Howard's IRS and the Law Blog

Before jumping in with an offer in compromise, it is important to understand how the standardized IRS expense allowances apply to you, and how they can benefit you.

Here is a valuable offer in compromise expense allowance to be aware of and to claim:

The IRS will allow you to claim a $200 vehicle ownership cost if you own an older vehicle and do not or will not have a car payment on it.  Yes, the IRS will give you an expense in this situation even if you do not actually have it.

In an offer, the IRS is trying to predict your future cash flow to pay them back. The purpose of the $200 auto ownership cost allowance is recognition that older cars will need replacement, and, as a result, it is likely you will have a car payment in the near future, even though you do not have one now.

You will qualify to claim the $200 auto ownership cost on your IRS 433A financial statement submitted with an offer in compromise if:

  1. You own a car and there is no monthly payment on it; or
  2. You own a car and have a monthly payment, but the car will be paid off before the IRS statute of limitations on collection expires; and
  3. The car is over six years old; or
  4. The car has over 75,000 miles.

Here is an example from Internal Revenue Manual 5.8.5.6.3 illustrating the IRS’s allowance of auto ownership costs on older vehicles in compromises:

“The taxpayer, owns a 1995 Ford Taurus, with 90,000 reported miles. The vehicle was bought used, and the auto loan will be fully paid in 30 months, at $300 per month. In this situation, the taxpayer will be allowed the ownership expense until the loan is fully paid, i.e., $300 plus the allowable operating expense of $231 per month, for a total transportation allowance of $531 per month. After the auto loan is retired in 30 months, the ownership expense is not applicable; however, at that point, the taxpayer will be allowed a $200 operating expense allowance, in addition to the standard $231, for a total operating expense allowance of $431 per month.”

If the car referenced in this IRS example had no car payment when the offer was submitted, the IRS would immediately allow the $200 ownership cost allowance, rather than waiting for the car to be paid off.

Either way, making use of every IRS expense allowance in an offer in compromise goes a long way towards getting an offer through and putting the IRS behind you.

If you are having trouble convincing the IRS to release a levy or seizure of your property, bankruptcy may be the solution.

The filing of a bankruptcy creates what is known as an automatic stay against your creditors, including the IRS.   As its name implies, the automatic stay is indeed automatic – the filing of bankruptcy puts a “stay” on the IRS and requires immediate release of a levy or seizure of your property.

The purpose of the stay is to stop the pursuit of you and your property while you seek a fresh start from bankruptcy.

Bankruptcy takes away IRS discretion in releasing a levy or seizure – Section 362(a) of the bankruptcy code requires it.  In most cases, after a bankruptcy has been filed, a levy or seizure should be released within 24 hours.  Bankruptcy also prevents the IRS from filing Federal tax liens.

Relief from IRS collection enforcement is powerful part of our bankruptcy laws, but it is not the limit on what bankruptcy can do.  For example, if you cannot afford to repay the IRS, Chapter 7 bankruptcy can eliminate your taxes.  If you have some ability to make payments back to the IRS, a Chapter 13 bankruptcy can stop the IRS from charging additional interest and penalties on your payments, shorten the length of how long you will be making payments, and lower the amount of your payment.

If you are in a bind with the IRS, and when all else fails, bankruptcy may be the answer to stopping the IRS and reducing your debt load.

The offer in compromise program is the best known way to solve an IRS problem.  The compromise program is so popular that I often see clients who have submitted multiple offers, each one having been rejected by the IRS.

In fact, a 2006 report by the Government Accountability Office found that 40% of submitted compromises were repeat offers.  That is a statistic I advise you avoid being part of.

Submitting multiple offers is rarely the solution to ending your IRS troubles.  Unless there is something very different in your circumstances, multiple attempts to compromise will likely only add to your IRS frustration.  If the IRS said no the first time, is your case strong enough to get them to agree to a settlement a second time or third time around?

But did you know that every time you submit an offer in compromise, you extend the 10 year timeframe the IRS has collect unpaid taxes?

I see clients who still have the IRS coming after them even though they have owed the IRS for more than 10 years.  They should be done, but they are not because of the rejected offers they submitted over the years. They unknowingly extended their problem – and the statute of limitations on collection – rather than solving it.

Do your research before submitting an offer in compromise.  Make sure the offer has a legitimate chance for acceptance.  Know how your  living expenses stack up to the IRS standard allowances. Understand how the IRS will look at your cash flow and asset values.  And if your offer is accepted, can you raise the settlement funds and pay it to the IRS?

Know about bankruptcy as an alternative to an offer in compromise.  Learn whether you can use the statute of limitations on collection to your benefit by being uncollectible.  Consider whether an installment agreement is better for you than an offer in compromise – making payments does not add time to the collection statute.

An offer in compromise is not the only way to handle an IRS problem – it is just the best promoted.  The IRS compromise program is viable for the right candidate, but it is not an open door policy.  There are consequences to just plunging in blindly with an offer in compromise. Before you submit an offer, know what you are getting into and make an informed decision as to all of your options, not just one.

If you owe the IRS and have a refund on your tax return, the IRS will keep the refund and apply it to your unpaid taxes.  The problem is not repaying the debt – you would if you could – but that you simply cannot afford to lose the refund.  The refund is needed to pay bills, repair a car, or see the doctor.

The solution to any lost refund issue:  Review your withholding to eliminate the IRS refund and put the cash in pocket for necessary expenses.

If you are losing your refunds to the IRS, change your withholding.   Take your refund, divide it by the number of your paychecks, and tell your employer to lower your withholding by that amount each pay period.  You can also change the number of exemptions you are claiming, although I prefer making a specific dollar change.  You will probably need to complete a new W-4 for the change.

If you are married, file jointly and only your spouse owes the IRS, it is important to attach an Injured Spouse Allocation (Form 8379) to your return.

You are being injured by the IRS taking your refund and applying it to your spouse’s tax liability. You can still file jointly – there are benefits to you over filing separately –  but use the injured spouse allocation – it permits the IRS to calculate how much of the refund was generated by you, and pay it to you, rather than apply it to a debt that is not yours.

Most tax refunds are generated from too much withholding.  In essence, this means you are making a loan to the IRS of your money by overpaying the current year’s taxes.  While for some this is a good way to accelerate paying the IRS back, if it is more than your budget can take, change your withholding or file a injured spouse claim.

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