Guide to IRS Collections

Interactive Self-Study CPE/CE Course

Guide to IRS

Collections

CPE/CE

1 Credit Hour

Course Overview

Program Content: This course provides continuing professional education (CPE/CE) to enhance a tax preparer’s competence in advising clients who are unable to pay tax due and have not entered into a payment agreement with the IRS. Subjects include collection due process, liens and levies, minimum living standards, wage garnishment, and trust fund penalties.

Publication Date: September 2015.

Expiration Date: The Final Exam must be completed online within one year from your date of purchase or shipment. See the Final Examination Instructions on the next page for information regarding final exam completion.

Field of Study: Taxes.

Program Level: Overview. This course provides a general overview of the subject area from a broad perspective. It is appropriate for tax professionals at all organization levels.

Recommended Participants: This course is recommended for tax professionals who advise clients on the best way to deal with collection activities by the IRS.

Prerequisites: None.

Advance Preparation: No advanced preparation is needed to complete this course.

Type of Delivery Method: Interactive self-study.

CPE/CE Credit Hours: 1 Credit Hour. One 50-minute period equals one CPE/CE Credit Hour.

Passing Grade: Participants who answer a minimum of 70% correct on the final exam will receive a Certificate of Completion. See the Final Examination Instructions on the next page for further information regarding passing require-ments and acquiring the Certificate of Completion.

Record Retention: As an IRS-approved provider of continuing education, Tax Materials, Inc. will report successful completion of this course to the IRS. According to the IRS, at some point in the future, you will be able to view your completed continuing education credits through your online PTIN account.

Complaint Resolution Policy: Please contact our customer service department toll-free at 1-866-919-5277.

Refund Policy: 30-day money-back guarantee. For information about our refund, complaint, and/or program cancellation policies, visit our website at www.thetaxbook.com.

Tax Materials, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regard-ing registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.learningmarket.org. National Registry of CPE Sponsors ID Number 109322

In accordance with the standards set forth in Circular 230, section 10.6, CPE/CE credits have been granted based on a 50-minute hour. IRS Program Number is 7VT8K-T-00073-15-S

Tax Materials, Inc. has been approved by the California Tax Education Council to offer the Guide to IRS Col-lections Self-Study CPE/CE Course 6193-CE-0020, which provides 1 hour of federal credit and 0 hours of state credit towards the annual “continuing education” requirement imposed by the State of California. A listing of additional requirements to register as a tax preparer may be obtained by contacting CTEC at P.O. Box 2890, Sacramento, CA, 95812-2890, toll-free by phone at 1-877-850-2832, or on the internet at www.ctec.org.

CTEC Course ID Number 6193-CE-0020

®

Guide to IRS Collections Self-Study CPE/CE

Helpful Hint: Attempt to relate your tax preparation experience with the information you are studying. By doing so, you will increase retention and maximize your results. Also, utilize the “Notes” sections to jot down reminders and information that will be helpful to you in your tax practice.

Follow the instructions below:

1) Start each chapter by reading the Learning Objectives.

2) Read the course materials in the chapter. Pay close attention to:

a) Key Facts: Information that is particularly pertinent to the Learning Objective.

b) Examples: Review the examples to associate the information to real-world application.

c) Notes: Many of the main points of the chapter are highlighted. Review the notes and try to relate the content with your experience.

3) Complete the Self-Quiz at the end of the chapter. The questions are broken out by Learning Objective. Review the Learning Objectives before completing each set of questions. Determine your progress by comparing your answers to the correct ones on the pages that follow.

4) After completing the study material, and taking the Self-Quiz, complete the Final Exam located at the back of this instruction booklet.

Expiration Date Reminder: The Final Exam must be completed online within one year from your date of purchase or shipment. CPE/CE credits are not available more than one year after your date of purchase or shipment. All Final Exams are administered online at www.thetaxbook.com. It is recommended that you review the Final Exam at the end of the course before taking it online. Final Exams mailed in will not be graded.

Follow the instructions below:

1) Go to www.thetaxbook.com.

2) Click on “Login to Education Center,” where you will find a location to log in to the Final Exam.

3) Enter your User Name in the self-study CPE/CE login location. The email address associated with your ac-count at Tax Materials, Inc. is your User Name. If you do not have an email address, or have not provided one, please call our toll-free number at 1-866-919-5277 to be assigned a User Name.

4) Enter your Password. The zip code associated with your account is your password. If you are having difficulty logging onto the Final Exam, please call our toll-free number at 1-866-919-5277.

5) Select the Guide to IRS Collections Exam and click the “Take Exam” button. 6) You will be taken to the Final Exam.

• First confirm your First Name and Last Name are correct. This is how your name will appear on your Certificate of Completion should you achieve a score of 70% or higher.

• Take the Final Exam. Read the questions carefully and answer them to the best of your ability. At the bottom of the exam, click on “Submit Answers” when finished. You will instantly know if you have passed the test. If you failed, you are able to retake the test. If you passed, the Certificate of Completion will be available for you to print.

Please provide suggestions and feedback regarding this CPE/CE course. The last page contains an Evaluation Form. After completion, please mail to:

Tax Materials, Inc.

15105 Minnetonka Ind. Rd., Ste. 221 Minnetonka, MN 55345

Thank you for helping us improve our CPE/CE course offerings!

Course

Completion

Instructions

Final

Examination

Instructions

Complete

Evaluation Form

Learning Objectives / Table of Contents

Learning Objective

A

Learning Objective A

1

Identify actions the IRS can take to ensure a client’s tax bill is paid.

B

Learning Objective B

5

Recognize situations where a taxpayer’s property is in jeopardy through an IRS levy.

C

Learning Objective C

8

Compute a taxpayer’s minimum allowable living expenses to be considered by the IRS when taking collection action.

D

Learning Objective D

11

Compute the amount of wages an employer must withhold and send to the IRS in the case of a levy on wages.

E

Learning Objective E

13

Recognize situations where an individual may be subject to the trust fund recovery penalty for unpaid employment taxes.

Final Exam

19

CPE/CE

Learning Objectives

Successful completion of this course will enable the participant to: A Identify actions the IRS can take to ensure a client’s tax bill is paid. B Recognize situations where a taxpayer’s property is in jeopardy through

an IRS levy.

C Compute a taxpayer’s minimum allowable living expenses to be consid-ered by the IRS when taking collection action.

D Compute the amount of wages an employer must withhold and send to the IRS in the case of a levy on wages.

E Recognize situations where an individual may be subject to the trust fund recovery penalty for unpaid employment taxes.

Glossary Terms

Garnishment. The process by which the IRS seizes a portion of the wages of

an employee.

Lien. A lien is a legal claim against current and future property. If a tax bill

is not paid when due, a lien is created by law and attaches to the taxpayer’s property.

Levy. A levy is the legal process used to seize property to satisfy a debt.

Summons. An IRS summons legally compels a taxpayer to meet with an officer

of the IRS and provide information, documents, or testimony.

Collection due process. If a taxpayer does not agree with collection action

taken by the IRS, a collection due process hearing is available to appeal the collection activity.

Learning Objective A

Identify actions the IRS can take to ensure a client’s tax bill is paid.

Collection Process

The collection process is a series of actions that can be taken by the IRS to col-lect taxes owed that the taxpayer does not voluntarily pay. The colcol-lection pro-cess will begin if the taxpayer does not make required payments in full and on time after receiving a bill from the IRS. The IRS will send at least two bills for the amount due before it proceeds with collection action.

Note: If a tax bill is for an individual shared-responsibility payment as a result of the Affordable Care Act, the amount owed is not subject to penalties, levies, or the filing of a tax lien. However, interest on the debt will accrue. Under cur-rent law, the only mechanism to collect such a debt is through offset of federal tax refunds.

The IRS will send at least two bills for the amount due before it proceeds with collection action.

NOTES

Responding to IRS Bill

Agree. If the taxpayer agrees the amount on the bill is correct, there are

in-structions on the correspondence explaining how to remit payment. If the tax-payer cannot pay the full amount due, the IRS should be contacted to explain the taxpayer’s situation. Based on the taxpayer’s ability to pay, the IRS may allow alternate payment options. See Options for Payment, below.

Disagree. If the taxpayer disagrees with the amount shown as due, the first

step is to contact the IRS at the number or mailing address shown on the bill to explain the reason for the disagreement. A timely response is important since collection action will be implemented if the taxpayer does not pay or give a reason for disagreement.

Timely Response

It is important to respond to an IRS bill or other notice of tax due in a timely manner. If a response is delayed, it can result in the taxpayer being unable to contest the underlying tax liability as the collection process proceeds. See Smith, T.C. Memo 2015-60, page 14.

Bankruptcy. The IRS should be notified if the taxpayer is in bankruptcy. The bankruptcy may not eliminate the tax debt, but the IRS may temporarily stop collection activities. When contacting the IRS in this situation, have available the location of the court, bankruptcy date, chapter, and bankruptcy number.

Options for Payment

More detailed information about options for payment is presented in the CPE course, Clients with Unpaid Taxes. The information in this section is a brief sum-mary of the options available.

Credit or debit card. An amount due the IRS can be paid with a debit or credit

card by visiting www.irs.gov/e-pay or calling 1-800-555-4477.

Installment agreement. For debts of individual taxpayers for $50,000 or less,

or business payroll taxes of $25,000 or less, a monthly installment agreement may be available. Installment agreements can be set up at the Online Payment Agreement section of the IRS website at www.irs.gov, or by filing Form 9465, Installment Agreement Request.

Offer in Compromise (OIC). If there is doubt as to liability or doubt as to the taxpayer’s ability to pay the full amount due currently or in the future, the IRS may accept an OIC. An application fee and initial payment is required, along with the taxpayer’s financial information. Use Form 656, Offer in Compromise.

A pre-qualifier tool for determining whether the taxpayer may qualify for an OIC is available at the IRS website at www.irs.gov.

Statute of Limitations

The IRS can proceed with collection activities for 10 years from the date the taxes were assessed.

If a response is delayed, it can result in the taxpayer being unable to contest the underlying tax liability as the collection process proceeds.

Key Fact

NOTES

Exceptions: The 10-year statute of limitations is suspended in the following situations.

• The IRS is considering the taxpayer’s request for an installment agreement or Offer in Compromise. If the taxpayer’s request is rejected, the IRS will sus-pend collection activities for another 30 days, and during any period the IRS Appeals Office is considering an appeal request.

• If the taxpayer lives outside the U.S. continuously for at least six months, col-lection activity is suspended while the taxpayer is out of the country.

• The tax periods under collection are included in a bankruptcy with an auto-matic stay (an autoauto-matic stay prohibits most creditors from conducting col-lection activities). The IRS will suspend colcol-lection activity for the time it can’t collect because of the automatic stay, plus six months.

• The taxpayer requests a due process hearing. Collection will be suspended from the date of the request until a Notice of Determination is issued or the Tax Court’s decision is final. See Collection Due Process, page 4.

• The IRS is considering the taxpayer’s request for innocent spouse relief.

Collection Appeals Program vs. Collection Due Process

The IRS has two paths a taxpayer can take if they disagree with collection ac-tivity. One important distinction is that once a decision is reached under the Collection Appeals Program, the taxpayer cannot take the issue to Tax Court. On the other hand, after a Collection Due Process hearing, the taxpayer has 30 days to appeal to the Tax Court. Another distinction is that tax liability can be contested in a Collection Due Process hearing, but not in a Collection Appeals Program hearing.

Collection Appeals Program

If the taxpayer does not agree with an IRS employee’s decision regarding any levy, seizure, or lien filing and wants to appeal it, he or she can request a con-ference with the employee’s manager. If the IRS seizes the taxpayer’s house or car or other property, the appeal must be made within 10 days after the Notice of Seizure is given to the taxpayer or left at the taxpayer’s home or business. There is no deadline to request a manager conference when a levy is served for other types of property such as wages or a bank account, but the collection activity will move forward if a conference is not requested within a reasonable time period.

If a request for a manager’s conference is not responded to by the IRS with-in two days, the taxpayer can proceed with filwith-ing Form 9423, Collection Appeal Request.

Form 9423,Collection Appeal Request. If a manager’s conference does not

resolve the collection issue, the taxpayer can appeal by filing Form 9423. The form can be used to appeal:

• Liens. • Levies. • Seizures.

• Rejections, modification, or termination of installment agreements.

If a request for a manager’s conference is not responded to by the IRS within two days, the taxpayer can proceed with filing Form 9423, Collection Appeal Request.

NOTES

Appeal on Installment Agreement. A manager’s conference is not required to appeal an issue involving an installment agreement. However, the IRS strongly recommends holding a manager’s conference whenever possible.

Form 9423 Eliminates Tax Court Option. If a taxpayer files Form 9423,

Collec-tion Appeals Request, the appeals decision is binding on both the taxpayer and the IRS. A taxpayer who has filed a collection appeals request cannot proceed to court if he or she disagrees with the appeal decision.

Collection Due Process

The taxpayer can request a due process hearing. The purpose of the hearing is for an IRS Appeals Office to review collection actions that were taken or have been proposed. The taxpayer can request a collection due process hearing if any of the following have been received.

• Notice of Federal Tax Lien and Your Right to a Hearing.

• Final Notice – Notice of Intent to Levy and Notice of Your Right to a Hearing. • Notice of Jeopardy Levy and Right of Appeal.

• Notice of Levy on Your State Tax Refund—Notice of Your Right to a Hearing. • Notice of Levy and Your Right to a Hearing.

See information about liens and levies in Learning Objective B, page 5.

Form 12153,Request for a Collection Due Process or Equivalent Hearing.

File Form 12153 to request a collection due process hearing. The IRS notice will indicate the due date for filing. The due date for proposed levies is 30 days after the date of the letter. If Form 12153 is timely filed, the taxpayer has a right to ju-dicial review of the determination issued in the collection due process hearing. Equivalent hearing. If Form 12153 is not timely filed, the taxpayer can request an equivalent hearing within one year from the date of the notice, but the tax-payer cannot go to court if he or she disagrees with the decision issued by the Appeals Office.

Suspension of collection activity. The 10-year statute of limitations for col-lecting a tax debt is suspended during a collection due process hearing period, and the IRS is generally prohibited from seizing the taxpayer’s property if a levy of the property is the subject of the hearing. Although the IRS is allowed to seize property during a collection due process hearing or equivalent hearing in some circumstances, the IRS will generally not do so.

One hearing per tax period. The taxpayer is entitled to only one collection due

process lien hearing and one levy hearing for each tax period or assessment.

If Form 12153 is timely filed, the taxpayer has a right to judicial review of the determination issued in the collection due process hearing.

NOTES

Patti raised money to pay medical expenses through a crowdfunding website. Patti believes that under the tax law the amounts given by donors should be considered nontaxable gifts to her. The IRS determined that the amounts re-ceived from Patti’s crowdfunding campaign represented taxable income and has proceeded with collection activity. Patti believes she has a good chance of prevailing in Tax Court. Patti opts for a Collection Due Process hearing so she can retain her right to go to Tax Court if the IRS continues collection activity.

Learning Objective A Self-Quiz

For answer, see Self-Quiz Answers, page 16.

Test your knowledge and comprehension of information presented in Learning Objective A.

1) For how long after tax is assessed can the IRS proceed with collection action? a) Two years.

b) Three years. c) 10 years.

d) There is no time limit on collections for tax assessed.

Learning Objective B

Recognize situations where a taxpayer’s property is in jeopardy through an

IRS levy.

Federal Tax Lien

A lien is a legal claim against all of a taxpayer’s current and future property. A Federal tax lien automatically comes into existence if a taxpayer does not pay tax due after receiving the first bill from the IRS.

Notice of Federal Tax Lien. A Notice of Federal Tax Lien gives public notice to

creditors a lien against the taxpayer’s property is in effect. The Notice is filed so the IRS can establish priority of their claim versus the claims of other creditors. The Notice of Federal Tax Lien is filed with local or state authorities, such as county recorder of deeds or the Secretary of State.

If a Notice of Federal Tax Lien is filed, it is often reported to credit reporting agencies, resulting in a lowering of the taxpayer’s credit score. Employers, landlords, and others may also use the information.

Appealing a Federal Tax Lien. Within five days of the first filing of the Notice

of Federal Tax Lien for a specific debt, the IRS will send the taxpayer a Notice of Federal Tax Lien Filing and Your Right to a Collection Due Process Hearing. The taxpayer will have until the date on the Notice to request a Collection Due Process hearing with the Office of Appeals. See Form 12153, Request for a Collec-tion Due Process or Equivalent Hearing, page 4.

example

A Notice of Federal Tax Lien gives public notice to creditors a lien against the taxpayer’s property is in effect.

NOTES

The taxpayer may also use the Collection Appeals Program, but this would re-sult in the taxpayer being unable to proceed to U.S. Tax Court.

Release of Federal Tax Lien. A Federal Tax Lien will be released for one of the

following reasons.

• The tax debt is fully paid,

• Payment of the debt is guaranteed by a bond,

• The taxpayer has met the payment terms of an Offer in Compromise that has been accepted by the IRS, or

• The period for collection has ended (this release is automatic).

Certificate of Release of Federal Tax Lien. If one of the conditions for a lease of a Federal Tax Lien has occurred and within 30 days the IRS has not re-leased the lien, the taxpayer can request a Certificate of Release of Federal Tax Lien. The request must be in writing, and mailed to the IRS Advisory Group Manager for the taxpayer’s state of residence, as listed in IRS Publication 5235, Collection Advisory Group Addresses. The certificate will not show the official re-cording information. A copy of the rere-cording certificate must be obtained from the office where the certificate was filed.

Withdrawal of Federal Tax Lien. A withdrawal removes the Notice of Federal

Tax Lien from public record. The purpose of the withdrawal is to notify other creditors that the IRS is abandoning its lien on the taxpayer’s property. A with-drawal of a Federal Tax Lien does not mean the lien is released or the taxpayer no longer owes the tax debt.

A Federal Tax Lien will be withdrawn for one of the following reasons. • The taxpayer has entered into an installment agreement to satisfy the tax

liability, unless the agreement states otherwise,

• Withdrawing the lien will help the taxpayer pay the amount owed more quickly,

• The IRS did not follow proper procedures,

• The lien was filed during a bankruptcy automatic stay period, or

• It is in the best interest of the taxpayer and the IRS to withdraw the lien. The taxpayer can request a withdrawal of a federal tax lien by filing Form 12277, Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien.

Discharge of Federal Tax Lien. A discharge of a Federal Tax Lien removes the

lien from a specific piece of property. The IRS may discharge a lien on certain property under one of the following circumstances.

• The value of the taxpayer’s property that will remain subject to the lien is at least twice the amount of tax owed,

• Discharging the lien will result in the tax debt being fully or partially satis-fied, such as discharging the lien in order to allow the sale of property, • The government’s interest in the property is of no value, such as when debts

senior to the IRS lien are greater than the FMV of the property,

A discharge of a Federal Tax Lien removes the lien from a specific piece of property.

NOTES

• An agreement is reached with the IRS allowing the property to be sold, or • A third party owns the property and a deposit is made or bond is provided

equal to the government’s interest in the property.

Form 14135,Application for Certificate of Discharge of Property from

Fed-eral Tax Lien. Form 14135 is used to apply for a discharge of a Federal Tax Lien.

Karlie owes the IRS $203,000 and her property is subject to a Federal Tax Lien. Karlie owns a building and found a buyer at a price of $215,000.

Property sale price...$ 215,000

Minus encumbrances senior to IRS lien ...$ 135,000

Minus settlement costs ...$ 15,000

IRS lien interest equals ...$ 65,000

Since discharging the lien to facilitate the sale would partially satisfy the tax debt, the IRS approves Karlie’s application to discharge the IRS lien from the property. After the IRS receives and applies $65,000 in partial satisfaction of the tax debt, there remains an outstanding tax debt of $138,000 ($203,000 – $65,000).

Subordination. In a subordination a creditor is allowed to move ahead of the

IRS’ priority position. The IRS might allow a subordination of a lien in a case where the taxpayer is trying to refinance a mortgage on their home, but is not able to because the IRS lien has priority over the new mortgage. The taxpayer makes a request for subordination by filing Form 14134, Application for Certifi-cate of Subordination of Federal Tax Lien.

Levies

An IRS levy is the process by which the agency actually seizes a taxpayer’s property or property rights in order to satisfy a tax debt. The IRS can seize property by a levy, such as a house or car, or can seize rights to things like So-cial Security, bank accounts, or wages.

The IRS cannot levy property if the taxpayer has a current installment agree-ment or Offer in Compromise in place, if the IRS agrees the failure to pay is due to economic hardship, or seizing the property would result in the taxpayer being unable to meet basic reasonable living expenses. See Miscellaneous expenses, page 9.

Wages. If the IRS seizes the taxpayer’s wages, the levy will be served once and

remains in place until the debt is fully paid, other arrangements are made, or the collection period ends. See Notice of Levy on Wages, page 11.

Bank accounts. Seizure of funds in a bank account includes funds available

for withdrawal. After the levy is issued, the bank will hold the funds and give the taxpayer 21 days to resolve any disputes about who owns the account be-fore sending the money to the IRS.

Property that can’t be seized. Certain property can’t be seized, including

un-employment benefits, certain annuity and pension benefits, certain

service-example

Key Fact

After the levy is issued, the bank will hold the funds and give the taxpayer 21 days to resolve any disputes about who owns the account before sending the money to the IRS.

NOTES

Learning Objective B Self-Quiz

For answer, see Self-Quiz Answers, page 16.

Test your knowledge and comprehension of information presented in Learning Objective B.

2) At what point after tax is assessed does a lien come into existence? a) Immediately at the time the tax is assessed.

b) After the first bill if the tax is not paid in full. c) After 21 days.

d) 30 days.

Learning Objective C

Compute a taxpayer’s minimum allowable living expenses to be considered

by the IRS when taking collection action.

Collection Financial Standards

Collection Financial Standards are used to help determine a taxpayer’s abil-ity to pay a delinquent tax liabilabil-ity. Allowable living expenses include those expenses that meet the necessary expense test. The necessary expense test is defined as expenses that are necessary to provide for a taxpayer’s (and his or her family’s) health and welfare and/or production of income.

National Standards. National Standards for food, clothing and other items

apply nationwide. Taxpayers are allowed the total National Standards amount for their family size, without questioning the amount actually spent. See Na-tional Standards: Food, Clothing, and Other Items, page 9.

Out-of-Pocket Health Care. National Standards have also been established

for minimum allowances for out-of-pocket health care expenses. Taxpayers and their dependents are allowed the standard amount on a per person basis, without questioning the amount actually spent. See National Standards: Out-of-Pocket Health Care, page 10.

Local Standards. Maximum allowances for housing and utilities and

trans-portation, known as the Local Standards, vary by location. In most cases, the taxpayer is allowed the amount actually spent, or the local standard, whichever is less. See Local Standards: Housing and Utilities, page 10.

Generally, the total number of persons allowed for necessary living expenses should be the same as those allowed as exemptions on the taxpayer’s most re-cent year income tax return.

If the IRS determines that the facts and circumstances of a taxpayer’s situation in-dicate that using the standards is inadequate to provide for basic living expenses, they may allow for actual expenses. However, taxpayers must provide documen-tation that supports a determination that using national and local expense stan-dards leaves them an inadequate means of providing for basic living expenses.

Maximum allowances for housing and utilities and transportation, known as the Local Standards, vary by location.

NOTES

National Standards: Food, Clothing, and Other Items

National Standards have been established for five necessary expenses: food, housekeeping supplies, apparel and services, personal care products and ser-vices, and miscellaneous. The standards are derived from the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey (CES) and defined as follows.

Food. Food includes food at home and food away from home. Food at home

re-fers to the total expenditures for food from grocery stores or other food stores. It excludes the purchase of nonfood items. Food away from home includes all meals and snacks, including tips, at fast-food, take-out, delivery and full-ser-vice restaurants, etc.

Housekeeping. Housekeeping supplies includes laundry and cleaning

sup-plies, stationery supsup-plies, postage, delivery services, miscellaneous household products, and lawn and garden supplies.

Apparel and services. Apparel and services includes clothing, footwear,

mate-rial, patterns and notions for making clothes, alterations and repairs, clothing rental, clothing storage, dry cleaning and sent-out laundry, watches, jewelry and repairs to watches and jewelry.

Personal care products and services. Personal care products and services

in-cludes products for the hair, oral hygiene products, shaving needs, cosmetics and bath products, electric personal care appliances, and other personal care products.

Miscellaneous expenses. The miscellaneous allowance is for expenses

tax-payers may incur that are not included in any other allowable living expense items, or for any portion of expenses that exceed the Collection Financial Stan-dards and are not allowed under an exception. Taxpayers can use the miscel-laneous allowance to pay for expenses that exceed the standards, or for other expenses such as credit card payments, bank fees and charges, reading mate-rial and school supplies.

Taxpayers are allowed the total National Standards amount monthly for their family size, without questioning the amounts they actually spend. If the amount claimed is more than the total allowed by the National Standards for food, housekeeping supplies, apparel and services, and personal care products and services, the taxpayer must provide documentation to substantiate those expenses are necessary living expenses. Deviations from the standard amount are not allowed for miscellaneous expenses. Generally, the total number of persons allowed for National Standards should be the same as those allowed as exemptions on the taxpayer’s most recent year income tax return.

Expense One Person Two Persons Three Persons Four Persons

Food $315 $588 $660 $821

Housekeeping supplies $32 $66 $65 $78

Apparel & services $88 $162 $209 $244

Personal care products &

services $34 $61 $64 $70 Miscellaneous $116 $215 $251 $300

Total $585 $1,092 $1,249 $1,513

More Than Four Persons Additional Persons Amount

Taxpayers are allowed the total National Standards amount monthly for their family size, without questioning the amounts they actually spend.

NOTES

Zack and Esther are married with no dependents. They owe a tax debt to the IRS. The couple does not have any assets they can sell to pay off the tax debt, but both are earning wages as employees. In determining the amount of wages that can be seized by the IRS, the national standards for food, clothing, and other items allow the couple to keep $1,092 of their income each month to spend on their living expenses. Additional amounts will be allowed for out-of-pocket health care costs and local standards for housing and utilities.

National Standards: Out-of-Pocket Health Care

The table for health care expenses, based on Medical Expenditure Panel Survey data, has been established for minimum allowances for 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 proce-dures such as plastic surgery or elective dental work are generally not allowed. The out-of-pocket health care standard amount is allowed in addition to the amount taxpayers pay for health insurance.

Out-of-Pocket Costs

Under 65 $60

65 and Older $144

Local Standards: Housing and Utilities

Housing and Utilities standards include mortgage or rent, property taxes, in-terest, insurance, maintenance, repairs, gas, electric, water, heating oil, garbage collection, residential telephone service, cell phone service, cable television, and internet service. The tables include five categories for one, two, three, four, and five or more persons in a household.

Local standards are listed by state on the IRS website at www.irs.gov/Businesses/ Small-Businesses-&-Self-Employed/Local-Standards-Housing-and-Utilities.

Six-Year Rule for Repayment

The six-year rule allows for payment of living expenses that exceed the Col-lection Financial Standards, and allows for other expenses, such as minimum payments on student loans or credit cards, as long as the tax liability, including penalty and interest, can be fully paid within six years.

Taxpayers are required to provide financial information in these cases, but do not have to provide substantiation of reasonable expenses.

example

Elective procedures such as plastic surgery or elective dental work are generally not allowed.

NOTES

Learning Objective C Self-Quiz

For answer, see Self-Quiz Answers, page 16.

Test your knowledge and comprehension of information presented in Learning Objective C.

3) Under which standard is the allowance for housing determined? a) National Standards based on family size.

b) Allowable housing expenses are allowed based on actual expenses. c) Six-year rule.

d) Local Standards.

Learning Objective D

Compute the amount of wages an employer must withhold and send to the

IRS in the case of a levy on wages.

Notice of Levy on Wages

Once a lien has been issued for a tax debt and required notice and demand has been made, if the debt has not been paid the IRS can send a Notice of Levy on Wages, Salary, and Other Income to the taxpayer’s employer. The notice requires the employer to compute the exempt amount and send the remainder to the IRS. The employer is informed the levy is the result of unpaid tax debt. A levy on wages is continuous, and remains in place until it is released.

Protection Against Termination

Under federal law, an employer may not fire any employee by reason of the fact that his or her earnings have been subject to garnishment for any one indebt-edness. An employer who violates this provision may be subject to fines up to $1,000 and one-year of imprisonment.

The protection against termination applies only for one garnishment. If more than one creditor obtains a garnishment against an employer, the employee is not protected by this statute.

The determination of whether an employer violated this provision is made by the Wage and Hour Division of the U.S. Department of Labor, not the IRS.

Exemptions from Levy

The amount of income that is exempt from levy is computed on an annual basis and divided by the number of pay periods during the year. The exempt amount includes the taxpayer’s standard deduction and total personal and dependent exemptions the taxpayer will be able to claim.

Under federal law, an employer may not fire any employee by reason of the fact that his or her earnings have been subject to garnishment for any one indebtedness.

NOTES

Aaron failed to pay a past-due tax debt. In 2015, the IRS sent a Notice of Levy on Wages to his employer. Aaron is single with no dependents. His employer issues a paycheck on a weekly basis. Aaron’s employer computes his weekly exemption as follows.

Standard deduction (Single – 2015) ...$ 6,300.00

Exemption (2015) ...$ 4,000.00

Total exemption ...$ 10,300.00

÷ 52 ...$ 198.08

Exemption tables. Tables showing the exempt amount per pay period based on

filing status are included with IRS Publication 1494, Tables for Figuring Amount Exempt from Levy on Wages, Salary, and Other Income.

Payroll deductions. Payroll deductions, such as income tax or FICA

withhold-ing, that were in place when the employer received the levy notice generally remain in place. The taxpayer is not allowed to claim any new voluntary payroll deductions while the levy is in place.

Child support. Any amount the taxpayer needs to pay child support which is established by a court or administrative order for minor children is exempt from levy, but the court or administrative order must have been made before the date of the levy. Such children cannot also be claimed as exemptions for computing the exemption from levy. The taxpayer is not entitled to the exemp-tion for child support unless the child support is being paid.

Production of Books and Records

Under Internal Revenue Code 6333, if a levy has been made or is about to be made on any property, or right to property, any person having custody or con-trol of any books or records containing evidence relating to the property shall, upon demand submit the books to the IRS.

Learning Objective D Self-Quiz

For answer, see Self-Quiz Answers, page 16.

Test your knowledge and comprehension of information presented in Learning Objective D.

4) Under federal law, an employer may terminate an employee for reasons of the employee’s wages being garnished under the following circumstances. a) The employee’s wages have been garnished by one creditor.

b) The employee’s wages have been garnished by more than one creditor. c) Garnishment of wages does not affect an employer’s ability to fire an

at-will employee.

d) An employer is restricted from firing an employee as long as the IRS garnishment continues.

example

The taxpayer is not allowed to claim any new voluntary payroll deductions while the levy is in place.

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Learning Objective E

Recognize situations where an individual may be subject to the trust fund

recovery penalty for unpaid employment taxes.

Trust Fund Recovery Penalty

The Trust Fund Recovery Penalty (TFRP) encourages prompt payment of with-held income taxes and employment taxes, such as Social Security and Medicare taxes. Employment taxes are designated as trust fund taxes because the employ-er is holding the employee’s money in trust until the fedemploy-eral deposit is made. If unpaid trust fund taxes cannot be immediately collected from the employer, the IRS may assess the TFRP against any person who is responsible for collect-ing or paycollect-ing withheld income and employment taxes, and willfully fails to collect or pay them.

Responsible person. A responsible person is any person or group of people

who have the duty to perform and the power to direct the collecting, account-ing, and paying of trust fund taxes. A responsible person can be:

• An officer or employee of a corporation, • A partner or employee of a partnership, • A corporate director or shareholder, • An accountant,

• A volunteer director/trustee,

• An employee of a sole proprietorship, or • Another corporation or third-party payer.

A responsible person also may include one who signs checks for the business or otherwise has authority to cause the spending of business funds.

Willfulness. For willfulness to exist, the responsible person must have been,

or should have been, aware of the outstanding taxes, and either intentionally disregarded the law or was plainly indifferent to its requirements. No bad mo-tive is required.

Using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness.

Third-party payers. The TFRP may be recommended against a third-party

payer, such as a payroll service provider or professional employer organiza-tion, that willfully fails to collect, account for, and pay over taxes held in trust on behalf of its client, the employer. However, the use of an outside payroll service does not relieve the employer or its employees who are responsible for collecting, accounting for, and paying the employer’s payroll taxes from the re-sponsibility of ensuring all the employer’s payroll tax obligations are met. The responsible persons of the employer may still be assessed the TFRP when an outside payroll service does not pay over taxes held in trust.

Amount of penalty. The penalty is an alternative means of collecting unpaid

trust fund taxes not fully collected from the business. The penalty is equal to the unpaid trust fund taxes, which consist of unpaid income taxes withheld, plus the employee’s portion of the withheld FICA taxes.

Using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness.

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Form 4180, Report of Interview with Individual Relative to Trust Fund

Recovery or Personal Liability for Excise Taxes

Form 4180 is used by IRS investigators to conduct TFRP interviews of poten-tially responsible persons. The purpose of the form is to secure direct detailed information about the individual’s involvement with the business to determine whether the individual meets the criteria to be considered a responsible person. Form 4180 is not generally available through the IRS. In fact, the Internal Reve-nue Manual states that interviewers should not provide Form 4180 to potentially responsible persons prior to the interview. Although it is not readily available from the IRS, the form can be easily found using an internet search engine.

Timely Response Required

If a taxpayer receives a Letter 1153, Trust Funds Recovery Penalty Letter, with a pro-posal to assess penalties for failing to collect and pay over employment taxes, a timely response is necessary to defend against the assessment. If a written re-quest for appeal is not mailed to the IRS within 60 days of the date of the Letter 1153, the individual may lose the chance to contest the underlying tax liability.

In October 2010, Olin Smith received a Letter 1153 from the IRS indicating a trust fund recovery penalty in excess of $36,000. The letter stated Mr. Smith had the right to appeal or protest the action, and indicated a written appeal should be mailed to the IRS within 60 days. The penalty was based on unpaid employment taxes for the first three quarters of 2010 incurred by a partnership of which Mr. Smith was a partner.

Mr. Smith claimed he should not be held liable for the payroll taxes incurred in 2010 because he had withdrawn as a partner in 2007.

After receiving the Letter 1153 from the IRS, Mr. Smith faxed a copy to his CPA. The CPA claimed he mailed a certified letter to the IRS stating that Mr. Smith had withdrawn from the partnership in 2007 and the IRS should contact the current tax matters partner. The CPA also claimed that several phone calls to the IRS contact person listed in the letter went without response. Unfortu-nately, the CPA could not locate the certified mail receipt, and had no proof of any phone calls being made.

Under Internal Revenue Code section 6333(c), an individual may contest an underlying tax liability at a collection review hearing if the person did not have an opportunity to dispute the liability. In this case, the court determined that Mr. Smith did have a prior opportunity to dispute the liability. Even though he relied on his CPA to file the request for appeal, and the failure was inadvertent on Mr. Smith’s part, he was found liable for the penalty. (Smith, T.C. Memo 2015-60)

Key Fact

If a written request for appeal is not mailed to the IRS within 60 days of the date of the Letter 1153, the individual may lose the chance to contest the underlying tax liability.

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Preparing a Request for Appeals

Small case request. If the total amount of the proposed assessment for each

tax period is $25,000 or less, the individual may file a small case request. If more than one tax period is involved and any tax period exceeds the $25,000 thresh-old, a formal written protest for all periods must be filed.

Respond by sending a letter to the IRS that the individual wants to Appeal the proposed assessment, to the attention of the IRS officer whose name and ad-dress are listed on Letter 1153.

Enclose a copy of the Letter 1153 and include the individual’s name, address, Social Security number, and daytime telephone number.

Explain the reasons for disagree with the amount of the proposed assessment. Include a clear explanation of the individual’s duties and responsibilities dur-ing the tax periods listed in the letter.

Formal written protest. If the total amount of the proposed assessment for

any one tax period is greater than $25,000, a formal written protest must be filed.

Send the formal written protest to the attention of the IRS officer whose name and address are listed on Letter 1153.

Include a statement that the individual wants to appeal the proposed assessment(s).

Include the individual’s name, address, Social Security number, and daytime telephone number.

Enclose a copy of the Letter 1153 with tax periods involved.

Explain the reasons the individual is not responsible for the unpaid taxes or disagreement with the amount of the proposed assessment.

Include a clear explanation of the individual’s duties and responsibilities. Cite relevant law or authority indicating the individual should not be liable for the penalty.

The individual should sign the written protest under the penalties of perjury, by making the following statement:

Under the penalties of perjury, I declare that I examined the facts stated in this protest, including any accompanying documents, and, to the best of my knowledge and belief, they are true, correct, and complete.

If a representative prepares and signs the protest, he or she must substitute a declaration stating he or she submitted the protest and accompanying docu-ments, and he or she knows personally that the facts stated in the protest and accompanying documents are true and correct.

If the total amount of the proposed assessment for any one tax period is greater than $25,000, a formal written protest must be filed.

NOTES

_{Learning Objective E Self-Quiz}

For answer, see Self-Quiz Answers, page 16.

Test your knowledge and comprehension of information presented in Learning Objective E.

5) The trust fund recovery penalty can be assessed for a responsible person’s failure to pay over the following amounts withheld from an employee’s wages. a) Income taxes and employment taxes.

b) Elective deferrals to a pension plan. c) Wage garnishments.

d) Child support payments.

Self-Quiz Answers

1) For how long after tax is assessed can the IRS proceed with collection action? a) Two years.

Incorrect. The statute of limitations for a claim for refund is the later of two years after the tax was paid or three years after the time the original return was filed. The statute of limitations for collection proceedings is 10 years.

b) Three years.

Incorrect. The statute of limitations for a claim for refund is the later of three years after the time the original return was filed or two years after the tax was paid. The statute of limitations for collec-tion proceedings is 10 years.

c) 10 years.

Correct. The IRS can proceed with collection activities up to 10 years

after tax has been assessed.

d) There is no time limit on collections for tax assessed.

Incorrect. The IRS can proceed with collection activities up to 10 years after tax has been assessed.

2) At what point after tax is assessed does a lien come into existence? a) Immediately at the time the tax is assessed.

Incorrect. At the time the tax is assessed the statute of limitations period begins. A lien comes into effect if the taxpayer does not pay the tax due after receiving the first bill from the IRS.

b) After the first bill if the tax is not paid in full.

Correct. The lien is automatic and legally comes into existence if the

tax-payer does not pay the tax in full after receiving the first bill. c) After 21 days.

Incorrect. After a levy of a bank account is issued, the bank will hold the funds for 21 days to allow the taxpayer to resolve any disputes about who owns the account. A lien comes into effect if the tax-payer does not pay the tax due after receiving the first bill from the IRS.

NOTES

d) 30 days.

Incorrect. If a taxpayer disagrees with the determination after a Collection Due Process hearing, he or she has 30 days to proceed to U.S. Tax Court. A lien comes into effect if the taxpayer does not pay the tax due after receiving the first bill from the IRS.

3) Under which standard is the allowance for housing determined? a) National Standards based on family size.

Incorrect. National Standards based on family size are used to determine allowable expenses for food, clothing, and miscellaneous ex-penses. Housing is determined using Local Standards.

b) Allowable housing expenses are allowed based on actual expenses. Incorrect. Allowable housing expenses are based on Local Standards. c) Six-year rule.

Incorrect. If there is a plan in place to pay the tax debt within six years the allowable expenses can exceed the Standards. Local Standards are used to determine allowable housing and utilities expenses. d) Local Standards.

Correct. Local Standards are used to determine allowable housing and

utilities expenses.

4) Under federal law, an employer may terminate an employee for reasons of the employee’s wages being garnished under the following circumstances. a) The employee’s wages have been garnished by one creditor.

Incorrect. Under federal law an employer may not fire an employee by rea-son of the fact the employee’s earnings have been garnished for any one indebtedness.

b) The employee’s wages have been garnished by more than one creditor.

Correct. The federal protection against termination applies only to any

one indebtedness. If there are two or more garnishments, the protection does not apply.

c) Garnishment of wages does not affect an employer’s ability to fire an at-will employee.

Incorrect. Under federal law an employer may not fire an employee by rea-son of the fact the employee’s earnings have been garnished for any one indebtedness.

d) An employer is restricted from firing an employee as long as the IRS gar-nishment continues.

Incorrect. An employer is not required to retain an employee because of the garnishment, but the employer cannot fire an employee by reason of the fact the employee’s wages have been garnished for any one indebtedness.

NOTES

a) Income taxes and employment taxes.

Correct. Income and employment taxes are called trust fund taxes

be-cause the employer is holding the employee’s money until the federal deposit is made.

b) Elective deferrals to a pension plan.

Incorrect. There are rules under ERISA for deposit of employee elective deferrals to pension plans, but the trust fund recovery penalty applies to income taxes and employment taxes.

c) Wage garnishments.

Incorrect. Employers are required to pay over wages garnishments, but the trust fund recovery penalty applies to income taxes and em-ployment taxes.

d) Child support payments.

Incorrect. The trust fund recovery penalty applies to income taxes and employment taxes. Child support payments are not trust fund items.

CPE/CE

Final Exam

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1) Jeremy has a past-due tax bill resulting from an individual shared-responsibility payment under the Affordable Care Act. What is the only collection process can the IRS use to collect the past-due amount? a) Levy the taxpayer’s property.

b) Garnish the taxpayer’s wages. c) Offset of a federal refund.

d) Under current law there is no means for the IRS to collect a tax debt based on the Affordable Care Act.

2) The IRS cannot seize the following item from a taxpayer through a levy. a) Wages.

b) Personal residence. c) Unemployment benefits. d) Social Security benefits.

3) What is the maximum number of persons allowed when determining family size for purposes of computing minimum allowable living expenses?

a) Two. b) Four. c) Six.

d) There is no limit on family size.

4) How is the amount exempt from levy on an employee’s wages determined? a) The amount of the taxpayer’s standard deduction plus personal exemptions

is exempt from levy.

b) The national standard for food, clothing, and other items is exempt from levy.

c) The local standard for housing and utilities is exempt from levy. d) The only item from wages that is exempt from levy is child support

payments.

5) Maple Corporation has withheld federal income and FICA taxes from employee wages and has not paid the withholding over to the federal government. When assessing the trust fund recovery penalty, which individuals will the IRS be most likely to focus on as responsible persons? a) The IRS will designate an officer, partner, or director of the business entity. b) The IRS will designate a payroll accountant.

c) The IRS will designate a third-party payer.

d) The IRS will designate as many people as possible as potential responsible persons.

Go to www.thetaxbook.com and click on

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_{Final Examination Instructions}

Expiration Date Reminder: The Final Exam must be completed online within one year from your date of purchase or shipment. CPE/CE credits are not available more than one year after your date of purchase or shipment.

All Final Exams are administered online at www.thetaxbook.com. It is recommended that you review the Final Exam at the end of the course before taking it online. Final Exams mailed in will not be graded.

Follow the instructions below:

1) Go to www.thetaxbook.com.

2) Click on “Login to Education Center,” where you will find a location to log in to the Final Exam. 3) Enter your User Name in the self-study CPE/CE login location. The email address associated with

your account at Tax Materials, Inc. is your User Name. If you do not have an email address, or have not provided one, please call our toll-free number at 1-866-919-5277 to be assigned a User Name.

4) Enter your Password. The zip code associated with your account is your password. If you are having difficulty logging onto the Final Exam, please call our toll-free number at 1-866-919-5277. 5) Select the Guide to IRS Collections Exam and click the “Take Exam” button.

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• First confirm your First Name and Last Name are correct. This is how your name will appear on your Certificate of Completion should you achieve a score of 70% or higher.

• Take the Final Exam. Read the questions carefully and answer them to the best of your ability. At the bottom of the exam, click on “Submit Answers” when finished. You will instantly know if you have passed the test. If you failed, you are able to retake the test. If you passed, the Certificate of Completion will be available for you to print.

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