Tax Practice
Chapter 13 pp. 533 - 560
2015 National Income
Tax Workbook™
Tax Practice
p. 533
 Issue 1: Recoveries and Tax Benefit
Rule
 Issue 2: Damage Awards and
Settlements
 Issue 3: US Tax Court Appeals
 Issue 4: IRS E-Signature
Authentication
 Issue 5: IRS Collections
Issue 1: Recoveries & Tax Benefit Rule
p. 533
 When a taxpayer receives a reimbursement,
refund, or other compensation for a payment
or loss that resulted in a prior-year tax
deduction or credit, the result is often taxable
income.
 The income is limited to the amount that
created a benefit on the prior-year return.
Issue 1: Recoveries & Tax Benefit Rule
p. 533 - 534
 Most Common type of Refund:
▪ Refund of State or Local Income Tax
▪ 1099-G: Certain Government Payments.
 NOTE: A recovery received in the same year the
expense is paid is not included in income; it simply
reduces the amount of the expense.
Itemized Deductions
p. 534
 A recovery is taxable only if the taxpayer owed
less tax as a result of the deduction.
 If the recovery is more than:
▪ The difference between the taxpayer’s potential
standard deduction
▪ AND
▪ The itemized deductions that were claimed,
▪ THEN: The recovery will not be fully taxable.
Itemized Deductions
p. 534
 TAX RETURN LOCATION:
▪ A taxable recovery of most itemized deductions
is reported on line 21 of Form 1040.
▪ Taxable refunds of state and local income taxes
are reported on line 10 of Form 1040.
State Income Tax Refunds
p. 534
 Includable in Income? Several Factors:
 1. Did the taxpayer itemize deductions in the prior
year?
 2. Did the taxpayer deduct state and local sales taxes
instead of state and local income taxes in the prior
year?
 3. How much was the taxpayer’s allowable standard
deduction in the prior year?
 4. Is the income tax refund for only one year?
State Income Tax Refunds
p. 534
 Includable in Income?
 1. Did the taxpayer itemize deductions in the prior
year?
▪ A taxpayer who claims the standard deduction
did not benefit from deducting state income taxes
and has no gross income from a state or local tax
refund.
State Income Tax Refunds
p. 534
 Includable in Income?
 2. Did the taxpayer deduct state and local sales
taxes instead of state and local income taxes in the
prior year?
▪ A refund of state or local income taxes that were
not deducted is not taxable.
State Income Tax Refunds
p. 534
 Includable in Income?
 3. How much was the taxpayer’s allowable
standard deduction in the prior year?
▪ The taxable amount of the refund is limited to the
excess of total itemized deductions over the
allowable standard deduction.
State Income Tax Refunds
p. 534
 Includable in Income?
 4. Is the income tax refund for only one year?
▪ If so, the entire refund is attributed to that year…..
▪ UNLESS…..the taxpayer made estimated
payments.
▪ If a final estimated tax payment was made in
January of the subsequent year, the refund must
be allocated.
Multiple Recoveries
p. 535
 A taxpayer may receive a state income tax refund
and also recover another itemized deduction in the
same year
 EXAMPLES:
▪ Medical expenses
▪ Real estate taxes
▪ Mortgage interest
 The taxable portion then must be allocated between
lines 10 and 21 of Form 1040, using a three-step
formula (see p. 535 of your book for details)
Itemized Deduction Floors
p. 535 - 536
 Some itemized deductions are subject to floors based
on a percentage of the taxpayer’s adjusted gross
income (AGI).
▪ 10%-of- AGI floor for medical expense
deductions
▪ 2%-of-AGI floor for miscellaneous itemized
deductions.
 Because the amount of a recovery included in
income is limited to the tax benefit derived from the
deduction, recoveries are not includable in income
to the extent the expense was never deductible.
Pease Reduction of Itemized
Deductions
p. 536 - 537
 I.R.C. § 68 reduces itemized deductions other than
medical expenses, investment interest expense, and
casualty or theft losses by the lesser of:
▪ 1. 3% of AGI in excess of the thresholds
▪ OR
▪ 2. 80% of all affected itemized deductions.
Pease Reduction of Itemized
Deductions
p. 536 - 537
 2015 AGI Thresholds for Pease Limitation:





Filing Status
Single
MFJ or QW
HoH
MFS
AGI
$ 258,250
$ 309,900
$ 284,050
$ 154,950
Negative Taxable Income
p. 537
 A taxpayer does not benefit from negative taxable
income created by deductions that cannot result in a
net operating loss (NOL).
 Therefore, if a tax return shows negative taxable
income, the negative amount can reduce the
otherwise includable recovery.
 Normally, a zero is entered on line 43, “Taxable
income,” of Form 1040 if taxable income is negative,
but the actual amount of negative income is needed
for this calculation.
Alternative Minimum Tax
p. 537
 A taxpayer who recovers an itemized deduction and
was subject to AMT in the prior year must recalculate
both regular tax and AMT to determine how much of
the recovery is includable in income.
 If the recomputation does not change the amount of
tax due, none of the recovery is taxable.
 If the tax increases, the recovery is includable to
the extent of the deduction that reduced the prioryear tax.
Unused Tax Credits
p. 537 - 538
 If the taxpayer’s available tax credits exceeded his or
her tax in the deduction year, that year’s tax liability
must be recomputed after a recovery by adding the
recovery amount to the prior year’s taxable income
and refiguring the tax and credits.
 If the net tax does not change, none of the
recovery is includable in income.
 If the recomputed net tax is more than the actual tax
in the prior year, the recovery is includable in income
up to the amount of the deduction that decreased the
prior-year tax.
Unused Tax Credits (Continued)
p. 537 - 538
 If the recomputed net tax is more than the actual
tax in the prior year, the recovery is includable in
income up to the amount of the deduction that
decreased the prior-year tax.
 A change in a credit carryover is considered to have
reduced the prior-year tax, even if the net prior-year
tax after application of the credits is zero.
Other Deductions and Losses
p. 538
 A recovery of an amount that reduced the
taxpayer’s AGI is generally fully includable in
income.
 However, the tax benefit rule still applies.
 To the extent the taxpayer did not benefit from the
deduction, the recovery is excludable from income.
Refunds of Business Deductions
(PRACTIONER NOTE)
p. 538
 Refunds of business deductions are generally
fully taxable and must be reported as other income
on the business income schedule.
 Restitution received in a later year for an
embezzlement or other theft loss, as well as
payments received after an accrual basis business
has deducted a bad debt, must be included in the
business’s income.
Credit Recoveries
p. 538
 When a credit was allowable for a prior tax year,
and there is a later downward price adjustment or
similar adjustment that reduces the credit, the tax for
the adjustment year must be increased by the
amount of the credit that is attributable to the
adjustment.
 NOTE: This does not apply to the foreign tax credit
or the investment credit, because they have their own
recapture rules.
Issue 2: Damage Awards & Settlements
p. 539
 Personal injury damages awarded for any
purpose are generally taxable.
 Exception:
▪ Compensation for physical injury or illness
 This issue reviews the guidelines for excluding a
settlement from gross income.
Definitions
p. 539
 1. Punitive Damages
 2. Compensatory Damages
 3. Tort
Definitions
p. 539
 1. Punitive Damages
▪ Monetary compensation awarded to an injured
party that exceeds the amount that is necessary to
compensate the individual for losses.
▪ Intent is to punish the wrongdoer.
▪ Punitive damages are sometimes called exemplary
damages.
Definitions
p. 539
 2. Compensatory Damages
▪ A sum of money awarded to indemnify a person for
a particular loss, detriment, or injury suffered as a
result of the unlawful conduct of another person.
Definitions
p. 539
 3. Tort
▪ A civil wrong recognized by law as grounds for a
lawsuit.
• Breaches of contract are not included.
▪ Torts can be:
• Intentional (intending to do harm)
• Negligent (not obeying a law)
• Strict liability (selling a defective product).
Punitive Damages
p. 540
 Before the Small Business Job Protection Act of
1996, Pub. L. No. 104-188, was enacted, I.R.C. §
104(a)(2) excluded from gross income damages
that were received “on account of personal injury
or sickness.”
 This led to conflicting court decisions about the
nature of personal injuries and whether punitive
damages were included.
Punitive Damages
p. 540
 In the 1996 legislation Congress amended I.R.C. §
104(a)(2) by adding the word “physical.”
 This limited the exclusion to awards received “on
account of personal physical injuries or physical
sickness,” and specifically excluding both punitive
damages and most damages for emotional distress
from its scope.
Punitive Damages
p. 540
 The House report on the bill stated that punitive
damages are intended to punish the wrongdoer
rather than to compensate the claimant for lost
wages or pain and suffering.
 It concluded that punitive damages are a windfall to
the taxpayer and should be included in gross
income.
Compensatory Damages
p. 540
 Compensatory Damages may include amounts for:
▪ Medical expenses,
▪ Pain and suffering,
▪ Emotional stress caused by the injury or illness,
▪ Lost wages,
▪ Loss of consortium, and more,
▪ BUT
▪ NOTE: The entire amount of the award is
generally excludable from income.
Compensatory Damages
p. 540
 Definition of Loss of Consortium:
▪ A claim for damages suffered by the spouse or
family member of a person….
▪ Who has been injured or killed….
▪ As a result of the defendant's negligent or
intentional, or otherwise wrongful acts.
Compensatory Damages
p. 540
 An exception applies to the exclusion from
income if the settlement reimburses the taxpayer for
previously deducted medical expenses.
 In that instance the rules for recoveries apply, and
that portion of the award may be taxable.
Wrongful Death Actions
p. 540
 Wrongful death cases arise when:
▪ An individual or an entity can be held
responsible for a death.
Wrongful Death Actions
p. 540
 Each state has its own statute, but all of the statutes
have four basic elements:
▪ 1. The death was caused, entirely or in part, by
the actions of the defendant.
▪ 2. The defendant is found to be either negligent or
strictly liable for the death.
▪ 3. There is a surviving spouse or children, or
there are surviving beneficiaries or dependents.
▪ 4. There are monetary damages.
Wrongful Death Actions
p. 540
 Punitive damages generally do not qualify for
exclusion from gross income.
 But some state wrongful death laws provide for
only punitive damages to be awarded.
 Because the recipients cannot receive any other type
of compensation for their loss, the exclusion applies
if the applicable state law in effect on September13,
1995, allowed only punitive damages.
 The exception will apply until the state law is changed
to allow compensatory damages.
Employment Related Actions
p. 540 - 541
 Employment-related lawsuits are usually filed
because a worker was fired or a worker claims
that contract obligations were not met.
 In these cases the settlement is usually specified to
be compensation for lost wages or business income.
 It is includable in income and should be reported by
the employer on Form W-2, Wage and Tax
Statement.
 An exception could occur if the worker lost his or her
job as the result of a physical injury or illness.
Social Security & Medicate Taxes
(PRACTIONER NOTE) p. 541
 The IRS treats back pay as income in the year paid.
 If a back pay award is not made under a statute,
the Social Security Administration (SSA) also credits
it as wages in the year it is paid.
 However, if back pay is awarded under a statute,
the wages will be credited to the year the wages
should have been paid.
 This is important because wages not credited to
the proper year may result in lower social security
benefits or failure to meet the requirements for
benefits.
Discrimination Claims
p. 541
 Age, race, gender, religion, or disability discrimination
claims can result in awards of compensatory,
contractual, or punitive damages.
 All such discrimination awards now result in
taxable income.
Damages to Reputation
p. 541
 Libel and slander awards arise from harm being
done to the taxpayer’s business or professional
reputation.
 Because emotional distress often accompanies these
actions, the question is whether the taxpayer incurred
medical expense for its treatment and whether the
claim or award identifies any damages as being
attributable to those expenses.
 Otherwise, damages for emotional distress are fully
taxable.
Damages to Property
p. 541
 Awards for property damage bring in the element
of basis reduction as well as income inclusion or
exclusion.
 Generally, compensation for property damage
reduces the basis of the property, but not below zero.
 If the compensation exceeds basis, the excess is
taxable unless the funds are spent to restore or
replace the property.
Damages to Property
p. 541
 A casualty loss deduction should be deferred for any
amount that is expected to be reimbursed.
 However, if the taxpayer previously deducted a loss
and then received compensation in a later year, all or
part of the damage award is treated as a recovery.
Information Returns
p. 542
 Taxable damages paid in the course of a trade or
business usually must be reported by the payer as
“Other income” in box 3 of Form 1099-MISC,
Miscellaneous Income.
Information Returns
p. 542
 Form 1099-MISC should not be filed for damages
paid on:
▪ Account of personal physical injuries or sickness
▪ Damages that do not exceed the amount paid for
medical care for emotional distress
▪ Damages paid on account of nonphysical injuries
under a written binding agreement, court decree,
or mediation award that was in effect on or issued
by September 13, 1995.
Information Returns
p. 542
 Payments that replace capital, such as damages
paid to a buyer by a contractor who failed to complete
a building, are also not reportable.
Failure to Report as Wages
(PRACTIONER NOTE)
p. 542
 Social security and Medicare taxes are generally
due when lost wages are paid.
 An information return is not always issued when
taxable damages are paid.
 Tax practitioners should request supporting
information to determine the taxable amounts of
damage awards or settlements received by their
clients.
Structured Settlements
p. 542
 It is not always beneficial for large settlements to be
paid in a lump sum.
 The alternative, making payments over a period of
time, is referred to as a structured settlement.
Structured Settlements
p. 542 - 543
 The tax treatment for the recipient does not change.
 The IRC excludes qualifying payments from the
recipient’s income whether they are paid in a lump
sum or in periodic payments.
 NOTE: Income realized on the sale of a taxable
settlement is ordinary income and not capital gain.
Attorney Fees
p. 543
 A specific amount of the settlement may be
allocated for attorney fees and court costs.
 The gross amount of undivided damages paid to the
recipient and his or her attorney generally is included
in the recipient’s income.
 There are exceptions and they are notated on p 543.
Attorney Fees
p. 543
 When gross damages of at least $600 are paid to
an attorney, the payer is generally required to
issue two Forms 1099-MISC:
▪ The gross amount of the taxable settlement is
reported in box 3 of the form issued to the
individual who was awarded the damages.
▪ The same amount is also reported in box 14 of a
Form 1099-MISC issued to the attorney or law
firm.
Issue 3: United States Tax Court
Appeals
p. 545
 Taxpayers can file a petition in the US Tax Court to
appeal:
▪ IRS notices of deficiency
▪ AND
▪ Notices of determination.
 Taxpayers can appeal a proposed tax liability or
determination to the Tax Court prior to paying the
tax.
Issue 3: United States Tax Court
Appeals
p. 545
 If the Tax Court rules against the taxpayer, the
taxpayer must pay interest on the tax due.
 If instead the taxpayer pays the proposed additional
tax prior to the appeal, no additional interest
accrues during the appeal.
 If the taxpayer prevails, the amounts paid are
refunded with interest if the appeal was filed within
the statute of limitations for refunds.
IRS Appeals vs. US Tax Court
p. 545
 IRS Appeals is part of the IRS.
 HOWEVER,
 The US Tax Court is totally independent from the
IRS.
US Tax Court Appeals
p. 545
 The Tax Court hears appeals for the following:
▪ Notices of deficiency issued by the IRS
▪ Notices of determination issued by the IRS
• Abatement of interest
• Worker classification
• Innocent spouse,
• Lien & Levy cases
▪ Final partnership administrative adjustment for Tax
Equity and Fiscal Responsibility Act of 1982
(TEFRA) partnerships.
US Tax Court Appeals
p. 546
 Additional jurisdiction includes:
▪ Re-determine transferee liability and/or worked
classification.
▪ Make certain types of declaratory judgments
▪ Adjust partnership items
▪ Review awards to whistleblowers
US Tax Court Appeals
p. 546
 Additional jurisdiction includes (CONTINUED):
▪ Order abatement of interest.
▪ Award administrative and litigation costs.
▪ Determine relief from joint liability on a joint return
(Innocent Spouse).
▪ Review certain collection actions.
Representation before the Court
p. 546 - 547
 The Tax Court is the only federal court that allows
non-attorneys to practice before the court.
 Taxpayers may represent themselves in a Tax Court
proceeding.
 Attorneys and non-attorneys must apply for
admission to practice before the Tax Court.
 Non-attorneys must pass a four-part written exam
administered by the Tax Court.
 Non-attorney applicants for the exam must be
sponsored by two members previously admitted to
practice before the Tax Court.
Life Cycle of a Tax Court Case
p. 547
 1. Notice of Deficiency
 2. Filing the Petition
 3. Pretrial Matters
 4. Calendar Call and Trial (If no Settlement)
 5. Post-Trial Procedures
1. Notice of Deficiency
p. 547
 IRS will issue a statutory notice of deficiency, also
known as a 90-day notice or Letter 531.
 The notice of deficiency must explain the IRS’s
position on every disputed issue.
 If the taxpayer misses the deadline for filing with
the Tax Court, there is no further appeal to the Tax
Court, and the tax will be assessed.
2. Filing the Petition
p. 547 - 548
 All petitions to the US Tax Court must be filed with the
court in Washington, DC.
 TC Form 2, Petition, is a simplified petition found on
the “Forms” tab of the Tax Court website.
 On the petition the taxpayer must indicate whether
he or she wants the case to be heard under the
regular tax case procedures OR under the small
tax case procedures.
 Dollar limits apply to the use of the small tax case
procedures, and those limits vary slightly depending
on the notice being contested. (see book for limits)
Appealing Small vs. Regular Tax Cases
p. 547 - 548
 If the taxpayer chooses the small tax case
procedures, then all court determinations are final.
▪ Neither the taxpayer nor the IRS can appeal the
findings of the Tax Court.
 If the taxpayer chooses the regular tax case
procedures, then either the taxpayer or the IRS can
appeal the decision to the US Court of Appeals for
the circuit in which the taxpayer resides.
Proof of Filing the Petition
(PRACTIONER NOTE)
p. 548
 To document timely receipt of the petition by the
court, the taxpayer should send the petition and
accompanying documents by:
▪ 1. Certified or registered mail, or
▪ 2. FedEx, or
▪ 3. UPS.
 Once the petition is submitted, the Tax Court sends a
notice of receipt of the petition and assigns a docket
number.
3. Pretrial Matters
p. 548 - 549
 SETTLING THE CASE – 1ST CHOICE OF THE IRS
 Once the IRS has filed their petition, the IRS typically
attempts to settle the case.
 The IRS Appeals Office usually contacts the
petitioner to try to assess the strength of the
petitioner’s case and to determine whether a
settlement is feasible.
 If the taxpayer reaches a settlement with the Appeals
Office, the IRS attorney and the taxpayer send the
settlement agreement to the Tax Court, and the case
is dismissed.
Pretrial Matters
p. 548
 If the parties cannot settle the case, the court
sends a notice setting the case on the trial calendar.
 The notice should be received approximately 5
months before the trial date.
 Continuances can be requested but are rare and
only the judge can approve (not the IRS.)
 Prior to trial the petitioner and the IRS must each file
a pretrial memorandum (it is not mandatory for small
tax cases but still recommended.)
 Taxpayer can also issue subpoenas for witnesses.
4. Calendar Call and Trial
p. 549 - 550
 On the first morning of the trial session, the taxpayer
or the taxpayer’s representative should arrive at the
court in time to attend the calendar call.
 Any witnesses should also be present prior to the
calendar call.
 If you fail to appear, IRS will move to have case
dismissed.
 Taxpayer gets to present their case then the IRS.
5. Post-Trial Procedures
p. 550
 After the trial the judge may immediately render
an opinion (a bench opinion), or the judge will
give an opinion at a later date.
 If the case was handled under the small tax case
procedures, the decision is final, and there is no
appeal.
 If the case was handled under the regular case
procedures, then either party may appeal the
decision to the US Court of Appeals.
 An appeal must be filed within 90 days of entry of
the Tax Court decision.
Issue 4: IRS E-Signature Authentication
p. 550
 New requirements for authentication of e-signatures
have raised privacy and other concerns.
 NOTE: This is not about authorization to E-File a
tax return.
 Rather, this is about authorization to use ESignatures on documents.
 EXAMPLE: You can sign in person your E-File
authorization and there are no additional restrictions.
 However, you cannot E-Sign the authorization form
without additional security measures.
Issue 4 – IRS E-Signature
Authentication
p. 550
 Tax preparers must document authorization by
the taxpayer to digitally sign the tax return.
 The tax preparer must maintain paper records of this
authorization.
▪ Form 8878, IRS e-file Signature Authorization for
Form 4868 or Form 2350; and/or Form 8879, IRS
e-file Signature Authorization)
 WHY? To protect the return preparer from an
allegation that the preparer fraudulently appropriated
the taxpayer’s identity in filing.
History of E-Filing
p. 550 - 551
 In 1986 about 25,000 federal tax returns were filed
 electronically.
 In 2009 Congress passed legislation requiring tax
preparers who file more than 10 individual tax returns
to file electronically.
 The requirement was phased in during 2010 and
2011, and in 2011 more than 100,000,000 tax
returns were filed electronically.
Signature Authentication
Requirements
p. 551
 In March 2014 the IRS updated Publication 1345, to
authorize taxpayers to sign and preparers to
accept electronic signatures on the e-file
authorization forms.
 Publication 1345 requires tax professionals to
authenticate the identity of taxpayers who sign
electronically.
Signature Authentication
Requirements
p. 551
 Tax preparers who accept electronic signatures
must authenticate the taxpayer’s identity by validating
his or her:
▪ Name
▪ Social Security Number (SSN)
▪ Address
▪ Date of Birth
▪ Validate the above with a government-issued ID
 Preparers must do this authentication every year.
Signature Authentication
Requirements
p. 551
 The IRS requires an e-signature authentication that
meets Level 2 or higher under the National Institute
of Standards and Technology
 Level 2 entails verifying the taxpayer’s identity
through records checks with credit bureaus and
other databases.
 Includes dynamic knowledge-based authentication,
which involves generating questions from public
data records and credit reports and requiring the
taxpayer to correctly answer those questions before
the taxpayer can electronically sign the authorization.
Signature Authentication Concerns
p. 551
 The AICPA has identified three primary areas of
concern with respect to the requirement to use
dynamic knowledge-based authentication.
 1. Identity Verification Vendors may have access to
private data.
 2. Use threatens the trusted advisor relationship
if there is a breach of data by vendors.
 3. There are many taxpayers for whom the dynamic
knowledge based system will note work.
▪ EX: Business Travelers, Expatriates and children
E Signature FAQ
p. 552
 Can all taxpayers use the new e-signature
option?
E Signature FAQ
p. 552
 Can all taxpayers use the new e-signature
option?
▪ No.
 The new e-signature option is available only to
taxpayers who e-file their tax returns through an
Electronic Return Originator (ERO) who uses
software that provides identity verification and esignature.
E Signature FAQ
p. 552
 Are taxpayers required to sign Forms 8878 or
8879 electronically?
E Signature FAQ
p. 552
 Are taxpayers required to sign Forms 8878 or
8879 electronically?
 No.
 Taxpayers may continue to use a handwritten
signature and return the form to the ERO in person,
or via US mail, private delivery, fax, e-mail (by
scanning), or an Internet website.
E Signature FAQ
p. 553
 Is identity verification a one-time event?
E Signature FAQ
p. 553
 Is identity verification a one-time event?
 NO
 Identity verification must be completed every time a
taxpayer electronically signs Form 8878 or 8879, with
one exception.
 If a taxpayer e-signs the form in the physical
presence of the ERO and the taxpayer has a
multiyear business relationship with the ERO, then no
further identity verification is needed.
E Signature FAQ
p. 553
 Is identity verification a one-time event? (CONT.)
 NO
 A multiyear business relationship is one in which the
ERO has originated tax returns for the taxpayer for a
prior tax year and has identified the taxpayer using
the identity verification process.
5. IRS Collection Procedures
p. 554
 A client may owe tax due to any of the following:
 1. Filing a balance due return
 2. An assessment because of an examination
determination
 3. Imposition of a civil penalty, such as a trust fund
recovery penalty.
IRS Fresh Start Program
(Online Payment Agreement) p554-556
 Goal for Today:
▪ Learn How to use the IRS Fresh Start Program
 Fresh Start Program = Streamline Installment
Agreement
▪ IRS Tax Tip 2013-57 – April 17, 2013
▪ Can use the Online Payment Agreement option on
IRS.GOV
 Must be current filing and must stay current filing and
paying
▪ Paying current includes ESTIMATED TAXES.
IRS Fresh Start Program
(Online Payment Agreement) p554-556
 Fresh Start includes personal liability up to
$50,000
 72 months (6 years) to pay if on Direct Debit (433D)
 $350/mo at $25,000
 $700/mo at $50,000
 60 months (5 years) to pay if no Direct Debit
 $420/mo at $25,000
 $840/mo at $50,000
IRS Fresh Start Program
(Online Payment Agreement) p554-556
 You can pay down to qualify for this program
 Fresh Start works great with IRS Automated
Collections System (ACS) Department
 Collection Statutes Do Matter:
 EXAMPLE: Fresh Start will not work over 72
months if a Collection Statute will expire prior to
full payment.
IRS Fresh Start Program
(Online Payment Agreement) p554-556
 You Qualify Even If:
 You have the assets to full pay.
 Your income would show you with a higher
Installment Agreement vs. national standards
 Interest and penalties continue to accrue
throughout Fresh Start
 CRITICAL: Make sure your clients understand
this!
IRS Fresh Start Program
(Online Payment Agreement) p554-556
 Business Fresh Start Program:
▪ Only under $25,000 over 2 years
• Very different timeline from personal Fresh
Start program
• IA at $25K = $1,042/month
▪ Business in payroll tax problems cannot always
afford that kind of monthly payment
▪ Only way to know is to do an accurate IRS Form
433B evaluation
Power of Attorney
(PRACTIONER NOTE) p.555
 To initiate any representation for a client, a tax
professional must have a valid power of attorney
covering all tax periods to be included in the
agreement.
IRS Collections
p. 557
 The IRS will not approve any Collection solution if
the taxpayer fails to make required federal tax
deposits or estimated tax payments.
 TAKEAWAY:
▪ To get any Agreement:
• Must Be CURRENT FILING
• AND
• Must Be CURRENT PAYING
IRS Installment Agreements
p. 556 - 557
 NOTE: Update to the TaxBook
▪ Automated Collections System (ACS): Only uses
IRS Form 433F
▪ Revenue Officer (RO): Use IRS Form 433A
 IRS uses national standards for expenses:
▪ Food, clothing, housing, transportation, and
medical.
 Deviations from the standards may be allowed if the
taxpayer can document that the deviation is
reasonable and necessary (but not easy to get.)
IRS Offer In Compromise
p. 557 - 558
 IRS does have a process to compromise tax debt.
 It is called Offer In Compromise (OIC)
 IRS Form 656 Booklet – Offer In Compromise contains:
▪ IRS Form 433A-OIC is the financial statement used as part
of the individual submission of the OIC.
It is a far more extensive financial statement form then the
433F.
▪ Form 656 – The form on which the offer is formally
submitted.
▪ Form 433B-OIC (if needed for a Business OIC)
OIC – Two Methods of Payment
p. 559
 Payment Option 1: Lump Sum Offer
▪ Paid within 5 months of the acceptance of the OIC
▪ Requires an initial down payment of 20% of the OIC
amount.
 Payment Option 2: Periodic Payment Offer
▪ Paid within 6 to 24 months of the acceptance of the OIC
▪ 1st of the periodic payment sent with OIC application and
must continue each month while application is pending.
▪ NOTE: If you miss 1 periodic payment while OIC is under
review by the IRS, your OIC Application can be immediately
denied.
OIC 5 Minute Evaluation TEST
 Questions to immediately evaluate OIC chances:
(Equity, Equity, Equity)
▪ Equity in Assets
• Equity in house?
• Equity/Value in Investments?
▪ Whatever is the total of that equity is your
minimum for calculating your offer!
 Only after considering the assets values should you
spend the time evaluating income vs. expenses
OIC – RISKS TO TAXPAYER
p. 560
 Downside to Offer In Compromise:
 Extension of the 10 year statute of collections
 Time in offer + 1 year
 Average OIC takes 1 to 1.5 years
 So if you lose, expect to had 2 to 2.5 years to
the Statute of Collections.
 Small Business Owners: Double the Difficulty
 Since a small business owner has control over
their income in the eyes of the IRS – more difficult
to win an OIC than someone who only has a W2.
OIC – If you win?
p. 560
 Must stay current filing and paying tax returns for
5 years or all tax liabilities return from the dead.
 All refunds due the in the calendar year in which
the offer is being reviewed and the year it is accepted
are applied to the tax debt.
▪ After that period, the refunds are the property of
the taxpayer again.
 Federal Tax Liens are not released until the
payment of the offer is satisfied.
IRS Currently Not Collectible (CNC)
Status
p. 560
 Achieving Currently Not Collectible (CNC) status uses the
same forms (433F, 433A, 433B) but means that a taxpayer
does not have the ability to pay at this time.
 Temporary Status: This status will last on average 12 to 24
months then IRS can return to re-evaluate……
 Penalties and Interest continue to accrue; however,
Collection statute continues to count down while in this status.
 Currently Not Collectible (CNC) Status all called:
▪ “Uncollectable” Status
▪ “Status 53” (represents the code on the IRS Account
Transcript that reflects CNC status)
Tax Practice – Chapter 13
Thank you.