Howard's IRS and the Law Blog

The ability to file a collection due process appeal is probably the most powerful right you have in defending against IRS enforcement by levy or seizure.

Due process, in the context of IRS collections, means the right to reach resolution of your case before the IRS can take your property, and the right to have an outside party – the U.S. Tax Court – review the collection decisions of the IRS before they can take place.

Due process in collection cases begins with the IRS sending you a Final Notice of Intent to Levy.  Within 30 days of this notice, the rights of due process allow an administrative appeal to be filed with the IRS, disputing the intent to levy.  While the appeal is pending and solutions are negotiated, the IRS cannot levy or seize your property by law.

Resolution is made with an IRS settlement officer, whose job is to, well, settle collection cases.   Collection due process can level the playing field, so to speak.

Sometimes it can be better to actually file the collection due process appeal late, more than 30 days after the Final Notice of Intent to Levy was mailed.

Late filed collection due process appeals are called “Equivalent Hearings.” Although equivalent hearings are not absolute and are provided on a case by case basis, the Internal Revenue Manual guides the IRS to process the late appeals and provide full appeal rights to the taxpayer’s benefit, including a hold on seizure and levy.  Late filed appeals are accepted up to one year after the Final Notice of Intent to Levy was sent.  Internal Revenue Manual 5.1.9.3.6 and Treas. Reg 301.6330-1.

The primary difference between timely and late filed collection due process appeals is the right to go to Tax Court.  It is lost in late filed appeals.

However, collection due process appeals can offer situations where late-filing with the Internal Revenue Service can actually be advantageous.   Counterintuitive, but true.

There are real benefits to filing an collection due process appeal late and requesting an equivalent hearing with the IRS.  Here are two good reasons to file it late:

1.     No tolling of the statute of limitations on collection.

The IRS has 10 years to collect a tax liability.  During the hold on enforcement caused by timely filed collection due process appeals, the 10 year IRS statute of limitations on collection is tolled.  Time stops running when the tax code prevents the IRS from levying or seizing property.

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As a general rule, count on IRS interest and penalties doubling the amount you owe every five years.   Interest is only part of the cause; it is the penalties that really hurt.

Interest rates charged by the IRS are not unfair – the federal short-term  rate plus 3%.  This has left IRS interest hovering in the 5% range.  Think about it – you owe the IRS money, they are now your bank, and they are charging you a reasonable rate of interest for a loan that they really never agreed to.

The penalties is where the hurt comes in.  The IRS charges multiple penalties, mainly for penalizing you for not doing something when you should have.  The most common penalties are for not paying on time and not filing on time.  If you owe taxes to the IRS, chances are you also owe them at least one of these two penalties.

Here is how the penalties add up to make repaying the IRS difficult:

1.     Not paying what  you owe when you file your return.  The late-payment penalty is one-half of one percent of the tax owed for each month it is unpaid.   Every month you owe, the penalty amount increases by a half of a percent.  So the first month the IRS will charge you  a half percent of the tax due, the second month 1%, the third month 1.5%, etc. The late-payment penalty does max out at 25%.  So if you have owed the IRS for more than 24 months, your late-filing penalty has hit its limit – 25% of the tax.  (Note:  the half percent rate increases to one percent (1%) if the IRS issues a final notice of intent to levy and the tax remains unpaid for 10 days thereafter.)

2.    Not filing your return on time.   The late-filing penalty is sort of like the late-payment penalty – it escalates every month, only quicker.  The late-filing penalty starts out at five percent (5%) of the tax owed for each month your return is late.   The penalty increase by 5% every month for a maximum of five months, hitting its limit at 25% in the fifth month your return is late.

When both penalties run concurrently, the late-filing penalty is reduced from 5% to 4 1/2% monthly.   When both penalties apply, the late-filing penalty hits its max at 22.5%, with the late-payment still maxing out at 25%.

The combined penalty for not paying on time and not filing on time:  47.5%.

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Making it through an IRS audit is stressful and anxiety ridden, but for many, it is not the end of the road in dealing with the IRS.  Many IRS audits result in balances due.  Here are my responses to great questions from a reader about dealing with IRS collections after the audit.

I just finished an audit covering three years … 08-09-10…and owe the IRS over $100,000.   My questions are:  Will the IRS do a payment plan?  Would they take a lump sum and forgive the balance?  And will a lien be put on my property as part of the payment negotiations?

To begin with, after the IRS concludes the audit, expect a steam of IRS collection notices seeking payment.   These notices are each sent several weeks apart, and bear titles like “Balance Due,” “Urgent,”  and “Final Notice of Intent to Levy.”   The most important of these notices is the Final Notice of Intent to Levy as this notice allows the IRS to start collecting the liability by levy action.   The Final Notice of Intent to Levy also provides important rights to file a request to talk to an IRS settlement officer to solve the liability.  This request is important as it stops the IRS from taking levy action while you negotiate  a solution of the balance due.

Speaking of solutions, the IRS would be likely to take a payment plan from you, but on a balance due of over $100,000 the IRS will require that you provide a financial statement listing your income, living expenses and valuing your property.   This is to help them determine your cash flow for an installment agreement.  Unfortunately, it is usually not as easy as saying “I want to pay $500 month” when you owe $100,000.

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Another great question from a reader on how the bankruptcy code and tax code can intersect when discharging taxes in bankruptcy.

Dear Mr. Levy,

We owe income tax from 2007.  We filed the return on October 15, 2008 with an extension.  We filed a collection due process appeal and had a hearing, agreeing to monthly payments of $100.00, which we have kept current.

My question is if we have met the proper time requirements for our income tax debt to be discharged in bankruptcy?

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The statute of limitations on collection will make most every IRS collection problem come to an end.  Internal Revenue Code 6502 puts a limit on how long the IRS can pursue the collection of a tax debt. The timeframe is 10 years from when the IRS puts a liability on its books.

But knowing there is an end is really just the beginning.

Most sources of IRS resolution – offer in compromise, innocent spouse claim, bankruptcy, collection due process appeal – extend the time the IRS has to collect while they are pending.  Be careful:  Not succeeding with a plan of resolution will only make a tax problem linger.  The IRS can even sue you and get a judgment that allows them to collect for more than 10 years.

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When the IRS gets you with a levy, bad things can happen – your wages are frozen and you are looking at living without a paycheck. The money you need to pay bills is suddenly swiped out of your bank account.

This presents an urgent dilemma requiring immediate relief.

So, what are the two quickest ways to get an IRS levy released with no questions asked?

1. Bankruptcy.

Although for some a course of last resort, bankruptcy results in an immediate release of an IRS levy, no questions asked. The filing of bankruptcy results in what is known as a “stay” on collection actions by all creditors, including the IRS. There is no need for disclosures or negotiations with the IRS for relief from a levy – it is automatic by bankruptcy law.

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