Category: Federal Tax Lien Filing

IRS Collection Action, IRS Levy, IRS Tax Lien, IRS Audit

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IRS collection action is down. There are fewer IRS audits, IRS levy and IRS Tax Lien filings. The IRS budget expenditures are lower and there is a reduced IRS workforce. While IRS collection action is down, taxpayer service and taxpayer rights are being jeopardized.  [See The 2017 IRS Data Book (released March 29, 2018) describing activities conducted by the IRS from Oct. 1, 2016, to Sept. 30, 2017].

Examinations and appeals – fewer audits:

Compared to the prior year, there were fewer IRS audits and IRS collection action is down (e.g., IRS levy, IRS Tax Lien filing) during fiscal year 2017.  The IRS audited almost 934,000 individual income tax returns during the fiscal year, the lowest number of audits since 2003. The chance of being audited fell to 0.6 percent, the lowest coverage rate since 2002.

Tax-related Identity theft – the fight continues:

In fiscal year 2017, the IRS also continued a years-long effort to fight tax-related identity theft. The IRS Criminal Investigation Division completed 524 criminal investiga­tions of tax-related identity thefts.

Changes in IRS enforcement activities – IRS Levy action down and fewer IRS Tax Lien filings:

IRS collection action fell during the fiscal year. IRS levy action was down 32 percent compared to the prior year, and the agency filed about 5 percent fewer IRS tax liens than in fiscal year 2016.

FY 2016

FY 2017
Number of offers received

63,000

62,000
Number of offers accepted

27,000

25,000
Number of federal tax liens filed

470,602

446,378
Number of notices of levy requested on 3rd parties:

869,196

590,249
Number of seizures

436

323

IRS budget and workforce levels when compared to fiscal year 2016 – down.

IRS’s actual expenditures were $11.5 billion for overall operations in Fiscal Year (FY) 2017, down from more than $11.7 billion in FY 2016

In FY 2017, the IRS used 76,832 full-time equivalent positions in conducting its work, a decrease of 14.9 percent from 2012.

The National Taxpayer Advocate also sheds some light on the current situation.

Taxpayer Services Reduced.

National Taxpayer Advocate Nina Olson, informed lawmakers recently that only about 4 in every 10 callers to IRS hotlines will be able to get through to a live operator to answer their tax questions during the fiscal 2018 filing season. The IRS plans to reduce telephone interactions with taxpayers and rely instead on more web-based services and tax practitioners. “Because of the IRS’s archaic telephone technology and operations, taxpayers face long wait times with the worry that the IRS’s telephone assistors will not be able to answer their questions if they are able to get through.”

Private Debt Collectors – a negative cash flow.

According to the Taxpayer Advocate, the use of Private Debt Collectors is not generating net revenues, appears to have been implemented inconsistently with the law, and burdens those taxpayers experiencing economic hardship. The Taxpayer advocate summarizes that according to the IRS, for Fiscal Year 2017, the Private Debt Collection program generated $6.7 million of payments from  taxpayers, but cost $20 million. At the same time, the IRS pays commissions to PCAs on payments from taxpayers that are attributable to IRS, rather than Private Debt Collector action.

Offer in Compromise Program – Still needs improvement.

The IRS continues to hold an exaggerated view of  taxpayer’s reasonable collection potential. This results in the IRS rejecting an Offer in Compromise which should have otherwise been accepted. The Offer in Compromise may be considered a potential alternative to IRS collection action.  However, an Offer in Compromise, absent special circumstances,  will not be accepted if the IRS believes the liability can be paid in full as a lump sum or through a payment agreement. This involves determining the taxpayer’s reasonable collection potential.

Citing a prior 2004 report, the Taxpayer Advocate advised that the IRS  is often overly optimistic in its view as to the collection potential from taxpayers with rejected offers.  Now, updated with the results of a current study,  the Taxpayer Advocate, advises that, “The IRS secures at least as much (often more) than the offered amount in 60 percent of the OICs it rejects. However, in the remaining 40 percent, the IRS has only collected a third of the amount offered through subsequent payments.  Overall, even after we factor in refunds offset to satisfy the delinquent liabilities, the IRS still collects significantly less than the amount offered on rejected or returned OICs” (emphasis added).

The Taxpayer Advocate, continued: “…when examining rejected OICs, the IRS determined reasonable collection potential was over 15 times the amount offered, and over 40 times the amount actually collected. While the rejection of the OIC is sometimes appropriate, in many instances, the IRS often has an exaggerated view of the taxpayer’s reasonable collection potential, with the dollars collected being less than the amount offered, and significantly less than the amount the IRS determined as the taxpayer’s reasonable collection potential.”

The Taxpayer Advocate recommended that the IRS should consider devoting more resources to obtaining acceptable OICs from taxpayers who seek to compromise their liabilities. See Offer in Compromise acceptance rate, and  IRS Offer in Compromise – will mine be accepted or rejected?

Reduced Training and reduction in competent advice and taxpayer services.

“The IRS has reduced its employee training budget by nearly 75 percent since fiscal year (FY) 2009. Not only has the budget for training drastically declined, but the way in which employees receive that training has shifted from in-person face-to-face training to virtual training. IRS employees cannot be expected to provide competent advice and adequate service to taxpayers who present myriad issues when they do not receive training timely or effectively. The downstream consequences to the IRS and taxpayers, including rework, misleading or incomplete advice, improper compliance actions, and distrust in the IRS serve to further degrade the relationship between the IRS and taxpayers, and violate the taxpayer rights to be informed, to quality service, and to a fair and just tax system. Employees must receive timely, comprehensive, and effective training in order to protect taxpayer rights and provide top quality service to taxpayers.” (Taxpayer Advocate Service – 2017 Annual Report to Congress).

For additional problems and recommendations, see the NATIONAL TAXPAYER ADVOCATE

Annual Report to Congress 2017.

 

 

The Filing of Federal Tax Liens and Abuse of Discretion.

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Filing of a Federal Tax Lien as a condition for an installment agreement was an abuse of discretion.

A sculptor (working in cast bronze) filed his individual federal income tax return and reported a balance of tax due of $163,928.00. He did not pay the balance. The IRS assessed the tax, penalties and interest. A notice of intent to levy was issued and the taxpayer requested and received a collection due process hearing.

During the hearing, the taxpayer agreed with the terms of an installment agreement which would full pay the liability with monthly installment payments of $5,500.00. However, the IRS Appeals Officer insisted on the filing of a notice of federal tax lien as a condition of entering into such installment agreement. Taxpayer had negligible assets. The only source for payment of the balance owing was taxpayer’s income from his business.

Tax Lien Filing would destroy the business.

The taxpayer’s legal counsel advised the IRS Appeals Officer that the filing of a tax federal lien would destroy the taxpayer’s business rendering him unable to satisfy the terms of the installment agreement. Specifically, the taxpayer had a longstanding business relationship with a foundry (supplier) which provided the taxpayer with 30% to 50% discounts from market prices.

The federal tax lien filing would adversely impact production, sales and payment for materials.

The filing of the tax lien would adversely impact all sides of the cash flow equation. It would drastically alter the discounts previously provided. The taxpayer would be required to immediately pay for all work previously produced, and additionally have to make “up front” payments for all future work. At the other end of the spectrum, the notice of tax lien would cause buyers to cease financing petitioner by paying up front commissions out of concern that they might never receive the artwork because of the taxpayer’s financial difficulties, or because the artwork may be encumbered by the tax lien. Further, the filing of a tax lien would even adversely affect the taxpayer’s ability to pay the foundry (supplier) using his American Express credit card (to pay for materials and casting costs) because of the detrimental effect on his credit rating.

IRS Appeals Ignores Economic Realities.

The IRS Appeals Officer essentially ignored all of the above factors. Instead, Appeals issued a notice of determination sustaining the notice of levy and that a federal tax lien would be filed to “protect the government’s interest”.

I have found that the phrases “best interest of the government”, and “protect the governments interest” are phrases routinely used by the IRS in collection cases. However, they are in fact used with little or no actual mental thought process or concern as to the real world consequences.

In this case, the taxpayer filed a timely Tax Court proceeding alleging that the Appeals Officer abused her discretion by requiring that a notice of lien be filed in conjunction with the installment agreement.

The Tax Court held that the Appeals officer was in error by concluding that the Internal Revenue Manual required the filing of a notice of federal tax lien under the circumstances of this case. The Tax Court found that under the facts of this case, the Appeals determination was an “abuse of discretion” (i.e., The Appeals Officer’s determination was arbitrary, capricious, or without sound basis in fact or law).

The Tax Court found that the Appeals officer gave little, if any, consideration to petitioner’s arguments and, instead, decided a notice of lien should be filed because of her mistaken belief that she lacked discretion to do otherwise under the IRM. The Court found that the Appeals officer did not balance the need for the efficient collection of taxes with petitioner’s legitimate concern that the collection action (i.e., the notice of lien) be no more intrusive than necessary, as required by section Internal Revenue Code Section 6330(c)(3)(C). By failing to perform that function, she abused her discretion in sustaining the levy against the taxpayer’s assets.

In this case, the Tax Court rejected the determination of Appeals, and remanded the case to Appeals for a supplemental collection due process hearing with directions that proper balancing of factors be done (i.e., efficient collection of the liability vs. taxpayer’s concern that collection action be no more intrusive than necessary).

T.C. Memo. 2014-239
UNITED STATES TAX COURT
JAMES B. BUDISH, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4243-12L. Filed November 24, 2014.

Trust Fund Penalty - Do you really owe it? Erroneous liability

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Are you actually liable for the Trust Fund Penalty Assessment?  Is the IRS billing you for a liability which you shouldn’t be paying? Has a Tax Lien been filed against you for a tax bill you shouldn’t owe?

The Taxpayer Advocate Service has posted case results in which a widow’s social security payments were being levied for employment taxes owed by her deceased husband’s business, which had closed.  The Trust Fund Penalty assessment had erroneously been made against the widow.

The business was a Corporation and the deceased husband’s accountant had told the widow to pay the outstanding payroll taxes. She had sold her home and paid as much as she could. She kept paying until she had sold her assets, didn’t have anything else to sell, and no money to pay with. Then the IRS levied her Social Security Payments, causing undue hardship.

The accountant was wrong! The surviving spouse was not a Responsible Person. She was not liable! The levy was released. It is not known whether the Taxpayer Advocate Service, inter-alia, filed claims for refund and sought abatement of the erroneous assessment (which is beyond merely obtaining a stay based on Currently Not Collectible). Such would have been recommended by me.

If you have a tax problem, I can be reached at 1-866-482-9767. The consultation is free.