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2008 IRS REPRESENTATION UPDATE©


By: Robert E. McKenzie

1. A CHANGING IRS TC "1. A CHANGING IRS" \f C \l "1"

More Compliance Centers to Cease Processing Returns:


1.10 TC "More Compliance Centers to Cease Processing Returns:" \f C \l "2" Because of
electronic filing the IRS is gradually eliminating its return processing centers. The closure schedule is
as follows.

· Philadelphia, Memphis & Holtsville no longer process


· Andover 10-09
· Atlanta 10-11

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.

Shrinking IRS Workforce


1.15 TC "Shrinking IRS Workforce" \f C \l "2" As a result of Congressional cuts in IRS budgets its
workforce continues to shrink in 2007. It’s workforce has shrunk from about 100,000 in 2002 to about
87,000 in 2007.

Table 30. Internal Revenue Service Personnel Summary, by Employment Status, Budget Activity, and Selected
Type of Personnel, Fiscal Years 2006 and 2007

Employment status, budget activity, Average positions Number of employees

and selected type of personnel realized [1] at close of fiscal year

2006 [r] 2007 2006 [r] 2007

(1) (2) (3) (4)

Internal Revenue Service, total 91,717 92,033 90,115 86,638

Employment status:

Full-time permanent 78,700 79,217 80,288 79,565

Other 13,017 12,816 9,827 7,073


Commissioner Everson Resigns
1.20 TC "Commissioner Everson Resigns" \f C \l "2" IRS Commissioner Mark Everson resigned on
April 18, 2007. Mr. Everson left the IRS to become president of the American Red Cross. He resigned
from that position within months in the midst of a sex scandal. During his tenure with the IRS, Everson
dramatically increased IRS enforcement activity. Audits more than doubled and there was an even
more dramatic increase in IRS enforced collection actions. Mr. Everson also shifted IRS audit
resources to examine the returns of high income taxpayers. He also initiated an aggressive program to
find and eliminate tax shelters.

New IRS Commissioner


1.25 TC "New IRS Commissioner" \f C \l "2" 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.

New Circular 230 Rules


1.30 TC "New Circular 230 Rules" \f C \l "2" In September the Treasury and the IRS announced
new Circular 230 rules. The revisions to would modify:

· the definition of practice,


· eligibility for enrollment, and
· the rules concerning contingent fees, conflicts of interest, standards with respect to tax returns
and documents, affidavits and other papers, sanctions, discovery, publicity, and appeals.

IRS Expands Access to e-Services Products


1.40 TC "IRS Expands Access to e-Services Products" \f C \l "2" Effective November 1, 2007 all
federally authorized tax professionals and electronic return originators are allowed to use these
e-Services products: Disclosure Authorization, Electronic Account Resolution and Transcript Delivery.
When first launched in the summer of 2004, the e-Services incentive products were reserved for those
who e-filed 100 or more individual returns.

e-Services Products for Practitioners


1.50 TC "e-Services Products for Practitioners" \f C \l "2" e-Services is a suite of Internet products
that allow third-party customers to conduct specific business activities with the IRS electronically and
are an incentive product to promote IRS e-File. All users must register and provide information to be
used online during secure sessions. Registration is confirmed via postal mail. A PIN is mailed directly
to the registrant. Other secure features of e-Services are:

· Principals/responsible officials on the application can delegate access to individual e-Services.


· All users are authenticated against IRS records.
· Passwords must be changed every six months.
· Passwords are known only to the user.
· Every transaction is recorded.
· Transactions are reviewed for access violations.
Taxpayer Identification Number (TIN) Matching
1.60 TC "Taxpayer Identification Number (TIN) Matching" \f C \l "2" TIN Matching is a pre-filing
service offered to payers and/or authorized agents who submit any of six information returns subject to
backup withholding (Forms 1099-B, INT, DIV, OID, PATR, and MISC). With Interactive TIN Matching
authorized payers can match up to 25 payee TIN and name combinations against IRS records prior to
submitting an information return. Bulk TIN Matching allows payers and/or authorized agents filing any
of the six information returns to match up to 100,000 TIN and name combinations. In order to
participate in TIN Matching, payers must be listed in the IRS Payer Account File (PAF) database. If
your firm has not filed information returns with the IRS in one of the past two tax years, the application
will not be available to you at this time.

Tax Professionals are eligible to use the following incentive products:

Disclosure Authorization
1.70 TC "Disclosure Authorization" \f C \l "2" Eligible tax professionals may complete authorization
forms, view and modify existing forms, and receive acknowledgement of accepted submissions
immediately--all online. Disclosure Authorization allows tax professionals to electronically submit Form
2848, Power of Attorney and Declaration of Representative, and Form 8821, Tax Information
Authorization. This e-service expedites processing and issues a real-time acknowledgment of accepted
submissions.

Electronic Account Resolution


1.80 TC "Electronic Account Resolution" \f C \l "2" Electronic Account Resolution allows tax
professionals to expedite closure on clients’ account problems by electronically sending/receiving
account related inquiries. Tax professionals may inquire about individual or business account
problems, refunds, installment agreements, missing payments or notices. Tax professionals must have
a power of attorney on file before accessing a client’s account. The IRS response is delivered to an
electronic secure mailbox within 3 business days.
Transcript Delivery System
1.90 TC "Transcript Delivery System" \f C \l "2" Eligible tax professionals may use Transcript
Delivery System to request and receive account transcripts, wage and income documents, tax return
transcripts, and verification of non-filing letters. A new product (the Record of Account) combines both
the Return Transcript and Account Transcript in one product. Tax Professionals can request the
products for both individual and business taxpayers. Use the TDS application to resolve your clients'
need for return and account information quickly, in a secure, online session. Tax professionals must
have a Power of Attorney authorization on file with the IRS before accessing a client's account (or use
Disclosure Authorization to file an authorization on a new client and obtain TDS information
immediately).

Taxpayer Identification Number (TIN) Matching


1.100 TC "Taxpayer Identification Number (TIN) Matching" \f C \l "2" TIN Matching is a pre-filing
service offered to payers and/or authorized agents who submit any of six information returns subject to
backup withholding (Forms 1099-B, INT, DIV, OID, PATR, and MISC). With Interactive TIN Matching
authorized payers can match up to 25 payee TIN and name combinations against IRS records prior to
submitting an information return. Bulk TIN Matching allows payers and/or authorized agents filing any
of the six information returns to match up to 100,000 TIN and name combinations. In order to
participate in TIN Matching, payers must be listed in the IRS Payer Account File (PAF) database. If
your firm has not filed information returns with the IRS in one of the past two tax years, the application
will not be available to you at this time.

2. TAXPAYER ADVOCATE TC "2. TAXPAYER ADVOCATE" \f C \l "1"

National Taxpayer Advocate Releases Report To Congress


2.10 TC "National Taxpayer Advocate Releases Report To Congress" \f C \l "2" In January 2008
National Taxpayer Advocate Nina E. Olson released a report to Congress. Internal Revenue Code
(IRC) § 7803(c)(2)(B)(ii)(III) requires the National Taxpayer Advocate to describe at least 20 of the most
serious problems encountered by taxpayers. This year’s report describes 26 problems and provides
status updates on three other issues: the IRS’s Private Debt Collection (PDC) initiative, its collection
strategy, and its Questionable Refund Program (QRP). Each of the most serious problems includes
the National Taxpayer Advocate’s description of the problem, the IRS’s response, and the National
Taxpayer Advocate’s final comments and recommendations. This format provides a clear picture of
which steps have been taken to address the most serious problems and which additional steps the
National Taxpayer Advocate believes are required. The 29 problems described in the report are as
follows:

1. The Impact of Late-Year Tax-Law Changes on Taxpayers. In recent years,


Congress has made significant changes to the tax code in December that apply to the
current tax year (e.g., the “extenders bill” in December 2006 and the Alternative Minimum
Tax (AMT) “patch” in December 2007). The IRS currently finalizes Form 1040 and its
accompanying instructions in early November, and tax software companies finalize their
shrink-wrapped software packages around the same time. If Congress changes the law
after those products have been finalized, significant problems arise. Because of systemic
limitations and to minimize taxpayer confusion, the IRS generally does not update Form
1040 or its accompanying instructions after initial publication. As a result, taxpayers filing
paper returns are particularly likely to complete their returns without taking into account
late-year changes. Taxpayers who purchase shrink-wrapped software have the option of
downloading a “patch” to update their software, but some taxpayers do not do so. As a
result, some taxpayers who prepare their returns electronically also do not take late-year
changes into account. In Tax Year 2006, Congress waited until after the Form 1040
package and shrink-wrapped tax software products had been finalized to “extend”
several popular tax deductions. Taxpayers ultimately claimed these deductions about 1.4
million times less frequently than in tax year 2005, when the deductions were included in
the Form 1040 instructions and built into all tax software. Thus, it appears that numerous
taxpayers did not claim tax deductions to which they were entitled simply because they
did not know about them.

Late-year tax-law changes also place enormous stress on the IRS’s ability to deliver a
successful filing season. The National Taxpayer Advocate recommends that the Treasury
Department and the tax-writing committees create a formal process by which IRS
estimates of the filing-season impact of significant tax legislation are transmitted to the
tax-writing committees at several points during the year, perhaps on June 30, September
30, and monthly thereafter.

2. Tax Consequences of Cancellation of Debt Income. When a taxpayer is


unable to pay a debt and the creditor cancels some or all of it, the amount of the
canceled debt is generally treated as taxable income to the taxpayer. Debt cancellation
arises in numerous contexts, such as when a taxpayer defaults on an automobile loan or
a credit card bill, and affects a significant number of taxpayers. In 2006, creditors issued
to borrowers nearly two million Forms 1099-C, Cancellation of Debt, reporting canceled
debts. The tax treatment of canceled debts is extremely complex and poses a significant
challenge to affected taxpayers. If the lender incorrectly values property, the amount of
canceled debt it reports will be wrong. If the taxpayer is insolvent (i.e., the taxpayer’s
liabilities exceed the taxpayer’s assets), the canceled debt is excludable from gross
income up to the amount of insolvency. Our review of IRS forms, instructions, and
publications reveals that the IRS does not provide adequate guidance to taxpayers or
practitioners. IRS personnel will not prepare tax returns for taxpayers who have received
a Form 1099-C even if the taxpayers are otherwise eligible for such assistance. The
National Taxpayer Advocate makes 11 recommendations to provide greater assistance to
taxpayers, including a recommendation that the IRS treat questions about canceled
debts as “in scope” at its walk-in sites and a recommendation that the IRS develop a
publication on the tax treatment and reporting of cancellation of indebtedness income
that consolidates all relevant information in one place.

3. The Cash Economy. Income from the “cash economy” – taxable income from
legal activities that is not subject to information reporting or withholding – is the type of
income most likely to go unreported. Unreported income from the cash economy is
probably the single largest component of the tax gap, likely accounting for over $100
billion per year. Noncompliance in the cash economy is difficult for the IRS to detect.
Thus, the IRS should be using different strategies to address this problem than it uses to
address noncompliance in other areas. The National Taxpayer Advocate has identified a
number of steps that the IRS can take to address this problem without additional
legislation. While the IRS can never achieve full compliance, these recommendations
should help the IRS make significant progress in improving compliance in the cash
economy.

4. User Fees: Taxpayer Service For Sale. The IRS lacks a consistent strategy for
the user fees charged to taxpayers. This makes many basic services unaffordable to the
public, in part because the IRS often neglects or is slow to waive fees for lower income
taxpayers. The IRS collects about $180 million in user fee receipts annually, mostly from
the installment agreement fee, and it uses this revenue to pay for taxpayer services,
information technology, and other program costs. The National Taxpayer Advocate
believes that the IRS should employ strong criteria for establishing and setting fees,
along with vigilant oversight and review of existing fees. Otherwise, taxpayers’ access to
service may be reduced and their rights harmed as the IRS establishes new fees and
raises others to make up for budgetary shortfalls.

Privacy and Protection of Taxpayer Information

5. The Use and Disclosure of Tax Return Information by Preparers to Facilitate


the Marketing of Refund Anticipation Loans and Other Products with High Abuse
Potential. Tax return preparers use the preparation process to sell a variety of products
to their clients. The sale of certain commercial products, such as refund anticipation
loans (RALs), refund anticipation checks (RACs), and audit insurance, is
disproportionately targeted toward low income taxpayers and may exploit those
taxpayers’ trust in their preparers and their own lack of financial sophistication. Some
preparers who market RALs also have a financial incentive to inappropriately inflate
refund amounts. To the extent that problems arise with a RAL or similar product,
taxpayers may incorrectly assume there are problems with the administration of the tax
laws. Within the existing statutory framework of IRC § 7216, the Treasury Department
has the discretion to restrict the ability of preparers to obtain taxpayer consent to either
use or disclose tax return information in the marketing of RALs, audit protection, and
similar products.

6. Identity Theft Procedures. The National Taxpayer Advocate first raised her
concerns about the IRS’s identity theft procedures in her 2005 Annual Report to
Congress. While the IRS has made some improvements, it has not done enough to
improve procedures for victims of identity theft or to secure its filing system from
fraudulent filers. The IRS’s identity theft measures are reactive rather than proactive and
require taxpayers to contact the IRS and work their way through layers of employees
until they reach someone with authority to adjust their accounts. Too often, victims of
identity theft receive more scrutiny from the IRS than perpetrators, such as those who
use the electronic filing system and bank account direct deposit to commit refund fraud.
The IRS should make a PIN process mandatory for all electronic filers, increase the
security of direct deposits, and generally take a more taxpayer-centric approach to
identity theft and put procedural and preventive changes on a fast track.

7. Mortgage Verification. When closing on a mortgage, borrowers often must


consent to disclose certain tax information in order to verify their income, including
signing a blank copy of Form 4506-T, Request for Transcript of Tax Return, which gives
the lender access to four years of tax information for 60 days from the date on the form.
However, the information disclosed is not subject to the same protection and limits on
use as other taxpayer information, which raises numerous privacy concerns. The IRS
should revise Forms 4506, 4506-T, and 8821 (and their instructions) to state in clear and
plain language that taxpayers should not sign a blank or incomplete form. for which the
information can be used by third parties.

Tax Return Preparers and Representatives

8. Transparency of the Office of Professional Responsibility. The IRS’s Office of


Professional Responsibility (OPR), which is charged with regulating tax practitioners, has
not published sufficient guidance or procedures to assure the public that it operates
fairly and independently. If there is any question about OPR's independence from the
IRS, practitioners (and taxpayers) may fear OPR will serve as an extension of the IRS
enforcement function and arbitrarily target practitioners who are appropriately advocating
for taxpayers. This belief would chill zealous advocacy by practitioners and harm
taxpayers as well. OPR should improve both the reality and perception of its
independence and establish reasonable limits on its discretion by issuing guidance on
which practitioners can rely. This guidance should more directly address who is subject
to regulation by OPR, what conduct is prohibited, how OPR follows up on referrals, how
OPR will adjudicate an allegation (including policies governing practitioner access to
information that could bear on the result), and what penalties OPR will seek for a given
offense.

9. Preparer Penalties and Bypass of Taxpayers’ Representatives. The IRS


should more effectively use the tools at hand to address incompetent or unscrupulous
tax return preparers. It has collected just slightly more than 20 percent of the preparer
penalties it has assessed under IRC §§ 6694 and 6695 during the past six years, and
that is inadequate. The IRS also places taxpayers at risk by failing to enforce the civil and
criminal penalties under IRC §§ 6713 and 7213. The IRS should also find a way to
systemically check whether all individuals identified on Electronic Return Originator
(ERO) applications as Principals, Responsible Officials, and Delegated Users have
unpaid preparer penalties assessed against them. The IRS’s authority to bypass
taxpayer representatives exists to protect taxpayers against incompetent or unethical
practitioners Finally, the National Taxpayer Advocate is concerned about the higher
standards of conduct recently added to IRC § 6694, which may affect the way tax
preparers dispense advice and create conflicts of interest between preparers and their
clients.

Taxpayer Service Issues

10. Taxpayer Service and Behavioral Research. The IRS has more quality research
on taxpayer service at its disposal than ever before. As part of the Taxpayer Assistance
Blueprint (TAB), the IRS conducted extensive research on taxpayers’ needs, preferences,
behavior, and willingness to use certain services. The National Taxpayer Advocate has
also commissioned studies to identify ways to improve the tax system. The IRS now
needs to test and apply the findings of these studies. The IRS should develop a
behavioral research lab that can test and enhance IRS products, thereby improving
taxpayer service. By applying existing findings and developing a better understanding of
taxpayer behavior, the IRS can also improve voluntary compliance

11. Service at Taxpayer Assistance Centers. The development of the TAB helped
the IRS learn more about taxpayer needs, preferences, and willingness to use services at
the Taxpayer Assistance Centers (TACs or “walk-in sites”). Despite this blueprint and the
knowledge that some taxpayers will always need face-to-face service, taxpayers who visit
TACs continue to experience difficulties making appointments, obtaining return
preparation assistance, and making payments. The National Taxpayer Advocate
commends the IRS for a recent change to the Internal Revenue Manual (IRM) allowing
any taxpayer visiting a TAC to receive a copy of his or her account transcript (up to the
last three years) regardless of urgency or reason. However, the National Taxpayer
Advocate recommends that the IRS also take other steps to help taxpayers who travel to
TACs, such as providing same-day service and not turning them away or referring them
elsewhere.

12. Outreach and Education on Disability Issues for Small Business/Self-


Employed Taxpayers. People with disabilities have always struggled to find
employment, largely because of the numerous barriers facing this population. Some
professionals believe there is an increasing trend among people with disabilities to
address these barriers by becoming self-employed or owning their own small
businesses. One of the most significant obstacles facing these individuals in starting
their own businesses is the inaccessibility of business materials and information.
Therefore, it is vital that the IRS take steps to ensure that tax administration is not a
barrier to disabled individuals entering business, but rather, is a resource for these
entrepreneurs.

13. Exempt Organization Outreach and Education. The U.S. tax-exempt sector
consists of more than 1.6 million organizations (not including most churches). These
exempt organizations (EOs) are diverse in size, ranging from large hospitals and
universities to small volunteer-run charities. Approximately half of all EOs have
all-volunteer staffs and another third have fewer than ten employees. Smaller EOs
frequently lack professional tax guidance. The IRS has increased enforcement actions
against EOs and the resources dedicated thereto. However, resources devoted to EO
education and outreach, which were never adequate, have continued to decline. The
National Taxpayer Advocate believes the IRS can and should do more to help EOs,
particularly small organizations, comply with the complex requirements to which they are
subject.

14. Determination Letter Process. Unreasonable delays in the processing of


applications for exemption from federal income tax have persisted for several years.
Three years after the National Taxpayer Advocate raised concerns about these delays in
the 2004 Annual Report to Congress, the processing time for many organizations’
applications still exceeds the IRS’s goal. These delays can have a serious, detrimental
effect on charitable organizations’ finances and activities.

Examination Issues

15. EITC Examinations and the Impact of Taxpayer Representation. Many


taxpayers have difficulty navigating the IRS examination process, particularly in regard to
the EITC. A study requested by the National Taxpayer Advocate found that taxpayers
retain significantly more of their EITC if they have representation during the examination.
The results suggest the IRS examination strategy is flawed. Changes to the existing
strategy are necessary to ensure that procedural barriers do not prevent taxpayers from
receiving the EITC to which they are entitled. To ease the process, the IRS should
increase communication with taxpayers, simplify correspondence and disabled
taxpayers, adopt the use of affidavits, and improve the process of transferring cases from
campuses to field offices. In addition, the IRS should work to promote available taxpayer
services.

16. Nonfiler Program. In fiscal year (FY) 2006, the IRS established an executive
group to oversee an enterprise-wide strategy to address nonfilers, but it has not
implemented sustainable plans to increase filing compliance. The present IRS emphasis
on automated systems and reductions in face-to-face service contributes to high rates of
default assessments (in the Automated Substitute for Return program), low collection
percentages, and downstream consequences in the form of TAS casework. The National
Taxpayer Advocate urges the IRS to develop a more balanced strategy of research,
service, and enforcement to increase filing compliance.

17. Automated Underreporter Program. The Automated Underreporter (AUR)


program plays a critical role in reducing the nation’s tax gap by verifying reporting
compliance for taxpayers who have filed returns and potentially failed to report all
income. In FY 2007, AUR closed more than 4.5 million cases and assessed $5.1 billion in
additional tax. Given that AUR maintains an inventory of over 15 million cases at any
given time, it is important for both the IRS and the taxpayer that the program be as
accurate and effective as possible. Yet AUR has the highest rate of abatement of any
compliance program and generates large numbers of TAS cases, most of which result
directly from the IRS’s failure to adequately or timely address taxpayer responses to AUR
contacts. The National Taxpayer Advocate recommends that the IRS make every effort to
ensure that only those taxpayers who have underreported income are affected by the
program, respond timely to correspondence, promptly process amended returns, and
significantly improve the level of service on the AUR toll-free telephone lines.

18. The Accuracy-Related Penalty in the Automated Underreporter Units. The


IRS has been increasing its reliance on the AUR program to systemically match
payments that third parties report on Forms W-2s, 1099s, and similar documents against
income that taxpayers report on their tax returns. The AUR program is vital to tax
administration and reducing the nation’s tax gap. However, the AUR’s practice of
automatically imposing the negligence penalty without the exercise of discretion by IRS
personnel is problematic. The law requires IRS managerial approval of all penalties
before assessment unless the IRS is able to “automatically calculat[e] the penalty
through electronic means.” The IRS takes the position that if within the past three years
the taxpayer failed to report amounts from the same type of information return which is at
issue in the current year, the AUR may automatically impute negligence. This is a per se
negligence standard. Negligence is a finding that requires an analysis of the taxpayer’s
intent and a review of whether the taxpayer had reasonable cause. It is doubtful that
Congress, which sought to ensure managerial review for penalty determinations in
general, intended to provide a different rule for the negligence penalty. Taxpayers and
the IRS would clearly benefit from some form of human review. Further, data suggests
that while the AUR is proposing negligence penalties more frequently, the AUR
experiences a high reversal rate – substantially higher than the IRS campuses or Field
Examination units. The National Taxpayer Advocate urges the IRS to add a level of
human review to the proposed AUR negligence penalty and develop a comprehensive
program to review the overall effectiveness of utilizing the AUR to assess the penalty.

19. Audit Reconsiderations. In FY 2006, the IRS closed audit reconsiderations of


tax assessments exceeding $1.7 billion by abating over $1.2 billion of those original audit
assessments. The audit reconsideration process constitutes rework, since the IRS
previously audited the taxpayers and assessed tax on the same tax period(s). The IRS’s
strategic goals of reducing cycle time and improving detection of noncompliance need to
be balanced against taxpayers’ need to receive clear communication and accurate
resolution of tax controversies. The IRS’s failure to convey its goals to employees in a
balanced fashion results in rework in the form of audit reconsiderations. The National
Taxpayer Advocate urges the IRS to promote one-stop customer service among
employees and to utilize the most effective means of communication to resolve tax issues
in a timely manner.

20. Audits of S Corporations. While the IRS is struggling to develop a


comprehensive strategy to address S corporation noncompliance, taxpayers are
burdened by the S corporation election process and K-1 matching program errors. In
addition, a significant number of S corporations classify all payments to their officers as
“distributions” rather than “wages,” effectively avoiding employment tax liabilities. The
National Taxpayer Advocate urges the IRS to increase the number of S corporation asset
ranges to improve classification and return selection, and establish a tracking system to
assess the final tax effect of S corporation adjustments and related issues such as
employment tax results. The IRS also should establish an outreach campaign and a soft
contact letter test to address the officer compensation issue.

Collection Issues

21. FPLP Levies on Social Security Benefits. The IRS has a legal right to attach
federal payments of taxpayers not meeting their tax obligations through the Federal
Payment Levy Program (FPLP). However, the IRS must employ proper safeguards to
ensure that taxpayers with the greatest potential for hardship are identified and removed
from the program before the IRS issues a levy. Although the IRS agreed to conduct
additional research to address the National Taxpayer Advocate’s longstanding concerns
with the FPLP, these efforts are not keeping pace with the rapid increase in FPLP levies
on taxpayers’ Social Security benefits. In FY 2007, the IRS received in excess of 1.74
million levy payments that attached to Social Security benefits – an increase of almost 24
percent from FY 2006. Yet rather than developing an automated process to screen out
low income or other taxpayers who are experiencing economic hardship, the IRS is
actually seeking to expand the FPLP to other federal payments commonly associated
with a taxpayer’s sole or primary source of income. The National Taxpayer Advocate
strongly recommends that the IRS postpone FPLP expansion on any payments
associated with retirement income until a suitable “low income and hardship” filter has
been created and successfully tested.

22. Third Party Payers. When third party payers do not file required employment tax
returns or make required deposits, employers remain liable for the underlying tax,
interest, and penalties and may face significant economic difficulties. The IRS generally
has no recourse other than to initiate collection of unpaid employment taxes from the
employers. Not only are employers forced to pay the amount of their employment tax
liability twice (once to the failed third party payer and again to the IRS), but they may
also be liable for interest and penalties. The National Taxpayer Advocate recommends
that the IRS assume a greater role in protecting taxpayers’ interests and assisting
taxpayers in third party payer cases by developing “global” remedies for situations where
large numbers of taxpayers share common facts. A global approach would provide a
common starting point for relief, regardless of where the case is worked within the IRS.

23. Employment Tax Treatment of Home Care Service Recipients. Many elderly
and disabled individuals receive home care and support services administered through a
variety of state and local government health and welfare programs. Often, elderly and
disabled home care service recipients (HCSRs) who participate in these programs fall
into the category of common law employers, and they are required to apply highly
technical and complex employment tax rules to determine their employer tax status and
responsibilities. Elderly and disabled HCSRs can suffer substantial financial hardships
when state and local government agencies contract out program responsibilities,
including payroll functions, to intermediary service organizations (ISOs) that fail to
properly report, file, and pay employment taxes. As a result, the elderly and disabled
HCSRs – as the common law employers – remain liable for the tax, interest, and
penalties. The National Taxpayer Advocate proposes a legislative change and a series of
administrative steps that, if adopted, will complement and bolster the actions taken by
the IRS to significantly mitigate the problems affecting HCSRs and minimize the
downstream impact of ISO failures on elderly and disabled individuals.

24. Offers in Compromise. The IRS’s Offer in Compromise (OIC) program is no


longer being used to any significant extent as a viable collection alternative. Between FY
2001 and FY 2007, offer receipts declined by 63 percent and the number of accepted
offers declined by 70 percent. The National Taxpayer Advocate believes that the
long-term success of the OIC program is best served by maximizing the number of cases
in which the IRS is able to complete the investigation and make a decision to accept or
reject the offer on its merits. However, for the IRS to achieve its policy goals and reap the
benefits of a successful OIC program, it must first minimize the extent to which policies
intended to deter taxpayers from submitting incomplete or unrealistic offers do not also
discourage taxpayers from submitting good ones. In order to do so, the National
Taxpayer Advocate recommends the IRS ensure all IRS Collection employees can
identify when accepting an OIC is a “win-win” situation for taxpayers and the government.
Moreover, the IRS should revitalize its OIC outreach efforts to taxpayers and practitioners
to better assist them with the submission of reasonable and appropriate offers. The key
to success of the OIC program is to identify those taxpayers for whom an offer is an
appropriate collection alternative and ensure they are aware of the OIC process and do
not face unreasonable barriers in the submission of an offer.

25. Inadequate Training and Communication Regarding Effective Tax


Administration Offers. Although the IRS has the ability to accept an OIC on the basis of
“effective tax administration” (ETA), it has done very little to educate the public or its
employees about how or when it will use this authority. As a result, eligible taxpayers
may not be applying for OICs based on ETA, and IRS employees may not recognize
situations when these offers are appropriate. Thus, the IRS needs to do more to ensure
that all collection employees know when an ETA offer may be a viable collection
alternative. The IRS also needs to conduct more in-depth external outreach to educate
taxpayers and practitioners about when the IRS will accept an ETA offer.

26. Assessment and Processing of the Trust Fund Recovery Penalty (TFRP).
Employers are responsible for withholding and remitting to the IRS certain trust fund
taxes, including income and Federal Insurance Contributions Act (FICA) taxes from
payments to employees, as well as certain federal excise taxes. When these monies are
not paid as required, the law provides for the assessment of a TFRP, which can have
disastrous economic consequences for those deemed to be responsible persons.
However, the IRS has failed to consistently adhere to its own quality standards for
investigating these cases. Despite almost a decade of negative findings by the
Government Accountability Office (GAO), the IRS has yet to implement an effective or
reliable system for the accounting and application of payments, credits, and offsets. The
National Taxpayer Advocate makes several recommendations designed to improve the
timeliness, fairness, and quality of the process.

Status Updates

27. Private Debt Collection. The Private Debt Collection initiative is failing in most
respects. It is not meeting revenue projections; its return on investment is dismal; the
private collection agencies (PCAs) are no better at locating or collecting tax liabilities than
the IRS itself; the IRS has failed to require the PCAs to disclose their taxpayer-related
procedures to the public to the same extent as the IRS, which shields the program from
adequate congressional and public scrutiny; and the IRS is sending the PCAs new cases
(because the number of “easy” cases is smaller than projected) and these new cases
may require the exercise of discretion and judgment in collection matters that is
appropriately the sole province of the IRS. For these reasons, the National Taxpayer
Advocate once again calls for the initiative’s repeal.

28. IRS Collection Strategy. The National Taxpayer Advocate has continually urged
the IRS to employ a collection strategy that effectively and efficiently balances the goals
of tax collection, taxpayer service, and tax compliance. We are mindful of the difficulties
the IRS faces when carrying out its collection strategy and properly administering the tax
system, which requires a delicate balance between customer service and enforcement.
Although the IRS’s collection strategy has improved over the past year, significant work
remains to be done. We continue to believe that more emphasis by the IRS on providing
timely service to taxpayers with tax delinquency problems and employing more flexibility
in the use of available collection payment alternatives (e.g., installment agreements,
partial payment installment agreements, and OICs), are necessary to deliver an effective,
balanced, and service-oriented program.

29. Questionable Refund Program. The IRS established the Questionable Refund
Program (QRP) in 1977 to prevent the payout of false refund claims. Historically and
presently, the IRS’s Criminal Investigation (CI) function has managed the program,
though the vast majority of the work is civil. In the 2005 Annual Report, the National
Taxpayer Advocate identified the QRP as the second most serious problem facing
taxpayers, and documented fundamental flaws with the program. While CI and the IRS
responded with improvements, QRP cases still rank among the top five reasons that
taxpayers seek TAS assistance. The National Taxpayer Advocate recommends that the
IRS expeditiously transfer oversight of the program to the civil side of the IRS and further
reduce the volume of legitimate taxpayer refunds that the QRP inappropriately delays

The Most Litigated Tax Issues


2.20 TC "The Most Litigated Tax Issues" \f C \l "2" 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:.
3. ENFORCEMENT TC "3. ENFORCEMENT" \f C \l "1"

Highlights of 2008 Enforcement


3.10 TC "Highlights of 2008 Enforcement" \f C \l "2" The IRS continues increase its
enforcement activities. he IRS enforcement efforts increased again in fiscal year 2007. For
instance, during 2007 the IRS audited 84 percent more returns of individuals with incomes of $1
million or more than during 2006. Overall, enforcement revenue reached $59.2 billion, up from
$48.7 billion in 2006 and nearly $34.1 billion in 2002.

Individual Enforcement
3.20 TC "Individual Enforcement" \f C \l "2" Audits of individuals with incomes of $1 million or more
increased from 17,015 during fiscal year 2006 to 31,382 during fiscal year 2007, an increase of 84
percent. One out of 11 individuals with incomes of $1 million or more faced an audit in 2007. Overall,
the total individual returns audited increased by 7 percent to 1,384,563 in 2007 from 1,293,681 in
2006. That’s the highest number since 1998.

High Income Taxpayers


3.30 TC "High Income Taxpayers" \f C \l "2" Audit rates increased in 2007, both for overall
individual rates and for higher-income taxpayers. Audits of individuals with incomes over $200,000
reached 113,105 returns, up 29.2 percent from the prior year total of 87,885. The IRS increased audits
of individual returns with income of $100,000 or more, auditing 293,188 of these returns in 2007, up
13.7 percent from last year’s total of 257,851.

Businesses
3.40 TC "Businesses" \f C \l "2" In the business arena, the IRS continued efforts to review more
returns of flow-through entities – partnerships and S Corporations. Its business numbers reflect that it
has placed more emphasis in the growing area of these flow-through returns. While large corporate
audits are down slightly, it has increased its focus on mid-market corporations – those with assets
between $10 million and $50 million dollars. The IRS enforcement budget in 2007 was similar to the
budget in 2006, and in times of flat budgets, the agency cannot increase activity across the board but
instead addresses the areas where there is growth and potential risk.

Audits of S Corporations increased to 17,681 during 2007, up 26 percent from the prior year’s total of
13,984. Audits of partnerships increased to 12,195 during 2007, up almost 25 percent from the prior
year’s total of 9,777. Audits of mid-market corporations increased to 4,473, up 6 percent from last
year’s total of 4,218.

Audits of businesses in general rose to 59,516, an increase of almost 14 percent from the prior year’s
total of 52,223. Although the audits of large corporations dipped slightly in 2007 to 9,644 audits, the
number of audits is up 14 percent from the fiscal year 2002 level.

Collection Enforcement
3.50 TC "Collection Enforcement" \f C \l "2" Overall, some of our most common enforcement tools
at the IRS also showed increases:

The IRS filed 3.8 million levies and almost 700,000 liens during 2007, an increase from
the previous year and a substantial increase from five years earlier.

Electronic Filing IRS Webpage


3.60 TC "Electronic Filing IRS Webpage" \f C \l "2" More taxpayers chose to file electronically in
2007 than during the prior year, with 57 percent of individual tax filers choosing to e-file in 2007, up
from 54 percent in 2006.
More people visited the IRS internet site, IRS.gov. The IRS site was accessed more than 217 million
times in 2007, up more than 10.5 percent from the same period in 2006.

Enforcement Revenue Collected 1


FY FY FY FY FY FY FY FY FY
(Dollars in Billions) FY 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Collection $21.3 $21.3 $22.1 $24.3 $24.4 $24.8 $25.7 $26.6 $28.2 $31.8
2
Examination $12.5 $10.0 $10.2 $7.9 $7.9 $10.7 $14.7 $17.7 $17.2 $23.5
3
Document Matching $1.4 $1.6 $1.5 $1.6 $1.8 $2.2 $2.7 $3.1 $3.3 $3.9
Total $35.2 $32.9 $33.8 $33.8 $34.1 $37.6 $43.1 $47.3 $48.7 $59.2

Staffing for Key Enforcement


Occupations4

FY FY FY FY FY FY FY FY FY
FY 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Revenue Officers 6,796 6,516 5,538 5,376 5,502 5,076 5,156 5,249 5,627 5,662
Revenue Agents 13,708 13,085 12,542 12,092 11,743 11,780 11,811 12,192 12,778 12,816

Special Agents 3,045 2,942 2,752 2,735 2,868 2,834 2,778 2,771 2,780 2,709

Total 23,550 22,543 20,832 20,203 20,113 19,691 19,746 20,211 21,185 21,187
1 Enforcement revenue collected in a fiscal year includes tax, interest, and penalties from multiple tax years. Some enforcement
activities can take more than a year to close and may generate revenue over several years, so it is generally inappropriate to compare
revenue collected in a given fiscal year to the staffing available for that same year.
2 Includes any revenue collection attributable to IRS Appeals activities.
3 Includes the Information Reporter Program (IRP) and the Automated Underreporter (AUR) Program.
4 Enforcement staffing levels presented in Full Time Equivalents (FTE).
Income $1 Million and Higher

FY 2004 FY 2005 FY 2006 FY 2007

Field 5,857 7,166 9,312 12,259

Correspondence 3,719 5,669 7,703 19,123


T o t a l
Examinations 9,576 12,835 17,015 31,382
Returns Filed in Prior
CY* 190,372 210,280 270,161 339,138

Coverage 5.03% 6.10% 6.30% 9.25%

Income $200,000 and Higher


FY 2004 FY 2005 FY 2006 FY 2007
Field n/a n/a 36,059 43,640

Correspondence n/a n/a 51,499 69,465

Total Examinations 87,558 113,105

Returns Filed in Prior CY* 3,400,435 3,942,702

Coverage 2.57% 2.87%


* CY = Calendar Year

Income $100,000 and Higher


FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007
64,955 67,439 70,452 84,326 112,484 127,544
Field
Correspondence 47,308 71,940 95,769 134,882 145,367 165,644
Total Examinations 112,263 139,379 166,221 219,208 257,851 293,188
Returns Filed in Prior
CY* 13,020,183 13,193,122 13,277,077 13,970,598 15,447,964 16,599,800
Coverage 0.86% 1.06% 1.25% 1.57% 1.67% 1.77%
Total Individual Returns
Field FY 2002 205,134 FY 2003 FY 2004 FY 2005 FY 2006 FY 20
206,457 197,388 247,235 302,959 311,3

Correspondence 538,747 642,839 810,486 968,073 990,722 1,073,2

Total
743,881 849,296 1,007,874 1,215,308 1,293,681 1,384,563
Examinations
Returns Filed in 129,444,947 130,341,159 130,134,277 130,576,852 132,275,830 134,421,400
Prior CY*
Coverage 0.57% 0.65% 0.77% 0.93% 0.98% 1.03

*CY = Calendar Year

Subchapter S Returns (Form 1120-S)

FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007


11,646 9,695 6,402 10,417 13,984 17,657
Returns Examined

Returns Filed in Prior CY* 3,022,589 3,191,108 3,369,122 3,523,934 3,715,249 3,909,730

Coverage 0.39% 0.30% 0.19% 0.30% 0.38% 0.45%


*CY = Calendar Year

Partnership Returns (Form


1065)

FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007


Returns Examined 5,543 7,871 6,226 8,489 9,777 12,195

Returns Filed in Prior CY* 2,165,011 2,271,755 2,405,361 2,546,439 2,720,290 2,934,597

Coverage 0.26% 0.35% 0.26% 0.33% 0.36% 0.42%


*CY = Calendar Year
Examination - Large Corporation Return Closures and Coverage Rates
Assets $10 Million and Higher FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007
Total Returns Examined 8,443 7,125 9,523 10,829 10,591 9,644

Returns Filed in Prior CY* 59,602 58,974 56,883 54,091 56,847 57,357

Coverage 14.2% 12.1% 16.7% 20.0% 18.6% 16.8%

By Asset Class FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007

$10 Million < $50 Million


Returns Examined 2,540 1,987 2,864 3,535 4,218 4,473

Coverage 7.8% 6.2% 9.4% 12.3% 14.2% 15.0%

$50 Million < $100 Million


Returns Examined 865 782 965 1,148 999 801

Coverage 10.7% 9.8% 12.9% 16.4% 13.8% 11.4%

$100 Million < $250 Million


Returns Examined 1,289 1,026 1,308 1,287 1,085 946

Coverage 16.0% 12.9% 16.9% 17.5% 14.0% 12.1%

$250 Million and Higher


Returns Examined 3,749 3,330 4,386 4,859 4,289 3,424

Coverage 34.4% 29.8% 39.8% 44.1% 35.3% 27.2%

Collection Enforcement Actions


FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007
Levies 674,080 1,283,742 1,680,844 2,029,613 2,743,577 3,742,276 3,757,190

Liens 426,166 482,509 544,316 534,392 522,887 629,813 683,659

Seizures 234 296 399 440 512 590 676


Criminal I nvesti gation s
FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007
Investigations
3,906 4,001 3,917 4,269 3,907 4,211
Initiated
Information &
1,924 2,128 2,489 2,406 2,319 2,323
Indictments

Prosecutions Recommended
FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007

Tax and Tax Related 991 1,336 1,439 1,434 1,343 1423

Nontax (illegal) 483 521 719 658 756 866

Narcotics 659 684 879 767 621 548

Total 2,133 2,541 3,037 2,859 2,720 2837

Incarceration Rate 91.5% 91.5% 92.2% 91.2% 91.5% 90.20%

Avg M 19 19 21 22 22 22

Nonfiler Criminal Enforcement.


FY 2007 FY 2006 FY 2005
Investigations Initiated 516 562 549
Prosecution Recommendations 300 322 413
Indictments/Informations 266 307 316
Sentenced 278 270 280
Incarceration Rate* 80.6% 80.0% 78.2%
Avg. Months to Serve 38 40 34

Fiscal Year 2008 Criminal Cases

(October 1, 2007 - December 31, 2007) Totals

Investigations Initiated 882

Prosecution Recommendations 670

Information/Indictments 602

Total Convictions 504

Total Sentenced* 498

Percent to Prison 85.9%

Average Months to Serve 40

Taxpayer Service
FY 2003 FY 2004 FY 2005 FY 2006 FY 2007
Electronic Filing (e-File)
Rate -- Individual Returns 40% 47% 51% 54% 57%
Toll-Free Assistor
Level of Service 80% 87% 83% 82% 82%
Toll-Free Tax
Law Accuracy 82% 80% 89% 91% 91%
Toll-Free Customer
Satisfaction Rating 93% 94% 94% 94% 94%
Web Page Visits on
IRS.Gov (in millions) 102.6 152.7 176.5 197.1 217.8
Online Refund Status
Checks through 'Where's
My Refund (in millions) 12.4 14.9 22.1 24.7 32.1

State Information Sharing


3.70 TC "State Information Sharing" \f C \l "2" The IRS is engaged in extensive information sharing
with state tax authorities which allows it to more effectively discover nonfilers and other tax omissions.
The IRS Fed/State Program saves government resources by partnering with state government
agencies to enhance voluntary compliance with tax laws. This includes facilitating the exchange of
taxpayer data, leveraging resources, and providing assistance to taxpayers to improve compliance and
communications.

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.

Federal Tax Returns and Return Information.


3.80 TC "Federal Tax Returns and Return Information." \f C \l "2" “Tax returns” include Form
1040, U.S. Individual Income Tax Return, as well as other income tax and information returns, such as
Form 941, Employer’s Quarterly Federal Tax Return; Form 730, Tax on Wagering; Form 1120, U.S.
Corporation Income Tax Return; various Forms 1099, U.S. Information Returns; and Form W-2, Wage
and Tax Statement. The states in turn share similar return information with the IRS. Since states have
extensive information on business revenue on sales tax returns that info is a valuable resource for
discovering nonfiling and underreporting.

Return Information
3.90 TC "Return Information" \f C \l "2" “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.

IRS Study Provides Tax Gap Estimate


3.100 TC "IRS Study Provides Tax Gap Estimate" \f C \l "2" 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 TC "Sources of Misreporting" \f C \l "2" 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.

Understanding the Tax Gap


3.120 TC "Understanding the Tax Gap" \f C \l "2" The Internal Revenue Service developed the
concept of the tax gap as a way to gauge taxpayers’ compliance with their federal tax obligations. The
tax gap measures the extent to which taxpayers do not file their tax returns and pay the correct tax on
time.

Components of the Tax Gap


3.130 TC "Components of the Tax Gap" \f C \l "2" The tax gap can be divided into three
components:

nonfiling,
underreporting and
underpayment.

Nonfiling occurs when taxpayers who are required to file a return do not do so on time. Underreporting
of tax occurs when taxpayers either understate their income or overstate their deductions, exemptions
and credits on timely filed returns. Underpayment occurs when taxpayers file their return but fail to
remit the amount due by the payment due date.
Underreporting
3.140 TC "Underreporting" \f C \l "2" 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 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.

Underreporting Is Largest Component


3.150 TC "Underreporting Is Largest Component" \f C \l "2" Underreporting noncompliance is the
largest component of the tax gap. Preliminary estimates show underreporting accounts for more than
80 percent of the total tax gap, with non-filing and underpayment at about 10 percent each. Individual
income tax is the single largest source of the annual tax gap, accounting for about two-thirds of the
total. For individual underreporting, more than 80 percent comes from understated income, not
overstated deductions.

Noncompliance Rising
3.160 TC "Noncompliance Rising" \f C \l "2" 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.

Areas Where Compliance Has Decreased


3.170 TC "Areas Where Compliance Has Decreased" \f C \l "2" Among the areas where taxpayer
compliance appears to have worsened are:

Reporting of net income from flow-through entities, such as partnerships and S corporations
Reporting of proprietor income and expenses, such as gross receipts, bad debts and vehicle
expenses
Reporting of various types of deductions

Areas With Improved Compliance


3.180 TC "Areas With Improved Compliance" \f C \l "2" 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.

New DIF Formulas


3.190 TC "New DIF Formulas" \f C \l "2" The IRS has done a preliminary update of its DIF formulas
for 2006 and when fully updated formulas become available for use, IRS employees will be better
positioned to select returns for examination that have the greatest likelihood of underreporting. Using
such an approach better ensures that IRS audits are focused on the returns most in need of
examination. This not only improves IRS efficiency, but it also assures taxpayers that others are paying
their fair share. It also lessens the likelihood that those with accurate tax returns will receive the same
degree of scrutiny.

Tax Year 2001 Gross Tax Gap by Type of Tax and Type of Noncompliance (in $ billions)
Type of Noncompliance TOTAL
Type of Tax Nonfiling Underreporting Underpayment Percent
Gap Gap Gap* Amount Distribution
Individual Income Tax 25 197 23.4 245 71.1%
Corporation Income
# 30 2.3 32 9.3%
Tax
Employment Tax # 54 5.0 59 17.0%
Estate & Gift Tax 2 4 2.1 8 2.4%
Excise Tax # # 0.5 1 0.1%
TOTAL 27 285 33.3 345
Percent Distribution 7.8% 82.5% 9.7% 100.0%
* Since the underpayment gap figures are generally actual amounts rather than estimates, they are presented here to the closest $0.1 billion.
# No estimates are available for these components.
Amounts may not add to totals due to rounding. See Figure 1 regarding the reliability of estimates
Businesses More Likely to Not Comply.
3.200 TC "Businesses More Likely to Not Comply." \f C \l "2" Most of the understated income
comes from business activities, not wages or investment income. Compliance rates are highest where
there is third-party reporting or withholding. Preliminary findings show less than 1.5 percent of wages
and salaries are misreported.

NRP Subchapter S Corporation Study Overview


3.210 TC "NRP Subchapter S Corporation Study Overview" \f C \l "2" During 2008 the IRS
continues its NRP of S corporations. The study has the following elements:

Random Sample consists of approximately 5,000 returns from Small Business/Self-Employed


(SB/SE) and Large & Mid-Size Business (LMSB) taxpayers covering two tax years, TY2003 and
TY2004.
The study follows the standard NRP methodology:

– IRS is preparing “case built” files for key cases.


– IRS is classifying returns to identify specific issues that must be examined.
– Examiners have the ability to expand scope of the audit, if warranted.

Each tax year will have an examination cycle of approximately 24 months.

The TY 2003 portion of the sample (1,200 returns) is complete, and these cases are now in the
hands of Revenue Agents.
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)
IRS Operating Division TOTAL

Small Business / Self-


Tax‑
Type of Tax Wage & Employed Large & Exempt Non-
Invest- Total Mid-Size Tax Compliance
Indi- Corpor- & Gov’t
ment Busines Gap Rate
viduals ation Entities

Individual Income
50 195 N/A 195 N/A N/A 245 20.9%
Tax
Corporation Income
N/A N/A 6 6 25 1 32 18.5%
Tax *

Employment Tax 0 40 7 47 8 4 59 8.1%

S e l f - Employment N/A 39 N/A 39 N/A N/A 39 51.9%

FICA and FUTA 0 1 7 8 8 4 20 3.0%

Estate & Gift Tax # 8 N/A 8 N/A N/A 8 22.9%

Excise Tax † 0 0 0 0 0 0 1

TOTAL Gap Percent 50 243 14 257 34 4 345


of Total 14.5% 70.5% 4.0% 74.5% 9.8% 1.2% 100.0%

Noncompliance Rate 12.1% 27.1% 5.3% 22.3% 8.0% 3.4% 16.3%

* 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.
Tax Year 2001 Individual Income Tax Underreporting Gap and Net Misreporting Percentage (NMP)
Associated with Income and Offset Line Items

Type of Income or Offset Net


Underreporting
Gap ($B) Misreporting
Percentage †
Total Underreporting Gap 197 18%
Underreported Income 166 11%
Non-Business Income 56 4%
Wages, salaries, tips 10 1%
Interest income 2 4%
Dividend income 1 4%
State income tax refunds 1 12%
Alimony income * 7%
Pensions & annuities 4 4%
Unemployment compensation * 11 %
Social Security benefits 1 6%
Capital gains 11 12%
Form 4797 income 3 64%
Other income 23 64%
Business Income 109 43%
Non-farm proprietor income 68 57%
Farm income 6 72%
Rents & royalties 13 51%
Partnership, S-Corp, 22 18%
Estate & Trust, etc.
Overreported Offsets to Income 15 4%
Adjustments -3 -21 %
§ -4 -51%
SE Tax deduction
All other adjustments 1 6%
Deductions 14 5%
Exemptions 4 5%
Credits 17 26%
Net Math Errors (non-EITC) *
† The amount of income or offset misreported divided by the amount that should have been reported. The NRP contains an adjustment for income amounts that were
underreported, but does not have a corresponding adjustment for offset amounts that were not claimed.
* Less than $0.5 billion.
§ Taxpayers understate this adjustment because they understate their self-employment income and, thereby, their self-employment tax. Therefore,
the gap associated with this item is negative.
Tax Year 2001 Individual Income Tax Underreporting Gap and Net Misreporting Percentage (NMP) Associated with
Income and Offset Line Items, By Visibility Groups

Visibility Group Underreporting Net


Type of Income or Offset Gap ($B) Misreporting
Percentage †

Total Underreporting Gap 197 18%


I t ems Subject t o Subst ant ial Information
10 1%
Reporting and Withholding
Wages, salaries, tips 10 1%
Items Subject to Substantial
9 5%
Information Reporting
Interest income 2 4%
Dividend income 1 4%
State income tax refunds 1 12%
Pensions & annuities 4 4%
Unemployment compensation * 11 %
Social Security benefits 1 6%
Items Subject to Some Information
51 9%
Reporting
Partnership, S-Corp,
22 18%
Estate & Trust, etc.
Alimony income * 7%
Capital gains 11 12%
Deductions 14 5%
Exemptions 4 5%
Items Subject to Little or No
110 54%
Information Reporting
Non-farm proprietor income 68 57%
Farm income 6 72%
Rents & royalties 13 51 %
Form 4797 income 3 64%
Other income 23 64%
Total statutory adjustments -3 -21 %

Not Shown on Figure 17 26%
Credits 17 26%
† The aggregate amount of income or offset misreported divided by the sum of the absolute values of the amount that should have been reported. The estimates of
the amounts that should have been reported account for underreported income that was not detected by the audits, but do not have a corresponding adjustment
for unclaimed offsets (e.g., deductions, exemptions, statutory adjustments, and credits) that were not detected.
* Less than $0.5 billion.
§ Since credits are offsets to tax, it is difficult to combine them with income and income offset items when calculating a combined NMP.
2008 Budget
3.220 TC "2008 Budget" \f C \l "2" The Administration’s 2009 budget proposal is for a $11.6 billion
operating budget. The Congress has approved a a 2008 budget which provides $10.9 billion with
increases for enforcement and to pursue the tax gap.

2009 Budget Proposals


3.230 TC "2009 Budget Proposals" \f C \l "2" The FY 2009 President’s Budget request for the IRS
increases funding as part of a strategy to improve compliance by focusing on the following priorities:

Improving voluntary compliance and reducing the tax gap by:

Increasing front-line enforcement resources,

Improving taxpayer service options,

Enhancing research, and

Implementing legislative and regulatory changes.

Maintaining balance between taxpayer service and enforcement.

Investing in technology to improve infrastructure, modernize, and increase the productivity of


existing resources.

Enforcement Program
3.240 TC "Enforcement Program" \f C \l "2" IRS continues its emphasis on tax enforcement,
increasing collections of delinquent tax debt from $33.8 billion in 2001 to an all-time high of $59.2
billion, yielding a 5.6 to 1 return on investment for all IRS activities in 2007. Revenue growth has been
the greatest in the areas of corporate taxes and high income individual taxes. The FY 2009 President’s
Budget request for the enforcement program is $7,487,209,000, an increase of $489,983,000 or 7
percent over the FY 2008 enacted level. As in the past three budget requests, the Administration
proposes to include these enforcement increases as a Budget Enforcement Act.
Overview - Abusive Return Preparer
3.250 TC "Overview - Abusive Return Preparer" \f C \l "2" 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.

Abusive Preparers FY 2007 FY 2006 FY 2005

Investigations Initiated 218 197 248

Prosecution Recommendations 196 153 140

Indictments/Informations 131 135 119

Sentenced 123 109 118

Incarceration Rate* 81.3% 89.0% 85.6%

Avg. Months to Serve 19 18 18

Audits of 30 Clients
3.260 TC "Audits of 30 Clients" \f C \l "2" 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:

Referral to Criminal investigation


Referral to the office of professional liability
Preparer penalties
Referral to Department of justice to seek an injunction ordering the preparer to cease filing tax
returns.

Money Laundering and BSA


3.270 TC "Money Laundering and BSA" \f C \l "2" IRS agents are now working with the Financial
Crimes Enforcement Network ( FinCEN ) seeking out money laundering and Bank Secrecy Act ( BSA
)violations. Almost 500 agents have been reassigned to these duties. Many taxpayers have unwittingly
run afoul of these money laundering and BSA laws.
Foreign Bank Account Reports
3.280 TC "Foreign Bank Account Reports" \f C \l "2" Under the Bank Secrecy Act, U.S. residents or
a person in and doing business in the United States must file a report with the U.S. Treasury if he or
she has a financial account in a foreign country with a value exceeding $10,000 at any time during the
calendar year. Taxpayers comply with this law by noting the account on their tax return and by filing
Form 90-22.1, the Foreign Bank and Financial Account Report (FBAR). Willfully failing to file an FBAR
report can be punished under both civil and criminal law.
Foreign account owners must remember that they may have to report their accounts to the
government, even if the accounts do not generate any taxable income. The Bank Secrecy Act requires
U.S. persons who own a foreign bank account, brokerage account, mutual fund, unit trust, or other
financial account (person having a financial interest in, signature authority, or other authority over one
or more accounts in a foreign country, and an aggregate value of all foreign financial accounts
exceeding $10,000 at any time during the calendar year) to file a Form TD F 90-22.1. The FBAR is not
an income tax return and should not be mailed with any income tax returns. The FBAR must be mailed
on or before June 30 of the following year; 2006 FBARs are due by June 30, 2007. Civil penalties can
and are being assessed for non-compliance .

Money Services Business Registration Requirements


3.290 TC "Money Services Business Registration Requirements" \f C \l "2" According to the
January 2006, U.S. Money Laundering Threat Assessment report, many money services businesses
(MSBs) are not registering with the U.S. Department of Treasury’s Financial Crimes Enforcement
Network (FinCEN) despite the fact that the law started requiring such registration in 2001. MSBs that
fail to register, or to renew their registrations, may be subject to civil and criminal penalties under the
Bank Secrecy Act.

Businesses that are considered MSBs for registration purposes are those that act in one or more of the
following capacities: The term money services business includes:

Currency dealers or exchangers who exchange more than $1,000 for any one customer on any
day.
Check cashers who cash checks totaling more than $1,000 for any one customer on any day.
Issuers of traveler’s checks, money orders or stored value who issue more than $1,000 in
traveler’s checks, money orders or stored value for any one customer on any day.
Sellers of traveler’s checks, money orders or stored value who sell more than $1,000 in traveler’s
checks, money orders or stored value for any one customer on any day.
Redeemers of traveler’s checks, money orders or stored value who redeem more than $1,000 in
traveler’s checks, money orders or stored value for any one customer on any day.
Money transmitters.
U.S. Postal Service.
Penalties
3.300 TC "Penalties" \f C \l "2" The civil penalty for failure to meet the registration requirement is
$5,000 for each violation. Each day that the violation continues represents a separate violation. Also,
reporting false or materially incomplete registration information can trigger a civil penalty of $5,000 per
day. Criminal penalties for willful violation of the law can include fines and imprisonment.

Filing FinCEN Form 107


3.310 TC "Filing FinCEN Form 107" \f C \l "2" MSBs should send completed FinCEN Forms 107 to
the IRS Detroit Computing Center to the attention of Money Services Business Registration at P.O.
Box 33116, Detroit, Michigan 48232-0116.

Has Your Client Implemented an Anti-Money Laundering Compliance Program?


3.320 TC "Has Your Client Implemented an Anti-Money Laundering Compliance Program?" \f C \l
"2" The USA PATRIOT Act, passed In October 2001, amended the Bank Secrecy Act (BSA) to require
all businesses defined in the BSA as financial institutions to implement an anti-money laundering
(AML) program. Many of these businesses had not been subject previously to BSA regulation. So far,
the entities that are subject to AML program requirements include: banks and other depository
institutions (such as credit unions); securities broker dealers; casinos; money services businesses;
mutual funds; operators of credit card systems; dealers in precious metals, precious stones, and
jewels; and the insurance industry.

Patriot Act
3.330 TC "Patriot Act" \f C \l "2" In 2002, pursuant to Section 352 of the USA PATRIOT Act, FinCEN
issued final regulations to require that all Money Services Businesses (MSBs) have an effective AML
compliance program. This regulation (31 CFR 103.125) defines an effective program as one designed
to prevent the MSB from being used to facilitate money laundering and the financing of terrorist
activities. An MSB’s AML program must be commensurate with the risks posed by the location, size,
nature and volume of the financial services provided by the MSB. Each MSB’s AML compliance
program must be in writing and must have fully implemented it.

Form 8300
3.340 TC "Form 8300" \f C \l "2" The general rule is that you must file Form 8300, Report of Cash
Payments Over $10,000 Received in a Trade or Business, if your business receives more than $10,000
in cash from one buyer as a result of a single transaction or two or more related transactions. The
information provided by Form 8300 provides valuable information to the Internal Revenue Service (IRS)
and the Financial Crimes Enforcement Network (FinCEN) in their efforts to combat money laundering.
This is an important effort, since money laundering is a tool that assists many individuals who
participate in various criminal activities, ranging from tax evasion to terrorist financing to drug dealing,
to hide the proceeds from their illegal activities.
Filing Form 8300
3.350 TC "Filing Form 8300" \f C \l "2" If you are required to file Form 8300 for a transaction, you
must do so by the 15th day after the date the cash transaction occurs. Meeting the proper filing
requirements is very important, since there are potential civil and criminal penalties for failure to file
Form 8300.

SAR's
3.360 TC "SAR's" \f C \l "2" Money services businesses and banks are required to report any
transactions they deems as suspicious. The MSB's file a Suspicious Activity Report with the Detroit
Computing Center. The author has had clients who came under scrutiny for the following activities:

The purchaser of a tavern was required to pay in cash. He went to his bank on multiple
occasions over a period of weeks to secure cash in amounts of less than $10,000 in order to
accumulate the purchase price.

An immigrant who did not fully trust banks accumulated cash of about $150,000 saving monies
from cashing her pay checks. She purchased a condo and needed a cashier's check for the
closing She went to a bank and deposited $20,000 and was required to file a CTR. The teller told
her that if she deposited less than $10,000 there would be no need to file a report. Over a period
of days she deposited cash in smaller amounts sufficient to accumulate money to purchase her
downpayment via cashier's check.

During a divorce a man accumulated cash in an effort to secret it from his soon to ex-spouse.
After the divorce he began depositing the money with a stock broker in amounts less than
$10,000. The IRS issued a forfeiture notice to the man's broker and has confiscated over
$400,000. The client has filed a claim and faces extended litigation and a criminal investigation.

Client was an used car dealer who sold cars for cash amounts in excess of $10,000 and failed to
file CTR's. He was indicted and convicted of money laundering and the IRS has initiated
forfeiture proceedings against all of his assets. He is currently in prison awaiting sentencing.
Money Laundering Investigations FY 2007 FY 2006 FY 2005

Investigations Initiated 1678 1443 1639

Prosecution Recommendations 1275 1248 1338

Indictments/Informations 1017 1016 1147

Sentenced 758 800 782

Incarceration Rate* 87.9% 88.1% 88.4%

Average Months to Serve 62 74 62

Bank Secrecy Act (BSA) Investigations FY 2007 FY 2006 FY 2005

Investigations Initiated 590 554 546

Prosecution Recommendations 396 437 379

Indictments/Informations 361 364 359

Sentenced 335 332 310

Incarceration Rate* 76.4% 75.3% 83.2%

Average Months to Serve 33 43 42

4. EXAMINATION TC "4. EXAMINATION" \f C \l "1"

More Audits of Wealthy


4.10 TC "More Audits of Wealthy" \f C \l "2" The IRS increased its audits of individuals with
incomes of $1 million or more increased from 17,015 during fiscal year 2006 to 31,382 during fiscal
year 2007, an increase of 84 percent. One out of 11 individuals with incomes of $1 million or more
faced an audit in 2007. Audits of individuals with incomes over $200,000 reached 113,105 returns, up
29.2 percent from the prior year total of 87,885.

Examination Reengineering
4.20 TC "Examination Reengineering" \f C \l "2" 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 new process.

Some of the features of the reengineered field examination process are:


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.

Some of the features of the reengineered office examination process are:

Clearly communicated expectations of both the taxpayer and the examiner prior to the initial
appointment. Office examiners will provide the taxpayer with focused document requests that
specifically identify the information needed.

Improved flexibility in the scheduling process will enable examiners and taxpayers to reduce the
time it takes to complete an examination.

Office examiners will use standardized templates for every examination issue to gather the
information necessary to resolve issues. Examiners will use a standardized guide when deciding
if additional issues need to be added to the examination. The examiner will explain to the
taxpayer if any additional issues are included in the examination.

The Dirty Dozen


4.30 TC "The Dirty Dozen" \f C \l "2" Each year the IRS announces its Dirty Dozen and urges
people to avoid these common schemes: The 2008 list is as follows:

1. Phishing Phishing is a tactic used by Internet-based thieves to trick unsuspecting


victims into revealing personal information they can then use to access the victims’ financial
accounts. These criminals use the information obtained to empty the victims’ bank accounts,
run up credit card charges and apply for loans or credit in the victims’ names. Phishing scams
often take the form of an e-mail that appears to come from a legitimate source. Some scam
e-mails falsely claim to come from the IRS. To date, taxpayers have forwarded more than
33,000 of these scam e-mails, reflecting more than 1,500 different schemes, to the IRS. The
IRS never uses e-mail to contact taxpayers about their tax issues. Taxpayers who receive
unsolicited e-mail that claims to be from the IRS can forward the message to a special
electronic mailbox, phishing@irs.gov, using instructions contained in an article titled “How to
Protect Yourself from Suspicious E-Mails or Phishing Schemes.” Remember: the only official
IRS Web site is located at www.irs.gov.

2. Scams Related to the Economic Stimulus Payment Some scam artists are trying to
trick individuals into revealing personal financial information that can be used to access their
financial accounts by making promises relating to the economic stimulus payment, often called
a “rebate.” To obtain the payment, eligible individuals in most cases will not have to do
anything more than file a 2007 federal tax return. But some criminals posing as IRS
representatives are trying to trick taxpayers into revealing their personal financial information by
falsely telling them they must provide information to get a payment. For instance, a potential
victim is told by phone or e-mail that he or she is eligible for a rebate but must provide a bank
account number (or similar information) to get the payment. If the target is unwilling, the victim
is then told that he cannot receive the rebate unless the information is provided. Individuals
should remember that the only way to get a stimulus payment is to file a 2007 tax return. The
IRS urges taxpayers to be extra-vigilant. The IRS will not contact taxpayers by phone or e-mail
about their stimulus payment.

3. Frivolous Arguments Promoters of frivolous schemes encourage people to make


unreasonable and unfounded claims to avoid paying the taxes they owe. Most recently, the
IRS expanded its list of frivolous legal positions that taxpayers should stay away from.
Taxpayers who file a tax return or make a submission based on one of these positions on the
list are subject to a $5,000 penalty. The most recent update of the list of frivolous positions
includes: misinterpretation of the 9th Amendment to the U.S. Constitution regarding objections
to military spending, erroneous claims that taxes are owed only by persons with a fiduciary
relationship to the United States, a nonexistent “Mariner’s Tax Deduction” related to invalid
deductions for meals and the misuse of the fuel tax credit (see below). The complete list of
frivolous arguments is on the IRS Web site at IRS.gov.

4. 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 was recently added to the list of frivolous tax
claims, potentially subjecting those who improperly claim the credit to a $5,000 penalty.

5. Hiding Income Offshore Individuals continue to try to avoid paying U.S. taxes by
illegally hiding income in offshore bank and brokerage accounts or using offshore debit cards,
credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities or life
insurance plans. The IRS and the tax agencies of U.S. states and possessions continue to
aggressively pursue taxpayers and promoters involved in such abusive transactions.

6. Abusive Retirement Plans The IRS continues to uncover abuses in retirement plan
arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking
for transactions that taxpayers are using to avoid the limitations on contributions to Roth IRAs.
Taxpayers should be wary of advisers who encourage them to shift appreciated assets into
Roth IRAs or companies owned by their Roth IRAs at less than fair market value. In one
variation of the scheme, a promoter has the taxpayer move a highly appreciated asset into a
Roth IRA at cost value, which is below annual contribution limits even though the fair market
value far exceeds the amount allowed.

7. Zero Wages Filing a phony wage- or income-related information return to replace a


legitimate information return has been used as an illegal method to lower the amount of taxes
owed. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a
way to improperly reduce taxable income to zero. The taxpayer also may submit a statement
rebutting wages and taxes reported by a payer to the IRS. Sometimes fraudsters even include
an explanation on their Form 4852 that cites statutory language on the definition of wages or
may include some reference to a paying company that refuses to issue a corrected Form W-2
for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any of the
variations of this scheme.

8. 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."

9. Return Preparer Fraud Dishonest tax return preparers can cause many problems for
taxpayers who fall victim to their schemes. These scam artists make their money by skimming
a portion of their clients’ refunds and charging inflated fees for return preparation services. They
attract new clients by promising large refunds. Some preparers promote the filing of fraudulent
claims for refunds on items such as fuel tax credits to recover taxes paid in prior years.
Taxpayers should choose carefully when hiring a tax preparer, especially one who promises
something that seems too good to be true.

10. Disguised Corporate Ownership Some people are going as far as forming domestic
shell corporations in certain states for the purpose of disguising the ownership of a business or
financial activity. Once formed, these anonymous entities can be used to facilitate
underreporting of income, non-filing of tax returns, engaging in listed transactions, money
laundering, financial crimes and even terrorist financing. The IRS is working with state
authorities to identify these entities and to bring the owners of these entities into compliance.

11. Misuse of Trusts For years, unscrupulous promoters have urged taxpayers to transfer
assets into trusts. They promise reduction of income subject to tax, deductions for personal
expenses and reduced estate or gift taxes. However, some trusts do not deliver the promised
tax benefits. As with other arrangements, taxpayers should seek the advice of a trusted
professional before entering into a trust.

12. Abuse of Charitable Organizations and Deductions The IRS continues to observe
the misuse of tax-exempt organizations. Misuse includes arrangements to improperly shield
income or assets from taxation, attempts by donors to maintain control over donated assets or
income from donated property and overvaluation of contributed property. In addition, IRS
examiners are seeing an upturn in instances where taxpayers try to disguise private tuition
payments as contributions to charitable or religious organizations.

IRS Still Watches Scams That Fall Off the List


4.40 TC "IRS Still Watches Scams That Fall Off the List" \f C \l "2" While the IRS has seen a
decline in the occurrence of some of these scams, other problems, such as abuse of the American
Indian Employment Credit and misuse of structured entity credits, continue to be areas of concern.
The absence of a particular scheme from the Dirty Dozen should not be taken as an indication that the
IRS is unaware of it or not taking steps to counter it.

5. APPEALS TC "5. APPEALS" \f C \l "1"

Strategic Priorities:
5.10 Appeals has set forth the following as its strategic priorities for 2008:

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
Campus Appeals Program
5.20 TC "Campus Appeals Program" \f C \l "2" The campus appeals program diminishes taxpayer
rights. Any appeal from a compliance generated notice is assigned to the campus appeals program.
The campus appeals personnel are poorly trained and lack field experience. Their incompetence
starkly contrasts with the well trained experienced former revenue agents and revenue officers
assigned to the local appeals offices. When your client receives a notice from a campus allowing an
appeal your protest should always request that your client be given a face to face conference in your
local office.

6. USEFUL INFORMATION FOR PRACTITIONERS TC "6. USEFUL INFORMATION FOR


PRACTITIONERS" \f C \l "1"

Whistleblower Reforms
6.10 TC "Whistleblower Reforms" \f C \l "2" 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. 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)).

Director Appointed
6.20 TC "Director Appointed" \f C \l "2" Stephen Whitlock has been appointed director and his
office will be responsible for assessing and analyzing incoming tips. After determining their degree of
credibility, his office will assign the information to the appropriate IRS office for further investigation.

As program director, Whitlock’s key responsibilities include:

Establishing the strategic direction of the program


Defining specific goals and operating guidelines
Communicating and implementing guidance to ensure the office’s success

Prior to his new appointment, Whitlock served since May 2003 as the Deputy Director of the IRS Office
of Professional Responsibility, which administers the regulations governing the practice of attorneys,
CPAs, and other tax professionals. From March 1999 until May 2003, he was the director of the IRS
Commissioner’s Complaint Processing and Analysis Group.

Mortgage Relief Act


6.30 TC "Mortgage Relief Act" \f C \l "2" The Mortgage Relief Act, effective for indebtedness
discharged on or after Jan. 1, 2007 and before Jan. 1, 2010, generally allows taxpayers to exclude up
to $2 million of mortgage debt forgiveness on their principal residence. Specifically, under the
Mortgage Relief Act, gross income doesn't include any discharge of qualified principal residence
indebtedness. (Code Sec. 108(a)(1)(E)) Qualified principal residence indebtedness is acquisition
indebtedness under Code Sec. 163(h)(3)(B) with respect to the taxpayer's principal residence, but with
a $2 million limit ($1 million for married individuals filing separately). (Code Sec. 108(h)(2)) “Principal
residence” has the same meaning as under the home sale exclusion rules of Code Sec. 121. (Code
Sec. 108(h)(5)) Acquisition indebtedness of a principal residence is indebtedness incurred in the
acquisition, construction, or substantial improvement of an individual's principal residence that is
secured by the residence. It includes refinancing of debt to the extent the amount of the refinancing
doesn't exceed the amount of the refinanced indebtedness. (Joint Committee on Taxation JCX-86-07)

Basis Reduction
6.40 TC "Basis Reduction" \f C \l "2" The basis of the taxpayer's principal residence is reduced by
the excluded amount, but not below zero. (Code Sec. 108(h)(1))

Qualified Principal Residence Indebtedness


6.50 TC "Qualified Principal Residence Indebtedness" \f C \l "2" If any loan is discharged, in
whole or in part, and only part of the loan is qualified principal residence indebtedness, the mortgage
forgiveness exclusion applies only to so much of the amount discharged as exceeds the amount of the
loan (as determined immediately before the discharge) which is not qualified principal residence
indebtedness. (Code Sec. 108(h)(4)) The exclusion doesn't apply to a loan discharged on account of
services performed for the lender or any other factor not directly related to a decline in the value of the
residence or to the taxpayer's financial condition. The exclusion also doesn't apply to a taxpayer in a
Title 11 bankruptcy. (Code Sec. 108(h)(3)) An insolvent taxpayer (other than one in a Title 11
bankruptcy) can elect to have the mortgage forgiveness exclusion not apply and can instead rely on
the Code Sec. 108(a)(1)(B) exclusion for insolvent taxpayers. (Code Sec. 108(a)(2))

Misclassified Workers
6.60 TC "Misclassified Workers" \f C \l "2" 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.
IRS Hotlines and Toll-Free Numbers
IRS Telephone Lines and Hours of Operation

Service Telephone Hours of operation


number

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

e-Help (Practitioners Only) (866) 255-0654 M–F, 6:30 a.m.–6:00 p.m., CT


(non-peak period)
M-F, 6:30 a.m.–10:00 p.m, CT (1/12/2007
– 4/27/2007)
and Saturdays 6:30 a.m. – 4:00 p.m., CT
(1/12/2007 – 4/27/2007)

Refund Hotline (800) 829-1954 Automated service is available 24/7

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

Electronic Federal Tax Payment (800) 555-4477 24/7


System

Government Entities (TEGE) Help (877) 829-5500 M–F, 8:30 a.m. – 4:30 p.m., ET
Line

TeleTax Topics and Refund Status (800) 829-4477 24/7

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 Line(866) 699-4096 M–F, 8:00 a.m.–6:00 p.m., ET

Information Return Reporting (866) 455-7438 M–F, 8:30 a.m.–4:30 p.m., ET


7. COLLECTION TC "7. COLLECTION" \f C \l "1"

Table 16. Delinquent Collection Activities, Fiscal Years 2004-2007


[Money amounts are in thousands of dollars.]

2004 2005 2006 2007


Activity
(1) (2) (3) (4)
Returns filed with additional tax due:
Total amount collected [1] 36,659,487 37,113,036 40,813,309 43,318,830
Taxpayer delinquent accounts (thousands):
Number in beginning inventory 6,170 5,981 6,478 7,074
Number of new accounts 5,179 5,870 6,100 7,146
Number of accounts closed 5,368 5,373 5,504 5,980
Ending inventory:
Number 5,981 6,478 7,074 8,240
Balance of assessed tax, penalties, and interest [2] 50,680,546 57,594,901 69,555,590 83,488,988
Returns not filed timely:
Delinquent return activity:

Net amount assessed [3]

15,635,584 22,765,462 23,305,535 30,287,802


Amount collected with delinquent returns 2,976,681 3,584,255 3,905,764 3,968,163
Taxpayer delinquency investigations (thousands) [4]:
Number in beginning inventory 2,964 3,022 3,658 3,874
Number of new investigations 2,051 2,558 2,373 2,587
Number of investigations closed 1,993 1,922 2,157 2,729
Number in ending inventory 3,022 3,658 3,874 3,732
Offers in compromise (thousands) [5]:
Number of offers received 106 74 59 46

Number of offers accepted 20


19 15 12
Amount of offers accepted 275,331 325,640 283,746 228,975
Enforcement activity:
Number of notices of Federal tax liens filed 534,392 522,887 629,813 683,659
Number of notices of levy served upon third parties 2,029,613 2,743,577 3,742,276 3,757,190
Number of seizures 440 512 590 676

Flawed Private Collection


7.10 TC "Flawed Private Collection" \f C \l "2" The National Taxpayer Advocate has issued several
reports critical of the IRS private collection program which began in 2006. The advocate discusses the
costs of the program which grants the collection agencies up to 24% of each collection and points out
that we the taxpayers are paying more costs than the amount actually recovered by the program. This
year, the program is projected to collect less than half of what the IRS initially projected. Nina E.
Olson, head of the National Taxpayer Advocate Service, an independent arm within the IRS, testified
to Congress earlier this month that the private debt-collection program will cost about $7.7 million to
run this year and produce net revenues of about $11 million. The American Jobs Creation Act of 2004
provided for the use of private collectors to collect unpaid Internal Revenue Service taxes. In March,
2006 IRS announced that it has awarded contracts to the three firms it has selected from 33 bidders to
participate in the first phase of its private debt collection initiative. Private collection began in the fall of
2006.One of the firms was subsequently removed from the program by the IRS. The private collectors
do not have the power to initiate any enforced collection actions including liens and levies. The
collection agencies are authorized to write to taxpayers demanding payment and to call taxpayers
demanding payment. The collection agencies are subject to the Fair Debt Collection Practices Act.
Therefore, the agencies may not harass taxpayers at work and must cease contact with the taxpayer
upon written demand that all further contact with the taxpayer cease.

Online Payment Agreement (OPA)


7.20 TC "Online Payment Agreement (OPA)" \f C \l "2" The IRS has implemented a program to
allow taxpayers to secure online payment agreements. The online application allows the taxpayer or
her authorized representative (Power of Attorney) to self qualify, apply for an installment agreement,
and receive immediate notification of approval. There may be times when you will need to mail in
paperwork or speak with the IRS before it can determine your eligibility for an installment agreement. If
that is the case, the OPA application will give you an address or a toll-free phone number to reach us.
The maximum liability will be $25,000 and is limited to 1040 liabilities. On March 23, 2007 the IRS
announced two recent enhancements which provide added functionality: the first permits individuals
who have not yet received a bill to establish pre-assessed agreements on current tax year Form 1040
liabilities. The second allows practitioners with valid authorizations to remain in the application to
request agreements for multiple clients.

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. “

https://sa2.www4.irs.gov/irfof/lang/en/eiapoalogin.jsp

Disqualified Employment Tax Levies


7.30 TC "Disqualified Employment Tax Levies" \f C \l "2" The Small Business and Work
Opportunity Tax Act of 2007 provided for modification of the collection due process procedures for
employment tax liabilities. The new CDP tax law change amended I.R.C. §6330(f) to permit levy to
collect employment taxes without first giving a taxpayer a pre-levy CDP notice if the levy is a
"disqualified employment tax levy." This amendment became effective for levies served on or after
September 22, 2007. A "disqualified employment tax levy" (DETL) as described in new section
6330(h), is a levy to collect a taxpayer's employment tax liability if that taxpayer or a predecessor
requested a CDP hearing under section 6330 for unpaid employment taxes arising in the two-year
period prior to the beginning of the taxable period for which the levy is served. If a DETL is served,
then the taxpayer shall be given an opportunity for "the hearing described in this section within a
reasonable period of time after the levy." The taxpayer may seek judicial review in the Tax Court of the
determination resulting from the section 6330(f) post-levy hearing.
DETL
7.40 TC "DETL" \f C \l "2" The IRS has issued a table setting forth the standards for DETL’s.

DISQUALIFIED EMPLOYMENT TAX LEVIES AND POST-LEVY CDP RIGHTS


Disqualified 1) A disqualified employment tax levy (DETL) is comprised of these three
Employment Tax Levy components:
a. It's a levy served to collect an employment tax liability;
b. The levy is for taxes owed by a taxpayer or a predecessor who previously
requested a CDP levy hearing; and
c. The prior CDP hearing involved unpaid employment taxes that arose in the two
year period before the period for which the levy is served.
2) Even if a taxpayer's employment tax liabilities meet the criteria for a DETL, this
action is discretionary and we have the option to issue a pre-levy CDP notice for
DETL periods, if the situation warrants. For example, the issuance of a pre-levy
notice might be advisable if no IRC 6331(d) notice has been issued or there has
been no contact with the taxpayer within the last 180 days.
3) A DETL can be issued if a predecessor of the taxpayer requested a CDP
hearing that meets the criteria. Note: Predecessor hearing requests should not be
used as a basis of a DETL until the term “predecessor” is defined in the CDP
regulations.
Prior Request for CDP 1) The prior request refers to a timely, processable CDP hearing request. Refer to
Hearing IRM 5.1.9 for information regarding the timeliness and processability of CDP
hearing requests. Even if the request is subsequently withdrawn, it qualifies as a
prior hearing request. Note: Requests for an equivalent hearing or untimely
requests for CDP hearings do not satisfy the requirement of having had a prior
hearing request. Thus, if the taxpayer requests an equivalent hearing or submits an
untimely request for a CDP hearing, that request cannot be used as a basis for a
DETL.
2) The following can be used to determine if the taxpayer requested a prior CDP
levy hearing involving unpaid employment taxes.
a) First hand knowledge of a prior CDP levy hearing. In most instances involving
pyramiding trust fund taxpayers, the revenue officer assigned the case will be
aware of previously requested hearings.
b) Case history.
3) A post-levy request for a CDP hearing made in response to a post-levy CDP
notice also can constitute a prior CDP hearing request as a basis for a DETL.
4) The period(s) listed by the taxpayer on the CDP hearing request to be used as
a basis of a DETL must be listed on a CDP levy notice preceding the request.
Two-Year Look Back 1) In addition to seeing if the taxpayer requested a CDP levy hearing from a pre or
Period post-levy CDP notice, we need to check to see if the hearing request involved
employment taxes arising and ending within the two-year period before the
beginning of the taxable period for which the DETL is served. Thus, the two-year
look back period is measured from the beginning of the period for which the DETL
is served.
2) If the taxpayer requested a CDP levy hearing for employment taxes arising
during a calendar quarter that ended during the two-year period, the module meets
the criteria for a DETL.

Examples:
7.50 TC "Examples:" \f C \l "2"

Example 1:
Taxpayer owes for 4th quarter 2005 (quarter ended 12/31/2005)
Taxpayer requested a timely CDP levy hearing
Taxpayer accrues additional employment tax liability for the quarter ended 06/30/2006
Additional liability qualifies for DETL levy because the taxpayer requested a prior levy hearing for
a quarter that ended (12/31/2005) within the two-year look back period (04/01/2004 thru
04/01/2006)

Example 2:

Taxpayer owes for 1st quarter 2006 (quarter ended 03/31/2006)


Taxpayer requested a timely CDP levy hearing
Taxpayer assessed additional employment tax liability for the quarter ended 12/31/2005
Additional liability does not qualify for DETL levy because the taxpayer requested a prior levy
hearing for a quarter that ended (03/31/2006) outside the two-year look back period (10/01/2003
thru 10/01/2005)

Example 3:

Taxpayer owes for 1st quarter 2004 (quarter ended 03/31/2004)


Taxpayer requested a timely CDP levy hearing.
Taxpayer accrues additional employment tax liability for the quarter ended 06/30/2006
Additional liability does not qualify for DETL levy because the taxpayer did requested a prior levy
hearing for a quarter that ended (03/31/2004) outside the two-year look back period (04/01/2004
thru 04/01/2006)

Example 4:

Taxpayer owes for 4th quarter 2005 (quarter ended 12/31/2005)


Taxpayer requested an equivalent levy hearing
Taxpayer accrues additional employment tax liability for the quarter ended 06/30/2006
Additional liability does not qualify for DETL levy. The taxpayer requested a prior levy hearing for
a quarter that ended (12/31/2005) within the two-year look back period (04/01/2004 thru
04/01/2006). However, it was not a timely CDP levy hearing request.
Levy Procedures on DETL’s
7.60 TC "Levy Procedures on DETL’s" \f C \l "2" The IRS has issued the following table to provide
guidance to its collection employees on the methods for levy on DETL’s.

DETL Levies
Issuing a DETL If the tax period meets the criteria for issuing a DETL and levy action is determined to be
appropriate,
• Make sure the taxpayer received the Notice of Intent of Levy under IRC 6331(d). This is the
CP 504 notice or the “Status 58” notice. If the CP 504 notice was not issued, issue the
pre-levy CDP notice, L-1058. This meets the IRC 6331(d) and IRC 6330 requirement.
• Document the case history regarding the DETL determination. For example, DETL to be
issued for tax periods 01-200606 and 01-200609. TP qualifies for a DETL based on CDP levy
hearing requested on 07/27/2007 for tax periods 01- 200512 and 01 200603.
• Prepare and issue the DETL. Note: The group manager will need to issue the DETL on ICS.
Post-Levy CDP Notice 1) If a DETL is served, issue the post-levy CDP notice when sending the taxpayer's copy of
the levy. This should be done as soon as possible but no more than 10- days after the levy. If
the Notice of Levy is mailed, allow time for the Notice of Levy to be received through the mail
before issuing the post-levy CDP Notice but no more than 10-days after the levy is issued.
Document in the ICS history the reason if the post-levy CDP notice is issued later than 10
days after issuing the DETL
2) Use Letter 1058(D), Notice of Levy and Notice of Your Right to a Hearing. Include a copy of
the levy, Form 12153, Pub 594 and Pub 1660 with the letter. Note: If the taxpayer received a
pre-levy CDP notice for the period being levied, do not issue a post-levy CDP notice.
3) The notice can be given in person, left at the taxpayer's home or business, or sent to the
taxpayer's last known address by certified or registered mail. Note: Use registered mail only if
the taxpayer is outside the United States. There is no international certified mail.
Post-Levy DETL Hearing 1) The DETL post-levy hearing request is processed similar to other hearing requests. Refer
Request to IRM 5.1.9 for processing hearing requests.
2) The same procedures regarding the suspension of the Collection Statute Expiration Date
(CSED) apply. If a timely filed post-levy CDP hearing request is filed, the CSED is suspended.
3) Document, for the benefit of Appeals, either in the case history or on Form 12153A, whether
continued collection action is planned.
DETL during CDP 1) A DETL may be served during a timely requested pre or post-levy CDP hearing or judicial
Hearing for Periods review of such hearing to collect employment tax liabilities (DETL tax periods) subject to the
Subject to the Hearing hearing.
Note: In determining if a DETL is permitted during the hearing or judicial review to collect
employment taxes subject to the hearing, the request giving rise to the hearing cannot be
used as a basis for the DETL.
2) A DETL may be served during a hearing or judicial review if it is appropriate. For example,
a DETL may be served during a hearing or judicial review if collection is at risk (e.g.,
taxpayer's business is deteriorating or taxpayer is pyramiding).
3) If the DETL is to take place during the hearing, check IDRS for actions that may prohibit
levy action, If no apparent TC codes, then contact the Appeals Team Manager of the
assigned hearing officer preferably via e- mail regarding planned levy action. Determine
whether Appeals has information that prohibits levy or may affects the decision to levy.
4) If the DETL is to take place during judicial review, contact the Counsel attorney assigned
the case to advise him or her of the planned levy action and to determine if there is any new
information that may affect the decision to levy.
Guaranteed Availability of Installment Agreements
7.70 TC "Guaranteed Availability of Installment Agreements" \f C \l "2" The Internal Revenue
Service Restructuring and Reform Act of 1998 requires the Secretary to grant an installment
agreement, at the taxpayer's option, if:

the liability is $10,000, or less (excluding penalties and interest);

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
7.80 TC "<$25,000 Liabilities" \f C \l "2" 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.

New Form 433A


7.90 TC "New Form 433A" \f C \l "2" 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.

New more Onerous Allowable Expense Standards


7.100 TC "New more Onerous Allowable Expense Standards" \f C \l "2" In October, 2007 the IRS
the IRS revised its allowable expense standards to make them more onerous. In February, 2008 the
IRS again revised the standards. Instead of establishing national standards which recognized the
need for higher living expense for higher income families it began a system of one size fits all. It
continued to fail to recognize the varying cost of living in different regions and communities and
eliminated 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.
There are four types of necessary expenses:

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.

Out-of-Pocket Health Care Expenses: Out-of-pocket health care expenses include medical
services, prescription drugs, and medical supplies (e.g. eyeglasses, contact lenses, etc.). Elective
procedures such as plastic surgery or elective dental work are generally not allowed. Taxpayers
and their dependents are allowed the standard amount monthly on a per person basis, without
questioning the amounts they actually spend. If the amount claimed is more than the total allowed
by the health care standards, the taxpayer must provide documentation to substantiate those
expenses are necessary living expenses. Generally, the number of persons allowed should be the
same as those allowed as exemptions on the taxpayer’s most recent year income tax return. The
out-of-pocket health care standard amount is allowed in addition to the amount taxpayers pay for
health insurance.

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.

A. Housing - Standards are established for each county within a state. When
deciding if a deviation is appropriate, consider the cost of moving to a new
residence; the increased cost of transportation to work and school that will result
from moving to lower-cost housing and the tax consequences. The tax
consequence is the difference between the benefit the taxpayer currently derives
from the interest and property tax deductions on Schedule A to the benefit the
taxpayer would derive without the same or adjusted expense. Housing costs 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

B. Transportation - The transportation standards consist of nationwide figures for


loan or lease payments referred to as ownership cost, and additional amounts for
operating costs broken down by Census Region and Metropolitan Statistical Area.
Operating costs were derived from BLS data. If a taxpayer has a car payment, the
allowable ownership cost added to the allowable operating cost equals the
allowable transportation expense. If a taxpayer has no car payment only the
operating cost portion of the transportation standard is used to figure the allowable
transportation expense. Under ownership costs, separate caps are provided for the
first car and second car. If the taxpayer does not own a car a standard public
transportation amount is allowed.

Vehicle insurance, vehicle payment (lease or purchase), maintenance, fuel, state


and local registration, required inspection, parking fees, tolls, driver's license, public
transportation. Transportation costs not required to produce income or ensure the
health and welfare of the family are not considered necessary. Consider availability
of public transportation if car payments (purchase or lease) will prevent the tax
liability from being paid in part or full. Public transportation costs could be an option
if it does not significantly increase commuting time and inconvenience the taxpayer.

Note: If the taxpayer has no car payment, or no car, question how the
taxpayer travels to and from work, grocer, medical care, etc. The taxpayer is
only allowed the operating cost or the cost of transportation. [ IRM 5.15.1.9
]

C. Other Expenses. Other expenses may be considered if they meet the necessary
expense test - they must provide for the health and welfare of the taxpayer and/or
his or her family or they must be for the production of income. This is determined
based on the facts and circumstances of each case. If other expenses are
determined to be necessary and, therefore allowable, document the reasons for the
decision in your history.

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.

E. National and local expense standards are guidelines. If it is determined a


standard amount is inadequate to provide for a specific taxpayer's basic living
expenses, allow a deviation. Require the taxpayer to provide reasonable
substantiation and document the case file.

F. Generally, the total number of persons allowed for national standard expenses
should be the same as those allowed as dependents on the taxpayer's current year
income tax return. Verify exemptions claimed on taxpayer's income tax return meet
the dependency requirements of the IRC. There may be reasonable exceptions.
Fully document the reasons for any exceptions. For example, foster children or
children for whom adoption is pending.

G. A deviation from the local standard is not allowed merely because it is


inconvenient for the taxpayer to dispose of valued assets.

H. Length. Revenue officers should consider the length of the payments. Although it
may be appropriate to allow for payments made on the secured debts that meet the
necessary expense test, if the debt will be fully repaid in one year only allow those
payments for one year. [ IRM 5.15.1.7 ]
Five Year Test
7.110 TC "Five Year Test" \f C \l "2" The amount allowed for necessary or conditional expenses
depends on the taxpayer's ability to full pay the liability within five years and on the taxpayer's
individual facts and circumstances. If the liability can be paid within 5 years, it may be appropriate to
allow the taxpayer the excessive necessary and conditional expenses. If the taxpayer cannot pay
within 5 years, it may be appropriate to allow the taxpayer the excessive necessary and conditional
expenses for up to one year in order to modify or eliminate the expense. (See IRM 5.14, Installment
Agreements) [ IRM 5.15.1.10 ]

8. OFFER IN COMPROMISE TC "8. OFFER IN COMPROMISE" \f C \l "1"

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
26%). 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.
Offer in Compromise Program

Offers in compromise (thousands) [5]: 2004 2005 2006 2007


Number of offers received 106,000 74,000 59,000 46,000
Number of offers accepted 20,000 19,000 15,000 12,000
Amount of offers accepted 275,331,000 325,640,000 283,746,000 228,975,000

Offer in Compromise Program

Details 2001 – June, 2007

Fiscal Year Received Not Processable Withdrawn and Rejected Accepted Total Acceptance
Processable Return Terminated Dispositions Rate
FY01 125,390 16,185 27,751 16,654 13,976 38,643 113,209 34%
FY02 124,033 32,897 50,492 13,621 16,952 29,140 143,102 20%
FY03 127,769 30,406 49,079 8,431 27,336 21,570 136,822 16%
FY04 106,025 38,553 32,358 7,859 25,654 19,546 123,970 16%
FY05 74,311 22,713 20,068 7,377 22,105 19,080 91,343 21%
FY06 58,586 16,733 12,350 5,407 14,945 14,734 64,169 23%
June-FY06 43,739 11,503 9,652 4,265 11,706 11,405 48,531 24%
June-FY07 34,740 7,663 7,772 3,470 9,036 8,959 36,900 24%
% Change - YTD 07 vs 06 -21% -33% -19% -19% -23% -21% -24%
% Change - 06 vs 01 -53% 3% -55% -68% 7% -62% -43%

Offer in Compromise Forms


8.20 TC "Offer in Compromise Forms" \f C \l "2" 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.

Tax Increase Prevention and Reconciliation Act of 2005


8.30 TC "Tax Increase Prevention and Reconciliation Act of 2005" \f C \l "2" The Tax Increase
Prevention and Reconciliation Act of 2005 (TIPRA), section 509, made major changes to the IRS OIC
program. These changes affect all offers received by the IRS on or after July 16, 2006..TIPRA section
509 amends IRC section 7122 by adding a new subsection (c) “Rules for Submission of Offers-
in-Compromise.”

Payments With Offers


8.35 TC "Payments With Offers" \f C \l "2" A taxpayer filing a lump-sum offer must pay 20% of the
offer amount with the application (IRC 7122(c)(1)(A)). A lump-sum offer means any offer of payments
made in five or fewer installments.

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.

Failure to Make Deposit


8.40 TC "Failure to Make Deposit" \f C \l "2" Taxpayers can avoid delays in processing their OIC
applications by making all required payments in full and on time. Failure to pay the 20 percent on a
lump-sum offer, or the first installment payment on a periodic-payment offer, will result in the IRS
returning the offer to the taxpayer as nonprocessable (IRC section 7122(d)(3)(C) as amended by
TIPRA).

Not Refundable
8.50 TC "Not Refundable" \f C \l "2" 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)).

Specify Payments
8.60 TC "Specify Payments" \f C \l "2" Taxpayers may specify in writing when submitting their offers
how to apply the payments to the tax, penalty and interest due. Otherwise, the IRS will apply the
payments in the best interest of the government (IRC section 7122(c)(2)(A)). For most taxpayers it is
in their best interest to apply the payment to their newest income tax liabilities as they may have
already reached the maximum late pate payment penalty of 25% on older liabilities.

The OIC application fee reduces the assessed tax or other amounts due. A taxpayer still must also
submit a $150 application fee and may not specify how to apply the fee.

Failure to Make Installment Payments


8.70 TC "Failure to Make Installment Payments" \f C \l "2" Taxpayers failing to make installment
payments on periodic-payment offers after providing the initial payment will cause the IRS to treat the
offer as a withdrawal. The IRS will return the offer application to the taxpayer (IRC section 7122(c)
(1)(B)(ii)).A lump-sum offer accompanied by a payment that is below the required 20 percent threshold
will be deemed processable. However, the taxpayer will be asked to pay the remaining balance in
order to avoid having the offer returned. Failure to submit the remaining balance will cause the IRS to
return the offer and retain the $150 application fee.

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.
Low Income Taxpayers
8.80 TC "Low Income Taxpayers" \f C \l "2" Under the new law, taxpayers qualifying as low-income
or filing an offer solely based on doubt as to liability qualify for a waiver of the new partial payment
requirements. Taxpayers qualifying for the low-income exemption or filing a doubt-as-to- liability offer
only are not liable for paying the application fee, or the payments imposed by TIPRA section 509. A
taxpayer seeking a waiver must submit Form 656-A with the offer. The monthly income levels to
qualify are listed below:

Deemed Accepted
8.90 TC "Deemed Accepted" \f C \l "2" 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 TC "Background" \f C \l "2" 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 TC "Supporting Documents
8.110" \f C \l "2" 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.

$150 Processing Fee


8.120 TC "$150 Processing Fee" \f C \l "2" The Internal Revenue Service now charges a $150
application fee for the processing of offers in compromise. The IRS expects that this fee will help offset
the cost of providing this service, as well as reduce frivolous claims. The law authorizes federal
agencies to charge fees to defray the costs of providing certain services. Guidelines encourage such
fees for benefits beyond those provided to the general public. The IRS anticipates the fee also will
reduce the number of offers that are filed inappropriately — for example, solely to delay collection —
enabling the agency to redirect resources to the processing of acceptable offers. Offers based solely
on hardship may seek a fee waiver.

Addresses
8.130 TC "Addresses
8.130" \f C \l "2" All offers from taxpayers living in Alaska, Alabama, Arizona, California, Colorado,
Hawaii, Idaho, Kentucky, Louisiana, Mississippi, Montana, Nevada, New Mexico, Oregon, Tennessee,
Texas, Utah, Washington, Wisconsin, or Wyoming must be filed as follows:

Wage earner or self employed without employees Other than wage earner or self employed without
employees
Then mail to: Then mail to:

Memphis Internal Revenue Service Memphis Internal Revenue Service


Center COIC Unit Center COIC Unit
PO Box 30803, AMC PO Box 30804, AMC
Memphis, TN 38130-0803 Memphis, TN 38130-0804

All other states submit offers as follows:

Wage earner or self employed without employees Other than wage earner or self employed without
employees
Then mail to: Then mail to:

Brookhaven Internal Revenue Service Brookhaven Internal Revenue Service


Center COIC Unit Center COIC Unit
PO Box 9007 PO Box 9008
Holtsville, NY 11742-9007 Holtsville, NY 11742-9008
Determining Processability
8.140 TC "Determining Processability" \f C \l "2" 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.

Note: Generally speaking, IRM 5.1.11.1.3(2) only requires employees to


conduct a compliance check, confirm and document all tax periods were filed
for the preceding 6 year period. The only exception would be if fraud were
discovered during the course of the investigation. Even then it should be
extremely rare to go beyond 6 years. IRM 5.1.11.4 discusses enforcement
criteria, which states that if the taxpayer refuses to file, neglects to file, or
indicates an inability to file, then the employees should determine to what
extent enforcement should be used (e.g. summons, 6020(b), referral to
Exam, or field, etc.). Filing requirements will normally be enforced for a 6
year period, which is calculated by starting with the tax year that is currently
due, and going back 6 years.

B. Taxpayer in Bankruptcy - An offer will not be considered during a bankruptcy


proceeding.

Note: IRM 25.17.4.7, Offers-in-Compromise and Bankruptcy (07-01-2002),


states that "[t]oo many administrative and legal problems would be created if
a tax liability was simultaneously the subject of a court-supervised
bankruptcy case and the administrative offer-in-compromise process."
Therefore, it is the policy of IRS that an offer will not be considered if a
taxpayer is in bankruptcy.

C. Taxpayer did not submit the offer on the current revision of Form 656 - The
offer must be submitted on the most current revision of the Offer in Compromise
Form 656.

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.

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).
Note: The application fee is not required if the offer is filed solely on the
basis of Doubt as to Liability.

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]

Full Pay Processing


8.150 TC "Full Pay Processing" \f C \l "2" The IRS is always looking for where it believes the
taxpayer has the ability to full pay the liability. Its manual provides as follows:

Taxpayers may submit an offer to compromise the liabilities based on Doubt as to


Collectibility, yet indicate on their application an ability to pay the account in full. These
cases, once determined to be processable, will be screened out. Absent any special
circumstances they will be rejected with no further investigation or verification. The
taxpayer will be directed toward the appropriate resolution for the delinquency. The
rejection letter will be the first communication with the taxpayer. A decision to reject with
appeals rights is adequately justified by the taxpayer's self-disclosed ability to pay in full.

Initial Review
8.160 TC "Initial Review" \f C \l "2" 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.

Do not adjust any asset values or apply necessary expense standards. [ IRM 5.8.3.12]
Computation of Offer Amount
8.170 TC "Computation of Offer Amount" \f C \l "2" The IRS uses three different methods for
determining the adequacy of an offer depending on the period of time the taxpayer proposes for
payment of the offer amount. The methods are:

· Cash (paid in 90 days or less), or

· Short-Term Deferred Payment (more than 90 days, up to 24 months), or

· Deferred Payment (offers with payment terms over the remaining statutory period for
collecting the tax.).

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
8.180 TC "Cash Offer" \f C \l "2" 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:

Quick Sale Value Plus Present Value of Income Equals Offer In Compromise
(QSV + PVI = OIC)

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.

Short-Term Deferred Payment Offer


8.190 TC "Short-Term Deferred Payment Offer" \f C \l "2" This payment option requires you to pay
the offer within two years of acceptance. The offer must include the realizable value of your assets in
addition to the total amount the IRS could secure over sixty months (or the remainder of the ten-year
statutory period for collection, whichever is less) through monthly payments. The IRS may file a
Notice of Federal Tax Lien on tax liabilities compromised under short-term payment offers.

Deferred Payment Offers


8.200 TC "Deferred Payment Offers" \f C \l "2" This payment option requires you to pay the offer
amount within the remaining statutory period for collecting the tax. The offer must include the
realizable value of your assets plus the amount the IRS could collect through monthly payments
during the remaining life of the collection statute. The deferred payment option itself has three
payment options:

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.

Corporate Trust Fund Liabilities


8.210 TC "Corporate Trust Fund Liabilities" \f C \l "2" 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.

Pursuit of Officers After Compromise.


8.220 TC "Pursuit of Officers After Compromise." \f C \l "2" Under this new system the IRS could
compromise with the corporate entity based upon its ability to pay and then continue to pursue
responsible officers for the remaining trust fund liability. The owners and officers would face
continuing economic risk. The system also makes it impossible for a company that had a change in
leadership to propound an offer in compromise. Prior officers would probably refuse to consent to the
demands of the IRS that they waive their TFRP appeal rights thereby negating any opportunity for the
company to have its offer considered by the IRS.

Promote Effective Tax Administration


8.230 TC "Promote Effective Tax Administration" \f C \l "2" As part of the IRS Restructuring and
Reform Act of 1998 (RRA 98), Congress added section 7122(c) to the Internal Revenue Code. That
section provides that the Service shall set forth guidelines for determining when an offer in
compromise should be accepted. Congress explained that these guidelines should allow the Service
to consider:
· 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
8.240 TC "Encourage Compliance" \f C \l "2" The availability of an Effective Tax Administration (ETA)
offer encourages taxpayers to comply with the tax laws because taxpayers will:

· Believe the laws are fair and equitable, and


· Gain confidence that the laws will be applied to everyone in the same manner.

The Effective Tax Administration (ETA) offer allows for situations where tax liabilities

· The tax is legally owed, and


· The taxpayer has the ability to pay it in full

Only Available If There Is No Doubt As to Liability Or Collectibility


8.250 TC "Only Available If There Is No Doubt As to Liability Or Collectibility" \f C \l "2" 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]

Rules for Evaluating Offers to Promote Effective Tax Administration


8.260 TC "Rules for Evaluating Offers to Promote Effective Tax Administration" \f C \l "2" The
determination to accept or reject an offer to compromise made on the ground that acceptance would
promote effective tax administration within the meaning of this section will be based upon
consideration of all the facts and circumstances, including the taxpayer's record of overall compliance
with the tax laws.

Factors
8.270 TC "Factors
8.270" \f C \l "2" Factors supporting (but not conclusive of) a determination of economic hardship
include:

· Taxpayer is incapable of earning a living because of a long term illness, medical


condition, or disability and it is reasonably foreseeable that taxpayer's financial resources
will be exhausted providing for care and support during the course of the condition;

· Although taxpayer has certain assets, liquidation of those assets to pay outstanding tax
liabilities would render the taxpayer unable to meet basic living expenses; and

· Although taxpayer has certain assets, the taxpayer is unable to borrow against the equity
in those assets and disposition by seizure or sale of the assets would have sufficient
adverse consequences such that enforced collection is unlikely Temp Reg
301.7122-1T(b)(4)(iv)(B)]

Example 1. Taxpayer has assets sufficient to satisfy the tax liability.


Taxpayer provides full time care and assistance to her dependent child,
who has a serious long‑term illness. It is expected that the taxpayer will
need to use the equity in her assets to provide for adequate basic living
expenses and medical care for her child. Taxpayer's overall compliance
history does not weigh against compromise.

Example 2. Taxpayer is retired and his only income is from a pension. The
taxpayer's only asset is a retirement account, and the funds in the account
are sufficient to satisfy the liability. Liquidation of the retirement account
would leave the taxpayer without an adequate means to provide for basic
living expenses. Taxpayer's overall compliance history does not weigh
against compromise.

Example 3. Taxpayer is disabled and lives on a fixed income that will not,
after allowance of adequate basic living expenses, permit full payment of
his liability under an installment agreement. Taxpayer also owns a modest
house that has been specially equipped to accommodate his disability.
Taxpayer's equity in the house is sufficient to permit payment of the liability
he owes. However, because of his disability and limited earning potential,
taxpayer is unable to obtain a mortgage or otherwise borrow against this
equity. In addition, because the taxpayer's home has been specially
equipped to accommodate his disability, forced sale of the taxpayer's
residence would create severe adverse consequences for the taxpayer,
making such a sale unlikely. Taxpayer's overall compliance history does not
weigh against compromise.
Undermine Compliance
8.280 TC "Undermine Compliance" \f C \l "2" Factors supporting (but not conclusive of) a
determination that compromise would not undermine compliance by taxpayers with the tax laws
include:

· Taxpayer does not have a history of noncompliance with the filing and payment
requirements of the Internal Revenue Code;

· Taxpayer has not taken deliberate actions to avoid the payment of taxes; and

· Taxpayer has not encouraged others to refuse to comply with the tax laws.[Temp
Reg. 301.7122-1T(b)(4)(iv)(C)]

Exceptional Circumstances
8.290 TC "Exceptional Circumstances" \f C \l "2" 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:

Example 1. In October of 1986, taxpayer developed a serious illness that resulted in


almost continuous hospitalizations for a number of years. The taxpayer's medical
condition was such that during this period the taxpayer was unable to manage any of his
financial affairs. The taxpayer has not filed tax returns since that time. The taxpayer's
health has now improved and he has promptly begun to attend to his tax affairs. He
discovers that the IRS prepared a substitute for return for the 1986 tax year on the basis
of information returns it had received and had assessed a tax deficiency. When the
taxpayer discovered the liability, with penalties and interest, the tax bill is more than three
times the original tax liability. Taxpayer's overall compliance history does not weigh
against compromise.

Example 2. Taxpayer is a salaried sales manager at a department store who has been
able to place $2,000 in a tax‑deductible IRA account for each of the last two years.
Taxpayer learns that he can earn a higher rate of interest on his IRA savings by moving
those savings from a money management account to a certificate of deposit at a different
financial institution. Prior to transferring his savings, taxpayer submits an E‑Mail inquiry
to the IRS at its Web Page, requesting information about the steps he must take to
preserve the tax benefits he has enjoyed and to avoid penalties. The IRS responds in an
answering E‑Mail that the taxpayer may withdraw his IRA savings from his neighborhood
bank, but he must redeposit those savings in a new IRA account within 90 days.
Taxpayer withdraws the funds and redeposits them in a new IRA account 63 days later.
Upon audit, taxpayer learns that he has been misinformed about the required rollover
period and that he is liable for additional taxes, penalties and additions to tax for not
having redeposited the amount within 60 days. Had it not been for the erroneous advice
that is reflected in the taxpayer's retained copy of the IRS E‑Mail response to his inquiry,
taxpayer would have redeposited the amount within the required 60‑day period.
Taxpayer's overall compliance history does not weigh against compromise.
TC " " \f C \l "3"
Expense One Two Three Four
Person Persons Persons Persons

Food $277 $528 $626 $752

Housekeeping supplies $28 $60 $61 $74

Apparel & services $85 $155 $209 $244

Personal care products & $30 $53 $58 $65


services

Miscellaneous $87 $165 $197 $235

Total $507 $961 $1,151 $1,370

More than four persons Additional Persons


Amount

For each additional person, add to four-person $262


total allowance:

Out-of-pocket health care expenses include medical services,


prescription drugs, and medical supplies (e.g. eyeglasses, contact
lenses, etc.). Elective procedures such as plastic surgery or elective
dental work are generally not allowed.
Taxpayers and their dependents are allowed the standard amount
monthly on a per person basis, without questioning the amounts they
actually spend. If the amount claimed is more than the total allowed
by the health care standards, the taxpayer must provide
documentation to substantiate those expenses are necessary living
expenses. Generally, the number of persons allowed should be the
same as those allowed as exemptions on the taxpayer’s most recent
year income tax return.
The out-of-pocket health care standard amount is allowed in addition
to the amount taxpayers pay for health insurance.

Out-of-Pocket Costs

Under 65 $57

65 and Older $144

Public Transportation
National $163

Ownership Costs

One Car Two Cars

National $489 $978

Operating Costs

One Car Two Cars

Northeast Region $235 $470

Boston $225 $450

New York $280 $560

Philadelphia $235 $470

Midwest Region $183 $366

Chicago $217 $434

Cleveland $186 $372

Detroit $267 $534

Minneapolis-St. Paul $187 $374

South Region $201 $402

Atlanta $226 $452

Baltimore $217 $434

Dallas-Ft. Worth $228 $456

Houston $263 $526

Miami $275 $550

Washington, D.C. $230 $460

West Region $211 $422

Los Angeles $261 $522

Phoenix $232 $464

San Diego $244 $488

San Francisco $261 $522


Seattle $192 $384

Illinois
County Housing and Utilities forHousing and Utilities forHousing and Utilities forHousing and Utilities for Housing and Utilities for a
a Family of 1 a Family of 2 a Family of 3 a Family of 4 Family of 5 or more

Adams 838 984 1,037 1,156 1,175

Alexander 718 844 889 991 1,007

Bond 882 1,036 1,092 1,217 1,237

Boone 1,275 1,497 1,578 1,759 1,788

Brown 678 796 839 936 951

Bureau 914 1,073 1,131 1,261 1,281

Calhoun 769 903 951 1,061 1,078

Carroll 814 956 1,008 1,123 1,142

Cass 798 938 988 1,102 1,119

Champaign 1,044 1,226 1,292 1,441 1,464

Christian 811 953 1,004 1,119 1,137

Clark 798 938 988 1,102 1,119

Clay 707 830 874 975 991

Clinton 1,017 1,195 1,259 1,404 1,426

Coles 894 1,050 1,106 1,234 1,254

Cook 1,438 1,689 1,780 1,984 2,016

Crawford 760 892 940 1,049 1,065

Cumberland 839 985 1,038 1,157 1,176

DeKalb 1,351 1,587 1,672 1,864 1,894

De Witt 877 1,030 1,086 1,211 1,230

Douglas 858 1,007 1,061 1,183 1,202

DuPage 1,648 1,935 2,039 2,273 2,310

Edgar 721 847 893 995 1,012

Edwards 712 837 882 983 999

Effingham 897 1,053 1,110 1,238 1,258

Fayette 784 920 970 1,081 1,099

Ford 844 991 1,044 1,164 1,183

Franklin 756 888 936 1,043 1,060

Fulton 798 938 988 1,102 1,119

Gallatin 702 824 868 968 984

Greene 715 840 885 987 1,003


County Housing and Utilities forHousing and Utilities forHousing and Utilities forHousing and Utilities for Housing and Utilities for a
a Family of 1 a Family of 2 a Family of 3 a Family of 4 Family of 5 or more

Grundy 1,255 1,474 1,553 1,732 1,760

Hamilton 753 884 932 1,039 1,056

Hancock 739 868 915 1,020 1,036

Hardin 666 782 824 919 934

Henderson 764 897 945 1,054 1,071

Henry 913 1,072 1,130 1,260 1,280

Iroquois 885 1,040 1,095 1,221 1,241

Jackson 877 1,030 1,086 1,211 1,230

Jasper 813 955 1,006 1,122 1,140

Jefferson 869 1,021 1,076 1,200 1,219

Jersey 914 1,073 1,131 1,261 1,281

Jo Daviess 980 1,151 1,213 1,352 1,374

Johnson 830 975 1,027 1,145 1,164

Kane 1,495 1,756 1,851 2,063 2,097

Kankakee 1,117 1,312 1,382 1,541 1,566

Kendall 1,494 1,755 1,849 2,062 2,095

Knox 801 941 992 1,106 1,124

Lake 1,725 2,026 2,134 2,380 2,418

La Salle 990 1,162 1,225 1,366 1,388

Lawrence 727 854 900 1,004 1,020

Lee 969 1,138 1,199 1,337 1,359

Livingston 946 1,111 1,171 1,306 1,327

Logan 887 1,042 1,098 1,224 1,244

McDonough 798 938 988 1,102 1,119

McHenry 1,544 1,813 1,911 2,130 2,165

McLean 1,172 1,377 1,451 1,618 1,644

Macon 877 1,030 1,086 1,211 1,230

Macoupin 854 1,003 1,056 1,178 1,197

Madison 956 1,123 1,184 1,320 1,341

Marion 805 946 997 1,111 1,129

Marshall 887 1,042 1,098 1,224 1,244

Mason 809 950 1,001 1,117 1,135

Massac 810 952 1,003 1,118 1,136

Menard 1,048 1,231 1,297 1,446 1,469

Mercer 877 1,030 1,086 1,211 1,230


County Housing and Utilities forHousing and Utilities forHousing and Utilities forHousing and Utilities for Housing and Utilities for a
a Family of 1 a Family of 2 a Family of 3 a Family of 4 Family of 5 or more

Monroe 1,179 1,384 1,459 1,627 1,653

Montgomery 803 943 994 1,108 1,126

Morgan 913 1,072 1,130 1,260 1,280

Moultrie 899 1,056 1,113 1,240 1,261

Ogle 1,090 1,281 1,349 1,505 1,529

Peoria 978 1,149 1,210 1,349 1,371

Perry 784 921 971 1,083 1,100

Piatt 957 1,124 1,185 1,321 1,342

Pike 744 874 921 1,027 1,043

Pope 717 843 888 990 1,006

Pulaski 647 760 801 893 908

Putnam 935 1,099 1,158 1,291 1,312

Randolph 840 986 1,039 1,159 1,178

Richland 799 939 989 1,103 1,121

Rock Island 906 1,064 1,121 1,250 1,270

St. Clair 1,013 1,190 1,254 1,398 1,421

Saline 740 869 916 1,021 1,038

Sangamon 1,053 1,237 1,303 1,453 1,476

Schuyler 783 919 968 1,080 1,097

Scott 776 911 960 1,070 1,088

Shelby 820 963 1,015 1,132 1,150

Stark 792 931 981 1,093 1,111

Stephenson 975 1,145 1,207 1,345 1,367

Tazewell 996 1,169 1,232 1,374 1,396

Union 788 926 976 1,088 1,106

Vermilion 771 905 954 1,064 1,081

Wabash 808 949 1,000 1,115 1,133

Warren 761 894 942 1,050 1,067

Washington 933 1,096 1,155 1,288 1,309

Wayne 736 865 911 1,016 1,032

White 709 832 877 978 994

Whiteside 896 1,052 1,109 1,236 1,256

Will 1,478 1,736 1,830 2,040 2,073

Williamson 842 989 1,042 1,162 1,180

Winnebago 1,093 1,284 1,353 1,509 1,533


County Housing and Utilities forHousing and Utilities forHousing and Utilities forHousing and Utilities for Housing and Utilities for a
a Family of 1 a Family of 2 a Family of 3 a Family of 4 Family of 5 or more

Woodford 1,087 1,277 1,346 1,501 1,525


"REPRESENTING THE AUDITED TAXPAYER BEFORE THE IRS"

AND

ROBERT E. MCKENZIE, ESQ.


ARNSTEIN & LEHR LLP
120 SOUTH RIVERSIDE PLAZA
SUITE 1200
CHICAGO, IL 60606
312-876-6927
312-876-7318 fax

REPRESENTATION BEFORE THE COLLECTION DIVISION OF


THE IRS
8066856.1

Revised 07/15/2009