As of October, 2011 there will be 2 returns processing centers for business returns and 3 returns
processing centers for individual returns. Each of the remaining compliance centers will continue
performing correspondence audits and collection activities.
Table 30. Internal Revenue Service Personnel Summary, by Employment Status, Budget Activity, and Selected
Type of Personnel, Fiscal Years 2006 and 2007
Employment status:
Disclosure Authorization
1.70 TC "Disclosure Authorization" \f C \l "2" Eligible tax professionals may complete authorization
forms, view and modify existing forms, and receive acknowledgement of accepted submissions
immediately--all online. Disclosure Authorization allows tax professionals to electronically submit Form
2848, Power of Attorney and Declaration of Representative, and Form 8821, Tax Information
Authorization. This e-service expedites processing and issues a real-time acknowledgment of accepted
submissions.
Late-year tax-law changes also place enormous stress on the IRS’s ability to deliver a
successful filing season. The National Taxpayer Advocate recommends that the Treasury
Department and the tax-writing committees create a formal process by which IRS
estimates of the filing-season impact of significant tax legislation are transmitted to the
tax-writing committees at several points during the year, perhaps on June 30, September
30, and monthly thereafter.
3. The Cash Economy. Income from the “cash economy” – taxable income from
legal activities that is not subject to information reporting or withholding – is the type of
income most likely to go unreported. Unreported income from the cash economy is
probably the single largest component of the tax gap, likely accounting for over $100
billion per year. Noncompliance in the cash economy is difficult for the IRS to detect.
Thus, the IRS should be using different strategies to address this problem than it uses to
address noncompliance in other areas. The National Taxpayer Advocate has identified a
number of steps that the IRS can take to address this problem without additional
legislation. While the IRS can never achieve full compliance, these recommendations
should help the IRS make significant progress in improving compliance in the cash
economy.
4. User Fees: Taxpayer Service For Sale. The IRS lacks a consistent strategy for
the user fees charged to taxpayers. This makes many basic services unaffordable to the
public, in part because the IRS often neglects or is slow to waive fees for lower income
taxpayers. The IRS collects about $180 million in user fee receipts annually, mostly from
the installment agreement fee, and it uses this revenue to pay for taxpayer services,
information technology, and other program costs. The National Taxpayer Advocate
believes that the IRS should employ strong criteria for establishing and setting fees,
along with vigilant oversight and review of existing fees. Otherwise, taxpayers’ access to
service may be reduced and their rights harmed as the IRS establishes new fees and
raises others to make up for budgetary shortfalls.
6. Identity Theft Procedures. The National Taxpayer Advocate first raised her
concerns about the IRS’s identity theft procedures in her 2005 Annual Report to
Congress. While the IRS has made some improvements, it has not done enough to
improve procedures for victims of identity theft or to secure its filing system from
fraudulent filers. The IRS’s identity theft measures are reactive rather than proactive and
require taxpayers to contact the IRS and work their way through layers of employees
until they reach someone with authority to adjust their accounts. Too often, victims of
identity theft receive more scrutiny from the IRS than perpetrators, such as those who
use the electronic filing system and bank account direct deposit to commit refund fraud.
The IRS should make a PIN process mandatory for all electronic filers, increase the
security of direct deposits, and generally take a more taxpayer-centric approach to
identity theft and put procedural and preventive changes on a fast track.
10. Taxpayer Service and Behavioral Research. The IRS has more quality research
on taxpayer service at its disposal than ever before. As part of the Taxpayer Assistance
Blueprint (TAB), the IRS conducted extensive research on taxpayers’ needs, preferences,
behavior, and willingness to use certain services. The National Taxpayer Advocate has
also commissioned studies to identify ways to improve the tax system. The IRS now
needs to test and apply the findings of these studies. The IRS should develop a
behavioral research lab that can test and enhance IRS products, thereby improving
taxpayer service. By applying existing findings and developing a better understanding of
taxpayer behavior, the IRS can also improve voluntary compliance
11. Service at Taxpayer Assistance Centers. The development of the TAB helped
the IRS learn more about taxpayer needs, preferences, and willingness to use services at
the Taxpayer Assistance Centers (TACs or “walk-in sites”). Despite this blueprint and the
knowledge that some taxpayers will always need face-to-face service, taxpayers who visit
TACs continue to experience difficulties making appointments, obtaining return
preparation assistance, and making payments. The National Taxpayer Advocate
commends the IRS for a recent change to the Internal Revenue Manual (IRM) allowing
any taxpayer visiting a TAC to receive a copy of his or her account transcript (up to the
last three years) regardless of urgency or reason. However, the National Taxpayer
Advocate recommends that the IRS also take other steps to help taxpayers who travel to
TACs, such as providing same-day service and not turning them away or referring them
elsewhere.
13. Exempt Organization Outreach and Education. The U.S. tax-exempt sector
consists of more than 1.6 million organizations (not including most churches). These
exempt organizations (EOs) are diverse in size, ranging from large hospitals and
universities to small volunteer-run charities. Approximately half of all EOs have
all-volunteer staffs and another third have fewer than ten employees. Smaller EOs
frequently lack professional tax guidance. The IRS has increased enforcement actions
against EOs and the resources dedicated thereto. However, resources devoted to EO
education and outreach, which were never adequate, have continued to decline. The
National Taxpayer Advocate believes the IRS can and should do more to help EOs,
particularly small organizations, comply with the complex requirements to which they are
subject.
Examination Issues
16. Nonfiler Program. In fiscal year (FY) 2006, the IRS established an executive
group to oversee an enterprise-wide strategy to address nonfilers, but it has not
implemented sustainable plans to increase filing compliance. The present IRS emphasis
on automated systems and reductions in face-to-face service contributes to high rates of
default assessments (in the Automated Substitute for Return program), low collection
percentages, and downstream consequences in the form of TAS casework. The National
Taxpayer Advocate urges the IRS to develop a more balanced strategy of research,
service, and enforcement to increase filing compliance.
Collection Issues
21. FPLP Levies on Social Security Benefits. The IRS has a legal right to attach
federal payments of taxpayers not meeting their tax obligations through the Federal
Payment Levy Program (FPLP). However, the IRS must employ proper safeguards to
ensure that taxpayers with the greatest potential for hardship are identified and removed
from the program before the IRS issues a levy. Although the IRS agreed to conduct
additional research to address the National Taxpayer Advocate’s longstanding concerns
with the FPLP, these efforts are not keeping pace with the rapid increase in FPLP levies
on taxpayers’ Social Security benefits. In FY 2007, the IRS received in excess of 1.74
million levy payments that attached to Social Security benefits – an increase of almost 24
percent from FY 2006. Yet rather than developing an automated process to screen out
low income or other taxpayers who are experiencing economic hardship, the IRS is
actually seeking to expand the FPLP to other federal payments commonly associated
with a taxpayer’s sole or primary source of income. The National Taxpayer Advocate
strongly recommends that the IRS postpone FPLP expansion on any payments
associated with retirement income until a suitable “low income and hardship” filter has
been created and successfully tested.
22. Third Party Payers. When third party payers do not file required employment tax
returns or make required deposits, employers remain liable for the underlying tax,
interest, and penalties and may face significant economic difficulties. The IRS generally
has no recourse other than to initiate collection of unpaid employment taxes from the
employers. Not only are employers forced to pay the amount of their employment tax
liability twice (once to the failed third party payer and again to the IRS), but they may
also be liable for interest and penalties. The National Taxpayer Advocate recommends
that the IRS assume a greater role in protecting taxpayers’ interests and assisting
taxpayers in third party payer cases by developing “global” remedies for situations where
large numbers of taxpayers share common facts. A global approach would provide a
common starting point for relief, regardless of where the case is worked within the IRS.
23. Employment Tax Treatment of Home Care Service Recipients. Many elderly
and disabled individuals receive home care and support services administered through a
variety of state and local government health and welfare programs. Often, elderly and
disabled home care service recipients (HCSRs) who participate in these programs fall
into the category of common law employers, and they are required to apply highly
technical and complex employment tax rules to determine their employer tax status and
responsibilities. Elderly and disabled HCSRs can suffer substantial financial hardships
when state and local government agencies contract out program responsibilities,
including payroll functions, to intermediary service organizations (ISOs) that fail to
properly report, file, and pay employment taxes. As a result, the elderly and disabled
HCSRs – as the common law employers – remain liable for the tax, interest, and
penalties. The National Taxpayer Advocate proposes a legislative change and a series of
administrative steps that, if adopted, will complement and bolster the actions taken by
the IRS to significantly mitigate the problems affecting HCSRs and minimize the
downstream impact of ISO failures on elderly and disabled individuals.
26. Assessment and Processing of the Trust Fund Recovery Penalty (TFRP).
Employers are responsible for withholding and remitting to the IRS certain trust fund
taxes, including income and Federal Insurance Contributions Act (FICA) taxes from
payments to employees, as well as certain federal excise taxes. When these monies are
not paid as required, the law provides for the assessment of a TFRP, which can have
disastrous economic consequences for those deemed to be responsible persons.
However, the IRS has failed to consistently adhere to its own quality standards for
investigating these cases. Despite almost a decade of negative findings by the
Government Accountability Office (GAO), the IRS has yet to implement an effective or
reliable system for the accounting and application of payments, credits, and offsets. The
National Taxpayer Advocate makes several recommendations designed to improve the
timeliness, fairness, and quality of the process.
Status Updates
27. Private Debt Collection. The Private Debt Collection initiative is failing in most
respects. It is not meeting revenue projections; its return on investment is dismal; the
private collection agencies (PCAs) are no better at locating or collecting tax liabilities than
the IRS itself; the IRS has failed to require the PCAs to disclose their taxpayer-related
procedures to the public to the same extent as the IRS, which shields the program from
adequate congressional and public scrutiny; and the IRS is sending the PCAs new cases
(because the number of “easy” cases is smaller than projected) and these new cases
may require the exercise of discretion and judgment in collection matters that is
appropriately the sole province of the IRS. For these reasons, the National Taxpayer
Advocate once again calls for the initiative’s repeal.
28. IRS Collection Strategy. The National Taxpayer Advocate has continually urged
the IRS to employ a collection strategy that effectively and efficiently balances the goals
of tax collection, taxpayer service, and tax compliance. We are mindful of the difficulties
the IRS faces when carrying out its collection strategy and properly administering the tax
system, which requires a delicate balance between customer service and enforcement.
Although the IRS’s collection strategy has improved over the past year, significant work
remains to be done. We continue to believe that more emphasis by the IRS on providing
timely service to taxpayers with tax delinquency problems and employing more flexibility
in the use of available collection payment alternatives (e.g., installment agreements,
partial payment installment agreements, and OICs), are necessary to deliver an effective,
balanced, and service-oriented program.
29. Questionable Refund Program. The IRS established the Questionable Refund
Program (QRP) in 1977 to prevent the payout of false refund claims. Historically and
presently, the IRS’s Criminal Investigation (CI) function has managed the program,
though the vast majority of the work is civil. In the 2005 Annual Report, the National
Taxpayer Advocate identified the QRP as the second most serious problem facing
taxpayers, and documented fundamental flaws with the program. While CI and the IRS
responded with improvements, QRP cases still rank among the top five reasons that
taxpayers seek TAS assistance. The National Taxpayer Advocate recommends that the
IRS expeditiously transfer oversight of the program to the civil side of the IRS and further
reduce the volume of legitimate taxpayer refunds that the QRP inappropriately delays
Individual Enforcement
3.20 TC "Individual Enforcement" \f C \l "2" Audits of individuals with incomes of $1 million or more
increased from 17,015 during fiscal year 2006 to 31,382 during fiscal year 2007, an increase of 84
percent. One out of 11 individuals with incomes of $1 million or more faced an audit in 2007. Overall,
the total individual returns audited increased by 7 percent to 1,384,563 in 2007 from 1,293,681 in
2006. That’s the highest number since 1998.
Businesses
3.40 TC "Businesses" \f C \l "2" In the business arena, the IRS continued efforts to review more
returns of flow-through entities – partnerships and S Corporations. Its business numbers reflect that it
has placed more emphasis in the growing area of these flow-through returns. While large corporate
audits are down slightly, it has increased its focus on mid-market corporations – those with assets
between $10 million and $50 million dollars. The IRS enforcement budget in 2007 was similar to the
budget in 2006, and in times of flat budgets, the agency cannot increase activity across the board but
instead addresses the areas where there is growth and potential risk.
Audits of S Corporations increased to 17,681 during 2007, up 26 percent from the prior year’s total of
13,984. Audits of partnerships increased to 12,195 during 2007, up almost 25 percent from the prior
year’s total of 9,777. Audits of mid-market corporations increased to 4,473, up 6 percent from last
year’s total of 4,218.
Audits of businesses in general rose to 59,516, an increase of almost 14 percent from the prior year’s
total of 52,223. Although the audits of large corporations dipped slightly in 2007 to 9,644 audits, the
number of audits is up 14 percent from the fiscal year 2002 level.
Collection Enforcement
3.50 TC "Collection Enforcement" \f C \l "2" Overall, some of our most common enforcement tools
at the IRS also showed increases:
The IRS filed 3.8 million levies and almost 700,000 liens during 2007, an increase from
the previous year and a substantial increase from five years earlier.
FY FY FY FY FY FY FY FY FY
FY 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Revenue Officers 6,796 6,516 5,538 5,376 5,502 5,076 5,156 5,249 5,627 5,662
Revenue Agents 13,708 13,085 12,542 12,092 11,743 11,780 11,811 12,192 12,778 12,816
Special Agents 3,045 2,942 2,752 2,735 2,868 2,834 2,778 2,771 2,780 2,709
Total 23,550 22,543 20,832 20,203 20,113 19,691 19,746 20,211 21,185 21,187
1 Enforcement revenue collected in a fiscal year includes tax, interest, and penalties from multiple tax years. Some enforcement
activities can take more than a year to close and may generate revenue over several years, so it is generally inappropriate to compare
revenue collected in a given fiscal year to the staffing available for that same year.
2 Includes any revenue collection attributable to IRS Appeals activities.
3 Includes the Information Reporter Program (IRP) and the Automated Underreporter (AUR) Program.
4 Enforcement staffing levels presented in Full Time Equivalents (FTE).
Income $1 Million and Higher
Total
743,881 849,296 1,007,874 1,215,308 1,293,681 1,384,563
Examinations
Returns Filed in 129,444,947 130,341,159 130,134,277 130,576,852 132,275,830 134,421,400
Prior CY*
Coverage 0.57% 0.65% 0.77% 0.93% 0.98% 1.03
Returns Filed in Prior CY* 3,022,589 3,191,108 3,369,122 3,523,934 3,715,249 3,909,730
Returns Filed in Prior CY* 2,165,011 2,271,755 2,405,361 2,546,439 2,720,290 2,934,597
Returns Filed in Prior CY* 59,602 58,974 56,883 54,091 56,847 57,357
Prosecutions Recommended
FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007
Tax and Tax Related 991 1,336 1,439 1,434 1,343 1423
Avg M 19 19 21 22 22 22
Information/Indictments 602
Taxpayer Service
FY 2003 FY 2004 FY 2005 FY 2006 FY 2007
Electronic Filing (e-File)
Rate -- Individual Returns 40% 47% 51% 54% 57%
Toll-Free Assistor
Level of Service 80% 87% 83% 82% 82%
Toll-Free Tax
Law Accuracy 82% 80% 89% 91% 91%
Toll-Free Customer
Satisfaction Rating 93% 94% 94% 94% 94%
Web Page Visits on
IRS.Gov (in millions) 102.6 152.7 176.5 197.1 217.8
Online Refund Status
Checks through 'Where's
My Refund (in millions) 12.4 14.9 22.1 24.7 32.1
The IRS also assists state agencies by identifying and reporting information on emerging tax
administration issues. This is accomplished through the IRS entering into agreements to share
information with the state agencies. There are more than 900 joint efforts underway. Examples include
the sharing of examination reports, abusive scheme data, and licensing verification.
Return Information
3.90 TC "Return Information" \f C \l "2" “Return information” includes everything else that has
anything to do with a person’s potential tax liability. Examples are any information extracted from a
return like names of dependents, business location, or bank account information; the taxpayer's name,
mailing address, or identification number; information on whether a return has been or will be
examined or subject to any other investigation; information contained on transcripts of accounts or on
IRS computer systems; the fact of filing a return; and whether a taxpayer has a balance due account.
Sources of Misreporting
3.110 TC "Sources of Misreporting" \f C \l "2" Though the net misreporting percentage varies by
category of income, the rates reflect that compliance is highest where there is third-party reporting
or withholding. Simply stated, compliance is highest where there is third-party reporting.
For example, one percent of all wage, salary, and tip income is misreported, contributing
an estimated $10 billion to the tax gap. In contrast, nonfarm sole proprietor income,
which is reported on a Schedule C and is subject to little third-party reporting or
withholding, has a net misreporting percentage of 57 percent, contributing about $68
billion to the tax gap.
nonfiling,
underreporting and
underpayment.
Nonfiling occurs when taxpayers who are required to file a return do not do so on time. Underreporting
of tax occurs when taxpayers either understate their income or overstate their deductions, exemptions
and credits on timely filed returns. Underpayment occurs when taxpayers file their return but fail to
remit the amount due by the payment due date.
Underreporting
3.140 TC "Underreporting" \f C \l "2" Of these three components, underreporting of income tax,
employment taxes and other taxes represents about 80 percent of the tax gap. The single largest
sub-component of underreporting involves individuals understating their incomes, taking improper
deductions, overstating business expenses and erroneously claiming credits. Individual underreporting
represents about half of the total tax gap. Individual income tax also accounts for about half of all tax
liabilities.
Noncompliance Rising
3.160 TC "Noncompliance Rising" \f C \l "2" Overall, the noncompliance rate is from 15 percent to
16.6 percent of the true tax liability. The old estimate, derived from compliance data for Tax Year 1988
and earlier, was 14.9 percent.
Reporting of net income from flow-through entities, such as partnerships and S corporations
Reporting of proprietor income and expenses, such as gross receipts, bad debts and vehicle
expenses
Reporting of various types of deductions
For example, most wages, salaries and tip compensation are reported by employers to
the IRS through Form W-2. Preliminary findings from the NRP indicate that less than 1.5
percent of this type of income is misreported on individual returns. IRS researchers
anticipate identifying other specific areas of deterioration and improvement in the coming
months as they complete the detailed analysis of the study’s data.
Tax Year 2001 Gross Tax Gap by Type of Tax and Type of Noncompliance (in $ billions)
Type of Noncompliance TOTAL
Type of Tax Nonfiling Underreporting Underpayment Percent
Gap Gap Gap* Amount Distribution
Individual Income Tax 25 197 23.4 245 71.1%
Corporation Income
# 30 2.3 32 9.3%
Tax
Employment Tax # 54 5.0 59 17.0%
Estate & Gift Tax 2 4 2.1 8 2.4%
Excise Tax # # 0.5 1 0.1%
TOTAL 27 285 33.3 345
Percent Distribution 7.8% 82.5% 9.7% 100.0%
* Since the underpayment gap figures are generally actual amounts rather than estimates, they are presented here to the closest $0.1 billion.
# No estimates are available for these components.
Amounts may not add to totals due to rounding. See Figure 1 regarding the reliability of estimates
Businesses More Likely to Not Comply.
3.200 TC "Businesses More Likely to Not Comply." \f C \l "2" Most of the understated income
comes from business activities, not wages or investment income. Compliance rates are highest where
there is third-party reporting or withholding. Preliminary findings show less than 1.5 percent of wages
and salaries are misreported.
The TY 2003 portion of the sample (1,200 returns) is complete, and these cases are now in the
hands of Revenue Agents.
NRP is selecting the TY 2004 (3,800 returns) portion of the sample. Expect results by December
2008
Tax Year 2001 Gross Tax Gap by Type of Tax and IRS Operating Division (in $ billions)
IRS Operating Division TOTAL
Individual Income
50 195 N/A 195 N/A N/A 245 20.9%
Tax
Corporation Income
N/A N/A 6 6 25 1 32 18.5%
Tax *
Excise Tax † 0 0 0 0 0 0 1
* Unrelated Business Income Tax is shown as corporation income tax. † Includes underpayment gap only.
# No estimate is available for this component.
Amounts may not add to totals due to rounding. Zeros indicate amounts less than $0.5 billion. See Figure 1 regarding reliability of estimates.
Tax Year 2001 Individual Income Tax Underreporting Gap and Net Misreporting Percentage (NMP)
Associated with Income and Offset Line Items
Enforcement Program
3.240 TC "Enforcement Program" \f C \l "2" IRS continues its emphasis on tax enforcement,
increasing collections of delinquent tax debt from $33.8 billion in 2001 to an all-time high of $59.2
billion, yielding a 5.6 to 1 return on investment for all IRS activities in 2007. Revenue growth has been
the greatest in the areas of corporate taxes and high income individual taxes. The FY 2009 President’s
Budget request for the enforcement program is $7,487,209,000, an increase of $489,983,000 or 7
percent over the FY 2008 enacted level. As in the past three budget requests, the Administration
proposes to include these enforcement increases as a Budget Enforcement Act.
Overview - Abusive Return Preparer
3.250 TC "Overview - Abusive Return Preparer" \f C \l "2" The IRS continues to expand and
enhance its abusive preparer program. The program was developed to enhance compliance in the
return-preparer community by engaging in enforcement actions and/or asserting appropriate civil
penalties against unscrupulous or incompetent return preparers. Bad preparers are a significant
problem for both the IRS and taxpayers.
Return preparer fraud generally involves the preparation and filing of false income tax returns by
preparers who claim inflated personal or business expenses, false deductions, unallowable credits or
excessive exemptions on returns prepared for their clients. This includes inflated requests for the
special one-time refund of the long-distance telephone tax. Preparers may also manipulate income
figures to obtain tax credits, such as the Earned Income Tax Credit, fraudulently.
In some situations, the client (taxpayer) may not have knowledge of the false expenses, deductions,
exemptions and/or credits shown on their tax returns. However, when the IRS detects the false return,
the taxpayer — not the return preparer — must pay the additional taxes and interest and may be
subject to penalties.
Audits of 30 Clients
3.260 TC "Audits of 30 Clients" \f C \l "2" Another aspect of the IRS preparer program is identifying
suspect preparers and audited their clients. If during an examination a revenue suspects that some of
the deficiencies on a return were caused by the preparer she can refer the matter to an area
coordinator. After review the coordinator can initiate a project on the preparer. The preparer is sent a
letter notifying her that she has been selected for a project and 30 of her client's returns are audited. If
significant deficiencies are found then the IRS may choose one of several courses of action including:
Businesses that are considered MSBs for registration purposes are those that act in one or more of the
following capacities: The term money services business includes:
Currency dealers or exchangers who exchange more than $1,000 for any one customer on any
day.
Check cashers who cash checks totaling more than $1,000 for any one customer on any day.
Issuers of traveler’s checks, money orders or stored value who issue more than $1,000 in
traveler’s checks, money orders or stored value for any one customer on any day.
Sellers of traveler’s checks, money orders or stored value who sell more than $1,000 in traveler’s
checks, money orders or stored value for any one customer on any day.
Redeemers of traveler’s checks, money orders or stored value who redeem more than $1,000 in
traveler’s checks, money orders or stored value for any one customer on any day.
Money transmitters.
U.S. Postal Service.
Penalties
3.300 TC "Penalties" \f C \l "2" The civil penalty for failure to meet the registration requirement is
$5,000 for each violation. Each day that the violation continues represents a separate violation. Also,
reporting false or materially incomplete registration information can trigger a civil penalty of $5,000 per
day. Criminal penalties for willful violation of the law can include fines and imprisonment.
Patriot Act
3.330 TC "Patriot Act" \f C \l "2" In 2002, pursuant to Section 352 of the USA PATRIOT Act, FinCEN
issued final regulations to require that all Money Services Businesses (MSBs) have an effective AML
compliance program. This regulation (31 CFR 103.125) defines an effective program as one designed
to prevent the MSB from being used to facilitate money laundering and the financing of terrorist
activities. An MSB’s AML program must be commensurate with the risks posed by the location, size,
nature and volume of the financial services provided by the MSB. Each MSB’s AML compliance
program must be in writing and must have fully implemented it.
Form 8300
3.340 TC "Form 8300" \f C \l "2" The general rule is that you must file Form 8300, Report of Cash
Payments Over $10,000 Received in a Trade or Business, if your business receives more than $10,000
in cash from one buyer as a result of a single transaction or two or more related transactions. The
information provided by Form 8300 provides valuable information to the Internal Revenue Service (IRS)
and the Financial Crimes Enforcement Network (FinCEN) in their efforts to combat money laundering.
This is an important effort, since money laundering is a tool that assists many individuals who
participate in various criminal activities, ranging from tax evasion to terrorist financing to drug dealing,
to hide the proceeds from their illegal activities.
Filing Form 8300
3.350 TC "Filing Form 8300" \f C \l "2" If you are required to file Form 8300 for a transaction, you
must do so by the 15th day after the date the cash transaction occurs. Meeting the proper filing
requirements is very important, since there are potential civil and criminal penalties for failure to file
Form 8300.
SAR's
3.360 TC "SAR's" \f C \l "2" Money services businesses and banks are required to report any
transactions they deems as suspicious. The MSB's file a Suspicious Activity Report with the Detroit
Computing Center. The author has had clients who came under scrutiny for the following activities:
The purchaser of a tavern was required to pay in cash. He went to his bank on multiple
occasions over a period of weeks to secure cash in amounts of less than $10,000 in order to
accumulate the purchase price.
An immigrant who did not fully trust banks accumulated cash of about $150,000 saving monies
from cashing her pay checks. She purchased a condo and needed a cashier's check for the
closing She went to a bank and deposited $20,000 and was required to file a CTR. The teller told
her that if she deposited less than $10,000 there would be no need to file a report. Over a period
of days she deposited cash in smaller amounts sufficient to accumulate money to purchase her
downpayment via cashier's check.
During a divorce a man accumulated cash in an effort to secret it from his soon to ex-spouse.
After the divorce he began depositing the money with a stock broker in amounts less than
$10,000. The IRS issued a forfeiture notice to the man's broker and has confiscated over
$400,000. The client has filed a claim and faces extended litigation and a criminal investigation.
Client was an used car dealer who sold cars for cash amounts in excess of $10,000 and failed to
file CTR's. He was indicted and convicted of money laundering and the IRS has initiated
forfeiture proceedings against all of his assets. He is currently in prison awaiting sentencing.
Money Laundering Investigations FY 2007 FY 2006 FY 2005
Examination Reengineering
4.20 TC "Examination Reengineering" \f C \l "2" Changes to the tax law, technology, and the
business environment necessitated the IRS to make changes to its examination process. SB/SE
initiated Examination Reengineering in order to improve the quality and consistency of its examinations
across the country. SB/SE gathered feedback from multiple sources to design the new field and office
examination processes. Since 2003 the IRS has been implementing this new process.
At the beginning of each examination, field agents and their managers will meet to discuss the
agent’s approach to the examination, the plan to close the examination, and the mutual
commitment date arrived at with the taxpayer.
Field agents will use standardized templates for every examination issue to gather the
information necessary to resolve issues. Agents will use a standardized guide when deciding if
additional issues need to be added to the examination. The agent will explain to the taxpayer if
any additional issues are included in the examination.
Clearly communicated expectations of both the taxpayer and the examiner prior to the initial
appointment. Office examiners will provide the taxpayer with focused document requests that
specifically identify the information needed.
Improved flexibility in the scheduling process will enable examiners and taxpayers to reduce the
time it takes to complete an examination.
Office examiners will use standardized templates for every examination issue to gather the
information necessary to resolve issues. Examiners will use a standardized guide when deciding
if additional issues need to be added to the examination. The examiner will explain to the
taxpayer if any additional issues are included in the examination.
2. Scams Related to the Economic Stimulus Payment Some scam artists are trying to
trick individuals into revealing personal financial information that can be used to access their
financial accounts by making promises relating to the economic stimulus payment, often called
a “rebate.” To obtain the payment, eligible individuals in most cases will not have to do
anything more than file a 2007 federal tax return. But some criminals posing as IRS
representatives are trying to trick taxpayers into revealing their personal financial information by
falsely telling them they must provide information to get a payment. For instance, a potential
victim is told by phone or e-mail that he or she is eligible for a rebate but must provide a bank
account number (or similar information) to get the payment. If the target is unwilling, the victim
is then told that he cannot receive the rebate unless the information is provided. Individuals
should remember that the only way to get a stimulus payment is to file a 2007 tax return. The
IRS urges taxpayers to be extra-vigilant. The IRS will not contact taxpayers by phone or e-mail
about their stimulus payment.
4. Fuel Tax Credit Scams The IRS is receiving claims for the fuel tax credit that are
unreasonable. Some taxpayers, such as farmers who use fuel for off-highway business
purposes, may be eligible for the fuel tax credit. But some individuals are claiming the tax
credit for nontaxable uses of fuel when their occupation or income level makes the claim
unreasonable. Fraud involving the fuel tax credit was recently added to the list of frivolous tax
claims, potentially subjecting those who improperly claim the credit to a $5,000 penalty.
5. Hiding Income Offshore Individuals continue to try to avoid paying U.S. taxes by
illegally hiding income in offshore bank and brokerage accounts or using offshore debit cards,
credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities or life
insurance plans. The IRS and the tax agencies of U.S. states and possessions continue to
aggressively pursue taxpayers and promoters involved in such abusive transactions.
6. Abusive Retirement Plans The IRS continues to uncover abuses in retirement plan
arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking
for transactions that taxpayers are using to avoid the limitations on contributions to Roth IRAs.
Taxpayers should be wary of advisers who encourage them to shift appreciated assets into
Roth IRAs or companies owned by their Roth IRAs at less than fair market value. In one
variation of the scheme, a promoter has the taxpayer move a highly appreciated asset into a
Roth IRA at cost value, which is below annual contribution limits even though the fair market
value far exceeds the amount allowed.
8. False Claims for Refund and Requests for Abatement This scam involves a request
for abatement of previously assessed tax using Form 843, “Claim for Refund and Request for
Abatement.” Many individuals who try this have not previously filed tax returns. The tax they
are trying to have abated has been assessed by the IRS through the Substitute for Return
Program. The filer uses Form 843 to list reasons for the request. Often, one of the reasons
given is "Failed to properly compute and/or calculate Section 83-Property Transferred in
Connection with Performance of Service."
9. Return Preparer Fraud Dishonest tax return preparers can cause many problems for
taxpayers who fall victim to their schemes. These scam artists make their money by skimming
a portion of their clients’ refunds and charging inflated fees for return preparation services. They
attract new clients by promising large refunds. Some preparers promote the filing of fraudulent
claims for refunds on items such as fuel tax credits to recover taxes paid in prior years.
Taxpayers should choose carefully when hiring a tax preparer, especially one who promises
something that seems too good to be true.
10. Disguised Corporate Ownership Some people are going as far as forming domestic
shell corporations in certain states for the purpose of disguising the ownership of a business or
financial activity. Once formed, these anonymous entities can be used to facilitate
underreporting of income, non-filing of tax returns, engaging in listed transactions, money
laundering, financial crimes and even terrorist financing. The IRS is working with state
authorities to identify these entities and to bring the owners of these entities into compliance.
11. Misuse of Trusts For years, unscrupulous promoters have urged taxpayers to transfer
assets into trusts. They promise reduction of income subject to tax, deductions for personal
expenses and reduced estate or gift taxes. However, some trusts do not deliver the promised
tax benefits. As with other arrangements, taxpayers should seek the advice of a trusted
professional before entering into a trust.
12. Abuse of Charitable Organizations and Deductions The IRS continues to observe
the misuse of tax-exempt organizations. Misuse includes arrangements to improperly shield
income or assets from taxation, attempts by donors to maintain control over donated assets or
income from donated property and overvaluation of contributed property. In addition, IRS
examiners are seeing an upturn in instances where taxpayers try to disguise private tuition
payments as contributions to charitable or religious organizations.
Strategic Priorities:
5.10 Appeals has set forth the following as its strategic priorities for 2008:
Increase taxpayer awareness of the Appeals process and their rights within the process
Increase taxpayer awareness of alternative dispute resolution programs
Improve our processes to meet customer needs and expectations and to reduce the length of the
Appeals process while spending the right amount of time with each taxpayer
Promote employee productivity, engagement, and satisfaction
Campus Appeals Program
5.20 TC "Campus Appeals Program" \f C \l "2" The campus appeals program diminishes taxpayer
rights. Any appeal from a compliance generated notice is assigned to the campus appeals program.
The campus appeals personnel are poorly trained and lack field experience. Their incompetence
starkly contrasts with the well trained experienced former revenue agents and revenue officers
assigned to the local appeals offices. When your client receives a notice from a campus allowing an
appeal your protest should always request that your client be given a face to face conference in your
local office.
Whistleblower Reforms
6.10 TC "Whistleblower Reforms" \f C \l "2" Tax Relief and Health Care Act of 2006 reforms the
reward program for individuals who provide information to IRS regarding violations of the tax laws for
information provided on or after the enactment date. Specifically, the Act establishes a reward range
for such 'whistleblowers' of 15% to 30% of proceeds collected by IRS (subject to certain exceptions)
where the amount in dispute exceeds $2,000,000. It also provides IRS with regulatory authority to
create a Whistleblower Office to administer the program. ( Code Sec. 7623, as amended by Act Sec.
406) An above-the-line deduction is allowed for attorneys' fees and court costs related to whistleblower
rewards (Code Sec. 62(a)(21), as amended by Act Sec. 406(a)(3)).
Director Appointed
6.20 TC "Director Appointed" \f C \l "2" Stephen Whitlock has been appointed director and his
office will be responsible for assessing and analyzing incoming tips. After determining their degree of
credibility, his office will assign the information to the appropriate IRS office for further investigation.
Prior to his new appointment, Whitlock served since May 2003 as the Deputy Director of the IRS Office
of Professional Responsibility, which administers the regulations governing the practice of attorneys,
CPAs, and other tax professionals. From March 1999 until May 2003, he was the director of the IRS
Commissioner’s Complaint Processing and Analysis Group.
Basis Reduction
6.40 TC "Basis Reduction" \f C \l "2" The basis of the taxpayer's principal residence is reduced by
the excluded amount, but not below zero. (Code Sec. 108(h)(1))
Misclassified Workers
6.60 TC "Misclassified Workers" \f C \l "2" Employees working for employers who failed to withhold
Social Security and Medicare taxes should use new Form 8919 to report and pay their share of these
taxes. This includes section 530 employees — that is, people who work for employers claiming relief
from federal payroll taxes under section 530 of the Revenue Act of 1978. It also includes employees
who are treated as independent contractors but who have received a determination letter from the IRS
which states they are employees.
Workers who believe they are misclassified as independent contractors can file Form SS-8 with the
IRS and request a determination of their worker classification. For employees, the Social Security tax
rate is 6.2 percent and the Medicare tax rate is 1.45 percent. Normally, employers withhold these taxes
from workers’ pay, match these amounts and turn over the combined amounts to the IRS. Workers,
properly classified as independent contractors, should not use Form 8919 but instead, continue to use
Schedule SE. IRS Publication 1779 has further details on employee versus independent contractor
status.
IRS Hotlines and Toll-Free Numbers
IRS Telephone Lines and Hours of Operation
Practitioner Priority Service (866) 860-4259 M–F, 8:00 a.m.–8:00 p.m., local time
IRS Tax Help Line for Individuals (800) 829-1040 M–F, 7:00 a.m.–10:00 p.m., local time
Business and Specialty Tax Line (800) 829-4933 M–F, 7:00 a.m.–10:00 p.m., local time
Forms and Publications (800) 829-3676 M–F, 7:00 a.m–10:00 p.m., local time
National Taxpayer Advocate Help (877) 777-4778 M–F, 7:00 a.m.–10:00 p.m., local time
Line
Telephone Device for the Deaf (800) 829-4059 M–F, 7:00 a.m.–10:00 p.m., local time
(TDD): Forms, Tax Help, TAS
Government Entities (TEGE) Help (877) 829-5500 M–F, 8:30 a.m. – 4:30 p.m., ET
Line
Forms 706 and 709 Help Line (866) 699-4083 M–F, 7:00 a.m.–7:00 p.m., local time
Employer Identification Number (800) 829-4933 M–F, 7:00 a.m.–10:00 p.m., local time
(EIN)
Excise Tax and Form 2290 Help Line(866) 699-4096 M–F, 8:00 a.m.–6:00 p.m., ET
NOTE: For security purposes, you will automatically be logged out of OPA after 20
minutes of inactivity per page. Be sure to gather all the necessary information so that you
are not automatically logged out of OPA before completing the required information. If
you have difficulty entering the data required, please call the IRS at the number listed
under “When should I call the toll-free number. “
https://sa2.www4.irs.gov/irfof/lang/en/eiapoalogin.jsp
Examples:
7.50 TC "Examples:" \f C \l "2"
Example 1:
Taxpayer owes for 4th quarter 2005 (quarter ended 12/31/2005)
Taxpayer requested a timely CDP levy hearing
Taxpayer accrues additional employment tax liability for the quarter ended 06/30/2006
Additional liability qualifies for DETL levy because the taxpayer requested a prior levy hearing for
a quarter that ended (12/31/2005) within the two-year look back period (04/01/2004 thru
04/01/2006)
Example 2:
Example 3:
Example 4:
DETL Levies
Issuing a DETL If the tax period meets the criteria for issuing a DETL and levy action is determined to be
appropriate,
• Make sure the taxpayer received the Notice of Intent of Levy under IRC 6331(d). This is the
CP 504 notice or the “Status 58” notice. If the CP 504 notice was not issued, issue the
pre-levy CDP notice, L-1058. This meets the IRC 6331(d) and IRC 6330 requirement.
• Document the case history regarding the DETL determination. For example, DETL to be
issued for tax periods 01-200606 and 01-200609. TP qualifies for a DETL based on CDP levy
hearing requested on 07/27/2007 for tax periods 01- 200512 and 01 200603.
• Prepare and issue the DETL. Note: The group manager will need to issue the DETL on ICS.
Post-Levy CDP Notice 1) If a DETL is served, issue the post-levy CDP notice when sending the taxpayer's copy of
the levy. This should be done as soon as possible but no more than 10- days after the levy. If
the Notice of Levy is mailed, allow time for the Notice of Levy to be received through the mail
before issuing the post-levy CDP Notice but no more than 10-days after the levy is issued.
Document in the ICS history the reason if the post-levy CDP notice is issued later than 10
days after issuing the DETL
2) Use Letter 1058(D), Notice of Levy and Notice of Your Right to a Hearing. Include a copy of
the levy, Form 12153, Pub 594 and Pub 1660 with the letter. Note: If the taxpayer received a
pre-levy CDP notice for the period being levied, do not issue a post-levy CDP notice.
3) The notice can be given in person, left at the taxpayer's home or business, or sent to the
taxpayer's last known address by certified or registered mail. Note: Use registered mail only if
the taxpayer is outside the United States. There is no international certified mail.
Post-Levy DETL Hearing 1) The DETL post-levy hearing request is processed similar to other hearing requests. Refer
Request to IRM 5.1.9 for processing hearing requests.
2) The same procedures regarding the suspension of the Collection Statute Expiration Date
(CSED) apply. If a timely filed post-levy CDP hearing request is filed, the CSED is suspended.
3) Document, for the benefit of Appeals, either in the case history or on Form 12153A, whether
continued collection action is planned.
DETL during CDP 1) A DETL may be served during a timely requested pre or post-levy CDP hearing or judicial
Hearing for Periods review of such hearing to collect employment tax liabilities (DETL tax periods) subject to the
Subject to the Hearing hearing.
Note: In determining if a DETL is permitted during the hearing or judicial review to collect
employment taxes subject to the hearing, the request giving rise to the hearing cannot be
used as a basis for the DETL.
2) A DETL may be served during a hearing or judicial review if it is appropriate. For example,
a DETL may be served during a hearing or judicial review if collection is at risk (e.g.,
taxpayer's business is deteriorating or taxpayer is pyramiding).
3) If the DETL is to take place during the hearing, check IDRS for actions that may prohibit
levy action, If no apparent TC codes, then contact the Appeals Team Manager of the
assigned hearing officer preferably via e- mail regarding planned levy action. Determine
whether Appeals has information that prohibits levy or may affects the decision to levy.
4) If the DETL is to take place during judicial review, contact the Counsel attorney assigned
the case to advise him or her of the planned levy action and to determine if there is any new
information that may affect the decision to levy.
Guaranteed Availability of Installment Agreements
7.70 TC "Guaranteed Availability of Installment Agreements" \f C \l "2" The Internal Revenue
Service Restructuring and Reform Act of 1998 requires the Secretary to grant an installment
agreement, at the taxpayer's option, if:
within the previous 5 years, the taxpayer has not failed to file or to pay, nor entered an
installment agreement under this provision;
if requested by the Secretary, the taxpayer submits financial statements, and the Secretary
determines that the taxpayer is unable to pay the tax due in full;
the installment agreement provides for full payment of the liability within 3 years; and
the taxpayer agrees to continue to comply with the tax laws and the terms of the agreement for
the period (up to 3 years) that the agreement is in place.[Act § 3467; IRC § 6159)
<$25,000 Liabilities
7.80 TC "<$25,000 Liabilities" \f C \l "2" The IRS has chosen to create a more liberal system that
allows installment agreements of up to 5 years for balances of less than $25,000.
National Standards
Out-of-Pocket Health Care
Local Standards
Other Expenses
National Standards: These establish standards for reasonable amounts for five necessary
expenses. Four of them come from the Bureau of Labor Statistics (BLS) Consumer Expenditure
Survey: food, housekeeping supplies, apparel and services, and personal care products and
services. The fifth category, miscellaneous, is a discretionary amount established by the Service. It
is $87 for one person up to $235 for 4 persons. The IRS allows a total of $262 per month for each
member of the household above 4.
Note: All five standards are included in one total national standard expense.
Out-of-Pocket Health Care Expenses: Out-of-pocket health care expenses include medical
services, prescription drugs, and medical supplies (e.g. eyeglasses, contact lenses, etc.). Elective
procedures such as plastic surgery or elective dental work are generally not allowed. Taxpayers
and their dependents are allowed the standard amount monthly on a per person basis, without
questioning the amounts they actually spend. If the amount claimed is more than the total allowed
by the health care standards, the taxpayer must provide documentation to substantiate those
expenses are necessary living expenses. Generally, the number of persons allowed should be the
same as those allowed as exemptions on the taxpayer’s most recent year income tax return. The
out-of-pocket health care standard amount is allowed in addition to the amount taxpayers pay for
health insurance.
Local Standards: These establish standards for two necessary expenses: housing and
transportation. Taxpayers will be allowed the local standard or the amount actually paid, whichever
is less.
A. Housing - Standards are established for each county within a state. When
deciding if a deviation is appropriate, consider the cost of moving to a new
residence; the increased cost of transportation to work and school that will result
from moving to lower-cost housing and the tax consequences. The tax
consequence is the difference between the benefit the taxpayer currently derives
from the interest and property tax deductions on Schedule A to the benefit the
taxpayer would derive without the same or adjusted expense. Housing costs include
rent and/or house payments, taxes, repairs and utilities the IRM provides as follows:
The utilities include gas, electricity, water, fuel, oil, bottled gas, trash and garbage
collection, wood and other fuels, septic cleaning, and telephone. Housing expenses
include: mortgage or rent, property taxes, interest, parking, necessary maintenance
and repair, homeowner's or renter's insurance, homeowner dues and condominium
fees. Usually, this is considered necessary only for the place of residence. Any
other housing expenses should be allowed only if, based on a taxpayer's individual
facts and circumstances, disallowance will cause the taxpayer economic hardship. [
IRM 5.15.1.9
Note: If the taxpayer has no car payment, or no car, question how the
taxpayer travels to and from work, grocer, medical care, etc. The taxpayer is
only allowed the operating cost or the cost of transportation. [ IRM 5.15.1.9
]
C. Other Expenses. Other expenses may be considered if they meet the necessary
expense test - they must provide for the health and welfare of the taxpayer and/or
his or her family or they must be for the production of income. This is determined
based on the facts and circumstances of each case. If other expenses are
determined to be necessary and, therefore allowable, document the reasons for the
decision in your history.
D. Conditional expenses. These expenses do not meet the necessary expenses test.
However, they are allowable if the tax liability, including projected accruals, can be
fully paid within five years.
F. Generally, the total number of persons allowed for national standard expenses
should be the same as those allowed as dependents on the taxpayer's current year
income tax return. Verify exemptions claimed on taxpayer's income tax return meet
the dependency requirements of the IRC. There may be reasonable exceptions.
Fully document the reasons for any exceptions. For example, foster children or
children for whom adoption is pending.
H. Length. Revenue officers should consider the length of the payments. Although it
may be appropriate to allow for payments made on the secured debts that meet the
necessary expense test, if the debt will be fully repaid in one year only allow those
payments for one year. [ IRM 5.15.1.7 ]
Five Year Test
7.110 TC "Five Year Test" \f C \l "2" The amount allowed for necessary or conditional expenses
depends on the taxpayer's ability to full pay the liability within five years and on the taxpayer's
individual facts and circumstances. If the liability can be paid within 5 years, it may be appropriate to
allow the taxpayer the excessive necessary and conditional expenses. If the taxpayer cannot pay
within 5 years, it may be appropriate to allow the taxpayer the excessive necessary and conditional
expenses for up to one year in order to modify or eliminate the expense. (See IRM 5.14, Installment
Agreements) [ IRM 5.15.1.10 ]
Number of Offers
8.10 The total number of proposed offer has halved from 128,000 in FY 2001 to 46,000 in FY 2007.
The number of OICs accepted declined from 38,643 (or 34 percent) in FY 2001 12,000 in FY 2007 ( or
26%). The IRS has made it so difficult to secure an offer in compromise that many taxpayers and their
representative no longer choose to propose a compromise.
Offer in Compromise Program
Fiscal Year Received Not Processable Withdrawn and Rejected Accepted Total Acceptance
Processable Return Terminated Dispositions Rate
FY01 125,390 16,185 27,751 16,654 13,976 38,643 113,209 34%
FY02 124,033 32,897 50,492 13,621 16,952 29,140 143,102 20%
FY03 127,769 30,406 49,079 8,431 27,336 21,570 136,822 16%
FY04 106,025 38,553 32,358 7,859 25,654 19,546 123,970 16%
FY05 74,311 22,713 20,068 7,377 22,105 19,080 91,343 21%
FY06 58,586 16,733 12,350 5,407 14,945 14,734 64,169 23%
June-FY06 43,739 11,503 9,652 4,265 11,706 11,405 48,531 24%
June-FY07 34,740 7,663 7,772 3,470 9,036 8,959 36,900 24%
% Change - YTD 07 vs 06 -21% -33% -19% -19% -23% -21% -24%
% Change - 06 vs 01 -53% 3% -55% -68% 7% -62% -43%
A taxpayer filing a periodic-payment offer must pay the first proposed installment payment with the
application and pay additional installments while the IRS is evaluating the offer (IRC section 7122(c)
(1)(B)). A periodic-payment offer means any offer of payments made in six or more installments.
Not Refundable
8.50 TC "Not Refundable" \f C \l "2" The 20 percent payment for a lump-sum offer and the
installment payments on a periodic-payment offer are “payments on tax” and are not refundable
deposits (IRC section 7809(b) and Treasury Regulation 301.7122-1(h)).
Specify Payments
8.60 TC "Specify Payments" \f C \l "2" Taxpayers may specify in writing when submitting their offers
how to apply the payments to the tax, penalty and interest due. Otherwise, the IRS will apply the
payments in the best interest of the government (IRC section 7122(c)(2)(A)). For most taxpayers it is
in their best interest to apply the payment to their newest income tax liabilities as they may have
already reached the maximum late pate payment penalty of 25% on older liabilities.
The OIC application fee reduces the assessed tax or other amounts due. A taxpayer still must also
submit a $150 application fee and may not specify how to apply the fee.
Taxpayers filing periodic-payment offers must submit the full amount of their first installment payment
in order to meet the processability criteria. Otherwise, the IRS will deem the offer as unprocessable
and will return the application to the taxpayer along with the $150 fee.
Low Income Taxpayers
8.80 TC "Low Income Taxpayers" \f C \l "2" Under the new law, taxpayers qualifying as low-income
or filing an offer solely based on doubt as to liability qualify for a waiver of the new partial payment
requirements. Taxpayers qualifying for the low-income exemption or filing a doubt-as-to- liability offer
only are not liable for paying the application fee, or the payments imposed by TIPRA section 509. A
taxpayer seeking a waiver must submit Form 656-A with the offer. The monthly income levels to
qualify are listed below:
Deemed Accepted
8.90 TC "Deemed Accepted" \f C \l "2" The IRS will deem an OIC “accepted” that is not withdrawn,
returned, or rejected within 24 months after IRS receipt. When calculating the 24-month timeframe,
the IRS will disregard any time periods during which a liability included in the OIC is the subject of a
dispute in any judicial proceeding (IRC section 7122(f) as amended by TIPRA). In five years the
consideration period for deemed acceptance will become 12 months.
Background
8.100 TC "Background" \f C \l "2" An offer in compromise is a settlement of a delinquent tax account
for less than the full amount due. Sec. 7122 states that the IRS may compromise any civil or criminal
case arising under the Internal Revenue Laws prior to reference to the Department of Justice for
prosecution or defense. In the past very few offers were accepted because the standards were almost
impossible to meet and the IRS really did not encourage them. But in 1992, the IRS decided that they
had a major problem with accounts receivable inventory and a growing number of cases reported as
currently not collectible. The new policy espoused by the IRS was that they would accept an OIC
when it was unlikely that the tax liability could be collected in full and the amount offered reasonably
reflected collection potential.
Supporting Documents
8.110 TC "Supporting Documents
8.110" \f C \l "2" The financial statements require the proponent to supply documentation for each
item on the forms, i.e. pay stubs, car payment book, mortgages, pay stubs, charge account
statements, and bank statements. The IRS considers smaller liability offers without conducting a field
investigation, therefore it is requiring the proponent to supply all the info to make a decision without
field verification.
Addresses
8.130 TC "Addresses
8.130" \f C \l "2" All offers from taxpayers living in Alaska, Alabama, Arizona, California, Colorado,
Hawaii, Idaho, Kentucky, Louisiana, Mississippi, Montana, Nevada, New Mexico, Oregon, Tennessee,
Texas, Utah, Washington, Wisconsin, or Wyoming must be filed as follows:
Wage earner or self employed without employees Other than wage earner or self employed without
employees
Then mail to: Then mail to:
Wage earner or self employed without employees Other than wage earner or self employed without
employees
Then mail to: Then mail to:
A. Taxpayer Not in Compliance - All tax returns for which the taxpayer has a filing
requirement must be filed. This rule applies even if a Service employee previously
decided not to pursue the filing of the return under the provisions of Policy
Statement P-5-133, because it was believed to have "little or no tax due" .
In-business taxpayers must have timely deposited, filed and paid all required
employment tax returns for the two (2) preceding quarters prior to filing the offer,
and must be current with federal tax deposits for the quarter in which the offer was
submitted.
C. Taxpayer did not submit the offer on the current revision of Form 656 - The
offer must be submitted on the most current revision of the Offer in Compromise
Form 656.
D. Taxpayer did not submit the most current revision of Forms 433-A and/or
433-B - The most current revision of the Collection Information Statement Forms
433-A and/or 433-B must be submitted with the offer.
E. Taxpayer did not submit the application fee with the offer - The application fee
of $150 or the signed Form 656-A, Income Certification for Offer in Compromise
Application Fee, must be submitted with each Form 656 (Form 656-A applies to
individual taxpayers only).
Note: The application fee is not required if the offer is filed solely on the
basis of Doubt as to Liability.
An offer cannot be returned for the sole reason that the cost of an investigation may exceed the
amount offered.[ IRM 5.8.3.4.1]
Initial Review
8.160 TC "Initial Review" \f C \l "2" For processable offers one of the first considerations is to
determine if the taxpayer can pay in full. The following initial review should be conducted on all
processable offers to make that determination.
Complete the Full Pay worksheet using the taxpayer's figures only, as reflected on the
CIS.
Do not adjust any asset values or apply necessary expense standards. [ IRM 5.8.3.12]
Computation of Offer Amount
8.170 TC "Computation of Offer Amount" \f C \l "2" The IRS uses three different methods for
determining the adequacy of an offer depending on the period of time the taxpayer proposes for
payment of the offer amount. The methods are:
· Deferred Payment (offers with payment terms over the remaining statutory period for
collecting the tax.).
NOTE: In all three cases, the IRS will release any filed Notice of Federal Tax Lien once
you have fully paid the offer amount and any interest that has accrued.
Cash Offer
8.180 TC "Cash Offer" \f C \l "2" You must pay cash offers within 90 days of acceptance. You should
offer the realizable value of your assets (quick sale value) plus the total amount the IRS could collect
over forty-eight months of payments represent value of income). When the ten-year statutory period
for collection expires in less than forty-eight months, you must use the Deferred Payment Chart shown
in the instructions to Form 656. The Internal Revenue Service's method of determining the adequacy
of an offer could be best expressed by:
Quick Sale Value Plus Present Value of Income Equals Offer In Compromise
(QSV + PVI = OIC)
In applying this formula, the IRS determines the Quick Sale Value of all of the client's assets and then
adds the amount of the present value of the taxpayer's ability to pay. It aggregates the two numbers to
arrive at an Offer in Compromise amount. The following paragraphs will discuss the Internal Revenue
Service's methodology for determining quick sale value and the present value of income.
Option One is: Full payment of the realizable value of your assets within 90 days from
the date the IRS accepts your offer and Your future income in monthly payments during
the remaining life of the collection statute;
Option Two is: Cash payment for a portion of the realizable value of your assets within
90 days from the date the IRS accepts your offer and Monthly payments during the
remaining life of the collection statute for both the balance of the realizable value and
your future income;
Option Three is: The entire offer amount in monthly payments over the life of the
collection statute. As with short-term deferred payment offers, the IRS may file a Notice
of Federal Tax Lien.
Treasury Regulation 301.7122-1 authorizes the Service to consider offers raising these issues. These
offers are called Effective Tax Administration (ETA) offers.
Encourage Compliance
8.240 TC "Encourage Compliance" \f C \l "2" The availability of an Effective Tax Administration (ETA)
offer encourages taxpayers to comply with the tax laws because taxpayers will:
The Effective Tax Administration (ETA) offer allows for situations where tax liabilities
Factors
8.270 TC "Factors
8.270" \f C \l "2" Factors supporting (but not conclusive of) a determination of economic hardship
include:
· Although taxpayer has certain assets, liquidation of those assets to pay outstanding tax
liabilities would render the taxpayer unable to meet basic living expenses; and
· Although taxpayer has certain assets, the taxpayer is unable to borrow against the equity
in those assets and disposition by seizure or sale of the assets would have sufficient
adverse consequences such that enforced collection is unlikely Temp Reg
301.7122-1T(b)(4)(iv)(B)]
Example 2. Taxpayer is retired and his only income is from a pension. The
taxpayer's only asset is a retirement account, and the funds in the account
are sufficient to satisfy the liability. Liquidation of the retirement account
would leave the taxpayer without an adequate means to provide for basic
living expenses. Taxpayer's overall compliance history does not weigh
against compromise.
Example 3. Taxpayer is disabled and lives on a fixed income that will not,
after allowance of adequate basic living expenses, permit full payment of
his liability under an installment agreement. Taxpayer also owns a modest
house that has been specially equipped to accommodate his disability.
Taxpayer's equity in the house is sufficient to permit payment of the liability
he owes. However, because of his disability and limited earning potential,
taxpayer is unable to obtain a mortgage or otherwise borrow against this
equity. In addition, because the taxpayer's home has been specially
equipped to accommodate his disability, forced sale of the taxpayer's
residence would create severe adverse consequences for the taxpayer,
making such a sale unlikely. Taxpayer's overall compliance history does not
weigh against compromise.
Undermine Compliance
8.280 TC "Undermine Compliance" \f C \l "2" Factors supporting (but not conclusive of) a
determination that compromise would not undermine compliance by taxpayers with the tax laws
include:
· Taxpayer does not have a history of noncompliance with the filing and payment
requirements of the Internal Revenue Code;
· Taxpayer has not taken deliberate actions to avoid the payment of taxes; and
· Taxpayer has not encouraged others to refuse to comply with the tax laws.[Temp
Reg. 301.7122-1T(b)(4)(iv)(C)]
Exceptional Circumstances
8.290 TC "Exceptional Circumstances" \f C \l "2" The following examples illustrate cases where
exceptional circumstances exist such that collection of the full liability will be detrimental to voluntary
compliance by taxpayers; and compromise of the liability would not undermine compliance by
taxpayers with the tax laws:
Example 2. Taxpayer is a salaried sales manager at a department store who has been
able to place $2,000 in a tax‑deductible IRA account for each of the last two years.
Taxpayer learns that he can earn a higher rate of interest on his IRA savings by moving
those savings from a money management account to a certificate of deposit at a different
financial institution. Prior to transferring his savings, taxpayer submits an E‑Mail inquiry
to the IRS at its Web Page, requesting information about the steps he must take to
preserve the tax benefits he has enjoyed and to avoid penalties. The IRS responds in an
answering E‑Mail that the taxpayer may withdraw his IRA savings from his neighborhood
bank, but he must redeposit those savings in a new IRA account within 90 days.
Taxpayer withdraws the funds and redeposits them in a new IRA account 63 days later.
Upon audit, taxpayer learns that he has been misinformed about the required rollover
period and that he is liable for additional taxes, penalties and additions to tax for not
having redeposited the amount within 60 days. Had it not been for the erroneous advice
that is reflected in the taxpayer's retained copy of the IRS E‑Mail response to his inquiry,
taxpayer would have redeposited the amount within the required 60‑day period.
Taxpayer's overall compliance history does not weigh against compromise.
TC " " \f C \l "3"
Expense One Two Three Four
Person Persons Persons Persons
Out-of-Pocket Costs
Under 65 $57
Public Transportation
National $163
Ownership Costs
Operating Costs
Illinois
County Housing and Utilities forHousing and Utilities forHousing and Utilities forHousing and Utilities for Housing and Utilities for a
a Family of 1 a Family of 2 a Family of 3 a Family of 4 Family of 5 or more
AND
Revised 07/15/2009