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Tax Audit Exams & Appeals | Tax Practice

Collections & Appeals

Relief from Tax Collection and Appeals

  1. Collection Process
    1. Assessment of Tax
      1. Self-assessment shows that tax is due
      2. Audit by IRS shows that tax is due
      3. Trust Fund Recovery Penalty- If the taxpayer fails to remit employment taxes, the IRS will propose a trust fund penalty assessment against the Responsible Person.
    2. Notice and Demand
      After assessment, the IRS will send the taxpayer a notice of the assessment and a demand for the amount owed. Four follow-up notices are mailed to the taxpayer in five week increments. The final notice will include the amount the taxpayer underpaid, plus all interest accrued since the payment was due and any penalties. Any unpaid balance is subject to daily compounding interest and monthly late payment penalties.
    3. Federal Tax Lien
      1. Arises upon assessment, notice and demand, and failure to pay
      2. Attaches to all of the taxpayer’s property and rights to property owned on or acquired after the date of assessment
      3. Does not result in direct collection of any tax liability
    4. Collection Enforcement of federal tax lien
      1. Seizure and Sale of Property
      2. Backup withholding
      3. Garnishment of wages and other payments
  2. Overpayments
    1. Filing for a refund
    2. The existence and determination of an overpayment must be shown
    3. Authority for the IRS to issue a refund does not exist until the taxpayer has filed a claim for a refund. §6511(b)(1)
    4. A refund claim must be filed within three years from the filing of the return in question or two years from the date the tax was paid. §6511(a)
    5. The claim must provide sufficient facts to support the basis of the claims for overpayment
  3. Recovery of overpayments
    1. The taxpayer will recover if the IRS allows a claim for refund filed by the taxpayer
    2. The taxpayer can file a suit for refund in a federal district court or through a US Court of Federal Claims
  4. Review by district court or court of Federal Claims
    1. A court will lack jurisdiction if a taxpayer files a claim more than 2 years after a notice of the disallowance of the part of the claim to which the suit relates by the IRS.
    2. Limited to grounds in filed claims for refund
  5. Interest payable to taxpayer amount of overpayment or underpayment.

Collection: Strategies and Defenses

  1. Suggesting Collection Alternatives
    1. Installment Agreement
      1. A taxpayer that is unable to immediately pay his tax debt may make monthly payments through an installment contract. Installment agreements will reduce or eliminate the interest and penalties that would accumulate with no payment.
      2. Who is eligible?
        1. Individuals must owe less than a combined $50,000 in taxes owed, interest and penalties, and must have filed all required returns
        2. Businesses must owe less than a combined $25,000in taxes owed, interest and penalties, and must have filed all required returns
        3. Ineligible individuals and businesses may apply using Form 9465
    2. Charges
      The IRS charges $120.00 to enter into a standard installment agreement, or $52.00 for a direct debit agreement, where payments will be collected directly through your bank account.
    3. Offer in Compromise (OIC)
      1. Completing the financial disclosure package including Forms 433-A and 656.
      2. Compute reasonable collection potential (RCP) for OIC’s in accordance with May 2012 rules and updated forms ( Jan 2015)
      3. Determine acceptable installment agreement levels
      4. Determine whether a taxpayer qualifies for OIC
        See Offer in Compromise
    4. Temporary Delay in Collection
      Taxpayers that cannot make payments because payments would jeopardize the taxpayer making basic living expenses, the taxpayer can request a delay in collection. An accepted proposal will delay payments until financial conditions improve. Penalties and interest will continue to be added to the debt.
  2. Final Notice of Intent to Levy
    If a taxpayer owes taxes and has not contacted the IRS, the IRS may file a notice of Federal Tax Lien, serve a Notice of Levy, or Offset a refund to which the taxpayer is entitled.
  3. Collection Appeals Program (CAP)
    1. A taxpayer may appeal the collection process through a CAP. Prior to requesting a CAP, the taxpayer must first discuss the issue with a collection manager.
    2. The advantage to a CAP is that an issue can be resolved quickly, usually within five business days of the case being assigned.
    3. The disadvantage of a CAP is that once decided, the decision is final and is not appealable to any court.
  4. Importance of Collection Due Process (CDP) Hearing
    1. Collection Revenue Officer: Out of Sight-Out of Mind
    2. Appeals.
      1. Appeals is required by IRC §6330 to verify that the IRS has followed rules and policies relating to the action leading to the notice.
      2. Appeals determines whether the government’s right to collection is no more intrusive than necessary.
      3. Taxpayers can raise spousal defenses, challenge the appropriateness of the collection action and collection alternative, and may challenge the liability if the taxpayer did not receive a notice of deficiency or otherwise have an opportunity to hold a conference with Appeals before or after assessment.
    3. Preserving Tax Court jurisdiction
      Unlike CAPs, Collection Due Process hearings may be reviewed by the Tax Court.
  5. Penalty Abatement and Defense
    The IRS will impose delinquency penalties for failure to:
    1. file a timely return;
    2. pay tax reported on a return; or
    3. pay an assessed tax required to be, but not shown, on a return. But in some circumstances, a taxpayer is able to raise defenses to avoid penalties. If the taxpayer who had reasonable cause for the delinquency is allowed to make a first time abatement, or is protected by a statutory defense, the tax payer will not be liable for a penalty attributed to the delinquency.
  6. Civil and Criminal Tax: Objective
    The primary objective of Civil and Criminal penalties is to deter others from violating the tax laws because there are insufficient resources to prosecute and penalize all violators of tax law. In addition to deterrence, penalties are used to punish the violator and promote respect for the tax laws.
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