Problems Found With IRS Collections Due Process Hearings

A recent report from the Treasury Inspector General for Tax Administration (TIGTA) has uncovered some troubling information about how the IRS handles Collection Due Process (CDP) hearings.  Specifically, the investigation identified the following problems:

(1) An estimated 1,450 of 47,855 taxpayer cases may have incorrectly received a CDP hearing when they should have been granted an Equivalent Hearing (EH).
(2) In an estimated 10,151 of 47,855 taxpayer cases, the Collection Statute Expiration Date (CSED) was incorrectly calculated.
(3) In an estimated 7,251 of 47,855 taxpayer cases the hearing officers did not correctly document their impartiality as required.
(4) Taxpayer requests for CDP hearings are not consistently sent by the IRS's Collection office to Appeals in a timely manner.

Background Information

After assessing a tax liability, the IRS has 10 years to collect this liability from a taxpayer. When a case reaches its expiration date or CSED, the IRS may no longer collect and must write off the balance due.

The IRS begins the collections process by sending out a number of notices to the taxpayer. Over several months, these notices become progressively more threatening, urging the taxpayer to contact the IRS in order to resolve the liability. If these initial contacts are unsuccessful, the IRS issues a "Notice of Intent to Levy and Your Right to a Hearing". If a taxpayer does not respond to this notice, the IRS can begin active collections such as wage garnishments, bank levies, etc.

If a taxpayer responds to this notice within 30 days, he is allowed a CDP hearing with IRS Appeals.  The 10 year statute of limitations is suspended while the taxpayer is in CDP status. If the taxpayer responds after the 30 day period has expired, the IRS may grant him an EH (during which the IRS can continue to collect from the taxpayer). At these hearings, Appeals may consider a number of alternatives to active collection, including, setting up an installment agreement, an Offer in Compromise, penalty abatement and the Innocent Spouse defense. If the taxpayer disagrees with the decision reached by Appeals at a CDP hearing, he can petition the U.S. Tax Court. A decision reached at an EH hearing may not be appealed.

Of the problems identified by TIGTA, the incorrect calculation of the CSED and the delays in forwarding CDP requests to appeals were found to most violate taxpayer rights.

Incorrect Computation of the CSED

Because the IRS ceases collections activity if a CDP hearing is granted, the CSED is temporarily suspended during a CDP hearing. TIGTA estimates that in almost a fifth of all CDP cases, the IRS suspended the collection statute for an incorrect period of time. In cases where the IRS suspended the CSED for longer than required, it violated the rights of the taxpayers since it allows the IRS more time to collect.

Delays in Referring Requests for CDP Hearings to Appeals 

Currently, the IRS has a target time of 90 days to initially resolve or forward a taxpayer's request to Appeals. A large portion of the cases reviewed took more than 180 days to resolve or forward to Appeals. TIGTA noted that when the IRS takes too long to forward a case to Appeals, the CSED is suspended for this additional time and this increases the time that the IRS is allowed to collect.

In response, the IRS agreed that these oversights violate the rights of taxpayers and has begun to take steps to prevent future violations. 

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional. 

10th Circuit BAP Ruled That You Cannot Discharge Your Tax Debt In Bankruptcy If You Filed Your Tax Return Post-Assessment

If you intend to discharge your tax debt in bankruptcy, there is an important holding that you should be aware of. If you file your tax return after the IRS has already prepared a substitute return (SFR) on your behalf, your form 1040 does not qualify as a tax return for purposes of bankruptcy.

An SFR is based entirely on information that the IRS received about you from third parties (i.e. your employer). Therefore, the SFR does not include any additional exemptions or expenses that you are entitled to and will therefore overstate your tax liability. 

This holding came out of last year's US Bankruptcy Appellate Panel (BAP) 10th circuit case Wogoman vs. IRS. The Wogomans did not file their 2001 tax return by the IRS deadline. In 2004, the IRS began the SFR process and sent the Wogomans a notice of deficiency notifying them of their right to challenge the deficiency in Tax Court within 90 days. The 90 days passed and on February 21, 2005 the IRS assessed the Wogomans for 2001. The Wogomans filed their correct 1040 for 2001 on August 1, 2006. In response, the IRS adjusted the Wogomans' liability and penalties to reflect the amounts on their filed 1040.

Subsequently, the Wogomans filed for bankruptcy attempting to discharge their tax debt. 

In deciding this case, the BAP relied on 11 USC 523 (a)(1)(B)(i) which states that a tax debt cannot be discharged in bankruptcy if the tax return, upon which it is based, was not filed. The BAP determined that a return filed after assessment did not qualify as a tax return filed under section 523. The BAP reasoned that "as a matter of law, a Form 1040 is not a return if it no longer serves any tax purpose or has any effect under the IRC." Since the IRS had already assessed the Wogomans with the SFR, their return filed after the fact no longer qualified as an honest attempt to satisfy their obligation to file a tax return.

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional. 

IRS Makes Changes To Its First-Time Abate Penalty Waiver

This is an update to my previous article: IRS First-Time Abate Penalty Waiver and the Report from the Treasury Inspector General for Tax Administration, published on October 26, 2012. 

The IRS has updated its First Time Abate program for penalty relief. This program allows taxpayers a one-time waiver the first time a failure to file, failure to pay or failure to deposit penalty is charged. The waiver is available for only one tax period. 

According to the update, in order to qualify for relief the taxpayer must have 

1. Filed all tax returns
2. Paid or arranged to pay all tax currently due (for example, the taxpayer has set up an installment agreement and is current with his or her payments). 

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional. 

Last Minute Filing: How To Guarantee Timely Filing With The IRS

There are many reasons for waiting until the last minute to meet an IRS deadline.  You may be having trouble getting your documents together or you may be searching for an attorney to represent you in Tax Court. No matter if you are running late out of necessity or out of procrastination, the consequences for missing an IRS deadline range from minor to drastic depending on the type of filing. 

For example, if you miss the deadline to file a tax return, a late filing means a late filing penalty. On the other hand, the consequences for missing the deadline to file a petition in Tax Court in order to contest an IRS notice of deficiency are severe. Taxpayers only have 90 days to file a Tax Court petition and if the deadline is missed, the Tax Court will not have jurisdiction to hear your case. Your only remaining option is to pay the tax owed and file suit in either the United State District Court or the Court of Claims. 

In order to determine whether a filing is timely, the IRS follows the "timely mailing treated as timely filing/paying rule" (26 USC Section 7502). This rule states that a tax return (or other document) required to be filed (or payment to be made) with the IRS (or Tax Court) is timely filed if:

1. The date of the U.S. Postal Service postmark is no later than the due date (or the date of its extension), 
2. The return is properly addressed and 
3. Has proper postage. 

If, on the other hand, the filing has a postmark after the due date, it is considered filed on the date that it is received by the IRS. 

According to 26 USC Section 7502 (c), if a return or other document is sent by United States registered mail, registration shall be prima facie evidence (accepted as correct) that the return or other document was delivered and the date of registration shall be deemed the postmark date. 

Furthermore, the IRS has only a handful of approved private-delivery services which will meet the "timely mailing as timely filing/paying" rule (see Internal Revenue Bulletin: 2004-83). 

• DHL Express (DHL): DHL Same Day Service.
• Federal Express (FedEx): 
• FedEx Priority Overnight
• FedEx Standard Overnight
• FedEx 2Day
• FedEx International Priority
• FedEx International First
• United Parcel Service (UPS): 
• UPS Next Day Air
• UPS Next Day Air Saver
• UPS 2nd Day Air
• UPS 2nd Day Air A.M.
• UPS Worldwide Express Plus 
• UPS Worldwide Express

If your private-delivery service provider is not on this list, neither the IRS nor the Tax Court will make an exception for you. This point can be illustrated by a recent Tax Court case, Scaggs v.s Commissioner of Internal Revenue. In this case the taxpayers used FedEx Airbill "Express Saver Third business day" to mail their Tax Court petition. The court held that since the private-delivery service used was not on the approved list, the petition was not filed within the requisite period prescribed by section 6213(a) and their case was dismissed for lack of jurisdiction. 

It is important to note that if you file your tax return online (e-file) it is not considered filed until you receive an IRS acknowledgement of acceptance. Since this could take up to two days, don't rely on electronic filing if you are filing your tax return last minute.  If your return was e filed on time but was rejected after the deadline, your return will be considered timely if it is corrected and re-e filed again within 5 business days or printed and mailed to the IRS within 10 days. 

Update 6/7/13: the "timely mailing as timely filing/paying" rule does not apply to FBARs which must be received by June 30th (see instructions to form TD F 90-22.1). Likewise, when dealing directly with an IRS officer or agent, clarify beforehand whether they expect the document mailed by or received by the deadline they set (thank you to tax attorney Michael A. Lampert for bringing these exception to my attention). 

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

IRS to Pursue "Quiet" Disclosure of Foreign Income

US taxpayers have different reasons for not disclosing their foreign bank accounts (by filing FBARs). While some taxpayers are intentionally hiding foreign income to avoid paying US taxes, many just don't know that they are required to disclose their account and pay taxes on the interest income. Some of these individuals are foreign born US citizens maintaining a bank account in their country of origin. Others are US citizen living overseas. Uninformed or not, during the last few years the US government has made it a priority to crack down on offshore tax evasion. 

As part of this effort, the US enacted the Foreign Account Tax Compliance Act which requires foreign financial institutes to report to the IRS information about financial accounts held by U.S. taxpayers. As a result of this enactment, the risk of an audit for individuals with foreign bank accounts increased substantially. 

In 2009, the IRS introduced its first Offshore Voluntary Disclosure Program (OVDP) to encourage individuals to voluntarily disclose their foreign bank accounts. As part of the deal offered by the program, the IRS agreed not to audit or criminally prosecute these individuals in exchange for the payment of taxes, penalties and interest on any undisclosed income and a one time 20% penalty on the highest balance in the foreign bank account (lower penalties are available if special circumstances are met). Due to the success of the first OVDP, the IRS reintroduced the OVDP in 2010 with a 25% highest balance penalty and in 2011 with a 27.5% penalty. 

As the penalties under the OVDP increase each year, more taxpayers are opting to instead come clean through a "quiet" disclosure. A "quiet" disclosure" means that taxpayers amend their past tax returns and FBARS without actually coming forward under the OVDP and paying the penalty on the highest balance. As a result, the government misses out on billions of dollars in revenue. 

This month, the Government Accountability Office (GAO), the "congressional watchdog," issued a report urging the IRS to pursue those taxpayers making "quiet" disclosures. The report, titled Offshore Tax Evasion. IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion, found that as of December 2012, the OVDP programs have resulted in over 39,000 disclosure and over $5.5 billion in revenue. Furthermore,while the IRS has also detected some taxpayers trying to avoid paying taxes, interest and penalties, many attempts have been missed. The GAO found many more potential "quiet" disclosures than the IRS detected by analyzing amended returns from 2003-2008 and matching them to available information about taxpayer offshore activities. The GAO concluded that the act of "amending past returns or reporting on current returns previously unreported offshore accounts, results in lost revenue and undermines the programs' effectiveness." 

The GAO recommended that in addition to identifying and educating taxpayers about their reporting requirements, the IRS should "explore options for employing a methodology to more effectively detect and pursue 'quiet' disclosures." The IRS has agreed to adopt these recommendations.  

Currently, in the OVDP question and answer section, the IRS urges taxpayers who have already made a "quiet" disclosure to take advantage of the penalty framework provided by the OVDP. The IRS warns that those taxpayers making a "quiet" disclosure should be aware of the risk of being examined and potentially criminally prosecuted for all applicable years (question #15). 

Although it is uncertain what methodology the IRS will adopt to ferret out "quiet" disclosures, it is likely that the risks may no longer be worth taking. 

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

Notes From The Trenches (The IRS Offer In Compromise Process)

Has the IRS Fresh Start Program really made it easier to get an Offer in Compromise ("Offer") accepted? In my experience, IRS Offer Specialists are still reluctant no matter how badly the taxpayer needs a fresh start.

After recently finalizing several Offers, I would like to share some important notes that taxpayers need to be aware of when submitting offers. These issues tend to come up often and being aware of them ahead of time will make the process smoother.  If you are unaware of how the Offer process works and would like summary, please take a look at my previous post, The IRS Makes Substantial Changes to the Offer In Compromise Process, before reviewing these notes.

1. Sole Proprietors: If you are a sole proprietor, it helps if you keep your business and personal finances separate. That entails having a separate business account in which you deposit gross receipts and from which you pay business expenses. If you need to pay personal expenses (mortgage, car payment, etc.) don't pay these expenses directly from your business account. Transfer enough funds to your personal account in order to meet these expenses. Your profit and loss statement needs to match your business bank statements. If something is unclear, the Offer Specialist will ask questions and thereby delay the process. If there are a lot of co-mingling issues, the Offer Specialist may even refuse to deal with a reconciliation and reject your offer. As a result you will have to go through appeals which will delay and complicate the process further. 
2. Medical Condition: If you have a medical condition which you plan to discuss in your Offer or include as a reason for your Offer (page 2 of 4 of the Offer Application), submit a letter from your doctor explaining your condition with the Offer application. This substantiation will be requested by the Offer Specialist and they will most likely want to know how your medical condition affects your current and future earning ability. 
3. Retirement Account: Be aware of the terms of your retirement account. The IRS will consider the funds in your retirement account an asset. If you plan to liquidate your retirement in order to fund the offer, the IRS will allow penalties and tax consequence to offset the amount of this asset. If you have little or no vested interest in the retirement account (you neither can liquidate nor borrow against the fund), submit a copy of your retirement plan substantiating this fact with your Offer application. If you cannot touch your retirement, neither can the IRS. For more information, take a look at IRM (Internal Revenue Manual) 5.8.5.9 (Retirement or Profit Sharing Plans) in order to assist you in valuing your retirement account for Offer purposes. 
4. Deposits: Explain non-income deposits made into your personal bank account. The Offer Specialist will go through your deposits thoroughly and check them against your pay stubs  If you have additional deposits which are not income (such as loans or gifts) the Offer Specialist will consider these deposits income unless you can prove otherwise. It may help to submit a letter explaining non-income deposits with the Offer application. 
5. Estimated Tax Payments: If the last tax return you filed showed a tax liability, the IRS will require that you make estimated tax payments before it will consider your Offer. This step may be avoided if you can prove to the Offer Specialist that you will have no tax liability when your next tax return is due. For example, you can show that your employer is withholding the maximum amount from your wages. 
6. Offer Terms: Finally, don't let the Offer terms (page 3 of 4 of the Offer Application) catch you by surprise. Review the terms carefully and know what you are agreeing to. Two terms that often catch taxpayers by surprise are
1. You are agreeing to stay current: you must "file tax returns and pay the required taxes for the five year period beginning with the date of acceptance" of your offer. If you do not stay current, you will be in default and the IRS will reinstate your liability. 
2. You are agreeing to give up your refund: "The IRS will keep any refund, including interest, that might be due [to you] for tax periods extending through the calendar year in which the IRS accepts [the offer]". For example, if the IRS accepts your offer on January 1, 2013, and you are due a refund for 2012 and 2013 the IRS will keep both refunds.

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.