Administrative File Rule

RRA98 section 1001(a)(4)

The United States Court of Appeals for the Eighth Circuit ruled on June 8, 2021 in Jason Stewart, Kristy Stewart v. Comm’r of Internal Revenue at Docket No. 19-3786 that the taxpayer was not entitled to a new Appeals hearing because the Revenue Officer included notes and correspondence about a meeting with the taxpayers’ attorney in the official file that was later made available to the Appeals Settlement Officer who ultimately reviewed the case. Over time there has been an attempt to “preserve” the independence of settlement officers in appeals from other parts of the IRS, the Court explains. The IRS Restructuring and Reform Act of 1998 (RRA98), further attempted to secure this goal. Independence generally includes separation of investigation and adjudicative functions. It has been ruled that certain comments and statements, particularly about the credibility or demeanor of a taxpayer or their representative and their level of cooperation, are generally prohibited. In this case, the Revenue Officer appeared unannounced at the taxpayers’ attorney’s office. Notes about the meeting, including comments from the lawyer that he would not supply financial information to the Revenue Officer on request, but would only supply it to IRS Appeals, were included in the file for Appeal’s review. A letter from the Revenue Officer was placed in the administrative file the same day indicating that the lawyer refused to provide financial information and directed the IRS Officer to leave. The taxpayers argued that they should have a new hearing and further that the Collections Division should have ceased any continued pursuit of financial information once the Appeal’s request was submitted. The Court disagreed. Relying on an exception set out in Rev. Proc. 2012-18, the Court ruled that the inclusion of the notes was allowed because they were contemporaneous statements pertinent to consideration of the case. These statements were deemed reminders of the need to get financials and what kind of effort might be required to do so. Additionally, the Court ruled that it was not inappropriate to continue investigation after the filing of a due-process hearing. Rather, the Court ruled that even though Appeals was involved, it would be necessary for the field Revenue Officer to continue to gather financial information and work with the taxpayer, so that the IRS could properly evaluate matters during the Appeal’s hearing.

Just filed a tax return and have a balance due you can’t pay?

You have many opportunities to deal with this situation – but the most important thing to remember is that taking action sooner is better than waiting.  Your timely response can provide you with an opportunity to review your financial situation and determine if it is best to use other resources to retire your tax debt.  Tax liens are not filed right away and as such, it may be in your best interest to borrow against the equity in your real estate.  Once a tax lien is filed, which happens in many cases, your likelihood of getting a loan is greatly reduced.

 Should you not have the ability to borrow money to pay off the tax debt, the time immediately after filing your return is the best time to analyze your financial situation to determine what options you have.  Once the IRS begins to send you notices, they will ultimately issue a Final Notice of Intent to Levy and then they have the right to seize assets and levy income.

 If a professional is assisting you with your financial analysis, they are working to put together a Collection Information Statement.  This document will allow the person assisting you to determine if you are a candidate to submit a settlement proposal to the IRS – known as an Offer in Compromise.  Nobody can tell you that you are a good candidate for a settlement unless they complete a full financial analysis and know how much you owe in taxes, interest and penalties.

 The Collection Information Statement is not only utilized to determine if you are a candidate for an Offer in Compromise settlement, but this document is also used to determine what you can pay on an Installment Agreement, a Partial Payment Installment Agreement, or if you are a candidate for the Currently Not Collectible Status.

 An Installment Agreement is an agreement to full pay your outstanding balance plus interest and penalties over a period of time.  There are instances where you do not have to disclose all of your financials in order to set up an Installment Agreement.  This is typically based on the amount you owe the IRS and the amount of time remaining for the IRS to collect the debt – the statute of limitations on collections.

 A Partial Payment Installment Agreement is an agreement where you will pay the IRS a monthly payment, but that payment amount would not pay off the entire debt before the IRS statute of limitations to collect runs out.  Because there is a possibility that the IRS will not collect all of the tax liability from you, they reserve the right to review your financial situation every couple of years.

 In addition to the above, many taxpayers qualify for placement in Currently Not Collectible status.  This status is given when you substantiate to the IRS through financial disclosure on a Collection Information Statement that you do not have any equity in assets, nor do you have the ability to make a monthly payment.  When placed in this status your debt continues to grow from accrual of interest and penalties.  The IRS will review your financial situation from time to time to determine if you can begin paying something toward the tax debt.

 Given the fact that the IRS has the power to levy your wages or seize assets if they issue a Final Notice of Intent to Levy, it is important to be aware of the status of collections of your tax debt.  When the Final Notice of Intent to Levy is issued, the taxpayer has the right to have the matter reviewed by Appeals Division of the IRS.  This review is independent of the Collection Division and the reviewing officer has the ability to establish one of the plans above.  Sometimes this is advantageous as the taxpayer’s matter is assigned to a single caseworker rather than a service center where the taxpayer has less of an opportunity to work directly with an IRS employee.

 As can be seen from the above, there are many options to deal with your tax obligations.  The situation can only get better by dealing with it sooner.  If you have tax liabilities you can’t pay, please contact us.  We would be happy to provide you with guidance to determine how best to proceed.