San Francisco Examiner, Business Section, Sunday, March 25, 1995



APRIL 15 (April 17 this year) is not just a day for filing tax returns; it is also when the Internal Revenue Service sends delinquent tax notices.

This year, it's likely that at least a few more of us will be receiving such notices. At the urging of Congress, the IRS has added more auditors and more high-tech record-searching to ferret out suspect tax returns. Last year, about 21,000 of 2.6 million returns in the Bay Area were audited. This year, that number is expected to rise by perhaps 25 percent, the IRS says.

So what should you do if the IRS claims you owe money?

In 1988, Congress passed the Taxpayer Bill of Rights -- over the objection of the IRS -- to curb egregious conduct of its collection department. Congress changed the rules regarding IRS-taxpayer conferences and IRS collection efforts. Taxpayers can even sue the IRS for its wrongful conduct!

The IRS must explain its audit procedures to you in writing prior to your first meeting. You must be informed of your rights during an audit, including your right to appeal an adverse decision. Tax-due or deficiency notices must clearly describe the basis for and specifically identify the tax, interest, additional amounts and additional penalties due. If you received IRS written advice you may now rely on it without fear of penalties, should that advice later prove wrong.

If, at any time during an IRS interview, you want to consult an attorney, certified public account or enrolled agent (someone licensed to practice before the IRS), the interview must stop. Also, the IRS cannot usually compel your presence at an audit, if you employ a representative. Therefore, you can usually avoid a face-to-face "interview" if you hire a representative.

You may tape record any in-person interview with an IRS agent, and the time and place of your interview must reasonably accommodate your needs.

The IRS encourages installment agreements for those who cannot pay their full taxes immediately. The agreement must be honored unless you fail to pay tax or an installment, to provide accurate information or experience a significant change in your financial condition. The IRS is entitled to charge a $43 processing fee to establish an installment agreement.

As an additional protection, an ombudsman (neutral third party) may intercede on behalf of the taxpayer. The ombudsman may issue a "taxpayer assistance order" if he or she determines you might suffer a "significant hardship." This procedure is designed to slice through the IRS bureaucracy when a gross injustice is imminent.

Collection methods of the IRS

The IRS used to enjoy virtual immunity from being sued, even when it engaged in questionable practices. The Taxpayer Bill of Rights has curtailed some abusive collection measures, although the IRS has retained formidable collection powers.

Your principal residence is now protected from levy (the seizure of property to satisfy a tax debt) unless sanctioned by the district director or assistant district director. Also, the IRS cannot levy property with a fair market value that is less than the estimated expenses of its levy and sale. Therefore, the IRS cannot punish you by selling property which may have great personal value to you, but little realistic economic value to the government (such as used clothing and furniture). It can, however, seize and sell a substantially higher asset to repay a smaller debt if that is your only source of payment.

The period between the notice of levy and the sale date is generally 30 days. The levy statement must explain your appeal rights and rights to redeem your seized property. Also, there is now a 21-day hold on accounts garnished by the IRS. A garnishment is a legal notice sent to a third party attaching your property (usually wages or bank accounts) to satisfy a debt. These provisions protect you by providing more time in case there is an improper levy or garnishment.

Taxpayers on the offensive

You may now sue the IRS in federal district court for damages resulting from an IRS employee who recklessly -- or intentionally -- disregards tax collection procedures. Suits are limited to the lesser of $100,000 or the sum of your actual and direct economic damages, plus court costs.

You may also sue in federal district court for actual and direct economic damages (plus court costs) resulting from an IRS employee's intentional or negligent failure to release a lien. In both situations, you must exhaust IRS administrative remedies, prior to filing suit. This includes the appellate process within the IRS. You must sue within two years from the date the IRS misconduct occurred. (Note: if you bring a "frivolous or groundless" lawsuit, the court may award damages up to $10,000.)

You may now also recover expenses as the "prevailing party" in an IRS administrative hearing. These include fees for expert witnesses, your representative, and necessary studies and reports. These costs are recoverable once the IRS either proposes a tax deficiency ("30-day letter") or gives formal notice of a tax deficiency ("90-day letter"), whichever occurs first.


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**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.**