CPAs, Enrolled Agents and attorneys can represent taxpayers at all levels before the IRS. The first step in resolving tax disputes with the IRS is to understand the taxpayer’s rights and the alternative defenses available. Although understaffed, Collections is still a significant activity of the IRS.
There are specific procedures the IRS must follow during the collection process, beginning with an established time frame for serving notices to taxpayers. These procedures are designed to provide taxpayers sufficient time to pay taxes before the IRS files a lien. And it’s important to note that the IRS is not required to prove that the notices are actually received by the taxpayer. Simply establishing the date the notices were mailed is sufficient.
The IRS has 10 years to collect delinquent taxes from the date they are assessed – or indefinitely, in the case of fraud. Since penalties and interest accrue during the collection process, they can be a significant portion of the overall debt.
A federal tax lien against taxpayer property is created with the first demand notice if the taxpayer has failed to pay taxes. The first notice is issued once the IRS determines that taxes are delinquent. It states the balance due and requests payment in 10 days. The IRS will mail three additional notices over a period of several weeks, with increasingly threatening language. Finally, if the delinquent taxes remain unpaid after those notices, the IRS issues Letter 1058, “Final Notice of Intent to Levy.” This is the time that the IRS typically records the tax lien that was previously established with the first notice, making a legal claim to property as security for the payment of the taxes.
If the taxpayer doesn’t respond within 30 days, the IRS will enforce its lien by levying the taxpayer’s assets. It is critical for taxpayer to take action and respond to the final notice within the 30-day time period provided.
Once the IRS has demanded full payment in its initial notice, or at any time up to and including the filing of a tax lien or notice of levy, the taxpayer may either voluntarily comply by making payment, or by seeking alternative payment arrangements.
There are primarily three possible arrangements. They are to have the tax debt classified as currently not collectible; a partial- or full-payment installment agreement; and an offer in compromise. All three options require the filing of a ‘collection information statement’ and supporting financial documentation to show the taxpayer’s financial condition, as well as all tax returns for the years being assessed. The IRS can, and usually will, file a tax lien during consideration of the proposed arrangement to protect its interest.
Once a notice of federal tax lien or a notice of intent to levy has been issued, the taxpayer has the right to a collection due process, or CDP hearing, with an IRS appeals officer who is not involved in the case. A CDP hearing is requested by filling out Form 12153, “Request for a Collection Due Process or Equivalent Hearing.”
If following the CDP hearing the appeals officer confirms that the delinquent taxes are owed, the taxpayer can still request an installment agreement or offer in compromise, or appeal the decision to the Tax Court. The CDP hearing can be a useful tool with an overly aggressive revenue officer.
And for CPAs with a desire to do some litigation work, the Tax Court is the only court in which non-attorneys can represent clients.
A taxpayer should pay delinquent taxes as soon as practicable given the levy power of the IRS and the accrual of penalties and interest, but if that is not possible, the tax professional should carefully consider the taxpayer’s rights and available settlement options in choosing the appropriate course of action, or seek legal counsel.
For help with tax delinquencies, offers in compromise, installment agreements, call Jeffrey R. Siegel, your Kansas City tax attorney at (913) 735-4829.