by Mark W, Sullivan, EA
D R Sullivan & Company, CPA PC
The Internal Revenue Service unofficially adopted a ''kinder, gentler'' approach to delinquent tax collections after passage of the IRS Restructuring & Reforming Act of 1998. In 1999 the IRS had 5.9 million delinquent taxpayer accounts; issued 504,000 Notices of Levy(1) filed 168,000 Notices of Federal Tax Lien; conducted 161 seizures(2), and accepted 31,000 Offers in Compromise(3). Over the past ten years the IRS enforced collection pendulum gradually shifted back to the pre-1998 principles. The IRS effectively scrapped the much touted ''settle for pennies on the dollar'' Offer in Compromise program, which allowed them to centralize Offer cases to two Service Centers and reassign personnel to conducting enforced collection work.
The economic downturn and resulting decline in federal tax receipts accelerated the return to aggressively enforced collection of delinquent taxes. Although, the number of taxpayers who owed delinquent taxes increased by 45% between 1999 and 2009, the issuance of Notices of Levy increased by a staggering 600% to 3.5 million; federal tax lien filings soared 475% to 965,000; 581 seizures were conducted, and only 11,000 Offers in Compromise were accepted(4). The statistics are not surprising to those who regularly practice in the area of tax controversy. A lay taxpayer who owes the IRS may be inclined to simply give up; resigning him or herself to the belief that the IRS will take whatever it wants.
Regardless of the prevailing Internal Revenue Service delinquent tax collection philosophy there are always collection alternatives.
Example 1: The Husband and Wife owed $69,000, including $22,000 of penalties and interest, for 2006 income taxes. The IRS levied the Husband's salary after he was furloughed from his employer. He was offered a new position within his company, but his employer required the IRS levy be released before re-hiring him. The IRS then levied her salary, which jeopardized her security clearance. They owned a home worth $520,000, but the mortgage balance was $535,000. They also owned a vacation cottage worth $60,000, but owed $54,000 on the mortgage. They had $51,000 in a 401(k) retirement plan.
Secure releases of levy so the Husband could be re-hired and the Wife did not lose her security clearance and potentially her job.
Establish a monthly installment agreement to repay the tax debt.
Analysis: A review of their financial statement indicated there was no equity in the homes from which to secure a loan to pay off the debt. Under ordinary installment agreement procedures their primary residence mortgage exceeded the IRS-allowed housing expense for their county by $2,500; the second home mortgage payment and college tuition they claimed for their daughter did not qualify as a necessary living expenses; they had no tangible property like a boat, coin or similar collectibles that could be sold quickly to pay off the debt. Relying on IRS National Standards of Allowable Expenses(5) their income exceeded expenses by $3,100 per month.
Issue: Installment agreement procedures require the submission of a collection information statement and no less than three months of expense documentation. The typical approval period after mailing in the required documents is six to eight weeks. The taxpayers could not afford to wait two months let alone consider the twenty-three month, $3,100 monthly installment plan a realistic alternative.
Solution: In order to secure prompt releases of the wage levies and protect their employment they were counseled to borrow $45,000 from the 401(k) to pay down the tax debt. The voluntary payment reduced the unpaid balance sufficiently to entitle them to an automatic, streamline installment agreement that was negotiated over the telephone with Practitioner Priority Service. The representative also promptly issued releases of the Notices of Levy against both their employers.
Example 2: The Husband owed a $49,000 civil penalty for 2005. The Wife was a non-liable spouse. The IRS issued a Notice of Intent to Levy Social Security Benefits(6). The Husband was a retiree and had no other income. The Wife owned a business and earned 75% of the household income. The Wife owned their home worth $220,000, both vehicles and was solely liable for the auto loans. The Husband and Wife maintained separate bank accounts.
Protect the non-liable spouse
Establish a monthly installment agreement to repay the tax debt.
Analysis: A review of the Husband's financial statement indicated his only asset was his Social Security Benefit. The IRS could not levy the income, assets and property of the Wife as a non-liable spouse. However, under installment agreement procedures the Husband could not claim transportation or housing related expenses. The Husband's other expenses were limited to his percentage of household income. Relying on IRS National Standards of Allowable Expenses his income exceeded expenses by $680 per month.
Issue: The Husband and Wife could not meet their actual monthly living expenses if the IRS required a $680 monthly installment plan.
Solution: An analysis of the Husband's monthly Social Security benefits indicated that IRS would be entitled to receive $189 per month if a levy was issued. Because of uncertainty over IRS' determination of monthly expenses - actual monthly costs; National Standard of Expenses; allocation (percentage) of income and business ownership valuation the Husband was counseled not to challenge the issuance of the Social Security benefit levy, which in effect created a monthly installment agreement.
Internal Revenue Service issues are serious matters, but retaining effective counsel who understands the procedural realities of tax enforcement can mitigate the risks of IRS enforced collection action.
- For this article a Notice of levy attaches rights to property, such as bank accounts, wages, commissions, and other income subject to levy.
- For this article a Seizure involves motor vehicles, real property (houses) and other personal property like boats, airplanes, collectibles, and safe deposit box contents.
- Internal Revenue Service, Data Book 1999, Publication 55B, Washington, DC 2000
- Internal Revenue Service, Data Book 2009, Publication 55B, Washington, DC 2010
- The IRS imposed specific standards for allowable housing and living expenses in August 1995.
- Notice CP 91/298 intent to issue a levy against fifteen (15) percent of Social Security benefits.