Currently Non-Collectible

[mactoolsix]

What has been your success with this status?

Client is 86, has Alzheimers, living is a nursing home (Alzheimers unit) in Calif.
Many years ago she took a loan on her life insurance policy, and when she couldn't make the payments, they added the loan payment (and interest) to the balance. Well the loan balance max'd out and she received a 1099-R for about $700K. Now owes the IRS $115K, Calif $38K.

Her income is short about $550 @ month to make expenses. She makes up the difference by withdrawals from savings which will run dry in 2020. She'll be broke with only SS and VA Aid & Attendance income (will then be short about $1,500 @ month). She has no other assets.

With the tax return (timely filed) I sent in a letter requesting C-N-C status for hardship, a Form 433-f, simple spreadsheet showing income / expenses and assets (a bank account).

Of course California ignored the letter and spreadsheet sending a notice of balance due.

IRS says they are "processing" the request and delayed any collection requests for up to 90 days, however we just received a CP14 with the balance due by June 20th (from a different IRS address). I responded by mail, but I'm thinking a phone call might be in order.

Thanks for your thoughts,
Mike

[MDEA]

Currently Non-Collectible

Over the years I have had no trouble putting people in non -collectible status when they should no ability to pay. They receive letters yearly asking for any changes in financial status. MD is much harder to deal with.

[mactoolsix]

MDEA - thanks for the encouragement.

Her total savings is $50K (her only asset) and it will be totally depleted in Dec 2020. I'm afraid California may want a partial payment from that and she would be left with nothing to cover her monthly shortfall.

Hopefully the IRS will allow CNC. . . .

Mike

[Burke]

Once her assets reach a certain point, she will qualify for Medicaid. This is just going to hasten that process, and the state will take over her care expenses anyway. Do they really want to do that? I realize these are two different agencies but common sense dictates that they coordinate. But, then again, common sense is not in large supply.......

[mactoolsix]

Burke: I'm hoping it doesn't go there . . . .

She is in Calif - so Medi-Cal.

With her current assets over $2,000 she does not qualify.
If the IRS & CA takes everything (her assets then less than $2,000) she would qualify for "shared cost" Medi-Cal.

This means she could keep $35 / month for personal expenses.
The rest of her income would go to the care facility (Medi-Cal would kick in the $229 @ month short fall).
Medi-Cal would cover healthcare & dental (so no more Medicare B or health insurance expense.

Not pretty!

thanks,
Mike

[TaxGuyBill]

I think you may be looking at the OLD Medicare rules. California has fully expanded Medicaid, so there shouldn't be ANY asset test, unless her income is over 138% of the Federal Poverty Level.

However, that doesn't necessarily mean the Nursing Home would accept that. I suspect that some nursing homes may have assets tests, and if assets are over a certain amount, they charge their 'full' price, and if assets are under that amount, they will accept the 'reduced' Medicaid-only payment.

[mactoolsix]

I think you may be looking at the OLD Medicare rules. California has fully expanded Medicaid, so there shouldn't be ANY asset test, unless her income is over 138% of the Federal Poverty Level.

Bill - you are correct about fully expanded Medicad in CA, however her monthly income (SS and VA Aid & Attendance) puts her over the 138% and into "shared costs." In CA the shared cost for a nursing home is they allow $35 @ month for "personal maintenance" and the rest of your income goes to the home. Medi-Cal makes up the difference. (I verified this with a phone call so Social Services - Medi-Cal).

However, that doesn't necessarily mean the Nursing Home would accept that. I suspect that some nursing homes may have assets tests, and if assets are over a certain amount, they charge their 'full' price, and if assets are under that amount, they will accept the 'reduced' Medicaid-only payment.

If the IRS & CA takes her entire savings, she will have no assets, so no problem there.

Thanks for you thoughts,
Mike

[Bay ArEA]

Over the years I have had no trouble putting people in non -collectible status when they should no ability to pay. They receive letters yearly asking for any changes in financial status. MD is much harder to deal with.

I also have gotten CNC status for many clients, and some of them I didn't think deserved it either and was really surprised when it came though. Fill out a 433 form, compare it to the Collection Financial Standards: https://www.irs.gov/businesses/small...cial-standards
and if she's anywhere close to zero, apply!

[spanel]

What has been your success with this status?

Client is 86, has Alzheimers, living is a nursing home (Alzheimers unit) in Calif.
Many years ago she took a loan on her life insurance policy, and when she couldn't make the payments, they added the loan payment (and interest) to the balance. Well the loan balance max'd out and she received a 1099-R for about $700K. Now owes the IRS $115K, Calif $38K.

Her income is short about $550 @ month to make expenses. She makes up the difference by withdrawals from savings which will run dry in 2020. She'll be broke with only SS and VA Aid & Attendance income (will then be short about $1,500 @ month). She has no other assets.

With the tax return (timely filed) I sent in a letter requesting C-N-C status for hardship, a Form 433-f, simple spreadsheet showing income / expenses and assets (a bank account).

Of course California ignored the letter and spreadsheet sending a notice of balance due.

IRS says they are "processing" the request and delayed any collection requests for up to 90 days, however we just received a CP14 with the balance due by June 20th (from a different IRS address). I responded by mail, but I'm thinking a phone call might be in order.

Thanks for your thoughts,
Mike

Isn't is something that bad tax planning/not enough tax withholding's from a 1099R and now we are trying to make a legitimate tax bill go away.

Chris

[Bay ArEA]

Isn't is something that bad tax planning/not enough tax withholding's from a 1099R and now we are trying to make a legitimate tax bill go away.

Chris

Yeah, it's bad for society, so seeing something go past statute, or seeing someone get a OIC when they were downright negligent irks me. However, there's a reason we got rid of debtor's prisons, and seeing someone get ruined just because they were unwise is counterproductive to the country as a whole. You ruin someone and their income will never recover. The most recent case I got a CNC for even though he could have afforded to pay a little something was one where they decided to pay their child support instead of their taxes because they were not smart enough to get a lawyer to reduce their child support. Now with the extra cash he has he's paying down credit card debt and increasing withholding so he'll be in a much better place when the CNC expires.

[Burke]

Isn't is something that bad tax planning/not enough tax withholding's from a 1099R and now we are trying to make a legitimate tax bill go away.

Chris

Per the OP, there was only a "deemed distribution" years after the original loan was taken out, due to loan value plus interest accumulated exceeding the cash value. So there was nothing to take any taxes out of.

[Burke]

Mactoolsix: Just for curiosity's sake, just how much was the face value of this "insurance policy" she had, that would provide a taxable distribution of over $700K? Something doesn't sound right here..... Taxable distributions occur when the amount withdrawn is in excess of what was put into the contract. How could she have received a 1099R of such a large amount (even including accumulated unpaid interest added back to loan each year) when she could not have received the original loan in an amount which exceeded the cash value at that time in the first place? Was this a variable life or universal life contract?

[Rapid Robert]

just how much was the face value of this "insurance policy" she had, that would provide a taxable distribution of over $700K? Something doesn't sound right here..... Taxable distributions occur when the amount withdrawn is in excess of what was put into the contract. [...] Was this a variable life or universal life contract?

This is a salient observation. I've seen 1099-R forms from Universal Life policies that were cashed out out, the gross proceeds were in box 1, but the taxable amount, much smaller, was in Box 2a, and Box 5 was the difference.

[mactoolsix]

Mactoolsix: Just for curiosity's sake, just how much was the face value of this "insurance policy" she had, that would provide a taxable distribution of over $700K? Something doesn't sound right here..... Taxable distributions occur when the amount withdrawn is in excess of what was put into the contract. How could she have received a 1099R of such a large amount (even including accumulated unpaid interest added back to loan each year) when she could not have received the original loan in an amount which exceeded the cash value at that time in the first place? Was this a variable life or universal life contract?

Burke -sorry for the delay . . .

1099-R box 1 Gross = 697,988; box 2 Taxable = 497,988; box 5 contributions 200,000.

She took out a loan (original loan amount unknown to me) and then they added each years payment and interest onto the balance. The total balance grew till it finally exceeded the insurance amount. If she had passed prior to reaching the limit, the life insurance would have paid out and the loan would be paid off.

I do not know what type of policy it was.

[Rapid Robert]

Per the OP, there was only a "deemed distribution" years after the original loan was taken out, due to loan value plus interest accumulated exceeding the cash value. So there was nothing to take any taxes out of.

It would be great if this loophole would be closed, so that when loan balance plus BACKUP WITHHOLDING (fed and state) exceeded the cash value, it would trigger the deemed distribution, with the backup withholding being remitted to the government.