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Part 2 of 2

Offers in Compromise

Congress has told IRS to accept more offers-in-compromise by lowering the standard for acceptance. In the past, IRS has rigidly adhered to national guidelines regarding living expenses and failed to take into account an individual’s particular living circumstance. For instance, IRS routinely denies private schooling as a legitimate expense, so if a taxpayer was spending $10,000 a year to send two children to private school, IRS would claimed that money was available for payment of taxes. Now IRS must take into consideration the lack of adequate public schooling available to the family.

IRS cannot reject an offer from a low-income taxpayer solely because the amount offered is too low. In other words, there is no longer a minimum amount (such as $1,000) for a low-income taxpayer.

Offers-in-compromise are based on two premises: doubt as to liability (taxpayer does not owe the tax) or doubt as to collectibility (taxpayer owes the money but cannot pay it). For cases involving doubt as to liability, IRS cannot reject an offer because it fails to locate the tax return or the administrative file. Also, taxpayers are not required to provide financial information when the offer is based on doubt as to liability.

IRS is prohibited from levying personal property or collecting on a tax liability while an offer-in-compromise is pending or its rejection has been appealed. Once an offer has been submitted, all collection activities must stop (except in egregious situations). Taxpayers have 30 days to appeal a rejected offer. IRS cannot commence court action while an offer is pending, but the 10-year statute of limitation is suspended during the offer period. IRS is directed to offer an installment agreement if an offer is ultimately rejected.

IRS is supposed to work with taxpayers who are sincerely attempting to meet their obligations by considering hardship and equity. Congress noted this could include a waiver of penalties and interest in appropriate cases.

A joint offer no longer can be terminated because one of the parties fails to meet the requirements (i.e. one spouse does not timely file tax returns after the couple is separated or divorced). As long as the other party continues to meet the offer’s requirements, it will remain in effect as to that spouse.

Installment Agreement

In general, IRS is required to provide installment agreements for tax liabilities under $10,000, effective immediately. IRS must provide an annual statement regarding the balance at the beginning of the year, all payments made and the year-end balance due. These statements must be provided no later than July 1, 2000.

The failure-to-pay penalty is reduced to 50% of its normal rate (from .5% to .25%) while an installment agreement is in effect, provided the taxpayer timely filed the return. The reduction in penalty takes effect after December 31, 1999.

Interest and Penalties

Interest on overpayments and amounts owed IRS are now the same. Under prior law, potential refunds had a lower interest rate than amounts owed IRS. Interest and certain penalties based on timely filing or payments are suspended if IRS does not provide notice of tax liability within 18 months after a return was timely filed.

If taxpayers have an installment agreement which is in effect after 1999, interest will stop accruing on the outstanding tax liability on January 1, 2000, provided the agreement relates to a timely filed return.

Statute of Limitations on Assessment or Collection

IRS is not permitted to request an extension on assessment beyond 3 years without specifically notifying taxpayers of their right to refuse to extend the statute or to limit the extension to certain outstanding issues. Also, IRS cannot extend the 10-year limitation on collection, unless there is a levy in place on a taxpayer’s property in connection with an installment agreement.

Financial Status Audits

The so-called “life-style” audits where IRS asks intrusive and personal questions regarding a taxpayer’s personal spending habits have been curtailed under the new law. CPA’s bitterly complained that these audits were inappropriate since CPA’s were not versed in criminal law and their conversations with taxpayers could not be protected under the attorney-client privilege. Also, IRS often insisted on conducting personal interviews with taxpayers at their homes, which also violated taxpayers’ rights of privacy and their right to have a professional represent them in audit.

IRS is now prohibited from using this technique to determine the existence of unreported income, unless it already has a reasonable indication that there is a likelihood of unreported income. This provision is effective after the date of enactment.

Expanded “Due Process” Rights

There are expanded “due process” protections in tax collection matters: Taxpayers have a right to appeal (via an independent appeals process) within 30 days after receiving a Notice of Lien and Intent to Levy. At the hearing, IRS must verify that all applicable laws and administrative procedures have been met. Taxpayers may raise issues regarding the appropriateness of the collection activity, raise an innocent spouse defense, make offers in compromise or suggest which assets should be used to satisfy the tax debt. The hearing officer must then balance IRS’s tax collection with the taxpayer’s concerns.

There is another 30-day period to file a Tax Court petition if IRS Appeals rules against the taxpayer. These new procedural rights represent significant changes in the traditional relationship between IRS and taxpayers. Before, IRS could levy property and sell it without providing any due process rights to a hearing. Now, IRS is treated like any other creditor seeking to enforce a debt: It must give the debtor the right to be heard.

IRS is prohibited from placing liens on property or levying (foreclosing on a lien) on taxpayer’s property while the appeals process is in effect.

IRS is Bound by Some Fair Debt Collection Practices Act

IRS must now comply with certain provisions of the Fair Debt Collection Practices Act. In general, IRS cannot harass, oppress or abuse any person in connection with the collection of taxes. This means IRS cannot use: (1) threats of violence or criminal action to harm a taxpayer, (2) profanity or abusive language, either verbally or in writing; (3) the telephone with an intent to harass or annoy any person at any number called; (4) the telephone, in general, without meaningful disclosure of the caller’s identity.

Collectors may not contact taxpayers at inconvenient times (generally contact outside 8:00 AM to 9:00 PM will be considered inconvenient) and if a taxpayer appoints an agent to represent him or her, the tax collector must direct future communications to the agent. Taxpayers can stop IRS from harassing him or her at work if such communications are prohibited by the employer.

Levies on Residences and Retirement Plans

A court order is needed before IRS can levy on a principal residence. IRS cannot levy on a principal residence when the tax liability (including penalties and interest) is less than $5,000.

If a retirement plan or IRA is levied, the 10% early withdrawal penalty is waived. This does not apply if taxpayers voluntarily withdraw money from a retirement plan to pay the taxes.

Tax Protester Designations

Congress gave illegal tax protestors a break (who knows why?) by declaring that IRS must remove codes identifying illegal tax protesters from its filing system. Evidently, Congress was concerned that innocent taxpayers might be mislabeled as tax protesters. Unfortunately, this could encourage these protesters to make their frivolous arguments without fear of being branded a tax protester.


The 1998 Tax Legislation provides significant procedural safeguards for innocent spouses and those dealing with IRS’s notorious tax collection branch. Minor changes in tax litigation will help balance the scales by providing taxpayers with expanded rights.

Will this legislation actually convert IRS into a consumer-oriented agency? As long as IRS personnel maintain their hostility toward the taxpaying public and as long as they remain under-trained, under-staffed, and loyal only to their bureaucracy, the efforts to restructure IRS will fail.

**NOTE: The information contained at this site is for educational purposes only and is not intended for any particular person or circumstance. A competent tax professional should always be consulted before utilizing any of the information contained at this site.**

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