Offer in Compromise: How to Qualify

If you have an IRS tax problem you have one of three tax reliefs, first is an installment agreement, the second is currently not collectible status and the last and possibly the best is offer in compromise.

Like everything else in life, good does not come in cheap. Some estimate that only 13% of the offers are accepted by the IRS.  We will venture and put this anemic result under three reasons:

First reason is reluctance from the IRS itself. The IRS acts as though this money that pays for the program (or the money forgiven) is paid for by the flesh of its employees. We have seen offers killed by the IRS even though the amount was agreed upon just because the taxpayer did not file a 1099 some years past; some excuse for rejecting an offer in compromise!

Second reason should be attributed to those who prepare the offers and counsel the taxpayers. Some of the preparers such as CPAs, tax attorneys or enrolled agents do not take the time to think the offer through and do the proper calculations. 

One of the reasons tax practitioners submit offers that are constantly rejected is an erroneous commitment to their clients that they qualify for an offer in compromise when they should have been told that they do not qualify in the beginning.  Practitioners submit offers to summarily dispose of their obligation to the client knowing that the offer will be rejected or worse yet having no idea if that offer is good or not.

The third reason rests with the taxpayer themselves. When people have a tax debt to the IRS, or owe back taxes, the first impulse is to shrink and hide everything. This may sound intuitive but in fact this may cause them not to qualify and thus they are denied tax relief that was within their reach.

We know that to qualify for an offer in compromise we look at both your assets (what you own) less any loans on those assets.  If you have a house worth $100,000 and the loan is $101,000, you are upside down on the house and you own nothing and the IRS will treat you as such. So, if they look for assets you have got none.

The other things that the IRS looks at are income and expenses.   If your income is less than expenses (the expenses that the IRS allows you to claim) you have no ability to pay. Thus if you have no assets and you have no extra money from your income, you are a good candidate for an offer in compromise.

The emphasis that we would like to make here is on the expenses and how taxpayers approach it. Taxpayers, in general, believe that the poorer they look the better off they are in handling their tax settlement with the IRS. This is generally true most of the time but not all the time.

Let us give an example. Sometimes a taxpayer prefers to drive a beat up car to show the IRS how destitute they are when in fact they are better off if they had a new car! Strange as it may sound, it may be the only way that will allow an offer in compromise to be accepted. 

Let us assume that a taxpayer has an IRS debt of $15,000. Let us also assume that the taxpayer makes $3,000 a month and has no car payment but drives a 1985 beat up Dodge that breaks down every day. 

Let us also assume that when we added the expenses for the taxpayer the total came out to be $2,700. If we submit the offer in compromise like this the IRS will reject it and will say that he can pay $300 a month against his IRS debt of $15,000.  They have 10 years to collect $300 per month. So they know they can collect from him up to $30,000 in those 10 years.

Now let us assume that the taxpayer wanted to go in style and buys himself a brand new Toyota with a payment of $350 a month. That puts the taxpayer in front of the IRS with a negative cash flow of $50 and hence allows him to qualify for an offer in compromise which means he will pay some dollar amount that could be as little as say $100 (can be anything but zero) to settle his back taxes of $15,000.

In summary, sometimes you are better off if you live your life naturally even though you are getting ready to submit an offer in compromise. Machination may adversely hurt taxpayer in settling their IRS debt.

Payroll Taxes and Tax Settlement

Payroll taxes is the worst tax debt you can owe to the IRS. Your tax problem is magnified by the fact that payroll taxes are not personal taxes or even corporate taxes that you or the corporation pay out of pocket to finance public policies. They are taxes taken from others and given to you to deliver to the IRS. I guess that is why they call them “trust fund.” For some reason those payroll taxes were not delivered. At the end of the year, your employees will file their personal income tax and send the W-2’s along with them and they will request the refund. The IRS will have to pay them their refund even if they never received the money from you. You get the picture. That will make them mad, of course.  Did you intend to willfully choose to ignore the tax law and to incur tax debts to IRS? Most likely not. You just got caught in a cash flow problem threat which became an IRS tax problem. Does the IRS care that you did not mean to use the trust fund? Probably not.

The IRS will deal, most likely, harshly with you if that tax debt ever became excessive. They will hold you personally liable for the tax debt. Your company tax problem is not only a proprietorship or a corporate tax problem but also became an individual tax problem. The tax problem has mushroomed into tax problems.

The IRS will issue a bank levy your account as they will the corporate account. They will garnish your wages if you become an employee of someone else and still owe those back taxes. The bank levy and the wage garnishment are not the only manifestation of IRS anger. They may attach among other tax penalties hefty civil penalties. Is their a tax resolution to this tax problem?  The answer is like anything in life, there is always a solution hanging out there; tax problem or no tax problem.

The proposed IRS settlement will be one of the traditional tax resolutions we have enumerated previously such as Installment agreement (IA), Offer in Compromise (OIC) or to be declared Currently Not collectible (CNC) by the IRS.  After you obtain tax representation the question will be: which flavor would a CPA, a tax attorney or an enrolled agent propose as a tax relief? The tax relief will depend on your financial situation. The worse it is the better the tax resolution to your tax problem it will be.

The best tax settlement to your IRS debt probably will be a minimum amount of an Offer in Compromise, if you qualify.  This will be an ideal tax help or tax relief for your IRS debt. The worst tax resolution is payment of the full amount of IRS debt which will include the penalty and interest. This solution is an Installment Agreement. Obviously, your CPA or your tax attorney will prefer to provide a better tax relief but they may have no choice because of your financial situation. You may have to accept this tax solution as the best tax help available at that time. Certainly such an IRS settlement can be renegotiated if your situation changes in the future.

Which Tax Resolution Will Be Your Best Tax Relief?

We discussed in the last blog of 3 possible tax settlement options available to settle IRS debt to prevent or remove wage garnishment, or bank levy. Tax lien will be a subject of its own in subsequent blogs. We mentioned three alternatives, installment agreement, offer in compromise and being declared currently-not collectible by the IRS.

We saw that installment agreement meant that we will pay all IRS taxes including interest and penalty but instead of a lump sum settlement, we will do it over certain period. We also said that we the tax relief that we will get for our back taxes will be shaped by our financial situation; assets and liabilities on one hand and income and expenses on the other. 

Your CPA or tax lawyer has to calculate both the amount of income in excess of your expenses and the net worth to decide the best tax help for your tax problem he or she should recommend. Generally, if you have assets to pay in full your total tax debt or if your monthly income is more than your monthly expenses in such a way that it is enough to pay your tax debt over the statute of limitation, you are not eligible for an offer in compromise but you may be eligible for an installment agreement and possibly the currently not collectible status. 

In the last blog we gave an example of how would an installment agreement be the only option to pay your back taxes and solve your tax problem. Now it is time to talk about offer in compromise as an IRS tax relief solution to your tax debt. Let us assume that your tax debt is $10,000 and you have no assets whatsoever. Let us assume that your monthly income is $1,000 and your monthly expenses are $1,100. In this case you have no assets and no residual income to payoff your tax debt. You are a perfect candidate for offer in compromise or currently not collectible.

The question then, should we try to declare you as currently not collectible or seek tax relief in an offer in compromise? We will discuss the difference between both alternatives as a way to resolve your IRS problems.

Offer in Compromise, Installment Agreement or Not Collectible?

If you have a tax problem or tax problems such as a bank levy, or wage garnishment and you are seeking tax relief for your tax debt, the tax help a CPA, an IRS Tax Attorney or an enrolled agent will offer you has to be one of three:

a. Installment Agreement

b. Offer In Compromise

c. Currently not Collectible

IRS Installment Agreement:

Basically, an installment agreement means that your tax debt settlement offered you no reprieve on the amount you owe.  You will pay the full amount of the IRS debt. The only tax debt relief you have is making periodic payments of the full tax debt amount. The tax resolution for this tax debt will not stop the accrual of interest and penalty.

The question is, why would a rational human being choose an Installment Agreement over, say an Offer in Compromise or Currently-Not-Collectible status? The short answer is: typically your financial situation dictates the agreement that will ultimately shape the tax resolution of your case.

Generally speaking, if you have a lot of net assets and your income is much more than your expenses, your chance of reducing IRS debt is lower. Net assets are defined as your assets minus your liabilities.  If you own a house that is worth $120,000 and your loan is $80,000, your net asset in this case is $40,000. Any IRS tax resolution must account for this fact. For example, if your tax debt is $10,000, the IRS will insist that you pay the full tax debt because they can collect that much from you. The only tax relief in this case is to schedule the payments over several years and you must understand that in your search for professional tax help.

The other factor when you seek tax debt settlement is the income and expenses as we said above. Let us say that you have no home and you own nothing in this life and your tax debt is $10,000 as in the case above. Let us assume further that your monthly income is $5,000 and your expenses according to IRS national and local standards are $4,500. If this is the case, the IRS will not reduce your tax debt and the only tax resolution for your tax problem is an Installment Agreement. 

If you have a wage garnishment or bank levy, the IRS will not embark on levy release or removals of your wage garnishment unless you strike some sort of a tax debt settlement be it an Installment Agreement, Offer In Compromise or be declared as Currently Not Collectible. As a side note you must bear in mind that your CPA or your tax attorney must prepare all your unfiled taxes.

Discussion of the rest of tax resolution options will be continued on the next blog.

Back Taxes: The Case Against Not Filing

The simplest argument for filing taxes in time is that it is the law. You must comply with the law. If you are not a tax protestor, and we hope that you are not (tax protestors usually end up on the wrong side of the bed) then you have no qualms with the legality of filing.

There are many benefits of filing in time besides being in compliance with the law. The most obvious benefit is getting your refund. If you are entitled to a refund and you don’t file, you may lose your refund because you are barred by the statute of limitations when you eventually file. We have seen people losing $7,000 or more of money in some cases that were coming to them and when they filed late they got nothing. Never mind that the IRS will ask you to pay the tax debt even if you don’t file. You guessed it. They file for you and now you owe back taxes (more on that later.)

One of the benefits of filing is that you may be able to wait out the IRS on you tax debt. The law states that the collection statute of limitation is 10 years.  If for example you owe taxes and disappeared from the radar of the IRS for ten years, the IRS may have lost the amount of tax you owed forever. In this case you have got yourself a nice tax settlement.

One of the disadvantage of not filing your taxes is that the IRS will file on your behalf. IRS calls that SFR or substitute for return.  Needless to say, in preparing your unfiled taxes, the IRS will not look after your best interests. The IRS will assume the worst against you. They will do a return for you as married filing separate even if you are single because filing separately causes you a tax liability higher than the latter.  In an SFR, you will not get any deductions for your expenses. 

For example, if you sell a house, the tile company will give you a 1099 for the proceeds and sends the IRS a copy of this 1099. The IRS records the total sale price as your income even if you were upside down on the house and they will not record the cost of the house. That is why we have many clients who come to us for $70,000 or even $100,000 of tax liability because of the sale of their residence when in fact they lost money. Unless you file, the tax liability remains on the book. The IRS had one of our clients owing over $250,000 in 2003 because of this exact issue. Guess how much he would have owed? Zero.

Because the amount of taxes owed is usually high you may even have a revenue officer appointed. When you have a revenue officer, that spells bad news. And to make things worse, we do charge more for revenue officers. So, that is another reason that you should file your taxes earlier.

Audits is another reason.  If you don’t file, the IRS can select any return regardless how old it is for an audit. On the other hand if file in time and you happen to have a year in the past that you made a lot of income and you think if you get audited on that year you will pay a lot of money, this year cannot be audited after three years. So, here you may have gotten away with murder.

We have seen other benefits to filing your taxes in time that particularly come in handy when you have a bank levy or wage garnishment or even when you want to do an installment agreement or an offer in compromise.  If you have unfiled returns, there will been no tax settlement for your tax debt unless you are in compliance. Tax compliance in this instance means filing all your back taxes. If have not filed, that may delay the process of IRS negotiation when you need it most.

Finally the IRS may even look sympethatic on your case if you have been filing on time.

IRS Levy, Tax Liens, and Wage Garnishments....Are They Overdoing It?

This time we want to discuss Taxpayer Advocate Report to Congress regarding IRS Collection Practices. The Watchdog expressed concern about the IRS collection procedures for IRS debt when it inflicts “unnecessary or disproportionate harm” on taxpayers. Not only does the practice hurt the taxpayer but it affects negatively the money that the IRS collects for back taxes.  IRS believes that the more aggressive they enforce collection actions against taxpayers such as tax liens and levies, the more money they collect for back taxes or tax debt.

The reality however points to the opposite results. The Taxpayer Advocate believes that the “data don’t bear that out.” The increased tax collection mobilization brought opposite results. The report to congress states that since 1999 the IRS increased tax lien filings almost five times (475%) and increased tax levies whether a bank levy or wage garnishment by 600% (six times.)  With this massive attack, one would expect that they IRS is doing now a great collection job. The numbers point that collection dollars (adjusted for inflation) went down by 7% over that period.

So we previously said that tax liens, bank levies, wage garnishments or other levies did not help the IRS but actually hurt them as the Advocate suggested. It also inflicts considerable damage on the taxpayers who have tax debts or back taxes.  They say that when the lien is filed you immediately lose 100 points on your credit score. If you were begging to recover and you built your credit score to 700 now they put you back at 600 and if you are at 600 and on your way to have access to the financial system and possibly the American dream, they put you back at 500.

Employers, credit card companies, renters, mortgage companies and even insurance companies check your credit. They practically shut you off from any decent opportunities. The questions is, "For what?"  What is the IRS gaining by this? In many instances, they are gaining nothing. It is sadly funny when I hold a conference with an officer of the IRS to negotiate an Installment Agreement, and after we successfully accomplish the agreement, the officer gives me the recital that of course, “Now that we have put them on Installment Agreement, we will file a lien against them.” 

When this first happened I was shocked and I reasoned, “Before the agreement my client had no tax lien, now we do the agreement and we get hit by a tax lien?”  I felt something is wrong. But soon I got trained by the system and when I do an installment agreement, I respond with all diginity and pride in my knowledge, “Yes sir, but of course, sir.”  Thus we have learned to expect anamolies. 

If we as tax practioners fail to voice our opinion, at least Congress, now based on people's complaints, is watching the problem. The problem is that The Advocate reported that although the IRS has been advised of the consequences of their actions, it is reported that they are underutilizing offer in compromise.  As the Taxpayer Advocate puts it, the acceptance of Offer in Compromise is at an all time low. The IRS has filed one million tax liens against taxpayers. To put it in perspective, there are countries in this world whose population is one million people. So in this case such country would be one under siege.  Remarkable? Perhaps next time we can propose some solutions along with Taxpayer Advocate's proposed ones.

IRS Tax Liens and Tax Levies....Challenges or Business as Usual?

Taxpayer Advocate continues to report IRS problems and IRS collection practices.  National Taxpayer Advocate Nina E. Olson released a few days ago (we appreciate her work on behalf of taxpayers who have IRS tax problems) a report to congress.  It addresses three main concerns:

1. Taxpayer Services: To show how the service is degrading the IRS after answering 87% of taxpayer's calls to IRS in 2004 now it is down to 57%. The IRS is taking on more of the social program such as Economic Stimulus payments, First Time Homebuyer Credit, Making Work Pay Credit and now the anticipated Health Care program. The IRS plans to increase funding for Collections activites by about 17% from 2004 while dereased spending on taxpayer service by 7%. Does that explain why almost half the calls to the IRS are not answered?

2. Reporting 1099 Requirement: This is a huge, huge problem and we would speculate that it may be practically unenforceable.  This 1099 provision applies to businesses, non profit organizations and even government entites. Basically they are trying to tell us if you do business with anyone and you pay them over $600 a year, then you must report them to the IRS. This requires that as a small business owner, you must keep track of everyone you do business with during the year, tally up how much you pay them, and then report them by giving them 1099 at the end of the year. 

Taxpayer’s Advocate estimates that about 40 million busineses are affected by this. Assuming that every business deals with 25 people a year, the IRS must receive 1 billion extra pieces of paper to deal with in addition to the burden they have. Common sense says that you should answer first the calls that you get before adding 1 billion 1099's to add to your fights. In addition, imagine the burden placed on each small business owner. If they don’t comply, they incur another penalty, another IRS notice, another collection action and another Revenue Officer that knocks on your door because now you owe tax debt to the IRS just because you did not participate in the massive paper Leviathan.

The third emphasized by Taxpayer advocate is the IRS Collection Practice which we will address in the next blog....

Tax Help: Identity Theft, Cancellation of Debt, and Seizures (2 of 3)

This is the second blog relating to a news release about the Taxpayer Advocates diagnosis of the most urgent problems that the IRS must face to regress the harm inflicted upon taxpayers. In the first blog we wrote about Identity Theft. We saw how the theft may cause income to be incorrectly attached to you and cause the IRS to move against you despite your pleas. They may end up enforcing wage garnishment or a bank levy against you. Even though you may be in constant contact with them. That is an issue that is picked up by the Taxpayer Advocate and was reported to Congress.

Cancellation of Debt

The second issue they stressed is cancellation of debt. The cancellation of debt issue comes into place when you default on your car payment, credit card payments, or default on a mortgage.  In this instance the debtor writes the debt off and in return sends you a 1099 for debt cancellation.

What does a 1099 debt cancellation mean? In essence the lender is telling you, by sending a 1099, that you owed this amount and now you don't owe it as though we saved you that much or paid on your behalf that much and therefore you are considered to have earned that amount. Why do they do that? Maybe the IRS forced them to do. Why would the IRS force the lender to give you a 1099 debt cancellation? Mechanically speaking, the IRS may be right. This how they add and multiply it. They rationalize that if the lender forgives your debt he is going to claim the loss as bad debt. With the lender claiming the loss as bad debt, the lender pays less tax and the IRS collects less money.

The IRS is smart of course; they whisper in the ear of the bank: "Mr. Lender there is a way to help us out. Do you Mr. Lender remember how much debt you forgave that guy?" The lenders take everything Uncle Sam says seriously. Otherwise they are in trouble. So the lender turns around to the guy who is down and out, apologizes (wishful thinking) and hands the poor guy his 1099 income. Way in the back the IRS is watching and smirking. The poor guy is coming now to the IRS with a 1099 income for the amount of debt cancellation and ready of course to pay the tax. Uncle Sam is very happy. Uncle Sam lost money with the lender but recovered it from the down and out guy. Sounds fair. Or is it?

Adding and dividing and multiplication may say it is fair. Let us look at the issue realistically. The poor guy just got kicked out of his house after he defaulted on his mortgage. The lender foreclosed on the house. Now the guy is trying to pick up the pieces. The bank sends him a gift of 1099 for the cancellation of debt, now he just got out of the house trying to cram his children in a small apartment and pick up the pieces. "Thank God we have a place to stay." He is now counting his blessings. But not so fast mister, Uncle Sam is ready to garnish your wages. You must pay or else. That is the better reality that trumps the addition, division and multiplication. This is the injustice that the Taxpayer Advocacy is talking about.

To avoid a bank levy, garnishment or any collection actions there is a form 982 that you need to file to address the debt cancellation and which will enable you in the end to avoid considering debt cancellation as income and thus avoiding IRS collections actions.

Tax Help: Identity Theft, Cancellation of Debt, and Seizures (1 of 3)

Taxpayer Advocate is the organization which monitors the IRS and the reported areas of significant hardships placed on the taxpayer by the IRS. Among those areas are identity theft, cancellation of debt income and the five areas of IRS collection policies - levies, allowable living expense standards, installment agreements, offer in compromise, and early intervention techniques including the quick resort to property seizures of taxpayer's assets.

Tax-Related Identity Theft

The advocates identified in its 2007 report to Congress that tax related identity theft as one of the most serious problems facing United States taxpayers. Identity theft can create a tax liability to an innocent taxpayer. 

Here's an example...

John steals the identity of Jane in 2008. John wins $100,000 gambling and does not report the income. The 1099 is issued by the casino to poor Jane who was minding her business and has no idea about the marathon she will have to run. 

Poor Jane gets a CP 2000 - Notice of under reporting of income. The tax bill is a modest $30,000. Jane calls the IRS and every time she talks to an officer they tell her that the IRS has the evidence issued by the casino (the 1099). She runs to the casino and tells them that they sent the 1099 to the wrong person.

The casino sends her evidence that she was playing on such and such dates in 2008. She sends the casino counter evidence that she was in the hospital. The casino people now are convinced that she is an innocent person. The next day she receives a notice from the IRS of their intention to levy. She calls the IRS again but they ask her: Where is the corrected 1099 from the casino to prove it was not you? She pleads with them but to no avail. They further threaten her with a garnishment on her wages.

She calls back the casino. They told her the case is referred to their security department. They ask her if she filed the incident with the police and the attorney general. She runs to the police and files a case. She goes back to the casino with the case number and requests a form to file with the attorney general of the state (The levy deadline is approaching). She calls the IRS with the case number the police gave her. They thank her for the effort but said there was nothing they can do. They have the infamous 1099. She realizes that they are about to levy her bank. She runs to the bank before they levy her money. She had just deposited her paycheck of $1,500 to pay her rent. To her dismay they beat her to her money. The bank recites the usual 21 days of holding her money. At first she is comforted but after 21 days the money is evaporated and the IRS gets it. It was too late. To make matters worse she also is slapped with a tax lien. 

Jane is still battling the system to resolve her tax problem. She does not have money to hire a CPA or an attorney. As you see from the story above the IRS system is not equipped to deal with Jane's tax problem in an expedient manner in order to alleviate the burden on her. The presumption is that she's guilty until proven innocent. The taxpayer has to navigate many sources of evidence and documentation that would otherwise be unnecessary if the IRS has a system in place to deal with it. Now the IRS based on recommendations is considering establishing a central unit that deals with these problems that invariably require an engagement of a tax professional such as a CPAs, enrolled agents or attorneys. Let us hope they can succeed.

Offer in Compromise or Uncollectible

Offer in Compromise (OIC) is the best thing since sliced bread. You owe $100,000 in tax debt to IRS. You make an offer for the debt settlement of $1,000 or even less and they accept it. How good is that?

Does it happen all the time? Not by far. Most offer in compromise applications are rejected. Who wins and who loses is what we want to talk about?

In any IRS negotiations, the outcome must be one of three, either an installment agreement, uncollectible status, currently not collectible (CNC) as the IRS calls it or an offer in compromise. In my opinion offer in compromise is superior to all when a taxpayer has the ability to choose either the OIC or the CNC.

Although, unlike the offer in compromise, uncollectible status requires you to pay zero, I still contend that the offer in compromise is superior to the non collectible status.

We frequently choose to seek an offer in compromise for our clients rather than the non collectible status, even when both are available to the client. Why would any one in his right mind choose to pay money for an offer in compromise when he or she could get away with zero? 

There are two main important reasons for that. The first is the penalty and interest. The second is that the uncollectible status can be an apparition which may be resurrected to torment you in the future. The key thing to understand about the currently not collectible is the word currently. It means although we, the IRS, cannot collect form you now, we have not forgot that you owe us money. 

The minute the IRS sees that you have a raise or some money is coming your way, they will summon the spooky ghost to knock on your door and demand everything; all prior taxes that you owed and then some. And then some? Yes and then some.  The IRS wants you to pay the tax debt, all the tax debt and the interest and the penalty thereon. My friends, the IRS computer has been ticking all along when they declared you CNC. They did not attack you but their computer is preparing for a day of reckoning.

Now, let me ask you a simple question: you have a tax problem of $100,000 and you have the option of paying $1,000 in an offer in compromise that will put the tax debt to rest once and for all. $1,000 will erase your name from among those who have an IRS problem for eternity. On the other hand, you can pay zero now as uncollectible but have Big Brother watching you for years to come, waiting to take your wallet. Big Brother smells the scent of money and he's coming your way, again. Need I tell how to cast your vote? Ok, take the offer in compromise, my friends and then dissolve your tax problems in the ether.