Wendy Kravit

Advising Delinquent Taxpayers

What steps should you take during the representation process?

September 19, 2011
by Wendy Kravit, CPA

The Internal Revenue Service Restructuring and Reform Act of 1998 represented the culmination of several years of Congressional criticism of IRS collection procedures. Many provisions offer a welcome measure of justice to delinquent taxpayers while even more give real opportunities to knowledgeable tax advisors to advance their clients’ interests in tax collection matters. In this climate, it may be possible for practitioners to secure more favorable treatment for delinquent taxpayers than at any time in the recent past.

In dealing with taxpayer delinquencies, it is vital to consider whether the IRS is entitled to assess the taxpayer. If the taxpayer has been assessed, the filing of a Notice of Federal Tax Lien (NFTL) and seizure of the taxpayer’s assets may be imminent. Determining the status for the taxpayer’s account therefore is critical to providing good counsel.

Steps in the Representation Process

Classifications of Taxpayer’s Assessment Status

When a taxpayer receives a bill from the IRS there are different actions to consider depending upon the nature of the notice.

If the asserted delinquency is subject to the deficiency procedures, the practitioner and client must determine if the asserted tax delinquency is correct and whether or not an appeal will be pursued. In this case, however, collection activity is not an immediate concern because of the time required for the deficiency procedures to be completed. If the 30-day Notice of Deficiency goes unanswered, the IRS will issue the 90-day Statutory Notice of Deficiency before the tax can be assessed. Therefore, if the notice appears to be correct the taxpayer can buy time by simply not responding.

If the tax is an amount that can be summarily assessed, the IRS will offer a pre-assessment appeal. An example is the trust fund recovery penalty of IRC § 6672. In such cases, pursuing an appeal will at least slow things down a little.

If the liability is immediately assessable, either because deficiency procedures have been followed or because they are unnecessary, the IRS can file a Notice of Federal Tax Lien (NFTL) and levy on the taxpayer’s property and rights to property within the time periods set forth in the Code. In this situation, the tax practitioner can usually assume the taxpayer has been assessed, although she should obtain a record of the assessment if issues appear to be present, such as the running of the assessment or collection statutory periods.

Power of Attorney

One of the first steps in the representation process is to obtain a federal tax power of attorney from the taxpayer. This should always be done at the initial client interview if the client wants representation before the IRS.

The IRS will deal with, and send notices to, a representative of the taxpayer, provided a power of attorney is on file and the representative is eligible to practice before the IRS under Treas. Reg. §601.502.

Form 2848 is the form for power of attorney. Any form is acceptable, however, provided it meets the requirements of Treas. Reg. §601.503. The IRS will accept faxed Forms 2848, which provide for very fast filing of the power. (Treas. Reg. §601.504(c)(4).)

Practitioners that sign up for services at the IRS website may now electronically file F2848. Eligible tax professionals can complete disclosure authorization forms, and view and modify existing forms, all online. Disclosure authorization allows tax professionals to electronically submit Form 2848, Power of Attorney and Declaration of Representative, and Form 8821, Tax Information Authorization. Disclosure authorization expedites processing and issues a real-time acknowledgement of accepted submissions.

Representatives should ensure when completing Form 2848 that the terms of the power are sufficiently broad for the matter at hand and specify the periods to which it will apply. The IRS will not process a power of attorney with open dates specified (for example, 2009 and all succeeding tax years).

Although the IRS undertakes to send notices to authorized representatives, the failure to do so does not invalidate the notice if it was sent to the taxpayer. (Treas. Reg. §601.506(a).) The IRS reserves the right to bypass the authorized representative if she unreasonably delays the proceeding. (Treas. Reg. §601.506(b).)

Collection Statute of Limitations

If the tax advisor establishes that the taxpayer has properly been assessed, she should then heck that the limitation period on collection has not expired. This can be done by requesting a tax history (MFTRA-X).

IRC §6502(a) provides that enforced collection of a tax liability, either by levy or by a proceeding in court, must take place within a ten-year period following the assessment. In United States v. Donovan, 2003-2 USTC, the taxpayer apparently did not review the tax history before submitting an offer in compromise two months before the statute of limitations was about to expire. As a result, he called attention to his case and the IRS filed a suit for judgment extending the statute of limitations for collection. This was relatively easy for the IRS to do in a timely fashion since submitting an offer in compromise tolls the statute.

If administrative collection measures are employed, the relevant act that must be performed within the limitation period is the levy or seizure. The date of the levy or seizure for this purpose is the date on which the notice of seizure provided for in IRC §6335(a) is delivered to the taxpayer or the owner of the property.

If the IRS brings an action in court to reduce the tax liability to a judgment, the act that must be performed within the limitation period is the filing of the complaint. If the IRS does this, the debt remains collectible for the time the judgment remains in effect under state law. In New York and New Jersey, for example, that period is 20 years.

Several acts also serve to extend the statute of limitations on collection. These include offers in compromise, installment agreements, the filing of a taxpayer assistance order, collection due process hearings and other circumstances where the IRS cannot levy due to the pendency of some hearing or refund suit, including bankruptcy.

This article has been excerpted from The Adviser’s Guide to Doing Business With the IRS. You can purchase the publication at cpa2biz.com.

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Wendy Kravit, CPA, MBA, has worked for the IRS as a Revenue Agent, taught federal taxation for 12 years and provides tax consulting services specializing in representation before the IRS.