A lot of people wonder about the role of an IRS Revenue Officer or a State Tax Compliance Officer. Revenue Officers are the ones tasked with collecting overdue taxes, investigating tax non-compliance, negotiating with taxpayers, and taking enforcement actions. Whether it’s at the federal level with the IRS or at the state level, their goal is to make sure individuals and businesses meet their tax obligations.
If you find yourself owing a substantial amount in taxes, whether it’s over $50,000 to the IRS or more than $25,000 to your state’s tax authority, your case may eventually catch the attention of a local Revenue Officer (in the case of federal taxes) or a Tax Compliance Officer (at the state level). In the past, these officers were known for making surprise visits to individuals’ homes or businesses to address tax issues. However, due to changes brought about by the COVID-19 pandemic, this practice has been more or less discontinued for the time being.
Today, their initial approach takes a different form. Instead of unexpected visits, the first step is to send you a written letter. This letter will invite you to schedule an interview, either at their office or over the telephone. During this interview, Revenue Officers will meticulously record your financial information, which includes details about your income, assets, liabilities, and living expenses. These details are documented on comprehensive forms known as Form 433.
Once your financial information is recorded, Revenue and Tax Compliance Officers will explore various avenues to facilitate tax payment. These may include:
- Demanding Immediate Payment: They may request that you settle the tax debt in full without delay.
- Suggesting a Bank Loan: Officers might recommend that you consider obtaining a bank loan to cover your tax liability.
- Encouraging Asset Sale: If applicable, they may propose selling assets to generate the necessary funds for tax payment.
- Offering an Installment Agreement: You could be offered the option of setting up an installment agreement, allowing you to pay off your tax debt in manageable monthly installments.
- Exploring an Offer in Compromise: In some cases, they might propose an Offer in Compromise, a negotiated settlement where you pay a reduced amount to satisfy the debt.
- Asset Seizure: In more severe cases of non-compliance, Revenue Officers can take action to seize your bank accounts, garnish your wages, or seize other valuable assets.
- Reporting as Currently Uncollectible: If your financial situation is particularly dire, they may report your case as currently uncollectible, temporarily suspending collection efforts until your financial situation improves.
The Collection Interview: Navigating the IRS and State Tax Authorities
The collection interview is a pivotal moment in the IRS collection process, and it can be a daunting experience for taxpayers. According to the Internal Revenue Manual, this initial interview sets the stage for what follows, making it a crucial event in resolving tax debt issues.
IRS Revenue Officers: Sugar and Vinegar
When dealing with an IRS Revenue Officer, it’s essential to understand their approach. These officers are trained to wear two masks during the collection interview. Initially, they may act sympathetic and friendly, aiming to gain your confidence and cooperation. This initial “sugar” is sometimes a facade, as their ultimate goal is to collect the unpaid taxes. After the sugar comes the vinegar, and they can become more assertive in their collection efforts.
State Tax Compliance Officers: Direct and Unyielding
State Tax Compliance Officers, on the other hand, may not always put on a facade of friendliness. Depending on the state and its fiscal situation, these officers may take a more direct and unyielding approach, which can even involve threats during the first telephone call.
Your Rights During the Collection Interview
It’s essential to be aware of your rights during the collection interview. Legally, you cannot be forced to answer any questions. However, refusing to cooperate can put you at risk of rapid “enforced collection.” This can include actions such as the seizure of your bank accounts or garnishment of your wages.
Moreover, it’s crucial never to lie to the IRS. If they catch you in a lie, they may intensify their scrutiny of your case. While the likelihood of this happening with state tax authorities like California or Nevada is lower, it could potentially lead to a referral to the IRS Criminal Investigation unit, a situation you undoubtedly want to avoid.
Understanding the Form 433-A
During the collection interview, a Revenue Officer will often press hard to obtain answers to questions listed on Form 433-A, known as the Collection Information Statement. This form is critical for assessing your financial situation and developing a plan to resolve your tax debt.
The Form 433-A is divided into two primary sections: assets and liabilities, and income and expenses. While most people have a good grasp of their assets, liabilities, and income, the expenses section often presents challenges. Many individuals lack precise records of their miscellaneous expenses.
Guarding Against Coercion
It’s crucial not to be coerced into signing the Form 433-A hastily. You have the right to review the forms with your financial records in hand, in the comfort of your home. Understating your expenses on the form can give the IRS the wrong impression that you have significant disposable income to pay off your tax debt. Accurate numbers are essential for a fair assessment.
If the Revenue Officer proves difficult or uncooperative during the interview, don’t hesitate to request a meeting with their supervisor. It’s essential to advocate for your rights and ensure the process is fair and accurate.
Understanding Necessary Living Expenses in IRS Installment Agreements
When negotiating an installment agreement with the IRS to repay your tax debt, one of the most critical aspects that can lead to disputes is the determination of necessary living expenses. The IRS establishes strict national, regional, and local collection standards that dictate what they consider acceptable living expenses. In general, these standards are quite conservative, and state tax agencies may even have stricter guidelines.
IRS National Standards for Living Expenses
The IRS outlines national standards for living expenses across six categories:
- Actual Cost of Health Insurance: This includes the cost of your health insurance premiums.
- Out-of-Pocket Health Care: Expenses related to medical and dental care that are not covered by insurance, such as copayments, deductibles, and prescription costs.
- Housekeeping Supplies, Clothing, and Services: Costs associated with maintaining your household, purchasing clothing, and utilizing cleaning services.
- Personal Care Products: Expenses for personal hygiene products and toiletries.
- Food: The amount allocated for groceries and necessary sustenance.
- Miscellaneous Expenses: A category that covers various other essential expenses not included in the previous categories.
The specific allowances you are eligible for depend on the size of your family. You can find the current maximum standards for these expenses on the official IRS website. However, it’s essential to note that these allowances are based on data from the annual Bureau of Labor Statistics Consumer Expenditure Survey, which is typically a year behind and may not account for inflation accurately.
Protesting National Standards
If you believe that your actual expenses exceed the national living standards set by the IRS, you have the right to protest these standards. However, to do so successfully, you must provide thorough documentation to substantiate that your actual expenses indeed surpass the established national living standards.
This documentation could include detailed records of your monthly expenses in the relevant categories, receipts, bills, and any other evidence that supports your claim. It’s essential to be thorough and transparent when presenting this information to the IRS, as they will carefully review your case.
Local Standards in IRS Expense Allowances
When it comes to negotiating tax debt repayment with the IRS, it’s important to recognize that the cost of living can vary significantly depending on where you reside. The IRS acknowledges this regional discrepancy and has established local standards for certain expenses in addition to the national standard allowances.
Local Expense Allowances
The local expense allowances encompass two primary categories:
- Housing and Utilities: This category includes expenses related to housing, such as mortgage or rent payments, property taxes, maintenance costs, and utility bills. The IRS recognizes that the cost of housing can vary greatly from one location to another, and these allowances are designed to reflect the local realities.
- Transportation: Under this category, the IRS considers the expenses associated with transportation, whether it’s related to owning a vehicle or using public transportation. This includes car payments, insurance premiums, gasoline, maintenance, and expenses related to public transportation options.
Court-Ordered Child Support and Alimony
In addition to housing, utilities, and transportation expenses, the IRS also allows for court-ordered child support and alimony payments as legitimate expenses. If you have court orders for either of these financial obligations, you will typically need to provide a copy of the court order as documentation.
Payment of State Taxes
It’s worth noting that the IRS does permit the payment of state taxes as part of your overall financial obligations. If you find yourself owing both the IRS and a state tax agency, you may want to consider making payment arrangements for your state taxes first. Resolving state tax debt can help streamline the negotiation process with the IRS and provide a more comprehensive solution to your tax issues.
Understanding Conditional Expenses and IRS Guidelines
When it comes to negotiating tax debt repayment with the IRS, it’s crucial to recognize that not all expenses are treated equally. The IRS categorizes certain expenses as “conditional,” which means they are not deemed absolutely necessary for your basic well-being. Here are some key examples of conditional expenses:
- Excessive House or Car Payments: If you have housing or vehicle-related expenses that exceed what the IRS considers reasonable, these can be classified as conditional. The IRS sets standards for housing and utilities, and if your expenses go beyond these limits, they may be considered conditional.
- Charitable Contributions: While charitable donations are a noble cause, the IRS views them as conditional expenses. This means that if you’re struggling to pay your taxes, the IRS may not allow these deductions in your repayment plan.
- Educational Expenses: This includes costs related to college education or other educational pursuits. In some cases, these expenses may be considered conditional, especially if they exceed certain limits.
- Unsecured Debts: Debts such as credit card balances and personal loans are generally considered conditional by the IRS. They may not be included in your repayment plan unless specific criteria are met.
Conditional Expenses and the Three-Year Rule
The IRS has a specific rule regarding conditional expenses. These expenses are typically only allowed if you can demonstrate that you can pay off your tax debt within a three-year timeframe. This rule aims to ensure that your tax obligations take precedence over discretionary spending.
Additionally, there is a grace period of one year during which you can work to eliminate conditional expenses from your budget if your proposed payment plan does not enable you to pay off your tax debt within three years. For instance, if your housing expenses exceed the IRS standards, you have 12 months to find more affordable housing arrangements.
Exceptions for Retirement Contributions and Credit Card Payments
In most cases, contributions to retirement plans and credit card payments are not allowed as part of your tax debt repayment plan unless you can demonstrate that they are essential for the health and welfare of your family or for generating income. This means that you must provide evidence that these expenses are crucial for your financial stability or your ability to earn income.
Securing Your Finances After Disclosures to a Tax Agency
Once your collection interview with the IRS or Franchise Tax Board is complete, you’ve essentially laid all your financial cards on the table. Tax authorities now have insight into your workplace, bank accounts, residence, and more. In essence, they are well-equipped to pursue actions like wage garnishments, bank account seizures, or asset confiscation. However, there are legal steps you can take to protect yourself from the scrutiny of a Revenue Officer.
Bank Account Privacy
Through the child support database, tax agencies can swiftly locate any bank accounts you hold within the state. However, it’s important to note that banks do not automatically report your account information to the government, contrary to common misconceptions. While President Biden sought broader authority in this regard, it was not granted by Congress. Instead, banks typically report annual interest income to the IRS in January.
In the state of California, bank levies are executed swiftly and electronically (so, effectively instantly) by statute, requiring banks to remit the levy amount to the state within ten days. Often, taxpayers are not even aware of the levy until after the funds have been transferred to the government.
Managing Account Disclosures
In the event a tax collector requests an updated Form 433-A, which details your financial information, be prepared to disclose your new accounts. However, this request is relatively infrequent, typically occurring no more than once a year.
Verification and Asset Tracing
Revenue Officers are meticulous in their verification of information provided on collection information forms. They are particularly vigilant for asset transfers within your family, as they may attempt to reclaim property under laws prohibiting fraudulent transfers. They also scour public records, including DMV files and property records, to uncover any stocks, real estate holdings, or past business ownership.
While you are not obligated to voluntarily disclose these assets, Revenue Officers can obtain tax filing data through IRS computers and summon additional information. Additionally, they may gain access to a new source of information: the database mandated by the Corporate Transparency Act, which requires most small businesses to report their ownership details. It’s prudent to anticipate that Revenue Officers will have access to this database for investigative purposes.
Navigating Installment Agreements for Tax Debt
When it comes to addressing old tax debt, one of the most commonly used methods is setting up a monthly installment agreement. The process and requirements for these agreements can vary depending on whether you’re dealing with the IRS or the California Franchise Tax Board and the amount you owe.
IRS Installment Agreements
With the IRS, obtaining an installment agreement is relatively straightforward if you owe $50,000 or less in taxes, penalties, and interest. However, if your debt exceeds this amount, the process becomes more challenging.
- Full Pay Installment Agreement: This type of agreement requires you to pay off your taxes before the ten-year collection or CSED (Collection Statute Expiration Date) expires. If approved, the IRS will not file a Notice of Federal Tax Lien. If you already have a federal tax lien, it may be possible to get it released after three months of timely payments.
- Partial Pay Installment Agreement (PPIA): If you cannot pay the full balance within the collection statute, the IRS may agree to a PPIA. In this case, they will file a Notice of Federal Tax Lien. To request a PPIA, you need to submit IRS Form 9465 (Installment Agreement Request) and provide detailed financial information through IRS Form 433-A (Collection Information Statement for Wage Earners and Self-Employed Individuals). A Group Manager must approve your PPIA, and you may be required to sell assets to enter into one. It’s important to note that discussing or negotiating a PPIA will put your case in pending installment agreement status, which extends the collection statute.
- Streamlined Installment Agreement: If you owe less than $50,000 in taxes, penalties, and interest (or $25,000 for business taxpayers), you may qualify for a Streamlined Installment Agreement. This agreement requires you to pay off your tax debt within 72 months (six years) and does not require disclosing detailed financial information to a Revenue Officer.
- Guaranteed Installment Agreement: If your tax debt is less than $10,000 (excluding penalties and interest), a Revenue Officer must grant you a Guaranteed Installment Agreement. These are relatively easy to obtain, but you must agree to pay your tax debt within 36 months (three years), not 72 months.
It’s important to note that to secure any installment agreement, a Revenue Officer will require you to be in current compliance. This means filing all unfiled tax returns and, if you’re self-employed, staying current on your quarterly estimated payments. If you have employees, you must also be current on your payroll tax deposits.
While negotiating an installment agreement, it’s crucial to be aware that requesting one will put you in pending installment agreement status. This status has the benefit of preventing levies by the Revenue Officer. However, it also extends the ten-year collection statute. It’s rare for the IRS to request Form 872 (extension of the collection statute) these days, but if it happens, consider rejecting the installment agreement request and filing an appeal, as IRS Appeals Officers rarely insist on Form 872.