GPSolo Magazine - April/May 2005
The IRS and Enforced Collection
The Internal Revenue Service is a powerful and historically unrelenting creditor. The Internal Revenue Code grants the Service extraordinary powers to enforce its tax liens administratively. The Service has more power than those possessed by a general creditor, which is usually required to obtain judgment before collecting from a debtor. The enactment of the IRS Restructuring and Reform Act of 1998 afforded taxpayers firm rights when the Service seeks to collect unpaid taxes. Gone are the days of seizures of primary residences and businesses with little or no opportunity to propose alternative collection means. Following passage of the 1998 tax act, the Service’s collection activity generally declined. Recently, however, collection activity by the Service is on the rise again. In 2004 more than 2 million levies were issued, a 21 percent increase from 2003 and triple the number of levies issued in 2001. Enforcement of collection activity is expected to increase further in 2005. This article serves as an introduction to the Service’s basic enforced collection methods and administrative remedies available to your clients.
It is always more desirable to pursue collection alternatives with the Service before it initiates enforced collection activity. Many formal payment proposals can delay or stop enforced collection. Even if your client is in enforced collections, there are alternatives to the enforced collection action chosen by the Service. Your client can propose an installment agreement, submit an offer in compromise, or, when appropriate, obtain a full or partial discharge of the tax liability through “innocent spouse” relief. If your client can demonstrate inability to pay, your client’s account may be marked “not collectible.”
Most relief for your client can be requested by filing the proper forms with the Service. Almost all practice before the Service is form based. Forms required to stop collection activity and to resolve your client’s tax debt are generally available on the Service’s website, www.irs.gov.
The Federal Tax Lien
Generally, if your client is liable to pay any tax and fails or refuses to pay the tax, the unpaid amount automatically results in a lien in favor of the United States. A tax lien arises by operation of law after an assessment of tax, a notice of the assessment and demand for payment, and a failure to pay the amount assessed within ten days of the notice and demand for payment. The resulting tax lien is enforceable against all property and rights to property, whether real or personal, belonging to your client. This lien is called the “general tax lien.” The general tax lien is in some respects a secret lien because the Service does not automatically file a “Notice of Federal Tax Lien” (NFTL). The statute of limitations for collection of the tax on which the lien arises is ten years from the date of assessment of the tax.
A general tax lien by itself does not result in seizure of your client’s property. The Service is required to serve a “Notice of Intent to Levy” before seizure, except in special circumstances where the Service is concerned that collection of the tax due is in jeopardy. The Service’s stated policy is not to file an NFTL or initiate enforced collection action until reasonable efforts have been made to contact your client and provide him or her an opportunity to pay the tax liability. First, the Service issues five demand letters at five-week intervals. The Service then may issue a “Notice of Intent to Levy” and/or an NFTL. Issuance of either of these notices entitles your client to request a “Collection Due Process” (CDP) hearing. It is often at this point in the collections process that a client will seek your help.
Collection Due Process Hearing
A CDP hearing is an informal administrative hearing held by the Service’s Office of Appeals. A request for a CDP hearing is made on Form 12153, “Request for a Collection Due Process Hearing,” within 30 days from the date of a “Notice of Intent to Levy” and 35 days from the date of filing an NFTL. While the request for a CDP hearing is pending, the Service generally will not levy your client. In contrast, if your client is afforded the right to a CDP hearing by way of filing an NFTL, a lien already has been publicly filed.
At your client’s CDP hearing, you may raise issues relating to the unpaid tax, including but not limited to the appropriateness of collection action, collection alternatives such as an installment agreement or offer in compromise, and spousal defenses (i.e., innocent spouse relief). If you disagree with the Service’s decision resulting from this hearing, you may petition the Tax Court on behalf of your client within 30 days of the date of the decision. The CDP hearing and the ability to appeal the decision resulting from this hearing present an excellent opportunity to resolve your client’s tax liability, but you should not wait until collection activity has escalated to this point if you can act earlier. Interest and penalties on your client’s tax liability continue to accrue from the date the tax is assessed. If your client approaches you before the right to a CDP hearing is triggered, act preemptively.
The Federal Tax Levy
A levy is an administrative means of collecting taxes by seizure and sale of property to satisfy delinquent tax debts. The decision to levy your client’s property is within the discretion of the Service and can occur any time after assessment and demand for payment of taxes.
Because a tax lien attaches to all property and rights belonging to property, the Service can levy all your client’s property unless it is specifically exempt from levy under the Code. Even Social Security and Medicare benefits are subject to a 15 percent continuous levy. Examples of property exempt from levy under Code section 6334(a) include clothing and schoolbooks that are necessary for your client or for members of his or her family, provided that they are not a luxury expense, and books and tools necessary for a client’s trade, business, or profession that do not exceed the statutorily defined amount. (All section references are to the Internal Revenue Code of 1986, 26 U.S.C. section 1 et seq.) With appropriate approval, the personal residence of a taxpayer can be levied if the amount of the tax liability (including interest and penalties) exceeds $5,000, as can tangible personal property and real property used in the trade or business of an individual.
A levy may not be issued while a proposal to pay a liability through an installment agreement is pending, for 30 days after an offer of an installment agreement is rejected, or, for the most part, while an installment agreement is in effect. A levy also cannot be issued while an offer in compromise (OIC) is pending, within 30 days after an OIC is rejected, or while a rejected OIC is being appealed, except in certain limited circumstances. A levy will generally not be enforced if a CDP hearing is requested within 30 days of the “Notice of Intent to Levy.”
Alternatives to Enforced Collection
Common administrative procedures are available to prevent or minimize enforced collection from your client. You may request that your client’s account be marked “not collectible,” request an installment agreement, submit an offer in compromise, or request innocent spouse relief.
“Not collectible” status. When your client’s account is marked “not collectible,” the Service refrains from enforced collection activity; however, the tax liability remains due and payable and continues to accrue interest and penalties for the remainder of the statute of limitations on collection. Your client’s account may return to active collection status at any time. Generally, this administrative procedure is available only when a client’s financial ability is limited to covering basic living expenses. If your client is subject to a levy on his or her wages, the levy will be released as soon as practicable within the discretion of the Service.
Installment agreement. You can contact the Service to request an installment agreement if your client owes less than $25,000. You may also submit Form 9465, “Request for Installment Agreement.” If your client owes more than $25,000, an installment agreement may still be available to your client, but most likely you will need to submit Form 433F, “Collection Information Statement,” to the Service.
Offer in compromise. You can submit an offer in compromise (OIC) to the Service through Form 656, “Offer in Compromise.” Form 656 contains detailed instructions to help you compute a sufficient offer amount. The Service legally can compromise a tax debt for one of the following three reasons: doubt as to liability, doubt as to collectibility, and effective tax administration. If your client’s OIC is denied, you can appeal the denial administratively. Court review of a denial is not generally available unless your client files an OIC in the context of a CDP hearing. Acceptance of an OIC by the Service will result in release of a federal tax lien. However, if your client does not adhere to the contractual requirements of the OIC, the Service can revoke the OIC and impose the full amount of taxes due at the time of acceptance, plus interest and penalties.
Innocent spouse relief (and separation of liability and equitable relief). Relief from joint and several liability that results from filing a joint return is commonly referred to as innocent spouse relief, although that is somewhat of a misnomer. Section 6015 of the Code provides three types of relief from joint and several liability for spouses who file joint returns: innocent spouse relief, separation of liability, and equitable relief. You can request innocent spouse relief at a CDP hearing or through Form 8857, “Request for Innocent Spouse Relief.” If the Service grants your client relief, your client may be partially or entirely relieved of his or her tax liability. If the Service denies your client’s innocent spouse claim, you may appeal the denial to the Tax Court.
Withdrawal, Subordination, Discharge, and Release of an NFTL
The general federal tax lien is not extinguished until your client has fully satisfied his or her tax liability or it becomes legally unenforceable. In certain circumstances, administrative relief from an NFTL is available even if your client has not fully satisfied his or her tax liability and the lien is still legally enforceable.
Withdrawal. Although not required, the Service may withdraw the NFTL under code section 6323 even if your client has not satisfied his or her tax liability. For example, the Service may withdraw an NFTL if it was filed prematurely or where withdrawal facilitates the collection of a tax liability.
Subordination. The Service can subordinate the NFTL in favor of a specific lien holder under section 6525(c) of the Code. The Service will generally subordinate an NFTL when your client obtains financing in order to apply the proceeds to his or her tax liability.
Discharge. A discharge of an NFTL under Code section 6325(b) removes the effect of the NFTL from a specific piece of property; your client’s other property remains subject to the NFTL.
Release. A release of the NFTL completely extinguishes a tax liability, thereby releasing the effect of the NFTL on all of your client’s property. Section 6525(a) of the Code requires the Service to release an NFTL and issue a certificate of release of NFTL within 30 days after a tax liability has been fully paid or becomes legally unenforceable.
There are no forms for requesting certificates of withdrawal, subordination, discharge, or release of an NFTL. The Service does provide regularly updated publications with detailed procedural instructions (see the sidebar on page 24 for a list of such publications). If the Service “knowingly or by reason of negligence” fails to release an NFTL in accordance with the provisions and your client suffers actual and direct economic actions as a result, you may file suit against the Service under Code section 7432, after exhaustion of all administrative remedies available to your client.
Practice before the Service
If you represent a client in connection with a collection alternative, levy, or lien, you are practicing before the Service. Rules promulgated by the Treasury Department regulate practice before the Service. The Treasury Department’s “Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, and Appraisers Before the IRS” are commonly referred to as “Circular 230.” It is imperative that you read “Circular 230” prior to representing a client before the Service. In fact, the very form you must sign and submit to the Service before you can contact the Service on behalf of your client requires that you acknowledge awareness of the regulations contained in “Circular 230.”
You must execute Form 2848, “Power of Attorney and Declaration of Representative,” and submit it to the Service before you can obtain information regarding your client’s tax matters. This form is also required to show that you have authorization from your client to represent him or her before the Service. Form 2848 requires the signature of your client and identifies the tax years involved, the type of taxes (e.g., income tax), and the acts you may perform on your client’s behalf. It is important to ascertain for which years or tax periods your client has an existing liability before you submit Form 2848. If you fail to list a particular year or tax period on Form 2848, you will be unable even to inquire as to that particular year or tax period. The Service has a designated “Practitioner Priority Hotline” that you can contact to obtain information regarding your client’s tax account once you have submitted an executed Form 2848 to the Service.
Avoiding Enforced Collection
The best way to handle enforced collection activity by the Service is to avoid it altogether. Resolving your client’s tax liability can be a lengthy process. In certain circumstances, the Service can take weeks or even months to respond to some requests. It may be helpful to explain this to your client so your client’s expectations of your services are reasonable. If your client requires immediate relief from enforced collection activity, you may request assistance from the Taxpayer Advocate Service by filing Form 911, “Application for Taxpayer As-sistance Order.” Immediate relief can be granted if you can demonstrate that the Service’s enforced collection action has created a “significant hardship.” The Taxpayer Advocate Service is also an excellent resource to utilize if you feel that the Service has not addressed your client’s requests in a timely fashion.
A final note: An attorney should never represent to a client that he or she can absolutely stop an enforced collection action or settle a tax debt for “pennies on the dollar.” The alternatives to enforced collection allow great opportunity to minimize your client’s anguish and achieve fair resolution—without making promises that may be impossible to keep.
All the publications below can be found at the Internal Revenue Service website, www.irs.gov.
Sara V. Spodick is staff attorney at the Tax Clinic of the Quinnipiac University School of Law in Hamden, Connecticut. She can be reached at email@example.com.