PowerPt OIC 2020 10 29 SJWT · 2020. 12. 20. · Microsoft PowerPoint - PowerPt_OIC 2020 10 29 SJWT.pptm 10/29/2020 8:36:36 AM ...

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


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.



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).”


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


15

16


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.


18

19


Asking for one’s interest in their own employer,But not in the employer of their spouse!

19

20202020


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


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


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


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


25252525


REVIEW BANK STATEMENTS BEFORE SUBMITTING!!

How Does IRS Determine Bank Account Values? NEW Bitcoin Section


Cash

25

In 2017 had been 0.7

26262626


26

27272727


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


28

Alan – 58-1/2

292929


29

Building Asset by Asset: Workpapers & Documentation Backing up Each Component

30303030


REVIEW INVESTMENT STATEMENTS BEFORE SUBMITTING!!

How Does IRS Determine Account Values?


30

Real Estate

Our Question:

“Do you own any Real Estate?”

Client Response:

“Not in My Name!”

- Transfers

31

32323232


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


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


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


• “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



• “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


43434343

See Materials, Pages 27-28Section 9 Questions – Very Important!

43

Define “Transferred”

444444


44

The Budget

• Computing Future Net Income

45

46

OIC InstructionsSee Materials OIC Booklet Excerpt, Page 112

46

47474747


“Additional household income” line IS BACK!

NEW in 2019

47

INCOME

484848


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


50

Implemented in 2016……..is it true for Box 42?

51515151

Deleted “Other Expenses”Where to put our fees?


Section for delinquent state & local taxes

51

52525252


52

53535353


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


56

Check Annually: 2020 Allowance in Mercer County is up 2% over 2019.

575757


57

585858


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


IRM 5.8.5.22.3 (03/23/2018)Applies ONLY to Offers, not IAs (see materials pg 63)

60

61616161


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


Tax Computations


66

67676767

Attorney Fee Expenses(see next slide)

67


FNI

6868686868



69

7070707070


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


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


757575

OLD NEW

Monthly Excess $750 750

48/12 Times Factor

$36,000 $9,000


R.C.P. $76,000 $49,000

R.C.P. – Example #1

75



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


777777

OLD NEW

Monthly Excess $4,000 4,000

48/12 Times Factor

$192,000 $48,000


R.C.P. $197,000 $53,000

R.C.P. – Example #2

77


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



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

[email protected]

87

PowerPt OIC 2020 10 29 SJWT · 2020. 12. 20. · Microsoft PowerPoint - PowerPt_OIC 2020 10 29 SJWT.pptm 10/29/2020 8:36:36 AM ...

Documents