollectible status if you can no longer make a payment.  (Uncollectible status is when the IRS makes a determination that forcing a payment plan would put you in economic hardship.  The law prevents the IRS from entering into payment plans that create financial hardship.)

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How frequently can the IRS ask you for a collection information financial statement?

To resolve most IRS collection cases, the IRS requires a disclosure of your finances.  If you think about it, that’s fair.  You owe the IRS money, and they want to know how – and if – they can get paid.  The IRS uses what is known as a collection information statement to find out what you make, how much you spend, what you own and who you owe.

The collection information statement is important – it actually leads to resolution with the IRS. Whether you are seeking an offer in compromise, a monthly payment agreement, or financial hardship, a properly completed financial statement is almost always necessary to IRS resolution.  (The collection information statements are also known as IRS Form 433A, Form 433B and Form 433F.)

But what if you recently provided the IRS with collection information statement, and then they ask again for a new one?

Completing an IRS financial statement takes time. It is not something you want to do twice.

Here are three examples where the IRS could make repeat requests for financial statements:

1.     You submitted an offer in compromise, and six months have passed since it was submitted, and your offer is just starting to be investigated (not unusual in the IRS world).  The financial statement you provided with the offer is now six months old, and the offer investigator sends you a letter requesting updated information – new paystubs, new bank statements, a new profit and loss statement from your business.

You worked hard to provide that information six months ago.  Should you have to do it again?

2.     Or you are working with an IRS Revenue Officer, and you have not heard back from the RO in months.  Maybe the Revenue Officer has higher priority cases, maybe he has been on leave, or maybe a new Revenue Officer is assigned to your case – whatever the reason, your case has been sitting. When the Revenue Officer gets back to working the case, he wants the collection information statement updated.  But you gave it to him five months ago. That’s double work for you, and for the IRS.

3.    Maybe you had a payment plan with the IRS, and you defaulted on the agreement.  IRS wants a new collection information statement to give you a new payment plan – but you gave them one within the last 12 months when the installment agreement was set-up.

But IRS procedures make the information on a collection information statements valid for 12 months.  If you have provided the IRS a financial statement within the past 12 months, you should not have to do it again.

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You want to submit an offer in compromise to the IRS, but you need an answer and relief now, fast.  Your circumstances are immediate, but it takes the IRS a minimum of 6-9 months to process, investigate and get managerial approval of an offer in compromise.

That may not be acceptable.  Maybe you are selling real estate, and have a closing pending hat will fund the settlement.  Or have a new job offer that requires settlement of your IRS debt. Maybe your business has a big transaction pending that requires full resolution of IRS debts.

But the IRS can convinced to speed up its investigation of an offer in compromise. Buried in the IRS internal guidelines is Internal Revenue Manual 5.8.4.27, which provides for the expedited handling of an offer in compromise.

When submitting the offer in compromise, it is important to make sure the IRS knows that you have an emergency requiring a quick compromise investigation.  To do this, on the top your Form 656, Offer in Compromise, write in bold, all cap letters: EMERGENCY PROCESSING REQUESTED.

I also suggest demonstrating to the IRS the reasons why the normal compromise process times would be detrimental to both you and the government.  In other words, it needs be made clear to the IRS that moving slow will hurt their chances of getting paid from the compromise, and moving fast will help bring in money.

To convince the IRS to shorten the usual compromise investigation time, a statement should accompany the offer in compromise detailing the basis for the emergency processing request. Make it easy on the IRS, and give them a reason to say yes to your request – be specific with the facts, and attach any documentation that backs up the statement.  (I have drafted a pretty good number of supporting statements of fact for the IRS – if you need help with this, let me know.)  Citation should also be made to the Internal Revenue Manual provision that permits faster investigation of a compromise.

Here are some examples as to what the IRS considers a basis for a quick offer in compromise investigation:

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I would like to share my response to a reader who was experiencing financial hardship because the IRS had levied his state income tax refund, and he needed the money to get his house out of foreclosure.

As the reader correctly pointed out, the problem with the IRS levy was that it was made while he was in an installment agreement.

One benefit of being in an payment agreement with the IRS is that the agreement stops the IRS from levying your property.

The protection against levy while in an installment agreement is required by law:  Internal Revenue Code Section 6331(k) states that the IRS cannot levy while an installment agreement is in place.

Internal IRS guidelines support this law.  Internal Revenue Manual 5.19.9.1.1(2) specifically states that bankruptcy, installment agreements and offers in compromise accounts are excluded from the Automatic Levy Program.

So why was the state income tax refund being levied?

Let’s look at a little background into how the IRS administers its state tax levy program:  State tax refunds are seized by the IRS under the State Income Tax Levy Program (SITLP).  The SITLP is part of the IRS’s Automated Levy Program (ALP).   (The IRS loves acronyms.)

Here is an example of the state income tax levy program works:  Ohio will sign an agreement with the IRS to permit an Ohio tax refund to be applied to a federal tax liability.  Every week or two, the IRS will send Ohio an electronic file of the potential tax debts and notice of the levy. If there is a match, the result is an automated “taking” of the Ohio state refund by the IRS to pay the IRS debt.  Ohio would send a notice to the taxpayer notifying him that his state refund was sent to the IRS.

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Straight from IRS Revenue Officers, it’s official:  The IRS has closed its headquarters for its suburban Cincinnati Revenue Officers, effective today, May 15, 2014.

The office was also used as a walk-in taxpayer services office, providing taxpayers with necessary forms, simple tax return preparation, or help with questions.   The Revenue Officers are still on the job, and have been relocated to the IRS’s downtown Cincinnati office at 550 Main Street, Cincinnati, Ohio  45202.  The other remaining area IRS office is in downtown Dayton at 200 W. Second Street, Dayton, Ohio 45402.

I understand from the Revenue Officers the consolidation was done as a cost-cutting move, using available office space in downtown Cincinnati.

I used the West Chester office not only to meet with Revenue Officers when necessary, but to hand-file multiple years’ tax returns, and, in the past, to expedite levy releases.  With the IRS offices now more spread out – the West Chester office was in the middle of the downtown Cincinnati and Dayton offices – it is now a farther drive not only for taxpayers, but for IRS employees.  There will always be change in working with the IRS; I will always strive to keep you updated.

A common question from a reader about the IRS settling for tax and forgiving the interest and penalties:

I owe the IRS $35,000 – I would like to pay what I owe, but the interest and penalties just seem awfully high.  I want to offer to pay the IRS what I originally owed – will they accept that and forgive the interest and penalties?

In negotiating with the IRS, it is important to remember that the government is not a private enterprise, and common sense judgments often yield to tax laws and internal IRS guidelines about how a tax debt can be settled.   That means what might seem like a good deal to you is not a good deal to the IRS.  Negotiating with the IRS requires understanding their guidelines – it may seem unfair, but that is the reality.

And the IRS guidelines have no provision for a deal where they can simply accept the tax and forgive interest and penalties just because it seems like a good deal.

Let’s break that down.

First, the IRS authority to settle a debt is done through an offer in compromise.  In an offer in compromise, the IRS investigates how much can be collected from you over the time they have to do it (which is 10 years, known as the statute of limitations on collection).   In an offer, the IRS values your assets, your income, and your living expenses – arriving at how much you are worth, and how much you could pay back to them monthly.   If you owe $35,000 but you are worth $10,000, then $10,000 is the value of the compromise.  If you are worth $50,000, then there is no compromise as the IRS believes it can collect the full amount.

In an offer in compromise, you could settle for less than the amount of tax.  Or it could be more.  There is generally no factoring of tax vs. interest vs. penalty in the compromise settlement equation.  The settlement is based on collection potential.

Although it seems reasonable, the IRS does not approach settlement by saying “Let’s just take the tax and be done with it – that makes sense over waiting years to get paid.”  An offer in compromise is not designed for the IRS to consider the question of whether they should just accept the tax and be done with it because it makes sense.

Bottom line:  There must be a factual basis for interest and penalty to be forgiven by the IRS. It is not done as a collection decision.

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