Why an Offer-in-Compromise is More of an Art Form Than a Fill in the Blank Form
Fairly
soon taxpayers will begin receiving IRS collection notices after several years
of hiatus during the COVID outbreak. For more information of this development check out this link. This will trigger the flood of national Offer-in-Compromise mills to put
out their “settle your tax debt for pennies on the dollar” and “The IRS writes
off millions of tax debt each year”. Both true statements but read the fine
print. You must qualify. Ahh, and therein lies the
rub. How do I qualify and keep my country club membership, my Tesla lease and
shopping at Whole Foods? The short answer is you can’t.
But
what about those taxpayers in the middle – who have legitimate, OIC worthy tax
situations? How do they communicate that to the OIC processor? Enter the
tax artist.
Form
433A is a complete, in your face, disclosure of your entire financial
situation. The IRS will evaluate your complete financial picture to determine your Reasonable Collection Potential. How
the tax artist paints your financial picture will determine
if you can qualify for a compromise. A good tax artist will also tell you that
you don’t qualify and re-direct you to another method for paying your taxes,
thus saving you lots of money on a process that you never had a chance to
succeed.
A
good tax artist is one who is versed via experience and book knowledge of all
the things the IRS requires you to disclose on your
433A. Some examples:
1. Do you know how a real estate
appraisal is prepared? Do you know how often they change or the ways in which
certain assumptions made by the appraiser increase (or decrease value)? Knowing
how appraisers calculate their final numbers, I’m in a great position to
challenge the IRS’ findings or support my finding. If you know, you know.
2. How does your legal interest in the
property alter your value? I was recently able to challenge a value simply
based on my client’s limited interest in the specific real estate in question.
I back up my position with case law and other legal commentary that supported
my position. I’m literally painting a picture for the IRS that the value of
this real estate is zero when computing RCP.
3. What are your rights in that 401(k)?
Are you vested? What impact will a liquidation have on your current tax
situation? Are you just bringing that liability forward to a new year, from an
older year?
4. Is there a spendthrift provision in
that LLC or partnership share you own? What are your rights to act? Limited
rights mean lower value? Does your OIC preparer have the legal background to
address these issues? When you’ve formed as many LLCs, partnerships and
corporations as I have you know the ins and outs of the owner’s rights.
5. Do you have any special
circumstances that you can document or highlight? You’re not looking for
sympathy points here because there are none. You are looking for impacts on
RCP. Look at the Internal Revenue Manual for guidance.
6. While inflation is coming under
control, the national financial standards can’t keep pace with increasing
rents, mortgage rates, property taxes, food costs, etc. What does your bank
statement ending monthly balance say about your ability to support your family
and pay those back taxes. Do you know enough about the taxpayer’s market to
point out how expensive it is to live in the taxpayer’s city? I don’t care what
the financial standards say. If the bank statements show a single digit as the
ending balance, and assuming no outrageous expenses, then there is nothing to
give here. As collection lawyers say, “you can’t get blood out of turnip”. At
best this is a currently not collectible account.
7. Point out that moving to cheaper
digs costs money in the short term and usually increases transportation costs
in the long run. The IRS will rarely force you to sell your house, especially
on initial collection attempts. They may ask you to
borrow against the home, but even that is not possible in many instances.
8. Finally, have you prepared yourself
for a financial look-up by the IRS? Have you identified
lavish or extravagant expenditures? It's hard to sustain an OIC on the way back
from a big vacation trip to Disneyworld, or that big purchase of electronics,
camping gear, etc. Getting your house in order is step number one. Are you
current on your taxes? Don’t give the IRS an easy reason to turn you down.
You’ll
see that I italicized the word “communicate” back in the second paragraph. That
is to emphasize that how you paint your offer, that is to say, communicate your
offer, will decide if the submission is successful. It is your opportunity to put your best foot
forward and start a conversation with the IRS about why your financial
situation qualifies for an OIC.
Dallas
Cowboy Hall of Fame Coach Tom Landry was asked why the club was not more
successful with their draft picks. Dallas was the first NFL club to use
computer technology to identify potential draft
picks. Coach Landry’s response was “garbage in, garbage out”. Applying that
your OIC, the tax artist makes it difficult for the IRS to turn down your
offer, or in the least come up with a counter-offer that you can live with.
I
hope this post clears up some misconceptions about Offers in Compromise. If you
are in the market for a tax pro who is a tax artist, give me a call and let me
see what I can do with your situation.
