Tax Controversy Magic 03/15/2011
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Latest government statistics for Delinquent Collection Activities show the IRS rejects more than three of every four Offers in Compromise. The IRS accepted only 11,000 of 52,000 of Offers in Compromise submitted in 2009. Even though the government is strapped for funds, the IRS accepted a mere 21 percent of people trying to get back into the system.
To get the IRS to agree to an Offer in Compromise, the taxpayer must offer an amount that “reasonably reflects collection potential.” (IRM 22.214.171.124.3). Translated that means an Offer in Compromise must contain the minimum amount of the taxpayer’s equity in his or her assets plus an amount based upon “Future Income.”
“Future Income” is one of the trouble spots where many Offers fail. The “Future Income” calculation creates an “asset” based upon the taxpayer’s ability to make monthly payments after necessary living expenses are deducted. Extra monthly income, that is “extra” as defined by the IRS, is multiplied by either 48 or 60 months, depending on Offer payment terms.
Assume for a moment that a contractor has no real assets, but after necessary living expenses are deducted has $400 extra each month. The minimum Offer amount could be as high as $24,000. Based upon regulations, the IRS takes the $400 and multiplies by as much as 60 months. What seemed like a promising situation now seems doomed.
Here’s where tax law becomes magic. With detailed knowledge of the Internal Revenue Manual regulations on Offers in Compromise, a dogged attitude to fix tax problems, and a questioning mind, a tax attorney can make the $24,000 Future Income asset disappear.
Let’s assume that the contractor hauls a lot of material and refuse each month for work. Were he to hire a hauler, the contractor would incur costs of $400 monthly. Right now, as we draft our Offer, the contractor uses his twelve year-old pickup to haul, a beat up truck worth about a $1,000.
By selling the pickup truck and offering the $1,000 for the Offer, the contractor can claim the expected costs of delivery as a business expense. (See IRM 126.96.36.199.1). With the contractor expected to have higher monthly hauling costs of $400, he no longer has any Future Income. Our minimum Offer amount has now plummeted by $23,000 to $1,000.
Now you see it; now you don’t. Of course, one problem remains – how will the contractor haul his materials and refuse? There are some secrets a magician can never reveal.