WHAT DO OFFERS IN COMPROMISE AND ALUMINUM SIDING HAVE IN COMMON?

After many years, I decided to watch Tin Men again. It is a 1987 movie starring Danny DeVito and Richard Dreyfuss, both of whom are aluminum siding salesman in Baltimore in the late sixties.  They run  multiple scams, including “Life Magazine” and “This Job is Free,” as a means of  ripping off unsuspecting homeowners.  In the end, the Home Improvement Commission revokes each actor’s license to sell aluminum siding.

Just as with aluminum siding, Offers in Compromise (“OIC’s”) have been used to scam unsuspecting individuals out of their hard earned money.  Many Tax Resolution Companies (“TRC’s”) use aggressive sales and deceptive trade practices to convince taxpayers into parting with their hard earned money. TRC’s have recently drawn the attention of the Internal Revenue Service and are now included in the IRS “Dirty Dozen” scams.

These TRC’s use radio and television advertisements as well as print media to reach customers.  The Companies routinely promise taxpayers that their tax woes can go away for pennies on the dollar. To reinforce this claim TRC’s often cite prior success stories with such claims as: “We resolved a $342,000 federal tax debt for $750.00 for one of our client’s.” In addition, the slick advertisements often claim that the TRC has attorneys, CPA’s and enrolled agents on its staff. More often than not, these claims are grossly exaggerated, and in some cases, outright lies.

The TRC’s often use sales people, many of whom never completed a 1040 in their life, much less an OIC. The sales associate is provided with a script and sales pitch.  The initial call generally culminates in the sales associate telling the prospective client that their debt can be settled for pennies on the dollar. In cases where the prospective client demonstrates a reluctance to move forward a TRC will sometimes bring in a “closer.”

Following the sale pitch, the unsuspecting consumer is asked to sign an engagement letter and pony up either the entire fee or a large deposit with a commitment to pay the balance at some future date.  As an inducement, some TRC’s will even offer monthly payment plans requiring either a credit card or ACH authorizations.

The foregoing all takes place without any financial analysis  having taking place, without regard to the remaining time on the statute of limitation for collections, and without regard to the taxpayer’s prior history, if any, with the IRS.

The above practices create false hope and unrealistic expectations on the part of those who take the bait.  While some TLC’s are ethical and provide an honest assessment of the Taxpayer’s chances for success for acceptance of an OIC, many do not.

The typical follow up by the TRC will include securing transcripts on behalf of the client and then barraging the client with document requests and questions.  After receiving the information from the client, the client is then informed that they no do not qualify for an OIC or in that they have failed to comply with the terms of the engagement letter. In more egregious cases, the TRC simply does nothing and keeps the client’s money.

In either case, the client has not only lost whatever money he or she paid the TRC, but is also still saddled with the tax debt.

An understanding of the mechanics and the rules related to an OIC is necessary before considering an OIC.

Currently, there are three types of Offers in Compromise including Doubt as to Collectability (“DATC”), Doubt as to Liability (“DATL”) and Effective Tax Administration (“ETA”). The discussion below is limited to DATC cases, since DATC OIC’s represent the overwhelming majority of cases submitted. The other two are taken up in separate blog posts.

An OIC based upon DATC occurs when a taxpayer does not have the financial ability to pay the full amount of the tax liability. In these cases, the taxpayer’s assets and income are insufficient to liquidate than the full amount of the liability.

The OIC procedures permit a taxpayer to settle his or her unpaid taxes for an amount which is less than the face amount of the tax, penalties and interest.  This form of settlement should be distinguished from an installment agreement, which requires the taxpayer to pay the full amount owed in installments over a time period or a partial pay installment agreement, both of which are discussed in separate blog posts.

OIC’s have been in existence since 1992 and are authorized under 26 U.S.C. § 7122 (a). However, it has been reported that the acceptance rates for OIC’s has declined since 2014 and is now estimated at somewhere between thirty and thirty five percent (See National Taxpayer Advocate, Erin M. Collins, “2022 Annual Report to Congress.” At Figure 1.2.6 “Offers in Compromise, Installment Agreements, and the Que, FY’s 2019-2022 (2023).

The IRS Policy on Offers in Compromise, which was approved on January 30, 1992 and is memorialized in its Policy Statement states in relevant part:

“The Service will accept an offer in compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. An offer in compromise is a legitimate alternative to declaring a case currently not collectible or to a protracted installment agreement. The goal is to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the Government” (See I.R.S.  Policy Statement P-5-100).

The Policy Statement, however, makes clear that Offers in Compromise will be carefully scrutinized:

“The success of the compromise program will be assured only if taxpayers make adequate compromise proposals consistent with their ability to pay and the Service makes prompt and reasonable decisions. Taxpayers are expected to provide reasonable documentation to verify their ability to pay. The ultimate goal is a compromise which is in the best interest of both the taxpayer and the Service. Acceptance of an adequate offer will also result in creating for the taxpayer an expectation of and a fresh start toward compliance with all future filing and payment requirements.”

Treas. Reg. Section 301.7122-1(c)(1) provides that the IRS is tasked with determining whether the taxpayer has the ability to pay.  The Regulations further provide that in DATC cases the IRS will permit the taxpayer to retain “sufficient funds to pay basic living expenses”  Treas. Reg. Section 301.7122-1(c)(2).

The IRS decision to accept or reject a DATC OIC is based upon the concept of reasonable collection potential (“RCP”).  The Internal Revenue Manual  Section 5.8.5.1.6 defines RCP as “the amount that can be collected from all available means, including administrative and judicial collection remedies.”

In calculating the RCP the IRS will consider:

  1. The amount collectible from the taxpayer’s net realizable equity in his or her assets. (quick sale value of the taxpayer’s asset less any liens that are senior to the IRS);
  2. The taxpayer’s expected future income after taking into account necessary living expenses;
  3. The amount collectible from any third party; and
  4. The taxpayer’s income or assets that are available to the taxpayer but beyond the reach of the IRS.

Additionally, the taxpayer’s history with the IRS may have an impact on his or her chances for success. In particular, the IRS may consider an OIC from a habitually delinquent taxpayer as a dilatory tactic or an attempt to impede or defeat any collection efforts on the part of the IRS.

In consideration of the Government accepting less than the face amount of tax, penalties and interest, the taxpayers must file his or her tax returns and also must remain compliant with the U.S. Tax Laws for five years following the acceptance of the OIC.

There are occasions where special circumstances exist when submitting a DATC OIC, which justify a deviation from the strict OIC rules.   In these instances, the Taxpayer cannot fully satisfy the tax liability even though assets exist, which, if liquidated, could satisfy the debt in its entirety.  These special circumstances include, but are not limited to, the liquidation of a pension by an elderly taxpayer, which would impair his or her ability to meet monthly living expenses or the sale of a home which would require the taxpayer to rent a dwelling.

The foregoing circumstances may also be used to submit an ETA OIC on the basis of economic hardship. The taxpayer bears the burden when submitting an ETA OIC of demonstrating compelling circumstances exist, that accepting the ATA OIC does not undermine public confidence and that acceptance of the offer is justified even though it would represent a divergence in the policy applied to similarly situated taxpayers.

In situations, where an OIC is not an option, there are other alternatives a taxpayer can consider including an installment agreement, partial pay installment agreement or being placed in uncollectible status.

A decision to submit an OIC should only be made after careful consideration and evaluation of all the facts. Any such decision should also include the advice of a competent and experienced tax advisor and complete financial and personal inventory.  When considering an OIC it is best to use the services of a tax attorney.  While there are reputable TRC’s out there, you are taking a chance that the $2,500 or $3,500 you spend with a TRC will be money wasted.

When assessing your potential for acceptance of an OIC, it is important to carefully review your particular situation, since each case is fact sensitive. Failure to properly evaluate your current and future financial situation will almost always result in an OIC being rejected. Additional factors that need to be considered are your age and health, your employment and marital status, the existence of other secured and unsecured creditors, your current and future earning potential as well as the remaining time under the statute of limitations for collection of the outstanding taxes.

From the many horror stories I have heard and read about, many TRC’s do not undertake the proper analysis prior to signing up a taxpayer.   They are simply doing “Life Magazine.”

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Making Appeals to the IRS: What You Need to Know

How to Make an Appeal to the IRS: What You Need To Know

irs appeals are made at their headquarters. The Internal Revenue Service in washington d.c.Tax cases fall into two categories: 

First, where there is no dispute over the amount of tax that is due, the only remaining question is how the taxpayer will satisfy the outstanding liability. The taxpayer can pay the amount in full, enter into an Installment Agreement or submit an Offer in Compromise. Where the taxpayer is suffering from financial hardship, it may be possible to be placed in uncollectible status.

The second type of tax case involves a dispute between the IRS and the taxpayer. A taxpayer, with the assistance of an attorney, should consider each of the various methods for resolving a tax dispute and select the method that makes most sense. The Appeals process is one such method for handling disputes with the IRS, but by no means the exclusive method. The following is a brief discussion of the Appeals process and the basic rules of engagement.

The IRS Office of Appeals (“Appeals”) is tasked with the responsibility of resolving tax controversies without recourse to litigation. The Appeals Mission Statement provides that resolution of tax disputes should be fair and impartial both to the government and the taxpayer and in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the Service. I.R.M.8.1.1.1 (1) (10/23/07).

The cornerstone for the preservation of the integrity in the Appeals process is independence. In this regard, Congress reaffirmed its commitment to “ensure an independent appeals function” within the IRS.  RRA’98 § 1001(a) (4). In order to avoid undue influence or even the appearance of impropriety, exparte communications between Appeals and other IRS employees are prohibited.

IRS Appeals hear taxpayer disputes in a number of ways and may conduct a hearing at one of its campuses or field offices in person. Appeals may also hear taxpayer disputes by way of correspondence or telephonically.

Jurisdiction for Appeals is very broad and may cover a variety of matters, including deficiency determinations, collections, penalty abatements and trust fund recover penalties.  Taxpayer disputes are segregated into docketed and non-docketed cases.

An Appeal is typically generated in response to a proposed audit or examination adjustment. After the examiner completes the audit or consideration of a refund request, the taxpayer will be given the opportunity to file a protest with Appeals. Typically, Exam will issue what is known as a “30 day letter,”unless the statute of limitations has less than nine months to go until expiration. In such cases, Exam will not issue a 30 day letter since Appeals will not accept a case with less than six months left on the statute of limitations.  When faced with the expiration of the statute of limitations, however, it is not uncommon for Appeals to solicit Form 872 from the taxpayer as a means of extending the statute.

In most cases, the taxpayer will need to file a formal written protest with Appeals. Smaller cases involving $25,000 or less may be subject to a small case request process that does not require a formal protest letter.

In cases where there is less than nine months left on the statute of limitations and the taxpayer refuses to sign an extension of the statute of limitations (Form 872), Exam will issue a Notice of Deficiency, which is sometimes referred to as a”90 day Letter.” The issuance of a 90 day letter will toll the statute of limitations. In addition, the filing of a tax court petition with the U.S. Tax court will further toll the statute of limitations until 150 days after the Tax Court Decision is final.

If the taxpayer wants to contest a revenue agent’s proposed adjustments, the taxpayer can:

  1. File a protest, resulting in a non-docketed Appeals case;
  2. Pay the proposed deficiency, file a claim for refund and, if that claim is denied, file a protest at that time;
  3. Request early referral under Rev. Proc. 99-28;
  4. File a Tax Court petition in response to a statutory Notice of Deficiency (90 day letter) and go to Appeals in docketed status; or
  5. Request Fast Track (Rev. Proc. 2003-40 for LB&I taxpayers and Announcement 2006-61 for SB/SE taxpayers).

The protest letter is filed with the examining agent within 30 days of receipt of the 30 day letter.  If the taxpayer needs additional time, an extension may be granted, but any request by the taxpayer should be made in writing.  In response to the taxpayer’s protest letter, the Agent will prepare a written response. The Agent will send both the protest letter and the Agent’s response, together with the case file to Appeals.

Thereafter, Appeals will contact the taxpayer to schedule a conference, generally within 60-90 days of the taxpayer’s filing of the protest letter.

In preparation for the Appeals conference, the taxpayer should be prepared to discuss the factual disputes, applicable law, and any additional research or the facts that need to be developed.

Following the initial conference, Appeals will expect the taxpayer to make the first settlement offer.  In developing a settlement offer the taxpayer needs to be realistic. He must determine the maximum concession he is willing to make, while at the same time gauging what Appeals would likely accept. If the taxpayer is sincerely interested in settling, the offer has to be reasonable.

Appeals will attempt to bring about a settlement based upon what the probable outcome would be if the parties were to litigate. In cases where there is substantial uncertainty as to how a court would decide the matter, the parties will be expected to make concessions to reflect the strength or weakness of each position. In some cases, the parties will agree on a split issue settlement, where the parties stipulate to a percentage or dollar amount of the adjustment or the tax that is due.

There are certain instances where filing an Appeal may not be advisable, particularly where there are sensitive issues and where there is a possibility that Appeal may uncover additional issues.

If the parties are unable to successfully negotiate a settlement, the taxpayer, in non-docketed cases, has the option of going to non-binding mediation, as an additional step in which to try and settle the case. It is important to note that mediation is not an available alternative in collection cases or in cases where the taxpayer did not act in good faith.

In addition to non-binding mediation, a taxpayer may elect to arbitrate following unsuccessful Appeals negotiations. The arbitrators are selected from an approved list of arbitrators. Unlike mediation, an arbitration decision is binding and considered final.

The takeaway here is that the Appeals process is one alternative available to the taxpayer as a means of resolving a tax dispute. It is by no means, however, the exclusive method for addressing a tax dispute. A decision to file an Appeal should only be made after thoughtful consideration and discussions with an experienced tax attorney for purposes of identifying the relevant and material facts of the case, assessing the taxpayer’s strengths and weaknesses, and developing an Appeal’s strategy designed to bring about the best possible outcome.

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All or Nothing – Trust Fund Recovery Penalty under Section 6672

trust fund recovery penaltyMany business owners believe that operating as a Corporation protects them from personal liability.

While oftentimes this is true, if a corporation does not pay income tax withholding and withheld Social Security, the IRS can and will pursue the collection of those taxes from the corporation’s officers, directors, stockholders, key employees.

The IRS does this though the Trust Fund Recovery Penalty.

The Trust Fund Recovery Penalty, also known as the 100% penalty because one hundred percent of the withheld income tax and Social Security tax can be assessed against a responsible officer, employee, director or stockholder, is authorized under section 6672 of the Internal Revenue Code. The penalty applies The code provides that any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

Who is Liable?

The IRS will usually seek collection of unpaid trust fund taxes from the corporate officers, directors or stockholders of the corporate entity. Those individuals will most likely meet the two requirements of section 6672 – “willfulness” and “responsibility.”

The IRS must determine:

  1. Determining whether the person was a responsible person within the meaning of §6671(b) and
  2. Whether the person’s failures to collect, account for, and pay over the trust fund taxes was “willful” as defined by the courts.

Before the IRS can proceed with asserting the Trust Fund Recovery Penalty, they must determine who is a “reasonable” officer, employee, director or stockholder.  The definition of a reasonable person is very broad.  There are no tax regulations that define the term “responsible person.” Courts have defined the term to mean any of the following:

  • Officer or Employee of a Corporation
  • Partner or employee of a partnership
  • Corporate Director or shareholder
  • Another corporation
  • Employee of a sole proprietorship
  • Surety lender
  • Any person with sufficient status, duty and authority to avoid the default on payment.
  • Any person with ultimate authority over expenditure of funds

Most frequently the courts have held that the responsible person for TFRP purposes is the one  e one with the ability to sign checks on behalf of the corporation, or to prevent a check’s issuance or to control the disbursement of payments. Godfrey v. U.S., 748 F2d 1568 (1984); Kalb v. U.S., 505 F2d 506 (1974); Gold v. U.S., 671 F2d 492 (1981); Calderone v. U.S., 799 F2d 254 (1986).

The reasonable person must have also acted willfully to fail to collect, account for and pay over the trust fund taxes as defined by the courts. Again there is no single definition of willful in the IRC.  The courts have defined the term through their decisions as the voluntary, conscious and intentional act of preferring other creditors over the United States.

An easy solution to the 100% penalty is an Offer in Compromise. Usually, the tax liability is so large; taxpayers cannot afford to pay it. Offers are accepted to reduce tax liability, even the 100% penalty where there is doubt as to liability or doubt as to ability to pay the tax liability.  Please see a legal tax professional with any questions or concerns you may have. It is always best to approach IRS issues with the advice and guidance of a tax professional.

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