CRS PAPER DISCUSSES TAXPAYER RIGHTS.

               TAXPAYER RIGHTS IN DEALING WITH THE IRS

This report is organized around a number of frequently asked questions relating to paying federal personal income taxes, receiving federal income tax refunds, IRS examination of taxpayer's returns, and collection procedures used by the IRS to enforce tax obligations. A couple of questions about special taxpayer assistance procedures are also included. The answers to many of the questions attempt to outline the procedures that the taxpayer can expect to encounter at each stage of a tax controversy and the choices (or lack of choices) that may be available to the taxpayer at that particular time.

                          TALE OF CONTENTS

There are few United States citizens who do not have a relationship with the Internal Revenue Service. For most the relationship is distant, involving having taxes withheld, paying taxes, or filing returns. For others the relationship is more personal, involving letters, telephone calls, or visits. If anecdotal evidence is even partly true, these personal encounters are often frustrating, confusing, and exasperating. This report is designed to explain some Internal Revenue procedures and some rights taxpayers have in dealing with the IRS.

The report is organized around questions about dealing with the Internal Revenue Service that have frequently been asked of researchers in the Congressional Research Service. This report is intended to provide basic information and is not intended as a do-it- yourself manual. Although many taxpayers are fully capable of resolving any problems they may have with the Internal Revenue Service, other taxpayers will find that there is no substitute for consulting with an attorney, an accountant, or an enrolled agent who represents taxpayers before the Internal Revenue Service.

FILING THE RETURN

1. WHAT IS THE PROCEDURE FOR FILING A LATE INCOME TAX RETURN?

Taxpayers who cannot file their income tax returns on time should file Form 4868 by April 15. Filing this form gives you an automatic four-month extension of the time to file the return. [IRC section 6081]. If you need additional time beyond the August 15 deadline, you must file Form 2688 (Application for Additional Extension of Time to File U.S. Individual Income Tax Return). Unlike Form 4868, Form 2688 requires an explanation of the reason for needing an additional extension. You need to file this request in advance of the August 15 deadline so that if your request is denied, you will still have time to file your return on time. Sometimes when your request for an extension is turned down, the IRS will grant you 10 days from the date of the notice to file your return (if the 10 days expires after the due date). This 10-day grace period is at the discretion of the IRS.

Filing these forms does NOT give you a right to pay your taxes late. You are expected to make an estimate of the amount of taxes that you owe and send the payment in by April 15. If you underestimate the amount of taxes that you owe, you will be charged interest on the unpaid amount. If the unpaid amount is more than $500, you may be liable for a penalty for failure to pay estimated income taxes. [IRC sections 6151, 6654]

If you do not file Form 4868 and you file a return after April 15 or if you do not file a return by the end of the extension, penalties for failure to file a return and possibly penalties for failure to pay the tax will probably be assessed. These penalties may be waived if you have "reasonable cause" for not paying or filing on time. You have to ask that the penalties be waived and you have to explain why you think they should be. Unlike a teacher confronting a student with late homework or a judge confronting an accused, the IRS will assert the penalty before hearing the excuse. The taxpayer is responsible for proving why the penalties should be waived. [IRC section 6651]

2. WHAT SHOULD I DO IF I CANNOT PAY MY TAXES?

The IRS encourages all taxpayers to file a return, even if they cannot pay the taxes. To this end, the IRS has recently introduced Form 9465, which is a request for an installment agreement. This form can be attached to the income tax return if the taxpayer does not have the resources to pay the tax. Form 9465 can be used if the amount owed is $10,000 or less. For larger amounts, an agreement has to be reached with a revenue officer.

3. WHY DO PARTNERSHIPS AND LIMITED PARTNERSHIPS WAIT SO LONG TO SEND OUT THE K-1?

Under IRC section 6031, every partnership required to file a return is required to furnish each partner with a K-1 "on or before the day on which the return for such taxable year was required to be filed." This means that calendar-year partnerships are not required to furnish K's to their partners until April 15. The accountant could put the forms in the mail that day and satisfy the legal requirement. Of course, if the partnership gets an extension to file late, the partners will receive their K-1s late also.

Not receiving a K-1 will generally require you to file for an automatic extension and possibly an additional extension of time to file your return. Unfortunately, you still have to make a good guess about the partnership results during the year so that you can pay your taxes by April 15.

With the crush of tax return preparation required during the first three and half months of each year, plus taxpayers' tendency to procrastinate until a deadline nears, it is unlikely that partnership accounting will be expedited in the future. Partnerships and accounting professionals can be expected to oppose any legislative proposals to shorten the deadline for partnership tax reporting. Under these circumstances, taxpayers probably have to resign themselves to filing for an extension or lobbying their partnerships to report sufficiently early that the April 15 deadline can be met.

REFUNDS

4. WHEN DO YOU HAVE TO FILE A CLAIM FOR A REFUND?

If you believe that you have overpaid your taxes, you are entitled to file a claim for a refund. Most claims for refund are indicated on the bottom of the tax return. The general rule is that claims for refund may be filed up to 3 years after the date the return was filed, or two years after you paid the tax, whichever is later. In certain cases, such as if your claim for a refund relates to a loss on a bad debt, the worthlessness of a security, or a net operating loss carryback, you may have a much longer period to file your claim. [IRC section 6511]

6. WHEN DOES THE IRS HAVE TO PAY A REFUND?

For refunds claimed on the tax return, the IRS tries to mail refunds by May 30 because it is not liable for interest before that date. If the IRS does not mail your refund by that date, it must pay interest from April 15. If you file your return late, the IRS has 45 days to process and mail the refund before interest accrues. [IRC section 6611(e)]

You have the right to find out whether or not you will be getting a refund, and if not, why not. The IRS gives a toll-free telephone number on the tax return instructions. That telephone number may be used to inquire about the status of a tax refund if the refund is not received within eight weeks after filing the return. (The information may not be in the computer before that time.)

6. WHAT SHOULD A TAXPAYER DO IF THE REFUND CHECK IS LOST OR STOLEN?

If you are entitled to receive a refund and if you believe your refund check has been lost or stolen, call the IRS Service Center which serves the state from which you filed your return. You will be asked to fill out Form 3911, which asks for facts about the taxpayer and the check, type of return, amount of refund, where you filed your return. This information helps the IRS determine whether the refund check was authorized. If the check was authorized, the Service Center will contact the Treasury's Bureau of Government Financial Operations and stop payment on the original check. A few days later a new check will be issued if the original check has not been cashed. Sometimes, due to delays in processing of more than 30 days, the IRS may ask the taxpayer to fill out a second Form 3911. Keeping a copy of the original form will make filling the form out a second time less time consuming.

If the original check was cashed, no new check will be issued until an investigation is made. You may be asked to fill out an additional Form 1133, which is a claim for the proceeds of a government check. The Adjudication Division will investigate the circumstances of the cashing of the original check. If the endorsement seems genuine, no new check will be issued. If the taxpayer wishes to pursue the matter, the taxpayer must then appeal this decision to the Adjudication Division.

7. CAN THE IRS PAY A TAXPAYER'S REFUND TO SOMEONE ELSE?

In certain circumstances, the IRS is required by law to apply your refund to other purposes instead of returning it to you. These circumstances include past-due taxes, debts to federal agencies (such as student loans), and past-due child or spousal support. [IRC section 6402] If the IRS applies your refund to past-due child support, alimony, or a past-due debt to a federal agency, it does so at the request of a state or federal agency. Because of this, the law protects the IRS from being sued or even having to listen to arguments that you don't owe the debt. Under the law, if you want to prove that you don't owe the money, you must raise the issue with the agency to which you supposedly owe the money, not with the IRS.

The IRS is required to notify you if it offsets your refund, but under IRC section 6402, the IRS does not have to notify you BEFORE reducing your refund unless the debt is an overpayment under title II of the Social Security Act (social security, survivor, or disability benefit payments). The IRS is required to notify each taxpayer filing a joint return that the refund is going to be offset. If all or part of the refund belongs to the spouse who is not liable for the overpayment, this procedure allows that spouse to prove what share of the refund belongs to him or her and to protect that portion of the refund from offset by the IRS.

Whether or not the injured spouse is notified in advance of the offset of a joint refund, the injured spouse who earned all or part of the refund is entitled to file Form 8379 (Injured Spouse Claim and Allocation Form) in order to protect the injured spouse's share of the refund. Form 8379 may be filed with the return anticipating a refund or it may be filed after the couple learns that the refund was or is about to be offset.

EXAMINING THE RETURN

8. WHAT HAPPENS TO MY TAX RETURN AFTER I FILE IT?

After you have determined your tax liability and filed your return with the IRS, the return is processed by the IRS. Your calculations are checked and some of your numbers may be verified by matching your numbers with those received from various information sources and by statistically comparing your numbers to those of typical taxpayers with similar incomes. For the vast majority of taxpayers, this processing will be the only examination performed on their returns. The return will be accepted as filed. Any refund owed will be paid.

9. CAN THE IRS AUDIT A TAXPAYER'S RETURN FOR THE SAME THING YEAR AFTER YEAR?

Taxpayers have the statutory right not to be examined more than once for each taxable year unless the Secretary of the Treasury determines otherwise. IRS section 7605(b). The Internal Revenue Manual section 4241 indicates that if taxpayers have previously been examined on the same issue and little or no tax change was warranted, then IRS may decide not to continue with the examination. If you receive a letter indicating that the IRS wishes to examine your return on a subject which was examined during the previous two tax years, you should send a copy of the previous year's correspondence from the IRS to the examiner for the current year. After examining your current and previous years' files, the examiner will inform you whether or not you qualify to have the examination terminated. The examiner must obtain supervisory approval in order to end the examination.

10. HOW LONG CAN THE IRS WAIT TO EXAMINE A PARTICULAR YEAR'S RETURN?

Generally, the statute of limitations for assessing income tax is three years from the date the return is filed or three years from the date the return is due, whichever is later. IRC section 6501(a). There are a number of exceptions to the general rule. If a return is determined to be false or fraudulent, i.e., filed with the intent to evade tax, there is no limitation on the time for assessment. Similarly, if no return was filed, there is no limitation on the IRS' right to assess the tax. In addition, the statute of limitations can be extended by a written agreement between the IRS and the taxpayer. IRC section 6501(c). Under IRC section 6501(e), if a taxpayer omits an amount of income which should have been reported in excess of 25 percent of the amount actually reported on the return, the tax may be assessed or a proceeding for collection may be begun without assessment, any time within six years after the return was filed. There are also certain extensions for court proceedings. IRC section 6503.

11. WHAT ARE MY RIGHTS IF THE IRS QUESTIONS MY RETURN?

Some returns will raise questions because of arithmetic errors or inconsistencies in parts of the return or because of statistical sampling. These returns will be examined to determine what type of further processing is necessary. For most of these, a letter will be sent from the Service Center explaining the error or question and asking for an explanation or payment of additional taxes (or in some cases explaining why a different amount is being refunded).

In many cases, IRS questions about your return will be handled by mail. The letter you receive from the IRS will indicate what it is about your return that concerns them. They may want more information or supporting documents, or they may indicate that a change in your return is necessary. If you have the information or supporting documents, supply copies to the IRS. If you do not have the information, send an explanation of why the information is not available.

The IRS uses form letters to correspond with most taxpayers. Many of the letters are automatically issued by computer at certain stages of the examination process. Because they are form letters, they are sent to all kinds of taxpayers. These letters try to walk the line between not offending honest taxpayers and intimidating unscrupulous taxpayers. In some cases the result is probably the opposite from the intent. Another problem with computer-generated form letters is that your answer to their first letter is likely to cross paths with their computer-generated second letter. In this case, most letters have a name and telephone number so that you can contact a human being if you have questions about the letters. As IRS computerization improves, it is more and more likely that the person you talk to will be able to call up the correspondence and be able to answer your questions about it.

If you do not want to correspond with the IRS yourself, you have the right to have an attorney, an accountant, or an enrolled agent represent you before the IRS. To do so, your representative must file Form 2848, a power of attorney form, with the IRS. After that, he or she can then conduct the correspondence.

After reviewing the letter from the IRS, the taxpayer may take one of the following courses of action: (1) The taxpayer may agree with the IRS. (2) The taxpayer may request an additional explanation from the IRS. (3) The taxpayer may provide the IRS with an explanation of why the taxpayer is right. (4) The taxpayer may request an interview. (5) The taxpayer may choose not to respond.

If the taxpayer agrees with the IRS (and pays any taxes owing) the case is closed.

If the taxpayer requests an additional explanation, the Service Center will usually send a letter answering the question and asking for a correction to or an agreement with the IRS position. Sometimes the IRS will follow up with a telephone call. Sometimes the file will be transferred to a District or Field Office so that the taxpayer can come in for an office interview. Office interviews may be warranted if the IRS believes that the taxpayer has trouble communicating in writing or on the telephone, if the taxpayer requests an interview, or if the scope of the examination is broader than can be covered by a letter.

If the taxpayer provides an additional explanation and the explanation is satisfactory, the IRS may accept the return as filed. The taxpayer will be sent a no-change letter. If the IRS needs additional information, it will request the required information. If the explanation does not provide enough information for the IRS to make a determination, the return will be transferred to a District Office for follow up. If the explanation is not convincing, the IRS will send a "30-day letter" advising the taxpayer that IRS proposes to make changes in the return and that the taxpayer has the right to appeal this determination.

If the taxpayer requests an interview or if the IRS decides that an interview is necessary, the Service Center will transfer the case to the District Office for an office interview. The taxpayer will be notified of the transfer.

If the taxpayer does not agree or does not respond within 30 days from the first letter, the Service Center will issue a "30-day letter." The taxpayer may then request an interview or an Appeals conference. If the taxpayer ignores the 30-day letter, a "90-day letter" will be issued at the end of the 30-day period. The 90-day letter is the statutory "Notice of Deficiency." Receipt of this letter entitles the taxpayer to file suit in Tax Court within 90 days. The taxpayer may also request an interview or a hearing with the Office of the Regional Director of Appeals.

12. WHAT HAPPENS IN AN OFFICE AUDIT?

Office audits are as individual as each taxpayer and each examiner. Some will be confined to a list of areas previously identified to the taxpayer. Some will be of much broader scope. The process usually begins with a letter or a telephone call to the taxpayer. Sometimes the taxpayer initiates the process. In some cases the taxpayer will be instructed to mail certain documents to the office in advance of the meeting. In other cases, the taxpayer will be instructed to bring certain documents to the meeting. At any point, the taxpayer is entitled to have a representative (attorney, accountant, enrolled agent) present. In some cases, the representative may appear in lieu of the taxpayer. All representatives are required to present the IRS with a proper power of attorney. This is Form 2848.

The examiner and the taxpayer and the taxpayer's representative will attempt to determine the taxpayer's correct tax liability. Examiners are expected to apply the IRS' official positions on questions subject to interpretation. Examiners are not permitted to weigh the hazards of litigation or consider the taxpayer's ability to pay any proposed tax increase. The examiner's duty is to recommend any proposed adjustments, explain the proposed adjustments to the taxpayer, and obtain the taxpayer's agreement, if possible.

The examiner can recommend no change or propose some adjustments. If no change is recommended, the taxpayer's return is accepted as filed. Generally the IRS will not reopen a return which has been examined. The taxpayer may accept this result or may decide that too much tax was paid and make a claim for a refund.

13. WHAT RIGHTS DO I HAVE IF THE IRS WANTS ME TO PAY MORE TAX?

If the IRS proposes adjustments, the taxpayer can agree to the adjustments, disagree to the adjustments, or agree in part and disagree to others. If the taxpayer agrees to the adjustments, he or she will be asked to sign Form 870 (Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Proposed Overassessment). Signing this form means you agree to be billed for and to pay the taxes owed. Signing this form means you give up your right to contest the issue in Tax Court. You may still file a claim for a refund however.

If the IRS proposes adjustments and you do not agree or want to contest the findings within the IRS or in the Tax Court, you should not sign Form 870. The IRS will then issue the 30-day letter. Receipt of this letter entitles the taxpayer to take advantage of the IRS internal appeals procedures. If the internal appeal is unsuccessful or if the taxpayer does not take advantage of the internal appeals process, the IRS will issue the 90-day letter, which is the taxpayer's ticket to Tax Court.

If the taxpayer agrees with part of the IRS findings, the Form 870 can be signed agreeing to certain adjustments and not to others. The issues which are agreed to cannot be challenged in Tax Court but may be subject to a refund suit. The other issues may be challenged at the IRS and in Tax Court.

14. WHAT HAPPENS IF THE IRS AND THE TAXPAYER CANNOT AGREE AFTER AN OFFICE AUDIT?

During an office audit, where the taxpayer and the IRS cannot agree on the proposed adjustments, the taxpayer has the right to request an Appeals hearing. If the taxpayer does not request an Appeals hearing, the IRS will send a 30-day letter. Following receipt of the 30-day letter the taxpayer also has the right to request an Appeals hearing.

The 30-day letter gives the taxpayer 30 days in which to request an Appeals hearing of the case. This is usually done by filing a written protest. Written protests are not required in an office examination case or in a field examination case where the amount in controversy is less than $2,500. The 30-day period can be extended by making a written request stating reasonable grounds for an extension. Reasonable grounds include hiring a representative who needs more time to prepare; hiring a new representative; sickness or injury of the taxpayer or the representative; complex issues requiring considerable research. The IRS may condition the extension on the taxpayer's consent to the extension of the statute of limitations.

Usually, the protest will be considered by Appeals. Appeals does not have authority to hear cases involving the failure or refusal pay taxes on moral, religious, political, constitutional, or conscientious grounds. Similarly, Appeals cannot hear certain excise tax cases, cases where the amount in controversy exceeds $200,000, cases involving declaratory judgments, or certain cases with a criminal component.

Proceedings before Appeals are informal. Taxpayers may represent themselves or be represented by an attorney, accountant, or enrolled agent. The Appeals officer is not an objective, neutral third party. The Appeals officer represents the IRS and will follow IRS policies on disputed issues. The Appeals procedure is somewhat like a higher level negotiating session in which the taxpayer may obtain a settlement in order to avoid litigation. The Appeals officer is permitted to consider the hazards of litigation in negotiating a settlement. The Appeals officer is not permitted to settle for nuisance value. Sometimes the Appeals officer will request technical advice from the National Office.

If the protest is successful, the taxpayer's arguments and return are accepted. If the protest is unsuccessful, the taxpayer has the usual options: agree with the IRS and terminate the case; agree in part and disagree in part; disagree totally.

If the taxpayer agrees with the IRS or wishes to terminate the case, the taxpayer will be asked to sign either Form 870 or Form 870- AD. Both of these are consents to assessment of the tax, but there are differences. The AD form contains pledges against reopening which prohibit the taxpayer from suing for a refund and the IRS from making an additional assessment. The regular Form 870 does not bar suit for refund or making additional assessments. The AD agreement does not become effective until accepted by the Commissioner. The AD form is usually used in cases where mutual concessions have been made because it would not be fair for one side to take advantage of the concessions made by the other side and then sue to undo the balancing concession.

Sometimes the IRS will enter a closing agreement with the taxpayer. This is authorized under IRC section 7121. Closing agreements are more formal than Form 870-AD, since they are statutorily recognized as binding on the IRS.

To the extent that there is disagreement, the IRS will issue a Notice of Deficiency, the 90-day letter. This letter gives the taxpayer 90 days to file suit in Tax Court or pay the tax and sue for a refund in the District Court or the Claims Court. During the 90 day period, the Appeals Office has settlement authority. Sometimes the Appeals Office will waive this authority in favor of the District Director's office which issued the Notice of Deficiency. Settlement discussions can continue with the Appeals office until the case is transferred to District Counsel for preparation for litigation.

At the end of the 90-day period, if the taxpayer has not filed suit in Tax Court, the IRS will assess the tax. If the taxpayer has filed suit, the IRS will delay assessment until the Tax Court decision is final.

15. WHAT IS AN ASSESSMENT?

Although the assessment of a tax is simply the formal recording of a taxpayer's liability [IRC section 6201, 6203], it has important legal and procedural significance. The assessment establishes the amount of tax owed to and entitled to be collected by the Government. Until the assessment is made, the IRS cannot make a demand for payment, and without a demand for payment, the IRS cannot use its lien or levy procedures. [IRC section 6303, 6321, 6331] If an assessment is not made on time, the IRS cannot keep any tax it collected, because any tax collected after an untimely assessment is a refundable overpayment. [IRC section 6401]. Assessment is the administrative act that divides deficiency procedures from refund procedures; examination and administrative settlement procedures from collection procedures; and prepayment disputes over liability from postpayment claims for the refund. Once an assessment is made, the taxpayer generally cannot obtain Tax Court review. The taxpayer must then pay the tax and file a claim for a refund, and, after denial, sue for refund in a Federal District Court or the Claims Court. ¹

Assessments can be corrected, supplemented, or abated. [IRC section 6204]. If an assessment is not properly signed within the statutory period or contains other defects, the defects may bar the IRS from collecting the tax. Most assessments are made from the tax returns filed by the taxpayer. [IRC section 6201]. Deficiency assessments are made after going through the procedures described in previous questions. [IRC section 6211 et seq.].

COLLECTION

16. WHAT HAPPENS AFTER THE ASSESSMENT?

Within 60 days after the assessment is made, the IRS is required to give notice to each person liable for the unpaid tax, stating the amount due and demanding payment. This "Notice and Demand", Form 8488, is required to be mailed or left at the taxpayer's last known address. [IRC section 6303]. This statutory requirement is usually satisfied by mailing a request for payment of balance due, demanding payment within 10 days.

If no payment is made, IRS computers are programmed to send out a second letter five weeks later. This notice, "Reminder of Unpaid Tax," Form 8125, includes a late payment penalty and requests payment within 10 days to avoid additional interest and penalties. Five weeks later a third letter, headed "Overdue Tax," is mailed. This essentially repeats the second letter with increases in the penalty and interest charges. Five additional weeks later, a fourth letter entitled "Urgent -- Payment Required" which mentions filing a notice of federal tax lien and seizure of property if payment is not received. Five weeks after the fourth notice, a final notice, Form 8126, before enforcement entitled "Notice of Intent to Levy" is mailed.

The goal of this letter writing campaign is to get taxpayers to pay their taxes. At any point taxpayers can contact the IRS and arrange for full or partial payment.

17. HOW LONG DOES THE IRS HAVE TO COLLECT THE TAX AFTER ASSESSMENT?

After making an assessment, the IRS has 10 years to make a levy or begin a proceeding to collect the tax in court. The 10-year period may be lengthened or shortened by a written agreement with the taxpayer. If a timely court proceeding is begun, the period during which the tax may be collected by levy is extended, and does not expire, until the liability for the tax (or the judgment against the taxpayer arising from the liability) is satisfied or becomes unenforceable. IRC section 6502.

18. WHAT PROPERTY IS SUBJECT TO A TAX LIEN?

If the taxpayer fails to pay any tax due after demand, the amount due (including interest and penalties) becomes a lien in favor of the Government and attaches to all the taxpayer's property. IRC section 6321. This lien is sometimes called a "secret lien" because the lien attaches before it becomes a matter of public record. It has priority over most other liens except those previously perfected under state law.

In order to perfect a lien against secured creditors, mechanics lienholders, or judgment lien creditors, the IRS is required to file a Notice of Federal Tax Lien. IRC section 6323. This notice simply gives notice to interested parties of the existence of the federal tax lien. Determining the actual priorities and who can prevail against a federal tax lien before and after the Notice of Federal Tax Lien is filed is an intricate process beyond the scope of this paper.

19. WHAT CAN A TAXPAYER DO TO GET A LIEN RELEASED?

If the Notice of Federal Tax Lien was filed erroneously, the taxpayer can apply for a special certificate of release of lien which indicates that filing the lien was a mistake. There are four possible avenues of relief from a valid tax lien: (1) a certificate of nonattachment; (2) a certificate of release of lien; (3) a certificate of discharge; and (4) a certificate of subordination.

A certificate of nonattachment can be issued when the wrong person appears to be identified in a Notice of a Federal Tax Lien (e.g. a person with the same name as the tax delinquent). If the filing of the notice of any lien was erroneous, the IRS must, to the extent practicable, issue a certificate of release within 14 days of the determination that the filing was erroneous. IRC section 6326.

A certificate of release of lien must be issued if the liability plus interest has been satisfied or has become legally unenforceable (e.g. by the expiration of the statute of limitations on collection), or if the IRS accepts the taxpayer's bond conditioned on payment of the full amount due. The certificate of release of lien must be issued within 30 days after the liability is satisfied or has become unenforceable or the bond is accepted. [IRC section 6325]. Taxpayers can sue for actual economic damages plus the cost of the action if the IRS knowingly or negligently fails to issue of certificate of release of lien. [IRC section 7432].

A certificate of discharge discharges certain property from the tax lien. The lien continues to exist, but the particular property is not subject to the lien. A certificate of discharge can be issued if the fair market value of the taxpayer's other property is worth more than twice the SUM of the unsatisfied tax obligation PLUS all other liens upon the remaining property which have priority over the tax lien. The IRS can issue a certificate of discharge if the taxpayer pays the IRS at least equal to the value of the IRS' interest in the property discharged. The IRS can issue a certificate of discharge if its interest in the property has no value. Theoretically, the IRS can also issue a certificate of discharge where the property is sold and the proceeds from the sale are held in an escrow fund subject to all the same interests in the property which existed before the sale. In practice, this procedure is used more for disputes between the IRS and a third party over priorities in or ownership of the property.

Information on how to apply for a certificate of discharge can be found in Rev. Proc. 68-9, 1968-1 CB 756.

In some cases the IRS may agree to issue a CERTIFICATE OF SUBORDINATION, where a later lien will be allowed to take precedence over the federal tax lien, if it believes that doing so will facilitate collection of the tax. An example of this might be where a taxpayer agrees to take out a home equity loan to make a substantial payment toward the tax liability. In such a case, the IRS might agree to issue a certificate of subordination.

20. WHAT ARE LEVIES?

Levies are an administrative means of enforcing an IRS lien. Some levies amount to seizure of the taxpayer's property. Others are levies on third parties in possession of taxpayer's property (e.g. banks). Under IRC section 6331, if a taxpayer neglects or refuses to pay a tax within 10 days of notice and demand for payment, the IRS has the right to collect the tax (plus expenses of the levy) by levy on all the taxpayer's property and rights to property (which is not exempt under IRC section 6334).

21. DOES A TAXPAYER KNOW IF THE IRS IS GOING TO LEVY ON PROPERTY?

Under IRC section 6331(d) the IRS must give taxpayers thirty days' notice of an impending levy. The notice must contain a simple and nontechnical description of the Tax Code provisions, administrative procedures, and appeals applicable to the levy and lien procedures, as well as a description of alternatives available to the taxpayer that might prevent levy on the taxpayer's property, and any Tax Code provisions or administrative procedures relating to how to redeem property and have liens released.

22. CAN THE IRS TAKE EVERYTHING? WILL IT?

IRC section 6334(a) lists property which is exempt from levy. State laws do not apply. There is a $1,650 exemption for fuel, provisions, furniture, and personal effects and a $1,050 exemption for books and tools. The IRS gets to determine the value of the exempt property. If there is a disagreement between the IRS and the taxpayer at the time of the seizure, the IRS "shall summon three disinterested individuals who shall make the valuation." [IRC section 6334(b)]. The wages exempt from levy will be an amount equal to the taxpayer's standard deduction plus allowable personal exemptions for the tax year in which the levy occurs, divided by 52. [IRC section 6334(d)]. If the taxpayer does not supply the IRS with sufficient information to determine the proper standard deduction and number of exemptions, the taxpayer will be presumed to be married filing separately, with one personal exemption.

Certain other property is exempt from levy, including unemployment benefits; undelivered mail; certain railroad retirement and military pensions; workmen's compensation; sufficient income to comply with any judgments for the support of minor children; certain service-connected disability payments; AFDC payments; supplemental security income for the aged, blind, or disabled; state and local government public assistance or public welfare programs for which eligibility is determined by a needs or income test; assistance paid under the Job Training Partnership Act; and the principal residence of the taxpayer (unless collection of the tax is in jeopardy or a district director or assistant district director of the IRS grants personal written approval of the levy). [IRC section 6334(a)].

The IRS is subject to certain restrictions. First, no levy can be made on any property if the estimated expenses of levy and sale exceed the fair market value of the property. Second, in a non- jeopardy situation, the IRS is not permitted to levy on any property of the taxpayer on the day on which the taxpayer is required to appear in response to a summons issued by the IRS. Third, banks and other financial institutions must hold accounts garnished by the IRS for 21 days after receiving the notice of levy. This waiting period gives the taxpayer an opportunity to notify the IRS of any errors with respect to the garnished accounts.

IRC section 6343 requires the IRS to release a levy in five situations. A levy has to be released if: (1) the liability for which the levy was made is satisfied or becomes unenforceable by lapse of time; (2) the IRS determines that the release would facilitate the collection of the tax; (3) an installment agreement is executed with respect to the underlying tax liability; (4) the IRS determines that the levy is creating an economic hardship due to the financial condition of the taxpayer; or (5) the fair market value of the property exceeds the liability and partial release would not hinder the collection of the tax and related costs owed to the IRS. Release under this provision does not prevent any subsequent levy on the property. There is a special provision for expedited determination of whether to release a levy on tangible personal property essential to carrying on the taxpayer's trade or business, if the levy would prevent the taxpayer from carrying on the trade or business.

As a practical matter, if the taxpayer is cooperating with the IRS, the IRS is likely to use an installment agreement to collect the taxes, rather than resorting to the draconian levy procedures.

23. WHAT DOES THE IRS DO WITH SEIZED PROPERTY?

Seized property is in the possession of the United States. If a taxpayer forcibly attempts to regain possession of seized property, the taxpayer can be subject to criminal prosecution under IRC section 7212(b). The IRS has a responsibility to safeguard the property in its possession.

If the IRS intends to sell the property, it must give both public notice of the sale and notice to the owner of the property. The date of the sale must be at least 10 but no more than 40 days after the date of public notice. Taxpayers have the right to request the IRS to sell seized property within 60 days (or longer) after the request. The statute directs the IRS to comply unless it determines that immediate sale would not be in the best interest of the United States and notifies the owner to that effect. [IRC section 6335]. Perishable goods may be returned to their owner, if the owner gives a bond to pay their appraised value, but if the owner fails to do so, the IRS may hold a public sale as soon as practicable. [IRC section 6336].

Prior to sale of the property, any person whose property has been levied on has the right to pay the amount of taxes due, plus the expenses of the levy, if any, and have the property returned. [IRC section 6337].

Once personal property is sold, the taxpayer cannot get it back. Real property, however, is sold subject to a right of redemption. The right of redemption must be exercised within 180 days of the sale by paying the buyer the amount paid at the sale plus 20 percent interest per year. [IRC section 6337]. Anyone purchasing property at a tax sale should also be aware of this right of redemption.

TAXPAYER ASSISTANCE

24. WHAT SHOULD A TAXPAYER DO IF IRS PROCEDURES ARE CAUSING HARDSHIP?

The Office of the Ombudsman has the power to issue "Taxpayer Assistance Orders" if a taxpayer is suffering or about to suffer a significant hardship as a result of the way the tax laws are being administered. IRC section 7811. The regulations indicate that "Mere economic or personal inconvenience to the taxpayer does not constitute significant hardship." 26 CFR section 301.7811-1. The regulations also indicate that a finding of significant hardship does not constitute entitlement to relief.

The Ombudsman may order the IRS to release property levied upon or to refrain from taking any action relating to the taxpayer unless the Taxpayer Assistance Order is modified or rescinded by a district director or higher official. The statute of limitations for taking any action will be suspended during the period when the taxpayer's application for assistance is pending and for any period specified in the Taxpayer Assistance Order.

The Ombudsman may take action independently or after request of a taxpayer or the taxpayer's representative. If the Ombudsman takes action independently, without a request by the taxpayer, the statute of limitations is not suspended.

Requests for taxpayer assistance should be addressed to the IRS Problem Resolution Officers in the district where the taxpayer resides. The request should indicate the taxpayer's name, taxpayer identification number, and current mailing address; the tax and years involved; a description of the IRS action which is causing or is about to cause significant hardship; the IRS office and personnel involved, if known; a description of the hardship and kind of relief requested; a signature of the taxpayer or the taxpayer's representative.

25. WHO HAS A RIGHT TO SEE MY TAX RETURN?

To a certain extent, your tax return is private information, and the IRS is prohibited from revealing any "return information" about you, such as your address, your income, your net worth, how you spend your money, or whether you are liable for any tax, penalty, or fine, without your permission. [IRC section 6103]. Any person who willfully discloses return information is guilty of a felony which is punishable by a fine of up to $5,000 or imprisonment for up to 5 years, or both. [IRC section 7213].

There are many situations in which it is permissible for the IRS to disclose return information. The IRS will share your return information with anyone you request them to share it with. Because of the prohibitions in IRC sections 6103 and 7213, requests are honored only if made on the IRS-authorized forms. Because you can authorize other persons to see your tax return, lenders will often ask you to authorize them to obtain copies of your tax return before they will extend credit. This is considered a voluntary authorization on your part. A dated authorization is valid for sixty days from its date.

State tax officials can see your tax returns. So can anyone who needs information from your return in order to file their own return, such as your child with a substantial amount of investment income or your spouse if you filed a joint return. If you are in bankruptcy, your trustee may be able to obtain your tax returns for the current or previous tax years. There are special procedures for congressional committees, the President, the Department of Justice, and other Federal agencies and departments to obtain tax return information. Return information can also be disclosed for purposes of enforcing certain child support obligations, for administering certain welfare- type programs, and to assist in the collection of defaulted student loans. These are just some examples of the types of disclosures which are authorized under the Internal Revenue Code.

26. CAN MY SENATOR OR REPRESENTATIVE HELP ME WITH MY TAX PROBLEMS?

It probably depends on what your tax problem is. Members of Congress are entitled to no greater access to returns or return information than any other person inquiring about the tax affairs of a third party. Any disclosure to a Member of Congress may be made only in accordance with IRC section 6103.

According to the Internal Revenue Manual Part 1272-430, a taxpayer's letter to a Member of Congress will authorize disclosure to the Member or his staff to the extent it is signed, dated, and indicates the taxpayer's name, address, and social security number. In addition, the letter must indicate to whom the disclosure is to be made. Letters addressed "Dear Sir" are not sufficient, nor are letters addressed to a different Member of Congress. These deficiencies can be overcome by including the envelope addressed to the Member. Finally, the letter must contain sufficient facts to enable the IRS to determine what specific tax matter is being addressed and the kind and extent of information or assistance being requested. According to IRM Part 1272-318, the IRS will not disclose information beyond 60 days following the date of the authorization.

If the congressional request does not include the taxpayer's correspondence or is made by telephone, the IRS will respond with general information only. In the alternative, the IRS may ask the Member for a copy of the taxpayer's correspondence or for other written authorization.

Information about court cases is generally handled by the Chief Counsel's office of the IRS. Without authorization to disclose return information, the IRS response will be limited to information in the public record.