IRS provides temporary relief from audit and collection activities

On March 25, 2020, the IRS announced the People First Initiative (IR-2020-59). The new initiative is aimed at helping taxpayers by providing relief on a variety of issues ranging from easing payment guidelines to postponing compliance actions. The temporary relief lasts through July 15, 2020, when the IRS presumably will resume normal operations. Significantly, the People First Initiative provides:

• The IRS will generally not start new field, office, and correspondence examinations; and
• General collection activities are suspended, but certain actions will continue.

Highlights of the provisions are outlined below:

Suspended collection activities

• Existing installment agreements: For taxpayers under an existing installment agreement, payments due between April 1 and July 15, 2020, are suspended.

• Offers in compromise (OIC): The IRS is taking several steps to assist taxpayers in various stages of the OIC process, including allowing taxpayers until July 15 to provide requested additional information to support a pending OIC.

• Field collection activities: Liens and levies (including any seizures of a personal residence) initiated by field revenue officers will be suspended during this period.

• Automated liens and levies: New automatic, systemic liens and levies will be suspended during this period.

• Passport certifications to the State Department: The IRS will suspend new certifications to the State Department for taxpayers who are “seriously delinquent” during this period. 

• Field, office, and correspondence audits: During this period, the IRS will generally not start new field, office, and correspondence examinations. In-person meetings involving current field, office, and correspondence examinations will be suspended.

• Independent Office of Appeals: Appeals employees will continue to work their cases. Although Appeals is not currently holding in-person conferences with taxpayers, conferences may be held over the telephone or by videoconference.

• Practitioner Priority Service: Practitioners are reminded that, depending on staffing levels and allocations going forward, there may be more significant wait times for the PPS.

Certain collection activities will continue

Shortly after the IRS unveiled the People First Initiative, the director of Collection, Small Business/Self-Employed Division, issued a memorandum dated March 30, 2020, to all collection executives providing details on suspended collection activities, as well as certain collection activities that will continue. (See Schindler, Memorandum for All Collection Executives, SBSE-05-0320-0030 (3/30/20).)

For tax professionals handling collection cases, the recent IRS memorandum is a must-read because it provides insight into what actions the IRS Collections can and cannot take, through July 15, 2020. Reading the memorandum can help properly advise clients, manage expectations, and avoid surprises.

Clients who have a tax collection problem may wonder what steps an IRS Revenue Officer can take during this time and, most importantly, to what extent they are protected against collection. The answer is that, although the IRS has suspended general collection activities, revenue officers are continuing to take certain collection actions, such as requesting credit reports, conducting online research, contacting taxpayers, and making trust fund recovery penalty assessments to protect an imminent statute of limitation expiration. This means that a client could still receive a phone call or fax from a revenue officer requesting status on a case or information.

Highlights of the provisions are outlined below:

• Taxpayer contacts: Employees will generally make initial contacts by telephone and may request that taxpayers provide documentation, but will not warn taxpayers of enforcement action.

• Assignment of case inventory to ROs: Managers will continue to assign inventory that is suited for employees to work under these circumstances.

• High-income nonfiler cases (HINF): The IRS will continue to assign HINF cases, and employees will continue to work them, although summonses to taxpayers and third parties will not be issued absent exigent circumstances.

• Case actions: The following actions will continue without additional managerial approval:
  • Establishing new installment agreements;
  • Determining a taxpayer’s liability is currently not collectable;
  • Requesting credit reports; and
  • Making a trust fund recovery penalty assessment to protect a statute of limitation that is about to expire.

This is a partial list only, and practitioners should refer to the memorandum for details on specific issues.

LB&I compliance priorities during the COVID-19 pandemic

Shortly after the Small Business/Self-Employed Division issued its March 30, 2020, memorandum to collection executives, Large Business and International followed suit and issued a memorandum dated April 14, 2020, to all LB&I employees. (See Memorandum for All LB&I Employees, LB&I Compliance Priorities During the COVID-19 Pandemic, LB&I-04-0420-0009 (4/14/20).)

The LB&I memorandum sets forth its compliance priorities during the COVID-19 pandemic and, most importantly, provides:

• LB&I will not start an examination of any new return unless it falls within Category II below; and
• Managers have discretion on prior, subsequent, and related returns associated with an existing examination.

The activity that LB&I is continuing (Category II) is summarized below:

• Compliance Assurance Process, Large Corporate Compliance, Foreign Account Tax Compliance Act, Qualified Intermediary programs, and current open examinations proceed as usual, but without in-person contact.

• New examinations arising from Voluntary Disclosure Practice cases, claims, and other pre-refund verification programs proceed as usual, but without in-person contact.

• Work should continue on the Syndicated Conservation Easements campaign, Micro Captive Insurance campaign, Sec. 965 transition tax campaign, and any future campaign related to the law known as the Tax Cuts and Jobs Act, P.L. 115-97, but without in-person contact. Existing and any new campaigns will be assessed to determine whether they are postponed or allowed to continue with clear communications to follow on how and whether they will proceed.

• Workload reviews of existing inventory will continue.

• Examiners can charge time to new cases (e.g., audit planning) where taxpayer contact will not be made until after the emergency declaration is lifted.

• Prior time limits on classification activities are suspended.

• Other consensual work initiated by taxpayers can proceed as usual, but without in-person contact, for example, pre-filing agreements or refund claims.

Takeaway: A new era in field audits

The IRS likely will continue to work cases without in-person contacts for the foreseeable future after July 15. This, no doubt, will change the dynamics in handling field examinations. Practitioners should anticipate agents conducting taxpayer interviews on the telephone and having meetings with revenue agents, and even group managers, over the phone. The same holds true for meeting with IRS Appeals.

Documents may need to be dropped off or faxed to the agent, without the benefit of an in-person meeting to review and explain the documents in person. This can make resolving a complex case more challenging, especially if the case involves complex estate or business tax planning documents. There is no substitute for the ability to have an in-person meeting and walk through the documents with the agent. A taxpayer’s testimony and credibility also play an important role in helping to resolve cases because the agents can “size up” the taxpayer. This, unfortunately, is lost on the telephone.  

Practitioners may want to submit a memorandum explaining the legal and factual basis for the taxpayer’s position in a clear, straightforward manner to help reach a favorable field closure. Another option may be to submit a video file. In short, audits will be challenging for both the agents and the taxpayers, and practitioners may need to think of new ways to creatively resolve a case. Otherwise, more cases may be headed to IRS Appeals and, ultimately, litigation in Tax Court.

Solutions for taxpayers who owe money

For taxpayers who have a balance due to the IRS and whose ability to produce income has been compromised by COVID-19, one option is to request currently not collectable (CNC) status. (See Internal Revenue Manual (IRM) §5.16.1, Currently Not Collectable.) Generally, the procedure is to submit a financial statement (a Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals) showing that “collection of the liability would create a hardship for taxpayers by leaving them unable to meet necessary living expenses.” (See IRM §5.16.1.2.9 (1) (9/18/18), Currently Not Collectable Procedures.) If a taxpayer meets the requirements for reporting the account as uncollectable, the IRS will suspend collection action.

Solutions for nonfilers

Taxpayers who are nonfilers should file their delinquent tax returns and enter into an installment agreement or an offer in compromise to obtain a “fresh start.” Simply filing the returns without making a payment or offering a collection alternative is not recommended because the debt will increase over time through interest and penalties. Not filing at all is also not recommended.  

An important advantage of filing a return is that it starts the 10-year statute of limitation on collections after assessment. (Sec. 6501(c)(3) (“In the case of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time.”))

Filing returns also positions the taxpayer to discharge the taxes through bankruptcy. (See, e.g., In re Smith, 828 F.3d 1094 (9th Cir. 2016) (debtor’s tax liabilities were nondischargeable where debtor failed to make a tax filing until seven years after his return was due and three years after the IRS prepared a substitute for return).)

Wrap-up

The temporary relief afforded to taxpayers in both examinations (audits) and collections provides taxpayers the much needed opportunity to regroup and formulate a strategy for handling their tax compliance issues. Tax professionals should be ready with a plan to help clients recover and move forward after July 15, which is just around the corner.

— Steven L. Walker, J.D., LL.M., is a tax attorney with the Law Offices of Steven L. Walker PLC in San José, Calif., who specializes in civil and criminal tax controversy involving both federal and state tax agencies, as well as estate and business planning. He is also an adjunct professor of law at the University of San Francisco School of Law (LLM Taxation) program. For more information, see www.walk-law.com. To comment on this article or to suggest an idea for another article, please contact Sally Schreiber, senior editor, at Sally.Schreiber@aicpa-cima.com.