Strategy 5 – Innocent Spouse Claims

An Innocent Spouse Claim is worth considering in cases where the taxpayers jointly owe a lot of IRS debt. The downside is that the IRS does not generally approve these claims. Worse, most of the appeals to the courts have been IRS wins.

That said, it is still worth considering. Innocent spouse claims arise in cases where the tax understatement can be attributed to just one spouse. Additionally,  the other spouse must have no knowledge or benefit from that understatement. The strategic advantage is that you might get a better result on the Reasonable Collection Potential formula by removing the one spouse from the liability.

An Offer-in-Compromise will only work if the taxpayers can show that they do not have the financial means that will enable them to pay the debt in full. The IRS does not accept offers for less than full pay merely because someone throws a number at them. Instead, they do a financial analysis. The results are plugged into the Reasonable Collection Potential formula. Removing one of the spouses from the liability could change the formula results and make the other spouse eligible for an offer.

 

3 Cases: IRS Agrees to Slash Tax Debts

Here are three  reasons why the IRS may accept your Offer-in-Compromise — your offer to pay less tax debt than you owe:

  1. Doubt as to Liability – this applies to taxpayers with good arguments that they do not owe the tax, either partly or completely.
  2. Doubt as to Collectability – taxpayers have neither income or assets to pay their tax debt.
  3. Hardship to Taxpayer – the taxpayer has the funds to pay the full debt but doing so will create an economic hardship. Think of an 80-year-old with a lumpsum payout from their retirement plan. The funds are needed to pay their living costs for the rest of their life.

Wow – sounds very reasonable. Why then is it that most (60%) Compromise Offers are rejected by the IRS? The answer to this boils down to two major categories:

  1. The taxpayer is not current on their tax return filings or has not made their current year estimated tax payments. The IRS will not even consider an Offer if this is the case. First is because the taxes must first be assessed before they can be compromised. Secondly, taxpayers who are not making their current year tax payments will be in default before the ink is dried.
  2. The second big reason for rejection is that the Offer is too small. The IRS looks at both the equity in the assets you own and your future cash flow. The result of this analysis is the Reasonable Collection Potential or RCP Offer less than this amount and the IRS is going to reason that it is not in the best interest of the government to compromise.

What should you do if you think you might be eligible? Figuring out the RCP amount is complex, so it is probably a good time to get professional help. Understanding how the RCP formula works will allow you to arrange your financial affairs in advance of the offer to minimize the offer amount without having it rejected.

Pay Pennies for Dollars Owed?

You see ads on TV about the IRS accepting “pennies on the dollar” to clear a backlog of tax debts. It seems an easy answer to a big problem. But, “too good to be true, usually not true.”

Bad News on Offers-in-Compromise

IRS rejects 60% of compromise offers it gets, per the 2018 IRS Data Book. This makes sense. After all, why would an agency with more collection powers than Herod be willing to forgive debt?  IRS agents certainly don’t win awards for giving away money!

Good News on Offers-in-Compromise

The IRS does accept 40% of the Offers-in-Compromise. These are offers that they decided were in the Government’s best interest to accept. Meaning, that they ran the numbers and decided this was the max they could expect to collect from the taxpayer.

So, how do you tilt the pinball machine to make it more likely to be in the 40% accepted? It starts with running your numbers on potential future earnings with the same formula that the IRS uses. This is called the “Reasonable Collection Potential” formula which calculates your disposable income on a monthly basis. Whatever this amount is times the number of months left before the Statute of Limitations nulls the debt is where the IRS is going to start. To make it into the acceptance column, you must make it a better deal than just sticking with the status quo.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com

Filing an Offer-in-Compromise? Timing is Critical

The best time to file an Offer-in-Compromise is when you have all your ducks in a row. Failure to get this right usually results in the Offer being rejected and all your work will be for naught.

Here are the steps I follow:
  1. Get the IRS Tax Transcripts showing the dates filed and amounts owed and the date that the Statute of Limitations
  2. Get any past due tax returns filed and current year estimated tax payments up to date. The IRS will automatically reject any offers when the taxpayer is not in compliance.
  3. Gaither all the client information regarding financial assets and their expectations for future earnings.
  4. Prepare the IRS Form 433 which is used to report the financial information to the IRS.
  5. Calculate the Reasonable Collection Potential (also known as RCP) using the IRS
  6. Recommend changes that might make reduce the RCP result. For example, the IRS treats life insurance premiums as an allowable expense. If the client does not have life insurance, then we get them signed up and paying those premiums.
  7. Once the client makes the recommend changes, we must wait long enough so that the new payments will show on three months of bank statements.

Once we have the three months of bank statements, we can finish up the Offer-in-Compromise and include all the documentation that is needed to support our position. Typically, this is close to a 5-month proposition to get an offer completed. Not being in compliance, not including the documentation to support your position, or making the offer for an amount that is less than the RCP formula is a guarantee that the offer will be rejected.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.

 

Dissipated Assets May Maim Your Offer-in-Compromise Application

Dissipated Assets can maim your OIC application.

Let’s say you spent many hours producing an Offer-in-Compromise Application that shows it’s in the Government’s interest to accept your payment offer of 50 percent on each dollar owed. Your tax debt, cut in half. With a smile, you submit it to the IRS.  Many months later, the IRS responds with a counteroffer that is $20,000 higher. Why?

IRS Eyes Form 4797 for Dissipated Assets

It turns out that part of the IRS process when evaluating an OIC Application is to look back at your last three years of tax returns, specifically at Schedule D and Form 4797 where you report sales of assets.

There, they found a big sale of stock that netted you $20,000.   Now they want that money plus your offer amount.

The moral of the story? Always look back in time — three years of returns worth — before finalizing an Offer-in-Compromise Application. Maybe that stock sale was on the earliest return and waiting a year before you make your offer is possible.

Another strategy is that if you owe the IRS and have a big sale that nets cash, make sure you spend it on “allowable expenses.”. Allowable expenses are housing, food, medical expenses, not vacations and personal loans. Paying down a credit card debt is not an allowable expense unless the underlying charge can be categorized as such.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.