OIC 101: First Things First

Often, as a senior tax consultant, I'll get phone calls from clients who want to bypass everything and get into a conversation about settling their tax debt. Clients do not understand taxpayers requesting an OIC must have filed all required federal tax returns. If in business, they must also have filed and paid any required employment tax returns on time for the two quarters prior to filing the OIC, and to get themselves current with deposits for the quarter in which the offer in compromise was submitted.

Recently, actor Westley Snipes discovered that it is a federal offense to refuse or to neglect to file your taxes. In such a case, there are two aspects to be considered:
1) Criminal Aspect, non filing and
2) the Civil or Monetary Aspect

One cannot come before the other. The IRS will not even allow a tax resolution firm to file an OIC on behalf of a client who has any unfiled years of taxes. The IRS considers them criminals.

OIC 101: What Can I Offer?

This would be a comical subject if it were not such a serious problem. I would not be exaggerating to say that over 3/4 of the OICs I see offered probably should have been given a second look. The amount offered often looks like the taxpayer and the CPA sat across from each other and said "what do you feel like you want to offer them?" As if they were buying a house.

Another trend is to offer too much, usually due to lack of information and expertise. When I have browsed through our software system and the minimum offer amount is revealed, it is usually lower than the client's proposed amount (originating from advice from non "tax resolution" sources). This is an expensive way to play darts and hope you hit a bull's eye. If you have filed an OIC and you did not consult a Professional tax resolution firm, withdraw your offer immediately, BEFORE you get a denial letter. All minimum offer amounts must generally be equal to, or greater than, a taxpayer's reasonable collection potential (RCP). The RCP is defined as the total of the taxpayer's realizable value in real and personal assets, plus future income. Sound like you could just whip that data up real quick? Right.

OIC 101: When All Else Fails

The OIC is a very important component to the IRS 's programs for a select group who qualify. The only problem is many companies are charging large fees and are delivering so little. The OIC can be considered only after all other avenues of payment have been exhausted. Monthly installment plans and full paying the tax must be turned down first. Make no mistake that the IRS wants all the money if they see there is any way to get it. There are actually 21 different options beside the OIC when all else fails. They leave the best for last. It is the ultimate solution to your tax problem.

OICs 101 : Do You Feel Lucky, Punk?

Have you ever known that guy or girl who always wins raffles or contests, or they win stuff from radio stations by being the 8th caller? Do you personally know anyone who has won a jack pot in Vegas? I wish there was at least someone in my family who won the lottery. That would be close enough to lucky for me.

For the rest of us, here are the odds we have to beat to be one of the lucky ones with the IRS. As of last count, there are 8.2 MILLION delinquent tax payer accounts actively in the IRS's system for the year of 2007. Out of those delinquent accounts there were 12 thousand OICs accepted. I hate math but this math I really didn't enjoy. You have less than ONE % chance with those numbers to come out with an OIC accepted.

I mentioned luck in my title. There really isn't any room at all to rely on luck. Self representation (doing it yourself) or calling a firm that promises everyone an OIC is definitely a good way to be another statistic. Tax offers or OICs need to be done the first time by a reputable tax resolution firm.

OICs 101: SHOW ME THE MONEY

Yes, it will cost you money right up front to even submit an OIC. Starting in 2001 the IRS started off setting costs of frivolous OICs being submitted. This due to alot of "do it yourself", "self representation" being attempted by the public. There were also many inappropriate offers submitted by less-than-scrupulous tax firms, CPAs and/or tax lawyers to delay enforced collections. This $150.00 filing fee, according to the Commissioner of Small Business/Self-Employed Division, will help redirect resources to the processing of acceptable offers.

"Taxpayers who file an OIC will have to pay the application fee with their submission unless the offer is based solely on doubt as to liability, or the taxpayer’s total monthly income falls at or below income levels based on the Department of Health and Human Services poverty guidelines. Taxpayers who claim the poverty guideline exception must certify their eligibility."

OICs 101

Today's post begins a series of blogs where I will shed some light on OICs (Offers In Compromise), the most advertised and sought after option for handling IRS debt. I will give you the "inside scoop" from enrolled agents, who have the daunting task of negotiating correctly this calculated, complicated resolution that seems to be a cure-all for IRS debt. I will cover and uncover numerous myths about OICs during this series of blogs. So hang on and see where it takes you !

ARE YOU PAYING SOMEONE ELSES TAXES ?

Have you seen the news lately?According to the Us Treasury, Business are creating a huge tax gap, and it has been going on for year's. This means they owe the taxes but they are just not voluntarily paying, and in most cases not reporting the tax. The same business are reporting great gains to their investment boards and share holders. They do this in order to keep investment money, and lines of credit flowing into the company.

"There are three key characteristics of the tax gap:
• Over 70 percent of the gross tax gap is attributable to the individual income tax,
which is the largest single source of Federal receipts.
• Over 80 percent of the gross tax gap is caused by under reporting of tax (i.e., by
under reporting income or overstating deductions and credits), with roughly half this
amount (including self-employment tax) attributable to under reporting of net business
income by individuals. Eighteen percent of the gross tax gap is attributable to
underpayments of taxes or failure to file tax returns.
• Noncompliance is highest among taxpayers whose income is not subject to third party
information reporting or withholding requirements.
These characteristics suggest a targeted response designed to address the most significant
areas of noncompliance. The following overview discusses these characteristics
As indicated above, the IRS estimates that over 70 percent of the gross tax gap is
attributable to the individual income tax. "

"Moreover, while it may be possible to develop a comprehensive strategy that reduces the
tax gap, it is not possible to implement a policy that would come close to eliminating the
tax gap without an unacceptable change in the fundamental nature of our tax compliance system"

Tax Gap Strategy Timeline for Fiscal Year 2007

January
• Taxpayer Advocate’s Annual Report to Congress
• Update of 2006-2007 Treasury Department/IRS Priority Guidance Plan
• Launch of Federal/State Electronic Federal Tax Payment System (EFTPS).
• Deliver Taxpayer Assistance Blueprint Phase II Report to Congress

February
• Administration’s fiscal year 2008 budget request, including anticipated legislative proposals for compliance initiatives, tax code simplification and IRS funding

March/April
• Detailed outline of IRS tax gap strategy reflecting provisions in Administration’s fiscal year 2008 budget request
o Outline steps to reduce opportunities for evasion
o Outline IRS research initiatives
o Outline IRS information technology initiatives
o Outline IRS compliance initiatives
o Outline IRS taxpayer service initiatives
o Outline steps to reform and simplify the tax law

May
• Stakeholder meetings to discuss Administration’s fiscal year2008 budget request

June
• Treasury Department review of practitioner compliance initiatives

July
• 2007-2008 Treasury Department/IRS Priority Guidance Plan.

The IRS and US TREASURY are committed to flushing out these companies. Revenue Officers are getting tougher on compliance and enforcement trying to make examples out of the business they are able to get now. My advice as a Tax Consultant in a prominent firm is to seek legal representation NOW

THINK LONG TERM !

I constantly remember the words of my mother (a wise woman), "The future is always closer than you think." Here is a word to the wise, a flashing red light!

A train is coming when you dip into your 401K/IRAaccount. More and more, tax resolution firms receive calls from clients who have made this tragic mistake. The effects are not momentary as many would surmise. When you rob Peter to pay Paul, Paul always comes back when you don't have the money to pay him, needing it the most.

I talk to clients every other day who have felt the pressure to dip into their "retirement funds." They use the money to pay for vocational or educational needs. Some are using the money for basic living expenses now, not realizing they are about to be double-taxed and charged a 10% early withdrawal penalty. This is mandatory if you are younger than 59-1/2. That money will then not be available in the future when you are ready to retire. Most of the time, brokerage firms do not withhold the correct amount of taxes for you to avoid this double taxation.

In most cases, you would be much better off borrowing money from private lenders, friends, specialty loans for vocational retraining, relatives, or do without until you find some other way.

Haven't filed a tax return in awhile? You may owe the IRS!

If you haven't filed a tax return in a few years, you may still owe the IRS. You may have even been suprised when you received a Balance Due Notice in the mail from the IRS for years you haven't filed.

The reason for this is the SFR. An SFR stand for Substitute for Return. When you go more than 2 years without filing a return, the IRS might prepare a return for you. They will file you single with standard deductions. You will not get any other deductions that might be beneficial to you. Once they prepare a return for you and you owe tax, they will file that return and assess the tax against you. If they prepare a return for you and you are due a refund, they will not file that return. Thus, you will not get your refund. It is not in the best interest of the Treasury to hand out money on returns not filed by the tax payer.

Once your tax has been assessed, they will put you in the collections letter cycle.

Even though you have a SFR, you can still file a return on top of it with all of your deductions included and you correct filing status. This will file over the SFR and adjust your tax liability, but it will take months to process, so in the meantime, you need to be in a resolution with your supposed liability or the IRS will enforce collections (even if your return shows you don't owe). Doesn't seem fair but that's the way it is.

This is one of those areas where professional representation might be your best bet. It is very tricky when filing over SFRs and when filing old returns. If your returns don't match up to IRS records, you will be red-flagged for an audit for sure, delaying the whole process and even resulting in more penalties.

Thats not your money!

The IRS takes the civil trust fund very seriously. If you own a business, you know exactly what the civil trust fund is. When you pay employees, the IRS "trusts" you to collect their withholding and FICA taxes. At that point, you have to give that money to the IRS and file a form 941 to reconcile what you have paid the IRS.

What happens a lot of times is a business will get into a cash crunch and not pay their civil trust fund deposits to pay other bills instead. They think they can catch up with it the next month and when that doesn't happen, the next. Slowly they realize that they are now behind 3 months and have not filed their form 941. The IRS sees this as stealing. This is not unpaid taxes of the business; instead, it is other people's money that was intended to pay their own taxes, medicare and social security retirement. It must be paid back and in full. The IRS does not negotiate on this type of liability.

This potentially places a business in great jeopardy. By not paying and/or filing for 3 months, they have earned themselves a Revenue Officer, the highest level of collections enforcement the IRS has. It is the Revenue Officer's job to collect the civil trust fund money. They will levy a business to collect the money. They can levy bank accounts and accounts receivables. They can even shut down a business to collect the civil trust fund.

It does not have to be the end of the road for your business. There are ways of handling this situation with the IRS. You need professional representation to help you navigate through these kinds of rough waters. There is help if you want it!

IS THERE A DOCTOR IN THE HOUSE ?

I love the commercial where the shirtless guy is talking to the doctor on the phone. The doctor tells the guy “oh, it's a fairly easy procedure.” Now I just want you to make a 3-inch incision in your abdomen. The guy’s face cracks me up. He looks like what!? It's funny, but we all do it all the time. We surf the net and read a couple articles or see a how-to site, and all of a sudden we can fly, fix cars, build a house, diagnose and treat ourselves like a doctor, and even take on the IRS with the skill of an enrolled agent! Intellectually, does that even add up?

According to the IRS manual, "There are two tracks to becoming an enrolled agent. These tracks are described in Federal regulations contained in a pamphlet known as Treasury Department Circular 230, Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, and Appraisers Before the Internal Revenue Service. The two tracks are:
Written examination. You can become an enrolled agent by demonstrating special competence in tax matters by taking a written examination. This track requires that you -
Apply to take the Special Enrollment Examination (SEE); prometric.com/irs;

Achieve passing scores on all parts of the SEE;

Apply for enrollment; and

Pass a background check to ensure that you have not engaged in any conduct that would justify the suspension or disbarment of an attorney, CPA, or enrolled agent from practice before the IRS.

IRS experience. You can become an enrolled agent by virtue of past service and technical experience with the IRS that qualifies you for enrollment. This track requires that you -

Possess the years of past service and technical experience specified in Circular 230;

Apply for enrollment; and

Pass a background check to ensure that you have not engaged in any conduct that would justify the suspension or disbarment of an attorney, CPA, or enrolled agent from practice before the IRS. "

Now are you ready to put what you know up against the knowledge that is required to practice before the IRS? Do you feel qualified? The outcomes you read here or see on TV are done by professionals. Please do not attempt any of these complicated negotiations without the help of a trained negotiator.

GOT GAS ?

The IRS doesn't care that it stinks! Organizations operating vehicles for business get a token small break, but no one else gets any relief. Deductions for medical and moving purposes, along with charitable organizations, went down or stayed the same. As of Jan. 1, 2008 the IRS standard mileage rates (including vans, pick ups or panel trucks) have increased for business. The new rates are in response to ever increasing gas operating costs for these organizations. Business mileage increased from 48.5 cents to 50.5 cents per mile driven, a 2 cent increase from 2007. Conversely, medical and moving rates fell from 20 cents per mile to 19 cents per mile. Charitable organizations (governed by law, not the IRS) had no change in their deduction. Tax payers deducting for mileage are not eligible for depreciation deductions. With these changes, the bottom line is the IRS has not helped business owners in America lower their bottom line.