Howard's IRS and the Law Blog

You want to submit an offer in compromise to the IRS, but you need an answer and relief now, fast.  Your circumstances are immediate, but it takes the IRS a minimum of 6-9 months to process, investigate and get managerial approval of an offer in compromise.

That may not be acceptable.  Maybe you are selling real estate, and have a closing pending hat will fund the settlement.  Or have a new job offer that requires settlement of your IRS debt. Maybe your business has a big transaction pending that requires full resolution of IRS debts.

But the IRS can convinced to speed up its investigation of an offer in compromise. Buried in the IRS internal guidelines is Internal Revenue Manual, which provides for the expedited handling of an offer in compromise.

When submitting the offer in compromise, it is important to make sure the IRS knows that you have an emergency requiring a quick compromise investigation.  To do this, on the top your Form 656, Offer in Compromise, write in bold, all cap letters: EMERGENCY PROCESSING REQUESTED.

I also suggest demonstrating to the IRS the reasons why the normal compromise process times would be detrimental to both you and the government.  In other words, it needs be made clear to the IRS that moving slow will hurt their chances of getting paid from the compromise, and moving fast will help bring in money.

To convince the IRS to shorten the usual compromise investigation time, a statement should accompany the offer in compromise detailing the basis for the emergency processing request. Make it easy on the IRS, and give them a reason to say yes to your request – be specific with the facts, and attach any documentation that backs up the statement.  (I have drafted a pretty good number of supporting statements of fact for the IRS – if you need help with this, let me know.)  Citation should also be made to the Internal Revenue Manual provision that permits faster investigation of a compromise.

Here are some examples as to what the IRS considers a basis for a quick offer in compromise investigation:

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I would like to share my response to a reader who was experiencing financial hardship because the IRS had levied his state income tax refund, and he needed the money to get his house out of foreclosure.

As the reader correctly pointed out, the problem with the IRS levy was that it was made while he was in an installment agreement.

One benefit of being in an payment agreement with the IRS is that the agreement stops the IRS from levying your property.

The protection against levy while in an installment agreement is required by law:  Internal Revenue Code Section 6331(k) states that the IRS cannot levy while an installment agreement is in place.

Internal IRS guidelines support this law.  Internal Revenue Manual specifically states that bankruptcy, installment agreements and offers in compromise accounts are excluded from the Automatic Levy Program.

So why was the state income tax refund being levied?

Let’s look at a little background into how the IRS administers its state tax levy program:  State tax refunds are seized by the IRS under the State Income Tax Levy Program (SITLP).  The SITLP is part of the IRS’s Automated Levy Program (ALP).   (The IRS loves acronyms.)

Here is an example of the state income tax levy program works:  Ohio will sign an agreement with the IRS to permit an Ohio tax refund to be applied to a federal tax liability.  Every week or two, the IRS will send Ohio an electronic file of the potential tax debts and notice of the levy. If there is a match, the result is an automated “taking” of the Ohio state refund by the IRS to pay the IRS debt.  Ohio would send a notice to the taxpayer notifying him that his state refund was sent to the IRS.

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Straight from IRS Revenue Officers, it’s official:  The IRS has closed its headquarters for its suburban Cincinnati Revenue Officers, effective today, May 15, 2014.

The office was also used as a walk-in taxpayer services office, providing taxpayers with necessary forms, simple tax return preparation, or help with questions.   The Revenue Officers are still on the job, and have been relocated to the IRS’s downtown Cincinnati office at 550 Main Street, Cincinnati, Ohio  45202.  The other remaining area IRS office is in downtown Dayton at 200 W. Second Street, Dayton, Ohio 45402.

I understand from the Revenue Officers the consolidation was done as a cost-cutting move, using available office space in downtown Cincinnati.

I used the West Chester office not only to meet with Revenue Officers when necessary, but to hand-file multiple years’ tax returns, and, in the past, to expedite levy releases.  With the IRS offices now more spread out – the West Chester office was in the middle of the downtown Cincinnati and Dayton offices – it is now a farther drive not only for taxpayers, but for IRS employees.  There will always be change in working with the IRS; I will always strive to keep you updated.

A common question from a reader about the IRS settling for tax and forgiving the interest and penalties:

I owe the IRS $35,000 – I would like to pay what I owe, but the interest and penalties just seem awfully high.  I want to offer to pay the IRS what I originally owed – will they accept that and forgive the interest and penalties?

In negotiating with the IRS, it is important to remember that the government is not a private enterprise, and common sense judgments often yield to tax laws and internal IRS guidelines about how a tax debt can be settled.   That means what might seem like a good deal to you is not a good deal to the IRS.  Negotiating with the IRS requires understanding their guidelines – it may seem unfair, but that is the reality.

And the IRS guidelines have no provision for a deal where they can simply accept the tax and forgive interest and penalties just because it seems like a good deal.

Let’s break that down.

First, the IRS authority to settle a debt is done through an offer in compromise.  In an offer in compromise, the IRS investigates how much can be collected from you over the time they have to do it (which is 10 years, known as the statute of limitations on collection).   In an offer, the IRS values your assets, your income, and your living expenses – arriving at how much you are worth, and how much you could pay back to them monthly.   If you owe $35,000 but you are worth $10,000, then $10,000 is the value of the compromise.  If you are worth $50,000, then there is no compromise as the IRS believes it can collect the full amount.

In an offer in compromise, you could settle for less than the amount of tax.  Or it could be more.  There is generally no factoring of tax vs. interest vs. penalty in the compromise settlement equation.  The settlement is based on collection potential.

Although it seems reasonable, the IRS does not approach settlement by saying “Let’s just take the tax and be done with it – that makes sense over waiting years to get paid.”  An offer in compromise is not designed for the IRS to consider the question of whether they should just accept the tax and be done with it because it makes sense.

Bottom line:  There must be a factual basis for interest and penalty to be forgiven by the IRS. It is not done as a collection decision.

If you are being audited, and have concerns that the IRS may discover that you committed fraud your tax return, don’t go at it alone.  The stakes have become high – here are guidelines to help you make a decision on the best way to proceed:

1.     Whatever you do, don’t represent yourself – hire a professional – whether a tax attorney, enrolled agent or C.P.A. – who has experiencing in defending potential IRS tax fraud cases.   A significant benefit to hiring a tax attorney is the attorney-client privilege – your communications with your attorney – telephone calls, emails, meetings – discussing your case, developing the facts, formulating a defense strategy – are confidential and cannot be disclosed to the IRS.

2.     You have the right to have your attorney handle all negotiations with the IRS for you.  All calls, conversations, negotiations, route directly through your attorney, not you.  You take a backseat in the negotiations.  You are no longer dealing directly with the auditor.  All conversations route through your attorney, who relays the information to you, with discussions to formulate responses.  No knee-jerk responses in potential fraud cases.

3.     If you have already met with the auditor, stop, and hire counsel.  It’s not too late.

4.     In potential fraud cases, it is best to distance yourself from the investigation.   The IRS would not mind if you, alone, gave testimony.  That is not recommended.  Going at alone allows you to make misstatements of facts – even if with good intentions – that can be difficult to go back on.  Nerves, anxiety, an over-eagerness to comply with the IRS – not too mention an unfamiliarity with the process – is a dangerous mix.   Adding untruths to a fraud investigation fuels the IRS’s fire.

5.     You have a Fifth Amendment right not to incriminate yourself.  That means you do not have to testify to the IRS, or provide them any firsthand information.  This is a tricky situation – you have the right to remain silent, but if you exercise it, the IRS often becomes more interested, more aggressive – something is clearly being hidden.  Sometimes, it is better to talk – but that is a determination that has to be carefully reviewed, with all the facts considered.

6.     Maybe we should fully disclose and admit to the problem, immediately.  The disclosures are made by your attorney, not you.  Chances are, the IRS is auditing your return because something on the return did not look right to them – remember, your tax return presents a financial portrait to the IRS.  The audit letter you received likely already identified the trouble areas.  The IRS already senses something is wrong – many times, the right amount of straight talk works with an auditor – and is appreciated.   I have found that there is a lot to be said for taking the edge off, coming forward and disclosing the obvious – auditors want to close cases, and often appreciate their work being done for them.  It is often the “a-ha” moment of auditor discovery that can doom a fraud case and turn it into more than negligence.  This strategy is fact specific – but usually will result in a reduction of charges to negligence – no fraud.

7.     If you already made misstatements on your tax return, don’t try to get around it with more creative accounting or explanations during the audit.  Making a mistake on a tax return can be explained away as negligence (which does not equate to fraud) – but lying to an auditor cannot.  Don’t pile it on.

8.     You are not necessarily going to jail.  There are different types of tax fraud – civil vs. criminal.  Civil tax fraud is money only, no jail, no criminal investigation.  The penalty is steep – 75% of the tax owed – but that beats a criminal investigation.

9.     Your case may be simply negligence – where the penalty is 25% of the tax owed.   The IRS has different standards of proof for tax negligence, civil tax fraud, and criminal tax fraud. Negligence is not fraud, and has no criminal repercussions.  Here’s the level of proof for the IRS, from highest to lowest:  (1) Criminal fraud, (2) civil tax fraud, (3) negligence.  You may have done something wrong, but it may not amount to criminal charges – it could be simply negligence, which is money damages only.

10.   IRS criminal indictment statistics are public record – and are instructive to the civil vs. criminal tax fraud concerns.  In fiscal year 2014, for example, the IRS initiated 2,015 criminal investigations, which resulted in 1,663 recommendations for prosecution.  1,590 of those recommendations resulted in prosecution.  The point:  IRS is very selective in how it uses its resources to prosecute tax crimes – 2,015 investigations is serious, but a very small number spread over the population base.  Few are prosecuted – the facts have to dictate the allocation of IRS resources.  Many IRS criminal investigations are specific programs – employment tax fraud, return preparer fraud, money laundering/related criminal activities, and abusive tax schemes.  But those who are prosecuted are usually convicted – IRS wants to win its criminal cases, and make them count.  Criminal tax fraud is extremely serious, but your facts have to be put into perspective with what the IRS is looking for.

And I say this often:  It is important to remember that an IRS audit is the beginning of a process, not an end.  If there is disagreement with the IRS audit results, you have rights to an administrative review of the audit with the IRS Office of Appeals.  If we cannot reach resolution in appeals, there are more rights – to file a petition to U.S. Tax Court, where a judge, independent of the IRS, will review our facts and law, compare to the IRS’s position, and give you an unbiased decision that is binding on the IRS.

When all else fails – or even if all else does not fail – Chapter 7 bankruptcy can be an excellent option to take old IRS problems out of your life.

Yes, bankruptcy can eliminate tax debt.

But bankruptcy is also incorrectly associated with losing assets, having everything you own wiped out by the bankruptcy court.

Chapter 7 is indeed what is known as a “liquidating bankruptcy,” meaning that in return for having your debt eliminated, a bankruptcy trustee can take your personal belongings, sell them, and pay the proceeds to your creditors.

But that would leave you with nothing – which is against public policy, not too mention prohibited by bankruptcy law.

Yes, you can file Chapter 7 bankruptcy on the IRS, eliminate your tax debt, and keep all of your property.

Here’s why:  Exemptions.

Exemptions are bankruptcy-speak for legal protections that prevent your creditors from taking your property.  Exemptions are law from Section 522 of the bankruptcy code – they make your property off-limits before bankruptcy, during bankruptcy, and after bankruptcy.

Here are some examples of exemptions in Ohio:

–     Up to $125,000 of equity for your interest in your house (increases to $250,000 if the house is jointly titled to and, say, your spouse).  Equity is the difference between what the house is worth and what you owe on your mortgage.

–     Up to $3,225 of equity in your car, increasing to $6,450 if the car is jointly titled.

–     Up to $10,775 of value in your household goods and belongings, increasing to $21,550 if jointly owned.

Retirement accounts are also protected from creditors in bankruptcy.

In most every case, these exemptions – and others too numerous to list – will allow taxes to be eliminated without the loss of any property to the bankruptcy trustee.

Yes – it is possible to eliminate taxes in a Chapter 7 bankruptcy, keep all of your property, and get a fresh start, debt-free.

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