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- Written by: E. Martin Davidoff
This is the eighth and final in a series of articles chronicling a real IRS matter. For details on what has transpired, please see the previous seven issues of this magazine.
Richardson’s letter of Feb. 6 was a standard letter (Letter 725) requesting that the client meet with him at 9 a.m. on March 3, 2009, to talk about unpaid amounts totaling more than $270,000. We found it odd that he did not even attempt to set up a mutually-convenient time and place.
In reply to Richardson’s letter, we pulled out the draft we had filed away the previous October (see Part VII) and supplemented it to bring Richardson up-to-date about Jim’s pending knee surgery and the loss of his job. We offered to meet Richardson but suggested in our letter that such a meeting probably was not necessary:
“As you will recall, Mr. Smith has just turned 66 years of age, and the probability of securing gainful employment in an amount sufficient to even meet his basic living needs is low. Accordingly, I believe that this case should be placed in uncollectible status.”
On Feb. 17, 2009, Richardson called and spoke with our paralegal, agreeing to place the case into currently not collectible status (CNC status) as long as we could provide verification of the medical procedure to be performed and the physical therapy required. Eager to finally resolve this matter, our client quickly secured a letter from his physician describing the procedure and explaining that he will convalesce for approximately three months and receive home physical therapy visits. We faxed this letter to Richardson. On Feb. 24, 2009, we received a detailed telephone message from Richardson saying that he reviewed the fax and that we sent exactly what he was looking for in this situation.
When a case is placed in CNC status, the IRS will take no collection action unless the taxpayer’s income changes. IRS policy is to revisit the taxpayer in two years to secure an update of his or her financial position. Sometimes such a revisit takes place within the stated time frame, but often a revisit never occurs. With a 66-year-old taxpayer, we figured that this case was finally done!
But, as you may recall, Jim had decided to sign up for Social Security benefits in January 2009, when he lost his job. You can probably guess what happens next. On March 23, 2009, we received 16 notices (CP 91) via certified mail.
Final Notice Before Levy on Social Security Benefits
The notices advised that the IRS may proceed to take 15% of Jim’s Social Security benefits to pay his overdue taxes. Jim could avoid this by either paying the tax or requesting a hearing. However, the notices were unclear about how to request a hearing and warned that the hearing might not stop the pending levy action. The notices also posed another possibility: Call the IRS and prove economic hardship. We already had done that!
The IRS’ central computers and Richardson were not in sync. Although Richardson knew that Jim had proved his economic hardship, Richardson had not entered this information into the computer; and he had no idea that another arm of the IRS was about to seize a portion of Jim’s Social Security benefits. This is a common flaw in the IRS collection machinery. Automated processes often take action in cases presumably under a revenue officer’s control.
In our case, we immediately called Richardson and asked him to block any further collection action by the IRS. We also filed a Form 9423, Collection Appeals Request (also known as a CAP Appeal), on April 2, 2009, to the origin of the levy notices, requesting Appeals consideration.
The CAP appeal was forwarded to Richardson, not to Appeals. On May 26, 2009, Richardson confirmed that the case was closed on his end and that the matter was placed into uncollectible status.
We never received written confirmation of our appeal or Richardson’s closure of the case. As I write this article, no IRS activity has taken place since May 2009, and Jim is awaiting 2016, when the IRS statute for collections will run out on the assessments.
Our firm has billed more than $10,000 in fees, which we are receiving at a rate of $250 per month. The IRS was offered $791 per month in February 2008 but rejected that offer and has received nothing to date.
Jim’s wife, Mary, sold the family home in 2009. Mary is working, and Jim is collecting unemployment. Jim and Mary are planning to retire to Florida this summer. For now, they are living here in New Jersey, spending time with their family and trying to make ends meet. For the time being, they are able to do so without the IRS breathing down their necks. But who knows how long that will last?
The End?
E. Martin Davidoff, CPA, Esq., is a practicing CPA and tax attorney in Dayton, NJ. He founded the IRS Tax Liaison Committee of the American Association of Attorney-CPAs and is the immediate past president of the AAA-CPA. Contact him at
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- Written by: E. Martin Davidoff
In practicing before the IRS regarding collection matters, penalty abatements and examinations, I have found certain "rules of engagement" helpful.
1. Never volunteer information, unless it is part of a strategy.
The IRS often asks us a lot of questions. To appear cooperative and move the case along, it is in our best interest to answer all questions directly, succinctly and narrowly. Answer the question and offer nothing more. On occasion, you may wish to strategically provide additional information to the auditor. For instance, sometimes volunteering information in one area may move the IRS away from asking questions in other, more difficult, areas. In other situations you are trying to provide the IRS employee a human perspective on the client (i.e. Taxpayer's mom died last December after fighting lung cancer for five years. Taxpayer would visit her every day!).
2. Never provide materials/documents to the IRS that you have not reviewed carefully — bank statements, paycheck stubs, credit card statements, etc.
The documents may contain information that is not helpful to your client. For example, in the context of determining the amount of an installment agreement, the IRS requests three months of recent bank statements to support your disclosures in form 433. In such cases, I will secure six months of recent bank statements from my client and I will choose which three months of statements to provide the IRS. In doing so, I will total up the deposits and make sure they are consistent with my client's representations of income. In following this process, you should investigate all significant discrepancies. Familiarize yourself as to whom the checks have been written to, for what purposes, and in what amounts. In choosing which three months of statements you are providing the IRS, you are still meeting their requirements, but you are doing so on your terms and in good defense of your client.
3. Assert yourself as appropriate.
One way of doing so is to learn how to say phrases such as:
- "Please give me your manager's name and phone number."
- "What is your authority for that position?"
- "Who is your territory manager?"
- "Are you refusing to provide that information to me?"
From first line staffers at the IRS 800 numbers all the way up to Appeal Officers, I have found that these phrases enable me to secure a clear chain of command and a true understanding of the positions the IRS is taking. On several occasions, the IRS has cited authority — a case or IRM section — for their position that actually supported my contention. In such situations the IRS representative had not carefully read the authority or was simply bluffing, figuring that I would not take the time to read the cited authority. In one Appeal involving tens of thousands of dollars, the Appeals Officer told me that there was a case on point supporting the IRS position. I presumed he was correct and politely asked him to send me the case before issuing his report. I followed up after the conference with several phone calls and faxes. After about a month, the Appeals Officer simply told me he was finding in my favor, never providing the case on point nor admitting that there was no such case supporting his position to begin with!
In the rare case that a Revenue Officer refuses to provide me the name and telephone number of his/her manager, I will say "Let me make this very clear. I have asked for the name and phone number of your manager and you are refusing to provide that information to me. Do I have that right?" Four out of five times such an assertive technique when making reasonable requests will secure the information you are seeking. (Those who work on the "800" numbers are not allowed to provide their managers phone numbers, but still should provide the name of their manager when asked. They should offer to provide a manager callback within 48 hours.)
4. Always ask for the full name and employee ID number.
When calling the IRS be sure to get the ID number of each and every IRS employee you speak with, as well as the correct spellings of their names. This should be done at the beginning of each conversation, before the possibility of the call becoming contentious. By doing so, you will able to backtrack to that individual if you find that behavior inappropriate or exemplary. Reporting both kinds of behavior to IRS management will likely make your feedback more effective and provide you with a reputation as a practitioner who is both fair and tenacious in representing your clients.
E. Martin Davidoff, CPA, Esq., is a practicing CPA and tax attorney in Dayton, NJ. He founded the IRS Tax Liaison Committee of the American Association of Attorney-CPAs and is the immediate past president of the AAA-CPA. Contact him at
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- Written by: E. Martin Davidoff
On May 21st, the IRS announced major revisions to the Offer in Compromise program (http://www.irs.gov/newsroom/article/0,,id=257542,00.html). A major impact of such revisions is to enable high-income/low-net-asset individuals a much greater opportunity to resolve their tax debts through the Offer in Compromise (“OIC”) program. Here is why. Offers in compromises are analyzed based upon one’s equity in assets and future net income. Prior to the May 21st announcement, taxpayers had to include as part of their offer an amount equal to 48-60 months of future net income. The May 21st announcement reduces the multiple to 12-24 months, an extraordinary reduction!
In his memorandum to subordinates, Scott Reisher, IRS Director of Collection Policy, provided nine pages of interim guidance to the Internal Revenue Manual. The highlights with respect to the future income component of OIC computations, provide:
· There will be no retirement of the first $400 of auto loan debt. Thus, even if the final payment of the automobile will take place within the horizon of the current analysis, the first $400 will be retained in the budget for evaluating the offer (5.8.5.17).
· Payments of student loans guaranteed by the federal government for post - high school education will now be allowed (5.8.5.20.4).
· The IRS will continue to allow $200 per month for older (over 6 years old) or high-mileage (over 75,000 miles) motor vehicles as an additional operating expense above and beyond the vehicle operating costs standards set forth on the IRS website. Up until the May 21st announcement, this additional $200 would NOT be allowed if the taxpayer had a monthly automobile loan payment. Under the new standard, the additional $200 in operating costs will no longer be tied to the absence of a car payment.[1]
· Clarification that expenses for state and local income tax installment agreements will be treated as allowable expenditures in proportion to the balance due to the state and/or locality as compared to the amount due to the IRS (5.8.5.20.4(7)). Form 433-A(OIC) has been revised to include a line item specifically for delinquent state and local taxes. The new rules are detailed and intricate. Accordingly, if you are dealing with a state tax debt, you should review the new guidance carefully.
· Future income is clearly defined in 5.8.5.23 as:
a. If the offer will be paid within 5 months, then only 12 months of future income will be required; and
b. If the offer will be paid in more than 5 months but within 24 months, then only 24 months of future income will be required.
Compare this to the previous standards of 48 and 60 months, respectively.
· Payments of more than 24 months (previously over the life of the statute) are no longer available! In practice, I had never used this alternative. But, it had always been an option I would have used in certain circumstances (i.e. large amount of assets, but little excess monthly income).
In addition to addressing the future income component of Reasonable Collection Potential (“RCP”)[2], the interim guidance addresses the net fair market value of assets as follows:
· The equity in income producing assets will no longer be added to the RCP of viable ongoing businesses unless such assets are not critical to the business operations (IRM 5.8.5.5.1). In some situations, this is a material change which eliminates what many believed to be a double-counting of assets. Two of the examples provided are particularly instructive:
“Example (5) A real estate salesman has a vehicle with $30,000 in equity. The vehicle is used to transport clients and assists in the production of income. The taxpayer's net monthly disposable income is $3,000. The equity in the vehicle generally will not be included in the RCP.
“Example (6) The same salesman in the previous example only has net monthly disposable income of $500 per month. Consider including the equity in the vehicle, yet allow for the impact the loss of the vehicle may have on the taxpayer's income.”
· There is a substantial write-up on revisions to IRM 5.8.5.16 regarding dissipation of assets. The dissipation rules appear to be narrowed and better defined. Generally the time-frame is limited to three years. Specifically, the new guidance states: “if the offer is submitted in 2012, any asset dissipated prior to 2010 should not be included.” The new rules appear to focus on intentional attempts to avoid the payment of tax. Yet, the rules, along with the examples, make it clear that transfers taking place more than three years prior to the submission of an offer in stating that it “may (emphasis added) be appropriate to include” a dissipated asset in the offer computation if the transfer and/or sale occurred within six months before or after the assessment of the tax liability. The new rules are worth reading as they provide significant guidance and several examples. It is my opinion that the net impact is that dissipated assets will still be an issue in the OIC arena and that the extent of such is still somewhat unknown.
· The first $3,450 per car will, generally, be excluded from net equity computations of vehicles owned by taxpayers. This exclusion is limited to two cars per household.
See http://www.irs.gov/pub/newsroom/interim_guidance_memo_for_offer_in_compromise.pdf for Mr. Reisher’s memorandum.
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New Form 433 – A Changes:
Below is a listing of changes to form 433-A (OIC) (new revision date is 05/12) which I have compiled through a visual comparison of the old and new forms:
1. Line item for “Delinquent State and Local Taxes” in personal budget (53). 2. Addition of field for Fax Number. 3. A box for “Cash” has been added within Cash and Investments sections for both personal (Section 3) and business (Section 4) assets. Previously, there was no process to report cash holdings. 4. A section for Accounts Receivable has been added to Section 4 on business assets. 5. The line for “Additional Household Income” was removed from Section 6. However, a new yes/no question has been added (“Are there additional sources of income used to support the household, e.g. non-liable spouse or roommate, for example.”). 6. The term “minimum payment on credit card” has been added to the food, clothing and miscellaneous section of the Monthly Household Expenses. Note that the Collection Financial Standards were revised on April 2, 2012 in anticipation of the May 21st announcement and include minimum credit card payments and the Internet costs discussed below. 7. The term “Internet” has been added to the housing and utilities section of Monthly Household Expenses. 8. Revision of Section 7 to take into account the lower multiples on future monthly income (12/24 vs. 48/60). 9. In Section 8, other information, the term “County Filed” referring to bankruptcies has been changed to “Location Filed”. 10. The question “Have you been party to a lawsuit?” has been changed to “Are you or have you been party to a lawsuit?”. 11. The checklist has been expanded to include “Verification of State/Local Tax Liability, if applicable”, while deleting the term “Accountant's depreciation schedules, if applicable”. |
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Reduced Offers Examples: One of the most significant changes is the multiple to be used by the IRS in computing the Future Net Income component of Reasonable Collection Potential (“RCP”). The following examples illustrate that policy change with respect to offers paid within five months of acceptance, wherein the multiple is reduced from 48 to 12.
Example #1: - Taxpayer owes $125,000 to the IRS - Taxpayer earns $80,000 per year. - We agree with IRS that the Taxpayer can afford to pay $750 per monthto the IRS. - We agree with the IRS that the Taxpayer has $40,000 in realizable value of his/her assets.
Under the old rules the acceptable offer (RCP) would have been $76,000, computed by multiplying the $750 by 48 ($36,000) and adding the $40,000.
Under the new rules the acceptable offer (RCP) will now be $49,000, computed by multiplying the $750 by 12 ($9,000) and adding the $40,000.
Example #2: - Taxpayer owes $400,000 to the IRS - Taxpayer earns $250,000 per year. - We agree with IRS that the Taxpayer can afford to pay $4,000 per month to the IRS. - We agree with the IRS that the Taxpayer has $5,000 in realizable value of his/her assets.
Under the old rules the acceptable offer (RCP) would have been $197,000, computed by multiplying the $4,000 by 48 ($192,000) and adding the $5,000.
Under the new rules the acceptable offer (RCP) will now be $53,000, computed by multiplying the $4,000 by 12 ($48,000) and adding the $5,000.
The result in this example #2 appears too good to be true. And, although on the face of the matter, the computations work, the IRS is likely to use its general rule that the acceptance of the offer would “not be in the best interests of the government” as a reason for rejecting such an offer.
In addition, if the full payment of the tax can be made within the statute of limitations to collect the tax (usually ten years from the filing of the return), then the offer will be rejected. So, in example #2, if the remaining time on the statute to collect the tax is 100 months or more, the offer will be rejected as the Taxpayer could pay the entire tax over the 100 months ($4,000 times 100 months equals $400,000, which is the tax due).
Each case will be considered based upon its own individual facts and circumstances. |
[1] Note that the $200 of additional automobile operating expenses is only allowed in an offer environment. It is not allowed in determining the amount of an acceptable installment agreement or in determining whether a taxpayer qualifies for CNC (currently not collectible) status.
[2] RCP is the minimum amount acceptable as an offer. RCP is defined by the IRS as the total of taxpayer’s realizable value in real and personal assets, and his/her future net income. Realizable value is, essentially, gross value less secured debt. For example, unsecured credit card debt is usually not considered. In addition, the IRS will discount valuations based upon “Quick Sale Value”. Future net income is based upon a forecast of the excess of gross income over allowable expenses – food, clothing, housing, transportation, medical and taxes – over a minimum of 12/24 months (formerly 48/60 months).
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- Written by: E. Martin Davidoff
By: E. Martin Davidoff, CPA, Esq. | 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