Taxpayers’ rights and the IRM: Part 1

Editor: Arthur Auerbach, CPA, CGMA

This first part of a two–part series on taxpayer rights and Internal Revenue Manual (IRM) procedures addresses questions including whether an anticipated liability can be part of an installment agreement (IA), which circumstances default an IA, the applicable period in which to cure the default, and what rights a taxpayer has to protest prior to the IRS’s filing of a notice of federal tax lien (NFTL). It also covers collection appeal rights and procedures that revenue officers (ROs) are required to follow when contacting taxpayers. It includes excerpts from the IRM with commentary, designed for practitioners’ use as a desk book. Part 2, which will appear in the October issue of The Tax Adviser, will cover IRS enforcement actions, penalty abatements, and federal tax lien procedures.

Practitioners should be familiar with IRS Publication 1, Your Rights as a Taxpayer, and procedures stated in the IRM. Consider the IRM as the IRS’s internal employee handbook, a set of procedures and standards that IRS personnel are expected to follow. Tax practitioners representing taxpayers should be familiar particularly with IRM Chapters 4, 5, 8, 20, 21, and 25, which govern examinations, collections, appeals, penalties, account management, and special enforcement matters. IRS employees are not always fully familiar with the IRM’s requirements. As a result, practitioners often need to reference specific IRM sections to ensure that cases are handled correctly and in accordance with established procedure.

Carefully read all IRS notices and letters received by the taxpayer and ensure that each is responded to in a timely manner. Notices are constantly being revised. Remember that 30 days is not the same as one month;deadlines are strict and counted by days, not calendar months. All appeal requests should be sent by certified mail or private delivery service to ensure proof of timely filing. Be patient throughout the process. Document all work thoroughly, and if you do not receive a response, follow up after 45 days. Practitioners’ role is to protect the taxpayer’s rights at every step.

In response to notices and letters such as CP503, CP504, and CP523, a practitioner can file a Form 9423, Collection Appeal Request, to request participation in the Collection Appeals Program(CAP). As a general rule, the IRS will suspend the collection action being contested until the appeal is resolved, unless the IRS determines that collection of the liability is in jeopardy. This suspension generally prevents the filing of a notice of federal tax lien, the issuance of a levy, or the default of an IA while the appeal is pending.

An IRS Notice LT40 informs the taxpayer that after 45 days from the date of the notice, the IRS may contact third parties such as a bank or employer. The IRS cannot issue a levy until the third–party notice is issued. The LT40 also states, “We may file a Notice of Federal Tax Lien without giving you advance notice.” The authors believe that this statement violates Publication 1’s Right No. 1, “The Right to Be Informed.” It states that taxpayers “have the right to be informed of IRS decisions about their tax accounts and to receive clear explanations of the outcomes.” The authors’ firm files Form 9423 in response to all LT40 notices.

Collection appeal rights

A CAP right (Form 9423) is the primary avenue of administrative appeal that a taxpayer has before a federal tax lien is filed (after the federal tax lien is filed, taxpayers may file Form 12153, Request for a Collection Due Process or Equivalent Hearing).

Ensurethat your client is afforded CAP rights before the IRS files a federal tax lien. CAP rights are an administrative procedure for contesting collection actions. Per IRM Section 5.12.9.3.1, Withdrawal for Premature or Inadvertent Filings (Dec. 7, 2015), a federal tax lien may be withdrawn if the filing was premature or not in accordance with administrative procedures.

Requesting access to records: IRM Section 4.2.5.6, Request for Open Examination File and Workpapers (March 16, 2022), states:

The examiner may be asked by a taxpayer or representative for a copy of the examiner’s files or workpapers. Under IRC §6103(e), Disclosure to Persons Having Material Interest, taxpayers have a right to receive their return information (administrative file and workpapers) unless the Secretary determines that the release of the information would seriously impair tax administration. Examiners should provide the taxpayer and their POA [power of attorney] a copy of the file and workpapers for open examinations directly when asked, to the extent their release does not adversely impact tax administration.

Practitioner: Requests for access to records pertaining to an open case and a copy of the examiner’s files or workpapers are known as direct release. The authors’ firm makes it a practice to request ROs’ and field agents’ workpapers and history sheets on most cases. The following is a sample request:

We request a copy of the Service Center and Revenue Officer history sheets prior to the Collection Appeal Hearing, as allowed under Internal Revenue Manual Section 5.1.10.7.4(2) (Feb. 26, 2016),which states, “Taxpayers seeking access to records pertaining to an open case should, to the extent possible, be given access to their records as part of the normal administrative process without having to resort to a formal Privacy Act or Freedom of Information Act (5 U.S.C. §552) request.”

Relevant taxpayer rights: IRM Section 1.2.1.6.2, Policy Statement 5–2, Collecting Principles(Feb. 17, 2000), discusses IRS–wide policies:

• Paragraph 3 of the policy statement addresses service and assistance, stating: “All taxpayers are entitled to courteous, responsive, and effective service and assistance in all their dealings with the Service.”
• Paragraph 4 states: “We will actively assist taxpayers who try to comply with the law, and work to continually improve the quality of our systems and service to meet the needs of our customers. All taxpayers, whether delinquent or fully compliant, are entitled to prompt and professional service whenever they deal with Service employees.”
• Paragraph 5 affirms a taxpayer’s rights, stating: “We will observe taxpayer’s rights, including their rights to privacy and to fair and courteous treatment.”
• Paragraph 7, headed “Compliance,” states: “The public trust requires us to ensure that all taxpayers promptly file their returns and pay the proper amount of tax, regardless of the amount owed.”
• Paragraph 9, headed “Case Resolution,” states: “While we will actively assist taxpayers to comply, we will also take appropriate enforcement actions when warranted to resolve the delinquency. To resolve a case, good judgment is needed to make sound decisions on the appropriate action needed.”

Comment: A policy statement is a set of rules or regulations to be followed by all IRS personnel. The IRS policy statements can be found in IRM Section 1.2.1.

Right to an explanation of appeal rights: Too often, an RO’s first action is to issue an IRS Letter 1058, Final Notice of Intent to Levy and Notice of Your Right to a Hearing, and/or a Letter 3172, Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320, initiating levy or lien enforcement against a taxpayer’s property or rights to property, with little or no explanatory communication. Following are relevant IRM provisions in this instance.

IRM Section 5.1.9.2, Informing Taxpayers of Their Appeal Rights (Aug. 28, 2025), paragraph (2), states: “Revenue officers need to clearly explain the appeal provisions to taxpayers throughout the collection process and thoroughly answer questions taxpayers may have regarding their right to appeal.”

IRM Section 5.1.9.2, paragraph (4), states:

Collection personnel are required to advise taxpayers of their right to appeal under CAP when an installment agreement (IA) is rejected, modified or proposed to be modified, or about to be terminated. As part of the initial contact, Collection personnel should also advise taxpayers of their right to appeal under CAP prior to and after levy or seizure or the filing of an NFTL. Collection personnel should also remind taxpayers of their CAP rights when the taxpayer disagrees with a NFTL filing or levy or seizure action. If collection action was deferred or suspended while a collection alternative was considered, ensure the applicable tax periods have an active advance third–party contact notification. … Collection personnel should also attempt to contact the taxpayer either verbally or in writing to remind them of their CAP rights before resuming collection action, unless collection is at risk. Refer to IRM 5.1.9.4, Collection Appeals Program (CAP).

Practitioner: Letters to the IRS should include the following wording: “We are in disagreement with any proposed lien or levy action and demand that we be allowed to exercise our appeal rights under a CAP prior to the filing of any federal tax lien or levy.”Try to resolve the case at the lowest possible level. The conference with the manager is a second chance to reach a resolution before the case goes to Appeals. File a Form 12153 and request an alternative resolution upon receipt of IRS Notice LT11 or Letter 1058, which states: “We haven’t received your payment for overdue taxes. We intend to seize your property or rights to property. You must contact us immediately,” or Letter 3172.

Whenever a taxpayer is granted appeal rights, the practitioner should timely pursue that appeal to preserve the taxpayer’s procedural protections and strategic options. Practitioners can request that the RO hold the case for 45 days and try to resolve the issue with the RO and, if needed, extend for another 45 days with the permission of the group manager. Failure to take advantage of filing a Form 12153 could leave a client open for a levy. A CAP appeal can generally be withdrawn before a decision is rendered.

Discussion before filing the appeal: IRM Section 8.24.1.3, CAP Appeals (Sept. 28, 2021), paragraph (10), states: “Before a taxpayer requests a CAP appeal, he or she must discuss the problem with the Collection manager. Taxpayers or representatives who make themselves unavailable to the manager for the mandatory discussion will not be entitled to a CAP appeal unless it is apparent the IRS manager did not offer a ‘reasonable’ opportunity for such discussion to occur” (emphasis added).

If the manager does not call back, state in the explanation on line 15 of Form 9423 that you did not receive a callback.See this sentence headed “Note” in IRM Section 8.24.1.3(10): “The discussion with the group manager on proposed modification, modified, proposed termination, terminated or rejected installment agreements is not mandatory due to statutory right to appeal these actions. See IRC 7122(e)(2).”

CAP conference: The representative will receive a “cold call” from an Appeals settlement officer (SO) to have the CAP conference on the spot. Do not be pressured into a cold call appeal CAP conference. Schedule a conference at your convenience but on a short time frame. Appeals’ goal is to complete CAP conferences within five business days from the time the case is assigned (IRM §8.24.1.3(6)); unless it involves a complex issue, the Appeal SO has 15 business days to resolve the case (IRM §8.24.1.3(8)). SOs are instructed in IRM Section 8.24.1.3.8(5) to allow a taxpayer a “reasonable time” to schedule a CAP conference.

Installment agreements

Numerous helpful IRM provisions address IAs. IRM Section 5.14.1.4.2, Compliance and Installment Agreements (Dec. 23, 2022), at paragraph (19), allows the current year’s anticipated tax liability to be included in an IA: “Analyze the current year’s anticipated tax liability. If it appears a taxpayer will have a balance due at the end of the current year, the accrued liability may be included in an agreement. … Compliance with filing, paying estimated taxes, and federal tax deposits must be current from the date the IA begins.”

Practitioner: If the taxpayer is requesting an IA for prior years and the current–year unfiled tax return is not filed and will have a liability, it is important to file the current year’s return and include the current year’s liability in the IA. The taxpayer must be in compliance. Suggest to the taxpayer that, going forward, the taxpayer should change their withholding if the taxpayer is an employee or start remitting estimated tax payments. Remitting estimated tax payments monthly may be easier on the taxpayer’s cash flow.

If the RO requests a copy of the return to file with the Service Center, only provide a copy of the return. Do not file the return through the RO. The return could sit in the RO’s file and not be forwarded.

IRM Section 5.14.1.4.4, Increases, Decreases, Varied Payment Amounts; Completing and Processing Installment Agreements (July 2, 2024), states at subparagraph (10)(c):

While meeting or speaking with taxpayers, if they do not agree to payment amounts or increases in payments, advise them that a meeting with the next level of management may be requested [emphasis added]. Also, employees may include managers in discussions about IAs with taxpayers, if it assists them in finalizing agreements. If approval of an agreement is not planned, inform the taxpayer that the status of the agreement is “pending,” and rejection will be recommended and that rejected request may be appealed. Then refer such cases for IAR [independent administrative review].

IRM Section 5.11.2.3.1.6, Installment Agreement (Oct. 26, 2017), states: “[A] levy is required to be released if the IRS entered into an installment agreement with the taxpayer, unless the agreement allows for the levy.”

IRM Section 5.14.1.5, Levy Restrictions and Installment Agreements (Dec. 23, 2022),states that no levy may be made on taxpayer accounts when the following actions occur:

1. While requests for IAs are pending.
2. While IAs are in effect.
3. For 30 days after requests for IAs are rejected.
4. For 30 days after IAs are terminated.
5. While an appeal of a default, termination, or rejection is pending or unresolved.

Pending IAs

Pending IAs are discussed under IRM Section 5.14.1.3, Identifying Pending, Approved and Rejected Installment Agreement Proposals on IDRS [Integrated Data Retrieval System] (July 2, 2024), paragraph (5). Taxpayers need to provide specific information for an IA request to be processed, as described next. Also, if the information in 1 through 4 below is provided but it is determined that the agreement request was made to delay collection action, accounts should notbe identified as being in pending IA status (see IRM §5.14.3.3, Installment Agreement Requests Made to Delay Collection Action (Oct. 10, 2020)).

For the IRS to identify accounts as pending IAs and process them, taxpayers must:

1. Provide information sufficient to identify the taxpayer, generally, the taxpayer’s name and the taxpayer’s identification number.
2. Identify the tax liability to be covered by the agreement.
3. Propose a monthly or other periodic payment of a specific amount. A date of payment should also be requested.
4. Be in compliance with filing requirements (see IRM §5.14.1.4.2).

Practitioner: The taxpayer may be required to submit Form 433–A, Collection Information Statement for Wage Earners and Self-Employed Individuals; 433–F, Collection Information Statement; or 433–B, Collection Information Statement for Businesses, with the request for an IA.

The effect of a pending IA: A pending IA is one of the criteria to have a referral to the State Department for denial or revocation of a taxpayer’s passport due to a seriously delinquent tax debt reversed (see Sec. 7345(b)(2)(A)). Under paragraphs (3) and (4) of IRM Section 5.14.1.3 (July 2, 2004), the IRS is directed to designate pending IAs with codes within 24 hours of the request for an IA to indicate that an IA has been proposed or approved. These codes prevent levy enforcement actions.

IRM Section 5.14.1.2, Installment Agreements and Taxpayer Rights (July 2, 2024), paragraph (7), provides for a reduced penalty rate:

Certain taxpayers who enter into IAs and file timely will have the failure to pay penalty reduced from a half to a quarter percent per month for any month in which an installment agreement is in effect [emphasis added]. … Input of TC [transaction code] 971 AC [action code] 063 reduces failure to pay penalty from one half (0.5) to one quarter (0.25) percent per month if all of the following conditions are met:

1. The IA was entered into on or after January 1, 2000.
2. The balances are due from an individual (whether IMF [individual master file] or BMF [business master file], due on income, employment or excise tax returns).
3. The tax return(s) was timely filed, including extensions.
4. No CP 504, LT11, or Letter 1058 was sent (indicated by a TC 971 AC 069), increasing the failure to pay penalty from one-half (0.5) to one (1) percent.

Comment: If agreements are terminated, penalties increase to 0.5%. Input of TC 971 AC 163 causes a reversal of the reduction.

IRM Section 5.14.1.3, paragraph (1), provides: “Proposals to enter into IAs may result from letters, phone contacts, voice mail, e–mail, or other communications between taxpayers and IRS personnel.” It advises that if proposals to enter into IAs are received by email, IRS personnel should not respond by email. Email responses violate the IRS’s Security Policy. In addition, they should not solicit emails from taxpayers regarding IAs or other tax collection or examination issues. Paragraph (2) states: “All taxpayers have the right to request IAs. Requests for IAs, including those on unassessed/pre–assessed modules, will be noted in the ICS [integrated collection system] case history, and must be identified on IDRS within 24 hours.”

Practitioner: In the current collection environment, the pending IA transaction code 971 is not input timely on the taxpayer’s account. The IRS is prohibited from initiating levy action while the pending IA is under consideration. A tax debt included in a pending IA is not considered seriously delinquent, and if it has been certified as seriously delinquent, the IRS will issue a CP508R notice reversing the certification to the State Department of the tax debt as seriously delinquent.

Practitioner: Powers of attorney are notreceiving copies of CP508C, Notice of Certification of Your Seriously Delinquent Federal Tax Debt to the State Department, or the CP508R reversal letter.

The six-year and one-year rules

IRM Section 5.14.1.4.1, Six–Year Rule and One–Year Rule (March 31, 2023), paragraph (1), provides:

Six–Year Rule: When a taxpayer is unable to full pay immediately and does not qualify for a streamlined IA, the taxpayer may still qualify for the six–year rule. Taxpayers are required to provide financial information in these cases, but are not required to provide substantiation of reasonable expenses. All expenses may be allowed if: the taxpayer establishes that they can stay current with all paying and filing requirements, the tax liability, including projected accruals, can be fully paid within six years and within the CSED [collection statute expiration date], and the expense amounts are reasonable. Do not automatically allow agreements based on the six–year maximum if expenses are unreasonable.

Practitioner: The six-year rule does not apply to corporations, partnerships, LLCs (where the LLC is identified as the liable taxpayer), or any business expenses. The six-year rule also does not apply to BMF liabilities owed by in-business sole proprietors or LLCs where the individual owner is identified as the liable taxpayer. Paragraph (2) of IRM Section 5.14.1.4.1 provides:

One–Year Rule: Taxpayers who cannot full pay their accounts within six years may be given up to one year to modify or eliminate excessive necessary expenses. In some cases, by modifying or eliminating some conditional expenses, a taxpayer may be able to full pay the liability plus accruals within the six–year limit. This would enable a taxpayer to retain some conditional expenses under the Six–Year rule. The taxpayer does not have to qualify for the Six–Year rule in order to apply the One–Year rule.

Default and termination

IRM Section 5.14.11.4, Default and Terminations: IDRS Monitored Agreements (Jan. 1, 2025), provides at paragraph (1): “When a taxpayer does not meet the terms of an installment agreement, she or he will be notified in writing and given 30 days to comply with the terms of the agreement before the agreement is terminated.”

IRM Section 5.14.11.1.1, Background (March 14, 2022), provides:

The IRS defines default of an installment agreement as providing inaccurate or incomplete information, or not meeting the terms of the agreement. … Taxpayers that do not meet the terms of the installment agreement will be notified in writing and given 30 days to comply with the terms of the agreement before the termination of the installment agreement. When this happens, taxpayers receive a notice called a CP 523 or Letter 2975. The notice will inform the taxpayer about the default and the action the IRS can take to recoup the taxes owed.

IRM Section 5.14.11.4(2) provides: “A taxpayer with an IDRS monitored installment agreement will receive Notice CP 523, Installment Agreement Default Notice — Notice of Intent to Levy. The notice or letter is sent by certified mail for domestic addresses, or by registered mail if taxpayers have foreign addresses.”

Practitioner: File Form 9423 to protect the client’s right to appeal the default of the IA. Cure the new period and/or the missed payment as soon as possible. The taxpayer has 30 days to file Form 9423. The appeals request should be filed by certified mail. The cure should be submitted within 30 days.

Allowable expenses

IRM Section 5.15.1.8, Allowable Expense Overview (July 24, 2019), paragraph (6), states:”National and local expense standards are guidelines. If it is determined a standard amount is inadequate to provide for a specific taxpayer’s basic living expenses, allow a deviation. Require the taxpayer to provide reasonable substantiation and document the case file.” The national standards and local guidelines are revised annually, usually in April or May.

Practitioner: If the taxpayer or the IRS believes reviewing the last three months of expenses does not reflect the actual yearly expenditures, additional months — up to one year — may be reviewed. A proposed levy action or filing of a notice of federal tax lien following the issuance of Notice CP504 or Letter 1058 is not appropriate where the taxpayer requested an IA in conjunction with a CAP request. Input of pending IA codes is necessary per IRM Section 5.14.3. Levy action is generally prohibited under Sec. 6331(k)(2) when a proposed IA is pending, so when these codes are present, the IRS may not take levy action.

IRS contacting taxpayers

An RO is required to adhere to the following IRM procedures regarding taxpayer contact. IRM Section 5.1.10.3.2, Initial Investigative Interview (April 24, 2025), paragraph (9), states:

When appropriate, issue Letter 1058, Notice of Intent to Levy and Notice of Your Right to a Hearing, and all required enclosures. Typically, the letter is delivered when a deadline is set for the taxpayer to take a specific action. (See IRM 5.11.1.3 for other factors related to delivering L–1058.) Use discretion when issuing the L–1058 on initial contact with an IMF–only balance due taxpayer.

Practitioner: If there is a pending IA code 971, the RO is not allowed to issue Letter 1058. If Letter 1058 is issued and the pending IA code is entered, the RO will need to withdraw the Letter 1058 and issue an apology letter.

IRM Section 5.1.10.4, Responding to Taxpayers (April 24, 2025), paragraph (1),states: “You are required to respond promptly to customer request or concerns. Return calls as soon as practicable after receiving a voice message. Check messages at least daily (more than once when able) to ensure taxpayers receive a timely response.”

IRM Section 5.14.1.3.1, Cases Received From ACS or Campuses (Dec. 23, 2022), paragraph (1), states:

If cases are assigned to the field from ACS [automated collection system] or campuses with TC 971 AC 043 present on one or more of the tax modules, employees will:

a. Attempt to contact the taxpayer and determine if the taxpayer requested an IA.

b. If the taxpayer requested an IA, follow the procedures in IRM 5.1.10.3.2 … regarding requesting payments.

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Contributors

Larry J. Wolfe, CPA, is founding practitioner of Larry J. Wolfe Ltd. in Skokie, Ill., specializing in tax controversy and resolution as well as tax preparation and planning. He is a member and former chair of the AICPA Tax Practice & Procedures Committee. In 2024, he received the Illinois CPA Society Lifetime Achievement Award. In 2025, Forbes magazine recognized him as one of America’s Best-in-State CPAs. Stan Green, CPA, is head of tax controversies for Larry J. Wolfe Ltd. and a former IRS manager. Magdalena D. Vervilos, Esq., is a tax controversy attorney practicing at Larry J. Wolfe Ltd., representing individuals and businesses in disputes before the IRS, state tax authorities, and the Tax Court.For more information about this column, contact thetaxadviser@aicpa.org.