Notice(s) Of Intent To Seize And Levy

 

I received the following notice under power of attorney for a client.  

Another accountant at Galactic Command works with the client. I am the tax nerd should problems arise.

Yeah, we have a problem.

For more than one year, too.

Combine the two and I can get cranky. Just because I know the route doesn’t mean I want to revisit the site.

But back to our topic.

The notice seems terrifying, doesn’t it? The IRS is talking about seizing and levying and all matters of unkindliness.

Let’s go through the sequence of these notices.

First, you owe the IRS. There is a sequence of four notices, sometimes referred to as the “500” sequence.

• CP501         You have unpaid taxes somewhere.
• CP502         We have not heard from you about unpaid taxes.
• CP503         Hey, dummy! Are you there?
• CP504         We intend to levy if you do not do something.

This is the fourth notice in the sequence for our client for tax year 2022. As you can see, he/she/they are moving through the IRS machinery rather quickly. Then again, almost $225,000 in taxes and penalties buys you a better spot in line.

The CP504 is however not the final:final notice.

Let’s talk IRS procedure.

Before the IRS can go after your stuff (bank account, car, John Cena collectibles), it must (almost always) allow you a hearing. This is called a Collection Due Process (CDP) hearing, and it entered the tax Code with the 1998 IRS Restructuring and Reform Act. The Act was Congress’ response to IRS horror stories, including aggressive collection actions.

The IRS is not allowed to go after you until you have been offered that CDP hearing. You can turn it down, blow it off or whatever, but the IRS must provide the opportunity before it can unleash the tender attention of Collections.

 Except …

There is a short list of stuff the IRS can levy before a CDP. The list is uncommon air, except for:

Your state tax refund

That’s it. For most of us, the IRS can only go after our state tax refund – at this stage.

Then you have the FINAL BIG BAD notice: either the 1058 or LT11.The difference depends on whether you have been assigned to a Revenue Officer (RO).

LIFE TIP: Avoid having your own Revenue Officer.

 

If you get to a 1058 or LT11, you are at the end of the line. You will be dealing with Collections, and it is unlikely you will like the experience.

You may want an attorney or CPA, depending upon.

Not that having a CPA seems to matter – because clearly not - to our client.

Offer In Compromise And Reasonable Collection Potential

Command Central is working two Collections cases with the same revenue officer.

For the most part, I am staying out of it. There is a young(er) tax guy here, and we are exposing him to the ins-and-outs of IRS procedure. This is a subject not taught in school, and training today is much like it was when I went through: a mentor and mouth-to-ear. Friday morning we spent quite a bit of time trying to determine whether someone’s tax year was still “open,” as it would make a substantial difference in how we approach the situation.

COMMENT: This is the statute of limitations. The IRS has three years to assess your return and then ten years to collect. Hypothetically one could get to thirteen years, but that would require the IRS to run the three-year gamut before assessing and then the ten-year stretch to collect. I do not believe I have ever seen the IRS do that. No, of greater likelihood is that the taxpayer has done things to suspend the statute (called “tolling”), things such as requesting payment plans or submitting offers in compromise. Do this repetitively and you might be surprised at how long ten years can stretch. 

Personally, I suspect one of these two clients is dead in the water.

Why?

Let’s like at some inside baseball for an offer in compromise.

Collections looks at something called reasonable collection potential (RCP). As a rule of thumb, figure that the IRS is looking at a bigger number than you are. RCP has two components:

(1)  Net realizable equity in your assets

The classic example is a paid-off house.

To be fair, the IRS does spot you some room. It will use 80% (rather than 100%) of the house’s market value, for example, and then allow you to reduce that by any mortgage. Yes, the IRS is pushing you to refinance the house and take out the equity. It is not unavoidable, however. The push could be mitigated (if not stopped altogether) in special circumstances.

(2)  Future remaining income

This is a multiple of your monthly disposable income.

Monthly disposable income (MDI) is the net of

·      Monthly income less

·      Allowable living expenses (ALE)

Trust me, what you consider your ALE is almost certain to be significantly higher than what the IRS considers your ALE. There are tables, for example, of selected expense categories such as allowable vehicle ownership and operating costs. The IRS is not going to spot you $1,000/month to drive a luxury SUV when calculating your ALE. You may owe it, but they are not going to allow it. Yep, the math has to give, and when it gives, it is going to fall on you.

MDI is then multiplied by either 12 or 24, depending on which flavor offer in compromise you are requesting.

The vanilla flavor, for example, requires you to submit a 20% deposit with the offer request.

That is a problem if you are broke.

Then you have to pay the remaining 80% payments over five months.

 But – you say – that 80% includes twelve months of income. How am I to generate twelve months of income in five months?

I get it, but I did not write the rules.

Let’s look at a recent case. We will then have a quiz question.

Mr. D owed taxes for 2009 through 2011, 2013 through 2017, and payroll tax trust fund penalties for quarter 2, 2014 and quarters 3 and 4, 2015. These totaled a bit under $410 grand.

Shheeessshhh.

Mrs. D owed taxes for 2011 and 2013 through 2017.

OK. Those were joint income tax liabilities and would already have been included in Mr. D’s $410 grand.

They filed and owed with their 2018 return.

In March 2020 they requested a Collection Due Process Hearing.

They filed and owed with their 2019 return.

In July 2020 they offered $45,966 to settle their personal taxes for 2009 through 2011 and 2013 through 2019. Total personal tax was about $437 grand.

Now began the Collections dance.

Their offer was submitted to the specialized unit that works with offers. The unit wanted more information. The D’s had disclosed, for example, that they had retirement accounts.

The IRS asked: could you send us paperwork on the retirement accounts? 

The D’s send information for her IRA but not for his 401(k).

COMMENT: It almost never works to play this game.

The IRS calculated RCP based on their best available information.

Let’s look at just one facet: the house.

The D’s said the house was worth $376,600 on their original application. It had a mortgage of $310,877.

The IRS said that the house was worth $680,816.

COMMENT: Really? Did they think the IRS had never heard of Zillow or Movoto?

Following is the taxpayers’ comment:

On September 24, 2021, petitioners acknowledged that this value did not reflect the actual fair market value of the personal residence, stating that ‘we always start low as the initial starting point of the negotiation.’”         

COMMENT: Again, it almost never works to play this game.

Here is the math for NRE:

FMV	680,816
	80%
Adjusted	544,653
Mortgage	(310,877)
RCE	233,776

                                          

 

 

The D’s argued that the $680,816 value for the house was ridiculous.

They had it appraised at $560,000.

The IRS said: OK. Even so, here is the NRE:              

FMV	560,000
	80%
Adjusted	448,000
Mortgage	(310,877)
RCE	137,123

The IRS of course determined the D’s could pay significantly more than their proposed offer. I want to stop our discussion here and go to our quiz question:

I have given you enough information to know the IRS would turn down their offer of $45,966. How do you know?

Go back and review how RCP is calculated.

It is the sum of realized assets and some multiple of income.

The offer was less than RCP.

In fact, it was less than the asset component of RCP.

Could it happen? Of course, but it would take exceptional circumstances: think elderly taxpayers, maybe severe if not terminal illness, the residence being the only meaningful asset, etc.

That is not what we have here.

So the D’s tried a gambit:

Petitioners propose that this Court find as fact their allegations that the SO was ‘hostile, irate [and] yelling’ and ‘not qualified to be impartial and honest in this case.’”

That might work. Must prove it though.

Jawboning the SO when gathering information does not seem like such a brilliant idea now.

Here is the Court:

Since the record before us (which we are bound by) is silent as to any of the SO’s alleged acts of impropriety or bias, we find this argument by petitioners to be unsubstantiated.”

Offer denied.

Our case this time was Dietz v Commissioner, T.C. Memo 203-69.

You Must Give The IRS Time

I understand the court’s decision, but I suspect the most interesting part is how this case even got to court.

The issue is almost prosaic:

Somona Lofton filed a 2021 Form 1040X (that is, an amended individual tax return) on May 18, 2022. She requested a refund of $5,362.

The dates strike me as odd. The 2021 return was due April 18, 2022. Lofton filed an amended return one month later. Does it happen? Sure and usually because someone left something out – maybe a W-2 or a broker’s account. That would normally increase tax though, so I am expecting a story.

The IRS did not immediately process the return.

I am not surprised. This was IRSCOVID202020212022, and you were lucky to get someone over there to even answer the phone.

Lofton filed a refund case against the IRS on September 14, 2022.

That was a waste.

Let’s talk about it.

Like any large organization, the IRS has policies and procedures to follow. I would argue that sometimes the rules approximate self-inflicted wounds, but I understand that coordinating that many people and processing that much data requires standardization.

And right there is a reason that many practitioners got upset during IRSCOVID202020212022. The system broke down. One side of the IRS was inadequately processing returns, correspondence, penalty appeals or whatnot, while the Collections side continued undeterred and unhindered.

Why was it broken? Because much of the Collections side is automated. Those notices go out without passing human eyes. If the IRS fails to match a 1099-whatever to your return, bank on receiving a CP2000 notice. Ignore it – or submit a response and then have the IRS ignore it - and you have entered automated hell. A tax practitioner can usually obtain time, allowing a break for response and processing, but the practitioner likely needs to speak with someone to obtain that time.

Yeah, no. Didn’t work when the IRS wasn’t answering the phone.

Back to Lofton.

May, September. I would have advised her to chill.

She however was not using a tax practitioner. She filed the case pro se, meaning she was representing herself. I am – frankly – impressed. Filing pro se with the Tax Court is one thing (and bad enough), but she filed pro se with the US Court of Claims. At first, I thought a tax clinic may have helped, but – no - that couldn’t be. A tax clinic would have told her to wait.

Why?

Look at this Code section:

§ 6532 Periods of limitation on suits.

(a)  Suits by taxpayers for refund.

(1)  General rule.

No suit or proceeding under section 7422(a) for the recovery of any internal revenue tax, penalty, or other sum, shall be begun before the expiration of 6 months from the date of filing the claim required under such section unless the Secretary renders a decision thereon within that time, nor after the expiration of 2 years from the date of mailing by certified mail or registered mail by the Secretary to the taxpayer of a notice of the disallowance of the part of the claim to which the suit or proceeding relates.

The IRS has six months to respond to your request for refund. Six months should be sufficient time for the IRS to adequately review a refund claim (at least in normal times). The flip side is that Congress did not want the IRS parking on a refund claim, effectively denying a refund by never processing it.  

Lofton filed suit within six months.

The Court immediately dismissed the suit. Easiest decision they made that week.

I find the rest of her story more interesting.

For example, she complained that the California Department of Social Services harassed her and withheld her benefits.

She was swinging hard.

… Civil damages for Certain Unauthorized collection action 1,000,000”

… Emotional distress $250,000”

I am not certain how that involves the Federal Court of Claims. The Court noted the same and dismissed her allegations.

Then we learn that she initially filed her 2021 federal tax return claiming a refund of $6,668. The IRS adjusted it for one of the refundable credits, reducing her refund to $3,918.

OK. She already received some of her refund as the IRS sent those monthly child tax payments.

Still, let’s do math. $3,918 plus $5,362 from the amended totals refunds of $9,280. Her original refund request was $6,668.

The woman is a tax Houdini.

Our case this time was Lofton V United States. U.S. Court of Claims, No 1:22-cv-01335.

Collections and Hutzpah

 

An old partner of mine would have called it “hutzpah.”

The case is ridiculous, but it does give us a chance to review the tolling of the statute of limitations.

Let’s start:

·      The IRS has – barring unusual circumstances – only so much time to collect taxes from you. This period is 10 years from the date of assessment. A key concept here is that the date of assessment is not necessarily the date you filed, and that one tax year can have more than one ten-year period running concurrently (think an IRS audit a couple of years after you filed).

·      The 10 years can be interrupted (the fifty-cent word is “tolled”) for certain things, such as filing for an offer in compromise. This means that that 10-year statute can stretch to much longer than 10 years in the real world.

Let’s look at the Ward case.

The IRS determined the Wards had underreported income by $197 grand for 1996 and $209 grand for 1997. The Wards took the matter to Tax Court and lost.

The 1996 tax was assessed in November 2002.

COMMENT: Plus ten years puts one at November 2012.

The 1997 tax was assessed in December 2002.

COMMENT: Plus ten years means December 2012.

Alright, how in the world does one get to 2022 with these dates and facts?

Let’s look at the following:

(1)  Offer in compromise dated 12/27/2002

(2)  Due process hearing requested 7/15/2003

(3)  Offer in compromise dated 3/15/2004

(4)  Offer in compromise dated 12/4/2008

(5)  Due process hearing requested 12/16/2011

(6)  Offer in compromise dated 3/6/2014

(7)  Offer in compromise dated 9/23/2015

Five offers? This has the signature of tax protest and will likely go poorly with the Court.

Each offer tolls the statute. The IRS has up to two years to resolve an offer, and it is not uncommon for an offer to take a year or more to resolve. The statute is tolled while an offer is being considered. Just reviewing the dates quickly, the Wards added at almost seven years to the statute.   

Then we have the due process hearings.

A CDP is a Collections hearing and generally means that the IRS wants you to pay more tax than you think you can pay. The hearing allows one to propose a payment alternative – think a smaller monthly payment than the IRS wants. The statute is tolled during CDP, and the IRS tacks-on another 30 days to boot after the determination.

I see that just one of the CDPs added over a year and a half to the statute.

Add all the seven tolling events and the statute had tolled until the summer of 2021.

Yep, the tax years were open, and the IRS could pursue collection.

Let’s go back.

Remember I said that the Tax Court had decided the matter?

Two of the offers were to contest the tax liability.

Let’s give some background about offers.

There are three types of offers:

(1) You argue that you do not owe the tax (or at least as much). This is a "liability” offer.

(2) You argue that you cannot pay the amount due in full. Think of a “pennies on the dollar” late-night commercial and you get the drift. This is a “collectability” offer.

(3)  You argue that fair and effective and fair tax administration requires acceptance of an offer. This third type is rare. I have never done one in practice, although we presently have a client where I intend to request one. The facts are extraordinary, though, and involve financial malfeasance while the client was a minor.

A key point is that a liability offer is off the table once the Tax Court has decided. The Wards’ first and fourth offers were liability offers and were therefore invalid.

Still, the offers tolled the statute.

So, the Wards played a wild card: they argued that the IRS considered two invalid offers in order to toll the statute. The IRS was playing a cynical game to buy time, and the Wards should not be punished for the IRS’ egregious behavior.

Hutzpah!

The Court shut them down immediately:

It was Defendants who primarily benefited from these delays. While the offers remained pending, the IRS could not collect payment on the underlying assessments…. [By] filing so many offers, [Defendants] successfully blocked collections for years.”

The statute tolled. The Wards owed. The Court had little patience with people who knew just enough to muck-up the tax collection process for the better part of two decades.

Our case this time was United States of America v Walter and Virginia Ward, USDC AK, Case 3:21-cv-0056, July 6, 2022.

A Tax Refund When The IRS Fails To Process A Return

I am looking at a case involving a tax refund. The IRS bounced it, and I am having a hard time figuring out what the IRS was thinking.

Let’s talk about it.

James Willetts filed an extension for his 2014 individual tax return. He sent a $8,000 payment and extended the return from April 15 to October 15, 2015.

Standard stuff.

He did not file the return by October 15, 2015.

Oh well.

He finally filed the 2014 return on April 14, 2018.

April 15, 2015 to April 14, 2018 is less than three years, and that is not even including the six-month extension on the 2014 return.

The IRS rejected the return because of potential identity theft.

I presume that the IRS sent a notice, but Willetts did not respond. The Court goes on to observe that it was unclear whether Willetts even knew there was an identity issue before bringing suit.

COMMENT: That struck me as odd, as one of the first things a tax professional would do is obtain a transcript of Willett’s tax account. I then noted that Willetts brought suit as “pro se,” generally interpreted as going to Court without professional representation. Technically, that is incorrect, as one can go to Court with a CPA and still be considered “pro se,” but, in Willetts’ case, I am inclined to believe he was truly pro se.

The issue before the Court was straight-forward: did Willetts file his return in time to get his refund?

Let’s go tax nerd for a moment:

(1)  A taxpayer may recoup a tax overpayment by filing a claim within a statutorily-prescribed period of time.

(2)  That period of time is:

a.    Three years from when the return was filed, if the return was filed within three years of when the return was due; otherwise

b.    … two years from when the tax was paid.

(3)  The three years in (2)(a) extends with a valid tax extension.

Let’s parse this.

(1) Willetts' 2014 tax return was due April 15, 2015.

(2) He had a valid extension until October 15, 2015.

(3) His three-year period for filing a refund claim would run – at a minimum - until April 15, 2018. Since he also had a valid extension, the extension period gets tacked-on. He therefore had until October 15, 2018 to file a refund claim within the three-year lookback period.

You can see where the IRS was coming from. It did not have a tax return in its system until after October 15, 2018.

However, Willetts filed - or at least attempted to file - a return on April 14, 2018. It wasn’t his fault that the IRS held up processing.

The Court made short work of this.

A tax return is deemed filed the day it is received by the IRS, regardless of whether it is accepted, processed, ignored or destroyed by the IRS. The IRS’ own records showed Willetts' return as received on May 2, 2018, well within the period ending October 15, 2018.

The return was filed timely. Willetts was due his refund.

I have a couple of observations:

(1)  I do not understand why the IRS pursued this. The rules here are bright-line. The IRS did not have a chance of winning; in fact, the case strikes me as borderline harassment. 

What concerns me is the mountain of paper returns – especially amended returns – waiting unopened and unprocessed at the IRS as I write this. Are we going to see Willetts-like foot-dragging by the IRS on those returns? Is the IRS going to force me to file with the Tax Court to get my clients their refunds?   

(2)  Let’s play what-if.  

Say that Willetts had filed his return on November 1, 2018, so that all parties would agree that he was outside the three-year lookback period. Once that happened, his refund would be limited to any taxes paid within the previous two years. His 2014 taxes would have been deemed paid on April 15, 2015, meaning that none, zero, zip of his 2014 taxes were paid within two years of November 1, 2018. There would be no refund. This, by the way, is the how-and-why people lose their tax refunds if they do not file their returns within three years.   

Our case this time was Willetts v Commissioner, Tax Court November 22, 2021.

Talking Tax Levies

I don’t see it very often.

I am referring to an IRS bank levy.

However, when it happens it can be disrupting.

Let’s distinguish between a lien and a levy.

A lien is a claim against property you own to secure the payment of tax that you owe. The most common is a real estate lien, and I have one on my desk as I write this.

A lien means that you are fairly deep into the collection process. It does not necessarily mean that you have blown-off the IRS. Owe enough money and the IRS will file a lien as a matter of policy. It does not mean anything is imminent, other than the lien hurting your credit score. When I see one is when someone wants to either sell or refinance a property. In either case the lien has to be addressed, which – if you think about it – is the point of a lien.

A levy is a different matter. A levy takes your stuff.

The threat of a levy is a powerful inducement to come to a collection agreement with the IRS. Perhaps the agreement is to pay-off the liability over time (referred to as an installment agreement). There is a variation where one cannot – realistically – pay-off the full liability over time. The IRS settles for less than the full liability, and this variation is called a partial-pay agreement.  A cousin to the partial-pay is the offer in compromise, that of notorious (“pennies on the dollar”) middle-of-the-night TV fame. If one is in dire enough circumstances, there is also currently-not-collectible status. The IRS will not collect for a period of time (around a year). A code is posted on your account and further collection action will cease (again, for about a year).

What collection agreements do is put a stop to IRS levies – with one exception.

Let’s talk about the three most common levies that the IRS uses.

The first is the tax refund offset.

This happens when you file a tax return showing a refund. The IRS will not send you a refund check; rather they will apply it to tax due for other periods or years. It is a relatively innocuous way of collecting on the debt, and I have seen clients intentionally use the offset as a way of paying down (or off) their back taxes.

The offset, by the way, is the one exception to continued IRS levy action mentioned above.

The second is the garnishment. The most common is the wage garnishment. The IRS sends a letter to your employer, advising them to start withholding. Your employer will, because – if they don’t – they become responsible for any amounts that should have been garnished. I have heard of people who will then keep changing jobs, with the intent of staying one step ahead of the IRS.  

There are other types of garnishments, depending on the income source. An independent contractor can be garnished, for example. Even social security can be garnished.

In general, if you get to this type of levy, you REALLY want to work something out with the IRS. The tax Code addresses what the IRS has to leave for you to live on; it does not address how much it can take.

The third is the bank levy.

The IRS sends a notice to the bank, which then has to freeze your account. The notice can be mailed (probably the most common way) or it can be hand-delivered by a revenue officer. The freeze is for 21 days, after which the bank is (unless you do something) sending your balance (up to the amount due) to the IRS.

That is how it works, folks. It is not pretty, and it is not intended to be.

You may wonder what the 21 days is about. The IRS wants you to contact them and work-out a collection plan. Hit the ground running and you might be able to stop the levy. Delay and all hope is likely gone.

The risk of a bank levy is one reason why some taxpayers are hesitant to provide bank information with their tax returns. Granted, as private information becomes anything but and as tax agencies are mandating electronic bank payments this issue is receding into the distance.

Did you, for example, know that the IRS can ping your bank account, just to find out your balance?

Take a look at this:

         § 6333 Production of books.

If a levy has been made or is about to be made on any property, or right to property, any person having custody or control of any books or records, containing evidence or statements relating to the property or right to property subject to levy, shall, upon demand of the Secretary, exhibit such books or records to the Secretary.

There is something about a bank levy that you may want to know: it is a one-time shot.

An offset or wage levy is self-sustaining. It will continue month after month, payment after payment, until the debt is paid off or the levy expires.

The bank levy is different. It applies to the balance in your bank account when the levy is delivered.  This means that it cannot reach a deposit made to the account the following day, week or month. If the IRS wants to reach those deposits, it has to reissue the levy (the term is “renew”).

What got me thinking about bank levies is a Chief Counsel Advice I was reading recently. A bank received a levy, and, wouldn’t you know, the taxpayer made a deposit to the account the same day – but after the bank’s receipt of the levy. The bank had zero desire to mess with surrogate liability and asked the IRS what it should do with that later deposit.

Remember that a bank levy is a photograph – a frozen moment in time. The IRS said that the later deposit occurred after that moment and was not in the photograph. The bank was not required to withhold and remit that later deposit to the IRS.

Makes sense. What doesn’t make sense is that the IRS would have/should have issued a blizzard of paperwork to the taxpayer, including an ominous “Notice of Intent to Levy” and “Final Notice of Intent to Levy and Notice of Your Rights to a Hearing.” Both those notices give one collection rights. I prefer the rights given under the “Final Notice,” but sometimes it takes a saint’s patience to explain to a client why we are not responding to the “Notice of Intent” and instead waiting on its sibling “Final Notice of Intent.”

Anyway, the taxpayer apparently blew-off these notices and kept depositing to the same bank account as if nothing was amiss in their world. Everything in the CCA made sense to me, with the exception of the taxpayer’s behavior.

This time we talked about Chief Counsel Advice 202118010.

Having Assets And Filing An Offer In Compromise

I glanced at the case because it involved an offer in compromise, a collections hearing, a lien and currently noncollectible (CNC) status.

That is a lot going on for approximately $23 grand in tax debt.

First thing I noticed was that the taxpayer represented himself before the Tax Court. This is referred to as “pro se.” It happens quite a bit, and it usually does not work out well for the taxpayer.

I double-shudder when I think about “pro se” and going hard procedural with the IRS, such as with liens and offers in compromise.

Let’s walk through it:

(1) On November 16, 2016 the taxpayer filed an Offer in Compromise. The tax was approximately $23 grand. He offered approximately $12 grand.

COMMENT: There are several “flavors” of Offers in Compromise. This one was the traditional vanilla: inability to pay or to pay in full. Those late-night commercials are hawking this type.

(2) On May 30, 2017 the IRS sent a Notice of Federal Tax Lien Filing.

The taxpayer filed for a hearing, called a Collection Due Process (CDP) hearing. I probably would have done the same.

(3) On July 11, 2017 the IRS indicated it would not accept the Offer in Compromise, at least as submitted. 

Taxpayer appealed. Again, I probably would have done the same.

(4) On September 27, 2017 the IRS settlement officer sent taxpayer a letter that the CDP hearing was being delayed until the Offer in Compromise was resolved.

COMMENT: Left hand: right hand. Happens all the time.

(5) Wouldn’t you know that the appeal of the Offer in Compromise was assigned to the same IRS settlement officer handling the Collections hearing?

(6) The IRS scheduled a telephone hearing for December 14, 2017. The settlement officer also offered to place the taxpayer’s case in currently noncollectible (CNC) status.

COMMENT: I have used CNC status over the years, especially during and after the Great Recession of 2008. The IRS realizes that there is no money to collect, so it places the case on hold, generally for a year or so. Their normal collections machinery is paused.

Mind you, the IRS is not writing-off the debt. They are allowing a break in collection activity, hoping your situation improves.

(7) Not waiting until the hearing, taxpayer on December 1 sent the settlement officer a letter addressing the rejection of his offer in compromise.

COMMENT. He should include additional or expanded financial information, as his offer was based on inability to pay. The common-sense response to rejection of an offer based on inability to pay is to expand on why one is unable to pay.

Having taken the stage, taxpayer also alleged that the IRS engaged in criminal activity.

COMMENT: Stop that. You are not winning with that behavior.

The settlement officer rescheduled the hearing for January 9th.

(8)  On December 12 taxpayer sent the settlement officer another letter lamenting the rejection of his offer in compromise.

COMMENT: Once again: no additional or expanded financial information. This action was fruitless and ill-advised.

(9) We finally get to the hearing. The settlement officer reviewed the offer in compromise. She sees debt of approximately $23 grand and assets of approximately $110 grand. Receiving no additional or expanded financial information from the taxpayer, the officer decided that rejection of the offer was appropriate.

(10) After the hearing taxpayer sent a letter to the settlement officer, complaining about the IRS Fresh Start Program and including correspondence the taxpayer previously exchanged with the Taxpayer Advocate Service.

Taxpayer was focused on the lien and highlighted a TAS letter including the statement “the IRS has determined that the lien should be withdrawn.”

He wanted the lien withdrawn.

The settlement officer, to her credit, looked into this. It did not change the outcome, but she did try.

The immediate takeaway is the someone with $100-plus grand in assets is probably not going to be able to offer-down $23 grand in tax debt, irrespective of having low income. While true as a generalization, there are several specific considerations.

(1)  Given his focus on removing an IRS lien, I presume that taxpayer’s house comprised most if not all of taxpayer’s assets. I can see not wanting to refinance when one has limited income. In truth, one probably could not refinance, as no traditional mortgage provider would originate the loan.

a.     And there is how I would respond to the request for additional financial information: by providing rejection letters from a couple of mortgage companies.

(2)  Let’s say that the house is not the lion’s share of the assets. Perhaps it is something else, like a retirement account.

a.     If a retirement account, I would argue economic hardship.

                                                                         i.      That is, taxpayer needs that asset and the income therefrom in order to meet reasonable basic living expenses. The loss of said asset would be an economic hardship.

                                                                      ii.      It is already stipulated that the taxpayer is low income. How hard of an argument is this?

(3)  In general, I am unmoved by the IRS filing a lien.

a.     I may be moved if disclosure of said lien would adversely affect one’s career or public status (a mayor or judge, for example), but those instances are few and far between.

b.     Distinguish a lien from a levy.

                                                                         i.      A lien just secures the government’s interest. A lien on my house cannot be collected until I sell the house.

                                                                      ii.      A levy is a different matter. The IRS going into your bank account is an example of a levy.

(4)  Let’s circle back to the presumption that taxpayer’s residence represented the majority of his assets, hence his focus on removing the lien. The IRS just bounced his offer. What happens next?

a.     Folks, the IRS cannot (barring exceptional circumstances) take one’s primary residence.

b.     Yep, he will get periodic and annoying IRS correspondence, but …

c.     … so what? There is little bite left in that dog.

d.     And after 10 years (without the IRS taking the matter to Court to obtain judgement), the statute of limitations will kick-in.

You can see the downside to a pro se, especially when dealing with IRS procedure. There is a lot going on here, and I suspect that – with professional advice – taxpayer could have gotten the offer. I doubt he would have gotten the lien released, though. He saved a few grand in professional fees in order to completely strike out with the IRS.

The case for the home gamers is Banks, TC Memo 2019-166.