What to Do When Your Client Owes a Bundle to IRS

What to do when your client owes a bundle to the Internal Revenue Service

The first question is: How did he get into this shape?

Filed tax returns with balance due?

Non-filer where IRS has created the returns under the IRS substitute for returns program?

Result of audit examination?

Is this an individual or a business tax problem?

Most popular business tax not paid is trust fund withholding  Section 6672 allows the government to assess this tax against responsible persons which can include officers and shareholders and others including accountants and lawyers who exercise some control over the business finances.

Liability for trust fund taxes exists as to the company with regard to all taxes due. With regard to officers and other responsible persons, the liability is for amounts which were withheld and not paid over to the Internal Revenue Service.

Employment tax returns can be created by the Internal Revenue Service in a summary fashion. They are not required to go the same procedure as income taxes and do not require issuance of a statutory notice of deficiency.

If this is an individual non-filer recognize that the designation 1040 A. indicates a return was created by the IRS. This type of return allows no deductions or credits, and is usually calculated for a married individual based on married filing separate rendering the highest tax rate.

In most cases at least four notices from the Internal Revenue Service will be sent as to amounts due. Check to see that these notices are sent to the last known address. Often, clients will simply throw these notices away or filed out of sight. Each notice becomes more threatening. The last notice form CP 504 advises the client that it will begin to search for refunds at the taxpayer is due for purposes of Levy. The failure to pay penalty goes from one half of one percent to 1% a month after the notice 504 is issued. The final notice that the taxpayer will receive will be clearly designated:“Notice of Intent to Levy and Your Right to a Hearing under section 6330 and 6320.” This notice cannot be disregarded as it will result in a Levy after 30 days. If sufficient grounds exist, Form 12153 should be filed requesting a collection due process hearing. To avoid Levy examine all notices that the taxpayer has received to determine where he or it is in the procedure.

Be careful that your power of attorney covers all of the tax periods for which tax liability exists. If there are other years not stated on the power of attorney you will not receive notices and the client may have due dates pass without action. The client may believe that you are receiving these notices as well. It is best to have the client forward or fax copies of any notices received at once.

The statute of limitations:

No matter the tax year is involved. Check to see the statute of limitations is still viable. The fact IRS has issued a notice does not necessarily mean that the statute is open. Prove to yourself that the statute of limitations has not expired. Request an IRS transcript to show dates of filing and other information for this purpose. The general tax collection statute is 10 years.

Options that exist with regard to back tax liabilities:

An Installment Agreement.

Offers in Compromise.

Code 53 (currently uncollectible)

Bankruptcy.

An installment agreement can be requested either by filing form 9465 or by a letter to the Internal Revenue Service requesting and suggesting an amount for an installment agreement area. An installment agreement provides the taxpayer will pay the amount on a monthly basis until it is fully liquidated. Interest and penalties continue to run.

Prior law did not allow the Internal Revenue Service to allow for a partial installment agreement. Current law allows a partial installment agreement which will result in less than full payment of the tax liability over the period of the statute of limitations. If the statute expires during the term of the installment agreement, the balance of the tax is not collectible.

Note that the Internal Revenue Service can request an extension of the collection statute of limitations under 6502 at the time an installment agreement is entered. It is the current policy of IRS not to request these extensions unless circumstances warrant. For example, the chance of a pending  inheritance to be received by the taxpayer or some other change in financial circumstances outside the normal statute of limitations. Note that the IRS can also have an assessment reduced to judgment thereby extending the period of collection to 20 to 25 years.

Current federal law offers a guarantee installment agreement for taxpayers with tax liability less than $10,000. This provides the taxpayer an ability to pay the amount over three years. If the amount of liability is $25,000 or less, the taxpayer may be able to arrange a stream line installment agreement for five years. This arrangement is not guaranteed under federal law. Both types of these agreements require less information than is normally submitted to the Internal Revenue Service for verification of income and expenses. Form 433F.

Obtaining an installment agreement requires the filing of form 433A for individuals and 433 B for businesses. These forms are basically income statements and balance sheets and they are signed under penalties of perjury and that any false statement can result in criminal prosecution and punishment in the same way ordinary tax returns can. Questions on the form also solicit information about prior transfers within the last 10 years. By providing all information on a financial disclosure form may set the taxpayer up for Levy by the Internal Revenue Service.  You should attempt to arrange an installment agreement without filing a formal financial disclosure form if at allpossible.

It is possible in business arrangements to be made especially where liability is $25,000 or less.

Federal tax liens:

An automatic tax lien arises when the taxpayer has received a notice and demand for payment and does not pay the tax liability within 10 days. This lien covers all of the taxpayer's property. However, it is not until recordation do buyers without actual notice get legal notice of the filed federal tax lien. Note when the total amount owed is less than $10,000 IRS may decide not to file a lien. This amount had been $5000. If evidence of asset dissipation or pending bankruptcy filing exists a lien will be filed notwithstanding its amount.

A direct debit arrangement with the client’s bank account may avoid the filing of a lien or permit the withdrawal of the filed lien. The IRS believes that it is more likely that the taxpayer will continue paying an installment agreement where direct debit exists.

In prior law when the tax liability was full paid the IRS was required to file notice of release of tax lien. Under current law IRS may withdraw that lien and thereby expunge all record of the lien being filed. Request a withdrawal of any lien which has been full paid. If the client has gone on to direct debit and the amount of liability is less than $25,000, the lien can also be withdrawn.

After the lien is filed, the taxpayer will receive notice of its filing and be given 30 days to request a collection due process hearing before the IRS appeals branch with regard to the lien. Unlike the Levy, this notice is sent after the lien has already been filed. In the Levy situations requesting a CDP hearing is a means of preventing the Levy action itself until after an appeals hearing. Note that IRS can reject a request for such a hearing if it deems it to be frivolous. It can also seek a $5000 penalty for frivolous filing.

Offer in Compromise:

Taxes penalty and interest can be the subject of the compromise filed on form 656. Offers are allowed on three grounds:

Doubt as to liability.

Doubt as to collectibility.

Effective tax administration.

Most offers are based on an inability to pay the tax. Taxpayers are required to file financial disclosure forms 433. IRS considers both the quick sale values of the taxpayers’ assets as well as an income stream over either four or five years depending upon the type of offer made. For cash offers this is 48 months and for deferred offers is 60 months. Note that if an offer in compromise is accepted the taxpayer must remain current, and in compliance with all tax laws for the next five years if not the offer will be terminated and the amount of the tax liability reinstated.

An offer suspends the statute of limitations on collection, while it is pending plus one year. You must advise the client of this serious consequence.

A down payment, which is not refundable of 20% of the amount of the offer must be made with the offer. A down payment is also required where a deferred offer is being considered. Many clients will simply not be able to make the down payment required.

IRS works the offer in compromise program through its campuses or service centers in Memphis,TN and Brookhaven, New York.

In the calculation of the amount of the offer there is no set percentage. Adverts of pennies on the dollar are misleading. The IRS website offers a calculation worksheet.

IRS is attempting to simplify and streamline the offer in compromise program is especially for offers of $50,000 or less. In these instances IRS offer examiners will be permitted to call taxpayers to ask for additional information. IRS uses guidelines that it publishes. Be advised that these are, in fact, just guidelines lines from which the IRS may deviate.

The failure to accept an offer in compromise will allow the client and appeal to the IRS appeals branch for review. Many times IRS will negotiate the amount of the offer at this administrative appeal level.

Offers based on doubt as to liability are examined by the IRS examination division. No amount of the payment is necessary and financial disclosure forms are not required. This may be an opportunity for the taxpayer to have a review of an assessment where no other opportunity was granted.

Offers based on effective tax administration are grounded on fairness. This is a catchall area based on all facts and circumstances. Few offers are accepted in this area.

Code 53:

Internal Revenue Service is allowed to make the determination that a taxpayer's tax liability is currently uncollectible. This is usually based upon financial disclosure forms which have been filed. Once placed in code 53, the taxpayer will no longer receive threatening notices from IRS with regard to tax liabilities. He will receive an annual notice of the total amount still do. Code 53 does not eliminate the tax liability. The statute of limitations on collection does continue to run when the taxpayers file is in this suspension account. Therefore at the end of this section 6502 limitations. The tax will no longer be collectible. In this regard, this can be a very favorable handling of the clients matter. IRS will set the file to tickle at a certain income level, which will then cause a re-examination of the uncollectible status.

Bankruptcy:

It should be noted that under certain limited circumstances income taxes are dischargeable in bankruptcy. Trust fund tax liabilities are not dischargeable in bankruptcy.

Stopping the IRS Levy:

Once Notice of Intent to Levy and Right to a Hearing is given a taxpayer Form 12153 should be considered to request an IRS appeals hearing.

IRS appeals branch consists of seasoned IRS employees whose job it is to settle cases. In the CDP hearing procedure, the appeals officer will first determine whether proper procedures were followed by the Internal Revenue Service including mailing of all notices to the last known address. Taxpayers can raise the underlying tax liability unless a  statutory notice has been issued which was not petitioned to the Tax Court or if a trust fund notice was sent and no request for hearing was made. It is possible at the appeals branch to arrange alternative collection handling of any tax liability. This can include offers in compromise, installment agreements, interest and penalties waivers and the failure to properly apply payments or the application of the Innocent Spouse provisions of section 6015. The appeals branch can also pass on the withdrawal of liens.

After appeals hearing, the appeals officer will issue the notice of determination, which gives the client 30 days to appeal to the United States Tax Court if all matters have not been settled. The Tax Court will consider all the issues that were raised in the CDP hearing. The Tax Court may remand the case back to the appeals branch for further hearing if necessary.