In a unique type of case, the IRS is sending out a slew of collection notices to taxpayers who paid 100% of all taxes, 100% of all interest, and 100% of all penalties. Why is this happening?
What happens when you owe the IRS money: the path towards “enforced collections”
If you owe money to the IRS, normally, the first collection notice the IRS sends is known as a CP503. This letter is sent from something known as ACS (Automated Collection System). This letter tells you have a balance due with the IRS and you better pay within 30 days or make arrangements to pay it off in full. If you fall to respond, the IRS ACS will then send you a CP504. This letter will say “Notice of Levy.” It tells you you better respond in 30 days or else. If you do not respond ACS (or a revenue officer, if your case has been so assigned) will send you something known as a Final Notice of Intent to Levy. If you do not respond with a request for a Collection Due Process hearing, the IRS is now free to levy and garnish your wages, bank accounts, accounts receivables and even retirement accounts.
The IRS Offshore Voluntary Disclosure Program (OVDP) Process
Thousands of US taxpayers have failed to report their worldwide taxable income from bank accounts overseas. Many of them were not aware that the IRS has universal tax jurisdiction, and some people were intentionally hiding income in order to evade taxes. Whatever the reason, the IRS has wanted to give taxpayers a chance to ‘come clean,’ and report those accounts using an offshore voluntary disclosure program
The OVDP process requires taxpayers to file all amended returns, and as long as they are able, to pay all additional taxes and penalties along with interest, along with auguring for lower penalties if necessary ad possible appeals and litigation. Most OVDP attorneys use a software to figure out this balance due to the penny and then typically add in a few extra weeks of interest so that tax bill is paid in full. If anything, the taxpayer will get refund once the case is closed out.
We send the amended returns, payments and the entire OVDP package to the OVDP unit. There, they code in the amended return and process payment. We await our successful close out of the case while the IRS is auditing our claims and support for a lower penalty amount if applicable.
So why are clients who paid their bills in full getting collection notices?
I can’t say for sure, but through many many calls, this is what it looks like is happening. The OVDP unit is properly adjusting the taxable income on the taxpayers account transcript. Yet, the OVDP process includes no such mechanism for altering ACS that this is no normal case. However, the proper tax, penalties and interest and payment are not being reflected. So that a balance due is being shown. And because Automated Collections Systems is, well, automated, a balance due always means a CP503 — that first collection letter.
So what is the proper response?
In these cases, it is difficult to find anyone in the OVDP unit to take care of the matter ask there is not any one particular agent assigned yet. So our response to this process has been to write to ACS to inform them that the taxpayer in is in the OVDP attaching a letter indicated the acceptance into the program. Because we have not seen any CP504 issued yet (again the CP504 is issued after a CP503), so we believe so far that out response has been adequate to stop these IRS collection letters.
If it is not, the fail-safe we have is responding to the Final Notice of Intent to Levy by requesting a Collection Due Process hearing. At a collection due process hearing we can get face-to-face with a real IRS appeals officer and explain that enforced collections is totally inappropriate. Of course, having to use the Appeals Division of the IRS to stop the IRS from collecting taxes when no tax is due, is not exactly an efficient allocation of resources.
Sending collection letters when no tax is due is not all that unexpected when dealing with an agency as powerful and as large as the IRS. My internal outrage meter has barely budged. The response to these letters is not to ignore them however, but rather, be the liaison of one IRS agency to the other. The IRS has difficulty speaking with each other, it can not control all consequences of the processes it imposes. Therefore, is the job of the tax professional to understand the IRS’ limitations and make appropriate accommodations. If we want to ensure the best result, the smoothest possible process, we can’t be shy about doing jobs for the IRS, that the IRS should probably be doing themselves.
If you’ve received a collection notice or need help getting into an offshore disclosure program, contact us at 888-727-8796 or email firstname.lastname@example.org
UPDATE: I talked to quite a few other OVDI attorneys from across the country. And they too have experienced the same phenomenon. We all have been handling this glitch in the same way: Contacting ACS and keeping track of all notices to make sure no enforced collections take place. One attorney used the services of the Taxpayer Advocate to help facilitate keeping ACS from taking collection action. However, he told me that was years ago on a 2009 OVDI. Right now, such a tact would likely not work as the Taxpayer Advocate has severely limited the types of cases in which it will intercede (this is because their workload has vastly increased). Now, we typically need to show an immediate irreparable harm in order to request Taxpayer Advocate Assistance.