Thursday, February 24, 2011

IRS Announces New Effort to Help Struggling Taxpayers Get a Fresh Start - Major Changes Made to Lien Process



IRS Announces New Effort to Help Struggling Taxpayers Get a Fresh Start;

Major Changes Made to Lien Process

IR-2011-20, Feb. 24, 2011

WASHINGTON — In its latest effort to help struggling taxpayers, the Internal Revenue Service today announced a series of new steps to help people get a fresh start with their tax liabilities.

The goal is to help individuals and small businesses meet their tax obligations, without adding unnecessary burden to taxpayers.  Specifically, the IRS is announcing new policies and programs to help taxpayers pay back taxes and avoid tax liens.

“We are making fundamental changes to our lien system and other collection tools that will help taxpayers and give them a fresh start,” IRS Commissioner Doug Shulman said. “These steps are good for people facing tough times, and they reflect a responsible approach for the tax system.”

Today’s announcement centers on the IRS making important changes to its lien filing practices that will lessen the negative impact on taxpayers. The changes include:

·        Significantly increasing the dollar threshold when liens are generally issued, resulting in fewer tax liens.

·        Making it easier for taxpayers to obtain lien withdrawals after paying a tax bill.

·        Withdrawing liens in most cases where a taxpayer enters into a Direct Debit Installment Agreement.

·        Creating easier access to Installment Agreements for more struggling small businesses.

·        Expanding a streamlined Offer in Compromise program to cover more taxpayers.

“These steps are in the best interest of both taxpayers and the tax system,” Shulman said. “People will have a better chance to stay current on their taxes and keep their financial house in order. We all benefit if that happens.”

This is another in a series of steps to help struggling taxpayers. In 2008, the IRS announced lien relief for people trying to refinance or sell a home. In 2009, the IRS added new flexibility for taxpayers facing payment or collection problems. And last year, the IRS held about 1,000 special open houses to help small businesses and individuals resolve tax issues with the Agency.

Today’s announcement comes after a review of collection operations which Shulman launched last year, as well as input from the Internal Revenue Service Advisory Council and the National Taxpayer Advocate.

Tax Lien Thresholds

The IRS will significantly increase the dollar thresholds when liens are generally filed. The new dollar amount is in keeping with inflationary changes since the number was last revised. Currently, liens are automatically filed at certain dollar levels for people with past-due balances.

The IRS plans to review the results and impact of the lien threshold change in about a year.

A federal tax lien gives the IRS a legal claim to a taxpayer’s property for the amount of an unpaid tax debt. Filing a Notice of Federal Tax Lien is necessary to establish priority rights against certain other creditors. Usually the government is not the only creditor to whom the taxpayer owes money.

A lien informs the public that the U.S. government has a claim against all property, and any rights to property, of the taxpayer. This includes property owned at the time the notice of lien is filed and any acquired thereafter. A lien can affect a taxpayer's credit rating, so it is critical to arrange the payment of taxes as quickly as possible.

“Raising the lien threshold keeps pace with inflation and makes sense for the tax system,” Shulman said. “These changes mean tens of thousands of people won’t be burdened by liens, and this step will take place without significantly increasing the financial risk to the government.”

Tax Lien Withdrawals

The IRS will also modify procedures that will make it easier for taxpayers to obtain lien withdrawals.

Liens will now be withdrawn once full payment of taxes is made if the taxpayer requests it. The IRS has determined that this approach is in the best interest of the government.

In order to speed the withdrawal process, the IRS will also streamline its internal procedures to allow collection personnel to withdraw the liens.

Direct Debit Installment Agreements and Liens

The IRS is making other fundamental changes to liens in cases where taxpayers enter into a Direct Debit Installment Agreement (DDIA). For taxpayers with unpaid assessments of $25,000 or less, the IRS will now allow lien withdrawals under several scenarios:

·        Lien withdrawals for taxpayers entering into a Direct Debit Installment Agreement.

·        The IRS will withdraw a lien if a taxpayer on a regular Installment Agreement converts to a Direct Debit Installment Agreement.

·        The IRS will also withdraw liens on existing Direct Debit Installment Agreements upon taxpayer request.

Liens will be withdrawn after a probationary period demonstrating that direct debit payments will be honored.

In addition, this lowers user fees and saves the government money from mailing monthly payment notices. Taxpayers can use the Online Payment Agreement application on to set-up with Direct Debit Installment Agreements.

“We are trying to minimize burden on taxpayers while collecting the proper amount of tax,” Shulman said. “We believe taking away taxpayer burden makes sense when a taxpayer has taken the proactive step of entering a direct debit agreement.”

Installment Agreements and Small Businesses

The IRS will also make streamlined Installment Agreements available to more small businesses. The payment program will raise the dollar limit to allow additional small businesses to participate.

Small businesses with $25,000 or less in unpaid tax can participate. Currently, only small businesses with under $10,000 in liabilities can participate. Small businesses will have 24 months to pay.

The streamlined Installment Agreements will be available for small businesses that file either as an individual or as a business. Small businesses with an unpaid assessment balance greater than $25,000 would qualify for the streamlined Installment Agreement if they pay down the balance to $25,000 or less.

Small businesses will need to enroll in a Direct Debit Installment Agreement to participate.

“Small businesses are an important part of the nation’s economy, and the IRS should help them when we can,” Shulman said, “By expanding payment options, we can help small businesses pay their tax bill while freeing up cash flow to keep funding their operations.”

Offers in Compromise

The IRS is also expanding a new streamlined Offer in Compromise (OIC) program to cover a larger group of struggling taxpayers.

This streamlined OIC is being expanded to allow taxpayers with annual incomes up to $100,000 to participate. In addition, participants must have tax liability of less than $50,000, doubling the current limit of $25,000 or less.

OICs are subject to acceptance based on legal requirements. An offer-in-compromise is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. Generally, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement. The IRS looks at the taxpayer’s income and assets to make a determination regarding the taxpayer’s ability to pay.

Related Items:

·        IRS Begins Tax Season 2009 with Steps to Help Financially Distressed Taxpayers; Promotes Credits, e-File Options (IR-2009-2)

·        IRS Speeds Lien Relief for Homeowners Trying to Refinance, Sell (IR-2008-141)


Automated Underreporting Soft Notices (CP 2057)

Practitioners email grourp:

I received a couple calls about the CP2057 letter. Below is research from internal and external sources.   Please help me get the word out to all practitioners. Thanks


3. Automated Underreporting Soft Notices (CP 2057)

The primary goal of the Automated Underreporting (AUR) Soft Notice program is to correct taxpayer behavior on future tax returns.  The secondary goal is the collection of any additional tax due on the current tax return.  Our recommendations provide suggestions for redesigning the soft notice by improving its readability and usefulness to both the taxpayer and tax practitioner.  The Subgroup also suggests that the notice include an educational component for the taxpayer, and that the IRS develops a procedure to inform the tax practitioner community of the soft notice program.

BOTTOM LINE        Bottom Line
Volume 3, Issue 39                            St. Louis, MO               
December 05, 2009                       
1. AUR Soft Notice Test - Tax Year 2008
ISSUE:AUR is testing a soft notice and other Campus areas may receive taxpayer
CHANGE(s):In an effort to reduce the Tax Gap, The Automated Underreporter
Program is again conducting a soft notice test of approximately 30,000 (14,500
to W & I taxpayers are being mailed with Austin AUR Campus contact information
and 15,500 to SB/SE taxpayers are being mailed with Philadelphia AUR Campus
information). These notices were mailed Monday, November 30, 2009.  These CP
2057s carry unique, dedicated toll-free AUR telephone numbers – TO BE USED ONLY
FOR INQUIRIES for the CP 2057.  

Tax Compliance: IRS Launching Test of Automated Notices Asking Taxpayers to Correct Underreporting * BNA Daily Tax Report, Daily Tax Report -The Bureau of National Affairs, Inc. Federal Tax & Accounting- September 4, 2008

Tax Compliance: IRS Launching Test of Automated Notices Asking Taxpayers to Correct Underreporting

The Internal Revenue Service Sept. 3 confirmed that it will be launching a pilot program this fall to send more than 30,000 automated notices to taxpayers in cases where the agency has discovered there may be underreporting of income or unreported income.

"The Automated Soft Notice (CP2057) is a test involving approximately 31,000 notices mailed this fall. If the test results indicate limited underreporting in the subsequent year and self correction of unreported income, we hope to expand the use of this notice," IRS spokeswoman Nancy Mathis said in a statement e-mailed to BNA.

According to IRS, the soft notice is automatically generated when there is a discrepancy between income listed on third-party information returns and the return itself. Examples of third-party returns would be Forms W-2 and Forms 1099, IRS said.

Taxpayers Asked to Amend or Correct Returns.

Rather than proposing specific amounts owed to the government, the CP2057 notice asks the taxpayers to file an amended return or work with their employer to correct the information return.

"A very small portion of our staff is assisting in this test--again, it is designed as an automated notice," the e-mailed statement emphasized. IRS said it hopes this will alleviate the need for prolonged communications between taxpayers and the government.

"We believe this approach will allow taxpayers to correct underreporting issues without having to correspond extensively with the IRS, thus benefiting both the taxpayer and the Service," the agency said in the statement.

IRS said it would continue to issue CP2000 notices, which propose changes to income, credits, and deductions, calling these "an important component of our enforcement efforts. [We] expect to continue issuing these notices as appropriate, even if we expand the use of CP2057."

Michelle E. Phillips, CPA, IRS Sends New Notices

Beginning in October 2008, the IRS will issue a new type of compliance letter called a CP 2057. The IRS will mail the CP 2057s to about 31,000 taxpayers with apparent underreported income for the 2007 tax year. The CP 2057s will:

Inform taxpayers that there appears to be an income discrepancy based on information reports received by the IRS.

Instruct taxpayers to file a Form 1040X to correct their return if the information shown on the notice is correct.

The CP 2057 generally replaces the IRS Letter 3957(CG), which became obsolete in February 2008. For many years, the IRS used the 3957 to ask taxpayers to reconcile income discrepancies. Note: Both the IRS Letter 3957(CG) and the CP 2057 differ form the CP 2000, which actually proposes changes to income, payments, or credits.

If a taxpayer receives a CP 2057 and the return is correct, the taxpayer need to do nothing. However, if the tax return is incorrect, the CP 2057 asks taxpayers to correct errors with employers (for W-2 discrepancies) and others (for 1099, K-1, etc., discrepancies).

It explains to taxpayers that the IRS will scrutinize the following year return to see that similar problems crop up. The CP 2057 requires taxpayers to do the leg work in that it does not always specifically list the type of income discrepancy.

The new CP 2057 is automatically generated using an IRS system of computer-matching returns with W-2, 1099, K-1, and other documents a system the IRS also uses for the 2000 notices.
The IRS hopes that the automated nature of the CP 2057s will allow it to run the program at a low cost.

By Arden Dale , The Wall Street Journal

This fall, more taxpayers won't be able to say they weren't given fair warning.

The Internal Revenue Service is ramping up efforts to mail out notices in October to a wider group of people, noting that they may not be reporting enough income on their tax returns.

The warning letter differs from one the IRS has been sending for years, which suggests specific changes to income, payments, credits, deductions or other parts of the return.

That letter, known as CP 2000, proposes an adjustment to the return and may ask the taxpayer to pay additional tax. Nearly 3.5 million such letters were sent for 2007, and will continue to be sent out.

The new letter, called a CP 2057, tells recipients they may be underreporting, and instructs them to double-check parts of the return and file an amended return Form 1040X if in error. It doesn't, however, specify the amount of additional tax that is owed.

The push is part of the IRS's desire to narrow the so-called tax gap, or the amount of uncollected taxes. Some tax experts view the new notices as helpful reminders, while others say they will rattle many taxpayers. "If you get one of these things, you should respond," says Robert E. McKenzie, a partner at Arnstein & Lehr, a law firm in Chicago.

The new warnings are "a major rollout by the IRS, using a totally different form than in the past," says Michael O'Keefe, a manager of tax research at H&R Block.

A CP 2057 would most likely show income omitted or an expense such as mortgage interest. It might note the discrepancy if the taxpayer reported $10 in interest income but information documents showed an interest income of $200.

It asks the taxpayer to work with employers and others to correct errors in W2s, 1099s, K1s and other documents. Finally, it says the IRS will scrutinize the following year's return to see that similar problems don't crop up. Roughly 31,000 of the CP 2057 letters will go out in the fall, and the IRS will expand their use depending on how effective they are in getting people to correct their own returns.

The new notice is automatically generated using an IRS system of computer-matching returns with 1099, W2, K1 and other documents -- a system the IRS also uses for the notices it currently sends.

The IRS hopes that the automated nature of the notices will allow it to run the program at low cost. It is designating only a tiny portion of its staff to work on it, with the aim that taxpayers will be to able to resolve underreporting issues without having to correspond extensively with the IRS.

But some tax experts question whether the program will be effective. Robert Kerr, senior director of government relations at the National Association of Enrolled Agents, wondered how the IRS is going to field all the calls from taxpayers with concerns about the notices.

The warning letters mark a significant shift in the IRS's strategy for recovering taxes, according to Thomas P. Ochsenschlager, vice president of taxation at the American Institute of Certified Public Accountants. By giving taxpayers lead time to correct an error without actually being penalized, it "avoids the 'gotcha!' situation that happens so often," particularly for small-business owners who file Schedule Cs. The IRS has identified Schedule Cs as being particularly rife with potential errors.

 James R. Kinsey
Sr Stakeholder Liaison Specialist
Communication, Liaison & Disclosure
SB/SE Division
Work 408-817-6842
Fax 408-817-4601