Practical Guide to
Kenneth C. Weil
Tax Code Remedies
Tax Code Remedies
¶ 201 Overview
¶ 215 Statute of Limitation on Collection
¶ 225 Installment Agreements
¶ 235 Offers in Compromise
¶ 245 Husband and Wife—The Innocent Spouse Rules
¶ 255 Other Useful Tools
¶ 201 Overview
Taxpayer remedies are divided between the Bankruptcy Code and the Tax
Code. This chapter explores Tax Code remedies.
The major Tax Code remedies are the statute of limitation on collection
(¶ 215), payment through an installment agreement (¶ 225), and offer in compro-
mise (¶ 235). The major advantage to the statute of limitation is that it costs
nothing. Its major disadvantage is availability often depends on serendipity. The
major advantage to the installment agreement is that it allows the payment of taxes
over an extended period of time. Its major disadvantages are that the taxpayer is
left on a limited budget and that interest and penalties continue to accrue. The
major advantage to the offer in compromise is that it discharges taxes that are
otherwise nondischargeable in bankruptcy. Its major disadvantage is that its availa-
bility depends on whom you know. Without an outside source of funds, a taxpayer
generally cannot qualify for an all cash offer.
This chapter also reviews special rules relating to husband and wife liabili-
ties—the innocent spouse rules (¶ 245). It concludes by looking at other useful
tools such as the taxpayer advocate program, collection appeals, the collection due
process hearing, and other miscellaneous procedures (¶ 255).
¶ 215 Statute of Limitation on Collection
The major advantage to the statute of limitation is that it costs nothing. Its
major disadvantage is that its availability often depends on serendipity.
10 Practical Guide to Resolving Your Client’s Tax Liabilities
A tax liability can be satisfied without cost if the 10-year statute of limitation on
collection (“the statute ) expires.1 Once the statute expires, the IRS is without legal
authority to collect the tax. This remedy’s availability depends on serendipity. For
example, on a recently assessed tax liability, the IRS may determine that an
installment agreement is not feasible and place the account in hardship status. If
upon subsequent review the IRS cannot locate the taxpayer, the statute may expire
without further collection activity.
As the statute approaches expiration and the liability remains unpaid, the IRS
may take aggressive collection activity for the remaining statutory period. Aggres-
sive collection activity can include levies against wages and bank accounts, thereby
leaving the taxpayer with only a small exemption for living expenses.2 The IRS can
also convert the liability into a judgment and extend the time period to collect at
least 20 years for real property and indefinitely for personal property.3
.02 Applicable Rules
Although the statute of limitation on collection is 10 years, that time period can
be extended by a number of events. They include bankruptcy filings, offers in
compromise, installment agreements, and collection due process hearings.
Ten-year rule. The IRS receives 10 years from assessment to collect.4 Once
the statute runs, the taxpayer can request the release of liens related to the
liability.5 Assessment generally occurs shortly after filing, but for the purposes of
the statute, can occur no earlier than the original due date of the return. If
unknown, the assessment date can be obtained from the IRS by requesting a tax
history (MFTRA-X).6 Note, while the Tax Code makes clear that fraud tolls the
statute of limitation for assessment, it is silent on whether fraud tolls the statute of
limitation on collection.7 The statute does not run when a taxpayer is out of the
country for a continuous period of at least six months.8
Bankruptcy. During bankruptcy, the statute is suspended while the automatic
stay is in effect, and it remains suspended for an additional six months thereafter.9
Bankruptcy also suspends the period for collection if the taxpayer has contractually
1 Code Sec. 6502; and see Esclante v. Comm’r, 2002-1 before the statute ran in United States v. Donovan, 2003-2
USTC ¶ 50,410 (D. Ariz. 2002) (taxpayer stated claim for USTC ¶ 50,705, 348 F.3d 509 (6th Cir. 2003). As a result,
refund where he alleged (i) IRS had allocated overpay- the taxpayer called attention to the case, and the IRS filed
ment from 1999 Form 1040 to 1985 Form 940 tax and (ii) suit for judgment during the additional time period
statute of limitation on collection for the Form 940 tax granted by the offer.
had run). 7 See In re Babich, 94-1 USTC ¶ 50,046, 164 B.R. 581, 584
2 See Code Sec. 6331 and Code Sec. 6334. (Bankr. N.D. Ohio 1993) (in dicta, court stated that fraud
3 See ¶ 215.02. tolls the statute of limitation on collection).
8 Code Sec. 6503(c).
4 Code Sec. 6502(a).
9 Code Sec. 6503(h). For an example, see United States
5 Code Sec. 6325(a)(1). Lien releases are handled by
v. Hall, 2002-1 USTC ¶ 50,347 (S.D. Ind. 2002) where the
the national office in Cincinnati, Ohio, whose telephone United States filed suit more than 10 years after the tax
number is 800-913-6050. As liens contain a self-release was assessed but three days before the bankruptcy-ex-
date, which is often 10 years and 30 days from the tended time period ran. See also United States v. Breaux,
original assessment date, it may not be necessary to 2000-1 USTC ¶ 50,286 (E.D. La. 2000) (even though Chap-
contact anyone from the IRS, if the statute of limitation on ter 11 bankruptcy concluded 18 months previously, stat-
collection has run. ute of limitation on collection did not start running again
6 Presumably, the taxpayer did not review a MFTRA-X
until debtor’s discharge entered with the clerk of the
before submitting an offer in compromise two months court).
Tax Code Remedies 11
extended the time to collect.10 The automatic stay remains in effect until the earliest
of either the time (a) the case is closed; (b) the case is dismissed; or (c) if an
individual under Chapter 7 or in a case under Chapters 9, 11, 12, or 13, a discharge
is granted or denied.11 Under the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005 (BAPCPA) (P.L. 109-8), there are rules that dissolve the
automatic stay, or never let it take effect, for debtors who have filed more than one
bankruptcy petition in the past year. These rules are discussed in ¶ 940.02.
Query whether the statute remains suspended as to a particular tax liability if
the taxpayer contests discharge of that liability in an adversary proceeding, but
otherwise discharge has been granted. It should because the IRS is constrained
from collecting that tax liability by the adversary proceeding.12 Note also that the
statute is suspended if the taxpayer is the subject of a state court receivership
action, which is the state law analog to bankruptcy.13
There is a special rule for partners who file for bankruptcy. The filing converts
the bankrupt partner’s partnership items into nonpartnership items. Under Code
Sec. 6229(f)(1), the period of limitation for assessment after a partnership item
becomes a nonpartnership item is one year. Under Code Sec. 6229(h), the filing of
the bankruptcy petition stays the running of the one-year period while the auto-
matic stay remains in effect and adds an additional 60 days.14
Offer in compromise. As to offers in compromise, the statute is suspended
while the offer is outstanding.15 If the offer is accepted, the statute remains
suspended while the taxpayer fulfills the underlying contractual obligation. The IRS
receives an additional 30 days to collect if the offer is (i) rejected or (ii) accepted
but not paid in full.16 For example, if the offer is outstanding for a year before
rejection, the IRS has 11 years plus 30 days from assessment to collect (10 years
plus one year while the offer was outstanding plus the additional 30 days). If the
taxpayer withdraws an offer, the statute resumes running as of the date the IRS
issues written notification of the withdrawal.17
Installment agreements. Pursuant to Treasury Regulation, the statute of
limitation on collection stops running while an installment agreement is being
considered by the IRS, i.e., after it is accepted for processing by the IRS.18 The
statute remains tolled for 30 days after rejection or termination of an installment
agreement. The statute of limitation on collection resumes running after the
10 Klingshirn v. United States (In re Klingshirn), 98-2 15 Code Sec. 6331(k); and Reg. § 301.7122-1(g)(1) and
USTC ¶ 50,538, 147 F.3d 526 (6th Cir. 1998). (i)(1) (statute of limitation on collection suspended if the
11 11 U.S.C. § 362(c)(2). IRS cannot levy plus 30 days). After three attempts at
12 See Sanford III v. Comm’r, 63 TCM 2571, CCH Dec. tinkering with Code Sec. 6331(k), Congress has now
made clear that the statute of limitation on collection is
48,107(M), TC Memo. 1992-182 (1992) (adversary pro- tolled when an offer is pending. Code Sec. 6331(k)(3)(B)
ceeding in former wife’s bankruptcy did not stay IRS from (which makes the statute of limitation tolling provision of
proceeding against husband who had previously received Code Sec. 6331(i)(5) applicable). The IRS did not toll the
discharge). statute of limitation on collection for offers made between
13 Code Sec. 6503(b) (stops the statute of limitation on December 21, 2000, and March 9, 2002.
collection from running when the assets of a taxpayer are
under the control of a court, e.g., state law receivership). 17 United States v. Donovan, 2003-2 USTC ¶ 50,705 (6th
United States v. Chrein, 2005-2 USTC ¶ 50,652 (S.D.N.Y. Cir. 2003) (statute of limitation resumed running as of the
2005). date the IRS acknowledged in writing the withdrawal of
14 See Waugh v. IRS (In re Waugh), 2001-1 USTC the offer); and Rev. Proc. 2003-71 at § 9.01, 2003-2 CB 517.
18 Reg. § 301.6331-4(a)(2) and (c).
¶ 50,324, 260 B.R. 806, 814-815 (N.D. Tex. 2001).
12 Practical Guide to Resolving Your Client’s Tax Liabilities
installment agreement takes effect.19 The statute will also continue running if the
taxpayer agrees that a levy can be made while the offer is pending, the IRS
determines that the proposed agreement was submitted solely to delay collection,
or the proposed agreement relates to collection of a tax that is in jeopardy.20
Taxpayer assistance orders. Filing a Form 911, Application for Taxpayer
Assistance Order (TAO), suspends the statute of limitation on collection.21 The
statute remains suspended from the time the application is made until the Taxpayer
Advocate responds plus any additional time suspension the Taxpayer Advocate
includes in the TAO.22
Collection due process hearings. The filing of a collection due process
appeal stays the statute of limitation for the time the appeal is processed plus an
additional 90 days after the final determination is made. This rule applies to both
lien23 and levy24 collection due process appeals. If collection activity continues while
the appeal is pending, then the statute continues to run.25
Other rules. The statute of limitation on collection is suspended during the
time period that the IRS cannot levy because of the pendency of a refund suit for a
divisible tax.26 It is also suspended if a person accused of being a responsible
person posts a bond.27 Under the relief from joint liability rules, if the requesting
spouse requests understatement or deficiency relief under Code Sec. 6015(b) or
Code Sec. 6015(c), the IRS is prevented from taking collection activity against the
requesting spouse and the statute of limitation is stayed.28 The statute is not
suspended if the requesting spouse asks for equitable relief.
Extending the statute voluntarily. A taxpayer can voluntarily extend the
statute by executing a Form 900, Tax Collection Waiver. Seriatim execution of
these forms allows the IRS to collect payments on the liability until the taxpayer
dies. Under the third Taxpayer Bill of Rights, enacted in July 1998 (P.L. 105-206)
and effective for requests to extend the statute made after December 31, 1999, the
IRS is not supposed to extend the statute of limitation on collection. Permissive
language previously found in Code Sec. 6502(a)(2) was deleted. Nonetheless, the
IRS is permitted to extend the statute of limitation under the partial payment rules
for each year that will be paid. The extension is for six years.29
PLANNING NOTE: Section 3461 of the 1998 legislation enacted a special
rule that stops the statute of limitation from running beyond December 31,
2002 in certain instances. The rule applies if the taxpayer executed an exten-
sion of the statute prior to December 31, 1999 and at least 10 years have run
from the original date of assessment. For example, if a tax were assessed in
1988 and the statute of limitation extended to December 31, 2010 in 1995, the
statute of limitation on collection now runs on December 31, 2002 (and not in
19 T.D. 9027, IRB 2003-6, 413 (December 17, 2002). 25 Code Sec. 6330(e)(2).
20 Reg. § 301.6331-4(a)(4). 26 Code Sec. 6331(i)(5).
21 Code Sec. 7811(d). 27 Code Sec. 6672(c).
22 Code Sec. 7811(d). 28 Code Sec. 6015(e)(2).
23 Code Sec. 6320(c), making Code Sec. 6330(e) 29 See the discussion of partial payment installment
applicable. agreements at ¶ 225.02.
24 Code Sec. 6330(e).
Tax Code Remedies 13
2010). Under Section 3461(c)(2)(C), there is an exception to the rule for
statute extensions executed “in connection with an installment agreement. In
other contexts, “in connection with has been construed broadly.30 As exten-
sions are almost always requested around some collection activity and that
collection activity is most likely an installment agreement, this is an exception
that appears to consume the rule. Query whether the exception was a poorly
drafted attempt to allow statute extensions for installment agreements on
specified balance due accounts, which were authorized under the 1998 legisla-
tion and disappeared after Congress authorized partial payment installment
agreements in 2004.
Extending the statute by legal action. In most cases, the IRS summarily
assesses tax without a formal legal proceeding. The IRS can extend the statute by
commencing a formal legal proceeding and obtaining a judgment against the
delinquent taxpayer.31 If a judgment is obtained, the government’s judgment lien
against personal property never expires.32 By statute, its judgment lien against real
property remains in existence for 20 years and can be renewed for one 20-year
period.33 The IRS rarely pursues this remedy. The IRS has not released information
on when it will file a formal legal proceeding, though presumably, its formula is
based on some combination of the amount due and probability of collection.
PLANNING NOTE: When discussing the statute of limitation on collec-
tion with your client, you should always warn the client about the IRS’s ability
to extend the statute by filing suit.
.03 Income Tax Consequences of Statute Expiring
The income tax consequences of allowing the statute to expire remain un-
resolved. Theoretically, Code Sec. 61(a)(12) discharge of indebtedness income
exists. Practically, no reported case exists in which the IRS forced a taxpayer to
report such income. This policy makes sense; otherwise a portion of the “uncollecti-
ble debt would remain collectible. (The portion equals the “uncollectible debt
multiplied by the taxpayer’s tax rate.) Information reporting requirements adopted
in 1993 may make the reporting of this income necessary.34
In summary, the advantages of allowing the statute to expire include discharge
of the tax liability without payment and the accompanying release of underlying
liens. The disadvantages include the difficulty of withstanding 10 years of collection
activity, including heightened collection activity prior to the statute’s expiration,
30 See Mellon Bank v. United States, 2000-2 USTC operation of statutes of limitation), cert. denied, 447 US
¶ 50,642, 47 Fed. Cl. 86 (Fed. Cl. 2000), aff’d, 2001-2 USTC 905 (1980); United States v. Pierce, 231 B.R. 890 (E.D.N.C.
¶ 50,621, 265 F3d 1275 (Fed. Cl. 2001) (the term “connec- 1998) (judgment in favor of government lasts indefi-
tion is defined as a relationship or association). nitely); and see also Hillyer v. Comm’r, 94-1 USTC ¶ 50,187
31 See Code Sec. 6502 and Code Sec. 7403(a); United (M.D. Pa. 1994) (government argued that its judgments
States v. Qurashi, 2004-2 USTC ¶ 50,362 (M.D. Fla. 2004) are enforceable for an indefinite period), aff’d, 95-1 USTC
(statute of limitation ran on May 26; suit filed May 20); ¶ 50,155 (3rd Cir. 1995) (unpublished opinion).
and M. SALTZMAN, IRS PRACTICE AND PROCEDURE 33 28 U.S.C. § 3201(c).
§ 14.08(2)(a) (2d ed. 1991) (explaining procedure includ- 34 Reg. § 1.6050P-1(b)(2)(C) (financial entities, includ-
ing taxpayer’s right to contest merits of assessment). ing the federal government, required to report forgive-
32 United States v. Weintraub, 80-1 USTC ¶ 9172, 613 ness of debt income arising by operation of law, e.g.,
F.2d 612 (6th Cir. 1979) (government is exempt from statute of limitation on collection).
14 Practical Guide to Resolving Your Client’s Tax Liabilities
and the possibility that the IRS may renew the taxpayer’s liability with a court
¶ 225 Installment Agreements
The major advantage to the installment agreement is that it allows the payment
of taxes over an extended period of time. Its major disadvantages are that the
taxpayer is left on a limited budget and interest and penalties continue to accrue.
.01 General Rules
An installment agreement is a contract between the IRS and the taxpayer for
the payment of a tax obligation over time. The IRS charges a $43 fee for the
acceptance of an installment agreement.35 The fee for restructuring or reinstating
an installment agreement is $24.36 Once accepted, an installment agreement
reduces the failure to pay penalty by half, from .5 to .25 percent per month.37
While a proposed installment agreement is pending, the statute of limitation on
collection is tolled.38 If the proposed installment is rejected or if an accepted
installment agreement is terminated, the statute is tolled for an additional 30 days.39
Once the installment agreement is accepted, the statute of limitation on collection
resumes running.40 The statute continues to run if the taxpayer files a written notice
waiving the restriction on levy, the IRS determines that the proposed installment
agreement was submitted solely for delay, or the collection of tax to which the
agreement relates is in jeopardy.41 Generally, the IRS cannot require the taxpayer to
extend the statute of limitation on collection as a condition for obtaining an
installment agreement.42 However, the IRS is permitted to extend the statute of
limitation on installment agreements on partial payment installment agreements
beyond the 10-year period.
PLANNING NOTE: If the taxpayer submits a bona fide installment
agreement, is the IRS likely to levy? Accordingly, to keep the statute running,
should the taxpayer waive the restriction on levy when submitting an install-
Installment agreements are not permanent; revenue officers are directed to
review them periodically. Execution of an installment agreement does not prevent
the IRS from requesting updated financial information, conducting further investi-
gations, filing or refiling notices of federal tax lien, and taking collection action
against a person not a party to the installment agreement.43 It does prevent the IRS
from filing a case to obtain a judgment.44
The IRS is allowed to terminate an installment agreement if the information
provided by the taxpayer is inaccurate or incomplete, or if collection is in jeop-
ardy.45 The IRS can alter, modify, or terminate an installment agreement if the
35 Reg. § 300.1(b). 41 Reg. § 301.6331-4(a)(4).
36 Reg. § 300.2(b). 42 This was accomplished in the third Taxpayer Bill of
37 Code Sec. 6651(h). Rights (P.L. 105-206) by deleting permissive language
previously found in Code Sec. 6502(a)(2).
38 Reg. § 301.6331-4(c). 43 Reg. § 301.6159-1(d).
39 Reg. § 301.6331-4(c). 44 Code Sec. 6331(k)(3).
40 T.D. 9027, 2003-1 CB 413. 45 Code Sec. 6159(b)(2).
Tax Code Remedies 15
taxpayer’s financial circumstances change significantly, the taxpayer does not
comply with its terms or conditions, the taxpayer fails to pay other tax debt as it
comes due, or the taxpayer fails to provide updated financial information when
requested.46 Except in the case of termination because of jeopardy, the IRS is
required to give 30-day notice before modifying, altering, or terminating an install-
ment agreement.47 The notice must explain why the IRS proposes its action.48 A
taxpayer can request an administrative review of any proposed termination of an
installment agreement.49 Congress did not provide for judicial review of modifica-
tions or alterations.
Payments on installment agreements are generally made directly by the
taxpayer to the IRS. However, Form 2159, Payroll Deduction Agreement, provides
for payment by payroll deduction. Such an arrangement will generally make both
the taxpayer and the employer unhappy. Nonetheless, in situations where the IRS
perceives the taxpayer as high risk for nonpayment, it may be the only available
method to obtain an installment agreement. Sometimes the IRS will enter a quasi-
installment agreement by instituting a continuing, monthly levy for the amount that
would otherwise have been paid according to the Form 433A.
Sometimes, the IRS reaches the conclusion that the taxpayer’s expenses
exceed income and no funds are available for the payment of taxes. In such an
event, the taxpayer is put on hardship status, and no further collection activity is
taken until the account is reviewed in the future.
.02 Types of Installment Agreements
An assortment of installment agreements is available. None of them are
particularly palatable, unless the taxpayer owes a relatively small amount of money
that can be paid over 36 months.
Form 9465, Installment Agreement Request. The simplest method for
entering an installment agreement is to submit Form 9465, which is often submit-
ted with a tax return that shows a balance due.50
PLANNING NOTE: Provided that the tax is paid over a three-year period
and is for a relatively small amount of money, it is likely that the proposed
installment plan will be accepted. However, the IRS does retain the right to
review a Form 433A to determine the taxpayer’s ability to pay. As a rule of
thumb for computing monthly payments, if the outstanding balance is divided
by 30, the total tax, interest, and penalties will be paid in full within 36 months.
Tax liability of less than $10,000. Under Code Sec. 6159(c), the IRS is
required to enter an installment agreement51 with an individual if (i) the aggregate
amount of tax at issue, i.e., total liability less interest and penalties, is $10,000 or
46 Code Sec. 6159(b)(3) and (4). vided for payment of 10 percent per month of the
47 Code Sec. 6159(b)(5). outstanding tax liability for any tax year, starting with the
48 Code Sec. 6159(b)(5)(B). earliest tax year. In other words, each tax year’s liability
was paid off over 10 months. Practically speaking, delin-
49 Code Sec. 6159(c).
quent taxpayers were rarely able to pay off one year’s
50 Another simple method is to use a consumer credit worth of tax liability in 10 months.
counseling service to intercede and arrange for a pay- 51 The Internal Revenue Manual (IRM) calls these
ment. At one time in Seattle, a standard agreement pro- guaranteed installment agreements (I.R.M. § 188.8.131.52).
16 Practical Guide to Resolving Your Client’s Tax Liabilities
less; (ii) the taxpayer has filed all returns for the past five years; (iii) the taxpayer
has paid all tax due on those returns; (iv) the taxpayer has not previously entered
into an installment agreement with the IRS; (v) after review of financial documents
provided by the taxpayer, the IRS determines that the taxpayer is financially unable
to pay the balance in full when due; (vi) full payment will be made within three
years; and (vii) the taxpayer remains in full compliance with the tax laws for the
same three-year period.
Also, when the taxpayer owes smaller amounts of money, an installment
agreement can be entered over the telephone and without the taxpayer providing
in-depth financial information. Confirmation of the installment agreement is made
by letter from the IRS to the taxpayer.
CAUTION: In entering an installment agreement, the taxpayer will al-
most always provide some financial information to the IRS. This information
will almost always be sufficient to provide a road map to the taxpayer’s assets.
Partial payment. The IRS is authorized to accept partial payment installment
agreements.52 The IRM directs the revenue officer to file a notice of federal tax lien
with any partial payment installment agreement.53 Only necessary expenses are
allowed. Conditional expenses are not allowed. A partial payment installment
agreement is not to be issued until a good faith effort has been given to utilize the
equity in the taxpayer’s assets, including a levy if necessary.54
Taxpayers may have a balance due that cannot be paid in its entirety, but it can
be paid in part for one or more years.55 For example, the taxpayer may owe a
balance of $25,000+ for each of several older years but have a balance due of
$1,000+ for more recent years. The IRS will allow the taxpayer to enter an
installment agreement to pay off the smaller balances, while leaving the larger
balances unpaid. The IRS requires a six-year extension of the statute of limitation,
which is explained as five years to collect plus an additional year for administrative
purposes, such as skips in payments. The statute extension is supposed to be only
for the years that are being paid; whether in practice this will be the case, remains
to be seen.
Partial payment agreements must be reviewed every two years.56 From the
IRS’s perspective this will facilitate larger collection payments by forcing revenue
officers to review periodically the installment agreement. Presumably, if financial
conditions worsen, the taxpayer can reduce the monthly payment.
Tax liability of up to $25,000. Taxpayers with liabilities of less than $25,000
may qualify for a streamlined agreement.57 The $25,000 does not include accrued
but unassessed interest and penalties. The agreement must result in the tax due
being paid in full within 60 months or the expiration of the statute of limitation on
52 Code Sec. 6159(a); and I.R.M. § 184.108.40.206. count. They are now considered a subset of partial pay
53 I.R.M. § 220.127.116.11.1. installment agreements. This paragraph discusses what
54 I.R.M. § 18.104.22.168.2.
used to be “installment agreements on a specified balance
55 I.R.M. § § 22.214.171.124.7-126.96.36.199.9. After the passage of 56 Code Sec. 6159(d).
Code Sec. 6159(a) in 2004, the IRM eliminated the phrase 57 See I.R.M. § 188.8.131.52. The IRM calls these stream-
“installment agreements on a specified balance due ac- lined installment agreements (I.R.M. § 184.108.40.206).
Tax Code Remedies 17
collection, whichever comes first. To qualify for a streamlined agreement, a tax-
payer must have filed all tax returns that are due prior to entering into the
Larger-dollar liabilities and agreements confirmed by Form 433D.
Before the IRS will enter an installment agreement for payments on larger bal-
ances, it generally requires the taxpayer to answer the questions found in Form
433A (Collection Information Statement for Individuals) or Form 433B (Collection
Information Statement for Businesses). Confirmation of these more formal agree-
ments is made on Form 433D, Installment Agreement, which is signed by both the
taxpayer and the IRS.
The Forms 433A and B are similar to financial statements in that they provide
asset, liability, income, and expense information to the IRS. Because of the asset
information provided, the IRS has a roadmap to the taxpayer’s assets. Asset
valuation need only be at quick sale value, as the form is designed to let the IRS
know what it could collect. The income and expense information is used to derive
the periodic payment, which is almost always monthly.
In-business trust fund express installment agreement.58 For balances of
$1,500 or less that can be paid within 24 months, the IRS provides for in-business
trust fund express installment agreements. As the name implies, the IRS employee
can do this type of agreement quickly. It is unnecessary for the IRS employee to
obtain financial information, make a lien filing determination, or obtain a supervi-
sor’s approval. Although the name implies that the taxpayer must still be in
business, the IRM instructions do not so indicate. Thus, it appears this express
agreement is available, regardless of whether the taxpayer is still in business.
PLANNING NOTE: The Internal Revenue Manual (IRM) is a valuable
source of information on how the IRS views installment agreements and offers.
For example, it provides detailed information on how the IRS values houses
and retirement plans. Given the ready availability of the Internet, a practitioner
should become familiar with the information in the IRM. The cite for the IRM
is as follows: http://www.irs.gov/irm/index.html.
.03 Comparing Necessary and Conditional Expenses
To promote even treatment among taxpayers, the IRS developed standards for
expenses on the Form 433A.
PLANNING NOTE: Those standards have been adopted in the Bank-
ruptcy Code as a part of abuse testing under § 707(b) (see ¶ 910 and ¶ 920).
The IRS classifies expenses as either necessary or conditional. Necessary
expenses are those that (i) affect the health and welfare of the taxpayer or the
taxpayer’s family, or (ii) are necessary for the production of income. All necessary
expenses are allowed.
Any expense that is not necessary is conditional. Except as otherwise provided,
conditional expenses are not allowed. Examples of conditional expenses include
58 I.R.M. § 220.127.116.11.
18 Practical Guide to Resolving Your Client’s Tax Liabilities
private school tuition and charitable contributions. If the outstanding tax bill can be
paid within five years and the expenses are reasonable, the IRS will allow condi-
tional expenses.59 Otherwise, the IRS gives the taxpayer one year to wring condi-
tional expenses out of the budget.60 For example, if a child starts the year in private
school, the child will be allowed to complete that year in private school.
.04 Necessary Expenses61
Categories of necessary expenses include national standard expenses, housing
and utilities, transportation, health care, taxes, court ordered expenses, child/
dependent care, life insurance, secured debts, and other expenses. These catego-
ries are discussed below.
PLANNING NOTE: There is considerable debate over whether these
collection standards are fair. For example, in 2006, a person who earns $1,000 a
month is budgeted $203 for food, while a person who earns $6,000 a month
receives a budget of $483. There is something uncomfortable about discrimi-
nating against the amount of food one can eat based on income.
Current information on all collection financial standards can be found by
going to the home page for the IRS at http://www.irs.gov/, clicking on
individuals, scrolling halfway down, and clicking on collection financial
National standard expenses include housekeeping supplies, apparel and ser-
vice, personal care products and services, food, and miscellaneous expenses. A
chart of national standard expenses per income level is currently provided as part of
the Form 433A and is also available in the IRM. The only discretion a revenue
officer has with national standard expenses is if the taxpayer can show that failure
to allow a larger amount will affect the taxpayer’s or the taxpayer’s family’s health
or welfare or the taxpayer’s ability to produce income.62
Local standards apply for housing and utility allowances. In many expensive
areas of the country, these housing allowances are unreasonably low. To argue
upward adjustment, the same health and welfare standards apply.
In some cases a taxpayer may be able to justify spending more than the normal
housing allowance . . . If limiting the expense . . . would force a taxpayer to sell
his [or her] home, there will be a loss of a tax deduction. As a result of the loss
of deductions, the taxpayer would pay more in taxes, which in turn reduces the
monthly installment payment to the IRS. If such a “wash situation results, the
IRS should not insist on a taxpayer changing the place of residence.63
Transportation costs have national standards for ownership costs, which in 2006
were $471 for the first car and $332 for the second car, and local standards for
operating costs. Health care costs are allowed as verified. Tax payments are
59 IRM § 18.104.22.168.5. condition of the taxpayer’s employment; taxpayer failed to
60 IRM § 22.214.171.124.4. prove that he was employed as a minister so court did not
61 See ¶ 11,200 for applicable tables. consider whether tithing was a condition of his
62 See Pixley v. Comm’r, 123 TC 269, CCH Dec. 55,744 63 R. Kane, Jr., What’s New at the IRS? An Update on
(2004) (charitable contributions are necessary expenses IRS Practice and Procedure, at 10 (July 18, 1996), paper
if they provide for a taxpayer’s health and welfare or are a presented to Seattle Tax Practitioners.
Tax Code Remedies 19
allowed as necessary. Court-ordered payments are allowed. Child care payments
are allowed as substantiated and justified. Life insurance is allowed, but only for the
purchase of $100,000 of term insurance. Payments can be made on secured debts
that prime the IRS. Unsecured credit card debt is not a necessary expense.
Payments are also allowed of up to 10 percent of net income, not to exceed $250, for
miscellaneous items. Attorney’s or accountant’s fees incurred in dealing with the
IRS can be included here.
Other necessary expenses are also allowable, and they are listed at I.R.M.
§ 126.96.36.199.3. Examples include child care, dependent care, whether the person is
elderly, invalid, or disabled, taxes, health care, court-ordered payments, involuntary
deductions, secured or legally perfected debts at the minimum payment, life
insurance, disability insurance for a self-employed individual, union dues, profes-
sional association dues, and accounting and legal fees for representing a taxpayer
before the Service.
.05 Unavailability of Installment Agreements for Certain Unpaid Payroll
The IRS takes a hard-line policy against businesses that owe payroll taxes. The
longest period available to a business for the payment of past due payroll taxes is
six months although revenue officers do sometimes exercise discretion and extend
the time period. The IRS’s view is that if any longer period is necessary, the
business is not viable and should be shut down. Businesses that owe payroll taxes
for three or more quarters may be unable to obtain an installment agreement, even
for as small a time period as six months. Obviously, these businesses face immedi-
.06 Annual Account Statement
Pursuant to section 3506 of the third Taxpayer Bill of Rights (IRS Restructur-
ing and Reform Act, P.L. 105-206), the IRS is required to provide an annual account
statement to the taxpayer. The statement must set forth the balance at the begin-
ning of the year, the payments made during the year, and the remaining balance at
the end of the year.
Advantages of the installment agreement include the creation of breathing
space free from examination by the IRS, the possibility of full payment, and when
payment is not possible, the possibility of hardship status. Disadvantages of the
installment agreement include an impossibly strict budget to live on, the possibility
of the extension of the statute of limitation on collection, and the possibility that a
notice of tax lien will be filed.
¶ 235 Offers in Compromise
The major advantage to the offer in compromise is that it discharges taxes that
are otherwise nondischargeable in bankruptcy. Its major disadvantage is that its
availability depends on whom you know. Without an outside source of funds, a
taxpayer generally cannot qualify for an offer.
20 Practical Guide to Resolving Your Client’s Tax Liabilities
An offer in compromise (offer) is a contractual agreement between the IRS and
the taxpayer in which the IRS forgives all the taxpayer’s federal tax obligations.65 In
addition, all tax liens are released. In exchange for the release, under a standard
doubt as to collectability offer, the taxpayer must make a cash payment equal to the
net liquidation value of the taxpayer’s assets plus the net present value of five years
of future payments. The taxpayer also loses all tax refunds for all tax years up to
and including the year the offer is accepted. Further, the offer can be revoked
unless the taxpayer remains in full compliance with the tax laws for five years.
Offers come in three types as follows: doubt as to liability, doubt as to
collectability, and effective tax administration.66 The authority for establishing types
of offers is found in Code Sec. 7122(c), which provides that the IRS shall prescribe
guidelines for offers.67
.02 Procedure for Filing the Offer68
Offers are made on Form 656, Offer in Compromise. The offer can be signed
by the taxpayer’s personal representative.69 A Form 433A (or Form 433B, if applica-
ble) must accompany the Form 656. A fee of $150 is required to submit an offer.
The fee is meant to discourage frivolous offers.70 A taxpayer whose monthly income
is at or below poverty level can have the fee waived by filing Form 656-A.
If an offer is rejected, it can be appealed to the local appeals office.71 One
should follow the appeal procedure used for audits.72 Once an offer is accepted, it
cannot be set aside, except for falsification of documents supplied in considering
the offer, falsification or concealment of assets by the taxpayer, or a mutual mistake
of a material fact sufficient to cause a contract to be reformed or rescinded.73
Note, an offer can be made by someone other than the taxpayer. If so, the
taxpayer has not signed the Form 656, i.e., the taxpayer has not agreed to waive the
statute of limitation on collection, forfeit all refunds, etc. Consequently, the IRS will
seek the signature of the taxpayer on the offer.74 Also of interest is the difficulty that
federal employees have in obtaining offers. This stems from the requirement that
64 General information about offers in compromise is 70 Internal Revenue News Release IR-2003-99, August
available in many places including Reg. § 301.7122-1 and 15, 2003.
Rev. Proc. 2003-71, 2003-2 CB 517. 71 Reg. § 301.7122-1(f)(5)(i) (taxpayer may administra-
65 See Reg. § 301.7122-1(a)(2) (“an agreement to com- tively appeal a rejection of an offer to IRS Appeals within
promise ). Because offers are contracts between taxpay- 30 days of the day after the date on the rejection letter).
72 For more on appeals procedure, see M. SALTZ-
ers and the government, general contract law principles
are applied. Jones v. United States (In re Jones), 97-1 USTC MAN, IRS PRACTICE AND PROCEDURE Ch. 9 (2d ed.
¶ 50,429, 208 B.R. 935 (9th Cir. B.A.P. 1997) (to rescind 1991).
offer government had to show fraud or mutual mistake). 73 Reg. § 301.7122-1(e)(5); and see Jones v. United States
66 Reg. § 301.7122-1(b). (In re Jones), 97-1 USTC ¶ 50,429, 208 B.R. 935 (9th Cir.
67 See H.R. CONF. REP. NO. 105-599 at 111 (1998), B.A.P. 1997) (government argued that offer should be set
aside for fraud because taxpayer submitted false financial
which provides that the IRS, in prescribing its guidelines,
statements; court remanded for fact finding on whether
is to consider additional factors beyond doubt as to liabil- debtor falsified or concealed assets; case also remanded
ity and doubt as to collectability in accepting offers. Thus, for fact finding on issue of IRS’s detrimental reliance on
the effective tax administration offer was created. submitted documents, which is an element of fraud).
68 See Rev. Proc. 2003-71, 2003-2 CB 517. 74 M. SALTZMAN, IRS PRACTICE AND PROCE-
69 IRS Letter Ruling 200115031 (January 30, 2001). DURE p. 15-71, (2d ed. 1991).
Tax Code Remedies 21
federal employees shall satisfy in good faith their obligations as citizens, especially
federal tax obligations.75
.03 Consequences to Taxpayer Beyond Discharge of Taxes
The IRS attaches many conditions to the acceptance of an offer. These include
extensions of the statute of limitation on collection,76 no missteps allowed for five
years, and loss of tax refund in the year the offer is accepted. In addition, while the
offer is being processed, the taxpayer waits on pins and needles.
A nerve-racking time for the taxpayer. Historically, the IRS has been slow to
process offers. Waits of one year or longer are not uncommon. Experience teaches
that it is a long and unpleasant time period for the taxpayer. Periodically, the IRS
takes administrative action to speed the process along. For example, it has tried to
speed-up the offer process by centralizing offer functions in a national office.
Congress has also tried to speed up the offer process. Before 1996, a written
opinion from the Office of Chief Counsel was necessary before the IRS could accept
an offer settling a tax obligation larger than $500. In 1996, legislation increased that
threshold to $50,000.77
Statute of limitation on collection stayed and collection stayed. A
processable offer stays the running of the statute of limitation on collection. It also
adds an additional 30 days to the statute.78 For example, if a tax is assessed
December 31, xx00, an offer filed December 31, xx03, and the offer rejected
December 1, xx04, the IRS has until December 31, xx11, to collect the tax (the 11
years from xx00 include the 10 years allowed under the statute plus one year stayed
while the offer is considered and rejected plus an additional 30 days).
While the offer is being processed, collection activity generally ceases.79 There
is no condition precedent that an installment agreement must be executed before
an offer will be processed.
CAUTION: Installment agreements that are currently in place when the
offer is made remain in effect while an offer is pending. As a result, when
installment agreements are in place and an offer is made, the IRS can collect
payments over and above the offer.80
No missteps are allowed for five years. A focus of the offer process is to
bring the taxpayer back into the system. Thus, for the tax debt to be discharged,
the taxpayer must file and pay timely for five tax years following acceptance of the
offer. Failure to do so can result in revocation of the offer.
75 See 5 CFR § 2635.809 (2005). IRS did not toll the statute of limitation on collection for
76 See Reg. § 301.7122-1(d) (offers must be submitted offers made between December 21, 2000, and March 9,
according to the procedures described by the IRS); Form 2002.
656 (taxpayer contractually agrees to suspend statute of 77 Code Sec. 7122(b).
limitation while offer is pending plus an additional 30 78 Reg. § 301.7122-1(g)(1) and (i)(1).
days); and Reg. § 301.7122-1(i)(1) (statute of limitation 79 Code Sec. 6331(k)(1) and Reg. § 301.7122-1(d), Reg.
suspended while levy not allowed). In addition, after
three attempts at tinkering with Code Sec. 6331(k), Con- § 301.7122-1(g)(1), and Form 656. Interest and penalties
gress has now made clear that the statute of limitation on continue to accrue.
80 See IRS Letter Ruling 200133045 (July 9, 2001) (IRS
collection is tolled when an offer is pending. Code Sec.
6331(k)(3)(B) (which makes the statute of limitation toll- will refund installment payments made after offer
ing provisions of Code Sec. 6331(i)(5) applicable.) The accepted).
22 Practical Guide to Resolving Your Client’s Tax Liabilities
CAUTION: Taxpayers who need offers often find it very difficult to
remain in compliance for five years.
Loss of refunds through tax year of acceptance. As part of the offer
process, the taxpayer forfeits all tax refunds for all years up to and including the
year the offer is accepted by the IRS. The refund rule can generate an unpleasant
surprise, especially if an offer is completed in January. For example, if the offer is
accepted in January xx02, the IRS is entitled to a tax refund payable in April xx03.
Extends the time that recently assessed taxes are nondischargeable.
Offers also extend the period in which relatively recently assessed taxes can be
considered a priority for bankruptcy purposes.81 This issue is discussed in ¶ 425.
.04 Requirements for Acceptance of Doubt as to Collectability Offer
A doubt as to collectability offer is formulaic. Failure to meet the formula
generally means that an offer will not be processed. The IRS cannot reject an offer
from a low-income taxpayer simply because the amount offered is insufficient.82
To make a successful offer, the taxpayer must pay the net liquidation value of
the taxpayer’s assets plus the net present value of a five-year installment agreement.
The IRS reasons that for an offer to make economic sense, the taxpayer should pay
the amounts to which it is already entitled, i.e., the net liquidation value of a
taxpayer’s assets plus the net present value of an installment agreement. Because
the offer requires the payment of all that a taxpayer has and all that a taxpayer
hopes to have for the next five years, offers are generally funded by family or close
friends. Thus, qualifying for an offer literally depends on whom you know.
PLANNING NOTE: The ability to make an acceptable offer almost
always depends on an outside source of funds. Practitioners serve their clients
well when they verify the availability of outside funds to pay the offer before
starting the offer process.
Net liquidation value of assets. Net liquidation value is computed from the
asset information pages of the Form 433A. In determining net liquidation value of
assets, all assets must be counted except those exempt under Code Sec. 6334 (see
¶ 11,220).83 For example, in 2005, the taxpayer could exempt up to $7,200 of
personal effects.84 Motor vehicles are not generally considered personal effects.85
As to valuation, the IRS seeks only what it would receive if it liquidated the
taxpayer’s assets. Thus, a quick sale or forced sale value can be used. For example,
when valuing personal residences, one generally uses 80 percent of fair market
value.86 Note, in Chapter 13, the value used to buy off the lien is the fair market
81 11 U.S.C. § 507(a)(8)(A)(ii). 84 Code Sec. 6334(a). The exemption amounts are in-
82 Code dexed for inflation. See Rev. Proc. 2004-71, 2004-2 CB 970,
Sec. 7122(c)(3)(A); and Reg.
§ 301.7122-1(f)(3). § 3.33.
83 The Code Sec. 6334 exemptions are substantially 85 I.R.M. § 188.8.131.52.10.1.
86 During the period 2003-2005, the housing market
smaller than the exemptions allowed in bankruptcy. Cf.
11 U.S.C. § 522 with Code Sec. 6334. See Practice Tool was very hot. Revenue officers stopped applying the
¶ 11,100. quick sale discount due to the belief that real property
could be sold quickly. Quick sale discounts were still
available at the appellate level.
Tax Code Remedies 23
value, without a discount for forced or quick sale or selling costs. Thus, there may
be equity for Chapter 13 purposes but not for an offer.
PLANNING NOTE: The taxpayer can reduce the actual offer by the $150
application fee. The IRM is a valuable source of information on how the IRS
values assets. For example, the valuation rules for pensions are very liberal, as
they provide that defined contribution plans are valued at zero, if distributions
cannot be made until separation, retirement, or death and no funds can be
Net present value of five-year installment agreement and timing of pay-
ment.88 The net present value of a five-year installment agreement reflects what the
IRS could collect over five years under an installment agreement (see ¶ 11,200). To
calculate the monthly payment, use the income information page of the Form 433A.
Unlike installment agreements, no leeway is allowed for conditional expenses. Only
necessary expenses may be used in computing the monthly payment. Although
directed by Congress, it is difficult to say that the IRS has updated its expense
schedules to insure that taxpayers are left with adequate means to provide for basic
living expenses, as they remain penurious.89 For example, while the cost of gasoline
increased almost 50 percent between February 2004 and February 2006, the IRS
standards to operate one car in Seattle, Washington declined $10.
If a taxpayer is married to a spouse who is not liable, the income (and assets)
of that spouse are not taken into consideration.90 However, the liable taxpayer may
have to verify that claimed expenses are in fact being paid by the liable taxpayer.91
Community property rules can be considered in making the determination of what
the nonliable spouse should contribute.
Provided full payment of the offer is made within 90 days, the IRS takes the net
monthly income and multiplies by 48. If the taxpayer can pay the amount due
sometime after the 90th day and before the end of 24 months, the IRS increases the
applicable factor from 48 to 60.
87 I.R.M. § 184.108.40.206.8.3. agreements may also be used to secure payment. In IRS
88 The net present value of an installment agreement Letter Ruling 200133040 (June 13, 2001), elderly taxpay-
replaced the income collateral agreement, although there ers were unable to pay the tax but had substantial equity
is still a section on collateral agreements in the IRM. The in their house. The ruling suggests using a collateral
income collateral agreement required the payment of agreement to have the taxpayers execute a mortgage on
future income, after acceptance of the offer, to the IRS. the house for the benefit of the IRS. The IRS did not want
The income collateral agreement allowed the IRS to to limit itself to a collateral agreement as those rights
share in the taxpayer’s financial good fortune, e.g., if the would expire when the statute of limitation on collection
taxpayer won the lottery. Under income collateral agree- ran. A mortgage would enable the IRS to circumvent the
ments, the taxpayer pledged to the IRS, for a five-year statute of limitation problem and secure payment upon
period, 20 to 50 percent of future income, over and above the death of the taxpayers.
a reasonable living allowance, including taxes. As a result, 89 Code Sec. 7122(c)(2)(A).
for every dollar earned, the IRS would have collected well 90 Reg. § 301.7122-1(c)(2)(ii)(A). Assets and income of
over 50 percent of each dollar. “Buy-downs were availa-
ble. For example, for an additional $10,000, the IRS might the nonliable spouse will be considered if they have been
have reduced the income collateral agreement by one received from the liable spouse in a manner that would
year. The income collateral agreement did not give the otherwise have allowed the IRS to collect from the nonli-
IRS any special rights if the taxpayer subsequently filed able spouse, e.g., transferee liability. Id. The income of
for bankruptcy. The IRS’s agreement was with the prepe- the nonliable spouse is also accounted for in the § 707(b)
tition taxpayer, while the person earning money was the abuse inquiry.
postpetition taxpayer, i.e., lack of mutuality. Collateral
24 Practical Guide to Resolving Your Client’s Tax Liabilities
For example, if the taxpayer can full pay within 90 days and the Form 433A
shows an ability to pay $100 per month, the amount due under the offer formula
would be $4,800 ($100 × 48). Multiplying by 48 is meant to serve as a proxy for the
present value of a 60-payment annuity at nine percent compounded monthly, which
has a factor of 48.17.92 If interest rates are below nine percent, this factor works in
the taxpayer’s favor because the factor should be increased to a number larger than
48. If interest rates are above nine percent, this factor works for the benefit of the
IRS because the factor should be decreased to a number less than 48.
PLANNING NOTE: When first meeting with a client, to determine the
net present value portion of an offer, multiply by 50 the current monthly
installment payment (or the amount the client is able to pay on a monthly basis
if an agreement is not in place).
Offers can also be made for periods where the remaining time period to collect
is less than 48 months. In such a case, the IRM states that no time value discount is
given.93 For example, if the statute of limitation has two years to run when the offer
is accepted, the multiplier used by the IRS is 24, and not the time value of money
If a taxpayer can only pay over the remaining statutory period for collecting the
tax, then three payment options are available. First, full payment of the net
liquidation value of assets is made within 90 days and the future income payment is
paid during the remaining life of the collection statute. Second, part payment of the
net liquidation value of assets is made within 90 days and the remaining balance of
the net liquidation value plus the payment for future income is made over the
remaining life of the collection statute. Third, the entire offer amount is paid in
monthly payments over the life of the collection statute.
Payments with the offer are allowable, and some practitioners think such
payments show good faith. If a payment is made with the offer, it is considered a
deposit.95 If the offer is rejected and the cash deposit returned, the cash deposit
does not bear interest.96 Conversely, if a deposit is not made, interest accrues on the
amount owed pursuant to the offer from the time the IRS accepts the offer until
payment is received.
PLANNING NOTE: Given that offers are almost always funded by
someone other than the taxpayer, offering to pay in full within 90 days of
acceptance allows the party who is funding the offer to retain the funds for as
long as possible.
.05 Effective Tax Administration Offers
If the taxpayer does not qualify for a doubt as to liability or doubt as to
collectability offer, the taxpayer may still qualify for an effective tax administration
offer.97 Such offers may be entered into when collection of the full liability will
92 [1−(1.0075)-60]/.0075. 95 Reg. § 301.7122-1(h).
93 I.R.M. § 220.127.116.11.5.2. 96 Id.
94 [1-(1.0075)-24]/.0075. 97 Reg. § 301.7122-1(b)(3).
Tax Code Remedies 25
create economic hardship within the meaning of Reg. § 301.6343-1,98 or regardless
of the taxpayer’s financial circumstances, exceptional circumstances exist such that
collection of the full liability will be detrimental to voluntary compliance by taxpay-
ers and compromise will not undermine compliance with the tax laws.99
Factors listed in the offer in compromise regulations that support economic
hardship100 include the taxpayer is incapable of earning a living because of a long-
term illness, medical condition, or disability and it is reasonably foreseeable that
the taxpayer’s financial resources will be exhausted providing for care and support;
although the taxpayer has certain assets, liquidation of those assets to pay the tax
liability will render the taxpayer unable to meet basic living expenses; and although
the taxpayer has certain assets, the taxpayer is unable to borrow against the equity
in those assets and disposition by seizure or sale would have sufficient adverse
consequences such that enforced collection is unlikely.
Factors that support accepting an effective tax administration offer include that
the offer would not undermine compliance by other taxpayers; that the taxpayer
does not have a history of noncompliance with filing and payment requirements;
that the taxpayer has not taken deliberate actions to avoid the payment of taxes;
and that the taxpayer has not encouraged others to refuse to comply with the tax
COMMENT: What is interesting is what is missing. The committee
reports to the legislation enacting effective tax administration offers (P.L.
105-206) request that the IRS enact regulations that utilize this authority to
resolve long-standing cases by foregoing penalties and interest that accumu-
lated as a result of delay in determining the taxpayer’s liability.101 The regula-
tions are, thus far, silent on this topic.
.06 Doubt as to Liability Offers
Doubt as to liability offers are very rare. Doubt as to liability exists where there
is a genuine dispute as to the existence or amount of the correct tax liability under
the law.102 Doubt as to liability does not exist when the liability has been established
by a final court decision or a judgment has been entered concerning the existence
or amount of the liability.103 Presumably, a default judgment would disqualify a
taxpayer from a doubt as to liability offer. Taxpayers submitting doubt as to liability
offers do not need to submit a financial statement.104 Full payment is due upon
98 Reg. § 301.7122-1(b)(3). The Reg. § 301.6343-1 rules 99 Taxpayers with enormous tax obligations from
on economic hardship cover almost every conceivable worthless incentive stock options have been unsuccessful
factor, including the following: (i) age, employment status in pursuing the argument that enforcement of the ISO
and history, ability to earn, number of dependents and
status as a dependent of someone else; (ii) the amount rules is detrimental to voluntary compliance. Speltz v.
reasonably necessary for food, clothing, housing, medical Comm’r, 124 TC 165, CCH Dec. 55,961 (2005).
expenses, transportation, current tax payments, alimony, 100 Reg. § 301.7122-1(c)(3).
child support, and expenses necessary for the production 101 H.R. CONF. REP. NO. 105-599, at 111 (1998).
of income; (iii) cost of living in the applicable area; (iv)
exempt property; (v) extraordinary circumstances such 102 Reg. § 301.7122-1(b)(1).
as special education, medical expenses, or natural disas- 103 Id.
ters; and (vi) any other factor that has an impact on
104 Reg. § 301.7122-1(d)(1), last sentence.
26 Practical Guide to Resolving Your Client’s Tax Liabilities
.07 Interaction of Bankruptcy and Offers
Theoretically, in making an offer, the taxpayer can use bankruptcy as a shield
to limit payments. The taxpayer’s argument is simply that if a bankruptcy petition
were filed, these payments (the nonpriority/dischargeable taxes) would not be
made to the IRS; therefore, in considering the size of the taxpayer’s offer relative to
the outstanding liability, the IRS should consider only the nondischargeable taxes.
A general lack of bankruptcy sophistication—in both practitioners and IRS person-
nel—makes arguing bankruptcy difficult.
Offers extend the time period in which recently assessed taxes are considered
a priority tax.105 The extension includes the time the offer is outstanding, plus 30
days thereafter. The IRS generally does not consider offers while a bankruptcy is
pending. Courts frown on this practice.106
.08 Income Tax Consequence of Offers
Tax liabilities discharged by offers are taxed as discharge of indebtedness
income under Code Sec. 61(a)(12). If the taxpayer is insolvent when the offer is
accepted, which generally occurs as offers require the payment of the taxpayer’s
net assets to the IRS, the income is excluded under Code Sec. 108(a)(1)(B).
The advantages to the offer in compromise include discharge by the taxpayer
of liabilities that are nondischargeable in bankruptcy and discharge of liabilities
without payment in full. In addition, an offer will remove liens on property that
might otherwise remain attached to property after a Chapter 7 filing. This is
especially useful for liens attached to retirement plans.
The disadvantages to the offer include the following: First, the taxpayer must
find the funds to pay the offer formula amount. Second, the IRS takes the taxpayer’s
refund for all tax years up through and including the year in which the offer is
accepted. Third, the filing of an offer stays the statute of limitation on collection,
both while the offer is pending and if the offer is accepted and the taxpayer does
not fulfill the underlying contractual obligation. In the meantime, interest continues
to run on the outstanding tax liabilities.
105 11 U.S.C. § 507(a)(8)(ii), and see ¶ 425.02. Some sary for debtor to propose confirmable Chapter 11 plan
might argue that offers, based on Young v. United States, and felt that it had authority under § 105 to issue order to
2002-1 USTC ¶ 50,257, 535 US 43 (2002) also toll the the IRS), aff’d, IRS v. Holmes (In re Holmes), 309 B.R. 824
§ 507(a)(8)(A)(i) three-year period. See ¶ 425.01. The IRS (M.D. Ga. 2004). Will such an order do any good? It did
has held otherwise. Chief Counsel Advice 200404049 not help Mr. Holmes as the court refused to confirm his
(January 5, 2004). Chapter 11 plan. Holmes v. United States (In re Holmes),
106 Mills v. United States (In re Mills), 2000-1 USTC 301 B.R. 911 (Bankr. M.D. Ga. 2003). Not all courts agree
¶ 50,103, 240 B.R. 689, 697 (Bankr. S.D. W.Va. 1999), (in with the holding in Mills and Holmes. 1900 M Restaurant
holding IRS policy violated § 525(a), court stated that the Assocs., Inc. v. United States (In re 1900 M Restaurant
IRS’s refusal to consider an offer in compromise while Assocs., Inc.), 2005-1 USTC ¶ 50,313, 319 B.R. 302 (Bankr.
debtor was in bankruptcy was not only discriminatory, D.D.C. 2005) (court refused to order IRS to consider offer
but also short-sighted); Holmes v. United States (In re in compromise; it made sense for IRS to decide that
Holmes), 2003-2 USTC ¶ 50,685, 298 B.R. 477, 486 (Bankr. treatment of its claim should be decided through confir-
M.D. Ga. 2003) (court viewed offer in compromise neces- mation of Chapter 11 plan and not offer in compromise).
Tax Code Remedies 27
¶ 245 Husband and Wife—The Innocent Spouse Rules
Innocent spouse relief is available for a joint filer107 when (i) there is an
understatement of tax attributable to an erroneous item of the other spouse; (ii)
when a spouse’s liability for a deficiency exceeds the amount of the deficiency that
is properly allocable to that spouse; or (iii) based on the facts and circumstances, a
spouse is unable to pay and it would be unfair to hold the spouse liable.108 Thus, the
innocent spouse rules cover understatements of tax, deficiencies, and the inability
The definitions of understatement and deficiency are the standard Tax Code
definitions. Thus, understatement is the difference between the correct amount of
tax on the return less the amount shown on the return less any rebates.109 A
deficiency is the difference between the correct amount of tax due on the return
less the sum of amounts shown as tax on the return less amounts previously
assessed plus any rebates.110
Relief is available only for income taxes.111 Community property laws are
ignored in determining whether relief is available.112 The general IRS rules regard-
ing ex parte contacts apply.113 Appeal can be made to the Tax Court for review of the
denial of relief, only if a deficiency has been asserted and relief has been elected
under § 6015(b) or (c).114 If after six months, the IRS has not made a determination,
the taxpayer can still appeal to the Tax Court.115 Review in the Tax Court is likely
limited to the record developed in the IRS administrative proceeding.116 All claims
must be made within two years of initial collection activity by the IRS. This rule is
not nearly as generous as it sounds because collection activity includes setting off a
refund from one year against an earlier liability,117 which happens quite frequently
without there being actual contact between the taxpayer and the IRS.118 Relief is not
available if the requesting spouse participated in a prior adjudication.119 Note, filing
a petition for review of an understatement or a deficiency request stops the running
107 Raymond v. Comm’r, 119 TC 191, CCH Dec. 54,915 6015(f), which had not been considered sufficiently; held,
(2002) (relief denied to requesting spouse who had not motion denied because relief in Tax Court is independent
signed a joint return). of any determination by the IRS, making the procedure
108 Code Sec. 6015. different from collection due process appeals).
109 Code Sec. 6015(b)(3) and Code Sec. 6662(d)(2)(A). 116 Cf. Robinette v. Comm’r, 2006-1 USTC ¶ 50,213 (8th
110 Code Sec. 6211(a); and see M. SALTZMAN, IRS Cir. 2006) (as to collection due process appeals, review
limited to administrative record); and see ¶ 255.04. The
PRACTICE AND PROCEDURE at § 10.03(1) (2d ed.
Tax Court has held otherwise as to innocent spouse
111 Reg. § 1.6015-1(a)(3).
hearings, but that decision was vacated for lack of juris-
diction. Ewing v. Comm’r, 2006-1 USTC ¶ 50,191 (9th Cir.
112 Code Sec. 6015(a).
113 Drake v. Comm’r, 125 TC 201, CCH Dec. 56,166 117 Campbell v. Comm’r, 121 TC 290 (2003).
(2005), citing Rev. Proc. 2000-43, 2000-2 CB 404. 118 See McGee v. Comm’r, 123 TC 314, 319 (2004) (set-
114 Code Sec. 6015(e); Ewing v. Comm’r, 2006-1 USTC ¶
off of refund is a collection activity; held, two-year period
50,191 (9th Cir. 2006); and IRS Letter Ruling 200006013 did not start running because IRS did not provide notice
(October 26, 1999) (bankruptcy court can also review of innocent spouse appeal rights).
rejection of the election, but only for understatement and 119 Reg. § 1.6015-1(e); and see Hopkins v. United States
deficiency relief). (In re Hopkins), 98-2 USTC ¶ 50,492, 146 F.3d 729 (9th Cir.
115 Code Sec. 6015(e)(1)(A)(i)(II); and see Friday v. 1998) (by signing closing agreement, taxpayer agrees to
Comm’r, 124 TC 220, CCH Dec. 56,019 (2005) (IRS liability for taxes set forth in agreement, thereby waiving
moved for remand to consider relief under Code Sec. innocent spouse defense).
28 Practical Guide to Resolving Your Client’s Tax Liabilities
of the statute of limitation on collection.120 It is unclear whether the personal
representative of an innocent spouse’s estate can request relief.121
The nonrequesting spouse must receive notice from the IRS of the request for
relief.122 The nonrequesting spouse must be given the opportunity to participate in
the Tax Court proceeding.123 This opportunity to participate does not make the
nonrequesting spouse a party, and for example, this means the nonrequesting
spouse can not appeal the outcome.124 At the request of one spouse, the IRS will
omit from shared documents information that could lead to locating the requesting
spouse.125 To remain hidden, the requesting spouse should type “Potential Domes-
tic Abuse Case at the top of the Form 8857.126
.01 Understatements of Tax for All Joint Filers
For all joint filers, if (i) on the joint return there is an understatement of tax
attributable to an erroneous item of one spouse;127 (ii) the other spouse establishes
that in filing the return he or she did not have reason to know there was an
understatement;128 (iii) taking into account all the facts and circumstances, it would
be inequitable to hold the unknowing spouse liable for the amount owing; and (iv)
the unknowing spouse so elects within two years of the commencement of collec-
tion activity by the IRS, then the unknowing spouse is relieved of liability for tax to
the extent the liability is attributable to the understatement.129
Given that relief goes to the “innocent spouse, care must be taken to deter-
mine whether the requesting spouse knew or had reason to know there was an
understatement. Factors to consider in determining whether a requesting spouse
had reason to know include the following:
• Requesting spouse’s level of education;
• Requesting spouse’s involvement in the family business and family financial
120 Code Sec. 6015(e)(2). peal); and see Maier III v. Comm’r, 119 TC 267, CCH Dec.
121 Cf, Jonson v. Comm’r, 2004-1 USTC ¶ 50,122, 353 F.3d 54,937 (2002) (nonrequesting spouse does not have right
1181 (10th Cir. 2003) (“When § 6015(c) speaks of an to contest in Tax Court the grant of relief to the request-
’individual’ in terms of being married or legally separated ing spouse).
or belonging to a household, the statute is surely speak- 125 Id.
ing of a living person. ); and IRS Letter Ruling 200117005 126
IRS News Release, IR-2001-23, February 20, 2001.
(January 12, 2001) (personal representative cannot file 127 See Shafman v. United States (In re Shafman),
original request for innocent spouse relief); with Hale
Exemption Trust v. Comm’r, 81 TCM 1507, CCH Dec. 2001-2 USTC ¶ 50,639, 267 B.R. 709, 714 (Bankr. N.D.
54,305(M), TC Memo. 2001-89 (2001) (successor in inter- W.Va. 2001) (relief under Code Sec. 6015(b) denied be-
est of nonrequesting spouse allowed to intervene in Tax cause both spouses were responsible for the
Court proceeding). See also Rev. Rul. 2003-36, 2003-1 CB understatement).
196 (executor can file for innocent spouse relief). Reading 128 Campbell v. Comm’r, 91 TCM 735, CCH Dec.
Jonson and the Revenue Procedure together, it appears 56,430(M), TC Memo. 2006-24 (2006) (in granting relief
the deceased spouse must qualify for relief before dying. under § 6015(b), court found that requesting spouse did
122 Reg. § 1.6015-6(a); Rev. Proc. 2003-19, 2003-1 CB not have reason to know about or understand her hus-
371, (grant of right to appeal to Appeals office to nonre- band’s sophisticated tax straddle scam; held, requesting
questing spouse, who must request conference within 30 spouse did not have knowledge of tax straddle and deny-
days); and Van Arsdalen v. Comm’r, 123 TC 135, CCH ing relief would be inequitable).
Dec. 55,702 (2004) (nonrequesting spouse can intervene 129 Code Sec. 6015(b). For an example of relief granted
in Tax Court case in support of requesting spouse). under Code Sec. 6015(b), see Hendricks v. Comm’r, 89
123 Code Sec. 6015(e)(4). TCM 1004, CCH Dec. 55,982(M), TC Memo. 2005-72
124 Baranowicz v. Comm’r, 2006-1 USTC ¶ 50,137 (9th (2005).
130 See Albin v. Comm’r, 88 TCM 340, CCH Dec.
Cir. 2005) (being called a “party does not mean that the
intervenor can force a case to judgment or take an ap- 55,772(M), TC Memo. 2004-230 (requesting spouse can
Tax Code Remedies 29
• Presence of expenditures that appear lavish or unusual when compared to
past levels of income, standards of living, and spending patterns; and
• The nonrequesting spouse’s evasiveness and deceit concerning the couple’s
In determining inequity, the IRS is to examine all facts and circumstances, e.g.,
one relevant factor is whether the requesting spouse benefitted, directly or indi-
rectly, from the understatement and another is whether the requesting spouse has
.02 Deficiencies/Separated Filers
Deficiency relief differs from understatement relief in several ways. First, the
election can be made only if the joint filers are no longer married or legally
separated or have not been living together for the past twelve months.133 Second,
the “known or should have known standard that defeats understatement relief
becomes actual knowledge for deficiency relief.134 The Fifth Circuit has ruled that
actual knowledge means knowledge of the item, as opposed to knowledge of the
proper treatment of the item on a return.135 Actual knowledge can be defeated if the
requesting spouse shows that the return was signed under duress.136 Third, the
requesting spouse can make an election without having unfair circumstances.137
Note, however, the election is not available if the IRS can show that assets were
transferred between the spouses as part of a fraudulent scheme or where the
principal purpose of the asset transfer was tax avoidance.138 In other words, while
not having an unfair circumstances requirement, deficiency relief does have a clean
135 Cheshire v. Comm’r, 115 TC 183, CCH Dec. 54,028
not turn “blind eye to a return with large income and
little or no tax due and a request for large refunds). (2000) (even though taxpayer did not know that pension
131 Braden v. Comm’r, 81 TCM 1380, CCH Dec. distribution was taxable, actual knowledge of the distribu-
tion defeated her request for relief), aff’d, 2002-1 USTC
54,383(M), TC Memo. 2001-69 (2001).
132 Reg. § 1.6015-2(d); and see Braden v. Comm’r, 81
¶ 50,222, 282 F.3d 326 (5th Cir. 2002). In deficiency cases
under Code Sec. 6015(c), the Tax Court has been some-
TCM 1380, CCH Dec. 54,283(M), TC Memo. 2001-69 what favorable to the requesting spouse who has a gen-
(2001) (nonrequesting spouse received most of the prop- eral, but not specific, knowledge of the item in question.
erty in the divorce; held, requesting spouse did not bene- Cook v. Comm’r, 89 TCM 752, CCH Dec. 55,926(M), TC
fit substantially from the understatement). Memo. 2005-22 (2005) (actual and clear awareness is
133 See Jonson v. Comm’r, 2004-1 USTC ¶ 50,122, 353 distinguished from mere reason to know); Baranowicz v.
Comm’r, 86 TCM 390, CCH Dec. 55,301(M), TC Memo.
F.3d 1181 (10th Cir. 2003) (“When Code Sec. 6015(c)
2003-274 (2003) (requesting spouse knew of partnership
speaks of an ‘individual’ in terms of being married or
investments but relied on her husband’s expertise as a
legally separated or belonging to a household, the statute CPA); King v. Comm’r, 116 TC 198, CCH Dec. 54,302
is surely speaking of a living person. ); and cf. Rev. Rul. (2001) (requesting spouse knew of her ex-husband’s cat-
2003-36, 2003-2 CB 296 (executor can apply for innocent tle business but did not have actual knowledge that the
spouse relief). Reading Jonson and Rev. Proc. 2003-61, business was not run for profit; held, requesting spouse
2003-2 CB 296, together, it appears the deceased spouse granted relief); Rowe v. Comm’r, 82 TCM 1020, CCH Dec.
must qualify for relief before dying. The Jonson court 54,582(M), TC Memo. 2001-325 (2001) (actual knowledge
commented that the case presented “the fearsome two- not proved when requesting spouse knew of sale but did
some of death and taxes. Jonson, supra, at 1182. not know amount of gain on sale or even if sold for gain);
134 Code Sec. 6015(c)(3)(C). Cf. Code Sec. and Mora v. Comm’r, 117 TC 279, CCH Dec. 54,565
6015(b)(1)(C) (“did not know, and had no reason to (2001) (IRS failed to prove taxpayer’s knowledge of rea-
son why cattle tax shelter deductions were disallowed).
know ), with Code Sec. 6015(c)(3)(C) (“actual knowl- 136 See In re Hinckley, 2001-1 USTC ¶ 50,127, 256 B.R.
edge ); and see Charlton v. Comm’r, 114 TC 333, CCH
Dec. 53,879 (2000) (relief available under Code Sec. 814, 824–825 (Bankr. M.D. Fla. 2000) (long, continued
6015(c) but not Code Sec. 6015(b) because requesting course of mental intimidation constitutes duress).
137 Code Sec. 6015(c).
spouse should have known of item, but did not have
138 Code Sec. 6015(c)(3)(A)(ii) and (c)(4).
30 Practical Guide to Resolving Your Client’s Tax Liabilities
hands requirement.139 Fourth, the requesting spouse cannot use the deficiency
procedure to obtain a refund.140
The election must be made within two years of the date that the IRS begins
collection activity, which includes setting off a refund from one year against an
earlier liability.141 The election can be made any time after a deficiency is
The election attributes any deficiency to the spouse that is responsible for the
item being on the original return.143 The burden of proof is on the individual making
the election to establish the proper allocation of the deficiency.144 The portion of any
deficiency allocated to an individual shall be the amount that bears the same ratio
to the deficiency as the net amount of items taken into account in computing the
deficiency and allocable to the individual bears to the net amount of all items taken
into account in computing the deficiency.145 In making the allocation, one assumes
that the individuals had filed separate returns, unless there was a special benefit to
the electing spouse of a particular item or a reallocation is appropriate because of
.03 Inability to Pay and Rev. Proc. 2003-61
If the problem is an inability to pay tax, i.e., not an understatement or a
deficiency, the IRS is authorized to establish rules that provide relief to the
innocent spouse.147 The IRS published those rules in Rev. Proc. 2003-61.148
The IRS has established seven threshold conditions for relief under Code
Sec. 6015(f) as follows:149
1. The requesting spouse filed a joint return for the year in which relief is
2. Relief is not available under the understatement and deficiency rules, i.e.,
an inability to pay as opposed to an understatement or a deficiency;
139 See Ohrman v. Comm’r, 86 TCM 499, CCH Dec. 146 Code Sec. 6015(d)(3); and see Hopkins v. Comm’r,
55,332(M), TC Memo. 2003-301 (2003), 2006-1 USTC 121 TC 73, CCH Dec. 55,243 (2003) for an example of an
¶ 50,128 (9th Cir. 2005) (unpublished opinion), (nonre- erroneous item on the requesting spouse’s return being
questing spouse had gambling problem and made early reallocated to the nonrequesting spouse because the
IRA withdrawals creating tax liability; all assets of nonre- nonrequesting spouse would have received some benefit
questing spouse transferred to requesting spouse in state from the erroneous item. For guidance in making the
court decree; held, relief under Code Sec. 6015(c) denied allocation see Reg. § 1.6015-3(d)(4)-(6). Another example
because state court decree designed to allow requesting of the allocation rules is found in Capehart, Est. v.
spouse to enjoy benefits of assets without paying tax Comm’r, 125 TC 211, CCH Dec. 56,192(2005) (allocation
obligation). of the deficiency proportionate to the items taken into
140 Code Sec. 6015(g)(3). account in determining deficiency and not the spouses’
141 See McGee v. Comm’r, 123 TC 314, 319 CCH Dec. income).
147 Code Sec. 6015(f). Under these rules, the innocent
55,781 (2004) (setoff of refund is a collection activity;
held, two-year period did not start running because IRS spouse “requests relief, as opposed to “electing relief.
did not provide notice of innocent spouse appeal rights). Cf. Code Sec. 6015(b)(1)(E) (individual “elects ); and
142 Code Sec. 6015(c)(3)(B). Code Sec. 6015(c)(1) (individual “elects ); with Reg.
§ 1.6015-4(a) (taxpayer “requests relief)). The equitable
143 See Corson v. Comm’r, 114 TC 354, CCH Dec.
relief provisions are based somewhat on the old rules of
53,882 (2000) (in essence, deficiency relief allows the Code Sec. 6013(e)(1)(D), and those cases may be useful
requesting spouse to have tax liability calculated as if in making arguments under the new rules. See Mitchell v.
separate returns were filed.) Comm’r, 2002-2 USTC ¶ 50,475, 292 F.3d 800, 806 (D.C.
144 Code Sec. 6015(c)(2). The burden of proof is on the Cir. 2002).
148 2003-2 CB 296, superseding Rev. Proc. 2000-15,
requesting spouse to prove all elements except for actual
knowledge. Reg. § 1.6015-3(d)(3). 2000-1 CB 447.
145 Code Sec. 6015(d)(1). 149 Rev. Proc. 2003-61 at § 4.01, 2003-2 CB 296.
Tax Code Remedies 31
3. Relief is requested no later than two years after the date of the IRS’s first
4. No assets were transferred between the spouses as part of a fraudulent
5. No disqualified assets as defined in Code Sec. 6015(c)(4)(B) were trans-
ferred to the requesting spouse by the nonrequesting spouse;
6. The requesting spouse did not file the return with fraudulent intent; and
7. The liability is attributable to the nonrequesting spouse.
In determining attribution, there are four special rules.151 First, in a community
property state, the item is attributed to the person who generated the item. Second,
if the liability is related to an item in which the requesting spouse only has nominal
ownership, the requesting spouse can rebut the presumption that the item is
attributable to the requesting spouse. Third, if the nonrequesting spouse misappro-
priates the funds necessary to pay the tax, without the knowledge or reason to
know of the requesting spouse, relief will be considered even if the item is related
to the requesting spouse. Fourth, if the requesting spouse establishes abuse prior
to the time the return was filed and as a result of the prior abuse the requesting
spouse did not challenge any items on the return for fear of retaliation by the
nonrequesting spouse, then the IRS will consider relief even if items are attributa-
ble to the requesting spouse.
If the threshold requirements are met, the IRS has established that relief will
ordinarily be granted if the following requirements are met (Ordinary Course
1. At the time relief is requested, the requesting spouse is no longer married
to or is legally separated from the nonrequesting spouse, or has not been a
member of the same household as the nonrequesting spouse at any time
during the 12-month period immediately preceding the request for relief;153
2. At the time the return was signed, the requesting spouse had no knowl-
edge or reason to know that the tax would not be paid and it was
reasonable for the requesting spouse to believe that the nonrequesting
spouse would pay;154 and
150 See McGee v. Comm’r, 123 TC 314, 319, CCH Dec. tion in a subsequent case. See also Jonson v. Comm’r,
55,781 (2004) (setoff of refund is a collection activity; 2004-1 USTC ¶ 50,122, 353 F.3d 1181 (10th Cir. 2003)
held, two year period did not start running because IRS (“when Code Sec. 6015(c) speaks of an ‘individual’ in
did not provide notice of innocent spouse appeal rights). terms of being married or legally separated or belonging
151 Rev. Proc. 2003-61 at § 4.01(7)(a)-(d), 2003-2 CB to a household, the statute is surely speaking of a living
296. See Wiest v. Comm’r, 85 TCM 1082, CCH Dec. person ); and cf. Rev. Rul. 2003-36, 2003-1 CB 296 (execu-
55,099(M), TC Memo. 2003-91 (2003) for an example of tor can apply for innocent spouse relief). Reading Jonson
the court making an allocation between the spouses. and the Revenue Procedure together, it appears the de-
152 Rev. Proc. 2003-61 at § 4.02, 2003-2 CB 296. ceased spouse must qualify for relief before dying.
153 In at least one case, the Tax Court has concluded 154 Relief can be apportioned to the extent that the
that if the individuals are still married this is a neutral requesting spouse had knowledge as to some amounts
factor and not a negative factor. Ewing v. Comm’r, 122 TC and no knowledge as to other amounts. Rev. Proc.
32, CCH Dec. 55,519 (2004), vacated for lack of jurisdic- 2003-61 at § 4.02(1)(b), 2003-2 CB 296. See also the
tion, Ewing v. Comm’r, 2006-1 USTC ¶ 50,191 (9th Cir. discussion of knowledge under deficiency relief and the
2006). Presumably, the Tax court will reaffirm this posi- cases cited therein.
32 Practical Guide to Resolving Your Client’s Tax Liabilities
3. Based on the rules of Reg. § 301.6343-1(b)(4), the requesting spouse will
suffer economic hardship if relief is not granted.
The rules on economic hardship cover almost every conceivable factor includ-
ing the following:
• Requesting spouse’s age, employment status and history, ability to earn,
number of dependents, and status as a dependent of someone else;
• The amount reasonably necessary for food, clothing, housing, medical
expenses, transportation, current tax payments, alimony, child support, and
expenses necessary to the requesting spouse’s production of income;
• Cost of living in the requesting spouse’s area;
• Exempt property;
• Extraordinary circumstances such as special education, medical expenses,
or natural disasters;155 and
• Any other factor the requesting spouse believes has a bearing on economic
The rules also provide that the requesting spouse must act in good faith.
When the IRS determines that Ordinary Course Relief is unavailable, it may
still grant relief. Relief is granted if, taking into account all the facts and circum-
stances,156 it would be inequitable to hold the requesting spouse liable for all or part
of the unpaid liability or deficiency (Equitable Relief). The IRS has set forth a list
of applicable factors, and no one factor is determinative. Factors the IRS will
consider include the following:157
1. Whether the requesting spouse is separated (legally or factually) or di-
vorced from the nonrequesting spouse.158
2. Whether the requesting spouse would suffer economic hardship as de-
fined under Reg. § 301.6343-1(b)(4), and as previously discussed under
Ordinary Course Relief.
155 When individuals were still married and the nonre- the Tax Court addressed the factors under Rev. Proc.
questing spouse had medical problems, the Tax Court 2000-15, 2000-1 C.B. 474, superseded by Rev. Proc.
concluded that it was prudent for the petitioning spouse 2003-61. Although there are some differences between
to save some money. Ewing v. Comm’r, 122 TC 32, CCH the two revenue procedures, the major change is that
Dec. 55,519 (2004), vacated for lack of jurisdiction, Ewing Rev. Proc. 2003-61 does a much better job of setting forth
v. Comm’r, 2006-1 USTC ¶ 50,191 (9th Cir. 2006). Presuma- the applicable tests.
bly, the Tax court will reaffirm this position in a subse- 158 In at least one case, the Tax Court has concluded
quent case. This is a very pro taxpayer conclusion, given that if the individuals are still married this is a neutral
the IRS’s belief that it should be paid first. factor and not a negative factor. Ewing v. Comm’r, 122 TC
156 See Block v. Comm’r, 120 TC 62, CCH Dec. 55,026
32, CCH Dec. 55,519 (2004), vacated for lack of jurisdic-
(2003) for an example of an unusual factor. There, the tion, Ewing v. Comm’r, 2006-1 USTC ¶ 50,191 (9th Cir.
court considered whether the tax was assessed within the 2006). Presumably, the Tax court will reaffirm this posi-
applicable statute of limitation as a mitigating factor, even tion in a subsequent case. See also Jonson v. Comm’r,
though it did not have jurisdiction under Code Sec. 6015 2004-1 USTC ¶ 50,122, 353 F.3d 1181 (10th Cir. 2003)
to determine whether tax was properly assessed such (“when Code Sec. 6015(c) speaks of an ‘individual’ in
that case could be resolved on that issue alone. terms of being married or legally separated or belonging
157 Rev. Proc. 2003-61 at § 4.03(2)), 2003-2 CB 296; and to a household, the statute is surely speaking of a living
see Ferrarese v. Comm’r, 84 TCM 400, CCH Dec. person ); and cf. Rev. Rul. 2003-36, 2003-1 CB 296 (execu-
54,894(M), TC Memo. 2002-249 for an illustration of how tor can apply for innocent spouse relief).
Tax Code Remedies 33
3. Whether the requesting spouse did not know or had no reason to know
that the liability would not be paid at the time the return is filed.159 In
determining reason to know, the IRS will consider the requesting spouse’s
level of education, deceit or evasiveness of nonrequesting spouse, request-
ing spouse’s involvement in activity generating the tax liability, requesting
spouse’s general degree of involvement in business and household mat-
ters, requesting spouse’s business or financial expertise, and any lavish or
unusual expenditures compared with past spending levels.160 Actual knowl-
edge that defeats a deficiency claim may be overcome in an equitable relief
case if the factors favoring equitable relief are particularly compelling.161
4. Whether the nonrequesting spouse is legally obligated to pay, either by
the divorce decree or separation agreement, except this factor does not
favor granting relief if at the time the divorce decree or separation agree-
ment were executed, the requesting spouse had reason to know or knew
that the nonrequesting spouse would not pay the tax. Unless there is a
large amount of time between the applicable tax year and the divorce, it
seems almost impossible to have both lack of knowledge and a negotiated
allocation in a divorce decree. Unfortunately for taxpayers, the IRS gives
considerable weight to knowledge because these are the “innocent
spouse rules.162 Having some understanding about these issues is a detri-
ment to the requesting spouse. It is this problem that makes the innocent
spouse rules so difficult.
5. Whether the requesting spouse received significant benefit beyond normal
support from the unpaid item.163
6. Whether the requesting spouse has made a good faith effort to comply
with income tax laws.
7. Whether the requesting spouse was abused by the nonrequesting spouse
and the abuse did not amount to duress.164 The presence of abuse is a
159 See Rosenthal v. Comm’r, 87 TCM 1183, CCH Dec. even though requesting spouse knew or had reason to
55,603(M), TC Memo. 2004-89 (2004) (surviving spouse know of the embezzled income that caused tax liability).
filed amended return to correct original return that omit- See also the discussion of knowledge under deficiency
ted IRA distribution; held, surviving spouse did not have relief and the cases cited therein.
knowledge of the IRA at time original return filed). 162 But see Foor v. Comm’r, 87 TCM 1046, CCH Dec.
160 Rev. Proc. 2003-61 at § 4.03(2)(a)(iii)(C), 2003-2 CB 55,563(M), TC Memo. 2004-54 (2004) (despite knowledge
296; and see August v. Comm’r, 84 TCM 183, CCH Dec. and reason to know, court granted relief indicating that
54,841(M), TC Memo. 2002-201 (2002) (due to mental other factors weighed towards granting relief).
illness, limited education, and complete dependence on 163 The Fifth Circuit has stated that the most important
nonrequesting spouse, requesting spouse had neither factor in determining inequity is whether the requesting
knowledge nor reason to know that tax was unpaid); spouse significantly benefitted from the understatement
Wiest v. Comm’r, 85 TCM 1082, CCH Dec. 55,099(M), TC of tax. Cheshire v. Comm’r, 2002-1 USTC ¶ 50,222, 282 F.3d
Memo. 2003-91 (2003) (requesting spouse is not deemed 326 (5th Cir. 2002). See also Ohrman v. Comm’r, 86 TCM
to know tax would not be paid by signing joint return); 499, CCH Dec. 55,332(M), TC Memo. 2003-301 (2003),
and Albin v. Comm’r, 88 TCM 340, CCH Dec. 55,772(M), 2006-1 USTC ¶ 50,128 (9th Cir. 2005) (unpublished opin-
TC Memo. 2004-230 (2004) (understatement analysis of ion), (relief denied where requesting spouse received all
reason to know applied equally to equitable relief; held, of nonrequesting spouse’s assets and thus had benefits of
requesting spouse can not turn “blind eye to a return assets without obligation to pay). In its ruling, the Fifth
with large income and little or no tax due and a request Circuit relied on a case decided before the passage of the
for large refunds). 1998 Act. Given Rev. Proc. 2003-61, 2003-2 CB 296, should
161 Rev. Proc. 2003-61 at § 4.03(2)(a)(iii)(B), 2003-2 CB one factor be the most important?
164 This covers abuse that does not rise to the level of
296; and Ferrarese v. Comm’r, 84 TCM 400, CCH Dec.
54,894(M), TC Memo. 2002-249 (2002) (IRS denied defi- invalidating the signature on the joint return, thereby
ciency and equitable relief; court granted equitable relief voiding the joint return filing.
34 Practical Guide to Resolving Your Client’s Tax Liabilities
factor favoring relief; the absence of abuse is ignored. A history of abuse
may mitigate a requesting spouse’s knowledge or reason to know. The IRS
unit processing innocent spouse is sensitive to claims of abuse, and these
cases are likely to be processed quickly.
8. Whether the requesting spouse was in poor mental or physical health
when the return was signed or when relief is requested. The presence of
this factor favors relief; the absence of such is ignored.
Under general community property law, the income of a spouse is allocated
half to the spouse who earns the income and half to the other spouse. For purposes
of the inability to pay rule, this general community property rule is ignored, and
income is allocated to the spouse who earned the income.165
There is also a special innocent spouse rule for spouses in community property
states who file a married filing separate return. Under general community property
law, such a spouse could have no “earned income but still be required to report
income on a separate return. Code Sec. 66(c) grants relief for such spouses so that
they receive relief identical to that granted spouses who file joint returns.166 The
rules of Rev. Proc. 2003-61 are used to determine if relief is available.167 Because of
the knowledge factor, if the income earned by the other spouse is reported on the
separate return of the non-earning spouse, proving innocence may be difficult.
PLANNING NOTE: The argument that a “knowledgeable wronged
spouse should have filed a separate return may carry less weight in a commu-
nity property state. Knowledge is an important factor because a remedy is
available to a spouse with knowledge—file a separate return. However, be-
cause a separate return provides only partial relief to the wronged spouse in a
community property state, knowledge should be a less relevant factor.
Tax Court review of denial of relief under Code Sec. 6015(f) is very limited.
Under a literal reading of § 6015(e), Tax Court review is only available when a
deficiency has been asserted and relief has been elected under § 6015(b) or (c).168
Review outside of Tax Court may not be possible at all.169 One final note, similar to
the deficiency rules, the equitable relief rules cannot be used to generate a
CAUTION: Experience shows that the IRS places heavy emphasis on
knowledge. It rewards “the empty of head but pure of heart while penalizing
the intelligent person who tries to keep a marriage together even though the
other spouse is a spendthrift.171 One Equitable Relief factor is the allocation of
165 Rev. Proc. 2003-61 at § 4.01(7)(a), 2003-2 CB 296. jurisdiction to hear case when no deficiency had been
166 See also Proposed Reg. § 1.66-4 (request for relief asserted). Bankruptcy courts agree.
from operation of community property law). An “inno- 169 See French v. United States, (In re French), 2000-1
cent spouse can defend against a notice of deficiency by USTC ¶ 50,448, 255 B.R. 1 (Bankr. N.D. Ohio 2000) (no
requesting Code Sec. 66 relief in Tax Court; an “innocent provision for judicial review; held; case dismissed for lack
spouse cannot appeal to Tax Court if Code Sec. 66 relief is
of subject matter jurisdication).
denied in an administrative hearing by the IRS. Bernal v.
170 Reg. § 1.6015-4(b).
Comm’r, 120 TC 102, CCH Dec. 55,042 (2003). Congress
failed to provide for appeal to Tax Court in Code Sec. 66. 171 See Von Kalinowski v. Comm’r, 81 TCM 1081, Dec.
167 Rev. Proc. 2003-61 at § 4.03(1), 2003-2 CB 296.
54,226(M), TC Memo. 2001-21 (2001) (relief denied
168 Ewing v. Comm’r, 2006-1 USTC ¶ 50,191 (9th Cir. partly because requesting spouse was well-educated and
2006) (vacating decision of Tax Court because it lacked had previously run her own business).
Tax Code Remedies 35
the liability in the divorce decree, which a priori assumes knowledge of the
liability. While the regulations provide that no one factor is determinative, it
will continue to be difficult to convince the IRS otherwise.172
.04 Injured Spouse Claim
Pursuant to 42 U.S.C. § 664(a)(3)(C), a spouse can make a claim for refund if
the refund was generated by the spouse’s income and withholding but the refund is
intercepted to pay the other spouse’s child support, student loan, or other federal
debt.173 Relief is available in noncommunity property states if the requesting spouse
is not required to pay the past due amount, reported income on the return, and
reported withholding or estimated tax payments on the return. In community
property states, only one of the three factors need be present for relief to be
granted. Relief is requested on Form 8379. Guidance can also be found in Rev. Rul.
80-7, 1980-1 CB 296.
.05 Disclosure of Collection Activities
If any deficiency with respect to a joint return is assessed and the spouses are
no longer married or no longer live in the same household, upon written request,
the IRS can disclose whether it has attempted to collect the deficiency from the
other spouse, the general nature of the collection activities, and the amount
.06 Separate Property Agreement in Community Property State
What protection is available in a community property state when two people
marry and one person owes the IRS and the other does not? In Washington state,
the IRS is entitled to all of the debtor’s income under federal law and one-half of the
nondelinquent spouse’s income under state community property law.175 In other
words, the IRS receives more than it would in a common law property state. Can
the spouses solve this problem by executing a separate property agreement? This
generally means three bank accounts: his, hers, and theirs (for household ex-
penses). If the separate property agreement is honored by the couple, then the IRS
should only be able to collect from the debtor spouse under federal law.176
¶ 255 Other Useful Tools
Over time, several miscellaneous programs and rules have been developed for
the benefit of the taxpayer. These include the taxpayer advocate program, collec-
172 In the Tax Court, the trend is toward some leniency (1998) (Department of Revenue held that it had no re-
in applying this rule. See also the discussion of knowl- course against the nonresponsible spouse after divorce
edge under deficiency relief and the cases cited therein. because the sales tax trust fund obligation is tort-like,
173 Oatman v. Dep’t of Treas., 94-2 USTC ¶ 50,449, 34 applying Washington community property law); and cf.
F.3d 787 (9th Cir. 1994); and see Code Sec. 6402(d)(3)(B) RCW 26.16.200 (all earnings and accumulations of debtor
(relief for interception of overpaid Social Security spouse available to that spouse’s pre-marital creditors
benefits). provided judgment entered within three years of
Code Sec. 6103(e)(8).
175 See United States v. Overman, 424 F.2d 1142 (9th 176 See Downing v. Comm’r, 86 TCM 739, CCH Dec.
Cir. 1970) (tax lien allowed IRS to reach one-half of the 55,383(M), TC Memo. 2003-347 (2003) (case decided
community property); deElche v. Jacobson, 95 Wn.2d 237, under Louisiana law; husband and wife had separate
622 P.2d 835 (1980) (separate tort creditor allowed to property agreement and filed separate tax returns; hus-
reach separate tortfeasor’s one-half community property band was liable for additional tax on his return, and wife
interest); and Determination No. 97-168, 17 WTD 142 was not liable).
36 Practical Guide to Resolving Your Client’s Tax Liabilities
tion appeals, collection due process hearings, and abatement of penalties and
.01 Taxpayer Advocate Program
Sometimes simple communication with someone other than the IRS represen-
tative with whom the taxpayer has been butting heads can resolve a problem.
Congress established the Office of the Taxpayer Advocate to provide that third
person.177 The Advocate’s office (i) assists taxpayers in resolving problems with the
IRS; (ii) identifies areas in which taxpayers have problems dealing with the IRS; (iii)
proposes changes in administrative practices that would alleviate those problems;
and (iv) proposes legislative changes that would mitigate those problems.178 Even
though the Taxpayer Advocate is part of the IRS, the Taxpayer Advocate works for
the taxpayer and not the IRS.
PLANNING NOTE: The Taxpayer Advocate office works best with basic
problems, e.g., misplaced notices, breakdowns in communication, etc. For
example, the Taxpayer Advocate may be successful in obtaining the release of
levied funds if the taxpayer is otherwise on hardship status because expenses
exceeded income or if the amount taken exceeds what the Form 433A indi-
cates is proper. It is unlikely that the office will resolve more complex legal
.02 Taxpayer Assistance Orders
Pursuant to Code Sec. 7811(a), the National Taxpayer Advocate is authorized
to issue a Taxpayer Assistance Order (TAO) if the taxpayer is suffering or about to
suffer a significant hardship as a result of IRS action. Significant hardship includes
(i) an immediate threat of adverse action; (ii) delay of more than 30 days in
resolving taxpayer account problems; (iii) potentially significant costs incurred by
the taxpayer, including professional fees, if relief is not granted; and (iv) irreparable
injury to, or a long-term adverse impact on, the taxpayer if relief is not granted.179
Significant hardship is a necessary, but not wholly sufficient, condition for the
issuance of a TAO.180 Issuance of the TAO also requires an examination of the
behavior of the taxpayer and the action or inaction of the IRS that is about to cause
the significant hardship.181
By means of a TAO, the Taxpayer Advocate can order the IRS to release a levy,
cease collection activity, or restrain from taking any action under the Internal
Revenue Code within a specified time period.182 A taxpayer requests a TAO by filing
with the IRS a Form 911, Application for Taxpayer Assistance Order. Filing a Form
911 suspends the statute of limitation on collection.183 The statute remains sus-
pended from the time the application is made until the Taxpayer Advocate responds
177 Code Sec. 7803(c)(1)(B). The head of the office is 179 Code Sec. 7811(a)(2).
the National Taxpayer Advocate. The mission statement 180 Reg. § 301.7811-1(a)(5).
for the Taxpayer’s Advocate is as follows: “We help tax- 181 Reg. § 301.7811-1(a)(5).
payers solve problems with the IRS and recommend 182 Code Sec. 7811(b).
changes that will prevent the problems. National Tax-
183 Code Sec. 7811(d).
payer Advocate: Fiscal Year 1999 Report to Congress.
178 Code Sec. 7803(c)(2)(A).
Tax Code Remedies 37
plus any additional suspension of time the Taxpayer Advocate may require in the
PLANNING NOTE: Under § 507(a)(8), time periods stop running if the
taxpayer requests a hearing and appeal of any collection action taken. Filing a
Form 911 does not invoke a hearing. Accordingly, the filing of a Form 911
probably does not affect the three-year time period.
According to the National Taxpayer Advocate report to Congress for the Fiscal
Year 1999, only five TAOs were issued during that year. Thus, receiving a TAO is
not a likely outcome. However, as the National Taxpayer Advocate hinted in the
1999 report to Congress, this may be the result of the effectiveness of the program,
as the Taxpayer Advocate may be able to convince the offending IRS employee to
change behaviors before any further action is needed.
.03 Collection Appeals
The IRS has a nationwide collection appeals program. The collection appeals
officer is authorized to review the filing of a notice of federal tax lien, a levy or
proposed levy, or a seizure. A collection appeal request is made on Form 9423,
Collection Appeal Request. A collection appeals officer can also review rejected
offers in compromise.
The third Taxpayer Bill of Rights (P.L. 105-206), enacted in July 1998, provides
for non-binding mediation, whether at the request of the taxpayer or the IRS, on
any unresolved issue at the conclusion of appeals procedures or unsuccessful offers
in compromise.185 In addition, the IRS shall establish a pilot program for binding
arbitration to settle any unresolved issues at the conclusion of the appeals proce-
dures or unsuccessful offers in compromise.186 Also, when a taxpayer cannot obtain
relief under the limited scope of the collection appeals process, a taxpayer assis-
tance order can still be requested.
.04 Collection Due Process Hearings187
Although the IRS issued separate rules for collection due process hearings for
withdrawal of notices of lien and release of levies, the rules are almost identical.
Note, Section 507(a)(8) is written with the intent of stopping its time periods from
running during a collection due process hearing. Whether it accomplishes its
purpose is uncertain. These issues are discussed in ¶ 425.
Liens. After the filing of a notice of lien, the IRS is required to give a taxpayer
notice of the lien filing and the right to a collection due process hearing.188 This
notice must be given within five business days of the filing of the notice of lien.189 A
taxpayer requests a collection due process hearing on Form 12153, Request for a
Collection Due Process Hearing. At the hearing, the taxpayer can raise (i) chal-
lenges to the underlying tax liability as to existence or amount if the taxpayer failed
184 Code Sec. 7811(d). much Process is Due: IRC Sections 6320 and 6330
185 Code Sec. 7123(b)(1). Collection Due Process Hearings, 29 Vt. Law Rev. 51
(2004-2005) and “Reforming, Not Replacing, CDP, Tax
186 Code Sec. 7123(b)(2).
Notes (August 15, 2005).
187 Prof. Danshera Cords has written extensively on 188 Code Sec. 6320; and see Reg. § 301.6320-1.
collection due process hearings. See, e.g., D. Cords, “How 189 Code Sec. 6320(a)(2)(C).
38 Practical Guide to Resolving Your Client’s Tax Liabilities
to get a deficiency notice or otherwise lacked an earlier opportunity for disputing
the tax liability;190 (ii) appropriate spousal defenses; (iii) challenges to the appropri-
ateness of collection actions; and (iv) offers of collection alternatives, including
bond, substitution of assets, installment agreement, or offers.191 The taxpayer is
entitled to a bona fide hearing with appropriate advance notice.192
If the IRS denies relief under the collection due process appeal, the taxpayer
has 30 days to appeal the denial of relief to the Tax Court,193 or if the Tax Court
does not have jurisdiction of the underlying tax liability, to a district court.194 If the
underlying obligation is being reviewed, the appropriate standard of review is de
novo.195 If IRS collection actions are being reviewed, the appropriate standard is
abuse of discretion.196 It appears that judicial review is limited to the administrative
Planning Note: Regardless of what evidence will be heard in the appel-
late court, great care should be taken to develop the record in the administra-
The filing of a collection due process appeal stays the statute of limitation for
the time the appeal is processed plus an additional 90 days after the final determina-
tion is made.198 If collection activity continues while the appeal is pending, then the
statute continues to run.199
190 Montgomery v. Comm’r, 122 TC 1, CCH Dec. 55,501 192 Cox v. United States, 2004-2 USTC ¶ 50,404 (W.D.
(2004) (Acq. 12/19/2005), (taxpayer self-assessed; tax- Okla. 2004) (opportunity to be heard at meaningful time
payer did not full pay balance due; upon receipt of levy and meaningful manner is bedrock principle of federal
notice, taxpayer requested collection due process hearing due process, and informal telephone hearing resulted in
and thereafter indicated intent to file amended return; inadequate record that consisted of appeal officer’s per-
taxpayer had not filed amended return when hearing sonal notes from the telephone calls).
193 Code Sec. 6320(c), making Code Sec. 6330(d)
officer decided that levy should proceed; on appeal to Tax
Court, court held that it could consider the correctness of applicable.
the underlying obligation and denied IRS’s motion for 194 Code Sec. 6320(c), making Code Sec. 6330(d)(1),
summary judgment to dismiss petition); Poindexter v. applicable; and see Moore v. Comm’r, 114 TC 171, CCH
Comm’r, 122 TC 280, CCH Dec. 55,604 (2004) (same), Dec. 53,802 (2000) (Tax Court could not review collection
2005-2 USTC ¶ 50,508 (unpublished opinion); and Ken- appeal on responsible person penalty as it does not have
dricks v. Comm’r, 124 TC 69, CCH Dec. 55,950 (2005) jurisdiction over those types of cases); and Van Es v.
(taxpayer had opportunity to contest liability in taxpayer’s Comm’r, 115 TC 324, CCH Dec. 54,080 (2000) (Tax Court
previous Chapter 13 case when the IRS filed proof of could not review collection appeal on a frivolous return
claim). For an example of a taxpayer not receiving the penalty as it does not have jurisdiction over those
notice of deficiency and being allowed to contest the penaltiwes).
195 See Rivera v. Comm’r, 85 TCM 832, CCH Dec.
underlying liability, see Sherer v. Comm’r, 91 TCM 759,
CCH Dec. 56,435(M), TC Memo. 2006-29. See also Nestor 55,040(M), TC Memo. 2003-35 (2003) (for some years,
v. Comm’r, 118 TC 162, CCH Dec. 54,655 (2002) (failure administrative review granted because the IRS could not
by the IRS to provide a copy of the assessment record for prove tax properly assessed).
the collection due process hearing, see Code Sec. 6203,
was harmless error); and Behling v. Comm’r, 118 TC 572, 197 Robinette v. Comm’r, 2006-1 USTC ¶ 50,213 (8th Cir.
CCH Dec. 54,787 (2002) (citing Reg. § 301.6320-1(e)(3), 2006) (reversing Tax Court, review limited to administra-
Q&A-E11, which allows an examination of the underlying tive record); Olsen v. United States, 2005-2 USTC ¶ 50,637
obligation by the hearing officer but does not make it (1st Cir. 2005) (same as to district courts); Muller III v.
subject to judicial review). It will be easier to contest the Rossotti, 2004-1 USTC ¶ 50,239 (M.D. Tenn. 2004) (same as
responsible person penalty, which can be assessed with- to district courts); and cf. Living Care Alternatives of Utica
out a notice of deficiency, than a liability arising from a v. Comm’r, 2005-1 USTC ¶ 50,395, 411 F.3d 621 (6th Cir.
change to the tax return. See ¶ 10,015. 2005) (request for remand to develop more thorough
191 Code Sec. 6320(c), making Code Sec. 6330(c)(2) record denied).
198 Code Sec. 6320(c), making Code Sec. 6330(e)
applicable; and see Skrizowski v. Comm’r, 88 TCM 336,
CCH Dec. 55,771(M), TC Memo. 2004-229 (2004) (IRS applicable.
abused discretion when it did not fully investigate tax- 199 Code Sec. 6320(c), making Code Sec. 6330(e)(2)
payer’s offer in compromise proposal). applicable.
Tax Code Remedies 39
After the issuance of a determination on the collection due process hearing,
the Appeals Office retains jurisdiction to consider any new matters that might arise,
e.g., a change in circumstances.200 This retention of jurisdiction has no impact on
the statute of limitation on collection.201
Even if the taxpayer misses the opportunity for a collection due process
hearing, the IRS will still hold a hearing that is almost identical.202 The questions
presented and the analysis given by IRS Appeals are identical to the collection due
process hearing. One major difference is that the statute of limitation continues to
run.203 Another major difference is that appeal to Tax Court is not allowed.204 Query
whether this lack of appellate review will make the IRS less likely to compromise.
Collection activity is not stayed, unless the Appeals office decides that it should
Levies. No levy can be made until the IRS notifies the taxpayer of the right to
a collection due process hearing.206 This notice must be given 30 days before the
first levy for the applicable year.207 A taxpayer requests a collection due process
hearing on Form 12153, Request for a Collection Due Process Hearing. At the
hearing, the taxpayer can raise (i) challenges to the underlying tax liability as to
existence or amount if the taxpayer failed to get a deficiency notice or otherwise
lacked an earlier opportunity for disputing the tax liability;208 (ii) appropriate
spousal defenses; (iii) challenges to the appropriateness of collection actions; and
(iv) offers of collection alternatives, including bond, substitution of assets, install-
ment agreement or offers.209
If the IRS denies relief under the collection due process appeal, the taxpayer
has 30 days to appeal the denial of relief to the Tax Court,210 or if the Tax Court
does not have jurisdiction of the underlying tax liability, to a district court.211 If the
200 Code Sec. 6320(c), making Code Sec. 6330(d)(2) dricks v. Comm’r, 124 TC 69, CCH Dec. 55,950 (2005)
applicable. (taxpayer had opporunity to contest liability in taxpayer’s
201 Reg. § 301.6320-1(h), Q&A H1. previous Chapter 13 case when IRS filed proof of claim).
202 Reg. § 301.6320-1(i). For an example of a taxpayer not receiving the notice of
203 Reg. § 301.6320-1(i), Q&A I2. deficiency and being allowed to contest the underlying
liability, see Sherer v. Comm’r, 91 TCM 759, CCH Dec.
204 Two levy cases are illustrative of the Tax Court
56,435(M), TC Memo. 2006-29. See also Nestor v. Comm’r,
refusing to hear the appeal. Moorhaus v. Comm’r, 116 TC 118 TC 162, CCH Dec. 54,655 (2002) (failure by the IRS
263, CCH Dec. 54,316 (2001); and Kennedy v. Comm’r, to provide a copy of the assessment record for the collec-
116 TC 255, CCH Dec. 54,315 (2001). tion due process hearing, see Code Sec. 6203, was harm-
205 Reg. § 301.6320-1(i), Q&A I3. less error); and Behling v. Comm’r, 118 TC 572, CCH Dec.
206 Code Sec. 6330(b); and see Reg. § 301.6330-1. Only a 54,787 (2002) (citing Reg. § 301.6320-1(e)(3), Q&A-E11,
potential levy is subject to a collection due process hear- which allows an examination of the underlying obligation
ing. A potential setoff is not. Boyd v. Comm’r, 124 TC 296, by the hearing officer but does not make it subject to
CCH Dec. 56,072 (2005). judicial review). It will be easier to contest the responsi-
207 Code Sec. 6330(a)(2)(C). ble person penalty, which can be assessed without a
208 Montgomery v. Comm’r, 122 TC 1, CCH Dec. 55,501
notice of deficiency, than a liability arising from a change
to the tax return. See ¶ 10,015.
(2004) (Acq. 12/19/2005), (taxpayer self-assessed; tax- 209 Code Sec. 6330(c)(2); and see Skrizowski v. Comm’r,
payer did not full pay balance due; upon receipt of levy
88 TCM 336, CCH Dec. 55,771(M), TC Memo. 2004-229
notice, taxpayer requested collection due process hearing
(2004) (IRS abused discretion when it did not fully inves-
and thereafter indicated intent to file amended return;
tigate taxpayer’s offer in compromise proposal).
taxpayer had not filed amended return when hearing 210 Code Sec. 6330(d) applicable.
officer decided that levy should proceed; on appeal to Tax
211 Code Sec. 6320(c), making Code Sec. 6330(d)(1)
Court, court held that it could consider the correctness of
the underlying obligation and denied IRS’s motion for applicable; and see Moore v. Comm’r, 114 TC 171, CCH
summary judgment to dismiss petition). Poindexter v. Dec. 53,802 (2000) (Tax Court could not review collection
Comm’r, 122 TC 280, CCH Dec. 55,604 (2004) (same), appeal on responsible person penalty as it does not have
2005-2 USTC ¶ 50,508 (unpublished opinion); and cf. Ken- jurisdiction over those types of cases); and Van Es v.
40 Practical Guide to Resolving Your Client’s Tax Liabilities
underlying obligation is being reviewed, the appropriate standard of review is de
novo.212 If IRS collection actions are being reviewed, the appropriate standard is
abuse of discretion.213 It appears that judicial review is limited to the administrative
PLANNING NOTE: Regardless of what evidence will be heard in the
appellate court, great care should be taken to develop the record in the
The filing of a collection due process appeal stays the statute of limitation for
the time the appeal is processed, plus an additional 90 days after the final determi-
nation is made.215 If collection activity continues while the appeal is pending, then
the statute continues to run.216 The IRS may still file a notice of lien while the
collection due process appeal is pending.217
After the issuance of a determination on the collection due process hearing,
the Appeals Office retains jurisdiction to consider any new matters that might arise,
e.g., a change in circumstances.218 This retention of jurisdiction has no impact on
the statute of limitation on collection.219
Even if the taxpayer misses the opportunity for a collection due process
hearing, the IRS will still hold a hearing that is almost identical.220 The questions
presented and the analysis given by IRS Appeals is identical to the collection due
process hearing. One major difference is that the statute of limitation continues to
run.221 Another major difference is that appeal to Tax Court is not allowed.222 Query
whether this lack of appellate review will make the IRS less likely to compromise.
Collection activity is not stayed, unless the Appeals office decides that it should
PLANNING NOTE: The collection due process hearing has put a great
strain on the IRS collection process. Many of the requests for a hearing are
frivolous. Taxpayers should be aware that the Tax Court is more than willing
217 Reg. § 301.6330-1(g)(2)(A-G3).
Comm’r, 115 TC 324, CCH Dec. 54,080 (2000) (Tax Court
could not review collection appeal on a frivolous return 218 Code Sec. 6330(d)(2).
penalty as it does not have jurisdiction over those 219 Reg. § 301.6330-1(h), Q&A H1.
220 Reg. § 301.6330-1(i).
212 See Goza v. Comm’r, 114 TC 176, CCH Dec. 53,803
221 Reg. § 301.6330-1(i), Q&A I2.
213 Id. 222 Moorhous v. Comm’r, 116 TC 263, CCH Dec. 54,316
214 Robinette v. Comm’r, 2006-1 USTC ¶ 50,213 (8th Cir. (2001); and Kennedy v. Comm’r, 116 TC 255, CCH Dec.
2006) (reversing Tax Court, review limited to administra- 54,315 (2001); but see Craig v. Comm’r, 119 TC 252, CCH
tive record); Olsen v. United States, 2005-2 USTC ¶ 50,637 Dec. 54,933 (2002) (where taxpayer filed unsigned re-
(1st Cir. 2005) (same as to district courts); Muller III v. quest for hearing that was ultimately granted outside the
Rossotti, 2004-1 USTC ¶ 50,239 (M.D. Tenn. 2004) (same as 30-day period when the taxpayer signed the request, the
to district courts); and cf. Living Care Alternatives of Utica IRS held an equivalent hearing and the Tax Court took
v. Comm’r, 2005-1 USTC ¶ 50,395, 411 F.3d 621 (6th Cir. jurisdiction to review the IRS’s decision because the tax-
2005) (request for remand to develop more thorough payer’s initial request, though unsigned, had been
record denied). timely). Presumably, the statute of limitation was sus-
215 Code Sec. 6330(e); and Boyd v. Comm’r, 117 TC pended in Craig, but the court did not address the issue.
127, CCH Dec. 54,495 (2001). See, id. at n. 5.
216 Code Sec. 6330(e)(2). 223 Reg. § 301.6330-1(i), Q&A I3.
Tax Code Remedies 41
to assess costs, attorney’s fees, and sanctions against taxpayers for pursuing
.05 Other Tools for Use Against Liens and Levies
Under certain limited circumstances set forth below, the IRS is authorized to
withdraw notices of lien or release levies.
Liens. Even after a notice of lien filing, the IRS can withdraw a notice of lien if
(i) the filing was premature; (ii) if the taxpayer has entered into an installment
agreement to pay the tax and that agreement does not allow the IRS to file a notice
of lien; (iii) if withdrawal of the notice will facilitate collection of the tax; or (iv) with
consent of the taxpayer or the Taxpayer Advocate, if the withdrawal would be in the
best interest of the taxpayer and the United States.225
A request for withdrawal is made to the National Lien Office in Cincinnati (or
as may be prescribed by the Commissioner). It should contain the name, current
address, and taxpayer identification number of the person requesting withdrawal, a
copy of the applicable notice of lien, grounds upon which the withdrawal is being
requested, and a list of names and addresses of any credit reporting agency and any
financial institution or creditor that the taxpayer wishes the IRS to notify of the
withdrawal.226 The information regarding credit reporting agencies puts the IRS in
compliance with Code Sec. 6323(j)(2), which provides that the IRS is required to
make reasonable efforts to give notice of the withdrawal to credit reporting agen-
cies and any financial institution or creditor whose name and address is specified in
Third parties who believe that a notice of lien has been filed erroneously
against their property can request a certificate of discharge by depositing funds
with the IRS or posting a bond.227
Levies. Property that has been levied can be returned if the IRS determines
that (i) the levy was premature or not in accordance with procedures; (ii) the
taxpayer has entered into an installment agreement to pay the tax, unless the
installment agreement prohibits the release of the levy; (iii) the return of the
property will facilitate collection of the tax; or (iv) with consent of the taxpayer or
the Taxpayer Advocate, release of the levy would be in the best interest of the
taxpayer and the United States.228 In the case of a levy on salary or wages, upon
agreement with the taxpayer that the tax is not collectible, the IRS shall release the
levy as soon as is practicable.229
Subject to certain provisions, there can be no levy during the pendency of a
refund action for a divisible tax.230 There can be no levy if an offer in compromise is
pending, an offer for an installment payment is pending, or an installment agree-
ment is in effect.231 Except for installment agreements that are in effect, the statute
224 See, e.g., Craig v. Comm’r, 119 TC 252, CCH Dec. 228 Code Sec. 6343(d); and see Proposed Reg.
54,933 (2002). § 301.6343-3.
225 Code 229 Code Sec. 6343(e).
Sec. 6323(j)(1); and see Reg.
§ 301.6323(j)-1(b). 230 Code Sec. 6331(i).
226 Reg. § 301.6323(j)-1(d). 231 Code Sec. 6331(k)(1) (pending offers); Code Sec.
227 Code Sec. 6325(b)(4). 6331(k)(2)(A) (pending installment agreements); and
42 Practical Guide to Resolving Your Client’s Tax Liabilities
of limitation on collection is suspended during the time period that the IRS cannot
Levies may also be defeated by a bankruptcy filing if the debtor retains rights
in the seized property. Under 11 U.S.C. § 541(a)(1), all the debtor’s interest in
property is included in the bankruptcy estate. What interest does a debtor have in
property after the IRS has levied? For example, does the debtor retain any rights in
cash after the IRS levies?233 One court has held that a debtor continues to have
rights in an automobile that is subject to a notice of seizure until the IRS takes
Relief from the damages caused by a wrongful levy may also be available under
Code Sec. 7433, which provides that a taxpayer can bring suit against the IRS if it
negligently disregards any provision of the Tax Code. Code Sec. 7433 is discussed
briefly under lawsuit remedies.
.06 Abatement of Interest
Code Sec. 6404(e) authorizes the IRS to abate interest that accrued because of
unreasonable errors and delays caused by the IRS in performing a ministerial235 or
managerial act. Interest can only be abated on income taxes.236 Note, based on the
committee reports accompanying the creation of effective tax administration of-
fers,237 the procedure for abating interest on employment taxes should be the
effective tax administration offer. However, when the IRS published its rules for
effective tax administration offers, it made no mention that offers could be used to
abate interest on employment taxes that accrued because of IRS delay.
The Committee Reports accompanying the amendment of Code Sec. 6404(e)
suggest that the following managerial acts may be cause for abatement: “the loss or
records by the IRS, IRS personnel transfers, extended illnesses, extended person-
nel training, or extended leave. 238 A ministerial act means:
Code Sec. 6331(k)(2)(C) (installment agreements that Elec. Contracting, Inc.), 185 B.R. 750 (Bankr. E.D. Mich.
are in effect). 1995) (taxpayer’s ownership rights in cash terminate im-
232 The statute continues to run during pending install- mediately). Eisenbarger details cases discussing this issue
ment agreements because Code Sec. 6331(k)(3) omits at Notes 2 and 3. See also ¶ 325.
any reference to Code Sec. 6331(i)(5). 234 See A & J Auto Sales, Inc. v. United States (In re A &
233 Cf. Hunter v. United States (In re Hunter), 201 B.R. J Auto Sales, Inc.), 98-1 USTC ¶ 50,416, 223 B.R. 839, 842
959 (Bankr. E.D. Ark. 1996) (because interest accruing (D.N.H. 1998).
on deposit after levy is treated as payment to bank’s 235 See Taylor v. Comm’r, 113 TC 206, CCH Dec. 53,541
customer, taxpayer still has rights in cash after levy); (1999) (delay in assessment because of ongoing criminal
Giaimo v. United States (In re Giaimo), 194 B.R. 210 investigation is not delay because of a ministerial act); Lee
(E.D. Mo. 1996) (taxpayer’s rights not terminated), order v. Comm’r, 113 TC 145, CCH Dec. 53,508 (1999) (IRS’s
vacated, 203 B.R. 696 (E.D. Mo. 1996) (order vacated decisions on how to proceed in litigation required exer-
when case converted to Chapter 7); Sanchez v. United cise of judgment and is not delay because of a ministerial
States (In re Sanchez), 96-2 USTC ¶ 50,590 (Bankr. N.D. act); Spurgin v. Comm’r, 82 TCM 841, CCH Dec.
Cal. 1996) (taxpayer’s rights not terminated); with In re 54,535(M), TC Memo. 2001-290 (2001) (process of evalu-
Eisenbarger, 93-2 USTC ¶ 50,538, 160 B.R. 542 (Bankr. E.D. ating an offer in compromise not a ministerial act); and
Va. 1993) (levy on wages perfected at time of service; all Krugman v. Comm’r, 112 TC 230, CCH Dec. 53,355 (1999)
of debtor’s rights in the property transferred; and upon (abatement not allowed for time period between return
subsequent bankruptcy filing, levied cash not property of due date and return file date).
the estate); In re Smiley, 189 B.R. 338 (Bankr. E.D. Pa. 236 Code Sec. 6404(e); and Woodral v. Comm’r, 112 TC
1995) (following Eisenbarger); Faith Missionary Baptist
19, CCH Dec. 53,206 (1999) (Acq. in result, 1999-2 CB
Church v. IRS (In re Faith Missionary Baptist Church),
95-1 USTC ¶ 50,075, 174 B.R. 454, 470 (Bankr. E.D. Tex. 237 H.R. CONF. REP. NO. 105-599 at 111 (1998).
1994) (taxpayer’s ownership rights in cash terminate im-
238 S. REP. NO. 506, 104TH CONG., 2D SESS. 27.
mediately); and United States v. Borock (In re Ruggeri
Tax Code Remedies 43
a procedural or mechanical act that does not involve the exercise of judgment or
discretion, and that occurs during the processing of a taxpayer’s case after all
prerequisites to the act . . . have taken place. Reg. § 301.6404-2(b)(2).
Interest cannot be abated until the taxpayer has been contacted by the IRS in
writing with respect to the deficiency or payment.239 Interest cannot be abated if the
taxpayer causes the problem.240 Interest cannot be abated for delays resulting from
general administrative decisions.241 Examples of such decisions include deciding
how to organize the processing of returns or delay in implementing an improved
computer system.242 The Congressional idea was that interest should be abated
where failure to abate interest would be widely perceived as grossly unfair. Thus,
interest abatement should not be used routinely to avoid payment of interest.243
Appeal of an IRS decision not to abate interest is made to the Tax Court.244
Appeal must be made within 180 days of the date of the mailing of the IRS’s final
determination not to abate such interest.245 The standard of review is abuse of
For tax years beginning after 1997, if the IRS fails to contact a taxpayer
regarding the imposition of additional tax, interest, or penalties within 18 months of
a timely filed return (including extensions), any time-sensitive assessments, e.g.,
interest, will be suspended for the period during which the taxpayer is not con-
tacted.247 For tax years beginning after 2003, the applicable time period is shortened
to 12 months. This interest suspension rule does not apply to any penalty imposed
by Code Sec. 6651, including failure to file, any case involving fraud, any amount
shown as due on the return, or any criminal penalty.248 Procedural guidance is
found in Rev. Proc. 2005-38.249
.07 Abatement of Penalties
Taxpayers are generally much more successful at having penalties abated than
interest. For example, many Tax Code penalties can be abated if the taxpayer
shows reasonable cause for the action or position taken. Reliance on a tax profes-
sional or lack of sophistication are two arguments often used successfully by
taxpayers to show reasonable cause. Another argument that has been successful is
financial distress.250 A complete discussion of Tax Code penalties and the argu-
239 Code Sec. 6404(e)(1); and see Krugman v. Comm’r, v. United States (In re Karlsson), 247 B.R. 321 (Bankr.
112 TC 230, CCH Dec. 53,355 (1999). In Krugman, the M.D. Fla. 2000) (bankruptcy court without authority to
taxpayer filed the return 6.5 years late and would also review IRS choice not to abate interest, citing 5 U.S.C.
have been disqualified under the requirement that no § 701(a), which provides that judicial review is not availa-
significant aspect of the error or delay is attributable to ble when agency action is committed to agency discretion
the taxpayer. Code Sec. 6404(e)(1). by law).
240 Code Sec. 6404(e)(1). See Wright v. Comm’r, 2005-1 245 Code Sec. 6404(g).
USTC ¶ 50,223 (5th Cir. 2005) (delay caused by taxpayer’s 246 Code Sec. 6404(g).
inability to pay and not by IRS fault).
241 Code Sec. 6404(e)(1). 247 Code Sec. 6404(g).
242 Code Sec. 6404(e)(1). 248 Code Sec. 6404(g)(2).
243 See Krugman v. Comm’r, 112 TC 230, CCH Dec. 249 IRB 2005-28, 81.
53,355 (1999), citing H. REPT. 99-426, 1986-3 CB 844; S. 250 See, e.g., E. Wind Indus., Inc. v. United States, 196
REPT. 99-313, 1986-3 CB 208. F.3d 499 (3d Cir. 1999) (penalty abated where taxpayer’s
244 Code Sec. 6404(g)(1). Can a bankruptcy court hear financial viability and cash flow was dependent on govern-
an abatement of interest issue as part of its right to ment contracts and corrupt employees of the applicable
determine the amount or legality of any tax? See Karlsson agencies).
44 Practical Guide to Resolving Your Client’s Tax Liabilities
ments that can be used for abatement is beyond the scope of these materials. For a
guide to abating penalties, the practitioner should consult the Consolidated Penalty
Handbook (Part 20 of the Internal Revenue Manual).
Statutes allowing lawsuits against the IRS to prevent collection of tax or for the
recovery of damages for improper collection activities are narrowly drawn.
Injunctive relief. What happens if the IRS insists on collecting a tax where it
has not properly issued its notice of deficiency? This is one of the few instances
where a suit for injunctive relief under Code Sec. 7421 will be entertained by a
district court.252 For example, a suit for injunctive relief under Code Sec. 7421 would
be proper if the IRS assessed a tax without sending the 90-day notice to the
taxpayer’s last known address.253
In an anti-injunction action, the Ninth Circuit also requires proof of traditional
equitable grounds for injunctive relief.254 The traditional requirements for equitable
relief are no adequate remedy at law and denial of injunctive relief would cause
immediate, irreparable harm.255 Thus, a taxpayer who is able to pay the proposed
deficiency may not be eligible for injunctive relief in the Ninth Circuit.256 Query
whether the authority for the issuance of relief is equitable or statutory.
Suit under Code Sec. 7426. A person other than the taxpayer can bring suit
to unwind a wrongful levy, claim surplus proceeds generated from a sale of seized
property, or make a claim in substituted sales proceeds.257 In general, suit must be
brought within nine months.258 If a request for administrative relief is made, the
time period is increased to 12 months from the date of filing the request or six
months from the mailing by certified or registered mail of a disallowance of the
request, whichever is shorter.259 Suit must be filed against the United States260 in
federal district court.261
Recovery of damages caused by unauthorized collection activity. If an IRS
office or employee acts recklessly or intentionally disregards any provision of the
Internal Revenue Code in collecting a tax, a taxpayer may bring suit for damages.262
Damages must be actual direct economic damages sustained by the taxpayer as a
251 For more detailed information, see M. SALTZMAN, 255 Id.
IRS PRACTICE AND PROCEDURE at ¶ 15.07 (2d ed. 256 In essence, the Ninth Circuit shifts the analysis
252 Code Sec. 7421(a) (“Except as provided in... from a means of controlling administrative abuses to the
taxpayer’s ability to pay. M. SALTZMAN, IRS PRACTICE
6213(a)... nosuit . . . shall be maintained for the purpose
of restraining the . . . collection of tax ). Code Sec. AND PROCEDURE at p. 15–114 (2d ed. 1991).
257 Code Sec. 7426(a); and Rev. Rul. 2005-49, IRB
6213(a) requires the issuance of a notice of deficiency
before collection can proceed. The state law equivalent to 2005-30 , 125 (remedies of third parties contesting levies).
the anti-injunction act is found in 28 U.S.C. § 1341, which See also Rev. Rul. 2005-50, IRB 2005-30, 124 (remedies of
provides that district courts shall not enjoin the collection third parties contesting liens).
of any tax under state law where a plain, speedy, and
258 Code Sec. 6532(c)(1).
efficient remedy is available in state court. McCrory Corp.
v. Ohio, 212 B.R. 229, 232 (S.D.N.Y. 1997). 259 Code Sec. 6532(c)(2).
253 Mall v. Kelly, 83-2 USTC ¶ 9433, 564 F.Supp. 371 (D. 260 Code Sec. 7426(d).
Wyo. 1983). 261 28 U.S.C. § 1346(c).
254 See Jensen v. IRS, 88-1 USTC ¶ 9130, 835 F.2d 196
262 Code Sec. 7433(a); and see Proposed Reg.
(9th Cir. 1987) citing Cool Fuel, Inc. v. Connett, 82-2 USTC
¶ 9559, 685 F.2d 309 (9th Cir. 1982). § 301-7433-2(e) for procedures for filing a claim.
Tax Code Remedies 45
result of the IRS action, including the costs of the suit.263 Damages are limited to
$1,000,000, and only $100,000 in the case of negligence. In addition, failure to
exhaust administrative remedies may result in a reduction of the award to the
taxpayer.264 A more detailed discussion of Code Sec. 7433 is beyond the scope of
Recovery of attorney’s fees. A taxpayer who successfully litigates with the
IRS, whether in court or administrative proceeding, can be reimbursed for attor-
ney’s fees and costs.265 To qualify, the taxpayer must have exhausted all administra-
tive remedies.266 Fees and costs are available for successful administrative
proceedings. The taxpayer can also receive attorney’s fees if a qualified offer is
The burden of proof is on the IRS to show that its position was substantially
justified.268 The IRS is presumed to be without justification if it does not follow its
published guidance, including revenue rulings, revenue procedures, notices, and
announcements. The IRS is also presumed to be without justification if it fails to
follow advice given directly to the taxpayer, e.g., a private letter ruling or technical
In 1996, the rate for attorney’s fees was set at $110 an hour.269 Thereafter, the
rate is subject to annual increases for inflation; and in 2006, the rate was $160 an
hour.270 The rate can be adjusted upward if the court determines that a special
factor justifies a higher rate, e.g., limited availability of qualified attorneys for the
.09 The Insolvency Statute
Practitioners should be aware of the federal insolvency statute, which is a
useful tool for the government.272 That statute provides that a claim of the United
States shall be paid first when any person indebted to the United States is insolvent
and without enough property to pay the United States and makes a voluntary
assignment of property.273 The insolvency statute also applies to decedents who die
without enough property to pay all debts.274 Furthermore, an executor can be held
personally liable if other creditors or beneficiaries are paid ahead of the United
263 Code Sec. 7433(b). 270 Code Sec. 7430(c)(1); Rev. Proc. 2005-70, IRB
264 Code Sec. 7433(d)(1). 2005-47, 979.
271 Code Sec. 7430(c)(1)(B)(iii).
265 Code Sec. 7430; and see ¶ 875.
272 31 U.S.C. § 3713.
266 Code Sec. 7430(b)(1). Exhaustion of administrative
273 31 U.S.C. § 3713(a); and see Straus v. United States,
remedies does not include agreeing to an extension of
the statute of limitation on assessment. 99-2 USTC ¶ 50,969, 196 F.3d 862 (7th Cir. 1999) (because
267 Code Sec. 7430(c)(4)(E), Code Sec. 7430(g) and state’s tax lien did not fit within any of the Code Sec.
6323(a) categories, its prior choate lien was primed by
Reg. § 301.7430-7. See United States v. Scheingold, 2004-1 later filed federal tax lien by operation of the insolvency
USTC ¶ 50,116 (D.N.J. 2003) for an example of a taxpayer statute).
making a qualified offer, obtaining a result at trial that 274 Id.; and see United States v. Irby III, 2006-1 USTC
was better than the offer, and being awarded attorney’s ¶ 50,143 (S.D. Ala. 2005) for an example of co-executors
fees. being held personally liable for paying state and local
268 Code Sec. 7430(c)(4)(B)(i).
taxes before the United States.
269 Code Sec. 7430(c)(1)(B)(iii). 275 31 U.S.C. § 3713(b).
46 Practical Guide to Resolving Your Client’s Tax Liabilities
There are some exceptions to the insolvency statute, including bankruptcy276
and the lien priming rules of Code Sec. 6323(a).277 The statute still contains
language stating that the insolvency statute applies when the taxpayer commits an
act of bankruptcy. Based on this language, the insolvency statute applies in a state
court receivership, even if it does not apply to a federal court bankruptcy filing.278
This chapter is reprinted with the publisher’s permission from Practical Guide
to Resolving Your Client’s Tax Liabilities published by CCH. Copying or
distribution without the publisher’s permission is prohibited. To learn more
about the Practical Guide to Resolving Your Client’s Tax Liabilities contact
CCH at 1-800-248-3248 or visit the Store at www.CCHGroup.com.
276 31 U.S.C. § 3713(a)(2). statute? See S. Independence, Inc. v. United States (In re S.
277 Estate of Romani v. United States, 98-1 USTC Independence, Inc.), 2001-1 USTC ¶ 50,312, 256 B.R. 861
¶ 50,368, 523 US 517 (1998) (judgment lien against insol- (Bankr. E.D. Va. 2000) (although Virginia fuel tax lien
vent decedent primed IRS lien because Code Sec. 6323(a) deemed a judgment lien by statute, held not judgment
is specific exception to insolvency statute). In Washing- lien sufficient to prime IRS lien because not created by
ton state, tax warrants are treated as if a judgment by judicial action).
statute. Would a Washington state tax lien be considered 278 See Straus v. United States, 99-2 USTC ¶ 50,969, 196
a judgment lien and defeat the insolvency statute? In F.3d 862 (7th Cir. 1999) (in state court receivership, IRS
other words, does the statute mean judgment lien by lien primed previously filed state tax lien).
actual litigation or can a judgment lien be created by