Tax & Business Insights

Effective Approaches to Collections Cases

Volume 8 Issue 5 -- September/October 1996

In the last newsletter, we discussed dealing with IRS Automated Collection Service (ACS). In this edition, we will explore a number of different initial approaches for dealing with IRS collection matters.

Again, remember to obtain payment in advance. For a variety of reasons, businesses and individuals who are delinquent in paying their taxes often have flawed perspectives about the genesis of their problem; frequently incorrectly blaming others and the IRS for their problems.

When immediate relief is not obtained -- the usual scenario -- it is easy for such taxpayers to rationalize why they should not pay their representatives.

In most collection cases, the first aspect that should be explored is, how did the tax debt arise?

Surprisingly, many taxpayers are not sure. In some situations it is easy to determine the origin of the tax debt, e.g. returns may have been filed without remittance. In other cases, the root of the problem may not be so obvious.

Keep in mind that the IRS cannot collect a tax unless there is an "assessment." Assuming the taxpayer did not file without remittance, how can there be an assessment? There are several basic ways: (1) A math error (which does not require any appeal rights), (2) an audit, and (3) a substitute for return, often abbreviated "SFR."

An audit can be done in absentia, so to speak, when any IRS office or field agent attempts to locate the taxpayer, fails, and then mails a notice of deficiency. Many times such notices are sent to the "last known" address (which is all the IRS is obligated to do). The failure of the taxpayer to respond to the notice of deficiency (which he may not have ever received) results in a "default" after 90 days and a tax assessment. In many states, the state collection agencies follow similar procedures to those discussed in this newsletter.

The "SFR" method of obtaining a tax assessment often arises after the IRS receives information about unreported income, via a W-2 or 1099(s) for example. The IRS will then attempt to match the income source with a return. Failing this, the IRS will attempt to locate the taxpayer whose income it may be. If the taxpayer cannot be located, the IRS is authorized by the Internal Revenue Code to issue a substitute for return. The resulting assessment is often the suspected income (from the W-2 or 1099(s)) with minimal deductions.

Tip: When reviewing tax collection cases where the source of the assessment could be an SFR, look for the "type of tax" to be reflected as "1040A"on the assessment. The "A" usually means a substitute for return was used by the IRS, particularly if no return has yet been filed by the taxpayer.

As improbable as it sounds, some delinquent taxpayers do not know when, or if, they filed or if they have received credits against the tax via withholding or estimated payments. In short, when dealing with tax collection cases, expect the unexpected.

Tip: If, as is often the case, the taxpayer cannot recall anything (including whether or not returns were filed), then what? One of the best ways to reconstruct the IRS' actions, the source of the assessment, and of course credits (payments), is to review the IRS transcript.

A transcript is a computer-generated representation of the taxpayer's account with the IRS, organized by year. There are two types of transcripts: One is the "internal" version (meant for IRS staffers) which explains activity or actions concerning the account using a 3-digit classification code. For example, 670 means "subsequent payment" and 582 means "lien," and so on.

The other type of transcript, the version usually given to taxpayers and their representatives, shows the same three-digit codes plus an abbreviated explanation in English. The entries on such IRS transcripts are not always accurate or in the correct chronological order. Often you need to unravel matters portrayed on IRS transcripts. Remember to look for misapplied payments (those not seized by the IRS) , particularly if there has been a request that a voluntary payment be applied to a particular period or year.

Often, unless there is a Revenue (Field) Officer assigned to the case (as opposed to an ACS office), it takes time to get the transcripts. In the meantime perhaps all you will have for reference are various IRS documents such as liens, bills, and wage garnishments. Some of these indicate the type of tax, 1040A, 1040, 941, etc. The infamous trust-fund (100%) penalty is sometimes noted misleadingly as "Civil Penalty."

If there is an SFR assessment, one of the first actions you should consider taking is filing returns. Why? The SFR assessment does not allow any business or itemized deductions. For example, assuming the taxpayer is self-employed, no related business deductions will have been factored into the tax, thus the Self Employment Tax (SECA) may be considerably overstated.

The bottom line is that you first have to discover what happened and, roughly, what the correct tax should be before you can advise the client on what to pay, and how. "Working out IRS payment strategies" will be covered in our next newsletter.

While designed to be accurate, this publication is not intended to constitute the rendering of legal, accounting, or other professional services or to serve as a substitute for such services.

Redistribution or other commercial use of the material contained in Tax & Business Insights is expressly prohibited without the written permission of Tax and Business Professionals, Inc.

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