The Taxpayer Advocate Service (TAS) is an organization that operates independently within the Internal Revenue Service (IRS), and exists in order to assist taxpayers experiencing “economic harm.” The IRS defines “economic harm” as a situation where someone is incapable of providing basic necessities for themselves, including housing, food, or transportation. Internal Revenue Service, The Taxpayer Advocate Service is Your Voice at the IRS!, available at Taxpayer Advocate Service!
About the Taxpayer Advocate Service
The independence of TAS allows it to operate more effectively and impartially, scrutinizing IRS operations as they pertain to individuals experiencing economic harm, and serving as a vehicle for correcting IRS procedure when implementation fails to take account of the economic harms that many Americans experience. Furthermore, the service is free, which also allows it to effectively advocate on behalf of those that cannot afford a tax attorney to directly petition the IRS.
The system operates regionally; once a person qualifies for TAS assistance, a local advocate from a local taxpayer advocate office—there is at least one in every state—will be assigned to your case. Notably, businesses as well as individuals can qualify for TAS assistance.
If working in conjunction with an attorney, one may wish to authorize an attorney to discuss information about a case with TAS. If this is the case, submission of Form 2848, Power of Attorney and Declaration of Representative is required. Alternatively, Form 8821, Tax Information Authorization can be used where the individual seeking assistance would like another individual to receive information about the case, but not necessarily represent you, such as a tax return preparer or another non-attorney tax professional. Internal Revenue Service, Contact a Local Taxpayer Advocate, available at https://www.irs.gov/uac/Contact-a-Local-Taxpayer-Advocate.
There are a number of TAS programs to choose from, including Case Advocacy (personalized assistance from a knowledgeable advocate), Systemic Advocacy (addressing problems that affects taxpayers in the aggregate), the Taxpayer Advocacy Panel (takes suggestions for improving the tax revenue collection system as well as serving as a voice on behalf of taxpayers within the IRS) and Low Income Taxpayer Clinics (assisting qualifying individuals with various tax issues). Taxpayer Advocate, Other TAS Programs, available at Taxpayer Advocate Service
In short, there are a number of useful and effective mechanisms functioning within the IRS, but also retaining a significant degree of independence and discretion, all of which are designed to assist taxpayers that find themselves in dire financial straits, and need crucial assistance with their tax issues and concerns.
Appealing a Rejected Offer in Compromise
An Offer in Compromise is basically a settlement with the IRS that comes in three basic forms, and describes a situation where the taxpayer agrees to make a lump sum payout, and in return the IRS agrees to wipe the original tax liability. These situations are Doubt as to Collectability, Doubt as to Liability, and Effective Tax Administration. See Offers in Compromise.
Sometimes the IRS will decide to decline an Offer in Compromise based on its financial analysis of the applicant’s reasonable collection potential (“RCP”), which represents the taxpayer’s ability to pay the original taxes owed. At that point, the applicant has a right to appeal that determination. Internal Revenue Service, Internal Revenue Manual, available at https://www.irs.gov/irm/part8/irm_08-023-003.html#d0e794.
The IRS Office of Appeals maintains a substantive separation from IRS enforcement, so that it can conduct an independent analysis of the applicant’s RCP to determine whether the Offer in Compromise should have been accepted. Sometimes Offers in Compromise are improperly rejected because, having found a basis for rejecting the Offer in Compromise, the IRS will immediately cease consideration of the overall application, thereby failing to account for Effective Tax Administration or Doubt as to Collectability. In other words, the IRS might reject an Offer in Compromise based upon the finding of a particular valuable asset, but fail to account for a liability that significantly offsets the applicant’s total ability to pay its tax liability. Id. All of that said, the IRS Office of Appeals does not have the discretion to disregard IRS administrative guidance in considering an appeal.
The right to appeal only arises when an applicant receives a rejection of its Offer in Compromise, which will explain the reason for rejection and also provide detailed instructions on how to appeal the decision to the IRS Office of Appeals. That appeal must be made within 30 days of the date of the rejection letter. Internal Revenue Service, Offers in Compromise, available at https://www.irs.gov/taxtopics/tc204.html.
Keep in mind that a rejection and a returned Offer in Compromise are not the same. An Offer in Compromise may be returned for any number of clerical, procedural, or administrative reasons, including the applicant’s failure to submit the necessary information, a bankruptcy filing, failure to include the application fee, or failure to pay current tax liabilities while the offer is under consideration. Unlike a rejection, a return affords no right to appeal, but there is nothing prevent the applicant from resending the Offer in Compromise following the correction of the deficiency cited in the rejection letter.
Statute of Limitations on Collections
A statute of limitations is a time limitation on a person or entity’s ability to sue. Like any person with a right to sue another, the Internal Revenue Service (IRS) is beholden to the law’s time limitation on its ability to collect taxes. This is called the Collection Statute Expiration Date (CSED). This might come as a surprise to many, but it is important to keep in mind given that certain actions a taxpayer can take will “toll” the CSED, effectively lengthening the amount of time the IRS may have to collect outstanding tax revenues.
For example, a taxpayer’s submission of an Offer in Compromise may toll the CSED. Additionally, if a person seeks a Taxpayer Assistance Order (TAO) requiring the submission of Form 911, Request for Taxpayer Advocate Service Assistance (And Application for Taxpayer Assistance Order), this may operate to extend the CSED for a certain period of time. Internal Revenue Service, Internal Revenue Manual, 126.96.36.199.13 (07-19-2012), available at https://www.irs.gov/irm/part5/irm_05-001-019.html. Finally, the IRS may also be able to obtain a waiver of the CSED from the taxpayer under certain circumstances. Prior to 1999, the IRS was able to do this without restriction as to the length of the CSED extension, the number of times the CSED was extended for a particular taxpayer, and the circumstances under which the extension occurred. Id. However, following the Restructuring and Reform Act of 1998 (RRA 98), the IRS’ ability to obtain a waiver was substantially curtailed. Now, the IRS can only obtain a waiver of the CSED at the same time an installment agreement is entered into, or prior to an IRS release of levy under IRC 6343 occurring after the CSED period expires. Internal Revenue Service, Internal Revenue Manual, 188.8.131.52 (07-19-2012), available at https://www.irs.gov/irm/part5/irm_05-001-019.html.
Currently, the CSED is ten years, which means that the IRS has ten years from the date of assessment of a tax liability to collect on that liability. Given the abovementioned ways for extending the CSED, a taxpayer with an outstanding tax liability that believes that liability was assessed ten years prior, or even slightly less than ten years prior, should consult an experienced tax attorney before making any additional IRS filings. Failure to do so could result in an inadvertent tolling or extending of the CSED, thereby reviving the IRS’ ability to collect on an outstanding tax liability.
How to fill out an IRS Form 433B
Internal Revenue Service (IRS) Form 433B is a source of information for the IRS in order to collect taxes from self-employed individuals and businesses alike, and the form is necessary for all voluntary payment arrangements with the IRS, including Offers in Compromise, Installment Agreements, and Uncollectible Status. The entities that would have to file a 433B form should they attempt to initiate one of these procedures includes corporations, partnerships, limited liability companies (“LLCs”) and other entities. Internal Revenue Service, Internal Revenue Manual 184.108.40.206 (10-02-2009), available at https://www.irs.gov/irm/part5/irm_05-015-001.html.
Form 433B must be filled out in a technical fashion. For example, a 433B form appended to an Offer in Compromise may be returned to the applicant for failure to fill out a particular row, even if that row requests information that does not apply to the applicant. Instead of leaving rows blank, fill them in with “N/A.” In addition, be prepared with the information you will need to fill out Form 433B ahead of time. This includes information pertaining to each of the following sections:
Remember to attach recent statements from creditors with monthly payments and balances for leased items, e.g. vehicles, and the same for mortgages and other creditor relationships. Also, in Section 6, include bank statements from all relevant accounts going back three months.
Form 433B must also be signed by an authorized representative of the taxpaying entity, and enclosed along with whatever other documentation you might need in order to engage in one of the voluntary payment arrangements described above.
Keep in mind, you must be completely honest when disclosing the financial information of your business to the IRS. Failure to do so would constitute a fraud on the IRS, and whatever difficulties you may be facing with respect to your current tax liability will be compounded by potential civil and criminal liability.
Form 433B can be found on the IRS website at https://www.irs.gov/pub/irs-pdf/f433boi.pdf. Consult a professional tax adviser to ensure you have appropriately filled out this form, and that other forms you are required to submit along with Form 433B are properly enclosed and submitted.
When a person or business files for bankruptcy, a separate estate is created called the “bankruptcy estate.” This estate separates all eligible assets and income from your personal account, placing it instead in the bankruptcy estate, a separate entity for taxation purposes. Internal Revenue Service, What If I File For Bankruptcy Protection?, available at https://www.irs.gov/uac/What-if-I-file-for-bankruptcy-protection%3F.
Debts discharged through bankruptcy are not considered taxable income. If you are an individual debtor who files for bankruptcy under chapter 7 or 11 of the Bankruptcy Code, a separate “estate” is created consisting of property that belonged to you before the filing date. This bankruptcy estate is a new taxable entity, completely separate from you as an individual taxpayer.
That said, by filing for bankruptcy your obligations to the IRS do not simply end. Under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, tax returns that come due after filing for bankruptcy must still be filed. Failure to file such a return or obtain an extension will allow the IRS to either request that the court dismiss the bankruptcy case altogether, bringing all of the taxpayer’s assets and income out of bankruptcy, or request that the case be converted to another chapter of the Bankruptcy code. This latter possibility is important, as different chapters of the code provide different levels of protection to debtors. To give just one example, under a chapter 11 Bankruptcy plan, corporate debtors are not discharged from tax debts if the debtor filed a fraudulent return or willfully attempted to evade, defeat or defraud the taxing authority. Internal Revenue Service, Bankruptcy Tax Guide, Page 2, available at https://www.irs.gov/pub/irs-pdf/p908.pdf.
Also keep in mind that some debts are not discharged through bankruptcy at all. For example, federal student loans are typically ineligible for discharge in bankruptcy, absent some extenuating circumstance that will sway a bankruptcy judge to discharge such a debt in the interest of fairness.
There are several different options for a potential debtor that is considering a bankruptcy filing, and the tax consequences of each vary, but generally speaking, a debtor can file for bankruptcy under chapters 7, 11, or 13 of the Bankruptcy Code, each of which provide differing levels of protection and flexibility for debtors in dire financial straits.
Keep in mind that in making decisions regarding bankruptcy, you should consult a professional that is fluent in the Bankruptcy Code, and has experience in that area of law.
Please keep in mind the information and advice presented in this blog is not intended to be used as formal legal advice. Contact a tax professional for personalized tax advice pertaining to your specific situation. While we try and answer all parts of the question when we write our blogs, sometimes there may be some left unanswered. If you have any questions about your problems with the IRS, SBOE, FTB, or BOE, or tax law in general, call RJS Law at (619) 595-1655.