Successfully Negotiating Offers In Compromise

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• 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.

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Successfully Negotiating 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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Learning Objectives

• • • • • • • • • Maximizing IRS Allowable Expense Standards Techniques for Valuing Assets Effective Tax Administration Offers Reducing Hassles From Campus OIC Functionaries Alternatives to Avoid the 20% Downpayment Doubt as to Liability Offers Collateral Agreements Aggressive Advocacy Appealing Unsuccessful Offers

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

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USER FEE

BEGINNING 11-1-03 A USER FEE TO PROCESS OFFERS

$150 6

OICs

2011 2012

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Offers in compromise (thousands)

Offers received Offers accepted

2007 2008 2009 2010 2011

46 44 52 57

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12 11 11 14

20 8

Allowable Expenses

4-13 IRS has issued revised allowable expense tables which are a substantial improvement from 2011 and a little better than 2012

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Allowable Expenses

Allowable Expenses Used for I/As over $50,000 & OIC

A. National Standards B. Medical expenses C. Regional Standards D. Local Standards E. Necessary for production of income or health & welfare of the family 10

New OIC Forms

• 5-12 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 OICs • 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 IRAs & 401Ks 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

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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 OICs • Most liberal OIC policies since adoption of the allowable expense standards in the 90s • The new policies can be used in negotiating installment agreements also

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2011 Offers in Compromise

• 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

• 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.

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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. 16-17

February 2009, Fresh Start

– Prevention of Offer in Compromise Defaults

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HAVE A LESS TAXING YEAR!!!!!

Thank You!!

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