EIGHT MISTAKES TAX PRACTITIONERS MAKE WHEN NEGOTIATING WITH THE IRS
Important Tips to Keep From Getting Your Client in MORE Hot Water
Representing citizens with IRS problems is a challenge. The IRS has little sympathy for delinquent individuals and businesses. Fortunately, citizens have rights and, through their legal representative, they can successfully negotiate a resolution that allows them to move on with their lives. To effectively represent their clients, tax practitioners must know the law, the rules and IRS policy.
There are several pitfalls and traps that an attorney, CPA or Enrolled Agent can fall into if he does not fully understand his client’s rights. Here are eight of the most common mistakes that practitioners make and how to avoid them.
1. Allowing the IRS to talk to a client.
With a valid Power of Attorney, Form 2848, on file with the IRS, the tax practitioner stands in the shoes of his client. As such, he has the authority to speak on behalf of the client in all matters. This gives the representative the power and ability to insulate the client from talking with IRS directly.
There are many reasons it is a bad idea to allow the client to communicate with the IRS. First, people have a tendency to talk too much and volunteer information they think will help them. Too often, they volunteer information without even thinking. More times than not, the information people think might help their cause actually hurts.
Of course, you must never lie to the IRS regarding any material matter in your client’s case. This includes both personal and financial information. However, you as the professional must control the case and you must control the presentation of the information. Keep in mind that the IRS has the tendency to construe all information in a negative light. You must work to present all information in a light most favorable to your client. That is best accomplished by filtering the information through you before it’s forwarded to the IRS.
You need to know that no law requires you to allow the IRS to meet with your client. However, it is IRS policy pursuant to its Internal Revenue Manual to make every effort to interview the taxpayer under certain circumstances. This includes audits, when working to assess a Trust Fund Recovery Penalty and during most collection procedures. But remember, the Manual is not the law and you are not bound to comply with a mere internal policy.
As a Power of Attorney, you speak to the IRS on behalf of your client. Anything they want to know, you can answer. If you do not have the answer immediately at hand, tell the agent that you will get an answer as soon as possible.
When an agent tells you that it is IRS policy to meet with or speak to the taxpayer, ask the agent to show you the law that requires a citizen to personally appear. When the agent says, “It’s our policy,” politely but firmly explain that it is your policy that your clients have no direct contact with the IRS.
Not only is there no law that requires your client to meet with the IRS, in fact, the law is quite the opposite. Internal Revenue Code section 7521(c) specifically states that when a valid Power of Attorney is in place, the IRS cannot contact the client directly. The IRS is specifically precluded from going around the POA to talk with the client without the POA’s express knowledge and consent to the contact. If the client doesn’t wish to talk with the IRS personally, he doesn’t have to – ever. Moreover, if a citizen goes into an audit without counsel then decides that he needs counsel, code section 7521(b)(2) provides that the agent “shall suspend” the meeting to allow the citizen to obtain counsel before proceeding further.
2. Failing to ensure that a client filed all tax returns and is paying current taxes.
Perhaps the single most important thing to do after being retained is to obtain from the IRS your client’s Individual Master File (IMF) transcripts (or Business Master File (BMF) transcripts if your client is an entity). The IMF/BMF transcripts are the computer records of your client’s accounts with the IRS. These transcripts confirm whether all returns have been filed and when. They also show, among other things, when the tax assessments were made, whether any liens are filed, the nature and extent of penalties assessed, and the various notices the IRS mailed to your client. The IMF/BMF will tell you at glance which returns have not been filed.
This is very important for several reasons, not the least of which is that generally, people cannot recall which returns they filed and which they didn’t. If your client failed to file one or more tax returns, you must undertake to get correct returns prepared and filed immediately.
In addition, the tax return for the most recent tax year must be filed on time. For example, as of this writing (February 2011), the current year’s tax return is for tax year 2010. That return is due to be filed by April 18, 2011. The client must file this return on time, whether or not prior tax returns are unfiled. Many people (and some tax pros) make the mistake of believing that a current year’s return cannot be filed until all delinquent returns are caught up. Not only is this not true, following that course can endanger you client’s capacity to negotiate a settlement on the back tax debts.
Part of the process of getting your client back into compliance is to confirm that he is paying the current year’s taxes. Now that we are in the year 2011, the current year’s taxes are those due on 2011 income. Wage earners make these payments through wage withholding on their income. A self-employed person makes these payments through estimated quarterly payments. In either case, the payments must be in compliance with the 100 percent/90 percent rule that’s expressed in code section 6654(d)(1).
The above process is what we call getting the client “current.” It’s always the first order of business. If you fail to get the client current, you will be prevented from negotiating a settlement and you may be unable to prevent wage or bank levies.
3. Failing to return a Revenue Officer’s phone call.
Cases involving unpaid payroll taxes and personal taxes with large balances are often assigned to local Revenue Officers (RO). These are the actual tax collectors the IRS uses to make personal visits and carry out the hands-on task of collection. When a Power of Attorney is in place, ROs make contact with the Power of Attorney by correspondence or a telephone calls. The purpose of the contact is to request the submission of delinquent tax returns and current financial information. This is always accompanied with a deadline by which to send the information.
Do not ignore this deadline. If for some reason you cannot comply by the time stated, get an extension by calling the RO. ROs are generally reasonable in granting extensions, at least early in the case.
If you receive a telephone call from an RO, return it as soon as you can. If you cannot do so promptly, have someone from your office call and set up a time when you can personally talk with the RO. Failure to contact an RO or otherwise comply with his lawful requests for information may result in collection action against your client and may lead the RO to bypass your Power of Attorney and contact your client directly. This action is rare but is authorized in certain narrow cases under code section 7521(c).
4. Ignoring a Final Notice of Intent to Levy and Notice of Your Right to a Hearing.
The IRS mails millions of collection notices every year, and the notices take on a wide variety of forms. Perhaps the single most important of these notices is the Final Notice of Intent to Levy, which is IRS Letter 1058. This Notice informs the citizen that the string is out on the preliminary collection process. The IRS now intends to enforce collection with levy and seizure action. The Notice states that if the tax is not paid in full within thirty days, the IRS will do just that.
But the Notice also states plainly that the citizen has a right to file a Request for Collection Due Process Hearing within that thirty-day period. As long as the request is made within that time, there can be no wage or bank levies, or other collection action, on any of the tax periods listed in the hearing request. Moreover, by requesting a hearing, you place your client in the position of being able to argue for “collection alternatives,” an important first step to starting the process of resolving the case once and for all. To request the hearing, you must file Form 12153, Request for Collection Due Process Hearing, within the thirty-day deadline.
The mistake tax pros sometimes make is to attempt to seek an extension of time or collection hold upon receiving the Final Notice. They do this by calling the IRS’s toll free number on the top of the form. Callers often find that the IRS is at least somewhat understanding and is willing to grant either a collection hold or a reasonably generous extension of time before collection begins in order to allow the citizen to develop a plan of action to deal with the debt.
It seems a natural thing to call with these requests and it also seems positive that the IRS reacts in the fashion outlined. However, neither step is the correct one. The reason is that the thirty-day deadline expressed in the letter is statutory—that is, code section 6330 plainly states that the IRS cannot collect until after the thirty-day period expires. Once it does expire, the agency is free to move. The ACS phone personnel do not have the legal authority to extend the thirty-day period that’s provided for in the law. Sure, they can place a hold on any levy action for a period, but that does not extend the thirty-day period available for requesting a hearing. If you don’t request a Collection Due Process Hearing within thirty days, you lose the right to—period.
5. Failing to request face-to-face Appeals hearings.
One of the tax practitioner’s greatest tools is the Collection Due Process Hearing. As explained above, when you request a hearing after receiving a Letter 1058, Final Notice of Intent to Levy, the case is often assigned to a Settlement Officer (SO) at an IRS campus somewhere around the country. When this happens, you need to immediately request a face-to-face hearing with a local SO.
This is important because local SOs are usually better trained and qualified to resolve your case. But even more importantly, with a face-to-face hearing, you have the opportunity to sit across the table from the SO. This is always an advantage because now you and your client are real people with real issues and not just faceless voices on the phone into whose eyes they never have to look.
In order to get a face to face hearing, you must ask for it. A face-to-face hearing will be granted if your client is current with his tax return filings and is current in making estimated tax payments. In addition, you must supply the SO with a Collection Information Statement, IRS Form 433-A (or 433-B for entities). SOs always request this form prior to transferring a case. For that reason, you should start working on completing this form as soon as you request your Collection Due Process Hearing.
6. Inadvertently tolling the collection statute of limitations.
Many people believe that once you owe the IRS money, they can chase you for the rest of your life to get it. Unfortunately, too many tax pros also believe this is the case. The truth is, code section 6502 limits to ten years the amount of time the IRS has to collect a tax debt. This is known as the collection statute of limitations. It is vitally important that you understand how the collection statute is calculated.
It is also vitally important to understand that while the IRS cannot unilaterally extend the collection statute, you can. The statute can be extended in a number ways, most of which are not advertised and are not very well understood. Just a few of the actions that stop the collection statue from running are: 1) an Offer in Compromise, 2) applying for an installment agreement, 3) the filing of a Form 911, Request for Taxpayer Advocate Assistance Order, and 4) filing a Request for a Collection Due Process Hearing, Form 12153.
Now you might recall that I stated earlier that the filing of a Request for Collection Due Process Hearing is an important step in preventing enforcement action. And that’s true. But it’s also true that this action stops the running of the collection statute. For this reason, you must balance the importance of stopping collection against negative effects of tolling the statute. This has to be part of your evaluation process before you take action.
This is yet another reason it is so important to obtain IMF/BMF transcripts before you take action on behalf of your client. When you obtain the transcripts, do an evaluation of the collection statute issue. Determine whether the expiration of the statute is imminent or not. If so, you must be careful not to toll the collection statute. On the other hand, if the IRS still has several years in which to collect, tolling the statute by taking other remedial action will likely have little negative affect.
7. Ignoring or misunderstanding a Notice of Deficiency.
When the IRS completes the audit process and determines that a citizen owes more money, it often issues a Notice of Deficiency. The Notice of Deficiency (NOD) is a letter that presents a detailed explanation of how the IRS determined the tax owed. The NOD also explains that you have the right to file a petition with the United States Tax Court if you wish to challenge the determination.
It is a critical mistake to either ignore or misunderstand the Notice of Deficiency and its implications. First, you must understand that the NOD is the IRS’s final administrative determination that your client owes more money. As far as the agency is concerned, there is no more discussion or negotiation to be had. If you wish to further challenge the determination before paying any of the tax, your only option is to file a petition with the United States Tax Court.
Second, the time for filing the petition is fixed by code section 6213 and cannot be extended. Generally, you have ninety days from the date shown on the NOD in which to file the petition. If you fail to file a petition or the petition is filed late, the Tax Court has no authority to hear the case. In that situation, the tax alleged by the IRS to be owed will be assessed and the matter will move to collection. You’ve lost your right to challenge the tax calculation through the Tax Court process.
Third, the IRS cannot extend the time for filing the petition. Often, people phone the IRS upon receiving an NOD and are told a number of things regarding their options. These statements include, among other things: 1) the IRS will give you more time to respond, 2) the citizen can provide additional information to a certain office, 3) the citizen can file his tax returns (if the NOD is based on a non-filing situation) within a stated time, or 4) the citizen can file an appeal with the IRS’s Office of Appeals.
All of this advice is simply incorrect. The one and only action you can take to prevent the tax stated in the NOD from being assessed is to file a timely petition with the United States Tax Court. If you’re not admitted to practice in Tax Court or do not have experience with Tax Court cases, you must refer the client to somebody who does. Tax Court is an extremely effective tool for beating incorrect assessments but it is a technical legal process that requires both experience and expertise. Don’t risk your client’s financial future if you don’t know what you’re doing in that environment.
8. Being unprepared.
Most cases require that you gather substantial information from the client, including the facts of the case. You must also prepare financial statements and provide supporting documents to back up the statements. Make sure that the client knows what you need and follow up at regular intervals to retrieve the necessary information and organize it for presentation to the IRS before your deadline. The client must understand that the burden of proof is on him, not the IRS, and without meeting that burden, you have no hope of effectively representing his cause.
If you are not getting cooperation from your client, write a strong and detailed letter advising that failure to cooperate will result in, a) your having to withdraw as the Power of Attorney, and b) the client losing his case. You cannot protect your client unless you are prepared and you cannot be prepared unless the client gives you the information and documents you need when they’re needed.
The bottom line is you must be careful. You must know your client’s rights and exercise them in a timely and appropriate manner. When you do, you will be able to negotiate a settlement that will likely exceed your client’s expectations, thus allowing him to move forward with his life.