Limits on collection.

Generally, the IRS has three years to assess tax (Sec. 6501(a)) and 10 years from the assessment date to collect it (Sec. 6502). Under prior law, the Service and a taxpayer could agree to extend the statute of limitations (SOL), apparently without limit on the number of extensions permitted (Sec. 6502).

Often, the IRS does a wage levy immediately before the end of the SOL collection period to pressure a taxpayer to agree to extend it. The taxpayer may not be given written notice before the Service's action. Because a Sec. 6334 IRS wage levy leaves fewer funds for a taxpayer, he may be at the mercy of a Revenue Officer to release the levy in exchange for an installment agreement combined with an extension of the SOL for collections.

Trust fund recovery penalties are not dischargeable in bankruptcy; if an extension of the SOL on collections is continuously given, a taxpayer could die before the taxes are paid. In essence, the penalty is a lifetime debt.

Fortunately, the Internal Revenue Service Restructuring and Reform Act of 1998 changed the law to provide that SOLs can be extended "if there is an installment agreement between the taxpayer and the Secretary, prior to the date which is 90 days after the expiration of any period for collection agreed upon in writing by the Secretary and a taxpayer at the time the installment agreement was entered into" (Sec. 6502(a)(2)(A)). The Conference Agreement states, "the extension is only for the period for which the waiver of the statute of limitations entered into in connection with the original written terms of the installment agreement extends beyond the end of the otherwise applicable 10 year period, plus 90 days."

Narrowly interpreting the Conference agreement, the extension only applies to the "original" written installment agreement. Further, there should be only one agreement (i.e., an IRS agent cannot force a client who, in good faith, entered into an original installment agreement that extended the SOL, to enter into a second installment agreement). The extension is "only" for the period for which the waiver of the SOL was extended; there is "only" one extension period.

Taxpayers would be wise to enter into a written installment agreement before the end of the collection period. Regs. Sec. 301.6159-1(c) generally provides that the IRS cannot change an installment agreement, absent a significant change in financial circumstances. This should allow a taxpayer to keep an agreement in place until the SOL expires.

If the IRS follows the general mandate and intent of Congress, it should accept reasonable installment agreements prior to the expiration of the SOL. By levying wages, the Service may still try to force taxpayers to extend the SOL in exchange for a release of levy. A tax adviser may then seek to dispute the action, to a Collection Manager. If the Manager refuses to act, the taxpayer or his adviser can use Form 9423, Collection Appeal Request, to appeal the collection action.

If Congress intended to further clarify the IRS's collection duties, it should have provided more guidance on installment agreements and the maximum time for which the collection period can be extended. Under Sec. 6159, there are limited situations in which the Service must accept installment agreements, but the tax liability has to be under $10,000.

Additionally, new Sec. 6502(a) (2) 03) states "if ... there is a release of levy under section 6343 after such 10 year period, prior to the expiration of any period of collection agreed upon in writing by the Secretary and the taxpayer" the Service may collect by levy or court proceeding during the extended collection period. The Committee Report fails to clarify the provision's application. Apparently, the IRS can continue collection after a levy is released during the extended time for collection agreed to by the parties.

Under Sec. 6502(a)(2)(A) and (B), SOL extensions should be permitted only if there is an installment agreement. Logically, the Service should be required to accept reasonable agreements in exchange for a limited extension of the SOL. A levy should occur only if the taxpayer breaches the agreement during the term of the extended SOL period.

Regs. Sec. 301.6343-(b)(4) states that a levy must be released if it"is creating an economic hardship due to the financial condition of an individual taxpayer.... The determination of a reasonable amount for basic living expenses will be made by the director," considering "information from the taxpayer." Therefore, a taxpayer should provide the Service with documentation supporting income and expense amounts on Form 433A, Collection Information Statement for Individuals, or Form 433B, Collection Information Statement for Business, to prove that there are no available funds to pay to the Service. The IRS Manual has standards (both national and local) indicating the maximum amount of specified living expenses (e.g., housing) allowable for a taxpayer in a particular area of the country.

If the collection agent refuses to release the levy without an extension of the collection period, a Taxpayer Advocate should have authority to release it under Sec. 7811(b)(11), by issuing a taxpayer assistance order.

Unfortunately, Sec. 6502 still provides that the Service can bring a court proceeding to extend the time for collection of a tax, prior to the end of the 10-year period. In most states, this will give the IRS another five years or more to collect the tax.

For assessment and collection procedures, the effective dates are as follows:

* All requests to extend a limitations period after 1999;

* For extensions under Sec. 6502(a) granted based on requests before 2000, the extension expires on the latest off:

   1. The last day of the 10-year collection period;

   2. Dec. 31, 2002; or

   3. If the extension is accompanied by an installment agreement, 90 days
   after the extension ends.

If there is a request for an extension in place before 2000, without an installment agreement, the IRS can take collection action until at least Dec. 31, 2002 (assuming the 10-year period has not expired). However, the extension should expire, by operation of this law, on the last day of the original 10-year collection period, if it is after 2002. Congress intended the statute to immediately forbid unlimited extensions of the SOL, absent installment agreements. Assuming an installment agreement is requested before Dec. 31, 1999 and the agreement expires before Dec. 31,2002, it is unclear when the SOL on collections expires, if the expiration date is beyond the 10-year period. For example, the 10-year period can end on Dec. 1, 1998, and the installment agreement end Feb. 1,2002. A literal reading of the statute is that the IRS has until Dec. 31, 2002 to collect, even if it is beyond the normal 10-year collection period. This literal reading contradicts congressional intent.

Provided a request for an installment agreement is made on or before Dec. 31, 1999 and the agreement expires after Dec. 31, 2002, the statute should run to the end of the agreement plus 90 days, even if it is later than the normal 10-year collection period.

The IRS may try to extend the SOL past Dec. 31, 2002 or the 10-year collection period, by acting before 2000. A tax adviser can argue that Congress intended that the provision only allow extensions in place as of the passage of the IRSRRA `98 to extend beyond the 10-year period or Dec. 31, 2002, whichever is later. The Service could argue that multiple extensions are permitted before 2000 and that an extension can be granted that will expire after 2002.

Congress should clarify the length of time for collection, when the Service and a taxpayer have agreed to extend the assessment period under Sec. 6501 (c) (4).

FROM ROBERT M. SINGER, ESQ., HAMDEN, CT3