Consequences of the (Fake) Notice of Intent to Levy

November 7, 2022 by 5 Comments

At the recent Fall ABA meeting there was a panel discussing Collection Appeals (which Christine was a panelist on). A discussion arose about the purpose of the CP504 “Notice of Intent to Levy,” since it is not a “real” notice of intent to levy for IRC § 6330 purposes. It is, however, a “real” notice of intent to levy for IRC § 6331(d) purposes… but what is the distinction, and when does it matter?

I have historically looked at the CP504 as little more than an IRS scare tactic strongly encouraging voluntary payment. My view has since changed, thanks in part to the ABA meeting. In this post, I’ll talk about the importance of the CP504 and why the language on the notice does such a bad job of explaining what actual legal consequence it carries that it almost shouldn’t carry legal consequence at all.

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This is not the first time Procedurally Taxing or the tax community at large has weighed in on the problems of the CP504. Keith posted about how misleading the notice is back in 2016. The main issue Keith raised was that the CP504 misleads people into thinking that if you don’t respond to the CP504 Notice the IRS can levy on things that it cannot levy on (yet).

In other words, it misleads people.

The IRS heard Keith’s complaint, and admirably took some steps to remedy the issue by changing the language of the CP504 Notice a few years later. Keith posted about this small step forward with a copy of the new CP504 Notice back in 2018.

Flash forward to present day, and a newly formatted CP504 Notice…

I don’t exactly know what decisions were made, but we appear to be back in the bad old days Keith had originally lamented. My clients routinely receive CP504 Notices like the one here. The offending language is exactly what Keith had highlighted before:

Consequences If You Don’t Pay Immediately

We may levy your income and bank accounts, as well as seize your property or rights to property if you fail to comply. Property includes wages and other income, bank accounts, business assets, personal assets (including your car and home), Social Security benefits, Alaska Permanent Fund dividends, or state tax refunds. [Emphasis in original]

Now I am but a humble tax lawyer and professor, but in reading this I can imagine someone concluding that failing to pay the IRS immediately upon receiving the CP504 means that the IRS could levy their income and bank account. Those are the bolded terms, after all. However, because I also know that to be untrue (the IRS cannot levy on my bank account and wages if I don’t respond to the CP504), I have tended to read the notice as being little more than a scare tactic and carrying no real legal consequence. My misunderstanding about the CP504’s consequences are in no small part because the consequences the CP504 focuses on so boldly are incorrect.

Actual Legal Consequences

But the CP504 actually does carry important consequences, such that it is a letter you should actually pay close attention to. The consequences it carries are so simple, it is a shame that the letter doesn’t really highlight them:

First, the CP504 is the notice that allows the IRS to levy on certain property prior to offering a CDP hearing. For my clients that is almost exclusively their state tax refunds. The CP504 mentions this in very small print at the bottom of page 2. The full list of pre-CDP Notice levy property is at IRC § 6330(f). I always knew the IRS could levy on state tax refunds prior to giving a CDP hearing, but admittedly never really considered the CP504’s role in that process.

Second, and generally less importantly, the CP504 notice bumps up the “failure to pay” rate from 0.5% per month up to 1%. See IRC § 6651(d). This is generally less important for my clients because the maximum amount of penalty cannot exceed 25% in the aggregate, and a lot of very late tax years hit that mark quickly. Also, most of my clients are able to settle their tax debts with an Offer in Compromise, such that penalties are irrelevant.

With Legal Consequences Comes… Legal Consequences

So now, despite the CP504 Notices best efforts, we have a clearer idea of what the CP504 Notice actually does. But what happens if the CP504 Notice is defective? Because it serves an actual, legal purpose, defects may carry actual legal consequences.

As Keith noted in his prior post, the IRS used to combine the IRC § 6331(d) notice and IRC § 6330 CDP opportunity into a single letter. Now those two statutorily required notices are “spread” across two letters. This may be a self-inflicted wound by the IRS. For one, an extra letter adds real costs to the IRS: both the 6331(d) and 6330 notices are supposed to be sent certified. Arguably having two (required) letters instead of one essentially doubles the IRS’s chances of screwing up.

Possibly, the IRS could argue that the current IRC § 6330 letter (usually, the LT11) also meets and incorporates the IRC § 6331(d) requirements, such that it current practice is really a belt-and-suspenders approach. In other words, a bad CP504 letter would be “fixed” by the later LT11 letter. I don’t know that this argument has ever been raised. But even if it was, it would certainly not prevail for levies that precede the LT11 (for example, state tax refunds). Accordingly, the issuance of the CP504 Notice remains worth looking into.

For a CP504 Notice to meet the IRC § 6331(d) requirements it must be sent (by registered or certified mail) to the taxpayers last known address no less than 30 days before the levy. I somewhat doubt that any such letter that isn’t sent certified/registered would be considered invalid. (I couldn’t find any freely available cases, but U.S. v. MPM Financial Group, Inc. (2005 WL 1322801, at *4 (E.D. Ky. May 27, 2005) aff’d, 215 F. App’x 476 (6th Cir. 2007) makes that point. The real issues are timing and address concerns.

Beginning with the last known address: this has primarily been an important topic on deficiency notices for some time (see posts here and here, among others). There is always a chance (perhaps a significant chance, given the IRS’s IT infrastructure) that the IRS will send a notice to the wrong last-known address. In such a case if the taxpayer doesn’t otherwise have actual knowledge of the notice, it should invalidate the CP504 Notice from serving its IRC § 6331(d) “notice” function.

What happens after a defective CP504 Notice has been mailed may be interesting. If the IRS levies on your state tax refund you will thereafter get a “Notice of Intent to Levy” under IRC § 6330. In my experience, a lot of time the IRS will send a CP504 Notice well in advance of actually taking any other collection actions, such that they may have had the wrong address in their file for the CP504 Notice, and then have corrected it by the time of the actual state tax levy.

If the state tax refund levy was improper because there was no valid IRC § 6331(d) notice preceding it, arguably you should be returned the state tax refund proceeds. That, at least, is the argument I’d make in the CDP hearing: the IRS plainly did not follow “the requirements of any applicable law or administrative procedure” in taking the refund. Accordingly, you should get it back: a very important potential remedy, given the limitations on refund jurisdiction in Tax Court. This matters enough to many of my clients (Minnesota income tax returns have some lucrative refundable credits) that a detailed review of the CP504 Notice validity is warranted.

My Plea: Make the Letter Useful

Again, the CP504 really only carries two legal consequences: (1) precursor to levy on very specific property (that might not matter at all to people in states without an income tax) and (2) increase the failure to pay penalty rate. If the goal of the notice is to inform people about the legal consequences of being issued a CP504 notice it does a tremendously bad job of it. Instead it reads like a scare tactic.

Perhaps this serves a useful function for the IRS in getting some people to voluntarily pay, but I think it comes at a reputational cost, and scares people into sub-optimal resolutions. A lot of my clients receive state tax refunds each year (particularly state property tax refunds) which they count on. A lot of my clients also are very clearly “can’t pay” candidates for an Offer in Compromise or Currently Not Collectible status.

The IRS’s mission isn’t simply to “get the most money” out of people. If it was, then the CP504 Notice would probably be justified. Rather, the IRS’s purported mission is to “Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities[.]” It is hard to see a misleading letter as “helping them to understand,” and I’d say the CP504 is an example of straying from that mission.

Filed Under: Collection Activity, Collection policy Tagged With:

Prior Opportunity and Other Collection Due Process Information

June 1, 2022 by 1 Comment

At the Court Practice and Procedure committee during recent ABA Tax Section meeting there was a panel on Collection Due Process (CDP.)  The panel put up some statistics on CDP from a few years ago that I will put into this post.  It also discussed a 15 year old case precedential CDP case, Perkins v. Commissioner, 129 T.C. 58 (2007) to highlight the narrow path it presents for obtaining a hearing on the merits of the underlying tax in contrast to most prior opportunity cases.  The panel also discussed the very recent case of Jackson v. Commissioner, T.C. Memo 2022-50 regarding the issue of variance in CDP cases.  In addition to providing the statistics, I will discuss the two cases.

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The first slide depicts the number of CDP cases filed in the past two fiscal years:

The second slide provides data from 2018 regarding the percentage of taxpayers who make CDP requests:

The third and fourth slides provides information about the taxpayers most likely to make CDP requests:

In addition to discussing characteristics of typical CDP petitioners, the panel discussed the narrow path to getting the Tax Court to look at the merits of an assessable penalty provided by the Perkins case.  As we have blogged about in some depth, the Tax Court takes the view that having the opportunity to go to Appeals counts as a prior opportunity for purposes of determining if a taxpayer may raise the merits of the underlying liability in a CDP case.  Here is a link to a post discussing prior opportunity and linking to several other posts on this issue.  The concern arises regularly in assessable penalty cases such as the three cases Lavar Taylor took to the circuit courts and discussed in posts found in the linked post; however, it arises in other contexts as well. 

I find it unsatisfactory that a visit to Appeals qualifies as a prior opportunity.  Taxpayers had that type of opportunity prior to the passage of the CDP legislation.  Why would Congress have passed a statute giving taxpayers an opportunity to contest the merits of their liability that they already had?  The tenor of the statute seemed to be one of a broad exception to the Flora rule but which has now been interpreted to create a very narrow exception to the Flora rule and one which is almost impossibly narrow of the case of Lander v. Commissioner, 154 T.C. No. 7 (2020) is taken to its logical extreme since every taxpayer who does not receive their notice of deficiency has the opportunity to seek audit reconsideration.

A long introduction to reach the narrow exception provided by Perkins for obtaining a merits hearing in a CDP case.  In Perkins the IRS sent a math error notice and Mr. Perkins did not respond within 60 days allowing the math error assessment to stand without requiring the IRS to send a notice of deficiency; however, he appealed the increase in a letter that was forwarded to Appeal. While the case was pending in Appeals, the IRS sent a notice of intent to levy and he requested a CDP hearing in which he sought to contest the merits of the assessment.

Before Mr. Perkins had his CDP hearing, Appeals held a hearing on his original request treating it as a request for abatement and denying the request. In his CDP case Appeals declined to hear his merits request again stating he had a prior opportunity to contest it.  The Tax Court held that because his first request for an Appeals hearing was still pending at the time of his CDP request he had not had a prior opportunity.  The panelist at the ABA took the position that the same situation that faced Mr. Perkins could occur in other setting, such as assessable penalties, if the appeal of the merits of the assessable penalty was still pending at the time the taxpayer received the CDP notice.  Given the delays at Appeals caused by the pandemic, the chance that Appeals might take a long time to resolve an administrative appeal of an assessed liability may exist now to a greater extent than might ordinarily be true.

I don’t know how often collection of the tax gets out in front of an administrative appeal on the merits of an assessed liability.  Keeping Perkins in mind for those situation is important but may provide a benefit only in rare situations.

In the Jackson case the Court granted a summary judgment motion filed by the IRS.  In the Jackson case the taxpayers did not remit full payment with the return and the unpaid balance was high enough that the IRS filed a notice of federal tax lien (NFTL.)  The Jacksons did not file a CDP request in response to the NFTL.  They sought an installment agreement which the IRS rejected after which it sent a notice of intent to levy.  They did request a hearing in response to this CDP notice.  Petitioners sought an installment agreement in the CDP hearing; however, the Settlement Officer informed them that because they had failed to make necessary estimated tax payments their lack of compliance rendered them ineligible for this relief.  Appeals issued a notice of determination sustaining the proposed levy.

In Tax Court petitioners continued to seek an installment agreement but also abatement of interest and penalties.  The Court viewed this additional request as a variance from the issue raised in their CDP request.  It pointed to its prior decisions requiring taxpayers to raise issues with Appeals if they wanted to raise them with the Tax Court:

This Court considers a taxpayer’s challenge to an underlying liability in a collection action case only if he or she properly raised that challenge at the administrative hearing. Giamelli v. Commissioner, 129 T.C. 107, 115 (2007). An issue is not properly raised at the administrative hearing if the taxpayer fails to request consideration of that issue or if the taxpayer requests consideration but fails to present any evidence after receiving a reasonable opportunity to do so. Id. at 115-16; Gentile v. Commissioner, T.C. Memo. 2013-175, at *6-7, aff’d, 592 F. App’x 824 (11th Cir. 2014).

The Petition in this case appears to assign error to respondent’s assessments of section 6651(a)(2) additions to tax and statutory interest for the years in issue. However, respondent asserts that petitioners never challenged their underlying liabilities at the CDP hearing, and we agree. The record of the CDP hearing includes no evidence that petitioners challenged their liability for the additions to tax or sought an abatement of interest. Neither petitioners’ Form 12153 nor the attached cover letter references additions to tax or interest. Furthermore, SO Melcher’s case activity record indicates that Mr. Bolton specifically disclaimed a challenge to the assessments in issue during their telephone conference. According to SO Melcher’s notes, the only issue Mr. Bolton raised during their telephone conference was the rejected installment agreement. Petitioners have not set forth any evidence suggesting otherwise.

The Jackson case does not raise new issues. It merely serves as a reminder to raise all issues when requested a CDP hearing.

Filed Under: Collection Activity, Collection Due Process, Collection policy

A Beneficial Effect of Inflation

April 28, 2022 by 1 Comment

The IRS increased the Collection Financial Standards on April 25, 2022. The increases reflect that we have entered a period of inflation, as the amounts have not increased by this much in a very long time.

The percentage increases between 2021 and 2022 are significantly higher than they were between 2020 and 2021 for all categories, but the biggest percentage increases were in the “Out of Pocket Health Care” and “Public Transportation” categories. 

These standards can be used in IRS collection-related matters, such requesting currently non-collectable status or an offer in compromise. Important related note: The offer in compromise booklet was also updated this month. The IRS website states that the new forms must be used if you apply for an OIC on April 25, 2022 or later.

Some of the standards can be used with no questions asked, while others serve as a ceiling (i.e. the amount that can be used is the “lesser of” the standard or what the taxpayer actually spends). For certain (and arguably, all) categories, amounts in excess of the standards are allowed if the taxpayer provides a good reason and proof.

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All of the current standard amounts are available here: IRS Collection Financial Standards.

Here are is a sampling of the changes (based on a household of one):

“No questions asked” amounts:

  • Food, Clothing, Other Items: New standard is $785, which is a 9% increase from the 2021 amount of $723. Compared to a 1% increase between the 2020 amount of $715 and 2021.
  • Public Transportation: New standard is $242, which is a 12% increase from the 2021 amount of $217. Compared to a 3% decrease between the 2020 amount of $224 and 2021.

This decrease corresponds with a more substantial increase in vehicle operating costs during the same period, and likely relates to the decreased use of public transportation during the early days of the pandemic.

“No questions asked” or “higher allowed with proof” amounts:

  • Out of Pocket Health Care under 65: New standard is $75, which is a 34% increase from the 2021 amount of $56. Compared to a 0% increase between 2020 and 2021, and a 2% increase between the 2019 amount of $55 and 2021.
  • Out of pocket health care 65 and older: New standard is $153, which is a 22% increase from the 2021 amount of $125. Compared to a 0% increase between 2020 and 2021, and a 10% increase between the 2019 amount of $114 and 2021.

“Ceiling standard” amounts (though, worth arguing for more if circumstances warrant it):

  • Vehicle Ownership Costs: New standard is $588, which is a 10% increase from the 2021 amount of $533. Compared to a 2% increase between the 2020 amount of $521 and 2021.

Local Standards such as “Vehicle Operating Costs” and “Housing and Utilities” also saw increases, although the percentage increases varied based on locality. For example:

  • Housing and Utilities (for the top three largest counties):
    • Los Angeles County (California): New standard is $2,544, which is a 7% increase from the 2021 amount of $2,367. Compared to a 1% increase between the 2020 amount of $2,335 and 2021.
    • Cook County (Illinois): New standard is $2,036, which is an 8% increase from the 2021 amount of $1,882. Compared to a 1% increase between the 2020 amount of $1,858 and 2021.
    • Harris County (Texas): New standard is $1,774, which is a 9% increase from the 2021 amount of $1,633. Compared to a 1% increase between the 2020 amount of $1,610 and 2021.

The standards are derived from various sources, such as the Bureau of Labor Statistics Consumer Expenditure Survey, Medical Expenditure Panel Survey, U.S. Census Bureau, and American Community Survey. There are at least two oddities that carry over from the previous numbers, the amount for housekeeping supplies and personal care products are less for a household of three than they are for a household of two.

Finally, the federal poverty limit was also increased earlier this year: 250% of FPL for a household of one is now $33,975, which is a 5% increase from the 2021 amount of $32,200. Compared with a 1% increase between the 2020 amount of $31,900 and 2021.

Filed Under: ACS, Collection policy, Economic Hardship, Offer in Compromise

Notes from Presentation on Collection

December 13, 2021 by Leave a Comment

Last week I ventured west to Las Vegas to attend the 35th Civil and Criminal Penalties Conference. Although the conference has been around for a long time and focuses on the type of work I do, at least on the civil side, I had not previously attended. For someone doing tax controversy work, this is the conference to attend. Despite the virus which kept it from meeting in Las Vegas last year, it returned to an in person format this year requiring proof of vaccination and masks.

One of the panels gave the Deputy Commissioner for SBSE (Collection), Darren Guillot, the opportunity to speak for about an hour to discuss the things happening in Collection. I was furiously taking notes but I am not trained as a note taker and apologize to Darren and to you if I missed the finer points of some of the discussion. The notes follow the discussion which covered numerous topics.

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In 2019 there were approximately 9.5 million non-filers – meaning individuals who failed to file a federal income tax return despite having a filing obligation. While it is a little hard to be precise, the information available to the IRS for that year suggests this many individuals (I think Darren was only talking about individual non-filers at this point) had enough income to have a filing requirement. Certainly, a decent number of these non-filers probably are due a refund but it was assumed the majority would owe.

Collection is looking to Artificial Intelligence for help in responding to taxpayers. Starting in the summer of 2022 an authenticated voice bot will answer questions and let taxpayers set up an installment agreement. Going live now is a chat bot which will allow taxpayers to get answers and to make a one-time payment. Darren called this the unauthenticated version, but it can still be helpful. There will be essentially no wait time to talk to the chat bot. He is hopeful that the nearly 3 million people who qualify for a streamlined installment agreement each year will find this service helpful and that having people use it will take some of the pressure off of the Automated Call Sites (ACS).

He described something called the Case Creation Non-filer Identification Program which is a system for identifying non-filers and specifically high dollar non-filers. Individuals identified through this program will receive a CP 59 letter (CP stands for Computer Paragraph) alerting them of the need to file. Darren said that in the tests taxpayers have responded favorably to this letter.

He said that ACS is now working high dollar cases up to $1 million. Collection is identifying the types of cases where even though the amount of income earned by the individual is high, the likely collection action is the type that ACS supports. In the past the cut off for ACS handling a case was much lower but the cut off doesn’t reflect the type of collection action necessary to bring a taxpayer into compliance. Though he did not frame it in this manner, I expect that a high dollar delinquent account in which the taxpayer is a wage earner or someone who otherwise has assets that would be easy to levy will end up in this program. In 2019, 843,000 of the 9.5 million non-filers were considered high income. For this purpose, the taxpayer was considered high dollar if more than $100,000 in income was reported to the IRS.

Revenue Officers (ROs) are the front-line collection employees in the field and generally maintain an inventory of about 50 to 70 cases. Now, there are less than 2,000 ROs working for the IRS. This is the lowest number of ROs since 1970. Darren said they had dwindled in size from about 4,000 in 2010. He said there is enough work for several thousand more ROs and collection representatives (the individuals who work in ACS.) The IRS is hiring now, and if legislation passes with funds for the IRS it will be hiring a large number of new ROs and collection representatives.

Finding new employees to hire is an issue. The IRS found high interest by well qualified individuals in collection representative positions in Puerto Rico. It has hired 400 people and is about to open its largest ACS site which will be located in Puerto Rico. It is in the process of hiring another 400 for a second site in Puerto Rico which will open by the end of the summer of 2022.

Darren said the IRS has gotten better at identifying individuals who owe money. In 2019 it was collecting about $430 per return. In 2021 it has collected an average of $686 per return. It has shifted ROs from working on delinquent returns to balance due returns.

Because the IRS has lost so many ROs its presence has diminished. Many smaller cities that previously had an RO presence no longer have one. To reach communities it might not otherwise easily reach given the current location of its staff, Collection is sending ROs out in “sweeps.” It will send 12-13 ROs into a community for a week to knock on doors and confront delinquent taxpayers who otherwise might not see an IRS field presence. The purpose is not to create criminal cases but to drive filing and payment. Collection did sweeps virtually during the pandemic. Darren said that these sweeps have been very effective, and he expects to continue them not only in the US but also overseas with an upcoming sweep in Australia. It is also going to conduct a sweep of high dollar return preparers who have not filed their own return. Collection’s name for the sweeps is Revenue Officer Collection Sweeps or ROCS.

Darren described another operation called Surround Sound run by the office of fraud enforcement seeking high dollar cases and the prospect of criminal referrals. Related to this discussion, he said that the IRS is getting much better at finding taxpayers who own digital currency and pursuing those individuals who have not filed and paid. Later in the conference there was a standalone panel on digital currency that left me thinking that IRS was beginning to get on top of this issue which could cause a number of people who thought they were getting around tax issues to find out otherwise.

Darren closed his remarks with a plea to practitioners to assist taxpayers in understanding the importance of timely filing even if they cannot pay at the time of filing.

Filed Under: Collection policy

My IRS Wishlist for 2021 Part 2 – the Economic Hardship Indicator

February 1, 2021 by 2 Comments

In recent weeks, the American Bar Association Section of Taxation wrote the IRS, recommending the IRS not exercise its refund offset authority under IRC § 6402 on 2020 individual income tax refunds with respect to three groups:  taxpayers claiming the Earned Income Tax Credit; taxpayers with income below 250% federal poverty level, and taxpayers who have pending offers in compromise.  Last week, the National Taxpayer Advocate released a blog advocating a similar approach.  Because both of these proposals seek to avoid creating economic hardship for taxpayers, I thought it would be a good idea to revisit a proposal I made years ago for the IRS to proactively identify taxpayers who are likely at risk of economic hardship and shield them from potentially devastating collection action.  This in turn has led to my next two wishes on my “IRS wish list”: 

  • That the IRS implement an “economic hardship indicator” that identifies taxpayer accounts with balances due where the taxpayer is at risk of economic hardship as defined by IRC § 6343(a)(1)(D), and use that indicator to trigger further inquiry into the taxpayer’s financial status before issuing levies or placing them into streamlined or other installment agreements; and
  • That the IRS utilize the algorithm underlying the economic hardship indicator (or other proxy such as percentage of federal poverty level) to identify taxpayer refunds where the offset of such refund for past tax liabilities would create economic hardship and proactively not offset those refunds.
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Proactively Using Data to Protect Taxpayer Rights

One of the things that has bothered me over the years is the IRS’s reluctance to use data to minimize taxpayer burden and protect taxpayer rights, despite its eagerness to use data to identify and address areas of noncompliance.  I first confronted this tendency in the first month of my tenure as the National Taxpayer Advocate, when the IRS was ready to implement the provisions of IRC § 6331(h) by offsetting 15% of the monthly social security benefit of any beneficiary who had a tax debt.  Despite years of working on the implementation strategy, the IRS apparently had not completed an analysis of the economic condition of Social Security beneficiaries – including the elderly and disabled – and thus had no plans to filter out taxpayers whose income was insufficient to pay their basic living expenses.  In a memo to Commissioner Rossotti in April, 2001, I outlined my concerns, and the Commissioner put a moratorium on the Federal Payment Levy Program (FPLP) with respect to social security benefits until those concerns could be addressed.  That led to the development of the Low Income Filter, a rudimentary tool which GAO criticized as both over- and under- inclusive.  That is, it allowed levies against many taxpayers who could not afford to pay and it excluded many taxpayers who had the ability to pay.  Based on this criticism, the IRS ceased using the filter.

This experience taught me, very early on, the importance of well-designed applied research studies for driving appropriate tax administration approaches.  Over the years, the research studies published in the National Taxpayer Advocate’s Annual Reports to Congress prompted many changes in IRS policy, simply because the data showed the way.  For example, with respect to the flawed Criminal Investigation Questionable Refund Program, TAS’s 2005 research study stopped it in its tracks and brought about major changes, including moving the program from CI and into W&I.  We revisited the FPLP Low Income Filter in the 2008 NTA Annual Report to Congress (vol. 2, beginning at page 48), showing that FPLP Social Security levies were being applied to taxpayers who could not pay their basic living expenses and therefore the levies must be released under IRC § 6343(a)(1)(D).  As a result of our study, the IRS asked TAS to identify a percentage of Federal Poverty Level (FPL) that could be used as a proxy for the algorithm we developed to identify taxpayers experiencing economic hardship as a result of the levy.  The IRS ultimately agreed to use 250% FPL as a proxy for economic hardship and to exclude taxpayers from the FPLP population.  This measure is known as the “Low Income Filter” or LIF.

The issue of using data to proactively identify taxpayers who are experiencing economic hardship has popped up time and time again – in the context of Private Debt Collection, streamlined installment agreements (IAs), and now, in the age of the coronavirus pandemic, refund offsets.  So it is helpful to review the proposal for an Economic Hardship Indicator and explore the research underlying it. 

The Economic Hardship Indicator

Section § 7122(d)(2)(A) requires the IRS to “develop and publish schedules of national and local allowances designed to provide that taxpayers entering into a compromise have an adequate means to provide for basic living expenses.”    The statute also requires the IRS to not use these schedules of allowances where “such use would result in the taxpayer not having adequate means to provide for basic living expenses.”  IRC § 7122(d)(2)(B). In these cases, the IRS should review the taxpayer’s circumstances on a case-by-case basis.  Treasury regulation 301.7122-1(c)(2)(i) further clarifies what the IRS must do:

A determination of doubt as to collectibility will include a determination of ability to pay. In determining ability to pay, the Secretary will permit taxpayers to retain sufficient funds to pay basic living expenses. The determination of the amount of such basic living expenses will be founded upon an evaluation of the individual facts and circumstances presented by the taxpayer’s case. To guide this determination, guidelines published by the Secretary on national and local living expense standards will be taken into account. [Emphasis added.]

The approach outlined in IRC § 7122(d)(2) and the related regulations gives effect to the taxpayer’s right to a fair and just tax system, which requires the IRS to recognize the taxpayer’s facts and circumstances in determining the ability to pay, and the right to privacy, which requires the IRS to take enforcement actions “no more intrusive than necessary.”  The Commissioner is required to ensure his employees adhere to these rights.  IRC § 7803(a)(3).

The IRS also applies these allowances in calculating the monthly payment for “non-streamlined” installment agreements, for currently not collectible status, and for determining economic hardship for purposes of releasing levies.  The Allowable Living Expenses, or ALEs, are based on data from the Bureau of Labor Statistics which reflect the actual spending based on family composition and income.  I have written elsewhere about the shortcomings of using BLS data for this purpose, and TAS research has clearly documented the harmful impact of the IRS’s application of ALEs here and here.  But for purposes of the Economic Hardship Indicator, it makes sense to accept the IRS’s ALE figures because they are what the IRS relies on and are very conservative, which should make it easier for the IRS to agree with this approach.  That is, the Economic Hardship Indicator algorithm adopts the very allowances and procedures the IRS lays out in its Internal Revenue Manual instructions to staff for determining ability to pay. 

TAS’s Economic Hardship algorithm essentially used the greater of total positive income from the taxpayer’s most recent tax return (or from a two-year old return if the most recent was not filed), or the total Information Return income reported for the most recent year.  In determining allowable expenses, the algorithm used family composition reported on the most recent tax return, and if no return was on file, it defaulted to a single person household.  The algorithm also took into consideration whether the taxpayer had assets.  The algorithm allowed ownership and operating expenses for one vehicle if a single or head of household return, and two vehicles for married-filing-jointly.  Finally, with respect to home expenses the algorithm used the local allowances based on the zip code shown on the return or income source used as a basis for the income calculation.

To the Injury of Many Taxpayers, the IRS No Longer Conducts Financial Analysis for Most Installment Agreements

With the IRS’s recent expansion of streamlined Installment Agreements (IAs) to seven year terms and liabilities over $25,000, it is clear the IRS wants to drive taxpayers into formulaic IAs rather than engage with them to learn their specific financial circumstances.  While streamlined IAs can be less burdensome for many taxpayers, and certainly minimize the use of IRS staff time, they also can extract payments from taxpayers who do not have the ability to pay.  The Economic Hardship Indicator maximizes the benefits of the streamlined IA while ensuring the IRS takes into consideration the taxpayer’s specific facts and circumstances where warranted by risk of economic hardship.

Over the years, TAS research has demonstrated that automated levies and streamlined installment agreements can harm taxpayers.   In addition to work with the FPLP Low Income Filter, the TAS research studies cited earlier found:

In Fiscal Year (FY) 2018,

  • streamlined IAs constituted 72% of all installment agreements;
  • 40% of those streamlined installment agreements were entered into by taxpayers whose income was below ALEs; and
  • 40% of streamlined IAs entered into by Private Collection Agencies were with taxpayers whose income was below ALEs; and
  • Streamlined IAs had high default rates – between 37% and 39%.

In the 2018 Annual Report to Congress, we proposed the IRS apply the algorithm TAS built and adopt the Economic Hardship Indicator (EHI) as a means to identify taxpayers who might experience economic hardship if the IRS levied upon their payroll or accounts, or placed them in a streamlined IA.  I clearly stated that the EHI was not a determination of economic hardship or currently not collectible status.  Rather, it could be used to program a pop-up screen for IRS phone assistors and collection employees to trigger a few additional questions about the taxpayer’s financial status before placing them in a streamlined IA or issuing a levy.  The EHI algorithm could trigger a similar pop-up where a taxpayer is applying for an online IA, prompting the taxpayer to provide a bit more financial information.  Moreover, the EHI could be a powerful tool applied during filing season to avoid refund offsets.  It would also improve the IRS’s case scoring and selection criteria, so it doesn’t waste resources pursuing uncollectible debts.  Thus, the EHI would serve as a trigger for when the IRS should conduct a case-by-case analysis of the taxpayer’s ability to pay basic living expenses, as outlined in 7122(d)(2)(A), the regulations thereunder, and the Taxpayer Bill of Rights.

Economic Hardship Algorithm and the Federal Poverty Level

As noted above, when TAS first tested its economic hardship algorithm in 2008 for Federal Payment Levies on Social Security recipients, the IRS resisted developing an algorithm, and instead proposed using a percentage of federal poverty level for purposes of the Low Income Filter.  Although I believe the correct approach is for the IRS to build an algorithm that adheres to the procedures used by IRS employees, 250 percent of federal poverty level is an effective proxy for economic hardship.  A chart from one of my last blogs as NTA makes this point:

Comparison of Ability to Pay by Indicated Percent of Federal Poverty Level (Computed on Adjusted Gross Income) to Ability to Pay as Determined by an Analysis of Total Positive Income to ALE

* Single = 1 vehicle allowance; married filing jointly = 2 vehicle allowances

As shown above, using 250% federal poverty level (FPL) as a proxy for the economic hardship algorithm excludes 85% of the taxpayers the algorithm (based on IRS procedures) finds cannot pay a tax debt.  And although 250% FPL also has the highest percentage – 3% — of taxpayers who the algorithm finds can afford to pay the debt, that is a small error rate for the significant taxpayer protection of avoiding profoundly damaging collection action.  And remember, all we are doing with the Economic Hardship Indicator is requiring the IRS to get more information from the taxpayer before it undertakes collection action that is very likely to result in the taxpayer being unable to pay basic living expenses.  (The rationale for using the EHI to bypass refund offsets is slightly different – unlike other collection actions which can be unwound (levy releases) or modified (IAs), the refund offset takes place within a very short window of processing time and cannot be reversed.  Thus, if there is a risk of economic hardship, as indicated by the EHI, the IRS should refrain from offset.)

It is baffling to me why, in the face of all this data (including yet another TAS research study from the 2020 Annual Report to Congress), the IRS refuses to adopt the EHI.  The IRS complains of not having sufficient resources to do collection work.  Well, failure to use the EHI not only harms taxpayers but also results in massive amounts of unnecessary work for those limited IRS collection resources, in the form of defaulted IAs, released levies under IRC § 6343(a)(1)(D) and return of levy proceeds, refund offset bypasses, and unproductive collection work, to name a few.  The time is long past for the IRS to “put taxpayers first” by adopting the EHI and proactively act to avoid harming taxpayers.  If it won’t do this in the midst of a pandemic, I really don’t know what it will take, other than legislative action.  And in fact, per IRC §§ 6343 and 7122, I would argue Congress has already legislated.

Filed Under: Collection policy, Offsets

Revenue Officers Continue to Stay Home

October 30, 2020 by 2 Comments

We have all grown accustomed to staying home in 2020.  Recent IRS guidance to Revenue Officers, SBSE-05-1020-0084, tells them essentially to stay the course and avoid going into the field unless absolutely necessary.  There is nothing surprising or alarming about the advice, but it does continue the new norm which has consequences, some good and some bad, for those dealing with a Revenue Officer.

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Revenue Officers (ROs) generally spend their time going into the “field.”  Here, the field means getting out of their office and into the community where delinquent taxpayers live or operate businesses.  The hallmark of a revenue officer is showing up and providing a physical presence to let the taxpayer know that the IRS has not forgotten about them and the unpaid taxes. 

Of course, no one wants to send ROs out into the field if the field is unsafe.  Essentially, ROs were told to sit tight when the pandemic hit.  The new guidance extends this situation until January 31, 20201.  I expect the IRS will extend it further at that point unless things get better quicker than it now appears.

Case work done from home

What does this mean for taxpayers?  It means that ROs work from home.  They have the capability to work remotely, but remote work will generally mean sitting in their home office making calls and dealing with correspondence.  My clinic does not often have cases that involve ROs but we have one now and have found that the RO does not even go into his office.  We know that because some of the case file is in his office, and he has not retrieved it.  Here is the specific guidance to ROs regarding making an in person visit:

Face-to-face public contact/field activities will only occur in exceptional cases, as described below. They will not be routine or regularly occurring activities and will be voluntary on the part of the employee. Revenue Officers (ROs) may conduct face-to-face contacts and other field activities with the taxpayer, the taxpayer’s authorized representative or other members of the public on a case-by-case basis and only when authorized. Face-to-face contacts and field activities require Territory Manager approval and are subject to the guidelines in the Deputy Commissioner memo dated July 6, 2020.

Face-to-face field contact should only be authorized where:

(1) there are no effective alternatives to face-to-face contact, and the failure to act poses a risk of permanent loss to the government, such as the expiration of a statute, assets being placed permanently beyond government reach, or continued pyramiding of employment tax liabilities; or

(2) the taxpayer or representative has requested face-to-face contact and the RO and manager agree that face-to-face contact would advance the progress of the case.

Note: Document all decisions to make face-to-face contact, public/field activities and discussions with management in the ICS history.

In all instances of public contact, employees are expected to wear masks or other face coverings, practice social distancing, and adhere to CDC guidelines (handwashing, etc.) to guard against possible exposure to or spread of COVID-19. Where possible, consider conducting the meeting with the taxpayer in an IRS facility (such as Taxpayer Assistance Centers) equipped with plexiglass barriers.

Offers in Compromise

This applies to the offer in compromise cases to which they are sometimes assigned to ROs to do assessments of property and other tasks which require field visits.  While the guidance applies field calls prior to acceptance of an OIC, it does not say if this means OICs will sit until the RO can make the visit or if OICs will move forward without the personal visit.

On October 23rd I participated in an ABA program on a panel with Tom Rath who is the Assistant Division Counsel, SBSE for General Litigation (Collection).  Tom indicated on the panel that the IRS will treat the date of receipt of an OIC as the date that triggers the running of the 24 month period for offer acceptance where the IRS fails to act.  For some taxpayers who mailed their offers in April 2020, six or more of the 24 months will pass before the IRS even opens the mail to know it has an offer.  Even with the loss of this six-month period, the IRS will ordinarily make an offer determination well before the 24-month period.  Still, the delay in getting to an offer because of the pandemic will drive certain cases closer to the deemed acceptance date and makes that period one that deserves more attention coming out of the pandemic.  

Filing Notice of Federal Tax Lien and other collection notices

The notice also states that on October 1, 2020 ROs should resume normal procedures for deciding whether to file the notice of federal tax lien (NFTL).  Taxpayers with outstanding liabilities have enjoyed a reprieve from the filing of NFTLs for the past several months but should expect filings to start again soon.

The IRS has held off of other collection notices pending the clearance of the mail backlog so that it could determine if a taxpayer had made payment.  As it comes to the end of the backlog of mail, expect the IRS to begin sending out collection notices again and to resume collection from the Automated Call Sites.

Filed Under: Collection policy

Some Reflections on the New IRS Collection Hiring

December 19, 2019 by 1 Comment

By Nina E. Olson

Nina Olson is the Executive Director of the Center for Taxpayer Rights, a 501(1)(c)(3) organization dedicated to advancing taxpayer rights in the US and internationally.  She served as the National Taxpayer Advocate from March 2001 through July 2019. We are pleased to welcome her as a contributor to Procedurally Taxing. Keith, Les, Christine and Stephen

Over the past four and half months since my retirement as National Taxpayer Advocate, I have been a bit busy.  I founded a nonprofit, the Center for Taxpayer Rights, which is dedicated to advancing taxpayer rights in the United States and throughout the world.  I’ve visited with the Independent Greek Revenue Authority and learned about their new Dispute Resolution Function; I’ve attended a conference on taxation and Sustainable Development Goals in Pretoria, South Africa, and finalized the agenda for the 5th International Conference on Taxpayer Rights, to be held in Pretoria on September 30 and October 1 of 2020.  I’ve participated in workshop in Sweden with 10 or so anthropologist whose work concentrates on taxation.  I went to Baku, Azerbaijan, where I am assisting the tax agency in establishing its Taxpayer Ombudsman office.  And finally, I’ve just come back from a visit to Vienna, Austria, where I attended a retreat with Erich Kirchler of the University of Vienna and his PhD students in the Department of Applied Psychology.  I’ve felt like a sponge, absorbing all sorts of information and using it to reflect on my past 18 years as National Taxpayer Advocate, along with my earlier 26 years in practice.

In the midst of all this travel, I attended several US-based conferences, and also read press reports about speeches and remarks by IRS leaders.  Last week I participated in a panel about developments in IRS Collection activities at the American Bar Association’s National Institute on Criminal Tax Fraud/Tax Controversy.  There is clearly a lot going on, with increased hiring of Revenue Officers (ROs), and the IRS utilizing teams of ROs to go out to geographic areas where data indicate there are clusters of problematic collection cases – aged accounts with large dollar amounts of trust fund payroll taxes owed, attributable to many quarters.  On the panel, the Deputy Commissioner of SBSE referred to these taxpayers as “stealing” from …. not sure from whom, the government? The IRS? Other taxpayers? All of the above?  This refrain of stealing was repeated several times.

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Now, I fully support the hiring and deployment of additional ROs.  In fact, throughout my career as a tax practitioner and as the National Taxpayer Advocate, I have believed that an experienced RO, who has witnessed myriad forms of human behavior and is really curious about what makes taxpayers do what they do, can be incredibly successful in resolving taxpayer arrears and bringing noncompliant taxpayers into compliance.  I’ve directed research studies that show, empirically, that ROs are more successful in the field collecting employment taxes than the Automated Collection Function (ACS), despite the fact that the IRS continues to funnel employment tax accounts through the ineffective ACS before assigning these cases out to ROs, so by the time the RO gets a case, it is already very old and very large and very intractable.

The IRS Collection Field Function used to talk about “Cause, Cure, Compliance” – that is, to successfully address an account in arrears, you have to first identify the cause of the noncompliance – did the taxpayer have some event in her life that caused her to get behind, whether it was a recession, a natural disaster, a physical illness, embezzlement by an employee, or simply trying to keep a struggling, unsuccessful business afloat? Or, was the taxpayer someone who, in the words of the IRS official, was intent on stealing from the public fisc?  I maintain you will know those folks when you see them; it is not hard to identify those folks; what is difficult and challenging is remembering that everyone else is not like them – they have other reasons for finding themselves in an arrears situation, even with large arrears.

Once you’ve identified the cause, you have to apply this causal analysis to come up with an appropriate cure of the noncompliance – an installment agreement, an offer in compromise, placing the account in currently not collectible (CNC) status, or moving to more enforcement-oriented approaches such as liens, levies, seizures, reducing liens to judgment or even seeking an injunction.   

Finally, the “cause/cure/compliance” approach requires you to consider how all the “cure” actions would affect future compliance, because, really, the whole goal of tax administration is to promote voluntary compliance, first, because it is the right thing to do, and second, because it eliminates future problems and instills a habit of compliance, thereby saving the taxpayer angst and the government resources.

These three components of a rational and humanistic collection strategy are deeply interconnected.  If you do not correctly identify the cause of the noncompliance, you risk applying the wrong cure.  Sure, you may get revenue, but you will make an enemy of the taxpayer, and you will certainly not achieve future compliance going forward.  You will just get some dollars, period.  If “revenue collection” is the sole measure of your success, well, you succeeded.  But tax administrations, and tax research, today, recognize that revenue collection is a short term measure of performance.  It must be balanced with a measure of long term voluntary compliance.  Did the taxpayer change his or her behavior and adopt a norm of voluntary compliance going forward, or must the tax administration continue to address the taxpayer’s repeated noncompliance in short-term and resource-intensive approaches?

I contend the IRS’s thinking about tax administration continues to be mired in short term thinking because it is inherently incurious about human behavior – why people do the things they do.  So its approaches to curing noncompliance are often overreaches – applying collection tools that are coercive where a much lighter touch would bring about the desired compliance.

Why should an agency care about a mismatch between cause and cure?  Simply put, there is strong evidence that respect for the tax agency is strongly linked to taxpayers’ perception that the government is using its awesome collection powers legitimately and not coercively; this perception in turn builds trust in the agency and creates an environment in which people who are in noncompliance with the tax laws are more comfortable with coming forward and working with the agency because it has the reputation for using power legitimately.  And this approach reassures compliant taxpayers that the agency will in fact address noncompliance in others, but through legitimate, not abusive, uses of its power.

So let’s bring this full circle.  How does one apply this approach to the taxpayers who have multiple periods of employment taxes in arrears, over time amounting to large dollar balances with the accruals of penalties and interest?  Well, first we look at the cause of the debt accrual.  Was this taxpayer playing cash roulette by using the payroll tax trust funds to keep a failing business afloat?  If so, is this business alive today or has it long since collapsed?  If the business is alive today, is it in compliance with its current payroll tax obligations?  If the business collapsed, has the taxpayer created another business that is incurring tax debts, or is the taxpayer now a wage-earner (or retired) and therefore not a compliance risk at all.  Did the taxpayer have a catastrophic event in his life – a heart attack, a divorce, a natural disaster – that caused the noncompliance and then the taxpayer just continued on under the radar, afraid to resurface because it might trigger aggressive collection actions.  Or, is the taxpayer one of those individuals at the far end of the compliance spectrum, who views compliance as a “Catch me if you can” game?  Finally, where was the IRS in all this?  Did it shelve the taxpayer’s case, or stick it in the queue, doing nothing with it for years, not even sending out monthly bills like every other creditor in the world does? As a taxpayer practitioner, and as the National Taxpayer Advocate, it was important to me to understand the underlying causes – the typology of noncompliance, if you will, that Les Book has written so eloquently about  here.  Only then could I fashion a strategy for (1) addressing the immediate problem before us and (2) bringing that taxpayer (if possible) into future voluntary compliance.

On my panel last week, I didn’t hear a lot about understanding the causes of noncompliance and tailoring its compliance approaches to those causes.  In fact, I didn’t hear a lot about changing compliance norms and increasing future voluntary compliance.  What I did hear was a lot of talk about increased revenue – how such and such an approach brought in more dollars.  Only time will tell whether these short-term approaches are actually effective in increasing voluntary compliance, the holy grail for tax administration.  There is so much low-hanging fruit around from years of poor compliance strategy at the IRS that it is not surprising that, once it starts “touching” people, it gets dollars.  The question remains whether these are dollars that should have been collected at all (under the taxpayer protections Congress has enacted or the IRS has adopted) and whether the IRS has actually reinforced noncompliance norms through the application of unnecessary enforcement measures, or promoted longterm voluntary compliance through the legitimate use of its power. 

Filed Under: Collection policy Tagged With:

Affordable Living Expense Standard

August 23, 2017 by 2 Comments

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.

Filed Under: Collection policy
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