We are now eight months into the COVID-19 pandemic, and more taxpayers than ever will be facing tax bills that just can’t be paid. Someone who had a great 2019, made a lot of money, and expected to pay the tax due in April of 2020 may have lost it all when the markets crashed. Despite Congressional intervention to keep businesses open and with operating capital, record numbers of small businesses are closing. And the IRS’s rules providing a temporary hold of all IRS enforced collections has ended. Record numbers of Americans will owe taxes that they cannot afford to pay. As I’ve explained in the past, burying your head in the sand never helps when dealing with the IRS. Instead, open your mail and take action.
Tax Filing Electronically with an IRS 1040 Tax Form on top of a computer keyboard and mouse.
Open your Mail.
It sounds simple, but it isn’t. Open your mail. Really. Over the course of my career, I’ve had countless clients who have waived significant rights because they were psychologically unable to open their mail. Envelopes from the IRS are scary. You may not be ready to deal with it. You would rather not even see how bad it is, because if you open the mail, you know a number and there’s just no possible way you can pay that number, deal with that number, or even think about that number.
All of that might be true, but here’s something else that’s true. Contained in the IRS letter you may be too scared to open might just be the IRS functional equivalent of the “Golden Ticket,” either a Notice of Deficiency, which gives taxpayers the right to go to Tax Court, or a notice that provides Collection Due Process Rights. (More on that below). The deadlines to respond to these notices are set by law. There’s no changing them, for any reason or no reason. If there’s one thing that everyone who is dealing with the IRS needs to do, it is steel yourself for the reality of your situation and open your mail.
Read your IRS Notice.
After you’ve gathered your courage and opened your IRS mail, read the IRS notice enclosed. Some of the most important notices from the IRS include:
- Notice of Deficiency - This gives taxpayers the right to file a petition in Tax Court and contest the amount of tax the IRS says is due. It is the only place where a taxpayer can dispute the amount of tax in court before paying the full amount the IRS says is due.
- Final Notice of Intent to Levy - This is the last notice a taxpayer will receive before the IRS can garnish your wages, garnish your social security, or seize funds from a bank account.
- Notice of Filing of Federal Tax Lien - This notice informs taxpayers that the IRS has filed a lien for the amount of past due tax.
- Notice of Determination - This notice also gives taxpayers the right to file a Tax Court Petition - but this time contesting the proposed collection action the IRS intends to take.
Exercise Your Rights.
After tax or penalties are assessed, the IRS expects to be paid. In general, if the IRS sends a notice and demand for payment, if no payment is received within ten days, the IRS can begin the “Collection” process. Imbedded within that process are important taxpayer rights and protections. To know what kind of rights to exercise, it is important to understand where in the collections process you are.
IRS Enforced Collection Tools
The IRS has two main “enforced collection” tools at its disposal.
The first is filing a federal tax lien, which would result in all of a taxpayer’s assets being encumbered by the lien. A lien is like a blanket - it literally covers everything that a taxpayer owns. Just because the IRS has filed a lien doesn’t mean that the IRS can take your house, your car, or your possessions. It does, however, mean that y0u can’t sell your house or your car without paying the IRS the proceeds of the sale.
The second enforced collection tool is a tax levy. A levy is like a bullet, because it has a target. Bank accounts, social security, wages, or alimony payments are just some examples of items that are subject to IRS levy.
Before the IRS can take these enforced collection actions, taxpayers are entitled to notices for payment. There are some exceptions, but in general the rule is that a taxpayer is entitled to three notices before the IRS begins enforced collection action.
Preventing IRS Enforced Collection
Taxpayers have a right to a Collection Appeal Request, or CAP appeal, once they become aware that the IRS is considering taking either kind of enforced collection action, a lien or levy. A CAP appeal provides the opportunity to talk to a manager and if a resolution cannot be reached with the manager, in IRS Appeals. However, taxpayers do not have the right to go to Tax Court or get judicial review of the decision.
Taxpayers have a right to a Collections Due Process Appeal, or CDP Appeal, once a final notice of intent to levy is issued or a notice of federal tax lien is filed. The main difference between a CAP appeal and a CDP appeal is that with CDP, the taxpayer has the right to go to Tax Court and contest the IRS’s decision. In a CAP appeal, IRS word is final.
Your rights as a taxpayer to a CAP appeal arise as soon as you have notice the IRS is considering enforced collection. Your rights as a taxpayer to a CDP appeal arise at different times. Your rights to a CDP hearing arise after a Notice of Federal Tax Lien has been filed. Your right to a hearing to dispute a levy arise before the levy is issued, when you receive a Final Notice of Intent to Levy. Without question, the right to a CDP hearing is more valuable to taxpayers because of the opportunity for judicial review if agreement cannot be reached with the IRS. However, for taxpayers who have failed to timely exercise their rights to a CDP hearing, a request for a CAP appeal is likely the best available option to prevent enforced collection.
Once the IRS issues a Final Notice of Intent to Levy or a Notice of Federal Lien filing, taxpayers have a short amount of time to request a CDP appeal. The CDP hearing request, if timely, puts a collections hold on all IRS enforced collection action. The IRS cannot proceed with enforced collection until after the hearing takes place. If a taxpayer files a CDP request with regard to a levy, the IRS may not issue any levies until after the hearing. They cannot seize funds, however, the IRS always has the right to apply refunds or overpayments to outstanding liabilities, regardless of whether there is a CDP request pending.
Taxpayers who file a CDP request with regard to a lien are entitled to a hearing, but the lien remains in place during the pendency of the hearing and any subsequent proceedings. The IRS may not move to enforce the lien, or reduce it to judgment. CDP hearings are conducted by IRS Appeals officers who specialize in collections. If the taxpayer and the IRS are unable to reach an agreement in the CDP hearing, then the IRS Appeals officer will issue a Notice of Determination stating the findings and the basis for the findings. Once a Notice of Determination is issued, the taxpayer has the right to go to Tax Court and contest the findings. Importantly, if a lien or a final notice of intent to levy is issued, in order to prevent enforced collection, you MUST file a CDP hearing request.
In general, the IRS has ten years from the date tax is assessed to collect it. But this can be extended for many reasons, and any time a taxpayer seeks relief that prevents the IRS from collecting tax, such as filing a CDP request, that ten year period is suspended.
Once a taxpayer files a CDP request, the 10 year statute of limitations to collect tax is suspended during the entire proceeding, including during the time a case is proceeding in Tax Court if the taxpayer decides to go to Tax Court. It is always better to try to reach negotiated agreements with the IRS instead of filing a CDP request, which suspends the 10 year collection statute and will also use the only opportunity for review by the Tax Court.
Requesting Relief
Once a taxpayer gets to a CAP or CDP hearing, or even if they never get that far, in order to prevent enforced collection, the taxpayer has to propose a “Collection Alternative.” This is just a fancy way of saying that the taxpayer can’t afford to pay the IRS in full, now, and is proposing to do something else instead. What kind of alternatives will the IRS accept?
Installment Agreement / Payment Plan - for taxpayers who can’t afford to pay the IRS in full, but can pay over time by making monthly payments, they can propose an Installment Agreement. More information about what kind of plans the IRS will accept is available at the link below. Interest and penalties continue to accrue while payments are made, but penalties are at a reduced rate. Taxpayers who can afford to pay in full are well advised to do so.
Temporary Delay of the Collections Process - For taxpayers who are experiencing temporary job loss or other significant financial disruption, the IRS will often temporarily agree to suspend collection action. This kind of relief is only a temporary solution, and as with Installment Agreements, interest and penalties continue to accrue while payments are made, but penalties are at a reduced rate.
Offer in Compromise - This is what many of the late-night commercials are referring to when they talk about the “fresh start program.” An Offer in Compromise, or OIC, is the only legal way for a taxpayer and the IRS to reach an agreement that the IRS will allow the taxpayer to discharge the tax debt for less than what is owed outside of bankruptcy. The idea of paying only what one can afford - instead of what is owed - is quite attractive. So attractive, in fact, that the IRS has deemed “Offer in Compromise Mills” part of the “Dirty Dozen” tax scams to look out for. Why? Because anyone who promises to get you out of something for “pennies on the dollar” before even having a clue as to your situation is selling a dream, not a reality. Full disclosure: I got my start as a tax professional at a reputable tax resolution firm that really did excellent work and delivered on its promises to clients to reduce tax to what the taxpayers could afford to pay. But they did this by actually carefully reviewing taxpayers’ financial situation and IRS records before ever relaying to the clients what possible outcomes they could expect. Anyone who wants to enter into an Offer in Compromise with the IRS should check the IRS’s pre-qualifier tool, and carefully check the references of any tax professional who is hired to help.
Bottom line: Taxpayers can only know if they qualify for an Offer in Compromise after a careful analysis of their financial situation and evaluation of IRS account status. And keep in mind, when filing an OIC, if a lien has not already been filed, the IRS will file one while they consider the OIC, and the ten year collection statute will be suspended while in consideration.
Get Help When Needed.
Dealing with the IRS is procedurally difficult, exhausting, and scary. Tax professionals can add real value when the professional is well versed in IRS procedure and can thoroughly and ethically assist the taxpayer. Be sure to check references or get a referral from someone who you trust whenever hiring a tax professional.
When all Else Fails, Contact the Taxpayer Advocate.
Erin M. Collins, National Taxpayer Advocate, Taxpayer Advocate Service testifies before a House ... [+]
In 1998, the IRS Restructuring and Reform Act was passed. This law contains some of the most important taxpayer protections ever enacted, including creating the office of the National Taxpayer Advocate and the Taxpayer Advocate Service. Our current National Taxpayer Advocate, Erin Collins, took her office in the pandemic and has been dealing with pure crisis ever since, but hasn’t let that stop her from fiercely advocating on behalf of taxpayers. Each state has a Local Taxpayer Advocate.
I’ve always thought of the Taxpayer Advocate this way: it is their job to get the IRS to do their job, correctly. When the IRS is resorting to enforced collection without merit, or taking other action that is outside of what is appropriate, the Taxpayer Advocate can step in and evaluate the situation with a fresh pair of eyes. In situations where the taxpayer is hitting a wall with the IRS, the Taxpayer Advocate can usually help.
