The IRS enforcement arm stayed eerily quiet through much of 2020 and 2021. In summer 2022, the Revenue Officers came back online. So, the big cases got attention (along with some startlingly small cases). It seemed like every other Revenue Officer we met was new and it showed.

In August, 2022 the Inflation Reduction Act passed. The IRA sent $80,000,000,000.00 (that’s fun to write out) to the IRS over 10 years for staff, structure and systems. It also will drive expanded enforcement on sophisticated tax cheats.

The impact of the IRA feels imminent. IRS added 5,000 more customer service personnel in December. Predictably, phone wait times have dropped dramatically. Surprisingly, the IRS has caught up on back filings, announcing this month that they’re caught up on tax returns filed and mail sent before 1/1/23.

Before now, it would have been unfair and inefficient to send demand notices, levies and liens. If you got one and called in, you’d have to wait two hours or call back the next day.

Now, if they can answer the phones effectively, and they can process paper effectively, the next thing to do is to send demand notices, liens and levies. And, you know that after the last three years of extreme financial disparities, there are plenty of people who have tax debts from losses or gains.

There is going to be a lot of enforcement for the IRS to do.

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So, here are three thoughts about what the tax code changes from December 2017 will mean for those of us defending clients in collections and exam:

There will be a bunch more people with small-to-medium tax debts who have never had them before. The changes to deductions for mortgage interest and state/property taxes are going to be the big culprit here. Self-employed people who relied on those deductions to mitigate their tax bill will be particularly stuck. Those folks counted on those deductions to keep their annual bill within the range of something they can throw on a credit card. Think professionals and self-employed people making $100,000-$200,000 per year. Also, the changes to the withholding calculators are going to leave a bunch of people surprised to find that they have under withheld for the year. Think about people in dual-income households where stacked incomes produce a balance because neither was withholding enough to account for the other? That problem is definitely worse now.

IRS does not have anywhere near enough resources to deal with the questions and problems that people are going to have.  The IRS hold times in the fall were already well over an hour. That is going to get much, much worse as people try to deal with entirely new forms (no 1040EZ any more!) and new balances. Add to that the shutdown is making it so much less appealing to work in the government, retirements are going to be even more rampant this year at the IRS.

Liens filings will go up. This is the one that obviously affects us the most since so many of our clients come to us from the direct mail piece we send after the lien is filed. What I predict is that the taxpayer and their preparer finish the return, realizing that they owe too much to pay off at once. The preparer, like so many who don’t do resolution work regularly, can’t get through to IRS on the phone, so throws an Installment Agreement request with the return. If the payment is too low, the lien will follow, and I’m going to get a lot of calls about how “the tax code changes really screwed me up and my CPA set up a payment plan, and now I have a lien….”.

This will go unnoticed by most people. The same people who ask me every day “Oh, is the government still shut down?”. But to a larger-than-ever pocket of first-timers, this is going to be a very rude awakening to how these tax cuts in 2017 really hurt a lot of regular people, and how tax policy isn’t something you pass and implement in a matter of weeks. Even holding the changes off for one year could have avoided a lot of pain.

I think it might turn out to be pretty painful….

UPDATE: IRS Confirms Tax Change Withholding Problems

Wow, that was strange. I posted yesterday that the tax code changes from last year are about to produce a bunch of new debts for people who hadn’t faced them before. Then, late yesterday, the IRS basically announced exactly that.

This announcement prompts stammering for several reasons:

1. Despite the headline, the IRS isn’t “waiving” withholding and estimated tax penalties. They’re reducing them. That is, in the past if you hit 90% of your liability through withholding or estimated taxes, no penalty. This year, they won’t penalize you if you get to 85%. Unless they already know that this little shift will save at least half the people who have a new problem… it’s a really shoddy maneuver. Between the use of “waiver” in the headline and the paltry shift in penalty policy, it’s a galling p.r. maneuver.
2. They act like the Service actually tried to warn people this would happen, talking about their “extensive outreach and education campaign” pointing people to the “paycheck checkup” Raise your hand if you saw a single news article warning about this? Now, part of the blame for the whole situation belongs with Congress and the President who dropped these changes on everyone, including the IRS, with no warning. This announcement proves that passing the tax law and implementing a year later would have been a good idea, so the “extensive campaign” could have been more effective at warning people.
3. Reducing the penalty isn’t going to cut it. There will be people with balances due, and provisions should be made to facilitate installment agreements, to provide increased resources to deal with the flood of new balances, and to re-consider policies on lien filings. Otherwise, this public relations mess is going to grow into the biggest tax cut backfire in history, depressing the economy, home sales, and further eroding basic compliance.

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If you have a retirement account you might think that liquidating that account to pay down the debt makes sense.  First, it’s likely that a tax debt is growing faster than your retirement (15% versus 5%-7%-9%?).  Second, carrying a tax debt over $25,000 on an Installment Agreement might require a persistent tax lien that can’t be easily negotiated, and a lien makes all sorts of other things expensive by ruining a credit score.  Third, paying more aggressively towards the debt opens up a swifter abatement of penalties.

Problem is, early withdrawal from retirement means paying taxes and early withdrawal penalties of 10%.  That means you may be having to take as much as 50% more than you “need” to have enough to pay the debt.  10% penalty doesn’t sound like a lot.  But, when 10% is ON TOP OF THE REGULAR TAXES, it hurts.  Recall that tax brackets run from 10% up to 39%, meaning the penalty might DOUBLE the cost of early withdrawal, or push you into a nearly-50% tax bracket.

However, the IRS code has traditionally held an exception to this penalty – the liquidation by IRS levy.  That is, if the IRS takes the account, you don’t pay the 10% penalty.

So, for years, our firm occasionally requested that the Revenue Officers on certain cases levy our clients’ retirement accounts.   With very rare exceptions, they declined.

The reason seemed to be that, even with the taxpayers’ ‘permission’, the processes for levies on retirement account were either unknown or untenable for our RO’s.  They didn’t know how, or didn’t want to bother.  They’d politely decline, then insist that either we pay the penalty and liquidate ourselves, or they’d threaten to levy income and bank accounts until the taxpayer would agree to an onerous Installment Agreement.

Here’s a scenario:  the delinquent taxpayer owes $125,000 in back taxes from a several bad years of self-employment, makes $150,000/year and is putting two kids through college.  They also have $100,000 in a 401k.   We know that IRS doesn’t think that helping your kids through college is an “allowable” expenses in their analysis of an Installment Agreement.  So, this RO is seeing thousands of dollars per month available in an IA payment.  If the taxpayer liquidates the 401k, they’re giving up $28k in taxes, and another $10k in penalties.  Leaving the net $62k, which brings the debt down to $63k.  This debt is still too big for the simple Direct Debit Installment Agreement, so the RO is STILL wanting thousands per month in an IA, likely wasting resources on the inevitable appeal of their determination.  If they’d just levy the thing, debt is then down to $53k, in striking distance of a simple IA that keeps the kids in college.

Now, the IRM allows them to do it.

But, they still kinda don’t.  At least, we’ve been trying since they added the provision last year and we haven’t seen one go through.  Problem is, they created the provision for the taxpayer to request the levy, but they didn’t remove the procedural hoops that the RO has to go through to get it done.  So, an inexperienced or overworked RO isn’t going to get it done very quickly.

Granted, I like that there’s somebody looking at the whole thing to make sure RO’s aren’t unduly pressuring taxpayers into a “voluntary” levy request.  But, it’s feeling like this needs another round of consideration to keep this from being one of those several programs that exist in theory in the IRM, but nobody has ever seen one.  (I see you Effective Tax Adminstration OIC  and Interests-of-the-Service Lien Withdrawal.).

So, please, IRS powers that be – streamline this thing, give us a form to use, so we can finally and easily, well, MAKE A BIG PAYMENT TOWARDS A TAX DEBT?

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Background on this might not be all that interesting, but HERE’s the Code section that authorizes the IRS to initiate a block on passport renewal or suspend the passport altogether.   Very basically – larger debts that go unresolved  and get all the way to liens and other collections, are going to produce these passport suspensions.  The specifics beyond that – debt size, lien or no lien, appeals exhausted – are more than we’re going to address in our blog and really merit a case-by-case analysis, which doesn’t take even a day with the Power of Attorney.  There are other scholarly blogs that have already done more exhaustive analysis of the code on this subject.  See THIS ONE, for instance.

Ways to avoid and reverse the flag:

1. Get resolved – get an Installment Agreement (simple or complex), an Offer in Compromise – these resolutions are listed in the Code, and we’ve seen them work to remove the “seriously delinquent” code from the Account Transcript

2. File a timely Collections Due Process (CDP) Appeal  (need to find a lien, notice of intent to levy with time to allow this) – we’ve also seen this work first-hand

3. File a bankruptcy?  We have not done this, and bankruptcies are a big hole that hasn’t been clarified.  A Chapter 7 discharges the debt, but the lien persists, so does this mean your debt is gone AND your passport?

4. Get into Currently Not Collectible status – this was a big question mark, since it’s not in the code, it’s an administrative decision by collections.   Different people have different opinions about whether Currently Not Collectible will/should block the passport problems.  Personally, I expect it to prevent suspensions and blocks.  The purpose of the program is to stimulate resolution on the merits.  There’s no justification for punishing poor people who can’t afford to hire someone to do an OIC for them (lord knows you shouldn’t do one yourself…).    It’s also dumb to punish someone who pays on their Installment Agreement for several years, then loses their job.  So far, we can attest to at least one case where the “Seriously Delinquent” code was taken back  off the  case after the CNC designation. 

What we don’t know yet

1. What the State Department action looks like – is it a letter?  How soon does it come after the certification by IRS?  Do they do them case-by-case or in bulk?   We know that you have to have BOTH the IRS action and the State Department action.

2. Process for reversing a suspension or renewal block – How quickly can you undo the action once State Department takes their action.   We assume you have to get right with IRS, but then how is that communicated to State Department?  Is it like the Federal Payee Levy Program, where a “block” goes in place an 45 days later the Social Security check is restored? One thing we can assume is reversing the block/suspension is not going to be a fast process, so it’s far better to prevent the action than reverse it.   Duh.

3. Can you pay your debt out of “seriously delinquent” territory once you’ve been certified?    This is an interesting question, but the answer is not that practical because if you can afford to be paying your debt down under a threshold to reverse a passport suspension, you probably can afford an Installment Agreement that will protect your passport.

As a general policy, there’s a lot of reasons to like passport suspensions and blocks as a method of bringing certain delinquent taxpayers into a resolution.  Ideally, it’s hitting some higher-net-worth travelling who probably are just delaying the inevitable instead of paying down, paying off.

What I don’t like is the over-the-road trucker clearing $25k annually while living in his truck who might lose his job because he can’t get into Canada over this.

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One of these measures was the Streamlined Installment Agreement Lien Withdrawal.  This allows taxpayers in a sub-$25k debt Installment Agreement to meet certain provisions, establish certain period of compliance, and receive a withdrawal of their lien as a reward.

The withdrawal of lien is a nice reward, too.  A release of lien, following full payment of a debt or even a granted Offer in Compromise, leaves a stain on credit, telling the world you don’t have a tax problem any more….

The lien withdrawal, on the other hand, erases the history of the lien, telling the world nothing at all – like the lien never happened.

After an initial period of adjustment, where we all learned how to calculate the Streamlined Installment Agreement payments, how to establish the direct debit structure, how to know when to bring the withdrawal petition, the lien withdrawals in these cases became nearly automatic.  From 2011-2017 our firm must have done several every month without a single issue I can even remember.

Then, earlier this year, we hit a stretch of several cases whose lien withdrawal petitions were denied!   The bases for the denials was varying from cryptic to nonsensical.  We were thrown, unsure what was going on.  We filed appeals, we battled, but it was very, very frustrating.

The root of the problem seemed to be in some language within the manual that spoke of “defaults in payment”.  If you set up one of these Streamlined agreements and you miss a payment, you don’t get a lien withdrawal.  Pretty simple concept, yes?  Paraphrasing a bit, the provision tells the lien unit decision-makers to grant the petition for lien withdrawal as long as the conditions are met and there have been no “defaults in payment”.  That language doesn’t seem terribly vague:  don’t grant the lien withdrawal if the taxpayer blew a payment on the agreement that qualifies them for the withdrawal.  It’s almost so obvious it’s a little strange they even wrote it.

But, one problem you run into all over the IRS is the application of essentially legal concepts by administrative personnel who haven’t had legal training.   You frequently experience decision making that is grounded in their experience with a fact pattern.  You get decision-makers who are accustomed to saying what they say most often, sometimes stretching logic to just do what they do without much ability to explain why.  When you confront one of these decision-makers with the logic or the outcome of their illogical, unprincipled decision, you might get “word salad”, or maybe a version of “I don’t make the rules”, or even just a shrug.  Maddening.

So, that’s what we were getting here – lien unit decision-makers denying run-of-the-mill lien withdrawal petitions for exotic reasons.  When I appealed one of these, the Appeals officer pretty freely granted that the decision by the lien unit was wrong, but then was stretching logic and common sense trying to sustain their decision.   She tried to use this “default in payment” language to say that my client’s technical default of a prior agreement due to an additional assessment caused by someone else’s mistake (she was reported to have credit card processing income she didn’t have) was a basis for denying this lien withdrawal, even though the lien unit didn’t even mention it.  I busted her when she read the provision to me and said only “default” instead of “default in payment”.  She was mad at me for shaming her sloppy efforts to read the manual to me, when she clearly hadn’t read these provisions before in her career and was bending the provisions to suit her inclinations right before my eyes.

Again, she was trying to sustain a decision even though she admitted it was wrong, instead finding a new way to deny my lien withdrawal by changing the words of the manual and grabbing an unrelated technical default from a prior agreement to say it was a “default in payment” of the current agreement.  I was stammering.

The Appeals manager served me a trough of word salad and sustained her sustain.

Now, we have continued to see lien withdrawal petitions granted since then and we’re still fighting those that were denied.  I wouldn’t hesitate to bring a petition if you qualify.  It did change my estimation of whether an SIA-LWD is still a DIY-category task, however.  It’s now in the category of things you could do yourself, but IRS may make it “interesting” in ways that an experienced practitioner would handle better than the layperson might. Another in a long list of practices at the IRS that will keep sending us clients for years.

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That’s when you get the knock on the door and the pit in your stomach as they hand you their business card and ask to speak with you for a moment.

They say they want to “work with you”.

You know they’re not there to help you.  You know that the conversation you are having with them is incredibly important, likely determining your fate with every passing moment, every innocuous exchange.  But, out of a desperate desire to avoid reality, we begin to trust this person is acting with our interests in mind.

To be clear:  they are not.

To be more clear:  that doesn’t mean that Revenue Officers are not good people or are not to be trusted.  My point is that they do not have your interests in mind.  They are not required to.  Here is a short list of things they are not required to discuss with you:

1.  All your options for resolving your tax problems.
2. Advantageous ways to present your financial situation.
3. Ways to change the RO’s mind about things.
4. Ways to deal with a difficult RO.
5. ….you get the picture…

This brings me to one of my biggest, chronic issues I have with Revenue Officer dynamics, generally:  their propensity to suggest they can help, which discourages hiring an advocate to help or seeking help from a clinic.

Taxpayers have rights, as IRS has made clear in their Bill of Rights.  To me, the RO context is the most dangerous for an unrepresented taxpayer.  I think it is malpractice for a lawyer to tell someone to proceed in that venue without representation.  The stakes are too high, the Revenue Officers hold all the cards, and are under a ton of institutional pressure to be active and aggressive.  But I hear about preparers who tell their troubled clients to engage Revenue Officers on their own all the time.

I’m not suggesting that RO managers are yelling at RO’s to issue more levies.  I don’t believe it is that overt.  Rather, my experience is that many RO’s are near-overwhelmed with work that keeps coming to them, leaving them to work their cases in fits and starts and get behind.  Then, once they are behind, they catch up through enforcement or overly-mechanical adherence to procedure.

The significance of this to me is that it presents an opportunity for my clients – to help them by helping the RO’s on their cases:  present a Revenue Officer with a proposal that you know will pass procedural muster, will resolve the case, and hopefully includes some good faith elements (call me to talk about our sell-the-Buick approach).  Then, follow up regularly.  Giving RO’s a means for resolving the case in your client’s favor before they get entrenched in their own presumption about what needs to happen, and you make it easier to do their job by helping your client.

But, there are very few unrepresented taxpayers who will happen upon such a proposal on their own.  To me, experienced representation is absolutely necessary to assure a safe, successful RO case outcome.

So, go set up your own Streamlined Installment Agreements, taxpayers.  Try your own Penalty Abatement requests.  But, leave the Revenue Officer negotiations to the professionals, even if your Revenue Officer is telling you they want to “work with you”.  Get someone who will work for you.

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It’s a question of strategy.

The Revenue Officer can’t grant an OIC.  All they can do is comment on it and pass it on to the OIC unit (IRM 5.8.1.8.1).  It’s that “comment” part that raises an issue.  Specifically, the Revenue Officer is to send to the OIC unit “Any information gathered during the field investigation that verifies or refutes amounts claimed on the CIS submitted with the offer”.

Now, there’s nothing inherently wrong with having a Revenue Officer provide that information, since they’re in a superior position to evaluate hard assets (real estate or vehicles) or to evaluate a business operation, relative to a regular OIC Examiner.

BUT, there’s no opportunity for the taxpayer or their representative to refute the RO’s impressions before the whole thing goes off to the OIC unit.  Then, if OIC unit says to you “well, your RO said that car looked beautiful” or “your RO said your business was thriving”, then the OIC is certainly going to defer to the RO’s on-the-ground impressions.

So, the conclusion is: don’t submit an OIC to an RO unless you feel they are encouraging you to do so.  Right?

Nope, there’s still a big risk that your RO is leading you down a road to a failed OIC.

So you think, “why would my RO tell me to consider an OIC if it didn’t have a chance?”. One reason might be that the RO doesn’t really understand OICs.  Depending on their background and training, they might believe your OIC has merit and they’re just wrong.  They might know your business has no value.  But the OIC unit is going to use a 2.5x gross revenues evaluation and blow your OIC out of the water.

The other, troubling reason that some ROs might be motivated to encourage OICs is that they get to close the file.

I recently had a first contact with an RO for a client with a $300k 1040 debt over three years.  Client and spouse make over $300k annually.  They have retirement and stocks worth over $100k.  They spend thousands each month to send their child to private school. Without opening up excel, we all know that case is never going to be a successful Offer, they’ll have to save money another way.

But in the first call with my Revenue Officer on the case, in her first 30 days with the file, and before she’s gotten any financial from us, she’s talking about two things: short deadlines (7 days) with threats of enforcement and ” have you considered doing an OIC?”.

So the REAL takeaway is generally never to submit an OIC to the RO.   If you’re going to qualify for an OIC, you’re also likely to qualify for a CNC, so just get the CNC from the RO and do your OIC on the backside.   The only exception might be if your RO is encouraging the OIC and they’re doing it having considered the financial and you think they know what they’re talking about and you don’t feel there are any “information that refutes” that will show up in their report that you’d rather deal with first-hand with the OIC examiner.

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