Who Qualifies for an IRS Offer in Compromise?

If you owe the IRS, chances are you’ve heard of an offer in compromise. After all, it’s the only form of tax relief that settles IRS debt for “pennies on the dollar.” However, qualifying for this popular form of tax relief is challenging, and truth be told, many people with tax debt will not qualify.  

But first… 

What is an Offer in Compromise? 

An offer in compromise is an agreement between you (the taxpayer) and the IRS to settle your tax liability for less than the amount owed.   

The IRS will not accept an offer in compromise unless the amount that you offer is equal to or more than the reasonable collection potential (RCP).  Reasonable collection potential can be understood as your ability to pay the IRS and includes the value of your realizable assets, such as real property, automobiles, bank accounts, and other assets, and anticipated future income (excluding the amounts allowed for basic living expenses).    

Pre-Qualifications 

There are some requirements you must meet before you can apply for an offer in compromise.  

  1. All your tax returns must be filed. 
  1. All your required estimated tax payments for the current year are made. 
  1. All required federal tax deposits for the current quarter are made (for business owners with employees only). 

Acceptable Basis for an Offer in Compromise 

The IRS will not outright accept your offer in compromise. It may only do so if the offer in compromise is based on any of the following reasons: 

  • Doubt as to a taxpayer’s liability.  There is doubt about the taxpayer’s liabilities if there is a genuine dispute that the correct tax debt exists under the law. 
  • Doubt as to the collectability of tax liabilitiesWhen a taxpayer’s assets and income are less than the total tax liability, a doubt that the IRS could collect taxes from the taxpayer arises. 
  • Effective tax administration. The IRS may accept this ground if it is clear that the taxpayer legally owed taxes, which are collectible, yet requiring payment in full would either create an economic hardship or be unfair and inequitable due to exceptional circumstances. 

Return and Rejection of an Offer in Compromise 

There are cases wherein the IRS returns, instead of rejecting, an offer in compromise. If your offer in compromise is returned, you do not have the right to appeal. However, you may re-submit the offer in compromise once corrections have been made. Return of an offer in compromise usually occurs when: 

  1. The taxpayer didn’t submit the necessary information. 
  1. The taxpayer filed for bankruptcy. 
  1. The taxpayer failed to include a required application fee or non-refundable payment with the offer. 
  1. The taxpayer has not filed required tax returns or has not paid current tax liabilities while the IRS was considering the offer.  

On the other hand, in cases of a rejection, the IRC notifies taxpayers by a mailed letter. If your offer in compromise is rejected, you will receive a letter stating the grounds for the rejection. You may file an appeal to the IRS Office of Appeals within 30 days from the date of the letter of rejection. 

How Is Equitable Relief Advantageous to an Innocent Spouse? 

The IRC provides for three forms of relief from joint and several liability due to deficiencies or understatements in a joint return by a guilty spouse. First, married taxpayers may request traditional innocent spouse relief. Second, taxpayers who are no longer married (or are widowed), legally separated, or living separately for 12 months from their spouses may file for separate liability election relief. Finally, the IRS may grant “equitable relief.” 

What is Equitable Relief? 

Equitable relief is relief from joint or several liability from joint returns for a former or separated spouse who wishes to file a separate liability election but is ineligible because he or she has not been widowed, divorced, legally separated, or living apart for at least 12 months from the spouse whom he or she filed a joint return.   

What is an Innocent Spouse relieved from in Equitable Relief? 

A taxpayer who wishes to apply for the separate liability election, but is ineligible for such relief, may instead apply for equitable relief (IRC Section 6015(f).   

Under equitable relief, an innocent spouse may be given relief from any deficiency attributable to an erroneous item of the guilty spouse. Also, the relief provides the possibility of relief for understatements, unlike in traditional relief and separate liability election relief that only provide relief from a proposed or assessed deficiency. 

The relief under equitable relief comes in the form of being excused from joint and several liability for the joint tax due. However, the relief granted is different between deficiency cases and underpayment cases. In deficiency cases, the IRS will determine the percentage of adjustments to income attributable to the guilty spouse and then multiply it by the deficiency to come up with the amount of relief to be granted to the innocent spouse. In underpayment cases, the innocent spouse may be relieved of all liability for the year requested, even for tax relating to his or her income or items, or the IRS can grant relief on a pro-rata basis using the percentage of each spouse’s income multiplied by the underpayment in underpayment cases.   

What does the IRS consider in granting Equitable Relief to an Innocent Spouse? 

The IRS’ authority to grant relief to a spouse or former spouse from joint return liability is discretionary. In granting the relief, the IRS must find that: 

  • It is inequitable to hold the requesting innocent spouse liable for any unpaid tax or deficiency in tax after considering all of the facts and circumstances.   
  • Relief is not available for the requesting innocent spouse under the election procedures. 

What You Should Consider Before Hiring A Tax Attorney

Individuals and businesses engage tax attorneys for different reasons. Some need a tax attorney to assist with a commercial transaction by navigating tax consequences and mitigating tax liability. Others need a tax attorney to advise on business formation. While these clients need assistance from a transactional tax attorney, most people looking for a local tax attorney are facing IRS collections. In other words, most people searching for a tax attorney owe tax debt to the IRS or the State of California, and they need help getting out of collections and resolving that tax debt.

For those prospective clients who owe tax debt, there are some important things to consider before signing a representation agreement.

Payment Plan

Some tax resolution lawyers (that is, tax lawyers who help clients resolve tax debt) offer payment plans. After an initial payment the attorney files a power of attorney with the IRS and officially represents the client. In exchange, the client makes monthly payments toward a flat fee or initial balance before a specific tax service is provided. However, if the client falls behind on monthly payments the tax attorney can simply withdraw from the matter, leaving the client without the legal service and that much poorer. Accordingly, consider the value of payment plans in lieu of paying a flat fee upfront. If delivery of the legal service is contingent upon payment in full, perhaps a payment plan won’t provide sufficient value or timely service.

Flat Fee or Hourly Rate

Attorney pricing is very important to any client. Attorneys are notorious for being expensive, so you shouldn’t sign a representation agreement you don’t understand. With that said, many tax resolution attorneys offer flat fees for specific services. That means that the client will pay a specific sum of money in exchange for a specific service. For instance, a client may pay $5,000 for an offer in compromise application. Flat fees give the client greater certainty as to the total cost of representation.

Attorneys also charge by the hour for certain services, often in litigation or whenever the total amount of work required is difficult to estimate at the beginning of representation. In this instance, a tax attorney will charge a “retainer fee” and bill against that amount as they work on the case according to their hourly rate. For example, a tax attorney may charge a $5,000 retainer fee in an audit defense case and bill at $300 per hour. If the attorney works 10 hours on the case during the first month they may deduct $3,000 from the retainer fee.

Outcome vs Cost

Prospective clients should weigh the expected relief against the cost of hiring a tax attorney. The less tax debt owed, the less sense it makes to hire a tax attorney. For instance, a client wouldn’t pay a tax attorney $3,000 to secure an installment plan for repayment of a $3,000 debt; the attorney fees would equal the amount of debt. Likewise, attorneys can’t guarantee a particular outcome, so there’s some risk that the client won’t receive monetary savings through the engagement. For instance, an offer in compromise application could get rejected by the IRS. (Of course, an experienced tax attorney will only file an application that stands a good chance of being approved.)

To give a practical rule of thumb followed by many tax attorneys, a client must owe at least $10,000 in tax debt. If less than $10,000 of tax debt is owed, it may not make sense to spend money on attorney fees when the debt can be repaid, the client can apply for relief on their own, or the client can hire a less expensive professional.

Summary

Consider the fee structure before hiring a tax attorney. Is the tax attorney charging a flat fee or billing by the hour? Is the fee being paid through monthly installments? What happens if you miss an installment payment? Is the goal of representation worth the cost of hiring the attorney?

-To learn more about tax resolution visit The Sacramento Tax Blog for articles on IRS tax resolution, tax attorney fees, and offers in compromise.

How To Avoid A Federal Tax Lien

A tax lien put into official records can have lasting financial consequences—your credit rating will suffer, decreasing your ability and increasing your cost to obtain financing. While it would not have an impact if you plan to sell your personal property, tax liens will prohibit you from selling or refinancing real estate.  Accordingly, individuals with tax liens that encumber real property should learn how to get rid of tax liens and get out of tax debt.

Appeal

There are a few steps you can take once a lien notice is filed. The first is to appeal. Upon the lien filing, the Internal Revenue Service is given five business days to send a written notice to the taxpayer, which includes the notice of the right to request a hearing. The lien can be withdrawn if you win the appeal, but unfortunately the filing will stay on your credit report.  

Pay

Second, you have the option to pay in full. If you do not have enough resources to pay what you owe, perhaps you can seek help from friends, family, or a local tax lawyer. The IRS has 30 days from the date when you paid in full to record a release. In case the agency would not attend to it, reach out to the IRS Centralized Lien Operation or the Taxpayer Advocate Service.  

Lien Release To Sell Real Estate

Next, here’s a possible scenario: The IRS filed a Notice of Federal Tax Lien that was attached to a real estate you own. You are hoping to sell that property but you know that the amount you will get would not make up for what you owe. That’s okay. You can proceed to sell it and offer clean title once the agency releases your lien in writing. Your buyer can have the property without attached Federal Tax Lien but the catch is, all of the money will go directly to the IRS. The lien will remain on the record but your tax bill will be reduced.  

Subordination of Tax Lien For Mortgage Refinance

Now, what if a tax lien is filed but you intend to refinance your mortgage? You can opt to request a Notice of Federal Tax Lien subordination. If the IRS will accept your request, the refinanced loan will be prioritized over the lien.   

Notice of Federal Tax Lien Withdrawal

The last one is a rare situation but you can still try: Request that the Notice of Federal Tax Lien be withdrawn. If the IRS approves the withdrawal, the reference to your tax lien will be removed from the records, essentially boosting your credit score. You must submit the IRS Form 12277 and ask the agency to send a Certificate of Withdrawal copy to credit reporting institutions.  

There are circumstances when the IRS would improperly credit your account despite your bill payment. This will result in a filed tax lien notice that would appear in public records even if you do not actually owe anything to the agency. Do not worry because the Taxpayer Bill of Rights states that you are authorized to get a Certificate of Release saying that the tax lien was filed in error.  

How To Divide Businesses & Real Estate In A California Divorce

There are two methods of dividing property in a California divorce case: In-Kind Division and Asset Distribution. Under the in-kind division method, the community property assets are divided by awarding one half to each party. For the asset distribution method, some properties are assigned to one party, and the other party receives properties of equal value. The Asset Distribution method is also called cash-out.  

A third alternative method of dividing properties is for the court to order the sale of community property and for the corresponding proceeds to be divided between the parties.  

Division of Family Business 

The division of a family business depends on several factors, such as valuation, the ability of a party to purchase the share of the other, and whether it requires special expertise to operate it.  

The family business should be awarded to either of the spouses if it is proven that either of them can operate it and have the means to buy the other’s share. If such is the case, then the business should not be sold to a third party but should be awarded to one spouse.  

The court can refuse to divide the business equally if the business requires special expertise to run and only one spouse has the ability to run the business. In such a case, the business should be awarded to the spouse with the ability to run it. However, if the nature of the business does not require special expertise in running it, then the business may be awarded to a spouse even if he or she does not have the ability to operate it yet. 

In case of a business that requires a professional license to operate, the business must be awarded to the spouse who possesses the license.   

Division of Out-of-State Real Property 

Courts are mandated to divide out-of-state real property in a way that does not change the nature of the interests held in the real property situated in the other state. So, for example, if the community estate possesses sole ownership in the real property located outside California, then the court should divide the real estate in a way that preserves the sole ownership interest over the property.  

The following may be done to divide the property if it is not possible to preserve the nature of the interests:  

  • Require the parties to execute conveyances or take other actions regarding the real property situated in the other state as necessary. 
  • Award to the party who would have been benefited by the conveyances or other actions the money value of the interest in the property that the party would have received if the conveyances had been executed or other actions are taken.  

Awarding Single Assets to One Party  

An asset of the community property can be awarded to one party alone if the economic circumstances warrant it. An example of an economic circumstance that warrants such kind of award is when the asset cannot be divided without impairment.  

Such can be applied to a family business that cannot be divided without impairment. It can also be applied to a family home used by the custodial spouse when there is no replacement available.  

A spouse’s special attachment to an asset can also be a basis for awarding an asset to one party. An example is a painting to which a party attaches special meaning.  

However, if the court sees it fit to award a major asset to one party alone, the other party will also receive compensation. It can be in the form of other assets or notes from the spouse awarded the asset.  

Liquidation to Avoid Risk 

The court has the power to order the liquidation of community assets to avoid unreasonable market or investment risks. If this is done to pay off the debts of a party, then there should be a determination of the rights of the parties or adequate protection given to the other party’s community property interest.  

How Much Do Sacramento Tax Attorneys Charge?

Summary: How much a Sacramento tax attorney will charge depends upon the service. First, California tax attorneys often charge flat fees for particular services. The flat fee can be as low as $1,500 for a tax account review to as much as $30,000 for an offer in compromise for a business with over $100,000 in tax debt. The best way to find out how much a tax attorney in Sacramento will charge is to call for a free consultation and quote. After a few consultations you’ll have a better understanding of local rates for the particular tax relief option that fits your case.

Currently Not Collectible

The least costly IRS collection task for an attorney to perform is securing currently not collectible status with the IRS. Not everyone qualifies for CNC status, and some who could qualify fail to appropriately complete the paperwork. A Sacramento tax lawyer may charge anywhere from $3,500 to $5,000 to secure Currently Not Collectible Status with the IRS

Installment Agreement

IRS installment agreements can be a good avenue for individuals who need to stop IRS collections, but who have income or assets such that the IRS can collect the balance due in time. An installment agreement will stop IRS collections and create an affordable payment plan. A tax attorney in Sacramento may charge anywhere from $3,500 to $5,000 for an individual and potentially double those amounts for a business.

Offer in Compromise

Many people have heard of an offer in compromise with the IRS, but few are successful in reaching this compromise without a tax attorney. To propose a viable offer in compromise your tax attorney must calculate your reasonable collection potential; something people without an attorney rarely do successfully. When successful, the taxpayer can essentially settle their debt with the IRS for less than the total amount owed, and in light of the potential savings and difficulty a tax attorney in Sacramento may charge an individual anywhere from $5,000 to $7,500.

What You Should Do If The IRS Sent An Audit Letter To Your Old Address

True enough, being audited is already a pain in the neck, but there are also other rare but serious audit problems you should take note of.

In previous discussions, it was mentioned that the Internal Revenue Service is supposed to send the audit notice to your last known address. The catch is, they are not required to confirm whether you received it or not. Some taxpayers are surprised to get examination bills as the audit notice was sent to their old address.

The IRS is required to regularly update its files and deliver notices to the most recent address you indicated in your tax return. The agency is given three months to update the record as soon as they receive a notification that you are changing your address.

Now, if you happen to change residences and you did not answer the audit letter (because you weren’t able to receive it in the first place), the IRS auditor will consider your case a “no show.” This means that deductions and exemptions are prohibited. The IRS will then send an audit report to let you know of the appeal process or a Notice of Deficiency offering you around three months to file a case in tax court. If you think about it, the agency is unfairly moving on with the process, thinking that you received the documents through your address. It would not bother to verify if you actually got the notices because, legally speaking, as long as it sends out the notices to your last known address, it is doing its job. So here’s how you can fight back:

Assessment Reconsideration

Write or call the IRS to request an assessment reconsideration. Inform them that you have not been receiving any notice because you changed your address. You can also schedule a meeting to talk with an auditor. This is discretionary, so you do not have the right to demand this reconsideration, but usually, valid requests will be granted.

Tax Court

If your request for an assessment reconsideration is rejected, the next thing you can do is to bring it to the tax court. You can argue that you have not been receiving deficiency notice in your last known address, per the requirement of law.

The other audit problem is jeopardy assessment which is usually done against foreigners or foreign businesses located in the United States. The key here is to meet a tax attorney right away because the IRS will have the power to conduct fast assessments without an audit, and it will take your assets without prior notice.

This one happens only if the agency thinks that you seem to be hiding out or planning to depart the country, you are concealing or removing properties from the country, or if your financial security is endangered.

The Probate Process Before the First Hearing

Several steps need to be taken at specific times and within certain deadlines throughout a Probate case. This article will provide you with a shortened version of the Probate process before the hearing, including the documents you will need at the initial consultation with your probate attorney, when certain documents need to be filed with the court, and what you will need to do in your role as Personal Representative of the Estate.

Essentially, the probate attorney will need all information about the decedent as possible. Creating a list or log of all accounts, property, heirs, those who should be disinherited, specific wishes, and the like will make the process much easier. Being organized, not commingling your funds with the decedents, paying debts, and keeping track of property may seem overwhelming at first, but as long as you stay on track and keep assets and debts separate, the Probate process will go much faster. At your initial appointment with the attorney, you should bring:

  • The decedent’s Trust documents (if any)
  • At least 5 certified Death Certificates
  • Titles of real property owned by the decedent (either jointly or separately)
  • Any bills in the decedent’s name (utilities, hospital bills, etc.)
  • Stocks, bonds, or annuities in the decedent’s name
  • All bank statements, IRAs, retirement statements, or portfolios
  • A list of all possible beneficiaries, heirs, or people who would be disinherited
  • Any Federal and State tax returns

Once you have initially met with the probate attorney, the original will and any codicils will be lodged with the court, the initial Petition for Probate will be filed, and a hearing date will be assigned. Your attorney will notify all potential beneficiaries or heirs of the decedent that there is now a probate case opened and notify them of the hearing date. The attorney will then file the Notice of Petition to Administer Estate with the court prior to the hearing to ensure the court that all heirs were notified of the proceeding.

The Personal Representative will need to obtain a bond through a surety company unless the decedent’s will declares that the bond can be waived with their own money. The amount of the bond is based off the value of the estate. However, even if the will declares the bond can be waived, the court may still order that a bond be obtained. The bond ensures that the Personal Representative will uphold their duty described in their role of being the Personal Representative of the Estate.

Your probate attorney will prepare and submit a proposed Order for Probate to the court prior to the hearing and then appear at the hearing. Once the Duties and Liabilities of the Personal Representative, Confidential Statement, and Bond are filed, the Judge will then appoint the Personal Representative, Letters of Testamentary will be issued and the Order For Probate will be signed by the Judge. Certified Letters will be needed so the Personal Representative can begin managing and administering the estate.

Tax Penalties: What Are They?

Negligence can always cause distress, but it will also cost you money when it comes to taxes. The Internal Revenue Service can hit you with an additional interest charge the moment they find out that you carelessly filed your tax return resulting in an underpayment of taxes.

To date, tax penalties are a reliable source of revenue for the federal government. In light of that consistent source of revenue, the federal government has invested in collection processes to collect tax penalties that leave some debtors at the mercy of the Internal Revenue Service.  However, if you owe tax penalties, rest assured that an experienced tax attorney can help you avoid those penalties and mitigate your tax liabilities.

Types of Tax Penalties

Here’s an overview of the classifications of IRS penalties:

  • Accuracy penalties. Do not try to understate your tax liability because once the IRS finds out that your tax return is misstated, they can impose an accuracy-related penalty that is equal to 20 percent of the net tax understatement. This type of penalty can either be due  to “substantial understatement” or “negligence or disregard of the rules or regulations.”

Warning – Accuracy related penalties (also called 6662a penalties after the relevant section of the Internal Revenue Code) can lead to substantial cost, especially in the cannabis industry. Tax courts have been quick to assess the 6662a penalty against cannabis dispensaries who’ve challenged the IRS in 280E litigation following applicable case law. Before making an aggressive tax strategy against conservative interpretations of tax state and case law, consult with a tax attorney. Especially for marijuana dispensaries, a cannabis taxation lawyer can help the business create a tax strategy that minimizes the risk of costly 6662a penalties.

  • Fraud penalties. If you are thinking of underreporting your income, well, think again. If the IRS checks your record and discovers that you fraudulently omitted your earnings, they can give you a penalty of up to 75 percent of the amount you did not report. 

The IRS says ignorance of the law does not constitute fraud. But once they find strong evidence of fraud, the case will be referred to the IRS Criminal Investigation Division for potential criminal prosecution.

  • Failure to pay employees’ taxes. If you are an employer who failed to withhold or deposit your workers’ social security, medicare, and income taxes on time, you can get in trouble with the IRS as well. This occurs when employers file IRS Form 941 late, and the penalty usually depends on how long it took them to settle the payments.
  • Failure to file information returns. This one still goes to employers but specifically to those who did not file Form 1099 that shows the payments made to service providers, such as contractors. The penalty will vary depending on the type of form they failed to file.
  • Failure to pay penalties. Time is of the essence when paying taxes, so in case you miss the deadline, the IRS can impose a penalty of 0.25 percent to 1 percent per month of the total amount you did not pay on time. The penalty will start at 0.50 percent per month, but if you agreed to be under an installment agreement, the IRS can drop it to 0.25 percent per month.
  • Late-filing penalties. Filing your tax return late and not requesting an extension can cost a 5-percent penalty per month, up to 25 percent of the total charge. The maximum of this penalty is reached when five months and one day after the April 15 deadline, you still did not file your tax return.

Offers in Compromise with the IRS

One way of removing your tax liability is to take advantage of an offer in compromise. An offer in compromise is an offer made by the taxpayer to pay a reduced amount from the original tax liability. It’s a good option for business owners or private individuals with federal tax debt who can afford some of the amount but not the full balance. If the IRS accepts an offer, the taxpayer can expect to pay a reduced amount and even schedule installment payments.

Getting Your Offer Approved

To get your offer approved, you must have a valid reason recognized by the IRS. Any of the following three circumstances can serve as a reason why you’re making an offer in compromise: 

  • Doubt As To Liability – there is a doubt about the existence of the tax liability itself.
  • Doubt As To Collectibility – there is uncertainty that the IRS can collect the full tax liability due to circumstances such as insolvency, lack of assets, etc. 
  • Effective Tax Administration – collecting the tax liability in full will lead to inequity or economic hardship. 

Your offer must also be greater than your RCP, which stands for reasonable collection potential. The IRS uses the RCP to determine a taxpayer’s ability to pay the tax. You must also submit all the necessary documents and fees. Failure to comply with the required documents and fees will result in your offer being returned. Don’t worry if this is the case – you can always cure your offer’s defect if it is returned and resubmit. If the IRS rejects your offer, you can still appeal the decision through the appeals process, which will be detailed in your rejection letter. 

Not everyone qualifies for an offer in compromise.  An experienced tax attorney can evaluate whether you meet the requirements for an offer in compromise and submit an effective offer on your behalf.