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Dead-Broke Client and an IRS Audit December 4, 2016

Did your dead-broke client receive an IRS audit letter? If so, ask for a collectability determination. If your client has piled up medical bills or credit card debt or business losses and has no ability to pay additional taxes, an IRS audit can be halted.

Throughout an IRS tax examination, examiners are expected to follow Internal Revenue Manual procedures to consider the taxpayer’s ability to pay a potential assessment. The purpose of these “collectability determinations” is to ensure that the IRS’s accounts receivable are collectible.

Yet in FY 2015, 50% of all IRS Field Collection closures and 19% of all IRS Automated Collection System closures of taxpayer delinquent accounts resulting from an examination were closed as currently not collectible. IRS examiners did not follow collectability procedures in 56% of collection cases reviewed in a recent Treasury Inspector General report (see report here).

So… since the IRS examiner might not volunteer to go to his or her manager to discuss collectability issues (i.e., blood from a turnip), it’s up to us to know the rules and give a friendly push. The bonus: the broke client is saved from further trouble and we are saved from what would likely end up being hours of pro bono work.

Vern Hoven, CPA, MT


Vern Hoven, CPA, MT, is one of America’s premier tax presenters and speaks to over 100 groups a year on a variety of tax topics. He teaches at Western CPE Federal Tax Update seminars and conferences and produces self-study and webcasts courses as well. Vern consistently receives outstanding evaluations and has won numerous teaching awards, including the prestigious AICPA 2014 Sidney Kess Award for Excellence in Continuing Education.
Vern is the author of the best-selling Real Estate Investor’s Tax Guide and a favorite interviewee on radio, television, and in newspapers. His presentation skills have earned him the coveted Certified Speaking Professional (CSP) designation from the National Speakers Association, which has granted only 400 CSPs out of 3,600 NSA members as of 2006.
Vern practiced in the public, governmental, and corporate accounting fields before starting his own public accounting practice in 1973, a firm that grew to one of the largest in western Montana. In 1985, he started his present tax consulting practice. CPA Magazine recognized Vern as one of the top 50 IRS representation practitioners in 2008.

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