Howard's IRS and the Law Blog

A concern frequently voiced by my clients is whether entering into an installment agreement with the IRS automatically extends the time the IRS has to collect.

The perception is that if you agree to an installment agreement with the IRS, you are in it forever.

Quite simply, you aren’t.  IRS installment agreements have end dates.  The end date is 10 years from when your IRS liability began.

When does an IRS liability begin?  The time the IRS has to collect begins when they place your debt officially on their books.  This is called an assessment.  Assessments typically occur in three situations: (1) after you file your tax return and there is an amount due but not paid (2) if you did not file a return, the IRS will make an estimated return filing and put an estimate of your debt on their books (3) after the IRS completes an audit of your tax return.

After the debt is put on the IRS’s books (assessed), the IRS has 10 year to collect the tax debt from you.  The legal reference is Internal Revenue Code 6502(a)(1).

During those 10 years, the IRS can levy your wages, your bank account, or take your property (possible but unlikely).

Agreeing to an payment plan with the IRS – a better approach than letting them have it at – does not change how much time they have to collect.  If you enter into an installment agreement with the IRS, the rule remains the same:  They have 10 years to collect, and you have no more than 10 years to pay.

An IRS installment agreement does not extend the time frame the IRS has to collect.

Let’s put this to practical application with an example.


Your IRS liability started, say, 4 years ago, maybe you were self-employed and did not understand how to handle your taxes, or maybe you took a retirement plan distribution and did not have enough taxes withheld.  Either way, 4 years ago the IRS made its assessment against you, and put your debt on their books.  The IRS made their assessment 4 years ago, and they have 6 years left to collect, for a total of 10 years.  An IRS Revenue Officer contacts you, or maybe you are prompted by a threatening letter from the IRS Automated Collection Service. Either way, you agree with the IRS to make monthly payments.

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Owing money to the IRS comes with fear – fear of losing your house, your property, your bank accounts, even going to jail.  And the fear of your employer finding out you have a tax problem.

Your employer would discover your IRS problem if the IRS sent a wage levy to your job in an attempt to garnish your paycheck.  That’s embarrassing.

But can your employer fire you for it?  Can you actually lose your job because of your IRS problem?

The good news is that you cannot be fired from IRS attempts to levy your paycheck.

The Consumer Credit Protection Act protects you from termination due to a wage garnishment, including one from the IRS. But that’s not the end of the story for your employer.  An employer can fined up to $1,000 for retaliating against your IRS problem, and can actually be imprisoned for up to one year.  These matters would be handled by the U.S. Department of Labor.  The legal citation is 15 U.S.C. 1674, and the IRS citation is Internal Revenue Manual

But you want your job, and for the IRS to leave you alone, not a case with the Department of Labor.

If you have a threat of being terminated due to an IRS levy, I suggest the following steps to resolution:

  1. Communicate with the IRS.  In most every case, the IRS issues a wage levy because of poor communication from you.  The IRS has tried to contact you, has sent out letters requesting payment, and believes there has not been a satisfactory response.  All the IRS wants is for you to contact them and make payment arrangements.  When IRS doesn’t hear anything, they take action into their own hands.
  2. You probably can’t afford the levy taking your paycheck.  The IRS needs to know that. They want to know what you earn, your monthly bills and what you own.  In other words, how can you pay them back?  Or maybe you can’t pay them back.  Either way, the IRS needs to know.  The IRS accepts financial hardship, no pay cases – their terminology for it is currently uncollectible.
  3. We may need to complete an IRS collection information statement.  This tells the IRS how you can – or can’t – pay them back.  Remember, the IRS is levying because they want information, and have not received it.
  4. If you owe under $50,000, and can repay the amount you owe within 72 months, the IRS does not need a detailed financial disclosure from you, and the levy release can be expedited with payment terms over the 72 month time period.
  5. If you have any unfiled returns, those need to be completed and filed.  The IRS calls this compliance – they want you to be current on any unfiled returns.  If completing the returns quickly is too burdensome, and the levy is causing an economic hardship on you, the IRS does have rules that permit a levy release without the returns and only a financial statement.
  6. Get the levy released.  What you really want is to keep your job, not to sue your employer or contact the Department of Labor.  With communication, IRS financial arrangements and compliance, the IRS will let go, and release the levy.
  7. Provide your employer with a copy of the levy release.  I usually have the release expedited, with the IRS faxing a copy to me and your employer immediately, alleviating any delays by mail.  When your wages are levied, time is the most important factor.
An IRS wage levy is solvable situation.  It does not have to result in threats of being fired from your job.  All the IRS wants is communication, information, and compliance. With that, we can put the bear to rest, and get back to living.

It can be overwhelming when the IRS demands payment, considering the power the IRS has to levy your wages, bank accounts, house, and business.  When you have an IRS problem, it is natural – and easy – to feel not only overwhelmed, but desperate.

I like to help my clients better understand their situation and why their perception of having no options may not match reality.  After all, there is almost always a better approach than acting out of desperation.

To put things in perspective, let’s take a walk through a better understanding of five desperate situations that do not always necessitate desperate measures.

When negotiating with the IRS, do you need to:

–     Liquidate your retirement account?

–     Transfer property out of your name to try to keep it away from the IRS?

–     Borrow money against your house to pay the IRS?

–     Sell your primary vehicle or work vehicle due to IRS demands?

–     Borrow money from friends and family members and give it to the IRS?

Let’s take these one at a time.

1.  Do you need to liquidate your retirement account?

Before you liquidate your retirement account to pay the IRS, you should know that the IRS does not like to seize retirement accounts. It makes for bad public relations, and is near the very bottom of the IRS list of preferred seizures.

But what if the IRS is demanding that you pay the money for your retirement to them?

The IRS should be taken seriously when they bark, but it is important to know how much bite is behind the demand.

The IRS has guidelines as to when it is okay to take a retirement account.  Those guidelines can be found in Internal Revenue Manual And the Internal Revenue Manual – which is the IRS’s internal guidelines – make it clear that it is not always okay.

To begin with, if you are employed, and have a retirement account through your employer, there are restrictions on your withdrawal of the money.  These same restrictions apply to the IRS taking your 401k. Most retirement plans prevent an employee from liquidating until separation from service, death or disability.   In other words, if you can’t get to it, neither can the IRS.

But what if you do not have restrictions on access to the retirement money?

Following Internal Revenue Manual, an IRS collection agent must consider the following three issues before levying a retirement account that you have access to:

     >    Is there a better way to collect the liability than taking away retirement funds?

Know that the IRS generally wants to collect in the least intrusive manner possible.  They may not tell you that – after all, if an IRS Revenue Officer sees a way to collect a liability (i.e., your retirement), he is going to do his job and go after it. That’s fine. But that’s also only half of the story.

The rest of the story is that the IRS will consider alternative collection methods to payment – i.e., better options that are less intrusive than taking your retirement.  

Do you qualify for an installment agreement that would make a dent in the liability?  Or do you have other assets that can be used to pay the liability?  These factors should be used to negotiate the IRS away from an intrusive seizure.

      >    Has your conduct been flagrant in not paying the taxes?

The IRS’s desire to levy on your retirement account rises and falls based on you.  How you act, and how you acted in regard to your tax debt, can make a difference.

The IRS considers good acts/bad acts as factors in taking retirement accounts.  The Internal Revenue Manual directs an IRS Revenue Officer to seize retirement accounts only in situations of flagrant conduct.

Flagrant conduct is defined by the IRS to include tax evasion, fraud, assisting others in evading tax, not complying with IRS requests for information, not taking necessary measures to stop accruing new tax debt (known as pyramiding), demonstrating a pattern of uncooperative behavior, and concealing or attempting to transfer assets out of the reach of the IRS.

Honest life mistakes that created a tax problem, whether it be divorce, business failure, poor judgment = IRS having less desire to wipe out your retirement.

Bad acts on your part, and a general disrespect for the obligation to pay taxes = IRS not sympathizing on your retirement.

The IRS needs to know you are a good person that made some bad mistakes, and that you did not act towards the IRS in a manner that necessitates having your retirement taken away.

     >    Do you – or will you in the near future – depend on the retirement account to pay needed living expenses?

Here, let’s directly quote the Internal Revenue Manual to make our point.

Internal Revenue Manual states:

“The final step in deciding whether to levy on retirement assets is to determine whether the taxpayer depends on the money in the retirement account (or will in the near future) for necessary living expenses. If the taxpayer is dependent on the funds in the retirement account (or will be in the near future), do not levy the retirement account.”

Some peace of mind for our negotiations:  If losing your retirement account to the IRS will put you in financial distress and unable to pay bills – whether now or in the near future – the IRS guidelines are for them to back off.

Now that you know the rules, you know that liquidating your retirement account in knee-jerk reaction can indeed be a desperate measure that may not be necessary to IRS resolution.

2.  Should you transfer property out of your name to try to keep it away from the IRS?

Don’t do it.  Unless, of course, you want to anger the IRS, lose credibility, and give them reason to become extremely aggressive and take your property.

Hiding property from the IRS in an effort to keep it away from them is a no-no.  It will make any effort to resolve your tax debt even more difficult.  After all, when your head is in the mouth of the bear, say nice bear.

And rest assured that the IRS has ways to recover that property that you are trying to hide. They can file tax liens against it, even if it is no longer in your name (these are called nominee liens).  They can also go after the person who holds your property up for legal recoveries that include transferee liabilty, successor liability, fraudulent transfers and nominee/alter ego theories.

Do you want to spread your IRS problems to others (and you don’t, by the way)?  The transfer your property to them.

In other words, it it’s to good to be true, think twice.  And putting property out of your name, or hiding it from the IRS, is too good to be true.  The IRS has plenty of remedies to undo your dirty work, and won’t be happy about having to use them.

In most cases, when you owe money to the IRS, a full financial disclosure of your assets is required.  That often is not as bad as you fear – like retirement accounts, the IRS usually does not want to take your stuff, and problems tend to have workable solutions.  But hiding your assets from them changes the equation and wakes the bear.

3.  Do you need to borrow money against your house?

Okay, so we know that the IRS does not like to take retirement accounts, right? Add taking your house to the top of the list.

Despite your fears, the IRS does not want to put you on the streets.

Let’s use the numbers to demonstrate how likely (or unlikely!) an IRS house seizure is.  In 2013, the IRS made 547 seizures of real and personal property – houses, cars, business equipment.  This is nationwide – of all the taxpayers who owe the IRS, and it is in the millions – the IRS saw that only 547 cases necessitated drastic measures of seizing real estate, business equipment and personal belongings.

In other words, owing the IRS is serious, and despite all negative publicity to the contrary, the IRS is not a heartless machine.  The heart is there, it is just a matter of knowing how to find it.

The IRS does not want to put a family on the streets, or take the home of a retiree.

That changes, however, when, bad acts come into play – hiding assets, not cooperating, pyramiding tax liabilities, outwardly trying to cheat and take advantage of the IRS.

If you are honest but just made some mistakes in paying your taxes, the IRS should consider alternatives to taking your house.

And taking your house is not easy for the IRS.  Here are some of the steps they need to go through:

     >     The IRS needs high-level internal approval to seize a house, and after that, the IRS has to send your case file to the Department of Justice for handling.

The IRS cannot just show up one day an unexpectedly take your house.  First, they have to send you a Final Notice of Intent to Levy.  And an IRS collection agent has to write-up a recommendation for seizure, and get that approved by IRS management.  But that’s only the start of the process.  The IRS wanting your house does not mean the IRS gets your house.  If the IRS says yes, the case has to be transferred to the Department of Justice for the second step.

The Department of Justice gets your case because the IRS cannot, on its own, take your house.  The government has to get an U.S. District Court judge to approve the seizure.  That means the Department of Justice has to sue you in court, and get the judge to order your house to be sold.  If you get sued by the Department of Justice for a house seizure, you have the right to file an answer in court, just like any other lawsuit, and defend the litigation.

Only a judge can order your house sold; the IRS cannot do it on their own.

The legal citation is Internal Revenue Code 6334(e).

     >     The IRS cannot take your house unless there is enough equity in it that will result in a payment on your liability.

Internal Revenue Manual, which lists prohibited IRS seizures, states “The following types of seizures are prohibited in light of restrictions in the Internal Revenue Code (IRC):  Seizures where the taxpayer has insufficient equity in the propertythere must be sufficient net proceeds from the sale to provide funds to apply to the taxpayer’s unpaid tax liabilities.

In other words, unless the IRS will get money from the seizure, it won’t happen, and can’t happen.

     >     The IRS should not take your house without considering better alternatives to get paid.

That’s right – seizure action is usually the last option in the collection process.  The. Last. Option.

Let’s do another direct quote here, go straight to the source.

IRS Policy Statement 5-34, Internal Revenue Manual Section states:  The decision to seize must be satisfied that other efforts have been made to collect the delinquent taxes without seizing. Alternatives to seizure and sale action may include an installment agreement, offer in compromise, notice of levy, or lien foreclosure. Seizure action is usually the last option in the collection process.

Contrary to popular belief, in most situations the IRS really does not want your house.  And because of that, alternatives should be considered and negotiated before borrowing against it.

4.  Do you have to sell your primary work or business vehicle to pay the IRS?

Hopefully, the picture is developing for you that the IRS treads lightly on property seizures that could put you in a hardship situation.

In the same vein, an IRS Revenue Officer will be hard-pressed to justify taking your primary vehicles and not allowing you to work or transport your family.

If the IRS wants you to sell a car you use for personal or business purposes, respectfully let them know that to do so would create an economic hardship for you and your family. And the Internal Revenue Manual (the IRS guidelines) really is not about creating economic hardship on honest taxpayers.

5.  Should you borrow money from friends and family members and give it to the IRS?

Your friends and relatives do not owe the IRS, and the IRS cannot collect from them.  So, before you borrow money from them to pay the IRS, make sure that the reason is justified and the money is not taken out of desperation.

If the IRS is threatening to take your property, and you feel you have to borrow money to get them to leave you alone, it is important to separate the threat from the reality.  The threat is serious, but you may have options the IRS is not telling you about – like the limitations in the Internal Revenue Manual and Internal Revenue Code on taking retirement accounts, or houses, or any real or personal property.

You may be able to box your way out of it and keep your stuff before having to rely on friends and family members.

To be clear, paying the IRS is a good thing.  But it is important to be fully informed and know your rights before borrowing or liquidating in a manner that may not be necessary, or may cause a hardship to you.

To summarize, taking desperate measures to solve an IRS problem should carefully considered and weighed before being implemented.  There is often a better alternative that can be found in the IRS collection laws and procedures.

Your fear, and the IRS’s threat, may not be equal the reality of the situation.

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, 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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