Earlier this year the IRS announced the “Fresh Start” program. The IRS implemented this program to provide relief to struggling taxpayers. I discussed the need for program in my blog posting, “IRS Overwhelmed by Offer in Compromise Requests, Changes Made.” I must admit that I was a little skeptical of this program in the beginning. But now I am a believer.
We engaged a new client for help in February, 2012. The client is self-employed and did not file annual income tax returns nor pay estimates for the past three years. We prepared and filed all unfiled annual tax returns. Once the tax returns were filed, the client owed about $35,000 in taxes including interest and penalties. The next step was to determine resolution.
We reviewed the client’s financial situation. The client’s equity in assets was about $3,000. We reviewed the client’s collectability. We determined that the client was not collectable. Since the client made less than $100,000 of income and the client owed less than $50,000 in taxes, the client qualified for the streamline Offer in Compromise. However, I had some reservations on the case. The client is not the best on maintaining the company books. Business net income used to determine collectability was based on the 2011 annual tax return and conservative year-to-date information for 2012. The IRS has taken issue with this approach in the past because profit and loss statements have not been prepared. As a result, the IRS may be skeptical of the numbers reported and request further proof of expenses. The other complication was income fluctuation in the previous four years. In our experience, the IRS has done income averaging calculations to benefit the IRS. The offer was submitted knowing further negotiation with the IRS may be required.
The offer and compromise was prepared and submitted for the client in April of 2012. We offered $3,000 which was the client’s equity in assets. The settlement was little aggressive based on the numbers submitted. The offer could be in the $8,000 to $10,000 range if adjustments were made to the offer. We informed the client that based on past experience it may take about six months for the case to be assigned to an offer specialist. Then it may take one to three months to negotiate the offer with the IRS. The offer was submitted with only the documentation required to be submitted per Form 656 Booklet instructions. The amount of documentation required under the new instructions is significantly less than the amount of information needed in the past.
Once the offer was submitted, we kept our fingers crossed. We received the letter from the IRS confirming the submission. The letter was timely sent. To our surprise, we received the offer acceptance letter in July of 2012. The IRS accepted our offer of $3,000 and accepted the offer within four months of submission! We notified the client of the good news. Of course the client was ecstatic! The client was anticipating a higher offer amount and a much longer response date. The client was very relieved on getting the tax issues resolved. Currently, I am working with the client to better maintain the business books and staying compliant with the IRS going forward. Needless to say, we are a new believer of the streamline offer in compromise program. We hope to experience similar results of other offers submitted.
If you owe back taxes and you are in a hardship situation, call the IRS Guardian. You may qualify for an Offer in Compromise. 855-MI-Tax-Help (855-648-2943)
IRS Circular 230 Disclosure: To the extent this writing contains advice on a federal tax issue, the advice is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed in this communication.