Family physicians, many of whom are board-certified internists, value that every patient is unique, and it is their job to create a personalized plan of care to produce the best possible outcome. Few family physicians (none that I know of) would perform heart surgery or transplant a kidney. Yet, their role is critical to the overall health of their patients going through such procedures.
In this world of specialization, our profession has considered family CPAs to be trusted advisers. Their role has been to prepare tax returns, provide tax advice, set up accounting systems and processes for client businesses, and be the financial quarterback for the bulk of their clients. In so doing, they rely upon and work with wealth managers, attorneys, and other specialists in coordinating those services. Just like the family physician, the family CPA creates a personalized plan of care for clients to produce the best possible outcome.
When clients get a notice from the IRS, their first contact with a professional is often with the family CPA. Because the family CPA does a great job at their tax planning and tax return preparation, the CPA must be comfortable working with the IRS in resolving tax controversies. Clients' presumption that family CPAs are comfortable dealing with the IRS is untrue because dealing with the IRS is a specialty, much like heart surgery, that many CPAs have developed expertise in (tax controversy specialists). But, often, the family CPA has not.
So, what is the role of family CPAs in tax controversy matters? In this article, we will focus on their role in IRS collection matters. The family CPA should:
- Help clients avoid owing money to the IRS in the first instance by working with clients to withhold sufficient taxes from their pay and/or pay quarterly estimated taxes. Similarly, work with clients on their budgets if they are strained in paying the IRS on the normal "pay-as-you-go" schedule.
- After clients fall behind with the IRS, be sure that they are focused on paying the current year first. The IRS will usually provide great flexibility for prior years' tax debts so long as current and future years' taxes are being paid timely.
- Encourage the client to promptly open all IRS mail and share it with the family CPA. Many IRS issues can be mitigated by simply dealing with them early.
- Secure full-pay installment agreements for clients who owe less than $50,000 ($50,000 being "streamlined") early in the IRS collection process. Those agreements can often be done online and without the IRS's filing a Notice of Federal Tax Lien (NFTL).
- For cases requiring financial disclosure to the IRS, work closely with the tax controversy specialist in terms of the client's budget and in determining a repayment plan that the client can meet.
- For clients whose tax liability varies significantly from year to year (usually those with businesses) run tax projections to ensure that they are not overpaying or underpaying their current year taxes. This is especially crucial for clients in installment agreements or negotiating other means of satisfying their tax liabilities; as overpayments will be seized to satisfy back taxes in situations wherein such cash flow could have been used more effectively in the current year.
The tax controversy specialist will usually deal with:
- Offers in compromise;
- Placing accounts into currently-not-collectible status;
- Negotiating partial-pay installment agreements;
- Negotiating terms of full-pay installment agreements that require full financial disclosure;
- IRS liens, levies, and appeals;
- Innocent spouse cases;
- Penalty abatements; and
- Setting strategies that may involve bankruptcy, expiring collection statutes, and IRS actions to reduce clients' tax liabilities to judgment.
Note: In our experience, penalty abatement requests prepared by those not specializing in tax controversy often lead to quick denials and take positions that may be inconsistent with IRS standards for penalty abatement. The appeal timelines of the denials are often missed, placing the taxpayer in a nearly impossible position to secure penalty abatement. Thus, tax controversy specialists should be brought in to write the first penalty abatement requests.
The first four items above require providing the IRS with financial disclosure packages (i.e., Forms 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, 433-B, Collection Information Statement for Businesses, and/or 433-F, Collection Information Statement) and a plan on how to satisfy the client's tax liabilities. Financial disclosures can take substantial time and effort and, for those with complex financial situations, can comprise hundreds of pages of backup documentation. Those packages and repayment plans, particularly in light of COVID-19 and income levels that are varying significantly from even 2019, require an accurate current snapshot of client's situation and a strategic/experienced eye on the best approach.
The expanded role for the family CPA
The Tax Adviser covered the IRS's new program to assist taxpayers with their tax debts in "IRS Announces Help With Tax Debt" on Nov. 3, 2020. The article discusses IR-2020-248, which is the IRS's Nov. 2 news release on the topic. IR-2020-248 announced the IRS increase in the threshold to $250,000 for providing financial statements or substantiation by individuals seeking full-pay installment agreements. The support for the $250,000 threshold is part of Internal Revenue Manual (IRM) Section 188.8.131.52.6.4.3 in this publicly available update. This new program expands the opportunity for the family CPA to enlarge his or her role in tax controversy matters. So, let's go through the rules and considerations.
$250,000 balance due threshold
If the taxpayer owes $250,000 or less and the case has not yet been assigned to a Revenue Officer, that taxpayer can enter into an installment agreement with the IRS to pay his or her liability without providing financial disclosure. Here are the areas that may need clarification:
The $250,000 threshold is based upon the "assessed liability," not the total liability due to the IRS. Thus, a taxpayer may owe more than $250,000 and still qualify for the new no financial disclosure requirement if the assessed liability does not exceed $250,000. This amount can be determined by looking at the taxpayer's IRS account transcript. For example, if a taxpayer's account transcript reads:
In this example, the $235,246.65 is the assessed liability.
Case not yet assigned to a Revenue Officer
If the case is assigned to a Revenue Officer, full financial disclosure will be required. Under a new rule, a case will be deemed to be assigned to a Revenue Officer once the IRS computer system has an indicator that the case is being sent out to the field, even if no specific Revenue Officer has actually been assigned the case. For cases $250,000 and under, this is not done early in the collection process. Taxpayers have to ignore several IRS notices before those cases are referred to the field.
IR-2020-248 provides that the $250,000 threshold applies to "qualified individual taxpayers," which means it does not apply to business taxpayers. Who is covered by the undefined term "qualified individual taxpayers"? If taxpayers fail to qualify, they may be ineligible to secure any installment agreement. So, who will not qualify? From past history and current statements by IRS officials, the author can provide some insight. First, taxpayers must have filed all of their tax returns. Taxpayers who owe money for 2017, but have not yet filed 2018 and/or 2019 tax returns will likely not qualify. Yet, "all" usually does not always mean all, but instead usually involves a six-year lookback for filing compliance.
Therefore, if taxpayers have been compliant for the past eight years, for example, but did not file returns in years prior to 2012, the IRS is not likely to keep those taxpayers out of this current program. Generally, to secure an installment agreement, taxpayers must also show that they are current with tax payments. Do the estimates/withholding being paid in for the current year satisfy the requirements to avoid a Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, penalty? In the past, this would disqualify taxpayers from entering into installment agreements. However, with the COVID-19 backdrop, the IRS is likely to make narrow exceptions to this rule so long as there is some assurance that the tax shortfall will not continue.
Ability to secure loans and/or liquidate assets
No mention is made in IR-2020-248 about existing IRS requirements to have taxpayers attempt to secure debt against their real estate or to liquidate assets. However, taxpayers are still encouraged to make full or partial payment if possible and it may be in their best interest to do so considering penalty and interest accruals. As no financial statement is being collected and, accordingly, no full financial analysis is being performed, the IRS will not require attempts to refinance mortgages.
Terms of repayment
Overall time frame
For streamlined installment agreements, the IRS has used a 72-month repayment plan. This 72-month period has also been incorporated into the "Six-Year Rule" of IRM Section 184.108.40.206.1 (1/1/16) wherein taxpayers who can fully pay their liabilities within six years, and within the collection statute expiration date (CSED), will be allowed to do so as long as their expenses are reasonable, even if they exceed the IRS standards. Generally, the CSED is 10 years from when the tax is assessed. The tax is assessed shortly after the tax return is filed. Note that the taxpayer can extend the CSED in taking advantage of opportunities to defer collection. Some of those opportunities include the submission of an offer in compromise, requesting a Collection Due Process hearing, or requesting an installment agreement.
Although not stated within IR-2020-248, IRS leaders have indicated to the author that taxpayers will be able to secure approval of installment agreements over any time frame that is completed within the CSED. This is a critical change to current policies, which require payment within six or seven years even if the CSED is still outstanding for a longer period of time.
Amounts and timing of individual payments
For the most part, the IRS prefers monthly level payments. However, in the past the IRS would allow seasonal payments for those with seasonal income and varying payments. The possibilities for repayment are endless so long as there is a reasonable basis for it.
It is not unusual to secure increasing payments over time. So, one might have an installment agreement of $1,000 per month for 24 months, $2,000 per month for 24 months thereafter and $3,000 per month until the debt is fully paid. Installment agreements with more than two increases are manually monitored and, therefore, discouraged.
The IRS will continue to allow for varying payments with this new tax relief. It will consider taxpayer payment proposals, as it has done in the past, that increase or decrease over time so long as the balance of tax, with accruals, is fully paid before the CSED.
IR-2020-248 is unclear on how and when it will be providing relief from IRS tax liens. Those liens become public upon the filing of an NFTL, which, up until the COVID-19 crisis, had been routinely filed by the IRS automated collection system personnel. IR-2020-248 simply provides that for tax year 2019 only, taxpayers who owe less than $250,000 "may qualify to set up an Installment Agreement without a notice of federal tax lien filed by the IRS." Yet an article on the IRS website by Darren Guillot, deputy commissioner for Collection and Operations in Small Business/Self-Employed Division, adds that "the IRS can offer one Installment Agreement opportunity with no lien filed" (Guillot, "IRS Offers New Relief Options to Help Taxpayers Affected by COVID-19" (Nov. 24, 2020)). Thus, a taxpayer who has previously defaulted on an installment agreement is unlikely to get an opportunity to secure a second agreement without the filing of a NFTL.
It appears that if you owe $250,000 or less for 2019 alone that you most likely can now secure a full-pay installment agreement without the filing of a NFTL. This is fantastic news. Hopefully, the IRS will expand this to 2020 and subsequent years. Also, what if a taxpayer files back returns for 2019 and prior years today? Shouldn't they have the benefit? They are coming in and attempting to resolve their tax liabilities promptly. Hopefully, the IRS will expand the no lien tax policy to all taxpayers securing an installment agreement who owe less than $250,000 and who are being quickly responsive to IRS notices. Those coming forth on their own to file back taxes should be included in this category.
Why is the IRS doing this? In the author's opinion, there are two reasons. First, the IRS is truly committed to providing relief to taxpayers dealing with COVID-19. Second, by making it easier for those behind in their taxes to enter into installment agreements, more taxpayers will pay voluntarily. This will free up resources to go after those intentionally refusing to pay their taxes even though they have the ability to do so. It appears that the IRS is using the "carrot and stick" approach to change the behavior of taxpayers and ensure the stability of our nation's revenues.
The elimination of financial disclosures for tens of thousands of taxpayers provides an opportunity for the family CPA to expand his/her services to clients with minimal additional risk.
— E. Martin Davidoff, CPA, Esq., is the partner-in-charge–National Tax Controversy for Prager Metis CPAs, in Cranbury, N.J. For comments about this article generally or suggestions about other topics in the newsletter, contact Sally Schreiber, Tax Adviser senior editor at Sally.Schreiber@aicpa-cima.com.