Offer in Compromise Workshop - FUNNEL...

Presented by:

Offer‐in‐Compromise

Workshop

Eric L. Green, Esq.

From Initial Call to Offer Acceptance

2Offer‐in‐Compromise Workshop

Tax Rep is a member driven community that helps each other build their representation practice and help taxpayers, with members being able to do so knowing they are not practicing on their own but have other accountants and attorneys backing them up.

If you are interested in joining (and getting today’s program for free) you can join Tax Rep at www.TaxRepLLC.com, use TAXREPNOW to save $100 a month for 3 months and start building your practice today!

About Tax Rep LLC

3After the Pandemic

Managing partner in Green & Sklarz LLC, a boutique taxfirm with offices in Connecticut and New York.

Focus is civil and criminal taxpayer representation beforethe Department of Justice Tax Division, Internal RevenueService and state Departments of Revenue Services.

Has served as a columnist for CCH’s Journal of Practice &Procedure.

Attorney Green is the past Chair of the ExecutiveCommittee of the Connecticut Bar Association’s TaxSection.

Eric is a Fellow of the American College of Tax Counsel(“ACTC”).

Eric Green, Esq.

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4After the Pandemic

Eric is the host of the weekly Tax Rep NetworkPodcast, available in ITunes, Apple Podcasts andGoogle Podcasts

Eric is the founder of Tax Rep Network, an onlinecommunity designed to help tax professionalsbuild their IRS Representation Practice

He is the author of the Accountant’s Guide to IRSCollection, the Accountant’s Guide to ResolvingTax Issues, and the Accountant’s Guide toResolving Payroll Taxes and Personal LIability

Eric Green, Esq.

5Offer‐in‐Compromise Master Class

IRC § 7122 authorizes the IRS to accept a compromise on an amount owed

IRC § 7122(c) provides that the Service shall set forth guidelines for determining when an offer in compromise (OIC) should be accepted

Offer Basics


Congress explained that these guidelines should allow the Service to consider:

a. Hardship,

b. Public policy, and

c. Equity

•Treasury Regulation § 301.7122‐1 authorizes the Service to consider OIC's raising these issues.

These Offers are called Effective Tax Administration (ETA) offers. See IRM § 5.8.11.1

Offer Basics

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Offer in Compromise

Three types of Offers:

Doubt as to liability

Doubt as to collectability

~ DCSC

Effective Tax Administration


Doubt as to Liability

Challenging the underlying liability

(Form 656-L)

Challenging the underlying liability

(Form 656-L)

Not about ability to pay but if the

taxpayer can prove they do not owe the

money

Not about ability to pay but if the

taxpayer can prove they do not owe the

money

Doubt-as-to-Liability Offer


Similar to Audit Reconsideration

Need to effectively do the audit the way it should have been done and submit the package with the 656‐L

Package should include the return, and if needed, the amended return showing the correct numbers


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The package includes the supporting documents

Make it dummy proof

Feel free to use table of contents, exhibit lists, cross references, etc



Collection Stops

Forces an audit reconsideration

Can reopen TFRP assessments

Must Offer something ($)

Compromises future liability (i.e. no refunds)

Taxpayer must be in and maintain compliance

Pros Cons

Pros and Cons of a DATL


Doubt as to Collectability

Most common Offer

Based upon the taxpayers inability to full pay the liability

It’s a request or the government to accept less than the full amount owed because of the taxpayer’s financial situation

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Offer in Compromise

Lump Sum •Paid in 5 or fewer payments

Deferred

•Paid in more than 5 but less than 24 monthly payments

•Payments must be made starting when the OIC is filed


Offer in Compromise

$205 application fee

20% deposit with a lump sum offered

Monthly payments with deferred offers start when the offer is filed and continue until accepted or rejected


1. Consultation

2. Pull and Review Transcripts for CSED Issues

3. Perform RCP Calculation

4. Deal with Compliance Issues

5. Implement Strategies

6. Prepare CIS

7. Submit Offer

8. Appeal if denied

The OIC Process

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The phone call…

Bring the documents

Need your current income

Bring a check

The Phone Rings


DATL: Doubt‐as‐to‐Liability Offer

DATC: Doubt‐as‐to‐Collectability Offer

ETA: Effective Tax Administration Offer

DCSC: Doubt‐as‐to‐Collectability with Special Circumstances Offer

RCP: Reasonable Collection Potential

CSED: Collection Statute Expiration Date

The OIC Lingo


Initial Considerations

• Statute of Limitations

• Compliance

• Financial Analysis

• RCP

• Easier Solution? CNC or Bankruptcy?

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Collection Statute Expiration Date (“CSED”)

• How much time is left on the statute?

• Pull Transcripts (the tale of Ron)


Pull Transcripts


Calculate the CSED Dates

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Is the Taxpayer in “Compliance”?

What’s compliance?

#1 issue with collection clients

Returns – now all outstanding years

Current payments

Educating the client


Step #1: Tax Compliance

• All returns filed that are due as of this date

• Current tax period payments being made

a) Proper withholding

b) Estimated tax payments

c) Payroll tax deposits


Inside Secret

• What is compliance for tax returns?

• Last 6 years – IRM 1.2.14.1.18

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Analysis

• Are they an Offer candidate or not?

• This is why we charge for consultations

• Taxpayer will get benefit just from the meeting


Reasonable Collection Potential

• Gross monthly income

• Allowable expenses

• Determine future income

• Net equity in assets (QSV)

• FI + NE = RCP


Financial Guidelines

Gross monthly income

Allowable v. actual

expenses

Why most offers/IA

requests are denied

https://www.irs.gov/businesses/small-businesses-self-employed/collection-financial-standards

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Food, Clothing & Misc. (national std)


Housing (local by county)


Transportation

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Transportation – Operating Regions


Out of Pocket Health Care Costs


Financial Guidelines

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What is the point of working on an OIC the taxpayer cannot pay?

Are there strategies we can utilize to reduce the RCP?

Is another alternative more attractive (like CNC)

Why RCP is so important


We have covered the Offer process and RCP calculation

Are there exceptions to the RCP number?

When do these special forms of Offers apply?

Up until now


Effective Tax Administration Offers

An ETA offer is an Offer where the taxpayer could full-pay the liability but where, for public policy reasons, the IRS should agree to accept less than the full-amount

Very rarely given

All ETA Offers are reviewed in Washington, DC

Effective Tax Administration Offers

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The availability of an ETA offer encourages taxpayers to comply with the tax laws because taxpayers will believe the tax laws are fair and equitable

The ETA offer allows for situations where tax liabilities should not be collected even though:

1. The tax is legally owed, and

2. The taxpayer has the ability to pay it in full

However, no ETA may be entered into if it would undermine compliance by taxpayers with the tax laws.

ETA Offers


First Investigate DATC and DATL

Economic hardship standard of CFR § 301.6343‐1 specifically applies only to individuals. Refer to IRM §5.8.11.2.1

Economic hardship occurs when a taxpayer is unable to pay reasonable basic living expenses.

ETA Offers


The determination of a reasonable amount for basic living expenses will be made by the Commissioner and will vary according to the unique circumstances of the individual taxpayer

Think 433 analysis

Hardship

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Other factors include:

i. The taxpayer's age and employment status,

ii. Number, age, and health of the taxpayer’s dependents,

iii. Cost of living in the area the taxpayer resides, and

iv. Any extraordinary circumstances such as special education expenses, a medical catastrophe, or natural disaster

Hardship


Factors that support an economic hardship determination may include:

The taxpayer is incapable of earning a living because of a long term illness, medical condition or disability, and it is reasonably foreseeable that the financial resources will be exhausted providing for care and support during the course of the condition.

Hardship


The taxpayer may have a set monthly income and no other means of support and the income is exhausted each month in providing for the care of dependents.

The taxpayer has assets but is unable to borrow against the equity in those assets, and liquidation to pay the outstanding tax liabilities would render the taxpayer unable to meet basic living expenses.

Hardship

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ETA is where RCP exceeds liability but hardship/public policy exists

Doubt‐as‐to‐Collectability with Special Circumstances is when they cannot fully pay the tax due but have proven special circumstances that warrant acceptance for less than RCP

ETA vs. DCSC


The taxpayer has remained in compliance since incurring the liability and overall their compliance history does not weigh against compromise;

TP acted reasonably and responsibly; and

The circumstances of the case must be such that the result of the compromise does not place the taxpayer in a better position than they would occupy had they timely and fully met their obligations, unless special circumstances justifying the compromise are present.

Public Policy Grounds


Criminal behavior on the part of another caused this

Circumstances beyond the taxpayer’s control (natural disaster)

If not compromised and normal collection is pursued will it harm the community (ie. TP is a non‐profit that provides essential services)

Public Policy Grounds

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Compromise under the ETA economic hardship or non‐economic hardship provisions are permissible if acceptance does not undermine compliance.

The public should not perceive that the taxpayer whose offer is accepted benefited by not complying with the tax laws.

Over‐Arching Premise


Factors that would suggest a negative impact on public perception/public compliance include, but are not limited to:

TP has an overall history of noncompliance with the filing and payment requirements of the Internal Revenue Code

TP has taken deliberate actions to avoid the payment of taxes

The taxpayer has encouraged others to refuse to comply with the tax laws

Over‐Arching Premise


Make your pitch

Support as best you can

All normal DATC documents are submitted

ETA Presentment

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72 year‐old dentist forced into retirement

Owed $450,000 to IRS

Inheriting $500,000 from his deceased wife

His 433‐A shows $1,000 a month negative future income based upon allowable standards

The ETA Offer ‐ Dr. V.


IRS Life expectancy table is to 87 years old, or 15 years

15 years x $12,000 a year shortfall

He needs $180,000 to live

No interest due to conservative investment and inflation

IRS agreed to accept $320,000 and allow him to keep $180,000

Dr. V.


Example: Taxpayer owes $100,000, RCP is $50,000 but includes equity in their home of $30,000. The home is specially outfitted for the taxpayer’s disability and would be almost impossible to replace.

DCSC should apply, and IRS should accept an amount less than RCP of $50,000.

I would offer $20,000

Need to make your case!

The DCSC Offer – Single Mom

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ETA and DCSC Offers are rare

Your client needs to have some fairly compelling facts

Document the facts that make it extraordinary and make your pitch!

ETA & DCSC: Final Thoughts


Situation comes up when only one taxpayer is responsible for a debt

Comes up Frequently:

a. Spouse incurred debts before marriage

b. Spouse is deemed responsible for TFRP

c. Couple live together but are not married

RCP If Only One Taxpayer is Liable


Treat the couple as married and then allocate joint expenses

Allocation is generally done based upon the percentage of household income

Treatment

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IRM § 5.15, Exhibit 5.15.1‐1, Questions and Answers to Assist in Financial Analysis, Example 14

Allocation of Joint Expenses

14. A taxpayer lives with his fiancé. Both of them are wage earners. The home is owned by the fiancé but the taxpayer claims he pays all the household bills, including the mortgage. They have a joint checking account and all wages are electronically deposited to that account. The taxpayer's proportionate share of household income is 64%. How is the excess income determined when making a determination of payment ability?

The total allowable and conditional expenses would be determined for the entire household the same as a married couple. The taxpayer would then be allocated 64% of those expenses when determining the monthly installment agreement amount.


Joe & Mary (Joe Resp)Future Income AnalysisMarried, Joe is resp. for TFRP, 2 minor children, live in New Haven, Connecticut 65%Income Actual Expenses Actual Allowable AllocatedWages (yourself) $ 6,500 Food, Clothing and Misc $ 1,800 $ 1,694 $ 1,101 Wages (spouse) $ 3,500 Housing & utilities $ 3,200 $ 2,641 $ 1,717 Interest - Dividends $ - Vehicle Ownership $ 450 $ 450 $ 450 Net Business Income $ - Vehicle Operating Costs $ 600 $ 460 $ 230 Net Rental Income $ - Public Transportation $ - $ -Distributions $ - Health Insurance $ 1,200 $ 1,200 $ 780

Pension/Soc Sec (taxpayer) $ - Out of Pocket HealthCare $ 200 $ 356 $ 231 Pension/Soc Sec (spouse) $ - Court ordered pmts $ - $ -Social Security (taxpayer) $ - Child/Dep Care $ - $ -Social Security (spouse) $ - Life Insurance $ 100 $ 100 $ 50 Child Support $ - Current Year Taxes $ 2,500 $ 2,500 $ 1,625 Alimony $ - Secured Debts $ - $ -Other Income $ - Delinquent State Taxes $ - $ -

$ - Student Loans $ - $ -$ - Total Living Expenses $ 10,050 $ 9,401 $ 6,184

Total $ 10,000 Net Difference $ (50) $ 599 $ 316

Allocation Example


Joint expenses that cover more than the couple

Food & Clothing, housing, health insurance and out‐of‐pocket healthcare costs are numbers that cover all 4 family members, so they are allocated

The auto payments, life insurance and taxes we can just use the debtor spouse for a single individual

So what is allocated and what is not

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5.15.1.5 (11‐17‐2014), Shared Expenses

Although the assets and income of a non‐liable person may be reviewed to determine the taxpayer's portion of the shared household income and expenses, they are generally not included when calculating the amount the taxpayer can pay.

One notable exception is community property states.

Community Property


Community Property States: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

In addition, Alaska is an opt‐in community property state; property is separate property unless both parties agree to make it community property through a community property agreement or a community property trust.

The territories of Puerto Rico, Guam and the Commonwealth of the Northern Mariana Islands also allow property to be owned as community property.

Community Property


The income of a couple will be determined as follows:

a. 100% of the income earned by the debtor spouse or from separate property owned by the debtor spouse

b. 50% of the income from community property and all sources regardless of who owns it or earned it

All property of the marriage will be available for collection in the community property state

Real estate of a non‐liable spouse in a separate property jurisdiction is not available for collection

Community Property State: Collection

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If the client comes in before filing, consider the impact of a MFS return

Can we keep the other spouse (and their assets) out of the tax issue

Are they in a separate property state or community property state

So conclusion for one spouse…


Beyond the obvious (lots of money, never boring, niche that few play in, etc)

There is strategy

Every case is a little different

Reason I love Representation Work


Strategies

• Spend assets to get into compliance

• Non‐Filer: File MFS?

• Non‐Filer: File State First

• Adjust the RCP Calculation: Go Shopping

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Taxpayer needs to get into compliance

Has assets they will otherwise be including in their Offer

Compliance is an issue

Spend the assets to get into compliance

Strategy 1: Spend the Assets


Example: Joe has an IRA with $25,000 and a Pick‐up Truck worth $5,000. His future income is $200 a month. RCP is ($17,500 + $550 + $2,400) $20,450.

Joe needs to be making quarterly estimated payments of $3,500 and it’s the third quarter.

Joe cashes the IRA (receives $17,500) and sends in his first three quarterly estimates ($10,500).

Reduces his RCP to $9,950, has the $1,990 for the 20% deposit, IRA is not dissipated (paid it to the IRS)

Strategy 1: Spend the Assets


CAVEAT: This works in Separate Property States, not so much in Community Property States

Consider filing Married filing separate to keep the other spouse out of the debt (and RCP)

See the client story after #3

Strategy #2: MFS instead of MFJ

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Delinquent state tax debts are 100% allowed as an RCP expense IF THE STATE IS IN PRIORITY POSITION OVER FEDS!

If file together IRC 6321 puts IRS in first position (according to IRS)

Only allowed a portion of the payment

Strategy #3: File the State First


Husband and Wife are non‐filers for last 8 years

Major issues have occurred

He is self‐employed, she is a stay at home mom

He has a pick‐up truck and small IRA, earns $180,000/yr

She left a corporate job in NYC, has an IRA with $500,000 and inherited their home worth $1.2 million, no mortgage

Case Study for Strategies 2 and 3


Go to CPA who does the last 6 years of tax returns MFJ

Owe IRS $300,000 and CT $120,000

He has future available income of $3,800 a month


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They can easily full‐pay from assets

He can also full pay from future income ($3,800 x 120 months on collection statute is more than the liability)

Have him redo them MFS: He now owes $380,000 to IRS and $150,000 to CT. She owes nothing

File CT returns. Once the bills arrive negotiate for $3,800 a month payment plan.

His Future Income is $0, and his assets are $4,100 for truck and net IRA



Figure out the RCP

Change the future income calculation by spending it:

a. New Car (up to $521/month)

b. Health Insurance

c. Term Life Insurance

d. Disability Insurance

e. Establish student loan, alimony or child support payments that have been in arrears

f. Our fees become a future expense ‐ IRM 5.15.1.11 (3)

Strategy #4


What Defaults an Offer?

• The taxpayer failed to fulfill the payment terms.

• The taxpayer failed to fulfill the terms of a related collateral agreement.

• The taxpayer failed to adhere to the compliance provisions.

• The taxpayer failed to return an erroneously issued refund.

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Propose an alternative to a defaulted Offer

If its not defaulted yet, can we adjust and avoid it? See examples later

Make up the missing payments

Compromise of a Compromise

Compromise of an Accepted Offer

Options for Saving a Defaulted Offers


IRM 5.8.9.4 (01‐12‐2017) contemplates that a taxpayer may propose an alternative to a defaulted offer.

IRM 5.8.9.5 (04‐23‐2018)‐‐”Compromise of a Compromise”. The provision says that a compromise of a compromise should be rare, but then goes on to say that if the taxpayer is unable to pay the balance of an accepted offer the IRS may determine the Government would better benefit to not accept a compromise of a compromise but it may be in the best interest of the government to

1) adjust the payment terms

2) formally compromise the existing compromise or

3) obtain managerial approval to settle for the amount already paid and not default the offer.



Then, IRM 5.19.7.2.15 (01‐31‐2017)—“Compromise of an Accepted Offer”—provides the requirements for a compromise of a compromise.

The taxpayer must be current with their filing and payment compliance requirements.

The taxpayer must submit the request to compromise an accepted compromise in letter format (not by filing a new form 656).

A current financial statement will be required.


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Client calls

Did not make estimated payments

Has schedule C. Has one part‐time employee on payroll, plus his wife works there but not on payroll

Put her on payroll and bonused her the entire net income of the Schedule C

Practice Points – Client Case #1


Client calls. Her compromise was done 2 years ago

Made estimated payments but not safe harbored

Had return done and has a $50 estimated tax penalty

Had her extend the return and pay in the entire tax, interest and penalty plus $100 so she is overpaid

She received refund in October

No defaulting of the Offer

System issue or IRS decision unknown?

Practice Points – Client Case #2


The Offer Package

• The Forms

• The Support

• The Cover Letter

• The Payment

• The IRS Responses

• The Appeal

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Offer Booklet is Form 656‐B

Inside is the Form 656 (The Offer)

Form 433‐A (OIC) – Personal Financial

Form 433‐B (OIC) – Business Entity Financial

Offer Documents


Cover Letter

Checks

IRS Form 2848 – Power of Attorney

Any Last Minute filings for compliance (2751 waiver forms, estimated tax payments, missing 1040s filed, etc)

Supporting Documents


Bank Statements – last three months

Retirement Accounts

i. Recent statement of value

ii. Copy of the plan document (to see if the taxpayer can access the funds)

Investment Accounts – recent statement of value

Life Insurance – statement of current cash value with premium payment amount and coverage


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Real Estate

a. Statement of Value (Zillow, etc)

b. Recent Mortgage Statement showing loan balance and monthly payment

Automobiles

a. Statement of Value (Kelly Blue Book)

b. Current lease or loan statement showing outstanding balance and monthly payment amount



Collectables, Artwork, etc – statements of values on collectables that can be used to pay the tax debt

Proof of income

a. Profit & Loss

b. Paystubs

c. Proof of non‐income (if deposits are loans or gifts)

Utility Bills – last 3 months (get proof of payments or highlight in the bank statements)



Proof of health insurance premium (get proof of payments or highlight in the bank statements)

Proof of term life insurance and premium amount (get proof of payments or highlight in the bank statements)

Proof of disability insurance (get proof of payments or highlight in the bank statements)

Proof of out‐of‐pocket medical expenses (get proof of payments or highlight in the bank statements)


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Proof of alimony (Divorce Agreement or Decree)

Proof of child support (Divorce Agreement or Decree)

Proof of dependent care expenses (get proof of payments or highlight in the bank statements)

Proof of judgments and payments to creditors

Proof of current taxes being paid/withheld

Written agreement with state department of revenue and proof of payments



For ETA and DCSC Offers, back‐up regarding the special issue

a. Medical documentation

b. Life Expectancy tables



Highlight anything you want the IRS to know and consider

Disclose anything that you believe requires disclosure

You may want to walk the IRS through your RCP argument

ETA and DCSC circumstances highlighted

The Cover Letter

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$205 application fee

$20% down payment for lump sum

First monthly payment for deferred offer

The payment


IRS Response – Offer Received


IRS Response ‐ Rejection

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IRS Response ‐ Reject or Increase


IRS Response – Offer Addendum


IRS Response – Offer Accepted

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IRS Response – Terms Met


Most of our Offers go to appeals

Draft a letter and state you are appealing

Raise any issue that you disagree with

Appeals will not raise issues that COIC did not raise

The Appeal


Clients are everywhere

Get the word out you handle these matters

Simple and cheap ideas you can do/start tonight:

1. Blog – see sample

2. Newsletter to existing clients and local biz: “What to do if you cannot pay the taxes?”

3. Newsletter to Divorce Attorneys, Bankruptcy Attorneys, etc

4. Fix your website to include this service

Marketing Ideas

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“After sitting through your test class I wrote a letter to my clients about what to do if they or someone they know could not pay the taxes. I had $20,000 in retainers within a week. At the end of that year I added $149,000 to my practice from representation. My only annoyance with this is why I did not do this sooner.”

Anthony sold his 1040 practice 4 years later, today runs his real estate and consults on rep matters

Anthony D., CPA


Do lien lists, radio ads, etc work?

Yes, but VERY expensive

You do not need to do that – it just takes consistent effort.

I ask Tax Rep Members to commit to 2 hours a week to add a $100,000 practice

Marketing


Case Studies

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Case Studies

• In It Together: The Joint Liability Offer for Joe and Mary

• When Only One Spouse is Responsible – Andy Smith

• Think Before You File: Utilizing the Strategies

• I can Pay But Shouldn’t Have to! The ETA Offer

• Disabled Child: DCSC Offers


• Joe and Mary owe $187,000 in back income taxes from 2014 – 2018

• Owe Connecticut $28,000

• Joe is 45, Mary is 43

• Joe used to be self‐employed but is now a W‐2 employee

• Joe earns $90,000 a year, Mary earns $48,000 a year

• Lives in New Haven, CT (New Haven County)

Case Study: Joint Liability


• They have two sons, ages 17 and 14

• Saw the family CPA who did all 6 tax years (14‐19) and filed them all – IRS and State – 60 days ago.

• CT already contacted and they set up the agreement of $500/month

Case Study: Joe and Mary

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• Home worth $480,000, mortgage of $332,000, $50,000 HE line used

• 2014 Cadillac Escalade, no loan, worth $12,000

• 2014 Honda Accord, no loan, worth $4,500

• Mary has a pension worth $78,000 (defined benefit)

• Checking account has $1,000, savings has $750

Joe and Mary: Assets


• Mortgage ‐ $3,850

• Home Equity Line ‐ $175

• Utility Bills ‐ $675

• Auto Expense ‐ $1,000

• Health Insurance ‐ $695

• Union Dues

Mary $50, Joe $80

Monthly Expenses


• Disney Time share ‐ $375/mo

• Credit Cards ‐ $200/mo min pmt

• Summer day camp for kids ‐ $4,500 for both for the summer

• Donations to the church ‐ $2,000 year

Monthly Expenses

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• Joe’s blood pressure medicine costs $200/mo

• Current Taxes

Joe $2,075/mo, Mary $800/mo

• Borrowing $4,500 from Mary’s mom to pay for us to do the Offer

Monthly Expenses


Income Actual Expenses ActualWages (yourself) 7,500$ Food, Clothing and Misc 1,500$ Wages (spouse) 4,000$ Housing & utilities 4,525$ Interest - Dividends -$ Vehicle Ownership -$ Net Business Income -$ Vehicle Operating Costs 1,000$ Net Rental Income Public Transportation -$ Distributions -$ Health Insurance 695$ Pension/Soc Sec (taxpayer) -$ Out of Pocket HealthCar 200$ Pension/Soc Sec (spouse) -$ Court ordered pmts -$ Social Security (taxpayer) -$ Child/Dep Care 375$ Social Security (spouse) -$ Life Insurance -$ Child Support -$ Current Year Taxes 2,875$ Alimony -$ Secured Debts -$ Other Income -$ Delinquent State Taxes 500$

-$ Other - Union Dues 130$ -$ Total Living Expenses 11,800$

Total 11,500$ Net Difference (300)$

Monthly Expenses


• Monthly income of $11,500

• Expenses of $11,800

• Available Monthly Income

($300)

• So what does the IRS think?

Actual

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Monthly Expenses

Expenses Actual AllowableFood, Clothing and Misc 1,500$ 1,740$ Housing & utilities 4,525$ 2,703$ Vehicle Ownership -$ -$ Vehicle Operating Costs 1,000$ 484$ Public Transportation -$ -$ Health Insurance 695$ 695$ Out of Pocket HealthCar 200$ 368$ Court ordered pmts -$ -$ Child/Dep Care 375$ 375$ Life Insurance -$ -$ Current Year Taxes 2,875$ 2,875$ Secured Debts -$ -$ Delinquent State Taxes 500$ 65$ Other - Union Dues 130$ 130$ Total Living Expenses 11,800$ 9,435$ Net Difference (300)$ 2,065$


• Monthly income of $11,500

• Allowable expenses of $9,435 – why?

• Housing is above the local standard ($4,525 v. $2,703)

• Auto Operating is above the local standard ($1,000 v. $484)

IRS Analysis


• Out of Pocket expense is higher than Joe claimed ($200 v. $368)

• State Tax payment is apportioned based upon liability ($500 v. $65)

IRS Analysis

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• IRS does not allow the timeshare payment ‐ unnecessary

• IRS does not allow the credit card payment – unsecured debt behind their claim

• IRS does not allow charitable giving unless its required for their jobs (its not)

Also


• Future income: $24,780 ($11,500 ‐ $9,435 = $2,065 x 12)

• House: $2,000 equity ($480,000 x 80%=$384,000 ‐$332,000 ‐ $50,000)

• Escalade equity: $6,150 ($12,000 x 80% ‐ $3,450 exemption)

• Honda equity: $150 ($4,500 x 80% ‐ $3,450 exemption)

• Cash: Zero ($1,000 exemption but if necessary for living expenses)

• Total Offer would be: $33,080

• NO OFFER BECAUSE CAN FULL PAY!

Analysis


• Can we do better than a full‐pay IA?

• Family CPA blew this by just knee‐jerk filing

• Strategy: What are Joe and Mary not spending?

Analysis

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Joe and Mary need life insurance

In our fact pattern Joe and Mary only have $40,000 of life insurance through Mary’s work

Joe and Mary purchase a $500,000 term life policy, costing Mary $40 a month and Joe $60 a month

Changes


• Joe trades in his escalade and buys a new Ford Pickup Truck

• He now has a $400 a month truck payment

• Mary’s mom is loaning then $4,500 for our fees

Joe and Mary should sign a note that it is a loan and will be repaid over 24 mo, pmt is $188

Changes


Expenses Before AfterFood, Clothing and Misc 1,740$ 1,740$ Housing & utilities 2,703$ 2,703$ Vehicle Ownership -$ 400$ Vehicle Operating Costs 484$ 484$ Public Transportation -$ -$ Health Insurance 695$ 695$ Out of Pocket HealthCare 368$ 368$ Court ordered pmts -$ -$ Child/Dep Care 375$ 375$ Life Insurance -$ 300$ Current Year Taxes 2,875$ 2,875$ Secured Debts -$ -$ Delinquent State Taxes 65$ 65$ Other - Union Dues 130$ 318$ Total Living Expenses 9,435$ 10,323$ Net Difference 2,065$ 1,177$

Monthly Expenses

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• Income: $11,500

• Allowable Expenses: $10,266

• Future Income: $1,177 x 12 = $14,124

• Assets: $2,150 (House and Accord)

• RCP: $16,274!

• We just saved them $170,000! – Can now do an OIC and avoid a full‐pay IA

• They need to dump the time share, and depending on their credit card balances, may want to consider bankruptcy

Updated Analysis


New Expenses

Need to show 3 months of payments

What if the IRS is breathing down the client’s neck

now?

Send the 433-A to Collection


Andy Smith is retired

Had a medical crisis in 2018 and pulled almost all his IRA money out to pay expenses

Did not pay the taxes

Currently owes $87,000 with penalties and interest

Andy’s wife Susan still works for the State of Connecticut

Andy’s 82 year old mother lives with them and collects social security

Case Study 2: Only Andy is Liable

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Susan only has to disclose her income, not assets

Andy will be given his proportionate share of the joint expenses

Based upon share of income into the household

So what changes?


• Andy’s monthly pension is $3,611

• Susan’s monthly wages are $7,656

• Andy’s mother’s monthly social security is $591

Actual - Income


• Food & Clothing – who cares (National Standard)

• Housing & Utilities ‐ $3,377

• Car Payment for Andy ‐ $392/month

• His wife’s car has no loan

• His mother takes cabs if she needs to go anywhere without them

• Andy gets health insurance through his wife, which costs her $537 per month

Actual - Expenses

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• Out of p[ocket medical expenses for each are:

a. Mom ‐ $95

b. Andy ‐ $35

c. Susan ‐ $27

• Andy has term life insurance that costs him $258 a month

• Andy’s current taxes on his pension are $490 for both federal and Connecticut

• Andy went back to school later in life and is still paying $263 a month for his federally guaranteed Student loans

Actual - Expenses


30%Income Actual Expenses Actual Allowable AllocatedWages (yourself) Food, Clothing and Misc 1,433$ 1,433$ 429$ Wages (spouse) 7,656$ Housing & utilities 3,377$ 2,504$ 1,013$ Interest - Dividends -$ Vehicle Ownership 392$ 392$ 392$ Net Business Income -$ Vehicle Operating Costs 242$ 242$ 242$ Net Rental Income Public Transportation 224$ 224$ 68$ Distributions -$ Health Insurance 537$ 537$ 161$ Pension/Soc Sec (taxpayer) 3,611$ Out of Pocket HealthCar 237$ 237$ 71$ Pension/Soc Sec (spouse) -$ Court ordered pmts -$ -$ -$ Social Security (taxpayer) -$ Child/Dep Care -$ -$ -$ Social Security (spouse) -$ Life Insurance 258$ 258$ 258$ Child Support -$ Current Year Taxes 490$ 490$ 490$ Alimony -$ Secured Debts -$ -$ -$ Other Income 591$ Delinquent State Taxes -$ -$ -$

-$ Student Loans 263$ 263$ 263$ -$ Total Living Expenses 7,452$ 6,580$ 3,387$

Total 11,858$ Net Difference 4,406$ 5,278$ 224$

Monthly Expenses


Andy earns 30% of the household income ($3,611 of the $11,858 gross monthly income into the household)

He therefore gets 30% of the joint expenses

In Connecticut (a separate property state) Susan does NOT need to disclose her assets

Mom’s public transportation is an issue

Andy did not want to argue about our Rep fees or claim them

RCP: $2,710

Analysis ‐ Connecticut

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If Andy lived in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Washington or Wisconsin, all of Susan’s income and assets would be included (just like in case #1 with Joe and Mary)

If Andy lived in Texas, 50% of Susan’s property would be included and 100% of her income

The reason is the tax debt is from income tax, so it is a community debt, so all community property is available for collection

Texas, the spouse has a 50% interest in all community property

Andy – in Community Property States


Mark and Michelle come to see us

Mark has been through a terrible ordeal: accident, health scares, two deceased parents very suddenly, nervous breakdown, etc

Has not filed in 10 years, federal and state

CPA Prepares joint returns and sends them to us before filing

Mark and Michelle will owe $600,000 to IRS, $75,000 to CT DRS for the last 6 years

Case Study #3: Utilize the Strategies


Mark owns his pickup truck worth about $9,000

Mark has an IRA with $6,000 in it

Michelle inherited the home from her parents worth $1.2 million, no mortgage

Michelle left her corporate job when they had two special needs children, and rolled her 401K over. Her IRA is now worth over $400,000

Case Study #3

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RCP Analysis shows Mark can pay $3,000 a month to the IRS

CT DRS wont care about the IRS – they will demand the same $3,000 a month or more

CPA runs MFS returns and Michelle will owe $0 and Mark will owe $720,000 to IRS and $120,000 to CT DRS

So now what?

Case Study #3


Strategy #1: Keep Michelle (and her assets) out of this

Strategy #2: Use CT DRS to compromise away the IRS

Case Study #3


File CT MFS returns certified

Upon receipt of delivery confirmation CT billing notices, call and arrange a payment plan ($3,000/month)

File IRS returns MFS

CT is now ahead of the IRS in priority

Case Study #3 ‐ Steps

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File Offer with IRS once all the billing notices are received

RCP is now zero for future income because CT IA is allowed in full

Assets are the value of his truck and the IRA:

Truck: $9,000 x 80% = $7,200, less the $3,450 exemption, leaves $3,750

IRA: $6,000 x 70% = $4,200

Total Offer: $7,950

Once IRS is dealt with can pursue a compromise with CT

Case Study #3 ‐ Steps


72 year‐old dentist forced into retirement

Owed $450,000 to IRS

Inheriting $500,000 from his deceased wife

His 433‐A shows $1,000 a month negative future income based upon allowable standards

Case Study 4: ETA for Dr. V.


Publication 590‐B

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IRS Life expectancy table is to 87 years old, or 15 years

15 years x $12,000 a year shortfall

He needs $180,000 to live

No interest due to conservative investment and inflation

IRS agreed to accept $320,000 and allow him to keep $180,000

Dr. V.


Woman is a single mother of a severely disabled child: mentally and physically

Lives in a home at the end of a cul‐de‐sac

Home is designed so that the child is locked in: windows and doors are designed so they cannot be opened from the inside

Child will run if she escapes

Home has some equity after 80% quicksale analysis

Case Study #5: DCSC for Raquel


RCP is $45,000

a. $400,000 home at 80% = $320,000, less mortgage of $280,000 = $40,000

b. $5,000 for cash and value of vehicle

Offered $5,000

Argued for DCSC, use 60% Forced Sales value for the home: necessary due to her special circumstances and cannot be easily replaced/replicated

Appeals ultimately agreed

DCSC for Raquel

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Resources

Resources:

Tax Rep Network: www.TaxRepLLC.com and use TAXREPNOW

• Get this program for free• Save $100 a month for three months while you build

your practice


Inside Tax Rep


Inside Tax Rep

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Resources

Resources:

Tax Rep Network: www.TaxRepLLC.com and use TAXREPNOW

Tax Help Software: https://www.taxhelpsoftware.com/~ 14 day free trial: TAXREPTRIAL~ 10% discount: TAXREP10

Call Enq: https://callenq.com/trn/~ (200 min for $19.97)


Questions?

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