DEALING
WITH THE IRS COLLECTION DIVISION
TAX COLLECTION PROBLEMS OF MILITARY
PERSONNEL©
Burton
J. Haynes, Attorney at
Law1
Many people with tax collection
problems feel like they're in a combat
zone, besieged by battalions of battle-hardened
IRS Revenue Officers. But many tax
practitioners, particularly those
of us here in the Washington metropolitan
area, will encounter clients who
are or have recently been in real
combat zones -- places like Iraq,
the Persian Gulf, Afghanistan, Kosovo,
Kuwait, Bahrain, Qatar, the United
Arab Emirates, and other such garden
spots. These folks have enough on
their minds without worrying about
what the IRS Collection Division
may do to them or their families
while they're gone.2 Certain
provisions of the Internal Revenue
Code are designed to protect them
from IRS collection action, but these
rules introduce administrative complexities
that are often beyond the capabilities
of the IRS's hopelessly antiquated
computer system, with the result
that deployment to a combat zone
can actually trigger the very IRS
collection action that these statutory
provisions were intended to prevent.
The IRS is aware of these problems
and has quietly formed a National
Office working group to address the
issue. But in the meantime, we as
practitioners should be ready to
help military personnel who have
tax collection problems that they
can't adequately handle because they
are busy defending us and our loved
ones.3
Two
statutory sources of relief
First, IRC §7508 and the implementing
notices and Rev. Procs. direct the
IRS collection machine to stand down
with respect to military members
and certain others while they are
in a combat zone or qualified hazardous
duty area, and for 180 days thereafter.
The price of this cessation of collection
action and the extension of various
tax-related deadlines is that the
statute of limitations on collection4 is
suspended for the same period of
time.
Second, the Servicemembers Civil
Relief Act (SCRA), was signed by
the President on December 19, 2003.
It replaced the Soldier's and Sailor's
Civil Relief Act (SSCRA), which had
remained largely unchanged since
its adoption in 1940. The SCRA, like
the SSCRA before it, provides that
the collection of any income tax,
whether falling due before or during
military service, may be deferred
if ability to pay the tax is "materially
impaired" because of the taxpayer's
military service. With many Reserve
and National Guard units in this
area and throughout the country having
been mobilized for active duty service,
there are many individuals and families
to whom this rule could apply.5 Collection
may be deferred during the period
of the taxpayer's military service
and up to 180 days afterward, with
a corollary extension of the statute
of limitations on collection for
the period of military service plus
270 days. Note that this is a broad
rule that can apply whether or not
the military member is in a combat
zone. However, it applies only to
certain military personnel, typically
in their initial period of enlistment.
IRC §7508, in contrast, applies to
all military personnel, regardless
of their length of service, but only
for those periods of time they are
in designated combat zones and for
180 days thereafter.
IRC §7508
In addition to deferring collection
on previously determined tax liabilities,
IRC §7508 provides for an extension
of the deadlines for taking many
time sensitive actions, including
the filing of income tax returns.6 These
deadlines are postponed until at
least 180 days after the taxpayer
leaves the designated combat zone.
IRS will not assess income tax or
charge any penalty or interest during
the postponement period, and is supposed
to cease all enforcement activities
against these taxpayers during such
periods. Those areas qualifying as
combat zones include the following:7
Operations Joint Endeavor and
Able Sentry. P.L. 104B117 provides
tax relief to personnel in the
Armed Forces serving in Bosnia,
Herzegovina, Croatia and Macedonia
(formerly Yugoslavia) as if they
were in a combat zone (effective
retroactive to 11-21-1995).
Operation Allied Force. Executive
Order 13119 (effective 3-24-1999)
designates Yugoslavia (including
Serbia and Montenegro), Albania,
the Adriatic Sea, and the Ionian
Sea north of the 39th parallel
as combat zones.
Operation Enduring Freedom. Executive
Order 13239 (effective 9-19-2001)
designates Afghanistan and the
airspace above as a combat zone.
Also included are Pakistan, Tajikistan,
Jordan, Kyrgystan, Uzbekistan,
The Philippines (effective 1-9-2002),
Yemen (effective 4-10-2002) and
Dijbouti (effective 7-1-2002).
Operations Desert Storm and Iraqi
Freedom. Executive Order 12744
(effective 1-17-1991) designates
as combat zones the Persian Gulf,
the Red Sea, the Gulf of Oman,
the part of the Arabian Sea north
of 10 degrees north latitude and
west of 68 degrees east longitude,
the Gulf of Eden and the total
land areas of Iraq, Kuwait, Saudi
Arabia, Oman, Bahrain, Qatar, the
United Arab Emirates, Turkey (effective
1-1-2003), Israel (1-1-2003 to
7-31-2003), Egypt (3-19-2003 to
4-20-2003), and the eastern Mediterranean
(3-10-2003 to 7-31-2003).
IRS Notice 2003-21 presents a series
of questions and answers that will
be helpful to you in understanding
how IRC §7508 is supposed to be applied
in particular situations.8 It
also explains how to contact special
IRS offices, both in the U.S. and
abroad, by e-mail, telephone, or
telecopier for more information.9 Among
the questions most directly related
to tax collection issues are the
following:
Q-12: My son is a member of the
U.S. Armed Forces, and he has been
serving in the combat zone since
February 1, 2003. Is he entitled
to an extension of time for filing
and paying his 2002 federal income
taxes? Are any assessment or collection
deadlines extended?
A-12: In general, the deadlines
for performing certain actions
applicable to his taxes are extended
for the period of his service in
the combat zone, plus 180 days
after his last day in the combat
zone. This extension applies to
the filing and paying of your son's
2002 income taxes. Also, in addition
to the 180-day period, your son's
extension period includes the 74-day
period that was left before the
April 15, 2003, deadline. During
this 254-day extension period,
assessment and collection deadlines
will be extended, and interest
and penalties attributable to the
extension period will not be charged.
Q-14: Assuming the same facts
as in question 12, will the deadline
extensions continue to apply if
my son is hospitalized as a result
of an injury sustained in the combat
zone?
A-14: The deadline extensions
will apply for the period that
your son is continuously hospitalized
outside of the United States as
a result of injuries sustained
while serving in the combat zone,
including 180 days thereafter.
For hospitalization inside the
United States, the extension period
cannot be more than 5 years.
Whereas the rules excluding combat
pay from taxable income apply narrowly
to U.S. military personnel, the cessation
of collection action and the extension
of various tax-related deadlines
due to service in a combat zone are
available to military personnel,
to those serving in a combat zone
in direct support of military personnel,
and to their families. This includes
merchant marines serving aboard vessels
under the operational control of
the Department of Defense, Red Cross
personnel, accredited correspondents,
and civilian personnel acting under
the direction of the U.S. Armed Forces.
The rules do not apply to private
businessmen, including civilian employees
of defense contractors, unless they
are acting in direct support of U.S.
military operations.
Q-18: My son is a civilian explosive
specialist who is in the combat
zone training U.S. Armed Forces
members serving in the combat zone.
Do the deadline extension provisions
apply to my son?
A-18: Yes. The deadline extensions
apply to your son because he is
serving in the combat zone in support
of the U.S. Armed Forces.
Q-20: I am a member of the U.S.
Armed Forces serving in the combat
zone. Do the deadline extensions
apply to my husband, who is in
the United States?
A-20: Yes. The deadline extensions
apply not only to members serving
in the U.S. Armed Forces (or individuals
serving in support thereof) in
the combat zone, but to their spouses
as well, with two exceptions. First,
if you are hospitalized in the
United States as a result of injuries
received while serving in the combat
zone, the deadline extensions would
not apply to your husband. Second,
the deadline extensions for your
husband do not apply for any tax
year beginning more than 2 years
after the date of the termination
of the combat zone designation.
Q-21: Assuming the same facts
as in question 20, will my husband
have to file a joint tax return
in order to benefit from the deadline
extensions?
A-21: No. The deadline extensions
apply to both spouses whether joint
or separate returns are filed.
If your husband chooses to file
a separate return, he will have
the same extension of time to file
and pay his taxes that you have.
Remember, the extensions apply not
just to the filing of income tax
returns, but to many other acts subject
to deadlines under the Internal Revenue
Code, such as filing a claim for
innocent spouse relief10 within
two years of the first collection
action:
Q-24: Almost two years ago, the
IRS contacted me to collect tax
on a joint income tax return I
had filed with my now former spouse.
I believe only my former spouse
should be held liable for the tax.
I understand that I may file Form
8857, Request for Innocent Spouse
Relief, within 2 years of the first
collection activity against me
by the IRS. I have just entered
a combat zone. Do the deadline
extensions apply to the filing
of Form 8857?
A-24: Yes. A list of time-sensitive
acts for which performance is postponed
for members of the U.S. Armed Forces
(or individuals serving in support
thereof) in a combat zone is provided
in Rev. Proc. 2002-71. Section
14.03(2) of that revenue procedure
concerns innocent spouse relief.
One event often triggering the start
of collection action against a delinquent
taxpayer is the default of an installment
agreement. IRC §7508 is supposed
to prevent this, instead allowing
a taxpayer serving in a combat zone
to forget about his problems "back
in the world" until 180 days after
his return. Unfortunately, the inadequacies
of the IRS computer system have led
to some outrageous results related
to installment agreements. For example,
the posting of a combat zone indicator,
intended to put a hold on actions
such as those related to the default
of an installment agreement, has
been wrongly interpreted as in itself
defaulting the agreement, even when
all payments have been timely made.
This in turn has precipitated aggressive
action by IRS Automated Collection
Service personnel, seemingly unaware
of the provisions of IRC §7508 or
Notice 2003-21. However, here's the
way it is supposed to work:
Q-28: My son, who is a member
of the U.S. Armed Forces, was on
an installment payment plan with
the IRS for back income taxes before
he was assigned to the combat zone.
What should be done now that he
is in the combat zone?
A-28: The IRS office where your
son was making payments should
be contacted. Because your son
is serving in the combat zone,
he will not have to make payments
on his back income taxes for his
period of service in the combat
zone plus 180 days. No additional
penalties or interest will accrue
during the deadline extension period.
Again, that's what is supposed to
happen. In reality, to get this statutorily
mandated result for your client you
may have to do battle with the Automated
Collection Service, an IRS behemoth
that blindly relies on an inadequate
computer system and is staffed by
personnel with insufficient training,
who in some cases sadly lack the
courtesy and common sense that in
these situations one would expect
them to have. The IRS Taxpayer Advocate's
Office is very responsive, however,
and you should not hesitate to call
on them for assistance.11
Servicemembers
Civil Relief Act
The SCRA provides protection that
is different in scope than that available
under IRC §7508. And since nothing
related to taxes is simple or straightforward,
let's go through a few important
definitions. For purposes of the
SCRA:12
"Person in military service," means
any member of the U.S. Army, Air
Force, Navy, Marine Corps, Coast
Guard, and any officer of the Public
Health Service detailed for duty
with the Army or Navy.
"Period of military service," means
a person's initial period
of active military service13,
which will be:
(a) The period of active duty
under the first enlistment of the
taxpayer in the military service;
(b) The period of service which
precedes any reenlistment following
recall of the taxpayer to active
duty from a reserve or National
Guard unit;
(c) The first period of reenlistment
of taxpayer who has been out of
the military service for one year
or more; or
(d) In the case of an officer,
the first two years of any tour
of active duty that is preceded
by a period of inactive duty or
nonmilitary status for one year
or more.
"Material Impairment" is present
if the taxpayer's current monthly
income (i.e. the military income)
is less than the monthly income
immediately prior to active duty.
Unlike what is supposed to happen
when someone is sent to a combat
zone and the IRS is automatically
notified of this fact by the Department
of Defense, you must take affirmative
action on behalf of your client to
obtain a deferment of IRS collection
action under the SCRA. A deferment
will be granted if:
(a) the taxpayer submits a written request
for deferment under the SCRA;
(b) The taxpayer establishes that
he or she is serving an initial
period of military service,14 and
(c) the taxpayer submits satisfactory
proof that ability to pay the tax
has been materially impaired because
of the taxpayer's military service.
If a deferment is granted, the statute
of limitations on collection is suspended
during the taxpayer's military service
plus 270 days thereafter. Interest
and penalties do not accrue during
the deferment on any tax for which
collection is deferred. However,
the taxpayer remains liable for interest
which had previously accrued. Interest
will also accrue while the tax remains
unpaid after the deferment ends.
Even if the deferment is denied,
the SCRA provides that interest will
be charged at only 6% while the taxpayer
is in active military status on liabilities
accruing prior to the beginning of
such service.15
If the taxpayer is on an installment
agreement and requests a reduced
monthly payment based on reduced
military income, the IRS will treat
this as a request for relief under
the SCRA.16 Upon
determining that relief under the
SCRA is available, the IRS is supposed
to advise the taxpayer that voluntary
payments can still be made, but that
the account will be deferred until
his or her military status is terminated.
Whether in practice the Service actually
does this in any particular case
is subject to the vagaries of the
IRS computer system and the level
of training of the IRS line personnel
involved.
Conclusion
Those serving our nation in the
Armed Forces, whether or not they
are currently in combat zones, deserve
our respect and undying gratitude.
And while they too are taxpayers,
they also deserve the tax relief
provided for them by statute. Although
the IRS tries its best to implement
these statutory protections, at times
it fails to do so, or worse yet takes
affirmative action against military
personnel because the posting of
a combat zone indicator is taken
by the IRS's Neanderthal computer
system to mean that an installment
agreement has been defaulted. In
such cases we need to be fully aware
of the rules so we can see to it
that our military clients have the
peace of mind needed to focus on
their more immediate responsibilities.17
1 Mr.
Haynes is an attorney
with offices in Burke, VA,
and Burtonsville, MD, and is a member of the Maryland Society
of Accountants' Newsletter
Committee. From
1973 to 1981 he was
a Special Agent with
the IRS Criminal Investigation
Division in Baltimore,
and in 1980 was named "Criminal
Investigator of the
Year" by the Association
of Federal Investigators. He
specializes in civil
and criminal tax disputes
and litigation, IRS
collection problems,
and the tax aspects
of bankruptcy and divorce. (phone
703-913-7500; website www.bjhaynes.com)
2 Various
provisions of the Internal Revenue
Code bear on the tax treatment
of certain military income, such
as combat pay. This article will
focus only on the tax collection
issues of those serving in the
military, or more specifically
in a combat zone. For general
information on the taxation of
persons in the U.S. military,
see the Armed Forces' Tax Guide
(IRS Pub. 3), IRS Notice 2003-21,
IRS FS-2003-11, and the Military
Family Tax Relief Act of 2003.
3 I
would respectfully offer for
your consideration the suggestion
that you follow the practice
of this office and handle such
cases pro bono.
4 See
the author's article on the statute
of limitations on collection
published in the Aug-Sep 2002
issue of The Freestate Accountant.
This and other articles are also
posted on the author's website
at www.bjhaynes.com. The entry
of a TC 500 code in the affected
module suspends the CSED unless
and until a TC 550 (new CSED)
is posted with a later transaction
date.
6 IRM
5.19.1.7.10.3 (12-15-2002). Section
7508 effects the deadlines for
filing a return; paying, assessing
or collecting a tax; claiming
a refund; litigating a suit;
and performing any act listed
in Rev. Proc. 2002-71, 2002-46
I.R.B. 850.
7 See
IRS Pub. 3 for additional information
and qualified hazardous duty
areas that may qualify for similar
relief.
8 See
also Notice 2002-17 (Tax Relief
for Those Involved in Operation
Enduring Freedom); Notice 99-30
(Tax Relief for Those Affected
by Operation Allied Force); and
Notice 96-34 (Tax Relief for
Those Affected by Operation Joint
Endeavor).
9 The
IRS has a special e-mail address
(combatzone@irs.gov)
to which a taxpayer in a combat
zone can send questions related
to filing and payment issues,
and to update his or her combat
zone status so as to qualify
for various tax relief provisions.
This is a good place to send
information about the dates a
servicemember enters and leaves
a combat zone. Sadly, the system
for the direct transmittal of
this information between the
IRS and the DOD seems to be prone
to error. For example, the DOD
seems to be using a "first day
of the month in, last day of
the month out" convention, which
has the effect of overstating
the time the statute of limitations
is suspended. Also, the information
is either not provided in timely
manner by the DOD, or is not
processed in a timely manner
by the IRS.
10 See
the author's articles on innocent
spouse relief published in The
Freestate Accountant in
the Aug-Sep 1998 and Jun-Jul
2000 issues, or on the website
www.bjhaynes.com.
11 Contact
information for the IRS Taxpayer
Advocate's Office can be found
in IRS Pub. 1546 or on the IRS's
website at www.irs.gov/advocate.
12 IRM
5.1.7.7.4(2) (1-24-2001) and
5.19.1.7.9 (12-15-2002).
13 Note
that certain career military
officers or enlisted men will
not fit these definitions, and
are thus not protected by the
SCRA.
14 A
copy of the military orders or
reporting instructions that detail
the period of active duty must
be provided.
15 If
the taxpayer has been determined
to be qualified for the reduced
interest rate, the transcript
will show a TC 340 for zero amount
with the activity code Military
6% REQ54.
16 IRM
5.19.1.7.9.4(2) (12-15-2002).
17 You
should also know that some con
artists actively prey on military
families. Some of these scams
are described here.
