Wednesday, March 28, 2018
An issue that I sometimes get into when dealing with practitioner questions concerns the IRS collections process. What can the IRS reach? What’s the process for establishing an IRS lien? What’s the levy process? What planning steps should a taxpayer take to protect assets within the limits of applicable law? These, and similar questions are important when a taxpayer finds themselves on the wrong end of an IRS audit.
The basics of the IRS collection process and related issues – that’s the topic of today’s post. This is not intended as a comprehensive review of the IRS procedures. Instead, today’s post is merely a primer dealing with some of the more common questions. Also, not discussed is a taxpayer’s option of contesting an IRS determination in Tax Court.
IRS notices. When the IRS, upon audit, determines that a tax liability exists for any individual or taxpaying entity, the IRS collection process begins. The process is basically the same for an individual taxpayer as it is for any taxpaying entity. The IRS will send at least two notices requesting payment. The verbiage becomes increasingly urgent with each notice. The last notice sent before any action can be taken will be labeled “Final” and will sent via certified mail. It is important to note that the IRS cannot take any action or file a notice of federal tax lien until 30 days have expired from that final notice.
The IRS automated collection system. After the final notice goes out and the 30-day period elapses, regardless of whether a lien is filed, the initial IRS contact will be by IRS collection personnel in what is known as the Automated Collection System (ACS). The ACS will provide notice and make demand for payment and try to get as much financial information from the taxpayer as possible to document possible sources for future collection actions. Depending on personnel resources and workload priorities, if ACS cannot resolve the delinquency, it would be assigned to a “queue” of collection cases that would then be assigned to field collection personnel for face-to-face contact. Cases are assigned to the field based on workload priorities. There are maximum caseload inventories for collection personnel, so the case could conceivably sit dormant for a period of time before being assigned to the field. Of course, the collection statute of limitations (10 years from the date of assessment) continues to toll even though the case is not being actively pursued.
Tax lien. Subsequent to the final IRS notice and the expiration of the 30-day period, if the delinquent taxes remain unpaid, the IRS will provide notice of an intent to levy and notice of a Collection Due Process hearing. Typically, the IRS provides taxpayers with notice of each of these steps by sending multiple letters as part of the ACS. Once the last notice is received (it will signify that it is the last) and the unpaid tax balance isn’t paid (or other arrangements aren’t made to pay the balance), the IRS can levy the taxpayer’s income or other assets. This levy power also includes the ability to garnish wages as well as self-employment income and the seizure of bank accounts.
A federal tax lien can be filed with the appropriate office determined by the taxpayer’s residence. Where that lien is filed is determined by state law. In general, filing will be in the office of the County Recorder for the county of the taxpayer’s residence. Once the asserted tax liability reaches a certain point, the filing of the lien is a foregone conclusion and it will likely be an automated process. Where that point is at is discretionary with the IRS, but certainly if the asserted tax liability is $50,000 and greater, a federal tax lien will be filed.
The lien is a general lien and attaches to all property, both personal and real. The lien must be filed in the jurisdiction where the real property is located. Thee lien is good for 10 years from the date of assessment and will not be extended, although exceptions do exist in the event of bankruptcy or mutual agreement between the taxpayer and IRS.
What about a lien on the taxpayer’s personal residence? The likelihood of IRS seizing a personal residence and offering it for sale is extremely small unless, of course, the taxpayer is living an opulent lifestyle. But, unless there are exigent circumstances, there is a virtually no chance that the IRS would take enforcement action against the taxpayer’s personal residence. That’s because there are several layers of authorization that an IRS Revenue Officer must receive to get approval to proceed to enforce a tax lien on a taxpayer’s personal residence by virtue of a tax sale. The IRS simply doesn’t operate like a county does for nonpayment of real estate taxes. The IRS will collect on the lien, however, if the taxpayer sells the residence.
Offers in Compromise
Offer in Compromise (OIC) acceptances, contrary to all the media advertisements, are generally not accepted unless it works to the government’s best interests for collection. When determining whether to compromise a tax debt, the IRS takes into consideration numerous factors. The taxpayer’s age is one of those as it relates to the likelihood that the taxpayer will outlive the collection statute and make payment. In general, the IRS will always determine to what extent the taxpayer has equity in their assets. In general, if the taxpayer has equity in the property that gave rise to the tax liability, that property could be subject to enforcement actions. But, not only must the taxpayer have equity in the property, there must be a market for the property.
The IRS will also see whether the taxpayer has income in excess of necessary living expenses. Those are all factors that the IRS will use to determine an acceptable amount to compromise a tax debt. All of the factors are tied to the likelihood of the ability of the IRS to collect on the tax debt.
Note: The IRS Collection Financial Standards should can be reviewed to help determine what goes into the IRS calculation of the collectability of a tax debt: https://www.irs.gov/businesses/small-businesses-self-employed/collection-financial-standards.
Social Security benefits are subject to levy actions on a monthly basis, but are limited to 15 percent of the individual taxpayer’s Social Security benefit. Disability payments under Social Security are not subject to levy. If the taxpayer has only social security and pension benefits, then it is probably in the taxpayer’s best interest to complete a Collection Information Statement to determine if there is any monthly income after allowable living expenses. If there is, it may be possible for the taxpayer to enter into an installment agreement to pay-off the tax debt. If there is no excess income or assets, the IRS will report the account as “currently not collectible” and the taxpayer’s case would be designated as having a “dormant” status (with the collection statute still running). At the end of 10 years, the lien would be automatically released.
The IRS can also levy pension benefits, but they are limited to allow for necessary living expenses. The amounts of the limitation are generally revised annually to take into account cost of living variations.
Note: The IRS chart for the income exemption from levies can be found at the following link: https://www.irs.gov/pub/irs-pdf/p1494.pdf.
Tax overpayments will almost always be utilized to offset a tax delinquency.
A taxpayer, in general, doesn’t ever want communication from the IRS. That’s especially the case for communication asserting a tax deficiency. But, if it occurs, knowledge of the basics of the IRS collection process is important in order to determine the best course of action to take in getting the alleged tax debt eliminated.