IRS Collection Process Part 2: Partial Payment Installment Agreements and Form 1099-OID Original Issue Discount Refund Scheme

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Hello, I'm Clint Russell, program manager for Case Resolution Alternatives, Collection Policy, with a reenactment of the presentation I delivered for the IRS's July 2009 National Phone Forum. The phone forum is titled "IRS Collection Process: What are your options?", and this is part two of a three-part audio series. In this segment, I will cover partial payment installment agreements, and Form 1099-Original Issue Discount refund schemes.

You'll find the other two audio recordings from the phone forum on our Web Site, IRS.gov.

First, I’ll discuss partial payment installment agreements, or PPIAs. PPIAs were authorized by Congress through the enactment of the American Jobs Creation Act of 2004, and signed into law on October 22, 2004. The new legislation amended Internal Revenue Code 6159 to allow the IRS to enter into installment agreements that result in full or partial payment of the tax liability.

The IRS officially began using the PPIA payment arrangement starting January 17, 2005.

Congress enacted this legislation to correct a weakness in the tax law that did not permit installment agreements with taxpayers who wished to make payments on their debt but who would not be able to pay their tax liabilities in full within the 10-year statutory period.

Before PPIAs were authorized, the IRS and the taxpayer had to find other options for resolving the liability which may have included offers in compromise, or OICs.

The limited options created hardships for some taxpayers prior to the existence of PPIAs.

It was not the intent of Congress to create a new method of resolving tax liabilities. Instead, the legislation was drafted to address a weakness within the existing resolution option of installment agreements.

You can find more information at IRS.gov by searching PPIA.

A PPIA is a type of installment agreement and not an independent resolution option. If an installment agreement is determined to be the best method to resolve the tax liability and the agreement will not satisfy the liability before the collection statute expires, then the IRS will identify this agreement as a PPIA.

Taxpayers cannot apply for a PPIA. A PPIA may be granted only under appropriate circumstances.

The determination to grant a PPIA is made as a result of financial analysis of the taxpayer’s ability to pay by installments and their equity in assets.

Keep in mind that IRS does not promote PPIAs as a separate case resolution option.

In a PPIA, the IRS is accepting installment payments to be made over the length of the time remaining on the collection statute.

In addition, the liability remains on the account and the Notice of Federal Tax Lien remains in place until the expiration of the collection statute. Also, equity in assets must be addressed according to legislation.

The taxpayer must make a good faith effort to utilize the equity in their assets to pay as much of the tax as possible before this type of agreement can be granted. However, unlike an OIC, a PPIA may be granted if a taxpayer does not sell or cannot borrow against asset equity.

Unlike an OIC, if a PPIA taxpayer’s financial situation changes, the IRS can revise the IA or terminate the agreement. OIC and PPIA resolutions are independent and are not competing case resolution options, and I’ll talk more about this in just a moment.

All PPIAs are required to undergo a financial review every two years.

The IRS streamlines this review whenever possible by using financial data that is available internally without contacting the taxpayer. For the majority of PPIAs, the streamlined review is done systemically.

However, when internal data sources are not available to complete the financial review, the IRS sends a written request for current financial information to the taxpayer.

In fiscal year 2008, 13 percent of the PPIAs granted in fiscal year 2006 were issued the CP522P letter requesting financial information. That’s nearly 2,500 out of roughly 18,900 agreements. These figures are estimates due to limitations in the data collection during the first two years following implementation of the PPIA program.

Legislation authorizing PPIAs was not meant to replace offers in compromise. Remember that OICs and PPIAs are independent and noncompetitive resolution options.

I’ll now discuss some comparisons between offers in compromise and partial payment installment agreements. For instance, when an OIC is in effect, balances due are removed from the taxpayer’s account, but in a PPIA, the balance remains on the account until the Collection Statute Expiration Date, or CSED. In most instances the CSED represents the last day that the liability can be collected by the IRS.

For an OIC, a Notice of Federal Tax Lien, known as an NFTL, is released due to an account being considered paid in full. But for a PPIA, the NFTL is filed and remains in place until the CSED date is reached.

Also, in an offer in compromise, a payment equivalent to the equity in assets must be made. However, for a PPIA, payment from equity in assets must first be considered by the IRS as an option, but a PPIA may be granted without equity being utilized.

Lastly, the IRS cannot seek collection from future increases in ability to pay in an offer in compromise, whereas changes in ability to pay can result in revision or termination of a PPIA.

The bottom line is that if the IRS determines that a taxpayer qualifies for an installment agreement, but the monthly payments that the taxpayer can make will be too small to pay the whole debt before the legal period to collect the tax expires, the IRS can consider granting them an installment agreement anyway. And that agreement will be a PPIA.

Now we’ll move on to Form 1099-Original Issue Discount refund scheme.

There has been a recent re-emergence of an Abusive Tax Avoidance Tactic refund scheme based on a myth that when the United States went off the gold standard in the 1930’s, there was a secret "straw man" account created in the Treasury Department for each citizen. The scheme alleges that with a promoter’s help, the client can draw on or redeem their so-called "secret account" by issuing a Form 1099-OID or similar reporting document to the Treasury Department and receive an offset of funds from that secret account to existing tax debts, and generate a refund of the balance of that "account."

Commercial redemption or straw man theories have no basis in fact or tax law. See Revenue Ruling 2005-21 on straw man theories; Revenue Ruling 2004-31 on commercial redemption, as well as Notice 2008-14.

Although there are numerous variations, here are seven common characteristics of this scheme:

  • One: Withholding reported on any Form 1099 that is equal to, or greater than, the income reported on Form 1040EZ, Form 1040A or Form 1040;
  • Two: Withholding reported on any series Form 1040 tax return that is equal to or greater than the "interest income" or "other income" lines on the return;
  • Three: Taxable income (before net operating loss or special deduction) on Line 28 of Form 1120 that is of an equal amount to a backup withholding credit on Line 32g;
  • Four: Excessive amounts claimed on Form 1041, U.S. Income Tax Return for Estates and Trusts, under the "other payments" line 24f, and/or on Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains, attached to Form 1041.
  • Five: Returns with unrealistically high withholding amounts, such as a Form 1099 withholding amount that is 28 percent or more of the reported income;
  • Six: Lack of information return documents to support the withholding credit; or
  • Seven: Form 56, Notice Concerning Fiduciary Relationship, naming a government or local official as fiduciary or trustee.

The IRS has successfully stopped the payout of many refunds under the Form 1099-OID refund scheme from taxpayers filing both paper and electronic tax returns.

Tax returns containing frivolous information are subject to a $5,000 civil penalty imposed by Internal Revenue Code section 6702(a).

If you have reason to suspect the legitimacy of a withholding credit, confirm with the taxpayer that the reported withholding was actually paid by a legitimate source.

Report any incident of a taxpayer seeking a refund, a tax offset, or promoting a scheme based on false withholding credits to the IRS using Form 3949-A, Information Referral.

This has been part two of a three part series on the IRS Collection Process: What are your options? National Phone Forum. You'll find the other two audio segments on our Web site, IRS.gov.