Internal Revenue Service Commissioner Mark W. Everson estimated that the current tax gap - the difference between taxes owed and collected - is $300 billion.That money is legitimately owed to the government and would do a lot of good ... if it could be collected.
On a recent Tax Talk Today program, Everson joined a panel of IRS officials and tax practitioners to discuss the implications of recent IRS collection initiatives.
"Certainly, if we can reduce the tax gap, that's really going to help the country," said Everson. "Also, I would say it's a question of basic respect for the rule of law. We can't have people not paying what they owe."
Whether due to the IRS's limited resources to pursue collections, or the taxpayer's limited ability to pay, many tax accounts with a balance due have languished. But with a new focus on collections and the legislation to back it up, the IRS intends to shrink the gap.
"We can't walk away from the fact that taxpayer rights exist, and we need to adhere to those taxpayer rights," said Brady R. Bennett, director of collection at the Small Business and Self-Employed Division at the IRS. "But, at the same time, we need to do our job with regard to collection and taxes, and that means in certain situations taking appropriate enforcement."
As the agency moves forward with this new focus on collections and payment, tax practitioners' phones will start to ring. For the tax professional, now is the time to brush up on your understanding of the latest changes in collection procedures and payment options, as well as your knowledge of the Taxpayer Bill of Rights. And since clients often don't come to us until they are already in a jam, preparedness will make a big difference for everyone.
Two new areas of particular interest for the tax professional with clients in collection cases are the use of private collection agencies and partial-payment agreements.
In January 2006, the IRS plans to launch a nationwide pilot program that uses three private collection agencies to assist in tax collection. "The private debt collection program itself really is a supplement to our own resources," said Bennett. "There's a lot of work out there that we just can't get to, based on our own resource level."
At its inception, the program will focus on:
* Individual taxpayers;
* Accounts owing less than $25,000 and deemed "highly collectible" by the IRS; and,
* Unassigned accounts. (If your client's account has already been assigned within the IRS, or has already been designated as currently not collectible, then that client will not be reassigned to a private collection agency.)
The IRS was careful to point out that no other profiling is done to select which accounts are assigned to private collection agencies. And because agency studies have shown no correlation between the amount of taxes owed and the taxpayer's level of income, the private collection agency initiative does not target any one category of taxpayer.
"We're not going to be looking at profiles by either age or income or geographic area," said Deborah Gascard Wolf, the business requirements director of the Filing and Payment Compliance Modernization Project at the Wage and Investment
Division of the IRS. "They will be randomly selected by the amount that they owe."
Taxpayers assigned to a private collection agency will receive a letter of notification from the IRS that includes contact information for both the collection agency and the IRS. If there is a power of attorney already on file, then the power of attorney contact will also receive a copy of the letter. The collection agency will have the authority to reach a viable payment agreement with the taxpayer, bound by the same legislative requirements as the IRS, but will have no enforcement capabilities. All tax payments will still be made directly to the IRS.
As for concerns about the impact of the private collection agency program on appeals, every taxpayer right that applies when dealing directly with the IRS also applies when dealing with the assigned collection agency. The Appeals Division and the Taxpayer Advocate's Office are still available, should the need arise, whether or not the taxpayer is assigned to a private collection agency.
The installment plan
Private collection agencies will also be authorized to allow taxpayers to enter into partial-payment installment agreements. This new payment option became possible with the passage of the American Jobs Creation Act of 2004, which was signed into law on Oct. 22, 2004. Prior to enactment of this legislation, taxpayers who could not fully pay their outstanding tax liabilities could only enter into an agreement with the IRS if it resulted in full payment of the liability within the allotted time. This left taxpayers who were unable to meet this criterion with limited payment options.
Taxpayers granted partial-payment agreements will be subject to Collection Financial Standards to help determine their ability to pay and a subsequent financial review every two years. As a result of this review, the amount of the installment payments could increase or the agreement could be terminated, if the taxpayer's financial condition improves.
A taxpayer may enter into a partial-payment agreement without first applying for an offer in compromise, which is a separate option. An offer in compromise is for the taxpayer who wants to extinguish debt and has the ability to come up with an amount that equals or exceeds the net realizable equity in her assets. These limitations often prevent taxpayers from qualifying for an offer. Now, with the addition of the partial-payment agreement option, there are more choices for the taxpayer in collections.
"Anything that increases the various alternatives to deal with a collection issue is a positive event," said Robert E. Panoff, Esq., PA. "It's a useful tool."
Because the IRS does not report information to credit bureaus, an installment agreement would not show up on a credit report. Credit bureaus can pick up on the filing of a federal tax lien, but the IRS does not report that type of information to third-party agencies.
Dealing with private collection agencies and negotiating partial payments on behalf of clients in collection requires one critical element: communication. As the IRS ramps up its collection activities, practitioners and revenue officers need to communicate in an effective manner. A practitioner who advocates for the taxpayer client, exhausts administrative remedies, and diligently pursues the research necessary to prepare and submit documents, must maintain clear communication with the revenue officer in order to avoid the appearance of delay.
Encouraging collection clients to respond in a timely fashion can be a particular challenge for practitioners, since ignoring IRS letters and trying to delay the process is characteristic of financially troubled taxpayers.
"Practitioners have to be careful of the client that delays," cautioned Panoff. "It can look like the representative is participating in the delay and create the wrong impression about their professional ethics."
Claudia Hill, EA, is a nationally recognized tax professional and frequent lecturer on taxation of individuals and representation before the IRS.
