I am looking at a case dealing with an offer in
compromise.
You know these from the late-night television and
radio advertisements to “settle your IRS debts for pennies on the dollar.”
Yeah, right.
If it were so easy, I would use it myself.
Don’t get me wrong, there are fact patterns where you probably
could settle for pennies on the dollar. Unfortunately, these fact patterns tend
to involve permanent injury, loss of earning power, a debilitating illness or something
similar.
I will just pay my dollar on the dollar, thank you.
What caught my attention is that the case involves a
Memphian and was tried in Memphis, Tennessee. I have an interest
in Memphis these days.
Let’s set it up.
Taxpayer filed tax returns for 2012 through 2014 but
did not pay the full amount of tax due, which was about $40 grand. A big chunk
of tax was for 2014, when he withdrew almost $90,000 from his retirement
account.
Why did he do this?
He was sending his kids to a private high school.
I get it. I cannot tell you how many times I have heard
from Memphians that one simply cannot send their kids to a public school,
unless one lives in the suburbs.
In December, 2016 he received a letter from the IRS
that they were going to lien.
He put the brakes on that by requesting a Collection
Due Process (CDP) hearing.
Well done.
In January he sent an installment agreement to the IRS
requesting payments of $300 per month until both sides could arrive at a
settlement.
The following month (February) he submitted an Offer
in Compromise (OIC) for $1,500.
That went to a hearing in April. The IRS transferred the
OIC request to the appropriate unit.
In late August the IRS denied the OIC.
Let’s talk about an OIC for a moment. I am thinking
about a full post (or two) about OICs in the future, but let’s hit a couple of
high spots right now.
The IRS takes a look at a couple of things when
reviewing an OIC:
(1) Your net worth, defined as the value of assets
less any liabilities thereon.
There are certain arcane
rules. For example, the IRS will probably allow you to use 80% of an asset’s
otherwise fair market value. The reason is that it is considered a forced sale,
meaning that you might accept a lower price than otherwise.
(2) Your
earning power
This is where those late-night
IRS settlement mills dwell. Have no earning power and near-zero net worth and
you get pennies on the dollar.
There are twists here. For
example, the IRS is probably not going to spot you a monthly Lexus payment. That
is not how it works. The IRS provides tables for certain categories of living
expenses, and that is the number you use when calculating how much you have “left
over” to pay the IRS.
Let’s elaborate what the
above means. If the IRS spots you a lower amount than you are actually
spending, then the IRS sees an ability to pay that you do not have in real
life.
You can ask for more than
the table amount, but you have to document and advocate your cause. It is far
from automatic, and, in fact, I would say that the IRS is more inclined to turn
you down than to approve any increase from the table amount. I had a client several
years ago who was denied veterinary bills and prescriptions for his dog, for
example.
The IRS workup showed that the taxpayer had monthly income
of approximately $12,700 and allowable monthly expenses of approximately
$11,000. That left approximately $1,700 monthly, and the IRS wanted to get
paid.
But there was one expense that made up the largest
share of the IRS difference. Can you guess what it was?
It was the private school.
The IRS will not spot you private school tuition,
unless there is something about your child’s needs that requires that private
school. A special school for the deaf, for example, would likely qualify.
That is not what we have here.
The IRS saw an ability to pay that the taxpayer did
not have in real life.
Taxpayer proposed a one-time OIC of $5,000.
The IRS said No.
They went back and forth and agreed to $200 per month,
eventually increasing to $700 per month.
COMMENT: This is not uncommon for OICs. The IRS will often give you a year to rework your finances, with the expectation that you will then be able to pay more.
The taxpayer then requested abatement of interest and
penalties, which was denied. Generally, those requests require the taxpayer to
have a clean filing history, and that was not the case here.
The mess ended up in Tax Court.
Being a court, there are rules. The rule at play here
is that the Court was limited to reviewing whether the IRS exercised abuse of
discretion.
Folks, that is a nearly impossible standard to meet.
Let me give you one fact: he had net assets worth
approximately $43 thousand.
His tax was approximately $40 thousand.
Let’s set aside the 80% thing. It would not take a lot
of earning power for the IRS to expect him to be able to repay the full $40
grand.
He lost. There really was no surprise, as least to me.
I do have a question, though.
His monthly income was closer to $13 grand than to $12
grand.
It fair to say that is well above the average American
monthly household income.
Private school is expensive, granted.
But where was the money going?
Our case this time was Love v Commissioner,
T.C. Memo 2019-92.
