Part III: Representation- Alternatives
(When Something Goes Wrong)
© Ben A. Tallman EA
This is the third & final segment in a three part series on Representation. If you missed the first and second parts, please go back to the previous blog posts to catch-up. We previously discussed the IRS letters that trigger certain actions and responses on your part as the client’s representative. This section discusses your alternatives when something goes wrong and you must consider other alternatives. We previously looked into filing an Offer in Compromise (OIC) so let’s continue that discussion.
If you have never submitted an OIC for a client, plan to take some additional time. The detail and substantiation required by your taxpayer will take much longer than first anticipated. Why? The need for account numbers and current balances along with 3 months statements on all their monthly obligations. If your taxpayer does not keep these documents, it will take 3 months to accumulate them. Completing the application forms is a major undertaking. The balances on the accounts must be updated (or changed) prior to final submission. So the completed portion will change several times before you get to the final version. In addition to the completion of the forms, there is an application fee of $186, plus a lump sum payment of 20% on the existing tax owed. These fees are not refundable, in case the application gets denied by the Service. If your taxpayer is destitute and falls within the Low Income Certification Guidelines, then you can request a waiver of the application fee and a waiver of the 20% lump sum payment.
So where should we start? I usually go to Form 433-A & 433-B first. This tells me upfront if this OIC is worth pursuing. Remember the calculation we discussed in the earlier segment? You can plug-in the figures from these forms and see what IRS is willing to settle on. If your taxpayer has too much equity in their house, investments, or cars, then the entire process may be an exercise in futility. I suggest doing a preliminary review before undertaking the entire process.
If Form 433-A & 433-B calculations look favorable, then let’s move on to Form 656 or 656-L (doubt as to liability). This is where we need to quiz our taxpayers on a ‘reasonable cause’ that will satisfy the Service. Did they lose their job? Was there illness in the family or did a loved one die? Was their home and belongs destroyed by flood, hurricane, or tornado? Was there a fire or theft? What put them into this dilemma? Once you have established “reasonable cause”, then you can put your narrative and essay skills to work on Form 656. The booklet also has a check list that makes things easier to follow. It will keep you on target and allow you to focus on the important details. If you have any questions, you can usually find the answer in the instruction booklet. So what can you expect? If you followed the checklist and completed all the questions and input lines then the calculation section should make things uniform and equitable for everyone (including the IRS). As long as things agree, there should be little deviation from the original offer if you requested Doubt as to Collectability. The other two offers are not that simple or as easy to predict, and may take longer than anticipated. If it takes IRS more than 2 years, the offer is deemed accepted. If the offer is denied, the taxpayer has appeal rights and can even petition the US Tax Court on the denial of the OIC.
CDP (Collection Due Process) Hearing
So we have discussed Audit Reconsideration and Offer in Compromise as alternatives to missing the filing deadlines. What happens when the tax has escalated to a Notice of Lien & Levy Letter (Letter 1058) from the IRS? This gives your taxpayer the opportunity to request a CDP Hearing on Form 12153 within 30-days. Yes, that is a short response period. If you miss the 30-day window you can still request an Equivalent Hearing within 12 months of the letter using the same Form 12153. Unfortunately the Equivalent Hearing does not give your taxpayer the right to an appeal or the right to petition the US Tax Court.
Both the denial on a CDP Hearing and a denial of an OIC allow the taxpayer the opportunity to petition the US Tax Court. There is a 30-day window after the denial letter to petition the court with the discussion being limited to the CDP and OIC issues; not the underlying audit and tax liability issues. That window was previously closed by the 90-day letter. On a rare occasion, the taxpayer may be given the opportunity to discuss the underlying tax issues, if they were never given the opportunity for that discussion in the past.
CAP (Collection Appeals Program) Hearing
Is there any other relief when the Collection/Revenue Officer is over-whelming your taxpayer with liens and levies? There is a CAP Hearing, using Form 9423, that can be requested before or after the IRS files a tax lien, seizes assets, garnishes wages, freezes bank accounts, or terminates/denies an Installment Agreement. Remember what I said earlier about following the chain-of-command? You must first share all recommendations and remedies with the Revenue Officer, followed by a discussion with their manager, and only then can you request a CAP Hearing. When you get to the CAP Hearing it is often held with a Territory Manager and they are willing to discuss reasonable remedies for paying the IRS without putting your client’s family on the street. The easiest remedy is a ‘Partial Pay Installment Agreement’ which runs for a period of 12 months. After that date, they must return to a full payment installment agreement requiring the balance be paid out in the remaining 60 months (72 months – 12 months partial pay). Under special conditions, the Service can consider periods longer than 72 months; and even place the taxpayer on “currently not collectible” status if they are below the income level that the Service will pursue. Supplemental forms that may be required to get to this point are Form 433-F Collection Information Statement and Form 9465 Installment Agreement Request. The Fresh Start Program allows individuals owing $50,000 or less ($25,000 for business) to apply for an installment agreement on-line with no additional paperwork. All Tax Returns must be current.
I have attempted to point out the taxpayer’s choices on each letter or action taken by the IRS through Examination or Collection. Your taxpayer has rights and it is our job to keep them informed and protected in the best way possible. To read more, refer to Publications 1660 & 3598 on Audit Reconsideration, CDP Hearings, & CAP Hearings; Tax Topic 201 & 202 for the Collection Process and Payment Options; Fresh Start Initiative; Form 656 Booklet on Offer in Compromise; Audit Technique Guides (ATG); Publication 5 for Your Appeal Rights; Publication 556 on the Examination of Returns; and the website www.ustaxcourt.gov for tax court petitions and related information.