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On December 31, 2013, the IRS posted the January 2014 revision to Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, to be used for offers in compromise. The new IRS instructions answer the question "What is an offer" as follows:
"An offer in compromise (offer) is an agreement between you (the taxpayer) and the IRS that settles a tax debt for less than the full amount owed. The offer program provides eligible taxpayers with a path toward paying off their tax debt and getting a 'fresh start.' The ultimate goal is a compromise that suits the best interest of both the taxpayer and the IRS. To be considered, generally you must make an appropriate offer based on what the IRS considers your true ability to pay."
The IRS defines the "true ability to pay" with a term called Reasonable Collection Potential (RCP), which is defined as the total of the taxpayer's realizable value in real and personal assets, and his/her future net income. Realizable value is, essentially, the gross value of assets less secured debt. Thus, for example, unsecured credit card debt is usually not considered. In addition, the IRS will discount valuations of real estate by 20% based on "Quick Sale Value." Future net income is based on a forecast of the excess of gross income over allowable expenses - food, clothing, housing, transportation, medical and taxes - over a minimum of 12 months. For the most part, other expenses such as court-ordered payments, life and disability insurance, child care, and the cost of tax representation, are also allowable. Many of the expenses are defined by guidelines published by the IRS. And, although the guidelines provide some certainty in the determination, there is room for negotiation where there are unusual circumstances. The Form 433-A (OIC) collects the raw information to compute RCP.
The new Form 433-A (OIC) also institutes an increase in IRS processing fees, effective January 1, 2014, from $150 to $186. The most significant changes to the form are as follows:
- The employment area for the form (Section 2) is now entirely separate from the Personal and Household Information and now inquires whether the taxpayer has an ownership interest in their employer. Interestingly, it asks this question separately of each spouse. Yet, the form does not inquire as to whether the wife, for example, has an ownership interest in the employer of the husband and visa versa.
- The subsection on Cash and Investments within Section 3 now includes CDs (Certificates of Deposit) which had previously not been specifically mentioned. We do not see this as a change in policy as it has always been intended that one should disclose all forms of savings and investments.
- The Real Estate section on page 3 now asks for the "Date of Final Payment," presumably requesting the date of final payment due on the mortgage payable by the taxpayer.
- The Vehicles section on page 3 makes two significant changes. The first requests the date of final payment on the vehicle loan. This is an important factor as the IRS considers retiring debt in determining one's expenditures. Also, in valuing the motor vehicle assets, the IRS now clarifies within the form that each taxpayer is allowed to exclude $3,450 for his/her vehicle. Although this had been the policy for the past several years, few understood how to claim the exclusion.
- The "Other valuable items" portion of the form on page 4 now asks one to include one's "interest in a company or business that is not publicly traded," in addition to artwork, collections, jewelry and items of value in safe deposit boxes. Previously, there was no guidance on where to report such interests and many would go unreported to the IRS. We applaud this change.
- There is a new Section 4 for Self-Employed Information that broadens the information requested regarding business interests previously contained as a subset of Section 2.
The budget information collected within Form 433-A (OIC) remains substantially unchanged.
The IRS also changed the entire Offer in Compromise package which, in addition to Form 433-A (OIC) includes Form 656, the form used to initiate the Offer in Compromise, and Form 433-B (OIC), the financial disclosure forms for most businesses. The changes in the Form 656 are, overall, relatively minor, with the most significant changes being:
- An initial question that asks whether the taxpayer used the IRS "Pre-Qualifier tool" located on the IRS website. Nothing in the 656 instructions suggests that you use the Pre-Qualifier tool and what impact such has on the offer submission. Our guess is that the question is for research by the IRS and an attempt to get more people to use the tool.
- Section 6, which is rarely used for the Designation of Down Payments made in excess of the required 20% deposit for many offers, has been clarified to eliminate unintentional use of the section which currently results in the return of offers to taxpayers.
- The small print within the Offer Terms at the end of the Form 656 now includes the following language:
"I also authorize the IRS to amend Section 2 on Page 1 by removing any tax years on which there is currently no outstanding tax liability."
It is unclear whether the IRS will notify you of such change. Thus, the IRS may eliminate a year from your offer without your knowledge because you have provided a pre-authorization for them to do so. Why is this a problem? Let's say you owe money for a year, but the IRS hasn't yet assessed the proper tax either due to delays in processing or identity theft. They could remove the year without conversation, approve your offer and, once the assessment goes through at a later time, you still have a debt to the IRS. In effect, you lost your fresh start. Also, knowledge of the removal of a tax year from the offer may impact on your decision to make the offer in the first place. For example, possibly the statute of limitations had expired on a tax year for which you had owed a lot of money. Now that the tax year has been removed, would you still pursue the offer? Hopefully, the IRS will provide notification when this authorization is exercised. As we consider our processes going forward, we are considering crossing out the authorization to ensure that we get specific notification of such changes.
Changes to Form 433-B (OIC), less frequently used, are not covered in this article.
E. Martin Davidoff, CPA, Esq. is the founder of the Dayton, New Jersey firm of E. Martin Davidoff & Associates, CPAs and has more than 30 years of experience practicing as a CPA and tax attorney. Davidoff is the founder of the IRS Tax Liaison Committee of the American Association of Attorney-CPAs and currently serves on the Executive Committee of the AAA-CPA. Mr. Davidoff may be reached at
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In July, I wrote about how the United States Supreme Court found Section 3 of the Defense of Marriage Act (DOMA) to be unconstitutional failing to recognize state-authorized same sex marriages. This article addresses a series of questions I had raised, set forth below, that have now been addressed by the IRS in Revenue Ruling 2013-17, announced by IR-2013-72 on August 29, 2013.
Q. How couples legally married in a state that recognizes same-sex marriages 1 will be treated if they reside in states that do NOT recognize same sex marriages.
A. They will be deemed married for federal income and estate tax purposes. Also, foreign same sex marriages will be recognized.
Q. Can married same-sex couples amend past returns to get refunds?
A. Yes, for all open years, which currently includes at least 2010, 2011 and 2012
Q. Must married same-sex couples amend past returns to pay additional tax if such tax is due?
A. No, the filing of amended returns for years prior to 2013 is optional. However, commencing in 2013 returns must be filed as married (either married filing jointly or married filing separately).
Q. What is the impact of state same-sex relationship laws other than full marriage as six states currently provide? 2
A. Same-sex couples having formalized their relationships in these states will NOT be deemed married for federal tax purposes. The IRS news release states:
1. “Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory or a foreign country will be covered by the ruling. However, the ruling does not apply to registered domestic partnerships, civil unions or similar formal relationships recognized under state law.”
2. Employees who purchased same-sex spouse health insurance coverage from their employers on an after-tax basis may treat the amounts paid for that coverage as pre-tax dollars that are excludable from income. Accordingly, such Taxpayers may file claims for refund.”
3. “Treasury and the IRS intend to issue streamlined procedures for employers who wish to file refund claims for payroll taxes paid on previously-taxed health insurance and fringe benefits provided to same-sex spouses. Treasury and IRS also intend to issue further guidance on cafeteria plans and on how qualified retirement plans and other tax-favored arrangements should treat same-sexspouses for periods before the effective date of this Revenue Ruling.”
Kudos to the IRS for providing such comprehensive and reasonable guidance so quickly.
1 As of July, 2013, eleven states (California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, New Hampshire, New York, Vermont and Washington), the District of Columbia, and five Native American tribes have legalized same-sex marriages. As of August 1, 2013, the states of Rhode Island and Minnesota permitted same-sex marriages. Prior to 2004, same-sex was not allowed in any U.S. jurisdiction.
2 New Jersey, Oregon, Nevada, Illinois, Hawaii, and Colorado.
For more information, see IR-2013-72 at http://www.irs.gov/uac/Newsroom/Treasury-and-IRS-Announce-That-All-Legal-Same-Sex-Marriages-Will-Be-Recognized-For-Federal-Tax-Purposes;-Ruling-Provides-Certainty,-Benefits-and-Protections-Under-Federal-Tax-Law-for-Same-Sex-Married-Couples), Revenue Ruling 2013-17 and FAQs for Registered Domestic Partners and Individual in Civil Unions referenced in IR-2013-72. Also, see the new FAQs for same sex marriages: http://www.irs.gov/uac/Answers-to-Frequently-Asked-Questions-for-Same-Sex-Married-Couples.
E. Martin Davidoff, CPA, Esq. is the founder of the Dayton, New Jersey firm of E. Martin Davidoff & Associates, CPAs and has more than 30 years of experience practicing as a CPA and tax attorney. Davidoff is the founder of the IRS Tax Liaison Committee of the American Association of Attorney-CPAs and currently serves on the Executive Committee of the AAA-CPA. Mr. Davidoff may be reached at
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On June 26th, the United States Supreme Court found that Section 3 of the Defense of Marriage Act (DOMA) was wrong in failing to recognize state-authorized same sex marriages. As a result, all legally married gay and lesbian couples, residing in states that recognize their marriages, are considered married for purposes of all federal programs and tax laws. Thus, such couples are entitled to spousal social security benefits and significant estate tax savings. Furthermore, such couples must file their U.S. individual tax returns as “married” whether that be “married-filing jointly” or “married-filing separately”.
Edith Windsor won her case claiming a refund of $363,053, plus interest, for overpaid estate taxes paid on the estate of her late wife, Thea Spyer, who died in 2009, having been Windsor’s life partner for 44 years. The full impact of the decision on Federal tax filings is still not known. However, it is clear that all couples who have legally married in their state of residence will be treated the same as their heterosexual counterparts. This means that they will be able to file joint federal tax returns and can no longer file as Single.
What is still not decided is how couples married legally in a state that recognizes same-sex marriages1 will be treated if they reside in states that do NOT recognize same sex marriages. These matters must now be addressed by the IRS along with issues such as dealing with possible refund claims. Can same-sex couples amend past returns to get refunds? Must they amend past returns to pay additional tax if such tax is due? Also, what is the impact of states that have enacted same-sex relationship laws other than full marriage as six states currently provide?2
What is the impact on same-sex couples who have been divorced? Are alimony payments now income to the recipient spouse and a deduction to the paying spouse?
Although the gay and lesbian community is happy with the Windsor decision, some in their communities will be paying a higher income tax bill as a result of the "marriage penalty" inherent in the tax code. Affluent couples with approximately equal income are likely to pay higher income tax rates as married than they had as single.
As of July 22, 2013, the IRS Website (www.irs.gov) section for “Answers to Frequently Asked Questions for Same-Sex Couples” merely states:
“NOTE: The questions and answers below do not reflect the Supreme Court's June 26 decision relating to DOMA. We are reviewing the important June 26 Supreme Court decision on the Defense of Marriage Act. We will be working with the Department of Treasury and Department of Justice, and we will move swiftly to provide revised guidance in the near future.”
More to come on this issue, for sure.
E. Martin Davidoff, CPA, Esq. is the founder of the Dayton, New Jersey firm of E. Martin Davidoff & Associates, CPAs and has more than 30 years of experience practicing as a CPA and tax attorney. Davidoff is the founder of the IRS Tax Liaison Committee of the American Association of Attorney-CPAs and currently serves on the Executive Committee of the AAA-CPA. Mr. Davidoff may be reached at
1. As of July, 2013, eleven states (California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, New Hampshire, New York, Vermont and Washington), the District of Columbia, and five Native American tribes have legalized same-sex marriages. As of August 1, 2013, the states of Rhode Island and Minnesota will permit same-sex marriages. Prior to 2004, same-sex was not allowed in any U.S. jurisdiction.
2. New Jersey, Oregon, Nevada, Illinois, Hawaii, and Colorado.
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You can view the first half of this article by visiting http://www.cpataxmag.net/davidoff-stories/42-e-martin-davidoff-columns/869-steps-to-effective-irs-audit-resolution.
When taxpayers receive the dreaded notice that their business is going to be examined by the Internal Revenue Service (“IRS”), the first thing they do is seek your advice. This is the second part in a series of articles on Effective IRS Audit Resolution. See Steps to Effective IRS Audit Resolution to read the first part, which covers “Carefully Read the Communication” and “Speak Directly with the Revenue Agent/Tax Compliance Officer.”
3. Do a Thorough Pre-Audit
Prior to the IRS conducting the examination, I perform a pre-audit that is more thorough than the actual examination. I scrutinize every check, receipt, and all of the books and records, trying to learn where all the “bodies” lie, and to understand the client’s books, records, and business inside out. Knowing the weaknesses of the case allows me to prepare more effectively for the examination and, in some cases, I decide to offer up those weaknesses to the auditor up front as a gesture of good faith.
It is important, especially with corporations, to understand all balance sheet accounts. For example, the impact of tax basis on S corporations may provide adjustments for the examiner. How many of us have observed the dreaded “loan to shareholders” account on the asset side of the balance sheet? Ask questions of your client and their bookkeeper to ensure you have a comprehensive understanding of your client’s financial history.
With nearly all closely-held businesses, the IRS will be looking at deposits into bank accounts and reconciling such deposits to reported gross income. Be sure you do a thorough analysis of bank and brokerage account deposits. Also, the IRS may look into the personal living expenses of the owners of the business to determine whether their lifestyle is consistent with the income being reported from the business. If not, what is the source of funding the shortfall? In many instances the shortfall is unreported income!
To support deductions, you will need proof of payment and receipts reflecting the purpose of the expenditures. For certain expenditures, such as meals & entertainment, travel and local transportation, a diary may be critical.
Recognize when you are in over your head. Some cases require an attorney-client privilege. As soon as you recognize that, refer your client to counsel and stop asking questions of the client. Remember, CPAs and enrolled agents do not have privilege in representing clients before the IRS.
4. The Client Should be a No-Show
Have a frank conversation with your client regarding why he/she should be a “no-show” at the examination. Clients will often talk too much and inadvertently provide more information than necessary. They are often angry about their situation (of being audited) and show that anger during the examination. And, by poorly choosing their words or becoming defensive, they may lead the auditor into believing that something is improper, even if that is not the case. Most clients will be relieved that their presence is not required.
Your role will be to act as a buffer between the auditor and the client, enabling the client to give thorough, well-considered answers to all questions. Also, if the questions become too invasive, you can always state that you are not authorized to answer the question presented and consider responding after you seek further guidance and/or clarification from your client. Keep in mind that the IRS does not have the right to interview your client directly. You are their representative. [See Internal Revenue Code §7521(c) and Internal Revenue Manual §4.10.3.2.1.]
5. 7 Rules for Conducting the Examination
1. Prior to the examination, find out all you can about the auditor. Inquire of your colleagues and check out social media sites.
2. Have the examination in your office, not the client’s. This enables you to more carefully control the flow of the examination. Avoid letting the auditor sit alone all day looking over the records on his or her own. It is important that your staff and you spend time with the auditor, getting to know him or her and knowing what he/she is doing. Develop a rapport with the auditor.
3. Completely review and understand all documents provided to the auditor.
4. Never lie or make a misstatement to the auditor.
5. Never volunteer information, unless it is part of a strategy to do so.
6. Do not accept unreasonable timelines to get information back to the auditor.
7. Meet all commitments made to the auditor, or at least call in advance if you cannot do so.
6. Negotiate a Resolution
Attempt to arrive at a negotiated resolution of the examination with the auditor. By doing so, you save your client the cost of an appeal or, possibly, the expansion of the examination to additional multiple years. Weak issues can often be negotiated more easily if you are able to establish mutual trust and respect with the auditor. Fully document your strong areas and cover them early in the examination process. Thus, as you get to other areas, you may be able to reach a resolution more easily. Keep in mind that the auditor is doing his/her job and usually has not prejudged your client. The auditor is getting all their information on the examination from you, both in terms of the facts and your approach in communicating with the auditor. Treat them as the professionals they are and they will likely treat you the same in return.
7. Appeal Rights
Your client has both formal and informal appeal rights. The informal rights are to speak to the auditor’s manager or the Territory Manager (who is the manager’s manager). Often, difficulties in reaching a resolution can be resolved through such conversations. The auditor may lack the experience and/or the power to resolve the case on his/her own.
In the event you do not reach a resolution, you may file a formal appeal upon the receipt of the auditor’s report (often referred to as the “30-Day Letter” as it provides you 30 days to file the formal appeal). Such appeals are heard by the IRS Office of Appeals, the mission of which is to “resolve tax controversies, without litigation, on a basis which is fair and impartial to both the Government and the taxpayer in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the Service.”
You should discuss with your client the costs and benefits of pursuing an appeal. If you have little or no experience going to the Office of Appeals, you may wish to offer to represent your client in the appeals process at a nominal charge to gain experience. Often, when faced with the 30-Day Letter, practitioners are so focused on providing additional information to the auditor in order to achieve a more favorable result that they allow Appeal deadlines to pass. Be sure not to do so. You can request, in advance, additional time to make your appeal. If you do not secure the additional time in writing, you need to file the appeal if you wish to protect your client’s right to be heard by the IRS Office of Appeals.
E. Martin Davidoff, CPA, Esq. is the founder of the Dayton, New Jersey firm of E. Martin Davidoff & Associates, CPAs and has more than 30 years of experience practicing as a CPA and tax attorney. Davidoff is the founder of the IRS Tax Liaison Committee of the American Association of Attorney-CPAs and currently serves on the Executive Committee of the AAA-CPA. Mr. Davidoff may be reached at
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When taxpayers receive the dreaded notice that their business is going to be examined by the Internal Revenue Service (“IRS”), the first thing they do is seek your advice. If you prepared the return, you already know there is nothing to worry about because the tax return is perfect in every way! So, of course, for the purposes of this column, we are talking about the new client who walks in with the tax return prepared by that “other CPA,” – not you!
1. Carefully Read the Communication
Carefully determine the type of examination taking place and what, precisely, is being examined. The IRS notice may pertain to a field examination, an office audit or a correspondence examination. In addition to these three primary types of examination methods which have the potential to adjust taxpayers’ liabilities, there are under-reporter notices (CP-2000), specialized audits of tax credits (i.e. earned income credit) and substitute for return (SFR) procedures. This article addresses only field and office examinations. Field examinations are conducted by Revenue Agents while office audits are conducted by Tax Compliance Officers.
2. Speak Directly with the Revenue Agent/Tax Compliance Officer
Call and introduce yourself to the Revenue Agent (RA) or Tax Compliance Officer (TCO) conducting the examination (the “Auditor”). IRS employees are people too. This should be a cooperative and friendly discussion. How you approach and deal with them will impact upon the success or failure of your representation.
Be sure to call before the response date on the examination notice. If the notice provides a date for a meeting, be sure to call well in advance of that meeting as it is likely (and permissible) that you will need to reschedule. As you negotiate a date and time convenient for you, allow sufficient time to conduct a thorough pre-audit.
Try to narrow the issues. For example, work with the Auditor to choose the expense categories to audit from the larger amounts on the tax return. Often, a relatively small number of categories will represent 70 – 85% of the total expenses of a business. I prepare a spreadsheet for my own use to determine that I am hitting this target range. To get the auditor’s “buy-in” I usually make it clear during the conversation that I understand that if we cannot substantially document the selected categories, that the Auditor may expand the scope of the examination. Generally, if I can show that there is a competent set of books and records, and can fully document the larger expense categories, there will be no need to look at the smaller categories. In some cases, I take the approach of having the Auditor choose the expense categories, recognizing that they are in control of the examination. Recognize that it is in both the taxpayer’s and the IRS’s interests to have an efficient examination.
Generally, you will encounter more productive discussions with RAs than TCOs. RAs are higher on the IRS pay and talent scales, more highly trained and have more flexibility in their workload allocation. TCOs are given a greater workload and are conducting the examinations in their offices, usually at their desks. Often, I have found TCOs to be autocratic and inflexible. In such cases, learn how to say, "Please give me the name and telephone number of your manager,” and, "Who is the Territory Manager?" and then be prepared to make the appropriate calls. Such calls work, even if the IRS employee states, “my manager will tell you the same as I did,” as they often do.
Recently, the IRS has been requesting electronic records of Taxpayers. The submission of such records could be damaging to our clients. The withholding of such records has not yet been tested in court. Up through the writing of this article, I have not turned over such records, with the following rationales:
- The records contain confidential information (i.e. doctor patients, attorney clients);
- The accounting file (often QuickBooks for small businesses) is not a true set of books and records and could be misleading; or/and
- We can document expenditures adequately through print-outs of selected reports.
But, before long, the IRS may insist on such records and test their power to do so through the courts. In the meantime, I recommend against turning over taxpayer electronic records unless and until the IRS issues a subpoena to do so.
Contact E. Martin Davidoff, CPA, Esq. at