The IRS speaks: bankruptcy, OICs, e-filing highlight Liaison meeting.

Bankruptcy law, examinations, offers-in-compromise, e-filing and practitioner enforcement were among the issues discussed at CalCPA's 2005 IRS Liaison meeting.

Bankruptcy Abuse Prevention Act

Pat Montero, an attorney in the Small Business/Self-employed (SBSE) division of the IRS Office of Chief Counsel, presented an overview of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which has "imposed a lot of additional duties on the debtor," she said. "The benefits of filing for bankruptcy have been greatly diminished."

With respect to Chapter 7, debtors are no longer able to go into bankruptcy at will, Montero said. Individuals are now subject to a "means test" to be eligible for relief.

Chapter 11 bankruptcies for corporations will see the U.S. Trustee take on a more active role in monitoring the case--with expended authority to review the debtor's books, records and conduct on-site inspections--while debtors are required to file more detailed periodic reports.

Chapter 13 bankruptcies also have changed to include a means test, and debtors are now subject to dismissal for failure to meet their tax obligation after filing a petition.

Offers-in-Compromise

The IRS has seen a drop in the volume of OICs in recent years, although a higher percentage of those offers are being accepted, said John Crawford, director, SBSE collection, California Area. "We're also seeing far fewer frivolous claims."

In fiscal year 2005, the IRS received nearly 67,000 OICs, down from 97,000 in 2004. Part of the drop may be due to the new fee requirement for taxpayers making the offer.

Several CalCPA members expressed concern regarding the efficiency of the OIC process, saying changes in the bankruptcy act, coupled with the OIC fee, impose additional hurdles for taxpayers seeking to resolve a past liability.

Crawford pointed the way toward relief. If practitioners are having problems with OIC employees, they can raise the issue with that employee's manager. If that doesn't work, they may request to speak with Gloria Orozco, the OIC territory manager for California. Practitioners also can contact the Taxpayer Advocate or the Treasury Inspector General of Tax Administration for highly contentious issues.

Additionally, the IRS will host phone forums this year so practitioners can have their OIC questions answered by national and territory OIC managers.

Partial Pay Installment Agreement

A partial pay installment agreement is available for taxpayers who have outstanding federal tax liabilities.

"We require a collection information statement and a financial statement and we address equity and assets as we would with an OIC," Crawford said. "Because we're ultimately going to get less than the full amount owed, we scrutinize those closely."

Change in Examinations

A new feature of the examinations process is the Mutual Commitment Date (MCD), which requires representatives for taxpayers under audit to make a commitment to work toward a closing date with the IRS examiner.

The MCD is "an attempt to come to a resolution up front about what the auditor is going to do and how much time it's going to take," said Terry Franklin, director, SBSE Examination, Area 7. "If we can agree on cooperating and getting the books and records we need by a certain date, we can finish the audit more quickly."

Practitioner Enforcement

In recent years, IRS criminal investigators have focused more resources on investigating legal sources of income, with return preparer investigations at a five-year high.

Return preparer cases referred to the Department of Justice recommending prosecution have increased from 73 to 167 over the last four years, while the number of individuals sentenced during that time increased from 56 to 90, according to Roger Wirth, special agent in charge, Criminal Investigation.

E-filing

Members expressed frustration over e-filing problems related to matching names and Social Security numbers for married female taxpayers, a complaint also registered at last year's meeting.

The IRS has vowed to accept two of the most common reject code errors, ERC 504, Dependent SSN Mismatch, and ERC 501, Earned Income Credit ID Information Mismatch.

"This filing season will be the first year that the IRS will accept imperfect returns," said Keith Kershner, a stakeholder liaison specialist. Returns with these types of errors will initially be rejected when transmitted. However, when resubmitting and checking the Imperfect Return Election Indicator, the e-filed returns will be accepted.

The IRS Taxpayer Identification Number Matching Service and Transcript Delivery Service also may help with the matching errors, he said.

Kershner added that an error code reject guide is available in IRS Pub. 1345-A Filing Season Supplement.

Beginning in processing year 2005 (for 2004 tax year returns), e-file began accepting returns with Married Filing Separate status for community property states.

Also, there will be five additional forms accepted for tax year 2005 e-filed returns. The list of these forms, as well as all of the highlights for tax year 2005, is available in Publication 1346, Electronic Return File Specifications, which can be found at, www.irs.gov/pub/irs-utl/1346_part_i.pdf.

Jerry Ascierto is CalCPA's managing editor. You can reach him at [e-mail].