Create an Offensive Plan For Your Client
By: Robert T. Leonard, J.D., C.P.A.
How to assist your clients in completing optimum financial information statements, Offers In Compromise and installment payment agreements
Practice before the Internal Revenue Service is document intensive. The IRS, as a government agency, is run by procedures and rules, which require forms for almost all activity taken by the Internal Revenue Service. In dealing with collection matters, there are three main forms with which the practitioner should be familiar. They are: Financial Information Statements, Offers in Compromise and Installment Payment Agreements.
The Financial Information Statements are in two forms, depending on the identity of the taxpayer. If the taxpayer is an individual, the taxpayer will complete and file a Form 433-A. If the taxpayer is a business, the taxpayer will complete and file a Form 433-B. In general, both of these forms require the taxpayer to fully disclose the existence of, nature of and value of all assets, as well as the income and expenses of said taxpayer. The Financial Information Statement is the most important document to be completed by the taxpayer in dealing with a collection matter. Any tax practitioner dealing with a collection matter should initially begin his or her review of the taxpayer’s options for resolution by requesting that the taxpayer complete a Financial Information Statement. It is only in reviewing a Financial Information Statement that the practitioner can make informed and valid recommendations for resolution of any collection matter.
An Offer in Compromise is submitted to the Internal Revenue Service on a Form 656. The Form 656 Offer in Compromise includes the three types of offers as well as the three options for payment. Specifically, an Offer in Compromise can be submitted to the Internal Revenue Service based on Doubt as to Liability. Doubt as to Collectibility or Effective Tax Administration. All three types of offers are included on the Form 656. Secondarily, there are three payment terms for any offer. An Offer in Compromise can be a cash offer, which requires payment within 90 days of written acceptance; a short-term deferred cash offer, which requires payment within 24 months of written acceptance; or an Offer in Compromise based on the life of the statute, which requires full payment to be made over the remaining period left on the statute of limitations on collection. All options for Offers in Compromise are contained on the one Form 656.
Installment payment agreements are submitted to the Internal Revenue Service on a Form 433-D. The Form 433-D is a simple and basic one-page form that is used to detail the terms of an installment payment agreement. The form itself requires the listing of the tax type and periods in issue, as well as the proposed terms of repayment. If the taxpayer would like the funds to be directly debited from a checking or savings account, the Form 433-D also requests the necessary information to process the direct debit.
The most important rule in completing any form submitted to the Internal Revenue Service is that the information must be complete and accurate. This is especially true when the taxpayer is preparing and submitting a Financial Information Statement because they are signed under penalty of perjury. It is the tax practitioner’s responsibility to advise his or her clients that the forms must be complete and accurate and also advise as to the penalties for submission of an incomplete or inaccurate statement. If a practitioner has reason to believe that information has been left off of a Financial Information Statement, the practitioner should question the client about the accuracy of the form as provided to the practitioner. Obviously, if a practitioner has any reason to believe that a Financial Information Statement is incomplete or inaccurate, it should not be submitted to the Internal Revenue Service.
Nevertheless, while it is always necessary for practitioners to require from their clients accurate Financial Information Statements, it is also the practitioner’s responsibility to zealously defend his or her clients. As such, the requirement that Financial Information Statements fully disclose and accurately detail all assets, income and expenses does not mean that a tax practitioner does not also have the ability to present the taxpayer’s financial information in a light that is most favorable to the taxpayer’s objectives. Although beyond the scope of this brief article, there are numerous ways that a practitioner can assist a taxpayer in completing a Financial Information Statement that will asset the taxpayer in obtaining a successful Offer in Compromise or installment payment agreement. As such, a practitioner should never forward a Financial Information Statement to the Internal Revenue Service without fully reviewing the familiarizing himself or herself with the information contained thereon.
Finally, the practitioner should not only be familiar with the contents of the Financial Information Statement prior to forwarding said form to the Internal Revenue Service, but should also have in his or her mind a strategy for resolution of the outstanding collection matter. When the practitioner presents the financial information to the IRS, it can be done as part of an offensive plan where the practitioner is ready, willing and able to provide the IRS with a solution to the outstanding collection problem. If a practitioner were simply to provide a Financial Information Statement to the IRS without contemporaneously providing a plan for resolution of the outstanding taxes, the IRS would be left to its own devices, now with information in hand, to collect the taxes. As such, it is always the practitioner that should be presenting the financial information to the IRS in light that it is most favorable to his or her client, combined with a plan for resolving the outstanding tax liabilities.
Questions and Answers by US Tax Experts
Q What penalties can be abated for reasonable cause? Specifically, can late filing, federal tax deposit, failure to pay penalties be abated for reasonable cause?
A Many, if not most, penalties can be abated. Those that you listed are indeed among those that can be abated.
Offer in Compromise
Q I’m working on an Offer in Compromise for a client who owns a restaurant. I have had several conferences with the revenue agent, and I am sensing some control issues on his part. The agent seems intent on dissuading me from filing an OIC – nothing direct on his part, just suggestions for alternatives.
Among those suggestions is that the taxpayer sell the restaurant. That is a possible alternative. The other alternative suggested by the agent is that the taxpayer agrees to settle his approximately $100,000 tax debt by taking out a loan (assuming he can get it) of $50,000 in settlement of the debt. In return, the agent is willing to put the taxpayer in uncollectible status regarding the balance.
However, I am somewhat troubled by the fact that there is no finality to the issue by doing this. The IRS would have the right at some point down the road to revoke the taxpayer’s uncollectible status should he come into some money. The agent says this is unlikely, and his word is good on this that they won’t. My thought is to file the OIC first and see where we get. According to a “draft” 433-B, the business is worth about $75,000. Most of it was paid for by credit card. Thus, there isn’t much in the way of secured debt here. Just wondering what you think.
A I suggest that you avoid uncollectible status because the debt continues to grow and is always hanging over the taxpayer’s head. If the draft 433-B shows only $75,000, try to apply some planning or restructuring of his situation to lower that and then see if an Offer in Compromise is a good alternative. Look for additional expenses that can be counted – unrecorded liabilities and other items that may reduce the value of assets. Note that you may be able to use financial information other than what comes from the year-end tax return.
Additionally, don’t forget to consider how much the IRS would receive if the client were to go bankrupt. Sometimes, that is the amount you should offer because in reality, if the IRS puts on too much pressure, that is all they would get.
Q What potential “land mines” await a taxpayer who hasn’t filed in 20 years, but chooses to file only the most recent six of those years? And what immediate “protective” actions can or should be taken by us? In our case, one client hasn’t filed since 1988, and another hasn’t’ filed since 1992. We are seeking the best possible result without flagging the IRS to probe into other years.
A The first thing you should make all clients with delinquent tax returns aware of is that the statute of limitations on a tax return does not start until the return is actually filed by the taxpayer. They must be made aware that all 20 years’ worth of tax returns are in fact due.
However, as a practical matter, the IRS generally will not pursue the filing of tax returns older than six years. The six years, coincidentally, is in alignment with criminal statutes.
If a taxpayer is filing an Offer in Compromise, it is recommended that all tax returns be filed. This keeps you in compliance with one of the OIC requirements.
As for protective actions, many practitioners believe they should notify the IRS immediately that the taxpayer has delinquent returns and will be filing them by some stated date. This is generally recommended when the IRS has not yet caught up to the taxpayer. If the taxpayers aren’t filing OICs, my approach would be to prepare the most recent six years of returns.
Many practitioners believe these returns should be filed one at a time a couple of days apart. Those practitioners feel that the IRS is less likely to pursue the case when receiving one delinquent return at a time. I have followed this procedure myself, as I do believe it can’t do any harm, though I am not absolutely certain it does any good.
Offer In Compromise
Q Will you please tell me where I am able to read about how a contract for deed on real estate affects the value in an Offer in Compromise? I have a potential client that has a contract for deed that he holds, but I think I might need to devalue it for the amount of quick sale asset in determining his value of asset.
I am interested in understanding how it relates to a person who is buying a piece of property under a contract for deed in an OIC and also how it relates to a seller in an OIC. A person who has sold a piece of property under contract for deed and is collecting money for the property, but more importantly is holding the title to the property until it is completely paid off.
Additionally, since the seller is holding title to the property, if the seller has a tax lien filed after the sale of the property, does that tax lien attach to the property that he has sold under contract for deed?
A I believe a contract for deed on real estate is what we refer to as a land contract. Under a land contract, a seller is party to a contract under which he agrees to transfer title to a specified property upon completion of a series of payments to be made by the buyer.
Assuming the payments are being made per the contract, the value of the land to the seller would be the present value of the remaining stream of payments. I would also argue that a discount of 20 percent (like many other assets) is defensible to get to quick sale value.
As for the buyer’s rights under the agreement, the value could depend on several factors, the most important of which is salability. Another might be the probability that the buyer can continue to make the payments. Failure to make the payments would likely result in the buyer forfeiting the investment.
Regarding the IRS lien attaching to property, I expect the title would be safe if there is not a notice of federal tax lien filed prior to the start of the land contact.
Offer in Compromise
Q My client has an oil company that basically is defunct. We have submitted an offer for the company and the individual. The company has assets (wells with little or no production), which the IRS has agreed are not worth anything. The IRS wants my client to give up more than $600,000 of net operating loss in exchange for the compromise of the taxes.
The total amount of the taxes is about $100,000. My client is willing to pay some cash, but does not want to give up all the net operating loss in this. I have never run into this before. Any and all suggestions are welcomed.
A It is not uncommon for the IRS to require that a taxpayer forgo certain tax benefits in exchange for an Offer in Compromise. I suggest that you negotiate with the IRS to give up only a portion of the net operating loss. For example, if the taxpayer is in a 30 percent tax bracket, giving up half of the $600,000 would equal the amount of tax being compromised. Further, if he is willing to pay cash for part of the tax due, you could attempt to forego an even smaller portion of the net operating loss.
Q We made a tentative deal on a payment arrangement with “Perry” Badge #S90-5921 of ACS in Jacksonville, FL, 818-485-2115. Since then, we cannot get through to him, and nobody else will assist us with this matter. Another agent refused to help because our POA did not cover the current quarter, yet the notice of levy is only for prior years. I was careful to include all referenced periods on the POA when I sent it to the Memphis CAF office in September. The IRS continues to garnish our client’s pay despite my efforts to make an arrangement. Agent “Perry” promised me that he would accept my offer of $250 per month and stop the levy. What should I do?
A I suggest you contact the taxpayer advocates office and relate the story to them and request their help. Make sure you advise them that you have a taxpayer who is willing to meet their obligations to the best of his/her ability and that the IRS is being unresponsive. I also suggest that before you call them, you contact your taxpayer and set up another Power of Attorney that covers two periods prior to the problem and all periods up to date. Generally, if the taxpayer advocates office does not take your case, they will put you in touch with someone who is responsive.
Q I recently received an IMF transcript and it looks very much like a credit report. The transcript uses codes and abbreviations everywhere. Keep in mind that this is the first IMF transcript that I have ever examined. I requested the Transaction Codes Pocket Guide from the IRS (Document 11734), but it is of little use in that I don’t know what to look for and, more importantly, where to look.
I would like to know if you have a sample transcript that could assist me in determining what codes are used where. My current case involves a bankruptcy. I need to know where on the transcript the filing date for the bankruptcy would appear, when the 1040 was filed and the assessment date for the tax. Where does this information appear on the IMF?
A I suspect that the transcript you have ordered is not the literal transcript, which is very easy to read. You don’t even need the transaction codes pocket guide, because each code is annotated right on the face of the form. I’ve been doing tax problem resolution work for several years and have never used the pocket guide. All of the information that you need will be shown on the literal transcript and is easy to read. I suggest that you call the Practitioner’s Priority line at the IRS and request the literal transcript. The phone number is 818-485-2115.
Offer In Compromise
Q My client is a professional athlete. His income, at this time, is many thousands, but only until next month. He has no other assets. His IRS debt is about $70,000. This debt originated when he played for a professional team in 1997. Since that time, he was cut from a team and has had no income.
He was just picked up by another team at the end of this season – and just for the rest of this season, perhaps only one month. We have no idea whether he will be picked up after this year. He is 33 years old, and this could be his last year.
Can I submit a viable Offer in Compromise? It appears that an installment agreement over an extended period will be violated unless he continues to play. What recommendation can we offer?
A Filing an Offer in Compromise for this individual will obviously be tricky due to the uncertainty of his income. However, there is nothing to lose by filing an offer, and it keeps the IRS wolf away from the door.
For income, I would use his actual income for the previous 12-month period. It seems the taxpayer should have some other source of income, as he has to live somehow when he isn’t playing for a team.
When meeting with the revenue officer, you might make the argument that the income from the non-professional source is the income that he will receive in the future. Further, by the time the offer is processed, you will most likely have a much better picture of his opportunities for next season. You should also keep in mind the fact that once an offer is submitted, you can amend the figures based on new information and keep the offer moving through the process. Of course, I agree with you that filing an installment agreement that is destined to fail is not a good idea.
Requests for Transcripts
Q Is there information other than transcripts that we can/should request for our clients under the FOIA? We want to make sure we’re getting all the information we need.
A On a typical case, the items that we request from the IRS include the Individual Master File (IMF). If there’s any question about the taxpayer’s income, order the Information Returns Mater File (IRMF). The IRMF shows the third-party information submitted to the IRS. It will include such items as W-2s and 1099s. Generally, these are the only pieces of information we request from the IRS.
Trust Fund Recovery
Q How do you determine the trust fund portion of the payroll tax liability prior to the TFRP? Is it on the BMF transcripts?
A The trust fund portion of the payroll tax liability can be found by revealing each quarterly form 941. This is the form that the employer files each quarter to remit payroll taxes withheld and those for which the company is liable.
The federal withholding, the Medicare and the Social Security taxes withheld are stated separately on the face of this form. You’ll have to review each quarterly return to accumulate the trust fund amount in total.
Another option, if the trust fund recovery penalty has already been assessed, is to request that the agent handling the case provide you with his work papers that show the computation.
Statute of Limitations
Q Does the filing of an Offer in Compromise stop the statute of limitations? I thought it used to, but then they passed a law that said it didn’t. If that is so, when did it stop?
A Yes, filing an Offer in Compromise does stop the statute of limitations. Due to an oversight and a recently passed bill, there is a short period of time – about three weeks – where the statute was not suspended.
Q We recently took on a client who was a victim of a tax preparer who advised our client that he would help him to receive more money refunded to him from the IRS. It turns out that a fictitious business was set up through which deductions were claimed that allowed for our client to file for a sizable return. He filed for and received refunds of $5,445 in 1993 and $2,220 in 1994. The client states that he was unaware that business expenses were used to increase his deductions. He was just happy to get the large amounts of money.
The tax preparer performed these “services” for/on several of my client’s fellow employees as well. A receipt for tax preparation was always promised, but never arrived in the mail. Electronic filings were done through the office of another tax preparer. The preparer who worked with my client has since disappeared. The IRS shut down the office he worked out of, and the business owner had their license revoked.
Subsequently, in 1997, our client had “Additional Tax Assessed By Examination” by the IRS for tax years 1993 and 1994. The result is that he now has an $11,500 liability that we are hoping to gain relief from in one of the following manners:
- Somehow prove that the tax preparer who committed the fraud is known by the IRS – many were taken advantage of by his services – and seek protection due to duress or due to being a victim and seek relief from the past due tax, interest and penalties.
- Seek and Offer in Compromise.
A Let’s first address the Offer in Compromise possibilities. An Offer in Compromise based on doubt as to liability will not be in order because, from your information, the taxpayer actually does owe the money. Secondly, an Offer in Compromise based on Effective Tax Administration (ETA) seems inappropriate, as the taxpayer in fact is guilty of taking advantage of the system, not being abused by it. Lastly, your question did not contain any indication of the taxpayer’s ability to pay. Therefore, an Offer in Compromise based upon doubt as to collectibility is something I can’t comment on.
One piece of good fortune appears to be the fact that the IRS decided not to pursue a fraud cause against your client. I would be sure to mention that to them, as well as the fact that they would be well advised to work this matter out as quickly as possible and not to awaken the sleeping giant.
You may be able to assist this taxpayer to save some money by requesting penalty abatement. The information related in your question indicates that they could qualify for family abatement using that story as reasonable cause. If paying the tax due is something that will create a financial hardship, you could consider an Offer in Compromise based on doubt as to collectibility.