What is IRS Representation?
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 or were required to appear in court. A representative does more than just speak for you. They help you navigate the many complex and 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 in the sense that 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 the receive expert guidance in the preparation, delivery, and clarification of IRS information statements. Financial information statements are at the heart of IRS collection activities and 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 statuses and programs.
While the preparation of IRS information statements can seem simple they are often deceptively nuanced. It has been said by many professionals that the preparation of such statements is as much an art as a science. There are a variety of 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 and are not discussed or explained in the guides the IRS publishes for taxpayer consumption. Ensuring that you meet all the requirements for such exclusions or that you are above or below an appropriate threshold sometimes takes a bit of prior planning and guidance. In addition, with enough time and planning clients can sometimes benefit from structuring their financial lives in ways they weren’t before 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 that IRS employees and Agents often employ. While the information taxpayers are required to divulge is often straightforward, nothing stops and IRS employee from asking further questions or prying deeper into a taxpayer’s financials than they are required to. More than one taxpayer working under the assumption that their cooperation will be rewarded has ended up realizing after the fact that 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 sometimes 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 its unwise to walk into a police interrogation or court room alone we believe that 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 and sometimes unlawful demands.
Payment Agreements and Partial Charge Offs
There are a variety of payment plans available through the IRS. Each different type of payment plan comes with different thresholds, rules, payment methods, tradeoffs, and information disclosure requirements.
Generally, the IRS will require taxpayers to pay their debt in full in a set number of years that depends on the amount due. 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 or if given our client’s facts and circumstances we can argue that there were mitigating circumstances for lack of payment or there is significant doubt that they client 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 and in a way that the IRS will be sympathetic to. The recounting of that story begins with the first phone call after we engage a client and extends all the way 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 a very effective way to be heard and receive nonstandard beneficial treatment. IRS officers and employees naturally look for certain phrases, references to law, and types of issues in the story they are told when they are making a determination.
The reality 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’ll need to check to provide relief. This means that most people end up telling the wrong parts of their story or don’t even realize that their story might qualify them for relief. This can have a significant impact on the amount a taxpayer ends up paying they IRS. In 2017 for example an appropriately formatted appeal, that told the right story saved one of our clients roughly 31,000 dollars in penalties.
The most common type of payment plan, especially for taxpayers that owe smaller 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 that the taxpayer has not previously defaulted on one.
Installment agreements become more complex and difficult to secure when a person wants to avoid a lien being filed or can’t pay the standard IRS required minimum payments. Depending on the taxpayer’s circumstances and balance due the IRS will either be required to file a lien, or they may choose not to.
Liens are a common topic of discussion for taxpayers dealing with a tax controversy as they attach to homes and make transactions like applying for refinancing, home equity lines of credit, and selling more difficult. Liens can be avoided though in several ways including: engaging in more favorable payment terms with the IRS or effectively arguing a variety of different positions including that it is the government’s best interest to not file a tax lien. Unfortunately, once a lien is filed it’s harder to get removed.
Many taxpayer’s have like filed for installment agreements not realizing that if they signed up for different payments term or paid a few hundred to a few thousand dollars up front the could have avoided the embarrassment of a public lien and the subsequent harassing phone calls from lien removal companies.
Another less talked about consideration for many taxpayer’s considering payment terms is the protection of their professional credentials, lines of credit they may need to run their business, and passports. Many professional bodies and creditors respond poorly to the placement of a lien on a member or client. In rarer cases professional credentials have even been revoked by credentialing bodies and states have refused to renew licenses. In addition, if a client must travel for work the seizure of a passport can be a very costly and embarrassing occurrence.
Partial Pay Agreements
This is another form of an installment agreement. Partial pay installment agreements are rarer, but they are still available to some taxpayers. These installment agreements are called “partial pay” because 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 when the collection statute of limitations is close to expiration or it is very clear that the economic circumstances of the taxpayer have changed dramatically.
Offers in Compromise
The Offer in Compromise program is one of the more famous collection alternatives available at the IRS. It was and has been made famous by sketchy late-night TV commercials and radio ads promising to settle your debt “for pennies on the dollar” or to “negotiate with the IRS.” While some people get these results, they have more to do with the person’s financial condition and their representative’s ability to hold an employee accountable to the IRS’s own 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. For this reason, while Offers can be 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 5-year compliance requirement or the IRS will retroactively cancel and offer. Some taxpayers sold a quick fix are often subject to unpleasant surprise when the find out what they really signed up for.
Given this we find that many people once they understand the full ramifications of an offer more seriously consider other programs and options. An OIC is a good tool, in the right circumstances, but we highly advise consulting a neutral professional you know and trust before attempting to file one.
Offers in Compromise (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. In addition, it also the more heavily advertised and more often misrepresented of the two. If you have heard of companies advertising a “onetime tax forgiveness program” or “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 so 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” and if you do not meet the requirements your offer will be denied almost instantly.
This is one of the reasons that while we do file offers in compromise we often counsel people against them and suggest other strategies. In addition to the cost of the preparation of 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 a 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 heavily vet any potential offer in compromise candidate to make sure that a potential offer does not worsen their situation.
Offers in Compromise (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” which provides taxpayers the ability to make the argument that it is in the best interest of the government and/or effective tax administration for the IRS to accept less than the full balance due. Doubt as to Liability on other hand allows the taxpayer to make the argument that the balance the IRS has assessed against the taxpayer is either not or unlikely to be correct. Doubt as to liability Offers are used much less often and are generally used in much more specialized situations where amending a return isn’t advisable or won’t yield the same result. However, there are certain specific types of problems that they can be particularly useful for, especially if active collections efforts are being made by the Internal Revenue Service.
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) but they are two very distinct programs with very different purposes. Confusing the two can causes a person to lose substantial rights. There was an even a situation in recent memory 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 taxpayer’s who have a tax liability originating from a joint return, meet certain financial and personal criteria, and wish to on the grounds of fairness and equity be relieved of a tax owed usually because the debt flows from the spouse or former spouses’ actions or inactions.
Innocent spouse relief is often applied for in situations where a spouse or former spouse has committed tax fraud, lied to the spouse about their tax situation, or has withheld information about taxes from the spouse or former spouse. Innocent spouse claims are particularly effective in situations where financial control and or abuse are present.
Innocent spouse claims are often particularly delicate and are helped by an increased degree of sensitivity, confidentiality, compassion, and discretion. There are a few reasons for this, claims often involve two parties often with a long or tumultuous history, 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 is helpful in denying a claim rather than guiding a taxpayer appropriately expressing their situation, and the emotional nature of such a claim for a person that may have survived significant emotional or physical abuse. For all these reasons we encourage people to find someone with experience in these kinds of claims who understands both the emotional and technical aspects of such a claim.
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 a spouse has tax or other debts that predate a marriage/union. An Injured Spouse claim is usually straightforward unless a taxpayer lives in a community property state. Maine, however, is not a community property state so unless a person recently moved or spends substantial time another state this usually isn’t an issue for our clients.
Hardship Programs, Currently Not Collectible Status, and Uncollectible 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. In addition, if the taxpayer files a return with income above a certain threshold they may also 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 a non-collectible status they must formally go through the process. The IRS has consistently gotten in trouble over the years for abusing their discretion around middle- and low-income taxpayers who qualify for this type of program. The Taxpayer Advocate, the government funded watchdog for the IRS, has included this issue multiple times in their annual report about the most serious problems with the IRS.
Additionally, the courts have ruled for over 20 years that the current administrative posture of the IRS towards certain taxpayers is an abuse of their legislatively provided discretion. In particular, the Vinateeri case cemented the legal framework for challenging many of the the abuses in 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 (or any case law for that matter) so they aren’t aware that courts have ruled this way and there is little internal movement in the IRS to fix this oversight.
Garnishment, Levy, and Lien Removal
A levy is a hold that the IRS puts on a taxpayer’s bank or other 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 that a taxpayer can receive in the mail and we’ve helped more than person go from tears to a smile as we’ve explained that a levy can be released and fought quite 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 and pay your current tax liabilities, arguing that there are exceptional circumstances that should be taken into account, and/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 was helping to stop one that had been incorrectly places on the business account and payroll account of some of his family members. 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 first hand and after he had the levy lifted 3 weeks quicker than the Bank said it could be done and 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). Wage garnishments 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 most often attached to employment income but can technically be attached to most types of income unless they are 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 an 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 or by 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 just simply take that much more. This can cause particularly hard to cope with problems for those who work on commission or a wage and commission hybrid.
The best way to deal with a lien is to avoid the filing of 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. The best course of action if you know you are going to owe 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 simply establishes the government’s priority as a creditor. The order in which different creditors file liens establishes their place in line for the proceeds from the sale of that property.
However, in some cases a lien can do damage to a taxpayer and it’s in the best interest of the Government to subordinate that lien to another creditor’s claim, withdraw or release it. In the case of subordination taxpayers often find they get the best results when the subordination is clearly linked to a quantifiable payment being made to the government. For example, if a subordination is needed to acquire a home loan to improve the property so it can be sold the IRS may agree to subordinate the lien but if for example 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 Hearings, Equivalent Hearings, & The Collection Appeals Program
Collection Due Process (CDP Hearing) and Equivalent Hearings
Collection Due Process hearings, not to be confused with the Collection Appeals Program, are one of the most significant tools in a taxpayer’s arsenal. CDP hearings give taxpayer’s representatives the right to challenge and 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, and the taxpayer can challenge both the validity of the underlying assessment and propose alternative collection and payment methods. Taxpayer’s 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 which is very similar but the same as 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 United States Tax Court.
Collection Appeals Program (CAP)
The Collection Appeals Program, not to be confused with the Collection Due Process Hearing, while dealing with related issues has a different function. The Collection Appeals Program (CAP) was birthed at a similar time and for similar reasons to the Collections Due Process Hearing. The best way to understand the Collections Appeals Program’s function 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 do tend to take less time than Collection Due Processing Hearings.
In certain circumstances the IRS can be surprisingly forgiving about penalties. A variety of 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 currently 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 as well its application being clarified in the Internal Revenue Manual. What this means is that unlike other forms of penalty relief such as the First Time Abatement taxpayers have the right to penalty relief if they meet the specific requirements of the code and 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 not only an understanding of what has been deemed reasonable over the years through challenge and litigation but also 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 be used to abate Failure to File and Failure to File to Pay penalties assessed against 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.
In addition, 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 issues with 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 consistently incorrectly deny First Time Abatement requests and has yet to be reported as fixed despite its undermining effect on the intent of the FTA program.
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 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 eservices, or over the phone. Phone abatements have an undisclosed upper limit at which point a taxpayer, or their representative must more formally the FTA. Some practitioners have reported that this limit is in the vicinity of 1,000 dollars 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 those of citizens abroad who receive no formal notice the IRS’s intent or of the action itself when completed.
Security Clearances, Public Officials, Known Persons, Government Employees and Targeted Groups
The IRS relies on what is referred to as “voluntary compliance” to enforce the collection of taxes. This doesn’t mean that they view the payment of taxes as voluntary, as in you can chose whether or not to pay taxes without facing negative consequences, but rather 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 taxes without direct government prompting is part of the system the IRS relies on.
However, if the IRS stopped enforcing the tax laws a greater of number of people would be likely to not file or pay. The goal of a voluntary compliance system is to enforce the law enough to keep most people paying their taxes either out of a sense duty or a fear or repercussions. To do this the IRS often tries to make public examples out of well-known non-compliant taxpayers. In addition, 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 many 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, and/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 house) are handed off to private debt collectors who are paid commission on the amounts they collect. These programs are rife with abuse and have been shut down twice before both because they failed to raise money (they cost more than they brought in) and 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 that 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, you can call us at (207) 573-1529. Engaging this free service will also help you understand why you might not want to have your file your file sent back to the IRS and help you make an informed decision. There are several tactical considerations to consider before moving a file back to the IRS from a private debt collection agency.