Source: https://www.scribd.com/document/27534006/2009-Representation-Update
Timestamp: 2017-10-20 06:29:54
Document Index: 288023171

Matched Legal Cases: ['§ 7803', '§7803', 'in fine', '§ 3467', '§ 6159', '§ 301']

2009 Representation Update | Internal Revenue Service | Loans
Uploaded by McKenzieLaw
Description: This article by attorney Robert E. McKenzie provides highlights of IRS procedures including collection, exam and special programs.
This article by attorney Robert E. McKenzie provides highlights of IRS procedures including collection, exam and special programs.
by ROBERT E. McKENZIE, EA, ATTORNEY
ARNSTEIN & LEHR SUITE 1200 120 SOUTH RIVERSIDE PLAZA Chicago, Illinois 60606 (312) 876-7100 REMCKENZIE@ARNSTEIN.COM
http://www.mckenzielaw.com/
1. A CHANGING IRS........................................................................................................1 More Compliance Centers to Cease Processing Returns:............................................1 Shrinking IRS Workforce................................................................................................1 New IRS Commissioner ................................................................................................2 2. TAXPAYER ADVOCATE..............................................................................................2 National Taxpayer Advocate Releases Report To Congress........................................2 The Most Litigated Tax Issues.....................................................................................11 3. ENFORCEMENT........................................................................................................13 Highlights of 2008 Enforcement...................................................................................13 Individual Enforcement.................................................................................................13 Millionaires...................................................................................................................13 Businesses...................................................................................................................14 Collection Enforcement................................................................................................14 Electronic Filing IRS Webpage....................................................................................14 State Information Sharing............................................................................................19 Federal Tax Returns and Return Information..............................................................19 Return Information........................................................................................................19 IRS Study Provides Tax Gap Estimate........................................................................20 Sources of Misreporting...............................................................................................20 Understanding the Tax Gap.........................................................................................20 Components of the Tax Gap........................................................................................20 Underreporting.............................................................................................................20 Underreporting Is Largest Component.........................................................................21 Noncompliance Rising.................................................................................................21 Areas Where Compliance Has Decreased..................................................................21 Areas With Improved Compliance...............................................................................22 Businesses More Likely to Not Comply.......................................................................22 NRP Subchapter S Corporation Study Overview........................................................22 2009 Budget.................................................................................................................26 2009 Budget ................................................................................................................26 Overview - Abusive Return Preparer...........................................................................27 Audits of 30 Clients......................................................................................................28 4. EXAMINATION...........................................................................................................29 Examination Reengineering.........................................................................................29 The Dirty Dozen...........................................................................................................29 5. APPEALS....................................................................................................................32 Strategic Priorities:.......................................................................................................32 Campus Appeals Program...........................................................................................32 OIC and TFRP Mediation and Arbitration....................................................................32 Application Process .....................................................................................................33 TFRP............................................................................................................................33
6. USEFUL INFORMATION FOR PRACTITIONERS....................................................34 Whistleblower Reforms................................................................................................34 Mortgage Relief Act......................................................................................................34 Basis Reduction...........................................................................................................35 Qualified Principal Residence Indebtedness...............................................................35 Misclassified Workers..................................................................................................35 Misclassification...........................................................................................................35 Recommendations.......................................................................................................36 UBS Criminal Charges.................................................................................................36 Agreement....................................................................................................................36 Allegations....................................................................................................................36 Prior Charges...............................................................................................................37 Comments of Government Officials.............................................................................37 Settlement Offer Unreported Offshore Income ...........................................................37 Highlights of the Offer. ................................................................................................37 Penalties.......................................................................................................................38 Fully Cooperate............................................................................................................38 VITA Grant Program....................................................................................................38 Identity Theft.................................................................................................................39 7. COLLECTION.............................................................................................................42 Taxpayer Advocate’s Report On Enforced Collection ................................................42 Flawed Private Collection Ends...................................................................................42 Help for People Who Owe Taxes.................................................................................43 Flexibility.......................................................................................................................43 Online Payment Agreement (OPA) .............................................................................44 Guaranteed Availability of Installment Agreements....................................................45 <$25,000 Liabilities......................................................................................................45 Form 433A....................................................................................................................45 New more Onerous Allowable Expense Standards.....................................................45 Five Year Test..............................................................................................................48 8. OFFER IN COMPROMISE.........................................................................................48 Number of Offers..........................................................................................................48 OIC’s FY2000 to 2008..................................................................................................49 Tax Increase Prevention and Reconciliation Act of 2005............................................49 Payments With Offers..................................................................................................49 Failure to Make Deposit...............................................................................................49 Not Refundable............................................................................................................50 Taxpayer Advocate Research......................................................................................50 Failure to Make Installment Payments.........................................................................50 Low Income Taxpayers................................................................................................50 Deemed Accepted........................................................................................................51 Background..................................................................................................................51 Supporting Documents.................................................................................................51 $150 Processing Fee...................................................................................................51 Determining Processability...........................................................................................52 Full Pay Processing......................................................................................................53
Initial Review................................................................................................................53 Computation of Offer Amount......................................................................................53 Cash Offer....................................................................................................................54 Short-Term Deferred Payment Offer............................................................................54 Deferred Payment Offers.............................................................................................54 Corporate Trust Fund Liabilities...................................................................................55 Pursuit of Officers After Compromise..........................................................................55 Promote Effective Tax Administration..........................................................................55 Encourage Compliance................................................................................................55 Only Available If There Is No Doubt As to Liability Or Collectibility.............................56 Rules for Evaluating Offers to Promote Effective Tax Administration.........................56 Factors..........................................................................................................................56 Undermine Compliance................................................................................................56 Exceptional Circumstances..........................................................................................56 California......................................................................................................................68 .....................................................................................................................................68 EXHIBITS 59-70
2009 IRS REPRESENTATION UPDATE©
By: Robert E. McKenzie 1. A CHANGING IRS More Compliance Centers to Cease Processing Returns: 1.10 Because of electronic filing the IRS is gradually eliminating its return processing centers. The closure schedule is as follows. • • • Philadelphia, Memphis & Holtsville no longer process Andover 10-09 Atlanta 10-11
As of October, 2011 there will be 2 returns processing centers for business returns and 3 returns processing centers for individual returns. Each of the remaining compliance centers will continue performing correspondence audits and collection activities. Shrinking IRS Workforce 1.15 As a result of Congressional cuts in IRS budgets its workforce continued to shrink in 2008. It’s workforce has shrunk from about 100,000 in 2002 to about 90,000 in 2008.
Table 30. Internal Revenue Service Personnel Summary and Type of Personnel, Fiscal Years 2007 and 2008
Employment status, budget activity, and selected personnel type
Average positions realized [1] 2007 (1) 2008 (2) 90,647 17,736 12,587 10,025 5,493 1,496 2,590 1,397 768
Number of employees at close of fiscal year 2007 (3) 86,638 19,307 13,026 4,525 5,468 1,506 2,683 1,455 798 2008 (4) 90,210 18,316 12,951 8,422 5,481 1,538 2,617 1,429 781
Internal Revenue Service, total Selected personnel type: Customer Service Representatives Revenue Agents Seasonal employees Revenue Officers Tax Technicians Special Agents Attorneys Appeals Officers
[r] 92,017 [r] 18,681 [r] 12,816 [r] 9,861 [r] 5,663 [r] 3,110 [r] 2,677 [r] 1,415 [r] 775
New IRS Commissioner 1.20 In March, 2008 the Senate unanimously confirmed IRS Commissioner Douglas H. Shulman. He promised would work to ensure that the tax agency is fair, and he would concentrate both on enforcement and service. "For the majority of Americans who pay their taxes willingly and on time, there must be clear guidance, accessible education and outstanding service," he said in a statement. "For taxpayers who intentionally evade paying taxes, there must be rigorous enforcement programs." Shulman has been vice chairman of the Financial Industry Regulatory Authority, previously known as the National Association of Securities Dealers. He also has served on the bipartisan National Commission on Restructuring the Internal Revenue Service. 2. TAXPAYER ADVOCATE National Taxpayer Advocate Releases Report To Congress 2.10 In January 2009 National Taxpayer Advocate Nina E. Olson released a report to Congress. Internal Revenue Code (IRC) § 7803(c)(2)(B)(ii)(III) requires the National Taxpayer Advocate to describe at least 20 of the most serious problems encountered by taxpayers. Each of the most serious problems includes the National Taxpayer Advocate’s description of the problem, the IRS’s response, and the National Taxpayer Advocate’s final comments and recommendations. This format provides a clear picture of which steps have been taken to address the most serious problems and which additional steps the National Taxpayer Advocate believes are required. The problems described in the report are as follows: 1. Complexity of the Tax Code. The largest source of compliance burdens for taxpayers is the complexity of the tax code. IRS data show that taxpayers and businesses spend 7.6 billion hours a year complying with tax-filing requirements. To place this in context, it would require 3.8 million full-time employees to work 7.6 billion hours. In dollar terms, we estimate that taxpayers spend $193 billion a year complying with income tax requirements, which amounts to 14 percent of aggregate income tax receipts. One count shows the number of words in the tax code has reached 3.7 million, and over the past eight years, changes to the tax code have been made at a rate of more than one a day – including more than 500 changes in 2008 alone. All of this complexity imposes additional monetary costs on taxpayers – about 60 percent of individual taxpayers pay practitioners to prepare their returns and an additional 22 percent purchase tax software to assist them. Perhaps most troubling, tax law complexity leads to perverse results. On the one hand, taxpayers who honestly seek to comply with the law often make inadvertent errors, causing them either to overpay their tax or to become subject to IRS enforcement action for mistaken underpayments of tax. On the other hand, sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities. The NTA recommends that Congress substantially simplify the tax code. To assist Congress in pursuing tax simplification, this report includes a series of recommendations, including recommendations to repeal the Alternative Minimum Tax, streamline education and retirement savings tax incentives, simplify the family status provisions of the Code, allow taxpayers to exclude modest amounts of canceled debts from income without having to make 2
an affirmative claim, reduce tax sunset and phaseout provisions, and revise the overall penalty structure.. 2. The IRS Needs to More Fully Consider the Impact of Collection Enforcement Actions on Taxpayers Experiencing Economic Difficulties. When the IRS contemplates taking enforced collection action against a taxpayer, both the tax code and IRS procedures require that IRS personnel consider whether the collection action will impose an economic hardship on the taxpayer. When the economy struggles and more taxpayers become unable to pay their tax liabilities, the importance of considering the impact of collection actions on taxpayers and their families becomes critical. In addition, while levy and seizure authority are important collection tools that allow the IRS to address serious incidents of noncompliance, a review of IRS historical enforcement data suggests that expanded use – as opposed to judicious use – of these tools does not necessarily translate into more tax dollars collected. For example, while the number of levies issued by the IRS increased by an astonishing 1,608 percent from fiscal year (FY) 2000 to FY 2007 – from 220,000 levies to about 3.76 million – the increase in total collection yield during this period was slightly less than 45 percent. To the contrary, historical enforcement data indicate that collection alternatives may be more effective at collecting liabilities from taxpayers having trouble paying their tax debts. To more effectively deal with taxpayers in these difficult economic times, the NTA recommends that the IRS provide specific guidance requiring pre-decisional consideration of economic hardship in all Internal Revenue Manual sections related to collection enforcement and encourage greater use of collection payment alternatives such as offers in compromise and partial payment installment agreements where economic hardship is present. 3. Understanding and Reporting the Tax Consequences of Cancellation of Debt Income. When a creditor writes off a debt, the tax code generally treats the amount of the canceled debt as taxable income to the debtor, but Congress has carved out a number of exceptions. The rules that determine whether cancellation of debt income is includible in gross income are complex, and taxpayers often do not receive reliable information about their tax reporting and payment obligations. For example, the Mortgage Forgiveness Debt Relief Act of 2007 carved out an exception for debts canceled in the course of a home foreclosure, but the exception only applies to the extent that the loan proceeds were used to acquire or improve a principal residence. It appears that most subprime borrowers use a portion of their loans for other purposes (e.g., to pay off car loans, credit card balances, student loans, or medical bills), and the exception does not apply to the extent loan proceeds were used for these “nonqualified” purposes. Moreover, taxpayers do not automatically receive the benefit of any exception. If they do not file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), with their tax returns to claim an exclusion and adjust their tax attributes, the IRS will assume the cancellation of debt is taxable (based on its receipt of a Form 1099-C, Cancellation of Debt, filed by the creditor). Even where Form 982 is properly filed, taxpayers who exclude canceled debt from income under the “insolvency” exception may receive IRS notices requesting additional documentation if they 3
do not also provide a statement of insolvency, a requirement that does not appear in any IRS forms or publications. The NTA recommends that the IRS take several steps to address this problem, including developing an insolvency worksheet that taxpayers can file with their returns and creating a centralized unit dedicated to handling cancellation of debt issues. 4. Employment Taxes. The NTA is concerned that IRS employment tax policies may overreach and undermine some of the important protections enacted in the Taxpayer Bill of Rights and the IRS Restructuring and Reform Act of 1998. With an estimated $58 billion in unpaid employment taxes, it is clear that the IRS faces a significant noncompliance problem. At the same time, the overall employment tax compliance rate is high – approximately 88 percent of all employment tax returns are filed and fully paid. While the need to collect unpaid payroll taxes is obvious, the IRS should follow a tailored approach to address the problem, including applying different treatments to taxpayers based on their levels of and reasons for noncompliance, encouraging prospective voluntary compliance by helping taxpayers who are attempting to follow complex rules and procedures, concentrating sufficient resources on early intervention techniques to prevent the accumulation of substantial employment tax liabilities, and building a local compliance presence that balances enforcement with outreach and education. 5. IRS Process Improvements to Assist Victims of Identity Theft. Identity theft occurs when one person unlawfully uses another person’s personal data to commit fraud or other crimes. In the past year, the IRS has improved its identity theft process in a number of ways, including establishing an Identity Protection Specialized Unit and a toll-free hotline for identity theft victims. These changes, if properly managed, should provide more assistance to victims of identity theft. The IRS recognizes identity theft as a serious problem and has agreed to address the concerns and recommendations that the NTA has previously raised. In light of the IRS’s agreement with our suggestions, the NTA makes no specific additional recommendations at this time. However, she will continue to urge the IRS to implement the following actions: provide global account review and account monitoring (if necessary) for all identity theft victims; allow employees the discretion to deviate from established guidelines in accepting evidence of identity theft; and allow employees more latitude in determining the rightful owner of a disputed Social Security number. Taxpayer Service Issues 6. Taxpayer Service: Bringing Service to the Taxpayer. Since announcing its original plan in 2001 to establish 676 Taxpayer Assistance Center (TAC) sites, the IRS has established only 401 TACs and just 55 percent of them are open 36 to 40 hours per week. Further, 40 percent of taxpayers live more than a 30minute drive from a TAC, and TACs are unable to handle many issues and questions. Similarly, the Small Business/Self-Employed Division since 2001 has sharply reduced its planned education and outreach program for small business taxpayers. In both instances, the IRS has sought to meet taxpayer needs by increasing Internet service. While that trend is generally positive, there remain significant numbers of taxpayers who do not have access to the Internet and 4
there are certain categories of service that are more effectively handled through face-to-face interaction. The NTA recommends that the IRS collaborate with TAS on all ongoing and new studies pertaining to taxpayer service, including the Taxpayer Assistance Blueprint for small business and self-employed taxpayers currently underway, and take steps to identify innovative approaches to delivering in-person assistance. 7. Navigating the IRS. The IRS employs more than 100,000 workers in 12 major business units in over 800 offices within and outside the United States. Taxpayers, practitioners, and even IRS employees have difficulty finding the appropriate office or employee to help them resolve tax problems. The IRS does not publish a topical or personnel directory that would assist taxpayers in navigating the agency. By comparison, this information is provided clearly on the websites of taxing authorities in other countries and U.S. states. The NTA recommends that the IRS take steps to address this problem, including revising the Internal Revenue Manual to direct IRS employees to accommodate taxpayer requests to speak to a particular employee, adding departmental phone numbers to the topical index on IRS.gov, and considering the creation of a phone number staffed by operators who would obtain details about the taxpayer’s question or problem and direct the taxpayer to the function that can help. 8. IRS Handling of ITIN Applications Significantly Delays Taxpayer Returns and Refunds. Any individual who must file a tax return but is not eligible to obtain a Social Security number must apply to the IRS for an Individual Taxpayer Identification Number (ITIN). With limited exceptions, ITIN applications must be submitted with a tax return filed on paper. In 2005, the inability to receive an ITIN before preparing and filing a paper tax return caused processing delays that affected 280,000 refunds totaling over $500 million. In addition, the IRS requirement for ITIN applicants to file paper returns is inconsistent with the congressional mandate for the IRS to achieve an 80 percent e-file rate. The IRS has provided inadequate assistance and information to applicants, as evidenced by the high number of Incomplete and rejected applications, restricted telephone access to ITIN personnel, and failure to expand the Certified Acceptance Agent program. The NTA recommends several actions for streamlining the ITIN process, which include permitting individuals to submit an ITIN application prior to the filing season where the individuals can demonstrate an imminent need to file a return, allowing new ITIN applicants to file returns electronically, and promptly acknowledging all applicant requests for the return of original documents. 9. Access to the IRS by Individual Taxpayers Located Outside the United States. Approximately five million American citizens living outside the country and over a half million troops deployed overseas need a way to contact the IRS when they have inquiries about their accounts or the tax laws. These taxpayers have limited options for obtaining information, filing returns, and replying to IRS notices and letters. There are only four IRS overseas customer service posts available to taxpayers with U.S. filing obligations, who are spread over 194 countries and more than 60 territories. Those outside the United States generally incur greater expenses, such as international telephone charges, transportation, 5
and carrier mailing costs, when trying to communicate with the IRS. Although the IRS has developed customer service initiatives as a part of its strategy for international tax administration, it does not provide enough resources to meet the needs and preferences of taxpayers based outside the country. The NTA’s recommendations for improving customer service for overseas taxpayers include opening toll-free international telephone lines and providing overseas taxpayers with secure online access to their tax accounts. Compliance Issues 10. Customer Service Within Compliance. Simply stated, the IRS gets what it measures. The IRS largely rates operational performance by using efficiency measures (e.g., cycle time, case closures, and average call time) instead of effectiveness measures (e.g., did the IRS’s actions achieve the desired voluntary compliance results?). The 2008-2009 IRS Strategic Initiative includes the goal to “Improve service to make voluntary compliance easier.” Yet current measures do not promote customer service and may ultimately lead to noncompliant behavior by taxpayers, because IRS business strategies and measures do not adequately emphasize a balanced approach between taxpayer service and enforcement within the IRS’s compliance organizations. The IRS has the opportunity to establish taxpayer-centric measures that encompass effectiveness as well as efficiency components to accomplish this strategic goal. The NTA recommends four actions to address this problem, including creating an IRS Cognitive Learning Lab and making it possible for taxpayers to work with one employee from start to finish on a case. 11. Local Compliance Initiatives Have Great Potential But Face Significant Challenges. Research suggests that concentrated examinations targeted at a local business segment or industry have a greater “ripple effect” on voluntary compliance by other taxpayers than seemingly random examinations. Compliance initiative projects (CIPs) allow local IRS employees to generate this impact by focusing on specific local compliance problems using examinations or “alternative treatments,” which may include outreach, education, form changes, regulatory changes, or even agreements with the states. The CIP process also enables employees from different IRS functions to work together, utilize local sources of information, and reach out to local organizations to address noncompliance at the local level. In addition, CIPs allow the IRS to learn about what works and what does not. The NTA is concerned that the IRS has neglected this important program. She recommends that the IRS take steps to revitalize it, such as developing better measures for local CIPs, allocating more resources to local CIPs, and making CIP reports more widely available to preserve the benefits of any lessons learned. 12. Customer Service Issues in the IRS’s Automated Collection System (ACS). ACS is a main component of the IRS’s collection process, sending automated collection notices to millions of taxpayers and employing numerous telephone assistors to receive calls from these taxpayers. Although ACS generally receives relatively high customer satisfaction survey ratings and internal quality assessments, TAS has received numerous complaints from tax 6
professionals and taxpayers that suggest the need for improvements. ACS customers have raised concerns about extensive wait times, the inability to fax documents to employees, overly burdensome procedures, and general dissatisfaction with the ACS process. Neither ACS’s customer satisfaction surveys nor its internal quality reviews measure these important aspects of taxpayer service. The NTA has identified several steps the IRS can take to improve processes that drive customer satisfaction, most importantly the need for the IRS to evaluate the entire customer experience with ACS instead of assessing only a “snapshot” in time. 13. The IRS Should Proactively Address Emerging Issues Such as Those Arising From “Virtual Worlds.” By one estimate, about $1 billion in real dollars changed hands in computer-based environments called “virtual worlds” in 2005. Over 16 million people are estimated to have active subscriptions to these environments, many of which have their own virtual economies and currencies. However, IRS employees have been unable to respond to taxpayer inquiries about how to report transactions associated with them. Economic activities in virtual worlds may present an emerging area of tax noncompliance, in part because the IRS has not provided guidance about whether and how taxpayers should report such activities. To improve voluntary tax compliance, the NTA recommends that the IRS issue guidance addressing how taxpayers should report economic activities in virtual worlds. Examination Issues 14. Suitability of the Examination Process. Since 2000, the IRS has continuously increased the number of individual income tax return examinations it conducts. The number more than doubled from 617,765 in FY 2000 to 1,384,563 in FY 2007, with examinations completed by correspondence accounting for 83 percent of all individual taxpayer audits. Although taxpayers understandably do not like to be audited, the IRS should initially assume good faith on the part of taxpayers and avoid taking an unnecessarily adversarial approach. The Internal Revenue Manual and IRS publications provide opportunities for the IRS to meet taxpayer needs and preferences throughout the examination process, including allowing taxpayers to choose a method for conducting an examination (face-to-face versus correspondence), request a telephone discussion with the examiner, and even set up a payment agreement for any taxes owed. Because the IRS often fails to meet taxpayer needs and preferences due to limited resources or policy reasons, the resulting unsuitability of the examination process can lead to disparities in audit and customer satisfaction results, including tax assessments that sometimes reflect the taxpayer’s inability to navigate the audit process rather than the amount truly owed. The NTA recommends five actions to help the IRS address problems with the suitability of the examination process, including directing its focus substantially toward meeting taxpayer needs and preferences and immediately eliminating the so-called “combination letter” from the process. 15. The IRS Correspondence Examination Program Promotes Premature Notices, Case Closures, and Assessments. In FY 2007, the IRS conducted 83 7
percent of all individual income tax examinations exclusively by mail in an effort to expand its audit coverage. The program as currently designed, however, is plagued by problems that increase taxpayer burden. These problems include a preoccupation with closing cases rather than working with taxpayers to resolve audit issues and an automated process that causes perpetual delays in responding to taxpayer correspondence. These issues lead to premature notices, premature case closures, and premature assessments, all of which drive taxpayers to TAS for help and generate needless re-work for IRS employees. The NTA urges the IRS to protect taxpayers by requiring managers and employees to adhere to the agency’s longstanding audit quality standards in conducting correspondence examinations. Tax Administration Issues 16. The Impact of IRS Centralization on Tax Administration. Over the years, the IRS has centralized many of its major operations and programs. This centralization has significantly changed the organizational structure, management, work processes, and the quality of interaction between the IRS and taxpayers. When carried out correctly, centralization can significantly reduce redundancies and increase effectiveness. However, if the IRS fails to consider the impact of centralization on taxpayer service and compliance, it may harm taxpayers. The IRS needs to do a better job of measuring the downstream consequences to taxpayers, including the impact on taxpayer service and compliance, when evaluating the costs and benefits of centralization. The NTA recommends that the IRS establish a standard matrix that defines the project, provides background information, sets forth objectives, establishes tangible products, quantifies expected benefits, and identifies necessary resources. The IRS should then use this standard project matrix to evaluate programs and determine whether the anticipated benefits of centralization have been realized. 17. Incorrect Examination Referrals and Prioritization Decisions Cause Substantial Delays in Amended Return Processing for Individuals. Every year, more than three million taxpayers file amended returns for various reasons, including the complexity of the tax code, changes in their circumstances, lateyear tax legislation, and incomplete or inaccurate tax preparation software. Many of these taxpayers experience unnecessary burden and delays. A cooperative IRS-TAS study of TAS amended return cases found the average taxpayer waited 26 weeks for the amended return to be processed before contacting TAS for assistance. These delays stem from the IRS not meeting its own processing guidelines, unnecessary referrals for audits, and management decisions to deemphasize processing so-called “duplicate filings,” which occur when more than one Form 1040 is filed with the same name and Social Security number. The NTA recommends that the IRS allow individual taxpayers to file amended returns electronically to reduce errors and shorten processing times, eliminate unnecessary audit referrals, and create a special unit to resolve duplicate filing cases as a top priority. 18. Inadequate Files Management Burdens Taxpayers. From FY 2005 through FY 2008, the IRS refunded over 40 percent (more than $3.7 million) of 8
the fees it collected for photocopies of taxpayers’ documents because it could not locate the files the taxpayers needed. The IRS is required by law to efficiently maintain and manage agency records, including electronic and paper files, as evidence of IRS policies, decisions, and operations. Both taxpayers and IRS employees need prompt access to paper documents to resolve tax return issues or verify taxpayer information, yet the IRS has failed to follow procedures and implement safeguards for maintaining and managing paper files and records. This failure has contributed to complaints from taxpayers, practitioners, IRS employees, and other stakeholders who experienced substantial delays or received the wrong taxpayer’s documents. Although control of the Files operation reverted back to the IRS in 2008 after being contracted out for the past two years, the transition has not resolved most of the associated problems. To further improve the Files operation, the NTA recommends the IRS take proactive steps to develop a service-wide recordkeeping and paper-file management strategy and database, take steps to convert paper returns to an electronic format, and revise relevant Internal Revenue Manual provisions to employ adequate quality control and specific timeliness measurements for expedited taxpayer files requests. 19. The IRS Miscalculates Interest and Penalties But Fails to Correct These Errors Due to Restrictive Abatement Policies. A TAS study has found that the IRS is miscalculating the failure to pay penalty and could be negatively impacting about two million taxpayer accounts annually. Moreover, the IRS’s manual calculations of interest yields an accuracy rate of only 67.7 percent, which means nearly one out of three restricted interest accounts are incorrectly computed. The IRS is aware of, but has failed to correct, certain systemic problems that cause penalty and interest miscalculations. These incorrect calculations lead numerous taxpayers to believe they have fully paid what the IRS says they owe, only to receive subsequent bills for accruals of interest, penalties, or both. The IRS bears the cost of these inaccurate calculations, not only through rework by employees but also by taxpayers’ reduced confidence in the IRS. The NTA recommends that the IRS consider allocating adequate resources toward planning and programming to resolve common penalty and interest computation issues, revising pertinent Internal Revenue Manual sections so all taxpayers are entitled to accuracy reviews of interest and penalty calculations, and reevaluating the overly complex restricted interest procedures to make certain that all taxpayers receive accurate interest charges. 20. Inefficiencies in the Administration of the Combined Annual Wage Reporting Program Impose Substantial Burden on Employers and Waste IRS Resources. The Combined Annual Wage Reporting (CAWR) program is designed to ensure that employers accurately report annual wage data to the IRS and the Social Security Administration. If the IRS discovers a discrepancy in the wage and tax data reported by an employer, it issues a notice and requests that the employer provide information to resolve the discrepancy. However, the CAWR notices are not clearly written. As a result, employers are often unable to identify the cause of the discrepancy and respond timely, which in turn may lead the IRS to improperly impose penalties on the employers. From FY 2003 to FY 2008, the IRS eventually abated 81 percent of the penalty dollars it previously 9
assessed, causing substantial rework for the IRS and needlessly burdening employers. The NTA recommends that the IRS provide specific information about the wage reporting discrepancy on notices, include the phone number for a live assistor in the CAWR unit on notices, and continuously train its employees about when it is appropriate to assess CAWR penalties. Status Update The IRS’s Private Debt Collection (PDC) Initiative I 21. s Failing In Most Respects. IRS data now shows that the IRS’s Collection function outperforms private collection agencies (PCAs) in almost every way, collecting three times as much as the PCAs and resolving more cases earlier in the process. Overall, the PCAs have only collected about four percent of the outstanding tax balances assigned to them, bringing in less than $56 million in commissionable payments on $1.46 billion of tax debt. The NTA has addressed a number of the PDC initiative’s deficiencies in prior Annual Reports to Congress and testimony. Many of these concerns remain while new ones have arisen. In addition, despite initial expectations that the IRS could learn about state-of-the-art collection practices in private industry through its work with PCAs, the IRS has now acknowledged that it has not been able to identify any “best practices” from the private debt collection industry. The NTA remains concerned that there is an inherently greater risk to taxpayer compliance, taxpayer rights, and taxpayer privacy when tax collection is outsourced to private, for-profit businesses. Given this risk and the PCAs’ unambiguous underperformance as compared with the IRS’s own Collection function, the NTA continues to believe that the PDC program should be terminated.
The Most Litigated Tax Issues 2.20 IRC§7803(c)(2)(B)(ii)(X) requires the National Taxpayer Advocate to identify the ten tax issues most often litigated in the federal courts and to classify those issues by the category of taxpayer affected. The following is a table the most litigated as determined by TAS:
Gross Income Collection Due Process Summons Enforcement Trade or Business Expense Accuracy-Related Penalty Civil Damages for Certain Unauthorized Collection Failure to File and Estimated Tax Penalties Joint and Several Liability Frivolous Issues Penalty (and analo-gous appellatelevel sanctions) Family Status Issues Totals
68 104 108 78 47 60 47 27 45 33 617
8 8 1 2 1 8 8 5 5 8 2 7 4
12% 137 8% 1% 27% 17% 13% 11% 19% 18% 6% 75 38 38 40 18 19 23 4 1
1 0 1 0 8 1 0 1 7 1 3 7 1 0 6 7
7% 13% 21% 26% 43% 6% 16% 30% 25% 0% 17%
12% 393
Table 20. Taxpayer Advocate Service: Postfiling Taxpayer Assistance Program, by Type of Issue and Relief, Fiscal Year 2008
Applications for taxpayer assistance received, by type of issue [1]: Total Processing amended returns Levies Other refund inquiries/issues Injured spouse claims Earned income tax credit Automated Substitute for Return Program [2] Expedite refund requests Criminal investigation Processing original returns Automated Underreporter Program [3] All others Applications for taxpayer assistance closed, by type of resolution [1]: Total Relief provided to taxpayer, total Taxpayer Assistance Order issued [4,5] No Taxpayer Assistance Order issued [4] Full relief Individual taxpayer issue [7] Systemic issue [8] Partial relief Individual taxpayer issue [7] Systemic issue [8] No relief provided to taxpayer, total Taxpayer Assistance Order rescinded [4,5] No Taxpayer Assistance Order issued [4] No response from taxpayer Relief provided prior to Taxpayer Advocate Service intervention Taxpayer withdrew application for assistance Tax law precluded relief Hardship not related to revenue laws Hardship not validated All others Congressional inquiries [9] 260,439 189,046 50 188,996 176,209 158,198 18,011 12,787 11,643 1,144 71,393 8 71,385 35,401 14,526 3,530 1,913 1,276 845 13,894 22,097 100 73 [6] 73 68 61 7 5 4 [6] 27 [6] 27 14 6 1 1 [6] [6] 5 N/A 274,051 21,963 17,082 14,817 14,238 13,489 12,419 11,376 10,152 10,021 9,594 138,900 100 8 6 5 5 5 5 4 4 4 4 51
3. ENFORCEMENT Highlights of 2008 Enforcement 3.10 The IRS continues increase its enforcement activities. he IRS enforcement efforts increased again in fiscal year 2007. For instance, during 2007 the IRS audited 84 percent more returns of individuals with incomes of $1 million or more than during 2006. Overall, enforcement revenue reached $59.2 billion, up from $48.7 billion in 2006 and nearly $34.1 billion in 2002. IRS collected $56.4 billion in enforcement revenue in 2008, down $2.8 million from 2007, Stiff said. She said 2007 was a record-breaking year for enforcement and saw some anomalies that did not repeat themselves in 2008, such as a few large corporate closures and cases closed out during tax shelter inventories. Audit enforcement revenue decreased from $23.8 billion to $20.6 billion; and Collection enforcement revenue decreased slightly from $31.8 billion to $31.1 billion Individual Enforcement 3.20 The number of audits of individual returns increased slightly in 2008. Those who earned less than $200,000 had about a 1 percent chance of being audited. Those with incomes of $200,000 and more had about a 3 percent chance of being audited. Millionaires 3.30 Meanwhile, taxpayers with incomes of more than $1 million had a 5.6 percent chance of being audited, a drop from 6.8 percent the year before. The number of audits for millionaires dropped even though their ranks increased by nearly 54,000. “We essentially audited as many millionaires as in the previous year, but there were more returns,” said Terry Lemons, an I.R.S. spokesman. The I.R.S. said it audited just over 23,000 returns of the nearly 340,000 filed by millionaires in 2007. That compares with just over 21,800 returns filed by 398,000 millionaires in 2008.
The income of the 400 wealthiest Americans swelled in 2006, to an average of $263 million, according to I.R.S. data. Since 1996, this group’s share of the nation’s total wealth has nearly doubled to more than 22 percent. Businesses 3.40 On the business front, the overall number of audits rose slightly, but dropped as a percentage of businesses that submitted a tax return. More emphasis was placed on medium and large corporations, as audit rates increased slightly for those companies with more than $50 million in assets and dropped slightly for those with less than $50 million in assets. According to 2008 IRS enforcement data released by the IRS audited 15.3% of returns of corporations with assets of $10 million or more. That is the lowest audit coverage level since 2003 and down from a 20% coverage rate in 2005. The tax audit rates of the largest companies are less than half what they were 20 years ago while more small and mid-size businesses are coming under scrutiny, according to an organization that monitors the Internal Revenue Service. The Syracuse Universitybased Transactional Records Access Clearinghouse has described a "historic collapse" in audits for corporations holding assets of $250 million or more. About 26 percent of them were audited in the 2007 budget year compared with 34 percent in 2006 and 43 percent in 2005. Collection Enforcement 3.50 Overall, some of our most common enforcement tools at the IRS also showed increases: The IRS filed 2.6 million levies in 2008 and 3.8 million in 2007. It filed 683,659 liens in 2007 and 768,168 liens during 2008, a substantial increase from five years earlier. Electronic Filing IRS Webpage 3.60 More taxpayers chose to file electronically in 2008 than during the prior year, with 58 percent of individual tax filers choosing to e-file in 2008, up from 57 percent in 2007. More people visited the IRS internet site, IRS.gov. The IRS site was accessed more than 217 million times in 2007 and 347 million times in 2008.
Table 9a. Examinat Examination, by Typ
United States, total Taxable returns: u Individual income tax re w Returns with total po
Table 9b. Examination Coverage: Individual Income Tax Returns Examined, by Size of Adjusted Gross Income, Fiscal Year 2008
Returns filed in Calendar Year 2007 (percent) [2] Size of adjusted gross income [1]
Examination coverage in Fiscal Year 2008 (percent) [3]
All returns [4] No adjusted gross income [5] $1 under $25,000 $25,000 under $50,000 $50,000 under $75,000 $75,000 under $100,000 $100,000 under $200,000 $200,000 under $500,000 $500,000 under $1,000,000 $1,000,000 under $5,000,000 $5,000,000 under $10,000,000 $10,000,000 or more
100.00 2.13 40.51 24.31 13.44 7.99 8.69 2.25 0.43 0.23 0.02 0.01
1.00 2.15 0.90 0.72 0.69 0.69 0.98 1.92 2.98 4.02 6.47 9.77
Activity Returns filed with additional tax due: Total amount collected [1] Taxpayer delinquent accounts (thousands): Number in beginning inventory Number of new accounts Number of accounts closed Ending inventory: Number Balance of assessed tax, penalties, and interest [2] Returns not filed timely: Delinquent return activity: Net amount assessed [3] Amount collected with delinquent returns Taxpayer delinquency investigations (thousands) [4]: Number in beginning inventory Number of new investigations Number of investigations closed Number in ending inventory Offers in compromise (thousands) [5]: Number of offers received Number of offers accepted Amount of offers accepted Number of notices of Federal tax liens filed Number of notices of levy served on third parties Number of seizures
2005 [r] 27,615,348 5,981 5,870 5,373 6,478 57,594,901
2006 [r] 29,172,915 6,478 6,100 5,504 7,074 69,555,590
2007 [r] 31,952,399 7,074 7,146 5,980 8,240 83,488,988
2008 28,465,648 8,240 7,099 6,107 9,232 94,357,717
22,765,462 3,584,255 3,022 2,558 1,922 3,658 74 19 325,640 522,887 2,743,577 512
23,305,535 3,905,764 3,658 2,373 2,157 3,874 59 15 283,746 629,813 3,742,276 590
30,287,802 3,968,163 3,874 2,587 2,729 3,732 46 12 228,975 683,659 3,757,190 676
24,888,918 3,773,528 3,732 1,972 2,271 3,433 44 11 200,103 768,168 2,631,038 610
Table 18. Criminal Investigation Program, by Status or Disposition, Fiscal Year 2008
Status or disposition Total Legal source tax crimes [1] Illegal source financial crimes [2] Narcotics-related financial crimes [3]
Investigations initiated Investigations discontinued Referrals for prosecution Indictments and informations [4] Convictions Sentenced Incarcerated [5] Percentage of those sentenced who were incarcerated [5]
3,749 1,259 2,785 2,547 2,144 1,957 1,583
1,531 684 893 757 666 645 498
1,441 409 1,204 1,164 958 864 696
777 166 688 626 520 448 389
State Information Sharing 3.70 The IRS is engaged in extensive information sharing with state tax authorities which allows it to more effectively discover nonfilers and other tax omissions. The IRS Fed/State Program saves government resources by partnering with state government agencies to enhance voluntary compliance with tax laws. This includes facilitating the exchange of taxpayer data, leveraging resources, and providing assistance to taxpayers to improve compliance and communications. The IRS also assists state agencies by identifying and reporting information on emerging tax administration issues. This is accomplished through the IRS entering into agreements to share information with the state agencies. There are more than 900 joint efforts underway. Examples include the sharing of examination reports, abusive scheme data, and licensing verification. Federal Tax Returns and Return Information. 3.80 “Tax returns” include Form 1040, U.S. Individual Income Tax Return, as well as other income tax and information returns, such as Form 941, Employer’s Quarterly Federal Tax Return; Form 730, Tax on Wagering; Form 1120, U.S. Corporation Income Tax Return; various Forms 1099, U.S. Information Returns; and Form W-2, Wage and Tax Statement. The states in turn share similar return information with the IRS. Since states have extensive information on business revenue on sales tax returns that info is a valuable resource for discovering nonfiling and underreporting. Return Information 3.90 “Return information” includes everything else that has anything to do with a person’s potential tax liability. Examples are any information extracted from a return like names of dependents, business location, or bank account information; the taxpayer's name, mailing address, or identification number; information on whether a return has been or will be examined or subject to any other investigation; information contained on transcripts of accounts or on IRS computer systems; the fact of filing a return; and whether a taxpayer has a balance due account. 19
IRS Study Provides Tax Gap Estimate 3.100 Internal Revenue Service officials have announced that they have updated their estimates of the Tax Year 2001 tax gap based on the National Research Program (NRP). The updated estimate of the overall gross tax gap for Tax Year 2001 – the difference between what taxpayers should have paid and what they actually paid on a timely basis – comes to $345 billion. This figure falls at the high end of the range of $312 billion to $353 billion per year, an estimate released in March, 2005. Sources of Misreporting 3.110 Though the net misreporting percentage varies by category of income, the rates reflect that compliance is highest where there is third-party reporting or withholding. Simply stated, compliance is highest where there is third-party reporting. For example, one percent of all wage, salary, and tip income is misreported, contributing an estimated $10 billion to the tax gap. In contrast, nonfarm sole proprietor income, which is reported on a Schedule C and is subject to little third-party reporting or withholding, has a net misreporting percentage of 57 percent, contributing about $68 billion to the tax gap. Understanding the Tax Gap 3.120 The Internal Revenue Service developed the concept of the tax gap as a way to gauge taxpayers’ compliance with their federal tax obligations. The tax gap measures the extent to which taxpayers do not file their tax returns and pay the correct tax on time. Components of the Tax Gap 3.130 The tax gap can be divided into three components: • • • nonfiling, underreporting and underpayment.
Underreporting 3.140 Of these three components, underreporting of income tax, employment taxes and other taxes represents about 80 percent of the tax gap. The single largest subcomponent of underreporting involves individuals understating their incomes, taking improper deductions, overstating business expenses
and erroneously claiming credits. Individual underreporting represents about half of the total tax gap. Individual income tax also accounts for about half of all tax liabilities. Underreporting Is Largest Component 3.150 Underreporting noncompliance is the largest component of the tax gap. Preliminary estimates show underreporting accounts for more than 80 percent of the total tax gap, with non-filing and underpayment at about 10 percent each. Individual income tax is the single largest source of the annual tax gap, accounting for about twothirds of the total. For individual underreporting, more than 80 percent comes from understated income, not overstated deductions. Noncompliance Rising 3.160 Overall, the noncompliance rate is from 15 percent to 16.6 percent of the true tax liability. The old estimate, derived from compliance data for Tax Year 1988 and earlier, was 14.9 percent. Areas Where Compliance Has Decreased 3.170 Among the areas where taxpayer compliance appears to have worsened are: • • • Reporting of net income from flow-through entities, such as partnerships and S corporations Reporting of proprietor income and expenses, such as gross receipts, bad debts and vehicle expenses Reporting of various types of deductions
Areas With Improved Compliance 3.180 Among the areas where compliance seems to have improved is the reporting of farm income. Overall, compliance is highest where there is third-party reporting and/or withholding. For example, most wages, salaries and tip compensation are reported by employers to the IRS through Form W-2. Preliminary findings from the NRP indicate that less than 1.5 percent of this type of income is misreported on individual returns. IRS researchers anticipate identifying other specific areas of deterioration and improvement in the coming months as they complete the detailed analysis of the study’s data. Tax Year 2001 Gross Tax Gap by Type of Tax and Type of Noncompliance (in $ billions
Type of Noncompliance Nonfiling Underreporti Underpaym Gap ng Gap ent Gap* 25 # # 2 # 27 7.8% 197 30 54 4 # 285 82.5% 23.4 2.3 5.0 2.1 0.5 33.3 9.7% TOTAL Percent Amou Distributio nt n 245 32 59 8 1 345 71.1% 9.3% 17.0% 2.4% 0.1% 100.0%
Type of Tax Individual Income Tax Corporation Income Tax Employment Tax Estate & Gift Tax Excise Tax TOTAL Percent Distribution
Businesses More Likely to Not Comply. 3.190 Most of the understated income comes from business activities, not wages or investment income. Compliance rates are highest where there is third-party reporting or withholding. Preliminary findings show less than 1.5 percent of wages and salaries are misreported. NRP Subchapter S Corporation Study Overview 3.200 During 2007 & 2008 the IRS continued its NRP of S corporations. The study has the following elements: • • • • Random Sample consists of approximately 5,000 returns from Small Business/Self-Employed (SB/SE) and Large & Mid-Size Business (LMSB) taxpayers covering two tax years, TY2003 and TY2004. The study follows the standard NRP methodology: Each tax year will have an examination cycle of approximately 24 months. The TY 2003 portion of the sample (1,200 returns) is complete, and these cases are now in the hands of Revenue Agents. 22
NRP is selecting the TY 2004 (3,800 returns) portion of the sample. Expect results by December 2008
IRS Operating Division Type of Tax Small Business / SelfEmployed
Indi- Corporviduals ation 195 N/A 40 39 1 8 0 243 70.5% 27.1% N/A 6 7 N/A 7 N/A 0 14 257 4.0% 74.5% 5.3% 22.3% 195 6 47 39 8 8 0
TaxLarge & Exempt Mid-Size & Gov’t Busines Entities N/A 25 8 N/A 8 N/A 0 34 9.8% 8.0% N/A 1 4 N/A 4 N/A 0 4 1.2% 3.4%
Individual Income Tax Corporation Income Tax * Employment Tax S e l f Employment FICA and FUTA Estate & Gift Tax Excise Tax † TOTAL Gap Percent of Total Noncompliance Rate
Type of Income or Offset Underreporting Gap ($B) 197 166 56 10 2 1 1 * 4 * 1 11 3 23 109 68 6 13 22 15 -3 -4 1 14 4 17 * Net Misreporting Percentage † 18% 11% 4% 1% 4% 4% 12% 7% 4% 11 % 6% 12% 64% 64% 43% 57% 72% 51% 18% 4% -21 % -51% 6% 5% 5% 26%
Total Underreporting Gap Underreported Income Non-Business Income Wages, salaries, tips Interest income Dividend income State income tax refunds Alimony income Pensions & annuities Unemployment compensation Social Security benefits Capital gains Form 4797 income Other income Business Income Non-farm proprietor income Farm income Rents & royalties Partnership, S-Corp, Estate & Trust, etc. Overreported Offsets to Income Adjustments SE Tax deduction§ All other adjustments Deductions Exemptions Credits Net Math Errors (non-EITC)
† The amount of income or offset misreported divided by the amount that should have been reported. The NRP contains an adjustment for income amounts that were underreported, but does not have a corresponding adjustment for offset amounts that were not claimed. * Less than $0.5 billion. § Taxpayers understate this adjustment because they understate their self-employment income and, thereby, their selfemployment tax. Therefore, the gap associated with this item is negative.
2009 Budget 3.210 The Internal Revenue Service will hire more than 3,500 frontline enforcement employees as it embarks on its largest hiring initiative in recent history, Deputy Commissioner for Services and Enforcement Linda E. Stiff said March 30. This number includes more than 2,000 new revenue agents and revenue officers, Stiff said during a luncheon at the Tax Executives Institute's 59th Midyear Conference. Several hundred of these new hires will be directed at large corporate compliance, and as many as 700 will be hired to deal with international issues, she said. The hiring push comes on the heels of the fiscal year 2009 omnibus bill, which contains $630 million above IRS's current funding level for it to address noncompliance through improved technology, collection efforts, and audits, Stiff said. The Obama administration and the Treasury Department are strongly supporting IRS in its efforts to combat abuses in the international arena, Stiff said. IRS's strategy in this area includes an integrated approach composed of separate yet complementary programs, such as international collaboration and information sharing, as well as information reporting and withholding, she said.1 2009 Budget 3.220 The FY 2009 President’s Budget for the IRS increased funding as part of a strategy to improve compliance by focusing on the following priorities: • • • • • • • Improving voluntary compliance and reducing the tax gap by: Increasing front-line enforcement resources, Improving taxpayer service options, Enhancing research, and Implementing legislative and regulatory changes. Maintaining balance between taxpayer service and enforcement. Investing in technology to improve infrastructure, modernize, and increase the productivity of existing resources.
Mar. 31 -- BNA, Inc. Daily Tax Report
3.230 The IRS continues to expand and enhance its abusive preparer program. The program was developed to enhance compliance in the return-preparer community by engaging in enforcement actions and/or asserting appropriate civil penalties against unscrupulous or incompetent return preparers. Bad preparers are a significant problem for both the IRS and taxpayers. Return preparer fraud generally involves the preparation and filing of false income tax returns by preparers who claim inflated personal or business expenses, false deductions, unallowable credits or excessive exemptions on returns prepared for their clients. This includes inflated requests for the special one-time refund of the longdistance telephone tax. Preparers may also manipulate income figures to obtain tax credits, such as the Earned Income Tax Credit, fraudulently. In some situations, the client (taxpayer) may not have knowledge of the false expenses, deductions, exemptions and/or credits shown on their tax returns. However, when the IRS detects the false return, the taxpayer — not the return preparer — must pay the additional taxes and interest and may be subject to penalties. Abusive Preparer Prosecutions FY 2008 Investigations Initiated Prosecution Recommendations Indictments/Informations Sentenced Incarceration Rate* Avg. Months to Serve 214 134 142 124 81.5% 18 FY 2007 218 196 131 123 81.3% 19 FY 2006 197 153 135 109 89.0% 18
Audits of 30 Clients 3.240 Another aspect of the IRS preparer program is identifying suspect preparers and audited their clients. If during an examination a revenue suspects that some of the deficiencies on a return were caused by the preparer she can refer the matter to an area coordinator. After review the coordinator can initiate a project on the preparer. The preparer is sent a letter notifying her that she has been selected for a project and 30 of her client's returns are audited. If significant deficiencies are found then the IRS may choose one of several courses of action including: • • • • Referral to Criminal investigation Referral to the office of professional liability Preparer penalties Referral to Department of justice to seek an injunction ordering the preparer to cease filing tax returns. 28
4. EXAMINATION Examination Reengineering 4.10 Changes to the tax law, technology, and the business environment necessitated the IRS to make changes to its examination process. SB/SE initiated Examination Reengineering in order to improve the quality and consistency of its examinations across the country. SB/SE gathered feedback from multiple sources to design the new field and office examination processes. Since 2003 the IRS has been implementing this process. Some of the features of the reengineered field examination process are: • Clearly communicated expectations of both the taxpayer and field agent through mandatory discussions between the revenue agent and taxpayer regarding the specific examination issues, required documentation, and a mutually agreed upon date to complete the examination. At the beginning of each examination, field agents and their managers will meet to discuss the agent’s approach to the examination, the plan to close the examination, and the mutual commitment date arrived at with the taxpayer. Field agents will use standardized templates for every examination issue to gather the information necessary to resolve issues. Agents will use a standardized guide when deciding if additional issues need to be added to the examination. The agent will explain to the taxpayer if any additional issues are included in the examination.
The Dirty Dozen 4.20 Each year the IRS announces its Dirty Dozen and urges people to avoid these common schemes: The 2009 list was as follows: 1. Phishing is a tactic used by Internet-based scam artists to trick unsuspecting victims into revealing personal or financial information. The criminals use the information to steal the victim’s identity, access bank accounts, run up credit card charges or apply for loans in the victim’s name. Phishing scams often take the form of an e-mail that appears to come from a legitimate source, including the IRS. The IRS never initiates unsolicited e-mail contact with taxpayers about their tax issues. Taxpayers who receive unsolicited e-mails that claim to be from the IRS can forward the message to phishing@irs.gov. Further instructions are available at IRS.gov. To date, taxpayers have forwarded scam e-mails reflecting thousands of confirmed IRS phishing sites. If you believe you have been the target of an identity thief, information is available at IRS.gov. 2. Hiding Income Offshore The IRS aggressively pursues taxpayers and promoters involved in abusive offshore transactions. Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks, brokerage 29
accounts or through other entities. Recently, the IRS provided guidance to auditors on how to deal with those hiding income offshore in undisclosed accounts. The IRS draws a clear line between taxpayers with offshore accounts who voluntarily come forward and those who fail to come forward. Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or life insurance plans. The IRS has also identified abusive offshore schemes including those that involve use of electronic funds transfer and payment systems, offshore business merchant accounts and private banking relationships. 3. Filing False or Misleading Forms The IRS is seeing scam artists file false or misleading returns to claim refunds that they are not entitled to. Frivolous information returns, such as Form 1099-Original Issue Discount (OID), claiming false withholding credits are used to legitimize erroneous refund claims. The new scam has evolved from an earlier phony argument that a “strawman” bank account has been created for each citizen. Under this scheme, taxpayers fabricate an information return, arguing they used their “strawman” account to pay for goods and services and falsely claim the corresponding amount as withholding as a way to seek a tax refund. 4. Abuse of Charitable Organizations and Deductions The IRS continues to observe the misuse of tax-exempt organizations. Abuse includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or income from donated property. The IRS also continues to investigate various schemes involving the donation of non-cash assets, including easements on property, closely-held corporate stock and real property. Often, the donations are highly overvalued or the organization receiving the donation promises that the donor can purchase the items back at a later date at a price the donor sets. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and new definitions of qualified appraisals and qualified appraisers for taxpayers claiming charitable contributions. 5. Return Preparer Fraud Dishonest return preparers can cause many headaches for taxpayers who fall victim to their ploys. Such preparers derive financial gain by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. Taxpayers should choose carefully when hiring a tax preparer. As the saying goes, if it sounds too good to be true, it probably is. No matter who prepares the return, the taxpayer is ultimately responsible for its accuracy. Since 2002, the courts have issued injunctions ordering dozens of individuals to cease preparing returns, and the Department of Justice has filed complaints against dozens of others, which are pending in court. 6. Frivolous Arguments Promoters of frivolous schemes encourage people to make unreasonable and unfounded claims to avoid paying the taxes they owe. The IRS has a list of frivolous legal positions that taxpayers should stay away from. Taxpayers who file a tax return or make a submission based on one of the 30
positions on the list are subject to a $5,000 penalty. More information is available on IRS.gov. 7. False Claims for Refund and Requests for Abatement This scam involves a request for abatement of previously assessed tax using Form 843, Claim for Refund and Request for Abatement. Many individuals who try this have not previously filed tax returns. The tax they are trying to have abated has been assessed by the IRS through the Substitute for Return Program. The filer uses Form 843 to list reasons for the request. Often, one of the reasons given is "Failed to properly compute and/or calculate Section 83-Property Transferred in Connection with Performance of Service." 8. Abusive Retirement Plans The IRS continues to uncover abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers are using to avoid the limitations on contributions to IRAs as well as transactions that are not properly reported as early distributions. Taxpayers should be wary of advisers who encourage them to shift appreciated assets into IRAs or companies owned by their IRAs at less than fair market value to circumvent annual contribution limits. Other variations have included the use of limited liability companies to engage in activity which is considered prohibited. 9. Disguised Corporate Ownership Some taxpayers form corporations and other entities in certain states for the primary purpose of disguising the ownership of a business or financial activity. Such entities can be used to facilitate underreporting of income, fictitious deductions, non-filing of tax returns, participating in listed transactions, money laundering, financial crimes, and even terrorist financing. The IRS is working with state authorities to identify these entities and to bring the owners of these entities into compliance. 10. Zero Wages Filing a phony wage- or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer also may submit a statement rebutting wages and taxes reported by a payer to the IRS. Sometimes fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any of the variations of this scheme. 11. Misuse of Trusts For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are many legitimate, valid uses of trusts in tax and estate planning, some promoted transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the promised tax benefits and are being used primarily as a means to avoid income tax liability and hide assets from creditors, including the IRS. 31
The IRS has recently seen an increase in the improper use of private annuity trusts and foreign trusts to divert income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust arrangement. 12. Fuel Tax Credit Scams The IRS is receiving claims for the fuel tax credit that are unreasonable. Some taxpayers, such as farmers who use fuel for offhighway business purposes, may be eligible for the fuel tax credit. But some individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving the fuel tax credit is considered a frivolous tax claim, potentially subjecting those who improperly claim the credit to a $5,000 penalty. 5. APPEALS Strategic Priorities: 5.10 Appeals has set forth the following as its strategic priorities for 2009: • • • • Increase taxpayer awareness of the Appeals process and their rights within the process Increase taxpayer awareness of alternative dispute resolution programs Improve our processes to meet customer needs and expectations and to reduce the length of the Appeals process while spending the right amount of time with each taxpayer Promote employee productivity, engagement, and satisfaction
Campus Appeals Program 5.20 The campus appeals program diminishes taxpayer rights. Any appeal from a compliance generated notice is assigned to the campus appeals program. The campus appeals personnel are poorly trained and lack field experience. Their incompetence starkly contrasts with the well trained experienced former revenue agents and revenue officers assigned to the local appeals offices. When your client receives a notice from a campus allowing an appeal your protest should always request that your client be given a face to face conference in your local office. OIC and TFRP Mediation and Arbitration 5.30 During a test period which began in December 2008 Appeals will seek appropriate OIC and TFRP cases for both mediation and arbitration during the two-year test period in order to evaluate the effectiveness of alternative dispute resolution for such cases. During the two-year test period, effective from the date of publication of this announcement, Appeals will initially offer mediation and arbitration for OIC and TFRP cases for taxpayers whose appeals are considered at an Appeals office located in one of the following cities:
Atlanta, Georgia Chicago, Illinois Cincinnati, Ohio Houston, Texas Indianapolis, Indiana Louisville, Kentucky Phoenix, Arizona San Francisco, California Application Process 5.40 Either the taxpayer or Appeals may submit a request to mediate or arbitrate after consulting with and obtaining the concurrence of the other party. A taxpayer may submit a request to mediate or arbitrate by sending a written request to the appropriate Appeals Team Manager and a copy to: Chief of Appeals Attn: Tax Policy & Procedure — Collection & Processing 1099 14th St. NW, Suite 4200 East Washington, DC 20005 For an OIC case, the written request to mediate or arbitrate should include: ►The taxpayer’s name, address, and taxpayer identification number, and the name, title, address, and telephone number of the person to contact; ►The name of the Appeals Team Manager, Appeals Officer, or Settlement Officer; ►The taxable periods involved; ►A detailed description of the issue(s) for which the taxpayer is requesting mediation or arbitration, including both the specific dollar amount and the basis by which that amount was determined; and ►A representation that the disputed issue is not an excluded issue listed in section 4.01 above or in Revenue Procedure 2002-44 or Revenue Procedure 2006-44. TFRP 5.50 For a TFRP case, the written request to mediate or arbitrate should contain items above and a detailed explanation of the taxpayer’s position, including explanations of the following (where applicable): ►Why the taxpayer was not required to collect, truthfully account for, and pay over the income, employment or excise taxes; ►Why the taxpayer did not willfully fail to collect or truthfully account for and pay over such tax, or willfully attempt in any manner to evade or defeat the payment of such tax; and ►Why the computation of the Trust Fund Recovery Penalty should reflect payment(s) designated specifically to the trust fund portion of the unpaid tax. 33
If the taxpayer wants to use a non-IRS co-mediator (at the taxpayer’s expense) or a non-IRS arbitrator (expense shared equally by the taxpayer and Appeals), the application should state this preference.
Table 21. Appeals Workload, by Type of Case, Fiscal Year 2008
Type of case Cases received [1] Cases closed [1] Cases pending September 30, 2008 [1]
Total cases [2] Examination Collection due process Offers in compromise Penalty appeals Innocent spouse Industry cases
115,819 42,990 35,760 10,558 10,365 4,041 1,398
106,722 37,354 33,981 10,311 9,139 3,993 1,288
59,899 28,565 16,601 4,865 3,590 2,237 1,593
6. USEFUL INFORMATION FOR PRACTITIONERS Whistleblower Reforms 6.10 Tax Relief and Health Care Act of 2006 reforms the reward program for individuals who provide information to IRS regarding violations of the tax laws for information provided on or after the enactment date. Specifically, the Act establishes a reward range for such 'whistleblowers' of 15% to 30% of proceeds collected by IRS (subject to certain exceptions) where the amount in dispute exceeds $2,000,000. For awards for individuals the income must exceed $200,000. It also provides IRS with regulatory authority to create a Whistleblower Office to administer the program. ( Code Sec. 7623, as amended by Act Sec. 406) An above-the-line deduction is allowed for attorneys' fees and court costs related to whistleblower rewards (Code Sec. 62(a)(21), as amended by Act Sec. 406(a)(3)). Mortgage Relief Act 6.20 The Mortgage Relief Act, effective for indebtedness discharged on or after Jan. 1, 2007 and before Jan. 1, 2010, generally allows taxpayers to exclude up to $2 million of mortgage debt forgiveness on their principal residence. Specifically, under the Mortgage Relief Act, gross income doesn't include any discharge of qualified principal residence indebtedness. (Code Sec. 108(a)(1)(E)) Qualified principal residence indebtedness is acquisition indebtedness under Code Sec. 163(h)(3)(B) with respect to the taxpayer's principal residence, but with a $2 million limit ($1 million for married individuals filing separately). (Code Sec. 108(h)(2)) “Principal residence” has the same meaning as under the home sale exclusion rules of Code Sec. 121. (Code Sec. 108(h) (5)) Acquisition indebtedness of a principal residence is indebtedness incurred in the acquisition, construction, or substantial improvement of an individual's principal residence that is secured by the residence. It includes refinancing of debt to the extent
the amount of the refinancing doesn't exceed the amount of the refinanced indebtedness. (Joint Committee on Taxation JCX-86-07) Basis Reduction 6.30 The basis of the taxpayer's principal residence is reduced by the excluded amount, but not below zero. (Code Sec. 108(h)(1)) Qualified Principal Residence Indebtedness 6.40 If any loan is discharged, in whole or in part, and only part of the loan is qualified principal residence indebtedness, the mortgage forgiveness exclusion applies only to so much of the amount discharged as exceeds the amount of the loan (as determined immediately before the discharge) which is not qualified principal residence indebtedness. (Code Sec. 108(h)(4)) The exclusion doesn't apply to a loan discharged on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or to the taxpayer's financial condition. The exclusion also doesn't apply to a taxpayer in a Title 11 bankruptcy. (Code Sec. 108(h) (3)) An insolvent taxpayer (other than one in a Title 11 bankruptcy) can elect to have the mortgage forgiveness exclusion not apply and can instead rely on the Code Sec. 108(a) (1)(B) exclusion for insolvent taxpayers. (Code Sec. 108(a)(2)) Misclassified Workers 6.50 Employees working for employers who failed to withhold Social Security and Medicare taxes should use new Form 8919 to report and pay their share of these taxes. This includes section 530 employees — that is, people who work for employers claiming relief from federal payroll taxes under section 530 of the Revenue Act of 1978. It also includes employees who are treated as independent contractors but who have received a determination letter from the IRS which states they are employees. Workers who believe they are misclassified as independent contractors can file Form SS-8 with the IRS and request a determination of their worker classification. For employees, the Social Security tax rate is 6.2 percent and the Medicare tax rate is 1.45 percent. Normally, employers withhold these taxes from workers’ pay, match these amounts and turn over the combined amounts to the IRS. Workers, properly classified as independent contractors, should not use Form 8919 but instead, continue to use Schedule SE. IRS Publication 1779 has further details on employee versus independent contractor status. Misclassification 6.60 A 2009 TIGTA report says IRS still needs to do more to identify misclassified workers [Audit Report No. 2009-30-035]: The Treasury Inspector General for Tax Administration (TIGTA) has issued an audit report that evaluates the effectiveness of IRS actions with respect to identifying misclassified workers. The report notes that the “misclassification of employees as independent contractors is a nationwide issue affecting millions of workers that continues to grow and contribute to the tax gap.” Workers are frequently misclassified for a variety of reasons, either intentionally to save costs, or unintentionally because of a lack of knowledge. Some independent contractor misclassifications occur because certain employers are protected from potentially large employment tax assessments by Section 530 of the Revenue Act of 1978. The report notes that the IRS' interest in this issue is not to reclassify workers from independent 35
contractors to employees. Rather, it is to ensure that employers are making the proper determinations and that workers are being treated appropriately. The report states that while the IRS has done a great deal to educate employers about proper classification of workers, much more needs to be done. For example, studies of the impact of misclassification on the tax gap are more than twenty years old. Therefore, it is difficult for the IRS to estimate the size of the problem today, or the overall effectiveness that its actions to date are having. The most recent IRS estimate of the tax gap is $345 billion, with an estimated $1.6 billion resulting from worker misclassification. However, the $1.6 billion figure is based on 1984 data, and is likely to be a great deal higher now. Recommendations 6.70 TIGTA recommends that the IRS develop an agency-wide employment tax program to coordinate the decision-making process and efforts among its business divisions. The report also recommends that the IRS Deputy Commissioner for Services and Enforcement (DCSE) conduct a formal compliance study to measure the current impact of worker misclassification on the tax gap. The IRS concurred with the findings in the audit report. DCSE will coordinate an agency-wide employment tax program. The Director of Specialty Programs for the IRS Small Business/Self-Employed Division will coordinate a study in fiscal year 2009 on worker classification and other employment tax issues. The planning for this project has already begun. UBS Criminal Charges 6.80 On February 18, 2009 UBS AG, Switzerland’s largest bank, IRS announced that it had entered into a deferred prosecution agreement on charges of conspiring to defraud the United States by impeding the Internal Revenue Service (IRS),. Agreement 6.90 As part of the deferred prosecution agreement and in an unprecedented move, UBS, based on an order by the Swiss Financial Markets Supervisory Authority (FINMA), has agreed to immediately provide the United States government with the identities of, and account information for, certain United States customers of UBS’s cross-border business. Under the deferred prosecution agreement, UBS has also agreed to expeditiously exit the business of providing banking services to United States clients with undeclared accounts. As part of the deferred prosecution agreement, UBS has further agreed to pay $780 million in fines, penalties, interest and restitution. Allegations 6.100 Justice Department alleges that Swiss bankers routinely traveled to the United States to market Swiss bank secrecy to United States clients interested in attempting to evade United States income taxes. Court documents assert that, in 2004 alone, Swiss bankers allegedly traveled to the United States approximately 3,800 times to discuss their clients’ Swiss bank accounts. The information further alleges that UBS managers and employees used encrypted laptops and other counter-surveillance techniques to help prevent the detection of their marketing efforts and the identities and offshore assets of their U.S. clients. According to the information, clients of the cross-border business in turn filed false tax returns which omitted the income earned on their Swiss bank accounts and failed to disclose the existence of those accounts to the IRS.
Prior Charges 6.110 In November 2008, UBS executive Raoul Weil was indicted by a federal grand jury in Fort Lauderdale and charged with conspiring to defraud the United States for his alleged role in overseeing the United States cross-border business. The district court recently declared him to be a fugitive. In June 2008, former UBS private banker Bradley Birkenfeld pleaded guilty to a charge of conspiring to defraud the United States for similar conduct. Birkenfeld is scheduled to be sentenced on May 1, 2009. Also, in June 2008, the U.S. District Court in Miami authorized the Internal Revenue Service to serve upon UBS a so-called “John Doe” summons seeking records that would identify United States taxpayers with accounts at UBS in Switzerland who have elected to conceal the existence of their accounts from the IRS. Comments of Government Officials 6.120 “Today’s agreement is but one milestone in an ongoing law enforcement effort to reassure hard-working and law-abiding taxpayers who pay their fair share of taxes that those who don’t will pay a heavy price,” said John A. DiCicco, Acting Assistant Attorney General of the Justice Department’s Tax Division. “The veil of secrecy has been pulled aside and we will continue to aggressively pursue those who shirk their federal tax obligations or assist others in doing so.” “UBS executives knew that UBS’s cross-border business violated the law,” said R. Alexander Acosta, U.S. Attorney for the Southern District of Florida. “They refused to stop this activity, however, and in fact instructed their bankers to grow the business. The reason was money -- the business was too profitable to give up. This was not a mere compliance oversight, but rather a knowing crime motivated by greed and disrespect of the law.” Settlement Offer Unreported Offshore Income 6.130 On March 26, 2008 IRS Commissioner Doug Shulman announced what is in effect a settlement offer for those that voluntarily and timely disclose unreported offshore income. Those meeting the terms of the offer will have to pay back-taxes and interest for six years, and pay either an accuracy or delinquency penalty on all six years. They will also pay a penalty of 20% of the amount in the foreign bank accounts in the year with the highest aggregate account or asset value. In other words, 20% of the highest asset value of an account anytime in the past six years. However, those who come forward on a timely basis will not face criminal prosecution. The offer is only open for 6 months. Highlights of the Offer. 6.140 As explained in a memorandum written by Linda E. Stiff, Deputy Commissioner for Services and Enforcement and addressed to the Commissioners for the Large and Mid-Size (LMSB) and Small Business/Self-Employed (SBSE) Divisions, the tax liabilities related to offshore issues of taxpayers that make “voluntary disclosure requests'” will be settled as follows:
►Taxes and interest due going back 6 years will be assessed. ►The taxpayer must file or amend all returns, including information returns, and Form TD F 90-22.1 (FBAR). Penalties 6.150 IRS will assess either an accuracy or delinquency penalty for all years (no reasonable cause exception will be applied). In lieu of all other penalties that may apply (including FBAR and information return penalties), IRS well assess a penalty equal to 20% of the amount in foreign bank accounts/entities in the year with the highest aggregate account/asset value. The penalty is reduced to 5% if, with respect to the accounts or entities formed: (a) the taxpayer did not open them or cause them to be opened or formed; (b) there has been no activity during the period the accounts/entities were controlled by the taxpayer; and (c) all applicable U.S. taxes have been paid on the funds in the accounts/entities (where only the earnings have escaped U.S. taxes). Fully Cooperate 6.160 The above terms will apply only to taxpayers that “fully cooperate with the IRS both civilly and criminally,” for all voluntary disclosure requests that are submitted to IRS, and are not yet resolved. The terms will remain in effect only for six months from Mar. 23, 2009 (the date that the Deputy Commissioner for Services and Enforcement released the memorandum on voluntary disclosure requests). IRS Commissioner Doug Shulman says that after that time, IRS would reevaluate all of its options, and warned that for those “who continue to hide their heads in the sand, the situation will only become more dire.” VITA Grant Program 6.170 In December 2007, Congress appropriated funds to the IRS to establish and administer a one-year matching grant program, in consultation with the Taxpayer Advocate Service, for the Community Volunteer Income Tax Assistance Program. The Report to Congress provides more information on the design plan. This grant program is intended to provide direct funds to organizations to: Enable VITA Programs to extend services to underserved populations in hardestto-reach areas, both urban and non-urban Increase the capacity to file returns electronically Heighten quality control Enhance volunteer training Significantly improve the accuracy rate of returns prepared at volunteer sites Refer to the Publication 4671 (VITA Grant Program Overview and Application Package) and to the frequently asked questions for more information on the VITA Grant Program. Questions about the VITA Grant Program may be emailed to the Grant.Program.Office@irs.gov.
Identity Theft 6.180 Identity theft is becoming a huge problem for the tax system. The IRS has established a new office for reporting. identity theft using stolen SSN’s. Their employers report that income to the IRS on W-2’s and the income is attributed to the theft victim. Two scenarios are most common: ►The taxpayer receives an audit notice from the IRS showing that he is working several jobs in many states or; ►The taxpayer attempts to file a return and it is rejected by the IRS because someone has already filed a return using the taxpayers SSN. The IRS website now gives taxpayers who are the victims of identity theft the following advice: Identity Theft and Your Tax Records The IRS does not initiate communication with taxpayers through e-mail. Before identity theft happens, safeguard your information. What do I do if the IRS contacts me because of a tax issue that may have been created by an identity theft? If you receive a notice or letter in the mail from the IRS that leads you to believe someone may have used your Social Security number fraudulently, please respond immediately to the name, address, and/or number printed on the IRS notice. Be alert to possible identity theft if the IRS issued notice or letter: ►states more than one tax return was filed for you, or ►indicates you received wages from an employer unknown to you. ►An identity thief might also use your Social Security number to file a tax return in order to receive a refund. If the thief files the tax return before you do, the IRS will believe you already filed and received your refund if eligible. If your Social Security number is stolen, it may be used by another individual to get a job. That person’s employer would report income earned to the IRS using your Social Security number, making it appear that you did not report all of your income on your tax return. If you have previously been in contact with the IRS and have not achieved a resolution, please contact the IRS Identity Protection Specialized Unit, toll-free at 1-800-908-4490. What do I do if I have not been contacted by IRS for a tax issue but believe I am a victim of identity theft? If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost/stolen purse or wallet, questionable credit card 39
activity, credit report, or other activity, you need to provide the IRS with proof of your identity. You should submit a copy, not the original documents, of your valid Federal or State issued identification, such as a social security card, driver's license, or passport, etc, along with a copy of a police report or Federal Trade Commission Identity Theft Affidavit. If the FTC Affidavit is not notarized, a witness (nonrelative) must sign it. Please send these documents using one of the following options: Mailing address: Internal Revenue Service P.O. Box 9039 Andover, MA 01810-0939 FAX: Note that this is not a toll-free FAX number 1-978-247-9965 For your convenience, Form 14026 is available as a cover sheet for submitting your documentation. You may also contact the IRS Identity Protection Specialized Unit, toll-free 1-800-908-4490 for guidance. Hours of Operation: Monday – Friday, 8:00 a.m. – 8:00 p.m. your local time (Alaska & Hawaii follow Pacific Time).
IRS Telephone Lines and Hours of Operation Service Practitioner Priority Service IRS Tax Help Line for Individuals Business and Specialty Tax Line e-Help (Practitioners Only) Telephone number Hours of operation
Identity Protection Specialized Unit 1-800-908-4490M – F, 8:00 a.m. – 8:00 p.m. local time Refund Hotline Forms and Publications National Taxpayer Advocate Help Line Telephone Device for the Deaf (TDD): Forms, Tax Help, TAS Electronic Federal Tax Payment System Government Entities (TEGE) Help Line (800) 829-1954 Automated service is available 24/7 (800) 829-3676 M–F, 7:00 a.m–10:00 p.m., local time (877) 777-4778 M–F, 7:00 a.m.–10:00 p.m., local time (800) 829-4059 M–F, 7:00 a.m.–10:00 p.m., local time (800) 555-4477 24/7 (877) 829-5500 M–F, 8:30 a.m. – 4:30 p.m., ET
TeleTax Topics and Refund Status (800) 829-4477 24/7 Forms 706 and 709 Help Line Employer Identification Number (EIN) Excise Tax and Form 2290 Help Line Information Return Reporting (866) 699-4083 M–F, 7:00 a.m.–7:00 p.m., local time (800) 829-4933 M–F, 7:00 a.m.–10:00 p.m., local time (866) 699-4096 M–F, 8:00 a.m.–6:00 p.m., ET (866) 455-7438 M–F, 8:30 a.m.–4:30 p.m., ET
7. COLLECTION Taxpayer Advocate’s Report On Enforced Collection 7.10 The Taxpayer Advocate has issued the following report to Congress: “While the history of the partial-payment installment agreement program is much briefer, the aggregate data indicate that it, too, is not widely utilized. Indeed, most taxpayers and many practitioners are not even aware it exists. What has the IRS done instead with respect to taxpayers with delinquent accounts? In FY 2008, it placed one million taxpayers into “currently not collectible” status – meaning that the IRS is collecting nothing at all30 – and it took traditional enforcement actions about 3.4 million times, imposing 2,631,038 levies, placing 768,168 liens, and conducting 610 property seizures. IRS data show that greater use of traditional enforcement tools like liens and levies does not have a significant impact on overall collection. For example, the number of levies the IRS has imposed plummeted from 3,659,000 in FY 1997 just before the IRS Restructuring and Reform Act of 1998 (RRA ’98), to 220,000 in FY 2000, and then climbed back up to 3.76 million in FY 2007.32. Yet the IRS collection yield has risen on a slow, relatively consistent and gradual path over that period of time with no discernable revenue loss resulting from the post-RRA ’98 reduction in levies, as shown by the following chart.
Flawed Private Collection Ends 7.20 In March, 2009 the IRS announced that after an extensive review of the private debt collection program, including its cost effectiveness, IRS won't renew its contracts with two private debt collection agencies. From the start private collection agencies have been controversial. While hailed by some as an opportunity to improve government service by utilizing more efficient and more motivated private enterprises, it has also been criticized by others as a misguided and inefficient effort to privatize government.
The American Jobs Creation Act of 2004 (Jobs Act) allowed IRS to use private companies to collect taxes owed to the federal government by providing that nothing in any provision of law may be construed to prevent IRS from entering into a qualified tax collection contract. (Code Sec. 6306(a), as added by Act Sec. 881(a)(1)) The private collection agency could keep and use up to 25% of the amount collected under qualified tax collection contract for the costs of services performed under the contract. The amount credited as paid by any taxpayer is determined without regard to these rules on fees and expenses. (Code Sec. 6306(c)) End of programs. IRS determined that the tax collection work is best done by IRS employees who have more flexibility handling cases, which is particularly important with many taxpayers currently facing economic hardship. Accordingly, it won't renew the current one-year contracts with two private debt collectors that expire on Mar. 6, 2009. IRS Commissioner Doug Shulman cited the results of a cost-effectiveness study of the private debt collection program (which was supported by an independent review) that showed that it was reasonable to conclude that when working similar inventory, IRS collection was more cost effective than the private contractors. He noted that IRS anticipates hiring over 1,000 new collection personnel in FY 2009. Help for People Who Owe Taxes 7.30 With many people facing additional financial difficulties, in February 2009 the IRS is taking several additional steps to help people who owe back taxes. “We need to ensure that we balance our responsibility to enforce the law with the economic realities facing many American citizens today,” Shulman said. “We want to go the extra mile to help taxpayers, especially those who’ve done the right thing in the past and are facing unusual hardships.” On a wide range of situations, IRS employees have flexibility to work with struggling taxpayers to assist them with their situation. Depending on the circumstances, taxpayers in hardship situations may be able to adjust payments for back taxes, avoid defaulting on payment agreements or possibly defer collection action. Flexibility 7.40 Among the areas where the IRS can provide assistance: Postponement of Collection Actions: IRS employees will have greater authority to suspend collection actions in certain hardship cases where taxpayers are unable to pay. This includes instances when the taxpayer has recently lost a job, is relying solely on Social Security or welfare income or is facing devastating illness or significant medical bills. If an individual has recently encountered this type of financial problem, IRS assistors may be able to suspend collection without documentation to minimize burden on the taxpayer. Added Flexibility for Missed Payments: The IRS is allowing more flexibility for previously compliant individuals in existing Installment Agreements who have difficulty making payments because of a job loss or other financial hardship. The IRS may allow a skipped payment or a reduced monthly payment amount without 43
automatically suspending the Installment Agreement. Taxpayers in a difficult financial situation should contact the IRS. Additional Review for Offers in Compromise on Home Values: The equity taxpayers have in real property can be a barrier to an OIC being accepted. With the uncertainty in the housing market, the IRS recognizes that the real-estate valuations used to assess ability to pay may not be accurate. So in instances where the accuracy of local real-estate valuations is in question or other unusual hardships exist, the IRS is creating a new second review of the information to determine if accepting an offer is appropriate. Prevention of Offer in Compromise Defaults: Taxpayers who are unable to meet the periodic payment terms of an accepted OIC will be able to contact the IRS office handling the offer for available options to help them avoid default. Expedited Levy Releases: The IRS will speed the delivery of levy releases by easing requirements on taxpayers who request expedited levy releases for hardship reasons. Taxpayers seeking expedited releases for levies to an employer or bank should contact the IRS number shown on the notice of levy to discuss available options. When calling, taxpayers requesting a levy release due to hardship should be prepared to provide the IRS with the fax number of the bank or employer processing the levy. Online Payment Agreement (OPA) 7.50 The Internal Revenue Service today introduced several new features to the interactive Online Payment Agreement application, which will make it easier for taxpayers and their authorized representatives to make changes to existing installment agreements. The system will now permit:    Individuals to revise their payment due dates and/or amounts on existing agreements. Individuals to revise existing extensions to regular installment agreements and direct debit installment agreements. Individuals to revise existing regular installment agreements to a payroll deduction installment agreement or a direct debit installment agreement.
Practitioners with valid authorizations to use the signature date found on their approved Form 2848, Power of Attorney and Declaration of Representative, or the caller ID as an alternate way to authenticate when requesting agreements for clients. More than 75 percent of those eligible for an installment agreement can establish one using the online application, according to the IRS. Since launching in October 2006, more than 30,000 taxpayers have successfully used it to set up a payment agreement. Eligible taxpayers who owe $25,000 or less in combined tax, penalties and interest can self-qualify, apply and receive immediate notification of approval for installment
agreements – including pre-assessed agreements on tax year 2008 Form 1040 liabilities and paperless direct debit agreements. NOTE: For security purposes, you will automatically be logged out of OPA after 20 minutes of inactivity per page. Be sure to gather all the necessary information so that you are not automatically logged out of OPA before completing the required information. If you have difficulty entering the data required, please call the IRS at the number listed under “When should I call the toll-free number. “ http://www.irs.gov/individuals/article/0,,id=149373,00.html Guaranteed Availability of Installment Agreements 7.60 The Internal Revenue Service Restructuring and Reform Act of 1998 requires the Secretary to grant an installment agreement, at the taxpayer's option, if: • • • • • the liability is $10,000, or less (excluding penalties and interest); within the previous 5 years, the taxpayer has not failed to file or to pay, nor entered an installment agreement under this provision; if requested by the Secretary, the taxpayer submits financial statements, and the Secretary determines that the taxpayer is unable to pay the tax due in full; the installment agreement provides for full payment of the liability within 3 years; and the taxpayer agrees to continue to comply with the tax laws and the terms of the agreement for the period (up to 3 years) that the agreement is in place.[Act § 3467; IRC § 6159)
<$25,000 Liabilities 7.70 The IRS has chosen to create a more liberal system that allows installment agreements of up to 5 years for balances of less than $25,000. Form 433A 7.80 In January, 2008 the IRS issued a revised Form 433A. The form requires that those taxpayers who are employed to complete only the first 4 pages while self employed individuals must complete 2 additional pages. It also provides a more logical concise presentation of the taxpayer’s assets. New more Onerous Allowable Expense Standards 7.90 In October, 2007 the IRS the IRS revised its allowable expense standards to make them more onerous. In March, 2009 the IRS again revised the standards. Instead of establishing national standards which recognized the need for higher living expense for higher income families it began a system of one size fits all. It continued to fail to recognize the varying cost of living in different regions and communities and eliminated
differentials for Hawaii and Alaska. It also added a new category of expenses for out-ofpocket health care expenses. Total allowable expenses include those expenses that meet the necessary expense test. The necessary expense test is defined as expenses that are necessary to provide for a taxpayer's and his or her family's health and welfare and/or production of income. The expenses must be reasonable. The total necessary expenses establish the minimum a taxpayer and family needs to live. There are four types of necessary expenses: • • • • National Standards Out-of-Pocket Health Care Local Standards Other Expenses
National Standards: These establish standards for reasonable amounts for five necessary expenses. Four of them come from the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey: food, housekeeping supplies, apparel and services, and personal care products and services. The fifth category, miscellaneous, is a discretionary amount established by the Service. It is $87 for one person up to $235 for 4 persons. The IRS allows a total of $262 per month for each member of the household above 4. Note: All five standards are included in one total national standard expense. Out-of-Pocket Health Care Expenses: Out-of-pocket health care expenses include medical services, prescription drugs, and medical supplies (e.g. eyeglasses, contact lenses, etc.). Elective procedures such as plastic surgery or elective dental work are generally not allowed. Taxpayers and their dependents are allowed the standard amount monthly on a per person basis, without questioning the amounts they actually spend. If the amount claimed is more than the total allowed by the health care standards, the taxpayer must provide documentation to substantiate those expenses are necessary living expenses. Generally, the number of persons allowed should be the same as those allowed as exemptions on the taxpayer’s most recent year income tax return. The out-of-pocket health care standard amount is allowed in addition to the amount taxpayers pay for health insurance. Local Standards: These establish standards for two necessary expenses: housing and transportation. Taxpayers will be allowed the local standard or the amount actually paid, whichever is less. A. Housing - Standards are established for each county within a state. When deciding if a deviation is appropriate, consider the cost of moving to a new residence; the increased cost of transportation to work and school that will result from moving to lower-cost housing and the tax consequences. The tax consequence is the difference between the benefit the taxpayer currently derives from the interest and property tax deductions on Schedule A to the benefit the taxpayer would derive without the same or adjusted expense. Housing costs 46
include rent and/or house payments, taxes, repairs and utilities the IRM provides as follows: The utilities include gas, electricity, water, fuel, oil, bottled gas, trash and garbage collection, wood and other fuels, septic cleaning, and telephone. Housing expenses include: mortgage or rent, property taxes, interest, parking, necessary maintenance and repair, homeowner's or renter's insurance, homeowner dues and condominium fees. Usually, this is considered necessary only for the place of residence. Any other housing expenses should be allowed only if, based on a taxpayer's individual facts and circumstances, disallowance will cause the taxpayer economic hardship. [ IRM 5.15.1.9 B. Transportation - The transportation standards consist of nationwide figures for loan or lease payments referred to as ownership cost, and additional amounts for operating costs broken down by Census Region and Metropolitan Statistical Area. Operating costs were derived from BLS data. If a taxpayer has a car payment, the allowable ownership cost added to the allowable operating cost equals the allowable transportation expense. If a taxpayer has no car payment only the operating cost portion of the transportation standard is used to figure the allowable transportation expense. Under ownership costs, separate caps are provided for the first car and second car. If the taxpayer does not own a car a standard public transportation amount is allowed. Vehicle insurance, vehicle payment (lease or purchase), maintenance, fuel, state and local registration, required inspection, parking fees, tolls, driver's license, public transportation. Transportation costs not required to produce income or ensure the health and welfare of the family are not considered necessary. Consider availability of public transportation if car payments (purchase or lease) will prevent the tax liability from being paid in part or full. Public transportation costs could be an option if it does not significantly increase commuting time and inconvenience the taxpayer. Note: If the taxpayer has no car payment, or no car, question how the taxpayer travels to and from work, grocer, medical care, etc. The taxpayer is only allowed the operating cost or the cost of transportation. [ IRM 5.15.1.9 ] C. Other Expenses. Other expenses may be considered if they meet the necessary expense test - they must provide for the health and welfare of the taxpayer and/or his or her family or they must be for the production of income. This is determined based on the facts and circumstances of each case. If other expenses are determined to be necessary and, therefore allowable, document the reasons for the decision in your history.
D. Conditional expenses. These expenses do not meet the necessary expenses test. However, they are allowable if the tax liability, including projected accruals, can be fully paid within five years. E. National and local expense standards are guidelines. If it is determined a standard amount is inadequate to provide for a specific taxpayer's basic living expenses, allow a deviation. Require the taxpayer to provide reasonable substantiation and document the case file. F. Generally, the total number of persons allowed for national standard expenses should be the same as those allowed as dependents on the taxpayer's current year income tax return. Verify exemptions claimed on taxpayer's income tax return meet the dependency requirements of the IRC. There may be reasonable exceptions. Fully document the reasons for any exceptions. For example, foster children or children for whom adoption is pending. G. A deviation from the local standard is not allowed merely because it is inconvenient for the taxpayer to dispose of valued assets. H. Length. Revenue officers should consider the length of the payments. Although it may be appropriate to allow for payments made on the secured debts that meet the necessary expense test, if the debt will be fully repaid in one year only allow those payments for one year. [ IRM 5.15.1.7 ] Five Year Test 7.100 The amount allowed for necessary or conditional expenses depends on the taxpayer's ability to full pay the liability within five years and on the taxpayer's individual facts and circumstances. If the liability can be paid within 5 years, it may be appropriate to allow the taxpayer the excessive necessary and conditional expenses. If the taxpayer cannot pay within 5 years, it may be appropriate to allow the taxpayer the excessive necessary and conditional expenses for up to one year in order to modify or eliminate the expense. (See IRM 5.14, Installment Agreements) [ IRM 5.15.1.10 ] 8. OFFER IN COMPROMISE Number of Offers 8.10 The total number of proposed offer has halved from 128,000 in FY 2001 to 46,000 in FY 2007. The number of OICs accepted declined from 38,643 (or 34 percent) in FY 2001, 12,000 in FY 2007 (or 24%) and 10,000 in 2008 (or 24%). The IRS has made it so difficult to secure an offer in compromise that many taxpayers and their representative no longer choose to propose a compromise.
OIC’s FY2000 to 2008 8.20 In February, 2007 the IRS issued new offer in compromise forms which apply the provisions of TIPRA 2005 discussed below. Taxpayers proposing compromises based upon doubt as to collectibility of effective tax administration must submit revised Form 656. Taxpayers proposing an offer based upon doubt as to liability must now submit Form 656-L and a narrative setting forth defenses to the liability. To comply with the new downpayment requirements taxpayers must submit Form 656-PPV with the required downpayment. Tax Increase Prevention and Reconciliation Act of 2005 8.30 The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), section 509, made major changes to the IRS OIC program. These changes affect all offers received by the IRS on or after July 16, 2006..TIPRA section 509 amends IRC section 7122 by adding a new subsection (c) “Rules for Submission of Offers-in-Compromise.” Payments With Offers 8.35 A taxpayer filing a lump-sum offer must pay 20% of the offer amount with the application (IRC 7122(c)(1)(A)). A lump-sum offer means any offer of payments made in five or fewer installments. A taxpayer filing a periodic-payment offer must pay the first proposed installment payment with the application and pay additional installments while the IRS is evaluating the offer (IRC section 7122(c)(1)(B)). A periodic-payment offer means any offer of payments made in six or more installments. Failure to Make Deposit 8.40 Taxpayers can avoid delays in processing their OIC applications by making all required payments in full and on time. Failure to pay the 20 percent on a lump-sum offer, or the first installment payment on a periodic-payment offer, will result in the IRS returning the offer to the taxpayer as nonprocessable (IRC section 7122(d)(3)(C) as amended by TIPRA). 49
Not Refundable 8.50 The 20 percent payment for a lump-sum offer and the installment payments on a periodic-payment offer are “payments on tax” and are not refundable deposits (IRC section 7809(b) and Treasury Regulation 301.7122-1(h)). Taxpayer Advocate Research 8.60 In 2007, the Taxpayer Advocate Service conducted a research study to assess the impact of the down payment requirement.28. The study analyzed a representative sample of more than 400 offers that the IRS accepted in the months just before the 20 percent requirement took effect. Among the principal findings were that 56 percent of taxpayers whose offers were accepted and who made lump-sum payments obtained the funds from family members and friends. While family and friends may be willing to help a taxpayer get straight with the IRS, they are probably much less willing to provide funds for taxpayers to make down payments on offers that are unlikely to be accepted – and fewer than one in four offers is, in fact, accepted. Thus, not surprisingly, the number of offers received by the IRS fell by 21 percent from FY 2006 to FY 2007 as the down payment requirement took effect. Failure to Make Installment Payments 8.70 Taxpayers failing to make installment payments on periodic-payment offers after providing the initial payment will cause the IRS to treat the offer as a withdrawal. The IRS will return the offer application to the taxpayer (IRC section 7122(c)(1)(B)(ii)).A lump-sum offer accompanied by a payment that is below the required 20 percent threshold will be deemed processable. However, the taxpayer will be asked to pay the remaining balance in order to avoid having the offer returned. Failure to submit the remaining balance will cause the IRS to return the offer and retain the $150 application fee. Taxpayers filing periodic-payment offers must submit the full amount of their first installment payment in order to meet the processability criteria. Otherwise, the IRS will deem the offer as unprocessable and will return the application to the taxpayer along with the $150 fee. Low Income Taxpayers 8.80 Under the new law, taxpayers qualifying as low-income or filing an offer solely based on doubt as to liability qualify for a waiver of the new partial payment requirements. Taxpayers qualifying for the low-income exemption or filing a doubt-as-toliability offer only are not liable for paying the application fee, or the payments imposed by TIPRA section 509. A taxpayer seeking a waiver must submit Form 656-A with the offer. The monthly income levels to qualify are listed below:
Deemed Accepted 8.90 The IRS will deem an OIC “accepted” that is not withdrawn, returned, or rejected within 24 months after IRS receipt. When calculating the 24-month timeframe, the IRS will disregard any time periods during which a liability included in the OIC is the subject of a dispute in any judicial proceeding (IRC section 7122(f) as amended by TIPRA). In five years the consideration period for deemed acceptance will become 12 months. Background 8.100 An offer in compromise is a settlement of a delinquent tax account for less than the full amount due. Sec. 7122 states that the IRS may compromise any civil or criminal case arising under the Internal Revenue Laws prior to reference to the Department of Justice for prosecution or defense. In the past very few offers were accepted because the standards were almost impossible to meet and the IRS really did not encourage them. But in 1992, the IRS decided that they had a major problem with accounts receivable inventory and a growing number of cases reported as currently not collectible. The new policy espoused by the IRS was that they would accept an OIC when it was unlikely that the tax liability could be collected in full and the amount offered reasonably reflected collection potential. Supporting Documents 8.110 The financial statements require the proponent to supply documentation for each item on the forms, i.e. pay stubs, car payment book, mortgages, pay stubs, charge account statements, and bank statements. The IRS considers smaller liability offers without conducting a field investigation, therefore it is requiring the proponent to supply all the info to make a decision without field verification. $150 Processing Fee 8.120 The Internal Revenue Service now charges a $150 application fee for the processing of offers in compromise. The IRS expects that this fee will help offset the cost of providing this service, as well as reduce frivolous claims. The law authorizes federal agencies to charge fees to defray the costs of providing certain services. Guidelines encourage such fees for benefits beyond those provided to the general public. The IRS anticipates the fee also will reduce the number of offers that are filed inappropriately — for example, solely to delay collection — enabling the agency to redirect resources to the processing of acceptable offers. Offers based solely on hardship may seek a fee waiver. 51
Determining Processability 8.130 The IRS campuses do an intensive review of each offer to determine if it is processable. The author believes that the IRS makes a concerted effort to return most offers to avoid the effort of performing a substantive consideration. An offer in compromise will be deemed not processable if one or more of the following criteria are present: A. Taxpayer Not in Compliance - All tax returns for which the taxpayer has a filing requirement must be filed. This rule applies even if a Service employee previously decided not to pursue the filing of the return under the provisions of Policy Statement P-5-133, because it was believed to have "little or no tax due" . In-business taxpayers must have timely deposited, filed and paid all required employment tax returns for the two (2) preceding quarters prior to filing the offer, and must be current with federal tax deposits for the quarter in which the offer was submitted. Note: Generally speaking, IRM 5.1.11.1.3(2) only requires employees to conduct a compliance check, confirm and document all tax periods were filed for the preceding 6 year period. The only exception would be if fraud were discovered during the course of the investigation. Even then it should be extremely rare to go beyond 6 years. IRM 5.1.11.4 discusses enforcement criteria, which states that if the taxpayer refuses to file, neglects to file, or indicates an inability to file, then the employees should determine to what extent enforcement should be used (e.g. summons, 6020(b), referral to Exam, or field, etc.). Filing requirements will normally be enforced for a 6 year period, which is calculated by starting with the tax year that is currently due, and going back 6 years. B. Taxpayer in Bankruptcy - An offer will not be considered during a bankruptcy proceeding. Note: IRM 25.17.4.7, Offers-in-Compromise and Bankruptcy (07-01-2002), states that "[t]oo many administrative and legal problems would be created if a tax liability was simultaneously the subject of a court-supervised bankruptcy case and the administrative offer-in-compromise process." Therefore, it is the policy of IRS that an offer will not be considered if a taxpayer is in bankruptcy. C. Taxpayer did not submit the offer on the current revision of Form 656 - The offer must be submitted on the most current revision of the Offer in Compromise Form 656. D. Taxpayer did not submit the most current revision of Forms 433A and/or 433-B - The most current revision of the Collection Information Statement Forms 433-A and/or 433-B must be submitted with the offer. 52
E. Taxpayer did not submit the application fee with the offer - The application fee of $150 or the signed Form 656-A, Income Certification for Offer in Compromise Application Fee, must be submitted with each Form 656 (Form 656-A applies to individual taxpayers only). Note: The application fee is not required if the offer is filed solely on the basis of Doubt as to Liability. An offer cannot be returned for the sole reason that the cost of an investigation may exceed the amount offered. [IRM 5.8.3.4.1] Full Pay Processing 8.140 The IRS is always looking for where it believes the taxpayer has the ability to full pay the liability. Its manual provides as follows: Taxpayers may submit an offer to compromise the liabilities based on Doubt as to Collectibility, yet indicate on their application an ability to pay the account in full. These cases, once determined to be processable, will be screened out. Absent any special circumstances they will be rejected with no further investigation or verification. The taxpayer will be directed toward the appropriate resolution for the delinquency. The rejection letter will be the first communication with the taxpayer. A decision to reject with appeals rights is adequately justified by the taxpayer's self-disclosed ability to pay in full. Initial Review 8.150 For processable offers one of the first considerations is to determine if the taxpayer can pay in full. The following initial review should be conducted on all processable offers to make that determination. • Complete the Full Pay worksheet using the taxpayer's figures only, as reflected on the CIS. • Do not adjust any asset values or apply necessary expense standards. [IRM 5.8.3.12] Computation of Offer Amount 8.160 The IRS uses three different methods for determining the adequacy of an offer depending on the period of time the taxpayer proposes for payment of the offer amount. The methods are: • • Cash (paid in 90 days or less), or Short-Term Deferred Payment (more than 90 days, up to 24 months), or
• Deferred Payment (offers with payment terms over the remaining statutory period for collecting the tax.).
NOTE: In all three cases, the IRS will release any filed Notice of Federal Tax Lien once you have fully paid the offer amount and any interest that has accrued. Cash Offer 8.170 You must pay cash offers within 90 days of acceptance. You should offer the realizable value of your assets (quick sale value) plus the total amount the IRS could collect over forty-eight months of payments represent value of income). When the tenyear statutory period for collection expires in less than forty-eight months, you must use the Deferred Payment Chart shown in the instructions to Form 656. The Internal Revenue Service's method of determining the adequacy of an offer could be best expressed by: Quick Sale Value Plus Present Value of Income Equals Offer In Compromise (QSV + PVI = OIC) In applying this formula, the IRS determines the Quick Sale Value of all of the client's assets and then adds the amount of the present value of the taxpayer's ability to pay. It aggregates the two numbers to arrive at an Offer in Compromise amount. The following paragraphs will discuss the Internal Revenue Service's methodology for determining quick sale value and the present value of income. Short-Term Deferred Payment Offer 8.180 This payment option requires you to pay the offer within two years of acceptance. The offer must include the realizable value of your assets in addition to the total amount the IRS could secure over sixty months (or the remainder of the ten-year statutory period for collection, whichever is less) through monthly payments. The IRS may file a Notice of Federal Tax Lien on tax liabilities compromised under short-term payment offers. Deferred Payment Offers 8.190 This payment option requires you to pay the offer amount within the remaining statutory period for collecting the tax. The offer must include the realizable value of your assets plus the amount the IRS could collect through monthly payments during the remaining life of the collection statute. The deferred payment option itself has three payment options: Option One is: Full payment of the realizable value of your assets within 90 days from the date the IRS accepts your offer and Your future income in monthly payments during the remaining life of the collection statute; Option Two is: Cash payment for a portion of the realizable value of your assets within 90 days from the date the IRS accepts your offer and Monthly payments during the remaining life of the collection statute for both the balance of the realizable value and your future income; Option Three is: The entire offer amount in monthly payments over the life of the collection statute. As with short-term deferred payment offers, the IRS may file a Notice of Federal Tax Lien. 54
Corporate Trust Fund Liabilities 8.200 The IRS has. recently changed its rules with respect to in business offers in compromise. It now requires that each potentially responsible officer of the company sign an agreement to assessment of the trust fund recovery penalty in advance of consideration of any corporate or LLC offer. The new system is extremely unfair because the IRS is requiring even those who should not be held liable for the TFRP to agree to liability and assessment. Only after the liability has been assessed against a non-responsible person may she file a claim for refund and defend against the penalty. The system is extremely unfair and represents an attempt to deprive officers of their statutory due process rights. Pursuit of Officers After Compromise. 8.210 Under this new system the IRS could compromise with the corporate entity based upon its ability to pay and then continue to pursue responsible officers for the remaining trust fund liability. The owners and officers would face continuing economic risk. The system also makes it impossible for a company that had a change in leadership to propound an offer in compromise. Prior officers would probably refuse to consent to the demands of the IRS that they waive their TFRP appeal rights thereby negating any opportunity for the company to have its offer considered by the IRS. Promote Effective Tax Administration 8.220 As part of the IRS Restructuring and Reform Act of 1998 (RRA 98), Congress added section 7122(c) to the Internal Revenue Code. That section provides that the Service shall set forth guidelines for determining when an offer in compromise should be accepted. Congress explained that these guidelines should allow the Service to consider: • • • Hardship, Public policy, and Equity
Treasury Regulation 301.7122-1 authorizes the Service to consider offers raising these issues. These offers are called Effective Tax Administration (ETA) offers. Encourage Compliance 8.230 The availability of an Effective Tax Administration (ETA) offer encourages taxpayers to comply with the tax laws because taxpayers will: • Believe the laws are fair and equitable, and • Gain confidence that the laws will be applied to everyone in the same manner. The Effective Tax Administration (ETA) offer allows for situations where tax liabilities • • The tax is legally owed, and The taxpayer has the ability to pay it in full 55
Only Available If There Is No Doubt As to Liability Or Collectibility 8.240 An Effective Tax Administration (ETA) offer can only be considered when the Service has determined that the taxpayer does not qualify for consideration under Doubt as to Liability (DATL) and/or Doubt as to Collectibility (DATC). The taxpayer must include the Collection Information Statement (Form 433-A and/or Form 433-B) when submitting an offer requesting consideration under Effective Tax Administration (ETA). Economic hardship standard of § 301.6343-1 specifically applies only to individuals. [IRM 5.8.11.1] Rules for Evaluating Offers to Promote Effective Tax Administration 8.250 The determination to accept or reject an offer to compromise made on the ground that acceptance would promote effective tax administration within the meaning of this section will be based upon consideration of all the facts and circumstances, including the taxpayer's record of overall compliance with the tax laws. Factors 8.260 Factors supporting (but not conclusive of) a determination of economic hardship include: • 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; • Although taxpayer has certain assets, liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses; and • Although taxpayer has certain assets, the taxpayer is unable to borrow against the equity in those assets and disposition by seizure or sale of the assets would have sufficient adverse consequences such that enforced collection is unlikely Temp Reg 301.7122-1T(b)(4)(iv)(B)] Undermine Compliance 8.270 Factors supporting (but not conclusive of) a determination that compromise would not undermine compliance by taxpayers with the tax laws include: • Taxpayer does not have a history of noncompliance with the filing and payment requirements of the Internal Revenue Code; • Taxpayer has not taken deliberate actions to avoid the payment of taxes; and • Taxpayer has not encouraged others to refuse to comply with the tax laws.[Temp Reg. 301.7122-1T(b)(4)(iv)(C)] Exceptional Circumstances 56
8.280 The following examples illustrate cases where exceptional circumstances exist such that collection of the full liability will be detrimental to voluntary compliance by taxpayers; and compromise of the liability would not undermine compliance by taxpayers with the tax laws.
Expense Food Housekeeping supplies Apparel & services Personal care products & services Miscellaneous Total One Person $285 $28 $86 $31 $87 $517 Two Persons $537 $66 $162 $55 $165 $985 Three Persons $626 $61 $209 $59 $197 $1,152 Four Persons $752 $74 $244 $65 $235 $1,370
The table for health care expenses, based on Medical Expenditure Panel Survey data, has been established for minimum allowances for out-of-pocket health care expenses. Out-of-pocket health care expenses include medical services, prescription drugs, and medical supplies (e.g. eyeglasses, contact lenses, etc.). Elective procedures such as plastic surgery or elective dental work are generally not allowed. Taxpayers and their dependents are allowed the standard amount monthly on a per person basis, without questioning the amounts they actually spend. If the amount claimed is more than the total allowed by the health care standards, the taxpayer must provide documentation to substantiate those expenses are necessary living expenses. The out-of-pocket health care standard amount is allowed in addition to the amount taxpayers pay for health insurance. Out-of-Pocket Costs Under 65 65 and Older $60 $144
Public Transportation Public Transportation National $173
Ownership Costs One Car National $489 Two Cars $978
Operating Costs Metropolitan Area Northeast Region Boston New York Philadelphia Midwest Region Chicago Cleveland Detroit Minneapolis-St. Paul South Region Atlanta Baltimore Dallas-Ft. Worth Houston Miami One Car $235 $225 $280 $235 $183 $217 $186 $267 $187 $201 $226 $217 $228 $263 $275 Two Cars $470 $450 $560 $470 $366 $434 $372 $534 $374 $402 $452 $434 $456 $526 $550
Metropolitan Area Washington, D.C. West Region Los Angeles Phoenix San Diego San Francisco Seattle
One Car $230 $211 $261 $232 $244 $261 $192
Two Cars $460 $422 $522 $464 $488 $522 $384
California Maximum Monthly Allowance
1,920 1,390 1,304 1,162 1,295 1,079 1,890 1,127 1,618 1,208 991 1,139 1,187 1,261 1,146 1,138 1,133 1,121 1,769 1,153 2,542 1,165 1,292 1,176 819 1,636 1,687 1,714 1,498 1,976 1,697 1,161 1,493 1,390
2,255 1,632 1,532 1,365 1,521 1,267 2,220 1,324 1,900 1,419 1,164 1,338 1,394 1,481 1,345 1,337 1,331 1,316 2,077 1,354 2,985 1,368 1,517 1,382 962 1,922 1,981 2,013 1,760 2,321 1,993 1,364 1,754 1,632
2,376 1,720 1,614 1,438 1,603 1,335 2,339 1,395 2,002 1,496 1,226 1,410 1,469 1,561 1,418 1,409 1,402 1,387 2,189 1,427 3,146 1,442 1,599 1,456 1,013 2,025 2,088 2,121 1,854 2,446 2,100 1,437 1,848 1,720
2,650 1,918 1,800 1,604 1,787 1,488 2,608 1,555 2,232 1,668 1,367 1,572 1,638 1,740 1,581 1,571 1,564 1,547 2,441 1,591 3,508 1,608 1,783 1,623 1,130 2,258 2,328 2,365 2,067 2,727 2,342 1,602 2,060 1,918
2,692 1,949 1,829 1,629 1,816 1,512 2,650 1,580 2,268 1,695 1,390 1,598 1,664 1,768 1,606 1,596 1,589 1,572 2,480 1,616 3,564 1,634 1,812 1,650 1,148 2,294 2,365 2,404 2,101 2,771 2,380 1,628 2,094 1,949
Alameda Alpine Amador Butte Calaveras Colusa Contra Costa Del Norte El Dorado Fresno Glenn Humboldt Imperial Inyo Kern Kings Lake Lassen Los Angeles Madera Marin Mariposa Mendocin o Merced Modoc Mono Monterey Napa Nevada Orange Placer Plumas Riverside Sacramen to
"REPRESENTING THE AUDITED TAXPAYER BEFORE THE IRS" AND REPRESENTATION BEFORE THE COLLECTION DIVISION OF THE IRS
by Robert E. McKenzie WITH PERMISSION FROM THOMSON WEST Rochester, NY All Rights Reserved COPYRIGHT 2009
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