rs-irs-tax-debt-resolution

The Offer in Compromise Program is a program that was developed by the IRS to give taxpayers a fresh start on life. A taxpayer in exchange for a lump sum or in exchange for a settlement of monthly payments can eliminate past tax liability in exchange to the promise of future compliance to the IRS. If the taxpayer promises to pay in full and on time, and file on time then the IRS will forgive their past tax liability. Sounds a good, great deal but it’s also a tremendous deal for the government, as well, because the taxpayer is essentially getting back into compliance to paying everything and the government loses that cost of having to administer the taxpayer’s file. It’s actually a win-win for both parties. With that said, there’s been a lot of negative press associated with the Offer in Compromise Program. You’ll see hilarious ads on TV that you can settle your tax liabilities for putting your pennies on a dollar. Although that is true, a lot of people have abused the program. They submit Offers in Compromise that don’t have a chance of being accepted. Offers in Compromises work on a pretty strict formula which I will get into a minute. The most common type of Offer in Compromise is what we call a Doubt as to Collectability Offer in Compromise.

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Let’s talk a little bit for a second about Doubt as to Collectability Offer in Compromise, the successes and the more common ones. So, Doubt as to Collectability Offers in Compromise fall under a specific set of guidelines. Doubt as to Liability Offers in Compromise are based on a formula that is the quick sale value to find by the IRS at 80% of the value of the taxpayer’s assets plus the positive monthly cash flow times 60 months. If a taxpayer is showing $10 and positive monthly cash flow over 60 months, that’s $600. A hundred dollars a month in positive monthly cash flow, that’s $6,000. A thousand dollars a month in positive monthly cash flow, that’s $60,000. Positive cash flow is really important from an Offer in Compromise standpoint because little changes in the positive monthly cash flow of the taxpayer really affect the minimum offer amount that the IRS will accept. When determining whether your client is an Offer in Compromise candidate, one of the best things to do is ask the client what assets do you have? List out the assets that they have, determine what their value is, meaning not with the client’s assessed value is but with the quick sale value of the client of the asset is. Then, take those assets and list the client’s income and expenses out, and figure out what their positive monthly cash flow is if any and then, that gives you an idea of what their minimum offer amount is. That’s a really great trick to pre-screen Offers in Compromise.

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The next thing I want to talk about, I want to talk about some issues associated with Offers in Compromises. The first issue I wanted to discuss is what we call dissipated assets. A dissipated asset is an asset that the taxpayer has disposed of, that the IRS is going to count towards their reasonable collection potential or their minimum Offer in Compromise. For example, this happens all the time. People will liquidate their IRAs and they will go out and spend money on all sorts of things. They’re going on vacations or trips or food or whatever. The IRS will come back and they’ll say, “Wait, the $100,000 in this IRA, what happened to the money?” The taxpayer will throw their hands and then go, “I don’t know. We just spent it.” The IRS goes, “That $100,000 of money should have been used to pay your tax liability. So, we’re going to consider this a dissipated asset.” Dissipated asset comes up all the time with property. They come up with IRA’s securities. Basically, you need to be able to substantiate to the IRS the money that was used with the dissipated assets was recently spent on ordinary and necessary living expenses, what other things that the IRS are going to accept. It’s really important that the outset to identify any dissipated assets that you might have, otherwise you might make an Offer in Compromise only to be disappointed at the end. The next issue I want to talk about is valuation. Valuation is a really hot topic within the IRS and it’s something that practitioners use all the time to present the client’s financials in the best light possible.

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IRS liens so I want to talk briefly about IRS liens IRS lien or lean in general is a security interest in a piece of property so an IRS lien it represents the government’s interest in the personal and real property of a taxpayer a tax lien has the effect of attaching to all the taxpayers real and personal assets and in the event of the taxpayer goes to sell one of those assets the government it has a claim to that money now in actuality liens really serve two purposes number one they attach to property and make it really difficult to sell houses and occasionally it can make it really difficult to sell vehicles or larger items of personal property to believe those that are registered with the DMV and secondly it leans have a very negative impact on a taxpayer’s credit and their ability to borrow now the officially the policy statement from the IRS is that liens are used to preserve the government’s interest but there is a big debate between. The IRS and the tax practitioner community on what the efficacy of liens are particularly where a taxpayer doesn’t have any assets for the government to secure because the government likes to say that leaves are a necessary measure of preserving a security interest we would argue that the liens are a punitive measure that really only impacts a taxpayer’s credit particularly you have a case where taxpayer has entered into installment agreement that will full pay a liability and the IRS goes and files lien anyway that is a particularly hot topic of debate, but an IRS tax lien can be dealt with in one of three ways you can withdraw you can ask the government to withdraw the lien meaning that the gleam effectively never happened and will completely disappear from a tax payers credit the government can release.

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IRS levies. A levy is a seizure of property or assets. Mostly what IRS levies are associated with is our bank levies. The IRS will come in and will levy a taxpayer’s account. Levy is different than liens. Liens do not immediately effect property in terms of seizing that property. A levy is a seizure. So, the IRS can levy bank accounts. They can levy accounts receivable. They can levy brokerage accounts or other financial assets. Levies are often a source of stress for taxpayer and when we get the majority of our levies clients, “Hey, the IRS wiped out my bank account.” Levies can be defeated with a number of things. The most important thing to defeat a levy is prevention. You want to make sure that you’re working with a revenue officer or with a CS to avoid any levies. When levies are issued it is important to fight them. You can fight them I numerous ways. The easiest way to fight a levy is to substantiate a documented hardship with the IRS.

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Interest and penalty abatements. One of the more commonly complaints that we get around our office is the amount of interest and penalties that are tapped on to liabilities. A taxpayer will call us up and say, “Hey, we owe $20,000 to the IRS but they charged another $20,000 in interest and penalties that we didn’t even know them. Is there anything that we can do about the interest and penalties?” The short answer is “yes,” particularly with respect to the penalties. IRS interest abatements are very difficult to get. The IRS fears interest as what they are entitled to because of a delinquent tax liability. The IRS interest rate usually is pretty low. It’s usually defined by the statutory interest rate. It’s usually between a 3% and 6%. So, it’s usually not that big of a killer. The killer is the penalty portion of it. The penalties are often substantial. They can raise anywhere from 10% to 75% and they can turn a small liability into a fairly substantial one really, really quickly. Penalty abatements are governed through Section 20 of the Internal Revenue Manual.

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So, state collection agents are under a very tight guideline for how they are supposed to behave and their behavior is mandated through either statue or through administrative collections manuals or procedures so a lot of the conduct that they have is governed internally. Although you do want to foster a generally good relationship with the agent, some agents are notoriously difficult to deal with or some go off the reservation from time to time. So, if you have a situation where you have a breached of conduct, you’d make sure you want to document the conduct that occurred, you want to get the agent’s name and ID number or station number and then you want to ask the collection agent for a phone conference with their manager. One of the rights that is installed for most tax payers is access to an immediate supervisor so the collection agent – In California, for example, collection agent is supposed to have the supervisor give you a call back within 48 hours. Some collection agents will not do this, they’ll refuse to enter notes in the system, they won’t pass the message along and in which case you are still entitled to that phone call.

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