Talking Frankly About Offers In Compromise

I am reading a case involving an offer in compromise (OIC).

In general, I have become disinclined to do OIC work.

And no, it is not just a matter of being paid. I will accept discounted or pro bono work if someone’s story moves me. I recently represented a woman who immigrated from Thailand several years ago to marry an American. She filed a joint tax return for her first married year, and – sure enough – the IRS came after her when her husband filed bankruptcy. When we met, her English was still shaky, at best. She wanted to return to Thailand but wanted to resolve her tax issue first. She was terrified.   

I was upset that the IRS went after an immigrant for her first year filing U.S. taxes ever, who had limited command of the language, who was mostly unable to work because of long-term health complications and who was experiencing visible - even to me - stress-related issues.

Yes, we got her innocent spouse status. She has since returned to Thailand.

Back to offers in compromise.

There are two main reasons why I shy from OIC’s:

(1) I cannot get you pennies-on-the-dollar.

You know what I am taking about: those late-night radio or television commercials.

Do not get me wrong: it can happen. Take someone who has his/her earning power greatly reduced, say by an accident. Add in an older person, meaning fewer earning years remaining, and one might get to pennies on the dollar.

I do not get those clients.

I was talking with someone this past week who wants me to represent his OIC. He used to own a logistics business, but the business went bust and he left considerable debt in his wake. He is now working for someone else.

Facts: he is still young; he is making decent money; he has years of earning power left.

Question: Can he get an OIC?

Answer: I think there is a good chance, as his overall earning power is down.

Can he get pennies on the dollar?

He is still young; he is making decent money; he has years of earning power left. How do you think the IRS will view that request?

(2) The multi-year commitment to an OIC.

When you get into a payment plan with the IRS, there is an expectation that you will improve your tax compliance. The IRS has dual goals when it makes a deal:

(a)  Collect what it can (of course), and

(b)  Get you back into the tax system.

Get into an OIC and the IRS expects you to stay out of trouble for 5 years. 

So, if you are self-employed the IRS will expect you to make quarterly estimates. If you routinely owe, it will want you to increase your withholding so that you don’t owe. That is your end of the deal.

I have lost count of the clients over the years who did not hold-up their end of the deal.  I remember one who swung by Galactic Command to lament how he could not continue his IRS payment plan and then asked me to step outside to see his new car.

Folks, there is little to nothing that a tax advisor can do for you in that situation. It is frustrating and – frankly – a waste of time.

Let’s look at someone who tried to run the five-year gauntlet.

Ed and Cynthia Sadjadi wound up owing for 2008, 2009, 2010, and 2011.

They got an installment plan.

Then they flipped it to an OIC.

COMMENT: What is the difference? In a vanilla installment plan, you pay back the full amount of taxes. Perhaps the IRS cuts you some slack with penalties, but they are looking to recoup 100% of the taxes. In an OIC, the IRS is acknowledging that they will not get 100% of the taxes.

The Sadjadis were good until they filed their 2015 tax return. They then owed tax.

The reasoned that they had paid-off the vast majority if not all of their 2008 through 2011 taxes. They lived-up to their end of the deal. They now needed a new payment plan.

Makes sense, right?

And what does sense have to do with taxes?

The Court reminded them of what they signed way back when:

I will file tax returns and pay the required taxes for the five-year period beginning with the date and acceptance of this offer.

The IRS will not remove the original amount of my tax debt from its records until I have met all the terms and conditions of this offer.

If I fail to meet any of the terms of this offer, the IRS may levy or sue me to collect …..

The Court was short and sweet. What part of “five-year period” did the Sadjadis not understand?

Those taxes that the IRS wrote-off with the OIC?

Bam! They are back.

Yep. That is how it works.

Our case this time was Sadjadi v Commissioner, T.C. Memo 2019-58.

Having Assets And Filing An Offer In Compromise

I glanced at the case because it involved an offer in compromise, a collections hearing, a lien and currently noncollectible (CNC) status.

That is a lot going on for approximately $23 grand in tax debt.

First thing I noticed was that the taxpayer represented himself before the Tax Court. This is referred to as “pro se.” It happens quite a bit, and it usually does not work out well for the taxpayer.

I double-shudder when I think about “pro se” and going hard procedural with the IRS, such as with liens and offers in compromise.

Let’s walk through it:

(1) On November 16, 2016 the taxpayer filed an Offer in Compromise. The tax was approximately $23 grand. He offered approximately $12 grand.

COMMENT: There are several “flavors” of Offers in Compromise. This one was the traditional vanilla: inability to pay or to pay in full. Those late-night commercials are hawking this type.

(2) On May 30, 2017 the IRS sent a Notice of Federal Tax Lien Filing.

The taxpayer filed for a hearing, called a Collection Due Process (CDP) hearing. I probably would have done the same.

(3) On July 11, 2017 the IRS indicated it would not accept the Offer in Compromise, at least as submitted. 

Taxpayer appealed. Again, I probably would have done the same.

(4) On September 27, 2017 the IRS settlement officer sent taxpayer a letter that the CDP hearing was being delayed until the Offer in Compromise was resolved.

COMMENT: Left hand: right hand. Happens all the time.

(5) Wouldn’t you know that the appeal of the Offer in Compromise was assigned to the same IRS settlement officer handling the Collections hearing?

(6) The IRS scheduled a telephone hearing for December 14, 2017. The settlement officer also offered to place the taxpayer’s case in currently noncollectible (CNC) status.

COMMENT: I have used CNC status over the years, especially during and after the Great Recession of 2008. The IRS realizes that there is no money to collect, so it places the case on hold, generally for a year or so. Their normal collections machinery is paused.

Mind you, the IRS is not writing-off the debt. They are allowing a break in collection activity, hoping your situation improves.

(7) Not waiting until the hearing, taxpayer on December 1 sent the settlement officer a letter addressing the rejection of his offer in compromise.

COMMENT. He should include additional or expanded financial information, as his offer was based on inability to pay. The common-sense response to rejection of an offer based on inability to pay is to expand on why one is unable to pay.

Having taken the stage, taxpayer also alleged that the IRS engaged in criminal activity.

COMMENT: Stop that. You are not winning with that behavior.

The settlement officer rescheduled the hearing for January 9th.

(8)  On December 12 taxpayer sent the settlement officer another letter lamenting the rejection of his offer in compromise.

COMMENT: Once again: no additional or expanded financial information. This action was fruitless and ill-advised.

(9) We finally get to the hearing. The settlement officer reviewed the offer in compromise. She sees debt of approximately $23 grand and assets of approximately $110 grand. Receiving no additional or expanded financial information from the taxpayer, the officer decided that rejection of the offer was appropriate.

(10) After the hearing taxpayer sent a letter to the settlement officer, complaining about the IRS Fresh Start Program and including correspondence the taxpayer previously exchanged with the Taxpayer Advocate Service.

Taxpayer was focused on the lien and highlighted a TAS letter including the statement “the IRS has determined that the lien should be withdrawn.”

He wanted the lien withdrawn.

The settlement officer, to her credit, looked into this. It did not change the outcome, but she did try.

The immediate takeaway is the someone with $100-plus grand in assets is probably not going to be able to offer-down $23 grand in tax debt, irrespective of having low income. While true as a generalization, there are several specific considerations.

(1)  Given his focus on removing an IRS lien, I presume that taxpayer’s house comprised most if not all of taxpayer’s assets. I can see not wanting to refinance when one has limited income. In truth, one probably could not refinance, as no traditional mortgage provider would originate the loan.

a.     And there is how I would respond to the request for additional financial information: by providing rejection letters from a couple of mortgage companies.

(2)  Let’s say that the house is not the lion’s share of the assets. Perhaps it is something else, like a retirement account.

a.     If a retirement account, I would argue economic hardship.

                                                                         i.      That is, taxpayer needs that asset and the income therefrom in order to meet reasonable basic living expenses. The loss of said asset would be an economic hardship.

                                                                      ii.      It is already stipulated that the taxpayer is low income. How hard of an argument is this?

(3)  In general, I am unmoved by the IRS filing a lien.

a.     I may be moved if disclosure of said lien would adversely affect one’s career or public status (a mayor or judge, for example), but those instances are few and far between.

b.     Distinguish a lien from a levy.

                                                                         i.      A lien just secures the government’s interest. A lien on my house cannot be collected until I sell the house.

                                                                      ii.      A levy is a different matter. The IRS going into your bank account is an example of a levy.

(4)  Let’s circle back to the presumption that taxpayer’s residence represented the majority of his assets, hence his focus on removing the lien. The IRS just bounced his offer. What happens next?

a.     Folks, the IRS cannot (barring exceptional circumstances) take one’s primary residence.

b.     Yep, he will get periodic and annoying IRS correspondence, but …

c.     … so what? There is little bite left in that dog.

d.     And after 10 years (without the IRS taking the matter to Court to obtain judgement), the statute of limitations will kick-in.

You can see the downside to a pro se, especially when dealing with IRS procedure. There is a lot going on here, and I suspect that – with professional advice – taxpayer could have gotten the offer. I doubt he would have gotten the lien released, though. He saved a few grand in professional fees in order to completely strike out with the IRS.

The case for the home gamers is Banks, TC Memo 2019-166.

Memphian Appeals An Offer In Compromise

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.

Estimated Taxes Matter

Sometimes I read a case and I wonder if the most interesting part was not included.

There is a couple – a doctor and a financial consultant - who are not keen on paying their taxes. Here is a quick recap:

          Year            Tax           Withheld         Due

          2014         $70,018      $24,148         $45,870

          2015         $58,293      $11,677         $45,995

          2016         $52,474      $20,230         $32,244

          2017         $37,001      $11,720         $25,281

This is not rocket science. Chances are that one person has withholdings and the other person is supposed to pay estimated taxes. No estimated taxes were paid. The solution? Simple: (1) pay estimated taxes, or (2) increase the other spouse’s withholdings to compensate for the lack of estimated taxes.

On November, 2016 the IRS sent a Notice of Intent to Levy.

COMMENT: This tells you the taxpayers had been in the system for a while.

The taxpayers requested for a Collection Due Process Hearing.

COMMENT: Good step. The CDP is a chance to halt the IRS automated machinery and allow the taxpayers an opportunity to speak with an Appeals Officer about their specific situation.

The taxpayers were interested in collection alternatives, including:

(a)  an installment agreement

(b)  an offer in compromise

(c)  a “cannot pay balance” status

Seems to me they covered the bases.

They did not submit financial data with the CDP request, but they did later when the Appeals Officer requested. Their information showed monthly income of $25,317 and monthly living expenses of $17,217, leaving a monthly net of $8,100.

The IRS wanted the $8,100.

Surprise factor: zero.

The taxpayers balked, arguing that it was beyond their means.

COMMENT: How can the $8,100 be beyond their means, if that is the amount they calculated? The likely reason is that the IRS has tables for certain expense categories, such as transportation. Say that you have an expensive monthly car payment. You will bump up against that limit, and good luck getting the IRS to spot you more. Mind you, the IRS says that it will consider specific circumstances, but they do not consider them for long. You may find yourself having to trade-down on your car or pulling your kid from private school.

The taxpayers indicated they were going to file an offer in compromise.

They did – eight months later.

COMMENT: Folks, seriously, do not do this. If you are hip deep in a CDP hearing with the IRS, it is a very poor decision to stall.

The Appeals Officer – not willing to wait the better part of a year – sustained the proposed levy.

Next stop: Tax Court.

From the Court we learn that the taxpayers withdrew the offer in compromise because they were “unable” to make estimated tax payments.

Huh?

Folks, this act is fatal. Here is a requirement for an offer:

“Proof of sufficient withholding or estimated tax payments”

The Tax Court’s purview can be broad or narrow, depending on the issue. If there is an issue of tax law, the Court generally has broad powers. This case was not an issue of tax law; rather it was an issue of IRS procedure. Did the IRS follow its own rules? To phrase it another way, did the IRS abuse its authority?

This narrows the Court’s reach – a lot.

It means the Court is not reviewing whether the taxpayers should have received an installment plan, an offer in compromise or whatnot. Rather, the Court is reviewing whether the IRS abused its authority by not allowing said installment plan, offer in compromise or whatnot.

The Court decided the IRS had not.

Why?

“Proof of sufficient withholding or estimated tax payments”

To me, the take-away question is: what are these people doing with their money?

Our case this time was Reid v Commissioner.

Blade’s Offer In Compromise

I am enough of a nerd to say that I enjoyed the Blade movies. I am a fan of Wesley Snipes, who played the half-vampire vampire hunter in the series.

You may recall that he got into big-time tax trouble several years ago. He bought into tax protestor arguments, such as being an ambassador from the planet Naboo or some similar nonsense. He spent three years in prison.

When he came out of prison the IRS wanted over $23 million in taxes, penalties and interest.

He went to a Collections Due Process hearing. The purpose of a CDP is to tamp-down IRS aggressiveness in separating you from your money. The CDP has limited range, but sometimes that range makes all the difference.

So he goes and requests collection alternatives.

Perfect. Exactly what a CDP is designed to do.

He proposes an installment agreement.

There are flavors of these, and one of the flavors is called a “partial pay.” For a partial, you have to convince the IRS that you are unable to fully pay your taxes over the period the IRS can collect from you. You almost have to provide photos of Bigfoot to persuade the IRS to go along.

Alternatively, he proposes an offer in compromise (OIC).

In some cases, the difference between a partial pay and an OIC can be slight, except for maybe at the edges. For example, enter a partial pay and the IRS may request payment adjustment if your income goes up. That is a risk you do not have with an OIC.

Right there you can anticipate that an OIC is harder to obtain than a partial pay.

And an OIC for an actor who has made millions from movies is going to be harder still.

OICs are the “pennies on the dollar” tripe you hear on radio or late-night commercials. Those “pennies” OICs are few and far between, and usually involve some or all of the following factors:

·      Someone was injured and will never work again

·      Someone has retired and will never work again

·      Someone owns next to nothing

·      Someone owes the IRS money   

The key theme here is that someone is broke, and there is little likelihood that condition will ever change.

Folks, that is not tax planning. That is bad luck in life, very poor life choices, or both.

Wesley Snipes put in an OIC of $842,061.

Out of $25 million plus.

Heck, even I don’t believe him.

Let’s begin with personal financials. You know the IRS is going to check him out, especially with such a lowball offer.

·      Snipes owns real estate and other assets through a series of related companies.

OK. The IRS is going to have to look at this.

·      Snipes argued that some of this real estate had been sold or went missing.

OK. The IRS is going to have to look at this.

·      Snipes argued that his financial advisor had “diverted” his assets and money without his knowledge or consent.

OK. The IRS is going to have to look at this.

·      Snipes requested that his tax liability be “transferred” to his advisor, as the advisor had conveniently “transferred” Snipe’s assets to himself. This would require an investigation, of course, and perhaps the IRS could place his account in “currently not collectible” status during the investigation.

I suspect there is or will be a lawsuit here. I would have hired an attorney and filed papers already.

The problem is that Appeals (where Snipes was at the moment) is not built for this. Snipes is requesting an audit, and audits are done by Examination. Given what was alleged, this matter could even go to the Criminal Division of the IRS. While Appeals can review the work of the field (Examination) division, they cannot perform the field investigation themselves.

·      He has one more argument: economic hardship.

Problem: the normal indicia of economic hardship include illness, disability, or exhaustion of income or assets providing for oneself or dependents. These do not apply in his case.

That leaves an argument that he is unable to borrow against assets, and the forced sale of said assets would leave him unable to meet basic expenses.

This argument may have traction. He is – after all – asserting that assets have disappeared and he doesn’t know when or where.

But he failed to provide enough financial information to allow the IRS to evaluate the matter. The IRS and the Court kept circling on this point. Could it be that he truly could not sherlock what happened to his money?

However, not providing information in an OIC tends to be fatal.

Still, the IRS was moved. They agreed to reduce the settlement to $9,581,027.

Snipes’ team said: No. It is $842,061 or nothing.

The Court said: Then nothing it is.

I suspect the most interesting part of the story is the part that was not provided: what happened to the real estate and other money?

I also wonder if there is a certain schadenfreude here.

Tax protestors sometimes use unnecessarily complicated structures (trusts, for example) to distance, obscure and possibly hide the ultimate control of money or assets. A protestor would not own real estate directly, for example. Rather an entity would own the real estate and the protestor would control the entity. Or there would be an intermediate entity owned by yet another entity controlled by the protestor.

What if the protestor goes to prison? The protestor might then cede a certain amount of authority over the entity/entities to someone – like an advisor - while incarcerated.

What happens if that advisor does not have the protestor’s best interest at heart?

Might sound a lot like what we read here.

The IRS Could Not Collect When Limitations Period Expired

Let’s talk a bit about the tax statute of limitations.

There are two limitations periods, and it is the second one that can lead to odd results.

(1) The first one is referred to as the limitations on assessments. This is the three-year period that we are familiar with. The IRS has three years to audit your return, for example. If they do not, then – in general – the opportunity is lost to them.

There are a number of ways to extend the three-year period. When I was young in the profession, for example, tax practitioners would “hold back” certain tax deductions until the client was closing-in on the three years. With a scant few and breathless days remaining before the period expired, they would file amended tax returns, thereby obtaining a refund for the client and simultaneously kneecapping the IRS’ ability to look at the return.

The rules have been revised allowing the IRS additional time when this happens. I have no problem with this change, as I consider the previous practice to be unacceptable. 

(2) The second one is the collections period, and this one runs ten years.

Say you filed your return on April 15, 2014. You got audited and the IRS assessed $15,000 on December 15, 2015. The IRS has ten years – until December 15, 2025 – to collect.

There are things that can extend (the technical term is “toll”) the collections period. Make an offer in compromise, for example, and the period gets tolled. 

Sometimes tax practice boils down to letting the ten-year period click-off, hoping that the IRS does not initiate action. It happens. A few years ago I had a client who had moved to Florida, remarried and had her new husband involve her in an unnecessary tax situation. It was extremely unfortunate and she was extraordinarily ill-advised. He passed away, leaving her as the remaining target for the IRS to pursue. She had a fairness argument, but that meant as much as a snowball in July to IRS Collections. They have a different mind frame over there.

So I am looking at a case where a taxpayer (Grauer) had an issue with his 1998 tax return. He filed it late (in 2000).  That was his first problem. He owed around $40 grand, which quickly became almost $58 grand when the IRS was done tacking-on interest and penalties. That was his second problem. He could pay that much money about as easily as I can fly.

In 2001 he signed a waiver, extending the ten-year collections period.

What makes this point interesting to a tax nerd is that someone would not (knowingly) sign a waiver without something else going on.  In fact, Congress disallowed this in the late nineties, responding to perceived IRS abuses - especially in Collections.

Sure enough, the IRS said that he signed an installment agreement in 2001 (around the time of that waiver), but that he broke it in 2006

Grauer said that he never signed an installment agreement.

It was now 2013, and off to Tax Court they went.

The Court looked at the account transcript, which showed that the IRS had issued an earlier Notice of Intent to Levy.  This was an immediate technical issue, as the Court would not have jurisdiction past the first Notice. The IRS persuaded the Court that the transcript was wrong. 

COMMENT: Your transactions with the IRS go to your “account.” That account is updated whenever a transaction occurs. The posting will include a date, a code, and sometimes a dollar amount and perhaps a meaningful description.  Some codes are straightforward, some are cryptic. 

The Court next observed that Grauer asserted that he had not signed a payment plan. In legal jargon, this was an “affirmative defense,” and the IRS had to prove otherwise. The IRS argued that its transcript was correct and that Grauer was incorrect.

The Court was a bit flummoxed by this response. The IRS was having it both ways.

The Court told the IRS to “show us the installment agreement.” 

The IRS could not.

The Court went on to describe the IRS account transcript as “indecipherable and unconvincingly explained.”

The Court decided for the taxpayer.

Remember: ten years had passed. The waiver needed to attach to something. In the absence of something, the waiver fizzled and had no effect.

The statute had expired.

Did the taxpayer get away with something?

I don’t know, but think about the alternative. Let’s say that the IRS could post whatever it wanted – to speak bluntly, to make things up – to your account. You then get into tax controversy. You are required to prove that the IRS did not do whatever it claimed it did. Good luck to you in that scenario. I find that result considerably more unacceptable than what happened here.