Offer in Compromise

[Burke]

I need to have a real heart-to-heart with a client about this. We are exploring his options. He will owe approx $12.5K to IRS due to 1099-C income from credit cards. Says he doesn't have it. Has personal residence assessed at $315K, mtge of $300K. Has 401k plan at work. Gross income from TP & SP is over $100K. Does he really have any realistic chance of getting this?

[JG EA]

It has been my experience that the TP has to have very little income to get the OIC. Does he have a job? If so, he could do an installment plan. However there is this from IRS :
New IRS Fresh Start Initiative Helps Taxpayers Who Owe Taxes

The Internal Revenue Service has expanded its "Fresh Start" initiative to help struggling taxpayers who owe taxes. The following four tips explain the expanded relief for taxpayers.

Penalty relief Part of the initiative relieves some unemployed taxpayers from failure-to-pay penalties. Penalties are one of the biggest factors a financially distressed taxpayer faces on a tax bill.The Fresh Start Penalty Relief Initiative gives eligible taxpayers a six-month extension to fully pay 2011 taxes. Interest still applies on the 2011 taxes from April 15, 2012 until the tax is paid, but you won't face failure-to-pay penalties if you pay your tax, interest and any other penalties in full by Oct. 15, 2012.

1. The penalty relief is available to two categories of taxpayers:

* Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to this year's April 17 tax deadline.

* Self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.

To qualify for this penalty relief, your adjusted gross income must not exceed $200,000 if married filing jointly or $100,000 if your filing status is single, married filing separately, head of household, or qualifying widower. Your 2011 balance due can not exceed $50,000.

Taxpayers who qualify need to complete a new Form 1127A to request the 2011 penalty relief. The new form is available on www.irs.gov or by calling 1-800-829-3676 (TAX FORM).

2. Installment agreements An installment agreement is a payment option for those who cannot pay their entire tax bill by the due date. The Fresh Start provisions give more taxpayers the ability to use streamlined installment agreements to catch up on back taxes and also more time to pay.

The new threshold for requesting an installment agreement has been raised from $25,000 to $50,000. This option requires limited financial information, meaning far less burden to the taxpayer. The maximum term for streamlined installment agreements has been raised to six years from the current five-year maximum.

If your debt is more than $50,000, you'll still need to supply the IRS with a Collection Information Statement (Form 433-A or Form 433-F). You also can pay your balance down to $50,000 or less to qualify for this payment option.

With an installment agreement, you'll pay less in penalties, but interest continues to accrue on the outstanding balance. In order to qualify for the new expanded streamlined installment agreement, you must agree to monthly direct debit payments.

You can set up an installment agreement with the IRS through the On-line Payment Agreement (OPA) page at www.irs.gov

3. Offer in Compromise Under the first round of Fresh Start in 2011, the IRS expanded the Offer in Compromise (OIC) program to cover a larger group of struggling taxpayers. An Offer in Compromise is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed.

The IRS recognizes many taxpayers are still struggling to pay their bills so the agency has been working on more common-sense changes to the OIC program to more closely reflect real-world situations.

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. The IRS looks at the taxpayer’s income and assets to make a determination regarding the taxpayer’s ability to pay.

4. More information A series of eight short videos are available to familiarize taxpayers and practitioners with the IRS collection process. The series "Owe Taxes? Understanding IRS Collection Efforts," is available on the IRS website, www.irs.gov.

The IRS website has a variety of other online resources available to help taxpayers meet their payment obligations.

[Burke]

Yes, I have printed this off the website along with the other topics. Both TPs are professionals and have good jobs. Neither is unemployed or is pending layoff, etc. Don't think they are based in reality, esp Mrs. TP. Got this 2 days ago, am filing extension. Says have no money to pay. BUT must file! Need for FAFSA! Right. Monthly payt calc over 6 yrs, is doable, IMO. Says can't do, but is "real interested" in the OIC option. (After all, got out of the CC debt.) Just don't see going through the process and expense (mainly the expense) if odds are against it. Monday is CTJ meeting.

[ChEAr$]

Refer him to Roni Deutsch out in California for the OIC.

Oh wait, shes no longer in business and enjoined from further activity.

Well, what about JK Harris? .... oh waita minute, they are also defunct.

Oh, I KNOW. Taxmasters out in Texas. patrick will get an OIC.
Or not, Seems to me he just filed for bankruptcy too.

Oh heck, clients have the wherewithall to pay eventually with good jobs and kids in college. If such and OIC came across my desk at IRS I would grab the "DENIED" rubber stamp in a minute.

[erchess]

OIC Facts of Life

An OIC will take several hours of your time each week for eighteen months or more. Since these clients are by definition bad at paying their debts most of us collect at least half of the fee if not more up front. There's no reason to give these birds a discount off of whatever your normal hourly rates are.

In this case you need an engagement letter and in it you need to say that you are going forward with the OIC at their insistence but you expect it to be rejected and this will in no way lessen what they pay you nor will it benefit them in any way. If and only if they sign that engagement letter it is in my opinion safe and ethical for you to proceed.

[Burke]

Oh, trust me. I have no intention of doing it in the first place. I am going to try to talk some sense into their heads and lay out what my advice is. If they want to pursue OIC, I am sendin' down the road to others. There is an EA next door, and a CPA across the hall. They can have 'em. This one surprised me. Have done for years, dealt with him, never had any problems, although I noticed mtge int was astronomical. But conversation with Mrs TP and several things she said tell me who is the culprit in all this. And why. And its not him.

[joanmcq]

All you have to do is run the numbers, and it will show what they qualify/don't qualify for.

Expenses are limited by IRS to reasonable amounts.

Charge to run it. And then you have an official IRS calculation showing they don't qualify, won't qualify, and set up a payment plan. And then you can also show them how much they saved by not sending any remaining OIC mills 5K to do the same thing.

[Burke]

On the 433?

[erchess]

I like Joann's idea better than mine

because it avoids charging them for work that carries no benefit to them and avoids putting the IRS through the labor of laughingly rejecting the OIC. The work of running the numbers in detail does benefit them by showing them why an OIC is not going to work when apparently a quick and much less expensive explanation did not satisfy.

[joanmcq]

Right, the 433.

[Burke]

because it avoids charging them for work that carries no benefit to them and avoids putting the IRS through the labor of laughingly rejecting the OIC. The work of running the numbers in detail does benefit them by showing them why an OIC is not going to work when apparently a quick and much less expensive explanation did not satisfy.

I agree. And in my experience, clients with these kind of income numbers do not qualify for financial aid either via the FAFSA. Maybe subsidized loans. Thanks for all the feedback. I did an OIC once so long ago I can't even remember the circumstances, but I do remember the 433.