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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Issues in the Offer in Compromise Process
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.
Taxes and Bankruptcy
Taxes and bankruptcy. Bankruptcy is what we consider a nuclear option. It is a very extreme measure. It can be a very effective tool if the taxpayer has other debts. But it has a lasting impact on the taxpayer and on their credit and on the perception of their general financial competency. We generally recommend bankruptcy as a last resort particularly if the taxpayer only has tax liability which is perhaps best settled in the Offer in Compromise program versus going and filing a Chapter Seven. However, bankruptcy can be an effective tool where there are other debts or where an Offer in Compromise might not be the most feasible route to go for a variety of circumstances. Obviously this is based on the individual and the variety of circumstances that surround most people which were all different. But in terms of bankruptcy, we are dealing with liabilities that are income taxes. There cannot be any indicator of fraud or tax evasion. We are dealing with tax that are at least three years old.
IRS liens so I want to talk briefly about IRS liens
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.
IRS levies. A levy is a seizure of property or assets.
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.
Interest and Penalty Abatements
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.
Innocent Spouse Relief
Innocent Spouse relief. Innocent spouse relief is a fairly hot topic of conversation particularly among family lawyers and those individuals who are going through separations because oftentimes these people feel that they wrongly injured by their spouse or significant other’s tax liability. Innocent spouse requires several things and I want to be clear about those from the onset. First of all, you must have some sort of understated tax in the return that you had no knowledge to. If your spouse runs a business and they understated their tax liability and you had no knowledge of it, then you could potentially be a candidate for a innocent spouse. You also have to show that when you sign the return you have no knowledge of the liability and do not benefit from it. That is a particularly tricky proposition because oftentimes if one spouse is cheating on their return or understating liability then the other spouse is receiving some indirect benefit of that whether it’s increased cash or to the household or some other financial gain. The IRS will not grant innocent spouse relief in those cases.
Differences Between the Federal Tax System and the California State Tax System
Briefly I want to talk to you about differences between the federal tax system and the state tax system. As I mentioned, due to limited resources state are usually more aggressive in their collection tactics and their examination tactics than the federal government and the principal reason for this is because taxation for the states is the principal source of revenue racing. A lot of times when there is a budget shortfall the state will lean on their self tax and the federal tax bureau will lean on the income tax to help mandate collections priorities and help raise revenues either through collecting past due liabilities or examining returns and finding new ones. In general, the states because of their limited resources will rely more on in voluntary collections actions than field representatives so there’s much greater reliance at the state level for collections processes that are instituted from a remote location so for example in California the main center of operation for the FTV which is the Franchise Tax for the State of California income tax bureau is in Sacramento. Most FTV actions are initiated from the Sacramento office whether they are levis, phone calls, contacts with tax payers, or any sort of collection actions. The states have limited resources at the local level.
California State Specific Tax Issues
So now I’d like to talk to you about some issues with regarding that the states have specifically. In California, we have a number of challenges in dealing with the state taxis that are either less of an issue or non-existent at federal level. The first as I’ve kind of touched down earlier is overside. There is usually less overside on cases than there is at the federal level. And I mean by that, is the auditor or the collection agent is given a lot more latitude in most cases to handle the cases as they see fit as long as it falls within the administrative guidelines. This particularly has an impact on the examinations process so a lot of the times the auditors are kind of given free rein to define the scope of what the audit is in sales tax or in particular they can do a really detail investigation and go through a number steps that you may not find in the federal process. As a result of this and as a result of the states having fewer resources, there is often times administrative delay when dealing with the state cases. For example, the time frame in California right now is if I were to represent a client in a sales tax audit and me and the auditor just agreed on the result and I filed and appeal, it would take anywhere from 8 to 12 months under the current structure to hear that appeal.
California Collection Tools Part One – Voluntary Compliance
Payment arrangements at the state level are a little stricter than they are at the federal level.