William D. Elliott practices tax law in Dallas, Texas, with particular experience in tax procedure and controversy and IRS confl ict resolution. Bill is author of the leading treatise, FEDERAL TAX COL -LECTION, LIENS & LEVIES and a Fellow of
the American College of Tax Counsel.
Tax Practice
By William D. Elliott
Potpourri of Tax Practice Issues
M
ost of the time, this column is devoted to one topic. This column will discuss a variety of tax practice issues that are per-colating near the surface. Some of the topics derive from comments or questions from practitioners, which are welcome.Nominee—Transferee—
Alter Ego Liens
IRS collection actions against nominees and alter egos of the delinquent taxpayer is receiving height-ened awareness.1 A nominee lien is used when the
IRS believes when property has been transferred or acquired in the name of a third party with the tax-payer’s funds. The IRS can fi le a nominee lien without court order, but only with IRS legal approval. Asset seizure can follow from a nominee lien.2 The
rem-edy from a nominee lien is not especially attractive because it requires a lawsuit in U.S. District Court under 28 USC §2410.
An alter ego is used by the IRS when they believe one entity is alter ego of another, such as when the taxpayer fails to observe corporate formalities.3
Innocent Spouse Developments
The IRS announced on July 25, 2011,4 that it will no
longer enforce Reg. §1.6015-5(b)(1), which limited to two years after the date of the IRS’s fi rst collection ac-tivity the period in which it would consider requests for equitable relief under Code Sec. 6015(f). Now, the IRS will consider requests for innocent spouse
relief under Code Sec. 6015(f) at any point in time as long as the period of limitation on collection of taxes provided by Code Sec. 6502 remains open for the tax years at issue.
In Notice 2012-8, the IRS provides a proposed revenue procedure that will supersede Rev. Proc. 2003-61,5 which provides guidance regarding Code
Sec. 6015(f) relief from joint and several liability.6
The factors used in making Code Sec. 6015(f) inno-cent spouse relief determinations will be revised “to ensure that requests for innocent spouse relief are granted under [Code Sec.] 6015(f) when the facts and circumstances warrant.”
Usually, the innocent spouse is the wife. Abused wives often involve the issue of whether the husband exerted fi nancial control over the couple’s affairs. When a wife has been abused by her husband, she may not have been able to challenge the treatment of any items on the joint return, question the payment of the taxes reported as due on the joint return or chal-lenge the husband’s assurance regarding the payment of the taxes. Furthermore,
a wife’s lack of fi nancial control may have a similar impact on her ability to satisfy joint tax liabilities
via IRS collection actions. Thus, the IRS guidelines indicate that abuse or lack of fi nancial control may mitigate other factors that might otherwise weigh
against granting Code Sec. 6015(f) equitable relief. The proposed revenue procedure also provides for certain streamlined case determinations; new guid-ance on the potential impact of economic hardship; and the weight to be accorded to certain factual circumstances in determining equitable relief.7
Liberalizing Some IRS Collection
Standards and Thresholds
In recent times, the IRS has liberalized standards for various collection actions, or increased payment thresholds, which are particularly useful for install-ment agreeinstall-ments and offers in compromise.
Installment Payment Changes
and Lien Withdrawals
The IRS announced changes to its criteria for tax lien fi lings and when an installment agreement will be
used without having to supply the IRS with a fi nancial statement has been raised to $50,000 from $25,000. Additionally, the maximum term for streamlined in-stallment agreements has been raised to 72 months from 60 months.8
The IRS has fi led 41 percent fewer notices of tax liens during the March 2012 period from a year ear-lier, and 61 percent fewer liens fi led by Automated Collection System.9
On the other hand, as of March 2012, those busi-nesses receiving installment agreements has declined as compared with earlier periods.10 The new
pro-cedures do not seem to have increased the use of installments agreements, in fact.
Penalty Relief for Unemployed
from Failure-to-Pay Penalties
New penalty relief has been announced by the IRS for those unemployed for failure-to-pay penalties when balance due amount do not exceed $50,000. The IRS plans to grant a six-month grace period to (1) wage earners who have been unemployed at least 30 consecutive days during 2011, or in 2012 up to the April 17 deadline for fi ling tax returns; and (2) self-employed individuals who experienced a 25-per-cent or greater reduction in business income in 2011. The penalty relief is subject to income limits, the IRS added. A taxpayer’s income must not exceed $200,000 if he or she fi les married fi l-ing jointly or $100,000 as sl-ingle or head of household.11
Offers in Compromise Changes
The IRS liberalized somewhat offers in compromise in instances when tax liabilities are less than $50,000 and gross income is $100,000 or less and there are no employment tax liabilities. Essentially, the IRS is limiting background research, relying to a greater de-gree on internal research, telephone communications with taxpayer, and liberalizing expenses and future income calculations.12 Also, in IR-2012-0313 the IRS
indicated other adjustments to offers in compromise: Consider future income for only one year, if the offer in compromise is paid in fi ve or few months. Consider future income for only two years, if the offer in compromise is paid in six to twenty-four months (reduced from fi ve years).
The challenge facing practitioners
who try to cope with this complex
array of rules, systems and faceless
IRS persons is huge. Perhaps the
unspoken story is how the tax
collection system works at all.
Consider more taxpayer-favorable computation of future income potential and living expenses (allowing loan guarantee payments of a high school education and allowing some state and local taxes).14
Surprisingly, the rate of acceptance of offers in compromise has increased to 38 percent. The actual number of offers accepted doubled during the March 2012 period from earlier similar periods.15
Available statistics indicate increased inventories of OIC cases, together with processing delays.16
Reality Check in Collection
Due Process Cases
Recent Tax Court statistics on winners and losers in Collection Process cases remind practitioners that most of the time, the IRS prevails in the Tax Court on CDP cases. The Taxpayer Advocate reported statistics on Collection Due Process cases in the Tax Court for the fi rst part of 2011, which indicate that the IRS wins these most of the time. From June 1, 2010, to May 31, 2011, the Tax Court issued 89 cases involv-ing CDP hearinvolv-ings. Of these, taxpayers prevailed in three, and in part in three other cases. Of these six cases in which taxpayer prevailed in whole or in part, taxpayers were pro se in three cases.17 These 89 cases
are a reduction of 32 percent from the 131 decisions published by the Tax Court for the previous 12-month period. The IRS enjoys a success rate in the Tax Court in CDP cases of 90 percent + in all years since 2003 (89 percent in 2010).
Centralization and Automation
of IRS Collection Activities
The IRS agency is underfunded and in need of greater manpower. The IRS business strategy is to central-ize functions and automate as much as possible. The National Taxpayer Advocate has been writing about these issues in each of her annual reports, and particularly her 2011 report. Consider the following telling statistics:
In 2011, the Automated Substitute for Return program processed 896 percent more returns than in 2002.
Automated adjustments are occurring more than actual exams. In 2010, out of 15 million IRS con-tacts with taxpayers, only 10 percent were real examinations. Of these 10 percent real examina-tions, some 78 percent (of the 10 percent) were
by correspondence in an automated setting, not actual examinations of returns.
The IRS fi led 1,042,230 notices of federal tax lien in 2011 against 713,524 taxpayers (5.2 percent less than 2010). The Advocate has con-cluded that increased lien fi lings did not lead to higher tax collections, and in fact, probably lessen tax collections.
In 2011, 3.7 million collection cases remain un-resolved after the notice phase and moved into ACS. Sixty percent of ACS cases have been in the system for six months or more. The dollar value of cases in the collection queue has doubled over the last six years to $56.2 billion.
In 2010, the IRS Excess Collections File held $4.7 billion. This is the fi le containing funds the IRS has not applied or credited to a taxpayer’s account, nor refunded. The Treasury Inspector General for Tax Administration (TIGTA) estimates more than one-half of the transfers to the Excess Collection File were due to IRS errors.
When Confronting an
Unreasonable IRS Position:
IRS Levy on a Lawyer’s
Client Trust Funds
The phone call referenced from a leading tax attorney in Dallas introduced the subject of what are useful strategies for the practitioner when confronting an un-reasonable IRS position in a collection matter. In this instance, the IRS was levying on a lawyer’s client trust funds, when the delinquent taxpayer was the lawyer and not the lawyer’s client. The IRS collection action is unusual and even unreasonable because under the laws of most, if not all, states, clearly provides that client trust funds held by a lawyer are client property, not the lawyer’s property. Therefore, the IRS collection action is unreasonable because the property sought to be levied belongs to the client, not the lawyer, and therefore the IRS is not entitled to levy it. This point is so very obvious.
Texas law is perfectly clear in identifying monies in a lawyer’s trust funds as client property. This is not a nominee or alter ego situation. The lawyer cannot touch the client trust funds without client approval without risk of jeopardizing the lawyer’s law degree and perhaps even invoke criminal sanction. The only justifi cation for the IRS levying on the client trust funds is that the lawyer’s property, the taxpayer’s
property if you will, includes the client trust funds, which is not the case. Therefore, the IRS is wrong in asserting the levy and unreasonably wrong. What is the practitioner to do?
The practitioner could consider several strategies, which are outlined in the following paragraphs.
Contact IRS Revenue Offi cer’s
Supervisor or Manager
Errant IRS collection actions can often be stopped by the practitioner contacting the supervisor or manager of the Revenue Offi ce who then would presumably see the light and stop the wrongful levy. Unfortunate-ly, in modern times, IRS supervisors or managers seem less likely to be willing to overrule errant Revenue Offi cers. Perhaps the Revenue Offi ce consulted with his or her manager or supervisor in advance of the levy and afterwards is unlikely to reverse the agreed upon action. Nevertheless, the effort required by the practitioner to speak to the manager or supervisors is not great and might prove successful. In the actual example, the supervisor or manager would not over-rule the Revenue Offi cer.
Release of Levy
Under Code Sec. 6343
There are administrative and judicial actions avail-able when a levy is wrongful. Code Sec. 6343 provides that the IRS offi cial for a geographical area has authority to release a levy on all or part of the property or rights to property levied upon where (1) it is determined that release of the levy will facilitate collection, or (2) the levy was wrong-ful.18 A levy is wrongful, and subject to Code Sec.
6343(b) (except that no interest will be paid), if the IRS determines that (1) the levy was premature or otherwise not in accordance with the IRS’s admin-istrative procedures.19
One problem with a levy release is timing. The author does not know of any statistics, but informal information would suggest timing measure in months, not days. Contact IRS Counsel or Taxpayer Advocate.
The practitioner could attempt to contact IRS counsel in the belief or hope that an IRS lawyer will quickly recognize that the taxpayer-lawyer does not have any property right in the client trust funds and thus persuade the IRS Revenue Offi ce to stop trying to collect from someone other than the taxpayer. For many practitioners, they do not have acquaintance with IRS counsel and are uncomfort-able with a blind call. Also, IRS counsel might not
want to become involved until the case appears in their inventory.
Another strategy is to request assistance of the Tax-payer’s Advocate Offi ce. The Advocate’s offi ce has the power to intervene and order the IRS Revenue Offi ce to stop its collection action.
Collection Appeal Program
A useful approach is to invoke the Collection Appeal Program (CAP).20 The Collection Appeals Program
allows a taxpayer faced with a notice of lien, levy, seizure or denial or termination of an installment agreement to challenge any procedural errors in the collection activity. A byproduct of the strategy of using the Collection Appeals Program is to obtain a short-term respite from the collection function. The statutory authority for the Collection Appeals Program is Code Sec. 7123(a), which statutorily binds the IRS to follow its internal administrative procedures with respect to Collection Appeals Program.21
Under the Collection Appeals Program, tight time periods are set forth for the various steps by taxpayers and IRS offi cials. If the taxpayer fi rst receives a notice from the IRS, then the taxpayer is instructed to con-tact the Collection manager by telephone. The time period for Collection managers to return telephone requests for review to taxpayers is twenty-four hours.
Collection Due Process Hearing
The practitioner could seek a Collection Due Pro-cess Hearing under Code Sec. 6330 for Tax Court review of the levy. There are various requirements, among which is timing. CDP hearings take months, not days.22Suit for Wrongful Levy
A suit for wrongful levy is authorized by Code Sec. 7426, which is a permitted judicial action when there has been a wrongful levy.23 There is a set of
requirements for this suit with which there must be compliance. The problem with a suit for wrongful levy is that it takes too long. A U.S. District Court lawsuit will take months, not days.
Injunction
The availability of an injunction is a possible strategy in the example presented. Normally, one would not consider an injunction against the IRS because the Anti-Injunction Act, Code Sec. 7421, prohibits suits against the IRS for injunction. In the instant example, an injunction is probably obtainable since the IRS
is engaged in a procedurally irregular collection process,24 or the IRS will not prevail under any
cir-cumstances.25
Damage Claim for Wrongful
Collection Action
A taxpayer may sue the United States if an IRS col-lection employee “recklessly or intentionally, or by reason of negligence” violates the Code.26
Fundamentals to Remember
First, the bank holding the client trust funds has no choice when confronted with this levy but follow standard procedure and give notice under the 21-day rule and then turn over the funds. There is no useful purpose served in the practitioner attempting to per-suade the bank to not comply with the levy. A party upon whom a levy describing particular property has been served is not required to determine the true owner of the property, nor whether the property is subject to levy. The bank is not liable for complying with the levy.27
Levies are provisional remedies. The levy is de-signed to give the IRS control or custody of the levied funds, not determine title to the funds. Ownership disputes are to be resolved in post-levy administrative or judicial remedies.28
Any recitation of current topics facing the practitio-ner must include the realization that tax practitiopractitio-ners confront the system every day. The challenge facing practitioners who try to cope with this complex array of rules, systems and faceless IRS persons is huge. Perhaps the unspoken story is how the tax collection system works at all.
E
NDNOTES1 See recent analysis of nominee, transferee, alter ego liens: R. McKenzie,
Nominee Liens & Alter Ego Liens, American Bar Association Section of Taxation, May 2012 Meeting, May 11, 2012, 2012 ABATAX-CLE 0511073; W. Elliott, Tax Practice, Coping With Nominee Liens, TAXES,
May 2011, at 13; W. Elliott, Tax Practice, The Troublesome Transferee Liability, TAXES, July 2012, at 21.
2 IRM 5.17.2.5.7.1 (Mar. 27, 2012); CCA 200235023 (Aug. 30, 2002). 3 W. ELLIOTT, FEDERAL TAX COLLECTIONS, LIENS & LEVIES (WGL 2012), ¶9.10. 4 Notice 2011-70, IRB 2011-32, 135 (July 25, 2011).
5 Rev. Proc. 2003-61, 2003-2 CB 296.
6 Notice 2012-8, IRB 2012-4, 309 (Jan.6, 2012).
7 IRS CCN CC-2012-004 (Jan. 05, 2012); IR 2012-03 (Jan. 5, 2012);
Notice 2012-8, IRB 2012-4, 309 (Jan. 6, 2012); Rev. Proc. 2012-18, IRB 2012-10, 455 (Feb. 15, 2012). See National Taxpayer Advocate, Fiscal Year 2013 Objectives Report to Congress (June 30, 2012), at 32–33.
8 SBSE-05-0312-034 (Mar. 27, 2012); IR 2012-31 (Mar. 7, 2012);
IR-2011-20, IRS Announces New Effort to Help Struggling Taxpayers Get a Fresh Start; Major Changes Made to Lien Process (Feb. 24, 2011).
9 Collection Activity Report NO-5000-25, Liens Report (Apr. 2012).
See National Taxpayer Advocate, Fiscal Year 2013 Objectives Report to Congress (June 30, 2012), at 32.
10 Collection Activity Report NO-5000-6, Installment Agreement
Cumu-lative Report (Apr. 2012). See National Taxpayer Advocate, Fiscal Year 2013 Objectives Report to Congress (June 30, 2012), at 32.
11 IR 2012-31 (Mar. 12, 2012).
12 SBSE-05-0212-010 (Feb. 27, 2012), set to expire one year later, Feb.
27, 2013.
13 IR-2012-03 (May 21, 2012).
14 SBSE 05-0512-041 (May 21, 2012), also to last only one year until
May 21, 2013.
15 Collection Activity Report NO-5000-108, Monthly Report of Offer in
Compromise Activity (Apr. 2012). See W. Elliott, FEDERAL TAX COLLEC -TIONS, LIENS & LEVIES (WGL 2012), at ¶22.05.
16 TIGTA, Ref No. 2012-30-033, Increasing Requests for Offers in
Compromise Have Created Inventory Backlogs and Delayed Responses to Taxpayers, (Mar. 30, 2012). See National Taxpayer Advocate, Fiscal Year 2013 Objectives Report to Congress (June 30, 2012), at 33.
17 National Taxpayer Advocate, 1 2011 Annual Report to Congress 619. 18 Code Sec. 6343(a), (b).
19 Code Sec. 6343(d).
20 The Collection Appeals Program was created in 1996. Announcement
96-5, IRB 1996-4, 1. See W. Elliott, FEDERAL TAX COLLECTIONS, LIENS &
LEVIES (WGL 2012), at ¶12.17.
21 IRM 8.7, Technical and Procedural Guidelines, 1.1.9, Collection
Ap-peals Program (Jan. 1, 1999).
22 W. ELLIOTT, FEDERAL TAX COLLECTIONS, LIENS & LEVIES (WGL 2012), at
¶13.04.
23 Code Sec. 7426(a).
24Enochs v. Williams Packing & Navigation Co., SCt, 62-2 USTC ¶9545,
370 US 1 (1962).
25Id., at 7; S. Shapiro, SCt, 76-1 USTC ¶9266, 424 US 614 (1976). 26 Code Sec. 7433(a).
27 Code Sec. 6332; Reg. §301-6332-1(c).
