IRS Tax Facts Senior Tax Consultant from Find Accountants LTD Tax Resolution has put together a fact list for taxpayers and practitioners pertaining to recent Internal Revenue Service collection information. What follows is the dispelling of myths regarding penalty abatements and Offer in Compromise determinations, clarification on the effectiveness of various collection options, and the most recent collection initiatives by the IRS. Should you have any questions regarding any of these facts or regarding any IRS collection issues, please contact Find Accountants LTD for assistance.
The Internal Revenue Service estimates that the tax gap between what taxpayers should pay versus what is actually paid timely is $345 billion. Even after subtracting revenue obtained through enforcement actions and other late payments, the Service estimated the net tax gap to be approximately $290 billion. This corresponds to a net noncompliance rate of 13.7 percent.
With over 2 million balance due accounts, the Offer in Compromise program is applicable to a miniscule number of taxpayers. The number of Offers in Compromise accepted by the Internal Revenue Service decreased by 72 percent, from 38,642 in FY 2001 to 10,677 in FY 2008. The Internal Revenue Service accepted 34 percent of Offer in Compromises submitted in FY 2001, but only 24 percent of the Offers in Compromise submitted in FY 2008.
The passage of the American Jobs Creation Act of 2004 allowed for Partial Payment Installment Agreements (PPIA). This addition allows taxpayers who cannot fully pay their tax debts during the statutory ten-year period for collection to pay a portion of their tax debts in installments on a monthly basis until the collection statute expires. The PPIA still remains a largely underutilized collection alternative. In FY 2008, the Internal Revenue Service granted 2,624,487 Installment Agreements compared with only 22,555 PPIAs during the same time (less than one percent).
According to TIGTA, over a 12-month period ending June 30, 2008, the Internal Revenue Service failed to send the notification to taxpayers’ representatives of the filing of lien notices in up to 30 percent of the cases reviewed. TIGTA estimated that 45,554 taxpayer representatives may not have been provided lien notices, resulting in potential violations of the taxpayers’ right to have their representative notified of the filing of a lien notice.
The Internal Revenue Service has committed to expediting requests for Subordinations and Discharges of Federal Tax Liens when taxpayers seek to refinance or sell their homes. At the same time, the number of lien filings steadily increased from 683,659 filed in 2007 to 768,168 in 2008.
While an Offer in Compromise is pending and under consideration, the statute of limitations on collection is suspended for the time the Offer is under consideration. Since Offers in Compromise may take up to a year to investigate (Appeals may use yet an additional year of investigation, if necessary), it is prudent to note the collection statute expiration date prior to the filing of an Offer.
One Year Rule: Taxpayers who cannot fully repay their liabilities within five years may be given up to one year to modify or eliminate excessive necessary expenses. By modifying or eliminating some conditional expenses, a taxpayer may be able to full pay the liability plus accruals within the five-year limit. This would enable a taxpayer to retain some conditional expenses.
The Small Business and Work Opportunity Tax Act of 2007 provided for modification of the Collection Due Process procedures for employment tax liabilities. The change amended IRC § 6330(f) to permit levy to collect employment taxes without first giving a taxpayer a pre-levy CDP notice if the levy is a “disqualified employment tax levy” (DETL). The DETL is a levy served to collect the employment tax liability of a taxpayer if that taxpayer or a predecessor requested a CDP hearing under IRC 6330 for unpaid employment taxes arising in the two-year period prior to the beginning of the taxable period to be collected by the levy.
Prior to September 4, 2009, the Internal Revenue Manual required the taxpayer to pay in full the underlying tax prior to granting an FTP (failure to pay) penalty abatement. The Internal Revenue Service agreed to change its “pay first” policy and now makes the abatement determination on reasonable cause criteria and prudence without requiring the full tax payment.
The minimum criterion for the processability of an Offer in Compromise has been revised. Taxpayers are given one opportunity to become current with estimated tax payments and federal tax deposits after submitting the initial Offer. In addition, businesses are no longer required to be in compliance for two quarters prior to submitting the Offer.
Due to the current economic climate, Offers in Compromise for individual tax liabilities that are to be rejected solely on the basis of a disagreement in the equity amount in the taxpayer’s real property will be referred to a separate group, the Non-Economic Hardship-Effective Tax Administration Group (Austin, TX), for additional review prior to rejection.
Interest will be abated by the IRS only if the interest is attributable to unreasonable errors and delays by the Service.