Affordable Living Expense Standard

In the National Taxpayer Advocate’s Fiscal Year 2018 Objectives Report to Congress, she identifies the affordable living expense standards as most serious problem #13.  These standards now provide critical information for almost all collection cases and deserve attention.  She seeks to move the IRS to a different way of calculating the living expenses based on need rather than on expenditures by individuals without enough money.  If she succeeds, it could make a difference for numerous individuals seeking to compromise their tax liability, to obtain an installment agreement, or to move into currently not collectible status.

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The affordable living expense standards have been around for two decades.  The NTA’s report cites to IRC 7122(d)(2)(A) as the legal mandate to the IRS to develop such standards for offer in compromise cases; however, as with many of the provisions enacted into law in the legislative actions in 1988, 1996 and 1998 labeled Taxpayer Bill of Rights I, II and III, Congress codified something that the IRS had already done.  As I have discussed before, the IRS abandoned about 130 years of ignoring the offer in compromise provisions in the early 1990s when under pressure from Congress to reduce its accounts receivable and after Congress, with no prompting from the IRS or Treasury, increased the statute of limitations on collections from six years to ten thinking it would produce more revenue.  The IRS knew the change in the statute of limitations would produce little revenue but would approximately double the size of its accounts receivable, making it look even worse.  Casting about for ways to avoid looking bad, it settled upon an offer in compromise program as a possible way to write debt off its books before the end of the 10-year period.

When the IRS jumped into accepting offers in compromise (OIC), it did so with very little thought regarding standards.  Revenue Officers, who handled OICs for the first several years of the program before most offers were centralized in Brookhaven and Memphis, received very little direction on what to allow.  Some were overly stingy while others were overly generous.  Most had a good sense of reasonable expenses but all were flying by the seat of their pants.  Because IRC 7122 at that time required that all offers in which the taxpayer owed more than $500 must be reviewed by Chief Counsel’s office, my office reviewed all of the offers in Virginia and, for a time, West Virginia.  Reviewing the offers with no standards on expenses was difficult.  So, I set some standards for vehicles and life insurance in an effort to bring order to the process.  The IRS headquarters heard many complaints about the lack of standards from without and within, and established standards by 1996 using Bureau of Labor Statistics data for expense standards and exemptions from levy for asset standards.

Since the beginning of the adoption of standards, taxpayers have complained about them.  The IRS has responded to some of the complaints adjusting and tweaking the formula occasionally.  Some of the biggest adjustments came in 2008, 2011 and 2012 with the adoption of the Freshstart Initiative.   The NTA writes her most serious problem report in this background and brings up some good points which the IRS might consider as it continues to adjust the living standards which have now become such an important part of the IRS collection process and which Congress adopted for use in bankruptcy cases in Bankruptcy Code 707(b)(2)(A)(ii) as part of the 2005 amendments.

The NTA points out that the IRS relies heavily on the Consumer Expenditure Survey (CES).  This survey measures what people spend and not what goods and services actually cost.  Because of the way it is designed, the survey will fail to recognize even necessary expenditures of taxpayers who must cut out such expenditures because of lack of funds.  She points out that the survey does not take into account the high percentage of a low income taxpayer’s funds that must be spent on housing and that the survey is out of date in many areas such as child care, technology, or retirement savings.  She proposes that the IRS develop alternate measures that better capture the true costs of living.

The IRS responded that it strives to make the allowable expenses up to date pointing to the many updates it has made over the years.  The IRS expressed concerns that the standards sought by the NTA do not meet “standards of accuracy or cover sufficient geographic area; they are also not collected regularly or generally accepted as a reliable data source.”  The IRS further replied that the allowable standards “are not based on the official poverty level or the average expenditures of poor households.  They are based on average expenditures for all income groups combined,” and that 10 years ago the IRS removed income based ranges at the suggestion of the NTA.

The NTA responds that the IRS is using data that measures expenditures and not what it actually costs to live.  The debate in which the NTA seeks to engage the IRS is an important debate.  Since moving to Boston, I find myself in a very high cost of housing area.  I have clients making $40,000 who are essentially homeless and couch-surfing to find a roof over their head.  Boston is not the only place where housing located near reasonable public transportation options forces residents to make tough choices.  Those choices can include many alternate living situations in order to make ends meet.  Do we want the standards to reflect what people spend when their ability to spend is limited by available funds or do we want the standards to reflect what they should be allowed to spend in order to live with what we as a society see as basic necessities?

The IRS is probably right that the survey data out there does not do a good job of capturing what should be allowed because there are so many ways to make ends meet.  Someone with access to housing in Boston because of family and friends will have a much easier time making ends meet than someone trying to find housing without those connections.  Housing is not the only area where these cost issues exist.  I applaud the NTA for seeking to engage in the discussion.  I do not expect the answers to come easily.  Should my very frugal clients who somehow make ends meet by cutting back on what many would consider to be life’s essentials be required to pay more than my more extravagant clients?  This is a question that comes up repeatedly.  I know of no easy answers but I hope we keep asking the questions.

Quick Follow Ups on Vigon v. Commissioner and Private Debt Collection

Vigon

I recently wrote about an order in the case of Vigon v. Commissioner in which Judge Gustafson provided instruction to respondent’s counsel because of a failure to lay the proper foundation for a the summary judgment motion.  IRS Counsel took the instruction to heart quickly and requested a continuance for a trial scheduled for February 22, 2017.  The IRS now agrees that petitioner is not liable for the penalties at issue in the case and stated in its motion that it was in the process of abating the penalties.  The IRS further stated that it was in the process of releasing the liens.  This is a great result for a pro se taxpayer who did not initiate the arguments resulting in these concessions.  The Court granted the continuance but had a question for the IRS:

“We understand how collection issues under section 6330(c)(2)(A) become moot if collection activity ceases. It is less clear how a liability challenge under section 6330(c)(2)(B) becomes moot merely upon an announced concession, which would not seem to have any res judicata or collateral estoppel effect. Perhaps a CDP petitioner who makes a liability challenge that the IRS concedes is entitled to decision in his favor on the liability issues.”

So, the Court ordered the IRS to make an appropriate filing by March 24, 2017, and to explain in the filing how it provide adequate relief to the petitioner on the merits side of this case.

Private Debt Collection

I also recently wrote about private debt collection and wanted to provide a quick update.

The IRS recently released sample CP40 notice letter.  The letter alerts the taxpayer that their account has been assigned to a PDC.  The hope is that the letter will prepare the taxpayer for the call(s) from the PDC and keep the taxpayer from having concerns that the PDC is a scam artist.

 

 

Continued Developments in Private Debt Collection

Based on the resounding failure of past efforts at private debt collection of federal taxes chronicled by the National Taxpayer Advocate and others here, here, here, here,  and here or perhaps based on the need for certain members of Congress to aid their constituents in the business of private debt collection discussed here and here, Congress revitalized IRC 6306 and enacted IRC 6307 on December 4, 2015 as part of the Fixing America’s Surface Transportation Act legislation requiring the IRS to once again use private debt collectors to collect accounts which the IRS has sitting on its shelf gathering dust.  I described the bill in an earlier post.  I will not again point out that over the past six plus years Congress has severely cut the IRS budget so that it does not have the resources to collect many of the accounts sitting on its shelf or to train its staff in how to appropriately collect that debt or that debt collection seems like an inherently governmental function which should not be privately sourced.  Instead of rehashing what a bad idea this is, I will try in this post to talk about what is about to happen with respect to private debt collection.

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Although the IRS was supposed to start using private debt collectors by now, it has not been sitting on its hands over the past 14 months but has been moving to the reimplementation of private debt collectors (PDCs) as Congress required it to do.  We should expect accounts to move into the hands of the PDCs within the next couple of months and the phones begin to light up as the PDC employees begin to contact the taxpayers whose accounts were turned over to them.  The IRS just issued Publication 4518 which provides some information on what taxpayer should expect with the coming of the PDCs.

Distinguishing PDCs from Scam Artists

One of the biggest issues surrounding the use of PDCs this time around concerns the proliferation of scam artists in the past couple of years who have preyed on people scared of the IRS and willing to believe that the scam artist represented the IRS.  So, the injection of a non-governmental player into the system has the potential to exacerbate the problem created by the scam artist.  One of the big problems for the IRS in the roll out of the PDC program addresses the concerns that taxpayers will have when contacted by a PDC.  The IRS has had its own employees questioned with respect to their authenticity.  It will be interesting to see how this plays out.  In its publication, the IRS addresses the problem by noting that it will send the taxpayer a letter advising the taxpayer their account has been assigned to a PDC and the PDC will send the taxpayer a letter confirming the assignment.  This will allow the taxpayer, in theory, to be comfortable that the call from the PDC represents a legitimate call and not a scam.  Two paragraphs in the publication address this issue:

What will the private collection agency do? The private collection agency assigned to your account is working on our behalf. They will send you a letter confirming assignment of your unpaid tax liability and then contact you to resolve your account. They will explain the various payment options and help you choose one that is best for you.

How can I be sure it is the private collection agency calling me? The private collection agency will send you a letter confirming assignment of your tax account. The letter will include the same unique taxpayer authentication number that is on the letter sent to you from the IRS. As part of the authentication process the PCA employee will use the unique number for identity verification. Keep both letters in a safe place for future reference.

Exclusion from Being Sent to PDCs

Moving past the issue of the authentication of the PDC, another issue facing the IRS as it assigns accounts to the PDC is which accounts should be assigned.  The IRS created an initial list of ten types of accounts that would not be assigned to PDCs.  This list can be found on its web site describing the program.  The list does not need to stop with the ten types list on the web site and depends on how the IRS decides to assign accounts and what Congress intended the IRS to do.  The answer to that question turns in part on how you view the authority of the IRS with respect to the creation of the PDCs.  If you take the view that the IRS does not have inherent authority to hire PDCs and that its authority derives only from the statute, then you would look at the statute as the sole source of authority for choosing the accounts to go to the PDCs.  Under this view, the IRS can only send to the PDCs the things specifically granted in the statute.  The interpretation of the statute on this point seems to have created some disagreement within the IRS, with the National Taxpayer Advocate taking the view that the statute provides a narrow grant of authority, while others in the IRS or Chief Counsel take a more expansive view.

The statute uses the term ‘potentially collectable inventory’.  What does that mean?  Together with others led by Chi Chi Wu at the National Consumer Law Center, I argued that the term, not defined in the Code, should be interpreted to exclude the same types of taxpayers the IRS excludes from the Treasury offset program.  This would exclude individuals on fixed income falling below 250% of poverty, which is a line used for other purposes in the Code including the cut off for services from low income taxpayer clinics.  The IRS leadership was kind enough to give us a high level meeting to discuss this and other issues regarding PDCs but did not agree with our view on the statute.  The IRS has continued to debate the IRS into the office of the Commissioner.  At present it seems that the IRS will not send to PDCs cases that have already achieved the Currently Not Collectible (CNC) categorization because it considers these as closed cases.  Everyone acknowledges that CNC cases can come out of that category and that the IRS can offset refunds to collect from cases in that category, but these cases will nonetheless not get sent to the PDCs – a decision that makes a lot of sense particularly when you consider that PDCs do not have the authority to place a case into CNC.

The Commissioner has also agreed to place a freeze on sending SSDI and SSI cases to the PDCs under the presumption that, even though a specific taxpayer receiving these payments may not yet have received the CNC designation, such a designation would likely occur if the IRS took a hard look at the case.  The Commissioner’s decision may have little practical impact if the IRS does not have the programming to cull these cases from the ones sent to the PDCs.  This is a big victory for consumers if the practical effect of IRS computer limitations does not totally undercut the decision.  The Commissioner did not decide to exclude taxpayers receiving regular social security or railroad retirement payments from referral because those individuals might have assets that would lift them out of CNC.  All cases pending in TAS will be excluded from referral and the National Taxpayer Advocate will likely issue an order that TAS will take any case in which the PDC seeks to collect from a taxpayer as she did the last time PDCs existed.  The NTA has the power to create special designations of public policy cases that qualify for the services of her office as I have discussed in a prior post.  Expect an order on this in the near future.

Voluntary Payments

Another issued presented by PDCs is how many times they can contact a taxpayer who does not have the ability to enter in an installment agreement but is willing to make a voluntary payment.  Many taxpayers do their best to avoid paying the IRS anything, but a significant number of taxpayers who owe the IRS try hard to pay off the debt even in the face of significant financial odds.  I spoke to a prospective client recently who owes the IRS about $2,000.  Last year she only made $2,500 yet somehow she is on an installment agreement and makes a $25 a month payment.  She called because she had a question on the offer in compromise form she could not answer.  Her mother was willing to give her money that would satisfy almost half of the outstanding liability.  I love her commitment to paying her taxes but I explained to her that with her financial situation we could make an offer for a much lower amount and that she could stop immediately making the monthly payments.  She did not want to stop.  That’s ok because that is her decision and what makes her feel right; however that attitude can be exploited.

Many others like my prospective client exist and the PDCs can obtain from them voluntary payments even though the individual falls into a hardship category and would not have to pay.  The issue before the IRS concerns how many voluntary payments can the PDC solicit from one taxpayer.  Keep in mind that the PDC gets paid for money it collects.  So, it has an incentive to keep going back to the well for people who have demonstrated a willingness to make a voluntary payment.  The PDCs, as mentioned above, do not have the ability to place the individual into CNC status, so they can just keep calling month after month or week after week or day after day trying to squeeze another voluntary payment out of the individual unable to enter into an installment agreement.  Does the statute allow the IRS to authorize the PDCs to make multiple calls for voluntary payments or, put another way, does the statute require the IRS to limit the PDCs in the number of calls made for voluntary payments.  Framing the question can drive the answer.  The Commissioner has apparently decided that the PDCs can make one, but not multiple, request for a voluntary payment.  This is a major victory for consumers because the calls can quickly become harassing if the PDCs have open season on these individuals.

Who are the PDCs

The IRS chose four PDCs.  The PDCs selected are Conserve, Pioneer, Performant and CBE Group.  One of these has recently been deselected by the Department of Education for apparently not following the rules for private debt collection of loans in a program administered by that department.  PDCs do not have a good reputation in the world of consumer law.  While that is natural and not unexpected, it means that taxpayers and their representatives should be looking out for practices that seem inappropriate.   To make a complaint about a PDC call the Treasury Inspector General for Tax Administration (TIGTA) hotline at 800-366-4484 or write to www.tigta.gov.  Like the IRS, PDCs are covered by the restrictions set out in IRC 6304 which I have discussed in prior posts here and here.  Consumer advocates requested great restrictions and more openness regarding the policies and practices the PDCs would use in collecting but these requests were denied by the IRS.

Final Observations

I think PDC is a bad idea so I may be a bad person to comment about it.  It will soon come again.  Understanding how it works will help you in advising clients who may have grown complacent as the IRS ability to reach delinquent taxpayers has diminished over the past several years.  While I hope it works, my expectations remain quite low.

IRS Examination Division’s Requirement to Consider Collectibility of Potential Assessment

On September 7, 2016, the Treasury Inspector General for Tax Administration (TIGTA) issued a report, entitled Examination Collectibility Procedures Need to be Clarified and Applied Consistently, looking at the failure of the Examination Division to consider collection in making decisions on who it should examine.  It found that the Examination Division did not follow its own collectibility procedures in 56% of the cases it sampled.  TIGTA pointed out in the report that the failure to follow these procedures led to collection closing 50% of all exam cases that came into the hands of field collection offices and 19% of all exam cases that came into the Automated Collection System (ACS).  At a time when the IRS examination resources have dropped by about 30% over the past six years and collection resources have dropped by almost 40% over that period, does it make sense to go after taxpayers at the examination stage who will turn into uncollectible accounts, or would it make more sense to look on the shelf at cases needing examination where the taxpayer has the ability to pay the liability in the event of an additional assessment.

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IRM 4.20.1.5.1 (February 26, 2013) provides that the Examination function of stovepipe SBSE “must strive for quality assessments and promote and increased emphasis on early collections in the continuing effort to reduce the Collection function’s inventory and currently not collectible (CNC) accounts.”

The full text of this IRM provision states:

  1. Examination may need to suspend collection activity on a taxpayer’s account. Examiners can suspend collection activity using Transaction Code (TC) 470 with Closing Code (cc) 90 or by using “STAUP” procedures.
  1. The use of TC 470 with cc 90 is restricted to those situations where it is expected that an adjustment will fully pay the tax for the suspended tax year. For example, if the IRS discovers that an obvious error created a balance-due condition in one tax year, and an adjustment will reduce the balance due to zero, the IRS can request the necessary tax adjustment and also request that this collection suspension code be entered for the specific tax year. This will ensure collection action is suspended while the adjustment is made and overpayments for other tax years will not be used to pay the tax in question.
  1. It is imperative that TC 470 with cc 90 is used correctly and only in those instances that meet the criteria outlined above. If TC 470 cc 90 is used incorrectly when adjustments may not be appropriate or when an adjustment does not eliminate the balance due, credits from a taxpayer’s other tax years will be refunded to the taxpayer rather than being used to satisfy the amount still owed for the suspended tax period. See IRM 5.1.15, Abatements, Reconsiderations and Adjustments.
  1. In instances where the TC 470 cc 90 criteria is not met, Collection activity can be suspended for a fixed period of time using Command Code “STAUP.” For example, an examiner encounters the situation where the suspension of collection activities is necessary when one or more of the following is expected to reduce the balance due to zero:
    1. Claims
    2. Net operating loss (NOL) carryback
    3. Credits carried back

In these instances, examiners can request a suspension with Command Code “STAUP.” Command Code STAUP is an IDRS command code used to accelerate, omit, or delay the issuance of an IDRS balance due notice. A STAUP will stop any notice from being issued or destroy a printed notice not yet mailed. See IRM 2.4.28, Command Codes STAUP, STATI, and STATB.

To achieve that goal, IRM 4.20.1.2 (February 26, 2013) provides that Exam employees should consider collectibility during the pre-contact, audit and closing phases of an examination.  In fiscal year 2015 approximately 75% of the accounts receivable owed to the IRS was listed as uncollectible.  The IRM provisions seek to keep the IRS from building more and more inventory in the uncollectible category.

I wrote about this issue previously in the context of the trust fund recovery penalty (TFRP).  Since the collection function handles TFRP investigations it sits in the best place to determine whether to work the case and does not need to refer the matter to anyone in order to make that determination.  Despite language directing the IRS to only pursue TFRP investigations on taxpayers able to pay, the comments received to that post almost uniformly took the view that the collection function did not make a determination on collectibility prior to initiating TFRP investigations.  If collection is not doing this, it is easy to believe that Exam would not follow the requirement to select cases that will result in collection of the resulting assessment.

TIGTA has some good stats in its report.  One is the information that between 2011 and 2015 Collection received an average of 707,789 new delinquent accounts each year as a result of an examination assessment.  TIGTA determined that if the examination division had focused on auditing taxpayers with the ability to pay the IRS “could have assessed approximately $109 million on cases that were more collectible.”  The IRS must balance the use of its enforcement tools such as an examination as a basis for generating revenue against the need to ensure a fair and just tax system.  The idea that taxpayers with a low potential for collection should get a free pass from collection does not sit well.  Yet, neither does the idea that the IRS spends a significant percentage of its examination resources generating assessments that merely sit on the books for 10 years without any resulting collection.

The IRM provisions do not require that the IRS examiners guarantee the collection function will collect on the assessments they generate, but the IRM does suggest that considering the collectibility of an assessment should factor into the decision to pursue an examination.  TIGTA stated that it planned to “review a sample of Examination cases closed as surveyed due to doubt of collectibility; however, the IRS does not systemically track these cases.”  So, TIGTA had no way to determine if the IRS had declined to audit cases, “survey” them in IRS parlance, in circumstances in which the taxpayers had even a less chance of collection than the ones the IRS chose to audit.

TIGTA interviewed examination employees during this course of its study and these employees “told us that they rarely or never survey a return due to collectibility.”  These employees cited the potential adverse impact on voluntary compliance as a reason for not surveying cases due to a lack of collectibility.  TIGTA cited to the language in the IRM which speaks in absolutes about the ability to collect rather than in degrees.  It seems very logical to conclude that the IRS should not exam returns where the chance of collection is absolutely zero.  I have watched it do that on many occasions in the assessment of individuals following a criminal prosecution.  The 2010 changes allowing assessment based on the restitution order removes the need for the IRS to devote examination resources to those cases in most criminal cases, though I do not know whether it walks away from the assessment of additional taxes in all criminal cases in which collection has a near zero chance.

TIGTA recommends that the IRS change the IRM to provide “clear instruction on documenting collectibility determinations, including examples of when cases should be given consideration for being surveyed….”  The IRS agreed with this recommendation and stated that it will update the IRM.  The IRS response also stated that the broader goal of examination in promoting voluntary compliance must enter into the decision and that collectibility should not drive the decision of who to examine.  The IRS response hits the right tone.  Whether the IRS will make changes that meaningfully change the role of collectibility in the choosing of cases to exam is something to watch as the IRS updates this IRM and implements the suggestions made by TIGTA.

The recommendations section of the report contains a discussion of the need for the examination division to coordinate with the collection division in making the collectibility determination.  The response suggests that the examination division has concerns about that proposal.  Based on the comments received in my earlier post about the collection division’s ability to incorporate collectibility into its own TFRP determinations, I cannot fault the examination division for their concerns.  The issue of how to incorporate collectibility into workload decisions requires a deep policy look by the IRS.  The TIGTA report exposes the issue but cannot resolve the policy issues that underlie the correct approach.  The same policy issues presented here also exist as the cases move forward into litigation and the difference in approaches between the litigators in Chief Counsel’s office and the Department of Justice also cry out for a uniform policy that takes into account the need to have a tax oversight system that promotes uniformly fair laws but does not waste limited resources chasing uncollectible accounts.

Because I represent low income individuals, a high percentage of the cases in which I represent individuals in Tax Court involve assessments the IRS will probably never collect.  I tell my clients that the fight in Tax Court represents a skirmish.  Even if we lose that skirmish, we can win the overall battle by obtaining an offer in compromise.  We do not send our clients away after the Tax Court phase, and post-trial work on those cases is often more important than the pre-trial or trial work because we settle the matter for a very low payment.  Knowing that the case will get resolved for a nominal payment makes me sad at all of the resources that Exam, Counsel, and the Tax Court put into the case so that my client will pay $50 and keep current on their filing obligations for the next five years.  I do not have the answer but it lies in a policy that avoids spending significant resources on uncollectible cases.

 

Procedure Grab Bag – Collection Financial Standards & 7-Eleven

Over the last two months, the IRS has made two administrative changes that we didn’t previously cover that impact the collection of taxes, predominately from low income taxpayers.  One is fairly negative (National Standards for collection potential), and I have mixed feelings about the other (paying taxes while buying a Big Gulp).

Deflation Nation

The Service has issued updated National Standards for taxpayer expenses when determining collection potential.  These amounts are what the Service views as reasonable expenses for food, housekeeping supplies, clothing, and miscellaneous expenses.  A taxpayer can rely on the National Standards without having to put forth any evidence of the actual expenses paid.  The Service also issues amounts by County for taxpayers for expenses relating to housing and utilities.  If a taxpayer seeks to claim expenses in excess of the National Standards (or local for housing), the taxpayer has to substantiate the same and prove the additional expense is necessary.  This can be onerous, especially for people using predominately cash, those who are ESL, and those with temporary housing.

The most recent National Standards, and at least some of the local housing and utilities amounts, have decreased from 2015.  The new 2016 amounts are:

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Expense One Person Two Persons Three Persons Four Persons
Food $307 $583 $668 $815
Housekeeping supplies $30 $60 $60 $71
Apparel & services $80 $148 $193 $227
Personal care products & services $34 $61 $62 $74
Miscellaneous $119 $231 $266 $322
Total $570 $1,083 $1,249 $1,509

 

More than four persons Additional Persons Amount
For each additional person, add to four-person total allowance: $341

Source: https://www.irs.gov/businesses/small-businesses-self-employed/national-standards-food-clothing-and-other-items

While in 2014 (and I think 2015), those amounts were:

Expense One Person Two Persons Three Persons Four Persons
Food $315 $588 $660 $794
Housekeeping supplies $30 $66 $69 $74
Apparel & services $88 $162 $209 $244
Personal care products & services $34 $61 $64 $70
Miscellaneous $116 $215 $251 $300
Total $583 $1,092 $1,249 $1,482

 

More than four persons Additional Persons Amount
For each additional person, add to four-person total allowance: $298

 

For larger families, the amount increased slightly, but for smaller families, the amount decreased, when many taxpayers making these types of offers were already feeling the pinch.  Various local amounts for housing and utilities also decreased, some of which by over $100.   When putting both together, collection potential is increased by well over $100, perhaps approaching $200 per month.  Having worked in the clinic at Villanova and assisting various pro bono clients in my private practice, I know most taxpayers using these standards felt the national amounts were difficult to live on and assumed significantly more discretionary income than they had.  That got squeezed a bit more with these adjustments.

7-Eleven Payment Heaven

The IRS has issued a new cash payment option largely aimed at helping unbanked taxpayers pay their taxes.  The notice can be found here.  The payment option allows taxpayers to use cash to pay their taxes at the over 7,000 domestic 7-Elevens (not sure it works in the roughly billion international 7-Elevens—I had no idea it was so popular overseas).   This is being done with a partnership with PayNearMe and ACI Worldwide’s  Officialpayments.com.  With rumors that the IRS will stop allowing walk in cash tax payments (already only allowed in limited locations) and taxpayers receiving penalties for certain cash payments, any additional payment method for those without bank accounts and credit cards is welcome.  I’ll be honest, the idea of 7-Eleven collecting our taxes is entertaining and seems quintessentially American (even if it is owned by a Japanese company).  It also makes me nervous, as outsourcing tax collection in other areas has not panned out well, and the franchise model strikes me as potentially allowing for less corporate oversight (7-Eleven in Australia is also currently battling a huge human rights issue over its wages).  Also, Slurpees are gross.  But, apparently other countries have been using 7-Elevens to pay some taxes and traffic tickets, so maybe this will work out splendidly.

Ignoring the major Slurpee issue, the IRS program requires the taxpayer to go to IRS.gov and to the payments page (so, no bank account, but easy access to the internet is needed).  There you select the cash option, and walk through the steps.  Once the taxpayer’s info is in the page, the taxpayer will receive an email from Officialpayments.com, which confirms their information.  The IRS then has to verify the information, at which point PayNearMe sends the taxpayer another email, with a link to a payment code and instructions (this is sort of seeming like a pain in the @$*).  The individual can then print the payment code, or send it to his or her smart phone.  The taxpayer then can go the closest 7-Eleven, make the payment, and receive a receipt.  Only $1000 per day can be paid, and there is a $3.99 charge per payment.

I applaud the notion, but the implementation, especially for low income and ESL, seems pretty onerous.  I’m not sure all taxpayers who may need to use this service have easy access to the internet, computers, email addresses, printers, and/or smart phones.  Not to mention, there are quite a few steps, this does take a while, and we are charging them to pay their taxes.

The IRS is also encouraging taxpayers to start the process well ahead of tax time, due to the three step process, and the fact that the funds “usually posts to the taxpayer’s account within two business days.”  The notice does not indicate what the payment date is for the penalties and interest, but the notice would seem to indicate it is the posting date and not the date the taxpayer hands the funds over to 7-Eleven.  I don’t think Section 6151 has a Kwik-E-Mart exception for time of paying tax, and I do not think 7-Eleven qualifies as a government depository under Section 6302, so taxpayers do need to be certain to allow for substantial time to pass between the payment date and the tax return due date.

Why is the IRS Collecting Taxes for Denmark?

The United States has bilateral tax treaties with many countries. Of all the tax treaties the United States has only five have a provision that allows each country to the treaty to collect outstanding liabilities of the other party to the treaty as I discussed in an earlier post.  One of the five countries that has a collection treaty with the United States is Denmark.  The other four are Canada, France, the Netherlands and Sweden.  This post discusses the recent case of Torben Dileng v. Commissioner in which the Danish taxpayer brought suit in the District Court for the Northern District of Georgia seeking an order to stop the IRS from collecting the taxes he owes to the Danish government.  These cases appear only rarely in the United States or in the courts of our treaty partners.  The case deserves attention because it demonstrates how the IRS can and will go about collecting the taxes owed to a treaty partner and it provides a basis for raising again why the United States only has the collection provision in five of its bilateral treaties and does not make an effort to routinely include this provision into tax treaties.

One argument against inserting collection language in treaties is that the United States has done more to collect for its treaty partners than those partners have done to collect for the United States. Even if this is true, it misses the mark that the United States should lead in insuring global collection of taxes just as it took the lead in FATCA.  If the United States ends up spending more resources to collect taxes for Denmark than it causes the Danish tax authorities to expend in collecting taxes for the United States, that also does not mean that the net expenditure did not benefit the United States.  If we eliminate places for persons seeking to hide from paying their taxes, all countries will benefit and perhaps domestic collection will increase.  If by failing to enter into treaties covering the collection side of tax compliance, we make it easy for high income, sophisticated taxpayers to move money and hide from tax collection, we degrade overall compliance.

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Mr. Dileng did business in Denmark before moving to Atlanta and incurred a liability for approximately $2.5 million. While the liability exists, he continues to contest it in Denmark and that fact becomes important in thinking about what the IRS can and should do to assist Denmark with respect to this tax.  Denmark made the appropriate formal request to the United States to initiate collection under the treaty and the IRS informed Mr. Dileng that to fulfill its treaty obligation it intended to levy on his assets.  He did not get the opportunity to have a Collection Due Process hearing to discuss whether other less intrusive ways might exist to collect the tax but Mr. Dileng did not think collection of the tax by levy in the United States worked best for him while he was still fighting about the liability in Denmark.  He asked that the IRS hold off collection until the litigation in Denmark over the liability ran its course.  He stated that collection of the liability by levy “would be financially ruinous” and “destroy his ability to care for his family…”

He brought suit to enjoin the IRS from collecting and the IRS filed a motion to dismiss for lack of jurisdiction. The IRS argued that Congress had not waived sovereign immunity to allow a plaintiff such as Mr. Dileng to bring suit to enjoin it.  Here the treaty required that the Danish revenue claim “be treated like U.S. federal income taxes for purposes of domestic U.S. law.”  Mr. Dileng argued that certain judicially created exceptions to the Declaratory Judgment Act (DJA) and the Anti-Injunction Act (AIA) applied to allow him to raise defenses.  The District Court then stopped and analyzed the application of the DJA and AIA to the circumstances of this case.  First it looked at the treaty where it found that the IRS had to treat the revenue claim certified by a treaty partner as if it were an assessment of taxes in the United States.  Although Mr. Dileng acknowledged that very limited exceptions exist allowing a taxpayer to avoid the application of the anti-injunction act, he felt that one of the exceptions applied to him.  The district court disagreed.  It first looked at the exception created by the Supreme Court in Enochs v. Williams Packing & Nav. Co.  It found that this exception did not apply because Mr. Dileng could not show that the claim totally lacked merit.  “Plaintiff does not and cannot show that the ‘claim of liability [is] without foundation.’ … Plaintiff here does not challenge the underlying validity of the Taxes in the United States, and does not assert in his Complaint, or in his Response, that there are no circumstances under which he can be found liable for the Taxes in Denmark.”

Mr. Dileng next argues that the taxes lack the finality required by the treaty. Article 27 at paragraph 2 of the treaty provides that “a revenue claim is finally determined when the applicant State has the right under its internal law to collect the revenue claim and all administrative and judicial rights of the taxpayer to restrain collection in the applicant State have lapsed or been exhausted.”  Because Mr. Dileng has ongoing litigation in Denmark concerning the taxes, he argues that the finality provision of the treaty does not exist in his circumstances.  The Court found that his claim of lack of finality for purposes of the treaty is not supported by Danish law.  In the Danish case he seeks to have Denmark forebear from collecting the tax.  He did not show that bringing the action in Denmark necessarily means that the taxes may not currently be collected by the Danish tax authorities and, in fact, his plea for forbearance of collection suggests just the opposite.  Denmark certified the taxes are “finally determined” which does not necessarily mean that Mr. Dileng has no avenues for continuing to contest the taxes.  In a similar situation in the United States an assessment of a tax liability could exist and provide the IRS with full rights of collection while the taxpayer retains the right to bring a refund suit at some point in the future and contest the amount of the liability.  The treaty does not require that the taxpayer have no remaining avenue to contest the tax but rather that the country have the full right to collect.

Next, Mr. Dileng contests the collection of the debt in the United States based on due process. He argued that the Danish court where he continues to fight has the equivalent status of the United States Tax Court and that collection should not begin because of the injunction in 6213 against collection during a Tax Court case.  Unfortunately, no authority exists for this argument and it appears that the Danish case is not a preassessment proceeding.  So, he also lost this argument which was the last of his arguments under Williams Packing but he also argued for an injunction under the exception to the AIA created by the Supreme Court in South Carolina v. Regan based on his lack of remedy elsewhere.

The Supreme Court in Regan found a limited exception to the AIA where the state had no other means of challenging the application of the statute. Here, the taxpayer has a forum in Denmark in which to challenge the statute and he seeks in the United States to challenge the collection of the tax rather than the underlying tax.  The narrow Regan exemption does not apply to these circumstances.  Thus, he loses on both of his attempts to find an exception to the AIA.  The opinion does not provide insight into what assets Mr. Dileng has in the United States from which the IRS can collect or what action the IRS intends to take to collect.  The case merely shows that he does not have the power on these facts to stop the IRS from collecting under the treaty based on the AIA or the DJA.  Since so few cases exist shedding any light on the collection by the IRS under the treaty provisions, the case is interesting from that aspect alone.

The obvious answer to the question in the title is that the United States is collecting taxes for Denmark because we have a treaty obligation to do so just as Denmark has a corresponding obligation to collect for us. The broader question is whether this treaty agreement represents a model the United States should seek to replicate on a broader scale or is simply one of five historically anomalous treaty provisions.

A Recent TIGTA Report on Collection Notices and a Recent GAO Report on the Automated Collection System Provide an In-Depth Look at How the IRS Collection Function Operates

Perhaps the citing of one of the taxpayer rights listed in the Taxpayer Bill of Rights (TBOR) should not receive extraordinary attention.  Still, I was impressed when I found that on the first page of its report about new collection notices, TIGTA cited to the taxpayer’s right to be informed as influencing the new collection notices.  Before I get into the details of these two reports I wanted to make special note of the TBOR sighting which suggests it has some importance in the development of administrative processes within the IRS.  The citation to TBOR also helps me as I prepare to speak on taxpayer rights and collection at the upcoming International Conference on Taxpayer Rights.  Les is also a speaker at the conference.

The TIGTA report discusses the taxpayer right immediately after discussing the statutory requirements.  Getting cited in a report prepared by an arm of the Treasury Department does not carry the same importance as a citation by a Court or independent body as the basis for action but it does signal that the rights are having an impact.  I understand that some states and localities have begun adopting taxpayer rights statements following the lead of the IRS.  Success in advocating based on these rights may yet occur.

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While the citation to the first right listed in TBOR, deserves passing mention, the TIGTA report itself demands attention from those doing collection work not only because it describes the new notices in the collection stream but also because of all of the statistics about the notices that it provides.  The IRS carefully monitors the effectiveness of the letters it sends in the collection notice stream.  Even a 1% change in taxpayer behavior based on these letters can have a significant impact on the number of cases in the IRS collection inventory.  Because of the impact of the language of the notices in effectively collecting revenue, the IRS measures the impact of these notices and tests the results of the chosen language.

When you combine the TIGTA report with the GAO report concerning the automated collection system issued shortly thereafter, it is possible to obtain a very detailed picture of the inner workings of the IRS collection process.  In this post we generally focus on statutory rights taxpayers have in dealing with the collection system but the administrative process provides a far more important topic for most taxpayers because the way the IRS administers the collection of taxes, while guided by the statutes, has a much more practical impact.  Understanding how the IRS guides cases through this process can assist in making decisions about what to do when your client has a problem with the collection system.  As I will discuss further below, understanding the significant problems the IRS now faces in administering the system, may also influence advice to clients on next steps.

If you want to take the time to read the reports, and I recommend reading them if you want to understand how the collection process at the IRS works, read the TIGTA report first because it covers the first part of the life of a case in collection.  This report focuses on the notices that the IRS sends to taxpayers.  It is easy to think of these notices by letter number or to not think of these notices at all but the notices generate a lot of money for the IRS.  The wording of the notices, the timing and everything about them requires careful choreography in order to maximize successful revenue impact.  The TIGTA report provides very granular detail concerning each of the notices and how successfully the notice produces payment.  Because the IRS recently went through a notice revision process, you can see in the report the impact of the changes in the language in the notices on taxpayer behavior.  I cannot say that the new improved notices provide the best way to gently guide taxpayers to compliance but knowing that the IRS pays careful attention to this, while considering taxpayer rights, gives me positive feelings about the tax collection process.

The GAO report essentially picks up where the TIGTA report leaves off.  It describes the three phases of IRS collection as notice, telephone (essentially Automated Call Sites or ACS) and in-person (Revenue Officers.)  Page 9 of the report has one of many helpful charts in the report and lays out this three step process.  Of course, not every collection case will go through this process and, as the report details, the IRS ability to handle the telephone phase is decreasing rapidly.  Its ability to handle the in-person phase, which I sometimes call its collection concierge service, has degraded significantly over the past two decades.  This report focuses on the second phase and does not analyze the in-person phase where I believe the loss of resources would equal or exceed the telephone phase.

While the TIGTA report had some positive numbers for the IRS concerning its success with notices, the GAO report starts off with some stark and troubling numbers for the IRS with respect to the telephone segment of its collection process.  “ACS has experienced significant declines in staffing, with full-time equivalents decreasing by 20 percent (from 3,672 to 2,932) from fiscal years 2012 through 2014.  Over the same period, the number of unresolved collection cases at the end of each year increased by 21 percent (from 4.2 million to 5.1 million).”  As staffing and inventory move in opposite directions at a rapid pace, this creates an interesting quandary for those giving advice to taxpayers who owe federal taxes.  The IRS sends fewer levies because sending levies generates phone calls.  It must monitor the number of levies it sends because of its limited ability to answer the phones in response to the levies.

The GAO report details how the IRS prioritizes the cases in collection.  While the report focuses on the perceived failure of the IRS to have adequate detail in its plan for prioritization and selection of cases, it is clear that the IRS does have a detailed process even if it has not linked that process to its mission.  It is also clear as you read the report who is likely to receive attention.  Nothing in the report is overly surprising, except perhaps the rapid rate in the past three years of the decline in the IRS ACS capabilities but, as with the TIGTA report, the amount of detail and the number of charts provides a significant level of granularity concerning this function of the IRS.  Table 3 on page 43 of the report gives the numbers of the dropping enforcement actions taken by ACS between 2012 and 2014:  Notices of Federal Tax Liens Filed down 11.29%; levies issued down 36.6%; letters sent by ACS down 30.9% and outgoing calls down 40.4%.  In addition to the loss of employees in ACS, some sites were shut down for over a year between 2013-2014 to work identity theft cases.

While I am focusing on the gloomy numbers, the GAO provides much detail on many of the sub-parts of the IRS ACS function.  Taken together these two reports can really instruct anyone interested in knowing about the systems at the IRS for collection as opposed to the statutes that apply.  Understanding the systems and the numbers can help you explain to clients what is happening in their case and why.

 

Contrasting the Compromise Standards between the Chief Counsel, IRS and the Department of Justice in Litigated Cases

We have discussed different aspect of offer in compromise (OIC) policy before in the blog (see posts here, here, and here); however, we have not discussed the difference in policy between the IRS and the Department of Justice Tax Division (DOJ Tax) when it comes to settlement of cases. When the IRS litigates in Tax Court to determine a taxpayer’s correct liability, Chief Counsel, IRS serves as its counsel. When the IRS litigates in other contexts, DOJ Tax serves as its counsel (see previous post about this here). Even though both offices have tax litigators seeking to represent the IRS, the offices take different approaches when it comes to their approach to settling a case.

This discussion has some crossover with the discussion on the IRS policy concerning applicability of collection to the assessment of taxes. Does it make sense to devote resources to trying a case when the taxpayer has little or no ability to pay the tax should the government win the case. In many of the cases coming into the Tax Court the IRS has invested almost no resources in proposing the assessment. It has simply sent the taxpayer a computer generated letter and maybe a relatively low graded correspondence examiner has spoken to the taxpayer or reviewed mail sent by the taxpayer. The relatively high graded attorney and the Appeals Officer face the prospect of spending far more time than the examination division did in creating the case all to produce an assessment that will simply sit in the every growing inventory of the understaffed Collection Division.

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Chief Counsel will settle a case based on the merits of the issue(s) presented but will almost never look at the ability of the taxpayer to pay the tax. Even in a situation in which the effort to try the case to determine the liability might require significant resources and the likelihood of ever collecting much, if any, of the liability should assessment occur, Chief Counsel attorneys generally close their eyes to the collection potential of the case because of their office policy.  The manual provision (IRM 35.2.6(1)) giving guidance to Chief Counsel employees provides “It is preferable that all settlements be effectuated by a merits settlement rather than upon the basis of inability to pay. This general guideline is applicable even though there may be a substantial basis for concluding that the petitioner may not be able to pay the agreed deficiency. In this instance, the case should be settled on its merits, and if the petitioner is unable to pay such deficiency, he can later file an offer in compromise based upon doubt as to collectability.” Most Tax Court cases result in a settlement or a trial, during which the IRS assesses the taxpayer; moreover, the taxpayer can file an offer in compromise only after an IRS assessment.

In contrast DOJ Tax attorneys have the ability to settle cases based on the taxpayer’s ability to pay the liability at issue. According to DOJ Settlement Reference Manual, Section V.A.1, “[e]ven though the Government may have a strong case on the merits, absent other considerations, Government lawyers should not expend substantial resources to obtain an uncollectible judgment. Instead, it may be more efficient to negotiate a collectability settlement.”  When the IRS refers a case to DOJ for DOJ to handle, the ability to settle the case also travels to DOJ.  Under  IRC 7122(a), the Attorney General has the authority to settle a refund or other suit at any stage of the proceeding after the suit has been referred to the Department of Justice. “The Attorney General has the inherent power to compromise any litigation in which the Department of Justice represents the United States;”

According to one author, David J. Herzig, writing “Justice for All: Reimagining the Internal Revenue Service,” this broad power “afford[s] the Department of Justice the opportunity to settle a case for reasons of strategy rather than solely on the merits.” The IRS acknowledges that once it has referred a case to DOJ, the referral gives DOJ full authority to settle cases.  IRM 34.8.1.1(7)  discusses the authority of DOJ to consider settlements based on collectability, regardless of whether the case has been classified as “S.O.P.”

As the IRS refers cases to DOJ, it generally classifies them SOP or Standard.   If classified SOP, Settlement Option Procedure, the IRS essentially says to DOJ no need to consult with us if you want to settle the case.  If the IRS classifies the case Standard, the IRS classification essentially requests DOJ consult with the IRS in settling the case.  The consultation, however, is somewhat one-sided in that DOJ can ignore the wishes of the IRS and settle in whatever manner it deems appropriate because it has sole authority to settle.  This does not mean DOJ ignores the IRS because it does not but it does mean that the views of the IRS on the outcome of a case do not bind DOJ in its decision to settle on whatever basis it deems appropriate.

Why does Chief Counsel adopt the policy of ignoring collectability in pursuing litigation at a time of limited resources while DOJ Tax exercises discretion in pursuing cases where it perceives that doing so would not result in the collection of tax should it succeed? In giving up the bankruptcy SAUSA work, Chief Counsel acknowledged that its resources are stretched very thin. The policy the IRS has adopted in TFRP cases to consider collectability in determining whether to assess could equally apply to settlements reached by Chief Counsel attorneys. It has precedent for changing its approach in the policies of its client and in the policies of its counterparts at DOJ. Yet, in the face of severely dwindling resources, Chief Counsel’s office continues to move cases into litigation without taking into consideration the ability of the IRS to collect the assessments it has spent many hours to create.

Perhaps it is time for Chief Counsel’s office to reconsider its policy to litigate cases in which the prospects of collection appear low or non-existent. In a small number of cases, it will wrap up litigation with an offer in compromise. Guest blogger Erin Stearns will discuss that rarely used process in an upcoming post. If Chief Counsel’s office got its client to work with it in identifying clients with little prospect of collection, it could work settlements similar to DOJ and perhaps achieve a greater number of settlements resolving the collection issue at the same time as the assessment. Given the resource issues it faces, it may be time to rethink its approach to tax merits litigation.