2009 representation update

8/14/2019 2009 Representation Update

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I.

2009 REPRESENTATION UPDATE

by

ROBERT E. McKENZIE, EA, ATTORNEY ©2009

ARNSTEIN & LEHR SUITE 1200

120 SOUTH RIVERSIDE PLAZAChicago, Illinois 60606

(312) 876-7100 [email protected]

http://www.mckenzielaw.com/





2009 IRS REPRESENTATION UPDATE© By: Robert E. McKenzie

1. A CHANGING IRS ........................................................................................................1More Compliance Centers to Cease Processing Returns:............................................1Shrinking IRS Workforce ................................................................................................1New IRS Commissioner ................................................................................................2

2. TAXPAYER ADVOCATE ..............................................................................................2National Taxpayer Advocate Releases Report To Congress ........................................ 2The Most Litigated Tax Issues ..................................................................................... 11

3. ENFORCEMENT ........................................................................................................ 13Highlights of 2008 Enforcement................................................................................... 13Individual Enforcement................................................................................................. 13Millionaires ................................................................................................................... 13

Businesses ................................................................................................................... 14Collection Enforcement................................................................................................ 14Electronic Filing IRS Webpage .................................................................................... 14State Information Sharing ............................................................................................ 19Federal Tax Returns and Return Information.............................................................. 19Return Information ........................................................................................................19IRS Study Provides Tax Gap Estimate ........................................................................ 20Sources of Misreporting ............................................................................................... 20Understanding the Tax Gap ......................................................................................... 20Components of the Tax Gap ........................................................................................ 20Underreporting ............................................................................................................. 20

Underreporting Is Largest Component......................................................................... 21Noncompliance Rising ................................................................................................. 21Areas Where Compliance Has Decreased .................................................................. 21Areas With Improved Compliance ............................................................................... 22Businesses More Likely to Not Comply....................................................................... 22NRP Subchapter S Corporation Study Overview ........................................................ 222009 Budget................................................................................................................. 262009 Budget ................................................................................................................ 26Overview - Abusive Return Preparer ........................................................................... 27Audits of 30 Clients ...................................................................................................... 28

4. EXAMINATION ........................................................................................................... 29

Examination Reengineering ......................................................................................... 29The Dirty Dozen ........................................................................................................... 295. APPEALS .................................................................................................................... 32

Strategic Priorities:....................................................................................................... 32Campus Appeals Program ........................................................................................... 32OIC and TFRP Mediation and Arbitration .................................................................... 32Application Process ..................................................................................................... 33TFRP ............................................................................................................................ 33

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6. USEFUL INFORMATION FOR PRACTITIONERS .................................................... 34Whistleblower Reforms ................................................................................................ 34Mortgage Relief Act...................................................................................................... 34Basis Reduction ........................................................................................................... 35Qualified Principal Residence Indebtedness ............................................................... 35

Misclassified Workers .................................................................................................. 35Misclassification ........................................................................................................... 35Recommendations ....................................................................................................... 36UBS Criminal Charges ................................................................................................. 36Agreement.................................................................................................................... 36Allegations .................................................................................................................... 36Prior Charges ............................................................................................................... 37Comments of Government Officials ............................................................................. 37Settlement Offer Unreported Offshore Income ........................................................... 37Highlights of the Offer. ................................................................................................ 37Penalties ....................................................................................................................... 38

Fully Cooperate ............................................................................................................ 38VITA Grant Program .................................................................................................... 38Identity Theft................................................................................................................. 39

7. COLLECTION ............................................................................................................. 42Taxpayer Advocate’s Report On Enforced Collection ................................................ 42Flawed Private Collection Ends ................................................................................... 42Help for People Who Owe Taxes ................................................................................. 43Flexibility ....................................................................................................................... 43Online Payment Agreement (OPA) ............................................................................. 44Guaranteed Availability of Installment Agreements .................................................... 45

<$25,000 Liabilities ...................................................................................................... 45Form 433A .................................................................................................................... 45New more Onerous Allowable Expense Standards ..................................................... 45Five Year Test.............................................................................................................. 48

8. OFFER IN COMPROMISE ......................................................................................... 48Number of Offers .......................................................................................................... 48OIC’s FY2000 to 2008 .................................................................................................. 49Tax Increase Prevention and Reconciliation Act of 2005 ............................................ 49Payments With Offers .................................................................................................. 49Failure to Make Deposit............................................................................................... 49Not Refundable ............................................................................................................ 50Taxpayer Advocate Research ...................................................................................... 50Failure to Make Installment Payments ......................................................................... 50Low Income Taxpayers ................................................................................................ 50Deemed Accepted ........................................................................................................ 51Background .................................................................................................................. 51Supporting Documents ................................................................................................. 51$150 Processing Fee ................................................................................................... 51Determining Processability ........................................................................................... 52Full Pay Processing ......................................................................................................53

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Initial Review ................................................................................................................ 53Computation of Offer Amount...................................................................................... 53Cash Offer .................................................................................................................... 54Short-Term Deferred Payment Offer ............................................................................ 54Deferred Payment Offers ............................................................................................. 54

Corporate Trust Fund Liabilities ................................................................................... 55Pursuit of Officers After Compromise.......................................................................... 55Promote Effective Tax Administration .......................................................................... 55Encourage Compliance ................................................................................................ 55Only Available If There Is No Doubt As to Liability Or Collectibility ............................. 56Rules for Evaluating Offers to Promote Effective Tax Administration ......................... 56Factors ..........................................................................................................................56Undermine Compliance ................................................................................................ 56Exceptional Circumstances .......................................................................................... 56California ...................................................................................................................... 68..................................................................................................................................... 68

EXHIBITS 59-70

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2009 IRS REPRESENTATION UPDATE© By: Robert E. McKenzie

1. A CHANGING IRS

More Compliance Centers to Cease Processing Returns:1.10 Because of electronic filing the IRS is gradually eliminating its return processingcenters. The closure schedule is as follows.

• Philadelphia, Memphis & Holtsville no longer process

• Andover 10-09

• Atlanta 10-11

As of October, 2011 there will be 2 returns processing centers for business returns and3 returns processing centers for individual returns. Each of the remaining compliancecenters will continue performing correspondence audits and collection activities.

Shrinking IRS Workforce1.15 As a result of Congressional cuts in IRS budgets its workforce continued toshrink in 2008. It’s workforce has shrunk from about 100,000 in 2002 to about 90,000 in2008.

Table 30. Internal Revenue Service Personnel Summary and Type of Personnel, Fiscal Years2007 and 2008

Employment status, budget activity,

and selected personnel type

Average positions realized

[1]

Number of employees

at close of fiscal year

2007 2008 2007 2008

(1) (2) (3) (4)

Internal Revenue Service, total [r] 92,017 90,647 86,638 90,210

Selected personnel type:

Customer Service Representatives [r] 18,681 17,736 19,307 18,316

Revenue Agents [r] 12,816 12,587 13,026 12,951Seasonal employees [r] 9,861 10,025 4,525 8,422Revenue Officers [r] 5,663 5,493 5,468 5,481Tax Technicians [r] 3,110 1,496 1,506 1,538Special Agents [r] 2,677 2,590 2,683 2,617Attorneys [r] 1,415 1,397 1,455 1,429Appeals Officers [r] 775 768 798 781

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New IRS Commissioner 1.20 In March, 2008 the Senate unanimously confirmed IRS Commissioner DouglasH. Shulman. He promised would work to ensure that the tax agency is fair, and hewould concentrate both on enforcement and service. "For the majority of Americanswho pay their taxes willingly and on time, there must be clear guidance, accessible

education and outstanding service," he said in a statement. "For taxpayers whointentionally evade paying taxes, there must be rigorous enforcement programs."Shulman has been vice chairman of the Financial Industry Regulatory Authority,previously known as the National Association of Securities Dealers. He also has servedon the bipartisan National Commission on Restructuring the Internal Revenue Service.

2. TAXPAYER ADVOCATE

National Taxpayer Advocate Releases Report To Congress2.10 In January 2009 National Taxpayer Advocate Nina E. Olson released a report toCongress. Internal Revenue Code (IRC) § 7803(c)(2)(B)(ii)(III) requires the National

Taxpayer Advocate to describe at least 20 of the most serious problems encountered bytaxpayers. Each of the most serious problems includes the National Taxpayer Advocate’s description of the problem, the IRS’s response, and the National Taxpayer Advocate’s final comments and recommendations. This format provides a clear pictureof which steps have been taken to address the most serious problems and whichadditional steps the National Taxpayer Advocate believes are required. The problemsdescribed in the report are as follows:

1. Complexity of the Tax Code. The largest source of compliance burdens for taxpayers is the complexity of the tax code. IRS data show that taxpayers andbusinesses spend 7.6 billion hours a year complying with tax-filing requirements.To place this in context, it would require 3.8 million full-time employees to work7.6 billion hours. In dollar terms, we estimate that taxpayers spend $193 billion ayear complying with income tax requirements, which amounts to 14 percent of aggregate income tax receipts. One count shows the number of words in the taxcode has reached 3.7 million, and over the past eight years, changes to the taxcode have been made at a rate of more than one a day – including more than500 changes in 2008 alone. All of this complexity imposes additional monetarycosts on taxpayers – about 60 percent of individual taxpayers pay practitioners toprepare their returns and an additional 22 percent purchase tax software to assistthem. Perhaps most troubling, tax law complexity leads to perverse results. Onthe one hand, taxpayers who honestly seek to comply with the law often makeinadvertent errors, causing them either to overpay their tax or to become subject

to IRS enforcement action for mistaken underpayments of tax. On the other hand, sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities. The NTA recommends that Congress substantiallysimplify the tax code. To assist Congress in pursuing tax simplification, this reportincludes a series of recommendations, including recommendations to repeal theAlternative Minimum Tax, streamline education and retirement savings taxincentives, simplify the family status provisions of the Code, allow taxpayers toexclude modest amounts of canceled debts from income without having to make

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an affirmative claim, reduce tax sunset and phaseout provisions, and revise theoverall penalty structure..

2. The IRS Needs to More Fully Consider the Impact of CollectionEnforcement Actions on Taxpayers Experiencing Economic Difficulties.When the IRS contemplates taking enforced collection action against a taxpayer,

both the tax code and IRS procedures require that IRS personnel consider whether the collection action will impose an economic hardship on the taxpayer.When the economy struggles and more taxpayers become unable to pay their tax liabilities, the importance of considering the impact of collection actions ontaxpayers and their families becomes critical. In addition, while levy and seizureauthority are important collection tools that allow the IRS to address seriousincidents of noncompliance, a review of IRS historical enforcement data suggeststhat expanded use – as opposed to judicious use – of these tools does notnecessarily translate into more tax dollars collected. For example, while thenumber of levies issued by the IRS increased by an astonishing 1,608 percentfrom fiscal year (FY) 2000 to FY 2007 – from 220,000 levies to about 3.76 million

– the increase in total collection yield during this period was slightly less than 45percent. To the contrary, historical enforcement data indicate that collectionalternatives may be more effective at collecting liabilities from taxpayers havingtrouble paying their tax debts. To more effectively deal with taxpayers in thesedifficult economic times, the NTA recommends that the IRS provide specificguidance requiring pre-decisional consideration of economic hardship in allInternal Revenue Manual sections related to collection enforcement andencourage greater use of collection payment alternatives such as offers incompromise and partial payment installment agreements where economichardship is present.

3. Understanding and Reporting the Tax Consequences of Cancellation of Debt Income. When a creditor writes off a debt, the tax code generally treats theamount of the canceled debt as taxable income to the debtor, but Congress hascarved out a number of exceptions. The rules that determine whether cancellation of debt income is includible in gross income are complex, andtaxpayers often do not receive reliable information about their tax reporting andpayment obligations. For example, the Mortgage Forgiveness Debt Relief Act of 2007 carved out an exception for debts canceled in the course of a homeforeclosure, but the exception only applies to the extent that the loan proceedswere used to acquire or improve a principal residence. It appears that mostsubprime borrowers use a portion of their loans for other purposes (e.g., to payoff car loans, credit card balances, student loans, or medical bills), and theexception does not apply to the extent loan proceeds were used for these “non-qualified” purposes. Moreover, taxpayers do not automatically receive the benefitof any exception. If they do not file Form 982, Reduction of Tax Attributes Due toDischarge of Indebtedness (and Section 1082 Basis Adjustment), with their taxreturns to claim an exclusion and adjust their tax attributes, the IRS will assumethe cancellation of debt is taxable (based on its receipt of a Form 1099-C,Cancellation of Debt, filed by the creditor). Even where Form 982 is properlyfiled, taxpayers who exclude canceled debt from income under the “insolvency”exception may receive IRS notices requesting additional documentation if they

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do not also provide a statement of insolvency, a requirement that does notappear in any IRS forms or publications. The NTA recommends that the IRS takeseveral steps to address this problem, including developing an insolvencyworksheet that taxpayers can file with their returns and creating a centralized unitdedicated to handling cancellation of debt issues.

4. Employment Taxes. The NTA is concerned that IRS employment tax policiesmay overreach and undermine some of the important protections enacted in theTaxpayer Bill of Rights and the IRS Restructuring and Reform Act of 1998. Withan estimated $58 billion in unpaid employment taxes, it is clear that the IRS facesa significant noncompliance problem. At the same time, the overall employmenttax compliance rate is high – approximately 88 percent of all employment taxreturns are filed and fully paid. While the need to collect unpaid payroll taxes isobvious, the IRS should follow a tailored approach to address the problem,including applying different treatments to taxpayers based on their levels of andreasons for noncompliance, encouraging prospective voluntary compliance byhelping taxpayers who are attempting to follow complex rules and procedures,

concentrating sufficient resources on early intervention techniques to prevent theaccumulation of substantial employment tax liabilities, and building a localcompliance presence that balances enforcement with outreach and education.

5. IRS Process Improvements to Assist Victims of Identity Theft. Identitytheft occurs when one person unlawfully uses another person’s personal data tocommit fraud or other crimes. In the past year, the IRS has improved its identitytheft process in a number of ways, including establishing an Identity ProtectionSpecialized Unit and a toll-free hotline for identity theft victims. These changes, if properly managed, should provide more assistance to victims of identity theft.The IRS recognizes identity theft as a serious problem and has agreed toaddress the concerns and recommendations that the NTA has previously raised.In light of the IRS’s agreement with our suggestions, the NTA makes no specificadditional recommendations at this time. However, she will continue to urge theIRS to implement the following actions: provide global account review andaccount monitoring (if necessary) for all identity theft victims; allow employeesthe discretion to deviate from established guidelines in accepting evidence of identity theft; and allow employees more latitude in determining the rightful owner of a disputed Social Security number.

Taxpayer Service Issues

6. Taxpayer Service: Bringing Service to the Taxpayer. Since announcing itsoriginal plan in 2001 to establish 676 Taxpayer Assistance Center (TAC) sites,the IRS has established only 401 TACs and just 55 percent of them are open 36to 40 hours per week. Further, 40 percent of taxpayers live more than a 30-minute drive from a TAC, and TACs are unable to handle many issues andquestions. Similarly, the Small Business/Self-Employed Division since 2001 hassharply reduced its planned education and outreach program for small businesstaxpayers. In both instances, the IRS has sought to meet taxpayer needs byincreasing Internet service. While that trend is generally positive, there remainsignificant numbers of taxpayers who do not have access to the Internet and

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there are certain categories of service that are more effectively handled throughface-to-face interaction. The NTA recommends that the IRS collaborate with TASon all ongoing and new studies pertaining to taxpayer service, including theTaxpayer Assistance Blueprint for small business and self-employed taxpayerscurrently underway, and take steps to identify innovative approaches todelivering in-person assistance.

7. Navigating the IRS. The IRS employs more than 100,000 workers in 12 major business units in over 800 offices within and outside the United States.Taxpayers, practitioners, and even IRS employees have difficulty finding theappropriate office or employee to help them resolve tax problems. The IRS doesnot publish a topical or personnel directory that would assist taxpayers innavigating the agency. By comparison, this information is provided clearly on thewebsites of taxing authorities in other countries and U.S. states. The NTArecommends that the IRS take steps to address this problem, including revisingthe Internal Revenue Manual to direct IRS employees to accommodate taxpayer requests to speak to a particular employee, adding departmental phone numbers

to the topical index on IRS.gov, and considering the creation of a phone number staffed by operators who would obtain details about the taxpayer’s question or problem and direct the taxpayer to the function that can help.

8. IRS Handling of ITIN Applications Significantly Delays Taxpayer Returnsand Refunds. Any individual who must file a tax return but is not eligible toobtain a Social Security number must apply to the IRS for an Individual Taxpayer Identification Number (ITIN). With limited exceptions, ITIN applications must besubmitted with a tax return filed on paper. In 2005, the inability to receive an ITINbefore preparing and filing a paper tax return caused processing delays thataffected 280,000 refunds totaling over $500 million. In addition, the IRSrequirement for ITIN applicants to file paper returns is inconsistent with thecongressional mandate for the IRS to achieve an 80 percent e-file rate. The IRShas provided inadequate assistance and information to applicants, as evidencedby the high number of Incomplete and rejected applications, restricted telephoneaccess to ITIN personnel, and failure to expand the Certified Acceptance Agentprogram. The NTA recommends several actions for streamlining the ITINprocess, which include permitting individuals to submit an ITIN application prior to the filing season where the individuals can demonstrate an imminent need tofile a return, allowing new ITIN applicants to file returns electronically, andpromptly acknowledging all applicant requests for the return of originaldocuments.

9. Access to the IRS by Individual Taxpayers Located Outside the UnitedStates. Approximately five million American citizens living outside the countryand over a half million troops deployed overseas need a way to contact the IRSwhen they have inquiries about their accounts or the tax laws. These taxpayershave limited options for obtaining information, filing returns, and replying to IRSnotices and letters. There are only four IRS overseas customer service postsavailable to taxpayers with U.S. filing obligations, who are spread over 194countries and more than 60 territories. Those outside the United States generallyincur greater expenses, such as international telephone charges, transportation,

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and carrier mailing costs, when trying to communicate with the IRS. Although theIRS has developed customer service initiatives as a part of its strategy for international tax administration, it does not provide enough resources to meet theneeds and preferences of taxpayers based outside the country. The NTA’srecommendations for improving customer service for overseas taxpayers includeopening toll-free international telephone lines and providing overseas taxpayers

with secure online access to their tax accounts.

Compliance Issues

10. Customer Service Within Compliance. Simply stated, the IRS gets what itmeasures. The IRS largely rates operational performance by using efficiencymeasures (e.g., cycle time, case closures, and average call time) instead of effectiveness measures (e.g., did the IRS’s actions achieve the desired voluntarycompliance results?). The 2008-2009 IRS Strategic Initiative includes the goal to“Improve service to make voluntary compliance easier.” Yet current measures donot promote customer service and may ultimately lead to noncompliant behavior

by taxpayers, because IRS business strategies and measures do not adequatelyemphasize a balanced approach between taxpayer service and enforcementwithin the IRS’s compliance organizations. The IRS has the opportunity toestablish taxpayer-centric measures that encompass effectiveness as well asefficiency components to accomplish this strategic goal. The NTA recommendsfour actions to address this problem, including creating an IRS CognitiveLearning Lab and making it possible for taxpayers to work with one employeefrom start to finish on a case.

11. Local Compliance Initiatives Have Great Potential But Face SignificantChallenges. Research suggests that concentrated examinations targeted at alocal business segment or industry have a greater “ripple effect” on voluntarycompliance by other taxpayers than seemingly random examinations.Compliance initiative projects (CIPs) allow local IRS employees to generate thisimpact by focusing on specific local compliance problems using examinations or “alternative treatments,” which may include outreach, education, form changes,regulatory changes, or even agreements with the states. The CIP process alsoenables employees from different IRS functions to work together, utilize localsources of information, and reach out to local organizations to addressnoncompliance at the local level. In addition, CIPs allow the IRS to learn aboutwhat works and what does not. The NTA is concerned that the IRS hasneglected this important program. She recommends that the IRS take steps torevitalize it, such as developing better measures for local CIPs, allocating moreresources to local CIPs, and making CIP reports more widely available topreserve the benefits of any lessons learned.

12. Customer Service Issues in the IRS’s Automated Collection System(ACS). ACS is a main component of the IRS’s collection process, sendingautomated collection notices to millions of taxpayers and employing numeroustelephone assistors to receive calls from these taxpayers. Although ACSgenerally receives relatively high customer satisfaction survey ratings andinternal quality assessments, TAS has received numerous complaints from tax

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professionals and taxpayers that suggest the need for improvements. ACScustomers have raised concerns about extensive wait times, the inability to faxdocuments to employees, overly burdensome procedures, and generaldissatisfaction with the ACS process. Neither ACS’s customer satisfactionsurveys nor its internal quality reviews measure these important aspects of taxpayer service. The NTA has identified several steps the IRS can take to

improve processes that drive customer satisfaction, most importantly the need for the IRS to evaluate the entire customer experience with ACS instead of assessing only a “snapshot” in time.

13. The IRS Should Proactively Address Emerging Issues Such as ThoseArising From “Virtual Worlds.” By one estimate, about $1 billion in real dollarschanged hands in computer-based environments called “virtual worlds” in 2005.Over 16 million people are estimated to have active subscriptions to theseenvironments, many of which have their own virtual economies and currencies.However, IRS employees have been unable to respond to taxpayer inquiriesabout how to report transactions associated with them. Economic activities in

virtual worlds may present an emerging area of tax noncompliance, in partbecause the IRS has not provided guidance about whether and how taxpayersshould report such activities. To improve voluntary tax compliance, the NTArecommends that the IRS issue guidance addressing how taxpayers shouldreport economic activities in virtual worlds.

Examination Issues

14. Suitability of the Examination Process. Since 2000, the IRS hascontinuously increased the number of individual income tax return examinationsit conducts. The number more than doubled from 617,765 in FY 2000 to1,384,563 in FY 2007, with examinations completed by correspondenceaccounting for 83 percent of all individual taxpayer audits. Although taxpayersunderstandably do not like to be audited, the IRS should initially assume goodfaith on the part of taxpayers and avoid taking an unnecessarily adversarialapproach. The Internal Revenue Manual and IRS publications provideopportunities for the IRS to meet taxpayer needs and preferences throughout theexamination process, including allowing taxpayers to choose a method for conducting an examination (face-to-face versus correspondence), request atelephone discussion with the examiner, and even set up a payment agreementfor any taxes owed. Because the IRS often fails to meet taxpayer needs andpreferences due to limited resources or policy reasons, the resulting unsuitabilityof the examination process can lead to disparities in audit and customer satisfaction results, including tax assessments that sometimes reflect thetaxpayer’s inability to navigate the audit process rather than the amount trulyowed. The NTA recommends five actions to help the IRS address problems withthe suitability of the examination process, including directing its focussubstantially toward meeting taxpayer needs and preferences and immediatelyeliminating the so-called “combination letter” from the process.

15. The IRS Correspondence Examination Program Promotes PrematureNotices, Case Closures, and Assessments. In FY 2007, the IRS conducted 83

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percent of all individual income tax examinations exclusively by mail in an effortto expand its audit coverage. The program as currently designed, however, isplagued by problems that increase taxpayer burden. These problems include apreoccupation with closing cases rather than working with taxpayers to resolveaudit issues and an automated process that causes perpetual delays inresponding to taxpayer correspondence. These issues lead to premature notices,

premature case closures, and premature assessments, all of which drivetaxpayers to TAS for help and generate needless re-work for IRS employees.The NTA urges the IRS to protect taxpayers by requiring managers andemployees to adhere to the agency’s longstanding audit quality standards inconducting correspondence examinations.

Tax Administration Issues

16. The Impact of IRS Centralization on Tax Administration. Over the years,the IRS has centralized many of its major operations and programs. Thiscentralization has significantly changed the organizational structure,

management, work processes, and the quality of interaction between the IRSand taxpayers. When carried out correctly, centralization can significantly reduceredundancies and increase effectiveness. However, if the IRS fails to consider the impact of centralization on taxpayer service and compliance, it may harmtaxpayers. The IRS needs to do a better job of measuring the downstreamconsequences to taxpayers, including the impact on taxpayer service andcompliance, when evaluating the costs and benefits of centralization. The NTArecommends that the IRS establish a standard matrix that defines the project,provides background information, sets forth objectives, establishes tangibleproducts, quantifies expected benefits, and identifies necessary resources. TheIRS should then use this standard project matrix to evaluate programs anddetermine whether the anticipated benefits of centralization have been realized.

17. Incorrect Examination Referrals and Prioritization Decisions CauseSubstantial Delays in Amended Return Processing for Individuals. Everyyear, more than three million taxpayers file amended returns for various reasons,including the complexity of the tax code, changes in their circumstances, late-year tax legislation, and incomplete or inaccurate tax preparation software. Manyof these taxpayers experience unnecessary burden and delays. A cooperativeIRS-TAS study of TAS amended return cases found the average taxpayer waited26 weeks for the amended return to be processed before contacting TAS for assistance. These delays stem from the IRS not meeting its own processingguidelines, unnecessary referrals for audits, and management decisions to de-emphasize processing so-called “duplicate filings,” which occur when more thanone Form 1040 is filed with the same name and Social Security number. TheNTA recommends that the IRS allow individual taxpayers to file amended returnselectronically to reduce errors and shorten processing times, eliminateunnecessary audit referrals, and create a special unit to resolve duplicate filingcases as a top priority.

18. Inadequate Files Management Burdens Taxpayers. From FY 2005through FY 2008, the IRS refunded over 40 percent (more than $3.7 million) of

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the fees it collected for photocopies of taxpayers’ documents because it could notlocate the files the taxpayers needed. The IRS is required by law to efficientlymaintain and manage agency records, including electronic and paper files, asevidence of IRS policies, decisions, and operations. Both taxpayers and IRSemployees need prompt access to paper documents to resolve tax return issuesor verify taxpayer information, yet the IRS has failed to follow procedures and

implement safeguards for maintaining and managing paper files and records.This failure has contributed to complaints from taxpayers, practitioners, IRSemployees, and other stakeholders who experienced substantial delays or received the wrong taxpayer’s documents. Although control of the Files operationreverted back to the IRS in 2008 after being contracted out for the past twoyears, the transition has not resolved most of the associated problems. To further improve the Files operation, the NTA recommends the IRS take proactive stepsto develop a service-wide recordkeeping and paper-file management strategyand database, take steps to convert paper returns to an electronic format, andrevise relevant Internal Revenue Manual provisions to employ adequate qualitycontrol and specific timeliness measurements for expedited taxpayer files

requests.

19. The IRS Miscalculates Interest and Penalties But Fails to Correct TheseErrors Due to Restrictive Abatement Policies. A TAS study has found that theIRS is miscalculating the failure to pay penalty and could be negatively impactingabout two million taxpayer accounts annually. Moreover, the IRS’s manualcalculations of interest yields an accuracy rate of only 67.7 percent, which meansnearly one out of three restricted interest accounts are incorrectly computed. TheIRS is aware of, but has failed to correct, certain systemic problems that causepenalty and interest miscalculations. These incorrect calculations lead numeroustaxpayers to believe they have fully paid what the IRS says they owe, only toreceive subsequent bills for accruals of interest, penalties, or both. The IRSbears the cost of these inaccurate calculations, not only through rework byemployees but also by taxpayers’ reduced confidence in the IRS. The NTArecommends that the IRS consider allocating adequate resources towardplanning and programming to resolve common penalty and interest computationissues, revising pertinent Internal Revenue Manual sections so all taxpayers areentitled to accuracy reviews of interest and penalty calculations, and re-evaluating the overly complex restricted interest procedures to make certain thatall taxpayers receive accurate interest charges.

20. Inefficiencies in the Administration of the Combined Annual WageReporting Program Impose Substantial Burden on Employers and WasteIRS Resources. The Combined Annual Wage Reporting (CAWR) program isdesigned to ensure that employers accurately report annual wage data to the IRSand the Social Security Administration. If the IRS discovers a discrepancy in thewage and tax data reported by an employer, it issues a notice and requests thatthe employer provide information to resolve the discrepancy. However, theCAWR notices are not clearly written. As a result, employers are often unable toidentify the cause of the discrepancy and respond timely, which in turn may leadthe IRS to improperly impose penalties on the employers. From FY 2003 to FY2008, the IRS eventually abated 81 percent of the penalty dollars it previously

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assessed, causing substantial rework for the IRS and needlessly burdeningemployers. The NTA recommends that the IRS provide specific information aboutthe wage reporting discrepancy on notices, include the phone number for a liveassistor in the CAWR unit on notices, and continuously train its employees aboutwhen it is appropriate to assess CAWR penalties.

Status Update

The IRS’s Private Debt Collection (PDC) Initiative I 21. s Failing In MostRespects. IRS data now shows that the IRS’s Collection function outperformsprivate collection agencies (PCAs) in almost every way, collecting three times asmuch as the PCAs and resolving more cases earlier in the process. Overall, thePCAs have only collected about four percent of the outstanding tax balancesassigned to them, bringing in less than $56 million in commissionable paymentson $1.46 billion of tax debt. The NTA has addressed a number of the PDCinitiative’s deficiencies in prior Annual Reports to Congress and testimony. Manyof these concerns remain while new ones have arisen. In addition, despite initial

expectations that the IRS could learn about state-of-the-art collection practices inprivate industry through its work with PCAs, the IRS has now acknowledged thatit has not been able to identify any “best practices” from the private debtcollection industry. The NTA remains concerned that there is an inherentlygreater risk to taxpayer compliance, taxpayer rights, and taxpayer privacy whentax collection is outsourced to private, for-profit businesses. Given this risk andthe PCAs’ unambiguous underperformance as compared with the IRS’s ownCollection function, the NTA continues to believe that the PDC program shouldbe terminated.

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The Most Litigated Tax Issues2.20 IRC§7803(c)(2)(B)(ii)(X) requires the National Taxpayer Advocate to identify theten tax issues most often litigated in the federal courts and to classify those issues bythe category of taxpayer affected. The following is a table the most litigated asdetermined by TAS:

Gross Income 68 8 12% 13710

7%

Collection Due Process 104 8 8% 7510

13%

Summons Enforcement 108 1 1% 38 8 21%

Trade or Business Expense 7821

27% 3810

26%

Accuracy-Related Penalty 47 8 17% 40

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7 43%

Civil Damages for Certain Unauthorized Collection 60 8 13% 18 1 6%

Failure to File and Estimated Tax Penalties 47 5 11% 19 3 16%

Joint and Several Liability 27 5 19% 23 7 30%Frivolous Issues Penalty (and analo-gous appellate-level sanctions)

45 8 18% 4 1 25%

Family Status Issues 33 2 6% 1 0 0%

Totals 61774

12% 39367

17%

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Table 20. Taxpayer Advocate Service: Postfiling Taxpayer Assistance Program, byTypeof Issue and Relief, Fiscal Year 2008

Type of issue and relief Number

Percentage of total

Applications for taxpayer assistance received, by type of issue [1]:

Total 274,051 100

Processing amended returns 21,963 8

Levies 17,082 6

Other refund inquiries/issues 14,817 5

Injured spouse claims 14,238 5

Earned income tax credit 13,489 5

Automated Substitute for Return Program [2] 12,419 5

Expedite refund requests 11,376 4

Criminal investigation 10,152 4

Processing original returns 10,021 4

Automated Underreporter Program [3] 9,594 4

All others 138,900 51

Applications for taxpayer assistance closed, by type of resolution [1]:

Total 260,439 100

Relief provided to taxpayer, total 189,046 73

Taxpayer Assistance Order issued [4,5] 50 [6]

No Taxpayer Assistance Order issued [4] 188,996 73

Full relief 176,209 68

Individual taxpayer issue [7] 158,198 61

Systemic issue [8] 18,011 7

Partial relief 12,787 5

Individual taxpayer issue [7] 11,643 4

Systemic issue [8] 1,144 [6]

No relief provided to taxpayer, total 71,393 27

Taxpayer Assistance Order rescinded [4,5] 8 [6]

No Taxpayer Assistance Order issued [4] 71,385 27

No response from taxpayer 35,401 14

Relief provided prior to Taxpayer Advocate Service intervention 14,526 6

Taxpayer withdrew application for assistance 3,530 1

Tax law precluded relief 1,913 1

Hardship not related to revenue laws 1,276 [6]

Hardship not validated 845 [6]All others 13,894 5

Congressional inquiries [9] 22,097 N/A

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3. ENFORCEMENT

Highlights of 2008 Enforcement3.10 The IRS continues increase its enforcement activities. he IRS enforcementefforts increased again in fiscal year 2007. For instance, during 2007 the IRS audited 84percent more returns of individuals with incomes of $1 million or more than during 2006.Overall, enforcement revenue reached $59.2 billion, up from $48.7 billion in 2006 andnearly $34.1 billion in 2002. IRS collected $56.4 billion in enforcement revenue in 2008,down $2.8 million from 2007, Stiff said. She said 2007 was a record-breaking year for enforcement and saw some anomalies that did not repeat themselves in 2008, such as

a few large corporate closures and cases closed out during tax shelter inventories. Auditenforcement revenue decreased from $23.8 billion to $20.6 billion; and Collectionenforcement revenue decreased slightly from $31.8 billion to $31.1 billion

Individual Enforcement3.20 The number of audits of individual returns increased slightly in 2008. Those whoearned less than $200,000 had about a 1 percent chance of being audited. Those withincomes of $200,000 and more had about a 3 percent chance of being audited.

Millionaires3.30 Meanwhile, taxpayers with incomes of more than $1 million had a 5.6 percent

chance of being audited, a drop from 6.8 percent the year before. The number of auditsfor millionaires dropped even though their ranks increased by nearly 54,000.

“We essentially audited as many millionaires as in the previous year, but there weremore returns,” said Terry Lemons, an I.R.S. spokesman. The I.R.S. said it audited justover 23,000 returns of the nearly 340,000 filed by millionaires in 2007. That compareswith just over 21,800 returns filed by 398,000 millionaires in 2008.

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The income of the 400 wealthiest Americans swelled in 2006, to an average of $263million, according to I.R.S. data. Since 1996, this group’s share of the nation’s totalwealth has nearly doubled to more than 22 percent.

Businesses3.40 On the business front, the overall number of audits rose slightly, but dropped as

a percentage of businesses that submitted a tax return. More emphasis was placed onmedium and large corporations, as audit rates increased slightly for those companieswith more than $50 million in assets and dropped slightly for those with less than $50million in assets. According to 2008 IRS enforcement data released by the IRS audited15.3% of returns of corporations with assets of $10 million or more. That is the lowestaudit coverage level since 2003 and down from a 20% coverage rate in 2005.

The tax audit rates of the largest companies are less than half what they were 20 yearsago while more small and mid-size businesses are coming under scrutiny, according toan organization that monitors the Internal Revenue Service. The Syracuse University-based Transactional Records Access Clearinghouse has described a "historic collapse"

in audits for corporations holding assets of $250 million or more. About 26 percent of them were audited in the 2007 budget year compared with 34 percent in 2006 and 43percent in 2005.

Collection Enforcement3.50 Overall, some of our most common enforcement tools at the IRS also showedincreases:

The IRS filed 2.6 million levies in 2008 and 3.8 million in 2007. It filed 683,659liens in 2007 and 768,168 liens during 2008, a substantial increase from fiveyears earlier.

Electronic Filing IRS Webpage3.60 More taxpayers chose to file electronically in 2008 than during the prior year, with58 percent of individual tax filers choosing to e-file in 2008, up from 57 percent in 2007.More people visited the IRS internet site, IRS.gov. The IRS site was accessed morethan 217 million times in 2007 and 347 million times in 2008.

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15



16



United States, totalTaxable returns: u Individual income tax

w Returns with total

Table 9a. Exami

Examination, by

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Table 9b. Examination Coverage: Individual Income Tax ReturnsExamined, by Size of Adjusted Gross Income, Fiscal Year 2008

Returns filed inCalendar Year

2007 (percent) [2]

Examinationcoverage in Fiscal

Year 2008 (percent)

[3]Size of adjusted gross income [1]

All returns [4] 100.00 1.00

No adjusted gross income [5] 2.13 2.15

$1 under $25,000 40.51 0.90

$25,000 under $50,000 24.31 0.72

$50,000 under $75,000 13.44 0.69

$75,000 under $100,000 7.99 0.69

$100,000 under $200,000 8.69 0.98

$200,000 under $500,000 2.25 1.92

$500,000 under $1,000,000 0.43 2.98

$1,000,000 under $5,000,000 0.23 4.02

$5,000,000 under $10,000,000 0.02 6.47

$10,000,000 or more 0.01 9.77

Table 16. Delinquent Collection Activities,Fiscal Years 2005-2008[Money amounts are in thousands of dollars.]

Activity 2005 2006 2007 2008

Returns filed with additional tax due:

Total amount collected [1] [r] 27,615,348 [r] 29,172,915 [r] 31,952,399 28,465,648

Taxpayer delinquent accounts (thousands):

Number in beginning inventory 5,981 6,478 7,074 8,240

Number of new accounts 5,870 6,100 7,146 7,099

Number of accounts closed 5,373 5,504 5,980 6,107

Ending inventory:

Number 6,478 7,074 8,240 9,232

Balance of assessed tax, penalties, and interest [2] 57,594,901 69,555,590 83,488,988 94,357,717

Returns not filed timely:

Delinquent return activity:

Net amount assessed [3] 22,765,462 23,305,535 30,287,802 24,888,918

Amount collected with delinquent returns 3,584,255 3,905,764 3,968,163 3,773,528

Taxpayer delinquency investigations (thousands) [4]:

Number in beginning inventory 3,022 3,658 3,874 3,732

Number of new investigations 2,558 2,373 2,587 1,972

Number of investigations closed 1,922 2,157 2,729 2,271

Number in ending inventory 3,658 3,874 3,732 3,433

Offers in compromise (thousands) [5]:

Number of offers received 74 59 46 44

Number of offers accepted 19 15 12 11

Amount of offers accepted 325,640 283,746 228,975 200,103

Number of notices of Federal tax liens filed 522,887 629,813 683,659 768,168

Number of notices of levy served on third parties 2,743,577 3,742,276 3,757,190 2,631,038

Number of seizures 512 590 676 610

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Table 18. Criminal Investigation Program, by Status or Disposition, Fiscal Year 2008

Status or disposition Total Legal source taxcrimes [1]

Illegal sourcefinancial crimes [2]

Narcotics-related financial crimes[3]

(1) (2) (3) (4)

Investigations initiated 3,749 1,531 1,441 777

Investigations discontinued 1,259 684 409 166

Referrals for prosecution 2,785 893 1,204 688

Indictments and informations [4] 2,547 757 1,164 626

Convictions 2,144 666 958 520

Sentenced 1,957 645 864 448

Incarcerated [5] 1,583 498 696 389

Percentage of those sentencedwho were incarcerated [5]

80.9 77.2 80.6 86.8

State Information Sharing3.70 The IRS is engaged in extensive information sharing with state tax authoritieswhich allows it to more effectively discover nonfilers and other tax omissions. The IRSFed/State Program saves government resources by partnering with state governmentagencies to enhance voluntary compliance with tax laws. This includes facilitating theexchange of taxpayer data, leveraging resources, and providing assistance to taxpayersto improve compliance and communications.

The IRS also assists state agencies by identifying and reporting information onemerging tax administration issues. This is accomplished through the IRS entering intoagreements to share information with the state agencies. There are more than 900 jointefforts underway. Examples include the sharing of examination reports, abusive schemedata, and licensing verification.

Federal Tax Returns and Return Information.3.80 “Tax returns” include Form 1040, U.S. Individual Income Tax Return, as well asother income tax and information returns, such as Form 941, Employer’s QuarterlyFederal Tax Return; Form 730, Tax on Wagering; Form 1120, U.S. Corporation IncomeTax Return; various Forms 1099, U.S. Information Returns; and Form W-2, Wage andTax Statement. The states in turn share similar return information with the IRS. Sincestates have extensive information on business revenue on sales tax returns that info isa valuable resource for discovering nonfiling and underreporting.

Return Information3.90 “Return information” includes everything else that has anything to do with aperson’s potential tax liability. Examples are any information extracted from a return likenames of dependents, business location, or bank account information; the taxpayer'sname, mailing address, or identification number; information on whether a return hasbeen or will be examined or subject to any other investigation; information contained ontranscripts of accounts or on IRS computer systems; the fact of filing a return; andwhether a taxpayer has a balance due account.

19



IRS Study Provides Tax Gap Estimate3.100 Internal Revenue Service officials have announced that they have updated their estimates of the Tax Year 2001 tax gap based on the National Research Program(NRP). The updated estimate of the overall gross tax gap for Tax Year 2001 – thedifference between what taxpayers should have paid and what they actually paid on a

timely basis – comes to $345 billion. This figure falls at the high end of the range of $312 billion to $353 billion per year, an estimate released in March, 2005.

Sources of Misreporting3.110 Though the net misreporting percentage varies by category of income, therates reflect that compliance is highest where there is third-party reporting or withholding. Simply stated, compliance is highest where there is third-partyreporting.

For example, one percent of all wage, salary, and tip income ismisreported, contributing an estimated $10 billion to the tax gap. Incontrast, nonfarm sole proprietor income, which is reported on a ScheduleC and is subject to little third-party reporting or withholding, has a netmisreporting percentage of 57 percent, contributing about $68 billion to thetax gap.

Understanding the Tax Gap3.120 The Internal Revenue Service developed the concept of the tax gap as a way togauge taxpayers’ compliance with their federal tax obligations. The tax gap measuresthe extent to which taxpayers do not file their tax returns and pay the correct tax ontime.

Components of the Tax Gap3.130 The tax gap can be divided into three components:

• nonfiling,

• underreporting and

• underpayment.

Underreporting3.140 Of these three components, underreporting of income tax, employment taxes andother taxes represents about 80 percent of the tax gap. The single largest sub-component of underreporting involves individuals understating their incomes, taking

improper deductions, overstating business expenses

20



and erroneously claiming credits. Individual underreporting represents about half of thetotal tax gap. Individual income tax also accounts for about half of all tax liabilities.

Underreporting Is Largest Component3.150 Underreporting noncompliance is the largest component of the tax gap.Preliminary estimates show underreporting accounts for more than 80 percent of thetotal tax gap, with non-filing and underpayment at about 10 percent each. Individualincome tax is the single largest source of the annual tax gap, accounting for about two-thirds of the total. For individual underreporting, more than 80 percent comes fromunderstated income, not overstated deductions.

Noncompliance Rising3.160 Overall, the noncompliance rate is from 15 percent to 16.6 percent of the true taxliability. The old estimate, derived from compliance data for Tax Year 1988 and earlier,was 14.9 percent.

Areas Where Compliance Has Decreased3.170 Among the areas where taxpayer compliance appears to have worsened are:

• Reporting of net income from flow-through entities, such as partnerships and Scorporations

• Reporting of proprietor income and expenses, such as gross receipts, bad debtsand vehicle expenses

• Reporting of various types of deductions

21



Areas With Improved Compliance3.180 Among the areas where compliance seems to have improved is the reporting of farm income. Overall, compliance is highest where there is third-party reporting and/or withholding.

For example, most wages, salaries and tip compensation are reported byemployers to the IRS through Form W-2. Preliminary findings from theNRP indicate that less than 1.5 percent of this type of income ismisreported on individual returns. IRS researchers anticipate identifyingother specific areas of deterioration and improvement in the comingmonths as they complete the detailed analysis of the study’s data.

Tax Year 2001 Gross Tax Gap by Type of Tax and Type of Noncompliance (in $ billions

Type of Tax

Type of Noncompliance TOTAL

NonfilingGap

Underreporting Gap

Underpayment Gap*

Amount

PercentDistributio

n

Individual Income Tax

25 197 23.4 245 71.1%

Corporation Income Tax

# 30 2.3 32 9.3%

Employment Tax # 54 5.0 59 17.0%

Estate & Gift Tax 2 4 2.1 8 2.4%

Excise Tax # # 0.5 1 0.1%

TOTAL Percent

Distribution

27 7.8% 285 82.5% 33.3 9.7% 345

100.0%

Businesses More Likely to Not Comply.3.190 Most of the understated income comes from business activities, not wages or investment income. Compliance rates are highest where there is third-party reporting or withholding. Preliminary findings show less than 1.5 percent of wages and salaries aremisreported.

NRP Subchapter S Corporation Study Overview3.200 During 2007 & 2008 the IRS continued its NRP of S corporations. The study hasthe following elements:

• Random Sample consists of approximately 5,000 returns from SmallBusiness/Self-Employed (SB/SE) and Large & Mid-Size Business (LMSB)taxpayers covering two tax years, TY2003 and TY2004.

• The study follows the standard NRP methodology:

• Each tax year will have an examination cycle of approximately 24 months.

• The TY 2003 portion of the sample (1,200 returns) is complete, and these casesare now in the hands of Revenue Agents.

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• NRP is selecting the TY 2004 (3,800 returns) portion of the sample. Expectresults by December 2008

Tax Year 2001 Gross Tax Gap by Type of Tax and IRS Operating Division (in $ billions)

Type of Tax

IRS Operating Division TOTAL

Wage &Invest-ment

Small Business / Self-Employed Large &

Mid-SizeBusines

Tax-Exempt& Gov’tEntities

TaxGap

Non-Compliance

RateIndi-

vidualsCorpor-ation

T o t a l

IndividualIncome Tax

50 195 N/A 195 N/A N/A 245 20.9%

CorporationIncome Tax *

N/A N/A 6 6 25 1 32 18.5%

Employment Tax 0 40 7 47 8 4 59 8.1%

S e l f -Employment

N/A 39 N/A 39 N/A N/A 39 51.9%

FICA andFUTA

0 1 7 8 8 4 20 3.0%

Estate & Gift Tax # 8 N/A 8 N/A N/A 8 22.9%

ExciseTax †

0 0 0 0 0 0 1

TOTAL GapPercent of Total

5 014.5%

24370.5%

144.0%

25774.5%

3 49.8%

41.2%

345100.0%

NoncomplianceRate

12.1% 27.1% 5.3% 22.3% 8.0% 3.4% 16.3%

* Unrelated Business Income Tax is shown as corporation income tax. † Includes

underpayment gap only.

# No estimate is available for this component.

Amounts may not add to totals due to rounding. Zeros indicate amounts less than $0.5 billion. See Figure 1 regardingreliability of estimates.

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Tax Year 2001 Individual Income Tax Underreporting Gap and Net MisreportingPercentage (NMP) Associated with Income and Offset Line Items

Type of Income or OffsetUnderreporting

Gap ($B)

NetMisreporting

Percentage †Total Underreporting Gap 197 18%

Underreported Income 166 11%

Non-Business Income 56 4%

Wages, salaries, tips 10 1%

Interest income 2 4%

Dividend income 1 4%

State income tax refunds 1 12%

Alimony income * 7%

Pensions & annuities 4 4%

Unemployment compensation * 1 1 %

Social Security benefits 1 6%

Capital gains 11 12%

Form 4797 income 3 64%

Other income 23 64%

Business Income 109 43%

Non-farm proprietor income 68 57%

Farm income 6 72%

Rents & royalties 13 51%

Partnership, S-Corp,Estate & Trust, etc.

22 18%

Overreported Offsets to Income 15 4%

Adjustments -3 -21 %

SE Tax deduction§ -4 -51%

All other adjustments 1 6%

Deductions 14 5%

Exemptions 4 5%

Credits 17 26%

Net Math Errors (non-EITC) *

† The amount of income or offset misreported divided by the amount that should have been reported. The NRP contains an adjustmentfor income amounts that were underreported, but does not have a corresponding adjustment for offset amounts that were notclaimed.

* Less than $0.5 billion.

§ Taxpayers understate this adjustment because they understate their self-employment income and, thereby, their self-

employment tax. Therefore, the gap associated with this item is negative.

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25



2009 Budget3.210 The Internal Revenue Service will hire more than 3,500 frontline enforcementemployees as it embarks on its largest hiring initiative in recent history, DeputyCommissioner for Services and Enforcement Linda E. Stiff said March 30. This number includes more than 2,000 new revenue agents and revenue officers, Stiff said during aluncheon at the Tax Executives Institute's 59th Midyear Conference. Several hundred of these new hires will be directed at large corporate compliance, and as many as 700 willbe hired to deal with international issues, she said.

The hiring push comes on the heels of the fiscal year 2009 omnibus bill, which contains$630 million above IRS's current funding level for it to address noncompliance throughimproved technology, collection efforts, and audits, Stiff said. The Obama administrationand the Treasury Department are strongly supporting IRS in its efforts to combatabuses in the international arena, Stiff said. IRS's strategy in this area includes anintegrated approach composed of separate yet complementary programs, such asinternational collaboration and information sharing, as well as information reporting andwithholding, she said.1

2009 Budget3.220 The FY 2009 President’s Budget for the IRS increased funding as part of astrategy to improve compliance by focusing on the following priorities:

• Improving voluntary compliance and reducing the tax gap by:

• Increasing front-line enforcement resources,

•

Improving taxpayer service options,

• Enhancing research, and

• Implementing legislative and regulatory changes.

• Maintaining balance between taxpayer service and enforcement.

• Investing in technology to improve infrastructure, modernize, and increase theproductivity of existing resources.

1 Mar. 31 -- BNA, Inc. Daily Tax Report

26



Overview - Abusive Return Preparer

27



3.230 The IRS continues to expand and enhance its abusive preparer program. Theprogram was developed to enhance compliance in the return-preparer community byengaging in enforcement actions and/or asserting appropriate civil penalties againstunscrupulous or incompetent return preparers. Bad preparers are a significant problemfor both the IRS and taxpayers.

Return preparer fraud generally involves the preparation and filing of false income taxreturns by preparers who claim inflated personal or business expenses, falsedeductions, unallowable credits or excessive exemptions on returns prepared for their clients. This includes inflated requests for the special one-time refund of the long-distance telephone tax. Preparers may also manipulate income figures to obtain taxcredits, such as the Earned Income Tax Credit, fraudulently.

In some situations, the client (taxpayer) may not have knowledge of the false expenses,deductions, exemptions and/or credits shown on their tax returns. However, when theIRS detects the false return, the taxpayer — not the return preparer — must pay theadditional taxes and interest and may be subject to penalties.

Abusive Preparer Prosecutions

FY 2008 FY 2007 FY 2006

Investigations Initiated 214 218 197

Prosecution Recommendations 134 196 153

Indictments/Informations 142 131 135

Sentenced 124 123 109

Incarceration Rate* 81.5% 81.3% 89.0%

Avg. Months to Serve 18 19 18

Audits of 30 Clients3.240 Another aspect of the IRS preparer program is identifying suspect preparers andaudited their clients. If during an examination a revenue suspects that some of thedeficiencies on a return were caused by the preparer she can refer the matter to anarea coordinator. After review the coordinator can initiate a project on the preparer. Thepreparer is sent a letter notifying her that she has been selected for a project and 30 of

her client's returns are audited. If significant deficiencies are found then the IRS maychoose one of several courses of action including:

• Referral to Criminal investigation

• Referral to the office of professional liability

• Preparer penalties

• Referral to Department of justice to seek an injunction ordering the preparer tocease filing tax returns.

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4. EXAMINATION

Examination Reengineering4.10 Changes to the tax law, technology, and the business environment necessitatedthe IRS to make changes to its examination process. SB/SE initiated ExaminationReengineering in order to improve the quality and consistency of its examinations

across the country. SB/SE gathered feedback from multiple sources to design the newfield and office examination processes. Since 2003 the IRS has been implementing thisprocess.

Some of the features of the reengineered field examination process are:

• Clearly communicated expectations of both the taxpayer and field agent throughmandatory discussions between the revenue agent and taxpayer regarding thespecific examination issues, required documentation, and a mutually agreedupon date to complete the examination.

•

At the beginning of each examination, field agents and their managers will meetto discuss the agent’s approach to the examination, the plan to close theexamination, and the mutual commitment date arrived at with the taxpayer.

• Field agents will use standardized templates for every examination issue togather the information necessary to resolve issues. Agents will use astandardized guide when deciding if additional issues need to be added to theexamination. The agent will explain to the taxpayer if any additional issues areincluded in the examination.

The Dirty Dozen

4.20 Each year the IRS announces its Dirty Dozen and urges people to avoid thesecommon schemes: The 2009 list was as follows:

1. Phishing is a tactic used by Internet-based scam artists to trickunsuspecting victims into revealing personal or financial information. Thecriminals use the information to steal the victim’s identity, access bank accounts,run up credit card charges or apply for loans in the victim’s name.

Phishing scams often take the form of an e-mail that appears to come from alegitimate source, including the IRS. The IRS never initiates unsolicited e-mailcontact with taxpayers about their tax issues. Taxpayers who receive unsolicited

e-mails that claim to be from the IRS can forward the message [email protected]. Further instructions are available at IRS.gov. To date,taxpayers have forwarded scam e-mails reflecting thousands of confirmed IRSphishing sites. If you believe you have been the target of an identity thief,information is available at IRS.gov.

2. Hiding Income Offshore The IRS aggressively pursues taxpayers andpromoters involved in abusive offshore transactions. Taxpayers have tried toavoid or evade U.S. income tax by hiding income in offshore banks, brokerage

29



accounts or through other entities. Recently, the IRS provided guidance toauditors on how to deal with those hiding income offshore in undisclosedaccounts. The IRS draws a clear line between taxpayers with offshore accountswho voluntarily come forward and those who fail to come forward.

Taxpayers also evade taxes by using offshore debit cards, credit cards, wire

transfers, foreign trusts, employee-leasing schemes, private annuities or lifeinsurance plans. The IRS has also identified abusive offshore schemes includingthose that involve use of electronic funds transfer and payment systems, offshorebusiness merchant accounts and private banking relationships.

3. Filing False or Misleading Forms The IRS is seeing scam artists filefalse or misleading returns to claim refunds that they are not entitled to. Frivolousinformation returns, such as Form 1099-Original Issue Discount (OID), claimingfalse withholding credits are used to legitimize erroneous refund claims. The newscam has evolved from an earlier phony argument that a “strawman” bankaccount has been created for each citizen. Under this scheme, taxpayers

fabricate an information return, arguing they used their “strawman” account topay for goods and services and falsely claim the corresponding amount aswithholding as a way to seek a tax refund.

4. Abuse of Charitable Organizations and Deductions The IRS continuesto observe the misuse of tax-exempt organizations. Abuse includesarrangements to improperly shield income or assets from taxation and attemptsby donors to maintain control over donated assets or income from donatedproperty. The IRS also continues to investigate various schemes involving thedonation of non-cash assets, including easements on property, closely-heldcorporate stock and real property. Often, the donations are highly overvalued or the organization receiving the donation promises that the donor can purchase theitems back at a later date at a price the donor sets. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and new definitionsof qualified appraisals and qualified appraisers for taxpayers claiming charitablecontributions.

5. Return Preparer Fraud Dishonest return preparers can cause manyheadaches for taxpayers who fall victim to their ploys. Such preparers derivefinancial gain by skimming a portion of their clients’ refunds and charging inflatedfees for return preparation services. They attract new clients by promising largerefunds. Taxpayers should choose carefully when hiring a tax preparer. As thesaying goes, if it sounds too good to be true, it probably is. No matter whoprepares the return, the taxpayer is ultimately responsible for its accuracy. Since2002, the courts have issued injunctions ordering dozens of individuals to ceasepreparing returns, and the Department of Justice has filed complaints againstdozens of others, which are pending in court.

6. Frivolous Arguments Promoters of frivolous schemes encourage peopleto make unreasonable and unfounded claims to avoid paying the taxes they owe.The IRS has a list of frivolous legal positions that taxpayers should stay awayfrom. Taxpayers who file a tax return or make a submission based on one of the

30



positions on the list are subject to a $5,000 penalty. More information is availableon IRS.gov.

7. False Claims for Refund and Requests for Abatement This scaminvolves a request for abatement of previously assessed tax using Form 843,Claim for Refund and Request for Abatement. Many individuals who try this have

not previously filed tax returns. The tax they are trying to have abated has beenassessed by the IRS through the Substitute for Return Program. The filer usesForm 843 to list reasons for the request. Often, one of the reasons given is"Failed to properly compute and/or calculate Section 83-Property Transferred inConnection with Performance of Service."

8. Abusive Retirement Plans The IRS continues to uncover abuses inretirement plan arrangements, including Roth Individual RetirementArrangements (IRAs). The IRS is looking for transactions that taxpayers areusing to avoid the limitations on contributions to IRAs as well as transactions thatare not properly reported as early distributions. Taxpayers should be wary of

advisers who encourage them to shift appreciated assets into IRAs or companiesowned by their IRAs at less than fair market value to circumvent annualcontribution limits. Other variations have included the use of limited liabilitycompanies to engage in activity which is considered prohibited.

9. Disguised Corporate Ownership Some taxpayers form corporations andother entities in certain states for the primary purpose of disguising the ownershipof a business or financial activity. Such entities can be used to facilitateunderreporting of income, fictitious deductions, non-filing of tax returns,participating in listed transactions, money laundering, financial crimes, and eventerrorist financing. The IRS is working with state authorities to identify theseentities and to bring the owners of these entities into compliance.

10. Zero Wages Filing a phony wage- or income-related information return toreplace a legitimate information return has been used as an illegal method tolower the amount of taxes owed. Typically, a Form 4852 (Substitute Form W-2)or a “corrected” Form 1099 is used as a way to improperly reduce taxableincome to zero. The taxpayer also may submit a statement rebutting wages andtaxes reported by a payer to the IRS. Sometimes fraudsters even include anexplanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issuea corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist anytemptation to participate in any of the variations of this scheme.

11. Misuse of Trusts For years, unscrupulous promoters have urgedtaxpayers to transfer assets into trusts. While there are many legitimate, validuses of trusts in tax and estate planning, some promoted transactions promisereduction of income subject to tax, deductions for personal expenses andreduced estate or gift taxes. Such trusts rarely deliver the promised tax benefitsand are being used primarily as a means to avoid income tax liability and hideassets from creditors, including the IRS.

31



The IRS has recently seen an increase in the improper use of private annuitytrusts and foreign trusts to divert income and deduct personal expenses. As withother arrangements, taxpayers should seek the advice of a trusted professionalbefore entering into a trust arrangement.

12. Fuel Tax Credit Scams The IRS is receiving claims for the fuel tax credit

that are unreasonable. Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. But someindividuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving thefuel tax credit is considered a frivolous tax claim, potentially subjecting those whoimproperly claim the credit to a $5,000 penalty.

5. APPEALS

Strategic Priorities:5.10 Appeals has set forth the following as its strategic priorities for 2009:

• Increase taxpayer awareness of the Appeals process and their rights within theprocess

• Increase taxpayer awareness of alternative dispute resolution programs

• Improve our processes to meet customer needs and expectations and to reducethe length of the Appeals process while spending the right amount of time witheach taxpayer

• Promote employee productivity, engagement, and satisfaction

Campus Appeals Program5.20 The campus appeals program diminishes taxpayer rights. Any appeal from a

compliance generated notice is assigned to the campus appeals program. The campusappeals personnel are poorly trained and lack field experience. Their incompetencestarkly contrasts with the well trained experienced former revenue agents and revenueofficers assigned to the local appeals offices. When your client receives a notice from acampus allowing an appeal your protest should always request that your client be givena face to face conference in your local office.

OIC and TFRP Mediation and Arbitration5.30 During a test period which began in December 2008 Appeals will seekappropriate OIC and TFRP cases for both mediation and arbitration during the two-year test period in order to evaluate the effectiveness of alternative dispute resolution for

such cases.

During the two-year test period, effective from the date of publication of thisannouncement, Appeals will initially offer mediation and arbitration for OIC and TFRPcases for taxpayers whose appeals are considered at an Appeals office located in oneof the following cities:

32



Atlanta, GeorgiaChicago, IllinoisCincinnati, OhioHouston, TexasIndianapolis, Indiana

Louisville, KentuckyPhoenix, ArizonaSan Francisco, California

Application Process5.40 Either the taxpayer or Appeals may submit a request to mediate or arbitrate after consulting with and obtaining the concurrence of the other party. A taxpayer may submita request to mediate or arbitrate by sending a written request to the appropriateAppeals Team Manager and a copy to:

Chief of Appeals

Attn: Tax Policy & Procedure —Collection & Processing1099 14th St. NW, Suite 4200 EastWashington, DC 20005

For an OIC case, the written request to mediate or arbitrate should include:

►The taxpayer’s name, address, and taxpayer identification number, and thename, title, address, and telephone number of the person to contact;►The name of the Appeals Team Manager, Appeals Officer, or SettlementOfficer;►The taxable periods involved;►A detailed description of the issue(s) for which the taxpayer is requestingmediation or arbitration, including both the specific dollar amount and the basisby which that amount was determined; and►A representation that the disputed issue is not an excluded issue listed insection 4.01 above or in Revenue Procedure 2002-44 or Revenue Procedure2006-44.

TFRP5.50 For a TFRP case, the written request to mediate or arbitrate should contain itemsabove and a detailed explanation of the taxpayer’s position, including explanations of the following (where applicable):

►Why the taxpayer was not required to collect, truthfully account for, and payover the income, employment or excise taxes;►Why the taxpayer did not willfully fail to collect or truthfully account for and payover such tax, or willfully attempt in any manner to evade or defeat the paymentof such tax; and►Why the computation of the Trust Fund Recovery Penalty should reflectpayment(s) designated specifically to the trust fund portion of the unpaid tax.

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If the taxpayer wants to use a non-IRS co-mediator (at the taxpayer’s expense) or anon-IRS arbitrator (expense shared equally by the taxpayer and Appeals), theapplication should state this preference.

Table 21. Appeals Workload, by Type of Case, Fiscal Year 2008

Type of case Casesreceived [1]

Casesclosed [1]

Cases pendingSeptember 30, 2008 [1]

(1) (2) (3)

Total cases [2] 115,819 106,722 59,899

Examination 42,990 37,354 28,565

Collection due process 35,760 33,981 16,601

Offers in compromise 10,558 10,311 4,865

Penalty appeals 10,365 9,139 3,590

Innocent spouse 4,041 3,993 2,237

Industry cases 1,398 1,288 1,593

6. USEFUL INFORMATION FOR PRACTITIONERS

Whistleblower Reforms6.10 Tax Relief and Health Care Act of 2006 reforms the reward program for individuals who provide information to IRS regarding violations of the tax laws for information provided on or after the enactment date. Specifically, the Act establishes areward range for such 'whistleblowers' of 15% to 30% of proceeds collected by IRS(subject to certain exceptions) where the amount in dispute exceeds $2,000,000. For

awards for individuals the income must exceed $200,000. It also provides IRS withregulatory authority to create a Whistleblower Office to administer the program. ( CodeSec. 7623, as amended by Act Sec. 406) An above-the-line deduction is allowed for attorneys' fees and court costs related to whistleblower rewards (Code Sec. 62(a)(21),as amended by Act Sec. 406(a)(3)).

Mortgage Relief Act6.20 The Mortgage Relief Act, effective for indebtedness discharged on or after Jan.1, 2007 and before Jan. 1, 2010, generally allows taxpayers to exclude up to $2 millionof mortgage debt forgiveness on their principal residence. Specifically, under theMortgage Relief Act, gross income doesn't include any discharge of qualified principal

residence indebtedness. (Code Sec. 108(a)(1)(E)) Qualified principal residenceindebtedness is acquisition indebtedness under Code Sec. 163(h)(3)(B) with respect tothe taxpayer's principal residence, but with a $2 million limit ($1 million for marriedindividuals filing separately). (Code Sec. 108(h)(2)) “Principal residence” has the samemeaning as under the home sale exclusion rules of Code Sec. 121. (Code Sec. 108(h)(5)) Acquisition indebtedness of a principal residence is indebtedness incurred in theacquisition, construction, or substantial improvement of an individual's principalresidence that is secured by the residence. It includes refinancing of debt to the extent

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the amount of the refinancing doesn't exceed the amount of the refinancedindebtedness. (Joint Committee on Taxation JCX-86-07)

Basis Reduction6.30 The basis of the taxpayer's principal residence is reduced by the excludedamount, but not below zero. (Code Sec. 108(h)(1))

Qualified Principal Residence Indebtedness6.40 If any loan is discharged, in whole or in part, and only part of the loan is qualifiedprincipal residence indebtedness, the mortgage forgiveness exclusion applies only to somuch of the amount discharged as exceeds the amount of the loan (as determinedimmediately before the discharge) which is not qualified principal residenceindebtedness. (Code Sec. 108(h)(4)) The exclusion doesn't apply to a loan dischargedon account of services performed for the lender or any other factor not directly related toa decline in the value of the residence or to the taxpayer's financial condition. Theexclusion also doesn't apply to a taxpayer in a Title 11 bankruptcy. (Code Sec. 108(h)(3)) An insolvent taxpayer (other than one in a Title 11 bankruptcy) can elect to have the

mortgage forgiveness exclusion not apply and can instead rely on the Code Sec. 108(a)(1)(B) exclusion for insolvent taxpayers. (Code Sec. 108(a)(2))

Misclassified Workers6.50 Employees working for employers who failed to withhold Social Security andMedicare taxes should use new Form 8919 to report and pay their share of these taxes.This includes section 530 employees — that is, people who work for employers claimingrelief from federal payroll taxes under section 530 of the Revenue Act of 1978. It alsoincludes employees who are treated as independent contractors but who have receiveda determination letter from the IRS which states they are employees.

Workers who believe they are misclassified as independent contractors can file FormSS-8 with the IRS and request a determination of their worker classification. For employees, the Social Security tax rate is 6.2 percent and the Medicare tax rate is 1.45percent. Normally, employers withhold these taxes from workers’ pay, match theseamounts and turn over the combined amounts to the IRS. Workers, properly classifiedas independent contractors, should not use Form 8919 but instead, continue to useSchedule SE. IRS Publication 1779 has further details on employee versus independentcontractor status.

Misclassification6.60 A 2009 TIGTA report says IRS still needs to do more to identify misclassifiedworkers [Audit Report No. 2009-30-035]: The Treasury Inspector General for TaxAdministration (TIGTA) has issued an audit report that evaluates the effectiveness of IRS actions with respect to identifying misclassified workers. The report notes that the“misclassification of employees as independent contractors is a nationwide issueaffecting millions of workers that continues to grow and contribute to the tax gap.”Workers are frequently misclassified for a variety of reasons, either intentionally to savecosts, or unintentionally because of a lack of knowledge. Some independent contractor misclassifications occur because certain employers are protected from potentially largeemployment tax assessments by Section 530 of the Revenue Act of 1978. The reportnotes that the IRS' interest in this issue is not to reclassify workers from independent

35



contractors to employees. Rather, it is to ensure that employers are making the proper determinations and that workers are being treated appropriately. The report states thatwhile the IRS has done a great deal to educate employers about proper classification of workers, much more needs to be done. For example, studies of the impact of misclassification on the tax gap are more than twenty years old. Therefore, it is difficultfor the IRS to estimate the size of the problem today, or the overall effectiveness that its

actions to date are having. The most recent IRS estimate of the tax gap is $345 billion,with an estimated $1.6 billion resulting from worker misclassification. However, the $1.6billion figure is based on 1984 data, and is likely to be a great deal higher now.

Recommendations6.70 TIGTA recommends that the IRS develop an agency-wide employment taxprogram to coordinate the decision-making process and efforts among its businessdivisions. The report also recommends that the IRS Deputy Commissioner for Servicesand Enforcement (DCSE) conduct a formal compliance study to measure the currentimpact of worker misclassification on the tax gap. The IRS concurred with the findings inthe audit report. DCSE will coordinate an agency-wide employment tax program. The

Director of Specialty Programs for the IRS Small Business/Self-Employed Division willcoordinate a study in fiscal year 2009 on worker classification and other employment taxissues. The planning for this project has already begun.

UBS Criminal Charges6.80 On February 18, 2009 UBS AG, Switzerland’s largest bank, IRS announced thatit had entered into a deferred prosecution agreement on charges of conspiring todefraud the United States by impeding the Internal Revenue Service (IRS),.

Agreement6.90 As part of the deferred prosecution agreement and in an unprecedented move,UBS, based on an order by the Swiss Financial Markets Supervisory Authority (FINMA),has agreed to immediately provide the United States government with the identities of,and account information for, certain United States customers of UBS’s cross-border business. Under the deferred prosecution agreement, UBS has also agreed toexpeditiously exit the business of providing banking services to United States clientswith undeclared accounts. As part of the deferred prosecution agreement, UBS hasfurther agreed to pay $780 million in fines, penalties, interest and restitution.

Allegations6.100 Justice Department alleges that Swiss bankers routinely traveled to the UnitedStates to market Swiss bank secrecy to United States clients interested in attempting toevade United States income taxes. Court documents assert that, in 2004 alone, Swissbankers allegedly traveled to the United States approximately 3,800 times to discusstheir clients’ Swiss bank accounts. The information further alleges that UBS managersand employees used encrypted laptops and other counter-surveillance techniques tohelp prevent the detection of their marketing efforts and the identities and offshoreassets of their U.S. clients. According to the information, clients of the cross-border business in turn filed false tax returns which omitted the income earned on their Swissbank accounts and failed to disclose the existence of those accounts to the IRS.

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Prior Charges6.110 In November 2008, UBS executive Raoul Weil was indicted by a federal grand

jury in Fort Lauderdale and charged with conspiring to defraud the United States for hisalleged role in overseeing the United States cross-border business. The district courtrecently declared him to be a fugitive.

In June 2008, former UBS private banker Bradley Birkenfeld pleaded guilty to a chargeof conspiring to defraud the United States for similar conduct. Birkenfeld is scheduled tobe sentenced on May 1, 2009. Also, in June 2008, the U.S. District Court in Miamiauthorized the Internal Revenue Service to serve upon UBS a so-called “John Doe”summons seeking records that would identify United States taxpayers with accounts atUBS in Switzerland who have elected to conceal the existence of their accounts fromthe IRS.

Comments of Government Officials6.120 “Today’s agreement is but one milestone in an ongoing law enforcement effort to

reassure hard-working and law-abiding taxpayers who pay their fair share of taxes thatthose who don’t will pay a heavy price,” said John A. DiCicco, Acting Assistant AttorneyGeneral of the Justice Department’s Tax Division. “The veil of secrecy has been pulledaside and we will continue to aggressively pursue those who shirk their federal taxobligations or assist others in doing so.”

“UBS executives knew that UBS’s cross-border business violated the law,” said R.Alexander Acosta, U.S. Attorney for the Southern District of Florida. “They refused tostop this activity, however, and in fact instructed their bankers to grow the business. Thereason was money -- the business was too profitable to give up. This was not a merecompliance oversight, but rather a knowing crime motivated by greed and disrespect of the law.”

Settlement Offer Unreported Offshore Income6.130 On March 26, 2008 IRS Commissioner Doug Shulman announced what is ineffect a settlement offer for those that voluntarily and timely disclose unreportedoffshore income. Those meeting the terms of the offer will have to pay back-taxes andinterest for six years, and pay either an accuracy or delinquency penalty on all six years.They will also pay a penalty of 20% of the amount in the foreign bank accounts in theyear with the highest aggregate account or asset value. In other words, 20% of thehighest asset value of an account anytime in the past six years. However, those whocome forward on a timely basis will not face criminal prosecution. The offer is only openfor 6 months.

Highlights of the Offer.6.140 As explained in a memorandum written by Linda E. Stiff, Deputy Commissioner for Services and Enforcement and addressed to the Commissioners for the Large andMid-Size (LMSB) and Small Business/Self-Employed (SBSE) Divisions, the tax liabilitiesrelated to offshore issues of taxpayers that make “voluntary disclosure requests'” will besettled as follows:

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►Taxes and interest due going back 6 years will be assessed.►The taxpayer must file or amend all returns, including information returns, andForm TD F 90-22.1 (FBAR).

Penalties

6.150 IRS will assess either an accuracy or delinquency penalty for all years (noreasonable cause exception will be applied).

In lieu of all other penalties that may apply (including FBAR and information returnpenalties), IRS well assess a penalty equal to 20% of the amount in foreign bankaccounts/entities in the year with the highest aggregate account/asset value. Thepenalty is reduced to 5% if, with respect to the accounts or entities formed: (a) thetaxpayer did not open them or cause them to be opened or formed; (b) there has beenno activity during the period the accounts/entities were controlled by the taxpayer; and(c) all applicable U.S. taxes have been paid on the funds in the accounts/entities (whereonly the earnings have escaped U.S. taxes).

Fully Cooperate6.160 The above terms will apply only to taxpayers that “fully cooperate with the IRSboth civilly and criminally,” for all voluntary disclosure requests that are submitted toIRS, and are not yet resolved. The terms will remain in effect only for six months fromMar. 23, 2009 (the date that the Deputy Commissioner for Services and Enforcementreleased the memorandum on voluntary disclosure requests). IRS Commissioner DougShulman says that after that time, IRS would reevaluate all of its options, and warnedthat for those “who continue to hide their heads in the sand, the situation will onlybecome more dire.”

VITA Grant Program6.170 In December 2007, Congress appropriated funds to the IRS to establish andadminister a one-year matching grant program, in consultation with the Taxpayer Advocate Service, for the Community Volunteer Income Tax Assistance Program. TheReport to Congress provides more information on the design plan.

This grant program is intended to provide direct funds to organizations to:

Enable VITA Programs to extend services to underserved populations in hardest-to-reach areas, both urban and non-urbanIncrease the capacity to file returns electronicallyHeighten quality controlEnhance volunteer trainingSignificantly improve the accuracy rate of returns prepared at volunteer sites

Refer to the Publication 4671 (VITA Grant Program Overview and Application Package)and to the frequently asked questions for more information on the VITA Grant Program.Questions about the VITA Grant Program may be emailed to [email protected].

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Identity Theft6.180 Identity theft is becoming a huge problem for the tax system. The IRS hasestablished a new office for reporting. identity theft using stolen SSN’s. Their employersreport that income to the IRS on W-2’s and the income is attributed to the theft victim.Two scenarios are most common:

►The taxpayer receives an audit notice from the IRS showing that he is workingseveral jobs in many states or;►The taxpayer attempts to file a return and it is rejected by the IRS becausesomeone has already filed a return using the taxpayers SSN.

The IRS website now gives taxpayers who are the victims of identity theft thefollowing advice:

Identity Theft and Your Tax RecordsThe IRS does not initiate communication with taxpayers through e-mail. Before identity

theft happens, safeguard your information.

What do I do if the IRS contacts me because of a tax issue that may have beencreated by an identity theft?

If you receive a notice or letter in the mail from the IRS that leads you to believesomeone may have used your Social Security number fraudulently, pleaserespond immediately to the name, address, and/or number printed on the IRSnotice.

Be alert to possible identity theft if the IRS issued notice or letter:

►states more than one tax return was filed for you, or ►indicates you received wages from an employer unknown to you.►An identity thief might also use your Social Security number to file a tax returnin order to receive a refund. If the thief files the tax return before you do, the IRSwill believe you already filed and received your refund if eligible.

If your Social Security number is stolen, it may be used by another individual to get a job. That person’s employer would report income earned to the IRS using your SocialSecurity number, making it appear that you did not report all of your income on your taxreturn.

If you have previously been in contact with the IRS and have not achieved a resolution,please contact the IRS Identity Protection Specialized Unit, toll-free at 1-800-908-4490.

What do I do if I have not been contacted by IRS for a tax issue but believe I am avictim of identity theft?

If your tax records are not currently affected by identity theft, but you believe youmay be at risk due to a lost/stolen purse or wallet, questionable credit card

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activity, credit report, or other activity, you need to provide the IRS with proof of your identity.

You should submit a copy, not the original documents, of your valid Federal or State issued identification, such as a social security card, driver's license, or passport, etc, along with a copy of a police report or Federal Trade Commission

Identity Theft Affidavit. If the FTC Affidavit is not notarized, a witness (non-relative) must sign it.

Please send these documents using one of the following options:

Mailing address:Internal Revenue ServiceP.O. Box 9039Andover, MA 01810-0939

FAX: Note that this is not a toll-free FAX number

1-978-247-9965

For your convenience, Form 14026 is available as a cover sheet for submitting your documentation.

You may also contact the IRS Identity Protection Specialized Unit, toll-free1-800-908-4490 for guidance.

Hours of Operation: Monday – Friday, 8:00 a.m. – 8:00 p.m. your local time (Alaska &Hawaii follow Pacific Time).

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IRS Hotlines and Toll-Free Numbers

IRS Telephone Lines and Hours of Operation

Service Telephonenumber

Hours of operation

Practitioner Priority Service (866) 860-4259 M–F, 8:00 a.m.–8:00 p.m., local time

IRS Tax Help Line for Individuals (800) 829-1040 M–F, 7:00 a.m.–10:00 p.m., local time

Business and Specialty Tax Line (800) 829-4933 M–F, 7:00 a.m.–10:00 p.m., local time

e-Help (Practitioners Only) (866) 255-0654 M–F, 6:30 a.m.–6:00 p.m., CT(non-peak period)

M-F, 6:30 a.m.–10:00 p.m, CT (1/12/2007 – 4/27/2007)

and Saturdays 6:30 a.m. – 4:00 p.m., CT(1/12/2007 – 4/27/2007)

Identity Protection Specialized Unit 1-800-908-4490M – F, 8:00 a.m. – 8:00 p.m. local time

Refund Hotline (800) 829-1954 Automated service is available 24/7

Forms and Publications (800) 829-3676 M–F, 7:00 a.m–10:00 p.m., local time

National Taxpayer Advocate HelpLine

(877) 777-4778 M–F, 7:00 a.m.–10:00 p.m., local time

Telephone Device for the Deaf (TDD): Forms, Tax Help, TAS


Electronic Federal Tax Payment

System

(800) 555-4477 24/7

Government Entities (TEGE) HelpLine

(877) 829-5500 M–F, 8:30 a.m. – 4:30 p.m., ET

TeleTax Topics and Refund Status (800) 829-4477 24/7

Forms 706 and 709 Help Line (866) 699-4083 M–F, 7:00 a.m.–7:00 p.m., local time

Employer Identification Number (EIN)


Excise Tax and Form 2290 HelpLine

(866) 699-4096 M–F, 8:00 a.m.–6:00 p.m., ET

Information Return Reporting (866) 455-7438 M–F, 8:30 a.m.–4:30 p.m., ET

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7. COLLECTION

Taxpayer Advocate’s Report On Enforced Collection7.10 The Taxpayer Advocate has issued the following report to Congress:“While the history of the partial-payment installment agreement program is much briefer,the aggregate data indicate that it, too, is not widely utilized. Indeed, most taxpayers

and many practitioners are not even aware it exists. What has the IRS done insteadwith respect to taxpayers with delinquent accounts? In FY 2008, it placed one milliontaxpayers into “currently not collectible” status – meaning that the IRS is collectingnothing at all30 – and it took traditional enforcement actions about 3.4 million times,imposing 2,631,038 levies, placing 768,168 liens, and conducting 610 propertyseizures. IRS data show that greater use of traditional enforcement tools like liens and leviesdoes not have a significant impact on overall collection. For example, the number of levies the IRS has imposed plummeted from 3,659,000 in FY 1997 just before the IRSRestructuring and Reform Act of 1998 (RRA ’98), to 220,000 in FY 2000, and then

climbed back up to 3.76 million in FY 2007.32. Yet the IRS collection yield has risen ona slow, relatively consistent and gradual path over that period of time with nodiscernable revenue loss resulting from the post-RRA ’98 reduction in levies, as shownby the following chart.

Flawed Private Collection Ends7.20 In March, 2009 the IRS announced that after an extensive review of the private

debt collection program, including its cost effectiveness, IRS won't renew its contractswith two private debt collection agencies.

From the start private collection agencies have been controversial. While hailed bysome as an opportunity to improve government service by utilizing more efficient andmore motivated private enterprises, it has also been criticized by others as a misguidedand inefficient effort to privatize government.

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The American Jobs Creation Act of 2004 (Jobs Act) allowed IRS to use privatecompanies to collect taxes owed to the federal government by providing that nothing inany provision of law may be construed to prevent IRS from entering into a qualified taxcollection contract. (Code Sec. 6306(a), as added by Act Sec. 881(a)(1)) The privatecollection agency could keep and use up to 25% of the amount collected under qualifiedtax collection contract for the costs of services performed under the contract. The

amount credited as paid by any taxpayer is determined without regard to these rules onfees and expenses. (Code Sec. 6306(c))

End of programs. IRS determined that the tax collection work is best done by IRSemployees who have more flexibility handling cases, which is particularly important withmany taxpayers currently facing economic hardship. Accordingly, it won't renew thecurrent one-year contracts with two private debt collectors that expire on Mar. 6, 2009.IRS Commissioner Doug Shulman cited the results of a cost-effectiveness study of theprivate debt collection program (which was supported by an independent review) thatshowed that it was reasonable to conclude that when working similar inventory, IRScollection was more cost effective than the private contractors. He noted that IRS

anticipates hiring over 1,000 new collection personnel in FY 2009.

Help for People Who Owe Taxes7.30 With many people facing additional financial difficulties, in February 2009 the IRSis taking several additional steps to help people who owe back taxes.

“We need to ensure that we balance our responsibility to enforce the law with theeconomic realities facing many American citizens today,” Shulman said. “We want to gothe extra mile to help taxpayers, especially those who’ve done the right thing in the pastand are facing unusual hardships.”

On a wide range of situations, IRS employees have flexibility to work with strugglingtaxpayers to assist them with their situation. Depending on the circumstances,taxpayers in hardship situations may be able to adjust payments for back taxes, avoiddefaulting on payment agreements or possibly defer collection action.

Flexibility7.40 Among the areas where the IRS can provide assistance:

Postponement of Collection Actions: IRS employees will have greater authority to suspend collection actions in certain hardship cases where taxpayersare unable to pay. This includes instances when the taxpayer has recently lost a

job, is relying solely on Social Security or welfare income or is facing devastatingillness or significant medical bills. If an individual has recently encountered thistype of financial problem, IRS assistors may be able to suspend collectionwithout documentation to minimize burden on the taxpayer.

Added Flexibility for Missed Payments: The IRS is allowing more flexibility for previously compliant individuals in existing Installment Agreements who havedifficulty making payments because of a job loss or other financial hardship. TheIRS may allow a skipped payment or a reduced monthly payment amount without

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automatically suspending the Installment Agreement. Taxpayers in a difficultfinancial situation should contact the IRS.

Additional Review for Offers in Compromise on Home Values: The equitytaxpayers have in real property can be a barrier to an OIC being accepted. Withthe uncertainty in the housing market, the IRS recognizes that the real-estate

valuations used to assess ability to pay may not be accurate. So in instanceswhere the accuracy of local real-estate valuations is in question or other unusualhardships exist, the IRS is creating a new second review of the information todetermine if accepting an offer is appropriate.

Prevention of Offer in Compromise Defaults: Taxpayers who are unable tomeet the periodic payment terms of an accepted OIC will be able to contact theIRS office handling the offer for available options to help them avoid default.

Expedited Levy Releases: The IRS will speed the delivery of levy releases byeasing requirements on taxpayers who request expedited levy releases for

hardship reasons. Taxpayers seeking expedited releases for levies to anemployer or bank should contact the IRS number shown on the notice of levy todiscuss available options. When calling, taxpayers requesting a levy release dueto hardship should be prepared to provide the IRS with the fax number of thebank or employer processing the levy.

Online Payment Agreement (OPA)7.50 The Internal Revenue Service today introduced several new features to theinteractive Online Payment Agreement application, which will make it easier for taxpayers and their authorized representatives to make changes to existing installmentagreements.

The system will now permit:

Individuals to revise their payment due dates and/or amounts on existingagreements.

Individuals to revise existing extensions to regular installment agreementsand direct debit installment agreements.

Individuals to revise existing regular installment agreements to a payrolldeduction installment agreement or a direct debit installment agreement.

Practitioners with valid authorizations to use the signature date found on their approved

Form 2848, Power of Attorney and Declaration of Representative, or the caller ID as analternate way to authenticate when requesting agreements for clients.

More than 75 percent of those eligible for an installment agreement can establish oneusing the online application, according to the IRS. Since launching in October 2006,more than 30,000 taxpayers have successfully used it to set up a payment agreement.Eligible taxpayers who owe $25,000 or less in combined tax, penalties and interest canself-qualify, apply and receive immediate notification of approval for installment

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agreements – including pre-assessed agreements on tax year 2008 Form 1040liabilities and paperless direct debit agreements.

NOTE: For security purposes, you will automatically be logged out of OPAafter 20 minutes of inactivity per page. Be sure to gather all the necessaryinformation so that you are not automatically logged out of OPA before

completing the required information. If you have difficulty entering the datarequired, please call the IRS at the number listed under “When should Icall the toll-free number. “

http://www.irs.gov/individuals/article/0,,id=149373,00.html

Guaranteed Availability of Installment Agreements7.60 The Internal Revenue Service Restructuring and Reform Act of 1998 requires theSecretary to grant an installment agreement, at the taxpayer's option, if:

• the liability is $10,000, or less (excluding penalties and interest);

• within the previous 5 years, the taxpayer has not failed to file or to pay, nor entered an installment agreement under this provision;

• if requested by the Secretary, the taxpayer submits financial statements, and theSecretary determines that the taxpayer is unable to pay the tax due in full;

• the installment agreement provides for full payment of the liability within 3 years;and

• the taxpayer agrees to continue to comply with the tax laws and the terms of the

agreement for the period (up to 3 years) that the agreement is in place.[Act §3467; IRC § 6159)

<$25,000 Liabilities7.70 The IRS has chosen to create a more liberal system that allows installmentagreements of up to 5 years for balances of less than $25,000.

Form 433A7.80 In January, 2008 the IRS issued a revised Form 433A. The form requires thatthose taxpayers who are employed to complete only the first 4 pages while self employed individuals must complete 2 additional pages. It also provides a more logical

concise presentation of the taxpayer’s assets.

New more Onerous Allowable Expense Standards7.90 In October, 2007 the IRS the IRS revised its allowable expense standards tomake them more onerous. In March, 2009 the IRS again revised the standards. Insteadof establishing national standards which recognized the need for higher living expensefor higher income families it began a system of one size fits all. It continued to fail torecognize the varying cost of living in different regions and communities and eliminated

45





differentials for Hawaii and Alaska. It also added a new category of expenses for out-of-pocket health care expenses.Total allowable expenses include those expenses that meet the necessary expensetest. The necessary expense test is defined as expenses that are necessary to providefor a taxpayer's and his or her family's health and welfare and/or production of income.The expenses must be reasonable. The total necessary expenses establish the

minimum a taxpayer and family needs to live.

There are four types of necessary expenses:

• National Standards

• Out-of-Pocket Health Care

• Local Standards

• Other Expenses

National Standards: These establish standards for reasonable amounts for fivenecessary expenses. Four of them come from the Bureau of Labor Statistics (BLS)

Consumer Expenditure Survey: food, housekeeping supplies, apparel and services,and personal care products and services. The fifth category, miscellaneous, is adiscretionary amount established by the Service. It is $87 for one person up to $235for 4 persons. The IRS allows a total of $262 per month for each member of thehousehold above 4.

Note: All five standards are included in one total national standard expense.

Out-of-Pocket Health Care Expenses: Out-of-pocket health care expenses includemedical services, prescription drugs, and medical supplies (e.g. eyeglasses, contactlenses, etc.). Elective procedures such as plastic surgery or elective dental work are

generally not allowed. Taxpayers and their dependents are allowed the standardamount monthly on a per person basis, without questioning the amounts theyactually spend. If the amount claimed is more than the total allowed by the healthcare standards, the taxpayer must provide documentation to substantiate thoseexpenses are necessary living expenses. Generally, the number of persons allowedshould be the same as those allowed as exemptions on the taxpayer’s most recentyear income tax return. The out-of-pocket health care standard amount is allowed inaddition to the amount taxpayers pay for health insurance.

Local Standards: These establish standards for two necessary expenses: housingand transportation. Taxpayers will be allowed the local standard or the amount

actually paid, whichever is less.

A. Housing - Standards are established for each county within a state.When deciding if a deviation is appropriate, consider the cost of moving to a newresidence; the increased cost of transportation to work and school that will resultfrom moving to lower-cost housing and the tax consequences. The taxconsequence is the difference between the benefit the taxpayer currently derivesfrom the interest and property tax deductions on Schedule A to the benefit thetaxpayer would derive without the same or adjusted expense. Housing costs

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include rent and/or house payments, taxes, repairs and utilities the IRM providesas follows:

The utilities include gas, electricity, water, fuel, oil, bottled gas, trashand garbage collection, wood and other fuels, septic cleaning, andtelephone. Housing expenses include: mortgage or rent, property

taxes, interest, parking, necessary maintenance and repair,homeowner's or renter's insurance, homeowner dues andcondominium fees. Usually, this is considered necessary only for theplace of residence. Any other housing expenses should be allowedonly if, based on a taxpayer's individual facts and circumstances,disallowance will cause the taxpayer economic hardship. [ IRM5.15.1.9

B. Transportation - The transportation standards consist of nationwidefigures for loan or lease payments referred to as ownership cost, and additionalamounts for operating costs broken down by Census Region and Metropolitan

Statistical Area. Operating costs were derived from BLS data. If a taxpayer has acar payment, the allowable ownership cost added to the allowable operating costequals the allowable transportation expense. If a taxpayer has no car paymentonly the operating cost portion of the transportation standard is used to figure theallowable transportation expense. Under ownership costs, separate caps areprovided for the first car and second car. If the taxpayer does not own a car astandard public transportation amount is allowed.

Vehicle insurance, vehicle payment (lease or purchase),maintenance, fuel, state and local registration, required inspection,parking fees, tolls, driver's license, public transportation.Transportation costs not required to produce income or ensure thehealth and welfare of the family are not considered necessary.Consider availability of public transportation if car payments(purchase or lease) will prevent the tax liability from being paid in partor full. Public transportation costs could be an option if it does notsignificantly increase commuting time and inconvenience thetaxpayer.

Note: If the taxpayer has no car payment, or no car,question how the taxpayer travels to and from work, grocer,medical care, etc. The taxpayer is only allowed the operatingcost or the cost of transportation. [ IRM 5.15.1.9 ]

C. Other Expenses. Other expenses may be considered if they meetthe necessary expense test - they must provide for the health and welfare of thetaxpayer and/or his or her family or they must be for the production of income.This is determined based on the facts and circumstances of each case. If other expenses are determined to be necessary and, therefore allowable, documentthe reasons for the decision in your history.

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D. Conditional expenses. These expenses do not meet the necessaryexpenses test. However , they are allowable if the tax liability, including projectedaccruals, can be fully paid within five years.

E. National and local expense standards are guidelines. I f i t isdetermined a standard amount is inadequate to provide for a specific taxpayer's

basic living expenses, allow a deviation. Require the taxpayer to providereasonable substantiation and document the case file.

F. Generally, the total number of persons allowed for national standardexpenses should be the same as those allowed as dependents on the taxpayer'scurrent year income tax return. Verify exemptions claimed on taxpayer's incometax return meet the dependency requirements of the IRC. There may bereasonable exceptions. Fully document the reasons for any exceptions. For example, foster children or children for whom adoption is pending.

G. A deviation from the local standard is not allowed merely because it

is inconvenient for the taxpayer to dispose of valued assets.

H. Length. Revenue officers should consider the length of thepayments. Although it may be appropriate to allow for payments made on thesecured debts that meet the necessary expense test, if the debt will be fullyrepaid in one year only allow those payments for one year. [ IRM 5.15.1.7 ]

Five Year Test7.100 The amount allowed for necessary or conditional expenses depends on thetaxpayer's ability to full pay the liability within five years and on the taxpayer's individualfacts and circumstances. If the liability can be paid within 5 years, it may be appropriateto allow the taxpayer the excessive necessary and conditional expenses. If the taxpayer cannot pay within 5 years, it may be appropriate to allow the taxpayer the excessivenecessary and conditional expenses for up to one year in order to modify or eliminatethe expense. (See IRM 5.14, Installment Agreements) [ IRM 5.15.1.10 ]

8. OFFER IN COMPROMISE

Number of Offers8.10 The total number of proposed offer has halved from 128,000 in FY 2001 to46,000 in FY 2007. The number of OICs accepted declined from 38,643 (or 34 percent)in FY 2001, 12,000 in FY 2007 (or 24%) and 10,000 in 2008 (or 24%). The IRS hasmade it so difficult to secure an offer in compromise that many taxpayers and their representative no longer choose to propose a compromise.

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OIC’s FY2000 to 2008

8.20 In February, 2007 the IRS issued new offer in compromise forms which apply theprovisions of TIPRA 2005 discussed below. Taxpayers proposing compromises basedupon doubt as to collectibility of effective tax administration must submit revised Form656. Taxpayers proposing an offer based upon doubt as to liability must now submitForm 656-L and a narrative setting forth defenses to the liability. To comply with thenew downpayment requirements taxpayers must submit Form 656-PPV with therequired downpayment.

Tax Increase Prevention and Reconciliation Act of 20058.30 The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), section509, made major changes to the IRS OIC program. These changes affect all offers

received by the IRS on or after July 16, 2006..TIPRA section 509 amends IRC section7122 by adding a new subsection (c) “Rules for Submission of Offers-in-Compromise.”

Payments With Offers8.35 A taxpayer filing a lump-sum offer must pay 20% of the offer amount with theapplication (IRC 7122(c)(1)(A)). A lump-sum offer means any offer of payments made infive or fewer installments.

A taxpayer filing a periodic-payment offer must pay the first proposed installmentpayment with the application and pay additional installments while the IRS is evaluatingthe offer (IRC section 7122(c)(1)(B)). A periodic-payment offer means any offer of

payments made in six or more installments.

Failure to Make Deposit8.40 Taxpayers can avoid delays in processing their OIC applications by making allrequired payments in full and on time. Failure to pay the 20 percent on a lump-sumoffer, or the first installment payment on a periodic-payment offer, will result in the IRSreturning the offer to the taxpayer as nonprocessable (IRC section 7122(d)(3)(C) asamended by TIPRA).

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Not Refundable8.50 The 20 percent payment for a lump-sum offer and the installment payments on aperiodic-payment offer are “payments on tax” and are not refundable deposits (IRCsection 7809(b) and Treasury Regulation 301.7122-1(h)).

Taxpayer Advocate Research

8.60 In 2007, the Taxpayer Advocate Service conducted a research study to assess theimpact of the down payment requirement.28. The study analyzed a representativesample of more than 400 offers that the IRS accepted in the months just before the 20percent requirement took effect. Among the principal findings were that 56 percent of taxpayers whose offers were accepted and who made lump-sum payments obtained thefunds from family members and friends. While family and friends may be willing to helpa taxpayer get straight with the IRS, they are probably much less willing to providefunds for taxpayers to make down payments on offers that are unlikely to be accepted –and fewer than one in four offers is, in fact, accepted. Thus, not surprisingly, thenumber of offers received by the IRS fell by 21 percent from FY 2006 to FY 2007 as thedown payment requirement took effect.

Failure to Make Installment Payments8.70 Taxpayers failing to make installment payments on periodic-payment offers after providing the initial payment will cause the IRS to treat the offer as a withdrawal. TheIRS will return the offer application to the taxpayer (IRC section 7122(c)(1)(B)(ii)).Alump-sum offer accompanied by a payment that is below the required 20 percentthreshold will be deemed processable. However, the taxpayer will be asked to pay theremaining balance in order to avoid having the offer returned. Failure to submit theremaining balance will cause the IRS to return the offer and retain the $150 applicationfee.

Taxpayers filing periodic-payment offers must submit the full amount of their firstinstallment payment in order to meet the processability criteria. Otherwise, the IRS willdeem the offer as unprocessable and will return the application to the taxpayer alongwith the $150 fee.

Low Income Taxpayers8.80 Under the new law, taxpayers qualifying as low-income or filing an offer solelybased on doubt as to liability qualify for a waiver of the new partial paymentrequirements. Taxpayers qualifying for the low-income exemption or filing a doubt-as-to-liability offer only are not liable for paying the application fee, or the payments imposedby TIPRA section 509. A taxpayer seeking a waiver must submit Form 656-A with theoffer. The monthly income levels to qualify are listed below:

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Deemed Accepted8.90 The IRS will deem an OIC “accepted” that is not withdrawn, returned, or rejectedwithin 24 months after IRS receipt. When calculating the 24-month timeframe, the IRSwill disregard any time periods during which a liability included in the OIC is the subjectof a dispute in any judicial proceeding (IRC section 7122(f) as amended by TIPRA). Infive years the consideration period for deemed acceptance will become 12 months.

Background8.100 An offer in compromise is a settlement of a delinquent tax account for less thanthe full amount due. Sec. 7122 states that the IRS may compromise any civil or criminalcase arising under the Internal Revenue Laws prior to reference to the Department of Justice for prosecution or defense. In the past very few offers were accepted becausethe standards were almost impossible to meet and the IRS really did not encouragethem. But in 1992, the IRS decided that they had a major problem with accountsreceivable inventory and a growing number of cases reported as currently notcollectible. The new policy espoused by the IRS was that they would accept an OICwhen it was unlikely that the tax liability could be collected in full and the amount offeredreasonably reflected collection potential.

Supporting Documents8.110 The financial statements require the proponent to supply documentation for eachitem on the forms, i.e. pay stubs, car payment book, mortgages, pay stubs, chargeaccount statements, and bank statements. The IRS considers smaller liability offerswithout conducting a field investigation, therefore it is requiring the proponent to supplyall the info to make a decision without field verification.

$150 Processing Fee8.120 The Internal Revenue Service now charges a $150 application fee for the

processing of offers in compromise. The IRS expects that this fee will help offset thecost of providing this service, as well as reduce frivolous claims. The law authorizesfederal agencies to charge fees to defray the costs of providing certain services.Guidelines encourage such fees for benefits beyond those provided to the generalpublic. The IRS anticipates the fee also will reduce the number of offers that are filedinappropriately — for example, solely to delay collection — enabling the agency toredirect resources to the processing of acceptable offers. Offers based solely onhardship may seek a fee waiver.

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Determining Processability8.130 The IRS campuses do an intensive review of each offer to determine if it isprocessable. The author believes that the IRS makes a concerted effort to return mostoffers to avoid the effort of performing a substantive consideration. An offer incompromise will be deemed not processable if one or more of the following criteria arepresent:

A. Taxpayer Not in Compliance - All tax returns for which the taxpayer has a filing requirement must be filed. This rule applies even if a Serviceemployee previously decided not to pursue the filing of the return under theprovisions of Policy Statement P-5-133, because it was believed to have "little or no tax due" . In-business taxpayers must have timely deposited, filed and paid allrequired employment tax returns for the two (2) preceding quarters prior to filingthe offer, and must be current with federal tax deposits for the quarter in whichthe offer was submitted.

Note: Generally speaking, IRM 5.1.11.1.3(2) only requires

employees to conduct a compliance check, confirm anddocument all tax periods were filed for the preceding 6 year period. The only exception would be if fraud were discoveredduring the course of the investigation. Even then it should beextremely rare to go beyond 6 years. IRM 5.1.11.4 discussesenforcement criteria, which states that if the taxpayer refusesto file, neglects to file, or indicates an inability to file, then theemployees should determine to what extent enforcementshould be used (e.g. summons, 6020(b), referral to Exam, or field, etc.). Filing requirements will normally be enforced for a6 year period, which is calculated by starting with the tax year that is currently due, and going back 6 years.

B. Taxpayer in Bankruptcy - An offer will not be considered during abankruptcy proceeding.

Note: IRM 25.17.4.7, Offers-in-Compromise and Bankruptcy(07-01-2002), states that "[t]oo many administrative and legalproblems would be created if a tax liability was simultaneouslythe subject of a court-supervised bankruptcy case and theadministrative offer-in-compromise process." Therefore, it isthe policy of IRS that an offer will not be considered if ataxpayer is in bankruptcy.

C. Taxpayer did not submit the offer on the current revision of Form 656 - The offer must be submitted on the most current revision of the Offer in Compromise Form 656.

D. Taxpayer did not submit the most current revision of Forms 433-A and/or 433-B - The most current revision of the Collection InformationStatement Forms 433-A and/or 433-B must be submitted with the offer.

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E. Taxpayer did not submit the application fee with the offer - Theapplication fee of $150 or the signed Form 656-A, Income Certification for Offer in Compromise Application Fee, must be submitted with each Form 656 (Form656-A applies to individual taxpayers only).

Note: The application fee is not required if the offer is filed

solely on the basis of Doubt as to Liability.

An offer cannot be returned for the sole reason that the cost of an investigation mayexceed the amount offered. [IRM 5.8.3.4.1]

Full Pay Processing8.140 The IRS is always looking for where it believes the taxpayer has the ability to fullpay the liability. Its manual provides as follows:

Taxpayers may submit an offer to compromise the liabilities based onDoubt as to Collectibility, yet indicate on their application an ability to pay

the account in full. These cases, once determined to be processable, willbe screened out. Absent any special circumstances they will be rejectedwith no further investigation or verification. The taxpayer will be directedtoward the appropriate resolution for the delinquency. The rejection letter will be the first communication with the taxpayer. A decision to reject withappeals rights is adequately justified by the taxpayer's self-disclosedability to pay in full.

Initial Review8.150 For processable offers one of the first considerations is to determine if thetaxpayer can pay in full. The following initial review should be conducted on allprocessable offers to make that determination.

• Complete the Full Pay worksheet using the taxpayer's figures only, asreflected on the CIS.

• Do not adjust any asset values or apply necessary expense standards.[IRM 5.8.3.12]

Computation of Offer Amount8.160 The IRS uses three different methods for determining the adequacy of an offer depending on the period of time the taxpayer proposes for payment of the offer amount.

The methods are:

• Cash (paid in 90 days or less), or

• Short-Term Deferred Payment (more than 90 days, up to 24 months), or

• Deferred Payment (offers with payment terms over the remaining statutoryperiod for collecting the tax.).

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NOTE: In all three cases, the IRS will release any filed Notice of FederalTax Lien once you have fully paid the offer amount and any interest thathas accrued.

Cash Offer 8.170 You must pay cash offers within 90 days of acceptance. You should offer the

realizable value of your assets (quick sale value) plus the total amount the IRS couldcollect over forty-eight months of payments represent value of income). When the ten-year statutory period for collection expires in less than forty-eight months, you must usethe Deferred Payment Chart shown in the instructions to Form 656. The InternalRevenue Service's method of determining the adequacy of an offer could be bestexpressed by:

Quick Sale Value Plus Present Value of Income Equals Offer InCompromise (QSV + PVI = OIC)

In applying this formula, the IRS determines the Quick Sale Value of all of the client's

assets and then adds the amount of the present value of the taxpayer's ability to pay. Itaggregates the two numbers to arrive at an Offer in Compromise amount. The followingparagraphs will discuss the Internal Revenue Service's methodology for determiningquick sale value and the present value of income.

Short-Term Deferred Payment Offer 8.180 This payment option requires you to pay the offer within two years of acceptance.The offer must include the realizable value of your assets in addition to the total amountthe IRS could secure over sixty months (or the remainder of the ten-year statutoryperiod for collection, whichever is less) through monthly payments. The IRS may file aNotice of Federal Tax Lien on tax liabilities compromised under short-term paymentoffers.

Deferred Payment Offers8.190 This payment option requires you to pay the offer amount within the remainingstatutory period for collecting the tax. The offer must include the realizable value of your assets plus the amount the IRS could collect through monthly payments during theremaining life of the collection statute. The deferred payment option itself has threepayment options:

Option One is: Full payment of the realizable value of your assets within90 days from the date the IRS accepts your offer and Your future incomein monthly payments during the remaining life of the collection statute;

Option Two is: Cash payment for a portion of the realizable value of your assets within 90 days from the date the IRS accepts your offer andMonthly payments during the remaining life of the collection statute for both the balance of the realizable value and your future income;

Option Three is: The entire offer amount in monthly payments over thelife of the collection statute. As with short-term deferred payment offers,the IRS may file a Notice of Federal Tax Lien.

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Corporate Trust Fund Liabilities8.200 The IRS has. recently changed its rules with respect to in business offers incompromise. It now requires that each potentially responsible officer of the companysign an agreement to assessment of the trust fund recovery penalty in advance of consideration of any corporate or LLC offer. The new system is extremely unfair

because the IRS is requiring even those who should not be held liable for the TFRP toagree to liability and assessment. Only after the liability has been assessed against anon-responsible person may she file a claim for refund and defend against the penalty.The system is extremely unfair and represents an attempt to deprive officers of their statutory due process rights.

Pursuit of Officers After Compromise.8.210 Under this new system the IRS could compromise with the corporate entitybased upon its ability to pay and then continue to pursue responsible officers for theremaining trust fund liability. The owners and officers would face continuing economicrisk. The system also makes it impossible for a company that had a change in

leadership to propound an offer in compromise. Prior officers would probably refuse toconsent to the demands of the IRS that they waive their TFRP appeal rights therebynegating any opportunity for the company to have its offer considered by the IRS.

Promote Effective Tax Administration8.220 As part of the IRS Restructuring and Reform Act of 1998 (RRA 98), Congressadded section 7122(c) to the Internal Revenue Code. That section provides that theService shall set forth guidelines for determining when an offer in compromise shouldbe accepted. Congress explained that these guidelines should allow the Service toconsider:

•

Hardship,• Public policy, and

• Equity

Treasury Regulation 301.7122-1 authorizes the Service to consider offers raising theseissues. These offers are called Effective Tax Administration (ETA) offers.

Encourage Compliance8.230 The availability of an Effective Tax Administration (ETA) offer encouragestaxpayers to comply with the tax laws because taxpayers will:

•

Believe the laws are fair and equitable, and• Gain confidence that the laws will be applied to everyone in thesame manner.

The Effective Tax Administration (ETA) offer allows for situations where tax liabilities

• The tax is legally owed, and

• The taxpayer has the ability to pay it in full

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Only Available If There Is No Doubt As to Liability Or Collectibility8.240 An Effective Tax Administration (ETA) offer can only be considered when theService has determined that the taxpayer does not qualify for consideration under Doubtas to Liability (DATL) and/or Doubt as to Collectibility (DATC). The taxpayer mustinclude the Collection Information Statement (Form 433-A and/or Form 433-B) whensubmitting an offer requesting consideration under Effective Tax Administration (ETA).

Economic hardship standard of § 301.6343-1 specifically applies only to individuals.[IRM 5.8.11.1]

Rules for Evaluating Offers to Promote Effective Tax Administration8.250 The determination to accept or reject an offer to compromise made on theground that acceptance would promote effective tax administration within the meaningof this section will be based upon consideration of all the facts and circumstances,including the taxpayer's record of overall compliance with the tax laws.

Factors8.260 Factors supporting (but not conclusive of) a determination of economic hardship

include:

• Taxpayer is incapable of earning a living because of a long term illness,medical condition, or disability and it is reasonably foreseeable that taxpayer'sfinancial resources will be exhausted providing for care and support during thecourse of the condition;

• Although taxpayer has certain assets, liquidation of those assets to payoutstanding tax liabilities would render the taxpayer unable to meet basic livingexpenses; and

•

Although taxpayer has certain assets, the taxpayer is unable to borrowagainst the equity in those assets and disposition by seizure or sale of the assetswould have sufficient adverse consequences such that enforced collection isunlikely Temp Reg 301.7122-1T(b)(4)(iv)(B)]

Undermine Compliance8.270 Factors supporting (but not conclusive of) a determination that compromisewould not undermine compliance by taxpayers with the tax laws include:

• Taxpayer does not have a history of noncompliance with thefiling and payment requirements of the Internal Revenue Code;

• Taxpayer has not taken deliberate actions to avoid thepayment of taxes; and

• Taxpayer has not encouraged others to refuse to complywith the tax laws.[Temp Reg. 301.7122-1T(b)(4)(iv)(C)]

Exceptional Circumstances

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8.280 The following examples illustrate cases where exceptional circumstances existsuch that collection of the full liability will be detrimental to voluntary compliance bytaxpayers; and compromise of the liability would not undermine compliance bytaxpayers with the tax laws.

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EXHIBITS



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60



61



62



63



64



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National Standards: Food, Clothing and Other Items

Expense OnePerson

TwoPersons

ThreePersons

Four Persons

Food $285 $537 $626 $752

Housekeeping supplies $28 $66 $61 $74

Apparel & services $86 $162 $209 $244

Personal care products & services $31 $55 $59 $65

Miscellaneous $87 $165 $197 $235

Total $517 $985 $1,152 $1,370

More than four persons Additional PersonsAmount

For each additional person, add to four-person totalallowance:

$262

National Standards: Out-of-Pocket Health CareThe table for health care expenses, based on Medical Expenditure Panel Survey data,has been established for minimum allowances for out-of-pocket health care expenses.

Out-of-pocket health care expenses include medical services, prescription drugs, andmedical supplies (e.g. eyeglasses, contact lenses, etc.). Elective procedures such asplastic surgery or elective dental work are generally not allowed.

Taxpayers and their dependents are allowed the standard amount monthly on a per person basis, without questioning the amounts they actually spend. If the amountclaimed is more than the total allowed by the health care standards, the taxpayer mustprovide documentation to substantiate those expenses are necessary living expenses.

The out-of-pocket health care standard amount is allowed in addition to the amounttaxpayers pay for health insurance.

Out-of-Pocket Costs

Under 65 $60

65 and Older $144

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Public Transportation

Public Transportation

National $173

Ownership Costs

One Car Two Cars

National $489 $978

Operating Costs

Metropolitan Area One Car Two Cars

Northeast Region $235 $470

Boston $225 $450

New York $280 $560

Philadelphia $235 $470

Midwest Region $183 $366

Chicago $217 $434

Cleveland $186 $372

Detroit $267 $534

Minneapolis-St. Paul $187 $374

South Region $201 $402

Atlanta $226 $452

Baltimore $217 $434

Dallas-Ft. Worth $228 $456

Houston $263 $526

Miami $275 $550

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Metropolitan Area One Car Two Cars

Washington, D.C. $230 $460

West Region $211 $422

Los Angeles $261 $522

Phoenix $232 $464

San Diego $244 $488

San Francisco $261 $522

Seattle $192 $384

The data for the Operating Costs section of the Transportation Standards are providedby Census Region and Metropolitan Statistical Area (MSA). The following table lists thestates that comprise each Census Region. Once the taxpayer’s Census Region hasbeen ascertained, to determine if an MSA standard is applicable, use the definitionsbelow to see if the taxpayer lives within an MSA (MSAs are defined by county and city,where applicable). If the taxpayer does not reside in an MSA, use the regional standard.

California

Maximum Monthly Allowance

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69

CountyHousing andUtilities for aFamily of 1

Housing andUtilities for aFamily of 2



Housing andUtilities for aFamily of 5 or

more

Alameda 1,920 2,255 2,376 2,650 2,692

Alpine 1,390 1,632 1,720 1,918 1,949

Amador 1,304 1,532 1,614 1,800 1,829

Butte 1,162 1,365 1,438 1,604 1,629

Calaveras 1,295 1,521 1,603 1,787 1,816

Colusa 1,079 1,267 1,335 1,488 1,512

ContraCosta

1,890 2,220 2,339 2,608 2,650

Del Norte 1,127 1,324 1,395 1,555 1,580

El Dorado 1,618 1,900 2,002 2,232 2,268

Fresno 1,208 1,419 1,496 1,668 1,695

Glenn 991 1,164 1,226 1,367 1,390

Humboldt 1,139 1,338 1,410 1,572 1,598

Imperial 1,187 1,394 1,469 1,638 1,664

Inyo 1,261 1,481 1,561 1,740 1,768

Kern 1,146 1,345 1,418 1,581 1,606

Kings 1,138 1,337 1,409 1,571 1,596

Lake 1,133 1,331 1,402 1,564 1,589

Lassen 1,121 1,316 1,387 1,547 1,572

LosAngeles

1,769 2,077 2,189 2,441 2,480

Madera 1,153 1,354 1,427 1,591 1,616

Marin 2,542 2,985 3,146 3,508 3,564

Mariposa 1,165 1,368 1,442 1,608 1,634

Mendocino

1,292 1,517 1,599 1,783 1,812

Merced 1,176 1,382 1,456 1,623 1,650

Modoc 819 962 1,013 1,130 1,148

Mono 1,636 1,922 2,025 2,258 2,294

Monterey 1,687 1,981 2,088 2,328 2,365

Napa 1,714 2,013 2,121 2,365 2,404

Nevada 1,498 1,760 1,854 2,067 2,101

Orange 1,976 2,321 2,446 2,727 2,771

Placer 1,697 1,993 2,100 2,342 2,380

Plumas 1,161 1,364 1,437 1,602 1,628

Riverside 1,493 1,754 1,848 2,060 2,094

Sacramento 1,390 1,632 1,720 1,918 1,949



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Portions Reprinted from

"REPRESENTING THE AUDITED TAXPAYER BEFORE THE IRS"

AND

REPRESENTATION BEFORE THE COLLECTION DIVISION OF THE IRS

by

Robert E. McKenzie

WITH PERMISSION FROM

THOMSON WEST Rochester, NY

All Rights Reserved