Offer in Compromise

Posted on by katemley

IRC 6320 Hearing

The United States Court of Appeals for the Seventh Circuit in Craig L. Galloway v. Comm’r of Internal Revenue, No. 21-2269 decided February 9, 2022 that because the issue at hand was outside of the authority of the Tax Court to decide, then the issue also fell outside of the authority of this Court to review.  

The Taxpayer in this case had an unpaid income tax liability of $64,315.43.  Taxpayer submitted an Offer in Compromise which was rejected by the IRS because they believed the taxpayer could pay the liability based on the reasonable collection potential.  Rather than appeal this decision, taxpayer filed another Offer in Compromise. It was rejected for the same reason.  He appealed, but the decision of the Offer unit was sustained.  After the appeal, the IRS issued a Notice of Federal Tax Lien Filing with rights to a Collection Due Process hearing under IRC 6320. Taxpayer requested a hearing and during that hearing the Officer advised that he could submit a new Offer directly to the Offer Unit, but that if it was the same Offer, it would be rejected.  No Offer was filed and the Tax Lien was sustained.  Taxpayer then appealed the decision to sustain the filing of the Notice of Federal Tax Lien to the Tax Court.  The IRS won in Tax Court by correctly arguing the taxpayer was prohibited from raising a challenge to the Offer in that setting – which he was trying to do.  Taxpayer then appealed to this Court.  This Court indicated that their review would be based on whether there was an abuse of discretion by the settlement officer in sustaining the federal tax lien – not a review of the underlying rejection of the Offer. This was because the taxpayer had participated meaningfully in his appeal of the Offer rejection.  Because the Tax Court was limited in reviewing the underlying debt, so too is this Court of Appeals.

Increased collection activity against federal employees’ Thrift Savings Plans (TSP)

Posted on by katemley

The National Taxpayer Advocate has reported in its Fiscal Year 2016 Objectives report to Congress that a proposal by the IRS to expand collection efforts against retirement plans of federal employees “infringes on taxpayers’ rights to a fair and just tax system.” Federal employees have the ability to participate in the Thrift Savings Plan (TSP), which is similar to a private sector 401(k) plan in that employee savings are tax deferred and qualify for some level of employer, (in this case the federal government), matching.

Taxpayers, including federal government employees, who owe taxes are subject to IRS levy on their property and rights to property.  This power extends to retirement accounts, including the TSP.  However, given the importance of retirement savings to an individual’s welfare during old age, the IRS has historically regarded a levy on retirement funds as a special case that requires additional scrutiny and a manager’s approval. 

Essentially, before a field Revenue Officer can levy a retirement benefit, the agent would determine what property is available to levy – both retirement and non-retirement, determine if the taxpayer has acted in a flagrant manner, and finally determine if the retirement funds are required for necessary living expenses. There are distinct problems with these factors, but that has been partially mitigated by other requirements prior to issuance of the levy.  The field Revenue Officer must either secure the signature of the Area Director of Field collections, or secure a manager’s approval.

In order to obtain a collection manager’s approval in this instance, the field Revenue Officer is required to draft a detailed memo that sets out a summary of all information provided to the agent by the taxpayer, whether the taxpayer has exhibited any flagrant behavior, and more importantly, other collection alternatives that have been considered and rejected.  In other words, the retirement account falls into a secondary level of collection after the field Revenue Officer reviews other property or income to levy. 

Recent activity at the IRS has created a pilot program to levy TSP accounts.  Most importantly, and of greatest concern, this program will be administered by ACS employees.  ACS is the Automated Collection System unit.  When a taxpayer’s account is in ACS, it is not assigned to a single employee for collection, rather, there are various employees in functions and units that work on similar matters.  These employees do not receive the same level of financial analysis training as a field Revenue Officer. 

In addition to the reduced training received by ACS employees, the pilot program calls for ACS employees to document any information that a retirement is impending and that the taxpayer will be relying on funds from the TSP for necessary living expenses.  This lacks any analysis regarding other property the taxpayer may have that would be available to collect from, or if the taxpayer acted in a flagrant manner, all requirements of a field Revenue Officer. 

Finally, the pilot program requires managerial approval prior to levy on retirement accounts – but that is a requirement of many collection actions by ACS employees – hardly elevating these situation to a special case status.  What is not referenced is the required memo to the manager detailing information provided by the taxpayer and collection alternatives considered and rejected before proposing levy to the retirement account – all requirements of the field Revenue Officer.

In summary, the IRS is targeting one type of retirement account, the TSP, for increased collection activity, over all others. ACS does not have the ability to levy any other retirement accounts at this time.  The National Taxpayer Advocate believes that this pilot program undermines both taxpayer rights and retirement security policy.  As such, the National Taxpayer Advocate is going to continue to push the IRS to abandon the Thrift Savings Plan levy pilot program  If the IRS adopts the program, the National Taxpayer Advocate is prepared to accept all TSP levy cases coming from ACS.  Taxpayers should take advantage of this opportunity to protect their retirement income.  Additionally, where possible, taxpayers should seek assistance from the Appeals division in order to entertain collection alternatives through Appeals’ Collection Due Process hearing procedures.  Feel free to contact Caraker Law Firm, P.C. with any questions you may have. 

IRS institutes Early Interaction Initiative for Employment Tax matters

Posted on by katemley

IRS institutes Early Interaction Initiative for Employment Tax matters

  It is expected that the IRS will be instituting swifter action against employers that are falling behind on their Federal Tax Deposits (FTD’s) for employment taxes.  Those taxpayers who have had interaction with a field Revenue Officer are likely hearing from those Revenue Officers more quickly if they fall behind on their required deposits.  However, the IRS announced in December 2015 that it is instituting efforts to identify employers who appear to be falling behind on their tax payments – apparently even before their employment tax return is being filed. 

            The IRS has indicated that their identification efforts will result in letters, automated phone messages, and other communications which could include a visit from a field Revenue Officer.  The IRS has indicated that this effort will reduce the likelihood of the problem becoming uncontrollable.  Many taxpayers simply do not realize how steep the penalties can be for failure to properly make tax deposits, pay employment taxes timely, or failure to file timely returns.  Further, it is unlikely that most taxpayers understand the personal liability that can be assessed from unpaid employment taxes.  A liability that is not dischargeable in bankruptcy.

            While the education efforts are beneficial, certainly there is an enforcement aspect of this activity by the IRS.  The IRS readily admits that two-thirds of federal taxes are collected through the payroll tax system.  With a reduced budget, this activity makes good sense for the IRS.  However, it is most likely going to be most burdensome for small businesses. 

            No doubt early action is best.  If you know you have been falling behind on your payroll tax obligations and need assistance planning before you hear from the taxing authorities, feel free to call. 

How do you decide if an Offer In Compromise is a good way to resolve your IRS debt?

Posted on by katemley

In the past couple of years, the IRS has dramatically changed its formula for calculating the amount a taxpayer must pay to settle a tax debt.  Fundamentally, the changes were favorable for the taxpayer and the IRS appears to better understand that acceptance of an Offer in Compromise likely results in collection of more tax dollars than simply continuing to enforce collection efforts through levies and lien filings.  However, the movement towards a more favorable calculation by the IRS of the taxpayer’s ability to pay, and thus the taxpayer’s reasonable collection potential, has actually been further adjusted in a manner that removes some of the initial excitement about formula changes to Offer calculations.

The basis of acceptance of most Offers in Compromise is doubt as to collectability.  Basically, the IRS performs an analysis of a taxpayer’s financial situation and if the taxpayer’s ability to pay is less than the amount they owe, then the taxpayer could theoretically qualify for an Offer in Compromise settlement.  The ability to pay analysis consists of the calculation of both a taxpayer’s equity in assets and “future income potential.”

A taxpayer’s future income potential for a settlement is typically calculated by performing a monthly financial analysis in which the IRS compares gross earnings to allowable expenses to determine if there is any excess monthly income remaining from which the taxpayer could pay the IRS.  If so, this excess income was historically multiplied by a factor – either 48 or 60, to determine the future income potential portion of a settlement Offer.  The taxpayer would be allowed to multiply the excess monthly income by 48 if the Offer was for a lump sum settlement, and 60 if the payments were to be made over a couple of years.

Recently, a favorable adjustment was made to the multiplier.  Rather than asking the taxpayer to multiply excess income over expenses by 48 for a lump sum Offer, the IRS dramatically adjusted this number down to 12!  And, rather than multiplying by 60 for a short term payment Offer over up to a couple of years, the multiplier was altered to 24! 

This seemed almost too good to be true. And in part, it was. The IRS clarified, through the adoption of guidance in its Internal Revenue Manual, that even if a taxpayer calculates that he or she qualifies under the new formula, the taxpayer will not qualify for a settlement Offer if the IRS could collect the entire debt through establishment of an Installment Agreement over the statutory period of collections, unless there are special circumstances.

What this means is that at the time of analyzing a taxpayer’s situation, it is important to be aware that even though the formula indicates a taxpayer would qualify for a settlement, if the monthly excess income over expenses would retire the debt under the statute of limitations, then the taxpayer is wasting time submitting an Offer.  Furthermore, the taxpayer will be putting the statute of limitations for collection on hold while the defective Offer is under review, and for a period of time after rejection.

Here’s a simple example of how this would work.  Assume a taxpayer owes $50,000 in tax debt.  If the taxpayer just filed the return, the IRS will have 10 years, or 120 months to collect the debt, with exceptions for extensions of time – such as when an Offer is filed. If the taxpayer has no equity in assets, but a financial analysis shows an ability to pay $1,000 a month, the taxpayer might think a lump sum Offer would be a good way to put the debt to rest forever.  Under the lump sum analysis, the future income potential would be $1,000 x 12 or $12,000.  With no equity in assets, this is less than the tax debt and would make this look viable.  Even the short term Offer looks good as the future income potential would be $1,000 x 24 or $24,000.  The settlement would be paid over 24 months, or $1,000 per month.

The reality in the above example is that the Offer will be rejected, absent special circumstances, because the monthly future income potential of $1,000 multiplied by the life of the collection statute exceeds the tax debt as follows: $1,000 x 120 months (or 10 years as the return was just filed) = $120,000.  The exception to this is if special circumstances exist as disclosed on submission of the Offer.  Generally, special circumstances would include creation of economic hardship, or alternatively, compelling public policy or equity factors, such as health concerns or age, could tip the analysis in favor of settlement, in spite of the above.

Fundamentally, and especially because of the fact that the statute of limitations is placed on hold during a lengthy analysis period (several months), a taxpayer has to be careful to review their particular situation so that submission of an Offer in Compromise doesn’t do more harm than good.  If you would like assistance with your tax matter, or the tax situation of a client, please don’t hesitate to contact us.

Final Regulations Issued for Use of Truncated Taxpayer Identification Numbers

Posted on by katemley

New IRS Regulations Aim to Fight Identity Theft Through Use of Truncated Taxpayer Identification Numbers

This week, in an effort to safeguard taxpayers from identity theft, the IRS issued its final regulations regarding the use of Truncated Tax Identification Numbers or (TTINs). The final regulations, published on July 15, are amendments to the Income Tax Regulations and Procedure and Administration Regulations, which allow the tax filer to truncate a payee’s identification number on certain documents. The Service states that the amendments are specifically targeted at reducing the risk of identity theft, which can stem from the use of an employee’s entire identification number on documents.

A “Truncated” identification number simply takes an existing nine-digit identification number and replaces the first five numbers with either asterisks or “X”s so that only the last four digits remain. (i.e. A tax identification number of 99-9999999 would become XX-XXX9999). Because a TTIN is merely a method of masking taxpayer identification numbers that already exist, use of a TTIN does not require the Service to issue any new identification numbers or expend any funds for the taxpayer to be able to use a TTIN. The new regulations allow for TTIN to be used for a taxpayer’s social security number (SSN), IRS individual taxpayer identification number (ITIN), IRS adoption taxpayer identification number (ATIN), or employer identification number (EIN) on payee statements and certain other documents.

Before issuing their final regulations, the IRS ran a pilot program, which allowed certain qualified filers to truncate an individual’s payee identification number on a paper payee statements for Forms 1098, 1099, and 5498. This program ran from 2009 to 2010. In 2011 the IRS extended the pilot program for two more years and modified it by removing Form 1098-C from the list of eligible documents.

In January of 2013, the US Treasury and the IRS issued proposed regulations, in response to the growing threat of identity theft and associated tax fraud. The proposed regulations largely mirrored the pilot program, with TTINs permitted on electronic payee statements in addition to paper statements.

The final regulations became effective on July 15, 2014 and permit the use of TTINs “on any federal tax-related payee statement or other document required to be furnished to another person….” TTINs may not be used (1) on any return or statement filed with, or furnished to, the IRS, (2) where prohibited by statute, regulation, or other guidance by the IRS, or (3) where a SSN, ITIN, ATIN, or EIN is specifically required. Further a TTIN cannot be used by an individual to truncate their own identification number on any statement or other document that they give to another person. This includes an employer’s EIN on a W-2 or Wage and Tax Statement that they might give to an employee, and also an individual’s identification number on either a W-9 or Request for Taxpayer Number and Certification. 

If you have questions about the use of TTINs, please contact our office.

Why do I have to owe over $10,000 to get help with my IRS tax debt?

Posted on by katemley

Everyone has seen on television, or heard on the radio, advertisments for assistance with owing the IRS back taxes.  Turn on the TV late at night to watch reruns of your favorite show and you’re bound to see at least one. But they all have that caveat, saying that you must owe the IRS over $10,000 for them to help you, but why?

The fact of the matter is that you don’t need to owe a certain amount to have representation to assist with your tax debt – at least not from our firm.  If you listen to the television or radio you would think that there is no way to help someone who owes less than this amount.  Most of the businesses that advertise in this way are looking to submit a settlement proposal, known as an Offer in Compromise, to the IRS on your behalf.  This may or may not be possible, but generally that is the only service these businesses provide.  What they know is that due to the manner in which the IRS settles debt, it is nearly impossible to settle a small tax debt.  However, here are several situations that our office sees frequently where taxpayers have a small tax debt, but still need help sorting through their options to come into compliance:

  • Sometimes a client may owe the government a small amount, but has unfiled returns and is preparing to file bankruptcy to discharge health care debt or other obligations.  The bankruptcy code requires the taxpayer to file their last three returns in order to qualify for the bankruptcy.  After filing, the client anticipates owing more.  Perhaps that is a small amount or a large amount.  Regardless, this client needs help with those taxes because they will not be discharged in the bankruptcy.
  • A client may owe a small amount based on a return filed by the government – known as a Substitute for Return (SFR).  However, the client will owe much more later when a proper return is filed.  This can happen when a client is self-employed and receives a few 1099’s that comprise a small amount of the taxpayer’s overall revenue.  Once the return is properly completed, there may be a different picture.
  • Sometimes a client owes tax debt that their spouse created and it is simply unfair for them to be held responsible for the debt.  That client may want to be relieved from the obligation – no matter how small – through the Innocent Spouse Relief process.  Alternatively, a spouse may be harmed because his or her refund was offset to their spouses tax debt.  In this instance, this client may need assistance filing an Injured Spouse claim.
  • A client may have a few thousand dollar tax debt created by automated Exam at the IRS, but if the client merely pays it or sets up a payment agreement to resolve the balance, the taxpayer may be setting himself or herself up for problems with future tax return positions.  If your expense or other deduction is valid and the IRS disallowed it, it may be worth fighting to substantiate it so you do not create a record showing you agreed with the claim or deduction being disallowed.  Therefore, your representative could make arguments to assist in your exam and protect your position for later.
  • Some clients owe less than $10,000 and are interested in relieving themselves from the burdens of a tax lien.  It is now possible to establish a Direct Debit Installment Agreement and apply for a withdrawal of the tax lien.  There are specific procedures for this doing this must be met to qualify, but it is possible.  As a matter of fact, it is now possible to accomplish this if you owe up to $25,000.
  • A client may owe a small tax debt which was originally much larger and triggered the filing of a tax lien.  Though the debt is paid down, it is preventing the sale of a piece of real estate because there is not enough equity to retire the tax debt at closing.  These clients need assistance with a request to Discharge Property from Federal Tax Lien.  This will clear title to the property and allow for the closing, even though the entire tax debt is not being paid off in full.
  • Some of our clients only owe a couple of thousand dollars, but have many years of unfiled tax returns and anticipate owing much more.  A settlement proposal, Offer in Compromise, may be appropriate.  However, it is impossible to know if that is the case until the taxpayer knows the total owed and a financial analysis is performed which includes a review of income, expenses and equity in assets.
  • A client may need assistance when a wage levy is in place, but the balance on their total tax debt is not larger than $10,000.   In those instance, it is very likely that the taxpayer can be moved to a voluntary payment agreement if all returns are filed.  Even if all returns are not filed, substantiation to the IRS of income and expenses could likely result in a partial levy release to relieve the client of some, or all of the wage levy.
  • If any of the above is similar to your situation, or you have some other tax problem, we will be happy to help you, regardless of the size of your debt.  Just give us a call.