IRS representation is your legal right to have another person speak on your behalf to the IRS during an administrative encounter or in response to a letter or notice. In much the same way as you would if you had a legal issue and were required to appear in court. A representative does more than speak for you.
They help you navigate the many complex technical rules that come up during a tax audit or other tax-related controversy. While the IRS is not a court, it can be similar because there are many specific procedures, deadlines, and requirements that an individual is likely to be unfamiliar with. This can become a problem because missing a deadline or not following a required procedure can lead to an inadvertent loss of rights and options for resolving an issue.
Our clients also benefit from retaining formal representation because they receive expert guidance in preparing, delivering, and clarifying IRS information statements. Financial information statements are at the heart of IRS collection activities. They can make or break receiving the payment plan you want, having an offer or Innocent Spouse Claim accepted or rejected, or qualifying for other administrative statutes and programs.
While the preparation of IRS information statements can seem simple, they are often deceptively nuanced. Many professionals have said that the preparation of such statements is as much an art as a science. There are various obscure exclusion amounts, thresholds, and asset classifications that determine how the IRS will respond to your situation.
Some of which have been generated through court cases or other proceedings. Some are not discussed or explained in the guides the IRS publishes for taxpayer consumption. Ensuring you meet all the requirements for such exclusions or that you are above or below an appropriate threshold sometimes takes prior planning and guidance. With enough time and planning, clients can benefit from structuring their financial lives to qualify for programs they would not have otherwise.
The most important benefit of securing professional representation clients receive is the ability to shield themselves from the skilled information-gathering tactics IRS employees often use. While the information taxpayers must divulge is often straightforward, nothing stops an IRS employee from asking further questions. Often, they pry deeper into their financials than they are required to.
More than one taxpayer working under the assumption that their cooperation will be rewarded realize after the fact that instead of helping themselves, they made their situation dramatically worse. A skilled representative knows exactly what the IRS needs, what they are required to be given, what they will not persist in asking for, and how to answer questions in ways that will not be misinterpreted or trigger further unnecessary, inconvenient, and time-consuming requests.
In the same way that most people would agree it’s unwise to walk into a police interrogation or courtroom alone, we believe you should never talk to the IRS alone either. The reality is that taxing authorities use many of the same tactics as interrogators and debt collectors to scare people into complying with unnecessary, sometimes unlawful demands.
Payment Agreements & Partial Charge Offs
There are a variety of payment plans available through the IRS. Each plan comes with different thresholds, rules, payment methods, tradeoffs, and information disclosure requirements. Generally, the IRS requires taxpayers to pay their debt in full in a set number of years, depending on the amount.
If a taxpayer submits appropriate financial information, they can have those required payments lowered. In some cases, this means our clients pay less than the total amount due. This is especially true in cases of older tax debt. If given our client’s facts and circumstances, we can argue that there were mitigating circumstances for lack of payment or significant doubt they can reasonably pay their tax debt.
In addition to the document preparation and delivery that goes into applying for any of the programs, an important aspect of helping a client looking for a nonstandard payment plan is telling their story in the best light possible in a way the IRS will be sympathetic to. The recounting of that story begins with the first phone call after we engage a client. It extends through the last call with a Revenue Officer.
The IRS is required by law to consider mitigating circumstances for certain types of events when interacting with taxpayers. Communicating those circumstances in a sympathetic story is often an effective way to be heard and receive nonstandard beneficial treatment. IRS employees naturally look for certain phrases, references to law, and types of issues in the story they are told when deciding.
The real thought is that taxpayers don’t know how to appropriately explain their situation in a way that makes it easy for an examiner to see how their story connects to the box they need to check to provide relief. This means most people tell the wrong parts of their story or don’t realize that it might qualify them for relief. This can have a significant impact on the amount a taxpayer ends up paying. In 2017, for example, an appropriately formatted appeal saved one client $31,000 of penalties.
The most common type of payment plan, especially for taxpayers that owe small amounts or do not have issues paying the required amount, is a standard installment agreement. Standard installment agreements are easy to apply for and receive from the IRS, assuming the taxpayer has not previously defaulted on one. Installment agreements become more difficult to secure when one wants to avoid a lien or can’t pay the standard IRS required minimum payments. Depending on the taxpayer’s circumstances and balance due, the IRS may be required to file a lien or not.
Liens are a common topic of discussion for taxpayers dealing with a tax controversy. They attach to homes, making transactions like refinancing, home equity lines of credit, and selling more difficult. Liens can be avoided in several ways. Engaging in more favorable payment terms with the IRS or effectively arguing various positions, including that it is in the government’s best interest not to file a tax lien, can help.
Unfortunately, once a lien is filed, it’s hard to get removed. Many taxpayers have filed for installment agreements. Often without realizing that had they signed up for different payments term or paid some money upfront, they could have avoided the embarrassment of a public lien and harassing phone calls from lien removal companies.
Another less discussed consideration for many taxpayers considering payment terms is protecting their professional credentials, lines of credit needed to run their business, and passports. Many professional bodies and creditors respond poorly to the placement of a lien on a client. Credentialing bodies have even revoked professional credentials in rarer cases. States have even refused to renew licenses. Also, if a client travels for work, a passport’s seizure can be a costly, embarrassing occurrence.
Partial Pay Agreements
This is another form of an installment agreement. Partial pay installment agreements are rarer. However, they are still available to some taxpayers.
These installment agreements are called “partial pay.” Unlike normal installment agreements, which pay the full amount due over time, partial pay agreements do not. These types of installment agreements are more common for old tax debts.
The IRS is also more likely to agree to a partial pay installment agreement. Especially when the collection statute of limitations is close to expiration. The taxpayer’s economic circumstances need to have changed dramatically.
Offers in Compromise
The Offer in Compromise program is one of the more famous collection alternatives available at the IRS. It has been featured on sketchy late-night TV and radio ads promising to “settle your debt for pennies on the dollar” or “negotiate with the IRS.” While some people get these results, they have more to do with their financial condition.
This depends on their representative’s ability to hold an employee accountable to the IRS’s rules rather than shrewd negotiation skills. It’s hard to advertise the truth, though. So, many have chosen not to.
Filing an Offer in Compromise also increases the statute of limitations on the IRS’s ability to collect the tax. While offers can be an excellent tool in many cases, if candidates are not carefully screened, they can do much more harm than good. In addition to the increase in the amount of time the IRS has to collect the tax if the offer fails, an accepted offer carries with it a five-year compliance requirement.
After that, the IRS will retroactively cancel an offer. Some taxpayers sold a quick fix are often subject to an unpleasant surprise when they find out what they really signed up for. Given this, we find that once they understand the full ramifications of an offer more seriously, people consider other programs and options.
An OIC is a good tool in the right circumstances. We highly advise consulting a neutral professional you know and trust before attempting to file one. Contact us for assistance in this situation.
Doubt as to Collectability
A Doubt as to Collectability Offer in Compromise is the more well-known of the two types of Offers in Compromise. Also, it is the more heavily advertised and misrepresented of the two. If you have heard of companies advertising a “one-time tax forgiveness program” or to “settle your tax debt for pennies on the dollar,” this is most likely the program they were trying to push.
While the program does exist, the advertisements are often quite misleading. The program is not as much a negotiation as advertisers lead people to believe. Bankruptcy laws were partially modeled on the IRS’s offer in compromise program.
The process is much more akin to proving that you can’t pay than a “settlement.” This means that there are some strict requirements for this program. Your acceptance into it often has more to do with your financial situation than the strength of a “negotiator.” If you do not meet the requirements, your offer will be denied instantly.
This is one reason why while we do file offers in compromise. We often counsel people against them and suggest other strategies. In addition to the cost of preparing an Offer in Compromise and the fees associated with following up with the IRS, a failed Offer in Compromise also extends the amount of time the IRS is legally able to attempt collection of tax debt.
Sometimes a failed offer can give the IRS as much as an extra two years to collect on the amounts due. Filing multiple Offers in Compromise can be worse than doing nothing in some cases. This means that if an Offer in Compromise is filed that clearly does not qualify, the only person benefiting from it is the preparer.
We feel strongly that tax advisers should act in the best interests of their clients. This belief leads us to vet any potential offer in compromise candidates heavily. We make sure that a potential offer does not worsen their situation.
Doubt as to Liability
This is a much less well-known version of the two types of Offers in Compromise. The more common one deals with “Doubt as to Collectability.” This provides taxpayers the ability to argue that it is in the best interest of the government or effective tax administration for the IRS to accept less than the full balance due.
On the other hand, Doubt as to Liability allows the taxpayer to argue that the balance the IRS has assessed against the taxpayer is unlikely to be correct. Doubt as to Liability Offers are used less often. They are generally used in much more specialized situations where amending a return isn’t advisable or won’t yield the same result. However, they can be useful for certain problems, especially if the Internal Revenue Service is making active collections efforts.
Innocent and Injured Spouse
Innocent Spouse Relief is one of the more misunderstood IRS programs. It is often confused with Injured Spouse Relief (described below). They are two very distinct programs with different purposes. Confusing the two can cause a person to lose substantial rights. There was even a situation recently where a taxpayer had to go all the way to tax court to resolve a mix up between the two.
Innocent Spouse Relief is a type of relief designed for taxpayers who have a tax liability originating from a joint return. They must meet certain financial and personal criteria. On the grounds of fairness and equity, they must wish to be relieved of tax owed because the debt flows from a spouse or former spouses’ actions.
Innocent spouse relief is often applied in situations where a spouse or former spouse has committed tax fraud, lied about their tax situation, or has withheld information about taxes. Innocent spouse claims are particularly effective in situations where financial control and or abuse are present. Innocent spouse claims are often particularly delicate.
They are helped by an increased degree of sensitivity, confidentiality, compassion, and discretion. There are a few reasons for this. These claims often involve two parties with a long, tumultuous history. For all these reasons, we encourage people to find someone with experience in these kinds of claims who understand such a claim’s emotional and technical aspects.
The IRS routinely inappropriately deny innocent spouse claims and only seriously considers them on appeal. The innocent spouse forms have been described as designed to elicit information that helps deny a claim rather than guiding a taxpayer appropriately expressing their situation. Also, the person may have survived significant emotional or physical abuse.
Injured Spouse Relief
Injured spouse relief is a program that allows the spouse of a taxpayer currently filing a joint return to request that the IRS not apply their federal withholding against a debt that is owed solely by the other spouse. This type of relief is often useful when spouses have tax or other debt that predate a marriage.
An Injured Spouse claim is usually straightforward unless a taxpayer lives in a community property state. However, Maine is not a community property state. Unless a person recently moved or spends substantial time in another state, this usually isn’t an issue for our clients.
Hardship Programs & Currently Not Collectible Status
The IRS has “Hardship” and “Currently Not Collectible” programs. These programs temporarily halt collections efforts for past due amounts for taxpayers who can prove hardship according to state and national guidelines. Generally, once the status is approved, program participants are subject to annual or biannual review.
If the taxpayer files a return with income above a certain threshold, they may their status and begin receiving letters. They must then either reapply or seek another solution. Unfortunately, for taxpayers, even if they clearly meet the requirements for non-collectible status, they must formally go through the process.
The IRS has consistently been in trouble for abusing their discretion around middle and low-income taxpayers who qualify for this program. The Taxpayer Advocate, the government-funded watchdog for the IRS, has included this issue multiple times in its annual report. Additionally, the courts have ruled for over 20 years that the IRS’s administrative posture towards certain taxpayers abuses legislatively provided discretion.
In particular, the Vinatieri case cemented the legal framework for challenging abuse by the IRS’s and its employee’s interpretation of IRC § 6343(a)(1)(D), which clearly states that the secretary (the IRS) should release a levy if it causes undue financial hardship. Unfortunately, the average IRS employee isn’t required to read case law related to these issues, so they aren’t aware that courts have ruled this way. There is little internal movement in the IRS to fix this oversight.
Garnishment, Levy, & Lien Removal
A levy is a hold that the IRS puts on a taxpayer’s bank or another financial account, giving them notice that they intend to seize the contents to satisfy what they understand to the amount due. A notice of intent to levy is one of the scariest letters a taxpayer can receive in the mail. We’ve helped more than one person go from tears to smiles as we’ve explained that a levy can be released and fought effectively.
In fact, there are numerous ways to have a levy released. They include options like establishing a payment plan, arguing economic hardship, arguing that it is in the government’s best interest not to seize the proceeds, arguing that the income is protected by a special law (such as certain forms of government benefits), arguing that the money is needed to run your business, paying your current tax liabilities, arguing that there are exceptional circumstances that should be taken into account, or arguing that the IRS is improperly levying the account.
Fighting levies is a practice area we are particularly passionate about. When Jerrod was in general practice, one of his earliest experiences with a levy helped stop one that was incorrectly placed on his family member’s business account. That experience is partially why Jerrod went on to found a firm dedicated solely to representation work.
He saw the abusive way levies are sometimes used firsthand. After he had the levy lifted three weeks quicker than the bank said it could be done, his family members were able to make payroll. He realized not only that he might have the skill for this kind of work but that he was also passionate about it.
Wage garnishments are another important topic when dealing with the Internal Revenue Service (IRS). They are technically levies under the Internal Revenue Code. The difference is that instead of levying an account once, the levy attaches to a stream of income until the debt is satisfied.
Wage garnishments are often attached to employment income. They can technically be attached to most income types unless statutorily excluded from levy by law. Wage garnishments at the Federal level typically follow the same guidelines as installment agreements for determining if they are causing undue hardship on a taxpayer.
This means that in many cases, they can easily be challenged and removed with appropriate professional help. A garnishment from the Internal Revenue Service may be challenged by filling the appropriate Information Statement with the IRS, requesting a Collection Due Process, Equivalent Hearing, or Collections Appeal Program request as applicable.
Wage levies are particularly aggressive in that they are designed to enforce compliance. In many cases, unless you argue effectively against them by providing the correct documentation to the Internal Revenue Service. Otherwise, they can and often will take the vast majority of a weekly paycheck.
Garnishments generally seize everything above a certain income amount rather than a set amount. No matter how much a paycheck increases, the IRS will take that much more. This can cause tough problems for those who work on commission.
The best way to deal with a lien is to avoid filing a Notice of Federal Tax Lien by setting up a payment or alternate payment plan before the notice is filed. Liens are much harder to have removed than stopping garnishments or levies. If you know you are going to owe, the best course of action is to consult with a professional first to see if tax planning can prevent the Notice of Federal Tax Lien from ever being sent.
Part of the reason for this is that in most cases, a lien doesn’t immediately take anything of value or cause substantial enough harm for many of the arguments made in other collections situations to be used. A lien establishes the government’s priority as a creditor. The order in which different creditors file liens establishes their place in line for the property sale proceeds.
However, in some cases, a lien can do damage to a taxpayer. It’s in the Government’s best interest to subordinate that lien to another creditor’s claim, withdraw it, or release it. In subordination, taxpayers often find they get the best results when subordination is clearly linked to a quantifiable payment being made to the government.
For example, if subordination is needed to acquire a home loan to improve the property, it can be sold. In that case, the IRS may agree to subordinate the lien. However, if a homeowner is interested in paying off some or all of the IRS debt by cashing out some or all of their equity the IRS is even more likely to subordinate their claim.
Collection Due Process, Equivalent Hearings, & Collection Appeals Program
Collection Due Process (CDP Hearing)
Collection Due Process hearings, not to be confused with the Collection Appeals Program, are among the most significant tools in a taxpayer’s arsenal. CDP hearings give taxpayer representatives the right to appeal Internal Revenue Service lien and levy actions early in the collection process. This includes continuous levies such as wage garnishments.
A request for a Collections Due Process hearing halts the action for which the hearing was requested. The taxpayer can challenge both the validity of the underlying assessment and propose alternative collection and payment methods. Taxpayers were not always afforded this right after the initial levy or lien documents were put in motion. It was a hard-fought-for right by professionals specializing in this practice area.
The one downside to Collection Due Process rights is that they are easily lost. A taxpayer must respond within 30 days to the initial Notice of Intent to Levy or Notice of Lien. If this timeline is not met, a taxpayer may, in many cases, request an equivalent hearing, similar to a Collection Due Process hearing. The major downside to an equivalent hearing is the loss of the ability to appeal the hearing’s decision in the United States Tax Court.
Collection Appeals Program (CAP)
The Collection Appeals Program, not to be confused with the Collection Due Process Hearing, has a different function while dealing with related issues. The Collection Appeals Program (CAP) was birthed simultaneously for similar reasons to the Collections Due Process Hearing. The best way to understand the Collections Appeals Program is to put the two programs side by side and look at the different notices and actions they are designed to respond to.
For example, a Collection Due Process Hearing may be requested after a taxpayer receives one of the following notices:
- Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320;
- Final Notice—Notice of Intent to Levy and Notice of Your Right to a Hearing;
- Notice of Jeopardy Levy and Right of Appeal;
- Notice of Levy on Your State Tax Refund—Notice of Your Right to a Hearing; or
- Post Levy Collection Due Process (CDP) Notice.
On the other hand, the Collections Appeals Program may be requested under the following slightly different circumstances:
- Before or after the IRS files a Notice of Federal Tax Lien or levies or seizes property.
- If the IRS has terminated or proposed to terminate an installment agreement, rejected an installment agreement, or modified or proposed to modify an installment agreement.
Collection Appeal Program decisions may not be appealed in the US Tax Court. However, they tend to take less time than Collection Due Processing Hearings.
In certain circumstances, the IRS can be surprisingly forgiving about penalties. Various administrative and legislatively required programs provide penalty relief and can even refund penalties that were already paid. The main type of penalty relief is Reasonable Cause.
Reasonable cause penalty relief is available to those who can establish per IRS guidelines that, as the name suggests, they had reasonable cause for why the taxes were not paid on time, or a filing deadline was not met. In addition to Reasonable Cause Penalty Abatement, First Time penalty abatement also exists for otherwise compliant taxpayers with a substantially clean compliance history.
Reasonable cause penalty relief is statutorily available to taxpayers in both the Internal Revenue Code and the Code of Federal regulations. Its application is rarified in the Internal Revenue Manual. This means that unlike other forms of penalty relief such as the First Time Abatement, taxpayers have the right to penalty relief if they meet the code’s code’s specific requirementsand may appeal a decision that denies relief that should qualify.
Reasonable cause penalty abatements are as much an art as a science or matter of law. These abatements require an understanding of what has been deemed reasonable over the years through challenge and litigation and an understanding of the current IRS posture around the collection of different types of tax, noncompliance, and other government interests.
Generally, factors such as health, age, mental status, financial status, education level, business prudence, reliance on the advice of a tax professional, and extenuating circumstances such as fire, natural disaster, death in the family, military service overseas, and serious illness will be considered when the IRS receives a request for abatement based on a reasonable cause argument.
First Time Penalty Abatements
The Internal Revenue Service has established procedures since 2001 for the abatement of certain penalties for taxpayers with clean compliance history. The First Time Abatement can abate Failure to File and Failure to File to Pay penalties assessed against the individual. For business taxpayers, the abatement may also be requested for failure to deposit payroll taxes.
To qualify for First Time Abatement Treatment, the taxpayer’s prior three years of compliance for the return in question must be clean. “Clean” is defined as having no substantial penalties. Yet, claims are routinely denied over insubstantial amounts.
Besides, claims should not be denied by the IRS. If the taxpayer had a penalty assessed more than years prior, the taxpayer had an estimated penalty assessed in the past three years, received a First-Time abatement more than years prior for the tax return in question, or had penalties in subsequent years.
Lastly, in addition to improper denials due to IRS employees being poorly trained on First Time Abatement procedures, the IRS also uses a flawed decision-making software referred to as the Reasonable Cause Assistant (RCA) to determine eligibility for penalty relief. The Reasonable Cause Assistant has been shown to deny First Time Abatement requests consistently incorrectly and has yet to be reported as fixed despite its undermining effect on the FTA program’s intent.
Should a request be denied, a taxpayer’s representatives may ask for the determination to be overridden, ask to be transferred to a manager, and as a last resort, contact the taxpayer advocate for further help. Taxpayers should be aware that First Time Abatement is an administrative relief measure, and the IRS is not bound to provide it. Nor is there a law from which a taxpayer can attempt to force the IRS to provide a First Time Abatement.
First Time Abatements may be requested in writing, through services, or over the phone. Phone abatements have an undisclosed upper limit, at which point a taxpayer or their representative must submit more formally the FTA. Some practitioners have reported that this limit is in the vicinity of $1,000, while others have reported verbal First Time Abatements as high as $30,000. These discrepancies are possibly due to the relative size of the taxpayers’ amount due or changes in administrative posture over time.
Passport levy is a relatively new topic, and as such, it is an IRS initiative that most people aren’t aware of. The IRS is now seizing passports of those with past-due taxes, including citizens abroad who receive no formal notice of the IRS’s intent or of the action itself when completed.
Security Clearance, Public Officials, Known Persons, Government Employees, & Targeted Groups
The IRS relies on what is referred to as “voluntary compliance” to enforce taxes. This doesn’t mean that they view the payment of taxes as voluntary, as in you can choose whether or not to pay taxes without facing negative consequences. Rather, it represents the reality is that the IRS has neither the financial or personal resources to knock on every door from which taxes are collected.
Voluntarily in this means that the assessing, filing, and paying tax without direct government prompting is part of the system the IRS relies on. However, if the IRS stopped enforcing the tax laws, a greater number of people would be likely not to file or pay. A voluntary compliance system’s goal is to enforce the law enough to keep most people paying taxes out of a sense of duty or fear of repercussion.
To do this, the IRS often tries to make public examples out of well-known non-compliant taxpayers. Also, to keep its own house clean, the IRS often targets government employees, public officials, and those with state and federal licenses or security clearances for extra compliance monitoring. While clearly not fair from an equality point of view, this is the compliance environment that taxpayers in those roles, jobs, and professions must live, work, and pay taxes in.
Representing such taxpayers requires an extra degree of sensitivity and planning. In particular, unlike taxpayers who may be looking to pay the absolute minimum due, people in this group may want to prioritize other goals such as avoiding the filing of lien in the public record, avoiding a wage garnishment that will alert their employee to the issue, settling the issue out of court, or avoiding the possible seizure of a passport or licensing document that would impede their ability to work and travel.
Private Debt Collectors
Private Debt collectors are not new to the IRS, but they have been absent for a while. The IRS recently restarted a program where Federal Tax Debts, usually owed by lower-income persons because larger debts are kept in the house, are handed off to private debt collectors paid commission on the amounts they collect. These programs are rife with abuse and have been shut down twice before.
They failed to raise money and cost more than they brought in because of the substantial abuse experienced by taxpayers at the hands of private agencies. Fortunately, it is fairly easy to have your file returned to the IRS and stop these collection agencies from harassing you.
We actually believe so strongly that this course of action was a mistake. We are willing to file all the necessary paperwork to have a private debt collector stop harassing a taxpayer for free. If you are interested in this free service, please contact us.
Engaging in this free service will also help you understand why you might not want to file your file sent back to the IRS and help you make an informed decision. Before moving a file back to the IRS from a private debt collection agency, there are several tactical considerations.