Welcome to the official blog of Brittany Lanphier, managing partner of Lanphier LLP based in Denver, Colorado!
Any tax guidance in this blog is intended for informational purposes only and is not guidance on which Lanphier LLP intends for you to rely. All tax issues specific to your business or family are largely facts-and-circumstances based and you should consult your tax advisor (or Brittany directly) to discuss how this might relate to you.
May 7, 2013
Well, it’s hard to believe, but we have landed safely on the other side of another tax season. The ride was long, it was at times bumpy, and there were a few times I thought we might run out of gas before we hit April 15th. I am always amazed, however, that somehow, someway it always gets done, no matter how much our firm continues to grow. We are grateful for wonderful clients who not only put their trust in us year after year but also refer their friends, family, neighbors, and co-workers to us to do the same. As crazy as those first three-and-a-half months of the year are for us, I am always energized and encouraged by what they represent for us as as firm. But Phew! I am glad we have entered a kinder, gentler time of year…
We enjoyed a wonderful and restful family vacation to San Diego right after April 15th. Brooklyn had just turned two years old and she was the perfect age for it! We enjoyed time on the beach (she loved the sand but was wary of the ocean waves), the zoo, and most off all, Sea World.
By far and wide, the highlight of Brooklyn’s young life was meeting Elmo and the other Sesame Street characters at Sea World. I have never seen a happier kid! So much fun for us to watch her little face light up!
Offers In Compromise: Pennies on the Dollar, Really?
It has been a while since I have done a tax post, so I know everyone has been waiting with bated breathe for this new installment. I wanted to touch on the tax abatement option available called an Offer In Compromise – what is it? Who qualifies for it? More importantly, who does not qualify for it?
Everyone has seen the TV commercials – settle your tax debt for PENNIES ON THE DOLLAR! In each version, we meet a cheerful, unsuspecting taxpayer who owed $32,492,321 in back taxes and Jedi Master Tax Relief Service got the IRS to settle for only $5,000! Thanks, Jedi Masters! How is this possible, you wonder? Is this too good to be true or could this possibly be for real?
Of course, all things that sound too good to be true usually are. If this was available in all cases, there would no reason for any of us to stay current on our taxes. An “Offer in Compromise” is a real option available to troubled taxpayers, but there are narrow requirements for qualifying for it.
First, there are 3 circumstances under which the IRS will consider an OIC:
- Doubt As To Liability – you legitimately do not believe you owe the tax assessed, and you can prove it;
- Doubt As To Collectibility – your income and assets (and reasonable expectation of future income and assets) are insufficient to pay the full amount due in a reasonable period of time; and
- Exceptional Circumstances / Effective Tax Administration – you have sufficient income and/or assets to pay the full amount due; however because of your circumstances, full payment would cause an economic hardship and/or be unfair and inequitable.
I am not going to spend much time discussing the first option, Doubt As To Liability. There are so many opportunities to dispute the amount of tax due, through examination, appeals, tax court, etc. that it is somewhat unusual to get all the way to an OIC and still have doubt that you actually owe the tax.
The third option, Effective Tax Administration, also doesn’t come around every day. A good example would be a family that owes substantial back taxes but now has a young special needs child with substantial medical and care expenses. If being required to pay the full amount owed would prevent the family from providing care to that child, the IRS may consider an OIC under Effective Tax Administration. While the IRS always wants their money, their goal is not to put people out on the streets or deprive them of basic needs.
The second option, Doubt As To Collectibility, is where I want to focus for the remainder of this post. This is the most common circumstance under which to apply for an OIC. You owe taxes, you know you owe taxes, and given your income and available assets, there is no way you can pay the full amount you owe.
First, in order to be eligible to even file an OIC, you must…
- Have filed all tax returns you are legally required to file;
- Have made all required estimated tax payments for the current tax year;
- Have made all required federal tax deposits (if you are an employer filing for employment taxes); and
- Not currently have an open bankruptcy proceeding for you or your business.
So if you have not filed your tax returns or you are already behind on this year’s taxes, you need to bring yourself current before the IRS will even consider an OIC (plus, you need to stay current while the IRS is considering the OIC, and until you have met all terms of the agreement). For those that do meet these preliminary eligibility requirements, the IRS will look at:
- Your monthly income minus your monthly expenses; and
- Your personal and business assets minus any liabilities to which they are subject.
If you are self-employed, the IRS will look at a P&L for your business and average your income over a 6 month period. For household expenses, the IRS will apply federal collection standards to items like housing, food, clothing, and transportation expenses. These are maximum allowable amounts based on the number of people in your family. So if you have a large house and luxury cars (even if they have almost no equity in them), the IRS may accept far less than your actual expenses when considering monthly available income.
In most cases, the IRS will multiply your available monthly income by 24 months and add that to the available equity in your assets. This number constitutes the “minimum offer amount”. There is (usually) no point in offering anything less, because it will typically be rejected.
As an example, let’s say you have monthly income of $6,000 and household expenses of $4,500. Your available monthly income is $1,500. Additionally, you have $30,000 of equity in your home and a car with no loan and a blue book value of $7,500. Your minimum offer amount would be $73,500 ($1,500 x 24 months + $37,500). If you owed $100,000 in taxes, an OIC might be a good option for you. If you owe $70,000, sorry, but in the IRS’ eyes they should be able to collect the full amount and there would be no reason for them to consider accepting less.
Once you determine your offer amount, there are two payment options, both of which require that the full offer be paid within 24 months. The first involves a 20% lump sum initial down payment and 5 subsequent installment payments. The second involves monthly payments, the first of which must be made at the time the offer is submitted. Therefore, even if you have a minimum offer amount well below your total tax due but you cannot pay the minimum offer amount within 24 months, the IRS may be more inclined to put you in a long-term payment plan (over 5-7 years) if they think they are more likely to collect a greater sum that way.
In summary, it is really quite difficult to qualify for an Offer In Compromise. It is not a “get out of tax debt free” card and the application and documentation required to be submitted with the offer are quite cumbersome (plus there is a $150 application fee), so it is not something to be considered lightly (or at all, if you know you don’t qualify).
So why does it sound so great on all the commercials? For one, these firms are not law firms or CPA firms and therefore are not regulated as such. Many (not all) of them have advertising that borders on the misleading and unethical, and some of the better known ones have been sued in multiple states for deceptive business practices (http://abcnews.go.com/Blotter/taxmasters-accused-fraud-deception/story?id=13364502#.UYsgtMqtq3E). At best, the story they are touting is the exception and not the rule.
As harsh as it sounds, there is no easy way out of tax debt. The IRS wants to be paid and they expect you to change your lifestyle if necessary in order to do this. There are options available to you, and you should consult with a licensed tax expert to assist you in finding the best option for you, even if the truth ends up hurting a bit.
Until next time…