IRS Offer in Compromise – Big Changes May Lead to More Tax Debt Relief

The IRS has dramatically changed the guidelines and rules that govern how an IRS offer in Compromise is http://www.dreamstime.com/-image22051385calculated.
In theory…this should increase the number of taxpayers who will qualify on paper and who will ultimately be successful. Arizona Taxpayers with serious tax debt may greatly benefit as a result.

The changes were published by the IRS on May 21, 2012. (See, IRS News Release)
Additional detail can be found in the Attachment 1 to Internal Revenue Manual 5.8.5 Financial Analysis

If you investigate past articles in this blog and our website about the IRS Offer in Compromise program, you will see that we have never been terribly thrilled about it. Most people just didn’t make great candidates. These changes are a big deal though. Such a big deal that we are in the process of reviewing all of our past client files to determine whether the new rules help those that it may not have helped before.

The biggest change and the one that will probably make the most difference in the numbers of Offers filed and the success of those Offers, is the way the rules are now being used to calculate the offer amount.

The amount that is supposed to be offered to settle a tax debt has always been determined by adding the taxpayer’s asset value to his or her future available income.

Future available income was basically, gross income minus reasonable and necessary living expenses (An amount partially or some would argue primarily determined by the IRS guidelines or standards – an unfriendly set of numbers) for a predetermined number of months. Those months were 48 and 60, prior to this change.

If the future available income was agreed to at $500.00 and the taxpayer could pay the offer in a very short period of time. than $500.00 was multiplied by 48 and added to the asset value. Things added up in a hurry this way. If the asset value was $10,000.00 and the available income was $500.00, than the “cash” offer would have to be $34,000.00

Now…the multipliers are 12 and 24.

Given the same scenario, the cash offer would only be $16,000.00 instead of $34,000.00. A difference of $18000.00.

Some other very important changes to the Offer in Compromise calculation include:

1. Certain student loan payments will be allowed as part of the calculation of reasonable and necessary budget.

2. A car that is six years or older or that has 75k in miles will be allowed an additional expense for gas/upkeep of $200.00 per month.

3. The first $400.00 per vehicle of retired debt will not be added back to the monthly available income.

4. Assets which have been spent or “dissipated” three or more years prior to the submission of the offer won’t be included in the calculation of the reasonable collection potential.

5. Payments on late state taxes may be allowed to some degree as part of the budget calcuation.

Despite these grand changes and the possibility that many with serious tax debt may be able to find long term relief now outside of bankruptcy, we remain guarded for several reasons:

1. The IRS is likely going to be overwhelmed with offers that could potentially drag the process out over a few years.

2. Even more offer “mills” will magically appear and oversell the offer process to those for whom it may not make sense.

3. The IRS is not famous for following it’s own rules. Just because the manual says something, doesn’t mean it will be easy to get the IRS to do it.

4. The IRS can reject an Offer for other reasons. Just because the numbers make sense doesn’t mean the IRS Offer in Compromise will be successful.

If you have a serious tax debt though, or expect to have one, and you want to learn more about your options contact us and speak to Arizona Tax Lawyer, Michael Anderson about your situation.

IRS AUDIT? LOST RECORDS AND RECEIPTS? Don’t Lose Hope. The Cohan Rule May Be Your Hero

If you are self employed, you probably don’t like the process of maintaining receipts and other proof that you bills-thumb-375x325-49437actually paid the business expenses.

Bookwork is no fun.

Many people who are self employed find it so boring to keep records that they haven’t done it for years.

The problem with this “rears” it’s head in two circumstances:

1. When the returns haven’t been filed and need to be re-created.

2. When a return has been filed and is being audited.

Lets look at the second problem and ask whether the small business owner can prove business expenses during the audit even if there are no receipts or even cancelled checks?

There is an old case called Cohan V. Commissioner, 39 F. 2d 540 (2d Cir. 1930) that states that the IRS will accept most expenses despite the fact that the receipts are missing.

The catch?

The business owner needs to present a reasonable basis upon which he or she recreated the expense.

So if you have very few records and you are being audited, here are two examples where this “Cohan Rule” may help you:

a. Mileage Log – This can be recreated using anything that creates a reasonable basis for the miles. A calendar along with a signed affidavit is a good example. If you keep a calendar of which job site you visited each day – this would work even though you didn’t keep a mileage log.

b. Subs or employee cost – recreating what is necessary to have performed the individual jobs can form a reasonable basis for the expense. Carpet doesn’t get laid by itself.

In recreating a reasonable basis for expenses it is important to understand how critical the business owner’s testimony can be. If the business owner is willing to swear under oath about the expenses and how they were arrived at despite a lack of documents, that can be powerful.

So..what happens if you lose the audit because you have few records and you failed to appeal timely?

You can ask the IRS to reopen the audit to re consider the expenses. This is called an audit reconsideration.

Conclusion:

If you own a small business and you haven’t kept records, it won’t devastating if an audit takes place as long you can logically estimate the expenses using some reasonable basis. Calendars, Memory, Comparables from other businesses and Affidavits will help.

If you have lost an audit but know that the IRS didn’t get the numbers right, you may want to consider asking the IRS to re-open the Audit so that you can provide a “reasonable basis” for the items that were disallowed.