The tax function entrusted to the Internal Revenue Service (IRS) can be viewed as a two-step process: the determination of an individual ’s or entity’s tax liability, and the collection of taxes after the liability is determined. The IRS’s organization reflects these two steps: the guidance, returns processing and examination functions (revenue agents) are involved in determining tax liability; and the collection function (revenue officers) collects the taxes.
For some taxpayers, these steps are routine: the taxpayer files a return to determine liability and writes a check to pay the IRS (or files for a refund). But for other taxpayers, even if the IRS and the taxpayer agree on tax liability, the payment of taxes can be difficult. This article looks at some of the IRS’s basic collection procedures and taxpayers’ rights during this process.
Tools
Primary IRS collection tools include liens and levies, property seizures, installment agreements and offers-in-compromise (OICs). As part of the lien and levy process, the taxpayer is entitled to a collection due process (CDP) hearing with the IRS Office of Appeals.
Taxpayers may appeal an IRS action under the collection appeals program (CAP). CAP is available for seizures and installment agreements, as well as for liens and levies. Taxpayers may also appeal the IRS’s rejection of an OIC.
Recognizing that these are difficult economic times for some taxpayers, the IRS has indicated that it may exercise its discretion to ease the collection process. However, at the same time, the National Taxpayer Advocate indicates that some IRS collection procedures are making it more difficult for taxpayers to pay their taxes.
Liens
A tax lien is an encumbrance or interest in a taxpayer’s property to secure payment of federal taxes. All of a taxpayer’s property and rights to property are subject to the federal tax lien, including property acquired after a Notice of Federal Tax Lien (NTFL) is filed. The lien does not attach if the taxpayer has no interest in property or has properly transferred his or her interest before the lien arose (except in fraud cases).
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The filing of a federal tax lien may affect a taxpayer’s credit rating.
A general tax lien arises automatically when the taxpayer fails to pay an assessed tax within 10 days after the IRS sends a notice and demand for payment. The lien continues until the liability is either satisfied or released, or if it becomes unenforceable. The IRS will usually file an NFTL with an appropriate state or local office to establish its rights versus other creditors of the taxpayer, although filing the notice is discretionary. The IRS also has discretion to withdraw the notice if it would facilitate the collection of taxes or under other circumstances.
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A taxpayer must be given notice of the filing of the NFTL and the right to a CDP hearing within five business days after the first filing of the NFTL for each tax liability. The taxpayer may request a hearing by the date shown on the notice, generally 30 days after the filing of the NFTL.
Lien Relief
In IRS News Release IR-2011-20, the IRS announced it was providing collection relief applicable to liens, installment agreements, and OICs. First, the IRS raised the threshold for filing an NFTL. Commissioner Douglas Shulman said that the old threshold for generally filing an NFTL was $5,000 and that the IRS was going to double that to $10,000, to reflect inflation since the number was last revised.
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Shulman said the change meant that tens of thousands of people with smaller tax debts will not be burdened by tax liens.
Second, the IRS will also make it easier for taxpayers to obtain lien withdrawals. Liens will be withdrawn immediately once the taxpayer fully pays his or her taxes. The IRS will also allow lien withdrawals for taxpayers entering into a direct-debit installment agreement, after the taxpayer demonstrates that the direct debit payments will be honored.
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This is significant because a lien that is released continues to be on the taxpayer’s credit report, but a lien that is withdrawn is removed from the report.
Levies
A levy is a seizure of a taxpayer’s property and rights to property. Levies also seize obligations due the taxpayer. A lien is a claim used as security for a debt, while a levy actually takes property to satisfy the debt. The IRS may levy on property 10 days after assessing the tax and making notice and demand for payment, if the taxpayer does not pay the tax.
Normally, the IRS then has to wait an additional 30 days to actually levy on property. No levy is permitted before the IRS sends a final notice of intent to levy and notifies the taxpayer in writing of the taxpayer’s right to a fair hearing (a CDP hearing), unless the IRS determines that collection of the tax is in jeopardy. When collection is in jeopardy, the right to a hearing applies after the levy. The IRS cannot levy on property if the tax liability is subject to a pending OIC or installment agreement request.
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The IRS can levy a state tax refund and then, after the levy, send notice of the right to a hearing.
Some property cannot be levied. This includes, for example, unemployment benefits, workers compensation, a weekly exemption amount for salary and other income, and household furniture and personal effects, up to a stated maximum.
The IRS can levy on property held by a third party, such as a bank account or the cash value of life insurance. If the IRS levies on a bank account, the levy attaches to deposits that have cleared and funds available for withdrawal when the levy is received. The bank must wait 21 days after the levy is received before sending the money, to allow the taxpayer to resolve any dispute about account ownership. If the IRS makes a wrongful levy claim, the taxpayer can file an administrative claim under Code Sec. 6343(b), as described in Publication 4528.
CDP Hearing
A taxpayer that receives notice of the filing of an NFTL, or of the IRS’s intent to levy on property, has 30 days to request a CDP hearing. If the taxpayer requests a hearing within 30 days of the levy notice, the levy actions are suspended. The hearing is held by the IRS Office of Appeals and must be conducted by an employee who had no prior involvement regarding the unpaid taxes. Taxpayers can go to court if they want to appeal the decision made at a CDP hearing.
Taxpayers request a CDP hearing by filing Form 12153, Request for a Collection Due Process or Equivalent Hearing. A taxpayer that misses the deadline for a CDP hearing may request an equivalent hearing, generally within one year from the date of the NFTL or the levy notice. The instructions to Form 12153 indicate that, unlike a CDP hearing, a taxpayer cannot go to court to appeal the decision made at an equivalent hearing.
The form requires that the taxpayer provide a reason for requesting a CDP hearing. These include a request for a collection alternative, such as an installment agreement or OIC, a request to subordinate or discharge a lien, a claim for innocent spouse relief, inability to pay taxes because of hardship, or disagreement with the tax liability or the amount of unpaid taxes.
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Even if the IRS accepts a reason for non-payment, penalties and interest continue to accrue.
According to the Form 12153 instructions, hardship includes: terminal illness or excess medical bills; taxpayer’s only income is from Social Security, welfare or unemployment benefits; taxpayer is unemployed with little or no income; taxpayer’s reasonable expenses exceeding income; or other conditions.
Comment
The National Taxpayer Advocate has accused the IRS of failing to provide timely and adequate CDP hearings and depriving taxpayers of an opportunity to have their cases fully considered. The IRS has issued CDP notices without verifying tax liabilities or analyzing the taxpayer’s ability to pay. Another problem is that collection employees routinely ask taxpayers to withdraw CDP hearing requests if the case is resolved, potentially causing the loss of judicial review rights if resolution is not complete.
Collection Appeals Program
Taxpayers have the right to appeal most IRS collections. CAP may be available even though a CDP hearing is not. Unlike CDP, taxpayers cannot challenge the existence or amount of the tax liability (although this right is limited under CDP), and cannot appeal the IRS decision in court (although the IRS puts this in a favorable light, indicating that the decision is binding on the IRS).
Under CAP, taxpayers can appeal:
· the proposed or actual filing of an NFTL, denied requests to withdraw an NFTL, and denied discharges, subordinations or non-attachments of a lien;
· a levy, before or after the IRS actually levies on the property, and an IRS refusal to return levied property;
· the seizure of property; or
· rejection or termination (actual or proposed) of an installment agreement.
Taxpayers should first appeal a collection employee’s decision to a collection manager. For a seizure, appeal must be made to the collection manager within 10 days after the seizure notice. If not satisfied with the manager’s decision, taxpayers can file a Collection Appeal Request, Form 9423, under CAP. Again, there may be a short time frame—appeal of a lien, levy or seizure must be postmarked within two days of the conference with the manager, or the IRS will resume collection action.
Form 9423 requires that taxpayers explain their disagreement with the collection action and how they would resolve their tax problem. Taxpayers can be represented by a tax professional.
IRS Discretion
Other IRS actions to ease collection practices include making streamlined installment agreements available to more small businesses and increasing the income and tax liability limits for taxpayers to participate in streamlined OICs. The National Taxpayer Advocate points out, however, that IRS’s streamlined policies can channel taxpayers into unaffordable installment agreements that set them up for later defaults and adverse collection actions.
Conclusion
The IRS collection function has a number of weapons and options at its disposal. Taxpayers must be diligent to exercise their rights to contest IRS actions, but the IRS is showing more flexibility in taking collection actions and providing relief to taxpayers.
CCH Pratical Tax Bulletin, 12, Tax-Bulletin
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