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IRS Restructuring and the Reform Act

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The “IRS Restructuring and Reform Act” is finally helping some professionals like doctors protect themselves from tax liens and levies

Prior to the Act

Before the IRS Restructuring and Reform Act went into effect almost a decade ago, matters concerning tax liens or levies were routine at the IRS, causing serious problems for medical professionals and family-owned businesses [FOBs]. Revenue officers issued notices of liens and levies merely as they deemed appropriate.

Since the Act

However, since the Reform Act went into effect, revenue officers have been required to obtain a supervisor’s approval before initiating collection activities or issuing notices of liens or levies. Now, supervisors review and investigate a case before a lien or levy is issued (i.e., homes and family business stock).

Specifically, for example, the supervisor must review the balance due from the taxpayer and confirm that the indicated collection action is appropriate given the amount owed by the taxpayer. This provision went into effect immediately upon passage of the act.

However, the effective date for automatic collection activities was delayed until Jan. 1, 2001. This delay was because most liens and levies are automated. Errors commonly occur in automatic liens and levies, but the IRS is working to introduce a human element into the transactions. Many doctors and family business professionals are taking advantage of the lien review requirement, helping clients avoid harsh collection activities.

Jeopardy Assessments Forbidden

In a related change, no jeopardy or termination assessments may be made without written review and written approval of the IRS chief counsel. Within five days of any jeopardy assessment, the IRS must provide the taxpayer with a written statement indicating the reason for taking action. As a result, substantially fewer jeopardy and termination assessments have been made. In addition, some family business professionals and doctors report they have been able to avoid jeopardy assessments and often challenge the basis for making the assessment.

Wage Levy

Under the Act, the IRS must release and cancel a wage levy once an agreement is made that the tax liability is uncollectible. If a wage levy is issued, tax-payers now have a firmer foundation for negotiating an end to the levy. This is helpful because, previously, levies were continued despite un-collectibility.

Seizure

Unless collection is in jeopardy, any property used in the business and personal property may not be seized without approval of an IRS district director. In determining whether to grant such approval, the taxpayer’s future ability to earn income will be taken into account. This provision has helped many substantially reduce the seizure of their business assets. Taxpayers have a right to contest a levy and to prevent or limit orders of seizures in appropriate cases.

IRAs and Qualified Plans

The IRS can continue to levy on IRA’s or qualified plan balances. However, the 10% excise tax on early withdrawals will no longer apply; this avoids the harsh double penalty of the past. If a doctor is faced with an IRS levy on an IRA or qualified plan, s/he may not want to withdraw the funds from an IRA or qualified plan to pay the obligation. The withdrawal will result in a 10% excise tax.

However, if the doctor pays the taxes with an IRS levy in place, the penalty is avoided. Some financial consultants report they have issued memoranda to their clients on this subject. For example, a taxpayer who previously had a federal tax lien placed on his or her property can have the lien discharged by posting a bond or by depositing the taxes. The cash deposited can be refunded if there is no deficiency, or if the deficiency is reduced. Such bonds are now being used in appropriate cases.

Liens

The IRS must notify a taxpayer if it intends to place a lien on the taxpayer’s property. The taxpayer then can request a hearing within 30 days. He or she also may contest any levy, unless collection of tax is in jeopardy. Doctors routinely are requesting hearings, using this procedure to terminate liens.

In addition, the taxpayer can request an installment agreement prior to levy. Thirty days after a hearing, the taxpayer can appeal the decision to the Tax Court. The act thus provides statutory appeals rights to taxpayers who are subject to a federal tax lien.

The hearing must be impartial and fair. The right of judicial review also ensures that the appeals officers act fairly. Taxpayers are informed of all their rights under these provisions. Congress has imposed a clear cut obligation on the IRS to consider alternatives to liens, such as posting of bonds, installment agreements, or offers in compromise. Thus, the medical professional has several alternatives to now consider. The right of judicial review is a major expansion of taxpayers’ rights.

Employment Taxes

The right of statutory appeal and the right of possible alternative obligations opens up a whole new area of appeal for the doctor and other taxpayers. The Reform Act permits early referral of disputes regarding independent contractors and similar matters. This should permit faster resolution of cases regarding employment status (employee or independent contractor). Many family businesses and/or medical practices contract with individuals employed by an outsourcing firm. The number of audits in this area has increased, and the IRS often regards the individual doctor as an employee of the medical practice or family business. In addition, the IRS has been encouraged to use mediation and arbitration to resolve disputes.

Offers-in-Compromise

Under the Act, the IRS must to consider factors such as equity or hardship when considering offers in compromise. The IRS is expected to forgo interest and penalties in appropriate cases. Rejected offers are subject to administrative review. Some medical professionals are finding the IRS more readily accepting of compromise offers.

Harassment

Many of the protections from harassment afforded to individuals by the Fair Debt Collections Practice Act in the commercial area have been extended to IRS collections. Some of those rights include not calling the taxpayer late at night, not harassing the taxpayer, and not dealing with the taxpayer if s/he has an authorized representative. If a violation occurs, the taxpayer can sue for negligent disregard of the Code. Here too, some doctors report that harassment-type activities have declined.

Innocent-Spouse Relief

The act contains significant provisions designed to protect innocent taxpayers from the tax misdeeds of their spouses the “innocent spouse relief” provision. The Tax Court can review any denials of innocent spouse relief.

Under the new rules, there must be actual knowledge of a tax misdeed before a taxpayer is considered “not innocent.” In the past, the test was whether the taxpayer knew or should have known about the other spouse’s tax misdeeds. Innocent spouse relief is easier to obtain under the “actual knowledge” test and is used routinely now.

Innocent spouse relief also is available on a partial basis. A taxpayer is relieved of liability on a partial basis even if he or she knew about the misdeeds, provided he or she did not know the extent of the misdeeds.

Thus, the spouse should not be liable for the portion of the understatement he or she had no knowledge of. This usually is as an alternative to a complete relief. All provisions (except the automatic lien provision) apply to any liability for taxes arising before, on, or after July 22, 1998.

Assessment

Since the IRS Reform Act passed, some doctors are working to protect themselves from tax collection activities or assessments. This is particularly true in innocent spouse cases. It bodes well therefore, for all family businesses, health practices, physician-executives and medical professionals to become and remain familiar with the provisions in the IRS Reform Act addressing such activities. You may just become grateful for this knowledge one day.

Conclusion

Your thoughts, comments and experiences on any or all of the above topics, are appreciated.

Related Information Sources:

Practice Management: http://www.springerpub.com/prod.aspx?prod_id=23759

Physician Financial Planning: http://www.jbpub.com/catalog/0763745790

Medical Risk Management: http://www.jbpub.com/catalog/9780763733421

Healthcare Organizations: www.HealthcareFinancials.com

Health Administration Terms: www.HealthDictionarySeries.com

Physician Advisors: www.CertifiedMedicalPlanner.com

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com  or Bio: www.stpub.com/pubs/authors/MARCINKO.htm

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Filed under: Taxation | Tagged: innocent spouse rule, IRS, tax reform | 3 Comments »