Kinder and Gentler IRS? Nope, Just Practical.

For a while it was said that what emerged from the IRS Restructuring and Reform Act of 1998 was “a kinder and gentler” IRS.  Over the past several years we have learned that the alleged tide of kindness was pulling back out to sea.  Replacing it appears to be a more practical and resourceful IRS that is recognizing that traditional collection methods are resulting in a greater number of business failures and lower rates of repayment. 

The IRS recently announced a “New Effort to Help Struggling Taxpayers Get a Fresh Start.”  See News Release IR 2011-20 here.  This is a good thing for a lot of taxpayers that have fallen behind on their tax obligations.  Make no mistake, this is not a program that has grown out of altruism.  The IRS must have realized that by lifting the threat of the sword and replacing it with a carrot, they could collect more unpaid taxes and allow the public a better solution to addressing tax problems.

The IRS announcement explains changes they are making. These include:   

• Significantly increasing the dollar threshold when liens are generally issued, resulting in fewer tax liens. 
• Making it easier for taxpayers to obtain lien withdrawals after paying a tax bill.
• Withdrawing liens in most cases where a taxpayer enters into a Direct Debit Installment Agreement.
• Creating easier access to Installment Agreements for more struggling small businesses.
• Expanding a streamlined Offer in Compromise program to cover more taxpayers.

The IRS explains that the increased dollar threshold for lien filing is tied to inflationary changes since its last adjustment.  They have not, however, released what those dollar thresholds will now be.  The revisions to IRS procedure should expedite the release of a filed lien once a liability is fully paid. 

The biggest change is the release of a lien where a taxpayer owing less than $25,000 enters into a direct debit Installment Agreement.  In these cases, the monthly installment payment against a tax debt is automatically withdrawn from a taxpayer’s bank account.  This means that people owing less than $25,000 might be able to avoid additional damage to their credit report resulting from a tax lien if they allow for an automatic withdrawal from their bank account.  I am confident, however, that if a payment is missed (due to insufficient funds in a bank account) the IRS will be quick to file a lien against a taxpayer.  Getting a lien removed after such a situation will likely require the full payment of the tax even where a direct debit is in place.

Small businesses owing $25,000 or less will also benefit under the new programs.  The new rules should allow these businesses to enter into automatic installment agreements provided that the debts are paid off within 24 months.  Obviously, this will require a monthly payment in excess of $1,000.  So, while not a benefit to everyone, this will help a number of business get out of tax trouble without too much bureaucracy getting in the way.

Overall, these changes will allow a number of past due taxpayers to become fully compliant without adding a credit-devastating lien to their financial troubles.  Setting cynicism aside, what the IRS is doing is a good thing.

A Word On Tax Collections

In November and December of 2010, I wrote a series of tax articles for the State Bar of Wisconsin's Inside Track electronic news letter.  The first concerned tax audits and can be read here.  The second article discussed appeals and can be read here. The third addressed the United States Tax Court and can be read here.

The fourth article discussed (with great generality) what happens and what options may be available once the tax liability has become a fact that must be dealt with.  A brief discussion on what options a taxpayer has for paying or negotiating a tax liability can be found here.  

A Word On The Tax Court

In November and December of 2010, I wrote a series of tax articles for the State Bar of Wisconsin's Inside Track electronic news letter.  The first concerned tax audits and can be read here.  The second article discussed appeals and can be read here.


The third article discussed challenging a tax audit beyond the Appeals Division and into the United States Tax Court and can be read here.

A Word On Tax Appeals

Nearing the end of 2010, I began writing a series of tax articles for the State Bar of Wisconsin's Inside Track electronic news letter.  The first concerned tax audits and can be read here.  The second article discusses the practical and procedural aspects of an IRS tax appeal.

The discussion on appeals considers the different routes to the IRS Appeals Division and differences in how a case is viewed by appeals officers and the appeals division.  The appeals article can be read here.

A Word On Tax Audits

Having recently spoken to a group of lawyers on what to do when their clients receive a letter from the IRS, I have begun writing a short series of articles on the same topic.  Today, the the State Bar of Wisconsin published the first installment in its "Inside Track" electronic newsletter.  The article can be found in full here.  

Additional installments will cover tax appeals, court proceedings and the collection process.  I will provide links to those articles as they are published.

A related video can be seen here:

Now that your return has been filed...what if you get a letter from the IRS?

The IRS recently issued one of their electronic "Tax Tips" emails.  I like this one in particular because it echoes something that I have said for quite some time.  If you get a notice from the IRS do not ignore it.  

One of the reasons that our tax system is successful (mostly) is because the IRS is, by design, scary.  This fear motivates us to file our returns and to do so correctly.  But for a great number of taxpayers this can also paralyze them when a notice arrives in their mailbox. To this the IRS has to say something that would make Douglas Adams proud: "Don't Panic!"  

Of course, the IRS makes it sound a little more simple than it really is to address a tax issue, but the main point is sound.  The envelope should be opened and the notice acted upon.  Failing to do so will only work to limit your options in what can be done.

Here is what the IRS has to say about receiving a notice:

"Don’t Panic! Eight Things to Know If You Receive an IRS Notice

The Internal Revenue Service sends millions of letters and notices to taxpayers every year. Here are eight things taxpayers should know about IRS notices – just in case one shows up in your mailbox.

1)  Don’t panic. Many of these letters can be dealt with simply and painlessly.

2)  There are a number of reasons why the IRS might send you a notice. Notices may request payment of taxes, notify you of changes to your account, or request additional information. The notice you receive normally covers a very specific issue about your account or tax return.

3)  Each letter and notice offers specific instructions on what you are asked to do to satisfy the inquiry.

4)  If you receive a correction notice, you should review the correspondence and compare it with the information on your return.

5)  If you agree with the correction to your account, then usually no reply is necessary unless a payment is due or the notice directs otherwise.

6)  If you do not agree with the correction the IRS made, it is important that you respond as requested. You should send a written explanation of why you disagree and include any documents and information you want the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the upper left-hand corner of the notice. Allow at least 30 days for a response.

7)  Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right-hand corner of the notice. Have a copy of your tax return and the correspondence available when you call to help us respond to your inquiry.

8)  It’s important that you keep copies of any correspondence with your records."

IRS Liens, Levies and Collection Due Process Hearings – What Happens in the Hearing

After a taxpayer receives a Notice of Federal Tax Lien or a Final Notice of Intent to Levy, he/she/it has the right to challenge the collection action in a Collection Due Process Hearing (a CDP hearing). In a Collection Due Process hearing, the taxpayer may raise issues such as:

1) The validity of procedural steps leading to the hearing.

2) Issues related to unpaid tax liabilities.

3) Challenges to the proposed collection action (i.e. liens or levies).

4) Alternate collection action.

5) Issues related to the intrusiveness/efficiency of the collection action.

The right to a Collection Due Process hearing only arises after the filing of a Federal Tax Lien, however, the right to the hearing arises before the IRS actually levies on the assets of a taxpayer.

The result of a Collection Due Process hearing may be the avoidance of the forced collection action. However, the result of the hearing can be the IRS’ determination that the collection action (lien or levy) is appropriate and then the IRS will move forward on that action.

Take note, however, that if a taxpayer plans to challenge collection in a Collection Due Process hearing, he/she/it must have a non frivolous reason for doing so. Additionally, a hearing cannot be requested if it is simply a means to delay collection of the tax. Using a Collection Due Process hearing to make a frivolous argument or as a delay tactic can result in monetary penalties.

IRS Liens, Levies and Collection Due Process Hearings.

When a business or individual owes unpaid taxes, the IRS will eventually seek to collect the tax through forced means. The first step is usually contacting the taxpayer to encourage payment, the second step is to file a lien on the taxpayer’s property and the third step is to levy on bank accounts, garnish wages or seize assets (all known as a levy).

When the IRS issues a Notice of Federal Tax Lien or a Final Notice of Intent to Levy, the taxpayer has the right to challenge the collection action in a Collection Due Process hearing (also known as a CDP hearing). Note: while it is called a hearing, there is no court proceeding or formalized hearing. Rather, a Collection Due Process hearing is simply a meeting or a phone conference in which the issues are discussed.

IRS Appeals – Settlement of Cases In Appeals After a 90-Day Letter.

I have written a number of posts that discuss 30-Day Letters and 90-Day Letters (Statutory Notices of Deficiency) an how they may be appealed to the IRS Appeals Division. This post discusses what happens at the end of an appeal of a 90-Day Letter.

When a taxpayer receives a 90-Day Letter and Petitions the Tax Court for a reconsideration of the asserted deficiency, the IRS Counsel’s Office will first prepare an Answer in the Tax Court case denying most or all of the positions the taxpayer takes in the Petition.

Following the filing of the Answer to the Petition (and any necessary Reply), if the case has not already been to Appeals via 30-Day Letter, the IRS Attorney will refer the case to Appeals for settlement. Currently, when a case is referred to the Appeals Division, an Appeals Officer will have jurisdiction over the case for 4 months beginning at the time Appeals receives the case.

An Appeals conference should be arranged within 45 days of receipt of the case. If a settlement is reached, Appeals will forward the stipulations and computations back to IRS attorneys who will prepare the settlement documents for filing in the Tax Court. The stipulated settlement will become part of the Tax Court proceeding and then become a judgment in the case.

If at the expiration of the 4 months during which Appeals has jurisdiction over the case a settlement is substantially likely, the IRS attorneys may extend the Appeals Division’s jurisdiction for a period of 60 days (subject to the placement of the case on the Tax Court trial calendar).

[Proposed regulations would extend this authority for such time as there is a reasonable likelihood of settlement but not beyond the date that the case appears on the trial calendar]

If no settlement is reached, the case will be sent to IRS attorneys and formal preparation for a Tax Court trial will begin. Once the case is with IRS attorneys, there is still the possibility of settlement, however, it will be amidst the trial preparation process (i.e. discovery requests, stipulations of fact, preparation of expert reports, etc.).

IRS Appeals – Settlement of Cases In Appeals After a 30-Day Letter.

I have written a number of posts that discuss 30-Day Letters and 90-Day Letters (Statutory Notices of Deficiency) and how they may be appealed to the IRS Appeals Division. This post discusses what happens at the end of an appeal of a 30-Day Letter.

Where 30-Day Letter cases are settled in appeals, the settlement will be documented and the Appeals Officer will ask the taxpayer to waive restrictions on assessment and the collection of any deficiency. That is, the taxpayer will be asked to agree to the immediate “assessment” (a term of art in tax practice) so that the IRS may quickly move forward on the collection of the agreed tax, penalty and interest.

Where no agreement, or only a partial agreement, is reached, a 90-Day Letter (Statutory Notice of Deficiency) will be issued with respect to the disagreed issues. This gives the taxpayer the right to continue a challenge of the disagreed issues in the Tax Court.

IRS To Show Leniency On Past Due Taxes.

In a move that recognizes that a down economy is making it more difficult for taxpayers to pay their taxes, the IRS says they will be showing leniency in the collection of past due taxes. The IRS announced today that it is taking steps to help those with outstanding tax obligations. In the announcement, IRS Commissioner Doug Shulman explained:

“We need to ensure that we balance our responsibility to enforce the law with the economic realities facing many American citizens today … 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.”

The full announcement can be found here.

Some of the programs in which leniency will be shown are outlined below. It will be interesting to find out what other programs will develop. However, the trick will be in communicating the leniency programs to the public. Those with unpaid taxes should note that we can only expect leniency for those who are actively engaged in sorting out their debts. We shouldn’t expect to see much leniency for those that ignore IRS contact.

Announced programs:

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 automatically suspending the Installment Agreement. Taxpayers in a difficult financial situation should contact the IRS.

Additional Review for Offers in Compromise on Home Values: An Offer in Compromise (OIC), an agreement between a taxpayer and the IRS that settles the taxpayer’s tax debt for less than the full amount owed, may be a viable option for taxpayers experiencing economic difficulties. However, 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.

IRS Appeals – The Appeal.

The IRS appeals process is not terribly mysterious. The proceedings are informal. The taxpayer or representative meets with the Appeals Officer, they sit across the table from one another and discuss the facts, the proof of those facts, the law and whether the law supports the taxpayer or the IRS.

The facts of a case are fixed, how those facts are proven, however, will vary from case to case. Perhaps the taxpayer had the foresight to keep detailed books and records. Perhaps more unconventional documents will be needed to establish certain facts. If the taxpayer has witnesses that would testify on their behalf, those witnesses could provide affidavits attesting to the truth of the taxpayer’s position.

Based on these aspects of a case, the taxpayer and appeals officer will likely find some basis on which to settle the case. Any such settlement will be agreed to and documented by the IRS and taxpayer. Following that documentation, both sides will be able to rely on the settlement in any situation related to the years and items at issue in the case.

IRS Appeals – Deciding Which IRS Letter to Appeal.

Following an audit, the IRS auditor will issue a 30-Day Letter outlining the IRS’ position on an asserted liability (and creating a right to appeal) before issuing the more formal 90-Day Letter (creating the right to appeal via a Petition the Tax Court). However, a taxpayer may request that the 30-Day Letter procedure be bypassed and that a 90-Day Letter be issued promptly. Alternately, if the taxpayer ignores the 30-Day Letter, the auditor will issue a 90-Day Letter.

Appealing after receiving a 30-Day Letter may be advantageous because it does not start a Tax Court proceeding. If additional information is submitted with the Protest, the auditor may make additional favorable adjustments before transferring the case to the IRS Appeals Division. These additional adjustments may eliminate the need to appeal the case. Moreover, while the appeal must be filed within 30 days, the auditor can retain the case for further consideration while the right to appeal can be preserved.

Appealing a 90-Day Letter may be advantageous because it may lead to a more speedy resolution of the case. Appealing a 90-Day Letter requires filing a Petition with the Tax Court. A Petition to the Tax Court will first transfer the case to the Appeals Division (if not already considered in Appeals). However, after a Petition to the Tax Court is filed, the Appeals Division will only have jurisdiction over the case for a limited timeframe. At the latest, once the Tax Court places a case on the Trial Calendar, Appeals is supposed to transfer the case to IRS attorneys and may no longer have power over the case. The limited time in which to act can be an incentive for the Appeals Division to resolve a case more quickly.

Conversely, when a 30-Day Letter is appealed, the Appeals Division obtains jurisdiction over a case without the pressure of a pending Tax Court trial. This may result in a lower prioritization of the case and it may take longer to have an appeals settlement conference.

In deciding whether to appeal the 30-Day or 90-Day letter, the factual backdrop of a case should be considered. If time considerations require a quicker resolution to a case, appealing the 90-Day Letter may be appropriate. However, as I wrote in a previous post, if a taxpayer wants to position him or herself to make a later claim for attorney’s fees, the 30-Day Letter must be appealed.

IRS Appeals – The Right to Appeal Following an IRS Audit.

A taxpayer has the right to request a conference in the IRS Appeals Division following a tax audit and the issuance of an audit report (i.e. a 30-Day Letter or a 90-Day Letter).

A 30-Day Letter constitutes the auditor’s outline of items on a tax return that are under attack. A taxpayer can request an appeals conference after receiving a 30-Day Letter by filing a Protest of the proposed adjustments with the auditor within 30 days of its issuance.

A 90-Day Letter (a.k.a. Statutory Notice of Deficiency) constitutes a formal IRS determination of a tax deficiency. The 90-Day Letter may be appealed by filing a Petition to the United States Tax Court. The Petition begins a proceeding in the Tax Court, however, if the matter has not yet been considered in the Appeals Division (following a 30-Day Letter), the case will first be sent to Appeals. The Petition must be filed within 90 days of the issuance of the 90-Day Letter.

A protest of a 30-Day Letter or Petition following a 90-Day Letter can either be (1) a “skinny” document that simply satisfies the formal requirements of an appeal or (2) or a “fat” document that details a wealth of information and a thorough explanation of why each issue should be decided in favor of the taxpayer. The decision to file a skinny or fat Protest/Petition is largely a strategic decision that turns on the nature of the case and complexity of the issues in the case.

The IRS Appeals Process

A taxpayer has the right to appeal the results of an IRS tax audit. There are two principal ways that taxpayers end up in the Appeals Division following an audit. Generally this right arises after the taxpayer receives one of the following:

1. 30-Day Letter (an audit report giving the taxpayer 30 days to file a written protest of the audit results), or

2. Statutory Notice of Deficiency (also known as a 90-Day Letter that formally asserts a deficiency in tax).

When deciding whether to appeal the result of an audit, a taxpayer should consider that the Appeals Division settles approximately 90% of the cases before it. This is largely because the Appeals Division has broader settlement authority than an auditor. An auditor can only resolve a case based on the law as applied to the facts. An Appeals Officer, however, can settle a case based on the “hazards of litigation” that a case presents.

The rule governing appeals settlements is: “Appeals will ordinarily give serious consideration to an offer to settle a tax controversy on a basis which fairly reflects the relative merits of the opposing views in light of the hazards which would exist if the case were litigated.” It is important to note, however, that no settlement will be made based on the nuisance value of a case.

During an appeal, if a taxpayer makes a good faith but unacceptable offer to settle a case, the appeals officer should respond in a manner that gives the taxpayer an idea as to what would constitute an acceptable settlement.

Ultimately, the appeal of an audit is a settlement negotiation. The negotiation turns on the law, the facts and the relative risks of pushing the case into litigation. It is up to the taxpayer, or representative, to explain the merits of the particular case in a way that encourages settlement.

Recovering Attorney’s Fees and Costs from the IRS – Part 2

One of the requirements of recovering attorney’s fees in a tax case is that the taxpayer must have exhausted its administrative remedies. To exhaust administrative remedies, the taxpayer must participate in an IRS Appeals conference before a Petition is filed with the Tax Court. This opportunity is often missed because an audited taxpayer is often unaware of the requirement or procedural right to an appeal.

At the end of an audit, the IRS auditor will issue an initial report that outlines the additional tax that the auditor believes is due. This letter gives the taxpayer a 30 day time frame in which to appeal a case. As an acknowledgement to the creativity of tax professionals, this letter is known as a “30 day letter.” Submitting additional information after the issuance of a 30 day letter may result in additional reductions in the asserted tax, but only a written protest requesting an appeals conference will have the case transferred to the IRS appeals division.

If the 30 day letter window to appeal expires, the auditor will issue a Statutory Notice of Deficiency giving the taxpayer 90 days to file a Petition to have the case heard in the Tax Court (the Statutory Notice of Deficiency is also known as a “90 day letter” – again, clever).  Unless an appeal has already happened, filing a Petition with the Tax Court will also cause the case to be transferred to appeals.

Unfortunately, if the 30 day letter appeal option is missed, an audited taxpayer will not be considered to have exhausted its administrative remedies and, as a result, will be unable to recover attorneys fees regardless of the successful outcome of the case.  Appealing the 90 day letter is not enough because (even though the case will go to appeals before actually going to the Tax Court), the rules on collecting attorney's fees require that the taxpayer goes to appeals before filing a Peition with the Tax Court. 

The message? If you are audited and have a good case, the taxpayer should consider challenging the case in appeals following the 30 day letter rather than waiting for the 90 day letter. Note, there may be strategic reasons for ignoring the 30 day letter appeal period and waiting to file the case in the Tax Court after a 90 day letter.  The point to remember, however, is that the 30 day letter vs. 90 day letter appeal right should be deliberately considered.

Recovering Attorney’s Fees and Costs from the IRS.

It may be a little known fact, but, in certain circumstances, an audited business or individual may recover attorney’s fees and costs from the IRS/United States if it successfully challenges a case into the Tax Court process.

To do so, the taxpayer must be a “prevailing party” and the government must not have been “substantially justified” in its position. If the taxpayer is a prevailing party it must also satisfy the requirements of Internal Revenue Code section 7430. This means that the taxpayer must have:

(1) exhausted its administrative remedies,

(2) substantially prevailed in the controversy,

(3) satisfied certain net worth requirements at the outset of the case,

(4) not have unreasonably protracted the proceedings and

(5) the amount of the costs must be reasonable.

All of these requirements must be met to recover attorney’s fees. If the taxpayer does not satisfy all of them, it cannot recover fees and costs.

IRS Financial Reporting Suffers from Serious Internal Control Issues.

The GAO (Government Accountability Office) has reported, with an obvious sense of irony, that the IRS financial statement process is in need of work. According to the GAO report “serious internal control and financial management systems deficiencies continued to make it necessary for the IRS to rely on resource-intensive compensating processes to prepare its financial statements.” Moreover, the internal controls used by the IRS do not give sufficient assurances that losses, misstatements, and noncompliance with the law would be prevented or detected on a timely basis.

What this means is that the IRS is spending extra manpower, time and taxpayer dollars to make sure that its financial statements are correct. While the GAO noted a number of strides the IRS has made to update the process, the outdated and obsolete systems used “could have serious implications on [the GAO’s] ability to determine whether IRS’s financial statements are fairly stated.”

A Trip Through the IRS Audit, Appeals and Court Procedures

When dealing with an IRS audit, my clients often ask: What is the IRS going to do?  What happens next?  What happens if we don't agree with the position that the IRS is taking?

Certainly, some IRS procedures are counter intuitive and can be confusing.  However, the movement of a case from the start of an audit, through appeals and into the court system does not have to be confusing.  At least not if you have the flow chart below.  I have had this flow chart for years.  It was handed down to me by someone who said that it came from an old IRS publication.  Whether it is old doesn't matter, because it is still accurate and clearly explains how a case moves through the audit/appeals/court process.

So, if you are currently going through an audit and what to know what happens next or how far you can challenge the case, look at the flow chart below.