Current Student Resources For The Low-Income Taxpayer Clinic - Dispute Resolution

Table of Contents

1. Statutes of Limitation
A. Assessment
B. Claims for Refund
C. Collections
D. Summary of Statutes

2. Administrative Review
A. Audit
B. 30-Day Letter
C. 90-Day Letter

3. Administrative Appeal
A. Protest Letter
B. Appeals Notebook
C. Appeals Conference
D. Collections Appeals Procedure
E. Collection Due Process

4. Judicial Review
A. US Tax Court
B. US District Court
C. Court of Federal Claims

5. Collections
A. The Collection Process
B. Liens
C. Levies

6. Tools for Resolution
A. Amended Returns
B. Audit Reconsideration
C. Refund Claims
D. Injured Spouse
E. Innocent Spouse
F. Installment Agreements
G. Offers in Compromise
H. Petition to US Tax Court
J. Protest Letter

1. Statutes of Limitation

A. Assessment

An assessment is the recording of a tax liability into the IRS system on Form 23-C (Assessment Certificate). IRC §6203. The information recorded includes the taxpayer's name, social security number, year in question and the amount and type of tax involved. The date Form 23-C is signed is called the assessment date. This date is important because it triggers two statutes of limitations: (1) notification of the taxpayer and (2) collection of the tax.

The IRS has three methods in which it assesses taxes. IRC §6203. The first method is the automatic assessment that occurs when a taxpayer files a return without paying the tax due. The second is the deficiency assessment that occurs after examination and administrative and judicial review. If the taxpayer files a petition to the Tax Court after receipt of the Notice of Deficiency, assessment is postponed until the Tax Court's final decision. The third method of assessment is the termination or the jeopardy assessment. An example of this kind of assessment is when the IRS believes the taxpayer is planning to leave the country in an effort to evade paying the tax liability.

A tax must be assessed within 3 years of the date the return was filed. A return is deemed filed on the last day of filing for the tax year if it was filed early. Also, the IRS may file a substitute return for nonfilers. However, the statute of limitations will not begin to run in the following cases:

1. False return
2. Willful attempt to evade tax
3. No return filed or
4. Extension by agreement

Internal Revenue Code

For Further Information:
The LITP Newsletter – Assessment
http://law.gsu.edu/taxclinic/clinic_forms/LITP_newsletters/LITCNewsJan-02.doc

The LITP Newsletter - Statute of Limitation on Assessment
http://law.gsu.edu/taxclinic/clinic_forms/LITP_newsletters/LITCNewsFeb-03.doc

Essay on Statutes of Limitation
http://law.gsu.edu/taxclinic/clinic_forms/all_documents/statutes_of_limitation_paper.doc

B. Claims for Refund

A claim for refund of an overpayment of any tax imposed must be filed within 3 years from the time the return was filed or 2 years from the time the tax was paid. IRC §6511. No refund will be granted to a claim made after the expiration of the statute of limitation. An overpayment is any payment in excess of the tax due.

When Tax is Considered Paid:

1. A tax is considered paid when the IRS levies on funds of the taxpayer.
2. Seized property is not considered payment until it is sold.
3. Withheld income tax and estimated tax payments are considered to be paid on the date the tax return is due.
4. Taxes paid through garnishments on wages and assets are considered paid on the various dates the garnishments were applied to the taxes.
5. Payments made through the application of the refund for another year is considered paid when the offset was made.
Filing a Claim for Refund

Most taxpayers file a refund claim for the current year by filing a federal tax return on IRS Form 1040. Refund claims for overpaid income taxes for previous years are made by filing IRS Form 1040X for individuals or IRS Form 1120X for corporations. Refund claims for taxes other than income taxes are made on IRS Form 843. The claim must include a statement of the facts and issues as to why the taxpayer is entitled to a refund.

Refund claims for prior years will usually be examined by the Examination Division of the district office. If the IRS denies the claim for refund by sending a statutory notice of claim disallowance or if six months pass without any action, the taxpayer may file a refund suit in either the Federal Claims Court or a U.S. District Court.

The taxpayer must file a claim for a refund within 3 years from the date the return was filed or 2 years from the date the tax was actually paid, whichever is later. IRC §6511(a). A return is deemed filed on the due date if it was filed early. IRC §6513(a). If no return was filed, the refund claim must be made within two years of when some portion of the tax was paid (see above for what is considered a payment). If the taxpayer is due a refund for a certain year and he did not file a return, then he generally must file a claim within 3 years from the date the return was originally due. Otherwise, he will lose the refund.

Protective Claims

Taxpayers may file protective claims before the expiration of the statute of limitations to preserve their right to make a claim for refund. Protective claims and real claims are the same except that protective claims are labeled with the words "Protective Claim" at the top pf the form.

Resources

Internal Revenue Code

IRS Forms and Publications

C. Collections

Ordinarily, the IRS has ten years (there was a six year period on taxes assessed before November 6, 1990) to collect any assessed tax deficiencies. IRC §6502(a)(1). If the taxpayer files a valid and timely Tax Court petition, the IRS cannot assess or collect the unpaid tax until the Tax Court decision becomes final.

Prior to formally assessing the tax, the IRS must notify the taxpayer of the alleged deficiency. If the taxpayer fails to pay the tax or fails to file a petition contesting the alleged deficiency within 90 days of the notice date, then the IRS may assess the tax and begin collection activity.

If a taxpayer files a bankruptcy petition after a notice of deficiency is mailed but before the 90-day period (150 days if taxpayer is out of the country) expires, the 90-day period is suspended from the date the bankruptcy petition is filed until the taxpayer is discharged or dismissed, plus 60 days.

If a taxpayer submits an offer in compromise, the statute of limitations is suspended for any period the offer is pending, which includes the period required to process the offer plus any period required to process any appeal and for one additional year after the offer is accepted.

If a taxpayer submits an installment agreement, the statutte of limitations is suspended while the agreement is pending and for a period of 30 days following rejection or termination. Under IRC § 6331(i)(5), the statute of limitations is suspended when levies are prohibited and § 6331 (k)(2) prohibits levies while an installment agreement is pending and for 30 days following rejection or termination.

D. Summary of Statutes

30-day Letter § 6212 - A letter explaining that the IRS does not agree with the taxpayer's position and it notifies the taxpayer that the taxpayer has thirty (30) days to start the appeal process.

90-day Letter § 6213 - Taxpayer has 90 days from the date on the 90-day letter to petition the U.S. Tax Court for relief. The 90 day period cannot end on a weekend or a legal holiday; if it does you simply do not count that day.

Notice and Demand § 6303 - IRS must notify the taxpayer with 60 days of making an assessment. Notice must clearly state the amount owed and demand payment. If the IRS fails to comply with § 6303 the assessment will remain valid but the IRS will be barred from utilizing its lien and levy collection powers.

Notice of Lien § 6320 - IRS must notify taxpayer of the filing of a federal tax lien within 5 business days after the filing on the notice of lien. After this 5 day period the taxpayer has 30 days to appeal the filing of the lien. If the IRS determines that it failed to properly provide a taxpayer with notice, it will promptly provide the taxpayer with a substitute notice and provide the taxpayer with an opportunity to request a hearing

Notice of Levy § 6330 - IRS must notify tax payer of intent to levy at least 30 days prior to the date of the first levy. Taxpayer can request an appeals hearing during this 30 day window (an appeals hearing will toll the statute of limitations on levy actions, collections, prosecution of criminal matters, and all suits under § 6532 for the period of the appeal).

Innocent Spouse § 6015 - A claim for relief under the innocent spouse rules must be made within 2 years from the date the IRS has commenced collection proceedings. Judicial review of a denied innocent spouse is appropriate if requested at anytime after the earlier of 1) notice of the IRS's final determination of relief, or 2) 6 months after the date the election for relief was filed with the IRS.

Bankruptcy § 6503 - During the automatic stay and for 60 days thereafter, the statute of limitations on making assessments is tolled, and the statute of limitations on collections is tolled for the period of the automatic stay and for 6 months thereafter.

Offers in Compromise § 7122 - An offer can be made after receiving an assessment from the IRS. The IRS cannot engage in collection activities while an offer is being considered.

Credits or Refunds § 6511 - A claim for a credit or refund must be filed within 3 years from the date the original return was filed or within 2 years from the date the tax was paid, if later. If no return was filed, the claim must be filed within 2 years from the date the tax was paid. If a claim for refund is denied by the IRS, the taxpayer can file a suit for refund within 2 years after the denial of the claim for refund.

Essay on Statutes of Limitation

http://law.gsu.edu/taxclinic/clinic_forms/all_documents/statutes_of_limitation_paper.doc

2. Administrative Review

A. Audit

To ensure that taxpayers voluntarily comply with the tax laws, the Internal Revenue Service (IRS) performs audits on a number of taxpayers. The IRS has many methods in which returns are selected for audits. Some of the methods include audit by infection (related returns), the Discriminate Information Function (computerized scoring system for returns using many factors) and issue-related reasons. The IRS has identified the Earned Income Tax Credit, an issue frequently seen in the Clinic, as an isssue-related reason for conducting audits. Consequently, low-income taxpayers who take the EITC are being audited more frequently. In fact the U.S. General Accounting Office reported that in the past several years, forty percent of all individual return audits are made up of taxpayers in the lowest income bracket.

The IRS uses four methods of examinations: correspondence exams, office exams, field exams and employment tax audits. Clients of the Clinic are most often audited by correspondence exams. The other three methods are rarely seen in the Clinic. Correspondence exams are conducted through the mail. Usually, the IRS will request that the taxpayer explain or send supporting documents to substantiate or clarify certain claims and matters.

In many instances, clients who come to the the Clinic for assistance have already passed the audit stage, either because they have ignored the IRS notices or because they have not provided the IRS with sufficient evidence to resolve the dispute.

Audits are resolved in one of two ways: taxpayer's agreement with the IRS' findings or taxpayer's disagreement with the findings. Clients who come to the Clinic usually do not agree with the results of the examination. The IRS will issue a notice to the taxpayer called the 30-day Letter that will state the findings of the examiner and the taxpayer's appeal rights. Taxpayer will have 30 days from the date of the 30-day Letter to request a confererence with the Appeals Office. If the taxpayer does nothing, then she will be sent a 90-day Letter (Statutory Notice of Deficiency).

IRS Forms and Publications

B. 30 Day Letter

If the IRS and a taxpayer disagree on the treatment of an item following an audit, the taxpayer will receive a letter that contains instructions on how to appeal the IRS proposed deficiency. This letter is commonly referred to as the 30-day letter because it gives the taxpayer 30 days in which to appeal the decision of the examining agent. As a tax professional representing your client, consider speaking with the agent's supervisor. If taxpayer disagrees and wants to appeal the examiner's proposed adjustments, a “Protest” is submitted requesting a conference with the Appeals Office to discuss the disputed issues.

Resources: IRS Forms and Publications

C. 90 Day Letter

Taxpayers who do nothing in response to the 30-day letter will receive a Statutory Notice of Deficiency, commonly referred to as a 90-day letter. A taxpayer will also receive a 90-day letter if he does not agree to the findings of the Office of Appeals following a protest. The 90-day letter grants the taxpayer 90 days in which to petition the Tax Court to redetermine the liability that is proposed by the examining agent. If the issue involves filing status, you must consider having the taxpayer file a joint return before the petition is filed. [See IRC §6013(b)(2)(B)]. Once a petition is filed, a joint return is no longer permitted to be filed. Because this period is prescribed by statute, the 90 days cannot not be extended for whatever reason. For this reason and to preserve the rights of the client, it is extremely important not to miss the 90-day deadline should a client come to the Clinic with a Notice of Deficiency.

The 90 days that the taxpayer has to file a petition or pay the tax is counted from the date the Notice of Deficiency is mailed to the taxpayer's last known address. The IRS is required by law to include on the notice the last day a petition may be filed. IRC §6213. The date of mailing of the notice is significant not only in determining the 90-day period a petition can be file, but it also activates two other important rules:

1. Statute of Limitation on assessment of the tax is suspended while the case is pending [IRC §6503(a)(1)] and
2. IRS is barred from any assessment or collection activity during 90-day period and until the Tax Court decision is final if taxpayer files a petition

Failure to file a petition with the Tax Court will result in losing the right dispute the IRS's determinations. There are other methods still available to the taxpayer in resolving the dispute, but these methods are usually at the IRS's discretion and not as favorable to the taxpayer. After the passing of the 90-day period and taxpayer did not file a petition, the IRS may immediately assess the tax and begin collections.

Resources: Internal Revenue Code

3. Administrative Appeal

A. Protest Letter

A protest is the term used for requesting a conference with the Appeals Office. Depending on the circumstances and amounts involved, different actions may be required in order to request an appeals conference:

1. If the total amount of proposed additional tax, proposed over assessment or claimed refund exceeds $10,000 for any taxable period, a written protest setting forth the facts, law, and arguments relied upon by the taxpayer, made under penalties of perjury, is required.
2. If the total amount of proposed additional tax, proposed over assessment, or claimed refund exceeds $2,500 but does not exceed $10,000. A brief written protest of disputed issues is required.
3. An oral protest is sufficient to obtain Office of Appeals consideration in field audit cases involving $2,500 or less and in all office interview or correspondence examination cases.

A protest should include the following:

1. Taxpayer's name, address and Social Security number
2. Taxpayer's Representative's name and a copy of Form 2848 Power of Attorney
3. Copy of or reference to the 30-day Letter and the audit report identifying the tax years involved and the proposed changes
4. Statement that the protest is timely
5. Request for an Appeals conference
6. List of the changes made by the IRS to the taxpayer's return that taxpayer disagrees with and why taxpayer disagrees
7. Facts supporting taxpayer's position
8. Law or authority on which taxpayer bases his position
9. Taxpayer's signature or representative's statement that she prepared the protest and knows the facts alleged to be true (to the best of their knowledge)
10. Supporting documents may be attached

Resources:

Treasury Regulations

IRS Forms and Publications

B. Appeals Notebook

An Appeals notebook is essentially a legal memorandum stating the taxpayer's position and arguments. The memorandum and the supporting documents are packaged into a notebook to provide an organized comprehensive presentation.

The notebook is usually prepared for an Appeals Conference. The completed notebook is sent to the Appeals Officer reviewing the case a couple weeks before the scheduled conference. Always make an extra copy of the notebook for the file.

C. Appeals Conference

The IRS' Appeals Division is the administrative appeals office for the IRS. Taxpayers may appeal most IRS decisions with the local Appeals Office. The Appeals Office may review most service center and district office determinations, such as a deficiency determination. The Appeals Office is independent of the IRS office that took the action that the taxpayer disagrees with. A request for an Appeals Conference is usually sent with a protest.

Conferences with the Appeals Officer are held in an informal manner by correspondence, by telephone or during a personal conference. Any conference with the IRS regarding your client, whether in-person or via telephone, will require your attendance/participation, along with the attendance/participation of the Assistant Director. Therefore, you should confirm that the Assistant Director is available before scheduling any conference. Also, please note that professional attire is required at all conferences conducted in-person.

Collection determinations may also be reviewed by the Appeals Office. The Appeals Office will determine if the collection procedures are reasonable, whether all avenues have been considered and whether the IRS has complied with required procedures. There are two methods in which collection determinations may be appealed: administratively or statutorily. The Collections Appeals Procedure (CAP) was created by the IRS to allow taxpayers who were subject to a lien, levy or seizure or who were defaulting on their installment agreements the right to request an appeals conference. The Collection Due Process (CDP) hearings were created by the 1998 Reform Act to give taxpayers additional rights to appeal collection actions. See the links below for further explanation of these two procedures.

The Office of Appeals reviews the matters in controversy without any bias. It is the mission of the Office of Appeals to resolve these matters and avoid litigation. An Appeals Officer is allowed to take into account the hazards of litigation in reaching her decision. Approximately 85 percent of the cases reviewed by the office of Appeals are settled.

Although taxpayers may request a conference upon receipt of a 30-day letter, most of the Appeals Conferences involving the Clinic clients stem from filing a petition with the Tax Court. Many taxpayers do not come to the Clinic upon receipt of a 30-day letter. Many Tax Clinic clients have already passed their 30-day deadline and have received their 90-day letter.

Once a petition is filed on behave of a client, the administrative file will be assigned to an Appeals Officer, who will contact the student attorney to schedule a conference. The conference is an opportunity for the IRS and the taxpayer to try to settlement the case prior to a trial in the U.S. Tax Court. The student is required to prepare and submit an Appeals notebook, containing documentary evidence and factual positions with citations to legal authority, to the officer before the scheduled conference. This allows the officer to acquaint herself with the facts, issues and taxpayer's position. Sometimes, the Appeals Officer will make a decision based solely on the notebook, and then a conference will not be necessary.

Once the Appeals Officer makes his decision, the student attorney should write an letter to the officer confirming the decision. The student attorney may notify the client of the decision but should clarify to the client that the Appeals Officer's decision is not final until a stipulation is filed with the Tax Court. Once the Tax Court receives the stipulation, we must still await a final decision from the Tax Court.

The whole process beginning from filing of the petition to receiving a decision from the Tax Court generally takes a long time. If the client is entitled to a refund because of the appeal, she may not receive the refund from anywhere from 6 to 8 weeks after the decision of the Tax Court is rendered. The student attorney needs to inform the client that the process is a long and slow one.

D. Collection Appeals Procedure

The Collections Appeals Procedure (CAP) was created by the IRS to allow taxpayers who were subject to a lien, levy or seizure or who were defaulting on their installment agreements the right to request an Appeals conference. This procedure is not one that is frequently employed by the Clinic. Typically, the Collection Due Process (CDP) procedure provides more options in completely resolving tax matters. However, the CAP can be helpful in avoiding the filing of a tax lien. The CAP has seveval limitations that make this process not as desirable as CDP; one of which is that Appeals decisions made through CAP cannot be appealed judicially.

To request a hearing, Form 9423 (Collection Appeals Request) must be filed with the Group Manager of the collection officer. The Group Manager will decide whether to try to resolve the situtation or to allow for an Appeals Conference. The Appeals Office must conduct a conference within two days of receiving the case. The case must be resolved and closed within five business days. Collection activity is postponed while Appeals is handling the case. Both the taxpayer and Collections will be notified by the office of its decision.

E. Collection Due Process

The Collection Due Process (CDP) hearings were created by the 1998 Reform Act to give taxpayers additional rights to appeal collection actions.

The IRS is required to notify a taxpayer in writing at least five days after it files a Notice of a Tax Lien. IRC §6320. The IRS must also send the taxpayer written notice at least 30 days prior to a proposed levy. IRC §6330. These notices must specify the amount of the tax liability and must state that the taxpayer has a right to request a CDP hearing within 30 days. The notice must also outline the administrative appeals rights of the taxpayer and the provisions and procedures to obtain the release of the levy or lien. These notices are called the Collection Due Process Hearing Notice (CDP Notice).

Unlike decisions in CAP hearings, the determination of the Appeals Officer following a hearing is subject to judicial review. The IRS is required to either serve the CDP Notice in person, either at the taxpayer's home or office or send a notice to the taxpayer’s last known address by certified or registered mail, return receipt requested, not less than 30 days before the day of the levy. If a taxpayer does not receive a properly transmitted notification, the 30-day period to request a hearing does not begin to run. If the notice is not received because it was improperly transmitted, the IRS must provide a substitute notice, and the 30 day period starts the day after the date of the correct notice.

Once a hearing has been requested, the IRS may not execute the levy on the taxpayer’s property. If a deficiency that generated the liability is at issue, the collection activity is also suspended while the judicial appeal is pending. However, the IRS is permitted to seize property immediately following the issuance of a Notice and Demand for payment under IRC §6331 if the collection of the tax is in jeopardy. If the collection of tax is in jeopardy or the IRS is levying on a state tax refund, a CDP Notice prior to the levy is not required. However, the IRS will provide a post-levy CDP notice, and the taxpayer will be entitled to a hearing.

Hearing Procedures

A CDP hearing is conducted by an impartial employee of the IRS Office of Appeals. The Appeals Officer should have no prior involvement in the issue that resulted in the collection of the unpaid liability. CDP hearings are conducted informally at the Appeals office. No transcript is taken of the conference and no oath or affirmation is taken. At the conference, the Appeals Officer will consider:

1. The validity, sufficiency, and timeliness of the CDP Notice and the request of the CDP hearing
2. Any relevant issue relating to the unpaid tax raised by the taxpayer at the hearing
3. Any appropriate spousal defenses raised by the taxpayer at the hearing
4. Any challenges by the taxpayer to the appropriateness of the collection action
5. Any offers for collection alternatives made by the taxpayer and
6. Whether the proposed collection action balances the need for the efficient collection of taxes and the legitimate concern of the taxpayer that the collection action be no more intrusive than necessary.

At the hearing, the taxpayer may also challenge the existence of the liability or the amount of the liability only if he (1) did not receive a Statutory Notice of Deficiency, (2) did not receive it in time to file a tax court petition or (3) if he did not have any opportunity to dispute the liability. The taxpayer may not raise an issue that was raised and considered at a prior administrative or judicial hearing.

Prior to issuing a determination, the Appeals Officer is required to obtain verification from the IRS office collecting the tax that the requirements of any applicable law or administrative procedure have been met.

The Appeals Office will issue its findings in a dated Notice of Determination sent by certified mail or registered mail to the taxpayer. While there is no time limit on when the IRS must issue its findings, the regulations require the Appeals Officer to conduct the hearing “as expeditiously as possible.” Once the finding is issued, the taxpayer has 30 days to request judicial review.

The Notice of Determination is required to:

1. State whether the IRS met the requirements of any applicable law or administrative procedure;
2. Decide any allowable issue raised by the taxpayer at the hearing (for example, challenges to the liability, spousal defenses, the appropriateness of the collection action);
3. Decide whether the levy is required for the efficient collection of taxes in light of a taxpayer’s concern that the collection action be no more intrusive than necessary;
4. Set forth any agreements reached with the taxpayer, any relief given to the taxpayer, and any actions that the taxpayer or IRS are required to take; and
5. Advise the taxpayer that the judicial review to the Tax Court or a U.S. District Court must be sought within 30 days of the date of the Notice of Determination (Temporary Reg. §301.6330-1T(e)(3), Q&A –E7)

Request for Judicial Review

A request for judicial review of a finding in a Notice of Determination must be made within 30 days of the date appearing on the Notice of Determination. However, if the taxpayer is appealing a denial of innocent spouse relief, the appeal may be filed with the Tax Court within 90 days of the determination as provided by IRC §6015(e). The appeal should be filed with the court having jurisdiction over the type of tax specified in the CDP Notice.

The court will apply a de novo review standard if the amount of the liability is at issue. All other issues are reviewed under an abuse of discretion standard.

While a judicial appeal is pending, the IRS may levy if (1) the underlying tax liability is not at issue and (2) the IRS shows good cause for not suspending the levy.

Resources

Internal Revenue Code

Treasury Regulations

IRS Forms and Publications

f. IRS Overview

LITP Newsletter August, 2002

http://law.gsu.edu/taxclinic/clinic_forms/LITP_newsletters/LITCNews-Aug-02.doc

4. Judicial Review

A. US Tax Court

The U. S. Tax Court is a Federal Court of limited jurisdiction. Congress established the court under Article I of the U.S. Constitution to to hear tax disputes concerning notices of deficiency, notices of transferee liability, certain types of declaratory judgment, readjustment and adjustment of partnership items, review of the failure to abate interest, administrative costs, worker classification, relief from joint and several liability on a joint return, and review of certain collection actions. The Tax Court is located in Washington D.C., however the judges travel around the country to hear cases.

Typically, a taxpayer begins a case with the Tax Court by filing of a petition. In deficiency cases, the petition must be timely filed within 90 days (150 days if the notice of deficiency is mailed to a taxpayer outside the United States) after the date of the mailing of the deficiency notice. Unlike the other tax dispute forums (U.S. District Courts and U. S. Federal Claims Court), the Tax Court does not require the taxpayer to first pay the disputed amount. This is why the Tax Court may be a first choice for many taxpayers.

The Tax Court also has the authority to hear certain types of declaratory judgment, review of the failure to abate interest, administrative costs, worker classification, relief from joint and several liability on a joint return (innocent spouse claims) and review of certain collection actions.

The Tax Court does not offer jury trials. All cases are decided by judges, and all of the judges have expertise in the tax laws. The judges serve for 15-year terms and are appointed by the President. The Tax Court is less formal that other federal courts. The rules of evidence are more relaxed, and the court has its own rules and procedures that are different from the Federal Rules of Civil Procedure. The Tax Court rules are more directed at facilitating a cooperative settlement of disputes. The court is bound by the precedent in the geographic jurisdiction of the taxpayer, and appeals are made to the Federal Appeals Court in the geographic jurisdiction of the taxpayer.

In certain tax disputes involving $50,000 or less, taxpayers may elect to have their case conducted under the Court's simplified small tax case procedure. IRC §7463. Trials under the small tax case procedure generally are less formal and result in a speedier disposition. However, decisions entered under the small tax case procedures are final and are not appealable.

Rule 23: Form and Style of Papers

All papers filed with the Court must have a caption, date and signature
Caption - The sample petition in the Clinic forms conforms to the rules
Date - Date of signature must be included on all papers filed with the Court
Signature - Original signature of party or party's representative. Individual's name rather than firm name must be used. The name, mailing address and telephone number of the party or counsel, as well as the counsel's Tax Court bar number must be typed underneath the signature.
Four copies along with the signed original, unless provided otherwise by the Rules, must be included for all papers filed with the Court.
Papers must be clear and legible.
Papers must be prepared on opaque, unglazed paper, 8 1/2 inches wide by 11 inches long. Margins are to be no less than 1 inch wide on the sides and no less than 0.75 inches on the top and bottom. Text and footnotes are to be in consistent type no smaller than 12 characters per inch produced by a typewriting element or 12-point type produced by a nonproportional print font. The lines are to be double-spaced for text and single-spaced for indented quotations and footnotes.
All papers are to be bound together on the upper left-hand side only and shall have no backs or covers.
All citations of case names shall be underlined when typewritten and in italics when printed.
The Court may return without filing any paper that does not conform to the requirements of this rule.

Resources

Tax Court Forms
http://www.ustaxcourt.gov/forms.htm

Small Case Procedure
http://ustaxcourt.gov/forms/Petition_Kit.pdf

Rules of Practice and Procedure of the U.S. Tax Court
http://ustaxcourt.gov/rules.htm

Internal Revenue Code

B. US District Court

Taxpayers may also litigate a tax issue against the IRS by filing a lawsuit in a U.S. District Court, however as a procedural prerequisite, the taxpayer must first pay the disputed tax liability and file a claim for a refund of the tax paid. Unlike the U.S. Tax Court, the factual issues may be resolved by a judge or a jury in the U.S. District Courts. The courts are bound by the legal precedent in the geographic jurisdiction of the taxpayer, and appeals are made to the Federal Appeals Court in the geographic jurisdiction of the taxpayer.

The Clinic does not represent taxpayers who have cases pending before U.S. District courts.

C. Court of Federal Claims

Like the U.S. Tax Court, the U.S. Court of Federal Claims is a court of limited jurisdiction. It only hears intellectual property matters and Federal tax matters. No jury trials are available in the Court of Federal Claims, and like in the U.S. District courts, taxpayers must first pay the disputed tax liability and file a claim for a refund of the tax paid prior to filing a lawsuit. The Court of Federal Claims is bound by the precedent of the former Court of Claims, the U.S. Appeals Court for the Federal Circuit and the U.S. Supreme Court. Decisions by the Court of Federal Claims may be appealed to the U.S. Appeals Court of the Federal Circuit and then to the U.S. Supreme Court.

The Clinic does represent taxpayers with cases pending in the Court of Federal Claims.

5. Collections

A. The Collection Process

Due Process requires that the IRS proceed through several different stages before it can seize a taxpayer's property. Unless the IRS complies with these procedural requirements, its collection efforts may be deemed unreasonable or illegal and therefore void. These stages can be broken down into three stages: (1) assessment of the tax, (2) notice to the taxpayer and (3) collection due process.

Prior to reaching the collection stage, the IRS must assess the tax. IRC §6202. An assessment is the recording of a tax liability into the IRS system on Form 23-C (Assessment Certificate). IRC §6203. The information recorded includes the taxpayer's name, social security number, year in question and the amount and type of tax involved. The date on which Form 23-C is signed is called the assessment date. This date is important because it triggers two statutes of limitations: (1) notification of the taxpayer and (2) collection of the tax. The IRS must notify the taxpayer of the assessment within 60 days from the date of assessment. Also, the IRS has 10 years from the assessment date to collect the tax. IRC §6502(a)(1).

The IRS must next send a notice and demand to the taxpayer. Usually, the IRS will send the first notice and demand for payment about 10 days after the date of assessment. If the taxpayer does not respond to the first notice, then the IRS may send up to three more notices. IRC §6303.

Finally, if no resolution is made from the previous notices, the IRS will send a Final Notice of Intent to Levy or a Notice of Federal Tax Lien Filing. IRC §6330 and IRC §6320. These notices will include information on requesting a collection due process hearing. See the section on Collection Due Process for more information.

If the taxpayer fails to respond to these notices, the IRS may then begin its collection procedures. To satisfy a tax liability, the IRS may levy property, seize and sell the property, file a tax lien, take withholdings and garnish wages and other payments. Many taxpayers do not come to the Clinic until the IRS has begun garnishing their wages.

Resources

Internal Revenue Code

IRS Forms and Publications

B. Liens

If the taxpayer does not pay a tax liability in full and fails to work with the IRS to find an alternative method to pay the tax, the IRS may file a lien against the taxpayer's property. By filing a lien, the IRS is making a legal claim to the taxpayer's property as security for payment for the tax debt. The IRS may only file a Federal Tax Lien after:

1. It assesses the liability;
2. It sends a Notice and Demand for Payment (a bill that tells the taxpayer how much the taxpayer owe in taxes); and
3. The taxpayer neglects or refuses to fully pay the debt within 10 days after the IRS notifies the taxpayer about it.

Once these requirements are met, a lien is created for the amount of the taxpayer’s tax debt. By filing this notice, the taxpayer’s creditors are publicly notified that the IRS has a claim against all the taxpayer’s property, including property the taxpayer acquires after the lien was filed. The lien attaches to all the taxpayer’s property (such as the taxpayer’s house or car) and to all the taxpayer’s rights to property (such as the taxpayer’s accounts receivable, if the taxpayer is an employer).

Releasing a Lien

The IRS will issue a Release of the Notice of Federal Tax Lien:

1. Within 30 days after the taxpayer satisfies the tax due (including interest and other additions) by paying the debt or by having it adjusted, or
2. Within 30 days after it accepts a bond that the taxpayer submits, guaranteeing payment of the debt.

In addition, the taxpayer must pay all fees that a state or other jurisdiction charges the taxpayer to file and release the lien. These fees will be added to the amount the taxpayer owes.

If the IRS has not filed it again, the lien will usually released automatically 10 years after a tax is assessed. The taxpayer may sue the federal government for damages If the IRS knowingly or negligently does not release a Notice of Federal Tax Lien when it should be released.

Payoff amount

The full amount of the taxpayer’s lien will remain a matter of public record until it is paid in full. However, at any time the taxpayer may request an updated lien payoff amount to show the remaining balance due. An IRS employee can issue the taxpayer a letter with the current amount due in order to release a lien.

Applying for a Discharge of a Federal Tax Lien

If the taxpayer is giving up ownership of property, such as when the taxpayer sell her home, she may apply for a Certificate of Discharge. Each application for a discharge of a tax lien releases the effects of the lien against one piece of property. Note that when certain conditions exist, a third party may also request a Certificate of Discharge. If the taxpayer is selling the her primary residence, she may apply for a taxpayer relocation expense allowance. Certain conditions and limitations apply.

Withdrawing Liens

By law, a filed notice of tax lien can be withdrawn if:

1. The notice was filed too soon or not according to IRS procedures,
the taxpayer entered into an installment agreement to pay the debt on the notice of lien (unless the agreement provides otherwise),
2. Withdrawal will speed collecting the tax, or
3. Withdrawal would be in the taxpayer’s best interest (as determined by the Taxpayer Advocate) and the best interest of the government.

The IRS will give the taxpayer a copy of the withdrawal and at the taxpayer's request, the IRS will will send a copy to other institutions.

Appealing the Filing of a Lien

The IRS is required to notify a taxpayer in writing at least five days after it files a Notice of a Tax Lien. IRC §6320. The IRS may give the taxpayer this notice in person, leave it at the her home or her usual place of business or send it by certified or registered mail to the her last known address. The notice, also know as a Collection Due Process notice, must specify the amount of the tax liability and must state that the taxpayer has a right to request a CDP hearing within 30 days. The notice must also outline the administrative appeals rights of the taxpayer and the provisions and procedures to obtain the release of the levy or lien. The taxpayer must file the her request for a CDP hearing by the date shown on the taxpayer’s notice.

Hearing Procedures

A CDP hearing is conducted by an impartial employee of the IRS Office of Appeals. The Appeals Officer should have no prior involvement in the issue that resulted in the collection of the unpaid liability. CDP hearings are conducted informally at the Appeals office. No transcript is taken of the conference and no oath or affirmation is taken. Some of the issues the taxpayer may discuss include:

1. The validity, sufficiency, and timeliness of the CDP Notice and the request of the CDP hearing
2. Any relevant issue relating to the unpaid tax raised by the taxpayer at the hearing
3. Any appropriate spousal defenses raised by the taxpayer at the hearing
4. Any challenges by the taxpayer to the appropriateness of the collection action
5. Any offers for collection alternatives made by the taxpayer and
6. Whether the proposed collection action balances the need for the efficient collection of taxes and the legitimate concern of the taxpayer that the collection action be no more intrusive than necessary.

At the hearing, the taxpayer may also challenge the existence of the liability or the amount of the liability only if he did not receive a Statutory Notice of Deficiency, did not receive it in time to file a tax court petition, or if he did not had any opportunity to dispute the liability. The taxpayer may not raise an issue that was raised and considered at a prior administrative or judicial hearing.

Prior to issuing a determination, the Appeals Officer is required to obtain verification from the IRS office collecting the tax that the requirements of any applicable law or administrative procedure have been met.

The Appeals Office will issue its findings in a dated Notice of Determination sent by certified mail or registered mail to the taxpayer. While there is no time limit on when the IRS must issue its findings, the regulations require the Appeals Officer to conduct the hearing “as expeditiously as possible.” Once the finding is issued the taxpayer has 30 days to request judicial review.

The Notice of Determination is required to:

1. State whether the IRS met the requirements of any applicable law or administrative procedure
2. Decide any allowable issue raised by the taxpayer at the hearing (for example, challenges to the liability, spousal defenses, the appropriateness of the collection action)
3. Decide whether the levy is required for the efficient collection of taxes in light of a taxpayer’s concern that the collection action be no more intrusive than necessary
4. Set forth any agreements reached with the taxpayer, any relief given to the taxpayer, and any actions that the taxpayer or IRS are required to take and
5. Advise the taxpayer that the judicial review to the Tax Court or a U.S. District Court must be sought within 30 days of the date of the Notice of Determination (Temporary Reg. §301.6330-1T(e)(3), Q&A –E7)

Resources

Internal Revenue Code

IRS Forms and Publications

C. Levies

If the taxpayer does not pay a tax liability in full and fails to work with the IRS to find an alternative method to pay the tax, the IRS may levy against the taxpayer's property. A levy is a legal seizure of the taxpayer’s property to satisfy a tax debt. Levies are different from liens in that a lien is a claim used as security for the tax debt, while a levy actually takes the property to satisfy the tax debt.

If the taxpayer does not pay her taxes (or make arrangements to settle the taxpayer’s debt), the IRS may seize and sell any type of real or personal property that the taxpayer owns or has an interest in. For instance, the IRS may seize and sell property that the taxpayer holds (such as the taxpayer’s car, boat, or house), or it may levy property that is the taxpayer’s but is held by someone else (such as the taxpayer’s wages, retirement accounts, dividends, bank accounts, licenses, rental income, accounts receivables, the cash value of the taxpayer’s life insurance, or commissions).

Before the IRS may levy on a taxpayer's property it must meet the following requirements:

1. It assessed the tax and sent the taxpayer a Notice and Demand for Payment;
2. The taxpayer neglected or refused to fully pay the debt within 10 days after the IRS notifies the taxpayer about it; and
3. It sent the taxpayer a joint Final Notice of Intent to Levy and Notice of the taxpayer’s Right to A Hearing (Collection Due Process Notice) at least 30 days before the levy. If the IRS levies the taxpayer’s state tax refund, the taxpayer may receive a Notice of Levy on the taxpayer’s State Tax Refund, Notice of The taxpayer’s Right to Hearing after the levy.

The taxpayer may ask an IRS manager to review the taxpayer’s case, or the taxpayer may request a Collection Due Process hearing with the Office of Appeals by filing a request for a Collection Due Process hearing with the IRS office listed on the taxpayer’s notice. The taxpayer must file the taxpayer’s request within 30 days of the date on the taxpayer’s notice.

Hearing Procedures

A CDP hearing is conducted by an impartial employee of the IRS Office of Appeals. The Appeals Officer should have no prior involvement in the issue that resulted in the collection of the unpaid liability. CDP hearings are conducted informally at the Appeals office. No transcript is taken of the conference and no oath or affirmation is taken. Some of the issues the taxpayer may discuss include:

1. Tax liability was paid before the IRS sent the levy notice;
2. The IRS assessed the tax and sent the levy notice when the taxpayer was in bankruptcy and subject to the automatic stay during bankruptcy;
3. The IRS made a procedural error in an assessment;
4. The statute of limitations expired before the IRS sent the levy notice;
5. The taxpayer did not have an opportunity to dispute the assessed liability;
6. The taxpayer wishes to discuss the collection options; or
7. The taxpayer wish to make a spousal defense.

At the hearing, the taxpayer may also challenge the existence of the liability or the amount of the liability only if he did not receive a Statutory Notice of Deficiency, did not receive it in time to file a tax court petition, or if he did not had any opportunity to dispute the liability. The taxpayer may not raise an issue that was raised and considered at a prior administrative or judicial hearing.

Prior to issuing a determination, the Appeals Officer is required to obtain verification from the IRS office collecting the tax that the requirements of any applicable law or administrative procedure have been met.

The Appeals Office will issue its findings in a dated Notice of Determination sent by certified mail or registered mail to the taxpayer. While there is no time limit on when the IRS must issue its findings, the regulations require the Appeals Officer to conduct the hearing “as expeditiously as possible.” Once the finding is issued the taxpayer has 30 days to request judicial review.

The Notice of Determination is required to:

1. State whether the IRS met the requirements of any applicable law or administrative procedure
2. Decide any allowable issue raised by the taxpayer at the hearing (for example, challenges to the liability, spousal defenses, the appropriateness of the collection action)
3. Decide whether the levy is required for the efficient collection of taxes in light of a taxpayer’s concern that the collection action be no more intrusive than necessary
4. Set forth any agreements reached with the taxpayer, any relief given to the taxpayer, and any actions that the taxpayer or IRS are required to take and
5. Advise the taxpayer that the judicial review to the Tax Court or a U.S. District Court must be sought within 30 days of the date of the Notice of Determination (Temporary Reg. §301.6330-1T(e)(3), Q&A –E7)

Levies on the Taxpayer’s Wages, Federal Payments or the Taxpayer’s Bank Account

If the IRS levies the taxpayer’s wages or federal payments, the levy will end when:
1. The levy is released;
2. The taxpayer pay the taxpayer’s tax debt; or
3. The statute of limitations expires for legally collecting the tax.

If the IRS levies the taxpayer’s bank account, the taxpayer’s bank must hold funds the taxpayer has on deposit for 21 days (up to the amount the taxpayer owes). This period allows the taxpayer time to solve any problems from the levy or to make other arrangements to pay. After 21 days, the bank must send the money, plus interest if it applies, to the IRS. To discuss the taxpayer’s case, call the IRS employee whose name is shown on the Notice of Levy.

Filing a Claim for Reimbursement When the IRS Made a Mistake in Levying the Taxpayer’s Account

If the taxpayer paid bank charges because of a mistake the IRS made when it levied the taxpayer’s account, the taxpayer may be entitled to a reimbursement. To be reimbursed, the taxpayer must file a claim (Form 8546) with the IRS within 1 year after the taxpayer’s bank charged the taxpayer the fee.

Federal Payment Levy Program

Under the Federal Payment Levy Program, the IRS may levy (take) monies from the following federal payments that the taxpayer may receive: retirement from the Office of Personnel Management, social security benefits, federal vendor payments, federal employee salaries, or federal employee travel advances and reimbursements. This program electronically levies the taxpayer’s federal payments paid through the Department of Treasury, Financial Management Service (FMS). If the IRS electronically levies the taxpayer’s federal payments, the levy will take 15% from each of the payments until the account is resolved. If the taxpayer already is working with an IRS employee, call that employee for assistance. If the taxpayer is not working with an employee, call 1-800-829- 7650 for assistance.

Releasing a Levy

The IRS must release the taxpayer’s levy if any of the following occur:

1. The taxpayer pays the tax, penalty, and interest the taxpayer owe;
2. The IRS discovers that the statute of limitations ended before the levy was served;
3. The taxpayer provides documentation proving that releasing the levy will help the IRS collect the tax;
4. The taxpayer has an installment agreement, or enters into one, unless the agreement says the levy does not have to be released;
5. The IRS determines that the levy is creating a significant economic hardship for the taxpayer; or
6. The expense of selling the property would be greater than the fair market value of the property.

Releasing the Taxpayer’s Property

Before the sale date, the IRS may release the property if:

1. The taxpayer pays the amount of the government's interest in the property;
2. The taxpayer enter into an escrow arrangement;
3. The taxpayer furnish an acceptable bond;
4. The taxpayer makes an acceptable agreement for paying the tax; or
5. The expense of selling the taxpayer’s property would be greater than the fair market value of the property.

Returning Levied Property

If the taxpayer requests the return of levied property within nine months from the date of the levy, the IRS can consider returning the property if:

1. The IRS levied before it send the taxpayer the two required notices or before the taxpayer’s time for responding to them has passed (ten days for the Notice and Demand; 30 days for the Notice of lntent to Levy and the Notice of Right to Hearing);
2. The IRS did not follow its own procedures;
3. The IRS agrees to let the taxpayer pay in installments, but it still levies, and the agreement does not say that it can do so;
4. Returning the property will help the taxpayer pay the taxpayer’s taxes; or
5. Returning the property is in the taxpayer’s and the government's best interest.

Selling the Taxpayer’s Property

The IRS must post a public notice of a pending sale, usually in local newspapers or flyers. The IRS is to deliver the original notice of sale to the taxpayer or send it to the taxpayer by certified mail. After placing the notice, it must wait at least ten days before conducting the sale, unless the property is perishable and must be sold immediately. Before the sale, the IRS will compute a minimum bid price. This bid is usually 80% or more of the forced sale value of the property, after subtracting any liens. If the taxpayer disagrees with this price, the taxpayer can appeal it and ask that the price be computed again by either an IRS or private appraiser.

The taxpayer may also ask that the IRS sell the seized property within 60 days. For information about how to do so, call the IRS employee who made the seizure. The IRS will grant the taxpayer’s request, unless it is in the government's best interest to keep the property. The IRS will send the taxpayer a letter telling the taxpayer of its decision about the taxpayer’s request.

After the sale, the IRS first uses the proceeds to pay the expenses of the levy and sale. Then it applies any remaining amount to pay the tax liability. If the proceeds of the sale are less than the total of the tax bill and the expenses of levy and sale, the taxpayer will still have to pay the unpaid tax. If the proceeds of the sale are more than the total of the tax bill and the expenses of the levy and sale, the IRS will notify the taxpayer about the surplus money and will tell the taxpayer how to ask for a refund. However, if someone, such as a mortgagee or other lienholder, makes a claim that is superior to the taxpayer’s, it will pay that claim before it refunds any money to the taxpayer.

Redeeming the Taxpayer’s Real Estate

The taxpayer (or anyone with an interest in the property) may redeem the taxpayer’s real estate within 180 days after the sale. The taxpayer must pay the purchaser the amount paid for the property, plus interest at 20% annually.

Property Exempt from Levy

By law, some property cannot be levied or seized. The IRS may not seize any of the taxpayer’s property when the expense of selling the property would be more than the tax debt. In addition, it may not seize or levy the taxpayer’s property on the day the taxpayer attends a collection interview because of a summons. Other items the IRS may not levy or seize include:

1. School books and certain clothing;
2. Fuel, provisions, furniture and personal
3. Effects for a household, totaling $6, 780;
4. Books and tools the taxpayer use in the taxpayer’s trade, business, or profession, totaling $3,390;
5. Unemployment benefits;
6. Undelivered mail;
7. Certain annuity and pension benefits; certain service-connected disability payments;
8. Workmen's compensation;
9. Salary, wages, or income included in a
Judgment for court-ordered child support payments;
10. Certain public assistance payments;
11. A minimum weekly exemption for wages, salary and other income.

Resources

Internal Revenue Code

Treasury Regulations

IRS Forms and PuBLications

6. Tools for Resolution

A. Amended Returns

An amended return is used to correct an original return and/or to claim a refund. A properly executed individual original income tax return or an amended return (IRS Form 1040X) constitutes a claim for refund or credit for the amount of overpayment disclosed by the amended return if the return contains a statement setting forth the amount determined to be an overpayment and advises the IRS whether the amount should be refunded or should be applied as a credit against the taxpayer's estimated income tax for the immediately succeeding tax year. IRC §6402(a).

The taxpayer should correct his return that is already filed if he finds that:

1. He did not report some income;
2. He claimed deductions or credits he should not have claimed;
3. He did not claim deductions or credits he could have claimed; or
4. He should have elected a different filing status.

Resources

Internal Revenue Code

IRS Forms and Publications

B. Audit Reconsideration

Audit reconsideration is an IRS procedure that allows a taxpayer to dispute the results of an assessment made because of an audit of taxpayer's return or a substitute return filed by the IRS on behalf of the nonfiling taxpayer.

The IRS has the authority to abate any assessment or unpaid portion thereof if:

1. The assessment is in excess of the correct tax liability
2. The assessment is made subsequent to the expiration of the applicable period of limitations or
3. The assessment was erroneously or illegally made

The IRS will not accept an audit reconsideration if:

1. The taxpayer has already signed an agreement agreeing to pay the amount owing. Examples:

1. Closing agreement
2. Offer in Compromise
3. Form 870AD with the Appeals Office

2. The U.S. Tax Court or another court has issued a final determination on the tax liability.

Requirements for Submitting an Audit Reconsideration

1. Return for the tax year in question must be filed
2. Must include a copy of the audit report (Form 4549, Income Tax Examination Changes)
3. Lists of the changes to be reconsidered

An audit reconsideration is not a matter of right but rather completely at the IRS's discretion. The request should include the taxpayer's position and arguments based on the law and should include a good amount of supporting evidence. The student attorney should not consider submitting an audit reconsideration if there is not sufficient evidence to support the taxpayer's position. The IRS will typically delay collection activity when an audit reconsideration has been submitted.

The audit reconsideration should only be submitted if other options, such as filing a petition, have expired and are unavailable. The audit reconsideration should be prepared and presented in the same manner as an Appeals notebook. The only difference is that a cover letter is included with the audit reconsideration.

Audit reconsiderations should be mailed to the following address:

Atlanta Service Center
Internal Revenue Service
P.O. Box 48-389 Stop 54A
Doraville, GA 30362

Resources
IRS Forms and Publications
IRS Publication 3598
http://www.irs.gov/pub/irs-pdf/p3598.pdf
What You Should Know about the Audit Reconsideration Process

C. Refund Claims

A claim for refund of an overpayment of any tax imposed must be filed within 3 years from the time the return was filed or 2 years from the time the tax was paid. IRC §6511. No refund will be granted to a claim made after the expiration of the statute of limitation. An overpayment is any payment in excess of the tax due.

When Tax is Considered Paid:

1. A tax is considered paid when the IRS levies on funds of the taxpayer.
2. Seized property is not considered payment until it is sold.
3. Withheld income tax and estimated tax payments are considered to be paid on the date the tax return is due.
4. Taxes paid through garnishments on wages and assets are considered paid on the various dates the garnishments were applied to the taxes.
5. Payments made through the application of the refund for another year is considered paid when the offset was made.

Filing a Claim for Refund

Most taxpayers file a refund claim for the current year by filing a federal tax return on IRS Form 1040. Refund claims for overpaid income taxes for previous years are made by filing IRS Form 1040X for individuals or IRS Form 1120X for corporations. Refund claims for taxes other than income taxes are made on IRS Form 843. The claim must include a statement of the facts and issues as to why the taxpayer is entitled to a refund.

Refund claims for prior years will usually be examined by the Examination Division of the district office. If the IRS denies the claim for refund by sending a statutory notice of claim disallowance or if six months pass without any action, the taxpayer may file a refund suit in either the Federal Claims Court or a U.S. District Court.

The taxpayer must file a claim for a refund within 3 years from the date the return was filed or 2 years from the date the tax was actually paid, whichever is later. IRC §6511(a). A return is deemed filed on the due date if it was filed early. IRC §6513(a). If no return was filed, the refund claim must be made within two years of when some portion of the tax was paid (see above for what is considered a payment). If the taxpayer is due a refund for a certain year and he did not file a return, then he generally must file a claim within 3 years from the date the return was originally due. Otherwise, he will lose the refund.

Protective Claims

Taxpayers may file protective claims before the expiration of the statute of limitations to preserve their right to make a claim for refund. Protective claims and real claims are the same except that protective claims are labeled with the words "Protective Claim" at the top pf the form.

Resources

Internal Revenue Code

IRS Forms and Publications

D. Injured Spouse

A taxpayer who has filed a joint return with his spouse and all or part of his share of an overpayment was applied against his spouse's past-due Federal tax, child or spousal support, Federal nontax debt or state income tax may file a claim as an injured spouse to request a refund of the amount of offset. For example, if a spouse is in arrears on his or her child support, it is possible that any refund generated by the filing of a joint tax return, regardless of which spouse made the overpayment, may be withheld by the IRS and applied toward the arrearage. A spouse who has income and withholdings or estimated tax payments and who files a joint return with an individual who owes past-due child support must file a request for a refund of his or her allocation of the joint return refund (Form 8379, Injured Spouse Claim and Allocation).

Requirements:

1. The taxpayer seeking relief is not required to pay the past due amount; Rather, the spouse is responsible for the debt
2. The taxpayer reported income such as wages, taxable interest, etc. on the joint return
3. The taxpayer made and reported payments such as Federal income tax withheld from taxpayer's wages or estimated tax payments or the taxpayer claimed the Earned Income Tax Credit or other refundable credit
4. Form 8379

Resources

IRS Publications and Forms

E. Innocent Spouse

Married taxpayers who file jointly are jointly and individually responsible for any tax due as shown on the return. Both taxpayers are also responsible for any interest or penalties fro any year in which a joint return is filed. This is true even if the taxpayers later divorce.

A taxpayer may be held liable for all the tax due even if the other spouse earned all the income. In 1971, Congress enacted a provision allowing "innocent" spouses to seek relief from the tax liability of a joint return. IRC 6013.

In 1998, Congress revamped the Innocent Spouse provisions and now three forms of relief are available IRC §6015:

1. Innocent Spouse Relief
2. Separation of Liability
3. Equitable Relief

Guidance on the administrative appeals rights for the non-requesting spouse is contained in Rev. Proc. 2003-19.

Innocent Spouse Relief Requirements

1. The taxpayer must file a joint return that had an understatement of tax due to erroneous items of the spouse;
2. The taxpayer must establish that at the time he signed the joint return he did know and had no reason to know that there was an understatement of tax; and
3. Taking into account the facts and circumstances, it would be unfair to hold the taxpayer liable for the understatement of tax.

Understatement of Tax:

An understatement of tax is generally the difference between the total tax liability that should have been shown on the return and the amount that was actually shown on the return.

A taxpayer may qualify for partial relief if, at the time she filed her return, she knew or had reason to know, that there was an understatement of tax due to her spouse's erroneous items, but she did not know how large the understatement was. She will be relieved of the understatement to the extent she did not know about it and had no reason to know about it.

Erroneous Items:

Erroneous items are either of the following:

1. Unreported income - This is any gross income item
received by the spouse that is not reported.
2. Incorrect deduction, credit, or basis - This is any improper deduction, credit, or property basis claimed by the spouse.

The following are examples of erroneous items:

1. The expense for which the deduction is taken was never paid or incurred. For example, the spouse, a cash-basis taxpayer, deducted $10,000 of advertising expenses on Schedule C (Form 1040), but never paid for any advertising.
2. The expense does not qualify as a deductible expense. For example, the spouse claimed a business fee deduction of $10,000 that was for the payment of state fines. Fines are not deductible.
3. No factual argument can be made to support the deductibility of the expense. For example, the spouse claimed $4,000 for security costs related to a home office, which were actually veterinary and food costs for the family's two dogs.

Indications of Unfairness for Innocent Spouse Relief:

The IRS will consider all of the facts and circumstances of the case in order to determine whether it is unfair to hold the taxpayer responsible for the understatement. Two indicators the IRS may use in deciding that it is unfair to hold the taxpayer responsible are whether she:

1. Received any significant benefit from the understatement of tax, or

• Taxpayer can receive significant benefit either directly or indirectly. For example, if the spouse did not report $10,000 of income on the joint return, the taxpayer can benefit directly if the spouse shares that $10,000 with her. She can benefit indirectly from the unreported income if the spouse uses it to pay extraordinary household expenses.
• The taxpayer does not have to receive a benefit immediately for it to be significant. For example, money the spouse gives the taxpayer several years after he received it or amounts inherited from the spouse (or former spouse) can be a significant benefit.
• Support payments that the taxpayer receives as a result of a divorce proceeding are not a significant benefit.

2. Was later divorced from or deserted by the spouse.

Refund potential:

Refunds of tax are limited if innocent spouse relief under §6015 is granted, as follows:

• A refund is available if relief is granted under §6015(b);
• No refunds are available if relief is granted under §6015(c);
• Limited refunds are available if relief is granted under §6015(f). Refunds are only permitted for amounts paid between 7/22/98 and 4/15/99 and amounts paid under an installment agreement after the Form 8857 "Request for Innocent Spouse Relief", is filed.

When Request May be Filed:

A request for innocent spouse relief under §6015 must be filed no later than 2 years from when first collection activity begins after 7/22/98. §§6015(b)(1)(E), (c)(3)(B) Reg.§6015-5(b):

• Collection activity, for this purpose, begins when the requesting spouse receives:
• A (§6330) "Notice of Intent to Levy";
• An offset of an overpayment of the requesting spouse against a liability, per (§6042); or
• The filing of a claim by the federal government in a court proceeding in which the requesting spouse is a party or which involves property of the requesting spouse.

Collection activity does not include:

• A "Notice of Lien" (§6320), or
• A "Notice and Demand for Payment" (§6303)

Relief By Separation of Liability

Under this type of relief, taxpayer allocates the understatement of tax (plus interest and penalties) on the joint return between taxpayer and the spouse (or former spouse). The understatement of tax allocated to the taxpayer is generally the amount he is responsible for. Taxpayers may request this type of relief in addition to innocent spouse relief.

Requirements:

To request relief by separation of liability, a taxpayer must have filed a joint return and must meet one of the following requirements at the time he files Form 8857:

1. The taxpayer must no longer be married to, or is legally separated from, the spouse with whom he filed the joint return for which he is requesting relief. (Under this rule, taxpayer is no longer married if he is widowed.) or
2. Taxpayer must not be a member of the same household as the spouse with whom he filed the joint return at any time during the 12-month period ending on the date he files Form 8857.

The taxpayer has the burden of proof in establishing the basis for separating the liability.

Invalid requests:

Even if the taxpayer meets the requirements above, a request for separation of liability will not be granted in the following situations:

1. The IRS proves that the taxpayer and her spouse transferred assets as part of a fraudulent scheme.
2. The IRS proves that at the time the taxpayer signed the joint return, she had actual knowledge of any items giving rise to the deficiency that were allocable to the spouse.
3. The spouse (or former spouse) transferred property to the taxpayer to avoid tax or the payment of tax.

In situations (2) and (3), a request will be denied only for the part of the deficiency due to the incorrect items about which the taxpayer had actual knowledge, or to the extent of the value of the property transferred. If the taxpayer establishes that she signed the joint return under duress, then it is not a joint return, and she is not liable for amounts from that return. However, she may be required to file a separate return for that tax year.

Transfers of property to avoid tax:

If the spouse transfers property to the taxpayer for the purpose of avoiding tax or payment of tax, the tax liability allocated to the taxpayer will be increased by the value of the property transferred. A transfer will be presumed to have as its main purpose the avoidance of tax or payment of tax if the transfer is made after the date that is one year before the date on which the IRS sent its first letter of proposed deficiency allowing the taxpayer an opportunity for a meeting in the IRS Appeals Office. This presumption will not apply if the transfer was made under a divorce decree, separate maintenance agreement, or a written instrument incident to such an agreement. The presumption will also not apply if the taxpayer establishes that the transfer did not have as its main purpose the avoidance of tax or payment of tax.

Equitable Relief

If the taxpayer does not qualify for innocent spouse relief, relief by separation of liability, or relief from separate return liability for community income, she may still be relieved of responsibility for tax, interest, and penalties through the IRS provisions for equitable relief. See a more detailed discussion of equitable relief in the memorandum prepared by Robert B. Nadler that appears below.

Requirements:

The taxpayer may qualify for equitable relief if she meets all of the following conditions:

1. She is not eligible for innocent spouse relief, relief by separation of liability, or relief from separate return liability for community income
2. The taxpayer and the spouse did not transfer assets to one another as a part of a fraudulent scheme
3. The spouse did not transfer assets to the taxpayer for the main purpose of avoiding tax or the payment of tax
4. The taxpayer did not file the return with the intent to commit fraud.
5. The taxpayer did not pay the tax. However, she may be able to receive a refund of:
1. Amounts paid after July 21, 1998 and before April 16, 1999 and
2. Certain installment payments made after she files Form 8857
6. The taxpayer establishes that, taking into account all the facts and circumstances, it would be unfair to hold her liable for the understatement or underpayment of tax
Unlike innocent spouse relief or separation of liability , the taxpayer can get equitable relief from an understatement of tax (defined earlier under Innocent Spouse Relief) or an underpayment of tax.

Underpayment of tax

An underpayment of tax is an amount of tax the taxpayer properly reported on the return but has not paid. For example, a joint 2000 return shows that the taxpayer and his spouse owe $5,000. They paid $2,000 with the return. They have an have an underpayment of $3,000.

Indications of unfairness for equitable relief:

The IRS will consider all of the facts and circumstances in order to determine whether it is unfair to hold the taxpayer responsible for the understatement or underpayment of tax. The IRS will consider all factors and weigh them appropriately.

• Positive factors

The following are examples of factors that weigh in favor of equitable relief:

1. Taxpayer is separated (whether legally or not) or divorced from the spouse.
2. Taxpayer would suffer economic hardship and would not be able to pay reasonable basic living expenses if relief is not granted.
3. Taxpayer was abused by the spouse, but the abuse did not amount to duress.
4. Taxpayer did not know and had no reason to know about the items causing the understatement or that the tax would not be paid
5. The taxpayer's spouse or ex-spouse has a legal obligation under a divorce decree or agreement to pay the tax. This will not be a positive factor if the taxpayer knew, or had reason to know, at the time the divorce decree or agreement was entered into, that the spouse would not pay the tax.
6. The tax for which the taxpayer is requesting relief is attributable to the spouse.

• Negative factors

The following are examples of factors that weigh against equitable relief:

1. Taxpayer will not suffer economic hardship if relief is not granted.
2. Taxpayer knew, or had reason to know, about the items causing the understatement or that the tax would be unpaid at the time he signed the return.
3. Taxpayer received a significant benefit from the unpaid
tax or items causing the understatement.
4. Taxpayer has not made a good faith effort to comply with Federal income tax laws for the tax year for which he is requesting relief or the following years.
5. Taxpayer has a legal obligation under a divorce decree or agreement to pay the tax.
6. The tax for which taxpayer is requesting relief is attributable to him.

How to Request Relief

To request for Innocent Spouse Relief, Separation of Liability or Equitable Relief, the taxpayer must complete and file IRS Form 8857. The taxpayer only needs to file one Form 8857, even if she is requesting relief for more than one tax year. The taxpayer must attach a statement to Form 8857 explaining why she believes she qualifies for relief. She must also provide certain information for each type of relief she is requesting. The instructions for Form 8857 offers more information pertaining to the required information.

The taxpayer should file a Form 8857 as soon as she becomes aware of a tax liability for which she believes only her spouse or former spouse should be held liable. However, she must file Form 8857 no later than 2 years after the date on which the IRS first attempted to collect the tax from her after July 22, 1998. Examples of attempts to collect the tax are garnishment of taxpayer's wages and applying her refund in a later year to the tax due.

The IRS is required to inform the spouse (or former spouse) if taxpayer requests innocent spouse relief or separation of liability and to allow the spouse (or former spouse) to participate in the determination of the amount of relief from liability.

Tax Court Review of Request
After the taxpayer files Form 8857, she may ask the U.S. Tax Court to review her request in the following two situations:

1. Taxpayer disagrees with the IRS' final determination notice indicating the extent to which the request for relief has been denied.
2. Taxpayer has not received a final determination notice from the IRS within 6 months from the date she filed Form 8857.

The taxpayer must file a petition with the United States Tax Court no later than the 90-days after the date the IRS mails its final determination notice. If taxpayer does not file a petition, or files it late, the Tax Court cannot review the request for relief.

Resources

Revenue Procedure 2003-61 - Links to IRS Bulletin 2003-32 which contains the new rules for applying for innocent spouse relief under Code Section 6015(f). You will need to scroll down to page 296 (p.13 of 65). http://www.irs.gov/pub/irs-irbs/irb03-32.pdf

Internal Revenue Code

RS Forms and Publications

F. Installment Agreements

If a taxpayer is unable to pay the full amount of her tax liability, she may be able to enter into an installment agreement with the IRS. Installment agreements allow full payment of the tax liability in equal monthly payments. The amount of the installment payment will be based on the amount the taxpayer owes and the taxpayer's ability to pay that amount within the statute of limitations for collection of the tax.

The IRS is required under IRC §6159 to accept an installment agreement if:

1. The amount of the tax owed (not including interests, penalties and other additions) is $10,000 or less;
2. The taxpayer, within the last five years, has not failed to file a return, has not failed to pay any tax shown on such return or has not entered into a prior installment agreement;
3. Based on information provided by the taxpayer, the IRS has determined that the taxpayer is financially unable to pay the liability in full when due;
4. The installment agreement will result in satisfaction of the full liability within three years;
5. The taxpayer agrees to comply with the requirement of filing returns and making payments while the agreement is in effect.

In cases where the requirements of IRC §6159 are not present, the IRS has the discretion to accept or reject a taxpayer's proposed installment agreement.

The taxpayer may request an installment agreement over the telephone or by submitting a written request using IRS Form 9465. A financial statement (Form 433-A or B) is not required if the taxpayer owes less that $25,000. All tax returns must be filed before the taxpayer is eligible for an installment agreement.

Consequences of an Installment Agreement

1. Penalties and interest continue to accrue.
2. An installment user fee of $43 will be taken out of the first payment.
3. IRS may still file a tax lien.
4. The IRS may begin levy action if taxpayer defaults.
5. Future tax refunds will be withheld and applied to the liability until paid in full.
6. Taxpayer must continue making payments while an offer in compromise is pending.

Resources

Internal Revenue Code

IRS Forms and Publications

G. Offers in Compromise

An Offer in Compromise is an offer (usually less than the total amount due) made by a taxpayer to settle his entire outstanding tax liability. IRC §7122. Generally, the amount of the offer should be equal to the taxpayer's net worth plus net disposable income for the next five years. For many taxpayers, these amounts are minimal, and the law prohibits the IRS from rejecting an offer simply because of the amount of the offer.

A compromise is effective for the entire assessed liability for taxes, penalties and interest for the years or periods covered by the offer. All questions of tax liability for the year(s) or period(s) covered by such offer in compromise are conclusively settled. Neither the taxpayer nor the government can reopen a compromised case unless there was falsification of information or documents, concealment of assets, a mutual mistake of a material fact was made that would be sufficient to set aside or reform a contract, or the taxpayer fails to meet his filing requirements for the five years following the acceptance of the offer.

The I.R.S. has set forth its policy for accepting an Offer in Compromise from a taxpayer in bankruptcy (See CC-2004-025). Although it is the position of the I.R.S. not to accept an offer when the taxpayer is in bankruptcy, exceptions are provided.

An offer in compromise may be submitted based on the following:

1. Doubt as to liability
2. Doubt as to Collectibility and
3. Effective Tax Administration

An offer in compromise becomes pending when it is accepted for processing. If an offer accepted for processing does not contain sufficient information to permit the IRS to evaluate whether the offer should be accepted, the IRS will request that the taxpayer provide the needed additional information. If the taxpayer does not submit the additional information that the IRS has requested within a reasonable time period after such a request, the IRS may return the offer to the taxpayer. The IRS may also return an offer to compromise a tax liability if it determines that the offer was submitted solely to delay collection or was otherwise nonprocessable. An offer returned following acceptance for processing is deemed pending only for the period between the date the offer is accepted for processing and the date the IRS returns the offer to the taxpayer.

The taxpayer may withdraw an offer any time before the IRS accepts the offer. The taxpayer must notify the IRS in writing. The withdrawal is effective upon the IRS' receipt of the notice or upon the issuance of a letter by the IRS confirming the taxpayer's notice.

An offer is not accepted until the IRS issues a written notification of acceptance to the taxpayer or the taxpayer's representative. It is also not rejected until the IRS issues a written notice to the taxpayer or his representative, advising of the rejection, the reason(s) for rejection and the right to an appeal. The taxpayer has 30 days from the date on the rejection letter to request an appeals conference with the Office of Appeals. The taxpayer may not request an appeal if the offer was returned because it was nonprocessable (required tax returns not filed or taxpayer in bankruptcy proceeding), because taxpayer failed to provide requested information or because the IRS determined that the offer to compromise was submitted solely for purposes of delay.

What is included in an offer in Compromise

1. Cover letter and memorandum containing the facts and a discussion of the law.
2. Form 656
3. Form 433A or Form 433B
4. Supporting documents for Form 433A or B

Basis of an Offer in Compromise

Doubt as to Liability

A taxpayer may submit an offer in compromise based on doubt as to liability if there is a genuine dispute as to the existence or amount of the correct tax liability under the law. Treas. Reg. §301.7122-1(b)(2). Doubt as to liability does not exist where the liability has been established by a final court decision or judgment concerning the existence or amount of the liability. The IRS may not reject an offer based on doubt as to liability because it could not find its administrative file.

The taxpayer must submit a detailed written statement explaining why she does not owe the tax. As an alternative, an offer based on doubt as to collectibility may be submitted concurrently with an offer based on doubt as to liability. If the offer is submitted under both grounds, then taxpayer must include the IRS financial statement (Form 433-A for individuals or Form 433-B for businesses). A financial statement does not need to be included with an offer made solely on the basis of doubt as to liability.

Doubt as to Collectibility

A taxpayer may submit an offer based on doubt as to collectibility if she believes that she cannot ever pay the full amount of the tax owed. Treas. Reg. §301.7122-1(b)(3). Doubt as to collectibility exists in any case where the taxpayer's assets and income are less than the full amount of the liability. The taxpayer must submit Form 433-A or 433-B showing her current financial situation.

The IRS will make a determination based on the financial statement whether the taxpayer has the ability to pay the liability. In making this determination, the IRS will allow the taxpayer an amount for basic living expenses. See Collection Financial Statement.

Effective Tax Administration

If the taxpayer does not qualify for an offer based upon doubt as to the liability or doubt as to collectibility of the tax, a compromise may be entered to promote effective tax administration when:

1. Collection of the full liability would cause the taxpayer economic hardship or
2. Compelling public policy or equity considerations identified by the taxpayer provides a sufficient basis for compromising the liability, and
3. Compromise of the liability will not undermine compliance by taxpayers with the tax laws [Treas. Reg. §301.7122-1(b)(4)]

Economic hardship is defined as the inability to pay reasonable basic living expenses. Treas. Reg. §301.6343-1. In determining reasonable basic living expenses, the IRS is to consider relevant information such as the taxpayer's age, employment status and history, number of dependents, and other exceptional circumstances. Factors to support a finding of economic hardship include (not inclusive):

1. Taxpayer is incapable of earning a living because of a long term illness, medical condition, or disability, and it is reasonably foreseeable that taxpayer's financial resources will be exhausted providing for care and support during the course of the condition;
2. Although taxpayer has certain monthly income, that income is exhausted each month in providing for the care of dependents with no other means of support; and
3. Although taxpayer has certain assets, the taxpayer is unable to borrow against the equity in those assets and liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses.

Compromise based on equity and public policy will only be accepted if, due to exceptional circumstances, collection of the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner. The circumstances must be such that compromise is justified even though a similarly situated taxpayer may have paid his liability in full.

Rules and Requirements