REPRESENTING TAXPAYERS BEFORE THE IRS

REPRESENTING TAXPAYERS BEFORE THE IRS

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All rights reserved. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher.

2 Hour(s) - Other Federal Tax

CTEC Provider #: 6209CTEC Course #: 6209-CE-0007

IRS Provider #: UBWMFIRS Course #: UBWMF-T-00200-21-S

NASBA: 116347

The information provided in this publication is for educational purposes only, and does not necessarily reflect all laws, rules, or regulations for the tax year covered. This publication is designed to provide accurate and authoritative information concerning the subject matter covered, but it is sold with the understanding that the publisher is not engaged in rendering legal, accounting or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.

To the extent any advice relating to a Federal tax issue is contained in this communication, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

COURSE OVERVIEW.............................................................................................................................................................. 7

Course Description ....................................................................................................................................................................... 7

Learning Objectives ...................................................................................................................................................................... 7

THE STAGE AND THE PLAYERS............................................................................................................................................ 7

Close Encounters of the IRS Kind................................................................................................................................................ 7

Who's Who in the IRS .................................................................................................................................................................10

ACT ONE: EXAMS (AUDITS) ............................................................................................................................................... 13

Types of Exams and Selection of Returns................................................................................................................................13

First Steps ....................................................................................................................................................................................14

Correspondence Exams .............................................................................................................................................................15

Office and Field Exams...............................................................................................................................................................16

ACT TWO: COLLECTIONS................................................................................................................................................... 19

Background .................................................................................................................................................................................19

Lien vs. Levy.................................................................................................................................................................................19

Audit Reconsiderations ..............................................................................................................................................................20

Collections Due Process Hearings ............................................................................................................................................20

Installment Agreements.............................................................................................................................................................21

Innocent and Injured Spouse Relief .........................................................................................................................................22

Offers-in-Compromise ...............................................................................................................................................................23

The Statute of Limitations..........................................................................................................................................................25

Course Description 7

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COURSE OVERVIEW

COURSE DESCRIPTIONThis is a basic level course that describes the contexts in which the Internal Revenue Service ("IRS") interacts with taxpayers in circumstances where representation of the taxpayer would be appropriate. The specific objectives of this course are to arm you with the necessary knowledge and skills to effectively represent taxpayers before the IRS with respect to both audits and collection activity. Using examples and illustrations, this course will familiarize you with the forums in which the IRS is encountered, the methods and procedures of each, and suitable responses to IRS communications. You will learn to distinguish "real" deadlines imposed by law from suggested response dates. Upon completion of this course you will have a better understanding of the options available to assist your clients at various stages of the controversy process, what to expect from IRS personnel, and what is expected of you as a taxpayer representative.

LEARNING OBJECTIVESThe stated learning objectives for this course include:

Define various terms associated with taxpayer examinations and representation before the IRS;

Recognize the role of the offices and divisions within the IRS who are tasked with performing audits and examinations;

List the forms which a taxpayer may receive or use to respond to inquiries during an examination or audit; and

Identify the key IRS employees involved in the examination and audit processes and define their roles.

THE STAGE AND THE PLAYERS

CLOSE ENCOUNTERS OF THE IRS KINDASSESSMENT

What is an Assessment?

The IRS interacts with taxpayers in a variety of different contexts. The primary dividing line with respect to this interaction is an event called "assessment." Assessment is what gives the IRS the legal right to collect a tax liability from a taxpayer.

The actual date of IRS assessment is the date an Assessment Officer signs a Summary Record of Assessment ("SRA"). Form 23C used to be used as the SRA, but the IRS now uses Revenue Accounting Control System Report 006 ("RACS 006"). Prior to the date of assessment, the IRS is without authority to levy bank accounts or wages, place a lien on property, or request payment from the taxpayer.

Methods of Assessment

Assessment may come about in a number of ways. For example, the law allows the IRS to enter an assessment based on the tax liability shown on a filed tax return. This is sometimes referred to as a "self-assessment" and occurs automatically when a tax return is filed. In essence, by filing a tax return the taxpayer is deemed to have agreed that the tax liability shown on the return is correct and grants the IRS permission to make a corresponding assessment (and begin collection activities if the amount not paid in full with the return).

With limited other exceptions, the IRS has to notify a taxpayer before it makes an assessment. Specifically, a "Statutory Notice of Deficiency" must generally be sent to the taxpayer at least 90 days before an assessment is made . This letter, sometimes referred to as a "stat notice" or "90-day letter," will inform the taxpayer that an assessment of tax deficiency will be made by the IRS unless a petition is filed by the taxpayer in the U.S. Tax Court within 90 days after

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8 The Stage and the Players

the date of the letter. The process of proposing an additional tax liability through the issuance of a 90-day letter is referred to as a "deficiency proceeding."

Practice Alert: Although this course does not cover the representation of taxpayers in U.S. Tax Court, there are a couple of things you should be aware of in this regard. First, the 90-day deadline is a jurisdictional deadline imposed by statute. In other words, neither the IRS nor the Tax Court itself has any ability to extend the deadline. Coming close is not good enough - if a petition is not filed by the deadline, the taxpayer forever loses the right to contest the proposed assessment in Tax Court. Although the IRS will sometimes suggest that the 90-day letter will be "retracted" if additional information is provided, such retractions are relatively rare and it is dangerous to rely on the IRS to actually do so. If there is a genuine dispute as to the tax liability, the safest course of action is to file a Tax Court petition upon the receipt of a 90-day letter. Second, although you must be licensed to practice before the U.S. Tax Court in order to file a petition on behalf of a taxpayer, a taxpayer can always file their own petition. In fact, in the vast majority of Tax Court cases (especially those involving less than $50,000 filed on the small case docket) the taxpayer is not represented. Procedures and forms for filing a Tax Court petition can be found at www.ustaxcourt.gov.

A 90-day letter is typically issued as the result of an examination, but it may also be issued when the taxpayer does not respond to an examination notice, or even if the taxpayer does not file a return. When a taxpayer does not file a return, the law allows the IRS to generate a "substitute for return" ("SFR") and issue a 90-day letter based on that SFR.

In addition to the self-assessment situations, there are two other circumstances in which the IRS can make an assessment without first issuing a 90-day letter. First, the law allows the IRS to make an additional assessment based on a mathematical or clerical error that is obvious on the face of the return. Clerical errors include failing to include accurate required information, such as the social security numbers of dependents. An assessment based on a mathematical or clerical error is referred to as a "summary assessment."

Illustration: Joan files a Form 1040 listing her daughter Melissa as a dependent. Unfortunately, Joan is not careful when she prepares the return and accidentally transposes the last two digits in Melissa's social security number. Because the names and social security numbers for dependents must conform to the government's database, the IRS will treat the dependency exemption claimed on Joan's return as a clerical error, recomputed her tax liability without the exemption, and send her a notice of summary assessment.

Practice Alert: Although a summary assessment notice means that the additional assessment has already been made, the law provides that the IRS must abate this assessment if requested to do so by the taxpayer within 60 days of the notice date. If the error can be easily rectified, as in Joan's case above, it may be prudent to request abatement and file an amended return with the corrected social security number. A request to abate a summary assessment is made

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Close Encounters of the IRS Kind 9

simply by sending a letter containing the request to the address on the assessment notice - no special form is required.

The second manner in which the IRS may assess additional tax liability without prior notice to the taxpayer by way of so-called "jeopardy" and "termination" assessments. When the IRS determines, after the close of a tax year, that there is unreported income and collection of the tax liability will be jeopardized by any delay, it may immediately assess the deficiency and demand payment. If this determination is made before the close of the tax year the same procedure may be used, but in this case it is referred to as a "termination" assessment.

EXAMS VS. COLLECTIONS

Assessment is important because it provides the line of demarcation between the exam and collection functions of the IRS. As noted above, prior to assessment the IRS may not institute any collection activity against the taxpayer. When representing a taxpayer in a pre-assessment posture, the issues will always revolve around determining the correct tax liability. This is the stage of interaction with the IRS in which there is the greatest opportunity to resolve factual issues, such as whether all income has been reported, the appropriateness of deductions, and the taxpayer's entitlement to a specific filing status or credit amount.

Once assessment occurs, the IRS no longer has any legal requirement to consider these issues (although, as a practical matter, they will sometimes still do so, as discussed in more detail below). An assessment is essentially the equivalent of a final, non-appealable court judgment. It establishes a definitive obligation of the taxpayer to pay the amount assessed and constitutes the legal right of the IRS to take steps to collect that amount.

At the point of assessment, the case moves from the Exam unit of the IRS to the Collections unit. The IRS personnel you encounter in the Collections unit generally will have no interest in arguments regarding the proper amount of the tax liability. As far as Collections employees are concerned, the amount of the liability has already been determined, and their job is to solely collect that amount.

THE ROLES OF IRS APPEALS

Appeals is a separate office within the IRS that handles a variety of matters emanating from both Exam and Collections. The mission of Appeals is to resolve tax controversies, without litigation, on a basis which is fair and impartial to both the government and the taxpayer, and in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the IRS.

Appeals gets involved in a tax controversy as a result of some action by the taxpayer, such as requesting a review of the outcome of an exam or the propriety of a collection activity, or when a Tax Court petition has been filed (in which case Appeals personnel are usually assigned to the case to negotiate a resolution prior to litigation).

Although functionally a part of the IRS, the personnel who staff Appeals have reporting responsibilities that are separate from the "front-line" IRS employees that taxpayers deal with in exam and collection matters. As a result, addressing an issue at the Appeals level presents an opportunity for an independent review of the facts and circumstances. Furthermore, due to its stated purpose and mission, personnel from Appeals have greater discretion in resolving certain issues. For example, Appeals will generally give serious consideration to the so-called "hazards of litigation" (i.e., the relative merits of the opposing views in light of the hazards which would exist if the case were litigated).

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WHO'S WHO IN THE IRSOftentimes the key to understanding where in the process a tax case stands is to properly identify the type of IRS personnel with whom the taxpayer is dealing. Each step in a tax controversy is handled by a designated job function within the IRS. Familiarity with these job titles and functions will greatly assist you in understanding what options are available to a taxpayer in the context of their involvement with the IRS.

THE STRUCTURE OF THE IRS

The IRS is divided into four Operating Divisions: Wage and Investment ("W&I"), Small Business/Self-Employed ("SB/SE"), Large Business and International ("LB&I"), and Tax-Exempt and Government Entities ("TE/GE"). The LB&I Division was formerly referred to as the Large and Mid Sized Business Division, or LMSB.

The W&I Division deals with exam, collection, and other administrative issues for individual taxpayers who file a Form 1040 with no Schedules C, E, F, or Form 2106, and no international activity. Individual taxpayers who do not fall into the W&I category, as well as businesses with assets of less than $5 million, are handled by the SB/SE Division. Larger businesses and taxpayers with international income are handled by LB&I, and tax-exempt organizations (including retirement and welfare benefit plans) as well as state and local government entities are subject to oversight by the TE/GE Division.

Prior to the IRS Restructuring and Reform Act of 1998, the IRS was divided geographically into "Districts." Each District was headed by a District Director and tax litigation was handled by the District Counsel. These Districts no longer exist, although you will sometimes still see outdated references to them.

Appeals and Criminal Investigations are organizationally separated from the Operating Divisions. IRS attorneys work in the Office of Chief Counsel. The Office of Chief Counsel not only operates outside of the Operating Division structure but is entirely independent from the IRS. It is a separate agency within the Treasury Department that drafts regulations and other guidance and represents the IRS in all Tax Court cases.

Who's Who in the IRS 11

TELEPHONE ASSISTORS AND CUSTOMER SERVICE REPRESENTATIVES

When you call the IRS toll-free number (800-829-1040) you will speak to someone known as a Telephone Assistor. Customer Service Representatives staff the Practitioner Priority Service line (866-860-4259). Telephone Assistors and Customer Service Representatives have limited training in tax law and generally respond to questions based on pre-determined scripts. Customer Service Representatives primarily handle questions about a taxpayer's account, as opposed to technical legal questions. All IRS call lines are run by the W&I Division.

The IRS maintains that the accuracy rate of information obtained from Telephone Assistors is approximately 90%.This means, of course, that one in every ten questions you pose to a Telephone Assistor is likely to be answered incorrectly. Unfortunately, the Telephone Assistor will not do you the favor of indicating which of their answers is wrong. As a result, information obtained from a Telephone Assistor should never be relied upon without verification from some other source.

Although a Telephone Assistor will give you his or her name and identification number when the call is answered, you should be aware that call sites are maintained by the IRS throughout the country. Thus, once you disconnect a call you will not be able to reach that specific Telephone Assistor again.

TAX SPECIALISTS, TAX TECHNICIANS, AND TAX COMPLIANCE OFFICERS

The specific type of IRS personnel handling an exam will be determined by the type of exam being conducted. Correspondence exams are conducted by Tax Specialists or Tax Technicians in one of the ten IRS Campuses (formerly referred to as "Service Centers") located across the country. Campuses are located in Andover (Massachusetts), Atlanta, Austin, Brookhaven/Holtsville (New York), Cincinnati, Fresno, Kansas City, Memphis, Ogden, and Philadelphia.

Office exams are handled by Tax Compliance Officers ("TCOs") and require taxpayers to physically present themselves (or their representatives) to the TCO at an IRS Area Office. Area Offices are generally the old District Offices.

Tax Specialists, Tax Technicians, and TCOs have more extensive training than Telephone Assistors and Customer Service Representatives, but are still relatively low on the food chain of IRS personnel. Educational prerequisites to be employed as a TCO, for example, include only six hours of undergraduate credits in accounting or the passing of an accounting proficiency test in lieu thereof.

REVENUE AGENTS

Field exams are conducted by Revenue Agents. Most Revenue Agents work for LB&I or SB/SE, although they may get involved with W&I taxpayers, usually due to a related exam of a partnership or S corporation. Revenue Agents are the most highly trained IRS exam personnel. Prerequisites to becoming a Revenue Agent include the completion of a bachelor's degree with a major in accounting or its equivalent. Many Revenue Agents are also CPAs and some are even attorneys.

THE AUTOMATED COLLECTION SYSTEM

Collections activity usually starts with letters, and sometimes calls, from the Automated Collection System ("ACS"). ACS obtains post-assessment information from the Integrated Data Retrieval System ("IDRS") and makes the initial contact with taxpayers requesting payment.

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REVENUE OFFICERS

If ACS is unsuccessful in collecting the full amount of the tax liability, the case may be referred to the field for collections. In that event a Revenue Officer will be assigned to the case. Since Revenue Officers are solely concerned with collecting assessments and not with determining the proper amount of the assessment, no accounting or tax background is required for this position. A Revenue Officer's training is primarily geared to locating and levying upon the taxpayer's assets.

TAXPAYER ASSISTANCE CENTERS AND CONTACT REPRESENTATIVES

During the course of representing a taxpayer you may find yourself in need of visiting an IRS Taxpayer Assistance Center ("TAC"), formerly referred to as "Walk-In Centers." TACs are located in former District Offices and at other locations and are most frequently used by taxpayers themselves to resolve issues regarding returns, payments, and collection notices. Representatives, however, may find it useful to visit a TAC to obtain a transcript, make a payment on behalf of a taxpayer, or file a return. TACs are staffed by Contact Representatives.

APPEALS OFFICERS AND SETTLEMENT OFFICERS

As noted above, certain exam or collection matters may wind up in IRS Appeals. Appeals is populated by Appeals Officers and Settlement Officers. Appeals Officers handle issues dealing with tax liability while Settlement Officers deal exclusively with collection-related appeals. Both Appeals and Settlement Officers tend to have more experience and a more extensive educational background than Exam or Collection personnel. Settlement Officers, however, like Revenue Officers, focus on the collection process and procedure and may have little technical tax expertise.

GROUP MANAGERS

IRS personnel work in groups headed by Group Manager. This is true whether the IRS employee is working in Exam, Collections, Appeals, on a Campus or at a TAC, or in most other areas of the IRS. The importance of knowing this is that contact with a Group Manager should be considered if an IRS employee is being uncooperative or unreasonable.

Practice Alert: Contacting a Group Manager is not something you should do routinely any time you have a disagreement with an IRS employee. However, if the IRS employee appears to be ignoring procedural rules contained in the Internal Revenue Manual ("IRM") or if the employee is unresponsive to your inquiries or appears to be dragging their feet with regard to your case, a call to the Group Manager may be warranted. It is a good idea to ask a Revenue Agent or Revenue Officer to provide the name and telephone number of their Group Manager at the initial meeting (a Revenue Agent will usually volunteer this information without being asked).

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Types of Exams and Selection of Returns 13

THE TAXPAYER ADVOCATE

The Taxpayer Advocate Service ("TAS") is an independent organization within the IRS that helps taxpayers resolve problems with the IRS and recommends changes that will prevent future problems. TAS maintains offices throughout the country and should be viewed as a sort of "last resort" when you cannot seem to get a reasonable response from the IRS. Note that TAS has no authority to compel the IRS to take any particular action or to accept any particular position; their assistance is most useful when there is some logistical problem (e.g., getting the IRS to respond to you or when you are receiving conflicting responses from the IRS) or when the IRS fails to follow their own procedures as indicated in the IRM.

In an extreme case, TAS can issue a Taxpayer Assistance Order ("TAO"), which is essentially an injunction to stop the IRS from taking some action. TAOs are only issued when a taxpayer is suffering or is about to suffer a significant hardship as a result of the manner in which the IRS is handling a case. A TAO is requested by filing Form 911 (yes, Form 911) with the TAS. The telephone number of your local TAS office can be obtained from the IRS website (www.irs.gov) or you can contact them at 877-777-4778.

ACT ONE: EXAMS (AUDITS)

TYPES OF EXAMS AND SELECTION OF RETURNSExams (or "audits") come in three basic varieties: correspondence, office, and field. As indicated above, Tax Specialists conduct correspondence exams, TCOs conduct office exams, and field exams are conducted by Revenue Agents. Although the forum is different (the mail for correspondence exams, an IRS Area Office for office exams, and the taxpayer's home or business--or that of the taxpayer's representative--for field exams), many of the basic procedures are the same.

Selection of a return for exam may occur for any of several reasons. For example, the IRS calculates a discriminant function ("DIF") score for individual, corporate, partnership, and fiduciary returns that is designed to rate the return for potential adjustment. DIF score formulas are devised based on the results of random compliance exams conducted periodically under the National Research Program ("NRP"). Generally, the higher the DIF score, the greater the potential for adjustment.

Sometimes an exam will be prompted by a newspaper story about a taxpayer or by a tip submitted to the IRS, often by a disgruntled ex-spouse or employee. The IRS also conducts special exam initiatives based on industry type or tax issue and may initiate a special project focusing on the returns completed by a particular tax return preparer. With the exception of NRP exams, tax returns are generally selected because, for one reason or another, the IRS believes there is a high probability of finding an adjustment.

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14 Act One: Exams (Audits)

FIRST STEPSRepresentation rights are limited to certain practitioners. The ability to represent clients is available for CPAs, attorneys, enrolled agents, and unenrolled tax preparers who participate in the annual filing season program (AFSP) and have earned their record of completion. An unenrolled preparer who has not earned the AFSP record of completion will not be able to represent clients, even if they prepared the return.

FORM 2848 POWER OF ATTORNEY

The first step in any representation of a taxpayer is to obtain an executed Form 2848 Power of Attorney and fax it to the IRS number listed in the instructions to form. The IRS is not allowed to communicate any information regarding a taxpayer to a representative unless a valid Form 2848 for that representative is on file. If a taxpayer, taxpayer's spouse, or former spouse are submitting powers of attorney in connection with a joint return that was filed, each taxpayer must submit separate Forms 2848 Power of Attorney, even if authorizing the same representative(s) to represent them. So, if filed a joint return, each spouse must execute his or her own power of attorney on a separate Form 2848 to designate a representative, even if authorizing the same representative.

TIP: A Form 8821 Tax Information Authorization may be used to obtain information about a specific return, but for representation purposes, a Form 2848 grants more authority to the representative to make decisions on behalf of the taxpayer.

PREPARING TO REPRESENT THE TAXPAYER

After obtaining and filing a Form 2848 Power of Attorney, the representative should thoroughly review the tax return(s) being audited, as well as any correspondence received by the taxpayer from the IRS. If the exam has already begun, the representative should immediately contact the IRS to inform them that the taxpayer is now represented. Also, the taxpayer should be advised to refrain from any continuing interaction with the IRS - once involved, it is prudent for the representative to be in control of any communications between the taxpayer and the IRS.

Next the representative will want to review the taxpayer's support for the items being examined and will want to make an honest and reasonable assessment of the relative strengths and weaknesses of the taxpayer's position.

The discussion below is designed to familiarize you with the general process used for the basic types of exams. An important part of preparing for the exam is to consider the procedures that the examiner is likely to pursue. To the

Correspondence Exams 15

extent practical, the representative should replicate these procedures prior to dealing with the IRS so that any potential issues will surface and not take the representative by surprise.

CORRESPONDENCE EXAMSINITIATION OF THE CORRESPONDENCE EXAM

Most exams of W&I taxpayers are correspondence exams. The only time a W&I taxpayer will be subject to an office or field exam is if the exam is related to another matter, such as a partnership exam or an exam regarding a prior year in which the taxpayer was not within the W&I category.

The general correspondence initial exam letter , which specifies the items being examined, requests specific documentation related to those items, and typically includes a questionnaire for the taxpayer to complete. The letter will specify that all information should be submitted within 30 days.

Practice Alert: Note that this 30-day deadline is not imposed by statute or regulation, and is merely an attempt by the IRS to move the case along in a timely fashion. There is no specified legal effect of not meeting this artificial deadline. If it is ignored, however, the IRS may simply close the exam and issue a report without consideration of any information you may otherwise have been able to provide. Therefore, you should always contact the IRS within the 30-day timeframe, even if just for the purpose of requesting additional time.

RESPONDING TO THE INFORMATION REQUEST IN A CORRESPONDENCE EXAM

The first order of business in responding to a correspondence exam is to carefully review the requested information and the return under examination. You should determine from the client which of the requested documents are available and how long it will take to obtain them.

Once this information is obtained, contact the IRS at the phone number listed on the correspondence exam letter. Make sure your Form 2848 Power of Attorney is already on file, or be ready to fax it to the person you speak to on the telephone. Discuss any documents that are unobtainable or will be difficult to obtain and ask if other documents or information may be sufficient. If you will not be able to submit the information within the requested 30-day timeframe, agree on a new deadline.

Practice Alert: Although the IRS should readily agree to give you additional time to obtain the information necessary for a complete response, and may even agree to subsequent additional extensions, their patience is not without limit. The best practice is to agree upon a reasonable date and stick to it.

The next step is to carefully complete any questionnaires that have been included with the correspondence exam. These questions should be responded to accurately and completely, but do not volunteer information that is not being sought. If the answer to a question may appear to be inconsistent with a position taken on the return, provide an explanation (if an accurate and reasonable one is available).

Finally, assemble the documents and other information in a neat, orderly manner, labeling the documents in a way that both clearly identifies them and indicates the specific inquiry to which they are responsive. A cover letter that summarizes your response, a copy of your Form 2848 Power of Attorney, and a list of the documents should be included. If the package is not too large you may want to consider faxing it as well as sending a hard copy (a fax number will appear on the correspondence exam letter). Delivery of the hard copy should be made by a private delivery service (Federal Express, UPS, or DHL) or by certified mail.

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OFFICE AND FIELD EXAMSINITIATION OF THE EXAM

Field examinations are usually initiated by a Revenue Agent with a telephone call to the taxpayer, during which the taxpayer will be told which return(s) have been selected for exam and advised of their right to be represented during the exam. The telephone call will be followed by an appointment confirmation letter.

If the Revenue Agent cannot reach the taxpayer by telephone, a letter will be sent requesting that the taxpayer call the Revenue Agent to schedule the initial appointment. If the taxpayer does not respond, an appointment letter will be sent to the taxpayer specifying a date, time, and place for the initial interview and enclosing an Information Document Request form ("IDR").

Office exam appointments will usually be scheduled using written communication. In either case, the letter will ask that the taxpayer contact the Revenue Agent or TCO within 10 days if they are unable to keep the appointment.

Observation: The IRS never initiates contact with a taxpayer via the internet. Any email a taxpayer receives that is purportedly from the IRS should be considered spam and should not be responded to.

In the case of an office exam the location will be the local IRS Area Office; for a field exam the location will be the taxpayer's residence or place of business. IRS procedures for field exams are to conduct the exam wherever the taxpayer's books and records are kept. However, the taxpayer has the right to ask that the exam take place at any reasonable time and place that is convenient for both the taxpayer and the IRS.

As long as the appropriate records can be made available, it is usually advisable that the initial appointment (and perhaps all subsequent appointments) be conducted at the representative's office rather than the taxpayer's place of business or residence. Having the exam conducted away from the taxpayer's place of business not only avoids any unnecessary disruption, it also allows for greater control of information made available to the Revenue Agent and prevents the Revenue Agent from obtaining extraneous information from employees or otherwise.

While it is usually in the taxpayer's interest to hold the exam at the representative's location, regardless of where the exam is held the IRS may visit the taxpayer's place of business or residence to establish facts that can only be established by direct visit, such as inventory or asset verification.

Practice Alert: While the IRS will usually request that the taxpayer (and not just the representative) be present during the interview, the taxpayer is never required to attend in the absence of a valid administrative summons. It is usually a good practice for the representative to interact with the IRS exclusively, outside of the presence of the taxpayer. One advantage is that, if information outside of the representative's knowledge is sought, the taxpayer and the representative will be able to carefully consider the appropriate response. Also, taxpayers who are present may have a tendency to "blurt out" information that is detrimental to their case.

MANAGING THE EXAM

In addition to setting the initial appointment, the main order of business when the representative first speaks to the Revenue Agent or TCO should be to set the "ground rules" for the exam. While the IRS is entitled to broaden the scope of the exam under the appropriate circumstances, the law prohibits "fishing expeditions" by the IRS and the specific planned scope and extent of the exam should be agreed upon at the outset.

Practice Alert: While a reasonable request for copies of selected documents from the IDR should be readily complied with, the taxpayer is not expected to provide voluminous copies at the taxpayer's expense. Remember that the exam is supposed to be conducted in the field and appointments should be substantive and not just document gathering exercises. Furthermore, be leery of giving the Revenue Agent more information than is necessary to conduct the exam. For example, the Revenue Agent may ask for an entire QuickBooks file when all he or she needs is the general ledger and specified journal entries.

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Office and Field Exams 17

The IDR will typically request a copy of the taxpayer's returns for the year immediately preceding the exam year, as well as the immediately following year. This request does not indicate that those years are being examined, although the IRS could decide to expand the exam to those years if it believes there is a reason for doing so.

Observation: The IRS cannot compel the taxpayer to produce any documents, such as copies of tax returns that are already in the possession of the IRS. A refusal to provide copies of tax returns, however, is usually unwarranted and will do nothing other than drag out the exam process while the agent retrieves the copies from IRS storage. Note that computer generated transcripts of tax returns (as opposed to photocopies of the returns themselves) are available from the IRS immediately.

At the conclusion of the initial appointment, the representative should ask whether additional appointments will be necessary and whether any adjustments are being considered. Depending on the circumstances, neither question may be susceptible to a definitive answer at that time, but the representative should keep in close contact with the Revenue Agent for at least two reasons. One is so that the representative can develop a proper expectation regarding the timing for completing the exam. Second, the Revenue Agent should discuss any possible adjustments with the representative and provide an opportunity for clarification or additional documentation prior to finalizing their report.

THE EXAM PROCESS

Office exams are typically more limited in scope than field exams. If all of the requested documents are produced, the TCO will spend some time reviewing the information, asking clarifying questions, and will then write their report. The report may even be written and presented to you before you leave the IRS office. On the other hand, while field exams may involve only one appointment, they usually take several days, and sometimes even weeks or months, to complete.

Most office and field exams involve a business, and the exam will usually begin with a discussion about the nature of the business, how it is conducted, and how the books are kept. The Revenue Agent or TCO will also want to gain an understanding of the taxpayer's financial history, identify sources of nontaxable funds, and identify any e-commerce activity.

In a field exam, the Revenue Agent may also request a tour of the place of business. As indicated above, this is not always necessary. If a visit to the taxpayer's place of business is requested, the Revenue Agent should be guided through the relevant parts of the physical facility and should not be allowed to "root around" on their own.

After the Revenue Agent has gained an understanding of the business, he or she will commonly conduct an "income probe" to identify possible sources of income that do not appear on the books, such as bartering income.

Generally, the next step will be a bank deposit analysis. In preparation for the exam, the client should be asked to identify the source of each deposit shown on the bank statements. For nonbusiness returns, Exam personnel should not routinely ask for bank statements, canceled checks or deposit slips, although requests for documentation supporting specific issues may be made, including canceled checks.

The IRS may contact, and even request documents from, third parties in the course of an exam. Third-party contact is not a routine exam procedure and should only be done when the IRS is unable to obtain needed information from the taxpayer or when it is necessary to verify the information provided by the taxpayer. Before contacting a third party, the taxpayer must be given advanced notice that such contacts may be made, and a list of contacts must be provided to the taxpayer.

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CONCLUSION OF THE EXAM

The exam process culminates with the issuance of a report either indicating that no change to the return is being proposed or detailing the specific proposed adjustments to the return. If changes are being proposed, the taxpayer will be asked to consent to those changes. Consent to the changes on the report will allow the IRS to immediately assess the deficiency indicated in the report without issuance of a 90-day letter.

If the taxpayer disagrees with the report, two options are available. One option is to do nothing. In that case, the IRS will issue a 90-day letter and the taxpayer can file a petition with the U.S. Tax Court for a review of the deficiency determination.

Alternatively, the taxpayer may object to the proposed deficiency and get a hearing with an Appeals Officer by filing a written protest within 30 days from the date of the report. The report itself will indicate that the taxpayer has this right, hence the report is often referred to as a "30-day letter."

Practice Alert: Unlike the deadlines indicated in IRS correspondence regarding document requests or a request to contact the IRS to schedule an appointment, the 30-day time period for filing a protest is a real deadline. If a protest is not filed within 30 days, the taxpayer will generally receive a 90-day letter without further IRS consideration of the case.

If there is not agreement with the proposed adjustments and evidence to support your position, it is generally in the taxpayer's best interest to take advantage of this right to appeal. As noted above, Appeals Officers are generally more experienced and better trained than the personnel conducting the exam. Perhaps most important, Appeals Officers have greater discretion to resolve issues than Revenue Agents or TCOs.

A "hearing" with an Appeals Officer is not as formal as it sounds - it is really just a meeting (or sometimes a telephone conference) with the Appeals Officer in which the representative gets to present the taxpayer's case in an attempt to persuade him or her that the proposed deficiency is unwarranted.

One of the best aspects of an appeals conference is that the IRS is represented only by the file compiled by the examiner. The taxpayer's representative gets to meet with the Appeals Officer "one-on-one" and the Revenue Agent or TCO will not be present. In fact, the Appeals Officer is not even allowed to discuss the matter with the examiner. The IRS position in the case is represented solely by the content of the examiner's file.

If the amount of the proposed deficiency, including penalties and interest, is $25,000 or less, a protest is filed by sending a written request for an appeals conference indicating the changes with which the taxpayer does not agree and the reasons for the disagreement. This request should be addressed to the person who issued the exam report. There is no specific form; a brief letter is sufficient. Always make sure to send this request by private delivery service (Federal Express, UPS, or DHL) or by certified mail.

If the amount of the proposed deficiency, including penalties and interest, is greater than $25,000, a "formal protest" is required. A formal protest must include:

the taxpayer's name and address, and a daytime telephone number;

a statement that the taxpayer wants to appeal the IRS findings to Appeals;

a copy of the exam report;

the tax periods or years involved;

a list of the changes that the taxpayer does not agree with and reason for disagreement;

the facts supporting the taxpayer's position; and

the law or authority, if any, on which the taxpayer is relying.

If the representative prepares and signs the protest for the taxpayer, a declaration must be included with the formal protest stating that the representative is submitting the protest and the accompanying documents, and indicating

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whether he or she knows personally that the facts stated in the protest and accompanying documents are true and correct.

When the appeals conference takes place, the representative should set out the arguments that indicate that the adjustments being proposed are improper, citing to specific facts, the documentary evidence, and statutory or regulatory standards. Remember that the Appeals Officer will consider "hazards of litigation." As a result, you do not necessarily have to convince the Appeals Officer that the taxpayer's position is unequivocally correct, only that there is a good chance that it would prevail if the case is litigated.

If the appeals conference is unsuccessful in resolving the matter, a 90-day letter will be issued and the taxpayer will have to decide whether to seek a hearing in U.S. Tax Court, pay the liability in full and sue for a refund in U.S. District Court, or deal with the liability as a collections matter, which is the topic of the next section below.

ACT TWO: COLLECTIONS

BACKGROUNDIf an assessment is unpaid after ten days, the taxpayer will receive a series of letters (and perhaps phone calls) from ACS. These letters are computer generated and come in a predictable series beginning with CP 501 ("Balance Due - Reminder") and progressing to CP 504 ("Balance Due - Urgent Notice") and eventually to Letter 1058 ("Final Notice - Intent to Levy").

In most cases the taxpayer's file will eventually be transferred to a local Revenue Officer who will handle the collections personally. A Notice of Federal Tax Lien may or may not be filed. If the liability is not properly addressed, at some point the taxpayer's wages and bank accounts will be garnished, and his or her tangible personal property, including automobiles, may be seized.

After the representative has obtained and filed the Form 2848 Power of Attorney and reviewed the correspondence received from the IRS, a call should be made to the Practitioner Priority Service (866-860-4259) to request transcripts of account for the years in question (the IRS will fax them to you). Representatives that are registered for e-services through the IRS website should be able to obtain such transcripts electronically.

The transcripts should be reviewed carefully to determine the date and amount of assessment, confirm any amounts that have been credited to the taxpayer, and verify the current amount due.

LIEN VS. LEVYOnce an assessment is made by the IRS, whether pursuant to a tax return filed by the taxpayer (a "self-assessment"), a change made due to a mathematical or clerical error on the return (a "summary assessment"), a deficiency procedure, or otherwise, the U.S. government has an automatic lien against all of the taxpayer's property. A lien is simply a legal recognition that the property is encumbered by an obligation owed by its owner.

Initially, the IRS lien is a "secret lien" in that only the IRS and the taxpayer know about it. In order to establish the priority of its lien over other creditors of the taxpayer, however, the IRS will sometimes file a Notice of Federal Tax Lien ("NFTL") in the jurisdictions where the taxpayer owns property.

The filing of an NFTL is significant in that it constitutes a public notice of the taxpayer's liability and will likely severely limit the taxpayer's ability to obtain credit. The IRS will not usually provide prior notification of the filing of an NFTL. Rather, the taxpayer must be notified within five days after the NTFL is filed.

Regardless of whether the IRS chooses to file an NFTL, levy on the taxpayer's property may begin once 30 days has elapsed after the taxpayer has received a Notice of Intent to Levy. The Notice of Intent to Levy (Letter 1058) is a form letter stating that the IRS intends to begin identifying and levying upon (i.e., taking) the taxpayer's assets.

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Once the 30 day period after the Notice of Intent to Levy has expired, the IRS may begin seizing the taxpayer's property, including wages and bank accounts. Note that the IRS is not subject to the same limitations on wage garnishments as other creditors. Although state law may limit other creditors to some modest percentage of net pay, those limitations are not applicable to the IRS, which may garnish any amount over the annualized standard deduction and exemption amounts for the taxpayer.

There are methods that a representative may use to avoid an NFTL or seek its release, as well as to stop the IRS from levying on the taxpayer's property. Some of those methods, and their limitations, are discussed below.

AUDIT RECONSIDERATIONSWhen an assessment has been made as a result of an exam it may be possible to get the IRS to reconsider the results of that exam, even after the assessment has been made. This can be done in cases where there is additional information that the taxpayer has not previously submitted to the IRS and that demonstrates that the assessment is inappropriate.

There are no specific forms to request audit reconsideration. The process is to send the IRS a letter that details the changes being requested, describes the additional information that was not previously considered by the IRS, and encloses documentation supporting the position. In addition, a copy of the original exam report should be enclosed, as well as the Form 2848 Power of Attorney. The package should be addressed to the IRS location shown on the examination report and should be sent by private delivery service (Federal Express, UPS, or DHL) or by certified mail.

Submission of a request for audit reconsideration puts a hold on collection activity. If the IRS requests additional information, such information must be submitted within 30 days or collection activity will begin again. If the IRS does not rule favorably with respect to the audit reconsideration request, a protest may be submitted to obtain a conference with an Appeals Officer. Since an assessment has already been made, however, no further appeal rights will be available.

COLLECTIONS DUE PROCESS HEARINGSUpon receipt of a Notice of Intent to Levy or a notification that an NFTL has been filed, the taxpayer is entitled to request a Collections Due Process ("CDP") hearing within 30 days. This 30-day deadline is statutory, meaning that a request submitted after 30 days will not result in a CDP hearing. A late request will usually result in a meeting with a Settlement Officer, but it will be in the form of an "equivalent" hearing that does not grant the same rights to the taxpayer as does a CDP.

A CDP request filed within the 30-day period will stop collection activity until the final disposition of the CDP hearing. A CDP request is made on a Form 12153 and should be sent to the address on the lien or levy notice.

Practice Alert: Only receipt of a Notice of Intent to Levy or the filing of an NTFL gives rise to a CDP right. The ACS letter that precedes the Notice of Intent to Levy typically contains the language: "Urgent!! We intend to levy certain assets." While this letter refers to levy, a close reading will reveal that the only asset actually subject to levy at that point is a state tax refund. The letter giving rise to a CDP right will specify that the taxpayer has a right to a CDP hearing if requested with 30 days.

A CDP hearing will be conducted by a Settlement Officer. Like an Appeals conference, the "hearing" is no more than a meeting or telephone call between the taxpayer (or representative) and the Settlement Officer. The IRS is not represented, other than through the file.

In a CDP hearing you must give the Settlement Officer a reason as to why it would be in the government's interest either not to proceed with a levy upon the taxpayer's assets or to release an NFTL. Generally, some plausible alternative must be offered, such as an installment agreement or offer-in-compromise (both of which are discussed later), a plan to borrow money to pay the tax liability once the NFTL is released, or an innocent spouse defense (also discussed later).

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The alternative offered should be fully prepared prior to the CDP hearing. If the Settlement Officer does not grant relief, a Tax Court petition may be filed. The Tax Court, however, will apply an "abuse of discretion" standard, meaning that the Settlement Officer's decision will only be overturned if the court is convinced that it is arbitrary and without a reasonable basis.

INSTALLMENT AGREEMENTSAn installment agreement represents an agreement by the IRS to accept payment (in full) of the taxes, penalties, and interest due from a taxpayer in a series of payments rather than all at once. While penalties and interest will continue to accrue while the installment agreement is in place, the IRS will not levy on the taxpayer's assets while payments are being made under an installment agreement.

All installment agreements require that a taxpayer be in current compliance with all filing obligations. Therefore, before seeking an installment agreement, the representative needs to make sure that the taxpayer has filed all tax returns that have become due and has made any required quarterly estimated tax payments for the current year.

Although installment agreements are generally entered into in the discretion of the IRS based on financial statements submitted by the taxpayer, they may be entered into on a "guaranteed" or "streamlined" basis, without having to provide the IRS a financial statement. Guaranteed installment agreements may be available when the taxpayer owes tax (tax liabilities exclusive of penalties and interest) of $10,000 or less. In that case, the IRS cannot turn down a request for an installment agreement if: (1) during the past five tax years, the taxpayer has timely filed all income tax returns and paid any income tax due; (2) the taxpayer has not entered into an installment agreement within the past five years; (3) the taxpayer provides the IRS with any requested information to determine that they are unable to pay the liability in full; (4) the installment agreement payments will fully pay the liability (including penalties and interest) within three years (36 months); and (5) the taxpayer timely files all tax returns and pays any taxes that become due while the agreement is in effect.

If the taxpayer owes more than $10,000 but not more than $50,000, they may qualify for the so-called "streamlined installment agreement". The conditions for a streamlined installment agreement are essentially the same as for a guaranteed agreement, except that the full amount of the liability (including penalties and interest) must be fully paid over six years (72 months), rather than three years (36 months).

To request an installment agreement a taxpayer can apply online through the Online Payment Agreement tool (if they qualify to apply online) or apply by phone, or apply by submitting Form 9465 Installment Agreement Request by mail (attach to front of tax return or if return is already filed, mail directly to IRS) or in person at an IRS walk-in office. If the IRS approves the plan, they send a notice detailing the terms of the agreement and the applicable fee that will be added to the taxpayer’s tax bill. If the taxpayer applies online, once the online application is complete, they will receive an immediate notification of whether their payment agreement has been approved.

If the taxpayer does not qualify for either a guaranteed or streamlined agreement (owes more than $50,000), a financial statement (on Form 433-F Collection Information Statement) will also have to be submitted with Form 9465 Installment Agreement Request in order to obtain an installment agreement. The representative should make sure that Forms 9465 and 433-F are prepared accurately and completely.

If the taxpayer owes more than $50,000 but less than $100,000, they may qualify for the IRS Extended Installment Agreement pilot program. Started in 2016, the Extended Installment Agreement is still an active pilot program in 2019. The Extended Installment Agreement provides for a seven-year (84-month) repayment period. Since the taxpayer does not qualify for a guaranteed or streamlined agreement (owes more than $50,000), a financial statement (on Form 433-F Collection Information Statement) will have to be submitted with Form 9465 Installment Agreement Request.

Practice Alert: Many of the expense items appearing on Form 433-F are subject to limitations by national or local standards. Make sure the form itself and its instructions are reviewed carefully when completing Form 433-F.

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Generally, any expense that is necessary to produce income or for the health of the taxpayer and/or the taxpayer's dependents will be allowed.

For a long-term payment plan installment agreement (paying in more than 120 days), the payment method options include:

Pay through Direct Debit (automatic monthly payments from your checking account), also known as a Direct Debit Installment Agreement (DDIA)

Make monthly payment directly from a checking or savings account (Direct Pay)

Make monthly payment electronically online or by phone using the Electronic Federal Tax Payment System (EFTPS), enrollment required

Make monthly payment by check, money order, or debit/credit card (fees apply when paying by card)

Effective January 1, 2017 (and still effective for 2021), the installment agreement applicable fees for a long-term payment agreement (paying in more than 120 days) are based on if the payment method is Direct Debit or not:

Apply by phone, mail, or in-person – setup fee is $225 if not Direct Debit or $107 if Direct Debit

Apply online using the agency’s Online Payment Agreement application – setup fee is $149 if not Direct Debit or $31 if Direct Debit

Low-income taxpayers may qualify for a reduced fee whether they apply online, by phone, mail, or in-person – the setup fee is $43 (which may be reimbursed if certain conditions are met) if not Direct Debit or is waived if Direct Debit

NOTE: For individuals with balances over $25,000, payments must be paid by direct debit.

An individual may qualify to apply online if:

Long-term Payment Agreement (paying in more than 120 days) – owe $50,000 or less in combined tax, penalties, and interest, and filed all required returns

Short-term Payment Agreement (paying in 120 days or less) – owe less than $100,000 in combined tax, penalties, and interest

If a taxpayer is able to pay the full amount owed within 120 days, he should not request an installment agreement on Form 9465. Instead, he should apply over the phone, apply in person, or apply online to request a short-term payment agreement (120 days or less). A taxpayer who can pay within the 120 day period can avoid paying the fee to set up the installment agreement.

Once approved, a taxpayer may submit a request to modify or terminate the installment agreement (a fee will apply to change an existing payment plan). This request will not suspend the statute of limitations on collection. While the IRS considers a request to modify or terminate the installment agreement, the taxpayer must comply with the existing agreement. If the taxpayer defaults with respect to an installment agreement, the IRS will generally accept a request for a new installment agreement (assuming the taxpayer is financially unable to pay in full immediately), but a separate fee will be imposed for each new agreement.

INNOCENT AND INJURED SPOUSE RELIEFSpouses who file joint returns are both equally liable for the full amount of any tax due, even if the source of the tax liability is from the activities of just one spouse. Agreements between the spouses to "split" the liability and court orders (such as those pursuant to a divorce) providing that one spouse is to pay the tax liability are not binding on the IRS and the IRS will attempt to collect the joint liability from both spouses until paid in full.

However, under certain circumstances the IRS may agree not to pursue collection from one of the spouses. This will be the case if one of the spouses can demonstrate to the satisfaction of the IRS that he or she did not know, and had no reason to know, of the deficiency and that it would be inequitable to hold the "innocent" spouse liable for the

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Offers-in-Compromise 23

deficiency. The spouse requesting relief under these circumstances must do so within two years of the date collection activity begins.

There are three different types of innocent spouse relief. The principle form of relief applies when there has been an understatement of tax liability on the joint return. This understatement may be the result of under-reported income or the overstatement of exemptions, deductions, or credits. When this form of relief is granted, the requesting spouse's account is set to "zero" with respect to the applicable liability.

Another form of relief is referred to as "separation of liability." Under this form of relief the tax liability is allocated between the spouses. In order to qualify for separation of liability relief the spouses must no longer be married or must be legally separated and cannot have lived together for at least 12 months preceding the request for relief. Furthermore, unlike the basic form of innocent spouse relief, separation of liability may be granted as long as the requesting spouse did not have actual knowledge of the error on the return.

The third and final form of innocent spouse relief is called "equitable relief" and is used when the other two forms of relief are unavailable. For example, equitable relief can be used when there is a correct statement of liability on the return, but that liability has not been paid in full.

Innocent spouse relief is difficult to obtain. The "knowledge" part of the test is broadly applied with respect to the basic form of relief. For example, if the couple's lifestyle could not be supported by the income reported on the return, the IRS will generally maintain that the requesting spouse had reason to know that the income on the tax return was understated.

With respect to the "equitable" part of the criteria, the IRS will consider all of the facts and circumstances, including the status of the marriage, whether there has been domestic abuse or violence, whether the requesting spouse benefited from the understatement of tax, etc.

The procedure for filing an innocent spouse claim is to file Form 8857, along with a detailed explanation of the basis for the requested relief. The explanation should include specific information supporting the claim. For example, if abuse is claimed, specific dates, details of the occurrence, and copies of police reports should be included. Information about the requesting spouse's educational and occupational background will always be considered important with respect to the "knowledge" criteria.

Collection activity will stop while an innocent spouse request is pending. If the request is rejected, it can be appealed by sending a letter requesting Appeals consideration within 30 days of the rejection. An adverse decision by Appeals can be further appealed by filing a petition in Tax Court.

So-called "injured spouse" relief applies when a jointly filing spouse would be entitled to a refund based on his or her income and tax payments alone, but the refund has been applied to some liability owed by the other spouse. This may happen, for example, with respect to tax for prior separate return years or when the other spouse has outstanding child support or student loan obligations.

Form 8379 is used to claim injured spouse relief. Note that this form can be filed with the return itself if the spouses are aware that a refund shown on the return will be intercepted to pay one spouse's debts.

OFFERS-IN-COMPROMISEAn offer-in-compromise is an agreement by the IRS to accept less than the full amount due in satisfaction of a tax liability (including interest and penalties). Like innocent spouse relief, there are three separate forms of offer-in-compromise relief. Unlike innocent spouse relief, there is no time limit for filing an offer-in-compromise, it may be filed anytime there is an outstanding tax liability.

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The first, and most common, form is "doubt as to collectability" relief. With this form of relief, the taxpayer has to prove to the satisfaction of the IRS that it is unlikely that the tax liability can be collected in full and the amount offered reflects the reasonable collection potential.

"Reasonable collection potential" is generally regarded by the IRS to be equal to the full amount of equity in the taxpayer's assets (including the amount of IRAs and other retirement funds that can be accessed, less the amount of tax that would be due), plus a multiple of the taxpayer's excess monthly income over allowable expenses. For the latter criteria, a strict view is taken of "allowable expenses." For this purpose, many categories of expense are limited based on national or local standards. In general, the IRS will only consider expenses that are necessary for the production of income or health needs. Payments on unsecured debt (i.e., credit cards) are disregarded, as are expenses for "luxury" items such as cable television and cell phones (unless necessary for the production of income).

Once the net monthly excess of income over expenses is determined, that amount is multiplied by: (1) 12, if pay the offer in 5 or fewer payments within 5 months or less (lump sum cash option); or (2) 24, if pay the offer in 6 to 24 months (periodic payment option). The result of that multiplication is the taxpayer's future remaining income and is added to the equity in the taxpayer's assets to determine the minimum offer amount or reasonable collection potential.

Illustration: Sally has cash on hand of $100, a bank account with a $300 balance, and her excess monthly income as calculated on Form 433 is $50. If Sally is offering a lump sum payment, the minimum offer amount is $1,000 ($100 + $300 + [12 × $50]). If the offer to be paid in periodic payments over more than 5 months but less than 24 months, the minimum offer amount would be $1,600 ($100 + $300 + [24 × $50]).

Offers-in-compromise based on doubt as to collectability are seldom accepted immediately, but are almost always subject to negotiation. If the initial offer is not accepted, the IRS will indicate what they believe the reasonable collection potential to be, and discussions as to the details of the calculation may ensue until some agreement is reached.

Practice Alert: Be aware that the facts considered by the IRS in determining reasonable collection potential are not limited to financial data. The IRS will also consider the age, health, education, and training of the taxpayer, as well as any credit available to the taxpayer that may be utilized to satisfy the tax obligation.

An offer-in-compromise can also be filed based on "doubt as to liability." This is essentially an alternative to audit reconsideration. In most cases, audit reconsideration is an easier and less expensive process. Doubt as to liability offers may be most appropriate when the taxpayer was unrepresented in the exam and did not fully understand the consequences of the 90-day letter or when the trust fund penalty is at issue.

The third (and most rare) form of offer-in-compromise is one based on "efficient tax administration." These offers are most often used when there are unusual circumstances that would cause an undue hardship if the taxpayer were required to pay the liability in full, such as when the taxpayer has ongoing medical needs that will not be met if they pay the full amount of the tax liability, or when the taxpayer can otherwise show that insisting on full payment will undermine public confidence that the tax laws are being fairly administered.

Offers-in-compromise (for doubt as to collectibility offers) must be submitted using Form 656 Offer in Compromise and offers-in-compromise (for doubt as to liability offers) must be submitted using Form 656-L Offer in Compromise (Doubt as to Liability). For offers-in-compromise (for doubt as to collectibility offers), Form 656 must be accompanied by, if applicable, Form 433-A (OIC) Collection Information Statement for Wage Earners and Self-Employed Individuals and/or Form 433-B (OIC) Collection Information Statement for Businesses. For offers-in-compromise (for doubt as to liability offers), Form 433-A (OIC) and/or Form 433-B (OIC) are not required to be submitted with Form 656-L.

In addition to the initial payment (discussed below), a $205 (2020) application fee must be submitted with Form 656 Offer in Compromise. This application fee is non-refundable, if the offer is processed, or, even if the offer is rejected.

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For Form 656-L Offer in Compromise (Doubt as to Liability), there is no application fee or initial payment required, do not send any payments with this offer.

The taxpayer must select a payment option and include the initial payment with Form 656 Offer in Compromise. The amount of the initial payment and subsequent payments will depend on the total amount of the offer and which of the following payment options was selected:

Lump Sum Cash - This option requires 20% of the total offer amount to be paid with the offer and the remaining balance paid in 5 or fewer payments within 5 or fewer months of the date the offer is accepted.

Periodic Payment - This option requires the first payment to be paid with the offer and the remaining balance paid in monthly payments within 6 to 24 months, in accordance with the proposed offer terms.

NOTE: If the taxpayer selects the Periodic Payment option, the taxpayer must continue to make monthly payments while the IRS is evaluating their offer.

The initial payment required to be submitted with Form 656 Offer in Compromise, will vary based on the offer and the payment option selected:

Lump Sum Cash - Submit an initial payment of 20% of the total offer amount with the application.

Periodic Payment - Submit initial payment (the first month's payment) with the application.

NOTE: If the taxpayer meets the Low-Income Certification guidelines, the application fee and the initial payment are not required, and the taxpayer is not required to make the monthly periodic payments while the IRS is evaluating their offer.

As with other requests for relief, the offer should be accompanied by a detailed statement presenting the taxpayer's argument for relief and should be well organized and neat. Although Form 656 contains space for the explanation of circumstances, representatives will generally want to include more details and supporting arguments than will be allowed by the limited space on the form itself and are advised to use a separate attachment for this purpose.

Collection activity will stop while an offer-in-compromise is pending. A rejected offer-in-compromise may be appealed to a Settlement Officer in Appeals, but no Tax Court review of an offer-in-compromise is available. No special form is used for an appeal; merely send a letter to the address on the rejection notice stating that you would like Appeals to reconsider the offer.

Observation: Although the rejection of an OIC is not technically reviewable by the Tax Court, if the OIC is submitted in the context of a CDP hearing and is rejected, the results of the CDP hearing can be appealed to Tax Court, thus the court will implicitly address the propriety of rejecting the offer under these circumstances.

THE STATUTE OF LIMITATIONSThe IRS must collect a tax liability by the date which is ten years from the date of assessment, otherwise known as the Collection Statute Expiration Date ("CSED"). After that date the tax liability is extinguished by operation of law. Be aware, however, that certain events will extend the CSED, such as a bankruptcy filing or the filing of a request for innocent spouse relief or an offer-in-compromise.

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Documents

REPRESENTING TAXPAYERS BEFORE THE IRS