New IRS Procedures Claim to Provide 'Fresh Start' for Taxpayers

Over the past several weeks, the IRS has made some significant changes in collection policies and procedures, which I am covering in this issue. The series “Rules of Engagement in Dealing with the IRS” will continue in a future issue.

IR News Release 2011-20 (02/24/2011)

IR News Release 2011-20 (“IR-2011-20”) appears long on claiming to provide taxpayers a “fresh start” and short on specifics. But, there are several important concepts and details that were provided.

A. Incentives for Direct Debit Installment Agreements (“DDIA”)

The IRS is using the avoidance of a lien as the carrot to provide incentives for people to enter into installment agreements with the IRS that allow the IRS to directly debit a taxpayer’s bank account for monthly payments. If the unpaid assessments of a taxpayer amount to $25,000 or less, then the IRS will consider withdrawing a lien:

  • For taxpayers entering into a DDIA;

  • For taxpayers converting their existing “regular” installment agreement into a DDIA; and
  • For taxpayers with an existing DDIA who request a lien withdrawal from the IRS.

However, the lien will be withdrawn only after a probationary period (the length of which was not covered in the IRS Release) “demonstrating that direct debit payments will be honored.” My guess is that the probationary period will run from 45-90 days from the time that the taxpayer moves into or creates a DDIA with respect to their debt.

Although not mentioned in the IRS release, it appears that taxpayers for whom no IRS liens have yet to be filed, and owing less than $25,000, will be able to avoid a lien upon entering into a DDIA. It should be noted, however, that current policy is to not file a lien for all installment agreements under $25,000.

B. Small Business Installment Agreements

Small businesses owing payroll taxes to the IRS will now have an expanded opportunity to avail themselves of a streamlined installment agreement process only if they enter into a DDIA. Prior to IR-2011-20, such streamlined agreements were only available on payroll tax liabilities if the liability did not exceed $10,000. Under the new rules, small businesses may enter into a streamlined installment agreement (SIA) with balances of up to $25,000 in payroll taxes as long as they agree to a DDIA. However, even though the dollar threshold is higher, the 24-month period remains for small businesses to pay off their SIAs. Accordingly, few are likely to take advantage of this new opportunity as it is currently offered.

Prior to IR-2011-20, small businesses were already allowed to enter into SIAs for income taxes and were allowed up to 60 months to repay such liabilities. One of the many unanswered questions presented by IR-2011-20 is whether the small businesses who only owe income taxes will now be required to enter into a DDIA in order to secure an SIA? If so, the new rules would actually create an added restriction upon taxpayers when compared to the previous rules of IRM §5.14.5.2 (08/05/2010).

C. Fewer Liens

The principal message of IR-2011-20 was that the IRS is taking steps to “help people get a fresh start with their tax liabilities” and announces that it is “making important changes to its lien filing practices.” Let’s look at these five changes.

1. “Significantly increasing the dollar threshold when liens are generally issued, resulting in fewer tax liens.”

The obvious question is what is the change in the threshold? In spite of the question being presented to the IRS at several levels, it remains unanswered. The pre-IR-2011-20 rules set forth in Internal Revenue Manual (“IRM”) §5.12.2.4.1 provide that a lien may be considered when the unpaid balance of an assessment against the taxpayer is more than $5,000. And, a lien can be considered even if the balance due is less than $5,000 if “the lien will promote payment compliance.” Is the $5,000 threshold being increased? If so, to what level?

The larger focus of IR-2011-20 was that one may avoid liens if entering into an SIA which is also a DDIA. IRM §5.14.5.2(4) has provided that “A lien determination is not required for a streamlined installment agreement but may be made at the discretion of the revenue officer and liens may be filed.” SIAs have generally been made available to those owing less than $25,000 to the IRS.

So, has the IRS truly taken action to reduce lien filings in IR-2011-20? Probably not, because existing policy generally would not have the IRS placing liens on taxpayers entering into streamlined installment agreements. Actually, for this group of taxpayers (those owing less than $25,000 and entering into a streamlined agreement), the requirements to avoid a lien may have been increased by the requirement for a DDIA. Will the IRS now routinely assert liens for those owing less than $25,000 who enter into an SIA if a DDIA is not elected? The answer is currently unknown to the public.

Who gets the biggest benefit from the new rules? In my mind, it is those who were not getting into a streamlined installment agreement and being unresponsive to the IRS. Such unresponsiveness would have led to the IRS placement of the lien upon the taxpayer. Under the new rules, the IRS will now remove the lien when the taxpayer enters into an SIA/DIA and gets through the probationary period. Previously, the removal of the lien prior to full payment was virtually impossible.

2. “Making it easier for taxpayers to obtain lien withdrawals after paying a tax bill.”

No specifics were mentioned here. Currently, it is not particularly difficult to secure a lien withdrawal after payment. Such can be done at walk-in centers if timing is pressing or through a centralized lien hotline. Will the IRS really make it easier? That remains to be seen.

3. “Withdrawing liens in most cases where a taxpayer enters into a Direct Debit Installment Agreement.”

See the discussion in sections A and B above. And, even if this is true, the IRS is getting a bigger benefit through the increase in the rate of compliance of those entering into DDIAs as compared to those who enter into an agreement to, hopefully, mail in the check each month.

4. “Creating easier access to Installment Agreement for more struggling small businesses.”

See discussion in section B above.

5. “Expanding a streamlined Offer in Compromise program to cover more taxpayers.”

IR-2011-20 goes further, stating that the IRS is expanding the availability of streamlined offer in compromises (OIC) to taxpayers with annual income of up to $100,000 and those owing up to $50,000 (doubled from the previous limit of $25,000). There is just one catch here. I haven’t found anyone who understands how a “streamlined” OIC program is different from the normal Offer in Compromise system. When one searches “streamlined Offer in Compromise” on the IRS Web site, the only entry that comes up is IR-2011-20! Also, the concept of a streamlined OIC is not mentioned in the OIC regulations under §7122.

Revised: Form 12153, Request for a Collection Due Process or Equivalent Hearing

For the first time since 2006, the IRS has revised form 12153, Request for a Collection Due Process or Equivalent Hearing. The form, now available on www.irs.gov, requests more information from the Taxpayer and provides much better guidance on the use of the form. Kudos to the IRS on providing very helpful information as to when and where to file the form. Also, very specific information is provided to assist taxpayers on what takes place in a Collection Due Process (CDP) hearing and what issues can be addressed in such hearings. The following changes have been made to the form itself:

  • Separate contact information is requested for the taxpayer and spouse.

  • The form now has language encouraging the submission of financial disclosure information (forms 433A and 433B) if a taxpayer wants to discuss collection alternatives. It should be noted that the IRS will not allow the transfer of a case from a Service Center Appeals office unless such financial disclosure forms are provided in advance.

  • The form makes it clear that you must provide a reason for your dispute and that failure to do so will result in your request for a CDP hearing not being honored. The instructions provide an entire page of examples of reasons.

  • A new box has been added to designate that the CDP hearing will be held with one’s representative.

  • The instructions make it very clear that liens may be filed during the pendency of a CDP regarding a proposed levy action.

As a side note, at press-time, the IRS had nine sections on the form, numbered 1 through 8 (two items marked #5).

E. Martin Davidoff, CPA, Esq., is a sole proprietor in Dayton, N.J., with more than 30 years experience practicing as a CPA and tax attorney. He founded the IRS Tax Liaison Committee of the American Association of Attorney-CPAs and is a past president of the AAA-CPA. Contact him at This email address is being protected from spambots. You need JavaScript enabled to view it. .

 

REVIEW QUESTION

True or False? Form 12153 has been revised to include language that encourages including forms 433A and 433B if a taxpayer wants to discuss collection alternatives.

Answer: True

The form now has language encouraging the submission of financial disclosure information (forms 433A and 433B) if a taxpayer wants to discuss collection alternatives. It should be noted that the IRS will not allow the transfer of a case from a Service Center Appeals office unless such financial disclosure forms are provided in advance.

You have no rights to post comments