Complaints against the abuses, or perceived abuses, of the IRS have been made for decades. At first they were ignored by Congress, the creator and parent of IRS, or dismissed as the wailings of tax cheats, malcontents or eccentric tax protesters. But as the complaints did not diminish — and even increased in numbers — Congress finally took notice and passed some legislation to try to deal with them. The results were the so-called Taxpayer Bills of Rights I and II. ("TBOR I and II").
While parts of TBOR I and II addressed some issues adequately, others, such as the Ombudsman provisions, were irrelevant or ineffectual. The Ombudsman, and his delegates, for example, lacked true independence and were subject to the authority of the people they were supposed to second-guess. It appears now that many of these provisions were weak versions of what could have been bold reforms, watered down by the influential managers of IRS who warned Congress of massive non-compliance and reduction in tax collections if the proposed provisions were implemented.
The depth and breath of IRS abuses did not become fully apparent until Congress lost its fear of IRS’ dire warnings and began to listen to the line employees of the IRS, as well as the public in general. Senator Roth’s hearings gave momentum to a bill (introduced by Rep. Bill Archer of Texas) that became known as the "Internal Revenue Service Restructuring and Reform Act of 1998" ("IRSRRA"). IRSRRA became public law following its signing by President Clinton on July 22, 1998. It is approximately 220 pages long and contains, among other things, additional taxpayer rights related to collection activity of the IRS.
Have these purported taxpayer rights finally clipped the wings of the IRS, or are they just so much hype and public posturing that leave IRS soaring as high and haughty as before? This article examines briefly the major provisions of IRSRRA as they relate to collection activities of the IRS.
Prior to the passage of IRSRRA, the federal tax lien arose upon assessment of the tax. It was commonly known among the cognoscenti as a "silent" lien because it did not have to be filed in a public place in order to attach to property of the taxpayer. It attached to all property and rights to property of the taxpayer: real, personal, tangible and intangible, as well as property acquired by the taxpayer after the lien arose. The only exception was that the lien did not attach to any interest of a Native American in restricted land held by the United States for an individual non-competent Indian. (Treas. Reg. 301.6321-1)
After the passage of IRSRRA, the power of the lien remains the same. The only difference is that there must now generally be supervisory approval prior to the filing of the lien, "where appropriate." The new law and controlling committee reports do not provide guidance regarding situations in which prior approval would not be necessary. However, the Conference Report states that the IRS Commissioner shall have discretion in developing the approval procedures required by IRSRRA to determine the circumstances under which supervisory approval of liens and levies issued by IRS’ Automated Collection System ("ACS") is or is not appropriate.
The approval process requires the supervisor to review the taxpayer’s information, verify the balance of the tax debt due and affirm that the collection action proposed is appropriate under the circumstances. The circumstances that the supervisor should take into consideration include the amount due in relation to the value of the assets subject to the lien. Presumably, this means that IRS shouldn’t file a lien that encumbers very large assets of the taxpayer if the tax liability is small.
The above provisions take effect upon the enactment of IRSRRA, except as they relate to ACS. ACS does not have to comply with these provisions until after December 31, 2000. (At which time IRS will have another Y2K problem.)
If IRS does record its liens at a public place, it must give notice to the taxpayer of such filing, either in person, by delivery, or by certified or registered mail within five days of the filing of the lien. The notice must include the amount of tax due, the right to a hearing within 30 days, and the right to an administrative appeal before an "impartial" employee of the IRS. (Is there such an employee?) It should be noted, however, that, unlike the approval provisions noted above, the notice provision do not take effect until 180 days after the enactment of IRSRRA.
In addition, IRSRRA increased the limits to the value of certain property to which IRS’ lien will be subordinated. For example, a purchaser of household goods, personal effects, or other tangible personal property at a casual sale can now take clear title to the property even though it is subject to an IRS’ lien, provided that he/she is not aware of the existence of an IRS lien against the seller and provided that the value of the property is less than $1,000.00. (Prior to IRSRRA it was $250.00). Also, the mechanic’s lien of a contractor who performed repairs or improvements to property of a taxpayer subject to an IRS’ lien will have priority over the lien up to $5,000.00. (It was previously $1,000.00). IRSRRA also indexed these amounts for inflation.
Prior to the enactment of IRSRRA, the IRS could levy on any third-parties which had possession of funds or other assets of the taxpayer and compel these third-parties to turn the funds or assets over to the IRS. IRS could, for example, levy on the wages of the taxpayer, his bank accounts, his accounts receivable, etc. The IRS employee did not have to get court approval, or even supervisory approval to levy and take possession of the assets. IRS’ biggest limitation was §6334 of the Internal Revenue Code ("IRC") which exempted certain income and property of the taxpayer from levy, such as unemployment benefits, some limited annuities and pension payments, workmen’s compensation payments, some disability payments, public assistance payments, etc. (Other than certain "specified federal payments" which were subject to a 15% continuous levy, even though they were otherwise exempt.)
After the enactment of IRSRRA, the fundamental power of the levy remains the same, except that a number of limitations have been placed all around it. First and foremost it now requires supervisory approval, as discussed above. Second, unless the IRS determines that the collection of tax is in jeopardy, it will now be required (180 days after the enactment of IRSRRA) to give notice of and an opportunity for a hearing prior to the service of a levy.
At least 30 days prior to levying on a person’s property or right to property, the IRS will have to notify that person in writing of his/her right to a hearing. The notice will have to provide the amount of unpaid tax, the right to a hearing during the 30-day period, and the action proposed by the IRS and the rights of the taxpayer with respect to such proposed actions. In addition, the notice will have to include a brief statement setting forth:
1. the Internal Revenue Code provisions relating to levy and sale of property;
2. the procedures applicable to levy and sale of property;
3. the administrative appeals (and their procedures) available;
4. the alternatives, such as an installment agreement, that could prevent levy on property; and
5. the Internal Revenue Code provisions and procedures relating to the redemption of property and release of lien.
The notice will have to be given in person, left at the taxpayer’s home or business, or sent by certified or registered mail to the person’s last known address. (However, only one notice is required for each tax period to which the underlying tax liability relates.)
Under IRSRRA the taxpayer will be entitled to a hearing at IRS’ Office of Appeals before an officer or an employee who has had no prior involvement with respect to the underlying tax liability. The appeal officer will have to obtain verification from the IRS that all applicable laws and administrative procedures have been met. The taxpayer will be able to raise any issue relevant to the proposed collection activity, such as requesting innocent spouse status, proposing an offer in compromise, requesting an installment agreement, or suggesting which assets may be used to satisfy the tax liability. The taxpayer will not be able to challenge the underlying tax liability at this hearing, however, unless he can show that he did not receive any statutory notice, or did not otherwise have an opportunity to dispute the tax liability.
In addition, the government has waived sovereign immunity under IRSRRA and the taxpayer will now have jurisdiction to appeal to the U.S. Tax Court within 30 days after the decision of the IRS’ Office of Appeals. If the Tax Court lacks jurisdiction, the taxpayer will be able to file suit in U.S. District Court. The only negative consequence to this procedure (from the taxpayer’s perspective) is that the ten-year collection statute will be suspended during the period that the taxpayer exercises his due process rights.
Third, IRSRRA also provides that the IRS is prohibited from taking levy action during the pendency of a refund suit. While this has been, and continues to be, the general policy of the IRS, it has now been enacted into law and could be grounds for a suit under IRC §7433 (discussed below) if it is violated.
Fourth, while IRS may continue to levy on the taxpayer’s IRA accounts, as before, as of January 1, 2000, the taxpayer will not be subject to the 10% early withdrawal penalty if it results from a direct IRS levy. (If the taxpayer takes the money out from the IRA to pay the taxes voluntarily, he/she will still be subject to the 10% early withdrawal penalty, even if IRS is threatening or has taken some other enforcement action.)
Fifth, if IRS determines that the taxpayer’s liability is currently uncollectable, IRSRRA now requires it to release any outstanding wage levies as soon as it is practicable. While this has been IRS’ general policy in the past, it was not statutorily prohibited from continuing the wage levy, and occasionally did so, at least for one pay period after the determination.
A seizure of property is a levy on property except that it is a levy on property in the possession of the taxpayer rather than a third party. For obvious reasons, seizures and sales of assets directly from the taxpayer have received the most attention from Congress and the Courts over the years. Those actions are the most direct and confrontational between the taxpayer and the government and have been the source of the most friction and complaints. In some cases they resulted in violence to and even death of the IRS employees who were attempting to seize, or threatening to seize, property of taxpayers. The first crack in the seizure facade appeared in 1977 when the United States Supreme Court ruled that IRS had to get a writ of entry from a U.S. Court in order to seize assets from the private area of a taxpayer’s business without the taxpayer’s permission. This changed radically the way IRS conducted its seizures. Prior to that ruling, IRS routinely seized assets of businesses and closed them down without court permission.
The second relatively significant crack came in 1988 when TBOR1 exempted the seizure of the taxpayer’s residence without the express permission of the District Director (or Assistant District Director) of the IRS. The reforms in this area continue with the passage of IRSRRA.
First, supervisory review and approval is now required prior to any seizure. The procedures are the same as for a lien and a levy on a third party, as discussed above. Second, the taxpayer now has a right to a notice and a hearing before an independent appeals officer before seizure, to the same extent as discussed above in relation to levies on third parties. The taxpayer also has the right of appeal to the Tax Court or a U.S. District Court, as discussed above.
Third, the amounts exempt from levy (i.e.: seizure) has been increased in two categories: the personal effects exemption (fuel, provisions, furniture and personal effects in the household) has been increased from $2,500.00 to $6,250.00 and the $1,250.00 exemption for books and tools of trade has been increased to $3,125.00 - effective on the date of enactment. Both exemptions have been indexed for inflation.
Fourth, IRSRRA now prohibits the seizure of the taxpayer’s residence or any other real property of the taxpayer (other than rented property), if it is used as a residence by any other person, to satisfy a liability of $5,000.00, or less. If the liability is greater than $5,000.00, IRSRRA requires written approval of a U.S. District Court Judge before the IRS can seize the personal residence of the taxpayer. (The approval of the District Director is no longer sufficient.). Seizure of other assets of the taxpayer, real or personal, that are used in his trade or business (other than rented real property) is still allowed but it now requires the written approval of the District Director or the Assistant District Director. Prior to any such approval, the District Director will have to ascertain that the taxpayer’s other assets (subject to the reach of the IRS) are not sufficient to pay the amount due and the expenses of the proceedings.
Fifth, current procedures of the IRS require certain steps to be taken before seizure of the property may proceed. Some of these procedures have now been codified into law by IRSRRA. They include the following:
1. verification of the taxpayer’s liability;
2. analysis of whether the estimated expenses of levy and sale will exceed the fair market value of the property; as required by IRC §6331(f);
3. determination of whether the equity in the property is sufficient to yield net proceeds from the sale of the property to apply to the taxpayer’s liability; and
4. thorough consideration of any alternative methods of collection.
Sale of Seized Property
IRS currently must set a minimum bid amount on property it seizes from the taxpayer prior to selling it. The minimum bid is generally not lower than 80% of the forced sale value of the property unless the balance due from the taxpayer is less than that amount, in which case the minimum bid is the amount of the tax due. Although IRC §6331(e)(1) did not suggest that the seized property could be sold for less than the minimum bid, it did not expressly prohibit such a sale. IRSRRA expressly prohibits the sale of the seized property for less than the minimum bid.
Second, IRSRRA now requires the IRS to keep detailed records related to the property it seizes and sells, including the dates of the seizure and sale, sale proceedings, expenses, names of purchasers of the property and the date of deed or certificate(s) of sale issued by the IRS. This information, other than the name of the purchaser(s), must now be provided to the taxpayer along with the amount of sales proceeds applied to his or her tax liability and the remaining balance due.
Third, within two years of its enactment, IRSRRA requires the IRS to establish procedures whereby the sale of the seized assets would be conducted by someone other than the revenue officer who seizes them. It also encourages the IRS to use professional auctioneers to conduct such sales.
Offers in Compromise
IRSRRA codifies the IRS’ existing guidelines for determining the adequacy of any offers in compromise, including IRS’ use of national and local standards in determining the allowable expenses of the taxpayer. However, it allows IRS to be flexible in the use of the standards if their use would result in hardship to the taxpayer.
Second, IRSRRA prohibits the IRS from taking enforcement action while the offer is pending and for 30 days after the offer is rejected. Third, it requires IRS to establish an administrative review of any offers that are proposed to be rejected and appeal rights to IRS’ Office of Appeals for any rejected offers. Fourth, it requires IRS to issue a notice to taxpayers which states, among other things, that if an accepted joint offer of a husband and wife is defaulted because of current non-compliance with tax laws (i.e.: non-filing of tax returns, non-payment of tax, etc.) of one of the spouses, the other spouse, or ex-spouse, who is in current compliance may be reinstated upon application to the IRS.
Prior to the passage of IRSRRA, a taxpayer had no statutory right to a payment agreement for delinquent tax liabilities. While IRS had internal procedures in place for granting such an agreement, it was ultimately discretionary on its part, or, to be more specific, on the part of IRS’ collection employees, to do so. This contributed, in some cases, to abuses of this discretion, or at least to uneven application of the internal procedures. IRSRRA now requires the IRS to grant such installment agreements, but only in limited circumstances. The taxpayer requesting such an agreement must not owe more that $10,000.00 and, over the previous five years, must not have:
1. failed to file any income tax returns;
2. failed to pay any income tax; or
3. previously been granted an installment agreement for payment of any delinquent income tax liability.
In addition, this right to an installment agreement applies only if the IRS determines that the taxpayer is unable to pay the liability in full and he/she provides the IRS will all the financial information necessary (i.e.: a completed form 433A with supporting documents) to make such a determination. Additional conditions are that the tax liability (including accruing interest and penalties) must be paid within three years and the taxpayer(s) must abide by tax laws (i.e.: file current tax returns, pay any amounts due, make estimated payments, if required to do so, etc.) while the agreement is in effect. For taxpayers who do not meet any of the above conditions, there is still no right to an installment agreement, other than at the discretion of the IRS.
Second, IRSRRA will now require IRS, starting July 1, 2000, to provide any taxpayer who has an installment agreement in effect with an annual statement setting forth the taxpayer’s beginning balance, all payments made during the year, and the remaining balance at the end of the year.
Third, IRSRRA requires that, for individuals with an approved installment agreement, the accrued failure to pay penalty will be reduced from .5% per month to .25% per month. This reduction in penalty applies only if the individual filed the tax return in question by the due date (or within any valid extension period). This provision becomes effective for any tax liabilities beginning after December 31, 1999.
Statute of Limitations
Currently the statute of limitations on collection of delinquent taxes is 10 years from the date of assessment. For those tax liabilities that have not been paid within 10 years, IRS routinely seeks to extend the statute by seeking a written waiver from the taxpayer. If the taxpayer does not sign the waiver, the IRS often takes or threatens to take enforcement action to collect the taxes. Consequently, many taxpayers agree to sign the extension waivers even though IRS has determined they did not have the present ability to pay the taxes. Under IRSRRA, the IRS will be prohibited from seeking an extension of the collection statute from an individual taxpayer, except in relation to an installment agreement. All other collection waivers entered into on or before December 31, 1999 (the effective date of this provision) will become null and void by the later of:
1. the last day of the 10 year period; or
2. December 31, 2002.
There are two exceptions to the rule above:
1. Waivers signed in relation to installment agreements will be remain effective till the end of the period agreed to, plus an additional 90 days.
2. If a levy is made on a taxpayer’s property or income on or prior to December 31, 1999, any extension agreed to by the taxpayer prior to the release of levy will be valid till the end of the extension period. (It appears that IRS can still compel the taxpayer to enter into a collection waiver prior to December 31, 1999, though it should expire no later than December 31, 2002.)
It should be noted, however, that IRS is not and will not be prohibited from taking enforcement action against taxpayers, whether it is authorized to seek collection waivers, or not.
Innocent Spouse Relief
Under current law, a taxpayer who files a joint income tax return with his or her spouse is jointly and severally liable for any tax liabilities. He or she has only limited protection under IRC §6013(e) from a liability resulting from a substantial understatement of tax by the culpable spouse. Under IRSRRA the protection to the innocent spouse has been broadened and liberalized. Effective on the date of enactment, the understatement of tax no longer needs to be "substantial" to invoke the innocent spouse provisions and the innocent spouse no longer needs to prove that the understatement was "grossly" erroneous. While the innocent spouse still needs to establish that, in signing the tax return, he or she "did not know or have reason to know" that there was an understatement of tax, he or she may now allege that he or she did not know the extent of the under-statement. If he or she can demon-strate that, he or she may be eligible for at least partial relief. If the innocent spouse prevails in his or her arguments, the tax liability will be apportioned among the spouses to the extent of his or her ability to demonstrate his or her innocence from specific understatements.
This provision is effective on the date of enactment, though it requires the innocent spouse to make the election within two years after collection efforts have begun, using an IRS form. (The IRS must provide such a form within 180 days after enactment of the law.)
Under IRSRRA, a taxpayer who files a joint income tax return may also elect separate liability if:
1. at the time of the election, the taxpayer is no longer married to or is legally separated from the spouse; or
2. the taxpayer was not living in the same household as the spouse at any time during the 12 months preceding the election.
While this election does not require the taxpayer to prove the elements of the innocent spouse provisions, it can be denied if the IRS (not the taxpayer) can demonstrate that the elector had actual knowledge of any item giving rise to the deficiency. [This is a more difficult burden for the IRS than the "knew or should have known" standard under IRC §6013(e)] Also it will not be available if there were fraudulent transfers of assets between the spouses intended to avoid or reduce tax liabilities. If no foul play is involved, the tax liability of the electing spouse will be determined as if she had filed separately.
If relief is denied by the IRS to the spouse making the election, she will now have jurisdiction to seek relief in the Tax Court within 90 days following the date on which IRS mails a determination to the taxpayer, or within 6 months after the election is made. Alternatively, the taxpayer can pay the tax and file a refund suit in the U.S. District Court or the U.S. Court of Federal Claims.
Fair Debt Collection Practices Act
Effective on the date of enactment, IRSRRA now requires the IRS agents to comply with certain provisions of the Fair Debt Collection Practices Act. (P.L. 95 — 109) For example, the IRS may not communicate with a taxpayer at any unusual or inconvenient time or place unless agreed to by the taxpayer. The IRS may not contact the taxpayer at his place of employment if the IRS knows, or has reason to know, that such communication is prohibited by the employer. Also the IRS may not communicate directly with the taxpayer if the IRS knows that the taxpayer has obtained representation from a person authorized to practice before the IRS, unless the representative consents to allow the IRS to contact the taxpayer directly. This requirement is void if the IRS cannot locate the representative, or if the representative fails to respond to IRS’ communications within a reasonable amount of time.
In addition, the IRS agents are now prohibited from harassing or abusing the taxpayer, such as making repeated phone calls, using obscene or profane language, threatening to use violence or harm a taxpayer’s reputation, etc. Finally, the IRS will have some limitations in contacting third parties in an effort to locate the taxpayer. IRS agents will now be prohibited from disclosing that they are from the IRS, unless specifically requested to do so, or that the taxpayer owes a debt. Also the IRS will be prohibited from contacting the third party more than once unless the information originally obtained was incomplete or erroneous. Failure to abide by these provisions will subject the IRS to possible suits under IRC §7433.
IRC §7433 — Civil Damages For Unauthorized Collection Actions
Prior to the enactment of IRSRRA, IRC §7433 gave jurisdiction to a taxpayer to sue the IRS in a U.S. District Court for reckless or intentional disregard of any provisions of the IRC or the Treasury Regulations by any officer or employee of the IRS. After TBOR II, the taxpayer could recover up to $1,000,000.00 in damages. IRSRRA added some new provisions, including the right to sue the IRS for negligent disregard of the IRC and Treasury Regulations, though it limits the damages to $100,000.00 and requires the taxpayer to exhaust the administrative remedies prior to any such suit. In addition, IRC §7433 now includes jurisdiction to sue the IRS for willful violation of the U.S. Bankruptcy Code (such as violations of the automatic stay) and awards damages of up to $1,000,000.00. Finally, IRSRRA also gives jurisdiction to 3rd parties who have been injured by IRS’ negligent, reckless or intentional disregard of the IRS or Treasury Regulations. Damages may be awarded up to $1,000,000.00 for reckless or intentional collection actions and up to $100,000.00 for negligent actions.
Any such suits must be brought within two years of the unauthorized collection actions and may require advance payment of any disputed tax (though this is not clear). Exhaustion of administrative remedies requires the filing of an administrative claim with the Chief of Special Procedures Function and waiting until a decision is rendered or for six months after filing, if no decision is rendered. It should also be noted that violation of IRS’ own Manual is not grounds for seeking relief under these provisions. Finally, the costs of litigation may also be recovered under IRC §7430.
IRSRRA has a number of other provisions related to collection, including new provisions for Taxpayer Assistance Orders, Third Party Summonses and notification requirements of an IRS contact person with all manually generated correspondence, but brevity requires the omissions of detailed discussions of them.
The question again is, has IRSRRA clipped IRS’ wings? The answer is, partly. The major provisions appear to be 1) the right pre-levy appeal and court jurisdiction, 2) the prohibition against the seizure of a residence without court approval, and 3) the reduction to a negligence standard unauthorized collection actions. It is also significant that the other provisions, though less significant, have been codified and now subject the IRS to court scrutiny under IRC §7433. While not everyone that is wronged by IRS’ unauthorized collection actions will be able to recover damages (or even sue, for that matter), IRSRRA should have at least a general influence on the corporate culture of the IRS. The IRS should not be underestimated, however. It still has plenty of bite. Many of the basic enforcement provisions (such as the levy, lien, summonses, etc.) are still intact and have been modified only around the edges, to give taxpayers additional due process rights. They have not been eliminated.
Tony Mankus is a Principal of Mankus & Marchan, Ltd., Downers Grove. His practice is concentrated in taxation. He is a frequent author and lecturer on IRS procedures; having been a manager and revenue officer for 15 years at the IRS. He may be reached at email@example.com.