NON BANKRUPTCY OPTIONS FOR BACK TAXES - OFFER IN COMPROMISE

OFFER IN COMPROMISE - The law office of Brian Kawamoto has many years of experience in this area and has represented numerous taxpayers seeking a reduction of their tax liability. One of the most significant was the reduction of a  $20,000 IRS debt to down $500. This is not to say however that this outcome will apply in your case as individual results will vary. 

Why a cash offer is best: Contrary to all those late night TV ads promising you a miracle of sorts by reducing your taxes for a fraction of the amount, most offers are rejected by the IRS and are not for everyone. There is no "secret" when submitting an offer and you need not rush to submit one, as this is not a one time deal with a deadline that will soon be closed on you. There are three types of offers to submit: 1) Cash out to be paid within 90 days 2) Short Term Deferred Payment (to be paid more than 90 days up to 24 months) and 3) Deferred Payment (payment plan over the remaining statutory period for collecting the tax. For "cash out" you are required to submit an offer containing the realizable value of your assets, plus the total amount the IRS could collect over 48 months of payments or the remainder of their 10 year statutory period for collection, whichever is less. For short term deferred payment, the offer must include the realizable value of your assets plus the total amount the IRS could collect over 60 months of payments or the remainder of the 10 year statutory period for collection,whichever is less. The IRS will give you up to 2 years from acceptance to pay in the amount of your offer. Under the deferred payment offer the IRS allows you to pay the offer amount over the remaining statutory period for collecting the tax. For this however the offer must include the realizable value of your assets plus the amount the IRS could collect through monthly payments during the remaining life of the collection statute. With short term and deferred payment offers the IRS may file a Federal Tax Lien. If you submit a cash offer the IRS releases the tax lien upon payment of the cash offer. Also with a cash offer the IRS only looks to the next 48 months of payments in determining your abililty to pay (or collection statute expiration date whichever is less), thus there are advantages in submitting a cash offer since it may allow you to pay the least amount of all three methods.Essentially then an offer to the IRS is based upon your "disposable income" and your net worth and what kind of offer you want to submit. If your net realizable value plus the total amount of your disposable income over 48 months or the statutory period for collection whichever is less exceeds your tax balance, you would not be a viable cash offer candidate as the IRS. If your net realizable value plus total amount of disposable income over 60 months or the statutory period for collection whichever is less exceeds the tax balance, you would not be a viable short term deferred payment candidate. If your net realizable value plus total amount of disposable income over the statutory period for collection remaining exceed the tax balance, you would not be a viable deferred payment offer candidate. IRS only allows certain living expenses in determining "disposable income", thus any such adjustment by the IRS leads to having more disposable income in theory and the IRS looks at this as an ability on your part to pay more towards your taxes. The IRS classifies your living expenses the way they see fit and unless Congress says otherwise we are bound by it. They are broken down as national expenses, local expenses, other expenses and what I refer to as "conditional expenses" (the IRS calls it that for installment plan purposes but not for offer purposes). Each expense category is treated differently as follows:

1. NATIONAL EXPENSES: These include food, clothing, housekeeping supplies, personal care, miscellaneous and out of pocket health care expenses. The IRS has a national table that is based upon your family size. In it they allow you an amount for these expenses no matter where you live. Even if you spend less you can still go with the higher amount allowed by the IRS. If you exceed this table amount however you can claim more but you must document all of these items.

2. LOCAL EXPENSES ARE CAPPED BY THE IRS TABLES: These expenses are for housing (rent or mortgage payments) property taxes, homeowner dues and condo or maintenance fees, utilities, gas, water, electric ,sewer fees, telephone bills, transportation ownership (auto loan or lease payments) and transportation operating expenses such as oil, gas, insurance, license, registration, parking fees, etc. (if your car is over 6 years old or has 75,000 miles then you get an additional $200 a month auto operating expense by the IRS).The IRS has a table for local expenses and it varies depending where you live. Unfortunately, if you exceed these table amounts you cannot claim more if you are submitting an offer. In other words if your rent or auto loan payments exceed what the IRS allows per its local expense tables, you may have to do some belt tightening before submitting an offer. An experienced tax attorney will be able to address these issues for you. 

3. OTHER EXPENSES may be allowed by the IRS if they meet the necessary expense test. They must be reasonable. They must provide for the health and welfare of the taxpayer and/or his or her family or they must be for the production of income. This is determined based on the facts and circumstances of each case. Generally they are allowed for taxes, health insurance premiums, term life insurance premiums for yourself (not whole life), union dues, medicare, social security, child care and court ordered payments such as child support (provided it does include payment of your child's private school tuition or your child's life insurance). Some unsecured debts (minimum payment only) may be allowed if the loan is for the production of income or used to pay taxes. Student loans for the taxpayer, and only if there were being paid are allowed. Proof of these expenses will be required and there is no cap on how much you can claim, so long as it is necessary for your situation.

4. CONDITIONAL EXPENSES, these expenses do not meet the necessary expense test therefore they are not allowed by the IRS when submitting an offer and should you list them, don't be surprised if your offer is rejected. These expenses include voluntary contributions towards your 401k or IRA, charitable contributions for the most part, most credit card payments, other unsecured loans (unless used to borrow money to fund offer or used to pay federal taxes), life insurance premiums for your children even if court ordered and private school or college tuition for your children (unless for special needs). Monthly payments to the State of Hawaii for back taxes even if part of an installment agreement or pursuant to a levy is also not allowed as a necessary expenses per the IRS. Payments to repay loans from your 401K or TSP also are not allowed as necessary expenses. As most of us have some form of "conditional expense" unless their is some belt tightening first, a submission of an offer would be problematic. KEY FOR OFFER SUCCESS: For you offer to have a good chance of success it should not contain any "conditional expenses" in your monthly expense schedule.

CONSUMERS NEED TO BEWARE OF DECEPTIVE ADVERTISING OR SALES PITCHES.There are some self promoting "tax specialists" that seem to be more interested in getting your business than they are in getting your offer accepted. The more flagrant violators will charge you to submit an offer when you simply don't qualify for one, others will prepare one that is not processable simply because they don't know how to properly prepare one, or they fail to submit the required documentation. Regardless of who is representing you, an offer should not be submitted unless you are confident about its chances of success. Anyone can prepare an offer for you and charge you for it, the key is to find someone who can prepare an offer that has a good chance of being accepted by the IRS, or someone who will tell you why are not a good offer candidate and that you should pursue other options instead. I have had a number of people contact me after they submitted an offer that was rejected by one of these so called tax specialists and it is unfortunate as they are out thousands of dollars in fees paid and worse yet, they now owe more to the IRS because of the interest charges that accrued while the offer was pending. It is also extremely disheartening when some of these individuals were not viable offer candidates to begin with. Some called the company to find out why the offer was rejected, either no one returned their calls, or they got another representative who told them to send in more money so that they could resubmit another offer to the IRS. I don't know of anyone that got their money back and unless you have a case that the FCC or your state's consumer protection agency will consider as actionable, you may probably never see your money again. To make thing worse, the IRS will not wait and you still have taxes to pay. It is better that you hire someone reputable in your town or city and who will personally see your case through from the start to the finish. So do some homework before you hire anyone, ask around, or simply google the company soliciting you and see if there are any complaints that have been filed. In fact there are so many rejected offers around that I once used to advertise that as a part of my services..."representing those with rejected offers". This problem is so rampant and widespread that the IRS Commissioner issued a nationwide consumer alert to taxpayers warning them to watch out for promoters charging excessive fees to those who had no chance of getting their offers accepted at all (see Consumer Alert below). We all like to hear promises of miracles that await us and all that stands in the way is one simple toll free phone call, but it is not that simple as you should know and most of you are not viable offer candidates to begin with. If a sales pitch sounds too good to be true, it is just that "too good to be true" and instead you should just walk away, just remember before you hire someone to help you, do your research first as there are good tax experts out there who can REALLY help you, the key is to find the right one for you, someone that you can trust and someone who will give your matter the personal attention that it deserves.

Before I submit an offer I will obtain a tax transcript from the IRS and go over the information with the taxpayer, especially as it concerns the CSED or collection statute expiration date. If the statute will be expiring soon and the taxpayer can afford to wait it out, then I will suggest that an offer should not be made (see below for more discussion of some of the negative consequences of submitting an offer). The information gathered from the tax transcript also tells me If the client meets tax dischargeability requirements in bankruptcy. If they qualify I also discuss with them that they have another option besides an offer in compromise, especially if it appears from all the financial information gathered at this point, that they do not appear to be a viable offer candidate. Since a majority of the delinquent taxpayers are not viable offer candidates if you have a serious tax issue and owe a lot of back taxes, it may also be better to discuss your situation with an experienced tax and bankruptcy attorney rather than an accountant. For one, there exists a confidential privilege between attorney and client, but not between accountant and client, and the other reason is that an accountant does not practice bankruptcy law and would not be able to analyze your case from that perspective, let alone inform you of the benefits for fiing bankruptcy discharging your taxes.

Differences between Chapter 13 and Offer in Compromise and why filing a Chapter 13 has several major and distinct advantages over filing an Offer in Compromise:

-Chapter 13 allows for reasonable and necessary mortgage expenses even if it exceeds the IRS housing allowance (provided that it is reasonable under Bankruptcy law in your state), also all utilities including water, sewer, garbage, electric, home owner association fees, condo maintenance fees, basic cable, cellphone, internet, security alarm monitoring, etc. are allowable. An Offer in Compromise on the other hand has a "ceiling limit" and this limit is often times well below what you actually spend each month for these expenses.

-Chapter 13 allows for actual car loan payments, insurance premiums, repairs, gas, oil, licensing etc. (there may be limits if it is for a luxury car). An Offer in Compromise on the other hand has a "ceiling limit" and this limit is often times well below what you actually spend each month on these expenses

.-Chapter 13 allows for charitable expenses including "tithing". Offer in Compromise generally does not, unless its a condition of your employment or it is to provide for your health and welfare.

-Chapter 13 allows for some private school tuition expenses for minor children. Offer in Compromise does not allow for private school tuition. For more on this topic in Hawaii see: http://hubpages.com/hub/BankruptcyHonolulu-School-tuition-is-it-a-necessary-expense

-In Hawaii, a Chapter 13 allows for repayment on 401k or TSP on loans taken out against your retirement accounts.

-Chapter 13 will wipe out your credit cards so you no longer have to juggle payments between paying them and the IRS each month. Chapter 13 also allows you to prioritize priority or secured tax payments over your unsecured creditors. An Offer in Compromise does not allow for credit card payments.

-Chapter 13 will allow you to cure back tax payments to the State of Hawaii and stop a wage levy. Incredulously, an Offer in Compromise does not allow for such back tax payments even if you have an installment agreement or are being levied upon by the State of Hawaii.

-If you own a home and have a second mortgage that is underwater, you can strip off that loan and use the savings to pay priority taxes instead under a Chapter 13. After your bankruptcy is over your priority taxes are paid off in full, the IRS is off your back and you no longer have a second mortgage to pay. An Offer in Compromise cannot get rid of a second mortgage for you.

-The odds of getting your bankruptcy approved by the court is a lot better than the chances of getting an Offer in Compromise approved by the IRS.

NEGATIVE CONSEQUENCES OF SUBMITTING AN OFFER: Lastly, there are some downsides to submitting an offer and this is a reason why you should not submit an offer if there is no realistic chance of its success. First of all when you submit an offer it creates a "tolling event" for bankruptcy discharge purposes, and it also extends your collection statute expiration date, so if your tax transcript says that your CSED or collection statute expires within a year, it may not be wise to submit an offer and if you can afford to wait, you may be better off by just letting the statute expire on its terms. Lastly,if your offer is accepted by the IRS you will be on "probation" for 5 years, this means you must file your returns and pay your taxes on time for the next 5 years, failure to comply will lead to your offer being cancelled by the IRS. Even if you are owed a refund, you must still timely file your return to be in compliance with the terms of your Offer.  If you are self employed this could be a daunting task especially if the economy is not stable and your business profitability and the payment of future taxes is not guaranteed over the next five years. 

BANKRUPTCY OPTIONS: If you are not a viable offer candidate all is not lost as you may have other legal options available to you such as bankruptcy. If you qualify you may be able to discharge certain* income taxes through bankruptcy. Both Chapter 7 and Chapter 13 allows for the discharge of certain income tax debts. To determine whether or not your taxes are dischargeable you must have filed your tax returns more than 2 years ago (an SFR where the IRS files a return for you is not considered a tax return, AND if the IRS assesses your tax based upon the SFR, that tax is not dischargeable, thus it will be a priority tax). in the past before BAPCPA and depending where you lived, courts were split on whether a tax return filed after an SFR was filed by the IRS was considered a tax return for bankruptcy discharge purposes...after BAPCPA, the IRS has apparently now taken the position that a late return filed after an SFR is not a tax return for discharge purposes, resulting in no tax discharge, see http://www.bankruptcylawnetwork.com/can-i-discharge-tax-on-late-filed-returns . Your taxes must be for older years (generally more than 3 years ago, calculated from the due date the tax return was required to be filed, plus extensions) and the taxes must have been assessed by the IRS more than 240 days ago. In addition you must add in more time to these tests if there are any applicable "tolling periods" that apply. These tolling periods are rather complex but you should be aware that it may apply to you and your bankruptcy attorney should discuss with you whether it applies. For example some of the more common tolling periods that will extend the dates of these tests, including filing a previous bankruptcy, submitting a previous offer in compromise and appeal of a rejected one, requesting an appeals collection hearing, seeking a taxpayer assistance order, and submitting a previous request for innocent spouse relief. This is not the full list of tolling events, so you need to go over that with your attorney. As you can tell the tax discharge test is very complex and only an experienced tax and bankruptcy attorney in Honolulu, Hawaii should be retained for that. A copy of your tax transcript is necessary before you can conduct this test. Also if there is a filed federal tax lien, the lien itself is never discharged in bankruptcy. For more about bankruptcy see http://bankruptcyhawaii.blogspot.com/2010/12/bankruptcy-law-in-hawaii.html [*The income taxes due must be non-fraudulent (no fraud penalty was assessed) and there must not be any willful tax evasion]

OTHER MATTERS: TENANCY BY ENTIRETY IN HAWAII NO LONGER PROTECTED FROM THE IRS. In the past if only one spouse owed taxes to the IRS and the marital couple owned a home as "Tenants by Entirety" in Hawaii, the IRS would not go after the home (not even one-half of the home). This IRS practice was based upon a long standing Hawaii Supreme Court case known as Sawada v. Endo. A recent U.S. Supreme Court case however, known as Commissioner vs. Craft, dealt a big blow to Hawaii homeowners and reversed that practice. This supreme court case now gives the IRS the right to go after one-half of your home here in Hawaii even if held as Tenants by the Entirety and only one spouse owes taxes (if both spouse owe taxes to the IRS, naturally the IRS can go after the entire home). All may not be lost however, per their own departmental memorandum known as an IRM (which they can change at any time) the IRS will consider when you bought your home in deciding whether they will go after it. Lets hope they don't change their minds.

.

OTHER MATTERS:

CONSUMER ALERT: In 2004, the IRS, without naming any names, warned the public to beware of "unscrupulous promoters" preying on unsuspecting people in deep financial trouble. These promoters "make money by inappropriately advising indebted taxpayers to file an application for an offer in compromise with the IRS, promising unrealistic results, even when the taxpayers do not meet the requirements of the program," the IRS said. "This bad advice costs taxpayers money and time." See article from Wall Street Journalhttp://online.wsj.com/article/SB121677131246575457.html

STOP IRS LEVY WITH A PAYMENT PLAN: If you owe back taxes and fail to address or resolve your issues with the IRS, they will assign your account over to the collection division where they will begin enforcement action. Prior to a levy the IRS will send via certified mail a "final notice of intent to levy". If you have moved since you filed your last tax return and if you mail forwarding expired you probably will not receive this letter since the IRS does not know your new address and will send this letter to your last known address on file with them. If you receive such a letter and do not know what to do or how to resolve your problem you should contact a tax attorney right away if you wish to prevent the IRS from levying your assets. As a "super creditor" the IRS can levy most assets. There are a few statutory exemptions that describe what assets they cannot take, but that list is quite limited, for that list see, Title 26, section 6334 of the Internal Revenue Code. The IRS generally goes after your bank accounts and wages before they begin to go after other assets that you own. Unfortunately some of you will know this when your employer or your bank informs you that they were served with a levy from the IRS and are now holding your funds. If you rely upon those funds to live on, this can be very devastating. If your name just so happened to be on your parents bank account as a joint account holder, the bank will hold those funds as well, so in other words your tax levy may cause some grief for not only yourself but for others as well. If you own real estate with other family members, the filing and recording of a federal tax lien against you will encumber that property and now once again you have involved other family members with your tax problems. By statute Social security benefits are exempt from garnishment by most creditors, but not the IRS. There are procedures in place that will also allow the IRS to sell your car and your home. They can also go after certain retirement accounts such as an IRA and 401k, as well as the cash value of life insurance policies. The IRS requires that you have filed all non-filed tax returns before they will enter into an installment plan and stop a levy so if you anticipate a levy you should have your delinquent tax returns prepared asap. If negotiations with the IRS are successful and an installment plan is agreed upon the levy will be released. There are various issues involved in negotiating for a payment plan that you can afford and I suggest that you not do it by yourself. Negotiating for an installment agreement depends on how much you owe and how much you can pay towards it. Sometimes excessive living expenses and conditional expenses are allowed, other times they are not. If you do it yourself you may not be able to successfully handle these issues and you may end up paying more to the IRS than what you really can afford. Depending upon the facts of your case and the necessity for the expense an experienced tax attorney may get you a temporary reprieve up to a year for excessive and conditional expenses. For some of you there may have to be some belt tightening on your part before the IRS will agree to an installment agreement. For those who qualify the IRS will agree to place certain people in an "noncollectable status". This means you don't have to pay the IRS anything so long as your financial situation does not change, If you are noncollectable you are probably a great candidate for an Offer in Compromise. If however you owe taxes to the IRS, the state of Hawaii and have major consumer debt then bankruptcy may be a better option as it will address all of those issues, something that an offer does not.