Post on 03-Jan-2021
111
OFFER IN COMPROMISE CASE STUDY
Presented at theIRS South JerseyWorking Together
ViaWebinar
October 29, 2020
E. Martin DavidoffCertified Public Accountant
Attorney at Law
1
Acceptances: 70% on Evaluated Offers!
Revenue had declined from $326 Million in fiscal ‘05 to less than $130 Million in FY ’10, to nearly $290 million for FY ’19, while # of acceptances were down by 6,000 from FY ‘18. More money, fewer acceptances. Percentage ofReturns exceed 25% in ‘19 and ‘20.
# of Acceptances: 39,000 (2001) to Low of <11,000 (2008) to nearly 24,000 (2018)
Almost 26% Returned!
See materials, page 3
New Cases Down 5%
FY ‘18, FY ‘19 and half of FY ‘20 Stats
Annualized Collections down 38%! But acceptances only down 9%; Trend of IRS accepting less $$ per case. From $16,354 to $11,172 per approval.
Percentages Not Significantly Changed. Acceptances of Evaluated Offers are nearly 70%
See materials, page 4
Historical SummarySee materials, pg 5
What Taxes Qualify for an OIC?
• Income• Payroll• Trust Funds• SFR (Substitute for Return) Assessments
5
See Materials, Page 92FORM 656 – Offer In Compromise
Don’t be too specific
6
(What if you leave this blank?)
New in 2018: include a copy of any tax return filed within 12 weeks of offer
IRM 5.8.2.4.1 – Determining Processability
7
• Unfiled Tax Returns – Interim Guidance from IRSQuestion: Taxpayers owe for years for which SFR’s established a tax liability. The taxpayer has not filed all required tax returns solely for years covered by the SFRs. All other years have been filed. Thus, Taxpayer’s offer will be returned? Even if the SFRs are from years ago?
Answer: A Substitute for Return (SFR) assessment will be considered compliant for the corresponding tax period. per 6/21/17 Email from IRS official
See Materials, Page 96
IRM 5.8.2.3.1 – Determining Processability
8
• Unfiled Tax Returns – Offers submitted where IDRSdoes not indicate a required return has been receivedwill be deemed not processable.
• NOTE: Generally, this will not exceed a 6-year look-back period without managerial approval. Internalresearch must validate a legal requirement to file themissing return. A Substitute for Return (SFR)assessment on Master File will be consideredcomplaint for the corresponding tax period.
See Materials, Page 96
IRM 5.8.2.3.1 – Determining Processability
9
• NOTE: – An unsigned tax return received with theoffer for the required tax period will be considered asfiled for offer purposes. Follow perfection instructionsin IRM 5.8.3.6, Perfecting Field Cases, and 5.8.3.7,Perfecting COIC Cases.
• (3) Update AOIC remarks to clearly state the reasonfor the not processible return.
For Example: “Offer returned as not processible due tounfiled tax returns for the 2014 and 2015 tax period(s).”
See Materials, Page 97
101010
Bankruptcy, Open Audit or Innocent Spouse
10
Page 108 of materials
11
What Is An Offer?Per IRS Instructions
(See OIC instructions, page 108 of materials)
"An Offer in Compromise (offer) is an agreement between you (the taxpayer) and the IRS that settles a tax debt for less than the full amount owed. The offer program provides eligible taxpayers with a path toward paying off their tax debt and getting a fresh start. The ultimate goal is a compromise that suits the best interest of both the taxpayer and the IRS. To be considered, generally you must make an appropriate offer based on what the IRS considers your true ability to pay."
The IRS defines “true ability to pay” with a term called
Reasonable Collection Potential
1212
TODAY’S GOAL
• To understand the basics in arriving at Reasonable Collection Potential
• To provide some “nuggets” of information not generally known in determining RCP
• The Future Income Component of RCP is frequently used to determine acceptable installment agreements or CNC (Currently Not Collectible Status)
• In 50 minutes, we cannot possibly cover it all!
12
1313
Reasonable Collection Potential(see article on page 6 of Materials)
• An offer will be accepted by the IRS if the amount offered equals or exceeds the taxpayer’s Reasonable Collection Potential (RCP), defined by the IRS as the total of the taxpayer’s realizable value in real and personal assets, and his/her future net income.
• Realizable value is, essentially, gross value less secured debt. For example, unsecured credit card debt is usually not considered. In addition, the IRS will discount valuations 20% based on “Quick Sale Value.”
• Future net income is based on a forecast of the excess of gross income over allowable expenses – food, clothing, housing, transportation, medical and taxes – over a minimum of 48 12 months.
13
141414
Reasonable Collection Potential
RCP =NRV (Net Realizable Value)
+
FNI (Future Net Income)
14
151515
See Materials, Page 13
15
16
See Materials, Page 15
Primary/Secondary Replaces Concept of Home, Business, Cell, Etc.
NOTE: NEW FORM AS OF April, 2020
17
There are no Line-by-Line Instructions for Forms 433-A (OIC)!
For Form 433-A, see Publication 1854 (REV. 3-2020)
For Form 433-B, see Publication 5059 (REV. 5-2019)
17
18
Note: The IRS is requesting
information on all those persons who live in the household.
See Materials, Page 15
18
19
See Materials, Page 15
Asking for one’s interest in their own employer,But not in the employer of their spouse!
19
20202020
See Materials, Page 16
REVIEW BANK STATEMENTS BEFORE SUBMITTING!!
How Does IRS Determine Bank Account Values?
See Materials, Page 22 for Rider #1
The 20% Discount is, essentially, a gift, even for
appreciated holdings.
Cash
20
Bank Accounts
• 5.8.5.7 (03-23-2018)Cash
• Use the amount listed on the Form 433-A (OIC) for the amount of cash in the taxpayer’s bank accounts. Reduce the total amount listed by $1,000.
• Note:
• The $1,000 reduction only applies to individual bank accounts.
21
See Materials, Page 17
Bank Accounts
• Exception:
• If the total amount listed on the Form 433-A (OIC) is over $1,000 and you have reason to believe the money will be used to pay for the taxpayer's monthly allowable living expenses, do not include it on the AET.
22
See Materials, Page 17
Bank Accounts
• Example:
• (1) The taxpayer lists $10,000 on Form 433-A (OIC) The taxpayer’s allowable living expenses are $3,000. Include $6,000 ($10,000 less $1,000 less $3,000) as an asset value on the AET.
23
See Materials, Page 18
Bank Accounts
• Example:
• (2) The taxpayer lists $3,000 on the Form 433-A (OIC) and his allowable living expenses are $2,700. Do not include any amount on the AET since the $300 difference is less than $1000.
24
See Materials, Page 18
25252525
See Materials, Page 16
REVIEW BANK STATEMENTS BEFORE SUBMITTING!!
How Does IRS Determine Bank Account Values? NEW Bitcoin Section
See Materials, Page 17 for Rider #1
Cash
25
In 2017 had been 0.7
26262626
See Materials, Page 22
26
27272727
See Materials, Page 16
REVIEW INVESTMENT STATEMENTS BEFORE SUBMITTING!!
How Does IRS Determine Account Values?
See Materials, Page 22 for “Rider #1”
Important, IRS 80% is ArbitraryCompute on your own!
(changed from 70% in 2016)
27
282828
See Materials, Page 22
28
Alan – 58-1/2
292929
See Materials, Page 38
29
Building Asset by Asset: Workpapers & Documentation Backing up Each Component
30303030
See Materials, Page 16
REVIEW INVESTMENT STATEMENTS BEFORE SUBMITTING!!
How Does IRS Determine Account Values?
See Materials, Page 16 for Rider #1
30
Real Estate
Our Question:
“Do you own any Real Estate?”
Client Response:
“Not in My Name!”
- Transfers
31
32323232
See Materials, Page 23
32
IRM 5.8.5.4.1 (09-30-2013) Net Realizable Equity(4) When a particular asset has been sold (or a sale is pending) in order to fund the offer, no reduction for QSV should be made. Instead, verify the actual sale price, ensuring that the sale is an arms length transaction, and use that amount as the QSV. A reduction may be made for the costs of the sale and the expected current year tax consequence to arrive at the NRE of the asset. Consider reviewing a lender statement that estimates proposed closing costs.
33333333
Home Value
Fair Market Value $ 410,000
Quick Sale Factor x 80%
$ 328,000
Less: Mortgage ($ 322,000)
Net Home Value $ 6,000
IRS Lien will be discharged to allow satisfaction of offer. See IRM 5.8.10.6 (12-05-2019)
[See Pages 33-35 of Materials for Valuation]33
http://pro.realquest.com and
http://realquest.com (transitional)
See Page 35 of Materials
34
See Page 34 of Materials
35
See Materials, Page 36
Sample Rider for Complex Real Estate
36
37373737
See Materials, Page 23NADA/KELLY/EDMUNDSwebuyanycar.com
TRADE-IN/PRIVATE PARTY/CONDITION?
** Check the $3,450 exclusion totals!
SECTION 3 – VEHICLE INFORMATION
37
See Materials, Page 24
Note: 2012 to 2018 forms required valuables, not all personal assets such as furniture, etc.- for 2019-20, BACK IN NOW!
§6334(a)(2) Personal Property Exemption - $9,690 for 2020.See IRM 5.8.5.11 (03-23-2018)
SECTION 3 – PERSONAL ASSET INFORMATION
38
“Interest in a company or business”
39393939
See Materials, Pgs 24 & 25
§6334(a)(3) Exclusion for “Books or Tools necessary for the trade, business or profession of the Taxpayer.” 2019: $4,770.
39
May 21, 2012 OIC Rules
• The equity in income producing assets will no longer be added to the RCP of viable ongoing businesses unless such assets are not critical to the business operations IRM 5.8.5.15 (03-23-2018). In some situations, this is a material change which eliminates what many believed to be a double-counting of assets.
40
See Materials, page 37
May 21, 2012 OIC Rules
• “Example (5) A real estate salesman has a vehicle with $30,000 in equity. The vehicle is used to transport clients and assists in the production of income. The taxpayer's net monthly disposable income is $3,000. The equity in the vehicle generally will not be included in the RCP”
41
See Materials, page 37
May 21, 2012 OIC Rules
• “Example (6) The same salesman in the previous example only has net monthly disposable income of $500 per month. Consider including the equity in the vehicle, yet allow for the impact the loss of the vehicle may have on the taxpayer's income.”
42
See Materials, page 37
43434343
See Materials, Pages 27-28Section 9 Questions – Very Important!
43
Define “Transferred”
444444
See Materials, Page 38
44
The Budget
• Computing Future Net Income
45
46
OIC InstructionsSee Materials OIC Booklet Excerpt, Page 112
46
47474747
See Materials, Page 26
“Additional household income” line IS BACK!
NEW in 2019
47
INCOME
484848
See Materials, Page 29
3- YEAR AVERAGE vs. CURRENT PAYCOLLATERAL AGREEMENT
(Attorney to Computer Consultant)IRM 5.8.5.21 – SEE PAGES 39-42
EMPHASIS ON JUDGMENT!
IRS.GOV, SEARCH “COLLECTING PROCESS PART 5” or go to my Website48
JUSTINE - COLLATERAL
49494949
See Materials, Pg 25
49Box C above leads into Line 36 of Section 7 for Business Income – See Previous Slide.
50505050
See Materials, Page 26
50
Implemented in 2016……..is it true for Box 42?
51515151
Deleted “Other Expenses”Where to put our fees?
See Materials, Page 26
Section for delinquent state & local taxes
51
52525252
See Materials, Page 30
52
53535353
See Materials, Page 30
53
IRS.govA valuable resource!
54
See materials pg 45
555555
See Materials, Pg 51
SINCE 2007, TABLES DO NOT ACCOUNT FOR “INCOME” CONSIDERATIONS.
55
Increase from 2017 allowable of $1,650 for 4 persons! $1,786 for 2019 but down to $1,740 for 2020
Increased in 2019 to $420 for each extra person but now down to $378
56565656
See Materials, Page 30
56
Check Annually: 2020 Allowance in Mercer County is up 2% over 2019.
575757
See Materials, Page 54
57
585858
See Materials, Page 30
How to handle for IAs?
Necessary vs. Conditional
58
Can Documentation of Mortgage alone suffice? emd
Can one have too many expenses?
Such may drive the budget deficit too
negative? emd
59595959
See Materials – Page 56 - 57
IRS Interprets as $521 each, not $1,042 for Two
From 2011 to 2015 was $342. Dropped to $308 in 2016 and stayed
in this range – same as 2019 now
59
Increase from 2019 of $508 and $1016, trending up after years of decrease
60606060
See Materials, Page 30
IRM 5.8.5.22.3 (03/23/2018)Applies ONLY to Offers, not IAs (see materials pg 63)
60
61616161
See Materials, Page 30
Detailing Medical Can SignificantlyReduce RCP
61
62626262
See Materials – Page 65
622019 Amounts were $55 and $114; 2015: $60 and $144 in 2015
https://www.irs.gov/businesses/small-businesses-self-employed/national-standards-out-of-pocket-health-care
Client Information Request LetterSee Materials, Page 85Letter Begins on Page 82
63
Medical Rider – by Month
64
(see materials page 66)
65656565
Importance of Running Tax Projections
FNI
65
See Materials, Page 30
Tax Computations
See Materials, Page 29
66
67676767
Attorney Fee Expenses(see next slide)
67
See Materials, Page 30
FNI
6868686868
See Materials, Page 32
See Materials, Page 38
69
7070707070
See Materials, Page 30
FNI
71717171
See Materials, Page 27“Life of Statute” option no longer exists! 71
727272
OLD NEW
Monthly Excess $361 361
48/12 Times Factor
$17,328 $4,332
Assets/Equity $35,457 $35,457
R.C.P. $52,785 $39,789
R.C.P. [See Page 72 for this Slide]
72
EMD Next
QUESTIONS RE: RCP?
73
May 21, 2012 OIC Rules
Example #1:
• Taxpayer owes $125,000 to the IRS
• Taxpayer earns $80,000 per year.
• We agree with IRS that the Taxpayer can afford to pay $750 per month to the IRS.
• We agree with the IRS that the Taxpayer has $40,000 in realizable value of his/her assets. 74
See Materials, page 71
757575
OLD NEW
Monthly Excess $750 750
48/12 Times Factor
$36,000 $9,000
Assets/Equity $40,000 $40,000
R.C.P. $76,000 $49,000
R.C.P. – Example #1
75
See Materials, page 72
May 21, 2012 OIC Rules
Example #2:
• Taxpayer owes $300,000 to the IRS
• Taxpayer earns $250,000 per year.
• We agree with IRS that the Taxpayer can afford to pay $4,000 per month to the IRS.
• We agree with the IRS that the Taxpayer has $5,000 in realizable value of his/her assets. 76
See Materials, page 72
777777
OLD NEW
Monthly Excess $4,000 4,000
48/12 Times Factor
$192,000 $48,000
Assets/Equity $5,000 $5,000
R.C.P. $197,000 $53,000
R.C.P. – Example #2
77
See Materials, page 73
May 21, 2012 OIC RulesExample #2: Dorothy & Mo Offer
• Result too good to be true?
• IRS may reject, using “not in the best interests of the government standard.”
• Offer will be rejected if full payment can be made within the remaining time of the statute.
Note: If statute is 100 months, government will receive $400,000 over that time. Why would they accept $53,000 if only $300,000 is due? 78
See Materials, page 73
May 21, 2012 OIC Rules
Example #2:
• IRS Rules Require Rejection of the $53,000 offer to satisfy $300,000 debt
• IRS Rules would normally Accept the $53,000 offer if debt was $500,000 or more!
79
LATE
BREAKING
NEWS
As announced by Darren Guillot at the UCLA Tax Controversy program and Paul Mamo at the SE Regional Bar Meeting
80
Installment Agreements –Less than $250,000 Owed
• NO FINANCIAL DISCLOSURE; and
• NO LIEN DETERMINATION, if
a. You owe less than $250,000; and
b. You contact the IRS prior to the case being sent out to the field for handling by a Revenue Officer.
Likely you will need to be current on all estimates/withholding and filings. 81
Installment Agreements –Less than $250,000 Owed
Effective Dates:
• No Financial Disclosure is imminent; and
• No Lien Determination will be effective prior to year end.
82
83
The Secret to Successful Negotiations with the IRS is to Bring….
84
The Grandchildren!
85
And the New Grandchildren!
86
878787
Want to know more?
Sign up for our email list
Sfields@pragermetis.com
87