Jan 18, 2009

If The IRS Wants To Be Kinder & Gentler, It Actually Needs To Try

Two weeks ago, the IRS announced that it will be “kinder” and “gentler” to those who have been affected by the dipping economy. Among the claimed IRS concessions are:

1. Levy relief for those in hardship (the IRS procedures for what is a hardship is nebulous at best- see IRM 5.19.4.4.10, paragraph J)
2. Increased access to an Offer in Compromise considering the loss of equity (see IRM 5.8.5.4.11 which remains unchanged since the last IRS modification on 9-23-2008) from devalued home values (an OIC is known as “a settlement on your tax debt”)
3. Solution options for missed OIC payments for those who cannot make payments on already accepted OICs (link to IRM on 24 months of payment)
4. Added flexibility for those who have missed on back payments on balances owed. (i.e. Installment Agreements) (again, the latest IRS procedure change in this area was on September 23rd, 2008- no procedure was changed to reflect the January 6, 2009 IRS relief proclamation)

To the untrained eye, this may seem like relief. However, when you take a closer look, this “relief” is simply the usual rules packaged in a more appetizing way. This can be seen by taking a closer look at long standing IRS practices, especially in the very 4 areas mentioned above.

Levy Relief for Hardship
The “new” rule stated has always been the rule and there does not appear to be any change to this rule to signal increased relief. For example, the IRS does not appear to be any more flexible on allowable living expenses in determining your ability to pay. In fact, the IRS Taxpayer Advocate Office (“TAO”) continually criticizes the IRS for not being flexible with these standards.

Americans are seeing housing costs skyrocket due to escalation of ARM loans and vehicle operating costs escalating from rising fuel costs (in fact, the IRS has raised its own standard mileage rates but not the allowable expense for operating a vehicle- this has not changed since March 1, 2008- the IRS is set to redesign these standards on March 1, 2009). However, the IRS will not take these “actual costs” into account (see Page 435 of the 2007 TAO Study). Even more interesting is that, in many cases, using the actual costs will cause the taxpayer to be uncollectible (see page 442 of the same report that states that the IRS put more amounts into a non-collectible status than all amounts collected from Installment Agreements and Offers combined).

Does this sound like relief to you?

Increased Access to the OIC
The 2006 law changes and recent IRS data show (see Page 27 of the 2009 TAO recommendation to Congress) that the IRS is institutionally restricting access to the OIC, despite the IRS’ new assertion that it will allow greater access.

Offers are a complex computation of assets and liability/expenses. The expenses allowed are held to allowable standards set by the IRS, as stated above. The IRS also considers: whether the taxpayer’s financial circumstances are temporary - i.e. the taxpayer has a history of producing income, or is in a business that is in a downturn, or is “under-employed” in some manner. If the financial hardship is show to be “temporary”, then these individuals will have higher offer in compromise amounts than they can afford. This is why an unemployed doctor will never receive an OIC. Do not take my word for it; statistics show that 1/3rd of rejected OICs end up in currently non-collectible status--the taxpayer is so broke he can’t currently pay at all! The fact is: the IRS institutionally restricts access to the OIC.

Does this sound like relief to you?

Allow clients flexible terms in defaulted OICs that were previously accepted.

This one is nice in theory, but how many will this reach? In 2008, only 10,667 offers were accepted. To put this in perspective, there are almost 10 million taxpayers that the IRS is pursuing collections on. Also, in this concession, the IRS is referring to the 24-month periodic payment OIC. But this type of offer in compromise is rarely used. So, this provision appears to have little or no relief to the masses.

Does this sound like relief to you?

Added flexibility for those who have missed on back payments on balances owed.

This policy is already in effect. If you are in a payment agreement, the IRS will allow you to miss one payment or be late on one payment annually and you will not default your agreement. But if you, in combination, miss more than one payment or are late on a payment, you enter into default. The IRS sends you a certified letter, a CP 523, that states that you have defaulted and that you have 30 days to contact the IRS or be subject to immediately levy. At that point, the IRS has two choices: ask for new financials to setup a new payment plan or restore the prior installment agreement. Thus, missing payments will just afford you the opportunity to renegotiate under the existing IRS procedures or restore your previous agreement. The conclusion: maybe you pay more, maybe you pay less, or maybe you pay the same. However, relief will not be automatic as a result of missing a payment. This is not a policy or procedure change with the IRS and unless your financial situation changes relative to what the IRS allows, your payments will be the same.

Does this sound like relief to you?

The reality is this: the IRS is a collection agency. The IRS Christmas levy reprieve is not a permanent measure.. In fact, the IRS did not change its Internal Revenue Manual, its “bible” on its enforcement procedures, to accommodate these recent “policy” changes. Because IRS procedure has not changed, the institutional “relief” that the IRS is professing will not be as easy as it sounds. It will still require you to go through the old traditional IRS standards for payment. The IRS press release and many news articles seem to imply that it will be easier to get relief, but the history of IRS enforcement does not reflect the IRS to be “kindler and gentler.”

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