Taxpayers’ rights and the IRM: Part 2

Editor: Arthur Auerbach, CPA, CGMA

This second part of a two–part series on taxpayer rights and Internal Revenue Manual (IRM) procedures addresses matters including IRS enforcement actions, penalty abatements, and federal tax lien procedures. The earlier portion of the article, “Taxpayers’ Rights and the IRM: Part 1,” appeared in the July 2026 Tax Adviser and covered installment agreements (IAs) as well as collection appeal rights and procedures.

The IRM is essentially the IRS employee handbook, which IRS employees are expected to follow in carrying out their duties. Citing relevant taxpayer rights language at an appropriate time can have a persuasive effect on IRS personnel and support your position.

Best used as a reference, this two–part article summarizes key provisions of the IRM and other sources that recognize taxpayer rights. The discussion is organized by topic.

IRS enforcement actions

Pre-levy considerations

Taxpayers have the right to a fair and just tax system. Under these rights, taxpayers “have the right to expect that any IRS inquiry, examination, or enforcement action will comply with the law and be no more intrusive than necessary, and will respect all due process rights, including search and seizure protections, and will provide, where applicable, a collection due process hearing.” Also, taxpayers “have the right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay, or ability to provide information timely. Taxpayers have the right to receive assistance from the Taxpayer Advocate Service if they are experiencing financial difficulty or if the IRS has not resolved their tax issues properly and timely through its normal channels” (IRS Publication 1, Your Rights as a Taxpayer, items 7 and 10).

Levy determinations are made on a case–by–case basis, requiring revenue officers (ROs) to exercise sound judgment when considering taxpayers’ individual circumstances. When ROs are determining if a levy is appropriate, IRM Section 5.11.1.3.1, Pre–Levy Considerations (November 24, 2021), paragraph (2), instructs them to consider “[a]nything that the revenue officer knows about the taxpayer’s financial condition including economic hardship.” A levy should not be issued if the RO has verified that it would cause an economic hardship, although additional information from the taxpayer may sometimes be needed to make that determination. Other considerations include:

• The taxpayer’s responsiveness to attempts at contact and collection;
• The taxpayer’s compliance history;
• The taxpayer’s effort to pay the tax; and
• Whether current taxes are being paid.

Practitioner: There is no requirement that taxpayers experiencing economic hardship be in filing or payment compliance before a levy is released (seeVinatieri,133 T.C. 392 (2009)).

“Under Sec. 6343(a)(1)(D), a levy is required to be released when the IRS determines the levy is creating an economic hardship, i.e., the levy will cause the taxpayer to be unable to pay their reasonably necessary living expenses” (IRM §5.11.2.3.1.4(1), Economic Hardship (Dec. 21, 2020)).

“Per Sec. 6343(a)(1)(C), 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 §5.11.2.3.1.6(1), Installment Agreement (Oct. 26, 2017)).

IRM Section 5.14.1.5, Levy Restrictions and Installment Agreements (Payment Plans) (July 20, 2026),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 agreements are rejected.
4. For 30 days after agreements are terminated.
5. While a timely appeal of a default, termination, or rejection is pending or unresolved.

Regarding IRS Letter 1058, Notice of Intent to Levy and Notice of Your Rights to a Hearing, (L1058) the IRM provides that the issuance of the letter is not appropriate or may not be appropriate under certain circumstances, including but not limited to the following:

1. Levy action is prohibited when a taxpayer requests an IA during the initial contact or when a pending IA transaction code has posted to the account (see IRM §5.14.9.2.3(10), Cases Returned From Independent Administrative Review (Aug. 21, 2025), for guidance on issuing L1058 and Letter 4052, Rejection of Proposed Installment Agreement, at the same time).
2. A levy would not be issued if mitigating circumstances exist, such as economic hardship or doubt as to the correctness of the liability, even if the taxpayer did not comply with the deadline.
3. Information obtained during the attempted contact indicates the taxpayer may no longer be at the last known address.
4. Individual Master File accounts have been in a suspended status, e.g., “assigned to the queue” awaiting review or reported currently not collectible (CNC) for more than 12 months.
5. The taxpayer satisfactorily demonstrates that the deadline set will be complied with; e.g., the taxpayer provides documentation that a loan is in process to fully pay the liability (IRM §5.11.1.3.3.3.3(9), Issuing Notice of Intent to Levy/Notice of a Right to a Hearing in Field Collection (July 13, 2026)).

Within 24 hours of a request for an IA, the Transaction Code (TC) 971, Action Code (AC) 043, which indicates there is a pending IA, is required to be posted to the taxpayer’s account (IRM §5.14.1.3), Identifying Pending, Approved and Rejected Installment Agreement (Payment Plan) Proposals on IDRS (July 20, 2026). Generally, levy action is prohibited when these codes are present in the account.

Penalty abatements

First-time abatement

In July 2026, the IRS announced (News Release IR–2026–83) that it will replace the first–time abate (FTA) program with a new automatic exemption from penalty (AEP) program, initially applicable to original returns filed for tax years 2025 and 2026. Under AEP, eligible taxpayers will automatically receive relief from failure–to–file, failure–to–pay, and failure–to–deposit penalties, eliminating the need to request such relief.

Reasonable-cause abatement

For reasonable–cause penalty abatement, IRM Section 5.1.15.16.5, Penalty Relief Denial and Appeals (March 17, 2025), sets forth the following procedures and appeal rights in paragraphs (1)—(5):

1. If the RO determines that a penalty does not qualify for abatement based on reasonable cause, the taxpayer must be informed of that decision. The RO must provide written notice of the denial and the taxpayer’s appeal rights, regardless of whether the request was made in person, by telephone, or in writing.
2. If a request for penalty relief is denied after assessment, the RO will request TC 290 for a zero amount, using Blocking Series 98/99 with Reason Code 062 and Hold Code 3 using Form 4844, Request for Terminal Action, which is forwarded to Centralized Case Processing (CCP) for input. When the Reasonable Cause Assistant (RCA) is used, the adjustment information is transmitted directly to CCP for input, and Form 4844 is not required.
3. If the taxpayer disagrees with the determination and maintains that the penalty should be abated, the RO must provide written notification to the taxpayer using Pattern Letter 2413.
4. If the taxpayer submits a written appeal, the RO who denied the abatement request will review the appeal to determine whether the taxpayer has provided new information. New information is information that was not previously discussed with or raised by the taxpayer or not previously investigated and documented by the RO. If the appeal contains new information that changes the abatement decision, the RO will take the following actions:
   • Document receipt of the appeal in the Integrated Collection System (ICS) case history and include details of the new information and basis for penalty abatement, and
   • Secure managerial approval of the penalty appeal and follow abatement procedures.
5. If the taxpayer submits a written appeal, the RO who denied the abatement request will review the appeal to determine whether it contains any new or additional information that may change the original determination to sustain the penalty. If the review does not result in a change to the penalty determination, the RO will document the receipt of the appeal in the ICS case history with a statement of the date on which the taxpayer’s appeal was received, that it did not contain any new information, and that the case is being forwarded to the group manager for review prior to transmission to Appeals.

Financial analysis of hardship

There is a difference between financial hardship and extreme financial hardship, as each may warrant different collection considerations and relief options. Financial hardship is when a taxpayer is not able to meet their ordinary and necessary living expenses. Extreme hardship exists when there is a mortgage foreclosure or delinquent utility bills where there is an indication that there will be a stoppage in service.

IRM Section 5.16.1.2.9, Hardship (March 3, 2025), provides:

Follow the procedures in IRM 5.15.1, Financial Analysis Handbook, to determine the correct resolution of the case based on the taxpayer’s assets and equity, income and expenses:

• A hardship exists if a taxpayer is unable to pay reasonable basic living expenses.
• The basis for a hardship determination is from information about the taxpayer’s financial condition provided on Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B, Collection Information Statement for Businesses.

The same section in paragraph (10) states:

IRC 6343(e) requires the release of a levy on salary or wages payable to or received by a taxpayer, upon agreement with the taxpayer that the tax is currently not collectible. See IRM 5.11.2.3.1.4(6), Economic Hardship. Steps should be taken to accomplish the release immediately. Case histories must be reviewed to ensure that wage levies are released prior to declaring an account uncollectible under hardship closing codes. The case history must be documented.

Reminder: If TC 670 with designated payment code (DPC) 05 (levy) is present on any module or a regular series of payments is noted, ensure that the disposition of the levy is known.

Then, under paragraph (12), it states: “Caution: If a hardship determination is verified, a levy cannot be issued or left in place to persuade a taxpayer to file.”

IRM Section 5.15.1.8, Allowable Expense Overview (July 24, 2019), provides at paragraph (10): “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.”

CNC status

IRM Section 5.16.1.2.9, Hardship (March 3, 2025), states at paragraph (16):

Case Closing Letter 4223, Case Closed – Currently Not Collectible, will be issued to the taxpayer and/or Power of Attorney (POA) when a case is closed as CNC – hardship. The case closing letter will only be used when the collection investigation of the taxpayer entity is concluded. Letter 4223 is systemically generated by ICS after GM [group manager] approval of the CNC. Follow procedures in IRM 5.1.1.5, Case Closing Letters. For cases not on ICS, Letter 4223 is available on the publishing web site located at Publishing Catalog.

Practitioner:Cases closed under CNC are usually reviewed every two years. IRM Section 5.16.1.3.3, Cases Reported Currently Not Collectible Based Upon a Prior Form 53 (April 13, 2021), states at paragraph (1):

If another delinquent module becomes due and owing after the initial CNC, the new module may be reported CNC without further investigation if the prior CNC determination is no more than twelve months old. … A NFTL [Notice of Federal Tax Lien] determination is required per IRM 5.12.2.3.2, Notice of Lien Determinations – Determination Requirements. [See Wolfe, Green, and Vervilos, “Taxpayers’ Rights and the IRM: Part 1,” 57–7 The Tax Adviser 56 (July 2026).]

Federal tax liens

A Collection Appeals Program (CAP) appeal is submitted on Form 9423, Collection Appeal Request. It is the only appeal right available to a taxpayer prior to the filing of a federal tax lien.

IRM Section 5.12.2.4, Determination Criteria for “Do–Not–File” or Deferring the NFTL Filing (Nov. 9, 2015), addresses under paragraph (1) the circumstances under which federal tax liens should not be filed.

1. When considering the non-filing or deferring of an NFTL determine if the taxpayer is in filing and payment (Federal Tax Deposits, estimated tax payments, notice accounts, etc.) compliance. You should also consider the following:

a. The use of a collateral agreement (see IRM 5.6.1, Collateral Agreements and Security Type Collateral, for additional information).

b. Whether filing the NFTL then using a subordination of the NFTL for loan and financing situations is appropriate in lieu of not filing an NFTL (see IRM 5.12.10, Lien Related Certificates).

c. Whether filing the NFTL then using a discharge of the property for removing specific property from the Federal Tax Lien is appropriate in lieu of not filing an NFTL (see IRM 5.12.10, Lien Related Certificates).

5. The filing of an NFTL may affect a taxpayer’s credit rating, but this alone is not sufficient reason to withhold filing the NFTL.

IRM Section 5.12.2.4.2, Do Not File (DNF) Criteria (Nov. 9, 2015), provides under paragraph (5):

NFTLs should not be filed under the following circumstances:

a. The taxpayer is a corporate entity or LLC (where the LLC is liable) that has gone through a liquidating bankruptcy or receivership regardless of dollar amount. Document the proceeding number in the case history.

b. When a non-paying officer has been assessed the Trust Fund Recovery Penalty (TFRP) and an adjustment to the TFRP is pending because the assessment has been paid by another officer.

c. There is an indication that the liability has been satisfied or that credits are available to satisfy the liability.

d. The taxpayer is in bankruptcy and the NFTL relates to liabilities incurred before the taxpayer filed for bankruptcy. Section 362(a) of the Bankruptcy Code imposes an automatic stay that prohibits all creditors from taking certain collection actions against debtors in bankruptcy. Consult Insolvency or Counsel to determine if an NFTL may be filed after the automatic stay ends.

e. There is genuine doubt as to the validity of the liability (for example, assessments made against victims of identity theft; see IRM 5.1.28, Identity Theft for Collection Employees, and IRM 5.12.11.2.1, Identity Theft and Liens [related to requested or filed NFTLs]. But the revenue officer must document the taxpayer’s justification and the method of resolution i.e., payment tracer, amended return, credit transfer etc.).

IRM Section 5.12.2.4.3, Defer Criteria (Nov. 9, 2015), states:

(1) Use “Defer” when the decision to delay filing will be revisited (e.g., doubt as to liability pending taxpayer documentation or Form 911 submission). …

(2) When a revenue officer determines to defer the filing of an NFTL, the action must be supported by an … ICS history entry that clearly states why filing an NFTL is not proper at that time. The entry must also include a follow–up date by which the revenue officer expects the requested information and/or payment or the date the NFTL will be filed.

(3) A decision may be made to defer the filing of a NFTL when the revenue officer can substantiate with reasonable certainty … that filing the NFTL will hamper collection. The determination to defer filing the NFTL because it will hamper collection must be part of an agreed resolution between the RO and the taxpayer that deferral will both facilitate collection and be in the best interest of the government and the public. In general, a hamper collection determination could apply in the following situations:

a. A viable business, which factors account receivables, proposes a reasonable resolution with supporting documentation. See IRM 5.12.10.6.1.1, Subordination to Factoring Agreements, for more information on factoring.

b. A viable business, which operates on a floor plan, proposes a reasonable resolution with supporting documentation.

Example: Automobile dealerships may use floor–plan financing to acquire their inventory of vehicles.

c. A viable business, which would lose its revolving account receivables upon the filing of an NFTL, proposes a reasonable resolution with supporting documentation.

d. When a taxpayer is near closing on refinancing a property to secure equity from the home in order to pay his tax liability and the filing of the NFTL will prohibit closing the loan.

e. When a taxpayer alleges the assessment may be a result of Payroll Service Provider fraud and the filing of the NFTL may affect the taxpayer’s ability to secure funds to full pay or fund an offer in compromise, see IRM 5.1.24.5.2, Initial Contact with a Client of a Third-Party Payer.

Comment:The authors have been successful in obtaining an assurance that no federal tax lien will be filed in the following circumstances:

• The filing of the federal tax lien will hamper the collection of the tax;
• The taxpayer is a licensed professional, and the filing of the federal tax lien could affect the license renewal;
• The taxpayer is a member of an organization such as a law firm, and its partnership agreement states that the filing of the federal tax lien is grounds for termination; or
• The filing of a federal tax lien is grounds for default of an existing loan.

An IA could state that no federal lien will be filed unless the taxpayer defaults on it. A box at the bottom of the Form 433–D, Installment Agreement, will need to be checked by the RO.

Practitioner: Try to resolve the case with the IRS employee and provide information in a timely manner. If additional time is needed to provide information, the IRS employee can delay the lien determination in anticipation of closing the case. The lien determination can usually be deferred for 30 days and can be deferred more than once. At the conclusion of the case, a lien determination can be made. If the lien determination is to file a federal tax lien, the practitioner can file a CAP. Again, CAP is the only appeal right the taxpayer has before a federal tax lien is filed.

Pursuing remedies with patience but persistence

Keep in mind that not all IRS personnel are fully trained and versed in current procedures or familiar with relevant provisions of the IRM. If you believe an employee is not following proper procedures, request to speak with a manager (everyone has a boss). If the issue remains unresolved, consider escalating the issue through the chain of command by contacting the territory manager, area director, or program manager. Taxpayers and their representatives are entitled to request from the IRS employee their manager’s name and phone number. Continue escalating through the chain of command until you are confident the matter is being handled correctly.

Tax practitioners serve as advocates for taxpayers, ensuring their rights and interests are protected throughout all interactions with the IRS. It is important to reassure clients and provide informed guidance. Practitioners should never guarantee specific outcomes, as results depend on the facts, applicable law, and IRS procedures. Effective representation also requires regular communication. Keep clients informed at every stage of the matter, promptly advise them of important developments and deadlines, and strive to meet those deadlines to avoid unnecessary complications.

Finally, exercise patience throughout the representation; IRS employees often deal with heavy workloads and varying levels of training and experience. Likewise, clients may be anxious, frustrated, or overwhelmed by the process. A patient, professional approach can help foster productive interactions and lead to better outcomes.

Practical considerations

Read each notice carefully and determine whether it is an appealable notice and/or whether it requires a response. The authors generally file appeals for most appealable notices and send the appeal letter via certified mail (i.e., for CP504, CP523, Letter 3172, Letter 1058, LT–11, or denial of penalty relief).

A Letter 2644C informs the taxpayer that the IRS requires additional time to respond. Generally, no action is required from the taxpayer unless the IRS’s response deadline has passed without a response.

As mentioned in Part 1 of this column, Notice LT40 is issued by the service center to inform the taxpayer that the IRS may contact third parties regarding the collection of the taxpayer’s liability after 45 days from the date of the notice. The notice states, “We may file a Notice of Federal Tax Lien without giving you advance notice.” Our office’s position is that this statement on the notice is a violation of taxpayers’ rights. In response, we file a Form 9423 (CAP) requesting that no lien be filed.

We have taken the position that, if a federal tax lien is filed after filing a CAP request, the IRS has failed to follow proper administrative procedures. In such cases, we request withdrawal of the federal tax lien pursuant to IRM Section 5.12.9.3.1(1), which provides that “[an] NFTL may be withdrawn if the filing was premature or otherwise not in accordance with administrative procedures.” Following the filing of the lien, the taxpayer has the option to file either Form 12153, Request for a Collection Due Process or Equivalent Hearing, or Form 9423, seeking withdrawal of the lien.

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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 and 2026, Forbes magazine recognized him as one of America’s Best-in-State CPAs. Until his death on May 5, 2026, Stan Green, CPA, was 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.