Howard's IRS and the Law Blog

“How long does the IRS usually take to investigate an offer in compromise?” is a great question, and one I am often asked by clients.

The answer is six to twelve months, on average, although it can be longer, depending on the complexity of the case. If an appeal is necessary, add another six months.

But there is a flip side to the often frustrating amount of time it can take the IRS to investigate an offer in compromise.  The IRS does not have forever, and there are ramifications if the IRS takes too long to act on an offer.

If the IRS does not act within two years and notify you of a decision, the offer is automatically deemed accepted.

That’s right – done, at the amount you offered, courtesy of Internal Revenue Code 7122(f).

So, if your offer is sitting in year two of consideration and things are progressing slower than molasses, maybe you want to think twice about the urge to call the IRS and kick it into gear. (If you wait, bear in mind the statute of limitations on collection is tolled while the IRS considers an offer).

Here’s the small print:  The offer is considered accepted only if the IRS does not make a decision on it within two years after it is received.  “Decision” is defined to nclude the IRS rejecting the offer, returning the offer as not processable, withdrawal of the offer by you, or a failure to make payments under a periodic payment OIC.  If you have had any of these happen, the IRS has acted on the offer and made an decision. Time you spend in appeals from a rejected offer is not counted towards the two year time limit.

I have yet to have an offer accepted this way, although I have been close.  The IRS is more than aware of the timing limitations, and disciplinary considerations likely (and unfortunately) wait for the employee with the offer.  But if an offer is progressing slowly, it is important to know how to manage the clock and that too much time can work in your favor.

Some things can be simple to negotiate with the IRS.  If you are looking for a great way to repay an income tax liability to the IRS, consider a streamlined installment agreement.

Streamlined installment agreements are available to anyone who owes under $25,000 and can afford to repay their balance in five years.  If you qualify, the IRS will automatically approve the installment agreement, and there should be no questions asked.

Here are your advantages in using a streamlined installment agreement:

1.     Eliminates disclosure of your finances to the IRS.  The IRS does not require a financial statement (Form 433A or Form 433F) for streamlined installment agreements.   That’s right – no disclosure of where you work, where you bank, what your assets are.

2.     Simplicity in IRS negotiations.  A streamlined installment agreement can be made with one phone call to the IRS.   Just tell them you owe under $25,000 and want to repay the liability over five years under streamlined criteria.

3.     No documentation is required to be given the IRS.  To enter into a regular installment agreement, the IRS usually will require personal documents from you – recent paystubs, three month’s bank statements, verification of your living expenses.  If you notify the IRS that you are electing to repay them with a streamlined installment agreement, no documents are required to be provided.

4.     Eliminates the use of IRS financial standards.  In most installment agreement requests, the IRS will apply its financial standard allowances to your living expenses.  The result is often a request for you to pay more than you can afford.  However, in streamlined installment agreements, the IRS cannot apply their expense allowances as they do not have the information to do so – remember, no financial disclosure is required. Because of that, streamlined installment agreements can result in your payment being lower than if you disclose your finances and the IRS applies their expense allowances.

Example:  You owe the IRS $20,000.  Before you call the IRS, you complete an IRS financial statement.  After applying their expense allowances, you realize the IRS might ask you to pay $1,000/month.  You can afford $400.00, which will pay off the liability in five years and permit you to qualify for a streamlined agreement. You call the IRS, request the streamlined agreement, do not provide the financial statement, and get the $400/month payment.

5.     Saves time and money.  No financial disclosure + no documentation = less time negotiating with the IRS.  If you are hiring a professional to represent you before the IRS, less time should equal less money.  Even if you try it yourself, you are saving time (and aggravation) by going the streamlined route.

Making arrangements to repay the IRS does not have to involve fear or intimidation.  A streamlined installment agreement not only simplifies the process, but provides benefits to you in negotiating with the IRS.

Here is an issue to be aware of before filing a Chapter 7 bankruptcy on the IRS:

I just completed a Chapter 7 bankruptcy.  It was determined to be a no-asset case.  A few months later,  I got a letter from an IRS Revenue Officer stating that even though the taxes were discharged, they are enforcing their tax lien post-bankruptcy on my retirement account, and want to seize the account.  I thought that the retirement account was protected, and anyways, weren’t the taxes eliminated?

To begin with, if the IRS did not file a tax lien before you filed the Chapter 7 and your taxes were discharged, the IRS cannot take your retirement account after the bankruptcy is over.  Without the tax lien, the IRS has no security in the retirement account, and no claim to it.  Case closed.

But what happens if the IRS has filed a tax lien against you (and your property) before your bankruptcy started?

How a tax lien can survive bankruptcy and impact your retirement account

First, it is important to understand the legal concept that a Chapter 7 bankruptcy does not automatically cause Federal tax liens to be released; it is discretionary with the IRS after the bankruptcy is over.  In other words, tax liens survive a Chapter 7 bankruptcy discharge, and the IRS can pursue enforcement of their lien against your property.

(For practical purposes, however, if you have minimal assets, the IRS does not pursue your assets or the lien after the bankruptcy is concluded, and tends to be fair in releasing the lien post-bankruptcy. Retirement accounts come under IRS scrutiny in enforcing their lien post-bankruptcy as these assets often have enough value to yield significant recovery.)

Second, know that retirement accounts are protected assets in bankruptcy; this means that bankruptcy law will allow you to come out of bankruptcy with your retirement account intact. In other words, retirement accounts are assets that are not lost in bankruptcy.

Now put these two parts together:  tax liens survive bankruptcy, and so do retirement accounts.  Hence, a surviving tax lien attaches to a retirement account, and the IRS maintains an interest in it post-bankruptcy, even if the underlying taxes were discharged.

But do not lose faith:  Even if you have a tax lien attaching to your retirement account after bankruptcy, there are still defenses to permit you to keep it and defeat the IRS’s desire to seize it.

Defenses to IRS seizures of retirement accounts after bankruptcy

Your primary defense to an IRS retirement account seizure is that the IRS stands in your shoes as it relates to their ability to take your property, including retirement accounts.  The IRS has the same rights to your property that you have – if you have no rights to an asset, neither does the IRS.  This applies equally to whether the IRS is seeking a post-bankruptcy enforcement of a tax lien or just a straight seizure without any bankruptcy involvement.

Applying this concept to retirement accounts means that if you are still employed, and cannot access your retirement account until separation from employment, death, or disability, neither can the IRS.  The IRS may have a tax lien on your retirement account, but has no right to enforce it because you have no right to the property.

Additionally, you should be familiar with the three factors in the Internal Revenue Manual used by the IRS in considering whether to levy and seize retirement accounts.

Here are the three factors to put to the IRS to show that retirement account seizure is not an administrative priority:

1.     Before levying on a retirement account, the IRS is required to first consider collection alternatives before levying on the retirement plan, including monthly payments.  The IRS generally does not desire to take retirement accounts; it tends to make for bad public policy.

2.     The IRS is generally interested in taking retirement accounts only if the conduct leading to the tax liability was flagrant. The IRS generally wants retirement accounts to pay a tax liability in cases of egregious behavior. Contributing to the retirement account while the unpaid taxes were accruing and a history of employment tax problems are factors in favor of account seizure.

3.     The final factor in whether the IRS will take a retirement account is whether you depend on the money in the retirement account, or will depend on it in the near future. Again, the IRS tends to be sensitive to retirement account seizures, and proving that the money in the account is important to meeting everyday living expenses can be a factor to keeping the money.

Make sure the Revenue Officer assigned to your case is aware of these factors and arguments; a post-bankruptcy Federal tax lien does not mean your retirement account is doomed – there are defenses.

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 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.

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