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Indirect Methods: How the IRS Deals with Taxpayers, Part II

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You, me, and the TPC. 

The Facts:
a) The 2016 IRS budget keeps the IRS funded at fiscal 2015 levels.
b) The 10.6 billion in funding is 1.7 billion less than the President’s budget.
c) Since 2010, IRS funding has been reduced by 18%.

What this means to US taxpayers:
13,000 fewer IRS employees, 10,000 fewer enforcement staff, the lowest individual and business audit levels in 10 years, and an average wait time of 23 minutes to receive assistance via phone when calling into the IRS.

In direct relation, the IRS now resorts to indirect, ancillary methods to assist with the assessment and collection of tax due. This article explores three such methods identified recently by the National Taxpayer Advocate.

Third Party Contacts

What is third party contact (TPC)? Internal Revenue Code 6103 prohibits the IRS from disclosing taxpayer information unnecessarily. There is an exception to the rule if the disclosure is necessary for the IRS employee to execute their job duties. The IRS is generally required to give taxpayers reasonable advanced notice before making a TPC. Additionally, if a TPC occurs, then upon request by the taxpayer the IRS must provide post-contact reports.

What is the process for providing TPC notice? Example (under the perfect IRS scenario): Taxpayer owns a business. Taxpayer fails to remit payroll taxes to the Federal Government. IRS assesses a balance due and begins collection activity. Taxpayer fails to provide the IRS with the information needed to determine collection potential. IRS gives advanced notice to the taxpayer of third party contact request. Taxpayer fails to provide information. IRS discloses taxpayer’s confidential information to business vendors in an effort to collect information from the vendors. This is a third party contact.

What are the ramifications to the taxpayer of third party contact?

Senate Committee on Finance that wrote this law explains the ramifications as follows:

“Taxpayers should be notified before the IRS contacts third parties regarding examination or collection activities with respect to the taxpayer. Such contacts may have a chilling effect on the taxpayer’s business and could damage the taxpayer’s reputation in the community.”

What is the best strategy for a taxpayer dealing with this type of situation?

Third party contact notices normally occur with businesses or self-employed individuals, i.e., sole proprietorships. The general information requested by the IRS manifests on either IRS Form 433-A or more likely 433-B.

The proverbial fork in the road can categorize the danger with both of these forms:
-What does the IRS consider mandatory information versus discretionary information?
-Secondarily, there are statutory rules that the IRS must follow when issuing TPC notices and conducting a TPC.

It is important to hold IRS employees accountable to the law.

The best strategy for dealing with a TPC is as follows:

  1. Look Internal
    1. If you are a business, how have you been doing your bookkeeping?
      1. Do you use QuickBooks? Are your books in order?
      2. Are there any foundational items that need to be corrected?
    2. If you are an individual,what does your personal record-keeping look like?
  2. Look External
    1. Once you understand your situation internally, obtain representation such as a Tax Attorney or Federally licensed Enrolled Agent.
    2. The right practitioner should be able to act as a strong buffer between you and the IRS.
  3. Discovery with the IRS
    1. If third party contacts have been made, then request a detailed breakdown of contacts.
    2. If no contacts have been made, then arrange to produce the requested information based on a reasonable timeline. Your practitioner should also request that the IRS agent or examiner produce their workpapers, i.e. 6103 disclosure.

You have the legal right to this information.

  1. Financial Analysis
    1. Conduct a financial analysis review with your practitioner – The discovery phase only gets halfway.
    2. The financial analysis of income and assets sets the final strategy for success.
  2. Implementation-This is always the hard part
    1. The final strategy culminates into a submission to the IRS that takes your “position.”
    2. You should always review the submission and have your practitioner explain how it falls within the guidelines of the Internal Revenue Manual (IRM), similar fact scenario tax court cases, private letter rulings or chief counsel advice.
  3. Revise and review until you are fully comfortable with the end product.
  4. No matter the situation, empower yourself to seize opportunities and take back control from the IRS.
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