[James M. Cha, CPA, Certified Tax Resolution Specialist]
IRS Enforcement Update
Right before the COVID-19 pandemic, the IRS was fully prepared to ramp up their its enforcement activities for tax audit and collections. In March 2020, they placed a halt by temporarily suspending exams and issuing notices for tax liens and levies.
The Inflation Reduction Act (IRA) authorized over $80 billion in supplemental funding to the IRS over a ten-year period to enhance the IRS's operation including to facilitate tax law enforcement. However, the 2023 budget deal struck by Congress and the president reduced that appropriation to $60 billion of which $25.7 Billion was allocated for enforcement and collection activities. Spending will increase every year until 2031, but most of the money is being spent in next the 2 years
The IRS has increased its full-time staff to nearly up to 90,000 full-time employees, a sharp increase from the 79,070 who were employed in 2022. They expect a net increase of 5,000 to 10,000 employees per year. The IRS has also had been actively hiring staff from accounting and law firms.
In September 2023, the IRS announced aggressive an enforcement focus to better detect tax cheating, identify emerging compliance threats, and improve case selection tools to avoid burdening taxpayers with needless 'no-change' audits. The following are the main focus areas.
- IRS will ramp up efforts on middle- and low-income people to take down scheme promising excessive EIC.
- Expanded work on digital assets - There is the potential for a 75% noncompliance rate.
- More scrutiny of FBAR violations - The IRS plans to audit the most egregious potential non-filer FBAR cases in fiscal year 2024.
- Improved audit selection fairness and equity - Black taxpayers, especially those who claim the EITC on their returns, are more likely to be audited than other taxpayers.
- High-wealth taxpayers with total positive income above $1 million that who have more than $250,000 in recognized tax debt. Revenue Officers will focus on these collection cases in FY 2024.
- Expansion of the Large Partnership Compliance program on large partnerships with complex structures and tax issues aided by AI.
- Labor brokers - The IRS has seen The IRS plans audits and investigations on contractors making payments to shell companies that funnel money back to the contractor.
Audits on Lower-Earning vs. High-Income Americans
There has been so much confusion on the Secretary of the Treasury’s statement that the IRS will not increase audits on taxpayers earning less than $400,000 a year to be audited relative to historical levels of 2018. On October 29, 2023, the new IRS Commissioner hinted at Possibility Audits May Rise for Americans Earning Under $400,000 and they might fail to make good on this promise that the IRS will not audit the group.
Currently, the IRS is focused on high-income non-filers, corporations, and pass-through entities in an effort to go after tax evasion. However, small businesses with employees still face enforcement mechanisms like audits and collections. Any business with employees can be subjected to enforcement. So the rumor that no business under $400k will be unaffected is not true.
There is no clear IRS definition of a 'high-income' taxpayer. During the pandemic in June 2022, non-filer individuals who had more than $100,000 in reported income was under IRS enforcement’s priority as ‘high income non-filers.’ Also, they rely on 1970s-era thresholds of $200,000 Total Positive Income to define high-income returns. In 2022, about 75% of new audits were on taxpayers with income under $200,000.
Collection Enforcement Update
On October 4, the IRS Acting Director for Collection Policy said that the normal collection and enforcement process will go forward on 2022 tax returns filed.
For all the past years’ balances due, soft reminder collection notices will go out in waves. Then, starting 2024, collection enforcement is well expected to ramp up.
Collection Notice Stream & Collection Process
The flow of IRS collection and enforcement is basically:
1. Tax is assessed, and CP14 Balance Due and Demand for Tax Notice is sent.
2. If the balance is not paid within ten days, the statutory lien arises automatically.
3. If no collection alternative is set up with the IRS, CP501 and CP503 Balance Due Notice are issued.
4. The Notice of Federal Tax Lien will usually be filed at this time if the taxpayer owes more than $10,000 with exceptions. This will give the taxpayer the right to request a Collection Due Process Hearing.
5. If no collection alternative is set up with the IRS, a CP504 Notice of Intent to Levy is issued by the IRS, providing the taxpayer 30 days to file a request for a CDP Hearing. An exception to issue the Final Notice applies to State Tax Refunds and Jeopardy Levy.
6. Final Notice of Intent to Levy with CDP rights is issued.
7. If the taxpayer fails to request the hearing, the IRS can move forward with enforcement action including levying the taxpayer's assets and income sources.
Collection Problem Types & Client Cases
If they don’t respond to the collection notices, taxpayers who owe back taxes will get into many problems. The IRS and other tax agencies can apply tax liens, bank levies, wage garnishments, and seizures in an attempt to collect payment.
Passport Revocation or Denial
If you owe back taxes, this might have consequences when you want to go travel. The IRS certifies tax debts of $59,000 or more (for 2023). If you pass this debt threshold, and receive a Notice of Federal Tax Lien (NFTL) and the period to challenge it has expired or a levy has been issued, certifying the delinquent debt to the State Department can lead to the denial, revocation, or limitation of your passport. The good news is that this certification can be reversed with our help.
Client Case) An attorney client who owed $120,000 was planning for a family travel to Cancun. The IRS issued a NFTL on his house and certified the debt to the State. He was in the risk of canceling the travel. We were able to resolve in reversing the certification, so he could enjoy his family vacation.
It allows the government to seize and lay legal claim on assets and properties. A tax lien that shows up in the public records may make it difficult for you to refinance or get loans from potential creditors and lenders, or may not be able to sell property as well.
Client Case) Larry tried hard to refinance his home to pay down his federal back tax of over $232,000. He had enough equity, but he couldn't get it due to the IRS’s lien and reluctance to cooperate. The IRS initially imposed a payment plan amount that was impossible to pay. He became eligible to proceed with the refinancing process and pay off all of the back taxes.
A levy occurs when the IRS collects your back taxes through seizing your real or personal property. Typically, levies are made on financial accounts held for you by others, such as a bank, a stockbroker, or an employer. Levies are placed on bank accounts, wages. social security benefits, and various income sources.
Client Case) Among many cases of Offer in Compromise, Hernando was struggling to pay his living expenses since he had fallen on hard times with his business. The initial IRS balance was about $70,000 and he received Final Notices of Intent to Levy for several years. With our strategies and negotiations with the Offer Examiner, we were able to get his tax debt settled with an Offer in Compromise for the final $180 amount.
Revenue Officer (field collector) - Having a Revenue Officer (RO) assigned to collect back taxes doesn’t have to be as scary, but it can be intimidating for someone who has never dealt with one before. The power of an RO lies in their ability to act decisively and autonomously in carrying out their duties.
For example, they can initiate audits, issue subpoenas, and enforce collection actions without seeking approval from a court or other higher authority. Failure to comply with an RO's demands can result in severe penalties and legal consequences, including wage garnishment, bank levies, and property seizures.
Working directly with an RO by a taxpayer is not recommended. An experienced professional with collection specialty has to should be sought for serious collection cases.
The taxpayer or representative may request an appeals conference with the IRS Office of Appeals to challenge many IRS collection actions or audit results to with the IRS Independent Office of Appeals. There are two main procedures: Collection Due Process & and Collection Appeals Program.
Collection Due Process (CDP) is available if you receive Notice of Federal Tax Lien Filing, Final Notice of Intent to Levy and Notice of Your Right to a Hearing, Notice of Jeopardy Levy, or Notice of Levy on Your State Tax Refund.
You may go through the Collection Appeals Program (CAP) for the tax lien, seizure, installment agreement. If you choose to go through the CAP, you cannot go to Tax Court if you disagree with the CAP decision.
If you receive a letter notifying you that your Offer in Compromise was rejected, you have 30 days to request an appeal of the decision.
A Trust Fund Recovery Penalty request for Appeals can be made with a Small Case Request or a Formal Written Protest.
In addition, a non-binding Fast Track Settlement (or Fast Track Mediation in collection cases) can be requested. A trained mediator uses mediation techniques and may offer a settlement proposal using Appeals authority.
Appeals programs include mediation called Alternative Dispute Resolution (ADR). Mediation is offered during pre-filing, examination, collection and appeals.
After an Appeals conference, another opportunity for settlement is made at a Post Appeals Mediation.
The IRS collection representation is an area totally different from tax preparation or audit representation. There are common misconceptions about negotiating tax debt with the IRS. Not all taxpayers qualify for Offer in Compromise, as the IRS has strict eligibility rules determined on facts and circumstances. However, the success rate can be higher with various strategies and negotiation skill.
In conclusion, seeking representation from a professional with specialized experience in negotiation and resolving tax collection matters is highly recommended. A specialist can properly evaluate eligibility, craft an effective strategy, and directly communicate with the IRS to navigate the process and achieve the best successful outcome.
James M. Cha, CPA, Certified Tax Resolution Specialist