The Internal Revenue Service has been called "The world's largest collection agency". In many ways this statement is indeed accurate. The Internal Revenue Service is tasked with the responsibility to collect the funds in the form of taxes that permits the country to operate. The system is largely dependent on voluntary compliance in the form of taxpayers preparing and filing a tax return each year. To enhance voluntary compliance, the IRS conducts civil audits of a small percentage of the tax returns filed. If the audit reveals that the tax return understates taxable income, the IRS may assess additional taxes, penalties and interest against the taxpayer. This becomes a financial obligation of the taxpayer.
In some cases the taxpayer files a tax return that reflects that he owes taxes but he is not able or willing to pay the tax at that time. The IRS Collection Division is assigned the task of collecting the funds that are owed to the IRS but have not been paid. As a practical matter, the IRS will permit a taxpayer to pay his obligation over a reasonable period of time. However, if the amount owed is greater than $50,000 the IRS will assign a revenue officer from IRS Collections to the case. The revenue officer will request that the taxpayer provide his financial condition on IRS Form 433. This form will educate the revenue officer as to the assets the taxpayer has as well as the taxpayer's monthly income and expenses. The revenue officer will also request several months of the taxpayer's most recent bank statements. The revenue officer will use these statements to confirm the accuracy of the information listed by the taxpayer on Form 433.
If the revenue officer believes that the taxpayer can affords to pay a certain amount to the IRS each month the revenue officer will agree to enter a monthly installment agreement with the taxpayer. The IRS will suspend collection efforts omce the taxpayer has an approved installment agreement.
However, if the taxpayer refuses to make payment or enter an approved installment agreement, the revenue officer may place liens on property, seize funds in the bank and garnish wages in extreme cases. Penalties for failure to pay may also be assessed.
If a taxpayer timely submits Form 433 and the requested bank statements to the revenue officer on a timely basis, the revenue officer has the authority to find that the taxpayer is temporarily uncollectible if the records reflect that the taxpayer has a negative cash flow and little in the way of assets.
Experienced tax lawyers know that the IRS has a limited amount of time to collect assessed taxes.
As a general rule the Internal Revenue Service has 10 years to collect taxes. The 10 years commences when the taxes are assessed. Internal Revenue Code Section 6502 provides that if the IRS has commenced a levy or court proceeding within the ten years the IRS may continue. If there was an installment agreement that was entered during the ten years and will last past the ten years, collection efforts must stop after 90 days of the termination date of the installment agreement.
In some instances, the IRS is willing to accept a payment from the taxpayer that is significantly less than the total amount of taxes, penalties and interest the taxpayer owes. This process is called "Offer in Compromise." If approved by the IRS, the payment of the agreed amount being offered by the taxpayer will satisfy in full the taxpayer's financial obligation for a specific period of time. The Offer in Compromise form is IRS Form 656.
The IRS is careful before it agrees to accept an amount that is less than the full amount due. Normally, there must be extenuating factors for the IRS to approve the offer. Examples of factors that may be considered are as follows:
If the Internal Revenue Service determines that it is in its best interests to wait the offer will be denied. Often taxpayers make the mistake of paying a significant amount ot the IRS with the Form 656. When the IRS denies the offer the IRS will keep the funds and apply them as a voluntary payment.
The best tax fraud lawyers know the pitfalls associated with offers in compromises as well as the collections proceedings in general. A taxpayer should consult an experienced tax attorney regarding these matters before taking any affirmative steps to avoid or minimize unwanted results.
The primary job of a Revenue Officer is to collect taxes and penalties that have been assessed. The Revenue Officer is authorized to levy on bank accounts and other assets of the taxpayer. However, the IRS is normally willing to structure an installment agreement in which the taxpayer makes monthly payments to the IRS to pay down the obligation. Interest will accrue and be added to the amount due until the obligation is paid in full.
The taxpayer or the taxpayer's representative will request an installment agreement. The Revenue Agent will determine the amount that the taxpayer owes. If the amount owed is less than $50,000 the agent can spread payments over 6 years (72 months). If the taxpayer is willing to execute a Form 433D and permit the IRS to make direct debit withdrawals from the taxpayer's bank account, the IRS may waive the requirement of a lien being recorded against the taxpayer. If the taxpayer owes over $100,000 the matter will be sent to the Collections branch of the IRS. A Revenue Agent will be assigned to the file.
Upon receipt of the file, the Revenue Agent will begin the process of determining what amount the taxpayer can afford to pay each month to the IRS. To accomplish this, the Revenue Agent will require the taxpayer to produce bank statements and complete an IRS Financial Statement (Form 433A). The Form 433A will reflect assets and liabilities as well as monthly income and expenses.
Once a determination is made as to the amount the taxpayer can afford to pay to the IRS monthly a formal installment agreement is prepared for the taxpayer to sign. Once a valid installment agreement is in place, the IRS suspends all other collection activity. The collection efforts will remain suspended as long as the taxpayer honors the instalment agreement.
The formal process to request the IRS to satisfy a tax obligation for less than the entire amount due in known as an "Offer in Compromise". The IRS will grant an offeer that is less than the entire amount due if the IRS believes that accepting the offer is in the best interest of the IRS. Primary factors that the IRS considers include:
The IRS will determine whether it is better off to wait for payment and permit interest to continue to accrue versus taking a smaller amount. For example: the IRS might not otherwise be able to get the amount of money being offered because the payment is coming from a third party and the taxpayer is old and retired, in very poor health, convicted of a crime and has no assets or income.
During the process of determining what amount a taxpayer can afford to pay to the IRS toward an outstanding tax obligtion, the Revenue Agent may discover from the Form 433A financial statement that the taxpayer presently does not have the ability to make any payment to the IRS. In those cases the Revenue Agent has the authority to designate the taxpayer as presently uncollectible. The IRS will suspend collection efforts for a period of time, normally 12 to 24 months.