Anatomy of a Federal Tax Controversy

Anatomy of a Federal Tax Controversy

Step one: The IRS conducts a tax audit. A tax audit is an examination of your income and expenses to ensure that you correctly reported your tax liability. All types of tax returns are subject to audit, including income, business, estate, and gift tax returns. 

Step two: The 30-day letter.

• If a revenue agent determines that a deficiency exists and the taxpayer does not agree, the agent prepares a "Revenue Agent Report" (RAR). Included with the RAR is a cover letter and a settlement agreement. 
• The cover letter is known as a "30-day letter" because it informs the taxpayer of the right to request a conference with the IRS Appeals Division within 30 days. 
• A taxpayer who receives a 30-day letter faces a strategic decision between requesting a conference with the IRS Appeals Division or doing nothing.

Step three: If a taxpayer requests an Appeals conference but the parties do not come to an agreement, or if the taxpayer simply ignores the 30-day letter, the IRS will send the taxpayer a notice of deficiency (i.e., a "90-day letter").

• The notice of deficiency provides the taxpayer with two options: (1) pay the asserted deficiency and follow the refund procedures or (2) petition the tax court to contest the claimed deficiency within 90 days of the date the notice was mailed. 
• The mailing of the notice of deficiency begins a period during which the IRS is prohibited from assessing tax. If the taxpayer petitions the tax court, the "prohibited period" continues until the tax court's decision is final.

Step four: Taxpayer petitions the Tax Court. 

• Issues that can be raised in Tax Court: The taxpayer can challenge the deficiency claimed by the IRS and any overpayment claimed by the taxpayer. 
• The taxpayer can appeal the resulting decision to the Court of Appeals for the circuit in which the taxpayer resided at the time he filed the petition.

Step five: If the taxpayer does not respond to a notice of deficiency either by petitioning the Tax Court in the time provided or by paying the tax outright, the IRS will make an assessment. 

Once an assessment is made, it becomes a debt of the taxpayer. The IRS must give notice and demand for payment to the taxpayer as soon as practical and within sixty days of making an assessment. If the taxpayer refuses or neglects to pay the tax after notice and demand for payment, the amount of the tax liability becomes a lien on all of the taxpayer's real and personal property until it is paid.
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Michael DeBlis III, Esq., LL.M.

Early 2014 IRS Released New Revisions of the Four Most Important Tax Resolution Forms

Early 2014 IRS Released New Revisions of the Four Most Important Tax Resolution Forms 

IRS releases updates to the four fundamental IRS Forms regularly used in resolving delinquent taxpayers’ accounts. These are: Form 433-A (OIC), Form 433-B (OIC), Form 656 and Form 9465.

1. Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, Rev. January 2014:

• For employed individuals it is now required to indicate if taxpayer(s) have an interest in their employers’ business. 
• The form now clearly allows the $1,000 adjustment to the individual bank accounts equity. However, there is no mention of reduction of bank account equity by allowable monthly living expenses.  
• On the form, it is now required to indicate the purchase date and date of final payment for real estate properties. 
• In the Vehicles section, disclosing the creditor's name, purchase date and date of final payment is required. 
• The form now clearly allows a $3,450 deduction from the vehicle value, and if a joint offer is filed, an additional $3,450 for a second vehicle. Vehicles don't have to be used for work, the production of income or the welfare of the taxpayer's family in order to qualify for the deduction. 
• Under the Personal Assets Information, it is now required to include interest in a company or business that is not publicly traded. 
• Self-Employed sections are to be completed not only for Schedule C filers, but for Schedule E and F filers as well. 

2. Form 433-B (OIC), Collection Information Statement for Businesses, Rev. January 2014:

• The Quick Sale Value of 80% is now clearly indicated for business investments, real estate assets and business vehicles. In prior revisions those calculated values were subject to guesswork. 
• The name of creditor and date of final payment are now required for real estate assets and business vehicles. 
• The IRS exemption amount for professional books and tools of trade increased from $4,290 to $4,470. 

3. Form 656, Offer in Compromise, Rev. January 2014

• The application fee for Offer in Compromise increased from $150 to $186, effective January 1, 2014. 
• The form added a question as to whether or not the taxpayer used the Pre-Qualifier tool located on OIC Pre-Qualifier prior to filling out the form. 
• Low Income Certification guidelines have increased slightly for all states and D.C. 
• Offer amount should now be rounded to whole dollars only; no cents please. 
• The loophole for Lump Sum Cash offers has been closed, as it is now clearly states that Lump Sum Cash offers must be paid within 5 or fewer months from the date of acceptance. In prior revisions the verbiage was in 5 or fewer payments, which allowed it to be paid over a period of 24 months. 
• Payment schedule for Lump Sum Cash offers no longer require specifying the ‘day of the month’ payments will be made; just the month suffices. 
• A Correction Agreement has been added to the Offer Terms section which indicates that the taxpayer authorizes the IRS to correct any typographical or clerical errors or make minor modifications to Form 656. 

4. Form 9465, Installment Agreement Request, Rev. December 2013:

• The Installment Agreement fee for non-direct-debit agreements and payroll deduction agreements increased from $105 to $120, effective January 1, 2014. 
• Form 9465 can now be filed by individuals who owe employment or unemployment taxes for businesses that are no longer operating. In such cases the name of business and EIN is required. 
• Foreign address fields have been added for those taxpayers who currently reside outside of the US. 
• The total amount owed is now to be divided by 72 months to see if the proposed installment amount is greater than or equal to this value. If it's less, Form 433-F is required for submission. If the amount is equal or greater, but the total amount owed is between $25,000 and $50,000, then direct debit from checking account or payroll deduction is required, unless submitted with Form 433-F. If the amount owed is over $50,000, then Form 433-F is always required. 
• Part II has been added to the newly revised form which is required to be completed by taxpayers who have either defaulted on an installment agreement within the past 12 months, or who owe (in total IRS debt) more than $25,000 but less than $50,000 and can pay the debt in full within 72 months. Part II questions mimic those on Form 9465-FS, which probably will drop out of circulation with the introduction of this newly revised Form 9465.

Reference: Lawrence M. Lawler, CPA, CTRS, EA - National Director - American Society of Tax Problem Solvers (ASTPS) thanks to PitBullTax Software