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By Michael S. Anderson of Anderson Tax Law logo for Arizona tax attorney Michael S. Anderson P.C.
  • Common IRS Scenarios and Real Solutions

    il_570xN.320280310COMMON IRS SCENARIOS AND REAL SOLUTIONS

    We have helped hundreds of clients solve their tax debt problems.  The following are examples of the most common scenarios we see.  Although the names and the facts used don’t reflect any particular client’s situation, you may find a situation that is similar to your own and it’s potential solution.

    THE QUINTESSENTIAL IRS OFFER IN COMPROMISE

    Mr. A was employed with a large company in Maricopa County.  He earned a good income of about $65,000.00 per year.  Several years prior he was self employed and failed to withhold any tax for 4 years.  That debt once assessed had grown to more than $120,000.00 with interest and penalty.  Mr. A was married and his wife worked at home raising 3 teens.  His IRS debt met the criteria for bankruptcy but he had very little other debt and his average net income was less than $4300.00 per month after tax and insurance were withheld.  The IRS’s standard budget for Mr. A. and his family was about $4000.00 per month.  The time left on the IRS’ statute of limitations for collection was 60 months and he had very few assets.  Instead of paying 300 per month for the remaining 60 months or filing for bankruptcy, he settled with the IRS for $3600.00.  He paid 20% of the settlement when he made the offer and the remainder came from a parent after the offer was finalized.

    A MORE DIFFICULT OFFER IN COMPROMISE

    Ms. B was self employed.  She hadn’t filed tax returns in several years as she realized after missing the first, that she wouldn’t be able to pay it.  The situation snowballed and eventually the IRS filed all the returns for her without any deductions or exemptions.   The debt was high, more than $250,000.00 and incorrect.  She completed the correct returns.  Filing these would have reduced the debt with interest and penalty to less than $125,000.00.  A sum that was still too high for her to pay.  Her business income fluctuated each year and over the last two years it was higher than the current year.   She was afraid her income was going to remain lower.  The IRS will typically look at 3 years of income to determine the amount of income to use in calculating the offer amount.  As the higher debt helped her cause in an offer in compromise, she left the debt in place and filed an offer. She was able to settle her debt for less than $30,000.00 by convincing the IRS to use the most recent year income calculation.

    USING THE IRS STATUTE OF LIMITATIONS INSTEAD OF AN OFFER IN COMPROMISE

    Mr. C owed more than $300,000.00 to the IRS and had been making hefty monthly payments toward the debt.  He lost his job and took another at a fraction of his previous pay.  Of course when that happened he couldn’t afford the payment anymore and he quit paying.  The IRS levied his new paycheck.  He was able to negotiate non-collectible status and that froze the collection account while leaving the 10 year statute clock running.  He had approximately 18 months left on the clock and was approached by several companies that told him to pay them a large fee and they would win an offer in compromise for him.  He realized that an offer in compromise had the following problems. One, it was possible that the IRS would try and use past income to determine his ability to pay, and two, he had a home with equity in it large enough to be considered a part of the offer amount, and three, the offer, if unsuccessful would stop the statute of limitations clock and put him right back where he started.  He opted to stay put rather than to file an offer and was able to remove the entire debt by simply waiting out the statute of limitations clock.

    OFFER IN COMPROMISE CANDIDATE USES BANKRUPTCY INSTEAD

    Ms. D was an Offer in Compromise candidate.  Her analysis showed income, budget and assets that would leave the IRS less than $10,000.00 on a $95,000.00 debt.  However, she also had $50,000.00 in credit and medical bill debt and the vast majority of her tax debt met the criteria for discharge in a bankruptcy.  She opted for bankruptcy in order to solve all of the issues at once.

    LARGE INCOME, HIGH TAX DEBT

    Mr. E was an executive at a Phoenix company with about 100 employees.  His income approached a few hundred thousand per year and his tax debt was more than $350,000.00 with interest and penalty.  He had several years remaining on the 10 year statute of limitations period for collection and had negotiated a large payment plan with the IRS of more than $4000.00 per month.  He wasn’t a good Offer in Compromise candidate because his income when compared to the IRS’ standard budget for his family size left enough to pay the debt over the remaining statute period and then some.  He thought he wouldn’t qualify for a chapter 7 bankruptcy for the same reason…too much income.  He didn’t realize that a small exception existed for people to qualify for chapter 7 bankruptcy in 9th Circuit States like Arizona if the majority of their debt was tax debt.  He used this exception and filed for bankruptcy discharging all but $50,000.00 of his tax debt.  He then changed his payment plan to one based on time, not income, and dropped the payment plan to less than $750.00 per month.

    CHALLENGING IRS SUBSTITUTE RETURNS

    Ms. F didn’t file a number of returns for several years.  The IRS eventually demanded them and when she didn’t comply, it created returns based on 1099 forms that had been reported during those years.  With these incorrect returns the IRS started the collection process and garnished her paycheck.  She had been ignoring the situation in hopes that it would go away. With research and advice, she realized that the IRS returns were terribly wrong and that if the IRS had included her small business expenses and her personal deductions, the debt would be just a fraction of what was claimed to be owed which was well over $200,000.00 with interest and penalty.  She gathered as many documents as she could find, created her returns with them and filled in blanks using estimates (based on logical comparisons, calendars, etc.) and filed the correct returns with the IRS. The IRS accepted the returns, changed her debt to less than $50,000.00 and she was able to arrange a payment plan that paid it off within 6 years.

    HIGH DEBT, HIGH EQUITY IN HOME, LOW INCOME

    Mr. G had a large payroll tax debt related to a business venture with his wife who had recently passed away.  The IRS was able to collect against him and was levying his accounts.  When Mr. G’s wife passed, a life insurance policy was used to pay off the family home.  It was worth more than $300,000.00.  Mr. G realized that an Offer in Compromise wouldn’t work as the equity in the home was about twice as much as the debt amount.  The IRS revenue officer refused to place him on a payment plan and wanted him sell or borrow against the home to pay the debt in full.  Mr. G appealed and at the appeal hearing convinced the IRS to use his low income to place him on non-collectible status and leave the home alone.

    SELF EMPLOYED, MISSING TAX RETURNS, IRS LEVY

    Ms. H was a self employed decorator and for several years she had seen lots of growth and decorated lots of large homes in the Valley.  She never withheld any tax.  Business died down with the economy and she took a job with a design firm and was paid a salary.  Unbeknownst to her, two of her previous clients reported amounts they paid her to the IRS and the IRS had used those amounts to create tax returns for two years.  The IRS then levied her new paycheck.  She gathered herself, collected her income and expense information for several years and was able with help to complete all the years that were un-filed including the years the IRS had done.  She was then able to negotiate a small partial pay payment plan that stopped collection activity.  Her income at her new job was quite a bit lower than her best years of self employment and after some time she was able to file an Offer in Compromise with the IRS and settle the debt for less than 20% of the overall debt amount.