He would in support of this, prepare false tax returns and bogus documents for his clients, tell them to conceal assets and income from the IRS by setting up "shell limited liability companies" and "unincorporated business trust organizations", and by transferring ownership of assets to nominees.
In 2002 he was ordered to stop operating his business, and continued anyway.
He was charged as a result with "aiding and assisting in the filing of false tax returns", "failure to file a tax return", "criminal contempt", and "structuring transactions to avoid reporting requirements" among other things and if convicted on all counts, he could face 33 years behind bars and a fine of as much as $1.95 million.
His business was called "New Found Freedom" and it operated in Sarasota as "Tax Escape Service". The irony is abundant.
The point of this blog post is to convey the idea that the IRS does prosecute those who don't pay tax on income. I dislike the IRS as much as anyone, and believe that an income tax is counterproductive.
Having said that, I also believe that the "right to vote" is the best way to combat ill conceived government policy.
If you agree that the income tax system as currently constituted is corrupt and counterproductive...vote.
If you have fallen prey to the notion that the government can't force you to file a return or pay a tax in income and want to re-enter the "system", call me to discuss your options.
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To tell the truth, I didn't know either until I read this forbes article.
Apparently, Koko Taylor is a blues singer who has won at least one Grammy as well as 25 "Blues Music Awards."
In the 90s, she had some good years income wise, and just didn't withhold enough income tax resulting in a rather large tax debt.
She is now about 80 years old and you'll probably agree that, her name is cool.
The point of this entry though is not to acquaint you with Koko Taylor, Blues singers, or to help you find a name for your child or your dog.
It is for the purpose of pointing out a few things about the offer in compromise that can be gleaned from this article. Things that may be of interest to the average consumer or small business taxpayer with serious tax debt and a sleepless night or two.
First, Offers in Compromise are legal matters as are all tax issues. This means that they fall under the jurisdiction of the U.S. Tax Court. They must be signed under oath, and the signer is subject to perjury penalties.
Second, A "rejected" Offer in Compromise can be appealed to the U.S. Tax Court.
Third, the appeal is often made on the basis that the IRS "abused" it's discretion in determining to reject the offer in compromise.
Fourth, whether the IRS "abused" it's discretion or not is a factual matter. A successful appeal is therefore factually driven, and the process of preparing, filing, negotiating and then appealing the offer in compromise should be done very carefully as a result. Every communication, and every word in every communication may have significance in the end. It is wise to seek local legal counsel.
Fifth, Koko Taylor doesn't appear to have filed an offer in compromise based on a doubt as to her ability to pay the debt, she appears to have filed it under a much less common method, "effective tax administration". She probably had enough assets and income to pay the debt off, but she felt that it would be "unfair" for a number of reasons to make her do so. This was probably a more difficult case to make the "abuse" claim stick then a doubt as to the ability to pay may have been.
Sixth, Tax Court Judges don't care about your fame or lack thereof.
If you have serious income tax debt, and are potentially an offer in compromise candidate or have had one recently rejected, call me, Arizona Tax Attorney, Michael S. Anderson at 480 507 5985 to discuss the seriousness of doing it right the first time, or whether it may be worth it to appeal to the U.S. Tax Court.
]]>It should however, always be carefully considered.
The potential benefits of a bankruptcy can be undeniable in relation to a taxpayer's potentially less effective options.
Having said that, bankruptcy does have some obvious negatives for the taxpayer with serious income tax debt. The more common are as follows:
1. Bankruptcy Costs Money
There is the attorney who is analyzing your case and representing you, the court who wants to be paid something i.e filing fees, the trustee takes 10% of non exempt assets in a chapter 7 and amounts paid in a chapter 13.
Also, what about lost wages due to time spent in preparing and cooperating, lost sleep and stress (does that cost money?) etc. etc.
2. Filing Gives The IRS More Time to Collect the Tax
What? If I file bankruptcy, the IRS will have more time to collect after the bankruptcy is over. But, I thought the bankruptcy would deal with the debt i.e. wipe it away?
It will if the debt meets certain criteria. But what if...
- the statute of limitations on collection that bars the IRS from collecting tax debt after 10 years is about to run out? Would it be wise to file a bankruptcy and stop that clock from ticking to deal with that same tax debt? Probably not. (There are some limited circumstances where it would make sense)
3. Credit Report
Bankruptcy does damage what otherwise was a good credit score. It typically comes back with time and some work, but nonetheless...the tax debt must be serious, with no other way out, to justify the hit.
4. Stigma
The "stigma" of bankruptcy has been diminishing over the years. Many consider this a good thing. You know..."stick it to the man" and all of that jazz.
I think that certain "stigmas" have their place.
The bankruptcy stigma can be especially harsh. For the rest of your life, if asked formally, you will have to answer yes. For some, this is reason enough to probe every other legal option before bankruptcy is used.
If you have a serious tax debt, call me, Arizona Tax Lawyer, Michael S. Anderson to talk about what the other options might be for you. 480 507 5985
]]>6 of the most important potential benefits are as follows:
1. The Automatic Stay
"Automatic Stay" is the common term used to describe that section of the bankruptcy code that governs what creditors must do or stop doing, once a bankruptcy is filed. It applies in every bankruptcy case. This law requires that almost every creditor in almost every situation, stop collection activity once the case is filed. This includes the IRS.
If the IRS has proper notice of the bankruptcy, the filer can actually sue the IRS for violation of the Automatic Stay Provision and recover actual damages including court costs and attorney fees, if the automatic stay provision is violated.
2. Elimination of Tax Debt after Discharge
The most obvious reason to file the bankruptcy, is the ability to get rid of the debt. As I often say, "believe it or not" certain income tax debts can be wiped away in bankruptcy along with accumulated penalty and interest. Determining "dischargeability" can be more complicated than it seems. Use of experienced legal counsel is a must.
3. Threat of Bankruptcy in an Offer in Compromise
A good bankruptcy candidate may be able to use threat of bankruptcy to obtain a better installment agreement or overall settlement in an offer in compromise without ever having to file. The key? A good bankruptcy candidate and experienced legal counsel.
4. Force payment plan
In a chapter 13 bankruptcy a payment plan can be forced on the IRS, if the IRS won't agree to a better and more reasonable payment plan outside of bankruptcy
Whether the plan is approved is not up to the IRS, but decided by bankruptcy law and the bankruptcy judge.
5. Deal with all other debt at same time
Most with serious tax debt have other debt problems as well. Credit card debt, medical bill debt, foreclosure issues, business related debt etc. etc.
A bankruptcy, chapter 7 or 13 depending on which best fits, can deal not only with the tax debt but also with these other problems, via discharge, cramdown, or payment.
6. Re-determination of Taxes Due
The bankruptcy code allows the Bankruptcy Court to redetermine the amount of tax owed.
Bankruptcy can be used to determine the amount of the debt even if you lost the argument in tax court.
If you have serious tax debt, you must talk to an attorney experienced in the relationship between tax debt and bankruptcy in order to find the best solution to the problem.
Call our office, Michael S. Anderson P.C. to discuss your tax situation over the phone with Mr. Anderson for free. 480 507 5985
]]>Some "experts" claim bankruptcy won't work and others claim that it may be your best option. Who to believe?
Let's make three things clear.
1. Income tax debt can be wiped away by a bankruptcy.
2. Whether bankruptcy is the best option depends on a number of different factors.
3. Everyone with serious tax debt should analyze their best options with bankruptcy in mind.
Number 3 is the quick topic of this post.
Why?
Even if you do not use bankruptcy to deal with the tax debt, the IRS is required to consider the fact that the tax debt could be discharged in a bankruptcy when determining ability to pay in response to an offer in compromise.
In english...a true bankruptcy candidate has more leverage in an offer in compromise.
In this office, every client is treated as a potential bankruptcy client in an effort to determine if that leverage exists and if it can be used.
Don't let anyone tell you that bankruptcy shouldn't be at least considered as an option. It is in more ways than one.
Call Arizona Tax Attorney Michael S. Anderson P.C. at 480 507 5985 if you have serious tax debt and need to find a solution. He will talk to you for free over the phone.
]]>The audit and the bill are often the result of the other spouse's failure to disclose some income OR the his or her "overstatement" of a deduction or two on the tax return.
The unsuspecting spouse, has signed the joint return, but truly believes that all the tax due has been correctly calculated and paid, and that the return contained the entire truth about income and deductions.
Surprising to some, the spouse who is "out of the loop" may meet the legal criteria to qualify as an "innocent" spouse as defined by the tax code.
This means that as to that spouse the tax will not be considered due and owing. He or she won't have to pay it.
In order to be "forgiven" the liability for the resulting tax the proposed innocent spouse MUST be able to show 4 things:
1. Incorrect Items
The other spouse disclosed incorrect or erroneous items in the tax return that caused the understatement of the tax owed on the return and thus the unexpected post audit additional tax.
Erroneous or incorrect items are either unreported income or an overstated and incorrect deduction. This includes outright lies about costs or purchases, and items that were paid for or purchased but aren't legally deductible,
2. Unaware or No Reason to Know
The "innocent" spouse was unaware (or had no reason to know) of the errors i.e. this understatement when the return was signed.
One knows or had reason to know of an understatement, if there was of course actual knowledge of the understatement, or a reasonable person in similar circumstances would have known of the understatement.
]]> 3. It is unfair4. Request the relief timely
The "innocent" spouse has sought the designation as such via IRS Code Section 6015(b) within two years from the date the IRS collection activity began.
If you have been surprised by an IRS bill or audit and think that it may have been the result of your spouse's or ex spouse's dishonesty, you will want to look into whether you qualify for innocent spouse relief. If you have tried and failed, you may have appeal rights.
Call Arizona Tax Lawyer Michael S. Anderson for free to discuss the situation at 480 507 5985.
]]>
Despite the fact that these calls are common, I continue to be shocked at the fees charged and tactics used by these firms.
If you have serious tax debt, great care needs to be taken when paying someone to help you solve it. Here are some reasons why:
1. Most tax organizations that you see on tv and hear on the radio are not law firms. They are highly specialized sales organizations.
2. The salespeople in these organizations are trained to scare the taxpayer about what the IRS may do to them in order to... you guessed it, make the service seem much more valuable then it is.
3. They are also trained to make it appear there is some "secret" ability to obtain an enormous reduction in the overall debt and remove the fear, and they are in on the secret.
4. They usually base a fee not on what the time involvement may be to help solve the problem, but on what they believe can be paid by the taxpayer. They do this by reviewing your assets a bit with you over the phone, including available credit you may have.
5. This fee is not typically based on the remedy. There is no correlation between the solution and the fee. You may end up paying the same very large flat fee for whatever is done, no matter how small or large.
6. The solution they sell although promising for some, doesn't work for most. That promised solution is the offer in compromise.
7. Despite the fact that the solution is usually something that requires less work than the offer in compromise, they keep the large fee anyway in the end.
My advice to Arizona taxpayers:
If a "firm" quotes you a very large fee for a tax resolution service without reviewing all of your documents, history and then comparing the available non bankruptcy options to bankruptcy itself, be very wary.
In fact, do yourself a favor by contacting a local tax attorney who bills by the hour, or whose flat fees are reasonable, and have that firm review your case.
]]>First, the IRS is offering to be more lenient with those who have recently lost a job, rely on social security, welfare or who have large medical bills. It will not be calling these people or sending them letters.
The IRS already has a program that allows taxpayers without income or with "low" income to be placed on "non collectible" status. This means that they are left alone by the collections department of the IRS until the income situation improves. This new leniency in relation to collections appears to be expanding the realm of those who may qualify for this treatment.
Second, the IRS is going to allow those that are in an installment agreement arrangement to miss a few payments and stay in the arrangement if they have been steady payers.
The installment agreement program has long been in existence. Previously, if a taxpayer missed a payment during the plan, the IRS would withdraw the plan and the full amount would become due. They would however, typically allow the plan to be re-instated with a fee.
Third, the IRS is promising to review the valuations of homes in cases where the taxpayer is filing an offer in compromise.
Normally, in an offer in compromise, the IRS would require the payment of any equity in a home as part of the settlement. Many homes have little or no equity now, but the IRS systems may be showing the valuations based on previous years. This will help more offers to be accepted.
If you have a serious tax debt and are facing IRS collection activity, please call Arizona tax attorney Michael Anderson at 480 507 5985 for a straightforward evaluation of your options.
]]>For all Arizona Taxpayers with debt, I encourage you to call my office to talk generally about what your options may be over the phone as soon as you find trouble.
However, there is no way for me to give specific advice without spending more time with the taxpayer's specific set of facts than I can during a short phone call.
For those who are wary of paying a larger retainer or who just don't have the funds to retain an attorney, a "strategy meeting" in my office may be the solution to obtaining some of that more specific advice without the higher cost of full representation.
The strategy meeting is designed to answer all of the taxpayer's questions at one time for one flat fee.
Many of those who choose the Strategy Meeting are then able to handle the issue themselves without spending more money. On occasion, a situation can be resolved during the meeting with a phone call.
Of course many situations are too complicated to be fully analyzed during a 2.5 hour meeting. In those instances, taxpayers will need further analysis and representation.
My goal is to help my clients solve the tax problem in a cost effective and timely manner. This meeting allows me to do that in many situations.
In order to set up the meeting, call to talk to me first. I will ask you some questions and discuss whether a strategy meeting may help you. Call 480-507-5985.
Anyone on the other hand, can own a business that "sells" tax controversy and resolution services to taxpayers nationwide. This ability to "sell" tax resolution services with little oversight has led to a tremendous amount of misinformation about a taxpayer's ability to deal with overwhelming tax debt.
I receive a number of calls from taxpayers who are certain, based on an ad or telephone sales pitch, that they will be able to simply settle their tax debt for a very small amount.
Many who call have paid the company, went through the process, and failed.
Not only have they failed, they don't really understand why, and probably paid a large sum for the opportunity.
Attorneys have as a profession become the butt of many jokes. Many are quite funny. Most attorneys I know however are smart, hardworking and have the best interests of the client at heart.
For these reasons as well as the following, I always encourage taxpayers to talk to a real, live, licensed, experienced, and local tax controversy attorney before deciding what to do about their tax debt.
1. Lawyers Are Regulated
Attorneys have all sorts of legal obligations placed on them by various regulatory systems that have been set up to ensure the highest standards of representation. These include state ethics rules, and IRS rules of practice. No CPA or Enrolled Agent is held to a standard as high as an attorney. Tax controversy businesses are unregulated. These regulations ensure that most attorneys are as mentioned above, hardworking and conscientious.
A counselor is supposed to be able to review your entire situation, and consider with you ALL of your options. Real counselors tell the truth to the client at their own expense, and even if the truth is not what the client wants to hear.
Most businesses that sell tax resolution services don't consider tax motivated bankruptcy when reviewing the taxpayer's situation because they can't legally, and because it may come at their own expense as well.
Any "counselor" in this arena who doesn't include bankruptcy as an option for the taxpayer in the analysis is not providing complete advice.
3. Attorney Client Privilege
What you tell your attorney is legally confidential in every scenario. Enough said.
4. Problem Solving and Legal Analysis Skills
Attorneys are highly trained in the skill of analyzing a set of facts and applying the current law to that set of facts. They are trained and experienced in finding the law and understanding it. They are trained to produce technical memoranda to accompany tax documents. No other profession is trained in this manner. These skills provide the attorney and the client an edge in negotiation and litigation with the IRS.
No matter where you live, you would be wise to contact a local, experienced tax controversy attorney who will tell you the truth about your options, even if the truth isn't what you want to hear.
I will tell you the truth and am available for a free phone consult to Arizona Taxpayers. Call 480-507-5985 and ask for Michael S. Anderson
]]>Most will be worried about whether they can be arrested and sent to jail. They have seen the stories about Wesley Snipes and other famous types who are currently residing in a federal prison for similar offenses.
The good news is that the IRS typically and as a matter of internal policy will not prosecute the taxpayer who files their returns voluntarily or in other words beats them to it. Visit the IRS.gov website for information about this policy.
Obviously, prosecution is not the easiest way for the IRS to collect, or they would do it to everyone with a late return. It would seem that the prosecution of a few high profile cases would be more cost effective. Fear trickles down.
Prosecutions of the "rest of us" do occur however, and much more often than one would think. There are many "average joes" whose careers and families have been lost while they sit in jail as a result of unfiled returns.
Therefore, the non filer should get the returns prepared and filed as a first step. If the IRS does decide to prosecute, it usually won't lose.
Not only does the non filer risk jail, he or she also risks the loss of tax refunds, lost earned income credit, lost social security benefits, and increased debt as a result of penalty and interest add ons.
I can help a taxpayer who hasn't filed for years to prepare the returns even if they are missing documentation, file them properly, and then find the best way to deal with the debt, all while protecting the attorney client privilege.
If you have un-filed tax returns, call Michael S. Anderson, an experienced Arizona tax controversy attorney at 480-507-5985 to discuss your situation for free.
This is one of my favorite lawyer jokes. It is funny because there is truth in humor. Most attorneys I know however are not trying to get something for nothing, as is this attorney They know their practice area, and their knowledge and experience can be worth their weight in gold to those with serious problems.
The problem is that in between it's "weight in gold" and zero, it is hard to determine what a taxpayer should pay a tax attorney.
Generally, the fees charged are set by the market. Sometimes the market is skewed a bit by the high pressure sales skills of the tax resolution company employee. When promises are made that aren't necessarily true, apples can't be compared to apples.
In our office, we feel that the best way to bill a client for tax related work is by the hour.
The hourly rate solves a number of problems related to the determination of what should be paid.
1. The rate can be compared to other attorneys with similar experience and knowledge.
2. The hourly rate provides the attorney an increased incentive to work personally on the case instead of handing the file off to staff and turning the office into a "mill" as "flat" fees often do.
3. The hourly rate provides the taxpayer client an incentive to fully participate and cooperate with the Attorney. This results in a more educated client, and a better outcome.
4. Hourly rates do not end up costing the client more necessarily than flat fees. They are often less in reality and less when the results are considered. Would a client pay $500.00 more in fee, if it resulted in $10,000.00 in additional savings?
5. Hourly rates provide the client more control over what is being accomplished.
6. Hourly rates provide the client more opportunity to participate and thereby be active in the reduction of the fee.
1. Telephone Discussion - 5- 15 minutes - Free
2. In office Consultation - 45 minutes - Free
3. Strategy Meeting - 2.5 hours - $325.00
All other matters including tax history analysis, financial analysis, bankruptcy discharge analysis, appeals, litigation, offer in compromise, installment agreement, non collectible status, bankruptcy etc. are billed at the following rates.
Attorney - $225.00 per hour
Paralegal - $125.00 per hour
Secretary - $60.00 per hour
The typical retainer varies between $850.00 and $3500.00 depending on the situation. The retainer is placed in the Arizona State Bar's trust account and only removed to pay the law office when the time is billed. The non billed or non earned portion remains in the trust account and belongs to the client.
A range of costs for common types of representation are often requested and are provided here:
Consumer Offers In Compromise without appeal - $2500.00 to $4500.00
Business Related Offers In Compromise without appeal - $3500.00 to $6500.00
Installment Agreement Negotiation - $500.00 to $2500.00
Consumer Tax Motivated Bankruptcy Chapter 7 - $1800.00 to $4000.00
Tax History and Personal Financial Analysis and Planning - $850 to $2500
If you have questions about legal fees, flat fees vs hourly rates etc. feel free to call me, Arizona Tax Attorney Michael Anderson at 480-507-5985.
]]>- Paycheck under-withholding
- Failure to pay tax on withdrawn retirement funds
- Assessed a trust fund penalty related to employment tax
- Failure to pay tax related to business
- Hobby Loss Challenge, Independent Contractor Challenge
No matter what the cause of the tax debt, the question inevitably becomes "what can I do about it, if I can't afford to pay it?"
There are 9 options that are commonly considered in dealing with tax debt, short of fully paying. Some options are used in combination with others and some are more effective than others.
They are as follows:
1. File un-filed tax returns and challenge the IRS substitute returns
Most of my clients have a number of years of un-filed returns. These returns need to created and filed in order to avoid possible jail time of up to one year per return. They should be filed as well because:
- The filing of the returns makes the taxpayer "current" in the IRS records. The taxpayer must be "current" in order to file an offer in compromise, file bankruptcy or negotiation an installment agreement.
- The filing of the returns will often reduce the amount of the outstanding debt. "What?" you ask. How can there be tax debt if no return has been filed? The IRS can file a substitute return based solely on income that has been reported to them from employers and others. These substitute returns are not typically accurate as they don't take into account the taxpayer's entire situation. The filing of the proper return and the challenging of the substitute return will likely reduce the debt.
2. Challenge the tax assessment
If the tax that has been assessed against the taxpayer is incorrect because the law wasn't properly applied to the taxpayers facts, the assessment can be appealed and litigated in various ways. The most common method is the offer in compromise based on a doubt as to the taxpayer's liability not ability to pay. Assessment of a trust fund recovery penalty, a debt related to the denial of a hobby loss, a debt related to the denial of the treatment of an employee as an independent contractor, among other issues can all be appealed and litigated.
]]> 3. Calculate and wait for the Statute of Limitations on collection to expireIf the taxpayer is in an installment agreement, on non collectible status or in limbo, the time period that by law provides the IRS ten years from the date of assessment of the tax to collect the tax, continues to tick away.
If the taxpayer has filed bankruptcy, requested a collection due process appeal hearing, filed an offer in compromise or used various other legal options to slow down collections, the time period may have been "tolled" or stopped, and can be difficult to calculate.
Once the statute period runs, the tax debt is gone and the tax lien if it exists, must be released.
4. Negotiate Non Collectible Status
Low income, low asset taxpayers are often able to negotiate an agreement with the IRS that stops collection of the debt. Often, the IRS will agree to this even if the taxpayer has equity in a home. For those under or unemployed, this can be a huge relief.
Many whose income and asset situation won't change, stay on non collectible status until the statute period on collection runs out.
5. Negotiate Installment Agreement
The IRS will almost always allow the taxpayer to make payments monthly on the debt. The taxpayer must first file all required tax returns. They then must fully disclose all assets, debts and income.
The IRS will want the difference each month between the average income and an expense budget that is partially imposed by them. This area provides a number of planning opportunities.
The payments continue until the taxpayer's income or budget change substantially, the statute of limitations period runs out, or the taxpayer switches to another option like bankruptcy.
6. Offer in Compromise
The offer in compromise is the initial goal of most taxpayers with serious tax debt. It allows for the substantial reduction in the amount of the debt and a settlement in full. It also allows for the taxpayer to challenge the underlying calculation and assessment of the tax. Upon acceptance and completion of the offer, all liens are released.
The problem with the Offer program based on a doubt as to the ability of the taxpayer to pay all of the debt, is that most income earners don't meet the strict criteria and/or can't weather the difficult process to get there. For most taxpayers another option is usually better.
7. Penalty Abatement Request
The IRS will forgive a penalty that has been added to the underlying tax, but not usually without a fight. The first step in obtaining the abatement or forgiveness of the penalty is to have a "reasonable cause" for the act that cause the penalty. A reasonable cause for the failure to file on time, failure to pay on time etc.
A reasonable cause can be almost anything, but it must make a lot of sense in order to stand a chance. The burden of proving the "reasonable cause" is on the taxpayer.
8. Tax - Motivated Bankruptcy
I am of the opinion that most taxpayers don't know that income taxes and some other tax related debts can be wiped out in bankruptcy. For income tax, the rules regarding this, appear to fairly simple at first glance:
- 3 years must have passed since the date the return for the underlying debt was due
- 240 days must have passed since the tax was assessed
- 2 years must have passed since the filing of the return
- no fraud, misrepresentation etc.
Unfortunately, these rules are fraught with hidden "traps for the unwary" taxpayer. What actually constitutes a return, whether the return was filed properly, extension, audits, previous offers in compromise and bankruptcies all contribute to create these traps.
Only an experienced tax -motivated bankruptcy attorney should be consulted to determine whether a tax debt meets the basic criteria for dischargeability in bankruptcy.
9. Innocent spouse claim
The law allows the spouse of a taxpayer who has caused the tax debt to ask for the debt to be forgiven as to him or her. The guidelines are stringent but are commonly met.
If you are an Arizona taxpayer who has been assessed a tax you feel is incorrect, or who has a tax debt you don't know how to handle, call my office and ask for me Michael Anderson at 480-507-5985. I will talk to you for free about your problem over the phone.
]]>The most common IRS Offer in compromise program, "doubt as to collectibility" was instituted to help the IRS close taxpayer files that showed little if any promise of future collection potential.
The program does this by setting up a formal application and negotiation process that allows the amount of the settlement to be based NOT on the amount of the debt or some informal give and take, but on the amount the taxpayer could theoretically afford to pay.
The remainder of the debt is forgiven.
Most taxpayers with serious tax debt hear about this and think "wow", I am going to be able to go on with my life after all. They then rush out and pay someone to fill out the paperwork, pay some fees and file it. A few months later, and.... rejection.
The reality is that most offers in compromise fail. They fail mainly because most taxpayers don't qualify well for the formal program. The reasons are numerous.
]]> The most common is that the IRS is empowered to impose a budget on each taxpayer in determining the amount of "excess" income that the taxpayer has available to pay the debt. The budget is not friendly to everyone. It assumes that the taxpayer is living on a budget the government thinks is appropriate.The IRS is able to take the difference between that budget and the taxpayer's average net income and multiply it by 48, 60 or the remaining period in the statute of limitations period left for collection. They also get to add any taxpayer asset value.
Typically, the amount calculated is such a large portion of the debt, the taxpayer can't afford the terms.
Last year, less than 25% of all offers submitted were successful. Many of those were probably not accepted on the taxpayer's original terms as well.
Despite the offer in compromise program's lack of success, it is touted as a cure all by hundreds of nationwide sales firms on TV, radio and in the mail. Many taxpayers have developed a distorted view as a result regarding their true options.
Having said that, an offer does make sense for some, and everyone with serious tax debt needs an experienced tax controversy attorney to review their situation with an offer in mind.
In order to complete a successful offer in compromise, the attorney should review the taxpayer's current, past and potential income, assets and budget to determine if it would make sense to file.
Often, a trained eye can guide a taxpayer who may not be a good candidate now, become a better candidate in the future.
However, no matter how much planning and preparing a taxpayer does, there may be better options.
I always recommend therefore that each client not only analyze their situation with an eye toward an offer in compromise, but also with an eye toward comparing the benefits an offer may supply, to those of a tax motivated bankruptcy, an installment agreement, non collectible status, statute of limitations defense or an appeal or litigation to challenge the underlying debt.
If you have serious tax debt, please call me, Michael Anderson, a local Arizona tax controversy attorney at 480-507-5985. I will discuss your options over the phone for free.
]]>Americans have always been good at two things. Solving problems and selling products that solve problems.
We have become especially adept at selling products that work for some, but not for most.
Think "Rogaine". For some...hair. For everyone else some new "fuzz" or nothing at all.
Americans with bald spots want their hair back so badly though, they buy in droves despite the easily ascertainable and mostly negative results.
They buy because of a polished sales pitch that provides them hope.
Strangely, our national obsession with selling products to those in pain, has found it's way to the world of tax debt.
The tax solution providing hope to thousands of Americans is the the IRS' “offer in compromise” program (“oic”). Savvy salespeople have realized that there are lots of Americans with tax debt who don't sleep well as a result. They offer the oic as a solution thousands of times every day on tv and radio.
The promise: "Settle your IRS tax debt for far less than what you owe easily and often guaranteed.
The problem: most taxpayers with serious tax debt aren't good candidates for the program.
Via the oic program, the IRS is statutorily empowered to accept less than what they are owed if there is
1. a doubt that they are actually owed the money
2. if there is a doubt about whether the debt that is owed is actually collectible from the taxpayer, or
3. the taxpayer can afford to pay the debt and taxpayer owes the debt, but there is some other circumstance about the taxpayers life that should be taken into account in settling the debt.
Most taxpayers pay these “sales” organizations to file an oic based on a doubt as to the taxpayer’s ability to pay. Many of those do so out of a hope that they will be able to sleep again. For the vast majority who do so, a short peaceful interlude without is interrupted when they find the offer has failed.
]]> This short article is not the place to delve into how the oic functions line by line, an overview will suffice. It is the place to quickly explain why the oic is so unsuccessful for many taxpayers in general terms and why bankruptcy may be a better option, by laying out some pros and cons.OIC PROBLEMS
1. The formula results in too large of a number - Taxpayers can't afford
The IRS is allowed to force each taxpayer who applies to settle their tax debt, to use a standardized budget in determining how much they have to pay.
In other words, everyone who files has to pretend that they live on the same budget as someone who possibly earns much less then them. This budget can, with the help of an experienced attorney, be planned for, added to, enlarged, but it can never match the actual budget of many with serious tax debt.
The result is that when the taxpayers actual net income is compared to this budget, there appears to be some large excess income left to pay the tax debt with each month.
The IRS then multiplies this "excess" by a pre-ordained number like 48 and then adds that number to the taxpayer's assets to arrive at a collection potential for the taxpayer.
If the "excess" number is 500 and the asset value is $5000.00, the IRS will claim that the taxpayer can afford to cough up $29,000.00
The problem is that the 500 is usually being used in real life to pay the taxpayer's ACTUAL mortgage, credit card bills, or the 20 year old son's car payment and insurance.
Items either limited or not allowed in the IRS's standard budget.
2. The process can be difficult
The IRS purposefully makes the process difficult. It initially rejects the vast majority of offers in compromise based on a cursory reviews of the facts. Many do not have the funds or desire to continue the fight.
3. Large amount paid upfront makes it more risky
The taxpayer must typically pay a large percentage of the debt with the offer or start making monthly payments equal to the offered monthly payment amount and loses those funds if the offer is unsuccessful.
4. If rejected, the debt comes back in full with interest
When rejected, the taxpayer still owes the entire debt with interest, while the statute of limitations period on the collection of the debt has been stayed.
5. Failure makes it easier for the IRS to collect
The taxpayer who has been rejected, has provided every detail about his financial life to the IRS making it easy for them to collect the debt. (In my opinion, this is why the IRS doesn’t push harder to regulate offer in compromise mills. The oic filing provides a road map of assets and income sources).
6. Full compliance is often a problem after acceptance
IF the offer is successful, the taxpayer must file tax returns and pay tax obligations for 5 years, if not, the offer is over, the money paid is lost, and the total original debt with it's accrued interest, continues to be owed, minus what has been paid.
7. Offer in Compromise is not a complete solution
More likely than not, the taxpayer proposing the offer in compromise has medical bills, credit card debt, personal loans, state tax debt etc. all of which must still be dealt with outside of the of the offer in compromise. The payments on these debts aren't typically allowed as part of the budget in calculating the reasonable collection potential of the taxpayer. The offer, at it’s best becomes only a partial solution as a result.
For these reasons and many others, the vast majority of oic’s fail. In a given year, less than 30% of offers submitted are successful. In 2007, it was closer to 25%.
There is a solution to serious tax debt, that is highly successful when attempted properly that is overlooked by most.
That solution is Bankruptcy.
A quick review of bankruptcy in relation to tax debt will help to explain why.
There are two types of bankruptcy that pertain primarily to consumers. Chapter 7 and chapter 13.
A chapter 7 bankruptcy is the more commonly filed, and is a liquidation case. In a chapter 7 bankruptcy, the debtor loses all assets not protected by statute and is forgiven his or her dischargeable debt.
Chapter 13 bankruptcy is a “reorganization” bankruptcy. The debtor attempts to keep his or her assets and pay some or all of the debt depending on income and budget amounts. The plan length varies between 3 and 5 years depending on a number of factors.
Tax debts as alluded to above, are classified in either a chapter 7 or chapter 13 as either dischargeable or non dischargeable on the date the bankruptcy petition is filed.
Non dischargeable tax debts include:
1. collected and unpaid sales tax
2. trust fund recovery penalty (employment tax unpaid by a business assessed against a “responsible party”).
3. Trust fund tax
4. Income tax related to a return that was not filed or filed but within 2 years of filing the bankruptcy.
5. Income tax related to a return that was due including extensions within the last three years
6. Income tax related to a return for which fraud was involved
7. Income tax for a tax liability that was assessed by the taxing authority within 240 days prior to the date of the bankruptcy filing.
Dischargeable tax debt includes:
1. Those income taxes that meet the following criteria:
A “return” was filed
It was filed more than two years ago
It was due more than three years ago including extensions
The tax was assessed more than 240 days ago
There was no civil or criminal fraud nor did the taxpayer willfully evade or defeat the payment of the tax debt.
In essence, a tax motivated bankruptcy is a bankruptcy case that takes into account filing issues, timing and taxpayer history in a way to take maximum advantage of bankruptcy law in relation to the tax debt.
Or in other words, what may be a nondischargeable tax debt today may become a dischargeable tax debt tomorrow.
The other benefits in comparison to an offer in compromise are as follows:
1. OIC’s factor in the taxpayer’s income while chapter 7 bankruptcies don’t. Whether the tax debt is dischargeable has nothing to do with income. In a chapter 7 if the majority of the taxpayer’s debt is tax debt, then the income is irrelevant to whether the taxpayer qualifies to file a chapter 7. The bankruptcy means testing doesn’t apply.
2. OIC’s factor in future income potential while bankruptcies don’t. It may not matter in bankruptcy that the taxpayer may be making more next year. Many offers are rejected on that basis alone.
3. OICs factor in asset equity. Bankruptcies do not. Equity in bankruptcy has little to do with ability to file or the dischargeability of the debt itself. Certain assets may be liquidated in a chapter 7, most consumer assets are safe.
4. The largest benefit of bankruptcy over the Offer in Compromise is that a bankruptcy can be crafted to deal with all of the other taxpayers debts at once. State tax, credit card, medical bill, personal loans and other consumer debt.
In my experience, most with serious tax debt need to have an experienced attorney, well versed in offer in compromise AND bankruptcy law, apply those laws to the taxpayer's facts BEFORE a decision is made to hire a sales firm to help with an offer in compromise.
The taxpayer who does so, will likely get a more straightforward answer about their oic chances, and an honest comparison between bankruptcy and the offer in compromise program.
Call Arizona Attorney Michael S. Anderson at 480-507-5985 to discuss your options.