Once the IRS makes an assessment against a taxpayer, it is required to send a series of notices to the taxpayer before it takes enforced collection action.
Substitute for Return
When a taxpayer fails to file a tax return, the IRS will sometimes file the return for the taxpayer. The IRS refers to this as a “substitute for return”. The IRS uses third party reporting information (W-2, Forms 1099s, etc.) provided to it to compute the taxpayer’s taxes due. When the IRS computes the taxes due, it does so using the filing status most advantageous to the IRS, ignores any tax credits the taxpayer may be eligible to claim, and when computing gains on sales, the tax is based on the gross proceeds and the IRS ignores the taxpayer’s cost. The IRS uses SFRs to motivate the taxpayer to file their own return. The IRS thinking is that when the taxpayer sees the taxes due computed by the SFR returns, he or she will file a return simply to reduce their tax liability.
Assessment of Taxes
After the taxpayer files their return or an SFR return is prepared for them by the IRS, the IRS assesses the tax due it. Once taxes are assessed, the series of IRS collection notices begin.
Notice of Intent to Levy
When a taxpayer has failed to respond to the series of IRS notices, the IRS’s “final” notice will state its intent to levy against the taxpayer. “Levy” is just another word for “seize”. The two most common types of levies are garnishment of bank accounts and wages. A levy is used to collect the taxes due the IRS.
A bank levy is that the IRS will seize whatever funds are in the taxpayer’s bank account as of the date of the levy notice. It’s a one and done process, unless the IRS sends the bank another levy notice.
A bank levy differs from a wage garnishment. When a taxpayer’s wages are garnished by the IRS, the wage garnishment continues indefinitely until the IRS debt is satisfied.
Action Steps to be Taken by Taxpayer Upon Receipt of Intent to Levy Notice
Unfortunately, far too many taxpayers do not respond to IRS notices. They often do not open IRS notices sent to them realizing it they often are not good news. Once their bank accounts are seized or wages are garnished, they get religion and want to resolve their IRS tax debt. Unfortunately, ignoring IRS notices has simply added to the taxes, interest and penalties they owe and certain appeal rights may have been lost.
IRS notices should never be ignored. Doing so only exacerbates the problem. The taxpayer’s response, along with a copy of the notice, should be sent by certified mail using the envelope provided by the IRS. The purpose in sending a response is to demonstrate that the taxpayer is concerned about their taxes and is not ignoring them. Depending upon various factors, a taxpayer response may place a hold on IRS collections.
Possible IRS Resolution Alternatives
- Installment Agreement – The IRS gives the taxpayer the right to pay taxes in installments.
- Audit Reconsideration – In some limited cases, the IRS permits audits of returns after collection has begun.
- Hardship on Taxpayer – A hardship exists if levy action prevents the taxpayer from meeting necessary living expenses. The IRS should not undertake collection action if a hardship is present.
- Currently not Collectible – If a taxpayer cannot pay taxes owed without placing them in a financial hardship (unable to pay necessary living expenses), then the IRS will defer collection by classifying the case as “currently not collectible (CNC)”. If this is done, collection is deferred until sometime in the future (usually two years).
- Bankruptcy – Bankruptcy will discharge taxes in some cases. We recommend that an experienced bankruptcy attorney work with an experienced tax resolution specialist.
- Offers in Compromise – The Internal Revenue Code permits the IRS to accept an amount less than the full amount if there is doubt as to collectibility, and/or doubt as to liability. While OICs are publicized by many firms on cable TV and the Internet, be aware that of the 7.4 million tax resolution cases settled by the IRS according to its 2020 news report, 14,288 taxpayers got accepted into the OIC program. That is less than 1/4 of 1% of all cases settled by the IRS. An OIC should only be submitted if there is a strong possibility that it will be accepted due to (1) the fact that OIC submissions toll the statute of limitations, giving the IRS additional time to collect the taxes due it; and (2) require a significant time and financial investment by the taxpayer.
- Abatement of Penalties – In almost all cases, an abatement of penalties should be sought. It is easy to request that penalties be abated, and the abatement of penalties could substantially reduce the amount of a taxpayer’s total tax liability.
- Taxpayer Advocate – The Advocate will help with almost everything except negotiating a payout with a Revenue Officer.
- Possibility of Amended Returns – Original returns should be reviewed to determine if amended returns will reduce tax liability. If so, they often should be prepared and filed.
- Has the IRS Made a Valid Assessment? Check the statute of limitations. Generally, an assessment must be made within three years from the date the return was filed, plus any extension executed by the taxpayer. In addition, the IRS has ten years after the taxes are assessed to collect the taxes. If the IRS has not followed the proper procedure, the assessment may not be valid, and the taxes cannot be collected.
- Form 911 – The Taxpayer’s Emergency Number. This form requests that a Taxpayer Assistance Order be issued to stop certain action being taken by the IRS. The taxpayer must be “suffering or about to suffer a significant hardship as a result of the manner in which the internal revenue laws are being administered.”
Tax Tip #1
While the use of the above alternatives was until a year ago fairly easy to avail oneself of, due to the pandemic, IRS budget cuts, early retirements, and IRS inefficiencies, many of the above are very difficult to implement due to the inability to reach someone at the IRS.
Tax Tip #2
At all levels of the IRS, the taxpayer has certain rights, and the taxpayer should take full advantage of these rights. If a taxpayer owes taxes, it is usually in the taxpayer’s best interest to seek professional advice in helping to resolve the matter. Carefully choose your tax professional . . . not all tax professionals, attorneys, CPAs, and enrolled agents have the experience and training in resolving IRS tax problems.
Tax Tip #3
All communications with the IRS need to be in writing and you need to be able to prove the mailing of the notice, return, payment, etc. to the IRS. If you are speaking with an IRS agent on the phone, be sure to document the name and proper spelling of the agent’s surname with whom you are speaking and the agent’s IRS identification number, the date of the call, and the issues and agreements reached during that call.
Tax Tip #4
If a person instructs you that you qualify for an OIC and a Form 433-A(OIC) has not been prepared and reviewed by you and the tax representative, run, don’t walk away from that representative. There is no way that one can determine if a person qualifies for an OIC without doing a financial information statement (FIS). Analyzing a FIS is also very helpful in determining if the taxpayer qualifies for an installment agreement, what type of an installment agreement or CNC status.
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
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BE SURE TO READ THE DISCLAIMER PAGE: Tax laws, IRS rules and regulations change frequently. Although we hope you’ll find this information helpful, this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher shall not assume liability for any losses, injuries, or damages from the display or use of this information.
About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.
A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.