Howard's IRS and the Law Blog

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 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.

If an IRS tax lien is hurting your credit, or stopping you from purchasing a house or car, the IRS offers a path to freedom.

The IRS will withdraw the lien from public record in the following circumstances:

1.     The amount you owe is under $25,000.   But this is flexible – see #2, below.

2.     Don’t despair if you owe over $25,000 – the IRS calculates the $25,000 threshold not on your current balance, but what you originally owed when your tax return was filed.   Because of interest and penalty accruals since the filing of the return, the amount you owe could be more than what you owed when the return was filed.  In some cases, it can be twice as much (yes, interest and penalties double what is owed every five years).

But the IRS bases the qualifications for lien withdrawal on what you owed then, not what you owe now.  (In IRS technical terms, this is called the SUMRY balance.)  The $25,000 is what was originally assessed when your return was filed.  It does not include accruals since then.  This eases qualifications for the lien withdrawal.

3.     You are financially able to enter into an installment agreement with the IRS to repay what you owe within 60 months or within the remaining time the IRS has to collect, whichever comes first.

4.     Your installment agreement payments are made by automatic debit out of your bank account.  This is called a Direct Debit Installment Agreement.

5.     No financial disclosures should be required of you for lien withdrawal with a Direct Debit Installment Agreement – meaning you should not have to tell the IRS where you work, bank or what property you own for the lien to be withdrawn.

6.     After you have made three payments in a Direct Debit Installment Agreement, you can request that the IRS withdraw the Federal tax lien that they filed against you.

If necessary, lump sum payments can be made to reduce the original balance owed to under $25,000 to qualify for lien withdrawal.  Also, if you are already in an installment agreement, you can convert it to a Direct Debit to qualify for lien withdrawal.

Installment agreements can get tax liens withdrawn, improve your credit score and help you purchase a house or car. It is just a matter of knowing where to turn and how to negotiate the withdrawal with the IRS.

When working with an IRS Revenue Officer, there are two warning signs that levy action is imminent.

The first sign is the IRS Final Notice of Intent to Levy.  This notice is required by law (Internal Revenue Code 6331) and provides a 30 day right to stop levy action by filing an administrative appeal.  The appeal puts resolution in the hands of an IRS settlement officer (as opposed to an IRS enforcement officer).  This is known as a collection due process appeal because levy action cannot occur until you have exhausted your rights to review.  And if you cannot reach resolution with a settlement officer, there are additional rights of appeal to U. S. Tax Court.  While this process is pending, there is no levy action.

If you missed filing the appeal, there are virtually no restrictions on the IRS’s ability to levy your wages, bank accounts, etc.  Which leads to the second sign that levy action could occur: IRS Letter 3174, New Warning of Enforcement.

The IRS does not have to issue Letter 3174 before levying  – but by their own administrative rule (Internal Revenue Manual, the IRS does send a second warning in certain circumstances. The purpose of Letter 3174 is to provide a refresher to taxpayers if a long time has passed since the Final Notice of Intent to Levy was issued.  As an alternative to sending the letter, a Revenue Officer can also give the notice intended by Letter 3174 verbally.  This is an IRS administrative courtesy. The point here is to recognize the signs of when levy may be imminent.

It is important to recognize the circumstances that will lead to the IRS sending Letter 3174, New Warning of Enforcement.  Of course, there has to first be the Final Notice of Intent to Levy.  And you should not receive Letter 3174 from the IRS Automated Collection Service (ACS) – just IRS Revenue Officers.  Automated Collection Service letters are all computer generated – no human function involved.   Letter 3174, New Warning of Enforcement is generated by a Revenue Officer.  So, expect to receive Letter 3174 only if you are working with a local IRS Revenue Officer, who will manually generate the warning letter.  In most every other situation, it is unlikely you will get a refresher notice after a Final Notice of Intent to Levy has been issued.

There is also a time frame that Revenue Officers that follow in issuing the refresher levy warning notice. Revenue Officers are instructed to issue Letter 3174 if more than 180 days have passed since the Final Notice of Intent to Levy was issued, and no enforcement action or warning of enforcement has occurred in that time frame.

If you receive Letter 3174, it is important to call your Revenue Officer within 15 days of the date on the letter. That is the window the IRS provides before starting enforcement again. In most cases, all you need to do is make contact with the Revenue Officer, find out what it is she needs from you (i.e., a financial statement), and set a date to provide it. You should not need to resolve the case in 15 days, just make efforts to communicate with the Revenue Officer. Not responding to the notice will likely result in levy action against your wages and bank accounts.

It is complicated enough to understand when taxes can be discharged in a bankruptcy.  But once it is determined that your taxes can be done away with in bankruptcy, another potential hurdle rears its ugly head:  Bankruptcy means testing.

Means testing determines what type of bankruptcy you qualify to file – Chapter 7, which eliminates debts (including taxes) without repayment, or Chapter 13, which forces you to repay a percent of your debt through a payment plan approved by the bankruptcy court.

Means testing is a financial calculation that “tests” whether your income is higher than the median income for a family of your size in your state.  The purpose of the test is to determine if you make too much money to eliminate your debts without repayment (Chapter 7), and if repayment is appropriate, what the minimum amount should potentially be.  If you “flunk” the test – meaning you make more than the average family – there is a presumption that you can afford to repay your debts (Chapter 13) rather than wipe the slate clean (Chapter 7).

The good news is that a tax debt to the IRS can help you avoid the effects of means testing (yes, owing the IRS can be a good thing).  Here’s why:

The means test applies only to what is known as consumer debts.  Consumer debt is defined in Section 101(8) of the bankruptcy code to be a debt that is primarily incurred by an individual for personal, family or household purposes.  This typically includes debts such as credit cards, home mortgages and car loans.  But not taxes.

If over half of your debt is not consumer debt (taxes), the means testing calculations do not apply. Pass go, collect $200.  You are not subject to bankruptcy means testing.

Example:  You have a mortgage on your house with $120,000 owed, $25,000 of credit cards and a car loan with an unpaid balance of $5,000.  This is $150,000 of consumer debt.  But you also owe the IRS, say, $175,000.  This is not consumer debt.   Your total debt is $325,000, and over half ($175,000) is non-consumer debt.  You can check the box on your bankruptcy petition that the means testing does not apply because the majority of your debt is not from consumer purchases.  (Business debt, like guaranteed loans, are also non-consumer debt.)

There are three distinguishing factors that makes tax debt a non-consumer debt:  Consumer debt is considered to be voluntary; taxes are not.  Taxes are for the public welfare, and consumer debt is for personal and household purposes.  And taxes are imposed on earnings, while consumer debt is based on consumption.  A good court decision on this is In re Westberry, 215 F.3d 589 (6th Cir. 2000).

Tax debt for bankruptcy means testing purposes includes money owed to the IRS and state and local taxing authorities.  When considering bankruptcy, know that your tax debt can help you avoid jumping through hoops.

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