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Offer In Compromise | IRS Settlement | How Does it Work? | Insight Law Firm May 13, 2012

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For some taxpayers facing IRS collection activities, an offer in compromise presents an opportunity to stop collection actions like wage garnishments and negotiate a final resolution to outstanding tax debts.
 
What is an offer in compromise?
 
An offer in compromise is an agreement between a taxpayer and the IRS, under which the IRS accepts a lesser amount of money than what is owed to satisfy an outstanding tax liability.  The IRS may accept offers in three circumstances: (1) there is genuine doubt as to whether the IRS correctly determined the amount of tax due; (2) there is doubt that the amount due is collectible in light of the taxpayer’s income and assets; and (3) requiring full payment of the tax liability would create an economic hardship or be unfair and inequitable in light of some type of exceptional circumstance.  OICs based on the second scenario–doubt as to the amount being collectible–are most common and are therefore the focus of the subsequent questions and answers.
 
How will the IRS determine whether I qualify for an offer in compromise? 
 
You may request an offer in compromise through Form 656.  To qualify for an offer in compromise, a taxpayer must generally demonstrate he/she is unable to fully pay the amount of his/her liability.  The taxpayer must then propose terms of an offer under which the IRS will receive at least the amount it could reasonably expect to collect from the taxpayer by pursuing collection opportunities. 
 
The IRS will consider your income, basic and necessary living expenses you incur each month, money you have in your accounts, and the equity you have in cars, homes, and other assets in determining your ability to pay the tax debts and its ability to collect from you.  You must disclose all of this information to apply for an offer on Form 433-A. 
 
How much of my tax liability will I pay under an offer in compromise?
 
The answer to this question will differ greatly from taxpayer to taxpayer.  Some taxpayers may have offers accepted under which they pay very little of their underlying tax liabilities; other taxpayers may pay close to the full amounts of their liabilities.  Your outcome is dependent on the specific facts of your case. 
 
Your monthly expenses for living expenses like food, clothing, housing, utilities, transportation, and medical care will be measured against local and national standards.  Leftover income after these expense allowances is then multiplied by a set period of time, and this amount becomes part of the total offered to the IRS to settle the debt.  You will also be expected to contribute the “quick sale value” of equity you hold in your car, home, or other assets to the amount of the offer, which is generally around 80% of the item’s value.
 
What do I need to apply for an offer in compromise?
 
Along with the offer forms detailing your income, expenses, and assets, you must submit an application fee and an initial offer payment.  Depending on the terms of the offer you propose, this initial payment is either 20 percent of your offer amount or the first of several, smaller monthly installments you may make while your offer is under consideration.  Low-income individuals may qualify for a waiver of the application fee and the first payment requirements.  The payments can be made over five months, or up to 24 months.
 
Can an offer in compromise be changed or rejected after the IRS agrees?
 
Yes.  The IRS can change or even suspend its agreement with you if you fail to follow a set of conditions.  This includes making agreed payments, continuing to file returns and pay taxes for following years, and permitting the IRS to keep any refunds for the period of time around the offer’s acceptance.
 

For more information on offers in compromise or to discuss whether an offer in compromise might help you, consult a local tax attorney.  Insight Law offers Washington taxpayers a complimentary consultation when they call (206) 397-4780, or click the Tax Attorney link below to visit our website.

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Innocent Spouse Relief | Do I Qualify? | Insight Law Firm May 13, 2012

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Can I be heldresponsible for tax debts my spouse incurs? 

Yes.  When spouses file joint tax returns, each spouse is generally joint and severally liable for any tax due that year, including the full amount of taxes due, penalties, and interest.  This means that the IRS may pursue the whole amount due from both spouses or any one of the spouses individually, and your liability can survive divorce.  However, there are forms of relief available.

What if the tax debt is from my spouse or ex-spouse not properly reporting income, deductions, etc.?

Under some circumstances, the IRS may grant “innocent spouse relief” to a spouse or ex-spouse facing liabilities that arose by the other partner failing to report income or taking improper deductions or credits.  IRC § 6015(b).  A party seeking relief as an innocent spouse must demonstrate that:

(1) He/she filed a joint return that understated taxes due to erroneous items reported by your spouse or ex-spouse;

(2) He/she did not know and had no reason to know that there was an understatement of tax when the joint return was signed;

(3) It would be unfair to hold him/her responsible for the understatement of the tax given the totality of the facts and circumstances; and

(4) He/she did not transfer property with the spouse as part of a scheme to defraud the IRS and/or another third party.

What if we later separate or divorce?

Tax liabilities you incur while married will survive your separation or divorce.  However, if you and your partner later separate, you may petition the IRS to separate your liabilities under IRC § 6015(c).  This permits you to abandon your earlier “joint” filing status, distinguish your tax debts from your former partner’s debts, and request the IRS to separate your liabilities accordingly.  A taxpayer can qualify for this “separation of liability relief” only if he/she is divorced, legally separated, or widowed, or if he/she is no longer a member of the same household as the former spouse.

Are there other options if I don’t qualify for relief under IRC  § 6015(b) and IRC  § 6015(c)?

Both of the forms of relief described above have time limitations and other restrictions that not every taxpayer may qualify for.  Taxpayers who do not qualify for relief under 6015(b) or 6015(c) may still seek  “equitable relief” under IRC § 6015(f).  Under this section, the IRS evaluates the individual facts and circumstances of each case and determine whether it is inequitable to hold a spouse liable for an unpaid tax liability.  Factors the IRS will consider in determining whether to grant equitable relief include:

  • whether you have separated from your spouse,
  • whether any divorce decree or separation agreement makes you liable for the debt,
  • whether you benefitted from the understated or underpaid tax,
  • whether you would suffer a significant economic hardship if you were not granted relief,
  • whether you made good faith efforts to comply with tax laws, and
  • whether you knew or had reason to know the tax not be paid.

If you would like to discuss whether innocent spouse relief, separation of liability relief, or equitable relief may help you with a Washington tax attorney, call Insight Law for a free consultation at (206) 397-4780, or click the Tax Lawyer link below to visit our website.

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Innocent Spouse | Equitable Relief – Lantz v. Commissioner: 7th CIRCUIT REVERSES TAX COURT – UPHOLDS TWO-YEAR TIME LIMIT FOR EQUITABLE RELIEF UNDER 6015(f) May 13, 2012

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When spouses file joint tax returns, each is generally joint and severally liable for any tax due in that year, including the full amount of taxes due, penalties, and interest. This means that the IRS may pursue the whole amount due from both spouses or any one of the spouses individually. However, under Section 6015(f), an “innocent spouse” who signed an erroneous return without knowing or having any reason to know of the misstatements on the return may request to be relieved of additional taxes and penalties the IRS seeks to collect as a result of these misstatements.
Unlike Section 6015(b) and (c), Section 6015(f) does not contain any time limitation by which a taxpayer must claim this type of relief. Despite this, the Department of Treasury enacted a regulation to impose this same limitation on equitable relief claims under 6015(f). When the IRS enforced this regulation against several “innocent spouses,” this regulation was challenged. The U.S. Tax Court sided with taxpayers. The Tax Court reasoned that since 6015(f) doesn’t expressly state a time limit, the Treasury lacked authority to impose the two year limit.

However, the Seventh Circuit Court of Appeals reversed this decision, holding the IRS cannot impose its two-year limitation on innocent spouse relief claims under Section 6015(f). The Court ruled that even though Section 6015(f) does not contain a time limit, Congress expressly granted the Treasury broad authority to promulgate regulations to administer Section 6015(f). Therefore, its regulation adding a two-year time limit, which appears in surrounding areas of the code, was not improper.

While this Seventh Circuit case is only binding on taxpayers in Illinois, Indiana, and Wisconsin, the IRS will continue to try to enforce its two-year time limitation in every other state as well, but the Tax Court has specifically not followed this decision outside of the 7th Circuit. This means innocent spouses wanting to fill outside this two-year time period could possibly face an uncertain battle in those states, and possibly others in the future.

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Currently Not Collectible – Vinatieri v. Commissioner: TAXPAYER FACING ECONOMIC HARDSHIP MAY STOP IRS LEVY DESPITE UNFILED RETURNS May 13, 2012

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The IRS possesses authority to levy the personal wages and property of taxpayers owing past taxes, interest, or penalties. However, when a taxpayer in poor financial condition can establish that the IRS’ levy creates an economic hardship, the IRS must release part or all if its levy and utilize collection alternatives. These alternatives might include preparing an installment agreement for the taxpayer, accepting an offer-in-compromise, or granting the account status as currently not collectible.

The dispute in Viatieri arose when the IRS proceeded with a levy against a taxpayer owning only $14 in cash and a $300 car she depended on to get to work and earning only $800 a month, which was consumed by the $800 a month she spent on basic living expenses for herself and her daughter. The IRS argued that the taxpayer was not eligible for relief, because she had failed to file tax returns in two prior years. The U.S. Tax Court disagreed, concluding the IRS cannot proceed with a levy that would create an economic hardship for an individual. Instead, the IRS should consider a collection alternative.

Viatieri does not otherwise change the requirements for relief. To qualify for these collection alternatives, a taxpayer still must establish the levy would pose an economic hardship by providing accurate and complete financial information to support his or her arguments. Taxpayers unsure of their eligibility for collective alternatives or who seek assistance in establishing economic hardship to the IRS should seek the assistance of a local tax attorney.

133 T.C. 16 (2009)

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Trust Fund Penalty | Employment Taxes – A Business Owners Worst Nightmare: Personal Liability for Employment Taxes May 13, 2012

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Employers really work for Uncle Sam, collecting the IRS’ taxes through the withholding system. (States with income tax laws also impose wage withholding.) By law, employers make three kinds of payments to the IRS after each payday. The check (or electronic transfer) they send covers (1) the income tax withheld from your paycheck, (2) the Social Security and Medicare tax also withheld, and (3) the employer’s matching Social Security/Medicare payment. The first two items – the withheld portions – are known as the “trust fund” part of the tax because a special statute imposes a trust on those withheld funds until the employer pays them to the IRS. The money doesn’t have to be put in a separate bank account, but it’s automatically deemed “in trust” from the instant your employer withholds it from your pay. In a perfect world, the money is there.

But the world is far from perfect. If the employer just doesn’t pay, or decides to pocket that money, employees get full credit on their taxes, but the IRS is still short the money. So it uses a special weapon thousands of times each year, the Trust Fund Recovery Penalty.

This penalty makes the people who were responsible for the nonpayment personally liable for 100 percent of the money that was withheld but not paid over to the IRS, that is, 100 percent of the unpaid income withheld and Social Security/Medicare tax. (The penalty does not apply to the employer’s share of Social Security/Medicare.)

Of course, the corporation is also liable, and the IRS goes after that primary payor first. But the Trust Fund Recovery Penalty makes the responsible persons “guarantee” the corporation’s payment, at least in part. This penalty is a debt that can follow you for at least ten years, or the rest of your life, whichever comes first. The limited liability you personally enjoy from most corporate debts does not apply against this federal law. On top of that, you cannot discharge this penalty by filing personal bankruptcy, as you can with most personal debts.

This Trust Fund Recovery Penalty can be a major tragedy for the businessperson. Most business owners want to stay in business and prosper, but when money gets too tight, many take a chance by paying the squeaky wheels. The IRS is like a hibernating bear in these payroll tax cases. It wakes up late, sometimes years after the first default, but it also wakes up very hungry and aggressive. On top of that, the longer the default goes on, the easier it is to continue and the harder it is to feel that you can ever catch up.

But you can fight the imposition of this “penalty” (it’s really just a substitute for part of the tax the corporation did not pay) in several ways.The law allows you to do this, even before the IRS officially imposes it. The law in this field is very extensive, mostly through cases tried in the courts. You can argue that you were not truly responsible, that some other person was, that you did not know, and a range of other defenses that are technical in nature but that work if you prove them.

Call our firm at (206)397-4780, or click the Tax Lawyer link below to visit our website.

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Insight Law Firm | North King County Tax Attorney Blog | Lynnwood Tax Attorney | Shoreline Tax Attorney | Edmonds Tax Attorney | Mountlake Terrace Tax Attorney | Mercer Island Tax Attorney | Northgate Tax Attorney | wa | IRS May 13, 2012

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Insight Law – Lynnwood, Edmonds, Shoreline and Mukilteo Tax Attorney

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