Monday, January 17, 2011
IRS ABUSE OF DISCRETION – IRS FINANCIAL STANDARDS I have requested IRS misconduct hearings on a number of occasions. IRS oversight and “transparency” is the responsibility of Congress and there have been no misconduct/abuse hearings since 1997. Given the current need to consider tax simplification or reform and the ability of the IRS to administer the tax law, the new health legislation and other matters, Congress needs to evaluate the administrative effectiveness of both the IRS and the office of the National Taxpayer Advocate. The “abuse of discretion” situation described in this memorandum is just one of hundreds that I experience as a tax attorney with an IRS “controversies” tax practice. The IRS does not follow the statute, regulations and its own Internal Revenue Manual (IRM) on deviating from published guidelines for either Offers in Compromise (OIC) or Installment Agreements (IA). See below for the technical provisions of section 7122, its regulations and the IRM on this topic. For either an OIC or an IA, the IRS takes into account the “reasonable collection potential” (RCP) of a taxpayer. In most cases the monthly RCP is computed by subtracting “reasonable and necessary living expenses” (including an amount for housing taken from its regional housing schedule). I have been working on OICs since the 1998 Restructuring and Reform Act of 1998, and the IRS has NEVER accepted any housing expense, transportation or other standards that exceeded IRS published financial standards, even in cases where taxpayers are suffering an economic hardship (i.e., inability to meet their basic support), even though Congress gave the IRS that statutory authority. For both OICs and IAs, the IRS has the statutory authority to use schedules, as noted below under section 7122. The IRS publishes those schedule standards for housing, food, out-of-pocket-health care, and other items http://www.irs.gov/individuals/article/0,,id=96543,00.html. The schedules for housing, for example, come from prior Bureau of Labor Statistics data that is low compared with the current cost of living. The housings standards are far lower than the cost of housing for my clients in almost all cases. It is rare and unusual to have a client with a housing expense that is less than the average housing in his or her county in any state. Consider the following facts involving a current client. Client lives by herself in the District of Columbia. I told her that she does not qualify to get her tax liability of $40,000 eliminated in an OIC. My client spends all of her income for her basic support (housing, food, transportation, medical, etc.). She has no equity in her home and no investments or other assets that the IRS takes into account in determining her RCP. The IRS published housing standard for a single person in the District of Columbia is $1,524. The standard includes mortgage or rent, property taxes, interest, insurance, maintenance, repairs, gas, electric, water, heating oil, garbage collection, telephone and cell phone. Client is spending $2,524 per month just for mortgage, interest and taxes. The IRS will not allow $1,000 in her housing expenses (using the IRS formula for RCP - $2,524 - $1,524), she would be deemed collectible for $48,000 (48 x $1,000, the IRS formula for computing RCP). Client would have zero RCP if the IRS properly would follow the section 7122 statute, its regulations and the IRM, and I would would be able to get her OIC settled at a low number, consistent with the intent of Congress to offer taxpayers like this a "fresh start." Client does not have the $40,000 to settle her higher tax debt in an OIC. I had to tell her that she is not a candidate for an OIC settlement. She would qualify for an OIC settlement if the IRS would accept her modest housing expense in the District of Columbia of $2,524. I gave Client that advice because the IRS NEVER accepts housing expenses larger than their published low standard for housing in her case. The National Taxpayer Advocate (NTA) is useless in this type of a case, based on my experiences with the NTA. The NTA has refused to issue Taxpayer Assistance Orders (TAOs) based on my many years of experience in dealing with the NTA on this kind of a hardship, although that authority exists under section 7811. The data in the NTA Report to Congress documents the fact that she rarely issues a TAO in any hardship case. The IRS has never accepted any deviation from the published guidelines in any of my cases since that authority was created in 1998, even in cases of hardship and even when a client is unemployed.. This failure to follow the statute is an abuse of power, abuse of discretion and MISCONDUCT. Although the IRS does have “discretion” on this issue, that discretion is an abuse of discretion when the IRS does not follow the intent of Congress to exceed the schedule in hardship cases. It is obvious that when Congress drafts a statute stating that the IRS can exceed published standards and the IRS does not go above those standards, even in hardship cases, the IRS is willfully ignoring Congressional guidance. The National Taxpayer Advocate does not intervene in these matters even though the intent of Congress under section 7811 is to require the NTA to issue Taxpayer Assistance Orders in these hardship cases. Similarly when Congress gives the NTA the authority to issue TAOs in cases where taxpayers are undergoing “significant hardship” as that term is defined in section 7811, and the NTA rarely issues those TAOs, she is willfully ignoring Congressional Guidance. Note the following technical authority. ------------------------------------------------------------------------------- Section 7122(d) Standards for evaluation of offers. (1) In general. The Secretary shall prescribe guidelines for officers and employees of the Internal Revenue Service to determine whether an offer-in-compromise is adequate and should be accepted to resolve a dispute. (2) Allowances for basic living expenses. (A) In general. In prescribing guidelines under paragraph (1), the Secretary shall develop and publish schedules of national and local allowances designed to provide that taxpayers entering into a compromise have an adequate means to provide for basic living expenses. (B) Use of schedules. The guidelines shall provide that officers and employees of the Internal Revenue Service shall determine, on the basis of the facts and circumstances of each taxpayer, whether the use of the schedules published under subparagraph (A) is appropriate and shall not use the schedules to the extent such use would result in the taxpayer not having adequate means to provide for basic living expenses. Reg §301.7122-1(c)(2)(i) states: In determining ability to pay, the Secretary will permit taxpayers to retain sufficient funds to pay basic living expenses. The determination of the amount of such basic living expenses will be founded upon an evaluation of the individual facts and circumstances presented by the taxpayer's case. To guide this determination, guidelines published by the Secretary on national and local living expense standards will be taken into account. IRM 188.8.131.52.1 (10-22-2010) Necessary Expenses 1. A necessary expense is one that is necessary for the production of income or for the health and welfare of the taxpayer's family. * * *. 3. National and local expense standards are guidelines. If it is determined a standard amount is inadequate to provide for a specific taxpayer’s basic living expenses, allow a deviation. § 7811 Taxpayer Assistance Orders. (a) New Law Analysis Authority to issue. (1) In general. Upon application filed by a taxpayer with the Office of the Taxpayer Advocate (in such form, manner, and at such time as the Secretary shall by regulations prescribe), the National Taxpayer Advocate may issue a Taxpayer Assistance Order if— (A) The National Taxpayer Advocate determines the taxpayer is suffering or about to suffer a significant hardship as a result of the manner in which the internal revenue laws are being administered by the Secretary.