Bar News - February 19, 2014
Tax Law: Offers in Compromise: Newly Expanded IRS Program Helps Cash-Strapped Clients
By: Barbara G. Heggie
“Pennies on the dollar!” When cash-strapped clients walk in the door with a federal tax debt, they might well be thinking of this advertising slogan. Thanks to the recent expansion of the Internal Revenue Service’s Fresh Start Initiative, particularly with regard to offers in compromise, there may be good reason for a client’s optimism.
The offer-in-compromise program allows a taxpayer – an individual or a business – to negotiate a settlement amount that is lower than the amount owed as a way to clear the debt. Offer acceptances based on doubt as to collectability are on the rise, and the Internal Revenue Code now specifically prohibits rejection of an offer solely on the basis of the dollar amount. The offer must simply be higher than zero and come supported with adequate documentation.
In addition to the actual offer in compromise (OIC) document, IRS Form 656, every offer submission must include Form 433-A (OIC) (revised in January 2014). This form is a collection information statement tailored for offer-in-compromise processing by the IRS OIC Unit. Unlike the standard Form 433-A, the OIC version leads the taxpayer through a series of asset, income, and expense calculations. These funnel down into one, theoretically-acceptable offer amount, otherwise known as the “reasonable collection potential” or RCP. If a taxpayer’s RCP is $20, and the offer submission includes documentation to prove it, then the IRS has no grounds for rejecting it. Reports from low-income taxpayer clinics around the country give ample cause to set aside most knee-jerk skepticism.
Although much of Form 433-A (OIC) is self-explanatory, a few aspects are not. Please consult the practice tips accompanying this article for advocacy ideas. In most instances, it’s best to explain your figures in an accompanying narrative or cover letter, especially if they don’t seem to fit neatly into the form’s structure. If you have questions about using the national standards or any other aspect of the form, or the OIC process in general, feel free to call me at (603) 715-3215.
Five OIC Practice Tips
1. Form 433-A (OIC) contains no reference to one of the more helpful provisions of IRM 18.104.22.168(1): “If the total amount listed on the Form 433-A (OIC) is over $1,000 and you have reason to believe the money will be used to pay for the taxpayer’s monthly allowable living expenses, do not include it on the [asset and expense table].” For many clients, this can amount to an allowance of more than $2,000, but there’s no obvious way to note this on the form. Accordingly, if your client’s circumstances warrant taking advantage of this provision, you must first complete the “monthly household expenses” section, then go back to “cash and investments” and subtract the total household expenses from the total cash.
2. The newest revision of the form specifically allows for a $3,450 vehicle deduction, but provides no way to account for the steady depreciation of this asset during the several-month OIC processing period. If the $3,450 deduction still leaves you with a vehicle value of more than zero, be prepared to argue for a lower figure if an OIC unit examiner happens to call you several months later. While you’ve got the examiner on the phone, get online and do a quick search on www.kbb.com or a similar site and provide the new number.
3. Regardless of vehicle value, include a quick line in the narrative accompanying your OIC submission stressing the importance of the vehicle to your client’s life. The IRM 22.214.171.124(3) only allows this deduction for “vehicles owned by the taxpayer(s) and used for work, the production of income, and/or the welfare of the taxpayer’s family.”
4. If your client’s car is more than six years old or has more than 75,000 miles on it, you can add another $200 to “vehicle operating costs” when completing the monthly household expenses section. If the vehicle’s age and mileage are just shy of the magic numbers, consider postponing submission of the offer until you can claim that extra $200 per month. Of course, if the vehicle “turns” after submission, be ready to point this out to any OIC unit examiner who calls.
5. Heed this instructional note displayed on the monthly household expense table: “Expenses may be adjusted based on IRS Collection Financial Standards.” The standards are found at www.irs.gov. As IRM 126.96.36.199.1(2) explains: “Taxpayers are allowed the National Standard Expense amount for their family size, without questioning the amount actually spent.”
So, for certain categories of expenses, such as food, you can claim the national standard expense for your client, even if the actual expense is lower. However, “if the total amount claimed is more than the total allowed by the National Standards, the taxpayer must provide documentation to substantiate and justify that the allowed expenses are inadequate to provide basic living expenses.”
Barbara G. Heggie is the coordinator of the Low-Income Taxpayer Project, part of the Pro Bono Referral Program at the NH Bar Association.