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Offer in Compromise: How the 2012 Change in Guidelines Will Help You Settle Your IRS Debts

Alex Moretsky

An Offer in Compromise (OIC) is an agreement between you, the taxpayer, and the IRS that settles a tax debt for less than the amount owed. It offers a way to pay off your debt and get a fresh start. In 2012, the IRS changed the guidelines and liberalized the rules making it easier to afford and qualify for an OIC. That, in turn, resulted in a dramatic increase in the acceptance rate. In the last two years the number of offers accepted has risen from 24,000 to 31,000, a percentage change of 38% to 42%. This is a dramatic improvement from a decade ago when less than 25% of applications were accepted. It also represents a welcome change from an agency that has placed substantial roadblocks to those seeking to compromise their tax obligations. These changes will help some taxpayers resolve their tax problems in as little as two years compared previously to four or five years.

The financial analysis used to determine which taxpayers qualify for an OIC has also changed. It now includes:

  • Revising the calculation for the taxpayer’s future income.
  • Allowing taxpayers to repay their student loans.
  • Allowing taxpayers to pay state and local delinquent taxes.
  • Expanding the Allowable Living Expense allowance category and amount.

When the IRS calculates a taxpayer’s reasonable collection potential, it will now look at only one year of future income for offers paid in five or fewer months, as opposed to four years and two years of future income for offers paid in six to 24 months, down from five years.
The most recent changes also allow taxpayers larger discounts on their assets from prior rules. As an example: before the recent changes, a taxpayer’s investment account with a value of $100,000 would have required the taxpayer to fully account for that amount in their offer. Under current rules, the taxpayer can discount the value of the account by 20%, thereby reaching a valuation of $80,000. In fact, the IRS uses the concept of discounting by 20% for almost all taxpayer assets, whether tangible like real estate and vehicles, or intangible.

Before an OIC will be considered you must do all of the following:

  1. File all tax returns that are legally required through the tax year;
  2. Make all required estimated tax payments for the current year; and
  3. Make all required federal tax deposits for the current quarter if you are a business owner with employees

OIC qualifications are based on computation of a taxpayer’s ability to pay debt before the IRS runs out of time to collect (collectible statute expiration date). This decision is not subjective, but predicated on formulas.

To qualify for an OIC:

  1. You must prove you cannot pay the total balance owed before the collection statute expires
  2. There is doubt whether the IRS can collect the full amount owed from you, known as “doubt as to collectability”
  3. Alternatively, you can show that due to exceptional circumstances, payment would cause economic hardship or be unfair or inequitable

The OIC process is a formal process. It begins when you file Form 656 and pay a $186.00 fee (exempt if you are below poverty guidelines). In addition, you must send the first month’s payment with your completed application unless paying in 5 payments or 5 months, in which case you must send 20% with your application. If taking longer than 5 months to pay, you must continue to make all proposed payments while the offer is pending.
Even if you are rejected you should try again. Two reasons for rejection are your offer was too low, in which case the IRS will tell you what amount is acceptable or you are a notorious character. After finding out why you were rejected, re-submit. If the financial circumstances have not appreciably changed or the new offer is not different from the old, consider writing a letter offering more cash.

Innocent Spouse Relief Alternatives

Alex Moretsky

When Valarie Stephenson tried to leave her husband in 2003, he put a gun to her head and threatened to kill her. She was so terrified that she remained in the marriage until 2007. She then contacted an attorney and filed for divorce. After the divorce was finalized in 2008, she learned that she was liable for more than $77,000 in unpaid taxes stemming from a joint tax return filed in 1999. During their marriage, Valerie’s husband controlled the finances and Valerie was in the dark.

Unfortunately, Valerie’s situation, though extreme, is not the exception. According to one study, approximately 50,000 individuals each year become responsible for their spouse’s debts through marriage. When filing a joint federal income tax return, existing law states that spouses are jointly and severally liable for taxes assessed on the joint return, even after divorce or the death of one spouse.

Prior to 1998, the IRS allowed innocent spouse relief, but the requirements were so stringent that very few spouses qualified. Congress, concerned that the IRS was seeking taxes from the wrong spouse, expanded relief for “innocent” spouses in 1998. It created exemptions to help relieve wives who were unfairly left oppressive tax burdens by divorced or deceased spouses. There are two main, but distinct, arguments to attain “Innocent Spouse Relief”:

  1. Limited equitable relief for those meeting statutory requirements, or
  2. General equitable relief provided by the Secretary of the Treasury, taking all relevant facts into consideration.

For someone that does not qualify under other forms of relief, “Separation of Liability Relief” is an alternative form of relief. It is available to divorced or separated spouses who filed a joint return during their marriage. This alternative determines the liability of each person separately by allocating income and deductions from the joint return to each spouse, effectively amending a joint return to a separate one.

To qualify for “Separation of Liability Relief” you must show the following:

  1. Filed joint returns for the relevant year(s)
  2. At the time of filing Form 8857, the “innocent” spouse is no longer married or is legally separated, or is not a member of the same household for the last 12 months
  3. Relief does not apply to items spouses knew to be erroneous but signed off on willingly, and
  4. There was no transfer of property to the “innocent” spouse for the main purpose of avoiding taxes

If you do not qualify for “innocent spouse” or “Separation of Liability” you might still qualify for Equitable Relief. The requisites are as follows:

  1. A spouse must have an unpaid, understated or underpaid tax liability and not be eligible under the other Innocent Spouse subsections
  2. It would be unfair to hold spouse liable for understated/underpaid taxes
  3. There was no transfer of property to another party as part of a scheme to avoid taxes, and
  4. The income tax liability from which relief is sought by one spouse is attributable to a tax item or omission of the other spouse

There are also preventable measures and alternative avenues you can take to avoid being in the situation where you need to avail yourself of these remedies. First, you can file separate rather than joint tax returns, especially when you believe your spouse’s financial or business activities are questionable. Second, you can take advantage of a CDP – collection due process – hearing whereby the taxpayer challenges a tax liability or workout an alternative collection arrangement. And finally, if the IRS has levied on taxpayer property you can seek release of the levy and return of the property if it creates an economic hardship whereby the taxpayers cannot pay for reasonable living expenses.

To help you determine your eligibility for Innocent Spouse Relief, contact a Philadelphia, Pennsylvania lawyer who will take the time to discuss your options.

The Tax Consequences of Debt Forgiveness

August 11, 2014

Alex Moretsky

Settling a debt for less than the full amount owed seems like a blessing when you are burdened with lots of it. Unfortunately, the Internal Revenue Service and Pennsylvania Department of Revenue takes a different view of your good fortune.

When a creditor writes off or reduces a debt, it usually reports the amount written off as lost income to reduce its own tax burden. The IRS treats the forgiven amount as gained income for you and wants to collect a tax on this phantom income. For example, if you owe VISA $15,000.00 and the company decides to reduce your debt to $5,000.00, the difference of $10,000.00 is considered income and, consequently, taxable.

Any financial institution that forgives or writes off a debt of $600.00 or more will send a 1099-C to the IRS. It is incumbent upon the debtor to list the income on his tax return to avoid any discrepancies between him and the creditor.

The rule even applies after your property has been foreclosed or repossessed, provided the lender forgives the difference between what you originally owed and what the property sold for, otherwise known as a “deficiency”. This problem became especially acute during the Great Recession. In view of the toll the recession was taking, Congress passed the Mortgage Forgiveness Debt Relief Act. The Act forbids the IRS to tax the deficiency on homes foreclosed between the years 2007-2014. But it applies only to one’s primary residence. Vacation and investment properties are not eligible for debt forgiveness and monetary limits apply. Read More…

Offshore Voluntary Disclosure Program (OVDP) – Deciding to Pay to Avoid Criminal Exposure

Alex Moretsky

Alex Moretsky

By Alex Moretsky – July 14, 2014

So while on that island vacation years back you decided that instead of getting yourself a second home you’d find an offshore one for your money and investments. Well, be advised that the IRS has been pursuing international tax violations through civil audits and criminal investigations of unreported foreign bank accounts. So how can you avoid being caught up in this sweep? Glad you asked. In 2012, the IRS has announced a continuation of its Offshore Voluntary Disclosure Program (OVDP) whose objective is to bring taxpayers who have used undisclosed foreign accounts and foreign entities to avoid or evade taxes into compliance with U.S. tax laws. This program allows taxpayers to avoid substantial civil penalties and any criminal prosecution. The concept is that a qualifying person comes forward to the IRS before being contacted by the Service and attempts to correct past failures. The IRS will not seek criminal prosecution of anyone coming forward voluntarily who satisfies certain criteria. To qualify for the OVDP you need a pre-clearance which entails faxing to the IRS Criminal Investigation Development Center your name, date of birth, social security number and address. You will be notified if you are cleared to make a voluntary disclosure. After that there are criteria you need to meet:

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The Tax Angle: What to Know When Donating to Your Church, Synagogue or any Religious Institution

Alex Moretsky

Alex Moretsky

By Alex Moretsky, June 2014

Many people contribute to their religious institutions whether it is in the form of cash payments or donations of household goods and clothing. Sometimes services are also provided to the non-profit organization. If you are planning on making a deduction on your taxes for donations or services, then you must follow the Internal Revenue Service (IRS) rules.

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