Taxpayers’ rights in the Internal Revenue Manual

In handling tax controversies, many practitioners find it useful to be familiar with provisions in the Internal Revenue Manual (IRM) that set forth taxpayers' rights. Because the IRM is essentially an employee handbook that IRS employees must follow, pointing out relevant taxpayer rights language at an appropriate time can have persuasive effect on IRS employees, especially because some may not know the IRM's requirements.

This article, which is best used as a reference, summarizes some of the key provisions in the IRM and other sources that recognize taxpayer rights. The discussion is organized by topic.

Taxpayers' rights generally

To be informed: "Taxpayers have the right to know what they need to do to comply with the tax laws. They are entitled to clear explanations of the laws and IRS procedures in all tax forms, instructions, publications, notices, and correspondence. They have the right to be informed of IRS decisions about their tax accounts and to receive clear explanations of the outcomes" (IRS Publication 1, Your Rights as a Taxpayer (Rev. September 2017)).

Access to records: "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" (IRM §5.1.10.7.4(2) (2/26/16)).

Courteous, responsive, and effective service: "All taxpayers are entitled to courteous, responsive, and effective service and assistance in all their dealings with the Service" (IRS Policy Statement 5-2, para. 3, found in IRM §1.2.1.6.2(3) (2/17/00)).

Prompt and professional service: "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" (IRS Policy Statement 5-2, para. 4, found in IRM §1.2.1.6.2(4) (2/17/00)).

Privacy and fair treatment: "We will observe taxpayers' rights, including their rights to privacy and to fair and courteous treatment" (IRS Policy Statement 5-2, para. 5, found in IRM Section 1.2.1.6.2(5) (2/17/00)).

Note: IRS policy statements set forth rules to be followed by all IRS personnel.

Collection appeal rights

Too often, the first act of a revenue officer is to serve a Letter 1058, 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, without explanation.  

Right to explanation of collection appeals rights: "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 §5.1.9.2(2) (8/27/21)).

Right to be advised of collection appeal rights at appropriate times: "Collection personnel are required to advise taxpayers of their right to appeal under CAP [Collection Appeals Program] 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 [Notice of Federal Tax Lien]. Collection personnel should also remind taxpayers of their CAP rights when the taxpayer disagrees with NFTL filing or levy or seizure action. If collection action was deferred or suspended while a collection alternative was considered, and a significant time has passed, 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)" (IRM §5.1.9.2(4) (8/27/21)).

Comment: Try to resolve the case at the lowest possible level. The conference with the manager is a second attempt to resolve a case before the case goes to Appeals.

With respect to scheduling CAP conferences, the representative may receive a "cold call" from an appeals settlement officer to have the CAP conference on the spot. Do not be pressured into this. 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)). Settlement officers are allowed to grant reasonable time to schedule a CAP conference.

Installment agreements

Be familiar with the IRM's discussion of installment agreements, which includes the following information:

• The current year's anticipated tax liability can be included in an installment agreement (IRM §5.14.1.4.2(19) (12/23/22));
• Taxpayers who do not agree to payment amounts or increases in payments may request a meeting with the next level of management (IRM §5.14.1.4.4(10)(c) (12/23/22));
• 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 (10/26/17));
• No levy may be made on taxpayer accounts if certain circumstances exist involving a pending, rejected, or other installment agreement (IRM §5.14.1.5 (12/23/22));
• Certain taxpayers who file timely will have the failure-to-pay penalty reduced for any month in which an installment agreement is in effect (IRM §5.14.1.2(7) (12/23/22));
• The six-year rule and one-year rule are discussed (under the six-year rule, a taxpayer who does not qualify for a streamlined installment agreement may be able to pay off their tax liability over six years; under the 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) (IRM §5.14.1.4.1 (12/23/22)); and
• Default and termination for Integrated Data Retrieval System (IDRS) monitored agreements are discussed (IRM §5.14.11.4 (1/1/15)).

Best practice: To protect your right to appeal the default of the installment agreement, file Form 9423, Collection Appeal Request, within 30 days, and do so by certified mail. Cure the new period and/or the missed payment as soon as possible.

IRS contacts with taxpayers

The IRM sets forth certain procedures that revenue officers are required to follow.

Effective initial contact: "When appropriate, issue Letter 1058, Notice of Intent to Levy and Notice of Your Right to a Hearing, and all required enclosures" (IRM §5.1.10.3.2(10) (3/24/20)). 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 [Individual Master File]-only balance due taxpayer" (IRM §5.1.10.3.2(10) (3/24/20)).

Responding to taxpayers: "You are required to respond promptly to customer requests 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 §5.1.10.4(1) (12/11/18)).

Cases received from automated collection system (ACS) or campuses: "If cases are assigned to the field from ACS or campuses with TC [Transaction Code] 971 AC [Action Code] 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 [installment agreement] (b) If the taxpayer requested an IA, follow the procedures in IRM 5.1.10.3.2, Effective Initial Contact, regarding requesting payments" (IRM §5.14.1.3.1 (12/23/22)).

IRS enforcement actions

Pre-levy considerations: "[T]axpayers 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" (IRM §5.11.1.3.1(1) (11/24/21); see also Publication 1, Your Rights as a Taxpayer (Rev. September 2017), items 7 and 10).

More pre-levy considerations: "[L]evy determinations are made on a case-by-case basis and revenue officers must exercise good judgment in making the determination to levy. When determining if a levy is appropriate consider the following:

• Anything that the revenue officer knows about the taxpayer's financial condition including economic hardship. If the revenue officer has sufficient information and verified that the levy would cause an economic hardship, the levy should not be issued. While information in the IRS's records may be sufficient to corroborate the presence of economic hardship, in some cases the taxpayer may need to provide additional information in order to make that determination.

• The taxpayer's responsiveness to attempts at contact and collection.

• The taxpayer's compliance history.

• The taxpayer's effort to pay the tax.

• Whether current taxes are being paid" (IRM §5.11.1.3.1(2) (11/24/21)).

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

Releasing levies due to economic hardship: "Under IRC 6343(a)(1)(D), a levy is required to be released when the Service determines the levy is creating an economic hardship, i.e., the levy will cause the individual to be unable to pay their reasonable necessary living expenses" (IRM §5.11.2.3.1.4(1) (12/21/20)).

Releasing levies due to installment agreements: "[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 (10/26/17)).

Levy restrictions relating to installment agreements: "No levy may be made on taxpayer accounts:

1. While requests for IAs [installment agreements] 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 an appeal of a default, termination or rejection is pending or unresolved" (IRM §5.14.1.5(1) (12/23/22)).

Letter 1058, Notice of Intent to Levy: "Issuing L1058 in any case is not appropriate or may not be appropriate when:

1. Levy action is prohibited, such as when the taxpayer requests an installment agreement on initial contact or the pending installment agreement transaction code has already posted. Note: See IRM 5.14.9.7(13)(d) 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 the taxpayer did not comply with the deadline, e.g., the taxpayer is in a hardship situation or there is doubt as to the correctness of the liability.
3. Information obtained during the attempted contact indicates the taxpayer may no longer be at the last known address.
4. IMF [Individual Master File] accounts have been in a suspended status, e.g., assigned to the Queue or reported currently not collectible 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 full pay the liability" (IRM §5.11.1.3.3.3(7) (11/24/21)).

Penalty abatements

When it comes to penalty abatements, if you don't ask, you don't get. According to IRM Section 20.1.1.3.6.1 (10/19/20), the first-time abate (FTA) administrative waiver using the Reasonable Cause Assistant provides an option for penalty relief for failure-to-file and failure-to-pay penalties if no prior penalties have been assessed in the three previous years.

Note: Any penalty in the prior three years will eliminate the abatement of any other penalty under FTA requirements.

Financial analysis of hardship

There is a difference between financial hardship and extreme financial hardship. Financial hardship is when taxpayers are unable to meet their ordinary and necessary living expenses. Extreme hardship exists when there is a mortgage foreclosure or delinquent utility bills with an indication that there will be a stoppage in service.

Hardship: "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" (IRM §5.16.1.2.9 (4/13/21)).

Levies on salary or wages: Sec. 6343(e) requires a levy on salary or wages to be released upon agreement with the taxpayer that the tax is currently not collectible. See also IRM Section 5.11.2.3.1.4(6) (12/21/20). 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 transaction code (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.

Caution: If a hardship determination is verified, a levy cannot be issued or left in place to persuade a taxpayer to file (IRM §5.16.1.2.9(10) (4/13/21)).

Currently not collectible status

Notable IRM sections on this topic include:

• Section 5.16.1.2.9(16) (4/13/21), which discusses Case Closing Letter 4223, Case Closed — Currently Not Collectible.

• Section 5.16.1.3.3 (4/13/21), which discusses cases reported currently not collectible based upon a prior Form 53.

Federal tax liens

Notable IRM sections on tax liens include:

• Section 5.12.2.4 (11/9/15), which discusses when the IRS should not file a federal tax lien or should defer filing it.
• Section 5.12.2.4.2 (11/9/15), which discusses the "do not file" criteria.
• Section 5.12.2.4.3 (11/9/15), which discusses the criteria for deferring the tax lien filing.

Best practice: Try to resolve the case with the field employee, providing information in a timely manner. If more time is needed to provide information, the field employee can delay the lien determination with the hope of case closure. 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 Collection Appeal Program (CAP) request (Form 9423). CAP is the only appeal right the taxpayer has before a federal tax lien is filed.

Some final suggestions

Read all IRS notices carefully and respond in a timely manner, using certified mail for Appeal requests. Be patient, document all work, and follow up on notices within 45 days if no response is received. Remember that many IRS employees are not familiar with the IRM due to a lack of training. Speaking to a manager can be helpful where a practitioner believes that proper procedures are not being followed. Everyone has a boss. If needed, contact the territorial manager, area director, or program manager. Ask the line employee for the manager's name and phone number. Go up the ladder until the practitioner is satisfied that the issues are being handled correctly.

Keep clients informed throughout the process. Be patient with both IRS employees and clients.

— Larry J. Wolfe, CPA, is the owner of Larry J. Wolfe Ltd. in Skokie, Ill. He is a former chair of the AICPA Tax Practice and Procedures Committee. Stan Green, CPA, is the head of tax controversies for the firm. Previously he worked for the IRS Collection Division for over 35 years, 28 in management positions. To comment on this article or to suggest an idea for another article, contact Dave Strausfeld at David.Strausfeld@aicpa-cima.com.