The IRS Fresh Start Initiatives Program
At Arnold Law Firm, LLC we can assist you in dealing with the Internal Revenue Service (IRS) in the Offer In Compromise Program to settle your tax liabilities for less than their face amount. The IRS defines “Offer In Compromise” as an agreement settling the tax liability at less than face amount. The IRS’s policy is to collect the most at the earliest possible time, and at the least cost to the Government.
The IRS recently introduced its Fresh Start Initiatives Program, designed to give relief to more taxpayers struggling with past-due tax liabilities, which is designed to qualify more tax payers for relief. We would assist you in filing the offer with the IRS. The IRS is required to evaluate offers according to prescribed guidelines, using prescribed allowances for living expenses, prescribed guidelines for withdrawals, rejections and appeals and to issue and publish legal opinions for accepted offers of $50,000.00 or more in unpaid tax.
TYPES OF OFFERS
There are three types of authorized offers:
1) “Doubt as to Collectability”;
2) “Doubt as to Liability”; and
3) “Offers to Promote Effective Tax Administration”.
Offers based on “Doubt as to Collectability” are the most common, where the tax liability exceeds the sum of the taxpayer’s net worth plus future income ability. “Net worth” is the fair market value of all of the taxpayer’s assets, less lien liabilities, such as mortgages, judgment liens, and mechanic’s liens but not unsecured credit. “Future income ability” is gross monthly income minus necessary basic living expenses, for food, clothing, health, etc. The IRS ignores private school tuition, college expenses, charitable contributions, unsecured debt payments (e.g. credit card payments). The IRS’s allowances are very low for each of the living expenses.
“Doubt as to Liability” offers are uncommon. It cannot be used where liability was judicially determined. Acceptable grounds include, taxpayer’s inability to dispute tax liability, IRS auditor committed errors interpreting the law, or the taxpayer discovers new evidence never considered during an IRS examination.
Offers based on “Promoting Effective Tax Administration” are also uncommon, but sometimes useful. The method applies when a taxpayer’s financial resources are adequate to pay the entire tax liability, but doing so could create an “economic hardship”. The taxpayer must demonstrate “economic hardship”. Examples of “economic hardship” are the taxpayer must use financial sources for long-term health condition or fixed income is being used to support dependents.
CONTRACT TERMS ASSOCIATED WITH OFFER
At Arnold Law Firm, LLC we will assist you in preparing the correct prescribed IRS forms. The offers contain multiple contract terms, including:
1) The offer will be automatically deemed accepted within 24 months if not rejected by the IRS;
2) The payment sent with the offer is nonrefundable, even if the offer is rejected;
3) Rejected offers can be appealed;
4) The taxpayer must comply with all tax laws for a period of 5 years, including filing returns;
5) The offer suspends the statute of limitations for the IRS to assess within 3 years of the tax return filing date, and to collect on the liability within 10 years of the tax return filing date.
When we prepare to submit offers, the forms require identifying information, relevant financial information, establishment of the taxpayer’s net worth and future income ability, bank statements, profit and loss statements for businesses, documented personal living expenses and business expenses. We will also provide the IRS with the offer and specify how the offer will be paid, and when.
REQUIRMENTS OF THE TAXPAYER
There are three things the taxpayer must do:
1) File all delinquent tax returns, even if the taxpayer cannot pay the liability;
2) Must begin making estimated tax payments;
3) If required, must begin making timely deposit of payroll taxes, and, file timely payroll tax returns;
4) Must comply with payment and filing obligations while IRS evaluates the offer.
There are two payment options:
1) Lump Sum Payment Option; and
2) Periodic Payment Option.
Under the Lump Sum Payment Option, the taxpayer must pay 20% of the offered amount with the application and must pay 80% in five or fewer payments in no more than 24 months. The 80% only begins if the IRS accepts the offer. The Lump Sum Payment Option is the best option for the taxpayer, if it is feasible.
Under the Periodic Payment Option, 24 or less consecutive monthly payments beginning with the offer application are required. There is no requirement that 20% be paid with the application. However, the offer defaults if the monthly payment is untimely. This option increases the offer amount. However, if the taxpayer meets the Low Income Certification Guidelines, the taxpayer would be exempt from making payments during the IRS evaluation. These are guidelines set by the IRS. For example, a married couple with four children in Ohio meets Guidelines if the gross monthly household income is $4,802.00 or less.
We will assist in the calculation of the offer amount. For example, if the taxpayer has $1,000,000.00 in unpaid tax liability, has a net worth of $100,000.00 and a net monthly cash flow of $7,000.00, we must offer the IRS $184,000.00. Under the Lump Sum Payment Option, the taxpayer would pay $36,800.00 with the offer, and if accepted, pay $29,440.00 five times over the next 24 months. Under the Periodic Payment Option, the taxpayer must offer $268,000.00, and pay $11,166.00 with the offer and $11,166.00 continuously over the next 23 months.
RECENT CHANGES TO OFFER PROGRAM
There have been recent changes to the offer program:
1) Student Loan payments are now allowed to reduce monthly future income ability;
2) State and Local tax payments are now allowed to reduce monthly future income ability;
3) Lower multipliers (12 times net monthly income for Lump Sum Payment and 24 times net monthly income for Periodic Payment) for Payment Options, which lowers the offer amount;
4) Increased Allowances for older automobiles, which reduces net worth and future income ability;
5) Exclusions for income-producing assets, which lowers net worth; and
6) Exclusions for cash accounts used to pay living expenses, which lowers net worth and future income ability.
What happens if the IRS rejects the offer we submit? The rejection must be appealed administratively within 30 days. Rejected offers can be included in collection due process appeal, which can ultimately be appealed to the U.S. Tax Court for adjudication. The Court uses an “abuse of process” standard, which is difficult to succeed.
FIVE MAJOR ADVANTAGES OF OFFERS
1) Paying less than the full tax liability;
2) Levies and asset seizures are stayed while IRS evaluates;
4) Tax Liens are released if IRS accepts the offer; and
5) IRS must accept offer if not rejected within 24 months.
THREE MAJOR DISADVANTAGES OF OFFERS
1) Taxpayer must disclose all financial information to the IRS;
2) Offer stays collection and assessment statutes of limitations; and
3) Nonrefundability of payments made with offer.
WHEN WILL OFFER NOT WORK?
1) If taxpayer is in bankruptcy;
2) Taxpayer resists compliance with tax laws, continues to file delinquent tax returns, or makes no or delinquent tax payments;
3) When 10-year collection statute is about to expire.
Under the new Offer In Compromise Program, more taxpayers will qualify for relief, the offers are more affordable, and the IRS will be inundated with offers, which can result in the IRS not rejecting the offer within 24 months, and thus accepting it. The advantages to filing an offer far outweigh the disadvantages, especially where the taxpayer is struggling and the IRS is levying. At Arnold Law Firm, LLC we assist the taxpayer in getting the available relief.