• How Reasonable Collection Potential affects your Offer in Compromise

    18 July 2015
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    The Offer in Compromise

    An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service (IRS) that settles the taxpayer’s tax liabilities for less than the full amount owed. Taxpayers who can fully pay the liabilities through an installment agreement or other means, will not be eligible for an OIC in most cases.

    In order to be eligible for an OIC, the taxpayer must have:

    1. filed all tax returns;
    2. made all required estimated tax payments for the current year
    3. made all required federal tax deposits for the current quarter, if the taxpayer is a business owner with employees.

    How do I know if my offer will be enough?

    In my experience it is not possible to know if your offer will be accepted (about 1 in 4 are), but it is possible to know if it will be rejected before you even file. In most cases, the IRS will not accept an OIC unless the amount offered by a taxpayer is equal to or greater than the reasonable collection potential (RCP). The RCP is how the IRS measures the taxpayer’s ability to pay. The RCP includes the value that can be realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property. In addition to property, the RCP also includes anticipated future income less certain amounts allowed for basic living expenses.

    How does the RCP Calculation work?

    Lets take a look at a hypothetical business owner. Ned used to be a top salesman at a high flying software company, but he was laid off and is now self-employed. Ned owes the IRS $190,000 in back taxes. He has a home worth $265,000, but he owes $165,00 on it. He runs a successful lawn care business and nets about $84,000, after business expenses. He owns two trucks and some lawn care equipment worth about $38,000. He also owns an old sports car worth about $12,000. He has a 401(k) account with about $50,000 in it, but he has borrowed about $20,000 to cover out-of-pocket medical expenses from an injury. Ned’s living expenses are $5,250 a month.

    Let’s calculate Ned’s RCP:

    Step One – Asset Evaluation

    1. Ned’s home is worth $265,000 but the quick sale price of his house (FMV x .80) is only $212,000. After allowing for his first mortgage debt, he has $47,000 of equity available. For offer purposes, we will count $47,000.

    2. Ned’s two trucks and business equipment all generate income for his business. Under current IRS rules, equity assets that produce income will not be factored into an offer because the income steam produced by those assets will be picked up in the future income calculations (see below).

    3. Ned’s car is worth $12,000, but the quick sale value is (FMV x .80) is only $9,600, which we will use for offer purposes.

    4. Ned’s 401(k) is worth $50,000, but we can argue that the liquidation value of this asset is about 70%, which gives us a value of $35,000. Since Ned also has a loan of $20,000 against the account, there is only $15,000 of asset value here for offer purposes.

    Ned’s total asset value for offer purposes is $71,600; this figure represents the asset based component of his RCP.

    Step Two – Future Income

    Ned is making a nice living from his lawn care business, but he is not getting rich. Nonetheless, the IRS still looks at his income when calculating RCP. Ned makes $84,000 a year or $7,000 a month, and his allowable monthly expenses are $5,250, leaving him with $1,750 a month. Assuming Ned wants to pay off the IRS quickly (within 5 months), the IRS will only look at 12 months of future income (12 x $17,50) or $21,000, otherwise they will multiply his remaining income by 24.

    Ned’s Recommended Offer Amount

    If Ned wants a reasonable chance a settling with the IRS, his offer should be $92,000 (his RCP).

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  • Trust Fund Penalty Woes? What to do about it.

    25 May 2015
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    I was a signor on our company checking account and now the IRS says I am liable for the unpaid payroll taxes. If the preceding sentence describes you, then you are not alone. The IRS is serious about collecting payroll taxes – very serious.

    Taking Names

    After serving the business entities’ banks with an administrative summons demanding bank account signature card copies, the IRS will review a sampling of checks to see who signed them. Revenue officers will also search public records to find out who owns the business.

    Part of the Revenue Officer’s job is to determine who is liable for the trust fund recovery penalty.In many cases, simply being a signor on the checking account is enough for the IRS, although its really not the fact that you are a signor that really matters — it is whether you had the actual “authority” to approve the issuance of payroll checks.

    It’s just an interview right? Wrong.

    Revenue officers will then typically demand potential targets to submit to an in-person interview to answer live questions. At the end of this session the officer will fill out IRS Form 4180, “Report of Interview with Individual Relative To Trust Fund Recovery Penalty”, followed by the revenue officer’s request/demand the interviewee sign the form 4180 as factually accurate.

    After the Revenue officer has interviewed all the potentially liable individuals, he/she will prepare IRS Form 4183, “Recommendation re: Trust Fund Recovery Penalty Assessment”; once this form is approved by his/her manager, the IRS will send via certified mail, to each trust fund recovery penalty target, an IRS statutory notice of deficiency letter 1153, formally alleging personal trust fund recovery penalty liability, beginning the legal procedure to assess against individuals.

    Time is short.

    In order to stop the IRS from assessing the penalty, the IRS letter 1153 target (in this case you) must file a written appeal within 60 days from the letter 1153 date by certified mail, return receipt requested, and retain evidence establishing timely mailing. Failure to file for an appeal within 60 days from the letter 1153 date results in the IRS assessing against the individual personally, a trust fund recovery penalty liability, and removes the future opportunity to challenge trust fund recovery penalty liability administratively before the IRS.

    You waited too long. You owe the IRS! Now what?

    If you have read this far and realize that you missed all your opportunities to timely appeal, you have a problem, but a couple of ways remain to effectively deal with it.

    OPTION A – Pay Part of the Tax and File a Lawsuit

    A. Pay a portion of the Trust Fund Recover Penalty (TFRP), file a claim for refund (an 843 Claim), and when the claim is denied sue in the United States Court of Federal Claims. Doing this can be accomplished by paying the amount due for a single employee for each quarter that was allegedly unpaid. This will bring the entire matter before the Court and allow your liability to be determined by the Court and not the IRS.

    OPTION B – Make an Offer

    B. File an Offer in Compromise under Doubt as to Liability stating that you are offering X to settle the entire claim, but that the legal basis for your liability is in serious doubt. Therefore, the IRS should take what you offer and call it a day. While this sounds straight forward, it will require, as would Option A, a reconstruction of the events, and we would need to obtain admissible evidence and identify possible witnesses. In the event of Option B, we could attach statements from these folks in the form of Affidavits as well.

    If you prevailed in A, you would end up recovering what you paid and owe nothing. In my estimation, it is really an all or nothing argument for TFRP. You either owed it or you did not.

    If you prevail in B and an offer is accepted, you must offer more than $0.00 and the argument must be strong and the offer still enough to entice the IRS to accept it. If accepted, and the offer amount is paid, your remaining liability would be zero.

    What to do?

    Doing nothing resulted in the assessment, but don’t be hasty either. Talk this decision over with your CPA, your attorney and your husband/wife. Neither course of action can guarantee a positive result, but if you are certain that you are on solid legal ground, either course of action is worth considering.

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  • Was your Offer in Compromise Rejected? Appeal.

    6 September 2014
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    An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayer’s tax liabilities for less than the full amount owed. If the liabilities can be fully paid through an installment agreement or other means, the taxpayer will in most cases not be eligible for an OIC. Every year thousands and thousands of OICs are filed by taxpayers hoping to pay the IRS “Pennies on the Dollar”. The IRS accepts about one (1) in every four (4) offers; those are not great odds. So, what to do when the IRS rejects your OIC?

    If the IRS rejects an OIC, then the taxpayer will be notified by mail. The letter will explain the reason that the IRS rejected the offer and will provide detailed instructions on how the taxpayer may appeal the decision to the IRS Office of Appeals. The appeal must be made within 30 days from the date of the letter. In some cases, an OIC is returned to the taxpayer, rather than rejected, because the taxpayer has not submitted necessary information, has filed for bankruptcy, has failed to include a required application fee or nonrefundable payment with the offer, or has failed to file tax returns or pay current tax liabilities while the offer is under consideration. A return is different from a rejection because there is no right to appeal the IRS’s decision to return the offer.

    The appeals process might seem like a long-shot, but the reality is that you have a better shot at getting your offer accepted in the appeal’s process.To start, you need to fill out IRS Form 13711, Request for an Appeal of Offer in Compromise. This will get the ball rolling by showing the IRS that you believe your offer was unfairly rejected. Complete IRS Form 2848 if a tax professional will be signing the Form 13711. Once you are ready, send the letter to the address provided in your rejection letter. If you would prefer to handle this another way, then you can send your own letter into the IRS stating you want to appeal your OIC with the following information:

    • Your Contact information (specifically, your name, address, phone, and SSN)
    • A copy of letter IRS sent you that confirms their rejection
    • The Tax years covered by the OIC in question
    • The Details of the OIC submitted
    • Any Documentation or Facts supporting  your disagreement with the IRS’s decision

    Just keep in mind, you must sign the letter stating that all information is true. This statement is made “under the penalty of perjury,” Again, once you are ready,  send it to the address the IRS indicated in your rejection letter. Sometimes refusing to take  ”No” for an answer pays off.

    If you need help with an Offer in Compromise, contact the tax attorneys with the Perliski Law Group at (214) 446-3934 for a free consultation or use our online form.

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