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IRS PROCESSING OF NOTICES OF
DELINQUENT TAXES DUE
By: Robert E. McKenzie
1-1 TAX COLLECTION
1-1.10 The IRS Collection Division attempts to collect
delinquent taxes as inexpensively and rapidly as possible. To
accomplish this task the IRS makes extensive use of computers.
Only when automated methods have failed to collect a tax is the
matter assigned to an individual for collection.
Four-Level System
1-1.20 To effectuate this policy the IRS utilizes a
four-level system of collection. It begins its collection efforts
on each account by generating computer notices from a Regional
Service Center. If the efforts of the Service Center do not
secure payment, the account is then assigned to the Automated
Collection System (ACS). The Automated Collection System attempts
to collect the tax liability by initiating telephone calls to the
taxpayer and others. During the time that an account is assigned
to Service Center and ACS, accounts may also be resolved by
Collection Support Staff assigned to handle "walk-ins"
in local IRS offices. If none of these levels of the system are
successful in collecting the account, it is eventually assigned
to a Revenue Officer for a field investigation. Obviously, it is
much less expensive for the IRS to collect a tax by mailing a
notice or placing a telephone call than it is to visit the
taxpayer personally. For the taxpayer, however, personal
negotiation is much more effective than dealing with an automated
system.
1-2 SERVICE CENTER
1-2.10 The IRS has ten Regional Service Centers which process all tax returns filed with the IRS. Service Centers are extensively automated. The information on each tax return filed is encoded into the IRS computer at a Service Center. That IRS computer system will determine if computational errors are contained on the return and issue notices regarding errors. The computer also will analyze each return to determine its DIF score (the score which determines whether it will be audited). The Service Center is also responsible for initiating notices to taxpayers to collect balances due on tax returns.
Start of Collection Action
1-2.20 The starting point for all collection action by
the Service Center is the receipt of a document showing a tax
liability. That document could be a tax return showing a balance
due, an audit closing agreement, an audit deficiency that was not
contested or a Tax Court judgment. Collection action should not
be initiated if an appeal of an audit is pending or if a Tax
Court petition is pending.
1040 Notice Procedure
1-2.30 Upon receipt of a tax return or other document
showing a balance due, the following process takes place in the
Internal Revenue Service Center. Within several weeks after
receipt of the document, the information is placed on the
computer system. That system will then initiate a series of
notices. The first notice issued is a document titled
"Request for Payment," which informs the taxpayer that
there is a balance due on the return, states the amount of tax,
interest and penalties due, and requests payment within ten days.
This is the notice statutorily required for the creation of a
valid Federal Tax Lien. If the liability is for individual income
taxes, and the liability is relatively small, the taxpayer will
normally receive four subsequent notices before the IRS proceeds
to take any administrative collection measures. If the balance is
larger, the IRS will send only three notices. If the liability is
not paid after the initial notice, the taxpayer will receive a
second notice, "Reminder," Notice 501. The IRS will
issue Notice 503, "Urgent, Immediate action is required
", five weeks after the first notice. The taxpayer will
receive Notice 504, "Urgent, We intend to levy on certain
assets. Please respond NOW.", in the mail five weeks after
issuance of Notice 503 if payment is not made after that notice.
Notice 504 is the nastiest of the IRS letters. If the taxpayer
fails to pay after Notice 504 the matter will be referred for
collection by the Automated Collection System (ACS). If ACS is
unsuccessful in collecting or resolving the matter the IRS will
then issue Letter 1058, "FINAL NOTICE, NOTICE OF INTENT TO
LEVY AND NOTICE OF YOUR RIGHT TO A HEARING . PLEASE RESPOND
IMMEDIATELY." If the taxpayer exercises her appeal rights,
collection will be held. If the taxpayer fails to appeal the IRS
will levy after expiration of 30 days from the notice. One
unusual convention of the IRS is that each notice will bear a
date which falls on Monday. The IRS has been recently revising
its notice procedure, but the process has yet to be published in
its Manual.
Business Taxpayers
1-2.40 In the case of business taxes (either corporate income or withholding taxes), the IRS will send three notices prior to initiating enforcement measures. The total time from first notice to enforcement action is normally at least 16 weeks. The taxpayer will receive a first notice and a Notice 504 five weeks subsequent to the first notice. The account will then be referred to ACS or a Revenue Officer for issuance of Letter 1058 if the taxpayer fails to resolve the liability.
Accelerated Issuance
1-2.50 Taxpayers with a history of delinquency or who
already owe taxes will receive fewer notices. The IRS computer
categorizes persons with a delinquency within 12 months as
repeaters. Repeaters and persons with other liabilities due will
receive as few as two notices, the first notice and Notice 504.
The IRS may also accelerate issuance of large dollar cases.
Usually taxpayers assessed with a trust fund recovery penalty
receive only two notices. An IRS employee may also request that
the computer accelerate issuance of notices.
Notice of Levy
1-2.60 If the Service Center has computerized sources
of income or assets of the taxpayer, such as wages, bank
accounts, certificates of deposit or accounts receivable, all of
which can be seized administratively from the taxpayer, it will
issue a Notice of Levy against the taxpayer's assets
approximately six weeks after the Letter 1058. If the Service
Center does not have sources of income or other assets to levy
upon, it will either assign the case to the Automated Collection
System (ACS) or issue a Taxpayer Delinquent Account (TDA) to a
local area office for collection, several weeks subsequent to the
final notice.
1-3 SMALL DOLLAR PAYMENT PLANS
1-3.10 A taxpayer may be able to secure a 60-month
payment plan for 1040 liabilities of less than $25,000. The IRS
Restructuring and Reform Act of 1998 requires the IRS to grant a
payment plan to individual taxpayers who owe less than $25
thousand. The taxpayer should respond to the IRS on the first
notice by writing to the Service Center requesting 60 months to
pay the tax liability. Your request for a payment arrangement on
small dollar accounts could also be made by transmitting the new
IRS Form 9465. On many occasions the taxpayer has been granted a
payment plan, but the IRS failed to confirm the plan. If
subsequent notices cease from the Service Center, the taxpayer
should assume that the Service has granted a plan. If the Service
Center continues to issue subsequent notices, the taxpayer should
assume that her plan has been improperly processed by the Service
and contact either Collection Support Staff or a Revenue Officer.
1-4 QUALITY OF SERVICE CENTERS
1-4.10 Service Centers are of varying efficiency. The Philadelphia Service Center is generally acknowledged to be the worst in the country. Fresno, Austin, Holtsville and Atlanta are usually in close competition to be the second worst center. Ogden is the best Service Center. Inefficient Service Centers can create tremendous problems for your clients. The Philadelphia Service Center once lost the records of federal tax deposits of 10,000 businesses and then proceeded to bill the companies. Obviously, the IRS does not agree with my appraisal of the quality of IRS Service Centers.
1-5 TELEPHONE COLLECTION EFFORTS
1-5.10 If an account cannot be collected by a Returns
Processing Center by using notices and/or levies upon the
taxpayer's wages or bank account, the matter will then be
transferred to a Customer Service Center for telephone collection
efforts. Each Customer Service Center has a computerized
telephone collection system. All ten Service Centers have
Customer Service Centers, and thirteen additional sites are
spread across various regions of the country.
APPENDIX
Collection Due ProcessDiefenbaugh v. Weiss, 86 AFTR 2d 2000-5496 (6th Cir. 2000)
IRC § 6320, 6330 Appeal of
Income Tax Liabilities. Case dismissed. The Tax Court has
exclusive jurisdiction over levies to collect income taxes and
not the district court.
Miller v. Commissioner, 115 T.C. 40 (2000)
Notice of Participation under IRC
§ 6015. An individual whose former spouse was granted as a
spouse under section 6013(e) was not entitled to a Notice of
Participation rights under section 6015.
Pierson v. Commissioner, 115 T.C. 39 (2000)
Taxpayer contested proposed IRS
levy actions based upon frivolous tax protestor arguments: The
court held that Pierson failed to raise a valid defense or
challenge the Internal Revenue Service's proposed levy. It
further warned subsequent tax protestors of potential sanctions.
Samuel and Bernice Boone Trust v. Commissioner, T.C. Memo 2000-12
Case dismissed because the tax
liability arose from a non-rebate erroneous refund that left the
court without jurisdiction.
Stephen C. Loadholt Trust, et al. v. Commissioner, T.C. Memo 2000-349 (2000)
The Tax Court held that it lacked
jurisdiction to review administrative collection actions taken by
the Internal Revenue Service in an erroneous refund case because
of no jurisdiction over the underlying tax liability.
Meyer, et ux. v. Commissioner,115 T.C. 31 (2000)
The Tax Court held that the
determination letters issued to a couple after they requested an
appeal hearing but before a conference was scheduled are invalid
in light of section 6330. The couple was not provided an
opportunity for hearing before the determination letters were
issued. Thus, the court concluded that the determination letters
were invalid.
Katz v. Commissioner, 115 T.C. 26 (2000)
A Collection Due Process hearing
is not required to be held in person. The taxpayer requested that
the hearing be held in West Palm Beach. The court held that it
was sufficient that the taxpayer had a hearing by telephone with
the Appeals Officer. The court further held that there was no
explanation as to why a one-hour commute would be an undue burden
on the taxpayer. The court further held that Katz could not
re-litigate the issues raised and considered in previous
administrative or judicial hearings.
MacElvain v. Commissioner, T.C. Memo 2000-320 (2000)
Partial summary judgment granted
to the government with respect to litigation of the nature and
the amounts of the tax liability. The taxpayer previously agreed
to the liabilities in question in a stipulated decision entered
by the Tax Court.
Van Es v. Commissioner, 115 T.C. 25 (2000)
The court held that it lacked the
jurisdiction to review an Internal Revenue Service determination
of frivolous return penalties. The court further held that the
Internal Revenue Service had initiated and completed its levy
action prior to the effective date of section 6330. Thus, Van Es
was not entitled to the protection of that section for prior
collection activities. Van Es was granted thirty days after the
order of dismissal to file an appeal with the U.S. district
court.
Howard v. Commissioner, T.C. Memo 2000-319 (2000)
The Tax Court had previously
sustained an Internal Revenue Service determination of a
deficiency by the Service. The court held that the taxpayer could
not now contest the underlying tax liability in a Collection Due
Process proceeding.
Anderson, et ux. v. Commissioner, T.C. Memo 2000-311 (2000)
The Tax Court lacked jurisdiction
to hear an employee's challenge to FICA liability. The taxpayer
had contested an IRS determination that he was liable for
self-employment tax. An Internal Revenue Service Appeals Officer
determined that he was not liable for the self-employment taxes
but was liable for FICA taxes.
McCune v. Commissioner, 115 T.C. 7 (2000)
The court held that it lacked
jurisdiction on an individual's petition because he failed to
file his initial petition with a U.S. district court within
thirty days of the notice of adverse collection action
determination.
Davis v. Commissioner, 115 T.C. 4 (2000)
The court held that an individual
does not have the right to subpoena witnesses and documents in an
Internal Revenue Service Collection Due Process hearing and that
the Appeals Officer conducting the hearing may rely upon Form
4340 ("Certificate of Assessments and Payments") to
verify the assessment.
Sego, et ux. v. Commissioner, 114 T.C. 37 (2000)
The court held that the Service
did not abuse its discretion in allowing collection to proceed
against a tax protestor couple who refused to properly respond to
notices of deficiency. The court determined that the taxpayers
repudiated their right to challenge a levy by returning the
Internal Revenue Service notices with frivolous defenses on it
and not filing a petition.
Hoffman v. Commissioner, T.C. Memo 2000-198
The court sustained an Internal
Revenue Service notice of determination concerning collection
actions under section 6320 and/or 6330. The taxpayer received a
deficiency notice and did not file a Tax Court petition. When the
Internal Revenue Service issued a Notice of Intent to Levy, he
requested a Collection Due Process hearing. At the hearing he
presented only frivolous arguments. The court specifically warned
Hoffman that it was authorized to impose substantial penalties on
taxpayers who institute proceedings with frivolous and groundless
positions.
Offiler, et al. v. Commissioner, 114 T.C. 30 (2000)
The court held that it lacked
jurisdiction to hear an individual's claim for relief for tax
liability because she did not timely request a Collection Due
Process after the final Notice of Intent to Levy. The taxpayer
did not file within thirty days and only filed an appeal after
the Internal Revenue Service had issued Notices of Levy.
Van Fossen v. Commissioner, T.C. Memo 2000-163
The court held that the taxpayer
could not contest Internal Revenue Service collection actions
because he had received a deficiency notice before the assessment
of the underlying tax liabilities. The taxpayer failed to raise
other defenses to the proposed collection actions.
Goza v. Commissioner, 114 T.C. 12 (2000)
The court held that a tax
protestor was not entitled to contest his tax liabilities before
the Internal Revenue Service Appeals Office under section 6330
because he had already received the deficiency notice and had
disregarded his opportunity to challenge the liability. The
taxpayer did not raise further defenses to the 6330 notice.
Moore v. Commissioner, 114 T.C. 11 (2000)
The court held that it lacked
jurisdiction to review a responsible person's administrative
appeal under Section 6320 because it lacked jurisdiction over the
underlying taxes and penalties arising under section 6672.
Provenzano v. United States, et al., 86 AFTR 2d para. 2000-5432 (USDC S.D. Cal. 2000)
The district court held that the
taxpayer had not met the jurisdictional prerequisites for court
jurisdiction because he did file a refund claim with the Internal
Revenue Service, allow six months to pass between the filing for
the refund and the suit in federal court; nor did he pay the
assessed tax liability of least one employee for periods at
issue. Therefore, the court would not consider the taxpayer's
6320 and 6330 contest to the underlying tax liability, although
the court granted the government's motion to dismiss and allowed
Provenzano thirty days to amend his claim and properly state a
claim upon which relief could be granted.
AJP Management v. United States, 87 AFTR 2d para. 2001-312 (USDC C.D. Cal. 2000)
The court found that the Appeals
Officer did not abuse discretion when he issued a determination
to allow the IRS to serve Notices of Levy to collect employment
taxes. The taxpayer argued that a better option was an
installment agreement or an Offer in Compromise. The court noted
that the taxpayer continued to incur additional tax liabilities
during the pendency of its appeal.
TTK Management v. United States, 87 AFTR 2d para. 2001-313 (USDC C.D. Cal. 2000)
Same facts, same owners, same
holding as AJP Management above.
Mesa Oil, Inc. v. United States, 87 AFTR 2d para. 2001-366 (USDC D. Col. 2000)
The court entered judgment
ordering a remand of the corporation's tax case to the Appeals
Officer's finding that the Officer who originally heard the
company's appeal failed to meet statutory requirements of
impartiality. Mesa Oil, Inc. fell behind in its payroll taxes and
the Internal Revenue Service issued a Notice of Intent to Levy
and a hearing notice under Section 6330. The Internal Revenue
Service also filed a tax lien and issued an notice pursuant to
6320. The court found that the Appeals Officer failed to make a
proper balancing analysis and failed to make an adequate record
of the hearing. The taxpayer had proposed a one year repayment
plan for its tax liabilities. The Appeals Officer denied that
proposal and the court held that the determination letter
indicated that the Appeals Officer prejudiced the case by making
conclusions before Mesa's statutorily mandated hearing. The court
specifically ordered that a new Appeals Officer by assigned to
hear a new Collection Due Process hearing. The court further
reminded the Appeals Officer to create an adequate record of the
proceedings to secure Mesa's right to judicial review.
Konkel v. Commissioner, et al. 86 AFTR 2d para. 2000-5545 (USDC M.D. Fla. 2000)
The court held that there was no
abuse or indiscretion by the Appeals Officer in issuing a Final
Notice of Determination. The taxpayer had previously contested a
proposed 6672 penalty through his representative, but that
representative subsequently withdrawn the protest. Konkel's new
protest filed in response to an IRC § 6330 notice raised the
same issues with respect to the underlying tax liability. Konkel
denied knowledge that his representative had previously requested
an appeal and withdrawn it. The court held that Konkel had been
given an opportunity for a hearing on the underlying tax
liability. Because he had an opportunity, he could not now
contest the liability. The taxpayer apparently failed to raise
other defenses allowed under section 6330.
Johnson v. Commissioner, et al., 86 AFTR 2d para. 2000-5051 (USDC Ore. 2000)
Case dismissed. Taxpayer had
failed to file a timely Collection Due Process appeal and there
was no statutory provision allowing appeal of an equivalent
hearing.
Lewis v. I.R.S., et al., 86 AFTR 2d para. 2000-5517 (USDC S.D. Tex. 2000)
The court dismissed the
taxpayer's petition because the proper jurisdiction for income
tax liabilities was in the U.S. Tax Court.
Sparks v. United States, 85 AFTR 2d para. 2000-658 (USBC N.D. Okla. 2000)
The court granted the
government's motion for summary judgment holding that an
individual is barred from relitigating her individual tax
liabilities. The taxpayer had failed to file her individual
income taxes for 1993 and 1994. She received a deficiency notice
from the Internal Revenue Service based upon a Substitute For a
Return (SFR). The taxpayer previously petitioned to the U.S. Tax
Court seeking redetermination of liabilities claiming that she
was a non-resident alien not subject to tax and various other tax
protestor claims. She lost her case in tax court but then
attempted to re-litigate it before the United States Bankruptcy
Court. Appropriately, she once again lost.
Wylie v. Commissioner, T.C. Memo 2001-65
Taxpayer contested the underlying tax liability and alleged that Form 4340, Certificate of Assessments and Payments, was not a proper basis to verify the assessments. Petitioner raised no other arguments and offered no collection alternatives. The respondent moved for summary judgment and a motion was granted after the taxpayer failed to respond.
CHAPTER 1
IRS PROCESSING OF NOTICES
OF DELINQUENT TAXES DUE
1-1 TAX COLLECTION Page 1
1-1.10 Page 1
Four-Level System
1-1.20 Page 1
1-2 SERVICE CENTER Page 1
1-2.10 Page 1
Start of Collection Action
1-2.20 Page 2
1040 Notice Procedure
1-2.30 Page 2
Business Taxpayers
1-2.40 Page 2
Accelerated Issuance
1-2.50 Page 3
Notice of Levy
1-2.60 Page 3
1-3 SMALL DOLLAR PAYMENT PLANS Page 3
1-3.10 Page 3
1-4 QUALITY OF SERVICE CENTERS Page 3
1-4.10 Page 3
1-5 TELEPHONE COLLECTION EFFORTS Page 4
1-5.10 Page 4
CHAPTER 2
IRS COLLECTION PROCEDURES
2-1 THE POWER OF THE IRS TO COLLECT TAXES Page 5
2-1.10 Page 5
2-2 CREATION OF LIEN Page 5
2-2.10 Page 5
Meeting Statutory Requirements
2-2.20 Page 5
Liens on All Taxpayer Property
2-2.30 Page 6
2-3 EXTENT AND DURATION OF LIEN Page 6
2-3.10 Page 6
2-4 STATUTE OF LIMITATIONS Page 6
2-4.10 Page 6
2-5 NOTICE OF LIEN Page 6
2-5.10 Page 6
Notice Five Days After Filing
2-5.20 Page 7
2-6 RRA SECTION 3401 Page 7
An Overview of the Due Process Procedures
2-6.10 RRA Section 3401, Due Process in IRS Collection Actions Page 7
2-6.20 Page 7
2-6.30 Page 8
2-7 IRC SECTION 6320, NOTICE AND OPPORTUNITY
FOR HEARING UPON FILING OF NOTICE OF LIEN Page 8
Requirements of Notice
2-7.10 Page 8
2-7.20 Notification Page 9
2-7.30 Right to Collection Due Process Hearing Page 9
2-7.40 Conduct of Collection Due Process Hearings Page 10
2-7.50 Matters Considered at Collection Due Process Hearing Page 10
2-7.60 Judicial Review of Collection Due Process Hearing Page 12
2-7.70 Effect of Request for CDP Hearing
and Judicial Review on Periods of Limitation Page 12
2-7.80 Retained Jurisdiction of IRS Office of Appeals ("Appeals") Page 13
2-7.90 Equivalent Hearings Page 13
2-8 IRC SECTION 6330 Page 13
2-8.10 Notice and Opportunity for Hearing Before Levy Page 13
2-8.20 Overview Page 14
2-8.30 Requirements of Notice Page 15
2-8.40 Notification Page 15
2-8.50 Right to CDP Hearing Page 15
2-8.60 Effect of Request for CDP Hearing
and Judicial Review on Statutes of Limitation Page 16
2-8.70 Jeopardy Levies, State Tax Refund Levies1 and
Required Notices Page 16
2-9 LEVY EXEMPTIONS Page 16
2-9.10 Page 16
CHAPTER 3
3-4 PAYMENT AGREEMENTS Page 17
3-4.10 Page 17
Guaranteed Availability of Installment Agreements
3-4.13 Page 17
Prior Administrative Rights
3-4.17 Page 17
Modifications of Installment Agreements
3-4.25 Page 18
Collection Information Statements
3-4.30 Page 18
3-5 COLLECTION INFORMATION STATEMENTS Page 18
3-5.10 Page 18
3-6 FORM 433-A Page 18
3-6.10 Page 18
Amount of Payments
3-6.20 Page 19
3-7 F0RM 433-F Page 19
3-7.10 Page 19
3-7.20 Page 19
3-8 F0RM 433-B Page 19
3-8.10 Page 19
Substantial Net Worth
3-8.20 Page 19
Cash Flow Statement
3-8.30 Page 19
3-9 CRITERIA FOR GRANTING AN INSTALLMENT AGREEMENT Page 20
3-9.10 Page 20
Completion of Page 4 of CIS
3-9.20 Page 20
Allowable Expenses
3-9.30 Page 20
Necessary Expenses
3-9.40 Page 21
Conditional Expenses
3-9.50 Page 22
Expenses Which Will Not Require Substantiation
3-9.60 Page 22
Housing Expense
3-9.70 Page 23
Transportation
3-9.80 Page 23
Necessary Expenses (Other)
3-9.90 Page 23
Necessary Expenses: Other Unsecured Debts
3-9.100 Page 25
Necessary for Production of Income
3-9.105 Page 25
Excessive Necessary and Conditional Expenses
Incurred after Assessment of Tax Liability
3-9.110 Page 26
Applications of the Standards
3-9.115 Page 26
Harsh Results of IRS Policies
3-9.120 Page 26
3-11 SMALL DOLLAR CASES Page 27
3-11.10 Page 27
60-Month Agreements
3-11.20 Page 27
3-12 SHORT TERM EXTENSIONS Page 27
3-12.10 Page 27
3-13 VARIATIONS ON INSTALLMENT AGREEMENTS Page 28
3-13.10 Page 28
Withholding by Employer
3-13.20 Page 28
Bargaining Tactics
3-13.30 Page 28
Direct Debit Installment Agreements
3-13.40 Page 28
3-19 MODIFICATION AND TERMINATION
OF PAYMENT AGREEMENTS Page 28
3-19.10 Page 28
3-20 TAXPAYER ASSISTANCE ORDERS Page 29
3-20.10 Page 29
Taxpayer Assistance Orders
3-20.20 Page 29
Nonexclusive
3-20.30 Page 30
3-20.35 Page 30
Extension of Statute of Limitations
3-20.40 Page 30
3-21 CURRENTLY NOT COLLECTIBLE ACCOUNTS Page 30
3-21.10 Page 30
Release of Levy When Amount Is Uncollectible
3-21.20 Page 30
3-22 BASIS FOR REPORTING ACCOUNTS UNCOLLECTIBLE Page 31
3-22.10 Page 31
APPENDIX Page 32
EXHIBITS Page 37-47
