The Tax Court ruled in Warren Keith Jackson and Barbara Ann Jackson v. Comm’r of Internal Revenue, T.C. Memo 2022-50, filed May 12, 2022 that it is not an abuse of discretion for IRS Appeals to sustain a proposed levy and deny a proposal of an installment agreement for a taxpayer that has failed to make required estimated tax payments. Taxpayers timely filed and failed to pay multiple years of 1040 income tax liabilities that totaled $128,095 as of 2018. Taxpayers submitted a proposal for an installment agreement. A field Revenue Officer rejected the proposal of $556 per month for the installment agreement and cited that the taxpayers had “sufficient cash or equity in assets to fully or partially pay the balance owed.” Further, that rejection stated that taxpayers needed to make estimated tax payments to qualify for an installment agreement. Given the amount of the debt and monthly proposal, this was a Partial Payment Installment Agreement which requires the IRS to address equity prior to establishment of the payment agreement. After the IRS rejected the agreement, a levy notice with appeal rights was issued. On Appeal, the IRS noted that the taxpayers did not appear to be current on estimates and that they had equity equal to $98,000 in real property. Ultimately Appeals sustained the levy because of non-response. The Tax Court in its review made clear that it has consistently held that an Appeals officer does not abuse their discretion by declining a collection alternative for taxpayers that fail to remain compliant with current taxes. The fundamental take away is that the taxpayer must fix the problem by showing they are capable of paying their current taxes, prior to seeking a collection alternative.
Increased collection activity against federal employees’ Thrift Savings Plans (TSP)
The National Taxpayer Advocate has reported in its Fiscal Year 2016 Objectives report to Congress that a proposal by the IRS to expand collection efforts against retirement plans of federal employees “infringes on taxpayers’ rights to a fair and just tax system.” Federal employees have the ability to participate in the Thrift Savings Plan (TSP), which is similar to a private sector 401(k) plan in that employee savings are tax deferred and qualify for some level of employer, (in this case the federal government), matching.
Taxpayers, including federal government employees, who owe taxes are subject to IRS levy on their property and rights to property. This power extends to retirement accounts, including the TSP. However, given the importance of retirement savings to an individual’s welfare during old age, the IRS has historically regarded a levy on retirement funds as a special case that requires additional scrutiny and a manager’s approval.
Essentially, before a field Revenue Officer can levy a retirement benefit, the agent would determine what property is available to levy – both retirement and non-retirement, determine if the taxpayer has acted in a flagrant manner, and finally determine if the retirement funds are required for necessary living expenses. There are distinct problems with these factors, but that has been partially mitigated by other requirements prior to issuance of the levy. The field Revenue Officer must either secure the signature of the Area Director of Field collections, or secure a manager’s approval.
In order to obtain a collection manager’s approval in this instance, the field Revenue Officer is required to draft a detailed memo that sets out a summary of all information provided to the agent by the taxpayer, whether the taxpayer has exhibited any flagrant behavior, and more importantly, other collection alternatives that have been considered and rejected. In other words, the retirement account falls into a secondary level of collection after the field Revenue Officer reviews other property or income to levy.
Recent activity at the IRS has created a pilot program to levy TSP accounts. Most importantly, and of greatest concern, this program will be administered by ACS employees. ACS is the Automated Collection System unit. When a taxpayer’s account is in ACS, it is not assigned to a single employee for collection, rather, there are various employees in functions and units that work on similar matters. These employees do not receive the same level of financial analysis training as a field Revenue Officer.
In addition to the reduced training received by ACS employees, the pilot program calls for ACS employees to document any information that a retirement is impending and that the taxpayer will be relying on funds from the TSP for necessary living expenses. This lacks any analysis regarding other property the taxpayer may have that would be available to collect from, or if the taxpayer acted in a flagrant manner, all requirements of a field Revenue Officer.
Finally, the pilot program requires managerial approval prior to levy on retirement accounts – but that is a requirement of many collection actions by ACS employees – hardly elevating these situation to a special case status. What is not referenced is the required memo to the manager detailing information provided by the taxpayer and collection alternatives considered and rejected before proposing levy to the retirement account – all requirements of the field Revenue Officer.
In summary, the IRS is targeting one type of retirement account, the TSP, for increased collection activity, over all others. ACS does not have the ability to levy any other retirement accounts at this time. The National Taxpayer Advocate believes that this pilot program undermines both taxpayer rights and retirement security policy. As such, the National Taxpayer Advocate is going to continue to push the IRS to abandon the Thrift Savings Plan levy pilot program If the IRS adopts the program, the National Taxpayer Advocate is prepared to accept all TSP levy cases coming from ACS. Taxpayers should take advantage of this opportunity to protect their retirement income. Additionally, where possible, taxpayers should seek assistance from the Appeals division in order to entertain collection alternatives through Appeals’ Collection Due Process hearing procedures. Feel free to contact Caraker Law Firm, P.C. with any questions you may have.
Why do I have to owe over $10,000 to get help with my IRS tax debt?
Everyone has seen on television, or heard on the radio, advertisments for assistance with owing the IRS back taxes. Turn on the TV late at night to watch reruns of your favorite show and you’re bound to see at least one. But they all have that caveat, saying that you must owe the IRS over $10,000 for them to help you, but why?
The fact of the matter is that you don’t need to owe a certain amount to have representation to assist with your tax debt – at least not from our firm. If you listen to the television or radio you would think that there is no way to help someone who owes less than this amount. Most of the businesses that advertise in this way are looking to submit a settlement proposal, known as an Offer in Compromise, to the IRS on your behalf. This may or may not be possible, but generally that is the only service these businesses provide. What they know is that due to the manner in which the IRS settles debt, it is nearly impossible to settle a small tax debt. However, here are several situations that our office sees frequently where taxpayers have a small tax debt, but still need help sorting through their options to come into compliance:
- Sometimes a client may owe the government a small amount, but has unfiled returns and is preparing to file bankruptcy to discharge health care debt or other obligations. The bankruptcy code requires the taxpayer to file their last three returns in order to qualify for the bankruptcy. After filing, the client anticipates owing more. Perhaps that is a small amount or a large amount. Regardless, this client needs help with those taxes because they will not be discharged in the bankruptcy.
- A client may owe a small amount based on a return filed by the government – known as a Substitute for Return (SFR). However, the client will owe much more later when a proper return is filed. This can happen when a client is self-employed and receives a few 1099’s that comprise a small amount of the taxpayer’s overall revenue. Once the return is properly completed, there may be a different picture.
- Sometimes a client owes tax debt that their spouse created and it is simply unfair for them to be held responsible for the debt. That client may want to be relieved from the obligation – no matter how small – through the Innocent Spouse Relief process. Alternatively, a spouse may be harmed because his or her refund was offset to their spouses tax debt. In this instance, this client may need assistance filing an Injured Spouse claim.
- A client may have a few thousand dollar tax debt created by automated Exam at the IRS, but if the client merely pays it or sets up a payment agreement to resolve the balance, the taxpayer may be setting himself or herself up for problems with future tax return positions. If your expense or other deduction is valid and the IRS disallowed it, it may be worth fighting to substantiate it so you do not create a record showing you agreed with the claim or deduction being disallowed. Therefore, your representative could make arguments to assist in your exam and protect your position for later.
- Some clients owe less than $10,000 and are interested in relieving themselves from the burdens of a tax lien. It is now possible to establish a Direct Debit Installment Agreement and apply for a withdrawal of the tax lien. There are specific procedures for this doing this must be met to qualify, but it is possible. As a matter of fact, it is now possible to accomplish this if you owe up to $25,000.
- A client may owe a small tax debt which was originally much larger and triggered the filing of a tax lien. Though the debt is paid down, it is preventing the sale of a piece of real estate because there is not enough equity to retire the tax debt at closing. These clients need assistance with a request to Discharge Property from Federal Tax Lien. This will clear title to the property and allow for the closing, even though the entire tax debt is not being paid off in full.
- Some of our clients only owe a couple of thousand dollars, but have many years of unfiled tax returns and anticipate owing much more. A settlement proposal, Offer in Compromise, may be appropriate. However, it is impossible to know if that is the case until the taxpayer knows the total owed and a financial analysis is performed which includes a review of income, expenses and equity in assets.
- A client may need assistance when a wage levy is in place, but the balance on their total tax debt is not larger than $10,000. In those instance, it is very likely that the taxpayer can be moved to a voluntary payment agreement if all returns are filed. Even if all returns are not filed, substantiation to the IRS of income and expenses could likely result in a partial levy release to relieve the client of some, or all of the wage levy.
- If any of the above is similar to your situation, or you have some other tax problem, we will be happy to help you, regardless of the size of your debt. Just give us a call.
Under an IRS levy and think there is nothing you can do about it?
Unfortunately, this feeling of hopelessness is an all too common feeling of clients in this situation. This blog intends to provide educational articles about tax topics, rather than playing on emotions as many firms do in the tax controversy area. The reality is that these issues are emotional. Unfortunately, an emotional issue can trigger irrational decisions. One irrational decision is buying into the promise of a solicitor that your tax problems are easily resolved because you “qualify” for a settlement. The fact is that everyone can “qualify” for a settlement. That’s the wrong analysis to start with. And, when a firm is approached with a levy situation, it is premature to analyze whether or not a client qualifies for a settlement.
At the time a taxpayer is under levy, the proper analysis is whether or not the taxpayer can get immediate relief of some sort from the levy. If the levy is affecting the taxpayer’s wages, then the taxpayer’s representative should work through a detailed and documented financial analysis to determine if there is an opportunity for either immediate relief from the entire levy or partial levy relief. If a taxpayer substantiates that the levy creates economic hardship, then relief may be possible.
Sometimes clients under levy have not prepared all of their tax returns and as such, believe that there is no way to remove the levy until their tax returns are filed. This simply is not true. While it may or may not be possible to acquire full relief, an analysis of income and expenses utilizing IRS standards will allow for the taxpayer to obtain at least partial relief to pay for many expenses. These expenses can include basic necessities such as food, clothing, medicines and health insurance premiums. Payments for housing and utilities will be allowed up to a maximum amount based on county of residence and household size. Additional expenses such as car payments and vehicle operational expenses, like gas and insurance, will also be allowed up to a standardized amount.
After seeking partial levy relief, it is then appropriate to file tax returns as soon as possible. Once the taxpayer has filed all outstanding tax returns, the IRS then makes available a variety of options that are not available when a taxpayer has failed to file all returns. At that point, the representative can assist the taxpayer with an analysis of their income, expenses and equity in assets to determine if the taxpayer is a good candidate for an installment agreement, a partial payment installment agreement, an Offer in Compromise (settlement), or currently not collectible status. It is ALWAYS best to go through this analysis as there are opportunities to come into compliance with the tax laws, move yourself out from under the enforcement action, such as a wage levy, and still address the old tax debt. Many would be surprised to learn that the IRS does work with taxpayers to resolve many issues in a way that isn’t nearly as traumatic as believed.
Obviously, the best case scenario is to take action before a levy is in place, however, once that occurs, there is always something that can be done to make the situation more bearable. We encourage you to contact our firm if you have any questions or concerns about these matters.
Have You Received an IRS Notice of Intent to Levy?
Unfortunately, this question is more confusing than you would think. The reality is that once a taxpayer owes the federal government, a series of notices will be sent to the taxpayer by the IRS demanding payment and referencing the federal government’s ability to levy, or seize the taxpayer’s assets. While the taxpayer is always encouraged to pay his or her indebtedness to the U.S. government, the risk of enforcement action through levy of assets may only happen if certain statutory requirements are met – even though many IRS notices mention that the government may seize or levy assets.
The Internal Revenue Code authorizes the IRS to levy or seize assets in order to satisfy delinquent taxes. While there is no need for the government to file a lawsuit in order to proceed with such a seizure, it must abide by proper statutory guidelines. The IRS must send a Final Notice of Intent to Levy and Notice of Your Right to a Hearing at least 30 days prior to actual seizure of assets. The IRS may levy your State tax refund prior to issuing a final notice, but must provide you with a right to a hearing, after. The final notice may be left at your home or business, provided to you in person, or sent to your last known address by certified or registered mail, return receipt requested.
Given the importance of your hearing rights explained below, if the IRS has created a debt for you a few years ago, or you failed to file returns for a period of time after a return with a balance due was filed, then you need to make sure the IRS has your proper address. This can be done by filing Form 8822 – Change of Address. The IRS is most likely to send a Final Notice of Intent to Levy and Notice of Your Right to a Hearing to the address on your last filed tax return. If you have moved since this return was filed and your mail forwarding notice has expired, you will miss your right to a hearing. Remember, the IRS may have current income source information for you – such as W-2 or 1099 information. So, making sure the government has your proper address makes sure you are properly advised of your rights and provides you with an opportunity to address your debt before the IRS enforces collection action through a wage or bank levy, for example.
A Final Notice of Intent to Levy is only issued one time per tax period. Once issued, a 30 day clock starts. Every taxpayer has the opportunity during this window of time to request a Collection Due Process hearing. That hearing is held by the Appeals Division of the IRS, an independent division from the Collections Division. When a taxpayer requests a hearing after receiving a final notice, Appeals will make sure that all proper statutory requirements were followed by the Collections Division. Further, and maybe most important, the Appeals Division can entertain collection alternatives at this hearing. This means that you can work with Appeals to set up an installment agreement, a partial payment installment agreement, place your account in currently not collectible status, or work with the taxpayer to process an Offer in Compromise. This is a very important taxpayer right and no taxpayer should miss this opportunity to bring their matters into compliance and eliminate the uncertainty that having a delinquent tax matter creates. Please contact our office if you have any questions about these matters.
Caraker Law Firm, P.C. 