Volume 8 Issue 5
Effective Approaches to Collections Cases
© by Tax & Business Professionals
In the last newsletter, we discussed dealing with IRS Automated
Collection Service (ACS). In this edition, we will explore a number of different initial
approaches for dealing with IRS collection matters.
Again, remember to obtain payment in advance. For a variety of
reasons, businesses and individuals who are delinquent in paying their taxes often have
flawed perspectives about the genesis of their problem; frequently incorrectly blaming
others and the IRS for their problems. When immediate relief is not obtained the
usual scenario it is easy for such taxpayers to rationalize why they should not pay
In most collection cases, the first aspect that should be
explored is, how did the tax debt arise? Surprisingly, many taxpayers are not sure. In
some situations it is easy to determine the origin of the tax debt, e.g. returns may have
been filed without remittance. In other cases, the root of the problem may not be so
Keep in mind that the IRS cannot collect a tax unless there is
an "assessment." Assuming the taxpayer did not file without remittance, how can
there be an assessment? There are several basic ways: (1) A math error (which does not
require any appeal rights), (2) an audit, and (3) a substitute for return, often
An audit can be done in absentia, so to speak, when any IRS
office or field agent attempts to locate the taxpayer, fails, and then mails a notice of
deficiency. Many times such notices are sent to the "last known" address (which
is all the IRS is obligated to do). The failure of the taxpayer to respond to the notice
of deficiency (which he may not have ever received) results in a "default" after
90 days and a tax assessment. In many states, the state collection agencies follow similar
procedures to those discussed in this newsletter.
The "SFR" method of obtaining a tax assessment often
arises after the IRS receives information about unreported income, via a W-2 or 1099(s)
for example. The IRS will then attempt to match the income source with a return. Failing
this, the IRS will attempt to locate the taxpayer whose income it may be. If the taxpayer
cannot be located, the IRS is authorized by the Internal Revenue Code to issue a
substitute for return. The resulting assessment is often the suspected income (from the
W-2 or 1099(s)) with minimal deductions.
°Tip: When reviewing tax collection cases where the source of
the assessment could be an SFR, look for the "type of tax" to be reflected as
"1040A"on the assessment. The "A" usually means a substitute for
return was used by the IRS, particularly if no return has yet been filed by the taxpayer.
As improbable as it sounds, some delinquent taxpayers do not
know when, or if, they filed or if they have received credits against the tax via
withholding or estimated payments. In short, when dealing with tax collection cases,
expect the unexpected.
°Tip: If, as is often the case, the taxpayer cannot recall
anything (including whether or not returns were filed), then what? One of the best ways to
reconstruct the IRS actions, the source of the assessment, and of course credits
(payments), is to review the IRS transcript.
A transcript is a computer-generated representation of the
taxpayers account with the IRS, organized by year. There are two types of
transcripts: One is the "internal" version (meant for IRS staffers) which
explains activity or actions concerning the account using a 3-digit classification code.
For example, 670 means "subsequent payment" and 582 means "lien," and
The other type of transcript, the version usually given to
taxpayers and their representatives, shows the same three-digit codes plus an
abbreviated explanation in English. The entries on such IRS transcripts are not always
accurate or in the correct chronological order. Often you need to unravel matters
portrayed on IRS transcripts. Remember to look for misapplied payments (those not seized
by the IRS) , particularly if there has been a request that a voluntary payment be applied
to a particular period or year.
Often, unless there is a Revenue (Field) Officer assigned to
the case (as opposed to an ACS office), it takes time to get the transcripts. In the
meantime perhaps all you will have for reference are various IRS documents such as liens,
bills, and wage garnishments. Some of these indicate the type of tax, 1040A, 1040, 941,
etc. The infamous trust-fund (100%) penalty is sometimes noted misleadingly as "Civil
If there is an SFR assessment, one of the first actions you
should consider taking is filing returns. Why? The SFR assessment does not allow any
business or itemized deductions. For example, assuming the taxpayer is self-employed, no
related business deductions will have been factored into the tax, thus the Self Employment
Tax (SECA) may be considerably overstated.
The bottom line is that you first have to discover
what happened and, roughly, what the correct tax should be before you can advise the
client on what to pay, and how. "Working out IRS payment strategies" will be
covered in our next newsletter.
Previous Article | Next Article
List of Articles by Tax & Business Professionals
Published jointly by The Tax & Business Professionals, Inc. and the law firm of Newland & Associates as a service to their clients.
If you are a tax professional and would like more information about the subjects covered in this newsletter or any other tax and business matter, please call the Tax & Business Professionals, Inc. at (800)-553-6613, e-mail us at
, or visit our web site at http://www.tax-business.com.
For a full range of business law and tax-related services, call the law firm of Newland & Associates at (703) 330-0000.
If you are reading this newsletter but are not on our mailing list, and would like to be, please contact us at (800) 553-6613.
While designed to be accurate, this publication is not intended to constitute the rendering of legal, accounting, or other professional services or to serve as a substitute for such services.
Redistribution or other commercial use of the material contained in Tax & Business Insights is expressly prohibited without the written permission of Tax and Business Professionals, Inc.
You can search for information in the entire Authors Row section,
or in the entire site. For a more focused search, put your search word(s) in quotes.
Tax & Business Professionals Main | Authors Row Main | Home