It is true. There are inescapable certainties in life: death, and taxes. These issues are not local…people all over the world must deal with them. From a cohesive standpoint, these two concerns bind us all together. Looking to find common ground with a stranger? Look no further than the topics of death and taxes. To date, no individual is invincible, and while there are a few countries without income tax, short of renunciation of your U.S. citizenship, the responsibility to report and pay taxes on your worldwide income is inevitable for U.S. citizens and permanent residents. (1)
Unfortunately, many taxpayers often find themselves unable to pay their federal income taxes. This could be due to a variety of reasons. It may have been a difficult year. For example, your spouse got sick, and all the funds which should have gone to paying estimated taxes was used to cover medical bills. Come April 15th, you find yourself in a situation in which you are unable to make the full tax payment. You are stressing because you have no idea what to do or how to handle the situation, and (with good reason) you fear the IRS placing a lien on your property or worse, levying your bank account, taking all of your hard-earned money. While this does seem scary, there are things which may be done in order to mitigate this issue.
There are various procedures with which taxpayers may actively address outstanding taxes. The key behind proper tax planning lies in proper tax deferral, or in pre-payment of future year balances.
However, in the circumstance when a taxpayer is already behind, they should work with a CPA, Enrolled Agent, or Tax Attorney who will help them negotiate their outstanding taxes with the IRS. Below is a description of IRS collection procedures, and options for taxpayers with outstanding tax balances.
IRS Collection Practices
If a Taxpayer does not pay his taxes in full, they will receive a bill for the outstanding balance, further described below. This initial bill starts the collection process. The collection process will continue until the account is satisfied, or until the IRS may no longer legally collect the tax, such as when the time or period for collection expires. (2)
Series of Notices and Actions (3)
Notice 1: The first notice, a Notice of assessment and demand for tax under I.R.C. §6303, is a letter that explains the balance due and demands payment in full. (4) It will include amount of tax, plus any interest and penalties accrued on the unpaid balance from the date the tax was due. The unpaid balance is subject to interest that compounds daily and a monthly late payment penalty. Thus, it is in a taxpayer’s best interest to pay their tax liability off in full as soon as they can, in order to minimize the penalty and interest charges. (2)
Notice 2: Five weeks later, a follow-up balance due notice is mailed. This “Reminder of Unpaid Tax” includes a late payment penalty and requests payment within ten days to avoid additional interest and penalty charges.
Notice 3: A second follow-up letter is mailed after five weeks. This follow-up notice is usually titled “Overdue Tax”, and it requests payment within ten days, to avoid interest and penalty charges.
Notice 4: A third follow-up notice is mailed after another five weeks. This notice is headed “Urgent – Payment Required”.
Notice 5: A final follow-up notice, a Final Notice Before Seizure, is mailed after another five weeks. This notice warns that it is a final notice before enforcement action is taken.
Taxpayer Delinquent Action: If the taxpayer still does not pay the balance due within five weeks of the prior notice, a Taxpayer Delinquent Action (TDA) is automatically generated, for processing by the taxpayer’s local IRS office.
Required Annual Notice: The Taxpayer Bill of Rights 2 and I.R.C. §7524 added a new notice. At least annually, the service is required to send a written notice to a taxpayer who has a delinquent account, setting out the amount of the tax delinquency, as of the date of the Notice.
Contact with a Revenue Officer:
It is likely that either during the time the taxpayer receive the notices or afterwards, they may be contacted and interviewed by a revenue officer, and a meeting set either by telephone or, through a field visit. During these interviews, a Taxpayer is entitled to a professional representative. In addition, the Taxpayer has certain rights, described to them in IRS Publication 1.
If it is determined that the Taxpayer cannot pay the full amount due, the revenue officer will attempt to obtain the maximum amount that can be paid immediately, and the balance in the shortest period possible. The Revenue Officer will try to learn enough about the Taxpayer’s situation so that enforcement action an be taken without further contact, such as if the taxpayer fails to keep a commitment to make a payment by a certain date. (3)
- Federal Tax Lien
If the tax is not paid, a federal tax lien is filed. A lien is a claim or charge on property for the payment of a debt. By itself, the creditor’s lien does not transfer the debtor’s property to the creditor. A transfer of the debtor’s property can be affected only by a levy or a seizure. The tax lien is the government’s claim or charge on a taxpayer’s property for the payment of a tax debt; similarly, the tax lien itself does not seize or deprive a delinquent taxpayer of property. (3)
Prior to the lien being filed, several factors are considered. The Service’s practice is not to file a notice of lien until the taxpayer has been contacted, and the amount of tax due and the value of the taxpayer’s property and rights to property have been considered. Once the decision has been made to file a lien, the Service uses Form 668(Y), Notice of Federal Tax Lien under Internal Revenue Laws. (3) Tax liens continue on file until the liability is satisfied, or until the period of tied to the statute of limitations for collections after assessment has run. (3)
- Levy/ Seizure
Once the lien exists, the Service need only wait thirty days after giving the taxpayer notice if its intention to levy before it may, without judicial intervention, levy upon, seize, and sell all property and rights to property of the taxpayer, in order to recover its interest. The government need not proceed administratively by levy. Once the tax lien exists, it may constitute any proceeding in court that it considers appropriate under the circumstances. (3)
Remedies for Taxpayers
Formal Procedures – Avoiding and Minimizing the Effects of Tax Liens and Levies:
The main benefit for taxpayers in actively dealing with their outstanding tax balances is that subsequent to initiation of most remedial measures, a collection hold must be placed on their account. While this does extend the statutory collection period, during the time in which the taxpayers have entered an installment agreement or compromise plan with the IRS, as long a they stay current, Taxpayers need not worry that the IRS will move forward with collections measures.
- The Taxpayer Advocate Program: Taxpayers may seek the assistance of a local taxpayer advocate in the National Taxpayer’s Advocate’s organization to assist them with resolving tax problems, if the Service has not responded to the taxpayer’s communications, inquiries or complaints on a timely basis, or if the taxpayer has or will suffer significant hardship. (3)
- Installment Payment Agreements: A Taxpayer may be able to work out a payment schedule with the Collection personnel using an installment payment agreement or some other collateral agreement. Generally, the term for an installment payment agreement is limited to the ten-year statute of limitations on collection There are different types of installment agreement plans:
- Guaranteed/ Mandatory Installment Agreements. Taxpayers whose outstanding tax balance is not more than $10,000, who have previously timely filed all income tax returns and paid any income tax due, and who have not entered into an installment agreement for the payment of income tax are eligible for a guaranteed installment agreement plan. These plans require full payment of the amount owed within 3 years. (3) Unlike the Streamlined Agreement rules, the dollar limit for guaranteed agreement of $10,000 applies only to tax due. (5)
- Streamlined Installment Agreement. Streamlined installment agreements are approved for taxpayers who have aggregate unpaid balances of $50,000 or less. This includes tax, assessed penalty and interest, and all other assessments on the tax modules, but does not include accrued penalty and interest. Generally, the maximum term for a streamlined agreement is 72 months. Taxpayers may apply online for either guaranteed or streamlined installment agreement payment plans or use Form 9465, Installment Agreement Request. (6)
- General Discretionary Installment Agreement. Taxpayers whose outstanding balance exceed $50,000 should send in a written installment agreement request to the IRS. These types of agreements must be carefully analyzed by IRS employees, and the final determination is largely based on each Taxpayer’s financial situation. Taxpayers may use Form 433-D to apply for a general installment agreement. (6)
- Offers in Compromise (“OIC”)
I.R.C. § 7122 grants the Service the authority to compromise a case arising under the internal revenue laws. A successful offer in compromise will settle the taxpayer’s liability for less than the full amount and release the taxpayer from a portion of the tax liability assessed. When the Service accepts an offer, the compromise conclusively settles the liability of the taxpayer specified in the offer, unless the taxpayer has supplied false information, concealed the taxpayer’s assets or ability to pay, or the parties discover that there has been a mutual mistake of material fact. (3) There are three traditional grounds for a compromise, described below:
- Doubt as to liability: This type of offer is rare and occurs infrequently. A compromise meets these criteria only when there is a genuine dispute as to the existence or amount of the correct tax debt under the law. (3)
- Doubt as to collectability: The IRS can accept a compromise if there is doubt that the amount owed is fully collectible. Doubt as to collectability exists in any case where the taxpayer’s assets and income are less than the full amount of the tax liability. (7)
- To promote effective tax administration: The IRS can accept a compromise based on effective tax administration when there is no doubt that the tax is legally owed and that the full amount owed can be collected, but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances. (7) A very thorough presentation and analysis of the taxpayer’s particular situation in these types of cases is required.
- Minimizing the Effects of Tax Liens
- Filed in Error: I.R.C. 6326 permits the administrative appeal of the filing of a federal tax lien and for the release of the lien. After a notice of federal tax lien has been filed, “any person” whose property or rights to property are encumbered by a tax lien is allowed to appeal to the Service for a release of the lien alleging “an error in the filing of the lien”. If there has been an error, a certificate of release of the lien is required to be issued. (3)
- Withdraw of Notice of Lien: Collection may withdraw a notice of lien if it determines that: 1. the filing was premature; 2. the taxpayer has entered into an installment agreement payment, unless the agreement provides otherwise; 3. the withdraw of the Notice will facilitate collection of the tax liability; 4. with consent of the taxpayer or Taxpayer Advocate, the withdraw of the notice will be in the best interest of the taxpayer. (3)
- Release of Lien: A release of lien is required when 1. there is a finding that the liability for the amount assessed, together with all interest with respect to that assessment, has been fully satisfied; 2. the liability for the amount assessed has become unenforceable; 3. an acceptable bond is furnished to the Service guaranteeing payment of the amount assessed within the period of limitations on collection.
- Discharge of Lien: A delinquent taxpayer who cannot obtain a bond or pay the tax may nevertheless be able to transfer clear title to particular items of property by obtaining a partial discharge of the property from the tax lien. A discharge is authorized where 1. the value of the taxpayer’s remaining property is double the amount of the liability; 2. payment is made in an amount equal to the value of the government’s interest in the specific property; or 3. the value of the government’s interest in the specific property is valueless. (3)
- Subordination: A tax lien may be subordinated to another interest where 1. an amount is paid equal to the amount with respect to which the tax lien is subordinated or 2. the district director is persuaded that the amount the government may realize will be increased by issuing the certificate and that issuance will aid in the collection of the tax liability. (3)
- Nonattachment of the Tax Lien: The Code authorizes nonattachment of a tax lien to be certified where, because of confusion of name or otherwise, a person other than the taxpayer is or may be injured by the effect of the lien. (3)
Informal Steps in Minimizing the Risk of Summary Collection Action:
Since the IRS Restructuring and Reform Act of 1998, an array of new procedures are available to help taxpayers resolve delinquent tax problems. Taxpayers have due process review rights when collection files a lien or intends to serve a levy, and these due process rights include the right to administrative review in appeals and judicial review in the Tax Court.
In addition to the above, although not an easy process, taxpayers may communicate directly with revenue officers to try to come to an agreement concerning their outstanding taxes. In engaging in these negotiations, it is important to remember that in discussions, revenue officers have leverage and the taxpayer, generally, has none. In addition, the revenue officer is armed with the Code’s formidable power to collect tax without judicial intervention. Unfortunately, since revenue officers and other collection personnel have wide discretion in the handling of a collection matter, this discretion is often not exercised wisely. (3)
For this reason, we highly recommend for Taxpayers to hire an experienced resolution representative. Our firm has the expertise and knowledge to adequately and successfully negotiate with the IRS on behalf of taxpayers. We urge taxpayers to refrain from mentally writing off their tax debt as a passive issue, it is important to actively deal with your outstanding tax matters.
If you need assistance with tax planning, tax resolution, or if you simply need advice, do not hesitate to reach out to Ellrich, Neal, Smith & Stohlman P.A. We are here to help.
- The 5 Countries Without Income Taxes, https://www.investopedia.com/articles/personal-finance/100215/5-countries-without-income-taxes.asp
- Topic Number 201 – The Collection Process, Internal Revenue Service, https://www.irs.gov/taxtopics/tc201
- IRS Practice and Procedure, Student Edition, Michael I. Saltzman, page 14-18; 14-24; 14-30; 14-40; 15-5; 15-22; 15-54; 15-78; 15-151; 15-152; 15-157
- R.C. 6303, Notice and demand for tax at (a) General rule
- Instructions for Form 9465, Rev. December 2018
- IRM 5.14.5 at 3 (12-23-2015) Guaranteed Installment Agreements; and at 2, (12-23-2015) Streamlined Installment Agreements
- Topic Number 204 – Offers in Compromise, IRS.gov, https://www.irs.gov/taxtopics/tc204