IRS Offer in Compromise – Another Boring Explanation About How It Works

I am asked so often whether it’s true that the IRS will actually settle tax debt…I find myself thinking about it even when I don’t want to be.  It’s like a song that you can’t get out of your head.  Don’t Stop Believing.
So in another effort to answer this question yet again…and to help clear my head for the weekend, here is a quick review:

YES!  THE IRS WILL SETTLE TAX DEBT FOR LESS THAN WHAT IS OWED

The IRS settles tax debt formally and they do it all the time.  The “program” that is used to tell the IRS whether it should settle, is call the “Offer in Compromise” program (“OIC”).

AGAIN, IT’S FORMAL

The OIC program process isn’t one that is based on some phone calls and some wheeling and dealing.  It is formal.  The Taxpayer has to prove that the facts and circumstances qualify him or her for settlement.

“Hey – do you think you’d take 10%”, doesn’t work.

FIRST REQUIREMENT TO SETTLE

The first “hoop” of several that need to be jumped through, is proving to the IRS that the taxpayer can’t afford to pay all of the tax debt before the 10 year date on the IRS’ ability to collect runs out.  This date is commonly known as the Collection Statute Expiration Date or CSED.

In my opinion…this is not only the first hoop to jump through, but for most people the most difficult part of the OIC process.

WHY IS THE FIRST REQUIREMENT SO DIFFICULT TO SATISFY

Three Reasons:

Reason One – CSED Length

The CSED is 10 years long plus anytime the taxpayer did anything to stop it like file an appeal, request a payment plan, file a bankruptcy, or leave the country.

Reason Two – Most Recent Date Used

The most recent tax year is the year used to calculate the CSED.  If the taxpayer owes for five years from 2013 to 2017…the 2017 CSED is used to determine the 10 year + CSED.

Reason Three – Budget set by the IRS

The IRS looks very closely at three things when you request a settlement.  Your income, assets, and budget.  It will try to use the largest income amount it can prove.  It will give a discounted value on assets, but…it will count their remaining value.

But the most common problem is that it limits the budget to one that is based on what it thinks the average household spends – not necessarily what the taxpayer spends. (IRS Collection Standards)

An Example:

Tax debt                          $50,000.00

Asset Value                     $8,000.00

Avg. Income                   $4,500.00 per month

Avg. Budget                    $4,500.00 per month

CSED                                80 remaining months

Given the above…you’d think the IRS Settlement should be $8000.00.

But look at what happens when the IRS uses it’s budget.

Assuming that budget includes $250.00 more per month than what the IRS thinks the average car payment is, and $300.00 in minimum credit card payments above their standard amount for miscellaneous expenses…it will see an ability to pay $550.00 per month toward the debt.

Given 80 months remaining on the CSED, the amount the IRS believes the taxpayer could afford toward the debt will be:

$8,000.00 plus $44,000.00 or $52,000.00.  Rejection.

Yes, the IRS will actually reject the offer if the numbers show an ability to pay before the CSED.

WHAT IF THE FIRST “HOOP” IS SATISFIED – WILL THE IRS SETTLE?

Probably.

If the first rule is met, the IRS is supposed to multiply the excess number by 12 and add the asset value to it and allow the taxpayer to pay that amount over several payments and settle the debt.

In the example above – assuming that excess car payment amount were $150.00 and not $250.00, the excess income would be $450.00, not $550.00.

$450.00 x 80 is $36,000.00 plus $8,000.00 = $42,000.00  – LESS than the debt so:

$450.00 x 12 + $8,000.00 is $13,400.00.

$13,400.00 should be the settlement amount.

BUT HOW DOES THE SETTLEMENT AMOUNT GET PAID?

Using the 12 month multiplier example above…the taxpayer would have had to pay 20% with the OIC filing and the rest in 5 installments after acceptance.

There is another way to skin the “payment cat” that has to do with using a larger multiplier and  longer pay-back period.  You can ask me later.

THE SECOND BIG HOOP – NOT ABLE TO PAY THE SETTLEMENT

The second big problem that we see is that even when a taxpayer makes the numbers work, they have no way to pay the settlement amount.  This happens because the asset value is usually tied up in a home or other difficult to sell asset and/or the excess income number was created using a fictional budget…the taxpayer doesn’t actually have the excess and hasn’t been able to save it.

HOW TO JUMP THROUGH THIS SECOND HOOP

If the taxpayer plans ahead and creates a “tight” situation with this potential problem in mind, he or she might be able to pay the settlement amount.  Even then…a third party often has to get involved to help the taxpayer come up with the money.

WHAT DO I DO

If you have a large IRS debt, start the process of determining whether an OIC might work by doing the following:

  • Become an expert on the issue of your average income and budget
  • Become an expert on the value of your assets
  • Provide your expert analysis to me
  • Allow me to review your analysis and the IRS’ history re: your IRS debt and apply the facts to the rules

If you’ll provide the numbers and other valuable information about yourself,  I do the evaluation for free.  Once we know what’s going on, we can discuss whether you can make an offer work, either now or in the future.  We’ll also discuss your other options.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IRS Debt? 7 reasons bankruptcy is often used to deal with it

idea_lightbulb_cartoon2-thumb-375x491-53213IRS Debt and Bankruptcy

No one likes bankruptcy, except bankruptcy attorneys.  For most Americans, it remains a very negative process.  In fact…many of our clients refuse to even consider bankruptcy during a first meeting.  I don’t blame them.  It is interesting however, how many of those who are initially so opposed, change their minds once they see the potential benefits.

Why is bankruptcy such a mind changer?  Some quick background:

The Bankruptcy Code, which is updated occasionally by Congress, reflects our Nation’s desire to provide a fresh start for debtors. The Code attempts to create a system that forces those that can afford to pay their debt out, and allows those that can’t…in.

This balancing process between “who should and who shouldn’t” is applied to tax as well. Certain types of tax are considered so important by society that the bankruptcy code doesn’t allow for them to be wiped away (discharged). “Trust fund” taxes like taxes that are withheld from an employee paycheck to be forwarded to the government by the employer, are a common example.

Income taxes don’t warrant the same concern, and therefore the bankruptcy code provides for their discharge in specific circumstances. Those circumstances are as follows:

  • The tax return had to be filed more than two years before the bankruptcy filing.
  • The tax return had to be due for filing more than three years before the bankruptcy filing.
  • The tax debt had to have been “assessed” or entered into the IRS record as a debt, more than 240 days before the bankruptcy filing
  • The taxpayer didn’t file a fraudulent return.
  • The taxpayer didn’t engage in tax fraud more generally or engage in tax evasion.

These dates are found in the Bankruptcy Code sections 507(a)(8)(A)(i), 523 (a)(1)(B) and 507(a)(8)(A)(ii).Of course you realized while reading this list that nothing is ever that simple, and for a number of reasons you are right.

  • The first reason is that in an effort to be fair to the debt collectors at the IRS, the Bankruptcy Code requires that the clock stop ticking in certain circumstances. Circumstances like time spent in a previous bankruptcy, collection due process appeal, or offer in compromise.  It is not always easy to calculate these time periods as a result. Also, the taxpayer has to wait for these time periods to pass. In the meantime, the IRS is aggressively looking for money.

So if the date calculations are complex, and the tax lien can negate many benefits of the discharge…why such a mind changer?The primary reasons:

1.  The Bankruptcy Code controls the Tax Code

If the taxpayer meets the various bankruptcy qualification criteria and the tax debt meets the requirements for discharge, the IRS has little say in the matter. This isn’t a subjective decision on it’s part. It has to do what is told. If it doesn’t i.e. it tries to collect the debt when it wasn’t supposed to, the taxpayer can sue. This is as opposed to trying to deal with the IRS directly in an offer/installment/other situation where the IRS is the decider of facts and the applier of the law.

2.  Bankruptcy can be a “one-stop” shop

Many people with serious tax debt have other serious debt as well. If planned well, bankruptcy can deal with all of the problems at one time and some that many don’t realize were “fixable”. Not only can income tax and consumer debt be dealt with, but cars can be “crammed down” to market value, homes saved, and assets protected. All legal options provided by the tax code, deal with the tax debt only.

3.  The lowest debt settlement program is the no asset chapter 7 bankruptcy

Where the bankruptcy trustee in a chapter 7 bankruptcy is unable to collect any assets for liquidation and distribution to creditors, which is a common occurrence, the IRS will get nothing as well. This amount is always less than the settlement amount in an offer in compromise.

4.  Offers in Compromise don’t work for many

The vast majority of offers in compromise filed in the U.S. fail. There are a number of reasons. Some of them are:

a.  Legal standards do exist that govern how the IRS should view the offer to compromise the debt, but they are…a bit loose. Loose enough that the IRS is able to inject a great amount of subjectivity into the process. Bankruptcy on the other hand, creates quantifiable results based on objective criteria. Offer in compromise results are all over the place.

b.  These legal standards have a lot to do with what the IRS thinks you can afford to pay toward the debt over time. The starting point for household budgets is very low and is usually much lower than the taxpayer’s actual budget. The IRS doesn’t have to consider certain budget items at all, like consumer debt payments and savings plans. This usually results in a large discrepancy between what the IRS thinks the taxpayer can afford and what the taxpayer thinks he can afford.

c.  Failure is costly. Most need legal representation and that costs money. Most/all of which doesn’t get refunded when the offer fails. Most have to pay some large amount to file the offer (20% of cash offer amount, or monthly payments based on the offer amount) which isn’t refundable when the offer fails. The debt continues to grow in the background thanks to interest, and when the offer fails all the new debt is waiting with hat in hand and even a smile.

5.  High income taxpayers don’t always have to “qualify” for a chapter 7 bankruptcy

There is an exception in the bankruptcy code to the requirement that all who file chapter 7 bankruptcy must pass a test of ability to pay debt. Where the majority of the debt is tax debt, this rule doesn’t always apply. As a result, many who wouldn’t be able to even hope for an offer in compromise, are able to use bankruptcy to discharge the debt.

6.  Many with serious tax debt don’t have large assets

Most taxpayers with serious tax debt, will see the IRS record a Notice of Federal Tax Lien. As mentioned above, that lien attaches to all assets. When the bankruptcy is filed and the underlying debt is discharged, the tax lien remains and is in essence a secured debt. It’s value is based on the value of the assets on the date of the bankruptcy filing. If the taxpayer owned a home that was “underwater”, a car with $5000.00 in equity and some furniture, the lien is almost worthless and the IRS will often remove it.

7.  Chapter 13 bankruptcy is often a “cheaper” solution then an installment agreement.

The taxpayer may not be a good offer in compromise candidate, and may not be a good chapter 7 candidate because the tax debt is not the greatest part of the overall debt or for another reason. The taxpayer is left with two options: An installment agreement to pay the tax over time and wait out the statute of limitations period, or a chapter 13 bankruptcy.

The installment agreement amount is often much higher than the taxpayer would like. The chapter 13 bankruptcy payment on the other hand, can be based on friendlier budget criteria. In many cases the taxpayer can deal with all of his debt with a smaller monthly payment than the IRS was requiring to deal with the tax debt alone.

5 Commonly Used Ways To Deal With IRS Debt

Faced with large tax debt and feeling hopeless? Take heart…if you are willing to create a “strategy” and combine it with some hard work and patience, there may be a real solution. The following are the most 5 common methods people use to deal with tax debt.

1. Use the IRS Statute of Limitations to Your Advantage

Congress limited the time the IRS has to figure out how to get paid.  26 U.S.C Section 6502 provides this limit and as a result, the IRS has ten years to get the debt collected. Many people with IRS debt buy the time necessary to get to the 10-year period by negotiating an installment agreement or non-collectible status placement.

An example:

Imagine a tax debt of $120,000.00 and that the IRS has let 7 years pass without fully attempting to collect the debt, but they are now at the doorstep. The debt has grown to $200,000.00 with penalty and interest over time, but the taxpayer can only afford to pay $100.00 per month toward the balance. If the taxpayer were able to negotiate such a payment, only $3600.00 of the $200,000.00 would be paid before the debt disappeared.

The above scenario happens more often than you would think. However, there are things people do that stop the ten-year clock from running. Filing an offer in compromise, a bankruptcy, a collection due process appeal, or anything else that stops the IRS’ ability to collect also stops the statute of limitations clock from ticking. It isn’t always advisable to do anything other than to negotiate the payment plan or non-collectible status as a result.

2. Challenge the Tax Debt

What about a situation where the IRS assessed a debt against you that you know isn’t correct.

Usually, this is the result of an audit “gone bad” or the creation of a tax return by the IRS, because you didn’t file it yourself.

Audit Appeal

IRS Audits that go badly can be appealed. If done right, they can be appealed to the US tax court. If your audit result is wrong, you have a limited amount of time to bring the appeal, so call someone now.

Substitute Tax Return Appeal

Tax returns filed by the IRS come with appeal rights as well. Most people don’t respond in time and lose them, however. Thankfully, the assessment of the tax from the incorrect return can be challenged using the IRS audit reconsideration process.

Challenge Trust Fund Recovery Assessment

There are other things the IRS does to assess tax debt that can result in an incorrect debt amount, like the assessment of the trust fund recovery penalty against a responsible party.

Where the business has withheld the employee portion of the payroll tax but didn’t send it in, the IRS stick the amount on you personally as a penalty if you are the “responsible” party.

There are defenses to this, however, and the assessment of the debt can be challenged as a result.

Innocent Spouse Relief

Sometimes the tax is correct but it just isn’t fair that the spouse should be stuck with it. The law provides the ability to challenge the debt based on some theories about innocent spouses.

3. File an IRS Offer in Compromise

26 U.S.C Section 7122 provides the basis for the settlement or one-time reduction of the tax debt. In essence, you would be making an offer to compromise and settle the back tax liability. But this isn’t horse-trading.  The amount that the law requires the IRS to settle for is based on objective criteria. The criteria is called the IRS reasonable collection potential or the RCP.

In theory, the RCP is the amount that the IRS could collect from you before the statute of limitations period on collection runs out.

The vast majority of offers filed in the last several years fail primarily because the RCP calculation is rigged a bit in the IRS’ favor. The IRS is allowed to use as a starting point for calculation purposes, a budget that is based on averages they have created.

For instance, they may have pre-determined that a family of four only needs $1650.00 per month to pay for all housing and utilities expenses. That family may be actually spending $2100.00 per month. If in the end, the IRS were able to use the $1650.00 figure to determine the RCP, then the amount of extra income per their calculation would be at least $450.00 per month.

If the statute of limitations period remaining on collections is 8 years than the RCP, just based on this number could be as high as $43,200.00

Typically, the IRS must use a smaller multiplier than the statute period, but even then, you can see how quickly the RCP can grow.

Successful Offers in Compromise, require much thought and planning as a result. They shouldn’t be entered into lightly.

4. Bankruptcy

Bankruptcy and its relation to tax debt are misunderstood. Many people including many attorneys believe that bankruptcy can’t resolve income tax debt. Nothing could be further from the truth.

In fact, the treatment of the tax debt is not up to the IRS. The Bankruptcy Code governs the treatment of the debt. The Bankruptcy Code says that income tax and certain other tax debts can be wiped away in bankruptcy, if it meets certain date requirements and the taxpayer didn’t cheat.

Sometimes the date requirements haven’t been met yet and we guide our clients in negotiating a payment plan or non-collectible status to help them avoid collection activity while they wait for those dates to arrive.

5. Penalty Abatement

As a taxpayer, you have the right to request the cancellation of any IRS penalty. There are more than 140 penalty provisions and they all have a good faith exception.

If you have been penalized for something like a failure to pay the tax on time, but you acted in good faith and there exists some reasonable basis for the failure, then the penalty can be removed along with interest on it. This removal often makes it easier for you to deal with the underlying debt.

 

Written By:

Michael S. Anderson, Attorney
2158 N. Gilbert Rd. Ste 101
Mesa, Arizona 85203

Phone: (480) 507-5985
Fax: (480) 507-5988
Email: [email protected]
Website: www.taxlawyeraz.com

An IRS Offer In Compromise May Be Overkill – Even If You Qualify

The IRS Offer in Compromise isn’t always necessary or available.  Most people with tax debt just don’t make good candidates for the IRS’ formal “settlement” program.

So the question for those people who do qualify for the Offer in Compromise is whether it’s really necessary to try?

There are ways to keep the IRS at bay that may be less “difficult” and that will allow you to end up with the same result in the end.

An example:

Tom owed the IRS $200,000.00 plus interest and penalty that he incurred as a result of trying to keep a venue booking business afloat.  Instead of paying the IRS he paid his employees and vendors.

The business went under and he filed for bankruptcy before the IRS debt met date criteria for discharge.  He then floundered for a while licking his wounds and trying to get back on his feet.

He worked regular jobs but none paid well.  The IRS would contact him every few years and every few years he’d supply a list of his assets, basically a car and some old furniture, his income and his budget.

The IRS would agree to a small payment plan and Tom and the IRS would go back to co-existing.

Finally Tom found a job he enjoyed and began making much better money…bought some stuff, saved some money, and he met the love of his life and wanted to get married.

The IRS spotted the change in income, not the change in the romance department… and asked for some updated income information.  His small payment plan with the IRS became a bigger one.  So he visited an attorney and they decided that he had two choices:

1.  He qualified to file an offer in compromise and given his new income he might have been able to settle the debt for $45,000.00

2.  He could stay on the payment plan negotiated with the IRS previously and end up paying $24,000.00 on the debt.

Which do you think Tom chose?

Tom really wanted to just get this tax debt mess over-with.  He was afraid that his fiance wouldn’t stick around if he didn’t.  But what she didn’t understand was that Tom only had 24 months remaining on his 10 year statute for collection and the amount the IRS agreed that Tom could afford to pay each month was $1000.00.  24 x 1000 = 24000.  The IRS had agreed to leave his 401k savings alone.

The alternative Offer in Compromise was the quick sale value of the money in the 401k plus the $1000.00 x 12 for the total mentioned of $45,000.00 above.  The Offer in Compromise would stop the 10 year clock from running while it was being reviewed for up to one year.

Tom stayed in the payment plan.

Other reasons to rely on the Collection Expiration Statute and not an Offer in Compromise

What if you’ve reached a point in life where your income is fixed and relatively low.  The IRS might agree to place you on Non-Collectible Status or a small payment plan and simply leave you alone while the clock runs on collection.

What if you don’t care about a tax lien release?  The offer would give you the release if successful…but, you may not need to get a better credit score (and liens may not affect credit scores much longer anyway) or buy property.  If you don’t own a lot of stuff, the lien isn’t really worth much as a result anyway.  What if the 10 year statute period were near and the liens would expire anyway on that date?

What if your income is steady? An IRS Payment Plan may make sense given the fact that the 10 year clock continues to run while on a payment plan.  If it’s not far away – this may make more sense than an offer in compromise.  See Tom’s example above.

The key is to compare all your options

Facts make the case.  A close review of the facts surrounding your present and future situation both financially and with the IRS.. will tell you what the best route is.  Sometimes it’s a close call.  But time…is your friend.  You can always come back to the Offer in Compromise down the road if the facts change.

Income Producing Assets in an IRS Offer in Compromise

imagesIf you own a business and that business has value, many people would assume that it should be included as an asset in calculating the amount of settlement.  As a result, many offers are calculated much higher than they should be.

Income producing assets in an IRS Offer in Compromise shouldn’t always be fully included in the calculation of “reasonable collection potential”.

When an Offer in Compromise is submitted to the IRS and that taxpayer owns business assets that produce income, it’s correct to adjust the income or the expense calculation to account for any loss of income if the asset were liquidated or used as collateral to secure a loan for purposes of funding the offer.

This analysis may even include a rental property.

The Internal Revenue Code defines rental property as a real estate trade or business.  Rental property is important to the production of income where it is actually being rented.  If the IRS were to treat the equity in the rental property as an asset for Offer in Compromise calculation purposes, it would then need to reduce the income from that rental property as well.

The reason so many people get this calculation incorrect is because the IRS forms 433A and 656 don’t specifically ask if any business assets are essential to the production of income.  Most offer in compromise “filers” simply add both the asset value and the income stream from the asset to the disclosures in 433A and to the calculation in the 656 form as a result.

When they do this, the IRS gladly accepts.  It won’t catch the mistake and fix it.  It definitely won’t make the argument for the taxpayer either.

If you own rental property or a business and have significant tax debt, keep in mind that the Offer in Compromise must take the above into account. The documents should contain and the argument must be made that either the equity should be excluded or the stream of income should be excluded from the income producing business asset when calculating a settlement amount in an Offer in Compromise.

 

 

 

 

 

 

 

 

 

 

The Offer in Compromise isn’t over when it’s over

ber0-005The IRS Offer in Compromise isn’t over when you get the letter approving settlement with the IRS.  Don’t get me wrong, the Offer in Compromise (OIC) can be a great solution for some people with IRS debt. But unlike a chapter 7 or chapter 13 bankruptcy case, an offer in compromise isn’t over when you may think it is, it isn’t even over when have paid the agreed upon amount.

What?!!!   It isn’t over when it’s over?  No, it isn’t.  Or as Yogi Berra once said, “The future ain’t what it used to be.”

Unfortunately, IRS rules require that you do a few things to ensure the settlement remains in place.

TAX FILINGS

You have to file your tax returns every year for 5 years and you have to file them on time.  Now…if you don’t file them on time, the IRS won’t just pull the rug out from under you.  It will send you a warning letter before it does because it doesn’t want to waste the time and effort it put into the offer either.  But in any event, if your offer in compromise has been paid, you should triple check the calendar each year to make sure you have filed your return.

TAX PAYMENT

The corollary to the Tax Filing Requirement is the Tax Payment Requirement.  No longer can you wait until after tax day to figure out how you are going to pay the tax debt for the year.  You must make sure that you are withholding or saving enough throughout the year to guarantee that you won’t have tax bill that you can’t pay when the return is filed.  Again, the IRS won’t just kick you out…it will or should send a letter.  But don’t risk this.  Keep withholding correctly and make sure that you have stored enough money away to pay the difference.

 

TAX REFUND

The relief you felt when the offer was accepted will be lessened when the IRS keeps that next tax refund and applies it to the debt.  What?  Yes, even though the amount has been accepted the IRS will and can keep the net tax refund for the year in which the offer was accepted.  Example:  On September 15, 2015 the IRS send you the acceptance letter, in October you file your 2014 return that was on extension and your refund is $3500.00 because you have done such a great job of withholding during the 2014 year.

A bit of advice: Check to see if you are over-with-holding.

 

IRS LIEN

The IRS won’t release that lien until the offer amount is paid in full.  Some people are on payment plans that can last as long as 24 months and under the mistaken impression that the Offer settlement letter will be the IRS’ starting gun for release of that or those liens.  They won’t do it.  You have to pay the offer amount in full.

 

IRS SURPRISES

Sometimes the IRS makes mistakes and doesn’t change the books to show a zero balance and it doesn’t release the lien(s).  You will have to follow up after you have made the last payment to ensure these two things have happened.  A good place to start is by looking at the IRS’ account transcript for each year in question and than contact the IRS to follow up on ensuring all is correct.

 

IRS Form 433 Matters – There are hidden dangers

dl4IRS form 433 is the primary piece of equipment that the IRS collection unit and IRS revenue officers use to get your information. If you are an individual that owes almost any type of tax and you don’t qualify for a streamlined agreement, you will probably have to supply the 433a or at least the information it requests.  If you own a business, that business would need to supply a form 433b.

It’s important to understand that this form is more complex than it appears. On it’s face, the 433 appears to be simpler and even shorter than the intake form at a Lawyer’s office.   It’s only a few pages long and the questions appear straightforward.

The reason it is complex isn’t easily detected on it’s surface, the reason lurks in the dark like a shark staring up at the bottom of your surfboard and contemplating whether you might taste good.

The following is a list of “sharks” or the most common things that matter and that linger below the surface of a 433a form… that can really change the outcome of the case.

Numbers Matter

When you understand how the IRS is allowed to view your financial information when determining whether you are a candidate for an offer in compromise or what type of payment plan you qualify for, you begin to understand why a mistake when supplying these numbers can mean so much.

Incorrect Numbers Example 1:

Mr. and Mrs. Smith are self-employed.  In 2013 their business’ net income (income after all actual expenses) averaged $13,000.00 per month.  They had a tax debt and filled out a form 433-A on their own.  When doing this they estimated how much they believed their 2014 income would be and estimated lower than the 2013 total.  They also included in their business expenses the depreciation related to a piece of equipment and the mileage deduction related to a vehicle.  They filed the 433-A along with a 656 form for an offer in compromise.  When the live body at the IRS got around to reviewing the 433-A, she immediately noticed the discrepancy between the 2013 actual income, the last 3 months income and the estimated income in the 433-A.  She also noticed that the business expenses in the 433-A didn’t match the income and business documentation supplied to the IRS. She disallowed the numbers. They didn’t jive with the facts and this added $1700.00 per month to the amount the Smith’s had calculated as the net income.  With this additional $1700.00, the IRS believed that the Smiths could afford to pay the entire tax debt over the remaining CSED and rejected the Offer. The IRS kept the 20% down on the offer that was paid with the financial documents and then used the 433a as a roadmap to get to the Smith’s accounts and assets.

Incorrect Numbers Example 2:

Mrs. Henry received $1500.00 per month from social security and still worked. Her job netted her another $1500.00 per month. She had some old tax debt and attempted to provide the IRS with a financial statement. When she filled it out she told the truth about the fact that she had been paying $350.00 per month toward her credit card debt. The IRS doesn’t consider credit card payment as a budget item in an offer in compromise and considered the $350.00 as excess income. It multiplied the $350.00 by the amount of months remaining in the statute period and determined that Mrs. Henry could afford to pay the debt in full before the Statute ran out. Her offer was rejected. The IRS kept her monthly payments and used her 433a information to levy her bank account when she didn’t respond to the rejection notice.

In both of these examples, some thought and pre-planning may have prevented the outcome. Sometimes an offer or a payment plan request can be made at a different time, and sometimes good-faith budget planning and asset planning can be done to make the outcome better.

If you don’t understand the rules for the calculation of offers in compromise, payments plans, and bankruptcy, you don’t know how many sharks are watching you.

Truth Matters

Sometimes people get in trouble for providing incorrect information on the form 433A. They lie outright, or the IRS takes the position that the information provided was incorrect and purposely so… even though the incorrect information was inadvertently provided.

This document is a “serious” document. It’s signed under the penalty of perjury and if it can be shown that some intent was involved in skewing the information, fines and jail time are theoretically possible.

Assets Matter

 There are a few areas in the 433a form where information about assets are requested. The IRS is asking for this information primarily to calculate the value of available assets and determine whether it wants that value included in an offer in compromise or whether it wants to demand liquidation of the assets before setting up a payment plan.

Simple enough I suppose, as long is you understand how asset valuation is done. If you do, you can use the numbers when calculating the offer in compromise amount. If you don’t…well you may get bitten.

Asset Matter Example – Know the Rules

Mr. Franklin owned a business. He was self-employed. The business had a few pieces of machinery that weren’t used to run the business. Mr. Franklin had read somewhere that business assets weren’t countable in calculating asset value in an offer in compromise. He missed the part about assets that are being used to create the income aren’t countable but the income is.

He submitted a form 433a and although he disclosed the assets, he valued them at zero. The IRS was unaware of these assets previously and when it learned of them it conducted a valuation, rejected the offer and then moved to seize the assets forcing Mr. Franklin into a chapter 13 bankruptcy.

Another area where assets matter is in the area of transfers. The IRS is lurking and watching this one closely. The form 433a asks whether you have transferred anything in the last 10 years for less than market value.

Transfer of Asset Example – The Shark sees you moving

Mr. Azzari owned a business that had a serious tax debt. That business had alot of accounts receivable and those accounts receivable had a good value to them. Mr. Azzari transferred the accounts receivable to another “sister” entity he set up and then a few years later had the business submit an offer in compromise.   The IRS rejected the offer and the Tax Court confirmed that the offer rejection was fine because the transferred assets weren’t disclosed and included in the value of the offer. The sister company obtained the accounts receivable without paying fair market value for them so the Court considered the transfer to be fraudulent as well.

We see people who have transferred assets well before the tax debt became an issue. This isn’t fraud in the same sense as in the Azzari example,  but it’s possible that those assets could be considered part of the offer amount as well. Or at least failure to disclose the transfer… could result in rejection.

This stuff can require some guidance. There are sharks lurking in places you wouldn’t think.  Get some help if you are trying to complete a 433 financial statement.

 

 

 

 

 

No the IRS Fresh Start Program Doesn’t Include Penalty Abatement – Sorry

fresh_startAlmost every person who contacts me asks about getting rid of IRS penalties.  There are two reasons I think this happens:

1.  Many Americans believe in paying debt and see tax as a debt.  But they regard penalties as just unwarranted punishment.

2.  Many people have been falsely led to believe the IRS’s Fresh Start Program allows for some new, magical way to reduce or eliminate IRS penalties.

As for the second reason, I blame the tax resolution “experts” who use the veiled promise of penalty relief to take advantage of people who aren’t sleeping well and are desperate to hear good news.  These “experts” will use a subtle tongue slip to take money.   There is no such thing as IRS penalty relief under the IRS Fresh Start Program.

Unfortunately, penalty abatement almost never happens the way that it is portrayed.  You must still qualify for penalty relief using one of the legal remedies that existed before the Fresh Start program existed as follows:

Bankruptcy

Even though I have helped hundreds of people with tax debt problems use the bankruptcy code to find relief, I consider it to be a last resort.  For certain people with IRS penalties bankruptcy can provide penalty relief. Most penalties that meet the date requirements for tax debt discharge will be discharged in a chapter 7 bankruptcy.  In a chapter 13 bankruptcy almost all penalties are treated as dischargeable no matter the age.

Don’t run out and file a bankruptcy though.  Alot of thought and planning has to go into a decision to file a bankruptcy case.

First Time Penalty Abatement

The IRS will usually give a first time offender a free pass and waive a late filing or late payment penalty.  In order to get this abatement though, you have to be in current compliance with tax return filings, making any estimated tax payments, have no penalties assessed during the previous 3 year period, meaning paid and filed on time.

First time penalty abatement doesn’t apply to the failure to pay taxes through the Electronic Federal Tax Payment System, or to one-time filing for gift or state tax returns.

Reasonable Cause

Reasonable Cause.  You will hear this phrase being thrown around alot by tax professionals but if you think about it…the phrase is reasonably meaningless.  The IRS determines what is reasonable or not and even though it tries to treat these requests uniformly, it doesn’t.

Generally, the IRS considers reasonable cause to be when you have done everything else right but despite those efforts you weren’t able to comply.  Most people have failure to file and failure to pay penalties so the argument usually revolves around why you were late and/or broke.

Serious illnesses, death in the family, caught in a hurricane, and things like this are often the best arguments to make but really just about any argument can be posed if it is based on reality and and the situation was really beyond your control.

The IRS will also look at and should grant penalty abatement requests based on the law.  If for instance you can prove you mailed your return on time, or if there was a government slowdown etc.  than the law sometimes orders the IRS to remove the penalty.

Administration Based Abatement

The IRS will often change the way it is doing something and it will realize that changing the process may confuse some people.  When this happens there is usually some kind of administrative waiver that it put in place to forgive penalties out the outset for a certain period of time.

IRS Makes an Error

The IRS messes up all the time.  They apply penalties when they shouldn’t, lose returns, misplace payments, fail to make notes etc. etc. etc.

They will remove penalties or they should…if the penalty was based on the IRS’ error and you can prove it.

IRS Offer in Compromise

Much like a bankruptcy a successful offer in compromise will reduce IRS debt.  This includes the debt that has accrued as a result of penalty.

NO FRESH START BUT…..

There isn’t such a thing as IRS Fresh Start Penalty Relief…sorry.  Don’t believe people who try and tell you there is.  But there are ways to eliminate penalties in certain circumstances and sometimes with the right help.

 

What is the IRS Fresh Start Program?

download (4)The IRS Fresh Start program was created a few years ago.  It’s claim at the time was that “struggling” taxpayers needed some help so it changed some of the ways it did business with taxpayers.  The changes were done in three areas.  IRS Liens, IRS Installment Agreements and IRS Offers in Compromise.

It is debatable whether or not these changes have actually made the process of dealing with the IRS much easier, but if you owe the IRS money or have an IRS Lien, you should be aware of them.

IRS Lien and the Fresh Start Program

The IRS increased the threshold for filing a tax lien notice from $5000.00 to $10,000.00.

This wasn’t a large jump in amount.  In my opinion, it should have been at least a $25,000.00 limit.  I think that the IRS debated this issue as it did change it’s policy regarding the withdrawal of liens and used $50,000.00 as the thresh-hold amount.

Withdrawal of Notice of Tax Lien

Individuals

As mentioned, the IRS also changed it’s policy toward the withdrawal of a notice of lien when it added the ability for individuals, businesses with income tax debt, or entities that have gone out of business to request the withdrawal of a lien notice under circumstances.

The requirements for individuals to get the lien notice withdrawn are:

1.  The assessed balance must be $25000.00 or less;

2.  There must be full compliance, meaning un-filed returns;

3.  3 consecutive direct debit payments have to have been made and all the payments must be made by direct debit.

4.  You can’t have had a previously lien withdrawal for the same tax (unless lien was improperly filed);

5.  You can’t have defaulted on your current or any previous direct installment agreement.

6.  And the debt must be paid in full within 60 months or before the CSED Expires, whichever time is shorter.

Small Business

Small Businesses can qualify in much the same way, but only have 24 months to pay.

IRS Installment Agreement and the Fresh Start Program

If the assessed debt is $50,000 or less, the IRS now allows you to set an installment agreement without providing full financial information.  The debt is spread out of 6 years (used to be 5) or the length of time left in the CSED.  (Collection Statute Expiration Date)

In theory, this is a big deal.  People with higher incomes that are going to have large installment payments if the financial information is provided, can now avoid the large payments by paying the assessed balance down to the $50,000 threshold and setting one of these up.  They are relatively easy to set up and I have posted elsewhere instructions about how to do it.

The IRS’ generally won’t record an IRS notice of lien if one of these types of arrangements are set if it hasn’t filed one already.

If the assessed balance is less than $25,000.00 no financial information is necessary to set the payment plan up, and as mentioned above, if you are able to meet those lien notice withdrawal criteria that is an added bonus.

If a business is operating and it owes payroll taxes, the business may be able to take advantage of the “fresh start” program in relation to installment agreement if:

1.  The debt is $25,000 or less at the time of the agreement

2.  The payment plan is 24 months or less

3.  The payment is made by direct debit if the amount is between $10,000 and $25,000

4.  The taxpayer/business must be in compliance in all filing and payment requirements

Two benefits to this are:

1.  No financial statement is required.  This is great because it can be a real burden on a small business to put this together.

2.  No trust fund penalty is assessed against the owner for the trust fund portion of the payroll tax.  At least it isn’t supposed to be.

IRS Offer in Compromise and the Fresh Start Program

The OIC program allows qualified taxpayers to negotiate a settlement for an amount that is less than the tax owed. An OIC agreement won’t be accepted by the IRS if it believes that the outstanding liability can be paid in full in a lump sum or via a payment arrangement. The IRS reviews the taxpayers’ income, potential income, past income, expenses, assets, past assets and liabilities very closely to make a determination about the ability to pay.

Most people fail the above part of the test because they rely on the IRS’ pre-qualifier, or some bad advice and don’t fully understand as a result that the IRS won’t agree to settle if  it believes that the debt can be paid in full before the CSED ends.

But the IRS did make a big change for people who can’t pay the tax debt in full before the CSED ends, when it altered the way it multiplied excess income under the Fresh Start program.

Previously the IRS would multiply excess income when it was calculating how much you could afford to pay by 60 and 48.  60 if the offer amount was to paid over time, and 48 if the offer was a cash offer.

Under the Fresh Start program, these multipliers are 24 and 12.

Now a person with no assets and $1000.00 in excess income will pay $12000 instead of $48,000 toward the debt and $24,000 instead of $60,000 if the settlement is going to be paid over time.

This is probably the most important overall change made to tax collection by the Fresh Start program but specifically in the offer compromise area.  It roughly doubled the numbers of offers that are being accepted from about 20% to about 40%.

The offer in compromise program was affected in other ways as well.  The second best thing it did was to change the allowable expenses category to include more things like:

  • 200.00 per month for car allowance on older cars
  • Student loan payments
  • Some credit card payments
  • A portion of payments made to state and local tax authorities

IRS Penalty Abatement and the Fresh Start Program

If an offer is accepted it settles the debt and the penalty entirely, so in that sense I suppose you could argue that the penalty abatement under the fresh start program exists… but in reality this isn’t a “fresh start” program for IRS penalties.  Don’t let the salespeople fool you.

When looking for penalty relief, you have to go through the same process that has already been in place for a long time.

 

How many years will my IRS currently non collectible status stay in place?

calendar-thumb-375x250-49268When you are in an IRS currently not collectible status (CNC status) you are protected from IRS collection enforcement.  The IRS can’t levy or garnish and other than possibly filing a notice of tax lien, it leaves you alone.

This sounds great,  but in order to be placed in this status you have to convince the IRS that paying would be a real financial hardship.   For some people this is difficult to do.  Despite this, the U.S. Treasury Inspector General consistently reports that a few million people are in this status at any given time.

Many of our clients use CNC status in combination with the IRS’ statute of limitation on collection to get rid of the debt entirely.  An example:

Mr. Smith owes the IRS $100,000.00 and is now facing IRS enforced collection.  6 years of the IRS’ 10 year statute on collection have passed and Mr. Smith has 4 years remaining until the statute removes the debt permanently.  He is retired and living on social security and a small pension.  The IRS agrees that he qualifies for currently not collectible status and discontinues collection activity.  Other than receiving reminders from the IRS about the debt amount, the IRS makes no attempt to collect for 4 years and Mr. Smith’s debt is wiped away.

Sounds great of course, but the IRS also removes people from currently non collectible status on a regular basis for the following reasons:

1.   Failure to file and pay all future taxes

The most common reason we see for people being removed from this status is the failure to file a subsequent tax return and/or the failure to pay subsequent taxes when they come due.  Nothing will get you booted sooner because the IRS system can easily ascertain when a return is late or a payment is late.

2.   Increase in Income

When you file a tax return the IRS can see whether your income situation has improved and will often as for an updated set of financials to determine whether your can afford making a payment.  When it sees the financials and a new ability to pay, you will be removed and a payment plan will have to be negotiated.

3.  Formal Review

The IRS will often mark your file for a formal review when it agrees to place you on CNC Status.  Every few years the system will issue a request for updated financial information from you.  The revenue officer or collections will do this when they believe that your income may go up in the future.

4.  Right to Review at any time

In the end, the IRS has the ability to review CNC status for any reason at all.  If you have several years remaining on your 10 year statute period, you will want to look at other long term options like an IRS offer in compromise or bankruptcy in order to avoid this.