Offers in Compromise

[Golden Rocket]

This topic is not really "taxation" so much as it is "dealing with the IRS."

A friend (not a client) has approached me about assistance in trying to favorably settle a $50,000 debt with IRS. The first thing I did was examine the last 3 years returns in an attempt to reduce the tax by filing amended returns. The original returns were self-prepared on TurboTax. I refiled two years and have reduced the debt to under $40,000.

She talked with IRS collection people and they sent her IRS literature about Offers in Compromise. There are all manner of misconceptions fostered by this. Firstly, sending the literature leaves the impression that the IRS routinely reduces indebtedness. Secondly, the impression with this woman is that can protect assets and get away with paying less than she owes. Additionally, she has been watching TV commercials where certain tax offices can get the IRS to settle for "pennies on the dollar."

Is there a good website I can visit to get pointers? (Not an IRS website -- but one who deals in real-life terms and experiences) Specifically, are there ANY assets (such as her home) that they exempt from seizure or attachment?

[Jiggers]

OIC's

Don't try this one on your own if you have never done one. Seek competent advise from an EA or CPA that has vast experience in this area.

Don't use those OIC mills that advertise on TV. They take your fee and really don't help you.

An OIC requires extensive documentation.

If there are any assets, including the home, the IRS wants you to either sell or mortgage to obtain the funds to pay off the debt. If there are too many assets, no OIC.

If there is a lot of income, no OIC.

Don't forget that a large down payment is required, and if the OIC is denied, which it will be, the IRS will get to keep the down payment.

[JoshinNC]

Here's the formula, as best I understand it

This topic is not really "taxation" so much as it is "dealing with the IRS."

A friend (not a client) has approached me about assistance in trying to favorably settle a $50,000 debt with IRS. The first thing I did was examine the last 3 years returns in an attempt to reduce the tax by filing amended returns. The original returns were self-prepared on TurboTax. I refiled two years and have reduced the debt to under $40,000.

She talked with IRS collection people and they sent her IRS literature about Offers in Compromise. There are all manner of misconceptions fostered by this. Firstly, sending the literature leaves the impression that the IRS routinely reduces indebtedness. Secondly, the impression with this woman is that can protect assets and get away with paying less than she owes. Additionally, she has been watching TV commercials where certain tax offices can get the IRS to settle for "pennies on the dollar."

Is there a good website I can visit to get pointers? (Not an IRS website -- but one who deals in real-life terms and experiences) Specifically, are there ANY assets (such as her home) that they exempt from seizure or attachment?

I only know this because I was able to befriend a revenue officer who used to work OIC's. Basically they have you document all of the client's income/expenses to determine the "net amount available" each month. Then you figure all of the client's assets at lesser of tax value or FMV, minus 20% (quick sale value). If this value exceeds the liability against the asset that amount is deemed collectible. You then add this value to the monthly "net amount available" multiplied by 48 months and that is the minimum amount they will accept.

Example:

Client clears $2000 after taxes per month with monthly expenses of $1800. Client also owns property with a tax value of $100,000, FMV of $120,000 and liabilities of $75,000. 80% of tax value is $80,000, which exceeds liability by $5000. Client's monthly disposable income is $200, which is $9600 when multiplied by 48 months. Lowest offer they will accept is $14,600 ($5000 + $9600).

If the client doesn't have any equity in thier property and is running paycheck to paycheck they will offer to put her in "uncollectible status" and will review in 18-36 months to see if the situation has changed. If there are collectible assets and no chance that income/equity levels will substantially change any time soon you have a candidate for the OIC.

My suggestion is to find out who is assigned to the case from your local IRS office and contact them directly. Set up a face to face meeting and bring as much income/expense documentation as you can get. And DON'T let the taxpayer go with you (assumes you're an EA or CPA).

Good luck!

[snowbird]

CPE for OIC?

Does anyone know of some good CPE material or attended a seminar on OIC? This is an area that may be good part-time work. My non-tax background includes a lot of negotiations … my previous employer sent me through Karrass, etc. I discussed this idea with a couple of CPA’s and they were surprised that I would want to do it. They said most of the people are not their clients, it’s time consuming, and inconvenient … sounds perfect for a retiree that has more time than an IRS agent.

PS: I know Glooge provides a ton of CPE opportunites on OIC, but I asking for personal experience.

[Zee]

There is good, professional software available to help you with OIC and lots of literature available. I looked into this a service some time ago, learning everything I could, purchased the software, etc. But, I determined there was too much time involved (short and long-term) and marketing would be extremely difficult for a sole proprietor and especially a CPA that is prohibited from contingent fees. JK Harris does a reasonable job. I visited their headquarters as a prospective employee. They wanted to open a processing office in PA at the time. They charge a large upfront fee that folks would be reluctant to pay to a sole proprietor. My suggestion? It isn't worth the trouble and learning curve for one client.

[erchess]

What is the software and what does it cost??

There is good, professional software available to help you with OIC and lots of literature available. I looked into this a service some time ago, learning everything I could, purchased the software, etc. But, I determined there was too much time involved (short and long-term) and marketing would be extremely difficult for a sole proprietor and especially a CPA that is prohibited from contingent fees. JK Harris does a reasonable job. I visited their headquarters as a prospective employee. They wanted to open a processing office in PA at the time. They charge a large upfront fee that folks would be reluctant to pay to a sole proprietor. My suggestion? It isn't worth the trouble and learning curve for one client.

and can you post or PM to me a link to it?

[Zee]

and can you post or PM to me a link to it?

Sorry, I tossed the software when I decided not to move forward in offering OIC services a few years ago. I'll see if I have any record whatsoever (it's doubtful) and post if I can find it. I'd suggest a google search. It was very good software, reasonably priced, but did require annual updates. It may have even offered a CPE component.

[ED SMITH]

You don't say whether your friend is self-employed, but if she is, she probably shouldn't be thinking OIC, because she would have to be current with estimated tax payments for the year and would have to stay current. I have found this to be the biggest roadblock in doing OIC's. In addition, with self-employeds, the IRS looks back at the last 3 Years of income and will usually base its decision on the year with the highest income. With a wage earner, they usually only look at the last 3 months. If she has enough equity in her home, then any offer will get rejected (except in the case of an elderly person on fixed income).

Since these are recent returns, the statute of limitations has a long way to run. (When amended returns are filed, this reset the clock). So, the IRS has less incentive to settle with an OIC if they think they can eventually get the full amount.

The first thing she should consider is an Installment Agreement. If your friend can pay $830/mo, she can set up a 60 month installment agreemente and pay off the $40,000. If she can only pay a smaller amount, then this could become the basis of an OIC. She should seek the help of someone experienced in doing this, someone who is familiar with using the IRS collection standards, otherwise she could end up making higher payments than necessary.

The fear of having her home seized is unfounded. This only happens in the worst cases of unreported income. However, bank levies and wage garnishments are a reality. Once an I/A or OIC is entered into, a lien will be filed in the counties where she has any property.
This will attach to any current or Future assets she might acquire.

Yes, there are cases of people settling for pennies on the dollar. In fact this comes from the IRS. Accepted OIC's generally settle for 12-15% of the amount owed. In the company I am associated with, I saw a check for $147,000 made out to the IRS to settle a debt of $1.25 million. The problem with most of the firms on TV is that they sign you to an OIC contract without first determining whether or not an OIC is even feasible. So they submit the Offer knowing full well it will be rejected.

Ed

[Golden Rocket]

Thanks to All

Thanks to all of you for sharing your experience and knowledge.

I'm going to first determine whether this lady qualifies. She is gainfully employed, and makes $50,000 per year. It's going to be tough for her to qualify, even though she says she has extenuating circumstances.

If she somehow qualifies, I will have to decide whether to turn her over to someone else, or go on my own. I don't think the "pennies on the dollar" people are very forthright and will choose some other option if we proceed.

[Jiggers]

Taxpayer caused the problem

[QUOTE=Golden Rocket;46457]Thanks to all of you for sharing your experience and knowledge.

I'm going to first determine whether this lady qualifies. She is gainfully employed, and makes $50,000 per year. It's going to be tough for her to qualify, even though she says she has extenuating circumstances.

QUOTE]

Most, if not all clients, think that they are NOT the problem. They think that they should be the exception to all the rules. Remember in representing her that she caused the problem and don't let her try to make her problem your problem. Continue to represent her, but follow this important advise. Us old-timers have learned that.

She will also think that her credit card monthly payments and lots of other personal expenses are allowed in trying to qualify for an OIC. They are not. You are allowed only the national standards for living, housing, auto.

Keep up informed as to the outcome.

[Black Bart]

A couple of notes

I'm going to first determine whether this lady qualifies. She is gainfully employed, and makes $50,000 per year. It's going to be tough for her to qualify...

I had a client ask me about OIC, but wasn't a real hardship case (like yours -- also made $50K); owed $10K, lived well, and, basically, just didn't want pay his income taxes. I told him, in my opinion, it was futile. He went to the national OIC mill (Harris) anyway and, like Jiggers said, they took his money ($1,500) upfront, wouldn't return his calls, and got him zero results. I don't think the locally advertising -- "pennies on the dollar" -- lawyers would do much better.

She will also think that...lots of other personal expenses are allowed in trying to qualify for an OIC. They are not. You are allowed only the national standards for living, housing, auto.

I think he's right about this too. I haven't submitted any OICs, but I did work with the Taxpayer Advocate a few years ago attempting to reduce a monthly installment from $300 to $200 and I believe they use some of the same forms as the OIC guys. My bookless client claimed very high monthly expenses and came up with a net monthly surplus of $200 cash available to pay IRS, but about half were thrown out (they only allow certain amounts for basics). The agent said my client should now be able to pay $2,000 per month rather than the $300 he had been paying. Flabbergasted (some "help"), we dropped the whole thing.

My seminar's IRS speaker said last month there were changes (Feb.-'07) to the program:
https://www.irs.gov/newsroom/article...168404,00.html. He's not specifically an OIC guy, but specializes in putting practitioners in touch with IRS people that can (supposedly) help. He passed out cards, encouraged us to call, and, I'm assuming, since our state's right next door his jurisdiction might apply to Tennessee. Good luck.

Agent: Greg Metcalf, Senior Stakeholder
E-mail: GREGORY.O.METCALF@IRS.GOV
Telephone: 501-324-5328, Ext. 264

[ED SMITH]

Suggestion

Download form 433Fand check out the IRS Collection financial standards - http://www.irs.gov/individuals/artic...=96543,00.html

Then fill out the expense part of the form and see what the difference is between that and her takehome pay. This should give you a fairly good idea whether an I/A or an OIC is in order.

The food/clothing, etc allowance is only $494/mo. For many single woman that can put a big crimp in their lifestyle, clothes, shoes, hairdressers, manicures, etc.

[Black Bart]

Some relevant statistics (from Nov. tax seminar)

Here are the figures/results per IRS on their FY 2006 OIC program:

Accepted offers - 14,734
Rejected offers - 14,945

Returned offers - 12,350
Withdrawn/terminated - 5,407

Processable offers - 47,436
Non-processable offers - 16,733

Acceptance rate - 49.6%
Returned offers - 26.0%

Acceptance rate of all processable offers disposed - 31.1%

Other notes:

The IRS reports that the Brookhaven and Memphis COIC (centralized offer in compromise) sites are processing 94% of their offers with 0-6 months. The IRS field groups are reporting that 70% of their offers are processed with 0-9 months.

COIC usually processes all offers that indicate an ability to pay the account in full on their application. This type of case is referred to as an "Obvious Full Pay."

[Zee]

Here are the figures/results per IRS on their FY 2006 OIC program:

Accepted offers - 14,734
Rejected offers - 14,945

Returned offers - 12,350
Withdrawn/terminated - 5,407

Processable offers - 47,436
Non-processable offers - 16,733

Acceptance rate - 49.6%
Returned offers - 26.0%

Acceptance rate of all processable offers disposed - 31.1%

Other notes:

The IRS reports that the Brookhaven and Memphis COIC (centralized offer in compromise) sites are processing 94% of their offers with 0-6 months. The IRS field groups are reporting that 70% of their offers are processed with 0-9 months.

COIC usually processes all offers that indicate an ability to pay the account in full on their application. This type of case is referred to as an "Obvious Full Pay."

I'm quite surprised with the acceptance rate. It seems to be much higher than I remember a few years ago, and I thought the OIC rules were actually much "tighter". It'd be interesting to see the details, wouldn't it of actual cases accepted/rejected.

[joanmcq]

I've gotten two OICs through; one was pretty much destitute, and the other sold their house (had quite a bit of equity) to make a lump sum payment (and also had extenuating circumstances).

These are hard to do because they take a lot of time, and most people wouldn't be doing offers if they had a lot of money. The 433 pretty much tells you what you need to know, and the worksheet will calculate the minimum offer they will accept. A lot of people, as has already been mentioned, simply don't want to pay their taxes. Another problem, is that if the offer is accepted, they have to stay current with their taxes for 5 years, or the offer will go into default. GET A RETAINER!

The 'pennies on the dollar' claims can be true (one of my guys owed about $45,000 and we settled for $2500, and then he went into default), and the other owed about $450,000 (mostly penalties & interest) and they settled for $106,000. But my first guy had all of $850/month social security and they still made him pay $25/month.