On-Demand: Dealing with the IRS | Payment Plan Alternatives
This webinar is part of a series of webinars on how to deal with the Internal Revenue Service. During each webinar, we will explore a different topic that is essential for taxpayers or practitioners to know about when working with IRS personnel.
Dan Gibson:Thank you, Niky, and also I want to welcome Andal Iyengar, who is a senior manager in our private business services group here in Metro Park, will be assisting me today. We both work in the private business services group in our Metro Park, New Jersey office, do a lot of work in this tax resolution area, so if you're one that has issues, or if you're a practitioner who has clients that have issues, do not hesitate to give us a call.
Dan Gibson: We're going to go through some of the tax resolution alternatives today, particular the ones that involve payment. But first, I just want to quickly just go through, again, and this is stuff that we've covered in the previous webinars. But is very important to understand this, and I run into this almost every day with clients. There is a process to this whole thing. You may not think that there is, but there is a process to the whole tax resolution area.
First of all, the tax has to be assessed, either through a filing of the return, or an audit that you have, assessing additional tax. If you don't file a return, don't think the IRS can come after you, because they can file a return for you based on any information that they may have, and it's probably not good information in most cases. It's called a Substitute For Return that comes through, and those returns are not good, because any taxes that are been charged on those returns are not eligible to be reduced in bankruptcy and to the extent that you're not filing returns on a timely basis, you risk the loss of any refunds, or overpaying the credits that you're trying to get.
Once the tax is assessed, you get a billing notice. Once that billing notice goes unpaid over a week to 10 days, the IRS will issue what's called a silent lien, which is a lien against all of your property, presently held in the event that you obtain more in the future. That quickly turns into what's called a statutory lien, and it's those UCC filings, or filings with the municipalities where it becomes a public lien at that point, anybody can see that there's liens on your property. Then the IRS goes through what I call a Letter Campaign, where they send out a series of letters that go out, ending with a final notice of the IRS intention to levy, which is really your ticket to a collection due process hearing. Not too many people take advantage of that.
Statistically, the IRS is only 3% of taxpayers are eligible to use this taxing due process here and use it. We are going to talk about that in an extensive detail in a future webinar. But again, it's one of those things that people don't ... I call it the Crown Jewel Collections because it gets you to actually speak with someone and work out a settlement with those. If that's blown, then you're in an area called Enforced Collections.
Then usually, the IRS pounds away enough at you that you end up having to deal with them in some manner or another. That's where we're talking about these various alternatives that we have to do. We can never say that full payment isn't an alternative because it is. You may get in the situation, I've had clients who come in. They're just looking for deals. They got the money, they got the assets, there's no issue with the liability. They're just looking whether it's a better way, and there isn't a better way at that point. If you can full pay, and the IRS knows you can full pay, you'll full pay.
We talked about the substitute of our returns. If those are filed, and the IRS is chasing you for amounts there, and the amounts on the returns are incorrect, well, at that point, you want to file a corrected return, and get the numbers to where they should be. You want to also review the correctness of any tax liabilities that are out there on the return. If there is any, you want to be able to correct those quickly, and not wait until you're in the Enforced Collection mode, which I had a case this morning, where we had a client where they were in the Enforced Collection area. IRS is coming after them heavy.
It's a simple matter. The client had reported all the information on the returns. It was just in the wrong place in the return. Would have been easy enough to correct back in the time when they were first questioning him, or looking to assess the tax. Now, it's in collection, it becomes a little bit more of a laborious task. You want to address these notices as quickly as possible. We're going to talk more extensively today about the Currently Not Collectible status, also the installment agreement, including the partial payment agreements, offer-in-compromise. We're going to talk about that as well.
Penalty abatements, we're not going to talk too much about that today. But again, at a future webinar, we'll definitely address penalty abatements. Bankruptcy, same thing, not going to do too much on that today, but we will discuss that in a further program as well as innocent spouse relief. We are going to talk a little bit about the collection statute ending, and how to leverage that for your clients, and for you that may be involved in that in order to get some tax relief.
Full pay, we talked about that. That is an option, you always have to talk about the option of full pay. It's the IRS's default. You talk to the IRS, and it was that situation I talked about a little while ago this morning that I was dealing with talking to the IRS. First thing they talked about was trying to get paid right now. They want to get paid now, and they want it all. They don't want partial. That's enough said in that area. The IRS knows that if they get involved in any deal that goes on longer than 24 months, the taxpayer's normally going to default in those cases, so that historically they don't like to stretch out the payments. All right?
Again, make sure in these instances, the IRS needs to be able to make the assessment first, and then demand the payment second. You're not just going to get a notice looking for the IRS to hammer you for payments. There's a process they go through, starting with the assessment process, then going through the demand for payment. It's normally not something that just comes overnight.
We're hitting our first polling question. The polling question is, what tax resolution alternatives is used the most? All right, so I'm trying to do something a little differently today. I'm asking the question before I teach it to see what kind of knowledge base I have with the audience out there. We'll give you another five, 10 seconds, and then we'll give you the results here. These really are going to be the crux of the presentation today that we see.
Dan Gibson: Okay. Most of you got it right. When we look at these payment alternatives, we're in situations where the liability is not in doubt, but the ability to pay it is. We've got what I call the four alternatives here, which is Currently Not Collectible status, installment agreements, offer-in-compromise, and also looking at the collection statutes, because there may be cases where again, you got to look at this alternative. You may not do anything if you're close enough to the Collection Statute Ending Date. You may want to sort further time just to take care of that tax if the IRS has been remissed, which they really are.
But I've had cases where the IRS comes to us with only a couple months left on the collection statute, and the taxpayer's limited on what they can pay. They pay it, and then it just goes away. But those are very rare to come across. Also, these four things, they're not silos, they can be worked in tandem. For instance, if you've got the IRS bearing down on you, and you don't think you can get into an offer, or you don't have the track record in order to do a good offer, you may want to get an installment agreement, and let time expire a little bit so that you can get into a position maybe with various payments and things of that nature that make the offer a little bit more palatable for the IRS. Again, you can work these things in tandem with one another.
First, let's look at the Currently Not Collectible. It's also referred to as CNC, or 53 Status. These are instances where the IRS goes ... The IRS, when it comes to collections, they're really supposed to be doing what's called a balancing act strategy, which is balancing the ability for the taxpayer to pay with the government's need to get paid. All right? They got to look at both sides. There's many instances where I've come across where we have a taxpayer who can't pay, due to the fact that the amount that would be due from them, and for them to pay, they wouldn't be able to pay what we call reasonable living expenses. You have to put together what's called a Form 433 with supporting documentation.
The 433 is really probably no more difficult than filling out an individual tax return, or mortgage application. It's really just a lot of financial information that has to be done, put into the return with the supporting documentation. It's got to be well thought out because there are some strategies in order to do the 433. I'm not going to get them through strategies today. We will have a later date, but you just have to be cognizant of the fact that this to fill out the 433 is fine, but there were certain things that you can do to make better your situation of better your chances of getting the results that you want.
Just have to know while they the Currently Not Collectible status is being considered, the statute of limitations, which is that 10 years that the IRS has to collect the money that is owed to them is told during the consideration, that once the decision has been made, that someone is in CNC status, that that statute will start up again. All right, so that's one of the benefits of the CNC. The tax does continue to be owed, interest and penalties do continue to be accrued. If you have refund monies that are payable. I mean, the IRS, obviously, they're not going to pay you back money when you got money owed to them, so they're going to scoop that up.
You have to manage your tax returns going forward to ensure that you're not overpaying. You will be receiving an annual statement from the IRS. It's just an informational thing. It's not supposed to scare you. It's supposed to let you know what you owe at that point. IRS will continue to monitor you financially. They'll at least look at your future returns, at your file. They also, every two years, will may come in and asked you to update your Form 433 with the supporting documentation. Again, the statute of limitations, once that gets going after they made the decision, that continues to run.
You also have to keep in mind that you need to be compliant during this period of time. You need to file your tax returns, you need to pay your taxes on a timely basis. However, there was a case out there, and I wanted to get into CNC status scope, Vinatieri versus the Commissioner. This was a case where Vinatieri was able to prove that there was such an economic hardship, all right? That even though they weren't compliant, they had not filed their tax returns, they were able to get into a CNC. The court in this case was able to rule in favor of the taxpayer, and allowed them to still get into CNC even though they weren't compliant.
I need to set to make sure those are cases, and I spoke with an IRS agent this morning, and the practitioner hotline was unfamiliar with a lot of things that we were talking about. You have to be aware of the fact that these IRS agents aren't always as up to speed as they should be. You need to be when you're calling, and you're trying to get these things done for your taxpayers. Also, the Currently Not Collectible status can be a status that you can use as leverage. I call it a cheap offer-in-compromise. If you're pretty close to the end of the collection statue period, and you're in CNC, if you can get that the run to the end, guess what, the tax goes away at that time.
Next, we'll talk about the installment plan, and why they're so important, why many of you recognize that that's probably used the most out there. Less than 1% of the collection cases are resolved using the offer-in-compromise. Offer-in-compromise as many of you may or may not know, it's a very intensive process. It can be expensive. There's a lot of time put into it. Plus, if the IRS recognizes the fact that an installment agreement would work during that period of time, it's still open. They may not allow you to use the offer-in-compromise anyway, so you may be stuck back when the installment agreements.
15% of the taxpayers can go into the CNC status that we just talked about. Five to 10% of the delinquent taxpayers can full pay. 75% of all collection cases are resolved through installment plans. One nice benefit about the installment plan is that it helps stop the enforcement collection. If you're ever in an issue where the IRS is just bearing down on you, they're starting to empty out your bank account, things of that nature, once you started the request, the installment agreement, or you put in the installment agreement, you've submitted the application, or it's in the process of being reviewed, or you're appealing it, or even once it's been rejected, you've got 30 additional days after that, the enforcement activities have stopped.
They must stop. They cannot do anything detrimental with your assets, or your income that you have. Just recognize the fact that while that's happening, the statute of limitations, during the time that the IRS cannot enforce collections, the statute of limitations stops as well. With this, it continues to toll, so that statute just continues to stretch out at the end, all right? If you were in a situation where the IRS was not able to force any collection activity for six months against you, that's six months tax on to the back end of the statute of limitations if this adds on to it. All right? There's opportunities in some cases to remove liens, and have levies stopped. We'll go with that in a bit here.
I do have an extensive program that I will go over at a later date also, where we just talk about liens and levies. You can also structure partial payment agreement. After you submit your financials to the IRS, it may be determined that you can't pay the full amount of the monthly installments that needed to pay the amounts that are due within the statute period. The IRS may have to fall back and allow you just to make partial payments. That is allowable. It also allows you, as I was telling you before, it gives you some time, and it gives you some space, particularly if your thought is eventually do an offer-in-compromise, or maybe certain strategies that you may be doing, certain expenses that you may want to start adding into the mix to lower your cash flow in order to make your offer-in-compromise better.
But you need history behind that you need, you need three months. In most cases, if you've just started something up, you're going to need that to go off. It's for three months, but you want to be able to do that without the IRS going through its enforcement collection action. So you might want to go through, and set up an installment agreement for that period of time before you submit your offer-in-compromise.
The downside of the installment agreement is that you have to do the Form 433. Again, it's not a terribly difficult form to prepare. It is extensive, lot of information, lot of supporting documentation that are in place. Particularly if you have amounts that are owed that are more than 50,000 in total, you normally need a Form 433. Amounts that are below that, most of the time, you can get away without having to provide a whole lot of financial information, and having to fill out a Form 433. If you're owing an amount that's say a little bit over $50,000, before you can go to the IRS, you may want to try to pay that amount down to get it below the $50,000 so you can avoid having to do the disclosure statement.
You're basically laying out to the IRS in that disclosure statement, where your assets are at, where your cash is at, things of that nature, and you're giving them the roadmap to go after you. You really want to kind of avoid the 433 if you can. In many cases, if you have large amount, you can't, but if you can at all avoid it, then you want to be able to avoid it. Obviously, in the installment agreements, there's a mandatory monthly payment that you agree that you're going to pay in, and the IRS is expecting you to pay that in. Every year, there's a compliance requirement. Again and again, I'll repeat this, you need to be compliant in order to play ball with the IRS. You need to have all of your prior returns filed, and you need to have the current year payments that are due, whether they'll be withholding, or whether they've been in estimated payments that you're paying in. Those needs to be paid. They need to have been paid and timely. They need to be up to date before the IRS will begin to talk to you about some sort of an alternative other than full payment.
Penalties and interests will continue to run on the installment agreement. Much like the CNC, you want to manage these refunds, particularly in the year that you're negotiating the installment agreement, and the year after. IRS will typically scoop that any refunds up that you have, so you want to get tighten up on your planning for your returns going forward in order to make sure that you're paying in enough, but you're not paying in too much, and giving it away. As we talked about before, it's an opportunity to manage the clock. If you're near the end of the Collection Statute Ending Date, which is CSED, you want to be able to manage it so that if you're in a good installment agreement, stay there. But if you're near the end date, and you haven't paid everything in, and you've hit that end date, then the amount that's owed will basically go away at that point. You want to manage the clock and leverage the time.
That takes up to polling question number two, assuming the qualifications are met, which installment agreement is the easiest obtained from the IRS?
Dan Gibson: Did we get any questions yet, Andal, are we still ...
Andal Iyengar:None yet.
Dan Gibson: None yet. Okay, so if anybody has any questions, again, feel free to shoot them in. As the audience ombudsman, Andal, do you have any questions?
Andal Iyengar: Nothing yet.
Dan Gibson: Nothing yet. Okay. Again, I'm giving you these questions before I teach the topic. We're going to be going over these for the next couple of minutes, the different types of installment agreements. The installment agreement is a very much used alternative when dealing with amounts about to be paid. Once you're into that installment agreement area, you just have to know there's different types of installment agreements that you can deal with.
Dan Gibson: Actually, as we'll see, the guaranteed payment, it's usually the easiest one to get. As we talked about, there are four, the guaranteed, streamlined, regular, and partial payment. Okay. Yeah, we'll just review the whole thing with the installment agreement, I think it's important. While the install agreement is pending, while the IRS is making decision, there is no enforcement action at that point. The statute does toll during that period of time. But again, you're not being harassed by the IRS.
It's just some of the minimal information. If you get into mission we talked about, if you're under $50,000 in tax penalties and interest, many times you can get away without having to disclose a lot of information on a Form 433. But you do have to give certain information. Obviously, taxpayers ID information, address of security, the type of tax liability that's out there. You have to propose to the IRS what you think the payment terms should be. File all the returns data. Repeat it again. All the returns have to be filed the day that all taxes for that current year should be paid up, or withheld at that point.
Refunds, trust me, they will scoop those up. They will not let those go by without being taken, which makes sense. Again, the IRS feels that if you owe them money, why should they pay you money if you have an overpayment. We're talking about the guaranteed payment first. Guaranteed payment, not including penalties and interest, if you have $10,000 or less, you qualify for a guaranteed payment. Right? There are some strings to that. In the last five years, you have to be in a position where you haven't failed to file a return, you haven't failed to pay taxes, and you haven't entered into a prior installment agreement.
It's really someone who has maybe slipped up for whatever reason, they have less than $10,000 that's due, IRS is offering this guaranteed payment. It can be done. I mean, you can call in, you can do all of this online if you would prefer. But the guaranteed payment is just that it's almost a guaranteed payment. As long as your history has been clean for the last five years. You're limited in the amount of time. It's got to be the shorter of 36 months or the time that the statute ends.
No financial information is needed, which is a good thing. You can apply online, or you can mail in a Form 9465. There's normally no liens that are filed, and if there are, you should be making calls to the collection division. I'm sure there are some exceptions, but for the most part, there should be no reason why liens are filed at that point, and they shouldn't be. Again, you must remain current and compliant during the entire period of the installment agreement. That's the number one reason why, well, the IRS will default the loan.
If you're not committed to cleaning this up, there's really no point of getting into an installment agreement, because it's going to be defaulted, and the IRS will just renege on it, and so going after you full bore, going after you for amounts that are owed.
The next is a streamlines. Again, both of these have been around for a while, but the streamlined, it's a higher level of amounts that are due. This is for tax amounts, including penalties and interest that are $50,000 or less. Again, you need to have a clean compliance record for the past five years. These agreements are limited to the short of the 72 months, or the time that the collection statute is open. Very little, if any financial statement information is needed.
As long as you're under the 50,000, and if you're under 25,000, you can get the liens taken away, but you do have to jump through a small bit of hoops here. You have to be able to enter into an agreement. You have to have it, the amounts being paid through a direct debit. After three months, as long as that's clean, you can then go and request a discharge of the lien. Had a couple of those over the last couple years. Again, if you owe $30,000, and you can pay in a lump sum of say five or $6,000 to get below the $25,000 threshold, it's another way of managing the holding process, and getting the liens taken off of your records.
Next is the installment agreements, the regular agreement. This is where you don't qualify for the guarantee that the streamlined, but you still need to get into an installment agreement. All right? At that point, those are the things that you want to be able to look to see whether or not, and look very diligently at the fact that whether or not you can get the guaranteed payment, or the streamlined. By the way, on the streamlined, we talked about the $50,000 on the streamlined. They IRS did have a period of time recently where that amount was actually $100,000.
Some of you may be thinking that it's still there. They did have it for a while. They had it almost for two years, I believe, and then they let it expire. From what I had heard, it worked very well, but for whatever reason the IRS did not want to continue with, so it is $50,000. The installment agreement is good only through the collection statute period. Here, you don't qualify for the guaranteed, or the streamlined, here, you're going to have to fill out a 433. All right? The 433 in most cases, you're going to be disclosing assets, and you're going to be disclosing monthly cash flow information that you have.
The cash flow is your income, subtract out the IRS allowable, and I emphasize this, allowable expenses per month that you may have. Big car payments, you may have big house payments, but the IRS doesn't necessarily honor those payments, and come back to say, "Okay, where you live, based on statistics from the Department of Labor, these are the expenses that we think we should be able to allow you." You end up with, in some cases, what I call phantom income where the IRS is saying, "Your cash flow is this," but in actuality, the taxpayer's is a different number.
It becomes a little bit of a fight at that point as to what the taxpayer can do and not do, and we'll go over a couple things that they can do in order to mitigate some of that stuff. Liens will be filed. There's no way around that at this point. It's going to be filed. Again, think about it as good business practice. If someone owes you money, and it's a large amount of money, and they can't take advantage of maybe some of these exceptions like we have with the guaranteed and streamlined process, the government wants to protect their interest.
So they're going to file what's called a silent lien first, and push it to get paid. If it doesn't get paid fully, as quickly as they'll turn that into a statutory lien, which is a public lien, the ones that are filed with municipalities, and that if you run a lien inquiry, those things are going to come up. Now, for about a year now, liens have not been reported on credit reports. All right? But don't fool yourself, even though if you've heard of that, I'm sure anybody with any credibility, any bank, or any other institution that may want to grant you credit, I can guarantee you that they are searching their lien databases to see whether or not there are any liens out there.
It may not be as obvious as being on your credit report, but it's still going to be out there, and it's something that could affect your ability. It may not affect your credit score, but it may affect your ability to get credit from some of the financial institutions out there. Let's talk about the partial payment. I talked about that a little bit before. It's somewhat similar to the regular, except when you do all the numbers, when you submit the full disclosure, Form 433, and you're listing out the assets that you have, you're listing out your ability to make payments, cash payments, it's obvious that you're not able to pay the full amount within the statutory period. So the IRS at that point will allow you to make partial payments.
As with the Currently Not Collectible, the IRS will continue to watch over you. You can almost guarantee they'll be a two year review where they will come back and ask you to update your 433. If they deem that you now have the ability to pay more, they will require you to pay more. Liens will continue to be filed, and as I said, with the Currently Not Collectible, I call this the poor man's offer-in-compromise, because if you could get yourself to where you're able just to make the partial payment, or be in a CNC status, and let the statute run, then the amount that's owed goes away at that point, and it's much cheaper to do the partial and the CNC, and that's why I call it the poor man's offer-in-compromise one, because the offer-in-compromise as I spoke about before, and we'll talk about a little bit later, is it can be an extensive and an expensive process.
All right, so again, just to repeat about the installment agreement, you must be currently compliant. Don't even think about getting started unless you aren't. Requesting the installment agreement, you put the package together, you could, whether it's a simple 9465, or a 433, you can mail or fax that information in. You need to prepare those forms if you're in situation if the amounts, if you cannot get under the streamlines or guaranteed installment, you're going to have to do with a full financial disclosure and a 433. You'll need to fill out the 9465 in most cases. You need to specify what type of installment agreement you're looking for, and the type of tax and periods you're looking for at the cover.
You want to make sure that your taxpayer is qualify for the installment agreement that's being proposed. Don't overlook the assets that are involved here, or the equity that's in the assets. The IRS is normally in an installment agreement process. They're normally looking to get those net assets. If you got net assets out there, and you got liabilities against them, they're looking to tap into that. Now, when they do those calculations, a lot of times they're using a quick sale value amount. It could be anywhere from 80% for most assets, such as your house or your car. Or if it's retirement accounts, it usually 70%, and yes, they can go after retirement accounts. All right?
Again, don't fool yourself, and don't think that they can't go after retirement accounts. Because if you can get the money, they can get the money. In many cases, they may not go in and actually scoop the money out of their retirement accounts, because they're very picky about that. But they will push to have you liquidate retirement accounts that you have access to pay down your amounts are due. Because again, they're looking at it as that's their money in your retirement account, and they want their money. Again, don't take that lightly. They want to get the available net cash flow that we calculate when we do the Form 433.
We talked about the way the IRS comes up with their allowable expenses, which can be somewhat onerous for a lot of taxpayers. They just have to recognize the fact that the IRS does have the standards. However, they have what's called the one and the six-year rule. The one-year rule is they will allow taxpayers, and installment agreements situations to actually use what I call the real expenses as opposed to the allowable expenses for one year. All right?
The whole intention of that, obviously, is to allow the taxpayer to restructure their financial situation so that after that year, they can now enter an installment agreement where the IRS's allowable expenses kick in. They're giving you that bit of time, so it's a good opportunity to take advantage of that, and that does give the taxpayer a little breathing room, and the ability to maybe, if they have a second home, or they've got some roll in somewhere, to sell that in an orderly fashion in order to raise cash so that they can start paying down their IRS obligations.
There's also a six year rule, which again, you're able to submit a Form 433 using the real expenses. But you've got to be able to get into a situation where you're making a full payment within six years. Again, keep in mind, and this is probably the case with anything that you're doing in the collection area, you've got to get yourself compliant, and you've got to make sure that your current payments, your current tax payments with the gear that you're working in are up to date, or you're not going to get anywhere with the IRS in these situations.
Here's just a couple of examples of defaulting in a solemn agreement. If you incurred new tax debt, if you fail to file a return on time, if you fail to make installment of payments as you agreed to, or if you have amounts that are due on your returns that you're filing, and you don't pay the amounts that are due. Once you defaulted, the IRS will send you what's called a CP523 to terminating the agreement, and your options at that point are to either full pay, request what's called a collection appeals process, which is a quick appeals process to talk to a manager at the service, and then possibly an appeals officer at that point, or renegotiate new payment plans, which in a lot of cases can be done.
I've had some situations where I've had clients trying to deal with the installment agreements themselves, kind of not knowing what they're doing, listening to the agents on the other end of the line, get them into monthly payments that really don't fit their lifestyle, and don't take advantage of the one-year rule, or the six-year rule, or any of that stuff. They get themselves into a pickle, and eventually it's something that is just it's set up bound to be defaulted, and it usually is defaulted. It gets to be so bad that they come to folks like us, and then we can then work it out a little bit better with the IRS.
I think the IRS kind of recognizes that. I never really got pushed back on those sort of things, especially when I point out the fact that the IRS put them into installment agreement that they were bound to fail at to begin with.
We come across polling question number three, of all the tax resolution alternatives discussed, which one that is the most difficult to obtain? Do you have questions?
Andal Iyengar: Yeah.
Dan Gibson: Okay, Andal, fire away.
Andal Iyengar: Yeah, we have a few questions. The first one if you have a current installment agreement, and you're making all the monthly payments, can the IRS wait the installment agreement because the payments may not be sufficient to pay the balance within a 10 year period?
Andal Iyengar: Can the IRS wait the installment agreement because the payments may not be sufficient to pay the balance within a 10 year period?
Dan Gibson: Now, once they've made the agreement, and you make that, it's an agreement with the IRS. You make it upfront with that amount, could be, and in most cases, yes, you're going to be able to pay the full amount off during the statute period. But there may be some cases where you don't. We talked a little bit about the partial payment agreement, right, where you're in a situation where you're knowingly upfront not going to be able to pay it off.
I guess the IRS is good with it. Again, we got to do the balancing act here. All right, so the IRS, they're wanting to get paid. They want to get paid now, which we all understand. But we also have to balance that with the fact that the taxpayer based on the financials that they're doing, may not have the ability to pay all that. It may not pay that full amount down before the statute runs, and if it doesn't, it doesn't. I mean the statute ends, and there's an amount that's still owed, that amount goes away.
Andal Iyengar: Okay. Can the IRS reevaluate the ability to pay more on an existing agreement?
Dan Gibson:Not on an existing agreement, except for the partial payments. All right, and for the Currently Not Collectible. Remember, those, they normally will review every two years or so, and they'll go through it to make sure that ... In some cases, I'm not saying it's in all cases, I just want to make sure that people know, if you go into the Internal Revenue manual, which is the playbook for the IRS agent, it tells them they should be going and looking at this stuff every two years.
I'm not saying they don't normally. I would say that they normally do, but there were exceptions to that like there anything else. For whatever reason, maybe they get away with not having to reviewing it every two years. It could be every 18 months, it could be every three years. Maybe never. But the important thing is if you're in one of these deals like a Currently Not Collectible, or a partial payment, you want to be extremely careful, and be compliant during that period of time. Because again, at the end, when that 10 year collection period has ended, and you still owe money, that amount goes away. You don't owe it anymore.
Andal Iyengar: Okay. Is interest added to the installment agreements?
Dan Gibson: The interest continues, the penalties continued during the installment agreement. Yes.
Andal Iyengar: Okay.
Dan Gibson:Yeah, the only time that that's not ... Well, we're going to go over it, but the offer-in-compromise kind of addresses that. That's a situation where you can get in, and I mean, you still have penalties and interests to pay, but it stops at that point, even though you have some payments that you may owe in the future to the IRS.
Andal Iyengar: Okay. What happens if you had a prior installment agreement guaranteed, and you prepaid it? Can you get another guaranteed under the five years?
Dan Gibson: I don't think so, because I think if you've been in an installment within the five years, I'm not so sure you can-
Andal Iyengar: Get another one.
Dan Gibson: I would just caution to say that if you've had the history, you got into an installment agreement, and you've paid it then, maybe prepaid it and cleaned it up, and now three years later, you're getting into another situation, I would not just dismiss it and say, "I can't do it." I would try to do it. I would try to talk to the IRS, tell them, "Listen, I had some problems here. I got to pay it off. I've hit another snag," whatever that may be. I would still give it an effort to try to get into an installment agreement, so I wouldn't want to dissuade anybody not to do it.
Andal Iyengar: Okay.
Dan Gibson: I just think that the IRS, they may have an argument to come back and say, "No, no, you got to be clean for five years."
Andal Iyengar: Okay. We have a few more. Do you want to take them now or-
Dan Gibson: Yeah. That's the key. Yeah, just so you know, the offer-in-compromise is definitely the most difficult to obtain. The Currently Not Collectible, it's a little tough because again, you got to convince the IRS that the taxpayer knows if the taxes ... they're liable for it, they don't have the means to pay it. I've had a situation recently where I had a senior citizen who came into some inheritance money, and over a couple years, I finally got the case person, owed 15 grand. They had $20,000 in the bank. The taxpayer was diagnosis neural stages of dementia who was able to convince the IRS at that point, "Listen, she's going to need the 20 grand."
All she had was Social Security coming in at that point. She's going to need the 20 grand. She was 70 years old. I mean her life expectancy's 20 years. You can't possibly think that this woman could pay you that 15 grand and have 5,000 leftover. The agent gave me a little bit of trouble, but once we bumped it up to the supervisor level, it almost was instantaneous. We got it pretty quickly at that point. Well, from compromise a different story, I'm going to through some of that stuff now.
Just some of the elements that we have in the offer-in-compromise area, you're making an agreement with the IRS to pay a tax debt that's less than you owe. That includes taxes, penalties, interest, the whole ball of wax. You're entering into a binding contract between you and the government to pay this compromise amount. Very important, staying clean for the five years afterwards. All right? If you mess up in the five years afterwards, guess what, we go back to square one all over again. We start negotiating all over again, which you don't want to be.
But in exchange for that, that's forgiven permanently. No reviews, no checking back, no getting 433 later, you're done. All right? Change for staying clean, paying this compromised amount, and the amounts are gone. They're done. No more collection enforcement. Once you've submitted the offer-in-compromise the enforcement efforts stop, none of that stuff from the IRS. All right? Just remember, in these offer-in-compromises, and most people don't realize this, even though they've been told many, many times, this is not like going out and compromising the price on a car, all right? This is compromising a tax debt, and the government is looking at this, and they will settle on this compromise them out when it is in their interest, not yours. All right?
You have to do a sales job here. All right? You've got to be able to convince the IRS that this is the best deal that they're going to get, right? They have this amount that's sitting on their inventory, and you've got to be able to convince the IRS, "We're going to pay you with this compromised amount, and more than likely, you're not going to get a better deal than this right now. Right? That's why it becomes a very difficult process. You're filing a 433, filing a Form 656, all the supporting documentation. It better be good supporting documentation that'll push it back. They'll rejected on you.
The time that you have to spend on this, for those that are out there as practitioners, it could a 40-hour project, all right, and obviously becomes very expensive. That's why I said, this process is intensive, and it can be expensive, all right? There's a lot of back and forth, I can tell you, between the offer specialist, and whether it's the taxpayer or the practitioner negotiating the various components to go into doing these things.
That's why before you even get started on an offer-in-compromise, you always want to be pre-qualified. Now, the IRS has some tools. I would encourage you to use those. I don't think it's rocket science. In many cases, if you're sitting with a client or a taxpayer that owes $300,000, and they have a home in which they have an equity in at home of, say, a million dollars, they're not going to get an offer-in-compromise, because the IRS is going to say, "We can tap into that, and we can just go right into that and just take it out. It's not in our interest to compromise at that point.
Again, you want to make sure you're compliant, current, you want to make sure you're not overpaying your tax returns at that point, so you're not getting your money scooped up from you. Tax liabilities over $50,000, the IRS Council has to get involved, which the IRS is attorneys, and you do have the ability to appeal anything that gets rejected, or that doesn't seem qualified by the agent in charge.
There are three different types of offer-in-compromise. I'm not going to go into those in extensive detail now, and because we're going to do a program later that will do those in a couple months or so. You have doubt the liability, doubt as to collectability, which is where most of us are when we're working offer-in-compromises, and an area called effective tax administration, which is extremely rare, but it's one of those cases where you can negotiate it, but again, it's extremely, extremely rare to get into that area.
We had the last polling question, which offer-in-compromise option would you employ the balloon, and switcheroo, what I call the switcheroo strategy? Lump sum offer, periodic payment offer. If you would try to get through this quickly, because I got just a couple of more slides to get to here. I've been told I only got about five minutes left.
Dan Gibson: Okay. All right, yeah, that's the right answer, and we'll go through that. Actually, I'm going to go to the next slide. I'm going to go back to this. I think this slide, this lays out the offer-in-compromise a little bit better as far as the valuation package that you're going to put together. Key factors here is looking at the net assets, or you're looking at the includable assets versus allowable assets, or allowable liabilities. You have to know what those are.
There are certain assets, there are certain exclusions that you can take advantage of to lower the assets, which is what you want to do. There are liabilities that are allowable, not allowable, you need to know what those are. The cash flow, we talked a little bit about that with the installment agreements, you have to know what your cash flow income is. That's usually not a big deal, but it's the allowable expenses, knowing what the IRS allows and doesn't allow. Doing the calculation, again, we've got the assets plus the liabilities, that's the equity, then we have the monthly income less the allowable expenses.
If we're doing a lump sum payment, we multiply that monthly cash flow by 12. If we're doing a periodic payment, which is over 24 months, we multiply it by 24, right, to come up with the reasonable collection potential. I mean, that's basically, yeah, then taking the net assets, combining it with this cash flow calculation. Either multiply by 12 or 24, and that's the compromise amount, and that's what you have to convince the IRS that that's the best they're going to do over the remaining statute.
Now, they may look at it and say, "Gee, we can do much better. We just get these guys into installment agreement," well, then they're not going allow you to have the offer. I'm going to flip back to the next slide that I skipped over before, some of the disadvantages that lump sum offer. You got to pay 20% up front when you submit the agreement, and then you make five additional payments once the offer is accepted. There's no payments that are required during the evaluation, and you're using that multiplier of 12, which is good.
This works very well, and the amounts are relatively small. The periodical payment offer, the first payment is made on submission of the offer, and then you make 23 payments over the next, or you make payments over the next 23 months during the evaluation period. All right? The issue here is that in the periodic payments, you're allowed to actually make a payment very small for the first 23 months, and then make a balloon payment for that last payment. All right?
You could pay as little as 100 bucks a month. You may get into a situation where let's say your tax liability is a million dollars. You've compromise that, and you figured out that the offer that could be accepted, or that you're going to submit is $200,000. Well, if you're doing a lump sum offer, when you submit the offer, you're going to have to submit $40,000. Right? 200 times 20% is $40,000. If you're doing the periodic, you're submitting the offer-in-compromise, and then you only have to submit 100 bucks, but you got to submit hundred dollars per month.
If that goes on for six months, and then it gets rejected, well, the lump sum, you're out the 40 grand, they're not going to pay that back to you. But if you did the periodic, you're only out 600. It's a pretty big difference, and the balloon, the switcheroo strategy is that you do periodic first if you have a large amount that's out there. Once it's accepted, then you tell the auditor, "Why don't we switch to a lump?" They'll do that, they'll switch over to a lump sum at that point, because you know the amount is good. You've leveraged this whole idea of being able to use the balloon payment in the periodic.
Once you've gotten locked into a good offer amount, if you can, then you do a switch over to the lump sum so that you can use the 12 times multiplier instead of the 24 times multiplier. Nice strategy to do when you're going through the offer process.
I think I'm running up against the time here. Some of the stuff I repeated, these are some of the things that you can look at using the offer-in-compromise. You can use the Currently Not Collectible to buy some time in order to build good history in order to make your offer better when you submit it. There's some expenses that people don't take into account that maybe they don't have that they should have, that could help their offer amount, payments of health insurance, life insurance disability. There are these subtle allowances for cash, and the core assets that we can use so that we can maximize allowable expenses and liabilities that we may not think we have out there. But it may take a little time to build that, so you use the installment agreement, or the Currently Not Collectible during that time period to build that history.
I'm not going to go over this slide. We talked a lot about the statute ending period. I mean, you got to know where you're at in the statute period, for when it ends. You don't want to you don't want to go into an offer-in-compromise when you're nine, or your nine and a half. If you're in year two, yeah, if you're in year nine and a half, you want to maybe try to get it to an installment agreement to try to get leverage the time that you have at that point. Andal, do we have any questions?
Andal Iyengar: Yeah, we do. We have a few more.
Andal Iyengar: Among forgiven in an offer-in-compromise, can start cancellation of debt income and is it taxable?
Dan Gibson: No, it's not. No.
Andal Iyengar: It's not. If tax liability is over 100,000 for three audited tax years, must the deficiencies be combined if independently they are less than $50,000?
Dan Gibson: Say that again.
Andal Iyengar: If the tax liability is over $100,000 for three audited tax years, should the deficiencies be combined if independently, they are less than $50,000?
Dan Gibson: They will be combined. You're combining them all. You're not able to silo them out, unfortunately.
Andal Iyengar: When the statute runs on a tax, what happens next? Does IRS send correspondence regarding this, or should the taxpayer reach out to the IRS?
Dan Gibson:When the statute ends?
Andal Iyengar: Mm-hmm.
Dan Gibson:When the statute ends, it just goes away. I mean, I would definitely call the IRS. I would definitely ask for transcripts. The practitioners, you can get them. Taxpayers can go online now and get transcripts easily, get account transcript to show that the amount has been reduced. The other thing you want to look at too is making sure that within a reasonable amount of time, any liens that have been placed on taxpayers should go away as well.
Andal Iyengar: Okay. There's just one more. If there is an agreement for a partial pay of the balance, and there isn't a default, can the IRS reevaluate the payment after 10 years, and does the balance go away?
Dan Gibson:I'll answer that. They have the ability to reevaluate, based on the financial situation of the taxpayer. If it doesn't change, then it won't change. At the end of the statutory period, the 10 year period, the amount that was outstanding goes away.
Dan Gibson:All right. If anybody else has any questions, or wants to email me, or call me, feel free at any time. Appreciate it. All right Niky.
Transcribed by Rev.com
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