CHAPTER SIX: COLLECTION
STATUTE OF LIMITATIONS FOR COLLECTION
From the Taxpayer
Pursuant to IRC §6502(a), the IRS has ten years from the assessment date to either collect the tax by administrative means (seizures, levies, offsets), or begin a suit for collection or a judgment. If the IRS does not commence a suit for collection or judgment, then the statute of limitations expires 10 years after the date of assessment. If the IRS commences a timely suit to collect a tax or obtain a judgment, then it may continue its efforts to administratively collect the tax beyond the ten-year period. IRC §6502(a).
The IRS and the taxpayer may agree to extend the statute of limitations for collection if the extension occurs within the 10 year period. Generally, an extension filed by one spouse is not applicable to the other unless signed by the other, or unless the signing spouse has power of attorney. See Tallal v. Commissioner, 77 T.C. 1291 (1981).
The 10 year statute of limitations for collection can be tolled under various circumstances. Said circumstances include, but are not limited to:
- If the taxpayer’s assets are in the custody or control of a court.
- If the taxpayer files for bankruptcy.
- If the taxpayer is continuously abroad for six months or more.
- If the IRS wrongfully levies on property belonging to a third party.
- If the taxpayer files an offer in compromise.
Further, the IRS Restructuring and Reform Act of 1998 prohibits the use of agreements to extend the statue of limitations on collection after December 31, 1999, except in conjunction with installment payment agreements. When used with an installment agreement the extension must be limited to the period necessary to satisfy the tax liability. Extensions that are open as of December 31, 1999 expire on December 31, 2002.
From One Other than the Taxpayer
The IRS has one year after the expiration of the applicable statute of limitations of the taxpayer, to administratively assess transferee liability. IRC §6901(c). Alternatively, the IRS can commence an action to impose transferee liability under state of federal fraudulent conveyance acts. The IRS’ position is that there is no statute of limitations with respect to such actions.
LIENS
LEVIES AND SEIZURES
SALE
COLLECTION FROM THIRD PARTIES
INITIAL CLIENT INTERVIEW
The following information should be obtained from the client during the first contact:
- Full name of taxpayer and spouse, if spouse is involved in the collection action.
- Social security numbers and employer identification numbers.
- Current address and phone numbers.
- Type of tax and relevant tax return forms for the taxes at issue.
- Years or periods.
A power of attorney (Form 2848) should be completed and signed by the taxpayer and representative as soon as possible. The client should also complete the appropriate financial questionnaires. If the client is an individual, the client should complete a Form 433-A. If the client is a business, it should complete a Form 433-B. A determination of the stage of the collection action must be made immediately to determine the appropriate course of action.
SOLUTIONS TO TAX COLLECTION PROBLEMS
ANALYSIS OF TAXPAYER’S FINANCIAL CONDITION
IRM §5323 contains the detailed policy considerations of the IRS when analyzing a taxpayer’s financial condition. Expenses are divided into two categories; necessary and conditional. Necessary expenses are defined as those that are necessary to provide for the health and welfare of the taxpayer or family, or necessary for the production of income. There are three types of necessary expenses: national standards, local standards, and other.
National Standards
National standards are established standards for reasonable amounts of five necessary expenses; food, housekeeping supplies, payroll and services, personal care products and services, and miscellaneous. The first four standards are derived from the Bureau of Labor Statistics Consumer Expenditure Survey. They are stratified by income so as income levels increase, the percentage of income provided for those expenses decreases. The miscellaneous allowable expense has been established by the Internal Revenue Service, and is $100.00 for the first person and $25.00 for every additional person in the household.
Local Standards
Two necessary expenses will be determined by local standards. These two expenses are housing (including utilities) and transportation (including car insurance and public transportation). Local standards for housing and transportation have been developed with the assistance of the National Office Research and Analysis function and the District Office Research and Analysis sites. The allowable amount will be the lessor of the local standard or the amount actually paid by the taxpayer.
The maximum housing allowance for Buffalo, New York is $846.00 for a family of 2 or less, $996 for a family of 3, and $1,145 for a family of 4, including utilities. The maximum ownership cost for a car is $407.00 a month for one car, and $313.00 for a second car. The maximum operating cost for one car is $186.00 a month, $240.00 a month for two cars and $131 for no car (public transportation).
Other
Other necessary expenses are those expenses which are not included in the national and local standards, but are nonetheless usually considered to be necessary. These other expenses are taxes, health care, court ordered payments, involuntary deductions, accounting and legal fees for representing a taxpayer before the Internal Revenue Service, and secured or legally perfected debts. (Only minimum payments will be allowable for expenses related to secured or legally perfected debts.) Accounting and legal fees, other than those for representing a taxpayer before the Service, may be allowable necessary expenses if they meet the necessary expense test of health and welfare and/or production of income.
Depending upon individual circumstances, additional expenses may meet the necessary expense test including, but not limited to, child care, dependent care (elderly, invalid, or disabled), life insurance, charitable deductions, education, disability insurance for a self-employed individual, union dues, professional association dues, and optional telephone services (call waiting, caller identification, etc.) or long distance calls. Donations to charitable organizations will only be allowed as necessary expenses if they provide for the health and welfare of a taxpayer or family, or are a condition of employment. For an education expense to be a necessary expense, the taxpayer must be able to demonstrate (1) that the education is for a physically or mentally handicapped dependent and (2) that such education is not otherwise provided by public schools, or that the education is a condition of employment.
Payments on unsecured debts may also be necessary expenses. If the taxpayer can demonstrate that payments on unsecured debts meet the necessary expense test, minimum payments should be allowed. However, except for payments required for the production of income, payments on unsecured debts will not be allowed if the tax liability, including projected accruals, can be paid in full within ninety days.
Conditional Expenses
Conditional expenses are those that are not required to provide for the health and welfare of the taxpayer or family, or for the production of income. Conditional expenses will be allowed if the taxpayer can establish that he/she can remain current in all future tax payments and can pay the outstanding tax liability, including projected accruals, within three years.
The Three Year Rule
If the taxpayer establishes entitlement to conditional expenses by demonstrating that he/she can remain current and fully pay the outstanding liability within three years, all expenses may be allowed. This is the three year rule for full payment. However, IRM §5323.441 advises that, although three years are allowed, agreements should always be based on the taxpayer’s maximum ability to pay. Therefore, the three year rule is a maximum, not automatic, term for an installment payment agreement. Lastly, if the taxpayer incurred excessive necessary and not allowable conditional expenses after the assessment of the tax liability, these expenses are not covered by the three year rule.
The One Year Rule
The one year rule for eliminating excessive necessary and not allowable conditional expenses is contained in IRM §5323.5. This rule provides that taxpayers who cannot fully pay their accounts within three years may be given up to one year to modify or eliminate excessive necessary and/or not allowed conditional expenses. With the modification or elimination of some conditional expenses, a taxpayer may be able to fully pay a liability within the three year limit, thus enabling the taxpayer to retain some conditional expenses.
An installment payment agreement must include a payment increase at the date a taxpayer is expected to have modified or eliminated excessive necessary or not allowable conditional expenses. The Service has stated that the taxpayer is responsible for determining how best to adjust or eliminate excessive necessary and/or not allowable conditional expenses, but at the expiration of one year, the Service will expect an amount equal to the amount of the excessive or disallowed expenses.
ANNUAL REMINDERS TO TAXPAYERS
Pursuant to the Taxpayer Bill of Rights 2, the IRS is required to send taxpayers an annual reminder of their outstanding tax liabilities. The fact that a taxpayer did not receive a timely, annual reminder notice does not affect the tax liability. The provision requires the IRS to send annual reminder notices beginning in 1997. (TPBR2 §1204. IRC §7524).
Bluestein & Muhlbauer, P.C.
333 International Drive
Williamsville, NY 14221
716.633.3200
