Inflation and Tax Procedure

Each year the IRS issues a Revenue Procedure updating the dollar amounts in certain sections of the tax code to adjust those amounts for inflation.  The IRS recently issued Rev. Proc. 2022-38 to advise us of the applicable numbers starting in 2023.  Because of the surge in inflation during the past year after many years of low inflation, the adjustments take on a bit more significance.  I will discuss a few of the adjustments that apply to tax procedure.

This Revenue Procedure provides an annual reminder to me of a call from the Chief Counsel back in 1998 when Congress was considering what was to become the Restructuring and Reform Act of 1998 (RRA98).  The Chief Counsel asked that I provide him with suggested changes to the collection sections of the Internal Revenue Code that would benefit taxpayers and not cause significant problems for the IRS.  My Richmond office colleague, Chris Sterner, and I set down and came up with 25 proposals which we wrote up over one weekend and sent off to the Chief.  Six of those proposals made it into RRA 98 including a proposal regarding adjusting the dollar amounts listed in some of the collection code sections for inflation.  I write more about this and other memories from my work on RRA98 in a forthcoming edition of the Pittsburgh Tax Review.  The edition, which will come out in 2023, is a joint project between PT and the Pittsburgh Tax Review which has a series of articles reflecting on RRA98 a quarter century after enactment.  We will have more on this edition in future posts.

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 I will highlight the sections of the Revenue Procedure impacting tax procedure.  Obviously, there are many more sections of importance.

.48 Persons Against Whom a Federal Tax Lien Is Not Valid. For calendar year 2023, a federal tax lien is not valid against (1) certain purchasers under § 6323(b)(4) who purchased personal property in a casual sale for less than $1,810, or (2) a mechanic’s lien or under § 6323(b)(7) who repaired or improved certain residential property if the contract price with the owner is not more than $9,030.

IRC 6323(b)(4) creates a superpriority for purchases at casual sales.  The superpriorities of IRC 6323(b) allow protected parties to take property encumbered by a perfected federal tax lien, i.e., one in which the IRS has properly filed in notice of federal tax lien (NFTL) free and clear of the federal tax lien.  Unlike the superpriority for casual sales, 6323(b)(3) gives a superpriority for purchases from retail outlets that has no dollar limit. While PT readers are no doubt careful in their purchases at casual it may be good to remind family members, friends or spouses of the perils of casual sale purchases since large dollar purchases of this type do not carry the protections of purchases from sales by a retailer in the ordinary course of business.  The discussion of superpriorities is another matter Marilyn Ames and I are in the process of updating in Chapter 16 of “IRS Practice and Procedure.”

The updated number for 6323(b)(7) protects parties making home repairs.  The protection here, even with the increase due to inflation, is too low in today’s economy despite the bump up in amount in 1998 from the original amount adopted in the Tax Lien Act of 1966.  I doubt that many individuals or companies making home improvements check for federal tax liens before performing work at this dollar level but I also doubt that the IRS swoops in and bumps them out for the amount over $9,030 with any frequency.

.49 Property Exempt from Levy. For calendar year 2023, the value of property exempt from levy under § 6334(a)(2) (fuel, provisions, furniture, and other household personal effects, as well as arms for personal use, livestock, and poultry) cannot exceed $10,810. The value of property exempt from levy under § 6334(a)(3) (books and tools necessary for the trade, business, or profession of the taxpayer) cannot exceed $5,400.

The change here is probably most important for taxpayers seeking an offer in compromise (OIC).  A few years ago the IRS changed its OIC form to reflect a policy dating back to the mid-1990s.  The change in the form lists the amount of personal effects and books/tools of the trade a taxpayer can exclude from consideration in an OIC.  The IRS policy allows an exclusion from the OIC calculation for the amounts excluded from levy in IRC 6334(a)(2)&(3).  The updated Form 433A-OIC, unlike earlier versions of the form, makes the ability of the taxpayer to benefit from this exclusion clear.  Earlier versions did not make it clear and only those knowledgeable about the policy would claim the benefit.  I suspect, however, that the dollar amounts on the form may not be updated as the new year begins and taking note of these increased amounts could benefit clients seeking an OIC.  (Let’s hope the OIC specialist get a copy of the Revenue Procedure as they do their review in the event the form is not changed quickly.)

.50 Exempt Amount of Wages, Salary, or Other Income. For taxable years beginning in 2023, the dollar amount used to calculate the amount determined under § 6334(d)(4)(B) is $4,700.

Any exemption from levy is helpful to a taxpayer hit with a wage levy though you can see that the exemption is not high enough to really allow the person to eat.

There are a number of changes to dollar amounts for the myriad penalties in the code that bear reviewing but which I am not going to set out here.

.59 Revocation or Denial of Passport in Case of Certain Tax Delinquencies. For calendar year 2023, the amount of a serious delinquent tax debt under § 7345 is $59,000.

The dollar amount for passport revocation does make a difference and its increase may be helpful to those taxpayers with growing liabilities due to interest and penalties.

.60 Attorney Fee Awards. For fees incurred in calendar year 2023, the attorney fee award limitation under § 7430(c)(1)(B)(iii) is $230 per hour.

It remains hard to actually obtain attorney’s fees and the amount of the fees is still quite low compared to the rates charged by most tax professionals, still it’s nice to see an increased amount that can be obtained without a bruising fight over the special difficulty of the case or expertise of the representative.

This post just scratches the surfaces of the number of changes which matter more this year than any year in the past four decades.  The new Revenue Procedure is worth a look for the non-procedural changes as well.

Causing Less Work for Themselves and Others

Yesterday, the IRS announced that it was suspending a number of notices while it continues to work through its backlog of cases.  Included in the suspended notices are the first three notices in the collection notice stream.  These notices trigger additional work for the IRS answering phones and otherwise dealing with issues that result from its outgoing correspondence.  Hopefully, the suspension of these notices will assist the IRS in getting itself back to normal after the long period of digging out caused by the shutdown two years ago in the middle of the filing season while also providing relief to individual taxpayers still dealing with the pandemic.  The IRS Information Release is provided below in its entirety. 

The suspended notices listed make clear that the IRS will not be asking taxpayers for past due returns during the period of this suspension.  It has suspended this type of activity before in times when it was busy.  We reported on a TIGTA report discussing this here.

It will not be sending out collection notices other than, if I am reading the descriptions of the letters properly, the notice and demand.

The IRS is statutorily obligated to send out the notice and demand letter within 60 days after assessment.  If it fails to send out the notice and demand letter, the failure does not destroy the assessment but it prevents the federal tax lien from coming into existence.  The IRS should continue to send out this letter.

An interesting development is that it is not sending out the statutorily required notice of intent to levy letter required by IRC 6331(d).  It doesn’t need to send out this letter unless it intends to levy but without sending out this letter, the last letter in its notice stream, the letter giving Collection Due Process rights, will not allow the IRS to levy.  So, even though the IRS does not list the CDP letter (Letter 11) in the list below, I think it will suspend sending out that letter as well, at least with respect to levies, since sending out that letter will not allow the IRS to levy in the absence of the 6331(d) letter it states here it is going to suspend.

Note that it may have already sent out the 6331(d) letter to someone which would allow it to go ahead with the CDP letter and it states in the notice that it may still be sending out some letters already scheduled.

I hope that the IRS will take this opportunity to rewrite the 6331(d) letter, which is a terrible letter and perhaps the most misleading letter it uses.  The letter currently gives taxpayers the impression that following the 6331(d) letter the IRS can levy on their assets; however, it cannot.  The letter is effective if the goal is to make people think that’s what is about to happen but it is misleading in that without the mailing of the CDP letter (and the 30-day wait thereafter) the IRS has no right to levy on a taxpayer’s assets following the 6331(d) letter.  (I note the IRS might quibble with my statement arguing that the letter allows it to levy on a taxpayer’s state tax refund if that taking is viewed as a levy and not an offset.)  I find the 6331(d) letter an inexcusable overreach as it is currently written.