On-Demand: Dealing with the IRS | Offer-in-Compromise
- Nov 21, 2019
This webinar will provide confidence to the practitioner or anyone preparing an offer in compromise package.
Dan Gibson: And welcome to all those that are joining us for Dealing with the IRS Series. This program is Offer in Compromise. For most of you that have been around for a while, you may or may not have known that the Offer in Compromise, which is paying an amount less than what you owe the IRS. It's actually been around for quite a long time. Pre 1992, it was actually out there. You could do an Offer in Compromise, the IRS really didn't publicize it very much. 1992 they started to put a little bit of meat on the bone with respect to IRS notices and regulations. And in 1995 they established various standards for putting together an offer package, which we'll go through later on today.
Dan Gibson:As Nikki was saying, my name is Dan Gibson. I'm a partner here at EisnerAmper in our Eisner office in New Jersey. I work in the Private Business Services. Assisting me today is Andal Ayengar, she is a Senior Manager also on our Private Business Services. She'll be assisting me today in really being the audience ombudsman. So to the extent that you have any questions that come by, feel free to send it to us. And Andal will be fielding those questions. We've got a stacked program here, so I'm going to be going through this. Hopefully, I can get to most of your questions, if not feel free to send them anyway and I'll definitely follow-up with you later. One of the things that I ... Those of you that have come back now and have gone through this series with me.
As you know I always like to start out with a starting point. Where do we begin and it's the beginning. We need to know these rules. We need to be able to apply the rules. There is certain procedures that we need to follow. The IRS doesn't always follow them. We need to follow them to make sure that we're representing our clients properly. The most important thing in the collection area which the Offer in Compromise is a part of. We need to know that there needs to be an assessment first. And assessments or self-assessments is simply when you're filing your tax returns. Or if you're not filing your tax returns, the IRS is filing them for you and doing a substitute for returns. You may be audited and there may be a deficiency in the audit results that you have. That's another way of being assessed and also there are jeopardy and termination assessments which I'm not going to go into detail here. But there are these are ways that the IRS can assess you with taxes that are owed.
Again, the assessment positively has to be done in order for the collection process to start. There's a series of things that the IRS needs to do. So the taxpayer all of a sudden thinks the IRS is just hammering them from out of nowhere. It's probably, it's more than likely not true. There is a process the IRS goes through and the taxpayer knows that they're being chased at that time. They've got a series of letters which we'll go through, and they definitely know that it's coming. The date of the assessment isn't necessarily a date that you file the returns, you really need to obtain a transcript which will show you the assessment date. And this, the assessment date is important because there are statute of limitations.
And we want to distinguish what the audit statute is from the collection statute. The audit statute means that once the return is received, you have three years or the IRS I should say has three years to audit that return. And you by the way, you have three years in order to amend the return if you want it to. From a collection standpoint, the IRS has 10 years to basically chase you down once the assessment has been made. And we're just going to go through the collection, the life of a collection case. Again, we need to make sure we understand these steps and the IRS needs to go through these steps in order for them to be able to properly go after any collections that they need to go after. So step one, as we talked about before the taxes are assessed.
Step two, the assessed tax goes unpaid. There's a billing notice that goes out which simply just tells you it's a very, very easy going letter no threats. Basically telling you owe this amount of money. That if the tax continues to be unpaid, there is a silently lien that arises. And this will, this lien gives the IRS the ability to basically go after your stuff and if it stays out there long enough, the IRS will then actually what they call perfect the lien. Which is then make makes it public so that they get in line behind any other creditors that may be out there. If there are none that they have the first shot at, at any of the assets that you may have at that point. If it still goes continues to be unpaid there's what I call the levy letter campaign begins. It starts with a friendly nudge that nothing is done.
It ends with the IRS tape basically taking your stuff at that point. Just a little bit more detail. About step five here, want to talk about the letter campaign as you can see there is a number of letters that go out. So anyone who gets surprised and all of a sudden, they get their bank account cleaned out. There may be an exception, but most in most cases they pretty much know what's come, they should know what's coming down the pike. So you have a CP14 which is a polite reminder. 501 is a nudge, 503 it gets a little more stern. So Sandy, we haven't heard from you? Where are at? Mind you paying? 504 you can really tell us getting upset and we're telling you that if you have any state refunds that are due to you guess what we're going to scoop them up. The final notice of intent to levy is an L1058. If you're dealing with a revenue officer or an LT1, if you're dealing with the automated collection service.
When once you get that letter you look at the letter date you have 30 days to respond in order to obtain a, what's called a Collection Due Process hearing. Which I've always considered to be the white knight for us that deal in the collection arena. Because that allows us then to sit down with a settlement officer to figure out how we're going to get these taxes paid. Now we're going to deal with the Collection Due Process hearing next month on December 10. So those of you that would be interested in learning more about that hearing definitely dial into EisnerAmper's event page and sign up for that course. So we have alternatives that we need to sit down with either revenue officer or where we have the Collection Due Process hearing. We have all of these things that we can address and today we're going to address Offer in Compromise. So that brings us to our first polling question. And the question is a majority of Offers in Compromise are acceptable, are accepted by the IRS. True or false?
Dan Gibson: Now as this question ahead of time for giving you the answer and what we're going to talk about this in the next couple of pages. But basically, what happens in many cases is that the Offer in Compromises is for a majority of the cases are not accepted. And the primary reason for the reason that they're not accepted is that people aren't taking a preliminary look at the Offer in Compromise, facts and elements that the taxpayer has. To see whether if they have an amount due but when you look at their assets, you look at their net cash flow on a monthly basis. If it's clear that they can pay the balances in full more than likely the Offer in Compromise will not even be accepted at that point. In a lot of cases, people aren't reading the instructions for the offers. They aren't including everything that should be included in the offer. And if things are missing certain financial information that is going to kick it back and not accept that at that point.
Moderator: So let me close the poll and share the results.
Dan Gibson: Very good. So the answer is true. So when you get in these situations, which is more than likely be will be the case where the liability, there's no doubt that you owe it. But the ability to pay for it is another story. Here are some of the alternatives and we've talked about some of these in the past. We can get ourselves into what's called a Currently not Collectible Status. Installment agreement, where we're paying out over time and even we can even get to the point where we're doing a partial pay as opposed to a full pay installment agreement. We should be looking at our collection statute ending date. Maybe the IRS has forgotten about us. And we've come down to where the 10 years, it's just about ready to expire. And further time can help us settle all this stuff.
But again, today we're going to talk about the Offer in Compromise. And this is authorized by Internal Revenue Code 7122. And by the way, in some of these topics that we have on this page here, if you wanted to learn more about these things. We do write a weekly blog, at EisnerAmper. So a lot of these topics, particularly on this page, over the last couple of weeks or so have been covered. So if you want to learn a little bit more about those feel free to check out our blogs. This is just a chart a statistical chart from the IRS releases a data book on an annual basis with all kinds of good information regarding tax returns that are filed. This gives you an idea as to the percentages of offers that are accepted. As you can see for 2016, it's less than 43%. 17, 40%. And 2018, just a tad below 41%. So as you can see there's a lot of returns that are filed, or that are received approximately, on an average year looks like it's about 60,000 a year.
And they're only accepting probably about 25,000 of those. So there's a lot of efforts being made here. As you can see, because these are Offers in Compromise are not easy things to put together and they're very time consuming. And you can see the numbers that are actually accepted. Again, unfortunately, a lot of wasted effort by folks that maybe haven't looked at whether or not they're offering an amount that's in sync with what the IRS's idea of a compromise is. We will go a little more detail into that as we go into the next couple pages here. So this is a pretty busy slide and we're going to, we'll go through this slide. Here are some of the elements that we want to talk about as we go through an offer. I mean, obviously, the note and the breaking big news here when I say that the offer is basically the opportunity for a taxpayer to settle a debt for less than what they owe.
This includes the tax as well as the penalties and interest. It's a, it's really at the end of the day. It's a binding contract between you and the government. Government's giving up what they consider to be a lot. It's really a ... It's a five year binding contract. You're paying a compromise that amount, an amount that's lower than what you actually owe the government. In exchange for that, you're going to basically stay clean for the next five years. Tax wise, you're going to be a good taxpayer, you're going to file all your tax returns, you're going to pay everything that's due on time. If you have estimated tax payments that you got to have to make on a quarterly basis, you're making those. You're withholding the right amounts on your W-2s, all that good stuff to be a good taxpayer.
So in exchange for that debt that's being forgiven, you ... That's a permanent forgiveness. All right. God forbid you mess up at anything during that five years, there's a very good chance you're going to go back to square one. And we're going to start the process all over again. And if you thought it was tough the first time guaranteed it will be even tougher when you go through it the second time. Also once you've submitted the Offer in Compromise, sort of that process the collection enforcement stops. And it stops hopefully, if you get it accepted it will never come back. But if it does, if it stops the whole process has been pending through any rejections there might be. So gives the taxpayer time to breeze, to go through the process and put together a package that they would hope would be acceptable to the IRS. Now, the IRS will tell you that they will enter into an Offer in Compromise, which is both in there in the taxpayers interest but obviously, I will tell you that it's really in their interest.
I mean, they're the ones giving really giving something up at this point. So really, the objective of someone putting together an Offer in Compromise is being able to convince the IRS that for the foreseeable future, that the IRS is in their best interest is getting the best deal that they can get at this point in time. That they're not going to get any better deal than this. Than waiting the next two, three, four years. And as I said, this whole ... This process of doing an Offer in Compromise, which is putting together a form 433. Which is really a, it's almost akin to a mortgage application. There's a lot of financial information, personal information that goes into doing the 433. And the 656, which is really the contract or the cover ... I call it the cover sheet for the 433.
You're putting forth the terms of the agreement that you want to enter in with the IRS. That takes a lot of time. And I would say anybody who's an experienced practitioner that does this work, you've got to set aside at least 40 hours to do this process. So 200 dollars at 250 an hour for an experienced practitioner you can do the math. You can see that it can cost six, eight, $10000 to do an offer and do it and do it the right way. So it's a very expensive process. So one, you have to make the, make sure there's enough dollars out there to make it worth that fee. And the other is you want to make sure that the before you put on all this work, that you've put momentarily have gone through the financial elements that the client has to make sure that they can in fact, have a good chance of getting this offer accepted.
There is a lot of back and forth I will tell you, the offer specialist aren't in the business of giving these things away freely. You got to work for them. So you're going to be submitting them. They're going to be pushing back on you, you're going to be pushing back on to them. So again, the preferred ... The whole pre-qualification, the planning is a real must of mitigating, wasting the taxpayers’ dollars on doing this. And as I've said a number of times in the past couple of programs that I've done as with anything else, you must be compliant with any tax filings that you have and all your tax filings have got to be up to date. If you have any prior you're tax returns that haven't been filed, they need to be filed because the offer they want to be able to include everything that you may not have paid up to that date.
Now for the current year, we want to make sure that all of the current year's payments are made and that they are in there and this is a must in order for us to be able to submit the Offer in Compromise. The refunds that are due during the year of acceptance will be taken by the IRS. So you're going to have to manage the refunds that you have during the ... For the tax returns that you're filing in the year of the acceptance as well as that year tax return. I'll go through an example of that to make that a little bit clearer a little bit later. Any liabilities that are being compromised that are greater than $50,000. The IRS Counsel's Office must be brought into this. So the IRS, that's the IRS is attorneys. So as you as many of business people that are listening to this program will know once you get the attorneys involved in all this, forget about it. They're going to put a lot more time into this.
And again, that's why the specialists are going to be pushing back and forth. Because I'm sure they're being reviewed by this the IRS's council as to whether or not they're doing their job or not. So once you've gone through this process. And you've come to the end of the road with the offers specialists they've either accepted it or they've rejected it. If they've rejected it you have 30 days to review or to prepare a protest to the appeals office for them to review the Offer in Compromise. The other track that you might be on. We talked about the Collection Due Process hearing, if you are able to be able to get yourself into the Collection Due Process hearing track, and you're dealing with a Settlement Officer. Which is really an appeals officer at that point. They control the case. If it comes back from the offer unit and it's rejected, they will then review the case.
If they don't accept it. If you're in the Collection Due Process hearing track, you're able then to appeal that actually to the Tax Court. And have the Tax Court review the Offer in Compromise procedures, not the Offer in Compromise itself to see whether or not it's fair or not. But the tax courts will look at, they have what's called an abuse ... A discretion of abuse discretion for their standard. Well they'll look at the procedures and processes that the offer specialist and the settlement officer had gone through to make sure that you've been fairly dealt with during the whole Offer in Compromise reviews that they've done. But it is another layer of review which is favorable for the taxpayer for someone to take a look at it. There were three different types of Offers in Compromise. The one that's probably the most prevalent out there is and the one that gets the most publicity obviously is the doubt as to collectability. But there is a doubt as to liability.
So if you've gone through a process where the liability isn't question, you can actually fill out just the 656. And it's a -L version that you would fill out. This would be looked at by the examination group to see whether or not the liability is actually something that the IRS should be pressing or not. Again the collection, the doubt as to collection ... Collectability is the big one. This is processed by the collection group, the offer people. And as I said before that includes the 656, there's a 433-A (OIC) for wage earners and Schedule C self-employed people. And you have a form 433- B (OIC) for those of businesses that are not sole proprietorship.
There's also a type which is very rarely gotten, I should say the effect of tax administration extremely difficult to get. You in this situation, you actually agreed to a liability and you agree that you could pull pay the debt, but the payer would be unfair to require the payment. These would be examples like if for some reason you had an elderly couple or you had a recently severed, severely injured or sick person that maybe came into some income but to have them pay the tax would be unfair. There's very few cases where the IRS will bend on that. In fact, the IRS did an experiment number of years ago where they took accepted effective tax administration cases. And they recycle them through the system again and many of them were rejected. So it's not a very well defined area in the offer area.
So again, it's a very difficult thing you get, you've got to spend a lot of time getting that through the IRS. As we said with the doubt as to liability this has to do with you've determined that there's liabilities that have been incorrect through either audit or been in some sort of as an assessment You have, you in order to be able to do this, you have to be able to not have been a heavy use the appeals process that assessment, nor has there been any sort of judicial determinations by the Tax Court on your behalf with respectable liability.
Even if you failed to file a return the substitute for file, substitute for returns can be reviewed as well in this process. And again, you'd be filing as 656-L. You have to offer some amount, can't be zero, but it's got to be some dollar amount that you would have to offer in this process. So we've come up with polling question number two. If your offer is say $100,000 would it be better to do a lump sum payment offer or a periodic (deferred) payment offer? The answers or A periodic (deferred) payment offer or B lump sum payment offer.
Dan Gibson: Just go through these quickly on this and we'll go into a little more detail in the next few pages. But on the lump sum payment, what you're basically agreeing to do is you're paying an amount which is equivalent to 20%. When you first submit the Offer in Compromise and then after it's accepted you are committed to paying in the remainder of the balance within a five month period. So an example, if we had $100,000 we'd pay $20,000 in with the offer, that would come out of pocket. And then once or if the offer is accepted, you would pay in the rest of the 80 within five months. That rejected you lose the 20, that you don't get it back. Now with the periodic you get, you make payments during the pending of the offer. And you make monthly payments and they could be for any amount normally you make them for $100.
And it's over 24 month period with a balloon at the end. So you could set something up for $100 for 23 months, and then pay the remainder at the 24th month. So in our example, we would pay ... We would have $100,000 that we're making an offer for, we pay $100 per month for 23 months is $2300. And our balloon would be 970,700. Now, if we find out after a year we've been rejected, we're only out 100 times 12 months or 1200 bucks. So you tell me what was, what would be better in that case? Case would probably going to do answer A. So let's see what the answer is for that.
Dan Gibson: Okay. So we got a majority to get it right. So let's just go through the collectability evaluation, how we work this. And by the way, and I'll repeat this a couple more times through the end. I'm probably going to do a more deep deeper dive Offer in Compromise session probably in January. We're actually go through an example with the form so you guys can see what's going on. But here I'm going to kind of stay at 30,000 feet and just give you an overview at this point. So the key factors to doing an Offer in Compromise are looking at the assets and liabilities and the income and the expenses. And the assets and liabilities you're actually looking at what you have in possession of what a third party might have which is dissipated assets. Which are assets that you may have given away recently that the IRS thinks that you shouldn't be given away.
And also assets that are available to you but maybe not available to the government, example would be an offshore accounts that you may have. To do the calculation overview, let's do assets first. And in most cases, obviously, cash is cash that's not go ... That's not going to change but you have, if you have any non-liquid assets, usually what they do is you get to determine what the fair market value is. You multiply that by 80% to get a quick value and then any liabilities that might be securing that asset are then subtracted and you get the equity in that asset. So, you go down your personal balance sheet and you come up with the equity in your assets. You also look at the monthly income, less any allowable living expenses that you have, and that's your monthly cash flow.
You take your monthly cash flow, multiply that by 12 and that becomes your lump sum offer. Which we did, we talked about in the question just previous to this. The other alternative is to take the monthly cash flow times 24. And that becomes your periodic payment offer. Again, we discussed that in the question that was before this. And then you take, then you combine those and come up with what's called a reasonable collection potential. So you're taking your equity and assets plus that monthly cash flow, whether you picked the lump sum option or whether you did the periodic payment option. And determine what your reasonable collection potential is. Now the, when the IRS looks at that they must then be convinced that with that amount that's due, that they're going to get. That that's in their best interest.
That they should accept this, they're not going to do anything, they're not going to do any better than this. So they're going to be ... They're going to want to compromise and go for this. So in many cases, they may look at an offer and say, listen we can ... It's this isn't good for us. We can get these guys to full pay based on this, these calculations, particularly on a monthly cash flow. Where we can say they can, these guys can offer this taxpayer could actually get into it in installment agreement. And pay us over the remaining statute the full amount. So let me back off and not do the, not accept the offer at that point. Because again, it's not in their best interest to do that. So you really do need to look and I'm repeating myself, you really do need to look at this reasonable collection potential at a high level because as the saying goes the juice maybe not worth the squeeze on this.
Because you maybe doing all this work for basically nothing at that point, if you can't get to an offer acceptance. So but again, we will ... I will do a deeper dive on this, hopefully in January when we can ... I can delve into this a little bit more deeper with some numbers and forms. And this is destroyed. This gives some meat to the question that we did the latest quality question. It was the lump sum offer as we talked about before 20% down when submitted. You have to do to five additional payments when accepted. No payments are required during the evaluation period. And it's a lower amount. You using 12 times multiplier of your cash flow. This works well if your offer is going to be a relatively small amount on the periodic payment offer.
The first payment made with a submission can be as ... Can be pretty lower. And in my example, the prior I was using $100 a month. The monthly payments can be need to be done during the evaluation period, during the 24 month ... 23 months, and then the following 23 months, and then a balloon at the end. You can also do with what I call the balloon and switcheroo strategy. And that is take the periodic payment offer at the beginning when you do the submission, once it's accepted and switch to the lump sum offer. The offer specialist or settlement officer will accept that and that way you can protect the taxpayer. Of having to pay that big 20% losing that this way they're only losing whatever the amount of time is expired paying only $100 a month.
So this obviously if the amounts are very high, you want to do you really want to do the periodic payment. Otherwise you risk losing a lot of money with the 20% down requirements of the lump sum. Next is the is an area called the future income collateral agreement. There are many cases where the IRS gets into situations where maybe the future income, the outlook is a little fuzzy. Take for example, take me for example. I wake up tomorrow all of a sudden, President Trump signs a bill in no more taxes anymore. We're not paying. No one has to pay any taxes unless file tax returns. All of a sudden something that I've been doing for the last 35 years is done. Not much, it's not much I could have Andal on the other hand, young bright, probably figure out the artificial intelligence area. Maybe a robotics she kind of refigure herself. Here I am old crotchety old guy. I can't even set up my Roku TV. And what kind of future income do I have to face?
Well, the IRS may be a little suspect to that. And they may come back and say, Well, listen, we'll accept that. But we got to have a little bit of skin in the game. So to the extent that you earn some money in the future, we want a percentage of that. So you go through and it really becomes a negotiating point at that point. You have to determine how much potentially somebody could make. You may have somebody, you may have a doctor Who, who's lost his license. That's flipping burgers. But and he decides, well, I'll flip burgers for the next five or six years and that way I'll get out of this thing. Which is fine. But you got to make sure that the IRS wants to make sure that in the case for a person like that, or maybe a person like the example that escaped from myself. Earn some money in the future, that they get a certain percentage of that.
And how long does that ... How long? How much is that? What are the percentages? It's all negotiable. How long is it? Again, all negotiable. Probably going to be no less than the timing for the offer. So if you're doing a lump sum, it's going to be no less than 12 months. Or if you're doing a deferred, it's going to be no less than 24 months. I wouldn't make sure that it's absolutely no longer than the five year contract, that you have set up. But again, all that's negotiable with the IRS at that point. The IRS is going ... They're going to look at someone like me or the doctor in my example. And they're going to go back and look at priors tax returns and say, listen when we do it. Why don't we do an average of the last four or five years. And that would be the amount that's going to earn, you've got to convince the IRS, that's not to be the case. And then in exchange for that, be able to negotiate with them this future income collateral agreement with them.
So there's examples where taxpayers may be facing long term unemployment. They because of age, because the skills not that great. In my case I pumped gas when I was a kid, that's probably about this fourth, I'm going to be able to get other than don't tax returns at this point in my career. But those are the certain things that you have to go through with various taxpayers. Your taxpayers may be in school, may have somebody who's in law school, let's say hey, no they're not earning anything now and maybe they've not earn anything in the past. But there's a potential they may earn something in the future.
So you may have to give a little bit for the IRS. And the IRS in the Internal Revenue Manual it's it, there is a section in there called future income. Which says that this is a viable alternative that the government has to consider it. So that brings us to polling question number three. What are some legitimate ways to lower cash flow so as to lower the offer? We've got A, pay health insurance premiums. B, pay life insurance premiums. C, pay disability insurance premiums, and D, all of the above.
Dan Gibson: Yes, anybody doing an Offer in Compromise and filling out as I said, you're filling out this form 433 which is like filling out a mortgage application. You can't ... This is not just an algebra problem. You've got to go through and there's thinking that has to be involved here and some planning. Just like you would do with a tax return planner you've got to go through. And there are certain things that you want to go through the ... Through the offer. And if taxpayers are not taking advantage of certain things such as, if they've got a family and they don't have health insurance. Well, maybe they should consider paying the health insurance which would bring the offer down, or life insurance bring the offer down, or disability insurance that brings the offer down. Things that they should be paying anyway, that gets the offer down so they pay less to the government. So it's just some things that the taxpayers when we do the form 33s should be considering as well as the practitioners who are putting the forms together.
Moderator: I'm going to close the poll and share the results.
Dan Gibson: Okay, good. Good response there. Letter D was the correct answer. So there are strategies. We talked, in the polling question there, those three strategies are a good strategy to go by. You can't just start them up and submit your offer. There's got to, you have to have a little time that elapses there a little bit of history. So one of the strategies may be before you do the offer, maybe you get yourself into an installment agreement. Or you get yourself into a currently not collectible status, which will buy you a little time so you can build some history. Because you do have to provide financial statements support or the things that you're taking, the expenses that you're taking, the assets that you have. So you want ... You got to build this history. So this would allow you to do that. You want to look at the things that will help your of course in the offer.
Things expenses, as we talked about the health insurance. They pretty much allow you, whatever the actual amount that you pay in life insurance. You can't get, obviously you can't get a whole life insurance. But if you get a good term policy and it's a reasonable term policy, they'll give you the exact actual amounts that you're paying in, disability insurance. Everybody should have some sort of basic disability insurance. These are things that you should have anyway. And when you're going through this, why not pay that in and get that started to get your offer down. It's take advantage of some of the exclusions for the assets that are out there. Some of these are kind of settle on the forums, they don't always give you the answers. You got to make sure that you pick these things up. For instance, cash they give you an automatic thousand dollar exclusion against any cash amounts that you have balances that you have.
Plus, you look at your one ... Look at one month's worth of expenses and you also reduce your cash by that amount. There are exclusions to various assets, the automobiles as long as they're being used for business or production of income or the health and welfare of the family. You get those as exclusions. They have what's a ... What I called a clunker expense. If you have a car that's older with more mileage, you get additional expenses for that. Try to look through to see to make sure that you're maxing out on all of your allowable expenses. Can not let that and not unlike anything you do in your tax return, where you're looking for as many deductions as you can get. Same thing, there's a thought process, just not filling out a form. The assets and liabilities looking for all the secured assets that you have out there, all the things that you're required to pay, whether they be child support. Things of that nature.
You want to bring all these things up and see whether or not they can help reduce your offer. If you have assets for which you're generating cash flow from those should be excluded. If you don't have it's like the goose that laid the golden egg. I mean, you're not you can't kill the goose because you're not going to get the golden egg. So it's one or the other. So it's usually the assets that you exclude. And this is something that we all need to consider. We need to know whenever we're particularly when we're in a collection, and it's an audit as well remember three years for audit 10 years for a collection. But we're talking about Offer in Compromise, we got to know where we're at in that 10 year span. We're going to spend 10 grand to do a Offer in Compromise. And we're six months away from the end of OUR statute period, we got to find a way to get ourselves to the ...Through the next six months without irreparable harm.
So we're not wasting a lot of time putting together an offer which may or may not be excluded. By the way when you put it in, when you do submit an offer, it will suspend the statute. So your statute will stop until the collection or the Offer in Compromise is totally vetted. So you don't want to get yourself into that process when you only have six months left. And you have to consider other things you're going to get, you'll need to get the transcript from the IRS to verify where you're at in that 10 year timeline. And take into consideration there are certain events that toll the statute. Such as if you were in bankruptcy, if you had a Collection Due Process hearing, if you if an installment agreement was under review. There's a number of things that I'm not including here that will stop enforcement action. Namely and one of them is this Offer in Compromise that we're talking.
Whenever the IRS has prevented from doing anything harmful against you and your assets, be exchanged for that normally, is that the statute of limitations for collections will stop and toll at that point. So you have to be very, very cognizant of that. And know when you get into the end of this collection statute period that you've got to find a way. There's got to be a way of bridging that to get you to the end and allowing further time to take away some of these tax liabilities. The next area is this the monthly cash flow calculation again, just to go through this. There is the income that you generate, which is not obviously not difficult through W-2. You got your sole practitioner or your sole proprietor. You've got a Schedule C. That's not difficult. It's the living expenses which are a real mind numbing exercise, that you have certain expenses that you have.
The IRS has certain expenses that they think you should have. And they set up various standards. They have what's called a national standard for some items. And I always remember that when you have national standards, you need no verification, they just give you the number. So there's the category for food, clothing and other sundry items. They just give you a number. And they don't want it ... They don't need any support for that. Only if you think you need more than that would you give them support. Which is usually the case it's normally a reasonable number. The IRS also uses local standards which I remember local is the L, the lesser of the IRS standard or verified amount. So in these instances, you always have to provide verified amounts. So they have these for the housing utilities, transportation area.
Now looking at the housing and utilities, usually that's not ... That usually is not a reasonable number for most folks, because it's on a county by county basis. It's a statistic, statistical calculation that's done by the Department of Labor. And I will tell you, you'll have a county, I live in the county of Somerset, New Jersey. We have Basking Ridge in Bernardsville. Right neighborhood where Trump National Golf Course is at. Million dollar homes, easily million dollar homes. We have towns like Manville, Bound Brook very working class perfectly fine neighborhoods. But the houses there are anywhere from 150, 250. So you tell me at the end of the day where people that might be living in the Basking Ridge area or the Bernardsville area up near Trump national, weather the average for Somerset County is going to be conducive for them probably not.
So it's so it's a difficult thing, even if you're in a more of a middle class area that you ... The housing standards in this case, again may not be very conducive. Transportation, they actually allow you the ability to exclude certain costs of the other vehicles. Again, for the use of business, production of the income, for family use where that's it's important for the health and welfare of the family. If a car is has more than six years or more than 75,000 miles, you get what I call the clunker deduction. So it allows you to reduce your net cash flow for collectability. That gets us to our last polling question number four. If you're within six months of the Collection Statute End, the CSED. Would you likely want to do an offer? Yes or no?
Dan Gibson: So as I said before, if you're within six months of the CSED obviously, you get it you have to manage that. You don't want to do anything that would potentially stop the clock on this. You may want to find figure out some way to run it out. And as I said, you'd be managing the clock much like a coach in the NFL is managing the clock to try to get to the end. And maybe get this offer taken away. Maybe you get into an installment agreement, a currently not collectible status. So you can get yourself to that end of that 10 year period, and so that the any of the large amounts that you have may just go away by time.
Dan Gibson: Okay. Any answers? I'm sorry, where A yes, B no.
Moderator: Hurry, we're going to give you 10 more seconds. And I am now going to close the poll and share the results.
Dan Gibson: Okay, very good. So as we talked about before there are there's what's called national local and actual standards that the IRS has. Now, these are, this is guidance that's provided to the offer specialist. In any case, and I will tell you that these numerical standards. The offer specialists, particularly ones that are not as experienced as others will think that that's like set in stone. It's not set in stone. There's, there are many instances for which the standards may or may not apply because of facts and circumstances and in many times, if you look to the Internal Revenue Manual, it will consistently tell the IRS employee you must consider facts and circumstances. The standards are guidance. They have to have good reasons for obviously deviating from the standards, but they can deviate them based on facts and circumstances.
So again, the food clothing miscellaneous net is a national standard. No verification is give to you a number. The housing and utilities as we said, that's probably one of the ... That's one of the toughest areas because the numbers are usually not reasonable. They know that the auto ownership and operating is usually reasonable numbers as well as the public transportation. Health insurance they'll normally give you whatever you actually paid for. It's same thing with the healthcare costs as long as you can verify it. They most cases will give it to you. You have court ordered payments that you have out there, whether it be child support, alimony. They normally give you the actual loan as long as you have the support for it, and most importantly you're actually paying it. And if people try to get it and are not paying it, you have to be paying it. If there's needy child, dependent elderly care, things of that nature. They normally give you the actual reasonable life insurance.
They'll give you actual current year's taxes which again, some specialist will come back and say, well, no, we're not going to give you, we're not going to lie to deduct the taxes for the current year which is crazy. Because you've got to build that into the cash flow to the current year because that's the only way that someone going forward is going to be able to stay compliant. Any secured debt that you may have and you could make an argument in many cases. If you go back to where we talked about the housing and utilities, if that's not covering if that local standard isn't covering. You could almost make an argument, that's in a chart in the IRM that secured debt and mortgages or secured debt. If the local standard doesn't cover it in the housing there's more than enough to be able to tell you that you could try to stick it into this secured debt area.
Delinquent state local taxes, there's a certain formula that you would go through. In order to do that calculation to see what and what if not, you can deduct for state purposes. So again, I'm going to go into this in much more detail when I do the program in January. I'll walk you through it in Offer and Compromise form and I'll show you how this all works. And I can just remind you that we have this the CDP, Collection Due Process hearing seminar next month December, 10th. At the same time, at noon. So what I'm going to do is I'm going to skip ahead a little bit here because we are running short of time, to page 33.
Just want to cover one thing. And if you do attend the seminar in January, I'll cover all the stuff I just skipped over here, which is ... But I'll be doing it with numbers with that. But just the on page 33, dissipated assets. Should just know a little bit about that. Dissipated assets are those assets that you've given up in many cases doing offer and you talked to the taxpayer taxpayer. And the taxpayer so I just gave my car away to my son or I did this or I just gave away 20 grand to my daughter. We don't have to worry about that well, yes, maybe yes, maybe no. And probably in most cases, yes, you do. You got to worry about it. Because if the IRS finds out about the fact that you've given up certain assets and disposed certain assets, that's not in their interest. Then they may claw it back into the calculation even though you don't have it anymore.
So, but there are instances like if you sold your house, let's say, and you use that money to pay down a liability. And that's all you did with it, that's really not a dissipation of assets. If you finance your business, you took out money from your house and had additional mortgage but you bought equipment for your business, not a dissipated asset. You sold your house and use it to pay for vacation. That's a dissipated asset. That's going to be added back in even though you've blown all that money in your vacation, that money is going to be clawed back. And they'll just ignore that at that point. And then you're faced with having to either do some other alternative, whether it be installment agreement or currently not collectible, status, something of that nature. To again, to kind of work out the alternative, but the OIC may not be ... May not work at that point for you.
Be careful of your refunds as we talked about before if you have an acceptance of enough ... Of OIC in 2016, if you filed a 2015 return in 2016. They're going to scoop up that refund and you're 2016 return that you filed in 2017. They'll scoop up that refund, so you have to manage your refunds. I think it's probably the case with any alternative that you do. You'd be surprised that they'll still scoop that refund up and once they do, they're not going to give it back. Especially if the ... If you owe them money there's just no way you're going to get it back. So just make sure you manage that. The collection activity again it will come to a stop during any of the pending OIC procedures. Plus they'll will give you 30 days after it's been rejected. So you have enough time to appeal the rejection and if it goes into an appeal, then the collection effort stopped at that point as well.
But you're also you had your statute of ... Your collection statute gets tolled as well. So that 10 years doesn't run during these periods of time that they cannot enforce it. If the Offer in Compromise is rejected do yourself a favor do not ... The offer specialist or Settlement Officer will tell you to just withdraw the offer. Never withdraw the offer. Force the IRS to write up a formal rejection letter, list out everything that you ... That's going wrong with it because you're going to need that when you do your appeal.
So you're going to want to see the issues that have cropped up with the people that have reviewed this. So that when it goes to appeal or an appeals officer or even if it goes so Tax Court, at that point. You've listed out everything that they've come up with. And it also shows whether or not they filed proper procedures or not. So that comes to the end of the program. I don't know if we have time for questions but, no time for questions. But again, if you have any questions, you have my contact information. If you want to list them in your or your chat box here, I'll be more than happy to answer them for you. And hope you have a good day.
Transcribed by Rev.com
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Daniel Gibson provides accounting, tax planning and consulting services to real estate and services industries and is a member of the AICPA and New Jersey Society of Certified Public Accountants.
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