Collection Due Process hearing

Stop the IRS from Collecting Your Ex’s Tax from You – Innocent Spouse

Tom

What is Innocent Spouse Relief?

Innocent Spouse Relief is a form of tax relief that is available for people who signed a joint return with their spouses and who have good reasons as to why they should not be held liable for additional tax assessed as the result of an audit, or even for the tax that is shown as due on the joint return. At its most expansive level, called Equitable Relief, a request for Innocent Spouse Relief should be granted if, when considering all of the facts and circumstances, it would be unfair to collect the tax liability in question from the person making the request.

Why does Innocent Spouse Relief Exist?

If you file a joint return, the presumption is that you are agreeing that the IRS can collect any underpayments of tax, or any liability that results from an audit from you or from your spouse. This default rule can be found in Section 6013 of the tax code. This can lead to some seriously unfair consequences.

Consider a situation where a husband takes an early distribution from a 401k or Traditional IRA account to use for his own benefit, or maybe he makes business income at a side gig that he does not disclose to his wife. Is it fair to expect his wife to play detective and scrutinize the books of his business, to monitor his eBay/PayPal account or to check his phone to see if the Uber Driver or Lyft app is installed on his phone?

Sometimes these conversations are evaded by the tax-cheating spouse, or sometimes the activity is so well-concealed that the spouse requesting relief has no reason to expect that items are missing from the return. In that circumstance, the spouse should not be held to account for any new tax liabilities that arise from an audit.

Consider, also, a situation where a spouse signs a tax return which actually shows a balance due. Maybe his wife is a realtor, but she owes tax every year because she never pays her quarterly estimated taxes. Is it fair for the husband to be on the hook for a liability that she accrued by not keeping up with her taxes? Maybe, but maybe not. Maybe she told him that she was going to be mailing a check to pay the liability in full with the return, or that she would be establishing an installment agreement with the IRS to pay the liability off. Even if she did not make these representations, maybe there are other reasons that would make it unfair to hold him accountable for the tax liability.

Often, Innocent Spouse cases arise in the context of a divorce proceeding. It is important to know that a divorce decree assigning liability for particular taxes to one spouse does not settle the matter with the IRS. The IRS will still try to collect the tax liability from both spouses unless one spouse files a successful Innocent Spouse request. Whether or not a the taxpayers are divorced will be considered by the IRS, but that is only one factor the IRS will consider. It is important to remember that the IRS will consider all of the facts and circumstances in front of it when making an Innocent Spouse determination. The IRS is not a party to your divorce decree and is not bound by it, but it will still be considered as weighing in favor of relief.

When is Innocent Spouse Relief Available?

Innocent Spouse Relief is available whenever you have a joint tax liability with a current or former spouse. Certain types relief (in the case of an audit) is only available for 2 years after the IRS begins collection efforts. But relief is always available in some form for as long as the IRS can collect (10+ years). In certain circumstances, which I won’t be covering here, it may be beneficial (if the IRS has been trying to collect for less than 2 years) to make a claim for Innocent Spouse Relief under sections 6015(b) and 6015(c).

But the two year limitation is only a bar to certain types of relief. Innocent Spouse Relief is actually available until the IRS can no longer legally collect the tax from the taxpayer. That means you have at least 10 years to file for Innocent Spouse Relief (under “Equitable Relief” provisions laid out in section 6015(f).)

How do I request Innocent Spouse Relief with the IRS?

The most straight-forward way to request Innocent Spouse Relief with the IRS is to file 8857 with the IRS. This form will start the process with the IRS. I need to mention that this form contains many traps and elicits answers that might result in the IRS making a determination against the taxpayer, when it should not. It is important to distinguish between information that you know now when submitting this return and information you knew at the time the return was filed. The form and its instructions do not make this clear or obvious, and it is possible for the IRS to misinterpret the information provided and deny relief on and erroneous assumption.

Do States offer Innocent Spouse Relief?

Yes. Several states simply follow the same rules as the IRS, while other states have their own versions of Innocent Spouse Relief.

Are there any “cons” to filing for Innocent Spouse Relief?

Yes. This is a situation where a commonly cited “benefit” of filing for Innocent Spouse Relief is also a major downside. When you file for Innocent Spouse Relief, the IRS is prohibited from collecting taxes from you while it considers your request. Due to this prohibition, the IRS will also have more time to collect the tax liability in the event that relief is denied. Essentially, the period of limitations for assessment and collection will be put on pause and other 60 days will be added to the time the IRS has to collect or assess a tax debt when you file for Innocent Spouse relief.

Consider the following example:

Tony and Tanya are now divorced. Recently, Tanya received a collection notice from the IRS and decides to file Form 8857 to request Innocent Spouse Relief. The IRS processes her request and puts it in the queue to be reviewed by and IRS employee at the “Cincinnati Centralized Innocent Spouse Operation.” Assume that prior to filing for Innocent Spouse Relief, the statute of limitations on collecting the tax liability, would have “run” (IRS would be SOL) within three months. As soon as the IRS processes that request, the IRS will hit the pause button. If the IRS rejects the Innocent Spouse Request, and Tanya does not appeal the decision, then the IRS will still have five months (the time left to collect before the request was submitted plus 60 days) to collect the liability from her. Even if it takes the IRS several months to consider the request. So, now Tony has seen his tax debt expire, but Tanya still has to fend off IRS collections for another five months. Do you think the IRS will be aggressive in trying to collect the liability from Tanya? I do.

Where can I find out more about Innocent Spouse Relief?

The IRS provides several publications on the Topic of Innocent Spouse Relief, here are a few that you might find helpful:

  1. IRS Publication 971 provides a basic explanation of what the IRS will consider during an Innocent Spouse Relief, and what is required to request relief. It includes explanations of all of the basic factors that the IRS will consider when processing your case, and provides line-by-line instructions for Form 8857.
  2. Form 8857 is the form the IRS would like you to file to request Innocent Spouse Relief.
  3. Tax Topic 205 provides a very brief overview by the IRS about Innocent Spouse Relief.
  4. The Internal Revenue Manual Section 25.15.1 is the policy and procedure manual that IRS Employees will likely consult when processing your Innocent Spouse Case.
  5. Proc. 2013-34 contains official IRS positions on the processing of Innocent Spouse cases under the equitable relief provisions of Internal Revenue Code 6015(f) and 66(c).
  6. Internal Revenue Code 6015 is the actual statute that contains Innocent Spouse Relief provisions regarding joint tax returns, and Internal Revenue Code 66(c) Contains Innocent Spouse Relief provisions for taxpayers who live in a community property state.

Should I hire a Lawyer to help me with Innocent Spouse Relief?

I am a lawyer, so of course I am going to say you should at least consult  with a Tax Attorney before submitting a request for Innocent Spouse. You should at least be able to get an idea from your conversation with a Tax Attorney whether or not Innocent Spouse Relief is worth pursuing. You can reach me by email at tom@gglawct.com or visit my website, Tom Tax Lawyer, to schedule a consultation.

Innocent Spouse Tax Attorney Podcast

Tom

If you are considering filing an Innocent Spouse Request with the IRS, hiring an Tax Attorney with experience in Innocent Spouse Relief matters is in your best interest.

 

Schedule a phone call with Thomas S. Groth, Esq

We decided to do a podcast about Innocent Spouse Relief.

 

I recently had the pleasure of talking with Attorney Anthony Parent over at IRSMedic: Parent & Parent LLP on his up-and-coming (and entertaining) tax podcast “Parental Advisory: The Show”. It was a great experience. We might have gotten a little off-track at first, talking about the Connecticut Department of Revenue Services and how they like to put pressure on individuals taxpayers by charging them personally as criminals when they fall behind on state taxes. (Even though they can’t actually do that in some cases, they still do.)

Though we did not get into too much of the nitty-gritty of Innocent Spouse Relief under Revenue Procedure 2013-34, we did discuss some high points of what to do, and – more importantly what not to do when filing a claim for Innocent Spouse relief under the “equitable relief” provisions of Internal Revenue Code 6015(f).

Continue reading “Innocent Spouse Tax Attorney Podcast” →

“What reasons can I use to request a CDP hearing?”

Tom

When filing for a CDP hearing, it is important to make sure that you request the hearing in a way that ensures the IRS does not dismiss your Form 12153 (or a request in similar form) outright as frivolous before you have a chance to be heard.

 

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In order to do that, you will want to make sure that you use a valid reason to request a CDP hearing. However, in making the initial request for a hearing, you should also avoid making the basis of your request too narrow – the IRS may try to hold you to the basis for your request even if your circumstances or arguments change between the time you request the hearing, and the hearing takes place. Don’t feel like you need to check just one box, or that you cannot fill in additional reasons for requesting the hearing – just make sure that your reasons for the hearing comply with the Internal Revenue Code and Treasury Regulations.

How to know when you have the right to request a CDP hearing.

You Owe the IRS a legally enforceable debt.

So, you owe some money to the IRS. Maybe you self-reported this income to the IRS, but could just not afford to pay the amount due on your return, maybe you were audited in some way and have yet to find the funds to pay back the government, or maybe you are stuck holding the bill for what should be someone else’s tax problem. Whatever the reason for you tax debts, if you are reading this post, it is likely that you owe the IRS some money, or you know someone who does.

When you owe a legally enforceable debt to the IRS, the government can use its extreme powers of lien, levy, and the US mail to rip any assets or income away from you – midstream, before you even get your hands on it – and apply those funds to your back taxes.

Lucky for you, though, you happen to live in the United States. And, in the United States – we have this thing called Due Process. You are entitled to Due Process before the government can take your stuff away from you.

The trick is knowing when those Due Process rights are triggered, because you have a limited time to exercise those rights to the fullest extent.

If you miss the deadline to file for a CDP hearing, you can still request an Equivalent hearing (EH). But an EH does not protect you from collection while the hearing is pending, and an EH does not allow you to appeal an adverse decision by the IRS Settlement Officer to Tax Court.

The IRS Sends you a letter

The IRS will send you a letter via certified (and usually via regular mail as well) that informs you of its “intent to levy” your property or income. Or the IRS will file a lien and send you a letter notifying you of the filing.

Previously, the IRS was using letter that made it obvious that you have a right to a hearing. However, recently the IRS has begun sending out letters that make taxpayers due process rights less obvious. It is up to you to make sure that you read every letter you received from the IRS carefully to make sure that you are not sitting on your appeal rights. IF you do not understand the contents of a letter, you should bring it to a professional who offers free consultations and who is willing to look at the letter and explain it to you.

When can someone request a CDP hearing with the IRS?

There seems to be some confusing regarding the question of when a taxpayer can request a CDP (Collection Due Process hearing). In terms of a Notice of Levy or similar notice, a taxpayer has 30 days to request a hearing. If the hearing is requested within 30-days, the taxpayer will be protected form levy action until the taxpayer has a chance to be heard by IRS Appeals, an office separate and independent from the IRS offices actually tasked with collecting tax debt.

What reasons can someone use to request a CDP hearing?

A taxpayer is entitled to request a CDP hearing to propose alternatives to forced collection action by the IRS. It is really that simple. However, if you are about to file a request for a CDP hearing, and would like someone to take a look, I urge you to give me a call at (203)628-2952 so we can discuss the right approach to filing a CDP request. If you want me to review your actual filing, to make sure you are using the right words and checking the right boxes to make your request, I am happy to do that for a small fee.

Do you need to hire a Tax Lawyer for your CDP hearing?

No. But you probably should. Too many taxpayers try to go it alone with the IRS and end up getting tricked or misled by the IRS into a “solution” that is not optimal or sustainable for the taxpayer.

In addition, it is too easy to miss something when you have never submitted an Offer in Compromise or requested an Installment Agreement with the IRS. Having a representative speak for you at an IRS CDP hearing puts distance between you and the arguments being made – adding legitimacy to those arguments, because a professional is vouching for those arguments and helped develop them.

A CDP hearing is your best shot at obtaining a fair resolution to your tax problems – and you only get one shot at such a hearing per tax year.

When do you have to file for a Collection Due Process hearing?

Tom

30 Days. That’s how long you have to file for a Collection Due Process hearing in response to a Levy notice from the IRS.

It used to be that the IRS was issuing – for the most part – only a “Final Notice of Intent to Levy and Your Right to a Collection Due Process hearing” (Letter 1058) as the last letter before a taxpayer was exposed to a levy/garnishment of all of his assets and income. But recently, the IRS has started issuing a letter called a “lt11” – which it is pretending on its website is the same thing.  It is not. That letter (the lt11) is titled [notice of intent to levy] Intent to seize your property or rights to property. Nothing in the lt11 suggests action in the same way as the words “final notice” or “your right to a collection due process hearing,” in the Letter 1058, But I guess that’s the point. So be careful(!) and read every(!) certified letter you receive from the IRS. You might have a limited time to act before your property and income is exposed. If you would like me to review a recent notice you have received from the IRS, that is something I do that during all of my free consultations.

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///Start boring Tax Procedure Section///

Yesterday, Keith Fogg wrote a blog article over at Procedurally Taxing about the recently decided Ziegler case. In that case, the Tax Court was faced with the question of whether it had jurisdiction over a case when the IRS allowed an Appeals hearing to proceed as if it were a timely requested Collection Due Process hearing. Ziegler requested a Collection Due Process hearing by mailing the request to the IRS on July 14, 2011. Critically, this request was mailed 31 days after the date on the IRS notice giving Ziegler a right to the hearing(June 13) and 34 days after the date the FNOITL was mailed (June 10). At the end of the hearing, a Notice of Determination was issued by IRS, when the IRS should have actually issued a Decision Letter. Both of these letters have largely the same effect from an administrative perspective – they represent the decision made by IRS Appeals (generally, whether or not to proceed with the levy, or enter into an agreement with the taxpayer for a “collection alternative”).

The Court decided that it had jurisdiction over the case, because Ziegler’s Tax Court Petition was timely filed in response to a Notice of Determination. However, the Tax Court went on to convert the Motion to Dismiss for lack of jurisdiction to a Motion for Summary Judgment and granted it.

//end boring tax procedure section//

What does this case tells us about the IRS Collection Process?

Despite the boring “tax geek” flavor of this case, what it tells us about the IRS Collection Process in the context of a Final Notice of Intent to Levy is instructive.

If the IRS sends you a Final Notice of Intent to Levy (AKA a FNOITL aka cp1058 letter aka NOIL aka NIL), you have the opportunity to file for what is known as a Collection Due Process hearing. In order to file for a hearing with IRS Appeals, and retain the benefit of Tax Court review,  you have 30 Days to respond to this notice by requesting a hearing.

Benefits of timely requesting a CDP Hearing

The IRS can’t collect until the hearing is over

Filing for a Collection Due Process hearing on time has its benefits. First, the IRS is prohibited by statute from taking levy action against a taxpayer while the hearing is pending. In the Ziegler case, the FNOITL was sent on June 13, 2011 and Ziegler mailed a request for a hearing on July 14, 2011, but it wasn’t until over a year later – on September 28, 2012 – that IRS Appeals actually issued its “Notice of Determination.” This means that for the 14 months that Ziegler’s CDP hearing was pending the IRS could not collect against him for the year at issue. (Now in this case, the IRS actually could have collected against Ziegler if someone at the IRS had realized he had actually filed for an Equivalent Hearing (EH), but I’ll get to that in a minute).

14 Months is not an exceptional amount of time to wait for IRS Appeals to issue a determination letter or notice of determination when a hearing is requested. Taxpayers should realize that while the delayed enforced collection is a good thing for their bank accounts and paychecks, interest and penalties will continue to accrue while the Appeal is pending.

The IRS Appeals decision made in the context of a CDP hearing is subject to review in Tax Court

Not only is a timely filed CDP hearing an effective way to shutdown the IRS Tax Machine, but the decision made by IRS Appeals is subject to review in Tax Court. This is important from two perspectives – some argue that Settlement Officers (IRS Appeals employees who hear CDP/EH cases) take CDP hearings more seriously than EH cases and are more careful to consider the arguments made by a taxpayer or her representative. This is especially a factor when the representative is a Lawyer or USTCP who can actually file the Tax Court petition when necessary. It is also important for the more obvious reason – it gives taxpayers a second shot at arguing their case in a forum that is even more removed from IRS Collections than IRS Appeals. But, something to keep in mind is that the standard of review in Tax Court for CDP cases is “abuse of discretion,” which is a very high hurdle. Taxpayers usually lose CDP cases in Tax Court.

Since a CDP hearing is subject to review in Tax Court, Collections is held at bay for an even longer period of time. In Ziegler, the Tax Court issued it’s decision on November 4, 2014. That means IRS Collections had to wait over three years to actually issue that levy it warned Ziegler about in the FNOITL. Again, in this case, if the IRS Appeals agent had realized sooner that s/he should have issued a “Decision Letter” instead of a “Notice of Determination” this delay in collection would not have taken place at all.

 

Downsides to timely filing a CDP Hearing

CDP hearings should never be submitted for the purpose of delay alone. This is for two reasons: the request is actually invalid if it is made solely for the purpose of delaying collection, and there is really no point in filing for a CDP hearing if you know you have no arguments to make. Why bother?

There are a few procedural downsides to timely requesting CDP Hearings:

The CSED (the time the IRS has to collect the tax from you) will increase

It is true that the IRS is prohibited from collecting taxes from a taxpayer when a CDP hearing is pending, but the flipside is that the in exchange for the delay of this collection, the IRS will have more time to collect. Generally, if you don’t take steps to stop the IRS collection clock, then the IRS only has 10 years from the date of assessment to collect a tax. (Certain other exceptions exist, but I won’t get into them here.) So, let’s just say that Ziegler hadn’t missed the filing deadline for the CDP hearing, and this case had proceeded to trial. The IRS would now have an additional 3+ years to collect his tax debts from him.

(Interest and penalties continues to accrue, so Ziegler’s tax debt is now much higher than it was in 2011 as well – something to consider.)

The time YOU have to wait to file for bankruptcy will increase

There are several rules to the dischargeability of tax debts in bankruptcy. I won’t get into them here. If you want to know more about them, contact me. Let’s just say that if you file for a CDP hearing, the time you have to wait to file for bankruptcy on the particular tax debt will increase as well.

 

There may be a better option

Equivalent Hearings are basically CDP hearings that are filed late. Filing for an EH has zero impact (it does not stop the clock) on the expiration (CSED) of your tax debts. Equivalent hearings, like CDP hearings, allow you to make your case for a Collection Alternative to someone who’s job it is to consider the merits of your arguments, and who isn’t also tasked with collecting taxes from you.

The IRS is not legally obligated to put off levy action when an Equivalent Hearing is filed, but it generally will. The biggest upsides to filing for a EH instead of a CDP is that the clock on the expiration of your tax debt continues to run, and you might  also be able to discharge those debts in bankruptcy sooner. The biggest downside is that there is no Tax Court review for EH hearings. This might encourage IRS Appeals to abuse its discretion, but it probably won’t.