Part II: Representation- Before US Tax Court
© Ben A. Tallman EA
This is the second part in a three part series on Representation. If you missed the first part, please go back to the previous issue to catch-up. We had discussed the IRS letters that trigger certain actions and responses on your part, as the client’s representative. Below is the fifth paragraph dealing with our last level of response before going to US Tax Court. The earlier paragraphs can be found in the previous article.
- Taxpayer’s request for an Appeal or Negotiations with Chief Counsel – Your Power of Attorney is now good because you are dealing with the IRS again. We already talked about filing an Appeal, but did not insist on getting a face-to-face appeal. The IRS states you must make a reasonable request for a face-to-face meeting. Some suggestions include voluminous records, complexity of the issues, regional or cultural differences unique to your area, and anything else that shows reasonable cause. Personal preference is not a reasonable cause. Do not be persuaded by campus appeals sections to resolve issues over the phone and fax machine. I have been extremely disappointed with the outcome from campus appeals, but when given a face-to-face interview, I have seen fairness and consideration come back into the process. It’s all about the mutual respect and consideration from the Appeals Unit and the Chief Counsel’s Office. One thing I almost forgot, you must begin the negotiations. My understanding is they cannot begin the process; you must make the first request to resolve the issues. This will be a one-time shot, so have all your records available, do your homework, and have your client on speed-dial. I usually use Form 433A with my client to prepare for questions that I might be asked. No, I am not applying for an Offer in Compromise; I just like the detail and information on the form. As POA you should be able to pull up anything on your client (without calling them). The phone number is to ask for their agreement to the decision you “iron-out” with the appeals officer or IRS attorney. When I go to Chief Counsel’s Office, I wear a suit and act like a professional. These are people, just like we are, and they want to get this case closed as bad as we do. This may sound intimidating at first, but if you make it to this level, then you deserve to be here. You are a Circular 230 Practitioner and, believe it or not, they respect your credentials and level of knowledge.
As a rule, I do not take my client to the audit or any negotiations that follow. Why? They don’t understand the implications of their words. Even though idle chatter may seem innocent, they tend to sabotage my efforts and effectiveness with the auditor. The audit winds up taking much longer and opens up new topics I was not prepared to discuss. It only takes once or twice; and you’ll understand why I recommend going alone.
Other Options - Audit Reconsideration and Offer in Compromise
What happens when your client comes in to see you after the deadline? When this happens, you still have some options available. The first is “Audit Reconsideration” and this is your client’s last chance to resolve these issues with the Examination Unit. There is no appeal and the opportunity to petition the Tax Court has expired. So you need to be well-prepared and give this meeting your best effort. The IRS has the upper-hand and concessions must be earned.
So what happens if the Audit Reconsideration does not go the way you want? Form 656 Booklet allows your client to pursue an Offer in Compromise. There are the three categories to choose from:
- Doubt as to Collectability. The taxpayer has insufficient assets and income to pay the full amount; so they are asking IRS to consider a lesser amount. This portion has nothing to do with negotiating skills and more to do with the assets owned, outstanding obligations on those assets, and the income of the taxpayer(s). Both the personal and the business portions of the booklet have a calculation section to determine the minimum offer amount the IRS is willing to accept (433-A, Section 8 & 433-B, Section 5). This simplifies the entire process down to a calculation. You can explain to the taxpayer that paying an attorney or a firm advertised on the TV is not going to change the outcome. It is based on the facts and figures the taxpayer lists on the forms.
- Exceptional Circumstances (Effective Tax Administration). In this offer the taxpayer agrees they owe the money and they can pay the debt, but due to exceptional circumstances it would be unfair or inequitable to collect the full amount. It would also cause them economic hardship to pay the full amount. This requires a written narrative of the exceptional circumstances and a proposal for an amount that would be fair and equitable. Unlike the first offer based on the facts, this one relies on the circumstances. This offer is more difficult to achieve and has a lower rate of success than the first one.
- Doubt as to Liability. This offer needs a separate Form 656-L and it requires an explanation with substantiation as to the legitimate doubt that your taxpayer owes any or part of the debt. Assuming your taxpayer never got an opportunity to defend their position; this would give them that chance.
There are a few “ground rules” before we get started. The taxpayer’s income tax returns and estimated tax payments must be up-to-date. If they own a business with employees, then the federal tax deposits (FTDs) must also be current. They cannot be in bankruptcy, be under investigation by the Department of Justice, their offer cannot be frivolous or fraudulent, and the offer cannot be submitted simply to delay the collection process. If your taxpayer needs a short postponement of six months or less or if they wish to pay over time, then a temporary postponement using Form 1127 or an Installment Agreement using Form 9465 can be submitted instead of filing for an Offer in Compromise (OIC).
This is the second of three segments on Representation. The final segment appears in an upcoming blog post.