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.

 

 

 

 

 

 

 

 

 

 

Why did the IRS terminate my installment plan?

images-thumb-375x534-61823Just because you are in an IRS Installment Plan with the IRS doesn’t mean that your work is done.  One of the common questions I get is “why did the IRS terminate my installment plan?”.

The following are the most common reasons why this happens.

Your Income Changed

When you file a tax return the IRS reviews it to determine whether you income has changed i.e. increase.  If they see this and you are in a partial pay installment plan or a plan based on your income and budget, they will send you a letter indicating that the plan will end unless you provide updated financial information.  Unless your payment plan is guaranteed or streamlined, the IRS will request new financials when it sees the increase in income.

You Didn’t File a Return

Installment plans are contingent on compliance.  If you late file a future tax return….it will send you a notice of intent to terminate your agreement and send you back to collection.  You will have to file any missing returns, and negotiate a new plan.

You Didn’t Pay a Future Debt

If you file a subsequent return on time and it has a balance due but you don’t pay it, the IRS will do the same thing as if you didn’t file the return on time.  It will send a notice terminating the agreement and force you to re-supply your financials.

You are in a Partial Pay Installment Agreement

Many people with tax debt are either in non-collectible status arrangement or they are in a partial payment installment agreement with the IRS.  In a partial payment agreement, you aren’t paying enough to the IRS to pay the debt owed before the 10 year clock on collection runs out.  (IRS Statute of Limitations on Collection)  This type of arrangement is allowed, but the law requires that the IRS review the arrangement every few years.

An Example

You owe the IRS $75,000, and have convinced them to accept $100.00 per month toward it.  The Statute of Limitations period has 4 years or 48 months remaining to collect the debt of the 10 year total time-frame it has to do so.  Six years have elapsed.  About 2 years into that 4 year remaining period, the IRS should send you a letter asking you to supply updated financial information.

Late Payment

If you make a late payment, the IRS will typically warn you, but if not caught up, it will sever the installment agreement and you will have to re-negotiate it.

Avoiding problems

Contact the IRS as soon as you are having one of the problems above.  If you are having trouble, don’t ignore the situation.  Call the IRS and ask for a month off. Review any changes in your financial situation and re-think whether some other option may now make more sense like Non-Collectible Status, a Lower Installment Agreement, Bankruptcy, or an Offer in Compromise.

 

Written By:

michael-anderson-tax-lawyer-mesa-azAnderson Tax Law
2158 N. Gilbert Rd. Ste 101
Mesa, Arizona 85203

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

 

Self Employed? Pay your estimated taxes monthly

plowing-fieldThe Robert Burns poem To a Mouse, written in 1786, is an apology.  The story has it that Mr. Burns upended a mouse’s home while plowing a field and felt bad about it.  To make amends, he wrote a poem, the most famous portion of which reads:

But little Mouse, you are not alone,
In proving foresight may be vain:
The best laid schemes of mice and men
Go often askew,
And leave us nothing but grief and pain,

John Steinbeck, the author of the 1937 Novel….Of Mice and Men, borrowed from Burns’ poem when he titled the book, and this may be the reason we think of “Mice and Men” when our own grand plans go awry.

Every time I meet a self-employed client with tax debt,  grand plans are part of the discussion.  But the road to success is difficult, and grand plans get sidetracked by things like taxes.  Many people who are self-employed don’t withhold enough, and the IRS does it’s best to leave nothing but “grief and pan” when this happens.

It files incorrect tax returns, assesses penalties, and uses these to levy bank accounts and assets.

Everyone who goes into business for themselves has the intention to follow the law and make it work.  The plan is to make money, pay business expenses, quarterlies, and live a comfortable life.

But…running a small business is hard thing to do, and even the best laid plans…”go often askew”.

Contract’s are broken, clients don’t pay on time, competition grows like a weed, and the un-foreseen is around every corner.

The IRS makes it worse in it’s never ending quest to enforce the Government’s agenda of re-distribution.

The best solution short of winning the lottery, may be to stop making quarterly payments altogether.

No, don’t become a tax “protestor”,  just start paying monthly instead.

It’s too hard and there are too many twists and turns for most small businesses to hold onto the tax funds for an entire quarter.

Paying each month turns the tax bill into a bill just like any other.  It saves you from needing a separate account, and it eliminates the desire to use the funds for every emergency that pops up.

You can send the payment to the same address you would have sent your quarterly payments.  Write your social security on the check (assuming you are using your social as your ID for the business) and include “estimated 2016 liability” in the memo.

 

michael-anderson-tax-lawyer-mesaazWritten By:

Anderson Tax Law
2158 N. Gilbert Rd. Ste 101
Mesa, Arizona 85203

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