Top 5 Most Frequently Asked Questions about IRS Collections

Posted 9/25/2008 5:11:29 PM

1. How can our law firm protect the taxpayer from Internal Revenue Service (IRS) collections before it ever begins?

All taxpayers are subject to IRS collection action for their federal tax liability. However, the time it takes for a particular case to reach the IRS “collection” division or units varies from case to case.

Our tax attorneys can prevent a case from being turned over to the IRS collection division by submitting correspondence to the IRS. The correspondence includes a completed IRS Form 2848 (Power of Attorney) and a letter informing the IRS that we are representing the taxpayer to resolve their back tax liability and need time to assess the taxpayer’s current options. It may also include requests for collection holds. It also may be as simple as merely responding to the numerous notices the IRS sends the taxpayer.

Practically speaking, the IRS grants our requests for collection holds on a regular basis. However, the IRS rarely informs the law firm or the taxpayer when they have granted a collection hold. The IRS also does not document collection holds very well in their own computer database. Consequently, it is difficult for the taxpayer to verify that our law firm was successful in obtaining a collections hold.

2. When do you know you are in Collections?

There are two ways:

1) The taxpayer receives letters generated from the IRS Automated Collection System (“ACS”). In most cases, the letters can be identified by the notation “IRS ACS” in the upper left-hand corner. In addition, the letters will indicate the telephone number (800) 829-7650. IRS ACS may also attempt to contact the taxpayer by telephone.

2) The taxpayer is assigned to a local IRS Revenue Officer (“RO”). The local RO will have a local telephone/facsimile number and will likely try to schedule an appointment with the taxpayer. The appointment might be in the form of a summons for records or other documents.

3. Now that you are in Collections, what can the IRS do to you?

Often the first step the IRS ACS or IRS RO takes against the taxpayer is the filing of a federal tax lien. A federal tax lien secures the IRS’s interest in any assets held by the taxpayer and generally lasts until the tax debt is satisfied or expires. The IRS generally files a lien based on the amount of liability. The IRS may not file a lien on some smaller balances and those cases which do not reside in the ACS system. However, the IRS has the right to file a federal tax lien to protect its interest even if the taxpayer only owes a few thousand dollars in back taxes. Our law firm does not assist taxpayers regarding liens.

The IRS can issue levies to a taxpayer’s bank account. If the IRS issues a bank levy, the financial institution is required to freeze the funds the taxpayer has on deposit the day the bank receives the levy and the bank is required to send those funds to the IRS 21 days later unless the financial institution receives a release of levy from the IRS.

The IRS can issue levies to a taxpayer’s employer, Social Security, or pension. Additionally, if a taxpayer works as an independent contractor or is self employed then the IRS can issue an accounts payable levy that will direct any one paying the taxpayer to direct the funds to the IRS. If the IRS issues a wage garnishment, the employer is required to adhere to the IRS chart for wages exempt from levy in determining the amount of the taxpayer’s check. The IRS chart is based on pay frequency and the number of dependents claimed on the taxpayer’s W-4. The employer is required to garnish the taxpayer’s wages until the IRS issues a release of levy.

4. Once a taxpayer receives a levy is there any action the law firm can take to assist the taxpayer?

Our law firm can contact the IRS and attempt to obtain a full release or partial release of the levy.

IRS agents generally look at the following in determining whether to issue a full release:

1) Compliance with all tax return filings
2) Compliance with withholdings or estimated tax payments
3) Excessive liquefiable assets (i.e. large balances in checking or savings accounts, etc.)
4) Showing that monthly allowable expenses exceed monthly gross income, thus creating an economic hardship
5) Providing documentation to support any expenses which the IRS might view as excessive or unreasonable (for example, a child support payment of $1,500 per month, etc.)

Oftentimes, the IRS will require that the taxpayer resolve their back tax liability – either a one payment (see Full Pay Service, or Offer in Compromise), a monthly payment plan (see Installment Agreement, Streamlined Installment Agreement), or protected status (see Currently Not Collectible status) – before releasing the levy.

A partial release will usually occur if the taxpayer has an extreme financial hardship – e.g. an immediate need for the funds/income in question due to another obligation. Usually, these relate to bank levies, and occur when the funds in question are going to be used for the taxpayer’s payroll, or for a health issue (i.e. money for a surgery, etc.). Typically, the IRS will engage in the same type of analysis as above, but will consider the circumstances of the extreme financial hardship when making their decision.

5. What if the IRS unreasonably or incorrectly refuses to release the levy?

If our law firm is unable to achieve a positive result with IRS ACS or IRS RO because of an unreasonable or improper determination, we will contact the Office of the Taxpayer Advocate (“TAO”). The TAO acts to support taxpayers and their representatives when they are unable to reach a resolution with the IRS. Our law firm has achieved excellent results through the TAO.