1 Offers In Compromise Robert E. McKenzie Arnstein & Lehr LLP 120 South Riverside PLZ Suite 1200 Chicago, IL 60606 312.876.6927.

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Offers In Compromise

Robert E. McKenzieArnstein & Lehr LLP120 South Riverside PLZSuite 1200Chicago, IL 60606312.876.6927

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Offers In Compromise

• All audio is streamed through your computer speakers.

• There will be several attendance verification questions during the LIVE webinar that must be answered via the online quiz at the conclusion to qualify for CPE.

• Today’s webinar will begin at 2:00pm EDT• Please note: You will not hear any sound until the

webinar begins.

Learning Objectives

Upon completion of this webinar you will be able to:

•Recognize current IRS enforcement priorities.•Define foreign asset & FBAR reporting requirements.•Define the Foreign Account Tax Compliance Act FATCA and the Obligations of Foreign Financial Institutions and of U.S. Taxpayers to Report Foreign Assets.•Specify IRS audit rates and trends in audit procedures•Determine current IRS criminal enforcement trends•Recognize IRS collection trends •Specify collection alternatives available to taxpayers

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MCKENZIE’S PRIME DIRECTIVE

•GET THE FEE FIRST!!

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OFFERS IN COMPROMISE

•DOUBT AS TO COLLECTIBILITY•DOUBT AS TO THE ACTUAL LIABILITY•PROMOTE EFFECTIVE TAX ADMINISTRATION

OR EXCEPTIONAL CIRCUMSTANCES

Higher User Fee

• Beginning 1-1-14 the user fee for an OIC is:

•$186

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OIC’s Offers in compromise (thousands):

2012  2013  2014

Number of offers received

64 74 68

Number of offers accepted

24 31 27

Amount of offers accepted

195,652

195,379

179,354

% accepted 38% 42% 40%

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Offers in compromise (thousands) 2007 2008 2009 2010 2011 Offers received 46 44 52 57 59 Offers accepted 12 11 11 14 20

Allowable Expenses

•3-15 IRS issued revised allowable expense tables which are not a substantial improvement from 2013 and 2014

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Allowable Expenses

•Allowable Expenses Used for I/A’s over $50,000 & OIC

A.National StandardsB.Medical expensesC.Regional Standards D.Local Standards E.Necessary for production of income or health & welfare

of the family

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New OIC Forms

•2015 IRS released new version of Form 656-B, “Offer in Compromise Booklet,” and revised Form 656, “Offer in Compromise.”

•Many specific warnings to TP•Waiver of fee and/or downpayment included

in the form

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NEW FRESH START INITIATIVE

•5-21-12•Revises calculation of future income for OIC’s•Expands allowable expense categories•Liberalizes valuation of vehicles•Liberalizes valuation of assets used in business•Reduces use of dissipated asset theories•Reduces multiplier for determining future

income component of RCP

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Reduced Valuation of Assets

• As a general rule, equity in income producing assets will not be added to RCP of a viable business unless the assets are not critical to the business

• Reduce the value of TP cash by $1,000 and by the amount of allowable expenses because it will be used for those expenses

• Reduce the value of vehicles, planes & boats used to produce income or for health & welfare of the family by $3,450 each

• Less use of dissipated asset theory• If liability did not exist at the time TP at time of

transfer• Withdrawals from IRA’s & 401K’s to invest in a

business if taxpayer did not owe taxes at that time

• 3 year period for asserting dissipated assets including the year of submission

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Future Income Component

• More expenses allowed– Student loan payments– Payments to state agencies proportional to federal

payment– Charge card payments– No longer only allow car payments to projected

payoff date– Extra $200 per month allowed for vehicles with

more than 75,000 miles or 6 years or older

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IRC Sec. 7122(c)(2)(B)

• (B) Use of schedules. The guidelines shall provide that officers and employees of the Internal Revenue Service shall determine, on the basis of the facts and circumstances of each taxpayer, whether the use of the schedules published under subparagraph (A) is appropriate and shall not use the schedules to the extent such use would result in the taxpayer not having adequate means to provide for basic living expenses.

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TIPRA 2005

• (1) PARTIAL PAYMENT REQUIRED WITH SUBMISSION-– (A) LUMP-SUM OFFERS-

• (i) IN GENERAL- The submission of any lump-sum offer -in-compromise shall be accompanied by the payment of 20 percent of amount of such offer .

• (ii) LUMP-SUM OFFER -IN-COMPROMISE - For purposes of this section, the term `lump-sum offer -in-compromise' means any offer of payments made in 5 or fewer installments.

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PERIODIC PAYMENT OFFERS-

•The submission of any periodic payment offer -in-compromise shall be accompanied by the payment of the amount of the first proposed installment and each proposed installment due during the period such offer is being evaluated for acceptance and has not been rejected by the Secretary. Any failure to make a payment required under the preceding sentence shall be deemed a withdrawal of the offer -in-compromise .

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RULES OF APPLICATION-

•(A) USE OF PAYMENT- The application of any payment made under this subsection to the assessed tax or other amounts imposed under this title with respect to such tax may be specified by the taxpayer.

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Calculation of Future Income

• Offers to be paid in 5 or fewer payments use 12 as multiplier instead of prior 48– Example: TP can pay $300 per month the RCP is

$3,600 not $14,400• Offers of 6 or more payments use 24 as multiplier

instead of 60– Example TP can pay $300 per month the RCP

would be $7,200 not $18,000– A deferred offer can no longer exceed 24 months

Examples of Periodic Offers

• Offer of $25,000 to settle $100,000– Payable $100 per month with a balloon payment

in the 24th month• Offer of $10,000 to settle $60,000

– Payable 200 per quarter with a balloon in the 24th month

• Do not submit lump sum offers as they incentivize the IRS to reject the offer and keep the down payment– Better option start with a periodic offer and then

negotiate to change to lump sum once the IRS has agreed to and acceptable OIC

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Ability to Pay over Life of SOL

• The IRS reserves the right to compute the RCP value of excess income over the remaining statute of limitations and if that exceeds the amount owed it may reject the OIC

• Biggest impediment to OIC’s• Gives the advantage to those who run up larger tax

liabilities• Arguments against this rule

– Bankruptcy– Age & health of taxpayer– Effective tax administration

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Summary of 5-21-12 Changes

• Offers will now be accepted for a lot lower amount• New Form 656 & instructions for OIC’s• Most liberal OIC policies since adoption of the

allowable expense standards in the 90’s• The new policies can be used in negotiating

installment agreements also

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2011 Offers in Compromise Changes

• IRS expanded streamlined Offer in Compromise (OIC) program to cover a larger group of struggling taxpayers.

• Streamlined OIC expanded to allow taxpayers with annual incomes up to $100,000 to participate.

• Participants must have tax liability of less than $50,000, doubling the current limit of $25,000 or less.

• OICs are subject to acceptance based on legal requirements.

• Generally, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement.

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2010 Fresh Start

•New Flexibility for Offers in Compromise – Stop using 3 year average for income– Consider a taxpayer’s current income and

potential for future income when negotiating an offer in compromise.

– More use of future income collateral agreements

•Special Outreach Efforts to Unemployed

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Future Income for Offers in Compromise

• IRS revised its guidance to employees on figuring the value of a taxpayer's future income in evaluating an offer in compromise, with specific instructions to consider a variety of issues for unemployed or underemployed workers.

• The memorandum (SBSE 05-0310-012) noted that future income is defined as an estimate of the taxpayer's ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future.

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Income Averaging Addressed

• Judgment should be used in determining the appropriate time to apply income averaging on a case-by-case basis. “All circumstances of the taxpayer should be considered” in making this decision, the agency said.

• In situations where the taxpayer's income does not appear to meet stated living expenses, the difference should not be included as additional income to the taxpayer. Such inclusion should only be done if there are clear indications that the taxpayer is receiving, and will continue to receive, additional income not included on the collection information statement.

• “Employees need to exercise good judgment when determining future income.”

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Facts and Circumstances Approach Directed

• The memo directed IRS workers to evaluate each case on the facts and circumstances, and said the history “must clearly explain the reasoning behind our actions.”

• The agency said there are cases where it may be appropriate to use the taxpayer's current income and secure a future income collateral agreement, particularly in cases where the future income is uncertain, but where it is reasonably expected that the income will increase.

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Corporate Trust Fund Liabilities

• Requires that each potentially responsible officer of the company sign an agreement to assessment of the trust fund recovery penalty in advance of consideration of any corporate or LLC offer

• Extremely unfair because the IRS is requiring even those who should not be held liable for the TFRP to agree to liability and assessment

• Only after the liability has been assessed against a non-responsible person may she file a claim for refund and defend against the penalty.

• The system represents an attempt to deprive officers of their statutory due process rights

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IRM 5.8.5.5 Future Income Collateral

• A future income collateral agreement may be used in lieu of including the estimated value of future income in reasonable collection potential (RCP).

• Example:– Client earns $250,000 per year with a

potential for increasing income in the future. The IRS might take a collateral in lieu of cash value providing for an escalating percentage of future income.

Future Income Collaterals

• Examples:– (1) The taxpayer is an engineer, but is currently

employed as a salesman earning less than half of his prior salary due to difficulty he has had in obtaining a job in the engineering field at the present time;

– (2) The taxpayer is a student and is expected to graduate soon and begin earning a significant annual income.

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Collateral Agreements

•Waiver of losses Form 2261-C–NOL’s–Capital losses–PAL’s

•Reduction of basis in assets Form 2261-B

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IRM 5.8.10.2.2 Offers In Compromise Before Bankruptcy

•If the Offer Investigator believes, based upon factual information, that the taxpayer is seriously considering filing bankruptcy, the employee should discuss the benefits of filing an administrative offer instead.

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Help for People Who Owe Taxes Pgs.

•February 2009, Fresh Start– Prevention of Offer in Compromise Defaults– Allows taxpayer to correct a defaulted offer

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HAVE A LESS HAVE A LESS TAXING TAXING YEAR!!!!!YEAR!!!!!Thank You!!Thank You!!

Thank you for participating in this webinar.Below is the link to the online survey and CPE quiz:

http://webinars.nsacct.org/postevent.php?id=15865Use your password for this webinar that is in your email confirmation.

You must complete this survey and the quiz or final exam (for the recorded version) to qualify to receive CPE credit.

National Society of Accountants1330 Braddock Place #540

Alexandria, VA 22314Phone: (800) 966-6679

[email protected]

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