Articles Posted in Offers in Compromise

The IRS has completely revamped its offer in compromise guidelines to greatly increase the number of taxpayers who will be able to qualify. Our tax attorneys will be revisiting many of the offers in compromise that are pending, and we recommend that all tax lawyers, enrolled agents, and CPAs who have clients who have submitted unsuccessful offers in compromise in the past review their clients’ current financial condition to see if they will qualify under the new offer in compromise guidelines.

The new guidelines are announced in a news release by the IRS (IR-2012-53, May 21, 2012). More details are available in Attachment 1 to Internal Revenue Manual (IRM) 5.8.5 Financial Analysis. The changes are dramatic! And like all tax law changes they are complicated and loaded with ambiguities.

The most revolutionary change that our tax attorneys have noted is the methodology of calculating the offer amount. The amount of the offer in compromise has always been determined by the amount of the reasonable collection potential (RCP). RCP is determined by adding the realizable value of the taxpayer’s assets to his Future Income (FI). Thus
Offer amount = RCP +FI

Future income is defined as an estimate of the taxpayer’s ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future. In the past a taxpayer who could pay the offer amount in 5 monthly payments would multiply his monthly available income by 48 months to arrive at Future Income. A taxpayer who wanted to pay the offer amount over a 24 month period was required to multiply his monthly available income by 60 months to arrive at his Future Income. In both cases Future Income was added to the realizable value of the taxpayer’s assets to arrive at RCP, or the offer amount.

Under the new offer in compromise guidelines Future Income will be arrived at by multiplying the monthly available income by 12 if the offer can be paid in 5 monthly payments or less. If the taxpayer needs 24 months to pay the offer amount in full then the Future Income will be determined by multiplying the monthly available income by 24. The deferred payment option which allows payment over the life of the statute is no longer available. Our tax attorneys have formulated a simple example.

A taxpayer who has $50,000 in realizable equity in assets, and monthly future income of $2,000 will pay $74,000 if the offer amount can be paid in 5 months or less, and $98,000 if the offer will be paid over a 24 month period. This compares to offer amounts under the old guidelines of $146,000, or $170,000, respectively. The higher the monthly future income, the greater the discrepancy.

The new guidelines also include changes to the necessary living expenses:

  1. Payments on delinquent State taxes may be allowed in full or in part.
  2. Minimum payments on student loans guaranteed by the federal government will be allowed for the taxpayer’s post-high school education (note it says nothing about loans incurred by parents to pay for their children’s’ tuition).
  3. When the taxpayer owns a vehicle that is six years or older or has mileage of 75,000 miles or more, the IRS will allow additional operating expenses of $200 or more per vehicle. (A variation of this has actually existed in the past, but it has been buried in the IRM so deeply that most IRS offer in compromise specialists are unaware of the existence of this provision).
  4. The first $400 per vehicle of retired debt will not be added back to monthly available income.

Another welcome modification; the calculation of so-called “dissipated assets” has been radically altered. While the exact details are subject to numerous exceptions, and clarifications, in general assets which have been dissipated three years or more prior to the submission of the offer in compromise will not be included in the RCP. For example, if the offer is submitted in 2012, any asset dissipated prior to 2010 should not be included.

One thing that hasn’t changed is that zealous advocacy on the part of tax attorneys, CPAs and enrolled agents will still be essential to negotiate the best possible deal with the IRS. Careful planning on the timing of offers is also essential.

One of the few negatives is that even before these changes were announced the IRS was overwhelmed with the number of offers in compromise it was receiving. Things are likely to get worse. Our tax lawyers are guessing that very few offers in compromise will take less than a year for the IRS to process.

Another negative is that this is bound to bring unscrupulous “offer mills” out of the woodwork. Even with the new guidelines an offer in compromise is not for everyone, and the danger is that desperate taxpayers will wind up giving up their hard-earned dollars in the hopes of realizing a benefit which is not available to them.
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According to a complaint Part 2) filed by the California Attorney General against a well known tax debt problems through tax debt resolution services. Deutch tells clients that once they retain Roni Deutch A P.C., the clients are not legally obligated to continue making installment payments to the IRS.

* Roni Deutch’s tax attorneys each regularly carry caseloads as high as 600 to 700 clients at one time, but during especially busy periods can service as many as 1,200 clients at one time.

* Roni Deutch tell clients that their success rate in resolving clients’ back tax liability with the IRS is as high as 99%. In fact, her success rate is dramatically lower. In a majority of their clients’ cases, Deutch never actually submits a request for offer in compromise service, only 10% successfully receive an tax debt resolution services in a number of ways, including a television and radio advertising campaign. In these advertisements, Roni Deutch gives clients specific and non-representative examples of clients who have purportedly reduced their tax liability by as much as $150,000 by hiring Roni Deutch A P.C. At least some of these representations are false and misleading.

Last week, two Congressmen introduced The Tax Compromise Improvement Act of 2009, new legislation intended to encourage taxpayers to settle their tax debts by submitting Offers In Compromise (OIC) to the IRS.

Current law mandates a nonrefundable 20% down payment be submitted with each OIC application. A mandatory non-refundable fee, combined with a very low chance of acceptance (the IRS rejects more than 75% of all OIC applications), makes the OIC program much less alluring to taxpayers who are searching for ways to settle unpaid tax debts. In fact, the number of OICs received by the IRS fell by 21% from 2006 to 2007 when this down payment requirement took effect.

Should Congress pass this pending legislation , the nonrefundable down payment requirement would be repealed. Without this requirement,the OIC would be a much more attractive option to the countless taxpayers who are struggling to settle their tax debts with the IRS.

Sometimes taxpayers want to be “creative” in filling out IRS Form 433-A (Collection Information Statement for Wage Earners and Self-Employed Individuals). Stephen Miller got too creative, and he was found guilty of tax evasion in violation of Internal Revenue Code § 7201. He was sentenced to 46 months imprisonment. The conviction was upheld by the Court of Appeals. United States v. Stephen Miller (No. 06-11078) (5th Cir. 2008). Miller, who owed the Internal Revenue Service (IRS) about 2 million dollars filed an offer in compromise with the IRS in which he stated he had insufficient assets and income to pay the tax debt. The IRS Form 433-A (Collection Information Statement for Wage Earners and Self-Employed Individuals) he filed stated he only had $40,000 in assets including an IRA with a balance of $25,000. What he didn’t tell the IRS was that he had withdrawn $1,000,000 from his IRA, and transferred it offshore. When the IRS asked about the money taken out of the IRA he responded that the money had been used to pay off a loan Euromex Leasing Corporation in the Isle of Mann. As it turned out Euromex was a shell corporation controlled and formed by a financial planner that Miller consulted to hide his money from the IRS. And how did the IRS find out that it was all a lie? Simple, the financial planner turned Miller in when he wound up with his own tax fraud problems with the IRS.

If you have tax debts and don’t want to be convicted of tax evasion call the tax attorneys at Brager Tax Law Group, A P.C.

The United States Tax Court held that the IRS did not abuse its discretion when the Appeals Division upheld a notice of intent to levy issued under Internal Revenue Code § 6330. In West v. Commissioner, TC Memo. 2008-30, the Wests had obtained an offer in compromise from the IRS, but then violated its terms by failing to pay estimated taxes, failing to timely file tax returns, and failing to pay multiple tax penalties assessed against them during the 5 year period following the acceptance of their offer in compromise.

To make matters worse the IRS tried to notify the Wests about the impending default of the their offer in compromise, but the Wests had moved, and failed to notify the IRS of their new address. The Wests tried to rely on the failure of the IRS to notify their representative that their offer in compromise was in danger, but the Tax Court held that the IRS had no duty to notify their representative.

Points to Remember:

The United States Tax Court recently held that it could not consider a couple’s offer in compromise based upon doubt as to liability since it was a challenge to the underlying tax liability. In Baltic v. Commissioner, 129 T.C. No. 19 (2007) the Internal Revenue Service (IRS) had issued a notice of deficiency to the Baltics, but the Baltics did not file a Petition with the Tax Court. Later, after the IRS filed a lien, they filed a Request for a Collection Due Process Hearing, and submitted an offer in compromise based upon doubt as to liability, arguing that the notice of deficiency was in error. The IRS Appeals Officer refused to consider the offer in compromise, and the Baltics appealed that decision to the Tax Court.

Not surprisingly, the Tax Court held the offer in compromise based upon doubt as to liability was simply a method of challenging the underlying tax liability, and since the Baltics could have filed a petition with the Tax Court at the time they received their notice of deficiency they were barred from disputing the tax liability in the Collection Due Process Hearing.

The Baltics could have filed an offer in compromise based upon doubt as to collectibility, and the IRS would have been forced to act on it, and if it was denied then the Baltics could have had the Tax Court review that determination. Perhaps the Baltics didn’t file an offer in compromise based upon doubt as to collectibility because they thought they wouldn’t have qualified for one, but whatever the reason their attempt at getting the Tax Court to consider whether they actually owed the amount the IRS claimed was rebuffed.

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