What Happens at a Collection Due Process Hearing?
A Collection Due Process (CDP) hearing may be your last chance to prevent an IRS collection action, such as  bank account levy. It is also an opportunity request that the IRS withdraw or release its tax lien.  At a CDP hearing, you may request an installment agreement, offer in compromise, innocent spouse defense, or you may dispute the amount of tax you owe. However, you can only receive a CDP hearing if you request it in writing within 30-days of receiving the IRS Notice of Intent to Levy.

A CDP hearing will be available if you receive any of the following notices:

  • Notice of Federal Tax Lien Filing

How to Appeal Your IRS Tax Audit
Most audits can be appealed internally within the IRS, without requiring litigation in Tax Court. The IRS Appeals Office is independent from the IRS auditing division, and would prefer to settle cases quickly rather to take them to Tax Court.

There are several reasons taxpayers should consider appealing the results of an IRS tax audit:

  • you can receive substantial savings on your tax bill

IRS Actions Affecting Passports of Delinquent Taxpayers
Your unresolved tax debt could prevent you from taking your next trip overseas. The IRS has the right to certify to the State Department that an individual has seriously delinquent tax debt. Upon receiving this certification, the State Department will generally not issue you a new passport, and will revoke your current passport.

Tax debt is considered “seriously delinquent” if it is unpaid, legally enforceable and assessed, is greater than $50,000 (indexed for inflation annually), and a notice of federal tax lien has been filed, AND the rights to appeal a levy have expired, or a levy has been made. In other words, the IRS has been doing everything it can to collect your tax debt, and you still have a large outstanding balance owed to the Treasury.

There are exceptions where debt will not be included when determining if you have seriously delinquent tax debt. The following amounts will not be included:

Can a Business Benefit from the IRS Offer in Compromise Program?
The IRS Offer in Compromise (OIC) program is commonly associated with taxpayers who owe tax debt, but have insufficient assets or resources to pay it off. The IRS will agree to settle the tax debt for less—sometimes significantly less—than the amount owed if the taxpayer agrees to pay as much as the IRS can realistically collect.

However, the OIC is also available for businesses, including businesses that are currently operating. This includes tax debt attributable to back payroll taxes.

First, the business must be current in filing all tax returns. The IRS will not even consider OICs from taxpayers that have not filed all required tax returns. They will return your OIC, and keep any money you sent as an initial deposit to be applied towards your outstanding tax debt.

Have a Bankruptcy Judge Review Your Tax Fraud Penalty
Civil tax fraud penalties are 75% of the underpayment of tax attributable to tax fraud. Whenever the IRS believes that a taxpayer has intentionally violated a known legal duty, these penalties can be assessed, in addition to possible criminal prosecution.

The IRS or the California Franchise Tax Board (FTB) need to prove that tax fraud was committed by clear and convincing evidence. However, sometimes these penalties are assessed in situations where there is insufficient evidence to meet this standard. In these cases, having a bankruptcy judge review your tax fraud penalty can be an excellent option.

While bankruptcy can be a good option for taxpayers that just want to discharge some of their tax debt, it can also be an effective way to resolve a tax dispute. Section 505 of the Bankruptcy Code provides authority for a judge to determine the amount of legality of any tax or penalty relating to tax, regardless of whether or not the taxpayer has already paid the disputed amount.

Can the IRS Collect From a Non-Liable Spouse?
The IRS may be able to collect delinquent tax debt from a non-liable spouse in some cases. This means that tax debt that was accrued by one spouse on a return filed separately, may still result in collection action being taken on the other spouse. However, the IRS cannot pursue collection from a non-liable spouse in every case.

First, it is important to distinguish between joint tax debt and separate tax debt. Joint tax debt is any tax debt related to a return filed jointly. Separate tax debt could be related to a return filed before the taxpayer was married or a return filed after the marriage using the married filing separately status.

For joint tax debt, the IRS can collect from either or both spouses. They can levy your bank account, or your spouse’s bank account, or both. The Internal Revenue Manual states that wage levies should generally be applied to the spouse with higher earnings. However, in flagrant cases of neglect or refusal to pay, the IRS can levy the wages of both spouses.

How the IRS Initiates Criminal Tax Investigations
What seemed like a minor transgression when filing your tax return could end up being a tax crime punishable by years in prison. The IRS Criminal Investigation Division (CI) pursues about 3,000 criminal prosecutions per year to provide a deterrent effect to all taxpayers. If you have been chosen as one of the taxpayers to be “made an example of”, you could face severe fines or time in jail in the name of increasing tax compliance by other taxpayers.

The criminal investigation process often begins when an auditor or collection agent detects possible tax fraud. The IRS can also be “tipped off” by the public—anyone can submit a 3949-A Information Referral form to the IRS that reports suspected tax law violations. Other law enforcement agencies can also reported suspicious activity to the IRS.

Special agents may then begin a preliminary investigation. A supervisor will evaluate the information to determine if further investigation is warranted. At least two layers of CI management must review the information before a criminal investigation can proceed.

IRS “Substance Over Form” Argument Fails
The Sixth Circuit reversed a Tax Court decision and denied the IRS’s “substance over form” argument by allowing a clever tax reduction technique that was legal under the letter of the law. In Summa Holdings v. Commissioner, the court rejected the IRS’s position and declined to let Congress off the hook for allowing a loophole that was used by the taxpayer to avoid the contribution limits on Roth IRAs.

The Beneson family used a domestic international sales corporation” (DISC) to transfer money from their family-owned company to their sons’ Roth IRAs. DISC dividends are subject to a tax on unrelated business taxable income, but once the DISC dividends go into a Roth IRA, the earnings would grow tax-free, and the distributions would also not be subject to tax.

In other words, the Benesons avoided the Roth IRA contribution limits (currently $5,500 per account annually) using this strategy. Between 2002 and 2008, the Benesons transferred over $5 million into two Roth IRA accounts.