Accounting 432/732 Outline—Chapter 1
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- § 12.02 IRS Collection Procedures
- § 12.03 Statute of Limitations on Collections § 6502 Once the IRS assess a tax or other liability, the service generally has ten years
- The Statutory Federal Tax Lien
- Attachment of the Federal Tax
- Notice of Federal Tax Lien
- Seizure of Property Subject to Levy
- § 12.05 Minimizing Collection Activities
Chapter 12Tax Collection Omit Drye v. U.S. 528 US 49 (SC 1999) (pp. 566-576), U.S. v MC Dermott 507 US 447 (SC 1993), (pp 576-582), U.S. v Rodgers 461 US 677 (SC 1983), (pp 587-601), omit pages 636-646 § 12.01 Introduction Collection is the final step in the administrative process. Two different procedures generally utilized by the IRS to collect an unpaid assessment: administrative collection procedures (the more common) and judicial collection procedures. If the IRS is unable to levy on the taxpayer’s property or to so is not administratively feasible the government can protect its lien right by filing suit. The two most common types of collection related lawsuits instituted by the government are suits to foreclose a federal tax lien and suits to reduce a tax lien to a personal judgment. A foreclosure action normally is used to subject the delinquent taxpayer’s property to the payment of tax and to work out any priority conflicts among the government and other third party creditors also claiming an interest in the taxpayer’s property. A suit to reduce an assessment to personal judgment generally is utilized to extend the statute of limitations on collection. Organization Blueprint approach to collection emphasizes a new risk based method. § 12.02 IRS Collection Procedures Structure of IRS’s Collection Operation Under the new organizational structure each of the operating divisions will screen its own collection cases and attempt to process delinquent accounts first through correspondence and telephone contacts. Its seems likely that the computer generated billing process and ACS procedures described below will continue to exist for the foreseeable future.
Review $ 46,000 refund check example.
Notice and Demand for Payment § 6303 The IRS must as soon as possible and no later than 60 days after tax is assessed send to each person liable for the unpaid amount a written notice setting for the amount of the liability and demanding payment (‘the notice and demand” A taxpayer’s failure to pay the amount owed within 21 days after notice and demand (10 days in the case of liabilities of $100,000 or more) triggers failure to pay penalties. The notice and demand may be left at the taxpayer’s dwelling or usual place of business, or mailed to this last known address. If an agency relationship exists among two or more taxpayers, a single notice to one taxpayer is generally considered notice to all. In the usual case the first computer-generated bill issued to the taxpayer, the Request for Payment, satisfies § 6303. Review the Partner/Michigan Airplane Case § 12.03 Statute of Limitations on Collections § 6502 Once the IRS assess a tax or other liability, the service generally has ten years from the date of the assessment to collect the tax by levy or through a judicial proceeding. § 12.04 Administrative Collection Proceedings As noted above administrative collection cases normally begin with a written demand for payment by the IRS. Unless the taxpayer or his representative intervenes to negotiate a compromise or deferred payment or the IRS determines that the unpaid liability is collectible, the process may lead to seizure and sale of the taxpayer’s assets to satisfy the amounts owed. The IRS can collect an outstanding liability pursuant to these administrative collection procedures without the need for any judicial intervention because of the statutory federal tax lien. Note that state and local jurisdictions have similar lien arrangements. .
§ 6321 If a taxpayer neglect or refuses to pay the entire assessed amount after notice and demand, a lien in favor of the IRS automatically attaches to all of the taxpayer’s property. The federal tax lien is retroactive to the date of the assessment. In the case of a jeopardy assessment, the federal tax lien arises automatically upon assessment with no notice and demand required. Although a federal tax lien represents nothing more than a claim or encumbrance against the taxpayer’s property, the lien is important because it allows the IRS to levy and seize the taxpayer’s property, which may then be sold to generate the tax. Do Problem 12-1 Part A Attachment of the Federal Tax The tax lien also attaches to assets that the delinquent taxpayer acquires after the lien arises, provided that the lien is still in effect. The question of whether property or a property interest is owned by a delinquent taxpayer and thus subject to a federal lien is a matter governed by state law rather than federal law. Lien Priorities Once federal tax lien attaches, no additional action on the part of the IRS or judicial intervention is required to establish the government’s interest in the taxpayers’ property. For this reason, the federal tax lien is often referred to as a “secret lien”. Although only the taxpayer and the IRS may know the existence of the tax lien, the government may still have priority against third-party creditors asserting an interest in the taxpayer’s property. §6323(a) provides that the federal tax lien is not valid against any purchaser, holder of a security interest, mechanic’s lienor, or judgment lien credit until the Secretary files (records) a Notice of Federal Tax Lien, Form 668, in accordance with the Code. Once the secretary properly records the notice, the lien normally takes priority over subsequent purchasers, security interest holder, mechanic’s lienors, and judgment creditors. As a general rule the creditor must “perfect’” his interest under state law before the IRS files a Notice of Federal Tax Lien in order to obtain priority over the tax lien. Even timely filing a Notice of Federal Tax Lien does not assure the IRS’s priority. § 6323(b) describes classes of purchasers and lien holders who are afforded a “super-priority” protecting the party’s interest despite the fact that the IRS may have previously filed a Notice of Federal Tax Lien. This preferred status is granted with respect to ten separate interests including: (1) securities purchased without actual notice or knowledge of the tax lien; (2) motor vehicles purchased without prior knowledge of the federal tax lien; (3) tangible personal property purchased at retail in the ordinary course of the seller’s business and (4) personal property, such as household furnishings and personal effects, purchased in a casual sale. Liens covering real property taxes, payments for repairs and improvements of the taxpayer’s personal residence, and attorney’s fees are also accorded super-priority status if the specific requirements of the statute are met. To facilitate the use of common financing techniques, § 6323 (c) also confers super-priority status on certain security interests resulting from commercial transaction financing agreements. Do Problem 12-2 Notice of Federal Tax Lien Under § 6320 (a) the IRS must notify the delinquent taxpayer in writing of the existence of the lien within five days after it files the notice. The taxpayer is then afforded an opportunity to request a hearing with an IRS Appeals office (the “collection Due Process” or CDP Hearing”) within a 30-day period beginning on the date after the five-day period expires. Because a Notice of Federal Tax Lien filed against a taxpayer’s property may result in a significant hardship for the taxpayer and may prevent him from borrowing funds to pay the assessed liability, revenue officers do not automatically file a Notice immediately upon the taxpayer’s failure to pay in response to a notice and demand. The IRM instructs revenue officers to provide the taxpayer with an opportunity to pay the assessment or to work a security or deferred payment arrangement before filing the Notice of Federal of Tax Lien. The IRS will normally not file the Notice in cases when the unpaid balance is less than $5,000, the taxpayer is deceased and no estate assets exist, or when there are indications that the taxpayer’s liability has already been paid, is incorrect, or will be offset with existing tax credits. Release and Discharge § 6325 specifies the circumstances under which the IRS will release a federal tax lien or discharge property from the lien. A lien must be released no later than 30 days after the day on which the lien has been satisfied in full or becomes legally unenforceable. The lien must also be released if the taxpayer posts an acceptable bond that is conditioned upon the payment of the assessed amount plus interest. In addition the IRS has stated its willingness to release a lien once an offer in compromise is accepted provided the taxpayer pays the offered amount and otherwise complies with the offer agreement. Unlike a release, which frees up all the taxpayer’s property from the tax lien, a discharge applies only to a specific item of property. The IRS has discretionary authority to discharge property from a tax lien without the necessity of payment or bond, if the remaining property covered by the tax lien has a fair market value at least twice the amount of the tax lien plus the amount of any other liens that have priority over the tax lien. Finally the tax lien encumbering property may be discharged in order to permit the delinquent taxpayer to sell the subject property. Levy and Sale A federal tax lien is merely an encumbrance against the taxpayer’s property. The primary method used by the IRS to enforce the tax lien is the administrative procedure of levy and sale. §6331 permits the IRS to levy upon the taxpayer’s property and sell the property at public auction in order to generate proceeds to satisfy the unpaid liability. No judicial intervention is required. In cases not involving a jeopardy assessment, the IRS must wait to levy against the taxpayer’s property until after the expiration of a ten-day period following the issuance of a Notice and Demand for Payment. In the usual case the IRS will issue one or two additional demands for payment before resort to levy. If the taxpayer can convince the IRS that he is making a sincere effort to pay the liability the levy may be postponed. Before seizing the taxpayer’s property, the IRS must mail or deliver a written statement notifying the taxpayer of its intent to levy and describing the statutory and administrative procedures relating to levy and sale and the alternative procedures that may be available to the taxpayer to prevent a levy. The IRS must provide Form 668-A at least 30 days prior to levying on the taxpayer’s property. A levy may be made on all the delinquent taxpayer’s property or rights to property, real or personal, tangible or intangible, unless specifically exempted. In addition property that is encumbered by the federal tax lien is subject to levy, whether the property is in the taxpayer’s or someone else’ possession. An exception is made in the case of wages, salaries and certain other periodic payments. In these specific cases, the levy is deemed to be continuous, thereby permitting the IRS to collect amounts accruing after the date of levy so long as the liability remains unpaid. § 6443(a) enumerates classes of property that are exempt from the levy (see p 586), Note that state laws that may exempt property from levy are not applicable to federal collection efforts. Seizure of Property Subject to Levy Once a valid levy is made, the IRS will seek to obtain possession of the levied property. In most cases the IRS will first seek to levy upon the delinquent taxpayer’s bank deposits, if any, and wages owing from an employer. § 6332 (a) The taxpayer or third party in possession of the property subject to levy normally must surrender the property to the IRS on demand. § 6332 (e) Once a third party surrenders an asset or payment to the IRS in response to a levy notice, that party is discharged from any liability to the delinquent taxpayer regarding the surrender amount. In cases where the property is not voluntarily turned over, the IRS may forcibly seize the property from the taxpayer or the party in possession. Depending upon the type of property involved, the revenue officer will remove the property to a storage area or padlock it to prevent the taxpayer from retaking possession. As soon as practical after the property is seized the IRS must provide the owner or possessor or the seized property with notice describing the property and the amount demanded by the IRS for its release. Before the IRS attempts to sell a seized asset the taxpayer is normally given a last opportunity to come to some payment arrangement with the IRS. If the taxpayer and the IRS agree upon and a final payment and such payment is made the IRS will release the levy and, if necessary, return the seized property to the owner. The IRS is also required to release a levy if (1) the underlying liability for which the levy was made becomes unenforceable due to a lapse of time; (2) the release will facilitate collection of the tax liability; (3) the levy causes an economic hardship for the taxpayer or (4) the taxpayer enters into an agreement for paying the tax in installments. Sale Following Seizure § 6335(b) If following the notice of seizure the taxpayer is unable to obtain a release of the levy, the IRS can sell the seized property. Before doing so, however, the IRS must provide the delinquent taxpayer with a Notice of Sale, which specifies the property to be sold and the time, place and manner of the sale. The Notice of Sale must also be published locally in a newspaper of general circulation. § 6225(j) If the IRS proceeds with the sale, the property will be sold to the highest bidder at a public auction not less than ten days or more than 40 days following the Notice of Sale. §6335(e) Only the delinquent taxpayer’s right, title, and interest is offered for sale, and such interest is sold subject to all the encumbrances and liens that are superior to the government’s tax lien. § 6342 (a) Proceeds from the sale are first applied to reimburse the IRS for levy and sale expenses, then to the delinquent taxpayer’s liability § 6342 (b) Any surplus is paid to the person or persons (including the taxpayer) who make an application and provide satisfactory proof that they are entitled to the remaining amounts. § 12.05 Minimizing Collection Activities As a general proposition, a taxpayer’s ability to pay an asserted deficiency is not taken into account in determining the extent of the taxpayer’s liability, nor is it taken into account during compromise negotiations with the IRS. Because the IRS’s enforced collection procedures can seriously disrupt the taxpayer’s business and employment relationships and jeopardize his credit rating, it is crucial for the taxpayer and his representative to attempt to negotiate the method of payment before the IRS files a Notice of Federal Tax Lien. This part of the negotiation can be just as important as settling the underlying tax liability. The taxpayer or the taxpayer’s representative should confirm that the underlying liability has been properly assessed and determine whether the statute of limitations remains open. Both these matters can be established by requesting from the IRS a copy of the taxpayer’s transcript of account, obtained by filing Form 4506, Request for Copy or Transcript of Tax Form. If the IRS does not provide the transcript voluntarily, the representative may have to make a FOIA request for the item. Identifying assessment date is important not only for purposes of confirming whether the statute of limitations on collection has expired, but also because the date of assessment fixes the date on which the federal tax lien arose. Installment Agreements Although revenue officers are instructed to request immediate payment of an outstanding liability, it is obvious that, in some cases, a taxpayer is unable to comply with such a request. As an alternative to enforced collection action the IRS may be willing to defer payment in return for the taxpayer’s commitment to pay the full liability. If the taxpayer simply needs additional time to access funds to pay the amount owed, the revenue officer can grant an extension of funds without any formalities. Except as noted below, a taxpayer’s ability to enter into an installment agreement is largely subject to the discretion of the IRS. The IRS normally will not consider an installment agreement unless the taxpayer is otherwise in compliance with his filing and payment obligations for the current year. Furthermore to ensure that the taxpayer is truly unable to make an immediate payment in full, the IRS requires the taxpayer to furnish a financial statement detailing the taxpayer’s assets and liabilities, bank accounts, employment information, and future income prospects (Form 433-A, Collection Statement for Individuals and/or Form 4332-B, Collection Statement for Businesses). Review Form 433-A The revenue officer will generally insist on an immediate payment of part of the outstanding liability, followed by equal monthly payments. Equal payments amounts permit the IRS to monitor collection through its computer system and remind taxpayers when payment is due. If necessary, the taxpayer will also be asked to extend the statute of limitations on collection for the duration of the installment agreement. Offers in Compromise As discussed previously the IRS’s willingness to enter into an installment agreement is conditioned upon the taxpayer’s agreement to pay the entire liability owed. If, however, the taxpayer has few assets and little prospect of generating sufficient income to pay the liability in full, the taxpayer may be allowed to strike a settlement for less than 100 cents on the dollar. § 7122 provides the statutory authority for making an “offer in compromise”. An offer in compromise accepted by the IRS permits the taxpayer a fresh start by eliminating the excess liability over the amount offered. A taxpayer submits the offer by filing Form 656. Review Form 656. Historically the IRS would compromise tax liability on only two grounds: doubt as to the existence of the liability and doubt as to its collectibility. § 7122 (c) authorized the IRS to compromise tax liabilities based on new, additional criteria, including considerations of equity and economic hardship. Note that given a taxpayer has other avenues available to negotiate with the IRS over the extent of his tax liability, compromises on the basis of doubt as to liability are far rarer than those for doubt as to collectibility. Do Problem 12-3 The Bankruptcy Option Another alternative available to a delinquent taxpayer facing the threat of enforced IRS collection is to file a petition in bankruptcy. Although a broad treatment of the bankruptcy rules relating to tax liabilities is beyond the scope of this text, some understanding of the IRS’s status as a creditor in a bankruptcy proceeding is necessary to advise the taxpayer of his options. Download 157.83 Kb. Share with your friends:
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