Dealing with the IRS

As a public service to Colorado taxpayers, the Tax Section of the Colorado Bar Association has prepared a series of brochures intended to help individual taxpayers better understand how the IRS and the Colorado Revenue Department determine and collect taxes. This brochure will help you understand how the federal and state tax agencies carry out their revenue collection missions. Also included are useful tips and general advice on how to best prepare for and deal with that process. Sooner or later, both IRS and Colorado move to collect delinquent tax accounts. Knowing what to expect, and how to respond, can make things easier! Here are some of the most common questions about how the state and federal systems work:

Q. What should I do if I cannot pay federal and/or state income taxes for one or more years for which I have not yet filed a tax return?

A. Good general advice is to file all required tax returns by the due date (or as soon as possible), whether or not you can pay the taxes due in full. Timely filing may avoid failure to file penalties, and it will start the running of statutes of limitation on assessment and collection. If you cannot pay the full amount of tax due on a federal return, you can submit a payment plan request with the return using IRS form 9465. The IRS charges a small fee (currently $43) to your account if an installment plan is accepted, and interest (currently 9% compounded daily) will continue to run on the balance due. You should also be aware that a 1/2 of 1% per month "late payment penalty" is imposed on the amount of any tax due but not paid with a return. This penalty is limited to 25% of the tax amount, but the effect is that in the early stages of a delinquency, the effective interest rate you will be paying could actually be somewhat higher than 15% per year! Still, a payment plan is the best way to avoid those irritating letters and notices from IRS. You can get the installment request forms and instructions from your local IRS office. If you cannot pay a Colorado tax when due, help is available by calling the Tax Auditing and Compliance Division at 866-4440. Just follow the automated menu selection and instructions.

You can also file the federal and state returns with partial or no payment attached, and then wait for billing notices to be issued. While this may delay the onset of your collection problems for a few weeks, it will not solve them! If small amounts are involved ($5,000 or less), and if you can pay any balance due within a few months at most, it will usually save time and aggravation to apply for a payment plan when you file the returns. One more useful tip: Because federal liabilities are usually much larger, and since IRS has a somewhat more "user friendly" system of dealing with tax delinquencies, you may be ahead to try to pay Colorado in full first.

 Q. The IRS is sending me notices of taxes due on returns I previously filed, and which I agree I owe. However, I don't have the money to pay them. What response should I make?

A. Ignoring notices of taxes due is rarely a useful long term strategy. If IRS receives no response to its series of billings, it will refer the account to ACS (Automated Collection Services). The ACS Division has the capability, through tax ID, 1099 and W-2 form matching, of locating specific information about your employer, your bank accounts and other assets. The result could be a wage garnishment or an account levy. Once started, these measures can be difficult to stop. The better strategy is to always respond to all IRS notices, preferably in writing. If you cannot pay the taxes in full, explain why, and indicate what you can afford to pay per month. Try to make at least some payment with your response as a show of good faith. The IRS may respond by placing you on the payment plan you have requested, or it may ask for more information, such as having you complete an IRS Form 433-A (personal financial statement). Again, the best approach is to respond, and cooperate in a timely fashion, with all IRS requests for information.

Q. If I can't afford to pay my taxes, what action will IRS most likely take?

A. It is impossible to predict how the IRS will deal with any particular tax delinquency case. In general, however, a taxpayer who can show that he/she cannot afford to make any monthly payment is placed in a "non-collectible" status. A tax lien may be filed, and IRS may follow up in subsequent months or years to see if the taxpayer's financial situation has changed. Keep in mind that IRS will usually require a taxpayer to sell any assets in which he or she has equity, even if the taxpayer has little or no income with which to make installment payments. On the other hand, if the taxpayer is cooperative, IRS may not always insist on the sale of assets such as a home or automobiles before granting a payment agreement, or even treating an account as currently uncollectible. Consideration is usually given to the amount of equity in any particular asset, and whether it would cause undue hardship to force the taxpayer to sell the asset.

Also be aware that IRS is conducting a trial program in which some delinquent tax accounts are contracted out to private collection agencies. Little is known at this point about how this program will ultimately work, or what rights and options a taxpayer will have in dealing with private agencies. If you are contacted by a private agency, and if you are unable to pay the tax or dispute that you owe it, contact IRS directly and discuss your situation with them.

Q. The latest letter I received from the ACS (Automated Collection Systems) says they intend to seize and/or levy assets if I don't pay the taxes due. If I can't afford to pay, what should I do?

A. Again, responding to the earliest billings you receive is best, and may prevent the more unpleasant warning letters. With any notice of intent to levy, a quick response is required to head off the possibility of such forced collection action. You should call the number shown on the form, or write a letter explaining your situation. A phone call can be a good start with ACS communications, since that Division's mission is to quickly resolve tax delinquencies with a minimum of paperwork. Be patient when you call. It may take a while to get through to an ACS representative, and it will probably take 15 to 30 minutes (or more) to answer all of the questions that you will be asked.

Q. If an ACS representative asks me such things as where I work and bank, and what assets I have and where they are located, do I have to tell them?

A. There is little to be gained by being uncooperative. While it is true that giving asset locations and employer information could make it that much easier for the IRS to use forced collection methods, the fact remains that IRS will generally not use such methods if the taxpayer is willing to cooperate in working out a payment plan. Sooner or later the IRS will probably locate all of the requested information anyway, so voluntarily disclosing it may be the best approach.

Q. Is there any limit to the amount or kind of information that I must give to IRS during a collection proceeding?

A. Whether you are dealing with ACS or some other branch of the Collection Division, you will be asked extensive and often rather personal questions related to your financial situation. If you are seeking a payment plan, the IRS will probably ask questions about the financial status and economic contributions of other persons in your household even if you are the only one responsible for the taxes. Again, however, you must appreciate that the granting of a payment plan, or any other collection forbearance, is a matter of discretion and grace on the part of IRS. If you choose not to give any requested information, the result may be the denial of the relief you are seeking.

Q. I have been contacted by an IRS person who identifies himself as a "revenue officer." What should I do?

A. A revenue officer (RO) is an IRS agent who works collection cases "in the field." Old or otherwise troublesome cases are usually assigned to ROs. Large delinquencies may also find their way to the field. When ACS has been unsuccessful in contacting a delinquent taxpayer, or if the taxpayer has been uncooperative, assignment of the case to an RO will likely be the next step. Once again, the best response is to immediately return an ROs call or otherwise respond appropriately to his or her inquiry. An RO has maximum authority and power to make a delinquent taxpayer's life unpleasant. Among other things, an RO can start real estate lien foreclosures or other asset levy and seizure proceedings. There is rarely any benefit from trying to hide from an RO, particularly if you hold a job or have some assets. 

Q. The RO in my case has requested that I complete a financial statement, then appear at his office for an interview. What can I expect at that meeting?

A. First and foremost, keep the appointment if at all possible! If you can't make it, call the RO's office before hand and reschedule. Take with you all of the items and documents requested by the RO. The financial form (Form 433) which you are asked to complete and sign is a sworn statement. Dishonest or evasive answers will irritate the RO, and could lead to much more serious trouble. The RO will usually insist on some form of verification of the information listed in the 433; be open and honest when completing the form.

Meetings with an RO are seldom pleasant, but most ROs are professional and courteous. Their job is simply to determine what assets you have, and what payment ability you have over and above your necessary living expenses. They can recommend a payment plan, and will usually do so if that approach appears warranted based upon the information you have provided. In some cases, a follow up meeting may be necessary, or you may be asked to give them more information.

During any meetings with the RO, remain calm and courteous, even if you feel the RO is not. A combative attitude on your part will almost certainly lead to a poor result. As noted earlier, an RO has the power to make your life difficult. The best course is to "disarm" the agent with polite cooperation, and hope for the best possible payment plan. One precaution: don't have significant amounts of cash on your person when attending meetings with an RO. The RO may demand you hand over all monies that you have with you!  

Q. What are my alternatives if I cannot see eye to eye with the RO?

A. You and the RO may be unable to agree on your monthly payment ability, or whether you should be required to sell some of your assets. Taxpayers often feel that the demanded monthly payment amount is too high, and that the RO is being unfair. If you are unable to come to acceptable terms, you do have certain rights and alternatives. First, you can request a meeting with the RO's group manager. In most cases group managers will uphold the decision of the RO, but you may be able to obtain some further concessions, so it may be worth the effort.

If the group manager is not helpful, and if you feel that you cannot live with the payment plan or other payment demands that have been proposed, you can appeal the RO's decision. Ask for IRS Publication 1660, which contains information and forms to assist you in filing an administrative appeal. Taxpayers can also seek relief through the IRS District Problem Resolution Office, the number for which is listed in the Denver telephone directory "blue pages." A taxpayer who would experience a severe hardship as a result of proposed IRS collection measures, or who is already having problems because of IRS actions, may file a request with the Problem Resolution Office for a "Taxpayer Assistance Order" using IRS Form 911. This could be a way to quickly stop a wage levy that would (or does) leave the taxpayer without enough money to pay monthly bills.

Don't expect a lot of help and comfort from the appeal process or the Problem Resolution Office unless your case is fairly unusual and appears to warrant special treatment. Except in cases where there is a clear abuse of discretion, the judgment of the Collection Division personnel will be given great weight. This is particularly true if the taxpayer has acted irresponsibly or has been uncooperative. Still, you have the right to seek relief through all available channels.  

Q. Would I be better off if I hire a CPA or attorney to accompany me to any meetings with the RO (or to appear for me), and will the RO think I have something to hide?

A. An RO will not conclude you have committed any sins or have something to hide simply because you choose to be represented. Taxpayers who are unfamiliar with the tax system or who expect to have substantial issues raised often choose to be represented. It is a taxpayer's right to have an attorney or other person with them during the interview process. The cost of such representation must, of course, be weighed against the possible benefits.

Hiring a representative (CPA or attorney) may enable you to avoid direct contact with the RO, but not always. While ROs are required to, and generally will, respect a power of attorney, coming to some resolution usually requires face to face contact between the RO and the taxpayer. An RO will usually request such contact, since he or she will want to directly evaluate the taxpayer's appearance and credibility. In all events, an RO can work around an appointed representative if the RO does not get the level of cooperation he or she needs. Still, if your time limitations or other circumstances make it desirable for you to hire a representative to handle the matter for you, that is your right and choice.

Whether you will be better off with representation is a harder question to answer. Without a doubt, some ROs tend to be more aggressive with inexperienced and uninformed taxpayers. Having an experienced representative with you can result in a more restrained approach on the part of the RO, and of course it may be comforting to have someone else on your side of the table! An experienced representative will also be familiar with the collection procedures and limitations, and perhaps with the personality and philosophy of the RO you happen to be dealing with, which could help to produce a better result. In general, however, most ROs are courteous and will carry out their mission in a fair and reasonable manner. The RO's mission is simply to determine how best to collect the taxes due. With the taxpayer's cooperation, with or without a representative, that objective is usually attained with minimal pain and stress. Bear in mind you will need to convey all requested information to the RO sooner or later, and no appointed representative will be able to indefinitely shield you from that obligation. Another option is to attend the first meeting with the RO who is assigned to your case, then consider seeking representation (or at least a professional opinion) if you do not feel comfortable with the result. Most taxpayers with tax and other debts cannot easily afford the cost of qualified representation, and/or would be better off using the money to pay down their tax liabilities, so the decision to engage an attorney or CPA to assist you must be made carefully and wisely. Remember too that your county legal services office may be able to provide you with some help you if you meet their financial guidelines.

Q. I am on, or hope to get on, a payment plan with IRS. What happens if I can't keep up with the payments?

A. The IRS must give you at least 30 days notice of intent to modify or terminate your payment plan. If you fall behind on your payments, you may receive such a notice. The best policy is to contact IRS in writing or by telephone to tell them that you can't make a particular payment, or that for any reason you cannot continue the payment plan as it was originally structured. The IRS, through ACS or an RO, can modify your plan, suspend it temporarily, or otherwise work through the problem with you. Failure to communicate with the IRS will lead to a defaulted payment agreement, which could trigger forced collection action.

Q. I have more tax liabilities than I can ever hope to pay off. Is there anything I can do to reduce or avoid these liabilities?

A. There are alternatives. Bankruptcy can be a way to escape unmanageable tax liabilities. You may want to consider this avenue before spending a lot of time arguing and negotiating with IRS and/or Colorado. Taxpayers who, in addition to taxes, have other debts that are overwhelming may be particularly good candidates for bankruptcy.

Bankruptcy rules regarding taxes are very complex, but generally speaking, income tax liabilities that can be discharged in Chapter 7 are: (1) taxes due on returns more than three years old; (2) taxes due on late filed returns if the returns where filed at least two years prior to the bankruptcy; (3) tax deficiencies that were assessed on prior returns if the assessment occurred at least 240 days prior to the bankruptcy. There are many exceptions to these rules, and there are other factors that play a role. Also, no discharge can be obtained on any portion of the taxes that is already secured by a filed tax lien on assets you own. Even if you cannot qualify for a Chapter 7 discharge, some payment relief may be available under a Chapter 13 proceeding. If you feel you may be a bankruptcy candidate, confer promptly with a bankruptcy attorney. An important tip: Make sure the attorney you choose is a person who is knowledgeable regarding the tax discharge rules!

Q. I want to avoid bankruptcy. Is there any other alternative?

A. Yes. The IRS has a program which lets taxpayers submit an "offer in compromise" with respect to any tax liability. In essence, you can offer to pay the IRS a flat sum of money, in one lump or in installments, in exchange for a release from the full amount of the tax debt. Offers are not an easy way out however. In general, you will only be a good candidate if all of the following factors are present: (1) the taxes you owe are for past tax years, and you are currently in full compliance with all tax payment and filing requirements; (2) you have a third party source (parent, sibling, friend etc.) who can lend you or give you a sum of money with which to fund the offer; (3) the sum you are prepared to offer at least equals the total of your net equity in assets plus your estimated five year installment payment ability. In general, IRS dislikes offers that call for installment payments, as the default rate is high. Single lump sum payments are preferred. Also, offers somewhat above the net equity/payment ability threshold are more likely to succeed. You should know that an offer in compromise may take up to several months to process, and will result in a more detailed examination of your personal situation and financial affairs. Most offers are rejected for various reasons, with the net result that additional interest has accumulated on the amount owed. You may also be required to continue or begin monthly installment payments while the offer is pending if your current income is high enough. The filing and processing of an offer will also automatically extend the 10 year statute of limitations on collection, so doing one in hopes of delaying the collection process can be counter-productive!

If you would like to consider making an offer, ask the IRS representative with whom you are dealing for the offer form (# 656). There may be no harm in trying, and the benefits of an accepted offer include release of liens and cancellation of the entire remaining debt at the conclusion of the required five year full compliance period. An important tip: Be sure to read all of the fine print on the back of the offer form. Once accepted by IRS, it is a contract!

Q. What if I cannot pay the tax, don't expect to be able to pay it anytime soon, and have no ability to submit an offer in compromise?

A. The IRS will probably place your account in "currently uncollectible" status. While IRS tries to follow up on such accounts periodically, in many cases the 10 year statutory limitation period for collection will expire without the IRS making any further collection efforts. While there are legal means by which the IRS can preserve its right to collect delinquent taxes for much longer (by getting a court judgment), it seldom uses such means in cases where the taxpayer has little or no economic vitality (i.e., few assets and dim future income prospects). There is little the taxpayer can do other than hope to be placed in uncollectible status, or be put on a minimal payment plan for the duration of the collection period. The best approach is to come forward at the earliest stage of the collection process and explain your situation to the IRS.

Q. If IRS asks me to sign a form extending the collection limitation period, should I?

A. Whenever the 10 year collection period is running short (six months to one year left), ACS or an RO may ask the taxpayer to sign a "wavier form" which extends the collection period. This obviously is advantageous to IRS, but it may or may not be in the taxpayer's best interest. If you have no current assets, and your prospects for the future are not good, IRS may elect to "write off" your account. In such case, signing a statute wavier may not be wise.

On the other hand, if you refuse to cooperate by signing a waiver, IRS might seek a judgment that would extend the collection period by many years. Or, if you have wage or salary income, the IRS can (and very well may) issue a garnishment or levy the your employer. This could mean losing up to 75% of your paycheck for the duration of the collection period! The choice may be all-out forced collection action for a relatively short period of time, or continuation of a more comfortable payment plan for a longer period. Of course, if you are preparing to file for bankruptcy, or in some other special circumstances, it may not matter whether you extend the statute or not. The point is, don't rush to sign any waiver forms until you have had a chance to consider the options and consequences. This is one area where professional advice can be helpful!

Q. I have not filed some of my Colorado tax returns, and/or I have not paid some of my Colorado income taxes. What should I do?

A. Through an information sharing program, Colorado will almost always pick up any federal tax return filings, audit adjustments and assessments. Colorado will eventually send you a bill, though it may take a year or more. Colorado aggressively collects back taxes, so it may be best to file any required initial or amended returns so that you can deal with Colorado sooner rather than later. The Tax Auditing and Compliance Division of the Revenue Department can help taxpayers with tax payment problems. They can set up simple automated payment plans in many cases, or if necessary they have a department that deals with more complex and unusual payment needs. This Division also has the authority in certain circumstances to enter into "settlements" on older tax accounts. This is the Colorado equivalent of the offer in compromise program. By calling the general taxpayer assistance number of the Department (866-4440) you can talk to a representative about your problem.

As with the IRS, respond quickly to any billing notices from Colorado. In "no response" cases, Colorado ultimately refers delinquent tax accounts to private collection agencies. If this happens, the Revenue Department may not be willing to re-open your case, and your opportunity to work out more comfortable payment arrangements could be lost. It may be in your best interests to pay your Colorado taxes first. Among other things, on the state level there are less well defined appeal options if you feel you are being treated unfairly. Also, when figuring your federal tax payment ability, IRS will generally allow a deduction for your existing Colorado payment plan, yet Colorado will not give the same consideration for an IRS payment plan!

Q. The IRS says I owe taxes for past years, but I don't agree. What can I do to get them to correct assessments that I think are wrong?

A. For tax returns that are within the general three year statute of limitations period, you may be able to file amended returns to correct the assessments. Generally speaking, assessments made on tax returns that are beyond the statute period cannot be contested before paying the taxes in full. An RO in a collection setting will not want to hear arguments as to whether the tax assessment is valid or proper. However, after the tax is paid in full, you can file a claim for refund. Use a form 1040X for individual taxes, and use form 843 for other taxes. A claim can be filed to recover any taxes paid within the preceding two year period. If IRS initially rejects your claim, they will provide you with written information as to how you can request an administrative appeals hearing. If your claim is rejected by appeals, you have the right to file a refund suit in the federal district or in the US Claims Court.

In certain circumstances, IRS will consider a refund/abatement request with respect to a given year even if you have not paid the amount due in full. This is particularly true of penalties and taxes that were assessed in error. Form 1040X should generally be used, however the IRS does have specific penalty abatement request forms as well (Form 9264). Check with your local IRS office to get the necessary forms.

If you cannot afford to pay the taxes IRS says you owe, and if you don't believe you owe them as a matter of tax law, you can submit an "offer in compromise" based upon "doubt as to liability." Such offers are rarely accepted, particularly if the taxpayer has been through the IRS administrative appeals process. However, if you have not previously argued your case before the Appeals Division, an offer may be successful if a clear legal or factual reason for non-liability can be established. Get the necessary offer form (# 656) from your local IRS office, or directly from a revenue officer.

Q. The IRS says I owe taxes on a joint return that I filed with my spouse (or ex-spouse). The tax liability is related to my spouse's income, not mine. Am I still liable for the full amount owed?

A. In general, yes. If IRS cannot collect from your spouse, you are responsible. A separation or divorce agreement that says your spouse is responsible for any tax liabilities will not bind or even influence IRS in the collection process. You may be able to recover from your spouse through the local court system, but IRS can still come to you for taxes owed.

There are some very limited and narrow exceptions to the situation described above. If you did not in fact sign a joint return, that may be a complete defense if you can establish the truth of your assertion with adequate evidence. There is also a provision in the IRS Code (the "innocent spouse" doctrine) that permits a spouse to escape liability on a joint return if a tax deficiency is due that is related to income or deductions of your spouse, and if you can establish, among other things, that you had no knowledge, and no reason to know, that taxes were underpaid. If you feel you may have a basis to argue for innocent spouse relief, you should immediately raise the point with IRS at the earliest stage of the audit or collection process. Ask the IRS representative for a copy of Internal Revenue Code Section 6013(e). Consider retaining the services of a knowledgeable CPA or attorney, since the innocent spouse provisions are very complex and technical.

Q. My ex-spouse and I filed joint returns for which taxes are due, and for which I feel my ex should be responsible. Can I find out what IRS is doing to collect from my ex-spouse?

A. Yes. Under new provisions of the IRS Code, you are entitled to know what collection efforts are being made against your ex-spouse. This information will not relieve you of your obligation for the debt, but it will let you know what is happening, and help you determine what your remaining exposure is. With joint returns, IRS is free to pick and choose which party it wishes to pursue for the taxes due. You cannot compel IRS to leave you alone and go after your ex-spouse! But, you can offer information to the IRS as to the whereabouts and payment ability of your ex, and that may result in more aggressive collection efforts in that direction.

Q. Are there any special circumstances or situations that should cause me to be especially cautious in dealing with the Collection Division of IRS or the Revenue Department?

A. Contacts from IRS collection personnel, though not entirely pleasant, are rarely anything to be unduly concerned about. However, if you have illegal and/or unreported income, such that disclosure of your financial position or affairs could lead to exposure of these facts, you should seek the advice and counsel of an attorney experienced in dealing with criminal (or potentially criminal) tax matters. Deliberate false statements to an IRS official, or false written statements, can lead to serious criminal consequences. If honest responses to the RO's questions and requests would expose facts you fear could give rise to a criminal investigation, decline to respond until you have the benefit of counsel.

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PLEASE NOTE: The foregoing material is not intended as specific tax or legal advice regarding any particular type of tax problem, and it should not be viewed or relied upon as such. Every taxpayer's case is unique, and generalizations may not hold true in every situation. If you have specific questions, or need assistance with your particular tax problems, you should seek help from a qualified CPA or tax attorney. If you are unable to pay for such assistance, there are resources that you may find helpful. You may qualify for legal assistance through your local county bar association if you meet certain financial criteria. Check your local telephone directory for listings of county legal assistance offices. Also, please be aware that the tax laws, as well as IRS and Revenue Department practices and policies, change from time to time. This brochure is current to May 15, 1997. While efforts are made to update this brochure periodically, no assurance is given that it reflects subsequent changes at either the federal or state level.