The Collections Process

Audit reconsideration is an IRS administrative procedure that allows a taxpayer to dispute the results of an assessment made because of an audit of taxpayer’s return or of a substitute return filed by the IRS on behalf of the nonfiling taxpayer.  Although it is almost always more advantageous to use the offer-in-compromise process in lieu of an audit reconsideration on account of the fact that the service is required to respond to offers within a set period of time, this procedure remains available in situations in which an offer cannot be effectively submitted.

The IRS has the authority to abate part or all of any assessment if:

1. The assessment is in excess of the correct tax liability
2. The assessment is made subsequent to the expiration of the applicable period of limitations or
3. The assessment was erroneously or illegally made

The IRS will not accept an audit reconsideration if:

1. The taxpayer has already signed an agreement agreeing to pay the amount owing.  Those agreements include:
   1. Closing agreement
   2. Offer in Compromise
   3. Form 870AD with the Appeals Office
2. The U.S. Tax Court or another court has issued a final determination on the tax liability.

Requirements for Submitting an Audit Reconsideration

1. The return for the tax year in question must be filed
2. A copy of the audit report (Form 4549, Income Tax Examination Changes) must be submitted, if available.
3. The changes to be reconsidered must be set forth
4. A detailed memorandum setting forth the relevant facts and applicable law must be included.

An audit reconsideration is not a matter of right but rather completely at the IRS’s discretion.  The request should include the taxpayer’s position and arguments based on the law and should include supporting evidence.  It may not be worthwhile to submit an audit reconsideration if there is not sufficient evidence to support the taxpayer’s position.  The IRS will typically delay collection activity when an audit reconsideration has been submitted, although it is not required by law to do so.

The audit reconsideration should only be submitted if other options, such as filing a petition, have expired and are unavailable.  The audit reconsideration package should be prepared and presented in the same manner as an Appeals notebook.  A cover letter is included with the audit reconsideration.

Audit reconsiderations should be sent by UPS to the following address:

Internal Revenue Service
Atlanta Service Center
Audit Reconsideration Unit
2385 Chamblee-Tucker Road Stop 54A
Atlanta, GA 30362

By Certified Mail, Return Receipt Requested through United States Postal Service to:

Internal Revenue Service
Atlanta Service Center
Audit Reconsideration Unit
P.O. Box 48-389 Stop 54A
Doraville, GA 30362

NOTE:  Before sending in a request, confirm through the Practitioner Priority Hotline that this is the correct address for your client.  You can also verify the correct mailing address by contacting the Georgia IRS Audit Reconsideration Unit.  Refer to the IRS Contact folder in Amicus.

Resources

Documents

• Audit Reconsideration Memorandum
• Audit Reconsideration Cover Letter

Documents on IRS.gov

• IRS Publication 3598 What You Should Know about the Audit Reconsideration Process

The Collections Appeals Procedure (CAP) was created by the IRS to allow taxpayers who were subject to a lien, levy or seizure or who were defaulting on their installment agreements to request an appeals conference.  This procedure is not one that is frequently employed by the clinic.

Typically, the Collection Due Process (CDP) procedure provides more options for completely resolving tax matters.  However, the CAP can be helpful in avoiding the filing of a tax lien. The CAP has several limitations that make this process not as desirable as CDP; one of which is that appeals decisions made through CAP cannot be appealed judicially.

To request a hearing, Form 9423 (Collection Appeals Request) must be filed with the group manager of the collection officer. The group manager will decide whether to try to resolve the situation or to allow for an appeals conference.  The Office of Appeals must conduct a conference within two days of receiving the case.  The case must be resolved and closed within five business days. Collection activity is postponed while the Office of Appeals is handling the case.  Both the taxpayer and collections will be notified by the office of its decision.

The Collection Due Process (CDP) hearing procedure was created by the 1998 Reform Act to give taxpayers rights to appeal lien and levy actions.

Section 6321 provides for an automatic lien in favor of the United States upon all property, and rights to property, belonging to the taxpayer if, after notice and demand, the taxpayer neglects or refuses to pay the tax for which the taxpayer is liable.  This lien is not valid as against any purchaser, holder of a security interest, mechanic’s lien or judgment lien creditor until notice is given by recording the lien.  Notice is given by recording the lien in the public records office in the county where the taxpayer lives or in the county where the taxpayer owns property.  § 6323.  If the state does not have a county recording system, the IRS sends the notice to the Secretary of the State.  Even if the taxpayer does not own property when the lien is filed, the lien will attach to any property that the taxpayer may own in the future, if the lien has been recorded.

The IRS is required to notify a taxpayer in writing within five days after it files a Notice of a Tax Lien.  IRC §6320.  The IRS must also send the taxpayer written notice at least 30 days prior to a Notice of Levy.  IRC §6330.  These statutory notices must specify the amount of the tax liability and must state that the taxpayer has a right to request a CDP hearing within 30 days.  The notice must also outline the administrative appeals rights of the taxpayer and the provisions and procedures to obtain the release of the levy or lien.  These notices are called the Collection Due Process Hearing Notices (CDP Notices).  Unlike decisions in CAP hearings, the determination of the Appeals Officer following a CDP hearing is subject to judicial review.

If a taxpayer wishes to dispute the IRS’s proposed collection action, the student attorney should complete and have the client sign the Form 12153. The Form and an explanation of the proposed collection alternative (if there is time) should be sent to the IRS office which sent the CDP notice.  A taxpayer has this right to appeal attached to the first collection due process notice for each year. In some cases, the CDP notice is a second or third notice issued over a number of years.  The subsequent notices do not contain the CDP rights.  However, the taxpayer can request an “equivalent” Collection Appeal Request  (CAP) hearing.  The only difference in the two hearings is that the taxpayer has the option to appeal to the United States Tax Court the final determination only if a decision was rendered after a CDP hearing , not after the “equivalent” hearing..  The Tax Court’s jurisdiction is limited to whether the taxpayer’s due process rights were violated.

If a taxpayer or a third party has property impacted by the IRS Notice of Federal Tax Lein or a collection action, that party can also pursue a right to appeal by sending a completed Form 9423 (Collection Appeal Request) signed by the taxpayer or third party to the IRS office proposing to take the action by  certified mail.

The IRS is required to serve the Notice of Levy or Notice of Lien in person, either at the taxpayer’s home or office or send a notice to the taxpayer’s last known address by certified or registered mail, return receipt requested.  If a taxpayer does not receive a properly transmitted notification, the 30-day period to request a hearing does not begin to run. If the notice is not received because it was improperly transmitted, the IRS must provide a substitute notice, and the 30 day period starts the day after the date of the correct notice.

Once a hearing has been requested, the IRS may not execute the levy on the taxpayer’s property.  If a deficiency that generated the liability is at issue, the collection activity is also suspended while the judicial appeal is pending. However, the IRS is permitted to seize property immediately following the issuance of a Notice and Demand for payment under IRC § 6331 (d)(3)if the collection of the tax is in jeopardy. If the collection of tax is in jeopardy or the IRS is levying on a state tax refund, a CDP Notice prior to the levy is not required.  However, the IRS will provide a post-levy CDP notice, and the taxpayer will be entitled to a hearing. As a general rule, a student attorney should request on Form 12153 a face-to-face conference in Atlanta. In many situations  the settlement officer initially assigned the case will require that the client prepare a Form 433-A (Not OIC) before the request will be granted.

Hearing Procedures

A CDP hearing is conducted by an impartial employee of the IRS Office of Appeals.   The Appeals Officer should have no prior involvement in the issue that resulted in the collection of the unpaid liability.  CDP hearings are conducted informally at the Appeals office.  No transcript is taken of the conference and no oath or affirmation is taken.  At the conference, the Appeals Officer will consider:

1. The validity, sufficiency, and timeliness of the CDP Notice and the request of the CDP hearing
2. Any relevant issue relating to the unpaid tax raised by the taxpayer at the hearing
3. Any appropriate spousal defenses raised by the taxpayer at the hearing
4. Any challenges by the taxpayer to the appropriateness of the collection action
5. Any offers for collection alternatives made by the taxpayer and
6. Whether the proposed collection action balances the need for the efficient collection of taxes and the legitimate concern of the taxpayer that the collection action be no more intrusive than necessary.

At the hearing, the taxpayer may also challenge the existence of the liability or the amount of the liability only if he (1) did not receive a Statutory Notice of Deficiency, (2) did not receive it in time to file a Tax Court petition or (3) did not have any opportunity to dispute the liability.  The taxpayer may not raise an issue that was raised and considered at a prior administrative or judicial hearing.

Prior to issuing a determination, the Appeals Officer is required to obtain verification from the IRS office collecting the tax that the requirements of any applicable law or administrative procedure have been met.

Generally, the IRS will not grant an installment agreement or accept an offer-in-compromise if any tax return for which the taxpayer has a filing requirement has not been filed.  I.R.M. 5.14.1.4.1(4)-(6) (Sept. 26, 2008) (installment agreements): 5.8.3.13(1),(2),(4) (Sept 23, 2008) (offers-in-compromise);As to reporting an account currently not collectable the IRS no longer will automatically decline a request if all the other indicators show that the client  cannot meet the living standards. 5.16.1.2.9  (05-22-2012).

However, the client should file delinquent returns as compliance is still required to submit an offer in compromise or enter into an installment agreement., 5.1.11.2.3 (June 2, 2004 (general procedures).

The Appeals Office will issue its findings in a dated Notice of Determination sent by certified mail or registered mail to the taxpayer.  While there is no time limit on when the IRS must issue its findings, the regulations require the Appeals Officer to conduct the hearing “as expeditiously as possible.”  Once the finding is issued, the taxpayer has 30 days to request judicial review by filing a petition in Tax Court or U.S. District Court.  Student attorneys should assume that judicial review should be requested; however, the decision to do so is made by the Clinic Director.

The Notice of Determination is required to:

1. State whether the IRS met the requirements of any applicable law or administrative procedure;
2. Decide any allowable issue raised by the taxpayer at the hearing (for example, challenges to the liability, spousal defenses, the appropriateness of the collection action);
3. Decide whether the levy is required for the efficient collection of taxes in light of a taxpayer’s concern that the collection action be no more intrusive than necessary;
4. Set forth any agreements reached with the taxpayer, any relief given to the taxpayer, and any actions that the taxpayer or IRS are required to take; and
5. Advise the taxpayer that the judicial review to the Tax Court or a U.S. District Court must be sought within 30 days of the date of the Notice of Determination (Temporary Reg. §301.6330-1T(e)(3), Q&A -E7)

Request for Judicial Review

A request for judicial review of a finding in a Notice of Determination is in the form of a petition ot the Tax Court and it must be filed within 30 days of the date appearing on the Notice of Determination.

The court will apply a de novo review standard if the amount of the liability is at issue.  All other issues are reviewed under an abuse of discretion standard.

While a judicial appeal is pending, the IRS may levy if (1) the underlying tax liability is not at issue and (2) the IRS shows good cause for not suspending the levy.

In no event shall the IRS commence the levy process until the ninetieth day after the day on which there is a final determination in such hearing. If the IRS proceeds during this time of suspension, the taxpayer can petition the U.S. Tax Court for an injunction, enjoining the IRS from proceeding.

If the taxpayer has gone through the appeals process and has either paid the taxes or the IRS has conceded that the taxes are not owed, the IRS must then issue a Certificate of Release of Lien within thirty days after either the taxes have been paid, set aside, or the statute of limitations on collections has expired. Once the taxpayer receives a Certificate of Release of Lien, the taxpayer should mail photocopies to the credit bureaus.

If a tax lien has been filed in error, either because the taxpayer never owned anything, or more likely, the tax bill has previously been paid, the student attorney should notify the IRS that the lien has been filed in error and request a Certificate of Release of lien.  If after thirty days the IRS has not sent a Certificate of Release of Lien, the student attorney should write to the Chief of Special Procedures at the IRS office where the lien was filed explaining the circumstances.  Finally the student attorney should be aware that certain property is exempt from a levy proceeding, the exempt property is described in section 6334.

If the Settlement Officer and client reach an agreement, no final determination is issued. The Settlement Officer will request that the taxpayer sign a “Withdrawal of Request for Collection Due Process or Equivalent Hearing” (Form 12256) in conjunction with the resolution of the matter.  For instance, if as a collection alternative the taxpayer submits an offer in compromise, agrees to an installment agreement or the settlement officer agrees to place the account in currently not collectable  then the taxpayer will execute the Form 12256 as part of the resolution of the matter.

Resources

Documents

• Final Notice of Intent to Levy
• Notice of Tax Lien and Right to CDP Hearing
• CDP Checklist

Also see

• Appeals Conference

IRS Regulations

• IRC §6015(e): Petition for review by Tax Court
• IRC §6330: Notice and opportunity for hearing before levy
• IRC §6320: Notice and opportunity for hearing upon filing of notice of lien
• TD 2002FED ¶ 47,017: Treasury Decision 8979, (Jan. 17, 2002)

Treasury Regulations

• Temp. Reg. §301.6330-1: Notice and opportunity for hearing prior to levy

Documents on IRS.gov

• IRS Form 12153   Request for Due Process Hearing
• IRS Publication No. 1660   Collection Appeal Rights

Many of the clients seek the assistance of the Tax Clinic after the IRS has not only assessed the tax liability, but begun the collection process, such as levying on their wages, social security or other government benefit.  Once the IRS begins collection action, the taxpayer has several courses of action that will cause the IRS to suspend the collection action. These include submitting an installment agreement or an offer in compromise.

If an offer or installment agreement is not feasible, the IRS may agree to postpone further collection action informally but usually for no more than 30 days or it may formally determine that the account is “Currently Not Collectable” (“CNC”). Placing a client in CNC suspends all collection and enforcement activity. It also will cause the IRS to release any levy.  Because an account is reported CNC on Form 53, in IRS jargon the Revenue Officer “53’s” the account.

Since the CNC status does not resolve the taxpayer’s underlying tax issue, the Tax Clinic works with the client to resolve the tax issue either through an amended return, audit reconsideration, installment agreement, or offer in compromise. CNC should be use as only a temporary solution.

Revenue Officers, Appeals Officers, and Settlement Officers may report accounts as CNC.  Be aware that in many cases as part of agreeing to place an account in CNC, the IRS may file a Notice of Federal Tax Lien. This is more likely to be done for cases with a balance due over $10,000.  2011 TNT 38-2.

Upon a determination of CNC status, the Service will immediately release any levies on wages or salary. I.R.C. § 6343(e); I.R.M. 5.16.1.2.9(7).  However, since offsets from Social Security, Disability Payments or other federal programs may not occur until the next month. In hardship cases, you can submit a Form 911 to the local Taxpayer Advocate requesting refund of the levied upon amount. In doing so, the burden is on the taxpayer to show that it is indeed a hardship. Usually, the Taxpayer Advocate will require a completed and signed Form 433 A or 433 F (collection information statements (“CIS”)) to accompany the Form 911.  As a practice in the Tax Clinic, you must prepare a memorandum explaining the hardship and discussing the items on the 433 A or F. Use a sample memorandum for an OIC in structuring your memorandum.

While the IRS Manual provides several reasons why an account should placed in CNC status, the most common is that collection would create an economic hardship. This determination follows the review of the CIS. If the taxpayer does not have assets that can be used to pay the debt and his expenses equal or exceed his income, the matter is suitable for CNC status. Other reasons for placing an account in CNC include:

• Expiration of the statutory period for collection
  • Expiration of the statutory period for collection or suit initiated to reduce tax claim to judgment
• Inability to locate the taxpayer or assets
  • Inability to contact a taxpayer although the address is known, but there are no  means of enforcing collection
• Suspension of corporation business activities and no assets remaining
• A corporation liquidated in bankruptcy
  • Death of an individual with no collection potential from an estate or no collection potential for estate taxes

Collection of the liability would create an undue hardship for taxpayers by leaving them unable to meet necessary living expenses.

A corporation remains in business and has paid its current employment taxes, but is unable to pay back taxes.

Corporate income tax liabilities owed by a financial institution certified as insolvent by the Office of the Controller of the Currency or the Office of Thrift Supervision

Special actions, such as accounts on military personnel in a designated combat zone. I.R.M. 5.16.1.1(2).

Practice Tip: What the taxpayer may view as a hardship, the IRS  may view as mere inconvenience. “Significant hardship means a serious privation caused or about to be caused to the taxpayer… Mere economic or personal inconvenience to the taxpayer does not constitute significant hardship.” Reg. § 301.7811-1(a)(4)(ii).

The reporting of an account as CNC does not affect the validity of the underlying tax assessment. The tax is not forgiven or compromised and interest and penalties continue to accrue. If the IRS files a notice of federal tax lien (“NFTL”), it remains in force. In addition, the IRS’s computers are programmed to notify the field collection function when the taxpayer’s income increases significantly or when the expiration of the SOL on collection is imminent. I.R.M. 5.16.1.6 (mandatory and systemic follow up).

During the period the account is in CNC status, the IRS will automatically offset any future refunds due the taxpayer against the delinquent tax liability. Many accounts that are in CNC are eventually satisfied by refund offsets or by operation of the federal tax lien when the taxpayer sells property. If the taxpayer is an employee, he should be advised to fine tune his Form W-4 withholding statement to ensure that he does not over-withhold taxes.

CNC is not a permanent status. You should counsel the client that failure to file future returns and pay future required taxes may cause CNC status to be revoked.

If a taxpayer is unable to pay the full amount of her tax liability, she may be able to enter into an installment agreement with the IRS. § 6159  Installment agreements allow full payment of the tax liability in equal monthly payments.  The amount of the installment payment will be based on the amount the taxpayer owes and the taxpayer’s ability to pay that amount within the statute of limitations for collection of the tax.

When considering an installment agreement, make sure you also do an evaluation of the possibility of abating penalties.

The IRS is required under IRC § 6159 to accept an installment agreement if:

1. The amount of the tax owed (not including interests, penalties and other additions) is $10,000 or less;
2. The taxpayer, within the last five years, has not failed to file a return, has not failed to pay any tax shown on such return or has not entered into a prior installment agreement;
3. Based on information provided by the taxpayer, the IRS has determined that the taxpayer is financially unable to pay the liability in full when due;
4. The installment agreement will result in satisfaction of the full liability within three years;
5. The taxpayer agrees to comply with the requirement of filing returns and making payments while the agreement is in effect.

In cases where the requirements of IRC § 6159 are not present, the IRS has the discretion to accept or reject a taxpayer’s proposed installment agreement.

The taxpayer may request an installment agreement over the telephone or by submitting a written request using IRS Form 9465.  A financial statement (Form 433-A or B) is not required if the taxpayer owes less than $50,000.  The IRS issued interim guidance (SBSE-05-0112-013) in a Memorandum dated January 18, 2013.  These changes will be incorporated into IRS 5.14.10.  In addition the period for full payment increased from 60 months to 72 months.  If the taxpayer qualifies, no lien determination or managerial approval is required.  The streamlined offer will use the Allowable Living Expenses standards to determine whether the taxpayer has sufficient income to pay the installment offer.

Consequences of an Installment Agreement

1. Penalties and interest continue to accrue.
2. An installment user fee of $43 will be taken out of the first payment.
3. IRS may still file a tax lien.
4. The IRS may begin levy action if taxpayer defaults.
5. Future tax refunds will be withheld and applied to the liability until paid in full.
6. Taxpayer must continue making payments while an offer in compromise is pending.

Taxpayers are entitled to an administrative review of any rejection of a proposed installment agreement.  § 6159(f), § 7122(e).

Resources

Documents

• Financial Analysis Handbook

Documents on IRS.gov

• Installment Agreement Request – IRS Form 9465 
• Collection Information Statement for Wage Earners and Self-Employed Individuals-Form 433-A (Not OIC)
• Collection Information Statement (Short Form) – Form 433-F
• The IRS Collection Process – IRS Publication 594

IRS Regulations

• IRC §6159: Place and Due Date for Payment of Tax

If the taxpayer does not pay a tax liability in full and fails to find an alternative method to pay the tax, the IRS may levy against the taxpayer’s property § 6330, § 6331.  A levy is a legal seizure of the taxpayer’s property to satisfy a tax debt.  Levies are different from liens in that a lien is a claim used as security for the tax debt, while a levy actually takes the property to satisfy the tax debt.

The IRS may seize and sell any type of real or personal property that the taxpayer owns or has an interest in.   For instance, the IRS may seize and sell property that the taxpayer holds (such as the taxpayer’s car, boat, or house), or it may levy property that is the taxpayer’s but is held by someone else (such as the taxpayer’s wages, retirement accounts, dividends, bank accounts, licenses, rental income, accounts receivables, the cash value of the taxpayer’s life insurance, or commissions).  However, § 6334 lists property that is exempt from levy.

Before the IRS may levy on a taxpayer’s property it must meet the following requirements:

1. It assessed the tax and sent the taxpayer a Notice and Demand for Payment;
2. The taxpayer neglected or refused to fully pay the debt within 10 days after the IRS notifies the taxpayer about it; and
3. It sent the taxpayer a joint Final Notice of Intent to Levy and Notice of the taxpayer’s Right to A Hearing (Collection Due Process Notice) at least 30 days before the levy.  If the IRS levies the taxpayer’s state tax refund, the taxpayer may receive a Notice of Levy on the taxpayer’s State Tax Refund, Notice of The taxpayer’s Right to Hearing after the levy.

The taxpayer may ask an IRS manager to review the taxpayer’s case, or the taxpayer may request a Collection Due Process hearing with the Office of Appeals by filing a request for a Collection Due Process hearing with the IRS office listed on the taxpayer’s notice.  The taxpayer must file the taxpayer’s request within 30 days of the date on the taxpayer’s notice.

Hearing Procedures

A CDP hearing is conducted by an impartial employee of the IRS Office of Appeals. The appeals officer should have no prior involvement in the issue that resulted in the collection of the unpaid liability. CDP hearings are conducted informally at the appeals office.  No transcript is taken of the conference and no oath or affirmation is taken. Some of the issues the taxpayer may discuss include:

1. Tax liability was paid before the IRS sent the levy notice;
2. The IRS assessed the tax and sent the levy notice when the taxpayer was in bankruptcy and subject to the automatic stay during bankruptcy;
3. The IRS made a procedural error in an assessment;
4. The statute of limitations expired before the IRS sent the levy notice;
5. The taxpayer did not have an opportunity to dispute the assessed liability;
6. The taxpayer wishes to discuss the collection options; or
7. The taxpayer wish to make a spousal defense.

At the hearing, the taxpayer may also challenge the existence of the liability or the amount of the liability only if he did not receive a Statutory Notice of Deficiency, did not receive it in time to file a tax court petition, or if he did not had any opportunity to dispute the liability. The taxpayer may not raise an issue that was raised and considered at a prior administrative or judicial hearing.

Prior to issuing a determination, the appeals officer is required to obtain verification from the IRS office collecting the tax that the requirements of any applicable law or administrative procedure have been met.

The Office of Appeals will issue its findings in a dated Notice of Determination sent by certified mail or registered mail to the taxpayer.  While there is no time limit on when the IRS must issue its findings, the regulations require the appeals officer to conduct the hearing “as expeditiously as possible.” Once the finding is issued the taxpayer has 30 days to request judicial review.

The Notice of Determination is required to:

1. State whether the IRS met the requirements of any applicable law or administrative procedure
2. Decide any allowable issue raised by the taxpayer at the hearing (for example, challenges to the liability, spousal defenses, the appropriateness of the collection action)
3. Decide whether the levy is required for the efficient collection of taxes in light of a taxpayer’s concern that the collection action be no more intrusive than necessary
4. Set forth any agreements reached with the taxpayer, any relief given to the taxpayer, and any actions that the taxpayer or IRS are required to take and
5. Advise the taxpayer that the judicial review to the Tax Court or a U.S. District Court must be sought within 30 days of the date of the Notice of Determination (Temporary Reg. §301.6330-1T(e)(3), Q&A –E7)

Levies on the Taxpayer’s Wages, Federal Payments or the Taxpayer’s Bank Account

If the IRS levies the taxpayer’s wages or federal payments, the levy will end when:

1. The levy is released;
2. The taxpayer pays the taxpayer’s tax debt; or
3. The statute of limitations expires for legally collecting the tax.

If the IRS levies the taxpayer’s bank account, the taxpayer’s bank must hold funds the taxpayer has on deposit for 21 days (up to the amount the taxpayer owes).  This period allows the taxpayer time to solve any problems from the levy or to make other arrangements to pay.  After 21 days, the bank must remit to the IRS the money, plus interest if it applies.  To discuss the taxpayer’s case, call the IRS employee whose name is shown on the Notice of Levy.

Filing a Claim for Reimbursement When the IRS Made a Mistake in Levying the Taxpayer’s Account

If the taxpayer paid bank charges because of a mistake the IRS made when it levied the taxpayer’s account, the taxpayer may be entitled to a reimbursement. To be reimbursed, the taxpayer must file a claim (Form 8546) with the IRS within 1 year after the taxpayer’s bank charged the taxpayer the fee.

Federal Payment Levy Program

Under the Federal Payment Levy Program, the IRS may levy monies from the following federal payments that the taxpayer may receive: retirement from the Office of Personnel Management, social security benefits, federal vendor payments, federal employee salaries, or federal employee travel advances and reimbursements.  This program electronically levies the taxpayer’s federal payments paid through the Department of Treasury, Financial Management Service (FMS).  If the IRS electronically levies the taxpayer’s federal payments, the levy will take 15% from each of the payments until the account is resolved.  If the taxpayer already is working with an IRS employee, call that employee for assistance.  If the taxpayer is not working with an employee, call 1-800-829- 7650 for assistance.

Releasing a Levy

The IRS must release the taxpayer’s levy if any of the following occur:

1. The taxpayer pays the tax, penalty, and interest the taxpayer owe;
2. The IRS discovers that the statute of limitations ended before the levy was served;
3. The taxpayer provides documentation proving that releasing the levy will help the IRS collect the tax;
4. The taxpayer has an installment agreement, or enters into one, unless the agreement says the levy does not have to be released;
5. The IRS determines that the levy is creating a significant economic hardship for the taxpayer; or
6. The expense of selling the property would be greater than the fair market value of the property.

Releasing the Taxpayer’s Property

Before the sale date, the IRS may release the property if:

1. The taxpayer pays the amount of the government’s interest in the property;
2. The taxpayer enter into an escrow arrangement;
3. The taxpayer furnish an acceptable bond;
4. The taxpayer makes an acceptable agreement for paying the tax; or
5. The expense of selling the taxpayer’s property would be greater than the fair market value of the property.

Returning Levied Property

If the taxpayer requests the return of levied property within two years from the date of the levy, the IRS can consider returning the property if:

1. The IRS levied before it sent the taxpayer the two required notices or before the taxpayer’s time for responding to them has passed (ten days for the Notice and Demand; 30 days for the Notice of lntent to Levy and the Notice of Right to Hearing);
2. The IRS did not follow its own procedures;
3. The IRS agrees to let the taxpayer pay in installments, but it still levies, and the agreement does not say that it can do so;
4. Returning the property will help the taxpayer pay the taxpayer’s taxes; or
5. Returning the property is in the taxpayer’s and the government’s best interest.

Selling the Taxpayer’s Property

The IRS must post a public notice of a pending sale, usually in local newspapers or flyers.  The IRS is to deliver the original notice of sale to the taxpayer or send it to the taxpayer by certified mail.  After placing the notice, it must wait at least ten days before conducting the sale, unless the property is perishable and must be sold immediately.  Before the sale, the IRS will compute a minimum bid price.  This bid is usually 80% or more of the forced sale value of the property, after subtracting any liens.  If the taxpayer disagrees with this price, the taxpayer can appeal it and ask that the price be computed again by either an IRS or private appraiser.

The taxpayer may also ask that the IRS sell the seized property within 60 days.  For information about how to do so, call the IRS employee who made the seizure.  The IRS will grant the taxpayer’s request, unless it is in the government’s best interest to keep the property.  The IRS will send the taxpayer a letter telling the taxpayer of its decision about the taxpayer’s request.

After the sale, the IRS first uses the proceeds to pay the expenses of the levy and sale.  Then it applies any remaining amount to pay the tax liability.  If the proceeds of the sale are less than the total of the tax bill and the expenses of levy and sale, the taxpayer will still have to pay the unpaid tax.  If the proceeds of the sale are more than the total of the tax bill and the expenses of the levy and sale, the IRS will notify the taxpayer about the surplus money and will tell the taxpayer how to ask for a refund. However, if someone, such as a mortgagee or other lienholder, makes a claim that is superior to the taxpayer’s, it will pay that claim before it refunds any money to the taxpayer.

Redeeming the Taxpayer’s Real Estate

The taxpayer (or anyone with an interest in the property) may redeem the taxpayer’s real estate within 180 days after the sale.  The taxpayer must pay the purchaser the amount paid for the property, plus interest at 20% annually.

Property Exempt from Levy

By law, some property cannot be levied or seized.  § 6334.  The IRS may not seize any of the taxpayer’s property when the expense of selling the property would be more than the tax debt.  In addition, it may not seize or levy the taxpayer’s property on the day the taxpayer attends a collection interview because of a summons.  Other items the IRS may not levy or seize include:

1. School books and certain clothing;
2. Fuel, provisions, furniture and personal effects
3. Effects for a household, totaling $6,780;
4. Books and tools the taxpayer use in the taxpayer’s trade, business, or profession, totaling $3,390;
5. Unemployment benefits;
6. Undelivered mail;
7. Certain annuity and pension benefits; certain service-connected disability payments;
8. Workmen’s compensation;
9. Salary, wages, or income included in a Judgment for court-ordered child support payments;
10. Certain public assistance payments;
11. A minimum weekly exemption for wages, salary and other income.

Resources

See Also

• Appeals Conference
• Collection Due Process

Documents

• Sample Letter, Final Notice of Intent to Levy

Documents on IRS.gov

• Claim for Reimbursement of Bank Charges Incurred Due to Erroneous Service Levy or Misplaced Payment Check: IRS Form 8546.pdf
• Request for Due Process Hearing: IRS Form 12153.pdf
• Collection Appeal Rights: IRS Publication 1660.pdf

IRS Regulations

• IRC §6330: Notice and opportunity for hearing before levy
• TD 2002FED ¶ 47,017: Treasury Decision 8979, (Jan. 17, 2002)

Treasury Regulations

• Temp. Reg. §301.6330-1: Notice and opportunity for hearing prior to levy

If the taxpayer does not pay a tax liability in full and fails to find an alternative method to pay the tax, the IRS may file a Notice of Tax Lien against the taxpayer’s property. § 6320.  By filing a lien, the IRS is making a legal claim to the taxpayer’s property as security for payment for the tax debt. (§ 6321) The IRS may only file a Federal Tax Lien after It assesses the liability;

1. It sends a Notice and Demand for Payment (a bill that tells the taxpayer how much the taxpayer owe in taxes); and
2. The taxpayer neglects or refuses to fully pay the debt within 10 days after the IRS notifies the taxpayer about it.

Once these requirements are met, a lien is created for the amount of the taxpayer’s tax debt.  The lien attaches to all the taxpayer’s property (such as the taxpayer’s house or car) and to all the taxpayer’s rights to property (such as the taxpayer’s accounts receivable, if the taxpayer is an employer). It is not necessarily filed in the county clerk’s office.

Releasing a Lien

The IRS may issue a Release of the Notice of Federal Tax Lien (§ 6325) :

1. Within 30 days after the taxpayer satisfies the tax due (including interest and other additions) by paying the debt or by having it adjusted, or
2. Within 30 days after it accepts a bond that the taxpayer submits, guaranteeing payment of the debt.

In addition, the taxpayer must pay all fees that a state or other jurisdiction charges the taxpayer to file and release the lien.  These fees will be added to the amount the taxpayer owes.

If the IRS has not filed it again, the lien will usually released automatically 10 years after a tax is assessed.  The taxpayer may sue the federal government for damages If the IRS knowingly or negligently does not release a Notice of Federal Tax Lien when it should be released.

Payoff amount

The full amount of the taxpayer’s lien will remain a matter of public record until it is paid in full.  However, at any time the taxpayer may request an updated lien payoff amount to show the remaining balance due.  An IRS employee can issue the taxpayer a letter with the current amount due in order to release a lien.

Applying for a Discharge of a Federal Tax Lien

If the taxpayer is giving up ownership of property, such as when the taxpayer sell her home, she may apply for a Certificate of Discharge.  Each application for a discharge of a tax lien releases the effects of the lien against one piece of property.  Note that when certain conditions exist, a third party may also request a Certificate of Discharge.  If the taxpayer is selling the primary residence, the taxpayer may apply for a relocation expense allowance.  Certain conditions and limitations apply.

Withdrawing Liens

By law, a filed notice of tax lien can be withdrawn if:

1. The notice was filed too soon or not according to IRS procedures, the taxpayer entered into an installment agreement to pay the debt on the notice of lien (unless the agreement provides otherwise),
2. Withdrawal will speed collecting the tax, or
3. Withdrawal would be in the taxpayer’s best interest (as determined by the Taxpayer Advocate) and the best interest of the government.

The IRS will give the taxpayer a copy of the withdrawal and at the taxpayer’s request, the IRS will will send a copy to other institutions.

Appealing the Filing of a Lien

The IRS is required to notify a taxpayer in writing within five days after it files a Notice of a Tax Lien.  IRC § 6320.  The IRS may give the taxpayer this notice in person, leave it at the her home or her usual place of business or send it by certified or registered mail to the her last known address.   The notice, also known as a Collection Due Process notice, must specify the amount of the tax liability and must state that the taxpayer has a right to request a CDP hearing within 30 days.  The notice must also outline the administrative appeals rights of the taxpayer and the provisions and procedures to obtain the release of the levy or lien.  The taxpayer must file his or her request for a CDP hearing by the date shown on the taxpayer’s notice.  It is the customary practice of the Clinic to request a CDP hearing.

Hearing Procedures

A CDP hearing is conducted by an impartial employee of the IRS Office of Appeals.   The Appeals Officer should have no prior involvement in the issue that resulted in the collection of the unpaid liability.  CDP hearings are conducted informally at the Appeals office.  No transcript is taken of the conference and no oath or affirmation is taken.  Some of the issues the taxpayer may discuss include:

1. The validity, sufficiency, and timeliness of the CDP Notice and the request of the CDP hearing
2. Any relevant issue relating to the unpaid tax raised by the taxpayer at the hearing
3. Any appropriate spousal defenses raised by the taxpayer at the hearing
4. Any challenges by the taxpayer to the appropriateness of the collection action
5. Any offers for collection alternatives made by the taxpayer and
6. Whether the proposed collection action balances the need for the efficient collection of taxes and the legitimate concern of the taxpayer that the collection action be no more intrusive than necessary.

At the hearing, the taxpayer may also challenge the existence of the liability or the amount of the liability only if he did not receive a Statutory Notice of Deficiency, did not receive it in time to file a tax court petition, or if he did not had any opportunity to dispute the liability.  The taxpayer may not raise an issue that was raised and considered at a prior administrative or judicial hearing.

Prior to issuing a determination, the Appeals Officer is required to obtain verification from the IRS office collecting the tax that the requirements of any applicable law or administrative procedure have been met.

The Appeals Office will issue its findings in a dated Notice of Determination sent by certified mail or registered mail to the taxpayer  § 6320 (c), § 6330 (d) .  While there is no time limit on when the IRS must issue its findings, the regulations require the Appeals Officer to conduct the hearing “as expeditiously as possible.”  Once the finding is issued the taxpayer has 30 days to request judicial review.

The Notice of Determination is required to:

1. State whether the IRS met the requirements of any applicable law or administrative procedure
2. Decide any allowable issue raised by the taxpayer at the hearing (for example, challenges to the liability, spousal defenses, the appropriateness of the collection action)
3. Decide whether the levy is required for the efficient collection of taxes in light of a taxpayer’s concern that the collection action be no more intrusive than necessary
4. Set forth any agreements reached with the taxpayer, any relief given to the taxpayer, and any actions that the taxpayer or IRS are required to take and
5. Advise the taxpayer that the judicial review to the Tax Court or a U.S. District Court must be sought within 30 days of the date of the Notice of Determination (Temporary Reg. §301.6330-1T(e)(3), Q&A –E7)

Applying for Subordination of the Federal Tax Lien

Taxpayer occasionally refinance a loan to secure a better interest rate or to take some equity out of their property.  A recorded federal tax lien has the effect of preventing a lender from refinancing the loan.  However, section 6325(d) provides relief for taxpayers by permitting the subordination of a federal tax lien.

Subordination can occur in three instances: the refinancing permits the taxpayer to pay the amount of tax owed on the lien; the collection of the tax will ultimately be facilitated; or the IRS determines that the United States will be adequately secured after the subordination.  This relief permits a refinancing in order to improve the interest rate on the loan even when there is no cash due the taxpayer.  Refinancing also has the effect of facilitating collection because the taxpayer is better able to afford the reduced payments, which may then allow the taxpayer to pay some or all of the tax that is owed.

Publication 784 sets out the procedure and requirements to request subordination.  The request is made by sending a subordination notebook that contains enclosures specified in the publication.  The notebook is sent to the local technical support office.  For Georgia, it is sent to:

Internal Revenue Service
Attn: Technical Services Group 3
Stop 333-D, Room 900
401 West Peachtree Street
Atlanta, GA 30308-3539  ‘

Priority of the Federal Tax Lien

The law involving priority of a federal tax lien is quite complex.  The priority of a federal tax lien is relevant when submitting an installment agreement, offer in compromise, or other interacting with the IRS on collection matters.  Below is a brief general discussion of this area of the law.

As stated at the beginning of this section, a statutory federal tax lien arises under section 6321 after assessment and notice and demand for payment. The lien attaches to all property and rights to property of the taxpayer, even property acquired after the lien attaches.  It has priority over everyone except certain specific persons defined in section 6323 (purchaser for value without notice, holder of a security interest such as mortgages, mechanic’s lien or, or judgment lien creditor.)    If the IRS files a Notice of Federal Tax Lien (a formal record of the lien), creditors who perfect their lien prior to the recording of the federal lien have priority, but not creditors who perfect their lean afterward.

Upon filing the federal lien notice under section 6323 (f), the IRS becomes a secured creditor with priority over all subsequently arising liens both secured and unsecured.  For instance, if a client refinances a properly secured loan even through a loan modification procedure, the new mortgage would not have priority over the filed Notice of Federal Tax Lien.  This is why lending institutions insist on a subordination of the federal tax lien as a condition of the modification or new loan. (See website above for discussion of subordination).

There are certain exceptions to the federal lien priority rules that are listed in section 6323(b). In general, the follow is a list of the creditor interests that retain priority:

1. Purchaser of a security interest without actual notice;
2. Purchaser of a motor vehicle who at the time of purchase did not have actual knowledge of the IRS lien;
3. Purchaser of property at retail;
4. Purchase of personal property at a casual sale without actual knowledge when the item is less than $1,000;
5. Purchaser of property such to a possessory lien under local law security the cost of repair or improvement;
6. Real Property Taxes or special assessments;
7. Mechanics’ liens;
8. Attorneys’ lien;
9. Certain Insurance Contracts;
10. Depost-Secured Loans;
11. Purchase Money Security Interest.  While not listed as an exception both the courts and IRS have long recognized this as an exception to the priority rule.

Resources

See Also

• Appeals Conference
• Collection Due Process

Documents

• Sample Letter, Notice of Tax Lien and Right to CDP Hearing

IRS Regulations

• IRC §6320: Notice and opportunity for hearing upon filing of notice of lien
• TD 2002FED ¶ 47,017: Treasury Decision 8979, (Jan. 17, 2002)

Documents on IRS.gov

• Request for Release of Federal Tax Lien: IRS Publication 1450
• Request for Due Process Hearing: IRS Form 12153
• Collection Appeal Rights: IRS Publication 1660
• How to Prepare an Application for a Certificate of Subordination of Federal Tax Lien: IRS Publication 784

An offer in compromise is an offer for an amount less than the total amount of tax liability due made by a taxpayer to settle his entire outstanding tax liability. IRC § 7122. Generally, the amount of the offer should be equal to the taxpayer’s net worth plus net disposable income for the next twelve months and must address all tax liability owed, including liability for tax years for which returns have not been filed. For many taxpayers whom the Clinic represents, the net worth and net disposable income for the next twelve months are zero or minimal. The law prohibits the IRS from rejecting an offer simply because of the amount of the offer.

A compromise settles the entire amount of outstanding assessed liability for taxes, penalties and interest. All questions of tax liability for the year(s) or period(s) covered by the offer are conclusively settled. Neither the taxpayer nor the government can reopen a compromised case unless there was falsification of information or documents, concealment of assets, a mutual mistake of a material fact sufficient to set aside or reform a contract, or the taxpayer fails to meet his filing requirements for the five years following the acceptance of the offer. Historically, tax refunds received during the tax year following the year in which the offer is submitted are applied to the unpaid tax.  However, the IRS changed this policy in 2021, and for offers accepted after November 2021, the IRS has indicated that it will not withhold the refund for the year in which an offer is accepted.  Currently, as a condition to an acceptable offer, all returns must be filed. For the purposes of an Offer in Compromise, if the IRS prepares a substitute return, the return for that year will be treated as filed.

The IRS has set forth its policy for accepting an offer in compromise from a taxpayer in bankruptcy (See CC-2004-025). Although it is the position of the IRS not to accept an offer when the taxpayer is in bankruptcy, exceptions are provided.

An offer in compromise may be submitted based on the following:

1. Doubt as to liability
2. Doubt as to collectability
3. Doubt as to collectability, with special circumstances
4. Effective tax administration

When an offer is submitted, financial information usually must be disclosed. It is the Clinic’s policy to verify all financial data presented by a client before it is submitted to the IRS. Whenever possible, student attorneys should obtain documentary support for all financial data submitted with an offer. Exhibits should support key facts whenever possible. Treasury Circular 230 is explicit that if misleading information is submitted by a taxpayer’s representative, the representative may be barred from practice before the IRS.

A taxpayer is required to file a Form 656-L, Offer in Compromise (Doubt as to Liability), when the taxpayer believes that the tax liability is incorrect, while Form 656, Offer in Compromise, should be filed only when there is doubt as to collectability that the tax liability could ever be paid in full or when the offer is submitted on the basis of effective tax administration (ETA). A taxpayer is not permitted to file offers concurrently claiming both that the tax liability is incorrect, and there is doubt as to collectability.

An offer in compromise becomes pending when it is accepted for processing. If an offer accepted for processing does not contain sufficient information to permit the IRS to evaluate whether the offer should be accepted, the IRS will request that the taxpayer provide the needed additional information. If the taxpayer does not submit the additional information that the IRS has requested within a reasonable time period after such a request, the IRS may return the offer to the taxpayer. The IRS may also return an offer if it determines that the offer was submitted solely to delay collection or was otherwise non-processable. An offer returned following acceptance for processing is deemed pending only for the period between the date the offer is accepted for processing and the date the IRS returns the offer to the taxpayer. This affects the period of time that the statute of limitations is suspended.

The taxpayer may withdraw an offer any time before the IRS accepts the offer. The withdrawal must be in writing, and it is effective upon the IRS’s receipt or upon the issuance of a letter by the IRS confirming the taxpayer’s withdrawal.

An offer is not accepted until the IRS issues a written notification of acceptance. It is also not rejected until the IRS issues a written notice advising of the rejection, the reason(s) for rejection, and the right to an appeal. The taxpayer has 30 days from the date on the rejection letter to request an appeals conference with the Office of Appeals. The taxpayer may not request an appeal if the offer was returned because it was non-processable (required tax returns not filed or taxpayer in bankruptcy proceeding), because taxpayer failed to provide requested information, or because the IRS determined that the offer was submitted solely for purposes of delay.

The following must be included in an offer in compromise package sent by the Clinic to the IRS (refer to bottom of page to link to forms):

1. Cover letter and brief containing the facts and a discussion of the law.
2. Form 656-B (Booklet with forms) or 656-L
3. Form 433-A (OIC) or Form 433B (OIC) (not needed if Doubt as to Liability)
4. Supporting documents for Form 433A or B

Basis of an Offer in Compromise

In preparing an offer, ensure that you clearly state in the opening paragraph of the memorandum under what ground you are submitting the offer.

Doubt as to Liability

A taxpayer may submit an offer-in-compromise based on doubt as to liability (“DATL”) if there is a genuine dispute as to the existence or amount of the correct tax liability under the law. Treas. Reg. § 301.7122-1(b)(2). An offer or the DATL ground also may be submitted in lieu of a Request for Audit Reconsideration. DATL does not exist where the liability has been established by a final court decision or judgment concerning the existence or amount of the liability. The IRS may not reject an offer based on DATL because it could not find its administrative file. The taxpayer must submit a brief explaining why he/she does not owe the tax along with Form 656-L. A financial statement (Form 433) does not need to be included with an offer made on the basis of DATL.

If a client received a notice of deficiency, only a final court decree will bar the submission of an offer based on DATL. Thus one may be submitted after a petition to the Tax Court but before a final decree is entered. An OIC-DATL will be rejected where the underlying tax liability was previously stipulated in a Tax Court decision. In this situation the tax liability can’t validly be considered a “doubtful liability” under the applicable regulation. Sec. 301.7122-1(b)(1); Oyer v. Commissioner, T.C. Memo. 2003-178, affd. 97 Fed. Appx. 68 (8th Cir. 2004).

Rev. Proc. 2003-71

Doubt as to Collectability and Doubt as to Collectability with Special Circumstances

A. General

A taxpayer may submit an offer based on doubt as to collectability (“DATC”) or doubt as to collectability with special circumstances (“DATC-SC”) if the taxpayer believes that he/she cannot ever pay the full amount of the tax owed. Treas. Reg. § 301.7122-1(b)(3). DATC and DATC-SC exists in any case where the taxpayer has sufficient net assets or income to pay some of the liability, but the taxpayer’s assets and income are less than the full amount of the liability. The taxpayer must include with the request Form 433-A (OIC) or 433-B (OIC) showing his or her current financial situation

Doubt as to Collectability

A determination of DATC will include a determination of ability to pay. In determining ability to pay, the Secretary will permit taxpayers to retain sufficient funds to pay basic living expenses (see Collection Financial Standards). The determination of the amount of such basic living expenses will be founded upon an evaluation of the individual facts and circumstances presented by the taxpayer’s case. To guide this determination, guidelines published by the Secretary on national and local living expense standards are taken into account.

Where a taxpayer is offering to compromise a liability for which the taxpayer’s spouse has no liability, the assets and income of the non-liable spouse will not be considered in determining the amount of an adequate offer. The assets and income of a non-liable spouse may be considered, however, to the extent property has been transferred by the taxpayer to the non-liable spouse under circumstances that would permit the IRS to effect collection of the taxpayer’s liability from such property (e.g., property that was conveyed to defraud a creditor), property has been transferred by the taxpayer to the non-liable spouse for the purpose of removing the property from consideration by the IRS in evaluating the compromise.

Where collection of the taxpayer’s liability from the assets and income of the non-liable spouse is permitted by applicable state law (e.g., under state community property laws), the assets and income of the non-liable spouse will be considered in determining the amount of an adequate offer except to the extent that the taxpayer and the non-liable spouse demonstrate that collection of such assets and income would have a material and adverse impact on the standard of living of the taxpayer, the non-liable spouse, and their dependents.

Doubt as To Collectability with Special Circumstances

Internal Revenue Manual section 5.8.4.3 provides detailed guidance on an offer based on DATC-SC. That section of the manual refers to the factors to consider and refers the reader to the factors in the Manual dealing with an offer submitted on the basis of ETA. The Manual also refers to IRC § 6343, and Treas. Reg. § 301.6343-1, which provide that a levy can be released on the basis of economic hardship. I.R.M. 5.8.11.2.1 gives examples and specific provisions for the IRS employee to consider when making his or her decision.

In IRM 5.8.11.2.1 (5) other factors that may be taken into account when considering an offer based on DATC-SC are listed that impact the taxpayer’s financial condition other than basic living expenses, as follows:

• the taxpayer’s age and employment status
• number, age and health of taxpayer’s dependents
• cost of living in area the taxpayer resides
• any extraordinary circumstances such as special education expenses, medical catastrophe, or natural disaster

Each of these factors must be specifically addressed in the OIC brief submitted by the Clinic.

In IRM 5.8.11.2.1(6) factors constituting economic hardship are listed:

• The taxpayer is incapable of earning a living because of a long term illness, medical condition or disability and it is reasonable that the financial resources will be exhausted.
• The taxpayer has set monthly income and no other means of support, and the income is exhausted each month in providing for the care of dependents.
• The taxpayer has assets, but is unable to borrow against the equity in those assets, and liquidation to pay the outstanding tax would render the taxpayer unable to meet basic living expenses.

These factors also must be specifically addressed in the OIC brief.

Frequently, the client has a negative cash flow and no assets with equity except possibly in their vehicle. Assuming you have determined the reasonable value of the vehicle and there is equity in the vehicle in excess of the excluded amount, the IRS will insist that that equity is the minimum amount required for an offer unless you are able to convince them that the client comes within the provisions of the Manual dealing with economic hardship or some other provision dealing with special circumstances and effective tax administration. (See discussion of the excluded amount under “Financial Analysis”, below.)

In dealing with vehicles, several best practice suggestions include: providing evidence of the inability of the client to borrow against the vehicle and what would be added to the taxpayer’s monthly expenses should the client borrow against the vehicle; pictures of the vehicle showing damages or poor condition; the need to transport dependent children or other members of the taxpayer’s household in the vehicle; and the taxpayer’s health or employment situation necessitating use of the vehicle.

Effective Tax Administration

Even though a taxpayer is able to pay the tax in full, a compromise may be entered to promote ETA when:

1. Collection of the full liability would cause the taxpayer “economic hardship” or
2. Compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for compromising the liability, and
3. Compromise of the liability will not undermine compliance by taxpayers with the tax laws [Treas. Reg. § 301.7122-1(b)(3)(ii)]

Economic hardship is defined as the inability to pay reasonable basic living expenses. Treas. Reg. § 301.6343-1. In determining reasonable basic living expenses, the IRS is to consider relevant information such as the taxpayer’s age, employment status and history, number of dependents, and other exceptional circumstances. Factors to support a finding of economic hardship include, but are not limited to the following:

1. Taxpayer is incapable of earning a living because of a long term illness, medical condition, or disability, and it is reasonably foreseeable that taxpayer’s financial resources will be exhausted providing for care and support during the course of the condition;
2. Although taxpayer has certain monthly income, that income is exhausted each month in providing for the care of dependents with no other means of support; and
3. Although taxpayer has certain assets, the taxpayer is unable to borrow against the equity in those assets and liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses.

Compromise based on equity and public policy is not accepted if collection of the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner. The circumstances must be such that compromise is justified even though a similarly situated taxpayer may have paid his liability in full.

A DATC-SC offer is different from an offer submitted on the basis of Effective Tax Administration (“ETA”) because in the former the amount that could be collected is less than the full amount of the liability but special circumstances exist that warrant acceptance for less than the amount of the calculated reasonable collection potential (RCP). An offer submitted on the basis of ETA is one where the full tax liability could be collected from assets of the taxpayer, but should not be collected because to do so would cause a hardship to the taxpayer. Nonetheless, the IRS applies several of the criteria and procedures related to an offer submitted on the basis of ETA to offers submitted on the basis of DATC-SC.

Financial Analysis: Assets, Liabilities, Income, Expense

The Form 433 must be consistent with the Memorandum you prepare as well as the amount offered. There are two main areas of Form 433 that the IRS Offer Unit examines in determining the reasonable collection potential: the assets and liabilities sections and the income and expense section. The sections should not contain net numbers; that is, the assets should not be offset with the liabilities and the income should not be offset with expenses. When determining income and expense, you should take into account National and Local Standards, discussed below

In determining the correct amount to offer, the amount must be greater than the collection potential of the equity in all assets and the surplus in monthly income. Always review the Financial Analysis and the Future Income sections of I.R.M. 5.8.5 (revision 9-30-13). The IRS is routinely revising these sections. In completing the Form 433 sections listing assets and liabilities be aware that any amount of equity shown is normally the minimal amount of an offer. However, if the Form 433-A (OIC) shows cash on hand of $1,000 or less the IRS will treat the account as no cash on hand. If the amount of cash on hand or in savings and checking accounts is less than $1,000. List “0” as the amount of equity, but include in the accompanying brief an explanation of why you have done so. Furthermore, if the amount exceeds $1,000 and the client can show that the amount is used to pay for taxpayer’s monthly allowable living expenses, then, although it must be listed, that amount will not be included as an asset. In some instances it is helpful to present more than three months of bank statements if the average more clearly reflects the cash on hand. In all instances the brief you prepare is critical to explain the financial assets of the client.

The IRS now provides at I.R.M.5.8.5.11 that the IRS will exclude $3,450 from the net equity valuation of vehicles used for work, for production of income, and/or for the welfare of the taxpayer’s family, and up to two cars per household. The reduction is from the value that is determined to be the current value of the automobile. For most of our clients, this virtually eliminates the equity. If the value of the vehicle exceeds $3,450, ask the client to obtain a written appraisal from a used car dealer or the amount a lender is willing to loan on a car. Pictures of the vehicle or maintenance records are useful to determine the condition of a vehicle and any other information concerning the condition that can be considered in setting the value of the vehicle.

Dissipation of Assets (I.R.M.5.8.5.18) If the IRS determines that the taxpayer has disposed of assets within a three year period prior to the submission of the offer, the client must explain in detail what occurred and why those funds are not available. However, if for example the funds from an IRA were withdrawn to invest in a business and there was no prior liability, those amounts are not treated as dissipated assets. The Manual has other specific examples and should be reviewed carefully.

For clients that are either unemployed or underemployed, the IRS may imputed income to them under the assumption that they will be employed. In cases where this is the case, refer to the provisions of I.R.M § 5.8.5.20, “Future Income”. These sections provide guidance to IRS personnel in reviewing offers and other collection actions.

The IRS will consider the possible future earning potential of the taxpayer in judging what the income of the taxpayer will be. The Manual gives specific examples of child support of the taxpayer ending or a debt being paid, which would possibly indicate an increase in discretionary income. The Manual cautions not to automatically add the additional income. We should address any future discretionary income in the brief. The period of the future income is different depending on whether the offer is paid within a 5 month period or a 24 month period. The IRS will look only to earnings over a 12 month period if the offer is paid in 5 months, which will mean generally that the offer amount may be less than if the client seeks to pay the offer over 24 months. In any event, the future income over the remaining life of the collection statute of limitations is no longer used.

In 5.8.5.18.4 and 5.8.5.18.5 several situations are listed and how they should be treated where there is unemployment or underemployment. These sections should be carefully considered and commented on the brief. For instance, if the taxpayer is temporarily unemployed or underemployed, the IRS will then average past income in certain circumstances. A best practice is to affirmatively discuss the client’s situation and provide an analysis of past income. Explain how the present and past are different and why the client will not again reach the prior level of income because of such things as medical problems, age, etc. The section provides specific examples. You may want to consider citing the manual and the example in the law section of the brief.

In some situations in lieu of averaging past income, the IRS accepts the current income, but enters into a Collateral Agreement which becomes a part of the offer. The Agreement provides that the taxpayer will agree to pay a percentage of future income if that future income is over certain agreed upon amounts. The Agreement covers the situation when the taxpayer’s income substantially increases in future tax years. We may agree to enter into these agreements in appropriate cases. I.R.M. section 5.8.5.19 (10-22-10) Future Income Collateral Agreement sets forth the parameters for entering into a Collateral Agreement.

The IRS considers whether the tax would be dis-chargeable in bankruptcy as a factor in determining the amount of the offer (not whether the client has filed and received a discharge, but whether if they were to file, the tax would be dis-chargeable). Comment on this if it is applicable.

If a client has a roommate, we should not be required to produce the roommate’s income if they are maintaining separate households. However, whether and to the extent that the roommate contributes to household expenses should be addressed.

To assist in computing both the client’s net equity in assets and the income and expenses standards, below is an interactive excel spreadsheet useful for these computations. It pulls the current national standards and allowances provided by the IRS Manual sections and guidance.

As always, prior to citing and authority, including any section of the IRS Manual, you should check for any updates.

National and Local Standards

The IRS has provided national and local Standards for use in determining monthly expenses whether there is doubt as to collectability. The amount paid by the taxpayer for the items covered by the national standards need not be proved. Thus, the taxpayer is allowed the maximum amount regardless of what the taxpayer paid for those items. However, those expenses covered by the local standards are allowed only to the extent the taxpayer can prove that the expenditure was made. In general, no amount will be allowed in excess of the local standard.

• National Standards have been established several categories of living expenses: food, housekeeping supplies, apparel and services, personal care products and services, and health care expenses including medical services, prescription drugs, and medical supplies (e.g. eyeglasses, contact lenses, etc.) and miscellaneous. The out-of-pocket health care standard amount is allowed in addition to the amount taxpayers pay for health insurance.
• Local Standards have been established for housing and utilities. The housing and utilities standards are derived from Census and Bureau of Labor and Statistics (BLS) data, and are provided by state down to the county level. The standard for a particular county and family size includes both housing and utilities allowed for a taxpayer’s primary place of residence. Housing and utilities standards include mortgage or rent, property taxes, interest, insurance, maintenance, repairs, gas, electric, water, heating oil, garbage collection, telephone and cell phone.
• Transportation Standards – The transportation standards for taxpayers with a vehicle consist of two parts: (a) nationwide figures for monthly loan or lease payments referred to as ownership costs, and (b) additional amounts for monthly operating costs broken down by Census Region and Metropolitan Statistical Area (MSA).

A conversion chart has been provided with the standards that lists the states that comprise each Census Region as well as the counties and cities included in each MSA. The ownership cost portion of the transportation standard, although it applies nationwide, is still considered part of the Local Standards.

Internal Revenue Manual 5.8.5.22.3 (6) (03-23-2018) provides guidance to determine allowable operating expenses of older cars. It provides that in situations where the taxpayer has a vehicle that is over eight years old or has a mileage of 100,000 miles or more, an additional monthly operating expense of $200 will generally be allowed per vehicle. For example, assume that the taxpayer, has a 1998 automobile with 50,000 miles, the taxpayer is allowed the standard of $226 per month plus $200 per month operating expense (because of the age of the vehicle), for a total operating expense allowance of $426 per month.

Rules and Requirements For All Offers in Compromise

The IRS in its initial review of an OIC will determine whether the taxpayer is in compliance and if the taxpayer is not, the offer will be returned as not “processable”. Thus, in connection with the submission of an OIC, all required federal income tax returns must be filed. Clients should changing income tax withholding or making estimated payments to ensure that at the end of year in which the offer is submitted and into the future there will be no further unpaid tax. If an offer is accepted, the acceptance is dependent upon the taxpayer remaining fully compliant for 5 years after the offer is accepted. Thus all returns must be timely filed and taxes paid when due.

In addition, the IRS will require that the taxpayer:

1. Is not currently involved in a bankruptcy proceeding,
2. Has filed Form 656 or 656-L,
3. Has filed Form 433-A (OIC) or 433-B (OIC) (not needed if doubt as to liability). This form requires a substantial amount of supporting documents. See Documents to Support Form 433.
4. Has included a brief that demonstrates that the taxpayer will be unable to pay the tax liability currently and within the next several years

Consequences of an Offer

1. The taxpayer must file all required Federal tax returns or the IRS must have filed substitute returns and the taxpayer must pay all required taxes for the next five years or until the offer amount is paid in full, whichever is longer. Otherwise, the offer will go into default, and the full amount of the original liability (less any amounts paid pursuant to the offer) with interest will be reinstated.
2. The statute of limitations for the assessment and collection of tax liability for the tax periods compromised and collection is suspended.
3. The IRS will keep all payments and credits made, received or applied to the total original tax liability before the submission of this offer.
4. The IRS will keep any refunds, including interest, that the taxpayer is entitled to and has not yet received through the tax year prior to which the offer was accepted. Under prior policy, the IRS would also keep refunds for the year of acceptance, but the IRS is no longer keeping these refunds for offers after November 1, 2021.  Taxpayers wishing to avoid this refund offset may attempt to do so by submitting an offset bypass refund request.
5. Once the IRS accepts the offer, the taxpayer cannot dispute the amount of tax liability in court or otherwise.
6. If the taxpayer should default on an accepted offer, then the IRS may also:
   1. Immediately file suit to collect the entire unpaid balance of the offer.
   2. Immediately file suit to collect an amount equal to the original amount of the tax liability as liquidating damages.
   3. File suit or levy to collect the original amount of the tax liability without further notice of any kind
7. The IRS may not levy against the property or rights to property of a taxpayer to collect the liability that is the subject of the offer during the period the offer is pending, for 30 days immediately following the rejection of the offer, and for any period when a timely filed appeal from the rejection is being considered by Appeals.

Compromise of a Compromise

If the taxpayer is unable to pay the balance of an accepted offer, the IRS has the option to: (1) temporarily adjust the terms of the offer, (2) formally compromise the existing compromise or (3) exercise the default provisions of the offer. The Internal Revenue Code authorizes the Commissioner under § 7122 to accept an offer in compromise of an accepted offer. The new offer to compromise the original offer must be based on doubt as to collectability.

The taxpayer must send a current financial statement (Form 433-A or 433-B) and a written proposal of the new offer in letter format to the office where the original offer was submitted. The letter should be addressed to the Commissioner of the Internal Revenue Service and include the following information:

1. Name, address and Social Security number or the taxpayer identification number of the taxpayer
2. Amount proposed and the terms of the payment
3. Acceptance date of the original offer
4. Waiver of any and all claims to amounts due from the United States up to the time of acceptance to the extent of the difference between the amount offered and the amount of the claim covered by the offer and
5. Reasons why request is being made to compromise the existing agreement

The compliance agreement (item 8 on Form 656) will remain in effect from the date the original offer was accepted.

Potential Default Cases

An offer can reach a potential default status in one of two ways: the taxpayer failed to make timely payments of the amount due based on the terms of the offer or a related collateral agreement, or the taxpayer has not adhered to the compliance provisions of the offer contract. The revenue officer has the discretion to grant up to a six-month extension if the taxpayer can pay the defaulted amount in 6 months or less.

Appeal of Rejected Offer

Typically, after submission of an offer the IRS will ask for supplemental information. The failure to provide the information will result in rejection of the offer. It is imperative that you stay in contact with the IRS during this time and provide the supplemental information timely and accurately. Any supplemental letters or memoranda must be reviewed by a Clinic Director prior to mailing.

Once the offer has been accepted for processing, an Offer Specialist will review the completed offer. In some cases, the Offer Specialist will determine an ability to pay in excess of what the client is able to pay. This is usually based on a disagreement as to the value of assets, income or reported expenses. If you are not able to resolve the dispute with the Offer Specialist, the offer will be rejected in writing and you will be afforded 30 days within which to appeal the determination to reject the offer.

Include in the appeal, the form “Request for Appeal of Offer in Compromise” (Form 13711). The Appeal Memoranda/letter focuses on the specific issues raised in the rejection letter. The appeal is sent to the Offer Specialist. It is helpful to provide additional documentation to support the basis for the client’s appeal. In some cases, the Appeal Memoranda/letter is sufficiently persuasive and the Officer Specialist will reconsider his or her rejection and offer additional opportunities to negotiate a new offer amount and thus resolve the case.

If the Offer Specialist is not persuaded to reconsider the rejection, the offer is forwarded to an Appeals Officer with the materials we provided and any comments the Offer Specialist wishes to make. Our Appeal Memoranda/letter should state at the end that we are requesting a face to face conference in Atlanta, Georgia. If we did not so state, once notice is received that the case is assigned to an Appeals Officer at another location, the student should immediately request a face to face conference in Atlanta, Georgia. This will typically take 30-60 days for the case to be transferred to Atlanta and an Appeals Officer in Atlanta will then contact us to arrange a conference.

Appeals Mediation

Appeals Division of the Internal Revenue Service has begun (effective December 1, 2008) to apply arbitration and mediation process to Offers and Trust Fund Recovery Penalty cases. The process is described in Rev. Proc. 2002-44 and Rev. Proc. 2006-44.

Internal Revenue Code section 7123 provides for non-binding mediation in Appeals on any issue unresolved at the conclusion of Appeals procedures, which occurs when Appeals sustains the IRS’s offer determination.

Mediation as to offers is limited to factual matters. The Revenue Procedure specifically limits the scope of Appeals jurisdiction to matters not related to the overall determination whether a taxpayer’s offer was acceptable. The Appeals Area Director must approve acceptance of all cases for arbitration and mediation.

Types of issues that are subject to this process include:

1. Value of assets;
2. Value of dissipated assets;
3. Taxpayer’s proportionate interest in jointly held assets;
4. Projections of future income based on calculations other than current income
5. The calculation of a taxpayer’s future ability to pay when living expenses are shared with a non-liable person; and
6. Other factual determinations, such as whether a taxpayer’s contributions into a retirement savings account are discretionary or mandatory as a condition of employment.

Collection Action During the Pendency of the Offer Consideration

Section 6331 (k) provides that no collection action can be initiated during the pendency of the offer in compromise. However, that section refers back to section 6331(i), which provides that any levy that was first made before the date that the offer was submitted does not have to be released. The release is within the discretion of the IRS. However, Policy Statement P-5-97 dating back to July 10, 1959 provides that the IRS will “withhold” action, which means that the IRS generally will not take affirmative action to release a levy.

Though the Code does not require a release of a levy, an argument can be made that the levy creates an economic hardship due to the financial condition of the taxpayer and should be released. See section 6343(a)(1)(D). If a taxpayer has submitted an offer in compromise and the necessary collection information statements requests release of the levy on hardship grounds, the financial information provided by the taxpayer should enable the IRS to determine whether a levy should be released. For most of our clients a continuing levy makes their economic situation even more difficult. If the IRS agrees to place the client in CNC, this will generally result in the release of the levy.

Procedure for processing an accepted offer and closing the case

Upon receipt of a letter from IRS accepting an offer in compromise, the client has generally 30-days to pay the lump sum amount offered. There are a few exceptions where the client and IRS have agreed to an installment payment of the offered amount. Our preference is that all offers use the lump sum payment, not the installment alternative.

Immediately contact the client and request that the client send the payment to the Clinic. The payment should be in the form of a Money Order; however, the IRS will also accept a personal check or a certified check. While it is acceptable for the client to send in the payment directly to the IRS (and some do before we learn of the acceptance), it is the Clinic’s policy to forward the payment to the IRS. That provides certainty that the payment has been made.

Payment to the address listed on the letter (usually in Fresno, California) with a cover letter (linked below) and the front page of the offer acceptance letter. Always make a complete copy of the above package. The package is then sent by UPS to the place designated. Each offer is sent in a separate UPS package to ensure that each offer payment is properly accounted for and processed.

Usually in approximately 4-6 weeks the client and the Clinic will receive a confirmation of payment. At that point, confirm in the file whether a Notice of Federal Tax Lien has been filed. Although an accepted offer will result in the tax lien being released, there are potential credit report benefits to having the lien formally withdrawn (which, in effect, puts the taxpayer in the position of the lien never having been filed). Accordingly, prepare a Form 12277 to have the tax lien withdrawn.

The student attorney should then include this confirmation in the file, close the file and send the client a closing letter (linked below). Purge the file of miscellaneous correspondence before turning in the file for closing.

Resources

Documents

• Equity Determination & Income and Expense allowance worksheet
• Brief (include as attachment to Form 656)
• Offer in Compromise Closing Letter
• Offer in Compromise Cover Letter to I.R.S
• Offer In Compromise To-Do List
• Offer Payment Cover Letter
• Sample letter requesting documents to support offer
• Supporting document checklist

Documents on IRS.gov

• Collections Financial Standards
• IRS Form 656B: Offer in Compromise Booklet (includes forms 433-A and 433-B) (03/2017)
• IRS Form 656L: Offer in Compromise (Doubt as to Liability application) (01/2016)
• IRS Form 13711: Request for Appeal of Offer in Compromise
• IRS Publication 594: The IRS Collection Process
• IRS Publication 1494:  Table for Figuring Amount Exempt from Levy on Wages and other Income
• IRS Publication 1854: How to Prepare a Collection Information Statement

IRS Manual

Part 5  Chapter 8: Collecting Process: Offers in Compromise
Part 5 Chapter 8 Section 5: Financial Analysis
Part 8 Chapter 13: Closing Agreement Manual: Offers in Compromise

IRS Regulations

• IRC § 7122: Compromises

Treasury Regulations

• Treas. Reg. § 301.6343-1(b)(4): Economic Hardship
• Treas. Reg. § 301.7122-1: Compromises (only old temporary regulations are available online at this time)

The Code imposes a variety of deadlines upon taxpayers for filing tax returns and paying tax.  The deadlines are straightforward and uncomplicated; yet, many taxpayers fail to meet them and, as a result, face a daunting array of potential monetary sanctions

In addition to interest, monetary sanctions include penalties for:

1. Late filing penalty
2. Late payment penalty
3. Estimated tax penalty
4. Accuracy-related penalty for substantial understatements of tax liabilities when filing a return

These penalties pose additional burdens on taxpayers who may already have financial difficulties.

When penalties have been assessed, there are several approaches that can be taken to mitigate them, referred to as penalty abatement.  Abatement is the reduction of or exemption from taxes granted by the IRS for a specific period and is done by filing an IRS Form 843, although these penalties can also be accomplished over the phone.  The IRS can grant an abatement of interest, penalty or additional tax.  Abatement may be granted where taxpayer can show:

• Interest, penalties, or additions to tax were caused by certain IRS errors or delays, or certain erroneous written advice from the IRS
• The taxpayer is eligible for the First Time Penalty Abatement policy, which requires:
  • The taxpayer did not previously have to file a return or did not have any penalties for the three years prior to the year the penalty is being assessed
  • The taxpayer has filed all required returns or filed an extension
  • The taxpayer has paid all taxes due or has made arrangements to pay these taxes.
• Penalty or addition of tax is due to reasonable cause or other reason (other than erroneous written advice provided by the IRS) allowed under the law
  • Establishing reasonable cause avoids both the failure to file and failure to pay penalties under section 6651
  • Reasonable cause determinations are based on the facts and circumstances of each case
  • Taxpayer bears the burden of proving reasonable cause
    • CAVEAT: Although the taxpayer has the burden of proving reasonable cause, the Service has the burden, in a court proceeding, of producing evidence that it is appropriate to apply the penalty to the taxpayer
    • NOTE: There is no reasonable cause exception to the estimated tax penalty imposed under section 6654
    • By requiring the penalty to be imposed “unless” the failure is due to reasonable cause, the statute precludes any partial waiver of the penalty. The Service must either waive or impose the penalty in full.
    • CAVEAT: Appeals Office can (and often does) settle a penalty for an amount other than “all or nothing” if there are hazards to litigating the issue
    • The request for non-assertion or abatement should be accompanied by supporting documentary evidence and legal authority whenever possible. This might include affidavits of tax advisors or return preparers, death certificates, doctor’s statements, insurance statements, police or fire reports, etc.
    • The Internal Revenue Manual includes a list of the most common reasons given by taxpayers that are considered reasonable cause.
    • Some reasons are more appropriate to late filing, others to late payment, and others to both.
    • Examples:
      • Reliance on a Tax Advisor or Other Third Person
        • Ex: Reasonable reliance on a tax professional’s advice regarding the requirement to file or the return’s due date; Reliance on a tax advisor with respect to a question of substantive law may constitute reasonable cause when such advice turns out to be mistaken
        • Death, Serious Illness, or Unavoidable Absence
        • Fire, Casualty, Natural Disaster, or Other Disturbance

Any time you see that penalties have been assessed, you should make a determination as to whether an abatement request is warranted.  This is particularly important in cases where the taxpayer’s only resolution mechanism is to pay the tax liability either in full or in an installment agreement.  Note, however, that if the taxpayer is eligible for first-time penalty abatement, it may make sense, depending on statute of limitations issues, to wait until the payment plan has been completed to request it because the failure to pay penalty continues to accrue until the liability is paid.