I recently met with a married couple from West Palm Beach that prepared and submitted an offer in compromise in an attempt to settle their IRS back taxes.
Unfortunately, the IRS rejected their tax settlement offer and they decided to appeal the decision. They came to see me because they wanted my advice about how to present their case before the IRS Appeals office.
If the IRS rejects your offer in compromise you have 30 days to file an appeal. The appeal will be heard by a Settlement Officer and it generally takes 2-4 months before the hearing is conducted.
The taxpayers were retired, in poor health and living off pension and social security income and distributions from a small IRA. They owed $40,000 and made an offer of $2000 to settle their unpaid taxes. At the time of submitting their offer the value of the IRA was $20,000. This was their only asset.
When determining whether to accept your offer in compromise the IRS considers your reasonable collection potential (RCP). Your RCP is the total of a percentage (usually 80%) of the equity in your assets and a multiple (either 12 or 24) of your excess monthly income. To determine your excess monthly income the IRS subtracts allowable living expenses from your monthly income.
The IRS rejected the taxpayers’ settlement offer because they wanted the taxpayers to increase the offer to $16,000 (80% of the IRA). Using the pension and social security income the IRS determined the taxpayers did not have any excess monthly income but instead had a shortfall of $1500 a month. This shortage was being funded with the IRA. If the IRS takes $16,000 of the IRA this leaves the taxpayers with $4000, most of which will be needed to pay the current income taxes on the $16,000 distribution. Since the taxpayers have been funding their necessary living expenses with the IRA at a rate of $1500 per month, within no time they will be unable to meet these expenses resulting in economic hardship.
The IRS Offer Examiner who handled this case does not appear to have used common sense nor seem to have followed the IRS manual in rejecting the taxpayer’s offer and asking $16.000 to accept the offer. How did the examiner expect the taxpayers to meet their necessary living expenses if they are required to give up $16,000 of their IRA? Since the taxpayers would face economic hardship they seem to qualify for a “doubt as to liability with special circumstances offer”. Therefore, the IRA will not be considered an asset available to the IRS. The IRM provides several examples that illustrate the type of case that may be compromised under the economic hardship standard. The following example is similar to the taxpayers’ situation.
“The taxpayer is retired and the only income is from a pension. The only asset is a retirement account and the funds in the account are sufficient to satisfy the liability. Liquidation of the retirement account would leave the taxpayer without adequate means to provide for basic living expenses.”
There are other references in the IRM that would allow the taxpayers to keep the IRA from the reach of the IRS.
As the taxpayers wish to represent themselves, we provided them with the applicable sections of the IRM needed to successfully argue their case before the IRS Settlement Officer. In a future blog we” ll let you know the outcome of their appeal.
If you need to resolve back tax problems including preparation of an offer in compromise or want to appeal a rejected offer look to East Coast Tax Consulting Group for the very best in tax resolution services. Call us today at 561-826-9303 for a free no obligation consultation.