Tax Controversy Training for Pro Bono Lawyers

Tax Controversy Training

for

Pro Bono Lawyers

Presented by

Maryland Volunteer Lawyers Service, Inc.

September 15, 2016

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Instructors

Gerald W. Kelly

Kelly | Dorsey, P.C. [email protected]

410-740-8750

James P. Leith Local Taxpayer Advocate – Maryland

[email protected] 443-853-5145

Andrew “Jay” Maschas

Comptroller of Maryland [email protected]

410-767-4124

Cheri P. Wendt-Taczak Kelly | Dorsey, P.C.

[email protected] 410-740-8750

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mailto:[email protected]




Introduction

• Who are MVLS’ LITC clients? - Individuals with income <250% FPL who have an income tax controversy with the IRS and/or MD Comptroller in which the amount in controversy does not exceed $50K per tax year.

• What is a tax controversy? – dispute between the Taxpayer (“TP”) and the Government concerning a tax matter directly, financially impacting TP.

• What is the role of the attorney? – Education

• Taxpayer rights and responsibilities

• Tax laws pertaining to specific case

– Bring taxpayer into Current Compliance

– Resolution of Outstanding Issues

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IRS Taxpayer Bill of Rights

1. The right to be informed.

2. The right to quality service.

3. The right to pay no more than the correct amount of tax.

4. The right to challenge the IRS’s position and be heard.

5. The right to appeal an IRS decision in an independent forum.

6. The right to finality.

7. The right to privacy.

8. The right to confidentiality.

9. The right to retain representation.

10. The right to a fair and just tax system.

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Maryland

Taxpayer Bill of Rights

All Maryland taxpayers have: 1. The right to fair treatment and helpful advice.

2. The right to privacy of tax records.

3. The right to free forms and instructions available 24-hours a day at www.marylandtaxes.com.

4. The right to free assistance and state tax return preparation at any of the Comptroller’s 11 taxpayer service offices.

5. The right to a free copy of previously filed state tax returns.

Taxpayers who disagree with a tax assessment: 1. The right to file an appeal and ask to have case heard by a hearing

officer.

2. The right to have representation.

3. The right to file an additional appeal with the Maryland Tax Court within 30 days from the date of the final determination by the hearing officer.

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http://www.marylandtaxes.com/

Types of Controversy Cases

you will Encounter

• Examination (Audit)

• Appeals

• U.S. Tax Court Litigation

• Collection

• Audit Reconsideration

• Non-filers

• Innocent Spouse Relief

• Claim for Refund

• ID Theft

• More

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Types of Controversy Cases -

Comptroller of Maryland

• Compliance Division – MD Tax Adjustments following CP2000 Federal Adjustments

– MD Tax Adjustments following Federal Adjusted Gross Income (FAGIM)

– Revenue Adjustment Reports (RAR)

– Computer Matching Program

– Non-Filer Cases

• Revenue Administration Division – Balance Due Return

– Processing Adjustments

– Refund Denials

– Amended Return Denials

– Questionable Return Detection Team (“QRDT”)

– Field Enforcement

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Case Management Overview

• Client contacts attorney w/in 1 week of receiving letter from MVLS.

• Attorney conducts initial client interview.

• Attorney submits POA to IRS / MD Comptroller.

• Attorney obtains account status information from IRS / Comptroller.

• Attorney discusses next steps and resolution options with client.

• Attorney executes resolution of dispute.

• Attorney submits Case Update Form to MVLS on quarterly basis.

• Upon completion of case, – Attorney sends client written notification of case closure;

– Attorney withdraws POA from IRS / Comptroller; and

– Attorney sends MVLS Case Closure Form.

• MVLS closes case & sends Client Satisfaction Survey to client.

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Initial Client Contact / Interview

• Gather Info from Client – ALL IRS & Comptroller Notices for all tax years at issue

– ALL W-2s, 1099s, other support docs (if unfiled returns)

– Form 433 Collection Information Statement (if collections issue)

– Any other relevant documentation (tax returns, documentation already submitted by TP to IRS/MD Comptroller

• Review with TP & both sign: – Engagement Letter

– POA – IRS Form 2848 or IRS Form 8821

• Discuss the 3 Cs: Cause, Compliance and Cure

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Completing the POA - Form 2848

• Neither IRS nor the Comptroller will talk to 3rd parties without POA.

• IRS – IRM 21.3.7.5

– Years: Before and after problem years

– Forms: 1040, “separate assessment”

– TP Tel#: Yours (POA)

– CAF: All representatives are assigned CAF #. If no CAF, write “none” to get one assigned.

– Married couple: Must have separate POA for each spouse

– If working with client’s POA, client’s POA signs on behalf of TP

– If client has/had business, list business, business address, EIN, TPs title

• MD – Will accept a completed Form 2848 until December 31, 2016.

– New POA form: Maryland Form 548

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Completing the POA – MD Form 548

• On July 1, 2016, Comptroller’s office has a new MD Form 548 (Power of Attorney)

• Completed Form must have: – Taxpayer’s Name, Address, Social Security Number(s),

Signature(s), and Date

– POA’s Name, Address, telephone number, and signature

– Type of MD Tax, MD Form Number, Years Covered

– Declaration of Representative • Not currently suspended or disbarred

• Aware of regulations and penalties for false statements

• Designation Number

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Additional Instructions - MD Form 548

• Volunteer Organizations – Volunteers can use MD POA with no PTIN

– Clearly indicate the volunteer organization on the form

• Verbal POA – There are no Verbal POAs, but…

– MD websites states that if a TP and their representative is present, the TP can give permission for the representative to speak with the Comptroller’s office at that time. “The approval is for phone call at that time only.”

• Questions on MD POAs – Call 410-260-7424

– E-mail [email protected]

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Submitting the Power of Attorney

• IRS: – Fax Form 2848 to Centralized Authorization Unit (“CAF”)

– Fax #: 855-214-7519 (Memphis CAF Unit)

– If urgent, fax POA to PPS rep during initial call.

• MD: – Can submit POA by fax, email, or mail

– Fax #: 410-260-6213

– Email: [email protected]

– Mailing Address: Comptroller of Maryland

Revenue Administration Division

P.O. Box 1829

Attn: POA

Annapolis, Maryland 21404-1829

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Contacting the IRS & Comptroller

• IRS – Practitioner Priority Service: Tel#866-860-4259

– Automated Collection System (“ACS”) • Large Dollar Unit

• Federal Government Employees Unit

– Revenue Officers

• MD – Visit www.marylandtaxes.com for information

– Individual Tax Collections: Tel# 410-974-2432 or 888-674-0016

– Taxpayer Services: Tel# 410-260-7980, 1-800-MD TAXES, or e-mail [email protected]

– Correspondence Unit Fax # 410-974-2967

– Hearing & Appeals: Phone # 410-767-1572, Fax # 410-333-7745, or e-mail [email protected]

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Contacting the IRS & Comptroller

• Best Practices

– Both IRS and Comptroller representatives take notes

of conversations so BE POLITE!

– When calling, always write IRS representative’s name

& ID#.

– When writing:

• Include key case info on ALL pages, and

• Send documents “return receipt.”

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Resolving Tax Collection Cases

Flow Overview

• IRS Roadmap

• MD

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Resolving Tax Collection Cases

First Steps

• Gather Relevant Information

– Initial Info Needed

– How to Obtain

• Tax Assessment – Was it proper?

• Validity of Collection Action

• Filing Compliance

• Financial Analysis to Determine Viable Options

• Client Preference

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Tax Assessment – Was it Proper?

Ways to Assess Tax

• Filed Tax Returns – Self-Assessment (IRS & MD) – Data sufficient to calculate tax

– Must purport to be tax return

– Must be honest and reasonable attempt to satisfy tax law requirements

– Must be executed by TP under penalty of perjury

• “Math Error” (automatic assessment) – I.R.C. § 6213(b)(1)) – ACA – t/b used for PTC. I.R.M. 21.6.3.4.2.16.3.1

• Examination (MD & IRS) – I.R.C. § 6211

• IRS Substitute for Return (“SFR”) – If TP fails to file valid return or files a false or fraudulent return, IRS may execute its own return based on information obtained. – I.R.C. § 6020(b)(2) – SFR “shall be prima facie good and sufficient for all legal purposes.”

– I.R.C. § 6501(b)(3) – SFR does not start SOL on assessment or collections

– I.R.M. 25.6.1.9.4.5 (10/1/2010).

• Non-MD Taxpayer who has been erroneously assessed (MD) – Proof of residency

– Other state income tax returns

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Considerations • Assessment Statute of Limitations (ASED)

– IRS: • 26 U.S.C. § 6501

• Generally, 3 years from date I.R.C. § 6501(a)

• No time limit for SFR – I.R.C. § 6020

• If no return filed, statute of limitations (“SOL”) does not begin to run so indefinite ASED.

– MD • Tax-General § 13-1101

• Generally, 3 years from date of filing or due date of tax return

• No limit if failure to file, false tax return/willful evasion of tax, or failure to report IRS adjustments

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Considerations

• Proper Notification of Assessment – IRS Notices

• Notice of assessment sent to TP w/in 3 years of tax liability. I.R.C. § 6501(a).

• Plus tax refunds, federal payments

– MD MVA Notices

• Fraud - Impacts validity of return – TP-signed return that was later altered by fraudulent preparer

prior to filing

– Return filed without TPs knowledge or consent

– ID Theft (IRM 10.5.3.1.1(1); IRM 10.5.3.2(1))

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Validity of Collection Action

• Was there notice of the unpaid tax and collection action?

• Was the collection action taken within the collections SOL?

• Was the collection action taken proper?

• Notice – Initial Request for Payment –

• Sent w/in 60 days of assessment of tax.

• Informs TP of amount due & demands payment. IRC 6303

– Later Notices • CP14 – Notice of Unpaid Tax. 3 weeks to pay

• CP501 – “You have a balance due…”

• CP503 – 2nd Notice – “We have not heard from you and you still have an unpaid balance…”

• CP504 – Final Notice – Balance Due – “You have an unpaid amount due on your account. If you do not pay the amount due immediately, the IRS will seize (levy) your state income tax refund and apply it to pay the amount you owe.”

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Validity of Collection Action

• Collection SOL – IRS

• IRS may collect timely assessed tax by levy or court proceeding. I.R.C. § 6502.

• If return filed, 10 years generally.

• Collection Statute Expiration Date (“CSED”) - I.R.M. 5.1.19 (11/22/2013).

• If SFR or no return, clock not started. – I.R.C. § 6501(b)(3) – Notwithstanding [§ 6020(b)(2)], execution of a return by the Secretary

… shall not start the running of the period of limitations on assessment and collection.

– I.R.M. 25.6.1.9.4.5(2) – “If the Service processes a tax return prepared under…IRC Section 6020(b), the assessment date will start the period for the [collections SOL] per IRC Section 6502(a)(1), but does not start the period of limitations for assessment.

– I.R.M. 5.1.19.3.15 (01/01/2006) – Upon deficiency assessment, the IRC § 6502(a)(1) collections SOL begins.

– MD • 7 years from date of tax assessment - Tax-General § 13-1103

• For all practical purposes, no SOL

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Collection Action

• Ways to “Encourage” TP Compliance – Refund Offset

– Lien – Secret and Not So Secret (NFTL & MD)

– Levy – Bank and Wage

– Seizure & Sale of Assets

– MD MVA & Professional License Hold

• Collection Alternatives Ways to Resolve Outstanding Tax Liability – Extension to Pay

– Installment Agreement

– Partial Pay Installment Agreement

– Currently-Not-Collectible Status / Hardship Status

– Offer-In-Compromise

– Innocent Spouse Relief

– Amended Return

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“Encouraging” TP Compliance

Liens – IRS

• Liens – Secret and Not So Secret

– Statutory or Secret Lien – Arises 10 days after notice and demand for payment. I.R.C. § 6321. This notice and demand is almost always the first notice that TP receives concerning the balance due.

– Notice of Federal Tax Lien (“NFTL”) • Filed in the jurisdiction where TP resides and other jurisdictions where

TP owns real property.

• IRS’s lien is perfected against real property upon the filing of the NFTL in the jurisdiction where the property is located. Establishes priority with respect to other creditors of the taxpayer.

• Attaches to T by E property even if tax debt is owed by only one spouse.

• Letter 3172, Notice of Federal Tax Lien and Right to CDP Hearing

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Liens – IRS

• Most Common Types of Relief Associated with Lien:

– Lien Release • Required w/in 30 days if liability is satisfied or collection SOL

expires. I.R.C. § 6325(a).

• Ask for Certificate of Withdrawal as opposed to Release.

• Pub. 1450

– Certificate of Discharge • Most common reason: sale of property to an unrelated party for

FMV.

• Request is submitted to the IRS Advisory Unit using Form 14135.

• Pub. 783

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Liens – IRS

• Most Common Types of Relief Associated with Lien (cont’d): – Subordination of Lien.

• IRS will allow TP to refinance mortgages at a lower rate.

• Argue, if necessary, that the subordination, not release, of the lien will facilitate collection of the tax.

• Pub. 784

– Withdrawal of Filed NFTL. I.R.M. 5.12.9.3.1 (Jan. 1, 2015) • Preferable for credit reporting purposes.

• Does not affect the secret lien. The release extinguishes it.

• I.R.C. § 6323(j) authorize the IRS to withdraw a lien if: – IRS procedures not followed;

– Certain installment agreements entered into

– Withdrawal will facilitate collection of tax

– Best interests of IRS and taxpayer 26


Liens – MD

– Lien arises on “the date of notice that tax is due.”

– Filing of a lien “has the full force and effect of a

judgment lien.”

– A lien continues until satisfied or released by

Comptroller.

– Comptroller v. Shipe, (Court of Special Appeals, Feb. 3,

2015).

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IRS Levy Power

• Levy: a legal seizure of property or rights to property to satisfy a debt.

• IRS can levy if: – Tax properly assessed,

– Tax not paid within 10 days after notice and demand.

• Levy must be made within: – 10 years from assessment

– Collections period as agreed between TP and IRS in writing at time entering into IA or before release of levy. I.R.C. § 6502(a)(2).

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IRS Levy Power

• Types of Levy (applicable to individuals only): – Bank Levy (I.R.M. 5.11.4):

• Attaches only to monies in a bank account at time of levy.

• Levy on joint bank account allowed.

– Continuous Wage Levy (IR.C. § 6331(e), I.R.M. 5.11.5): • Attaches to all future paychecks until/unless levy released. IRC 6331(e).

• Wages, salary, fees, bonuses, commissions

– Federal Payment Levy Program (I.R.C. § 6331(h), I.R.M. 5.11.6): • Continuous levy

• Attaches to specific federal payments – Includes Social Security benefits, Railroad benefits (I.R.M. 5.11.7.2.1)

– Medicare – only in flagrant cases

• Low Income Filter Exclusion – If TPs income is <250% FPL, TP should be excluded from FPLP program. I.R.M. 5.19.9.3.2.3(6).

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IRS Levy Power

• Levy NOT allowed: – During pendency of IA or OIC (begins date OIC received)

– 30 days after rejection of OIC or IA

– While any timely filed appeal of the rejection of OIC or IA is pending

– While IA in effect and 30 days after IA terminated

– If it would cause economic hardship to TP. Vinatieri v. Commissioner, 133 T.C. 392 (2009).

• Property Generally Exempt from Levy (I.R.C. § 6334): – Wearing apparel and school books

– Fuel, provisions, furniture and personal effects not exceeding $6,450

– Primary residence

– Unemployment benefits

– Certain service connected disability payments

– Certain public assistance payments – Title IV, XVI, and SSA

– Child support

– Certain portion of wages (based on standard deduction, allowed personal exemptions)

– Tangible personal property or real property used in the trade or business of TP

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IRS Levy Power

• How implemented. I.R.M. 5.11.1.3.2. Before property can be levied, IRS must provide TP:

1. Notice & Demand, I.R.C. § 6303(a);

2. Notice of Intent to Levy at least 30 days prior to levy, I.R.C. § 6331(d)(2); and • Delivery must be:

– In person,

– Left at dwelling or usual place of business, or

– Sent by certified or registered mail to last known address.

• Notice of Levy: – Final Notice of Intent to Levy - Letter 1058

– Final Notice of Levy Upon Social Security Benefits – CP91

– Forms 668-A & 668-W

• Exception: Jeopardy Levy (I.R.C. § 6331(d)(3), I.R.M. 5.11.3) – No notice required

3. Notice of Right to Collection Due Process (“CDP”) Hearing, IR.C. § 6330.

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IRS Levy Power

• Levy Release. I.R.C. § 6343(a). The IRS shall release a levy: – When liability satisfied

– When release will facilitate collection of liability

– When TP enters into IA, unless agreement provides otherwise

– If determined levy is creating economic hardship for TP

– FMV of property exceeds liability and release of levy on part of the property can be made w/o hindering collection

– If TP and IRS agree that the tax is not collectible (wage/salary levy only)

• Return of Levied Property. If wrongful levy – I.R.C. § 6343(b)

– If Service determines that • Levy was premature,

• TP enters into IA,

• Return of property would facilitate collection, or

• In best interest of TP (with consent of TP, TAS and U.S.). I.R.C. § 6343(d).

– TP or 3rd party must file claim for the return of specific property w/in 9 months from date of levy.

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• Refund Offset. – IRS – Automatic when liability exists.

• Bypass of Refund Offset (TAS) in case of extreme economic hardship

– MD – Refund withheld if taxes or other state debts owed by TP. • Appeals

• Offset provision under Tax-General § 13-909

• Seizure & Sale of Assets. – IRS – I.R.M. 5.10

– MD – Tax-General § 13-816; Commercial Law Article § 15-601-1

• MD MVA Hold & Professional License Hold. – Released IF

• Prove TP is in economic hardship

• Enter into payment plan (25% down + 24 month plan)

• Offer-in-Compromise

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Getting Relief – Collection Alternatives

• Extension to Pay. Allows TP extra time in case of undue hardship – IRS

• Form 1127

• Have to explain why undue hardship to timely pay tax; extension not granted for general statement of hardship

• Must include detailed statement with income, expenses, assets and liabilities

• TP may propose date to pay tax

– MD Lump Sum Payment • More favorable settlement terms

• Penalty and partial interest waivers (case by case basis)

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Installment Agreements • Generally.

– Penalty and interest continue to accrue

– Collections not extended

– Depending on nature of liability, liens may be filed

• IRS – User Fees (IRM 5.14.1.2)

• $43 for low-income TPs (Form 13844)

• $50 for reinstated agreements

• $52 for DDIA

• $120 for others

– How to Request Installment Agreement • On-line payment Agreement (“OPA”)

• By Phone – Individuals: 800-829-1040

– Businesses: 800-829-4933

• My Mail - Form 9465, Installment Agreement Request

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Installment Agreements – IRS

• Types of Installment Agreements.

– Guaranteed Installment Agreement

– Fresh Start – Streamlined Installment Agreements

– Partial Pay Installment Agreement

• Resources.

– I.R.C. § 6159(a).

– Treas. Reg. § 301.6159-1(a).

– I.R.M. 5.14; I.R.M. 5.19.1.5

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Installment Agreements - MD

• Payment plan vs. voluntary payments

• Payment Plan

– As low as $10 per month

– 2 to 99 months

– Need financial discussion statement for longer

payment plans

• Penalty waiver (case by case basis)

• No interest waiver (generally)

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CNC Status – Generally

• IRS - As policy, IRS will not pursue collection if TP does not have means to pay necessary living expenses. – CNC is granted if:

• No available income or assets, or

• Limited assets but levy would create hardship.

– Hardship is based on financial analysis using necessary living expense allowances. • I.R.M. 5.19.17.1.1.3 (Nov. 25, 2014).

– Impact of CNC status: • Collection ceases so long as TP remains in economic hardship.

• Collection SOL continues to run while account in CNC status.

• Existing liens remain in place. New NFTL may be filed.

• No levy while account in CNC status.

• Refund offset continues unless bypass (TAS). 38


CNC Status – How to Request

• IRS – Obtain completed Form 433 & substantiation from client.

– Call IRS PPS/ACS line and request account be put into CNC status.

– Provide financial information statement as requested by IRS rep. IRS will sometimes but not always request substantiation be submitted.

– If SSA, welfare or unemployment benefits are sole source of income or in case of terminal illness, financial statement not needed. IRM 5.19.17.1.1.2.

– Determination usually made during call; IRS sends confirmation letter w/in 10 days.

– Wise to send client follow-up letter explaining impact and encouraging future compliance.

• MD – short term “hardship status” – Obtain completed Form 433 & substantiation from client.

– Fax to Comptroller along with cover letter.

– 6 – 8 weeks to process.

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Offer in Compromise (OIC) – IRS

• I.R.C. § 7122 grants the IRS the authority to compromise any civil or criminal tax obligation.

• Objectives of OIC program, per I.R.M. 5.8.1.1.4. – Effect collection of what can reasonably be collected at the earliest possible time and at the least

cost to the government.

– Achieve a resolution that is in the best interest of both the individual taxpayer and the government.

– Provide the taxpayer a fresh start toward future voluntary compliance with all filing and payment requirements.

– Secure collection of revenue that may not be collected through any other means.

• Basis for Submitting OIC. – Doubt as to Collectibility (“DATC”)– Inability to pay the entire amount during the remaining

collection SOL.

– Doubt as to Liability (“DATL”) – TP is not legally liable for the tax.

– Efficient Tax Administration – TP has sufficient resources to pay the full amount but cannot due to exceptional circumstances which “would cause economic hardship, would be unfair and inequitable.”

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OIC Considerations • TP future compliance. If offer is accepted, TP must remain compliant with all

tax filing and payment requirements for 5 years or until Offer is paid in full, whichever is later. If not, offer is defaulted and liability is reinstated.

• Time remaining until CSED vs. post-offer period of compliance

• All open years must be included. – Need proper assessment of outstanding liability.

– If not included, overlooked liability can be added before the offer is accepted. IRM 5.8.9.5.

• While offer is pending, SOL for assessment and collection is suspended.

• If offer is rejected, IRS keeps deposit and periodic payments and apply those to the outstanding liabilities.

• Once accepted, the offer cannot be re-opened unless there is mutual mistake of material fact. – Treas. Reg. § 301.7122-1(e)(5); Rosenberg v. U.S., 313 F.Supp. 28 (N.D. 1970).

– Rev. Proc. 2003-71.

• Refund in year of OIC acceptance – IRS keeps any refund due to TP for any tax period through the calendar year in which IRS accepts offer.

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Offer in Compromise – IRS

Components of OIC Submission - DATC.

• IRS Form 656, Offer

• IRS Form 656-A, Income Verification - Low-income TPs do not have to pay the $150 processing fee, the 20% lump sum, or periodic payments

• IRS Form 433-A (OIC), Collection Information Statement

• IRS Form 2848, Power of Attorney

• Substantiation – Income - Paystubs, benefit award notices, etc.

– Bank Statements (3 mos.)

– Lease / mortgage statements

– Housing & utility bills

– Medical expenses

– Vehicle expenses

– Other

• Statement in Support of OIC – tells TPs story – facts, law and application

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Offer Amount. Based on Reasonable Collection Potential (“RCP”). Requires analysis of income, expenses, and assets.

• Future Income. – If OIC paid in ≤ 5 months, RCP considers only 1 year of future income.

– If OIC paid in 6-24 months, RCP considers 2 yrs of future income.

• Expenses - IRS Allowable Necessary Living Expense Stds – Website - http://www.irs.gov/taxtopics/tc204.html

– Miscellaneous expenses can include credit card payments and bank fees and charges.

– Payments for TPs post-high school educational loans guaranteed by the federal government allowed.

– Payments for delinquent state and local tax based on a percentage basis of tax owed to the State and IRS allowed.

• Assets. – Dissipated assets.

– Income producing assets. Equity in income-producing assets generally will not be included in RCP for on-going businesses.

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http://www.irs.gov/taxtopics/tc204.html



Payment Terms. All Offers must be fully paid within 24 months of the date Offer is accepted.

• Lump Sum Cash Offer. – 20% down payment and remainder paid in 5 or fewer payments from date

of acceptance; OR

– 20% down payment and remainder paid in 6 to 24 months of acceptance date.

• Periodic Payment Offer. – Requires down payment of 1/24 of offer amount with the Offer, and

remainder payments each month for 24 months while offer is pending.

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• Other Considerations. – Age – taxpayer & debt

– Health of taxpayer and family members supported by taxpayer

– Education

– Work history

– Employability

– Source of Income – Social Security Benefits vs. Wages

– Living Situation

– Reason for Tax Liability

– Past Compliance

– Bankruptcy

– Location of Taxpayer

– Liens Filed

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Offer in Compromise - MD

• Offer-in-Compromise program is “used to resolve tax liabilities with the Comptroller when the taxpayer is unable to pay in full and all other efforts to resolve the liability have been unsuccessful.” – http://taxes.marylandtaxes.com/Tax_Compliance_and_Enforcement/Tax_Compliance_Inform

ation/Get_Help/Assistance_Programs/Offer_in_Compromise.shtml

• Requirements for Maryland Offer-in-Compromise: – TP incurred a delinquent tax liability that has resulted in an assessment.

– TP exhausted all other avenues of administrative appeal.

– TP cannot make an offer-in-compromise if there is any issue remaining that can be appealed.

– Two years must have passed since TP became liable for the tax.

– TP must be current with respect to all return filing requirements with the Comptroller’s Office.

– TP must not be currently involved in an open bankruptcy proceeding.

– TP is unlikely to be able to make payment in full any time in the foreseeable future due to TP’s financial situation.

– TP is either without resources or unable to apply present and/or future resources to paying the outstanding tax liability.

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http://taxes.marylandtaxes.com/Tax_Compliance_and_Enforcement/Tax_Compliance_Information/Get_Help/Assistance_Programs/Offer_in_Compromise.shtml





• Comptroller’s Procedures. – All decisions under the Offer-in-Compromise Program are final and

cannot be appealed. • Carefully consider the facts and arguments you submit with the original offer.

• If no grounds for adjustment exist, then you will receive notice of decline.

• If the Comptroller determines that grounds for adjustment exist but that the amount offered is insufficient, you will be advised as to an acceptable amount.

• If the Comptroller determines that your offer is acceptable, you will be notified so payment can be made.

• The Comptroller’s Office will consider another Offer if circumstances change.

– Must remain current with future filings for at least 3 years after Offer is accepted. Full liability will become due immediately for failure to be current.

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Practical Tips.

• Complete Application – Form MD 656, Offer-in-Compromise Statement

• Doubt as to Liability

• Insufficient Resources

• Economic or Other Hardship

– Form 433-A, Collection Information Statement

• Compliance – Contact Taxpayer Services to ensure tax filings and

balance due. 48



Factors Considered.

• Age – Taxpayer

– Debt

• Income – Amount

– Source

• Location of Taxpayer

• Bankruptcy

• Lien filed

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Determining Viable Options

Financial Analysis

IRS Necessary Living Expense Allowance Standards

• Defines expenses and amounts allowed in IRS’ financial analysis. – CNC

– OIC

• Expenses must be necessary: – For the production of income, and

– Health and welfare of client’s family. IRM 5.8.5.20.1 (Oct. 22, 2010).

• http://www.irs.gov/Individuals/Collection-Financial-Standards

• Changes annually. Check IRS.gov for updates.

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http://www.irs.gov/Individuals/Collection-Financial-Standards








Financial Analysis

IRS Necessary Living Expense Allowance Standards (Cont’d)

• National Standards – IRM 5.15.1.8 (Oct. 02, 2009). – Food, clothing, personal care products, miscellaneous household items

• Client is allowed this amount even if actual expense is lower.

• Verification of this expense is not required.

– Vehicle ownership – monthly lease or car loan payment; $517 per car; 1 vehicle per person.

– Out-of-Pocket Health Care - Expenses for co-pays, prescriptions, etc. • Per person:

– Under 65: $60

– 65 & older: $144

• Verification is not required unless national standards is exceeded.

• Local Standards – Housing & Utilities – IRM 5.15.1.9 (Oct. 2. 2009).

• Based on where TP resides and size of household.

• Functions as a cap on this expense.

• Deviations are allowed but rarely granted.

– Vehicle Operation – IRM 5.15.1.9 (Oct. 2, 2009). • Based on where client resides

• Verification is not required, as long as claimed expense does not exceed the standard.

• Taxes (federal and state) – IRM 5.15.1.10 (Oct. 2, 2009).

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Financial Analysis

Collection Information Statement (“CIS”) – IRS Form 433-A, 433-F, 433-B, 433-A(OIC)

– MD Form 433-A, 433-B

– Client documentation to support CIS • Income

– Last 3 Paystubs,

– Most recent SSA, SSDI, Unemployment, Food Stamp award letters

• Expenses – Last 3 months bank statements

– Last 3 months mortgage statements, utility bills,

– Latest apartment lease, life insurance, homeowner’s / renter’s insurance, auto insurance premium statements

– Other: Medical bills, auto repair bills,

• Assets: home, vehicle, other

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Financial Analysis

Reasonable Collection Potential (“RCP”)

• Amount of money IRS thinks it can collect

from a taxpayer for tax debts

– Net Equity in Assets

– Future Income

• http://www.irs.gov/taxtopics/tc204.html

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Financial Analysis

Collection Information Statement

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Penalty Abatement – IRS

Types of Penalties.

• Failure to file timely – 5% of the tax due up to 25% after 5 months. – I.R.C. § 6651(a)(1).

– Must be reduced by the amount of the failure to pay penalty for each month that both penalties apply. IRM 20.1.2.2.7.3 (April 19, 2011).

• Failure to pay - 0.05% per month for a maximum of 25%. – I.R.C. § 6651(a)(2).

• Failure to make estimated tax payments. – I.R.C. § 6654.

• Many others

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Abatement of Penalties.

• First Time Abatement (“FTA”). – Can be available even if TP doesn’t meet reasonable

cause standard. IRM 20.1.1.3.6.1 (August 5, 2014).

– No prior penalties for prior 3 years, except estimated tax penalty.

– In filing compliance for current year and has paid or made arrangements to pay balances due.

• Reasonable Cause. Relief from penalties shall be granted when TP demonstrates reasonable cause.

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Reasonable Cause – I.R.M. 20.1.1.3.2 (Nov. 25, 2011).

• Reasonable cause should be determined based upon the individual TP’s situation.

• Reasonable cause exists when – TP exercises ordinary business care and prudence in determining

his tax obligation, but is unable to comply with those obligations.

– TP shows that the failure to file a return was not due to willful neglect.

• Failure to pay penalties can be abated if payment in full would have cause an undue hardship.

• TP must show that he or she acted in a reasonable manner during the period in question.

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• Examples of Situations of Possible Reasonable Cause: – Death, serious illness, or unavoidable absence

– Fore, casualty, natural disaster

– Unable to obtain records

– Mistake or ignorance of the law

– Erroneous advice from tax professional

– Erroneous advice from IRS – required to abate penalties

– Oral advice from the IRS

• Penalty abatement request may be made: – Over the phone (not preferred method, except for FTA),

– Using IRS Form 843, or

– Through correspondence to the IRS.

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Penalty/Interest Abatement - MD

• Penalties. – 10% penalty for late payment of tax

– $500 penalty for filing “frivolous” tax return

– May be waived for “reasonable cause” • Case by case basis

• TP must be in “full” - not “substantial” – compliance

– Generally waived if TP agrees to lump sum or payment plan

– One time abatement only

• Interest. – 13% interest rate set by MD Legislature

– May be waived for “reasonable cause” • Case by case basis

• Reliance on tax preparer or mistake by State employee

• No adjustment because interest rate is excessive

– Generally no interest waiver under payment plan (lump sum only)

– One time abatement only

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Amended Returns – IRS

• Reasons to file an amended return: – Change filing status (but not from married joint to married separate);

– Claim additional dependents;

– Claim credits; or

– Claim additional deductions.

• How: – File using Form 1040X.

– Amended return cannot be filed electronically. It must be sent via U.S. Mail.

• When: – In order to receive refund, it must be filed

• within 3 years of original due date of the return, or

• within 2 years of payment.

– Can be filed at anytime to reduce a tax assessment. I.R.M. 21.5.3.4.6 (May 30, 2014).

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Amended Returns – IRS

• Generally, the amended return does not extend the assessment SOL. – I.R.C. § 6501(c)(7).

• If TP believed original return was accurate when filed, TP is not required to file an amended return.

• No statutory right to file an amended return requesting a reduction in tax; however, IRS will consider such requests as a matter of policy. – I.R.M. 25.6.1.10.1 (Oct. 1, 2013).

• Also consider a Doubt as to Liability Offer-in-Compromise.

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Amended Returns - MD

Amended Income Tax Denials

– 3 year statute of limitations for refund

– Statute of limitations if only decreasing tax without

refund?

– Must provide documentation of federal acceptance

– 1 year statute of limitation extension if federal

adjustment

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Audit Reconsideration - IRS

• Audit Reconsideration: a process by which TPs can contest the result of an IRS audit of TPs filed tax return, or a tax return created for TP by IRS (an SFR).

• During audit, examiner can only inspect books/records for each taxable year once – Unless TP requests otherwise, or

– Unless IRS, after audit, notifies TP in writing that additional inspection is necessary. I.R.C. § 7605(b).

• Reasons for Request – I.R.M. 4.13.1.3 (Dec, 31, 2009): – TP did not appear for audit,

– TP moved and did not receive IRS correspondence,

– TP has new information, which was not presented during original audit,

– TP has been denied tax credits during prior audit,

– TP disagrees with assessment IRS made by SFR, or

– TP disagrees with assessment resulting from audit of his/her tax return.

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Audit Reconsideration - IRS

• Criteria for Acceptance - I.R.M. 4.13.1.4 (10/1/2006). In order to request an audit reconsideration, – TP must have filed a tax return.

– The assessment must be unpaid or credits were denied by the IRS.

– TP must identify which adjustments s/he is disputing.

– TP must provide additional information not considered during the original audit.

– Additionally: • No final USTC or other court determination must exist

• TP did not previously sign an agreement to pay the amount due – No OIC filed,

– No signed Form 906 Closing Agreement or Form 870-AD (Appeals Office)

• Timing of Audit Reconsideration Submission: – Within 3 years from date return was filed, or

– Within 2 years from date the taxes were paid, whichever is later.

• Resources: – IRS Pub. 3598

– I.R.M. 4.13, Audit Reconsideration

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Audit Reconsideration – MD

“Application to Correct An Erroneous Assessment” – TGA 13-509

• Maryland tax assessments become “final” after 30 days

• Can apply to correct erroneous assessments made beyond 30 day appeal period

• Application is made to Hearing & Appeals Section

• Length of lateness does not matter, but may only be filed once

• Document request from Hearing Officer

• Hearing Officer review documents to determine if adjustment of tax assessment is warranted

• No “late” appeals of refund denials

• No appeal to Maryland Tax Court …decision in final!

• Cannot increase tax liability for late appeal

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Innocent/Equitable Spouse Relief

• Spouses are jointly and severally liable for any tax, interest and penalties due on a MFJ return, regardless of who earned the income creating the tax liability.

– I.R.C. § 6013(d).

– MD

• Divorce - Even if the divorce decree states that one spouse will be responsible for pre-divorce tax debt, joint and several liability continues.

• Death of spouse – joint and several liability of remaining spouse continues.

• Exception – Innocent spouse / Equitable Relief

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• In certain cases, one spouse can obtain relief as to tax debt due as a result of other spouse’s income. – Innocent Spouse.

• Understatement of tax. I.R.C. § 6015(b). – Requesting spouse did not know, or had no reason to know of the

understatement

– Not equitable to hold the requesting spouse liable.

• Deficiency. I.R.C. § 6015(c). – Must be made w/in 2 years of commencement of IRS collection activity

– No longer married; legally separated or no longer living with non-requesting spouse

– Equitable Relief. I.R.C. § 6015(f) provides relief from underpayment or understatement of tax when TP not eligible for I.R.C. § 6015(b) or (c).

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• How to request: – Review and discuss factors to determine eligibility:

• Knowledge / reason to know of understatement, deficiency on the joint return

• Control and involvement in financial affairs, tax return filing and payments

• Transfer of assets from non-requesting spouse to requesting spouse

• Significant benefit by requesting spouse

• Abuse by non-requesting spouse

• Duress on part of requesting spouse

• Marital status / living situation

• Economic hardship (requesting spouse)

• Allocation of income attributable to each spouse

• Compliance with tax laws

• Mental or physical health

– Form 8857, Request for Innocent Spouse Relief

– Supporting documentation

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Injured Spouse – IRS

• Injured Spouse. – Used when one spouse’s share of an overpayment

shown on a return was, or is expected to be, applied to the other spouse’s outstanding liability: • Federal or state taxes,

• Child or spousal support payments,

• State unemployment compensation debts,

• Federal nontax debt (ex – student loans)

– How to request: • Form 8379, Injured Spouse Claim and Allocation

• Submitted with return

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Injured Spouse – MD

• Injured Spouse.

– Form 502INJ

– To file an injured spouse claim, the injured spouse must have:

• Filed a joint return with the spouse owing the debt

• Received income

• Made payments

• An overpayment will be applied to other spouse’s: past due state or federal taxes, child support or other state debt.

• Innocent Spouse. MD generally follows IRS determination.

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Other Considerations

Appeal Rights - IRS

• Collection Due Process (“CDP”)

• Collection Appeals Process (“CAP”) – I.R.M. 8.24.1.2 (Dec. 02, 2014)

– Any proposed collection action can be appealed, including: • Levy or seizure action that has been or will be taken.

• Notice of Federal Tax Lien (NFTL) that has been or will be filed.

• Rejected, proposed for modification, or proposed for termination or terminated installment agreements.

– Must have managerial conference first.

– No judicial review.

• Equivalent Hearing – Untimely CDP Requests – I.R.M. 8.22.4.3 (March 29, 2012).

– I.R.C. § 6320 hearing must be requested within 1 year & 5 days of the date of the CDP Notice.

– I.R.C. § 6330 hearing must be requested within 1 year of the date of the CDP Notice.

– No judicial review. I.R.C. § 6331(k)(1)(B); § 7122(c).

– A Decision Letter will be issued as opposed to a Notice of Determination.

– Collections SOL is not tolled.

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Appeal Rights - IRS

• Appeal of Rejection of Offer-in-Compromise – 30 days from date of rejection.

– Is a statutory deadline.

– No judicial review

– In most cases, the issues are narrowed on appeal.

• Appeal of Tax Lien Filing pursuant to I.R.C. § 6320 – No appeal rights until after the lien is filed.

– Deadline for filing appeal is on the IRS letter transmitting the lien.

– If applicable, argue that: • Lien withdrawal will facilitate collection, and

• The lien does not give the government much security in terms of assets it can attach.

– CDP Appeal must be filed by deadline to preserve judicial review in U.S. Tax Court.

– Filing appeals tolls collections SOL.

– Request should be in writing using Form 12153.

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Appeal Rights - IRS

• Appeal of Notice of Intent to Levy pursuant to I.R.C. § 6330 – Must be filed w/in 30 days of notice. If not, IRS can take enforcement action.

– Can only dispute underlying liability, incl. penalties, if no prior opportunity to do so.

– Can propose any / all collection alternatives: • Offer-in-Compromise

• Penalty Abatement

• Installment Agreement

• CNC Status

• Innocent Spouse Relief

• Interest Abatement

– Adverse Notice of Determination – gives TP right to judicial review in U.S. Tax Court. • Standard of review is abuse of discretion for failure to accept a collection alternative. Sevo v.

Commissioner, 114 T.C. 604, 610 (2000).

• De Novo review for penalty and interest abatement denials. Goza v. Commissioner, 114, T.C. 176, 181-82 (2000).

• U.S. Tax Court Petition 73


Appeal Rights - MD

– Hearing & Appeals (“H&A”) • Located in Baltimore

• Part of the Compliance Division

– Administrative Appeals of Tax Assessments and Refund Denials

– Appeal must be in writing: • Letter to: Comptroller of Maryland, Hearings & Appeals, 301 W.

Preston Street, Room 315, Baltimore, MD 21201

• Email: [email protected]

• Online: www.marylandtaxes.com

• Fax: (410) 333-7745

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Appeal Rights - MD

• Types of Appeals. – Hearing Not Required (“HNR”).

• Simple issues

• Resolved with document submissions

• Does not warrant personal appearance

– Penalty and Interest Waiver Requests (“PWs”). • Appeal of penalty and interest assessments

• Unable to resolve with collections

– Hearing Request. • Complex or novel legal issue

• Factual dispute

• Personal appearance in Baltimore Office

– Application to Correct Erroneous Assessment. • Missed 30 day window for a timely appeal

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Appeal Rights - MD

• Informal Administrative Hearing.

– Baltimore Office Only

– Format:

• 45 minutes for individuals

• Recorded

• Hearing officer introduces case

• Swearing in parties who are testifying

• Auditor gives overview of assessment

• TP or Representative presents case

• Hearing Officer controls hearing

• Sets deadline

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Appeal Rights - MD • Informal Hearing.

– Respond to Hearing Officer’s request and deadline.

– Hearing Officer evaluates evidence and testimony.

– May disallow evidence or testimony based on credibility or relevancy.

– Disputes on constitutional issues, Comptroller’s office policy, legal issues, and evidentiary matters typically go to MD Tax Court.

– H&A and MD Tax Court does not waive tax due to financial hardship.

– One of three decisions: • Closing Letter

• Settlement Agreement

• Notice of Final Determination

– Decision appealable to MD Tax Court.

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Affordable Care Act - IRS

• Premium Tax Credit (“PTC”). – Treated for assessment and collections purposes like existing refundable

credits. • Anyone who receives advanced payments of PTC (APTC) must file a tax return

to reconcile advanced payments with the PTC actually due to the taxpayer. Treas. Reg. § 1.36B-4.

• Excess payments are treated as additional income tax liability. I.R.C. § 36B(f)(2). Treas. Reg. § 1.36B04(a)(1)(i).

– Deficiency procedures apply per I.R.C. § 6211(b)(4). • But math error authority will (may) also be used. I.R.M. 21.6.34.2.16.3.1 (Oct. 1,

2014).

• Penalties and interest may be assessed as with any other overpaid refundable credit.

• Because ACA does not impose limits on IRS’s collection powers for excess PTC, IRS may use levy, lien and refund offset to collect.

• Same collections options as any other tax apply, including CDP rights.

– No right to USTC petition before assessment.

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Other Considerations –

Affordable Care Act - IRS • Individual Shared Responsibility (“ISRP”).

– ISRP reported via federal tax return.

– If not paid with return, IRS will send notice & demand (like income tax)

– If not paid by due date after notice & demand, I.R.C. § 6601 interest accrues from date of the notice & demand.

– NO right to CDP because IRS is not legally obligated to provide rights conferred by I.R.C. § 6330 and I.R.C. § 6331 when employing its offset authority. • Boyd v. Commissioner, 451 F.3d 8 (1st Cir. 2006).

– Collection. • IRS MAY offset refunds, send letters requesting voluntary payment, consider ISRP when considering

collection alternatives for other IRS debt.

• IRS may NOT use levy, criminal sanctions, or file NFTL to collect ISRP. § 5000A(g)(2).

• IRS may NOT seize state refunds or Social Security benefits.

– Penalties. ISRP is assessed and collected like any other assessable penalty. Following do not apply: • I.R.C. § 6651 Failure to Pay Penalty

• I.R.C. § 6662 Accuracy-Related Penalty

• I.R.C. § 6663 Fraud Penalty

• I.R.C. § 6654 Estimated Tax Penalty

• I.R.C. § 6657 Bad Check Penalty

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Tips for Negotiating with IRS

• Carefully evaluate options prior to submitting a proposal to the IRS, especially if it will extend the Collection SOL.

• Stop collection action without extending the collections SOL.

• Avoid the filing of the NFTL

• Bankruptcy / health issues / age can be used to reduce collection potential.

• Press IRS on collection alternatives

• Promptly respond to IRS requests for information. Missed deadlines lead to levies.

• Make a strong case in your initial submission.

• Be thorough and well-organized in your submission.

• Manage client expectations.

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Research Tools

• Internal Revenue Code (Title 26)

• Regulations

• IRS Website

• Internal Revenue Manual (I.R.M.) – www.irs.gov/irm

• Case Law

• Treatises and Handbooks – Effectively Representing Your Client Before the IRS

– http://www.abanet.org/abastore/index.cfm?section=main&fm=Product.AddToCart&pid=5470721

• News & Journals – www.journalofAccountancy.com/news

– CPA newsletter –

– IRS Newswire - http://www.irs.gov/uac/Subscribe-to-IRS-Newswire

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http://www.irs.gov/irm

http://www.abanet.org/abastore/index.cfm?section=main&fm=Product.AddToCart&pid=5470721



http://www.journalofaccountancy.com/news

http://www.irs.gov/uac/Subscribe-to-IRS-Newswire








Tax Return Preparation

Referrals Federal Income Tax Return Preparation.

• IRS Suggestions as listed on www.IRS.org – VITA (Volunteer Income Tax Assistance) or TCE (Tax Counseling for the Elderly):

http://www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers)

– AARP Foundation Tax-Aide Program: available late January until April 15 - http://www.aarp.org/applications/VMISLocator/searchTaxAideLocations.action

– IRS Free File Do-It-Yourself Tax Return Preparation: http://www.irs.gov/uac/Free-File:-Do-Your-Federal-Taxes-for-Free

• CASH Campaign – Sites open during tax season):

• Maryland CASH Campaign – http://mdcash.org/free-tax-preparation/

• Baltimore CASH Campaign – http://www.baltimorecashcampaign.org/Tax-Preparation/Tax-Sites.aspx

– During off-season, taxpayers can use free software: http://www.myfreetaxes.com/

• UMD Law School Tax Clinic: 410-706-3295

• Bon Secours Foundation: “Our Money Place” - Althea Saunders-Ranniar – Tel: 410-362-3560 – [email protected] / http://bonsecoursbaltimore.com/about-us-bon-secours-community-works.html

• Annie E. Casey Foundation: http://www.aecf.org/MajorInitiatives/CenterforFamilyEconomicSuccess/EITCFreeTaxAssistance.aspx

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http://www.irs.org/

http://www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers















http://www.aarp.org/applications/VMISLocator/searchTaxAideLocations.action

http://www.irs.gov/uac/Free-File:-Do-Your-Federal-Taxes-for-Free















http://mdcash.org/free-tax-preparation/





http://www.baltimorecashcampaign.org/Tax-Preparation/Tax-Sites.aspx





http://www.myfreetaxes.com/




http://bonsecoursbaltimore.com/about-us-bon-secours-community-works.html











http://www.aecf.org/MajorInitiatives/CenterforFamilyEconomicSuccess/EITCFreeTaxAssistance.aspx



Tax Return Preparation

Referrals – cont’d Maryland Income Tax Return Preparation.

• Locations: http://taxes.marylandtaxes.com/Resource_Library/Taxpayer_Assistance/Contact_Information/Local_Offices_and_Directions.shtml – Hours: Monday – Friday, 8:30 am to 4:30 pm

– http://taxes.marylandtaxes.com/Individual_Taxes/Taxpayer_Assistance/Free_Income_Tax_Preparation.shtml

• MVLS also has a handful of volunteer accountants who are willing to prepare tax returns for our clients. If you wish to obtain help from one of the MVLS volunteer accountants, please contact me.

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http://taxes.marylandtaxes.com/Individual_Taxes/Taxpayer_Assistance/Free_Income_Tax_Preparation.shtml

http://taxes.marylandtaxes.com/Individual_Taxes/Taxpayer_Assistance/Free_Income_Tax_Preparation.shtml

Tax Controversy Training for Pro Bono Lawyers

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