Professional Documents
Culture Documents
by
1. A CHANGING IRS........................................................................................................1
More Compliance Centers to Cease Processing Returns:............................................1
Shrinking IRS Workforce................................................................................................1
New IRS Commissioner ................................................................................................2
2. TAXPAYER ADVOCATE..............................................................................................2
National Taxpayer Advocate Releases Report To Congress........................................2
The Most Litigated Tax Issues.....................................................................................11
3. ENFORCEMENT........................................................................................................13
Highlights of 2008 Enforcement...................................................................................13
Individual Enforcement.................................................................................................13
Millionaires...................................................................................................................13
Businesses...................................................................................................................14
Collection Enforcement................................................................................................14
Electronic Filing IRS Webpage....................................................................................14
State Information Sharing............................................................................................19
Federal Tax Returns and Return Information..............................................................19
Return Information........................................................................................................19
IRS Study Provides Tax Gap Estimate........................................................................20
Sources of Misreporting...............................................................................................20
Understanding the Tax Gap.........................................................................................20
Components of the Tax Gap........................................................................................20
Underreporting.............................................................................................................20
Underreporting Is Largest Component.........................................................................21
Noncompliance Rising.................................................................................................21
Areas Where Compliance Has Decreased..................................................................21
Areas With Improved Compliance...............................................................................22
Businesses More Likely to Not Comply.......................................................................22
NRP Subchapter S Corporation Study Overview........................................................22
2009 Budget.................................................................................................................26
2009 Budget ................................................................................................................26
Overview - Abusive Return Preparer...........................................................................27
Audits of 30 Clients......................................................................................................28
4. EXAMINATION...........................................................................................................29
Examination Reengineering.........................................................................................29
The Dirty Dozen...........................................................................................................29
5. APPEALS....................................................................................................................32
Strategic Priorities:.......................................................................................................32
Campus Appeals Program...........................................................................................32
OIC and TFRP Mediation and Arbitration....................................................................32
Application Process .....................................................................................................33
TFRP............................................................................................................................33
i
6. USEFUL INFORMATION FOR PRACTITIONERS....................................................34
Whistleblower Reforms................................................................................................34
Mortgage Relief Act......................................................................................................34
Basis Reduction...........................................................................................................35
Qualified Principal Residence Indebtedness...............................................................35
Misclassified Workers..................................................................................................35
Misclassification...........................................................................................................35
Recommendations.......................................................................................................36
UBS Criminal Charges.................................................................................................36
Agreement....................................................................................................................36
Allegations....................................................................................................................36
Prior Charges...............................................................................................................37
Comments of Government Officials.............................................................................37
Settlement Offer Unreported Offshore Income ...........................................................37
Highlights of the Offer. ................................................................................................37
Penalties.......................................................................................................................38
Fully Cooperate............................................................................................................38
VITA Grant Program....................................................................................................38
Identity Theft.................................................................................................................39
7. COLLECTION.............................................................................................................42
Taxpayer Advocate’s Report On Enforced Collection ................................................42
Flawed Private Collection Ends...................................................................................42
Help for People Who Owe Taxes.................................................................................43
Flexibility.......................................................................................................................43
Online Payment Agreement (OPA) .............................................................................44
Guaranteed Availability of Installment Agreements....................................................45
<$25,000 Liabilities......................................................................................................45
Form 433A....................................................................................................................45
New more Onerous Allowable Expense Standards.....................................................45
Five Year Test..............................................................................................................48
8. OFFER IN COMPROMISE.........................................................................................48
Number of Offers..........................................................................................................48
OIC’s FY2000 to 2008..................................................................................................49
Tax Increase Prevention and Reconciliation Act of 2005............................................49
Payments With Offers..................................................................................................49
Failure to Make Deposit...............................................................................................49
Not Refundable............................................................................................................50
Taxpayer Advocate Research......................................................................................50
Failure to Make Installment Payments.........................................................................50
Low Income Taxpayers................................................................................................50
Deemed Accepted........................................................................................................51
Background..................................................................................................................51
Supporting Documents.................................................................................................51
$150 Processing Fee...................................................................................................51
Determining Processability...........................................................................................52
Full Pay Processing......................................................................................................53
ii
Initial Review................................................................................................................53
Computation of Offer Amount......................................................................................53
Cash Offer....................................................................................................................54
Short-Term Deferred Payment Offer............................................................................54
Deferred Payment Offers.............................................................................................54
Corporate Trust Fund Liabilities...................................................................................55
Pursuit of Officers After Compromise..........................................................................55
Promote Effective Tax Administration..........................................................................55
Encourage Compliance................................................................................................55
Only Available If There Is No Doubt As to Liability Or Collectibility.............................56
Rules for Evaluating Offers to Promote Effective Tax Administration.........................56
Factors..........................................................................................................................56
Undermine Compliance................................................................................................56
Exceptional Circumstances..........................................................................................56
California......................................................................................................................68
.....................................................................................................................................68
EXHIBITS 59-70
iii
2009 IRS REPRESENTATION UPDATE©
By: Robert E. McKenzie
1. A CHANGING IRS
As of October, 2011 there will be 2 returns processing centers for business returns and
3 returns processing centers for individual returns. Each of the remaining compliance
centers will continue performing correspondence audits and collection activities.
Table 30. Internal Revenue Service Personnel Summary and Type of Personnel, Fiscal Years
2007 and 2008
1
New IRS Commissioner
1.20 In March, 2008 the Senate unanimously confirmed IRS Commissioner Douglas
H. Shulman. He promised would work to ensure that the tax agency is fair, and he
would concentrate both on enforcement and service. "For the majority of Americans
who pay their taxes willingly and on time, there must be clear guidance, accessible
education and outstanding service," he said in a statement. "For taxpayers who
intentionally evade paying taxes, there must be rigorous enforcement programs."
Shulman has been vice chairman of the Financial Industry Regulatory Authority,
previously known as the National Association of Securities Dealers. He also has served
on the bipartisan National Commission on Restructuring the Internal Revenue Service.
2. TAXPAYER ADVOCATE
1. Complexity of the Tax Code. The largest source of compliance burdens for
taxpayers is the complexity of the tax code. IRS data show that taxpayers and
businesses spend 7.6 billion hours a year complying with tax-filing requirements.
To place this in context, it would require 3.8 million full-time employees to work
7.6 billion hours. In dollar terms, we estimate that taxpayers spend $193 billion a
year complying with income tax requirements, which amounts to 14 percent of
aggregate income tax receipts. One count shows the number of words in the tax
code has reached 3.7 million, and over the past eight years, changes to the tax
code have been made at a rate of more than one a day – including more than
500 changes in 2008 alone. All of this complexity imposes additional monetary
costs on taxpayers – about 60 percent of individual taxpayers pay practitioners to
prepare their returns and an additional 22 percent purchase tax software to assist
them. Perhaps most troubling, tax law complexity leads to perverse results. On
the one hand, taxpayers who honestly seek to comply with the law often make
inadvertent errors, causing them either to overpay their tax or to become subject
to IRS enforcement action for mistaken underpayments of tax. On the other
hand, sophisticated taxpayers often find loopholes that enable them to reduce or
eliminate their tax liabilities. The NTA recommends that Congress substantially
simplify the tax code. To assist Congress in pursuing tax simplification, this report
includes a series of recommendations, including recommendations to repeal the
Alternative Minimum Tax, streamline education and retirement savings tax
incentives, simplify the family status provisions of the Code, allow taxpayers to
exclude modest amounts of canceled debts from income without having to make
2
an affirmative claim, reduce tax sunset and phaseout provisions, and revise the
overall penalty structure..
4. Employment Taxes. The NTA is concerned that IRS employment tax policies
may overreach and undermine some of the important protections enacted in the
Taxpayer Bill of Rights and the IRS Restructuring and Reform Act of 1998. With
an estimated $58 billion in unpaid employment taxes, it is clear that the IRS faces
a significant noncompliance problem. At the same time, the overall employment
tax compliance rate is high – approximately 88 percent of all employment tax
returns are filed and fully paid. While the need to collect unpaid payroll taxes is
obvious, the IRS should follow a tailored approach to address the problem,
including applying different treatments to taxpayers based on their levels of and
reasons for noncompliance, encouraging prospective voluntary compliance by
helping taxpayers who are attempting to follow complex rules and procedures,
concentrating sufficient resources on early intervention techniques to prevent the
accumulation of substantial employment tax liabilities, and building a local
compliance presence that balances enforcement with outreach and education.
7. Navigating the IRS. The IRS employs more than 100,000 workers in 12 major
business units in over 800 offices within and outside the United States.
Taxpayers, practitioners, and even IRS employees have difficulty finding the
appropriate office or employee to help them resolve tax problems. The IRS does
not publish a topical or personnel directory that would assist taxpayers in
navigating the agency. By comparison, this information is provided clearly on the
websites of taxing authorities in other countries and U.S. states. The NTA
recommends that the IRS take steps to address this problem, including revising
the Internal Revenue Manual to direct IRS employees to accommodate taxpayer
requests to speak to a particular employee, adding departmental phone numbers
to the topical index on IRS.gov, and considering the creation of a phone number
staffed by operators who would obtain details about the taxpayer’s question or
problem and direct the taxpayer to the function that can help.
Compliance Issues
10. Customer Service Within Compliance. Simply stated, the IRS gets what it
measures. The IRS largely rates operational performance by using efficiency
measures (e.g., cycle time, case closures, and average call time) instead of
effectiveness measures (e.g., did the IRS’s actions achieve the desired voluntary
compliance results?). The 2008-2009 IRS Strategic Initiative includes the goal to
“Improve service to make voluntary compliance easier.” Yet current measures do
not promote customer service and may ultimately lead to noncompliant behavior
by taxpayers, because IRS business strategies and measures do not adequately
emphasize a balanced approach between taxpayer service and enforcement
within the IRS’s compliance organizations. The IRS has the opportunity to
establish taxpayer-centric measures that encompass effectiveness as well as
efficiency components to accomplish this strategic goal. The NTA recommends
four actions to address this problem, including creating an IRS Cognitive
Learning Lab and making it possible for taxpayers to work with one employee
from start to finish on a case.
11. Local Compliance Initiatives Have Great Potential But Face Significant
Challenges. Research suggests that concentrated examinations targeted at a
local business segment or industry have a greater “ripple effect” on voluntary
compliance by other taxpayers than seemingly random examinations.
Compliance initiative projects (CIPs) allow local IRS employees to generate this
impact by focusing on specific local compliance problems using examinations or
“alternative treatments,” which may include outreach, education, form changes,
regulatory changes, or even agreements with the states. The CIP process also
enables employees from different IRS functions to work together, utilize local
sources of information, and reach out to local organizations to address
noncompliance at the local level. In addition, CIPs allow the IRS to learn about
what works and what does not. The NTA is concerned that the IRS has
neglected this important program. She recommends that the IRS take steps to
revitalize it, such as developing better measures for local CIPs, allocating more
resources to local CIPs, and making CIP reports more widely available to
preserve the benefits of any lessons learned.
13. The IRS Should Proactively Address Emerging Issues Such as Those
Arising From “Virtual Worlds.” By one estimate, about $1 billion in real dollars
changed hands in computer-based environments called “virtual worlds” in 2005.
Over 16 million people are estimated to have active subscriptions to these
environments, many of which have their own virtual economies and currencies.
However, IRS employees have been unable to respond to taxpayer inquiries
about how to report transactions associated with them. Economic activities in
virtual worlds may present an emerging area of tax noncompliance, in part
because the IRS has not provided guidance about whether and how taxpayers
should report such activities. To improve voluntary tax compliance, the NTA
recommends that the IRS issue guidance addressing how taxpayers should
report economic activities in virtual worlds.
Examination Issues
14. Suitability of the Examination Process. Since 2000, the IRS has
continuously increased the number of individual income tax return examinations
it conducts. The number more than doubled from 617,765 in FY 2000 to
1,384,563 in FY 2007, with examinations completed by correspondence
accounting for 83 percent of all individual taxpayer audits. Although taxpayers
understandably do not like to be audited, the IRS should initially assume good
faith on the part of taxpayers and avoid taking an unnecessarily adversarial
approach. The Internal Revenue Manual and IRS publications provide
opportunities for the IRS to meet taxpayer needs and preferences throughout the
examination process, including allowing taxpayers to choose a method for
conducting an examination (face-to-face versus correspondence), request a
telephone discussion with the examiner, and even set up a payment agreement
for any taxes owed. Because the IRS often fails to meet taxpayer needs and
preferences due to limited resources or policy reasons, the resulting unsuitability
of the examination process can lead to disparities in audit and customer
satisfaction results, including tax assessments that sometimes reflect the
taxpayer’s inability to navigate the audit process rather than the amount truly
owed. The NTA recommends five actions to help the IRS address problems with
the suitability of the examination process, including directing its focus
substantially toward meeting taxpayer needs and preferences and immediately
eliminating the so-called “combination letter” from the process.
16. The Impact of IRS Centralization on Tax Administration. Over the years,
the IRS has centralized many of its major operations and programs. This
centralization has significantly changed the organizational structure,
management, work processes, and the quality of interaction between the IRS
and taxpayers. When carried out correctly, centralization can significantly reduce
redundancies and increase effectiveness. However, if the IRS fails to consider
the impact of centralization on taxpayer service and compliance, it may harm
taxpayers. The IRS needs to do a better job of measuring the downstream
consequences to taxpayers, including the impact on taxpayer service and
compliance, when evaluating the costs and benefits of centralization. The NTA
recommends that the IRS establish a standard matrix that defines the project,
provides background information, sets forth objectives, establishes tangible
products, quantifies expected benefits, and identifies necessary resources. The
IRS should then use this standard project matrix to evaluate programs and
determine whether the anticipated benefits of centralization have been realized.
19. The IRS Miscalculates Interest and Penalties But Fails to Correct These
Errors Due to Restrictive Abatement Policies. A TAS study has found that the
IRS is miscalculating the failure to pay penalty and could be negatively impacting
about two million taxpayer accounts annually. Moreover, the IRS’s manual
calculations of interest yields an accuracy rate of only 67.7 percent, which means
nearly one out of three restricted interest accounts are incorrectly computed. The
IRS is aware of, but has failed to correct, certain systemic problems that cause
penalty and interest miscalculations. These incorrect calculations lead numerous
taxpayers to believe they have fully paid what the IRS says they owe, only to
receive subsequent bills for accruals of interest, penalties, or both. The IRS
bears the cost of these inaccurate calculations, not only through rework by
employees but also by taxpayers’ reduced confidence in the IRS. The NTA
recommends that the IRS consider allocating adequate resources toward
planning and programming to resolve common penalty and interest computation
issues, revising pertinent Internal Revenue Manual sections so all taxpayers are
entitled to accuracy reviews of interest and penalty calculations, and re-
evaluating the overly complex restricted interest procedures to make certain that
all taxpayers receive accurate interest charges.
Status Update
The IRS’s Private Debt Collection (PDC) Initiative I 21. s Failing In Most
Respects. IRS data now shows that the IRS’s Collection function outperforms
private collection agencies (PCAs) in almost every way, collecting three times as
much as the PCAs and resolving more cases earlier in the process. Overall, the
PCAs have only collected about four percent of the outstanding tax balances
assigned to them, bringing in less than $56 million in commissionable payments
on $1.46 billion of tax debt. The NTA has addressed a number of the PDC
initiative’s deficiencies in prior Annual Reports to Congress and testimony. Many
of these concerns remain while new ones have arisen. In addition, despite initial
expectations that the IRS could learn about state-of-the-art collection practices in
private industry through its work with PCAs, the IRS has now acknowledged that
it has not been able to identify any “best practices” from the private debt
collection industry. The NTA remains concerned that there is an inherently
greater risk to taxpayer compliance, taxpayer rights, and taxpayer privacy when
tax collection is outsourced to private, for-profit businesses. Given this risk and
the PCAs’ unambiguous underperformance as compared with the IRS’s own
Collection function, the NTA continues to believe that the PDC program should
be terminated.
10
The Most Litigated Tax Issues
2.20 IRC§7803(c)(2)(B)(ii)(X) requires the National Taxpayer Advocate to identify the
ten tax issues most often litigated in the federal courts and to classify those issues by
the category of taxpayer affected. The following is a table the most litigated as
determined by TAS:
1
Gross Income 68 8 12% 137 7%
0
1
Collection Due Process 104 8 8% 75 13%
0
Summons Enforcement 108 1 1% 38 8 21%
2 1
Trade or Business Expense 78 27% 38 26%
1 0
1
Accuracy-Related Penalty 47 8 17% 40 43%
7
Civil Damages for Certain Unauthorized Collection 60 8 13% 18 1 6%
11
Table 20. Taxpayer Advocate Service: Postfiling Taxpayer Assistance Program, by
Type
of Issue and Relief, Fiscal Year 2008
12
3. ENFORCEMENT
Individual Enforcement
3.20 The number of audits of individual returns increased slightly in 2008. Those who
earned less than $200,000 had about a 1 percent chance of being audited. Those with
incomes of $200,000 and more had about a 3 percent chance of being audited.
Millionaires
3.30 Meanwhile, taxpayers with incomes of more than $1 million had a 5.6 percent
chance of being audited, a drop from 6.8 percent the year before. The number of audits
for millionaires dropped even though their ranks increased by nearly 54,000.
“We essentially audited as many millionaires as in the previous year, but there were
more returns,” said Terry Lemons, an I.R.S. spokesman. The I.R.S. said it audited just
over 23,000 returns of the nearly 340,000 filed by millionaires in 2007. That compares
with just over 21,800 returns filed by 398,000 millionaires in 2008.
13
The income of the 400 wealthiest Americans swelled in 2006, to an average of $263
million, according to I.R.S. data. Since 1996, this group’s share of the nation’s total
wealth has nearly doubled to more than 22 percent.
Businesses
3.40 On the business front, the overall number of audits rose slightly, but dropped as
a percentage of businesses that submitted a tax return. More emphasis was placed on
medium and large corporations, as audit rates increased slightly for those companies
with more than $50 million in assets and dropped slightly for those with less than $50
million in assets. According to 2008 IRS enforcement data released by the IRS audited
15.3% of returns of corporations with assets of $10 million or more. That is the lowest
audit coverage level since 2003 and down from a 20% coverage rate in 2005.
The tax audit rates of the largest companies are less than half what they were 20 years
ago while more small and mid-size businesses are coming under scrutiny, according to
an organization that monitors the Internal Revenue Service. The Syracuse University-
based Transactional Records Access Clearinghouse has described a "historic collapse"
in audits for corporations holding assets of $250 million or more. About 26 percent of
them were audited in the 2007 budget year compared with 34 percent in 2006 and 43
percent in 2005.
Collection Enforcement
3.50 Overall, some of our most common enforcement tools at the IRS also showed
increases:
The IRS filed 2.6 million levies in 2008 and 3.8 million in 2007. It filed 683,659
liens in 2007 and 768,168 liens during 2008, a substantial increase from five
years earlier.
14
15
16
Table 9a. Examinat
Examination, by Typ
Typ
18
Table 18. Criminal Investigation Program, by Status or
Disposition, Fiscal Year 2008
Status or disposition Total Legal source tax Illegal source Narcotics-related financial crimes
crimes [1] financial crimes [2] [3]
The IRS also assists state agencies by identifying and reporting information on
emerging tax administration issues. This is accomplished through the IRS entering into
agreements to share information with the state agencies. There are more than 900 joint
efforts underway. Examples include the sharing of examination reports, abusive scheme
data, and licensing verification.
Return Information
3.90 “Return information” includes everything else that has anything to do with a
person’s potential tax liability. Examples are any information extracted from a return like
names of dependents, business location, or bank account information; the taxpayer's
name, mailing address, or identification number; information on whether a return has
been or will be examined or subject to any other investigation; information contained on
transcripts of accounts or on IRS computer systems; the fact of filing a return; and
whether a taxpayer has a balance due account.
19
IRS Study Provides Tax Gap Estimate
3.100 Internal Revenue Service officials have announced that they have updated their
estimates of the Tax Year 2001 tax gap based on the National Research Program
(NRP). The updated estimate of the overall gross tax gap for Tax Year 2001 – the
difference between what taxpayers should have paid and what they actually paid on a
timely basis – comes to $345 billion. This figure falls at the high end of the range of
$312 billion to $353 billion per year, an estimate released in March, 2005.
Sources of Misreporting
3.110 Though the net misreporting percentage varies by category of income, the
rates reflect that compliance is highest where there is third-party reporting or
withholding. Simply stated, compliance is highest where there is third-party
reporting.
For example, one percent of all wage, salary, and tip income is
misreported, contributing an estimated $10 billion to the tax gap. In
contrast, nonfarm sole proprietor income, which is reported on a Schedule
C and is subject to little third-party reporting or withholding, has a net
misreporting percentage of 57 percent, contributing about $68 billion to the
tax gap.
• nonfiling,
• underreporting and
• underpayment.
Underreporting
3.140 Of these three components, underreporting of income tax, employment taxes and
other taxes represents about 80 percent of the tax gap. The single largest sub-
component of underreporting involves individuals understating their incomes, taking
improper deductions, overstating business expenses
20
and erroneously claiming credits. Individual underreporting represents about half of the
total tax gap. Individual income tax also accounts for about half of all tax liabilities.
Noncompliance Rising
3.160 Overall, the noncompliance rate is from 15 percent to 16.6 percent of the true tax
liability. The old estimate, derived from compliance data for Tax Year 1988 and earlier,
was 14.9 percent.
21
Areas With Improved Compliance
3.180 Among the areas where compliance seems to have improved is the reporting of
farm income. Overall, compliance is highest where there is third-party reporting and/or
withholding.
For example, most wages, salaries and tip compensation are reported by
employers to the IRS through Form W-2. Preliminary findings from the
NRP indicate that less than 1.5 percent of this type of income is
misreported on individual returns. IRS researchers anticipate identifying
other specific areas of deterioration and improvement in the coming
months as they complete the detailed analysis of the study’s data.
Tax Year 2001 Gross Tax Gap by Type of Tax and Type of
Noncompliance (in $ billions
22
• NRP is selecting the TY 2004 (3,800 returns) portion of the sample. Expect
results by December 2008
Tax Year 2001 Gross Tax Gap by Type of Tax and IRS Operating Division (in $ billions)
S e l f -
N/A 39 N/A 39 N/A N/A 39 51.9%
Employment
FICA and
0 1 7 8 8 4 20 3.0%
FUTA
Excise
0 0 0 0 0 0 1
Tax †
Noncompliance
12.1% 27.1% 5.3% 22.3% 8.0% 3.4% 16.3%
Rate
* Unrelated Business Income Tax is shown as corporation income tax. † Includes
underpayment gap only.
# No estimate is available for this component.
Amounts may not add to totals due to rounding. Zeros indicate amounts less than $0.5 billion. See Figure 1 regarding
reliability of estimates.
23
Tax Year 2001 Individual Income Tax Underreporting Gap and Net Misreporting
Percentage (NMP) Associated with Income and Offset Line Items
24
25
2009 Budget
3.210 The Internal Revenue Service will hire more than 3,500 frontline enforcement
employees as it embarks on its largest hiring initiative in recent history, Deputy
Commissioner for Services and Enforcement Linda E. Stiff said March 30. This number
includes more than 2,000 new revenue agents and revenue officers, Stiff said during a
luncheon at the Tax Executives Institute's 59th Midyear Conference. Several hundred of
these new hires will be directed at large corporate compliance, and as many as 700 will
be hired to deal with international issues, she said.
The hiring push comes on the heels of the fiscal year 2009 omnibus bill, which contains
$630 million above IRS's current funding level for it to address noncompliance through
improved technology, collection efforts, and audits, Stiff said. The Obama administration
and the Treasury Department are strongly supporting IRS in its efforts to combat
abuses in the international arena, Stiff said. IRS's strategy in this area includes an
integrated approach composed of separate yet complementary programs, such as
international collaboration and information sharing, as well as information reporting and
withholding, she said.1
2009 Budget
3.220 The FY 2009 President’s Budget for the IRS increased funding as part of a
strategy to improve compliance by focusing on the following priorities:
1
Mar. 31 -- BNA, Inc. Daily Tax Report
26
Overview - Abusive Return Preparer
27
3.230 The IRS continues to expand and enhance its abusive preparer program. The
program was developed to enhance compliance in the return-preparer community by
engaging in enforcement actions and/or asserting appropriate civil penalties against
unscrupulous or incompetent return preparers. Bad preparers are a significant problem
for both the IRS and taxpayers.
Return preparer fraud generally involves the preparation and filing of false income tax
returns by preparers who claim inflated personal or business expenses, false
deductions, unallowable credits or excessive exemptions on returns prepared for their
clients. This includes inflated requests for the special one-time refund of the long-
distance telephone tax. Preparers may also manipulate income figures to obtain tax
credits, such as the Earned Income Tax Credit, fraudulently.
In some situations, the client (taxpayer) may not have knowledge of the false expenses,
deductions, exemptions and/or credits shown on their tax returns. However, when the
IRS detects the false return, the taxpayer — not the return preparer — must pay the
additional taxes and interest and may be subject to penalties.
Audits of 30 Clients
3.240 Another aspect of the IRS preparer program is identifying suspect preparers and
audited their clients. If during an examination a revenue suspects that some of the
deficiencies on a return were caused by the preparer she can refer the matter to an
area coordinator. After review the coordinator can initiate a project on the preparer. The
preparer is sent a letter notifying her that she has been selected for a project and 30 of
her client's returns are audited. If significant deficiencies are found then the IRS may
choose one of several courses of action including:
28
4. EXAMINATION
Examination Reengineering
4.10 Changes to the tax law, technology, and the business environment necessitated
the IRS to make changes to its examination process. SB/SE initiated Examination
Reengineering in order to improve the quality and consistency of its examinations
across the country. SB/SE gathered feedback from multiple sources to design the new
field and office examination processes. Since 2003 the IRS has been implementing this
process.
• Clearly communicated expectations of both the taxpayer and field agent through
mandatory discussions between the revenue agent and taxpayer regarding the
specific examination issues, required documentation, and a mutually agreed
upon date to complete the examination.
• At the beginning of each examination, field agents and their managers will meet
to discuss the agent’s approach to the examination, the plan to close the
examination, and the mutual commitment date arrived at with the taxpayer.
• Field agents will use standardized templates for every examination issue to
gather the information necessary to resolve issues. Agents will use a
standardized guide when deciding if additional issues need to be added to the
examination. The agent will explain to the taxpayer if any additional issues are
included in the examination.
Phishing scams often take the form of an e-mail that appears to come from a
legitimate source, including the IRS. The IRS never initiates unsolicited e-mail
contact with taxpayers about their tax issues. Taxpayers who receive unsolicited
e-mails that claim to be from the IRS can forward the message to
phishing@irs.gov. Further instructions are available at IRS.gov. To date,
taxpayers have forwarded scam e-mails reflecting thousands of confirmed IRS
phishing sites. If you believe you have been the target of an identity thief,
information is available at IRS.gov.
29
accounts or through other entities. Recently, the IRS provided guidance to
auditors on how to deal with those hiding income offshore in undisclosed
accounts. The IRS draws a clear line between taxpayers with offshore accounts
who voluntarily come forward and those who fail to come forward.
Taxpayers also evade taxes by using offshore debit cards, credit cards, wire
transfers, foreign trusts, employee-leasing schemes, private annuities or life
insurance plans. The IRS has also identified abusive offshore schemes including
those that involve use of electronic funds transfer and payment systems, offshore
business merchant accounts and private banking relationships.
3. Filing False or Misleading Forms The IRS is seeing scam artists file
false or misleading returns to claim refunds that they are not entitled to. Frivolous
information returns, such as Form 1099-Original Issue Discount (OID), claiming
false withholding credits are used to legitimize erroneous refund claims. The new
scam has evolved from an earlier phony argument that a “strawman” bank
account has been created for each citizen. Under this scheme, taxpayers
fabricate an information return, arguing they used their “strawman” account to
pay for goods and services and falsely claim the corresponding amount as
withholding as a way to seek a tax refund.
7. False Claims for Refund and Requests for Abatement This scam
involves a request for abatement of previously assessed tax using Form 843,
Claim for Refund and Request for Abatement. Many individuals who try this have
not previously filed tax returns. The tax they are trying to have abated has been
assessed by the IRS through the Substitute for Return Program. The filer uses
Form 843 to list reasons for the request. Often, one of the reasons given is
"Failed to properly compute and/or calculate Section 83-Property Transferred in
Connection with Performance of Service."
31
The IRS has recently seen an increase in the improper use of private annuity
trusts and foreign trusts to divert income and deduct personal expenses. As with
other arrangements, taxpayers should seek the advice of a trusted professional
before entering into a trust arrangement.
12. Fuel Tax Credit Scams The IRS is receiving claims for the fuel tax credit
that are unreasonable. Some taxpayers, such as farmers who use fuel for off-
highway business purposes, may be eligible for the fuel tax credit. But some
individuals are claiming the tax credit for nontaxable uses of fuel when their
occupation or income level makes the claim unreasonable. Fraud involving the
fuel tax credit is considered a frivolous tax claim, potentially subjecting those who
improperly claim the credit to a $5,000 penalty.
5. APPEALS
Strategic Priorities:
5.10 Appeals has set forth the following as its strategic priorities for 2009:
• Increase taxpayer awareness of the Appeals process and their rights within the
process
• Increase taxpayer awareness of alternative dispute resolution programs
• Improve our processes to meet customer needs and expectations and to reduce
the length of the Appeals process while spending the right amount of time with
each taxpayer
• Promote employee productivity, engagement, and satisfaction
During the two-year test period, effective from the date of publication of this
announcement, Appeals will initially offer mediation and arbitration for OIC and TFRP
cases for taxpayers whose appeals are considered at an Appeals office located in one
of the following cities:
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Atlanta, Georgia
Chicago, Illinois
Cincinnati, Ohio
Houston, Texas
Indianapolis, Indiana
Louisville, Kentucky
Phoenix, Arizona
San Francisco, California
Application Process
5.40 Either the taxpayer or Appeals may submit a request to mediate or arbitrate after
consulting with and obtaining the concurrence of the other party. A taxpayer may submit
a request to mediate or arbitrate by sending a written request to the appropriate
Appeals Team Manager and a copy to:
Chief of Appeals
Attn: Tax Policy & Procedure —
Collection & Processing
1099 14th St. NW, Suite 4200 East
Washington, DC 20005
For an OIC case, the written request to mediate or arbitrate should include:
►The taxpayer’s name, address, and taxpayer identification number, and the
name, title, address, and telephone number of the person to contact;
►The name of the Appeals Team Manager, Appeals Officer, or Settlement
Officer;
►The taxable periods involved;
►A detailed description of the issue(s) for which the taxpayer is requesting
mediation or arbitration, including both the specific dollar amount and the basis
by which that amount was determined; and
►A representation that the disputed issue is not an excluded issue listed in
section 4.01 above or in Revenue Procedure 2002-44 or Revenue Procedure
2006-44.
TFRP
5.50 For a TFRP case, the written request to mediate or arbitrate should contain items
above and a detailed explanation of the taxpayer’s position, including explanations of
the following (where applicable):
►Why the taxpayer was not required to collect, truthfully account for, and pay
over the income, employment or excise taxes;
►Why the taxpayer did not willfully fail to collect or truthfully account for and pay
over such tax, or willfully attempt in any manner to evade or defeat the payment
of such tax; and
►Why the computation of the Trust Fund Recovery Penalty should reflect
payment(s) designated specifically to the trust fund portion of the unpaid tax.
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If the taxpayer wants to use a non-IRS co-mediator (at the taxpayer’s expense) or a
non-IRS arbitrator (expense shared equally by the taxpayer and Appeals), the
application should state this preference.
Whistleblower Reforms
6.10 Tax Relief and Health Care Act of 2006 reforms the reward program for
individuals who provide information to IRS regarding violations of the tax laws for
information provided on or after the enactment date. Specifically, the Act establishes a
reward range for such 'whistleblowers' of 15% to 30% of proceeds collected by IRS
(subject to certain exceptions) where the amount in dispute exceeds $2,000,000. For
awards for individuals the income must exceed $200,000. It also provides IRS with
regulatory authority to create a Whistleblower Office to administer the program. ( Code
Sec. 7623, as amended by Act Sec. 406) An above-the-line deduction is allowed for
attorneys' fees and court costs related to whistleblower rewards (Code Sec. 62(a)(21),
as amended by Act Sec. 406(a)(3)).
34
the amount of the refinancing doesn't exceed the amount of the refinanced
indebtedness. (Joint Committee on Taxation JCX-86-07)
Basis Reduction
6.30 The basis of the taxpayer's principal residence is reduced by the excluded
amount, but not below zero. (Code Sec. 108(h)(1))
Misclassified Workers
6.50 Employees working for employers who failed to withhold Social Security and
Medicare taxes should use new Form 8919 to report and pay their share of these taxes.
This includes section 530 employees — that is, people who work for employers claiming
relief from federal payroll taxes under section 530 of the Revenue Act of 1978. It also
includes employees who are treated as independent contractors but who have received
a determination letter from the IRS which states they are employees.
Workers who believe they are misclassified as independent contractors can file Form
SS-8 with the IRS and request a determination of their worker classification. For
employees, the Social Security tax rate is 6.2 percent and the Medicare tax rate is 1.45
percent. Normally, employers withhold these taxes from workers’ pay, match these
amounts and turn over the combined amounts to the IRS. Workers, properly classified
as independent contractors, should not use Form 8919 but instead, continue to use
Schedule SE. IRS Publication 1779 has further details on employee versus independent
contractor status.
Misclassification
6.60 A 2009 TIGTA report says IRS still needs to do more to identify misclassified
workers [Audit Report No. 2009-30-035]: The Treasury Inspector General for Tax
Administration (TIGTA) has issued an audit report that evaluates the effectiveness of
IRS actions with respect to identifying misclassified workers. The report notes that the
“misclassification of employees as independent contractors is a nationwide issue
affecting millions of workers that continues to grow and contribute to the tax gap.”
Workers are frequently misclassified for a variety of reasons, either intentionally to save
costs, or unintentionally because of a lack of knowledge. Some independent contractor
misclassifications occur because certain employers are protected from potentially large
employment tax assessments by Section 530 of the Revenue Act of 1978. The report
notes that the IRS' interest in this issue is not to reclassify workers from independent
35
contractors to employees. Rather, it is to ensure that employers are making the proper
determinations and that workers are being treated appropriately. The report states that
while the IRS has done a great deal to educate employers about proper classification of
workers, much more needs to be done. For example, studies of the impact of
misclassification on the tax gap are more than twenty years old. Therefore, it is difficult
for the IRS to estimate the size of the problem today, or the overall effectiveness that its
actions to date are having. The most recent IRS estimate of the tax gap is $345 billion,
with an estimated $1.6 billion resulting from worker misclassification. However, the $1.6
billion figure is based on 1984 data, and is likely to be a great deal higher now.
Recommendations
6.70 TIGTA recommends that the IRS develop an agency-wide employment tax
program to coordinate the decision-making process and efforts among its business
divisions. The report also recommends that the IRS Deputy Commissioner for Services
and Enforcement (DCSE) conduct a formal compliance study to measure the current
impact of worker misclassification on the tax gap. The IRS concurred with the findings in
the audit report. DCSE will coordinate an agency-wide employment tax program. The
Director of Specialty Programs for the IRS Small Business/Self-Employed Division will
coordinate a study in fiscal year 2009 on worker classification and other employment tax
issues. The planning for this project has already begun.
Agreement
6.90 As part of the deferred prosecution agreement and in an unprecedented move,
UBS, based on an order by the Swiss Financial Markets Supervisory Authority (FINMA),
has agreed to immediately provide the United States government with the identities of,
and account information for, certain United States customers of UBS’s cross-border
business. Under the deferred prosecution agreement, UBS has also agreed to
expeditiously exit the business of providing banking services to United States clients
with undeclared accounts. As part of the deferred prosecution agreement, UBS has
further agreed to pay $780 million in fines, penalties, interest and restitution.
Allegations
6.100 Justice Department alleges that Swiss bankers routinely traveled to the United
States to market Swiss bank secrecy to United States clients interested in attempting to
evade United States income taxes. Court documents assert that, in 2004 alone, Swiss
bankers allegedly traveled to the United States approximately 3,800 times to discuss
their clients’ Swiss bank accounts. The information further alleges that UBS managers
and employees used encrypted laptops and other counter-surveillance techniques to
help prevent the detection of their marketing efforts and the identities and offshore
assets of their U.S. clients. According to the information, clients of the cross-border
business in turn filed false tax returns which omitted the income earned on their Swiss
bank accounts and failed to disclose the existence of those accounts to the IRS.
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Prior Charges
6.110 In November 2008, UBS executive Raoul Weil was indicted by a federal grand
jury in Fort Lauderdale and charged with conspiring to defraud the United States for his
alleged role in overseeing the United States cross-border business. The district court
recently declared him to be a fugitive.
In June 2008, former UBS private banker Bradley Birkenfeld pleaded guilty to a charge
of conspiring to defraud the United States for similar conduct. Birkenfeld is scheduled to
be sentenced on May 1, 2009. Also, in June 2008, the U.S. District Court in Miami
authorized the Internal Revenue Service to serve upon UBS a so-called “John Doe”
summons seeking records that would identify United States taxpayers with accounts at
UBS in Switzerland who have elected to conceal the existence of their accounts from
the IRS.
“UBS executives knew that UBS’s cross-border business violated the law,” said R.
Alexander Acosta, U.S. Attorney for the Southern District of Florida. “They refused to
stop this activity, however, and in fact instructed their bankers to grow the business. The
reason was money -- the business was too profitable to give up. This was not a mere
compliance oversight, but rather a knowing crime motivated by greed and disrespect of
the law.”
37
►Taxes and interest due going back 6 years will be assessed.
►The taxpayer must file or amend all returns, including information returns, and
Form TD F 90-22.1 (FBAR).
Penalties
6.150 IRS will assess either an accuracy or delinquency penalty for all years (no
reasonable cause exception will be applied).
In lieu of all other penalties that may apply (including FBAR and information return
penalties), IRS well assess a penalty equal to 20% of the amount in foreign bank
accounts/entities in the year with the highest aggregate account/asset value. The
penalty is reduced to 5% if, with respect to the accounts or entities formed: (a) the
taxpayer did not open them or cause them to be opened or formed; (b) there has been
no activity during the period the accounts/entities were controlled by the taxpayer; and
(c) all applicable U.S. taxes have been paid on the funds in the accounts/entities (where
only the earnings have escaped U.S. taxes).
Fully Cooperate
6.160 The above terms will apply only to taxpayers that “fully cooperate with the IRS
both civilly and criminally,” for all voluntary disclosure requests that are submitted to
IRS, and are not yet resolved. The terms will remain in effect only for six months from
Mar. 23, 2009 (the date that the Deputy Commissioner for Services and Enforcement
released the memorandum on voluntary disclosure requests). IRS Commissioner Doug
Shulman says that after that time, IRS would reevaluate all of its options, and warned
that for those “who continue to hide their heads in the sand, the situation will only
become more dire.”
Refer to the Publication 4671 (VITA Grant Program Overview and Application Package)
and to the frequently asked questions for more information on the VITA Grant Program.
Questions about the VITA Grant Program may be emailed to the
Grant.Program.Office@irs.gov.
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Identity Theft
6.180 Identity theft is becoming a huge problem for the tax system. The IRS has
established a new office for reporting. identity theft using stolen SSN’s. Their employers
report that income to the IRS on W-2’s and the income is attributed to the theft victim.
Two scenarios are most common:
►The taxpayer receives an audit notice from the IRS showing that he is working
several jobs in many states or;
►The taxpayer attempts to file a return and it is rejected by the IRS because
someone has already filed a return using the taxpayers SSN.
The IRS website now gives taxpayers who are the victims of identity theft the
following advice:
What do I do if the IRS contacts me because of a tax issue that may have been
created by an identity theft?
If you receive a notice or letter in the mail from the IRS that leads you to believe
someone may have used your Social Security number fraudulently, please
respond immediately to the name, address, and/or number printed on the IRS
notice.
►states more than one tax return was filed for you, or
►indicates you received wages from an employer unknown to you.
►An identity thief might also use your Social Security number to file a tax return
in order to receive a refund. If the thief files the tax return before you do, the IRS
will believe you already filed and received your refund if eligible.
If your Social Security number is stolen, it may be used by another individual to get a
job. That person’s employer would report income earned to the IRS using your Social
Security number, making it appear that you did not report all of your income on your tax
return.
If you have previously been in contact with the IRS and have not achieved a resolution,
please contact the IRS Identity Protection Specialized Unit, toll-free at 1-800-908-4490.
What do I do if I have not been contacted by IRS for a tax issue but believe I am a
victim of identity theft?
If your tax records are not currently affected by identity theft, but you believe you
may be at risk due to a lost/stolen purse or wallet, questionable credit card
39
activity, credit report, or other activity, you need to provide the IRS with proof of
your identity.
You should submit a copy, not the original documents, of your valid Federal or
State issued identification, such as a social security card, driver's license, or
passport, etc, along with a copy of a police report or Federal Trade Commission
Identity Theft Affidavit. If the FTC Affidavit is not notarized, a witness (non-
relative) must sign it.
Mailing address:
Internal Revenue Service
P.O. Box 9039
Andover, MA 01810-0939
For your convenience, Form 14026 is available as a cover sheet for submitting your
documentation.
You may also contact the IRS Identity Protection Specialized Unit, toll-free
1-800-908-4490 for guidance.
Hours of Operation: Monday – Friday, 8:00 a.m. – 8:00 p.m. your local time (Alaska &
Hawaii follow Pacific Time).
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IRS Hotlines and Toll-Free Numbers
IRS Telephone Lines and Hours of Operation
Practitioner Priority Service (866) 860-4259 M–F, 8:00 a.m.–8:00 p.m., local time
IRS Tax Help Line for Individuals (800) 829-1040 M–F, 7:00 a.m.–10:00 p.m., local time
Business and Specialty Tax Line (800) 829-4933 M–F, 7:00 a.m.–10:00 p.m., local time
Identity Protection Specialized Unit 1-800-908-4490M – F, 8:00 a.m. – 8:00 p.m. local time
Forms and Publications (800) 829-3676 M–F, 7:00 a.m–10:00 p.m., local time
National Taxpayer Advocate Help (877) 777-4778 M–F, 7:00 a.m.–10:00 p.m., local time
Line
Telephone Device for the Deaf (800) 829-4059 M–F, 7:00 a.m.–10:00 p.m., local time
(TDD): Forms, Tax Help, TAS
Government Entities (TEGE) Help (877) 829-5500 M–F, 8:30 a.m. – 4:30 p.m., ET
Line
Forms 706 and 709 Help Line (866) 699-4083 M–F, 7:00 a.m.–7:00 p.m., local time
Employer Identification Number (800) 829-4933 M–F, 7:00 a.m.–10:00 p.m., local time
(EIN)
Excise Tax and Form 2290 Help (866) 699-4096 M–F, 8:00 a.m.–6:00 p.m., ET
Line
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7. COLLECTION
IRS data show that greater use of traditional enforcement tools like liens and levies
does not have a significant impact on overall collection. For example, the number of
levies the IRS has imposed plummeted from 3,659,000 in FY 1997 just before the IRS
Restructuring and Reform Act of 1998 (RRA ’98), to 220,000 in FY 2000, and then
climbed back up to 3.76 million in FY 2007.32. Yet the IRS collection yield has risen on
a slow, relatively consistent and gradual path over that period of time with no
discernable revenue loss resulting from the post-RRA ’98 reduction in levies, as shown
by the following chart.
From the start private collection agencies have been controversial. While hailed by
some as an opportunity to improve government service by utilizing more efficient and
more motivated private enterprises, it has also been criticized by others as a misguided
and inefficient effort to privatize government.
42
The American Jobs Creation Act of 2004 (Jobs Act) allowed IRS to use private
companies to collect taxes owed to the federal government by providing that nothing in
any provision of law may be construed to prevent IRS from entering into a qualified tax
collection contract. (Code Sec. 6306(a), as added by Act Sec. 881(a)(1)) The private
collection agency could keep and use up to 25% of the amount collected under qualified
tax collection contract for the costs of services performed under the contract. The
amount credited as paid by any taxpayer is determined without regard to these rules on
fees and expenses. (Code Sec. 6306(c))
End of programs. IRS determined that the tax collection work is best done by IRS
employees who have more flexibility handling cases, which is particularly important with
many taxpayers currently facing economic hardship. Accordingly, it won't renew the
current one-year contracts with two private debt collectors that expire on Mar. 6, 2009.
IRS Commissioner Doug Shulman cited the results of a cost-effectiveness study of the
private debt collection program (which was supported by an independent review) that
showed that it was reasonable to conclude that when working similar inventory, IRS
collection was more cost effective than the private contractors. He noted that IRS
anticipates hiring over 1,000 new collection personnel in FY 2009.
“We need to ensure that we balance our responsibility to enforce the law with the
economic realities facing many American citizens today,” Shulman said. “We want to go
the extra mile to help taxpayers, especially those who’ve done the right thing in the past
and are facing unusual hardships.”
On a wide range of situations, IRS employees have flexibility to work with struggling
taxpayers to assist them with their situation. Depending on the circumstances,
taxpayers in hardship situations may be able to adjust payments for back taxes, avoid
defaulting on payment agreements or possibly defer collection action.
Flexibility
7.40 Among the areas where the IRS can provide assistance:
Added Flexibility for Missed Payments: The IRS is allowing more flexibility for
previously compliant individuals in existing Installment Agreements who have
difficulty making payments because of a job loss or other financial hardship. The
IRS may allow a skipped payment or a reduced monthly payment amount without
43
automatically suspending the Installment Agreement. Taxpayers in a difficult
financial situation should contact the IRS.
Expedited Levy Releases: The IRS will speed the delivery of levy releases by
easing requirements on taxpayers who request expedited levy releases for
hardship reasons. Taxpayers seeking expedited releases for levies to an
employer or bank should contact the IRS number shown on the notice of levy to
discuss available options. When calling, taxpayers requesting a levy release due
to hardship should be prepared to provide the IRS with the fax number of the
bank or employer processing the levy.
Practitioners with valid authorizations to use the signature date found on their approved
Form 2848, Power of Attorney and Declaration of Representative, or the caller ID as an
alternate way to authenticate when requesting agreements for clients.
More than 75 percent of those eligible for an installment agreement can establish one
using the online application, according to the IRS. Since launching in October 2006,
more than 30,000 taxpayers have successfully used it to set up a payment agreement.
Eligible taxpayers who owe $25,000 or less in combined tax, penalties and interest can
self-qualify, apply and receive immediate notification of approval for installment
44
agreements – including pre-assessed agreements on tax year 2008 Form 1040
liabilities and paperless direct debit agreements.
NOTE: For security purposes, you will automatically be logged out of OPA
after 20 minutes of inactivity per page. Be sure to gather all the necessary
information so that you are not automatically logged out of OPA before
completing the required information. If you have difficulty entering the data
required, please call the IRS at the number listed under “When should I
call the toll-free number. “
http://www.irs.gov/individuals/article/0,,id=149373,00.html
• within the previous 5 years, the taxpayer has not failed to file or to pay, nor
entered an installment agreement under this provision;
• if requested by the Secretary, the taxpayer submits financial statements, and the
Secretary determines that the taxpayer is unable to pay the tax due in full;
• the installment agreement provides for full payment of the liability within 3 years;
and
• the taxpayer agrees to continue to comply with the tax laws and the terms of the
agreement for the period (up to 3 years) that the agreement is in place.[Act §
3467; IRC § 6159)
<$25,000 Liabilities
7.70 The IRS has chosen to create a more liberal system that allows installment
agreements of up to 5 years for balances of less than $25,000.
Form 433A
7.80 In January, 2008 the IRS issued a revised Form 433A. The form requires that
those taxpayers who are employed to complete only the first 4 pages while self
employed individuals must complete 2 additional pages. It also provides a more logical
concise presentation of the taxpayer’s assets.
45
differentials for Hawaii and Alaska. It also added a new category of expenses for out-of-
pocket health care expenses.
Total allowable expenses include those expenses that meet the necessary expense
test. The necessary expense test is defined as expenses that are necessary to provide
for a taxpayer's and his or her family's health and welfare and/or production of income.
The expenses must be reasonable. The total necessary expenses establish the
minimum a taxpayer and family needs to live.
• National Standards
• Out-of-Pocket Health Care
• Local Standards
• Other Expenses
National Standards: These establish standards for reasonable amounts for five
necessary expenses. Four of them come from the Bureau of Labor Statistics (BLS)
Consumer Expenditure Survey: food, housekeeping supplies, apparel and services,
and personal care products and services. The fifth category, miscellaneous, is a
discretionary amount established by the Service. It is $87 for one person up to $235
for 4 persons. The IRS allows a total of $262 per month for each member of the
household above 4.
Note: All five standards are included in one total national standard expense.
Local Standards: These establish standards for two necessary expenses: housing
and transportation. Taxpayers will be allowed the local standard or the amount
actually paid, whichever is less.
46
include rent and/or house payments, taxes, repairs and utilities the IRM provides
as follows:
The utilities include gas, electricity, water, fuel, oil, bottled gas, trash
and garbage collection, wood and other fuels, septic cleaning, and
telephone. Housing expenses include: mortgage or rent, property
taxes, interest, parking, necessary maintenance and repair,
homeowner's or renter's insurance, homeowner dues and
condominium fees. Usually, this is considered necessary only for the
place of residence. Any other housing expenses should be allowed
only if, based on a taxpayer's individual facts and circumstances,
disallowance will cause the taxpayer economic hardship. [ IRM
5.15.1.9
47
D. Conditional expenses. These expenses do not meet the necessary
expenses test. However, they are allowable if the tax liability, including projected
accruals, can be fully paid within five years.
8. OFFER IN COMPROMISE
Number of Offers
8.10 The total number of proposed offer has halved from 128,000 in FY 2001 to
46,000 in FY 2007. The number of OICs accepted declined from 38,643 (or 34 percent)
in FY 2001, 12,000 in FY 2007 (or 24%) and 10,000 in 2008 (or 24%). The IRS has
made it so difficult to secure an offer in compromise that many taxpayers and their
representative no longer choose to propose a compromise.
48
OIC’s FY2000 to 2008
8.20 In February, 2007 the IRS issued new offer in compromise forms which apply the
provisions of TIPRA 2005 discussed below. Taxpayers proposing compromises based
upon doubt as to collectibility of effective tax administration must submit revised Form
656. Taxpayers proposing an offer based upon doubt as to liability must now submit
Form 656-L and a narrative setting forth defenses to the liability. To comply with the
new downpayment requirements taxpayers must submit Form 656-PPV with the
required downpayment.
A taxpayer filing a periodic-payment offer must pay the first proposed installment
payment with the application and pay additional installments while the IRS is evaluating
the offer (IRC section 7122(c)(1)(B)). A periodic-payment offer means any offer of
payments made in six or more installments.
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Not Refundable
8.50 The 20 percent payment for a lump-sum offer and the installment payments on a
periodic-payment offer are “payments on tax” and are not refundable deposits (IRC
section 7809(b) and Treasury Regulation 301.7122-1(h)).
Taxpayers filing periodic-payment offers must submit the full amount of their first
installment payment in order to meet the processability criteria. Otherwise, the IRS will
deem the offer as unprocessable and will return the application to the taxpayer along
with the $150 fee.
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Deemed Accepted
8.90 The IRS will deem an OIC “accepted” that is not withdrawn, returned, or rejected
within 24 months after IRS receipt. When calculating the 24-month timeframe, the IRS
will disregard any time periods during which a liability included in the OIC is the subject
of a dispute in any judicial proceeding (IRC section 7122(f) as amended by TIPRA). In
five years the consideration period for deemed acceptance will become 12 months.
Background
8.100 An offer in compromise is a settlement of a delinquent tax account for less than
the full amount due. Sec. 7122 states that the IRS may compromise any civil or criminal
case arising under the Internal Revenue Laws prior to reference to the Department of
Justice for prosecution or defense. In the past very few offers were accepted because
the standards were almost impossible to meet and the IRS really did not encourage
them. But in 1992, the IRS decided that they had a major problem with accounts
receivable inventory and a growing number of cases reported as currently not
collectible. The new policy espoused by the IRS was that they would accept an OIC
when it was unlikely that the tax liability could be collected in full and the amount offered
reasonably reflected collection potential.
Supporting Documents
8.110 The financial statements require the proponent to supply documentation for each
item on the forms, i.e. pay stubs, car payment book, mortgages, pay stubs, charge
account statements, and bank statements. The IRS considers smaller liability offers
without conducting a field investigation, therefore it is requiring the proponent to supply
all the info to make a decision without field verification.
51
Determining Processability
8.130 The IRS campuses do an intensive review of each offer to determine if it is
processable. The author believes that the IRS makes a concerted effort to return most
offers to avoid the effort of performing a substantive consideration. An offer in
compromise will be deemed not processable if one or more of the following criteria are
present:
A. Taxpayer Not in Compliance - All tax returns for which the taxpayer
has a filing requirement must be filed. This rule applies even if a Service
employee previously decided not to pursue the filing of the return under the
provisions of Policy Statement P-5-133, because it was believed to have "little or
no tax due" . In-business taxpayers must have timely deposited, filed and paid all
required employment tax returns for the two (2) preceding quarters prior to filing
the offer, and must be current with federal tax deposits for the quarter in which
the offer was submitted.
D. Taxpayer did not submit the most current revision of Forms 433-
A and/or 433-B - The most current revision of the Collection Information
Statement Forms 433-A and/or 433-B must be submitted with the offer.
52
E. Taxpayer did not submit the application fee with the offer - The
application fee of $150 or the signed Form 656-A, Income Certification for Offer
in Compromise Application Fee, must be submitted with each Form 656 (Form
656-A applies to individual taxpayers only).
An offer cannot be returned for the sole reason that the cost of an investigation may
exceed the amount offered. [IRM 5.8.3.4.1]
Initial Review
8.150 For processable offers one of the first considerations is to determine if the
taxpayer can pay in full. The following initial review should be conducted on all
processable offers to make that determination.
• Complete the Full Pay worksheet using the taxpayer's figures only, as
reflected on the CIS.
• Deferred Payment (offers with payment terms over the remaining statutory
period for collecting the tax.).
53
NOTE: In all three cases, the IRS will release any filed Notice of Federal
Tax Lien once you have fully paid the offer amount and any interest that
has accrued.
Cash Offer
8.170 You must pay cash offers within 90 days of acceptance. You should offer the
realizable value of your assets (quick sale value) plus the total amount the IRS could
collect over forty-eight months of payments represent value of income). When the ten-
year statutory period for collection expires in less than forty-eight months, you must use
the Deferred Payment Chart shown in the instructions to Form 656. The Internal
Revenue Service's method of determining the adequacy of an offer could be best
expressed by:
In applying this formula, the IRS determines the Quick Sale Value of all of the client's
assets and then adds the amount of the present value of the taxpayer's ability to pay. It
aggregates the two numbers to arrive at an Offer in Compromise amount. The following
paragraphs will discuss the Internal Revenue Service's methodology for determining
quick sale value and the present value of income.
Option One is: Full payment of the realizable value of your assets within
90 days from the date the IRS accepts your offer and Your future income
in monthly payments during the remaining life of the collection statute;
Option Two is: Cash payment for a portion of the realizable value of your
assets within 90 days from the date the IRS accepts your offer and
Monthly payments during the remaining life of the collection statute for
both the balance of the realizable value and your future income;
Option Three is: The entire offer amount in monthly payments over the
life of the collection statute. As with short-term deferred payment offers,
the IRS may file a Notice of Federal Tax Lien.
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Corporate Trust Fund Liabilities
8.200 The IRS has. recently changed its rules with respect to in business offers in
compromise. It now requires that each potentially responsible officer of the company
sign an agreement to assessment of the trust fund recovery penalty in advance of
consideration of any corporate or LLC offer. The new system is extremely unfair
because the IRS is requiring even those who should not be held liable for the TFRP to
agree to liability and assessment. Only after the liability has been assessed against a
non-responsible person may she file a claim for refund and defend against the penalty.
The system is extremely unfair and represents an attempt to deprive officers of their
statutory due process rights.
• Hardship,
• Public policy, and
• Equity
Treasury Regulation 301.7122-1 authorizes the Service to consider offers raising these
issues. These offers are called Effective Tax Administration (ETA) offers.
Encourage Compliance
8.230 The availability of an Effective Tax Administration (ETA) offer encourages
taxpayers to comply with the tax laws because taxpayers will:
The Effective Tax Administration (ETA) offer allows for situations where tax liabilities
55
Only Available If There Is No Doubt As to Liability Or Collectibility
8.240 An Effective Tax Administration (ETA) offer can only be considered when the
Service has determined that the taxpayer does not qualify for consideration under Doubt
as to Liability (DATL) and/or Doubt as to Collectibility (DATC). The taxpayer must
include the Collection Information Statement (Form 433-A and/or Form 433-B) when
submitting an offer requesting consideration under Effective Tax Administration (ETA).
Economic hardship standard of § 301.6343-1 specifically applies only to individuals.
[IRM 5.8.11.1]
Factors
8.260 Factors supporting (but not conclusive of) a determination of economic hardship
include:
Undermine Compliance
8.270 Factors supporting (but not conclusive of) a determination that compromise
would not undermine compliance by taxpayers with the tax laws include:
Exceptional Circumstances
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8.280 The following examples illustrate cases where exceptional circumstances exist
such that collection of the full liability will be detrimental to voluntary compliance by
taxpayers; and compromise of the liability would not undermine compliance by
taxpayers with the tax laws.
57
EXHIBITS
59
60
61
62
63
64
65
National Standards: Food, Clothing and Other Items
Expense One Two Three Four
Person Persons Persons Persons
66
Public Transportation
Public Transportation
National $173
Ownership Costs
Operating Costs
67
Metropolitan Area One Car Two Cars
The data for the Operating Costs section of the Transportation Standards are provided
by Census Region and Metropolitan Statistical Area (MSA). The following table lists the
states that comprise each Census Region. Once the taxpayer’s Census Region has
been ascertained, to determine if an MSA standard is applicable, use the definitions
below to see if the taxpayer lives within an MSA (MSAs are defined by county and city,
where applicable). If the taxpayer does not reside in an MSA, use the regional standard.
California
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Housing and
Housing and Housing and Housing and Housing and
Utilities for a
County Utilities for a Utilities for a Utilities for a Utilities for a
Family of 5 or
Family of 1 Family of 2 Family of 3 Family of 4
more
Contra
1,890 2,220 2,339 2,608 2,650
Costa
Los
1,769 2,077 2,189 2,441 2,480
Angeles
Mendocin
1,292 1,517 1,599 1,783 1,812
o
AND
by
Robert E. McKenzie
THOMSON WEST
Rochester, NY
COPYRIGHT 2009