Happy About Tax Relief: The Offer in Compromise Solution

Happy About® Tax Relief The Offer in Compromise Solution By Thomas M. Evans 21265 Stevens Creek Blvd. Suite 205 Cupert...

Author: Thomas M. Evans

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Happy About® Tax Relief The Offer in Compromise Solution By Thomas M. Evans

21265 Stevens Creek Blvd. Suite 205 Cupertino, CA 95014

Happy About Tax Relief: The Offer in Compromise Solution Copyright © 2007 by Happy About® All rights reserved. No part of this book and software shall be reproduced, stored in a retrieval system, or transmitted by any means electronic, mechanical, photocopying, recording, or otherwise without obtaining written permission from the publisher. No patent liability is assumed with respect to the use of the information contained herein. Although every precaution has been taken in the preparation of this book, the publisher and author(s) assume no responsibility for errors or omissions. No liability is assumed for damages resulting from the use of the information contained herein. First Printing: June 2007 Paperback ISBN: 1-60005-023-9 Place of Publication: Silicon Valley, California, USA Library of Congress Control Number: 2001012345 eBook Version 1.0: June 2007 eBook ISBN: 1-60005-024-7

Trademarks All terms mentioned in this book that are known to be trademarks or service marks have been appropriately capitalized. Happy About® cannot attest to the accuracy of this information. Use of a term in this book should not be regarded as affecting the validity of any trademark or service mark.

Warning and Disclaimer Every effort has been made to make this book and software as complete and as accurate as possible, but no warranty of fitness is implied. The information provided is on an “as is” basis. The authors and the publisher shall have neither liability nor responsibility to any person or entity with respect to any loss or damages arising from the information contained in this book and software.

More Praise for ‘Happy About Tax Relief’

"I believe this book would be very helpful to many people who can not afford to have a CPA or Tax Attorney prepare and process their OIC. It would even be a useful tool for the same Tax Attorney’s and CPA's!" George P. Delucchi, C.P.A., DABFA, FACFE, Delucchi, Hawn & Co., San Jose, CA

“Having done tax preparation and dealt with the Internal Revenue Service since 1982, I can appreciate the extra help that I can get when it comes to the complicated procedure of "offer in compromise." Mr. Evans has written a step-by-step "how to" book on this precise issue in a practical way. He has provided ample illustrations in his book and the accompanying Excel worksheets to guide you through the maze that is OIC.” Steven C. Lam, CPA, Sunnyvale, CA

"Sound advice and a very practical approach to an Offer in Compromise. Useful to both tax practitioners and sophisticated individuals. I plan to use the book and software in my practice in the future." Jeffrey K. Kolsin CPA, Fountain Valley, CA

“Great resource for discovering if you qualify for an Offer in Compromise on paying back taxes. Replaces fear and shame with knowledge. Be informed if you hire a professional. Save time and money if you do-it-yourself. Keeps you out of ‘tax mills’ and away from scams.” Don Morrison, CPA, CMA, MBA with Morrison & Company, Inc., Sacramento, CA

"Anyone dealing with the IRS must realize that choices do exist in most areas of the tax law. This includes the area of offers in compromise (OIC), and Tom Evans' book and software provides choices in strategies that can benefit a vast number of citizens. The product deserves your attention!" George Benoit, Enrolled Agent, Citrus Heights, CA

Publisher and Executive Editor • Mitchell Levy, http://www.happyabout.info/

Technical/Copy Editor • Jennifer Finger, President, Keen Reader http://www.keenreader.com/

Cover Designer • Cate Calson, http://www.calsongraphics.com/

Layout Designer • Val Swisher, President, Oak Hill Corporation http://www.oakhillcorporation.com/

Dedication To Laurie, David and Michelle whose love and patience sustain me.

Acknowledgments This project all started as Brian Gibson’s idea. At this stage I thank you but there were many other moments when entirely different emotions would have been equally real. Terry Guy, without you untiring support, advice, encouragement and friendship it never would have happened. Many thanks for always being there. We make an excellent team. From the beginning, our advisors generously contributed their wisdom and experience. These good friends include Ajith Chimata, Nancy Chou, Steve Denny, John Dicconson, Rick Ellinger, Jim Jones, Jim Killin, Dean Lane, Mitchell Levy, Ed Murrer, Paul McEntire, Bill Milks and Greg Von Gehr. You all know the very large pieces that you added and I hope you know how much it was appreciated. I am grateful to several ex-IRS personnel who so often said to me, “That’s fine, Tom, but this is how it really works…” My experience with these fine, hard working individuals gave me greater understanding and consideration for IRS employees. And, of course, there is one ex-agent of exceptional integrity who believes in what we are doing enough to put his time and extensive talents behind it. I wish I could acknowledge you (and the others) publicly. Writing a book and software program along with the patents and, at the same time starting up a company takes long, mostly solitary hours. The strong tethers that kept me (somewhat) balanced during this period have been my partner, Laurie and my children, David and Mitchell. Also, having participated in men’s circles for over 25 years, I know I wouldn’t be who I am today without the love and feedback many men have given me. So “Thank You” to my current teachers: Brian, Bruce, Francis, Fred, Guy, Ken, Kevin, Lalu, Mark, Mike and Paul. Lastly, I want to thank the Internal Revenue Service for making available and administering ‘safety valve’ programs like Offer in Compromise and Taxpayer Advocate Service. I am aware of the enormity of the IRS’s responsibilities as well as the powerful and varied demands placed the Agency. So it’s to the IRS’s credit that taxpayers have genuine ways to seek help from what could otherwise become an oppressive system. Thank you.

A Message From Happy About® Thank you for your purchase of this Happy About book. It is available online at http://HappyAbout.info/oic.php or at other online and physical book stores. • Please contact us for quantity discounts at [email protected] • If you want to be informed by e-mail of upcoming Happy About® books, please e-mail [email protected] Happy About is interested in you if you are an author that would like to submit a non-fiction book proposal or a corporation that would like to have a book written for you. Please contact us by e-mail [email protected] or phone (1-408-257-3000). Other Happy About books available include: • Climbing the Ladder of Business Inteligence: http://happyabout.info/climbing-ladder.php • Moving From Vision to Reality: http://happyabout.info/myfaith/vision2reality.php • Overcoming Inventoritis: http://happyabout.info/overcoming-inventoritis.php • Happy About People-to-People Lending With Prosper.com: http://happyabout.info/prosper/ • Happy About Online Networking: http://happyabout.info/onlinenetworking.php • Happy About Apartment Management: http://happyabout.info/apartment-management.php • Confessions of a Resilient Entrepreneur: http://happyabout.info/confessions-entrepreneur.php • Memoirs of the Money Lady: http://happyabout.info/memoirs-money-lady.php • 30-Day Bootcamp: Your Ultimate Life Makeover: http://happyabout.info/30daybootcamp/life-makeover.php • The Business Rule Revolution: http://happyabout.info/business-rule-revolution.php • Happy About Global Software Test Automation: http://happyabout.info/globalswtestautomation.php • Happy About Joint Venturing: http://happyabout.info/jointventuring.php • Happy About LinkedIn for Recruiting: http://happyabout.info/linkedin4recruiting.php • Happy About Website Payments with PayPal http://happyabout.info/paypal.php • Happy About Outsourcing: http://happyabout.info/outsourcing.php

N o t i c e

Notice to Users User License and Warranty

The software program (the OIC Calculator™) and accompanying User Manual (hereafter collectively referred to as the “Application”) is made available under this licensing agreement. Use of the Application must be in accordance with the provisions of this agreement. By using this Application, you indicate that you accept all the terms of this agreement. If you do not agree with all the terms and conditions of this agreement, do not install the Application and contact The Tax Co-Op, Inc. for a refund within thirty (30) days of purchase (email [email protected]). The Application, User Manual, the OIC Calculator™ and any other documentation provided are copyrighted and the property of The Tax Co-Op, Inc. You have certain rights to use the Application upon your acceptance of the terms of this agreement. You are not authorized to give, sell, rent or otherwise distribute the Application to anyone, except as provided under the U.S. Copyright Act.

Your Responsibility in Using the Application

This Application does not replace the advice from a qualified tax professional. The Application was created to give you information useful in negotiating an Offer in Compromise with the Internal Revenue Service. It is your sole responsibility to determine your need for and to seek qualified, professional advice based on your personal situation. Users employing this Application in an advisory capacity accept sole and exclusive responsibility to verify the accuracy and appropriateness of the calculations and recommendations for their clients. In addition, advisors assume sole and exclusive liability for the consequences of Application’s use with their client and in their practice.

No Warranty

The Application and user materials are provided to you as-is and The Tax Co-Op, Inc. makes no warranty as to its accuracy or use. The user is informed that this Application may become obsolete and/or its calculations and conclusions rendered incorrect for reasons that include, but are not limited to: a) changes in the Internal Revenue Service policies, procedures and interpretation of U.S. tax laws; b) amendments to the U.S. Tax Code; c) differences in each individual’s tax situation and the inappropriateness of applying the Application in every circumstance; and d) errors and other inaccuracies that the Application and documentation may contain. Being aware of these risks, the user assumes the risks and liabilities of employing and giving advice based on this Application. The Tax Co-Op, Inc. is not responsible to maintain or update the Application or notify the user of any changes that would modify or obsolete the Application. The Tax Co-Op, Inc. does reserve the right to make changes without prior notice.

Happy About Tax Relief: The OIC Solution

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Authorized Use of the Application

The user may only operate one copy of the Application on one computer. If Application is used on a network, a separate license for the Application must be purchased for each computer that can access the Application over the network. The user may not sell, rent, sublicense, lease or copy in any form any portion of the Application or documentation.

Limited Warranty

The user’s sole remedy in the event of a breach of this warranty is that The Tax Co-Op, Inc., will replace this Application or refund the user’s purchase price if user so requests within the warranty period. THE ABOVE WARRANTY IS EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING THE IMPLIED WARRANTIES AS TO PERFORMANCE, RESULTS THAT MAY BE OBTAINED BY USING THE APPLICATION, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. THIS WARRANTY GIVES YOU SPECIFIC LEGAL RIGHTS. YOU MAY HAVE OTHER RIGHTS, WHICH VARY FROM STATE TO STATE.

Limitations on Damages

EVEN IF A REMEDY SET FORTH HEREIN IS FOUND TO HAVE FAILED OF ITS ESSENTIAL PURPOSE, UNDER NO CIRCUMSTANCES IS THE TAX CO-OP, INC. LIABLE TO YOU FOR ANY SPECIAL, CONSEQUENTIAL, INDIRECT OR SIMILAR DAMAGES, INCLUDING ANY LOST PROFITS, INACCURATE OR INAPPROPRIATE ADVICE GIVEN OR ACTED UPON OR LOST DATA WHETHER BASED ON BREACH OF CONTRACT, BREACH OF WARRANTY, TORT (INCLUDING NEGLIGENCE), PRODUCT LIABILITY OR OTHERWISE ARISING FROM THE USE OR INABILITY TO USE THE APPLICATION EVEN IF THE TAX CO-OP, INC. HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. SOME STATES DO NOT ALLOW THE LIMITATION OR EXCLUSION OF LIABILITY FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES, SO THE ABOVE LIMITATION OR EXCLUSION MAY NOT APPLY TO YOU. IN NO CASE SHALL THE TAX CO-OP, INC.’S LIABILITY EXCEED THE PURCHASE PRICE FOR THE APPLICATION.

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Notice

Entire Agreement

This agreement contains the entire agreement of the parties and there are no other promises or conditions in any other agreement whether, oral or written. If any provision of this agreement shall be held to be invalid or unenforceable for any reason, the remaining provisions shall continue to be valid and enforceable. If a court finds that any provision of this agreement is invalid or unenforceable, but that by limiting such provision it would become valid and enforceable, then such provision shall be deemed to be written, construed, and enforced as so limited.


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Notice

c o n t e n t s

User Notice

Notice to Users - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -i

Quick Start

Quick Start Guide - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1

Intro

Introduction - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 3 You Are Not Alone - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -3 How This Application Can Help You - - - - - - - - - - - - - - - - - - - - - - - - - - - - -4 Background on The Tax Co-Op, Inc. - - - - - - - - - - - - - - - - - - - - - - - - - - - -5

Chapter 1

Strategic Overview - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 7 Advantages and Disadvantages of an OIC - - - - - - - - - - - - - - - - - - - - - - - -7 Best and Worst Case Scenarios - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -9 Reasons OIC Applications Are Rejected - - - - - - - - - - - - - - - - - - - - - - - - - 10

Chapter 2

Using The OIC Calculator™ - - - - - - - - - - - - - - - - - - - - - - - - - 13 How Jeff Qualifies for His OIC - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 20 Testing and Refining OIC Strategies - - - - - - - - - - - - - - - - - - - - - - - - - - - 25

Chapter 3

Your Reasonable Collection Potential Test - - - - - - - - - - - - - - 27 Getting Your Tax Information from the IRS - - - - - - - - - - - - - - - - - - - - - - - 27 Calculating Your Monthly Multiplier - - - - - - - - - - - - - - - - - - - - - - - - - - - - 29 John Taxwise’s Monthly Multiplier - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 30 Your Case from the IRS Perspective - - - - - - - - - - - - - - - - - - - - - - - - - - - 32 Enter Your Asset and Liability Information- - - - - - - - - - - - - - - - - - - - - - - - 33 Value Your Assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 34 John Taxwise’s Asset and Liability Data Input - - - - - - - - - - - - - - - - - - - - - 35 Enter Your Income and Expense Information - - - - - - - - - - - - - - - - - - - - - 36 John Taxwise’s Income and Expense Data Input- - - - - - - - - - - - - - - - - - - 37 Determining IRS Exemptions and Allowances - - - - - - - - - - - - - - - - - - - - - 38

Chapter 4

Asset and Liability Strategies - - - - - - - - - - - - - - - - - - - - - - - - 41 Liquid or Near-Cash Assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 42 Semi-Liquid Assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 43


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John Taxwise’s Monthly Multiplier and Asset Strategies - - - - - - - - - - - - - 44 Ill-Liquid Assets and Installment Loans - - - - - - - - - - - - - - - - - - - - - - - - - 46 John Taxwise’s Ill-Liquid Assets Strategy - - - - - - - - - - - - - - - - - - - - - - - - 47 Installment Loan Strategies- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 48 John Taxwise’s Installment Loan Strategies - - - - - - - - - - - - - - - - - - - - - - 50 Income and Lifestyle Assets - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 52 Strategies for Sheltering Cash- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 53 Chapter 5

Income and Expense Strategies - - - - - - - - - - - - - - - - - - - - - - 55 Your Income and Expenses Goals- - - - - - - - - - - - - - - - - - - - - - - - - - - - - 55 Documentation Period Strategies - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 56 Income Strategies - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 56 Using a Discount Rate on Future Income and Expenses - - - - - - - - - - - - - 57 Expense Strategies - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 58 John Taxwise’s Expense Strategies- - - - - - - - - - - - - - - - - - - - - - - - - - - - 61

Chapter 6

Testing and Executing Your OIC Strategy - - - - - - - - - - - - - - - 65 Determine Your Total Change in Cash- - - - - - - - - - - - - - - - - - - - - - - - - - 65 John Taxwise’s Cash Flow Strategies - - - - - - - - - - - - - - - - - - - - - - - - - - 66 Budgeting Strategies - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 68 John Taxwise’s Budget Strategies - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 70

Chapter 7

Examples Using the OIC Strategies - - - - - - - - - - - - - - - - - - - - 73 Roy No Canpay’s OIC - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 73 How Roy Qualifies for His OIC - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 79 Testing the Strategy - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 89 Mary N. Trouble’s OIC - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 95 How Mary Qualifies for Her OIC - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 100 Albert U. R. Broke’s OIC- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 110 How Albert Qualifies for His OIC - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 115

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Contents

Chapter 8

Documenting Your OIC - - - - - - - - - - - - - - - - - - - - - - - - - - - - 123 Documents to Submit with Your OIC Application - - - - - - - - - - - - - - - - - - 123 Documentation “Catch-22” - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 125 Written Responses - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 125 Quantitative Responses - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 126

Chapter 9

If Your OIC Is Accepted or Rejected - - - - - - - - - - - - - - - - - - 133 Your Application Is Accepted - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 133 Collateral Agreements - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 134 Your OIC Is Rejected - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 135 Other Options - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 137

Appendix A

Examples 1 through 5 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 139 Example 1: Jeff I. O. Alot- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 139 Example 2: John Taxwise - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 151 Example 3: Roy No Canpay - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 157 Example 4: Mary N. Trouble - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 175 Example 5: Albert U. R. Broke - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 187

Appendix B

Successful OIC Applications - - - - - - - - - - - - - - - - - - - - - - - 199 Case 1- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 199 Case 2- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 215 Case 3- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 226


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Appendix C

OIC Forms and Sample Letters - - - - - - - - - - - - - - - - - - - - - - 243

Appendix D

Frequently Asked Questions - - - - - - - - - - - - - - - - - - - - - - - - 253

Appendix E

Glossary - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 259

Appendix F

Communicating with the IRS - - - - - - - - - - - - - - - - - - - - - - - - 273

Appendix G

Other Choices in Dealing with the IRS - - - - - - - - - - - - - - - - - 277

Appendix H

Bibliography and Resources - - - - - - - - - - - - - - - - - - - - - - - - 279 Bibliography - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 279 On-Line Resources - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 280

Index

Index - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -283

Author

About the Author - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -289

Books & Calculator

Other Happy About Books - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -291 Obtaining the OIC Calculator™ - - - - - - - - - - - - - - - - - - - - - - - - - - - - -293

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Contents

G u i d e

Quick Start Guide Minimum System Requirements

To install and run the Application, you must have Microsoft Word and Excel software programs on your computer. Different versions of this Application suitable for various releases of these Microsoft programs. To obtain your copy your copy by sending e-mail to [email protected]. In your e-mail, please use the subject line “OIC Calculator” and include the date, place of purchase (store name and location) and purchase price, computer type, and operating system in the body of your message.

Installing and Operating the Application

Download and save this Application to your computer. Open Microsoft Word and Excel and use these programs to run the Application files. Save and print your work as you would any other Word or Excel file.

Customer Service

Visit the Tax Co-Op website at www.taxlifeboat.com for commonly asked questions regarding the Application. With individual questions or comments, please email Tom Evans at [email protected].


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Guide

I n t r o

Introduction Welcome to the Offer in Compromise (“OIC”) Wonderland! Along the way you will discover many things with this book and software Application: 1. Apply the new OIC regulations that went into effect July, 2006 and February, 2007 to your advantage. 2. Determine what “monthly multiplier” to use in your analysis—and why this is so important. 3. Calculate the benefit of and how to qualify for a more favorable monthly multiplier—a small change saves thousands of dollars. 4. Plan using the Asset Equity Table spreadsheet to minimize the “net equity” in your assets and what you’ll pay in taxes. 5. Test scenarios with the Retired Debt Calculations spreadsheet to avoid huge tax payments when a loan is paid off. 6. Adjust your monthly figures in the Income Expense Table spreadsheet to limit the impact these have on your settlement. 7. The Application links these spreadsheets together to derive the IRS’s “Reasonable Collection Potential.” While this figure determines their final recommendation, you’ll see how to change it to your advantage. 8. Finally, the OIC Calculator™ assists you in preparing the forms and documentation necessary to submit your OIC application.

You Are Not Alone

Experts estimate that ten million taxpayers owe back taxes to the IRS. Up to another ten million taxpayers aren’t filing with the IRS as required. This problem has grown so widespread that in 1996 Congress passed the Taxpayer’s Bill of Rights 2, which liberalized a program whereby people could settle all their IRS debt in one negotiation—often for pennies on the dollar. Since then the Offer in Compromise (OIC) program has been further expanded to encourage non-filers and those hopelessly behind to come into full compliance (see Internal Revenue Code §7122 and Regulations §301.7122-IT). In July, 2006 and February, 2007 further changes were made and these have been included in this Application. In 2001, 39,000 (31%) of the 125,000 OIC were accepted. Applications were down slightly in 2002 to 124,000 and acceptances fell to 29,000 (23%). From 2002 the number of acceptances has continued to decline while the approval rate increased somewhat due to fewer applications: 2003 was 22,000 (17%) and 2004 fell to 20,000 (19%). This trend has continued in 2005 where 19,000 (26%) were approved and in 2006 where 15,000 (25%) were accepted. While


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individual settlements obviously vary greatly, the average amount the IRS recovers has remained fairly constant at about 15% of the aggregate owed. There are three arguments under which the IRS considers granting an OIC: 1. You owe the tax but don’t have the money to pay it (also referred to as “doubt as to collectibility”). 2. You owe the tax but it would cause undue hardship to pay it. 3. You don’t owe the tax for some very good reason (“doubt as to liability”). This Application shows you how to adjust your finances to better fit the OIC guidelines for reasons #1 and #2 and, thereby, qualify for settlement at a reduce monetary amount. If you are applying under option #3 you need not submit financial statements, and can go directly to Chapter 8 to complete IRS Form 656, Offer in Compromise.

How This Application Can Help You

Whether you’re a tax professional or an individual negotiating an OIC under the premise “I owe the tax but…”, this Application can help you. How often has the IRS sent you a response to your application that seems incomprehensible to you? This Application provides you with detailed insight into the numbers and calculations the IRS employs to reach their conclusions. You will utilize the IRS’s own quantitative test to strategize around these challenges and best qualify for an OIC settlement. Also, you can test the feasibility and potential benefits of an OIC before doing the heavy lifting of gathering your records. Discover which numbers are important to passing the test so you can anticipant and document them in the application. Knowing how the IRS will likely view your OIC case and being able to quickly run varying scenarios is crucial in planning your strategy. Avoid the pit holes with our easy to follow, step-by-step process and extensive examples: Chapters 1 and 2 provide an objective view of the OIC process so you can decide its applicability to your situation. Plus, an example demonstrates how to strategize using the Application. Chapter 3 explains the key goals in these negotiations and the information you need to determine where you stand now—prior to any planning. Chapters 4 through 6 present detailed strategies and a case study on how to best secure an OIC from the IRS.

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Intro

Chapter 7 shows the application of these strategies in three real-world examples. Chapter 8 helps you implement your OIC strategy by completing the IRS forms and documenting your application. Chapter 9 gives you specific actions to take if your OIC is rejected. Appendixes A through H supply the range of resources to fully research and execute your OIC application.

Background on The Tax Co-Op, Inc.

The Tax Co-Op, Inc. is a nationwide, full service tax resolution firm based on the principle that clients are best served when they make informed decisions and implement the solution they choose. We take the mystery out the process so you can resolve your tax problem quickly and economically. This Application focuses on the Offer in Compromise solution and, to help you implement it, we provide comprehensive resources, step-by-step instructions and numerous examples. The result is you can proceed with confidence and likely save thousands in taxes and fees. Appendix G discusses the other possible tax solutions offered by The Tax Co-Op, Inc. via our forthcoming website at www.taxlifeboat.com. Purchasers of this Application will receive a 30% discount on the website services as they become available. To guide you through the maze of tax resolution strategies, we assembled a team of ex-IRS agents, tax and bankruptcy lawyers, CPA’s and other tax professionals as well as asset protection specialists and financial analysts. Collectively we have many decades of experience negotiating clients’ interests with the IRS and state tax authorities. We know how the IRS works from the inside. The founders of The Tax Co-Op, Inc. exemplify the high professional standards of our staff: Thomas M Evans is the author of a book and software program on taxes (Offer in Compromise), a book and software package on commercial loans (LoanBuilder) and a business planning simulation program (Strategy Simulator). He was previously a senior executive with high technology companies, strategic planner with Stanford Research Institute and senior securities analyst with a Wall Street member firm. Mr. Evans has an MS in Systems Analysis and Decision Theory from Stanford University and an MBA from the University of Southern California.


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Since 1967, Terry L. Guy has provided tax services (from return preparation and audit representation through negotiations and appeals) as well as business consulting to clients throughout the U.S. His entrepreneurial career includes purchasing and turning around small companies, developing real estate projects and establishing and operating copy centers (he was one of the founders of Kinko’s). Mr. Guy has been a director of seven corporations and is the past President of the Five Cities Junior Chamber of Commerce.

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Intro

c h a p t e r

1

Strategic Overview

Applying for an Offer in Compromise is, in many ways, an irrevocable decision. The pros and cons, as well as other factors, are presented here to consider so that you make an informed choice. In additional, opportunities to pursue alternative tax settlement strategies are discussed briefly in Appendix G, Other Choices in Dealing with the IRS. However, if you decide to pursue the benefits of an OIC, then plan to win! The most frequent reason for the failure of OICs is applicants don’t plan ahead and execute their strategy properly. The chapters that follow combine text and quantitative tools to help secure IRS approval and maximize your tax savings. The Application was designed as an OIC “cookbook” with simple, clear examples and directions.

Advantages and Disadvantages of an OIC

The Advantages

1. You gain peace of mind and certainty by settling all your outstanding issues with IRS in one negotiation. 2. The monetary settlement could be for far less than what you owe. The IRS accepts on average about 15% of the total due. 3. The settlement can be paid in installments over a number of years. 4. Interest accrues, not on the original assessment, but on the settlement amount until the OIC is paid in full. 5. The IRS generally delays seizure or levy of your assets if they feel you’re negotiating in good faith. Also, if an OIC is granted and you fulfill your obligations, you may avoid seizure or levy altogether. 6. If you are subject to federal tax liens, you can have them lifted within 30 days of paying off the OIC settlement. In addition, entering into a collateral agreement for future payments usually entices the IRS to release their liens. This allows you to begin repairing you credit rating.


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7. If you have paid your OIC settlement in full and your income and financial circumstances improve in the future, the IRS is prohibited from revoking the OIC and demanding the past taxes. This is a significant advantage over an installment agreement. 8. If your OIC application is rejected, you can appeal the ruling so long as you are current with your tax filings and payments and file your appeal within 30 days.

The Disadvantages

During the negotiations with the IRS: 1. The IRS approves about one in four OIC applications. 2. You are required to file all your past tax returns and be current on your quarterly payments or withholding prior to applying. 3. You have to collect, analyze and provide extensive reports and supporting materials along with your OIC filing. In addition, the IRS will undoubtedly request additional information. However, such tasks are considerably easier using this Application. 4. The OIC process takes at least six to eighteen months (or longer) to complete. 5. If you lie or do not disclose all your assets and the IRS finds out, the OIC will likely be revoked and you will probably not be approved for another in the future. 6. Submitting the disclosure forms supplies the IRS with all the personal and financial information they need to seize or levy your assets and/or garnish your income. 7. The IRS may audit you based on information contained in your application, but this is rare. 8. If the Revenue Officer decides you haven’t provided sufficient information to document your application, they can “close” your OIC case and there’s no appeal to their decision (as there would be if it were “rejected”). If your OIC application is rejected: 1. Amounts you pay in an OIC application fee are forfeited and your deposit is applied to your outstanding tax liability. 2. Interest and penalties accrued during the application period are added to you tax debt.

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Chapter 1: Strategic Overview

3. OIC submissions based on the argument “I owe the tax but…” bar you from contesting in tax court since you acknowledge the debt—even if your OIC is turned down. This applies to all the tax years you list in your application. 4. Applying for an OIC extends the time the IRS has to collect by the months the OIC is under consideration, plus one year, to whatever remains on the 10-year collection statute (see Chapter 3, “Getting Your Tax Information from the IRS” for an explanation of this law). After the IRS approves your OIC request: 1. You must remain current on all tax filings, payments and other requirements for five years. You must also fulfill the terms of your OIC agreement, or IRS will likely revoke it. 2. If your OIC is revoked, the original amount is reinstated in full (including interest and penalties less cash received), and the IRS will commence collection. 3. You give up any tax refunds you are due for prior tax years, the current year and usually for the next three to five years.

Best and Worst Case Scenarios

Many factors determine how easy or difficult it will be to adjust your finances to fit the IRS profile for granting an OIC. The best and worst scenarios are outlined below. Best Case: Your chances of successfully negotiating an OIC based on the premise “You owe the tax but don’t have the money to pay it” are good if your assets and income match one of these three situations: 1. You have limited assets, borrowing power or income. This is best because the IRS doesn’t have much to take, pressure you to borrow against, or garnish. 2. You don’t have much relative to what you owe. Here, you forfeit some money in order to avoid a much higher tax. Or, even better, you may be able to shield these funds from the IRS. 3. You have sizable resources but can protect them. The best solution in this situation is to arrange your assets and income so that they aren’t accessible to the IRS. Possible strategies are discussed in the next chapters.


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Worst Case: The most adverse circumstance is where you owe the tax and have sizeable resources that you can’t protect. This usually occurs if: 1. You have more equity than you owe in taxes. The equity in your home, business, and other assets is sufficient to cover the tax and the IRS has liens on them. 2. You have good future earnings potential. You’re young (say, under 50 years old) and are likely to earn enough over the next ten years to pay your back taxes. In these instances, the tax collectors will wait patiently while the interest compounds on your debt at 8% or more per year. And, since this type of interest is not tax deductible (unless you’re a corporation), you need to earn at least 13.4% before tax on your money just to break-even—assuming you’re in the 35% federal and 8% state tax bracket. Therefore, in these worst-case scenarios, your best hope is to plead “economic hardship” to qualify for an OIC and, if rejected, seek help from the Taxpayer Advocate Service. If you can’t justify adequate hardship, you’re better off borrowing and paying the tax. You’ll end up saving a great deal of money, because the interest will likely be tax-deductible and at a lower rate than the IRS charges. Plus, you’ll reduce stress and free up energy to make more money.

Reasons OIC Applications Are Rejected

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Immediate or quick denial of an OIC application happens for several reasons: 1. You didn’t use the latest OIC forms. Note that IRS Form 656, the OIC application form, was updated February, 2007. 2. The application Form 656 and documentation was incomplete with some questions unanswered or blank. A. Taxpayer’s social security or EIN numbers were missing, incomplete or incorrect. B. The offer was not signed and dated. C. Financial statement forms (433-A and 433-B) were not furnished or were incomplete. D. You didn’t include your deposit and application fee. 3. No monetary offer was made to settle.


4. Tax liabilities were not identified. A. If you owe both personal and business taxes, submit two separate OIC applications. 5. Not all past tax returns have been filed. 6. You are not up to date with tax compliance (e.g., quarterly tax remittances). Rejections that occur later are usually for the following reasons: 1. By far the most frequent reason for denial at this point is the amount offered isn’t enough compared to what the IRS believes it could collect using “normal collection efforts.” A. For instance, their analysis may conclude that you have higher disposable income or your assets are undervalued so you can afford to pay more. If this is the reason, the IRS usually counters or indicates what they would settle for in your case. B. Younger taxpayers have a harder time convincing the IRS not to wait and collect more over time. Even if this is the case and your offer is rejected, ask if there’s an amount they would accept to settle. C. The criterion used by the IRS to estimate what can be collected is the Reasonable Collection Potential test as explained in Chapter 3. 2. You failed to supply sufficient documentation to support your application. 3. You didn’t respond within the time limits specified. If you need more time, explain why and ask for it. 4. The IRS believes you lied or misled them in your application. Even suspicion that you aren’t being forthcoming can be grounds for rejection. A. For example, if your claimed expenses greatly exceed your income, it raises questions as to whether you disclosed all of your income. B. Also, the IRS may know more about you than you are aware, so be sure to obtain a copy of their rejection report (see Chapter 9). 5. They determine there’s a high probability that you can’t or won’t comply with an OIC agreement, due to your poor financial condition and/or history of dishonoring past pledges. For example, falling behind in paying your estimated taxes during the negotiations would likely disqualify you, as would having defaulted on a prior OIC.


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6. The IRS concludes that your offer was not made in good faith, but rather to delay or impede collection. For instance, if you promise to pay, but later file an OIC, this could easily be interpreted as a delaying tactic. 7. You re-filed an OIC application that was turned down without offering any new facts. 8. You have a criminal record, especially if it is tax-related. 9. Occasionally the IRS declines OICs because acceptance might jeopardize overall taxpayer compliance. In other words, if others found out what you settled for, they’d be less willing to pay their taxes as required. This reason is referred to as “Effective Tax Administration.” Following the instructions in this Application should prevent many of the above mistakes. However, even if the IRS denies your OIC, further options are presented in Chapter 9 and Appendix G.

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c h a p t e r

2

Using The OIC Calculator™

This chapter uses the IRS’s Reasonable Collection Potential (“RCP”) test to plan and implement a sample OIC. The purpose is to familiarize you with the software and demonstrate how to settle an IRS debt for pennies on the dollar. Other, more complex examples in Chapter 7 show the step-by-step process of strategizing an OIC. Example #1: Jeff I. O. Alot’s OIC Strategy

First, open the software and save a file titled “Jeff Alot before.” This allows you to enter data without making changes to the OIC Calculator™ template. Create a separate file each time you start a new case or run a scenario you want to save. Let’s say Jeff I. O. Alot wants to test the feasibility of applying for an OIC. Enter the following in the Monthly Multiplier spreadsheet: 1. “1/15/2007” in cell E3 (Date of Analysis) 2. “Jeff I. O. Alot” in cell M3 (Taxpayer’s Name) His name and the date are automatically copied to the other spreadsheets, so do not enter data in the light blue cells as these contain copied data or formulas. Read the text in the spreadsheet to learn about the IRS’s monthly multiplier which will help to understand what follows. Jeff elects to pay the full settlement amount upon approval of his OIC, so enter: 3. “C” in cell L26


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Next, fill in the table, starting in row 35, with this data: 4. “1999” in cell E35 (first year back taxes are owed) 5. “35000” in cell F35 (total taxes, penalties, and interest owed) 6. “80” in cell I35 (number of months since the first tax deficiency notice was received for this year)

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Chapter 2: Using The OIC Calculator™

Three monthly multipliers are computed and shown in the cells L57, L58 and L62 along with an explanation of each. Since only one tax year was entered, all three multipliers are the same. Now input a second year with taxes due: 7. “2004” in cell E36 (second year back taxes are owed) 8. “5000” in cell F36 (total taxes, penalties and interest owed) 9. “30” in cell I36 (number of months since the first tax deficiency notice was received for this year)


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With two years to analyze the multipliers diverge: a) the IRS uses the most recent first tax notice date (30 months ago) as shown in L57; b) Jeff’s best multiplier, L58, is based on the oldest tax notice data (80 months ago); and c) the application computes two averages of these extremes and reports back the average that is most favorable to him (see L62).

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Choose one of the three monthly multipliers to use in your analysis by entering a “1”, “2” or “3” in cell L64. Jeff wants to investigate how the IRS would regard his situation, so type: 10. 10. “1” in cell L64 (the monthly multiplier being selected; in this case, the IRS’s multiplier) Input Jeff’s current personal and financial data into the Data Input and Results spreadsheet (see tabs at the bottom of the Excel program): 11. “Santa Clara, CA” in E4 (taxpayer’s county and state of residence) 12. “0” in cell I4 (he chooses not to discount future cash flows; this is discussed in Chapter 5, “Income Strategies”)


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13. “2” in cell F5 (number of people in taxpayer’s household) 14. “500” in cell I6 (amount offered to settle OIC). Keep in mind the new OIC rules require a non-refundable deposit equal to either a) 20% of the amount offered for lump sum settlements or b) the first installment for settlements that are paid over time. Since he is making a cash offer, his deposit in cell C62 is 20% of $500 or $100. Continue entering his financial data: 15. “600” in cell C12 (checking account balance) 16. “1000” in cell C39 (monthly wages from first taxpayer) 17. “1000” in cell G54 (Entertainment, Vacations & Misc. spending); All his income is accounted for so his total income (cell C57) equals his total claimed living expenses (G57) and the Net Difference in cell H59 is zero.

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The Application now shows Jeff’s Reasonable Collection Potential (RCP) of $48,600 in cell I65 (i.e., his monthly multiplier of 48 times $1,000 plus $600 from his assets). The RCP is the IRS’s estimate of what they can collect from him. Since this is greater than what is owed, Jeff would not qualify for an OIC and the IRS would require all taxes be paid in full (see A65 and D65). If he had applied, his deposit in C62 will have been applied to his tax liability but he would have forfeited his application fee of $150. Actually, given his low income, he would likely have filed IRS Form 656-A, Income Certification for Offer in Compromise Application Fee and Payment, to have the OIC application fee waived.


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How Jeff Qualifies for His OIC As things stand now his application would be rejected. But that can be fixed as shown below. Save the “Before” file and create a new “After” one that will be used to strategize how to reduce Jeff’s RCP: 1. Save the “Jeff Alot before” file to retain your work 2. Now using the “Save As…” command, save the same file again under another name, “Jeff A lot after.” Jeff can justifiably argue that the IRS’s monthly multiplier overstates his true situation and that an average multiplier is much more appropriate. Also, he starts paying $1,000 per month to his in-laws for housing and utilities, which is $24 less than what the IRS allows in his case. To make these changes, type: 3. “3” in cell L64 of the Monthly Multiplier spreadsheet (this automatically selects the lowest average monthly multiplier) 4. “1000” in cell G40 of the Data Input and Results spreadsheet (monthly claimed Housing and Utilities bills) 5. “1024” in cell I40 of the Data Input and Results spreadsheet (the IRS monthly allowance for Housing and Utilities; where to find this number is explained in the next chapter) 6. “0” in cell G54 (Entertainment, Vacations & Misc.); All of his income now pays for rent so his income and expenses are equal and cells H59 and I59 are zero. Thus, Jeff’s RCP is cut to $600 and the IRS’s recommendation in cells A65 and D65 changes to pay the RCP since it is more than his offer of $500. Even so, this amount saves Roy $35,400 in taxes so he’s happy to remit it.

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Jeff has a plan but now he must test its feasibility and specify the financial adjustments required to execute it. Go to the Implementation spreadsheet and fill in this data: 7. “600” in cell D8 (Checking Account beginning balance)


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8. “1000” in cell C38 (his desired spending on Housing and Utilities) 9. “1000” in cell C52 (assuming he desires to continue spending this amount on Entertainment, Vacations & Misc. outlays) 10. “6” in cell I58 (the number of months he needs to document his finances) 11. “10” in cell I60 (the percentage of reserves he wants for stockpiling and prepayment of expenses, more on this below)

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The Application compares the beginning and ending entries, so these observations can be made about his plan: There were no changes to his assets or loans so the Total Change in Cash, H32, is zero. If money had been freed up, this could be applied to purchasing stockpiles, prepaying expenses, submitting the OIC charges or other uses. For example, his Total Desired Expenses (cell C54) is $2,000 or $1,000 more than his income (cell D54). Cell G52 shows this shortfall occurs: $1,000 less spending for Entertainment, Vacations & Misc. than Jeff would like. It would take a stockpile, or pre-payment of expenses totaling $6,600 (cell H52), to maintain his entertainment budget at the desired level over the documentation period ($1,000 per month times six months plus a 10.0% reserve). More will be said about stockpiles and prepaid expenses in the next chapters, but if any amounts were spent in this manner, they would have to be disclosed on his financial statements as part of the OIC application. Happy About Tax Relief: The OIC Solution

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The overall consequences of his OIC settlement are shown starting in row 57. Enter his OIC application fee: 12. “150” in cell E64 (OIC Application Fee) Now the Total Change in Cash from cell H32 needs to be supplemented to fund the $750 required for Total OIC Payments and Fees (cell E67). Therefore, enter: 13. “750” in cell E60 (funds to pay OIC Settlement) With this done, his Total Sources of Cash (cell F61) equals the Total Uses of Cash (cell F80) and his OIC is complete. Note that the numbers in cells E59 through F80 will appear bold red until his sources and uses are equal. In conclusion, Jeff’s strategy is feasible if he pays rent, forgoes entertainment expenditures over the documentation period and funds the OIC fees and settlement charges. Appendix A: Example 1 contains the before and after Excel printouts, the resulting financial disclosure (IRS Form 433-A) and Jeff’s OIC application (IRS Form 656). The steps to implement Jeff’s OIC strategy are as follows: 1. Make the changes to his budget as planned above. 2. Stay within the “After” budget limits and document these income and expenditure amounts for three months (six months had he been self-employed). 3. Submit his OIC application together with the financial disclosure forms demonstrating three months of his “After” income and expenses. 4. Maintain his “After” budget so he is prepared to provide an addition three months of income and expense documentation (a common IRS request during the OIC application process).

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Testing and Refining OIC Strategies The above example demonstrates that, once Jeff’s personal and financial data are entered, the Application becomes a powerful tool for planning his OIC strategy. It is easy to change assumptions and immediately view the consequences. This will be useful as you test-drive the strategies presented in the following chapters and create your own OIC plan. Some options will better fit your situation and goals than others. Save or print the scenarios you want to keep. To save, click on the computer disk icon, or click on “File”, then “Save As”, and give the file a name and location. To create a hard copy, select the print area and click the printer icon on your toolbar. Alternatively, click on “File” and “Print”. Custom headers and footers are added to your print copies by going to “View”, “Header and Footer”, “Custom Header” or “Custom Footer”, and typing in your notations.


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c h a p t e r

3

Your Reasonable Collection Potential Test

The last chapter demonstrated the importance of the Reasonable Collection Potential (RCP) test. Jeff’s RCP was pivotal in the IRS’s analysis and recommendation. The prospect for success with your OIC application also depends on your RCP. This chapter will take you through three processes leading to assessing your current RCP: 1) getting information from the IRS regarding the taxes you owe, 2) computing your “monthly multiplier”, and, 3) entering your financial and personal data into the Application. With these done, your RCP is automatically calculated and, when compared to the total owed, generates the likely IRS recommendation for your application. This initial assessment provides a starting point on which to build your OIC strategy. The example of John Taxwise begins in this chapter to show how specific strategies are executed. John’s case will continue over the next three chapters.

Getting Your Tax Information from the IRS

Your goals with this step:

Your OIC analysis requires a few facts for each year you owe taxes. Your objective is to have the IRS send you this information if you don’t already have it. For each year you want to know: – How much is owed (including penalties and interest). – The date the “10-Year Statue of Limitations” started for each tax year included in your OIC application (also called the “date of first tax assessment”). See explanation below on this statue of limitations.


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What you need to do:

– To obtain your tax information, file Form 4506-T, Request for Transcript of Tax Return (see Appendix B: Successful OIC Applications and Appendix C: OIC Forms and Sample Letters). Copies of these forms are obtainable by calling 1-800-829-1040, or on the IRS website at www.irs.gov/formspubs/lists/0,,id=97817,00.html. The website allows you to select any IRS form, fill it out online, and print the form or save it to your computer. – For Question 6 check the box for “Record of Account” and in Question 7 indicate for which years you want this information. – Print the completed Form 4506-T and fax it to your regional IRS office (instructions included with the form). – Call the IRS at 1-800-829-1040 to get the first assessment dates on your delinquent tax years. – You can also request your tax records under the Freedom of Information Act (FOIA) but this can take considerably longer. It takes two to four weeks for the IRS to respond to a Form 4506-T request. Don’t wait. If need be, approximate the first assessment by using the date you filed the tax return, and begin planning and implementing your strategy. The 10-Year Collection Statue of Limitations:

The IRS has a 10-year statute of limitations to collect taxes for any tax year. The statute starts when you file your tax return but don’t pay the taxes that are due. Thus, it’s to your advantage to file your returns and start the statue—even if you can’t pay. Also, the IRS requires you to file all past tax returns before applying for an OIC. You may have an additional collection statue (or more) for the same year if the IRS sends you a tax assessment notice. To simplify matters, the IRS normally uses the collection statue that applies to the largest amount due on any one tax year. For example, if you filed owing $15,000 and the IRS later assessed an additional $5,000 in taxes for that year, then they would likely start the statue when you filed your tax return. If the amounts were reversed, they would probably use the date the assessment was first mailed to you. Note that certain actions extend the 10-year statute, such as: – Filling for an OIC adds one year, plus the time your OIC is under consideration, to the 10-year statute on all the tax years included in your application. – Other delays in the statue occur when you sue the IRS, file for bankruptcy, or apply for a Taxpayer Assistance Order. – The IRS may garnish your wages and/or move to foreclose on your house just before the 10 years run out. These actions allow the Agency to continue collection behoyd the statute.

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Chapter 3: Your Reasonable Collection Potential Test

Calculating Your Monthly Multiplier Your goals with this step:

Your objective is to determine the “monthly multiplier” the IRS will likely use in your case and the lowest one you qualify for. A low multiplier is best because it reduces your RCP. For instance, if the IRS calculates you can pay $200 per month on your back taxes, your RCP and minimum settlement amount is as follows: A multiplier of 12 results in an RCP of $2,400 ($200 times 12 months). However, a multiplier of 60 increases your RCP to $12,000 ($200 times 60 months). Factors to consider:

What Monthly Multiplier the IRS uses depends on three components: 1) the time left in your “statutory collection period”, 2) how fast you elect to pay the OIC settlement, and, 3) the number of years included in your OIC application. Monthly Multiplier based on time left to collect

If this were the only issue, then your Monthly Multiplier would be 120 (the months in the 10-year statue) less the months since the first assessment date. For instance, if you filed your return 80 months ago owing taxes and didn’t receive any additional assessment notices, then your multiplier would be 40 (i.e., 120 minus 80). Monthly Multiplier based on settlement offer

You have three different OIC settlement options to choose from: Lump Sum Cash Offer, Short Term Periodic Payment Offer and Deferred Periodic Payment Offer. Each of these options has a different Monthly Multiplier. If you are uncertain which type of offer to make, try all three in the Excel spreadsheet to see what difference this makes to your RCP and then decide. Cash Offer is where you pay the full settlement amount in five months or less of IRS acceptance. In this case, your Monthly Multiplier is 48 or the number of months left for collection, whichever is less. Enter a "C" in cell L26 of the Monthly Multiplier spreadsheet to elect this option. Short Term Payment Offer is where you pay the settlement within two years of being approved. Here your Monthly Multiplier is the lesser of 60 or whatever is left on the collection statute. While this is the general rule for this type of offer, the IRS has taken the position in some cases to require payments until the collection statute expires. Enter an "S" in cell L26 to choose this option.


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Deferred Payment Offer has you pay the settlement amount over the remaining months of the collection statute whatever that number may be. In this case, your Multiplier is whatever months are left to collect. To elect this option enter "D" in L26. Monthly Multiplier based on multiple tax years

If you owe for only one tax year, the multiplier is simple. However, usually more than one year is included in an OIC application. Which year's "assessment date" and Monthly Multiplier do you use? Your best negotiating position is to take the earliest and most favorable assessment date and be prepared to argue the point with the IRS. If they don't give, your counter argument is to use an "average." Complete the table in the Monthly Multiplier spreadsheet and the Application will automatically compute two averages of your Monthly Multipliers and select the one most favorable to you in cell L62. With all the above said, a high multiplier, however, doesn’t have to be fatal. Chapters 4 and 5 present strategies that can usually work around this problem. What you need to do:

Open the first spreadsheet (Monthly Multiplier), read the explanation and follow the instructions. Next, fill in the date of analysis (cell E3), your name in cell M3 and indicate the type of offering you wish to make in L26. Strategy Hint:

An immediate cash settlement has a higher likelihood of being accepted. In addition, this avoids the risk of the IRS renegotiating the OIC settlement if your financial circumstances improve before all the installment payments are made. They can and occasionally do do this. Multi-year contracts that offer a large down of perhaps 50% soon after approval and the remainder over time are also considered favorably. Borrow the money from a relative if you must. If you have more than one tax year in dispute, you can chose which of three multipliers in cells L57, L58 or L62 to use by entering a “1”, “2” or “3” in L64. For the purposes of analyzing your “worst case scenario” type “1” and apply the IRS’s multiplier. The Application calculates your monthly multiplier based on these assumptions and copies it into the remaining spreadsheets.

John Taxwise’s Monthly Multiplier For this and the next three chapters an example, John Taxwise, will be used to illustrate the points as they occur. To start calculating John’s monthly multiplier, enter his personal and financial data in the Monthly Multiplier spreadsheet: 1. 1.“2/27/2007” in cell E3 (Date of Analysis) 2. 2.“John Taxwise” in cell M3 (Taxpayer’s Name)

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3. 3.“C” in cell L26 (cash OIC settlement option is selected)

Next enter his back taxes data and select the IRS’s monthly multiplier by typing a “1” in cell L64. The result shows John’s monthly multiplier at 48. 4. “2000” in cell E35 (year taxes owed), “10000” in F35 (taxes owed), “80” in I35 (months since first notice was received for this year) 5. “2003” in cell E36 (year taxes owed), “25000” in F36 (taxes owed), “40” in I36 (months since first notice was received for this year) 6. “1” in cell L64 (the monthly multiplier being selected; in this case, the IRS’s multiplier)


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Your Case from the IRS Perspective Your goals with this step:

Your objective is to calculate your RCP as it is now so you have a realistic assessment of your situation. Input all the information regarding your finances. You may be tempted not to tell the IRS about some of your assets and income but doing so could easily complicate your situation way beyond the problems you’re dealing with now. Factors to consider:

The RCP totals the IRS’s collection potential from three sources: – The net equity in your assets after subtracting liabilities and exemptions. Page 32


– Your net income after subtracting allowable expenses. – Loans that are paid off sooner than your monthly multiplier expires. For example, if your car payment is $300 per month for the next 20 months and your monthly multiplier is 48, then the IRS adds $8,400 to your RCP (i.e., $300 per month times the 28 months that remain after the loan is retired). Your goal is to limit your RCP to no more than what you are willing to pay the IRS. There are two possibilities: either your RCP is greater or less than what you’re offering in settlement. – If it’s greater, you pay the RCP (up to the total taxes you owe). – If it’s less, you pay what you offered. If, for instance, you owe $50,000, your RCP is $10,000 and you offer $1,000, the IRS will reject your offer on the assumption it can collect $10,000. However, if you reduce your RCP to $500, the IRS now will accept your offer of $1,000. As mentioned is the last chapter, the OIC rules were changed in July 2006 so that in addition to the non-refundable application fee, you now pay a deposit that is tied to a) the amount you offer to settle and b) the type of settlement offered (see “Documents to Submit with Your OIC Application” in Chapter 8 for more details). What you need to do:

Complete entering your data in the Monthly Multiplier spreadsheet, if you haven’t done so already.

Enter Your Asset and Liability Information Next, type your financial and personal data into the Data Input and Results spreadsheet. For each asset, its fair market value goes in column C, lender name in column D, loan amount and term in columns E and F, and lease and loan monthly payments in columns H and I, respectively. Estimate the value of all your furniture and personal property, such as clothing, appliances, dishes, and so forth in cell C22. The type of car and other assets are named in column B. Real Estate assets are separated into those with “allowable” loans and those whose liabilities are not allowable. By allowable the IRS means that the mortgage payments are exempt (up to a maximum amount) from being available to pay back taxes. In this context, the only clearly allowable real estate loans are on your home. Mortgages on other property are normally “non-allowable” unless some special circumstances can be established. For instance, a property could be your place of business and, thus, important in generating your income. Auto loans are allowable only up to the IRS limits and whether loans on your personal property or effects are “allowable” is a complex matter. In both instances, refer to “Installment loan strategies” in Chapter 4 for more clarification. For now, allocate allowable and non-allowable loans in accordance with the footnotes in row 60 of the Data Input and Results spreadsheet:


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Allowable loan payments (in addition to your home, cars and business property) are for pensions, life insurance, business purpose (e.g., account receivable financing and equipment purchases), medical debts, judgments, and other secured debts on personal property. Non-allowable loan payments are for investment or vacation property, boats, RV’s, airplanes, and other non-essential items or purposes. Note that vehicle market values and loans are handled separately starting in row 27. Lastly, “Other Assets,” such as investments, personal collections and anything that doesn’t fit into the categories provided are listed in rows 31 to 35. Amounts allowed or exempted by the IRS for pensions, Furniture/Personal Effects and Tools and/or Equipment are entered into cells G17, G22 and G26, respectively. How to find these figures is discussed below in “Locate IRS exemptions and allowances.”

Value Your Assets Liquid or near-liquid assets are easy to value, assuming there are active markets in which to sell them. [A ‘liquid’ asset is cash or can be readily converted to cash.] Subtract selling, shipping, other transaction costs and any loans against these assets to compute your net equity. Illiquid assets are discounted due to the cost and effort required to sell them. For instance, your personal possessions are presumed to be valued at garage-sale prices. Similarly, the discount on art, jewelry and collectibles is very high. Consult a source such as eBay for comparable pricing, and subtract your selling expenses. Prices of cars, boats, RVs, airplanes, investment property, and so forth vary, depending on year, condition, features and uniqueness. An IRS-acceptable way to determine their fair market value (FMV) and your net equity is as follows: Average published prices of comparable items to estimate the current market price. An excellent source for car prices is the Kelly Blue Book website at www.kbb.com. Alternatively, obtain written appraisals and use the lowest estimate to document the FMV. Take 70% or 80% of the FMV to calculate the “quick sale” value. Use 70% if you need to be aggressive or can justify a deeper discount. To be conservative, apply the IRS’s percentage of 80%. The Application assumes liquid assets are valued at 100% and other assets at 80%. You can change the quick sale percentage for any asset in column E of the Asset Equity Table spreadsheet. Subtract loans and selling costs to get your net equity.

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To estimate the FMV of your home, average the asking prices for residences in your area and subtract 10%. Another approach would be to get appraisals from local real estate agents and use the lowest one to document the FMV. Subtract selling costs and the mortgage balance to derive your net equity. If there’s a question of your business’ FMV, consult with business brokers or merger and acquisitions specialists for preliminary (free) valuations. Calculate your net equity by subtracting selling costs and liabilities. Personal property, such as clothing, furniture, and tools used in your trade, is valued at garage-sale, flea-market, auction or estate-liquidation prices (i.e., pennies on the dollar). The IRS rarely requires an inventory, so aggregate what you paid and multiply the total by 3% or 5% to get their FMV at open-market prices.

John Taxwise’s Asset and Liability Data Input Continuing the example of John Taxwise, enter the following in his Data Input and Results spreadsheet: 7. “Harris, TX” in E4 (taxpayer’s county and state of residence) 8. “0” in cell I4 (for now he chooses not to discount future cash flows) 9. “1” in cell F5 (number of people in taxpayer’s household) 10. “500” in cell I6 (amount offered to settle OIC). Recall that this figure determines the amount he must submit for a deposit on his OIC application. 11. “4000” in cell C12 (Checking Account(s)) 12. “1000” in cell C13 (Saving Account(s)) 13. “100000” in cell C17 (Pensions) 14. “50000” in cell C19 (Real Estate with Allowable Loans) 15. “10000” in cell C22 (Value of all Furniture / Personal Effects) 16. “2000” in cell C26 (Tools and/or Equipment) 17. “2003 Ford F150” in cell B28, “6000” in cell C28 (Car #1) 18. “123 Mortgage Company” in cell D19 (Real Estate Creditor) 19. “Car Loan Company” in cell D28 (Car #1 Creditor) 20. “5000” in cell E19 (Real Estate Loan 21. “6000” in cell E28 (Car #1 Loan) 22. “120” in cell F19 (Real Estate Loan Term) 23. “20” in cell F28 (Car #1 Loan Term) 24. “7040” in cell G22 (Furniture / Personal Effects Exemption); in 2007 this was increased to $7,720


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25. “3520” in cell G28 (Tools and/or Equipment Exemption); in 2007 this was increased to $3,860 26. “1000” in cell I19 (Real Estate Loan Payment) 27. “450” in cell I28 (Car #1 Loan Payment)

Enter Your Income and Expense Information Estimate your monthly income sources in cells C39 through C52. Allocate your expenditures to cells G39 through G55. Car ownership costs are copied from the loan or lease payments specified in the Asset / Liability Information section, therefore, don’t overwrite cells G42 and G43. Lump any expenses not allocated to cells G39 to G51 into cell G54 (Entertainment, Vacations & Misc.) so that all your income is accounted for and cell H59 is zero.

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What you now have is your own “before” spreadsheet. Save this file. The IRS’s RCP and recommendation are shown in row 65 of your Data Input and Results spreadsheet. The chapters that follow present strategies to decrease your RCP and likely secure approval for your OIC application on terms you can live with.

John Taxwise’s Income and Expense Data Input Once you finish making the entries below, John’s pre-planning RCP is $210,912. Save your work in the file, “John Taxwise before.” This is the starting point of his OIC planning which will parallel your own path over the next three chapters. 28. “5000” in cell C39 (Wages / Salaries TP1) 29. “500” in cell C41 (Interest / Dividends) 30. “1500” in cell G39 (Food, Clothing & Misc. Expenses) 31. “1300” in cell G40 (Housing and Utilities Expenses) 32. “500” in cell G44 (Transportation Operating Costs) 33. “750” in cell G47 (Taxes) 34. “1000” in cell G54 (Entertainment, Vacation & Misc. Expenses) 35. “919” in cell I39 (Food, Clothing & Misc. Exemption) 36. “1122” in cell I40 (Housing and Utilities Exemption) 37. “471” in cell I42 (Car #1 Ownership Exemption) 38. “338” in cell I44 (Transportation Operating Exemption)


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Determining IRS Exemptions and Allowances The IRS allowances for cells I39 to I44 and the various exemptions are found on the IRS web pages cited below. Keep in mind that you may be able to justify special circumstances and qualify for higher expenditures. – Pensions and retirement plans: The IRS excludes the amounts in retirement plans that can’t be borrowed or withdrawn by the taxpayer unless they quit, retire or die when they apply for an OIC. – Furniture / personal effects: Internal Revenue Code section 6334 (a) (2) sets an exemption of $7,720 for “fuel, provisions, furniture, and personal effects” (last updated in 2007). Unless you can justify special circumstances, enter “7720” in cell G22.

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– Tools and/or equipment: Internal Revenue Code section 6334 (a) (3) limits the exclusion for “tools of the trade” at $3,860 (updated in 2007). If you’re not claiming special circumstances, type “3860” in cell G26. – Allowable living expenses: The allowance for food, clothing, household and personal care products is found at www.irs.gov/businesses/small/article/0,,id=104627,00.html. This amount depends on your income and the number of people in your household. Enter the exemption in cell I39. Again, you may qualify for more than the guidelines. – Housing and utilities: The housing and utility cap varies according to where you live and number of dependents. Go to www.irs.gov/businesses/small/article/0,,id=104696,00.html and enter it in cell I40. – Transportation: Car and public transportation allowances are found at www.irs.gov/businesses/small/article/0,,id=104623,00.html. Car exemptions are divided into “ownership” costs (cells I42 and I43) and “operating” expenses (cell I44). Ownership allowances depend on the number of cars owned, and operating costs vary with where you live and the number of cars you have.


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c h a p t e r

4

Asset and Liability Strategies

This chapter presents strategies to reduce your Reasonable Collection Potential from two sources: a) your assets and b) your debts that are paid off before your monthly multiplier expires. However, before you begin planning, open and save your “before” Excel file as a new “after” file using the “Save As…” command. This gives you a fresh template upon which to strategize your OIC. To understand how your assets hurt you, start with the premise that the net equity in nearly every asset you own is included in your RCP. Thus, the primary options are to sell excess assets and shelter the proceeds, or borrow against your assets and protect that money. You’ll want to max out your borrowing capacity since the IRS usually views lines of credit and credit cards as sources to pay back taxes. Also, you must act before the IRS puts liens in place, because doing so locks in their claim on the equity. Thereafter, your ability to sell or encumber the property without turning over all the cash to the government becomes difficult and other strategies have to be utilized (see Appendix G). The analysis that follows divides your assets into four categories, according to their liquidity and IRS collection potential. Again, a liquid asset is cash or something easily converted into cash; illiquid possessions, on the other hand, take time, effort and expense to sell at a “fair market” price. For this analysis, here’s how your assets are classified: Liquid or near-cash assets 1. Cash on hand, plus checking, money market and bank accounts 2. Stocks, bonds, mutual funds and annuities 3. Accounts receivable and inheritances


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Semi-liquid assets 1. Cash values and proceeds from insurance policies 2. Pensions, IRAs, 401(k)s and other retirement plans 3. Revocable trusts Illiquid assets and installment loans 1. Cars, boats, RVs, art, jewelry and collections 2. Investment and vacation real estate Income and lifestyle assets 1. Business assets and equipment 2. Personal residence 3. Personal property (furniture, clothes, etc.)

Liquid or Near-Cash Assets Your goals with this step:

Your objective is to limit your cash on hand, bank, checking and money market accounts, stocks, bonds, mutual funds, annuities, accounts receivable, and inheritances, because the IRS includes all of these assets in your RCP. Factors to consider:

It’s illegal and ill-advised to lie to the IRS about what you own. However, you can move assets after you tell the IRS where they are and use this Application to shelter your equity prior to applying for an OIC. Possible strategies:

– Sell, liquidate and greatly limit near-cash assets. Shelter the proceeds using to the strategies at the end of this chapter. – Borrow against these assets only if the loan matures after you monthly multiplier runs out. – Collect money owed you and get advances on debts, lawsuits, inheritances, bonuses, liens, and so forth, even if at heavy discounts, because whatever you don’t receive now will go to the IRS. What you need to do:

Adjust your liquid and near-cash assets on the Data Input and Results spreadsheet for changes you’ll make to cut your RCP.

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Chapter 4: Asset and Liability Strategies

Semi-Liquid Assets Your goals with this step:

Your goal is to reduce the impact on your RCP from cash values and proceeds from insurance policies, pensions, IRAs, 401(k)’s and other retirement plans, and revocable trusts. Factors to consider:

– Plan and move quickly, because once liens are placed on them, any sales and transfers must be approved by the IRS. – These types of assets are especially easy for the IRS to discover, so don’t deny owning them. Possible strategies:

– Life insurance policies with cash values should be liquidated. Alternatively, check with an attorney to see if a life insurance trust can take them out of IRS reach. Another option is to borrow the cash values, but only if the loan term exceeds your monthly multiplier. – If you have access to money in your retirement plans without your having to quit, retire, or die, the IRS includes the available cash in your RCP. For instance, some retirement plans may be liquidated, but doing so usually generates substantial income taxes and selling charges. If the plan prohibits selling or borrowing, these funds are effectively sheltered from the IRS. Check the rules with your plan administrators. – Some 401(k) and 457 plans allow you to borrow up to 50% of your funds. If so, do it and shelter the money before applying for your OIC (see example below). If you have sizable sums in retirement plans, or they’re a large portion of your net worth, seek professional advice right away. If the bulk of your life savings is in an IRA, it’s possible that other, non-OIC strategies can better protect this asset. Trusts are also beyond the scope of this Application, so check with an experienced attorney. For instance, should the IRS find that the trust is revocable or sufficiently under your control, they add it to your RCP. Thus, you may need to transfer assets under trust to other, better protected venues. If you have loans outstanding against your semi-liquid assets, read the next section for strategies to deal with this situation. What you need to do:

Make adjustments to your semi-liquid assets in your own Data Input and Results spreadsheet to reduce the net equity available to the IRS.


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John Taxwise’s Monthly Multiplier and Asset Strategies Returning to the example form the previous chapter, open the “John Taxwise before” file and use that to create a new “after” file. 1. Use the “Save As…” command to save the same file again under another name, “John Taxwise after.” Amend the monthly multiplier to one that is more realistic and cut his RCP by $9,496. 2. “3” in cell L64 of the Monthly Multiplier spreadsheet

Next, John finds out from his 401(k) administrator that he can borrow half the funds in the account. Thus, $50,000 (half the total) is exempt from IRS seizure so he borrows the remainder and shelters it. In addition he reduces his checking, savings accounts and interest income since these directly contribute to his RCP. Implement these changes by typing the following to the Data Input and Results spreadsheet:

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3. “50000” in cell G17 (the exempted Pension amount) 4. “401(k) Lender” in cell D17 (the Pension fund lender) 5. “50000” in cell E17 (amount of Pension borrowed) 6. “72” in cell F17 (term of the Pension loan in months) 7. “450” in cell I17 (the monthly payment on the Pension loan) 8. “100” in cell C12 (Checking Account) 9. “200” in cell C13 (Savings Account) 10. “50” in cell C41 (Interest / Dividends) 11. “450” in cell G51 (Allowable Loan Payments) 12. “100” in cell G54 (reduces Entertainment to balance income and expenses)


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The pension loan payment should not only be allowable but also reduce his entertainment expenses. The total effect of these transactions takes another $144,300 off his RCP.

Ill-Liquid Assets and Installment Loans Your goals with this step:

Your objective remains the same: limit the contribution to your RCP from equity in your cars, boats, RVs, art, jewelry, collections, and investment and vacation real estate. Factors to consider:

Assets of this type usually take some effort and expense to sell, so the IRS is more reluctant to seize them. However, they would no doubt restrict your actions by putting liens in place.

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Possible strategies:

– You have some flexibility in calculating the Fair Market Value of your illiquid assets as discussed in Chapter 3. Also, you may borrow out the equity so long as the loan matures after your monthly multiplier expires. – Cars are a challenge, since the equity counts towards your RCP and auto loans often end prior to your monthly multiplier. In addition, the IRS usually won’t let you assume you’ll buy another car or refinance when the loan is paid off. Possible arguments to justify having to replace your car at the end of the loan are its age and high mileage. – If these constraints add significantly to your RCP, sell your cars, shelter the cash and lease or temporarily rent new ones. This way you take advantage of the car ownership exemption. – You may be able to keep your existing car and swap your payments for a lease by working with companies like D & M Leasing (www.dmautoleasing.com). The costs are a re-registration fee plus an acquisition charge, which can be rolled into the lease payment. – If you’re married, you may want to transfer assets to your spouse and file separate tax returns. This strategy to protect those assets and focus all the tax problems on one spouse has the highest likelihood of working in non-community property states. – If you still have equity in illiquid assets, you may gift them to parents, children or other trusted individuals. – Items of significant value and a low cost basis (such as stocks, collections, businesses, homes, and so forth) can generate special benefits when sold through a charitable remainder trust. Here, you gift the asset to a charity; they sell it and fund an income stream for you over your life from the proceeds. You don’t pay capital gains taxes on the sale and, in fact, generate a gift tax deduction. This strategy is highly technical, so consult an attorney to make sure it fits your situation and objectives. Most large universities and charities have experts to assist you. For more information, go to www.charitableplanning.com.

John Taxwise’s Ill-Liquid Assets Strategy The contribution to John’s RCP from Net Equity in Assets has been reduced to $1,260 (see cell I62). To investigate how this figure is calculated, go to the Asset Equity Table spreadsheet and find that most of it results form his Furniture / Personal Effects being valued at $960 more than the exemption (cell F23 minus cell H23). Realizing this, John revalues his Furniture / Personal Effects at what they would yield at garage-sale prices ($4,500). Entering this amount in the Data Input and Results spreadsheet eliminates $960 of his RCP. 13. “4500” in cell C22 (Value of Furniture / Personal Effects)


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Installment Loan Strategies The best strategy is to only keep or incur loans that are “allowable” (see explanation below), have payments that don’t exceed the IRS’s monthly exemption, and mature after you monthly multiplier expires. Any borrowings that don’t meet all of these criteria add to your RCP. – “Allowable” liabilities are home mortgages, car loans, pension fund debt, life insurance borrowings, judgments, medial debts and other “secured debts” as well as business-related loans. – Unsecured liabilities such as credit cards and personal loans may be allowed if your excess income (after expenses) isn’t sufficient to repay them within 90 days, and making minimum payments leaves more than “a small amount” for the IRS. – Payments on boats, RV’s, vacation homes, and liabilities not permitted above are normally excluded. Special circumstances would have to apply for them to qualify.

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– What, if any, allowable borrowings add to your RCP is shown in the Retired Debt Calculations spreadsheet (see column “I”, Final Retired Debt Amount). Here’s an example of how such a loan can cost you: Say your monthly car payment of $500 goes for another 30 months, your multiplier is 48 and the IRS exempts $475 per month. The fact that the loan term is less than your monthly multiplier increases your RCP by $9,000 ($500 per month times the remaining 18 months after the payments end). The $25 over the IRS’s allowance also boosts your RCP by $1,200 ($25 times 48 months). Even if your loan term were longer, say 50 months, it would still increase your RCP by $1,200 ($25 times 48 months). An aggressive solution would be to prepay the portion of the payment that exceeds the IRS allowance. Assume the case above with a car payment $25 over the IRS maximum. If the documentation period is six months, you could prepay $150 ($25 times six months) prior to having to track your expenses and then make installments of $475 for six months to satisfy the IRS’s requirement. This may work with your mortgage which is also subject to IRS limits but make sure you disclose any prepaid expenses to the IRS in your financial disclosure forms. Here are a few more points on installment debt to consider: – Should you end up negotiating with the IRS over retired debt computations, be aware that they use a short cut that over states the impact on your RCP. They divide your monthly payment into the outstanding balance to estimate the number of months remaining on the loan. This method is only accurate if your loans are at an interest rate of zero. Since this is virtually never the case, the actual number of months remaining is invariably higher. – You want more months because less is added to your RCP. For instance, an interest only debt that takes 60 months to repay would require 24 more months to discharge if it were at 10% annual interest. Therefore be sure the loan maturities used by the IRS are accurate. – Non-allowable loan and other expenses are aggregated in the Data Input and Results spreadsheet in cell G53. They’re significant because each dollar times your multiplier is added to your RCP. In summary, if your monthly multiplier is 60 or greater, you’re probably better off eliminating all your installment debts (allowable and non-allowable). In such cases only your home mortgage may pass the RCP test, but use the Application to verify which strategies best fit your circumstances. What you need to do:

Given the strategies you wish to implement, make appropriate adjustments to your ill-liquid assets for changes in equity positions, liabilities and expenses. Enter these into your Data Input and Results spreadsheet.


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John Taxwise’s Installment Loan Strategies In the case of John Taxwise, he sees that $10,800 of RCP comes from Tax Payments Available from Retired Debt (cell I63). To drill down on this figure, he goes to the Retired Debt Calculations spreadsheet:

The spreadsheet shows that all of the $10,800 comes from the IRS’s assumption that, once his car is paid off, the $450 monthly payment is available to pay back taxes (i.e., 44 [his monthly multiplier] minus 20 [the term of the loan] times $450). To fix this, John decides to sell his truck and lease another vehicle: 14. “2007 Ford Mustang” in cell B28 (type of Car #1) 15. “0” in cell C28 (Fair Market Value of Car #1) 16. “Car Lease Company” in cell D28 (Car #1 creditor) 17. “0” in cell E28 (Car #1 loan)

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18. “0” in cell F28 (Car #1 loan term) 19. “470” in cell H28 (Car #1 monthly lease payment) 20. “0” in cell I28 (Car #1 loan payment) 21. “80” in cell G54 (Entertainment to balance his income and living expenses in cell H59) This eliminates the problem so that essentially all of his RCP is attributable to Tax Payments Available from Income (cell I64). The next chapter deals with this challenge.


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Income and Lifestyle Assets Your goals with this step:

Your goal is to shrink the additions to your RCP from a) business assets and equipment, b) home and c) personal property (e.g., furniture, clothes, and so forth). Factors to consider:

– The IRS readily places liens on such property, but of anything you own, these assets are the ones the IRS is the most reluctant to seize and sell. If they take your business assets, that will likely reduce or eliminate your ability to pay taxes. Similarly, economic hardship would probably result from depriving you of your home and personal possessions. – Exceptions to this guideline are assets the IRS views as less essential to maintaining your business or life style. So the IRS is more willing to liquidate your accounts receivable, valuable collections, jewelry and art. – On the whole, however, the IRS’s strategy in dealing with income and life style assets is markedly different than other possessions. If the IRS determines these resources are significant, they’ll place liens, garnish your wages, and wait to collect as opportunities arise. – The IRS views time as on their side because their claim is secured and it’s earning at least 8% per year. Possible strategies:

– The IRS’s partial exemption for personal property and tools of your trade provides ample room to shelter considerable cash (see next section). – Incorporation is often cited by asset protection specialists as a preferred method to get business equity out of the IRS’s reach. A negative consequence can occur if the IRS values the closely held corporation at one times current sales and adds your proportionate equity to your RCP. Ways to limit the valuation are: 1. To decrease your business’ short-term profitability and capitalized value by delaying or reducing sales and receipts and prepaying or increasing costs. 2. Cut profits and transfer income by hiring your children, but don’t pay them more than what you’d compensate anyone else for the same work. 3. Forming a new corporation may shelter personal assets and income. However, be sure to consult with a qualified attorney or asset protection specialist to guide you in this strategy so that you don’t violate the law. – Max out your credit lines or sell part or all of your company and acquire business assets or find other ways to shelter the cash.

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– If you can, refinance your home and pull out any equity that would be added to your RCP. Proceeds can be sheltered or used for home improvements, purchasing furniture, repaying short-term borrowings, paying off and closing credit cards or lines of credit as well as other legitimate purposes. Alternatively you could sell your home, put a minimum down payment on another, and utilize legal means to shelter the remaining cash. – Chapter 5 covers ways to plan your housing and utilities bills so as not to add to your RCP. – As mentioned above, gifting highly appreciated assets through a charitable remainder trust can provide significant benefits in special situations. What you need to do:

Update the Data Input and Results spreadsheet for any anticipated borrowings, sales and other transfers that will impact your RCP as well as consequent changes to your income and expenses.

Strategies for Sheltering Cash Buy things the IRS doesn’t normally seize such as personal assets (e.g., furniture, clothing) and tools for your business. This works because the IRS exempts a given amount of these items and you can value them at garage-sale prices. In 2007 the exclusion for “fuel, provisions, furniture and personal effects” was increased to $7,720. Note that at five cents per dollar, $7,720 can shelter $154,400 of personal effects. To arrive at this number multiply $154,400 by $0.05 to get the fair market value of $7,720. At three cents per dollar, the amount sheltered is $257,333. So estimate the prices paid for your personal property, multiply this total by 3% or 5%, and you get an idea how much more you can buy without exceeding the exclusion. The next chapter shows how you can combine this allowance with the need to stockpile food and supplies to hold your living expenses within IRS limits. Similarly, the exemption on “tools of the trade” was raised to $3,860 in 2007. This can shelter $77,200 and $128,667 at five and three cents per dollar at retail prices, respectively. Determine if you can use freed-up cash to procure more business assets without going over the limit. A riskier strategy is to acquire antiques, gold, collectibles and the like, that can later be re-converted into cash. Unfortunately, this strategy could be problematic, because of the necessity to disclose such transactions to the IRS. Also, the possibility arises that the IRS would consider these transactions “bad faith” and refuse to give you an OIC agreement.


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Within reasonable limits and proper disclosure, excess cash can pay for past, current and future (prepaid) expenses for your business, utilities, cable and internet services, rent, legal and medical bills, child’s education and support payments, spousal support, and so forth. Cash can also be paid to “close” creditors such as family members for old loans like repaying your parents for money spent on college expenses. You may be able to use this occasion to negotiate debt settlements with other creditors. You’ll probably want to engage a professional to help implement this strategy. You can give $12,000 to any number of persons (such as family members) per year without incurring gift taxes. However, this strategy is illegal if the purpose of these gifts was to avoid money going to creditors, including the IRS. Other potentially legal options for sheltering cash from the IRS and other creditors include creating an irrevocable trust, special partnership, corporation, or offshore entity. These tactics are most cost-effective for high-net-worth individuals wanting to protect significant sums, so you should consult with an asset protection specialist and other professionals before attempting to implement such strategies.

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c h a p t e r

5

Income and Expense Strategies

In your OIC application, you must provide a detailed analysis of your financial inflows and outflows over a three-month period (six months if you’re self-employed). The IRS usually asks for an additional three months’ records, so if you want to be safe, prepare to analyze your transactions for six months (nine months for the self-employed). The IRS compares this data against allowances for various necessities in calculating your RCP. The objective is to show little or no surplus money available for back taxes, because every dollar of income above what the IRS permits is multiplied by your monthly multiplier and added to your RCP. To illustrate, let’s assume you have good income potential, your excess income averages $200 per month and your monthly multiplier is 60. In this case, just an extra $200 per month increases your RCP by $12,000 ($200 times 60).

Your Income and Expenses Goals

Your goals with this step:

Your objective is to have your monthly income equal or even slightly less than what you spend on IRS-authorized necessities. The IRS limits are not especially generous, and any expenditure greater than the IRS allows is added to your RCP. So you must adjust your income and outlays during the documentation period such that: – Every dollar of income is spent. – All your expenditures are for items allowed by the IRS and within the dollar limits they prescribe. Achieving these goals will minimize your excess income but it takes planning and discipline. The strategies presented in this chapter will show you how to do so while minimizing the impact on your lifestyle.


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Factors to consider:

Without any planning or budgeting, your claimed expenditures (cell G57 on the Data Input and Results spreadsheet) are either higher or lower than your declared income (cell C57). Cell H59 shows the Net Difference. In Chapter 3 we forced these to be equal by lumping any expenditures not accounted for in cells G39 through G51 into cell G54 (Entertainment, Vacations & Misc.) as non-allowed expenditures. At this point, however, you want to jointly strategize your reported income and disbursements to bring them into parity without much, if any, non-allowed expenses like vacations because: – If your spending significantly exceeds your income, the IRS will assume you are not telling the truth about your earnings or are receiving payments or subsidies from undisclosed sources. – If your spending is less than your income or you purchase non-authorized items (e.g., entertainment, vacations, etc), these increase your RCP.

Documentation Period Strategies You have some flexibility concerning which months you pick to document your finances. They must be three or six sequential months, but if it’s to your advantage, you can include or exclude the prior full month. For example, let’s say the current month is June and you need to submit records for three months. You have a choice to document either a) February through April or b) March through May. Another option, if you can respond within 30 days to an IRS request for the data, is to wait until June is over and submit April through June figures.

Income Strategies If you’re employed by a company, you usually have only minor discretion over your earnings. You may, nevertheless, employ some strategies to temporarily reduce your income during the documentation period: – Decrease your overtime pay or defer bonuses (if you can). – Lessen or eliminate the number of exemptions so more taxes are withheld from your check. – Increase your contributions to your 401(k) or other retirement plans if you can, especially if there are rules against borrowing. – Include in your tax payments any installments you’re remitting to your state for past due taxes. – If you have the option to do so, you may become an independent contractor and create a corporation to shelter your earnings. Clearly these are aggressive and should only be implemented if they are legal to do so in your situation.

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Chapter 5: Income and Expense Strategies

When you’re self-employed, own your own company or generate investment income, you have much greater control over your earnings. Suggestions for cutting the profitability of your business also may apply to discretionary distributions from investments. Specifically, to shrink such profits: – – – – –

Delay or decrease sales and receipts and prepay or increase costs. Purchase and immediately write off equipment. Hire your children to work in your company. Incorporate the business or investment activity. Establish a 401(k) plan without borrowing privileges.

Keep in mind that not only must whatever adjustments you make conform to tax and other laws, but be in place and documented over six months, so plan ahead. If your income varies from year to year, the IRS typically uses a three or four year average to estimate your income. To justify a lower base, you must provide adequate documentation to support your numbers. If your spouse is female, you may argue to have her earnings excluded because of family issues such as having a baby and raising children that will require her to stop working in the future. For either spouse, health, job security, and other problems may be legitimate claims for limiting their projected income. Social Security benefits and retirement payments are generally impossible to shelter from the IRS. However, if these are now the major source of your income because you’ve done a good job arranging your assets and other income, you might consider applying for a hardship OIC. If you’re rejected, make an application to the Taxpayer Advocate Service and, even if this fails, you could consider filing bankruptcy.

Using a Discount Rate on Future Income and Expenses When forecasting your income, one negotiating tool is to take the present value of your future earnings. Just as a dollar discounted at 10% per annum is worth only $0.90 today if its to be received a year from now, so is your future income worth less in today’s dollars. The Application offers you the option of utilizing a discount rate, and, if you so choose, to specify the annual discount rate (see cell I4 in the Data Input and Results spreadsheet). When you elect this option, the Application discounts the Net Difference between your gross monthly income and total allowed disbursements (cell I27 in the Income Expense Table spreadsheet). The Application also discounts each loan in the Retired Debt Calculations spreadsheet that contributes to the Retired Debt Available for IA (cell I34). Note: if you are able to zero out or greatly reduce your RCP using the Application strategies and are able to zero out or greatly reduce the Net Difference and Retired Debt amounts, then you don’t need to employ a discount rate to cut them further. Only discount when you can’t get these numbers low enough. As the IRS doesn’t discount, you’ll have to explain what you’re doing, how it’s being applied and why you chose the particular discount rate you are using. Sample language if you do discount could be:


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“I applied a discount rate to a) the net difference between my gross monthly income and total allowed expenses and b) the retired debt calculations. This adjusts the value of money to be received in the future to present dollars. The discount rate used was 10% [or pick your own rate] per year, which is the current rate on high-risk creditors.”

Expense Strategies Recall that your goals are to have a) your monthly outlays essentially equal your income and b) most or all of it accepted by the IRS as necessary, reasonable and within their guidelines. Specifically, you have to: – Research the IRS allowances for your circumstances (see the end of Chapter 3). – Plan so you come under or don’t greatly exceed the guidelines. – Decrease your expenditures in non-sanctioned categories (e.g., entertainment, vacations, and so forth). – Have little (if anything) left over for back taxes. Categories of Expenses:

To help your plan, be aware that your expenditures fall into four categories: – Allowed but capped expenses There are three of these: “Food, Clothing & Misc.”, “Housing & Utilities” and “Transportation” (for cars or public transit). Some of the capped amounts increase with your income, number of dependents and the standard of living in your local area. See the end of Chapter 3 for determining the IRS budgets in your specific situation. – Allowed but not necessarily capped expenses The IRS generally permits reasonable outlays for health insurance, other health care costs, payments ordered by a court (e.g., child and spousal support), child and dependent care, life insurance premiums on term life policies, secured debt payments (e.g., car and furniture loans), and business costs. The Application assumes 100% of your purchases in each of these categories are allowed. If you have unusually large charges for these, however, be prepared to justify them to the IRS. – Questionable expenses These might include things like church tithing, pension plan contributions, and other special uses of money. Be prepared for IRS challenges by having explanations and records to demonstrate why they are necessary and consistent with your past expenditures, as well as the special circumstances that require these payments for you and your family’s health, welfare and production of income. – Normally not allowed expenses As indicated, money expended on anything else normally adds to your RCP. This includes entertainment, vacations, non-allowable loan payments and the like.

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The really bad news is that the IRS can, and occasionally does, confiscate 100% of your income—regardless of your bills. Also, they can and will padlock your business, put a guard in place and make you pay for it. Such drastic actions are employed to get the attention and cooperation of especially abusive, flagrant and fraudulent tax avoiders—all the more reason to be polite and compliant with IRS agents and observe the tax laws. Allowed but Capped Expenses

The following approaches will help you plan and control these outflows: – Food, clothing, etc. is the only category that you don’t have to track and provide receipts for. Be careful, however, because anything you spend above the IRS maximum is included in your RCP. – One aggressive strategy is to prepay and stockpile those items you can prior to the documentation period so that your actual outlays are below the exclusion. This frees up money you can allocate to other things you want to buy. Remember to disclose any such inventories to the IRS. For example, the IRS’s current food budget for a family of three earning $5,000 per month is $1,156. Let’s say you were able to hold it to only $400 per month. That means you now have $756 per month that you don’t need to keep track of and apply elsewhere. How is this possible? The only items you can’t inventory are perishables like fruits, vegetables and dairy products. Budgeting $100 per person per month for these makes it doable. Consider buying a freezer and stocking it with meat. Thus, amend the amount claimed for Food, Clothing & Misc. in your Income / Expense Information (cell G39) to match what is allowed (cell I39). Once your plan is complete, use the Implementation spreadsheet to calculate what you can prepay or stockpile, and thus, the sum you’ll spend on these items over the documentation period. While you must provide canceled checks and the like for your housing and utilities bills, these can be handled in a similar manner. For instance, let’s say that your rent or mortgage is $200 under the IRS exemption for Housing and Utilities, but when you include utility expenses, your total is $20 over the limit. Simply prepay your utilities by $20 times the number of months you have to document your finances. This way, you still write $200 worth of checks for your utilities each month. Again, be sure to disclose any prepaid expenses to the IRS. Therefore, change your declared housing outlays (cell G40) to no more than the amount the IRS accepts (cell I40). Also, review the transportation budget strategies in Chapter 4 so that cells G42 through G44 do not exceed the IRS limits.


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Allowed but Not Necessarily Capped Expenses

You have much more latitude over these expenditures, so long as the IRS considers them reasonable. Also, if you can justify special circumstances, the IRS may approve even greater amounts. These are very important because many of the adjustments to balance your income and spending take place here. If, after the adjustments you’ve made so far, your income still exceeds your stated charges, consider the following strategies: – Medical There’s no set maximum and it’s perhaps the easiest to justify. Plus, if you want to justify “special circumstances” for your OIC, incurring large medical and psychiatric bills provides evidence for such claims. For example, no doubt you’re under stress or you have other psychological problems. Start seeing a therapist. In fact, other members of your family may need this kind of intervention, too. While the IRS instructs you not to count “one time” events, consider incurring medical care you’ve been putting off, especially if it’s the beginning of the year on your medical plan and your co-payment is an annual deductible. – Child and dependent care There’s no cap on these expenditures either, and care for elderly dependents applies, too. Just make it reasonable and document the need for such outlays. – Quarterly estimated taxes Be sure to make generous payments of your estimated taxes during the documentation period so you don’t fall behind again. You’ll want to monitor these closely, however, because any overpayments for the full tax year will be applied to your back taxes—even if the IRS accepts your OIC. – Life insurance Only premiums on term-life insurance polices are deductible. Could you and one or more dependents use some insurance, and can the annual premium be paid in advance? – Business and miscellaneous purchases The IRS usually considers unreimbursed employee expenses, union dues, professional association fees, and savings into retirement plans reasonable and allowable. Also, don’t forget charges by advisors and the cost of this Application to fix your tax problems and so forth. – Loan payments As noted before, generally avoid borrowing where the debt matures sooner than your monthly multiplier expires. – Questionable purchases Expenditures that you believe qualify as special circumstances have to be adequately documented and justified for IRS approval. If you think they qualify, allocate these to the appropriate categories in cells G39 through G51. Ideally, cells G53 through G55 (Other Expenses) should be zero or close to it. – Total income and expenses Your claimed outgo should not significantly exceed your income (cell H59 would be negative). If so, reduce your expenditures to approximate your income.

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Save Your Receipts:

Be sure to save your records and receipts to document your income and expenditures (with the exception of Food, Clothing & Misc.). Documentation means saving and producing copies of checks as well as credit and debit card and cash receipts. To get in the habit, remember that not being able to justify and prove just $10 per month could cost you $600 or more. What you need to do:

Update the Data Input and Results spreadsheet for changes to your reported finances. For your convenience, the Net Differences shown in cells H59 and I59 monitors the impact of these changes. Your goal is to get both of these numbers close to zero.

John Taxwise’s Expense Strategies The example of John Taxwise illustrates how to implement several expense strategies. Recall from the prior two chapters that he has been able to reduce his RCP from $210,912 to $44,476. All but $300 of the remaining is due to his Claimed Living Expenses exceeding his Allowed Living Expenses by $1,004 per month (see cell I59). Since his monthly multiplier is 44, the addition to his RCP is $44,176 (i.e., 44 times $1,004).


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To bring his living expenses in line, John takes these steps: 1) creates an inventory of Food, Clothing & Misc. so that the Amount Claimed (cell G39) equals the Amount Allowed (cell I39); 2) refinances his mobile home for a longer term so that his monthly mortgage payment is cut by $200; 3) starts taking the bus to work so that his Transportation Operating Costs (cell G44) is reduced to the amount allowed (cell I44); 4) buys a supplemental health insurance policy for $300 per month; 5) increases his monthly tax withholding to $1,376; 6) purchases term life insurance for $100 per month; and, 7) eliminates the $80 per month going to Entertainment. The following entries accomplish these moves: 1. 2. 3. 4. 5.

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“916” in cell G39 (Claimed Food, Clothing & Misc.) “180” in cell F19 (Mortgage Term) “800” in cell I19 (Mortgage Payment) “1100” in cell G40 (Claimed Housing and Utilities Expenses) “338” in cell G44 (Claimed Transportation Operating Costs)


6. 7. 8. 9.

“300” in cell G45 (Claimed Health Insurance premium) “1376” inc cell G47 (Taxes withheld) “100” in cell G50 (Life Insurance premium) “0” in cell G54 (Entertainment)

At this point John’s RCP is $300—well below the amount needed to qualify and have his $500 offer accepted.


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c h a p t e r

6

Testing and Executing Your OIC Strategy

At this point you’ve completed the “before” and “after” analyses of your finances. The “after” perspective contains your strategy for qualifying for an OIC and the settlement terms you can live with. You are cautioned not to give the printouts of your plan to the IRS as documentation for your OIC application. Doing so could invite requests for even more information from the Agency. In this chapter you’ll test the feasibility of your plan by examining: – The changes to your assets and liabilities prior to applying for an OIC. – Your income and outflows during the documentation period. – The allocation of funds such that your sources and uses of cash are equal.

Determine Your Total Change in Cash

The purpose of this step is to ascertain how much cash, if any, will be generated by the planned changes to your assets and liabilities. In cells D7 through D31 of the Implementation spreadsheet, enter the beginning Fair Market Values (FMV) on all your assets (get these numbers from your “Before” file). Similarly, enter your beginning debts in cells F7 through F31. The Application automatically calculates the Total Change in Cash resulting from all the adjustments you plan for these accounts and reports that figure in cell H32. This is copied into cell E59, your Total Sources of Cash. Caution: if you plan to gift an asset, don’t include its FMV or related loans in the beginning numbers. Otherwise, the application will assume you sold it and increase the Total Change in Cash by that amount. Also, devaluing your Furniture / Personal Effects and Tools and/or Equipment to garage-sale prices does not impact your cash because no transaction takes place. How much cash is freed up and applied toward stockpiles or prepayment of services varies with three assumptions. The first is the number of months you need to document your financial data (cell I58). Usually this is up to six months


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if you’re employed by a company, or nine months if self-employed. The second assumption is the reserves (if any) you want on top of your stockpiles. Suppose the Application indicates you need a stockpile of $1,000. If you want a 10% reserve ($100) to make sure you have enough, then enter “10” in cell I60. The third is the level of spending you wish to budget for during the documentation period.

John Taxwise’s Cash Flow Strategies Once the beginning asset values and loan amounts are entered into John’s Implementation spreadsheet, the Application calculates that $54,700 of cash is freed up from the changes in his finances (see cell H32). 1. 2. 3. 4. 5. 6. 7. 8. 9.

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“4000” in cell D8 (Beginning Checking Account) “1000” in cell D9 (Beginning Savings Account) “100000” in cell D13 (Beginning Pensions) “50000” in cell D15 (Beginning Real Estate with Allowable Loans) “10000” in cell D18 (Beginning Value of Furniture / Personal Effects); revising this figure downward does not generate any cash so cell H18 is zero “2000” in cell D22 (Beginning Tool and/or Equipment); if this had been revised downward it, too, would not generated any cash or changed cell H22 “6000” in cell D24 (Beginning Car #1 Fair Market Value) “50000” in cell F15 (Beginning Real Estate Loan) “6000” in cell F24 (Beginning Car #1 Loan)

Chapter 6: Testing and Executing Your OIC Strategy

John is an employee and desires a 10% reserve so he enters: 10. “6” in cell I58 (Months for Documentation) 11. “10” in cell I60 (Stockpiling Reserves)


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Budgeting Strategies Here you reconcile your desired level of consumption during the documentation period with how much cash is available from repositioning your assets and liabilities. The goal is to stockpile or prepay enough of what you consume so that your cash expenditures are within the IRS limits. This will be true only if you have sufficient cash to acquire these items ahead of time. If not, you must allocate whatever money is available to minimize the inconvenience. The examples that follow will make this clear. Start by entering your desired monthly expenditures (not the IRS exemptions) in cells C37 through C53 of your Implementation spreadsheet. Your planned food purchases (cell C37) are likely to be the same as “Before.” In other words, if you are normally spend $2,000 per month for food, clothing and miscellaneous expenses, you’d probably want to keep that level even during the

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documentation period. Enter what you plan to buy for food, etc. out of current income in cell D37. Typically, this will be the IRS exemption but you may find it advantages to make it even less than this limit (see discussion below). Housing related expenses (cell C38) should reflect any mortgage refinancings plus your actual expected utility bills. Your transportation disbursements in cells C40 through C42 are the forecasted amounts (again, not the IRS exclusions). Enter all your other allowed necessities as projected in cells C43 to C49 (mostly these should be the same as forecasted in the “After” file). Lastly, your preference, no doubt, is to maintain your entertainment outgo at the “Before” levels, so enter this in cell C53. Other Expense items have likely been eliminated so put zeros in cells C51 and C53 or, if not completely done away with, the projected expenditures). Use of Prepaid Expenses and Stockpiles

The strategies that follow only apply if your Total Change in Cash is positive. In other words, the adjustments to your assets must generate cash to procure stockpiles, make prepayments, and be available for other purposes. The Application automatically allocates available cash when desired disbursements are greater than what you can pay for from monthly income. It does this by creating stockpiles in the following descending rank of importance: food, housing, transportation, other accepted categories, and lastly, other (non-sanctioned) expenses such as entertainment. For instance, assume that after moving your assets around, your Total Change in Cash is $5,000. Say you need a stockpile of $1,000 to keep your food budget at the desired level. The Application automatically makes $1,000 available for this purpose. If there’s a shortfall for housing, the next $4,000 could be applied to that and so on to cells E38 through E53, until all the classes of expenditures are at the desired level and need for stockpiles is fulfilled or the available cash is exhausted. If not enough money is available, then it covers the most critical payments in the order of the listed class of expenditures (food, then housing, then transportation, and so forth). If you want to adjust these priorities, change the desired outgo in cells E37 through E53. To demonstrate, if you can’t do without a stockpile of $1,000 to operate your cars, but all the cash is being absorbed by your food fund, then reduce your desired food spending level until the $1,000 trickles down to operate your cars. Keep in mind such amendments replicate how you plan to allocate your money. In other words, you really are going to buy $1,000 less food per month so you can run your cars. The next strategy to address is the option to re-allocate surpluses, if any, from Food, Clothing & Misc. Recall that the IRS sets maximums for this category, but you don’t have to provide receipts. So, if you’re under the allowance, the excess can be applied to other categories. Enter your plan


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to spend from current income (i.e., cash payments each month) on Food, Clothing & Misc. in cell D37. The Application automatically shows the excess (if any) in cell E37. If E37 is positive, distribute this surplus to cells E38 to E53 until all the money is used and cells E37 and E54 are equal. For example, say the IRS’s limit for your family is $1,500 per month and you plan to actually buy only $500 and prepay or draw down from stockpiles whatever else is desired. This frees up $1,000 to allocate to other necessities. Suppose further that your housing bills are $300 over what the IRS authorizes. Apply $300 of the $1,000 to housing. If the operating costs for your cars are $200 a month over the exemption, use the next $200 to cover this shortfall. If no other classes of expense are in deficit, the remaining $500 can go for entertainment. Again you are strongly advised to inform the IRS of any stockpiles and prepaid expenses in your OIC financial disclosure forms (examples of how to do this are in the next chapter). Allocate Excess Cash to Other Uses

Any money that remains after stockpiling is applied to 1) the OIC payments and fees (cells E64 through E66) and 2) the alternatives presented in cells E70 to E78. Regarding the former, enter you application fee in cell E64. This will normally be $150, unless you file for a low income exemption using IRS Form 656-A. The other OIC payments are entered automatically for you. The other places to put cash (cells E70 to E78) were discussed in Chapter 4, “Strategies for Sheltering the Cash.” When these entries are complete your sources and uses of cash (cells F61 and F80) should be equal and all the numbers in cells E59 to F80 should be black (if in red that indicates cells F61 and F80 are unequal).

John Taxwise’s Budget Strategies John plans his budget as follows: 1) keep his Food, Clothing & Misc. spending at the pre-documentation levels ($1,500 per month) but only have cash outlays equal to the IRS exemption ($916) so he’ll have to stockpile to do this; 2) pay his mortgage and utilities bills at the new lower amount ($1,100) after refinancing his loan; 3) make his car lease payment ($470); 4) retain his car operating costs at the pre-documentation level ($500) by prepaying expenses; 5) pay his health insurance premium ($300); 6) increase his tax withholding to $1,376; 7) spend $100 on his new life insurance policy; and, 8) make a $450 payment to his 401(k) plan. This budget is finalized with these entries in his Implementation spreadsheet. 12. “1500” in cell C37 (Desired Food, Clothing & Misc. expenses) 13. “1100” in cell C38 (Desired Housing and Utilities expenses) 14. “470” in cell C40 (Desired Car #1 Ownership costs) 15. “500” in cell C42 (Desired Car Operating costs) 16. “300” in cell C43 (Desired Health Insurance premium) 17. “1376” in cell C45 (Desired Tax withholding) 18. “100” in cell C48 (Desired Life Insurance premium) Page 70


19. “450” in cell C49 (Desired Secured Loan payments) 20. “916” in cell D37 (Food, Clothing & Misc. expenses paid from income)

Note that the shortfall in John’s monthly Food, Clothing & Misc. budget of $584 is shown in cell F37. This amount is his desired spending of $1,500 in cell C37 minus the amount to be paid out of his earning of $916 in cell D37. The shortfall is made up by creating a reserve of $3,854 (cells H37 and I37). In addition, the $162 deficit (cell F42) in his monthly car operating costs is eliminated by funding a $1,069 stockpile (cells H42 and I42) or prepaying expenses in that amount. The total stockpiles are $4,924 (cell I54) and copied into cell E68 under Uses of Cash. John values these inventories at 5% of their purchase price and either adds $246 to his Furniture / Personal Effects or lists $246 as “Prepaid Expenses” on his OIC application. John makes these allocations for the remaining cash:


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21. “150” in cell E64 (OIC Application Fee) 22. “10000” in cell E70 (Purchase of Furniture and Personal Effects) 23. “5000” in cell E71 (Purchase of Tools and/or Equipment) 24. “20000” in cell E73 (Expenditures on Home Improvements) 25. “14126” in cell E76 (Gifts to Family Members)

Now you know where your cash is coming from and where to apply it. Also, you have a specific, concrete plan to see you through the documentation period. The next chapter illustrates how all this comes together in three extensive examples.

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c h a p t e r

7

Examples Using the OIC Strategies

Three separate examples are presented in this chapter to demonstrate how the Application can be used in various OIC situations—even when the starting RCP is very high. The first shows a taxpayer with moderate assets and income. The second emphasizes strategies for those with high assets and the last deals with a high income OIC challenge. As you review these examples, you may feel it’s a lot of work. After all you have to plan your OIC offer, reposition your assets, and maintain a strict budget for six to nine months while you document your income and spending. Well, you’re right—it is a significant effort. But, if you can save $98,500 like Roy in the first example or $227,000 as Mary does in the second, you see why it’s worth doing.

Roy No Canpay’s OIC

Roy is a self-employed building contractor who got behind in his taxes during the start-up years of his business. His total tax debt with penalties and interest is $100,000. A summary of this and his financial circumstances before any planning is shown in Appendix A as Example #3: Roy No Canpay’s OIC. You can recreate this scenario by saving the OIC Calculator™ template as “Roy No Canpay before” and typing in the data as shown below. If you need to, review the example in Chapter 2 for entering and changing personal and financial data. Without any planning Roy’s RCP would be $274,588. Since this far exceeds the $100,000 he owes, the IRS would demand payment of all the taxes owed. Fortunately, however, Roy can adjust his finances and qualify for an OIC. In fact, detailed below are the steps to reduce his RCP to only $750—even less than what he offers to settle. Enter Roy’s personal and financial data in the Application as follows: Monthly Multiplier spreadsheet:


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1. 2. 3. 4. 5. 6. 7. 8.

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“2/15/2007” in cell E3 (Date of Analysis) “Roy No Canpay” in cell M3 (Name) “C” in L26 (cash OIC settlement option is selected). “1998” in cell E35 (year taxes owed), “40000” in F35 (taxes owed), “85” in I35 (months since first notice received for this year) “1999” in cell E36 (year taxes owed), “30000” in F36 (taxes owed), “65” in I36 (months since first notice received for this year) “2000” in cell E37 (year taxes owed), “20000” in F37 (taxes owed), “40” in I37 (months since first notice received for this year) “2001” in cell E38 (year taxes owed), “10000” in F38 (taxes owed), “32” in I38 (months since first notice received for this year) “1” in cell L64 (the monthly multiplier being selected; in this case, the IRS’s multiplier)

Chapter 7: Examples Using the OIC Strategies


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Data Input and Results spreadsheet: 9. “Santa Clara, CA” in E4 (taxpayer’s county and state of residence) 10. “0” in cell I4 (for now he chooses not to discount future cash flows) 11. “4” in cell F5 (number of people in taxpayer’s household) 12. “1500” in cell I6 (amount offered to settle OIC). Recall that this figure determines the amount he must submit for a deposit on his OIC application. 13. “300” in cell C11 (Cash) 14. “500” in cell C12 (Checking Account(s)) 15. “1000” in cell C13 (Savings Account(s)) 16. “2000” in cell C14 (Business Bank Account(s)) 17. “3000” in cell C16 (Life Insurance Cash Value)

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18. “50000” in cell C17 (Pensions) 19. “450000” in cell C19 (Real Estate with Allowable Loans) 20. “25000” in cell C22 (Value of all Furniture / Personal Effects) 21. “3500” in cell C25 (Accounts Receivable) 22. “50000” in cell C26 (Tools and/or Equipment) 23. “2003 Dodge truck” in cell B28, “10000” in cell C28 (Car #1) 24. “2002 BMW” in cell B29, “15000” in cell C29 (Car #2) 25. “Gold” in cell B31, “3500” in cell C31 (Asset #1) 26. “3000” in cell C40 (Wages / Salaries: TP2) 27. “7500” in cell C42 (Net Business Income: Sole Prop.’s) 28. “US Life” in cell D16 (Life Insurance Creditor) 29. “US Savings” in cell D19 (Real Estate Creditor) 30. “VISA” in cell D24 (Personal Loan Creditor) 31. “Cheap Car Loans” in cell D28 (Car #1 Creditor) 32. “Cheap Car Loans” in cell D29 (Car #2 Creditor) 33. “1000” in cell E16 (Life Insurance Loan) 34. “300000” in cell E19 (Real Estate Loan) 35. “5000” in cell E24 (Personal Loan) 36. “8000” in cell E28 (Car #1 Loan) 37. “10000” in cell E29 (Car #2 Loan) 38. “20” in cell F16 (Life Insurance Loan Term) 39. “240” in cell F19 (Real Estate Loan Term) 40. “18” in cell F24 (Personal Loan Term) 41. “36” in cell F28 (Car #1 Loan Term) 42. “24” in cell F29 (Car#2 Loan Term) 43. “7040” in cell G22 (Furniture / Personal Effects Exemption); in 2007 this was increased to $7,720 44. “3520” in cell G26 (Tools and/or Equipment Exemption); in 2007 this was increased to $3,860 45. “2000” in cell G39 (Food, Clothing & Misc. Expenses) 46. “2300” in cell G40 ( Housing and Utilities Expenses) 47. “600” in cell G44 (Transportation Operating Costs) 48. “550” in cell G45 (Health Insurance Expense) 49. “200” in cell G46 (Other Health Expenses) 50. “2500” in cell G47 (Taxes) 51. “150” in cell G50 ( Life Insurance Premiums)


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52. “50” in cell G51 (Allowable Loan Payments) 53. “350” in cell G53 (Non-Allowable Loan Payments) 54. “650” in cell G54 (Entertainment, Vacation & Misc. Expenses) 55. “50” in cell I16 (Life Insurance Loan Payment) 56. “1500” in cell I19 (Real Estate Loan Payment) 57. “350” in cell I24 (Personal Loan Payment) 58. “550” in cell I28 (Car #1 Loan Payment) 59. “600” in cell I29 (Car #2 Loan Payment) 60. “1564” in cell I39 (Food, Clothing & Misc. Exemption) 61. “2771” in cell I40 (Housing and Utilities Exemption) 62. “475” in cell I42 (Car #1 Ownership Exemption) 63. “338” in cell I43 (Car #2 Ownership Exemption) 64. “466” in cell I44 (Transportation Operating Exemption)

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To check that the numbers you entered are accurate, his RCP should total $274,588 when you’re done. Save this file to keep your work and use it later to strategize Roy’s OIC plan. Clearly the IRS will reject his offer and recommend he pay the full amount due (see cells A65 and D65). Thus, his OIC deposit of $300 (cell C62) will be applied to his outstanding tax liability and he will lose his application fee of $150.

How Roy Qualifies for His OIC Monthly Multiplier Strategies

Sometimes the IRS proposes to base monthly multipliers solely on the most recent tax year. Roy can justifiably point out that using a weighted average would result in a more equitable multiplier of 43 rather than 48. Note that even if the IRS stubbornly holds to their position, using a multiplier


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of 48 would not increase Roy’s ending RCP of $750. This is possible because, by reducing his excess income and eliminating his retired debt problems, it will not matter how high the multiplier is. Select the most favorable averaging multiplier, which cuts his RCP by $14,404. 1. Use “Save As…” and the “Before” file to create a new file: “Roy No Canpay after” 2. “3” in L64 of the Monthly Multiplier spreadsheet


The above change doesn’t alter the contribution that the equity in Roy’s assets makes to his RCP. It remains unchanged at $167,840 (cell I62 of the Data Input and Results spreadsheet). To determine the source, go to the Asset Equity Table spreadsheet and review the figures in the right column, Net Realizable Equity. While there are many smaller items to fix, the largest four ones account for $154,440 or 92% of the problem. As a test, Roy opts to see what impact discounting his future cash flows would have: enter “10” in cell I4 (the annual discount rate selected). This change would lessen his RCP by $15,867. While this looks substantial, Roy decides to pursue other strategies before resorting to the discounting option. Cancel this entering “0” in I4. On the Data Input and Results spreadsheet, make the following changes, which will decrease his RCP by $77,120 to $183,064. To zero out the $60,000 of equity in his home, Roy refinances and increases his mortgage to $360,000. You would think this would only take $60,000 off his RCP but the increased mortgage payment also cuts his excess income. If the IRS had a lien on his home, however, refinancing would require their permission and they would apply the $60,000 to his tax bill. 3. “360000” in cell E19 (Real Estate with Allowable Loans); this debt is “allowable” since it’s on his home 4. “1900” in cell I19 (Monthly Loan Payment) 5. “2700” in cell G40 (Housing and Utilities)

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Next, the $60,000 can be used for a variety of purposes: home improvements, living expense provisions, business requirements (e.g., tools, equipment and promotion), home furnishings, and so forth. For instance, $5,000 is used to eliminate his Visa charges: 6. “None” in cell D24 (Non-Allowable Personal Loans), “0” in cells E24 (Loan Amount), F24 (Loan Term) and I24 (Loan Payment) 7. “0” in cell G53 (Non-Allowed Loan Payments) because $350 per month no longer goes to Visa 8. “600” in G54 (Entertainment, Vacations & Misc.) which balances his income and claimed outlays after the above changes


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Note that discharging the Visa debt boosts his RCP by $5,000 because it increases the equity in his Furniture / Personal Effects. Curiously, the IRS disallows the Visa bill as a necessity but permits it as a deduction from the equity in his personal property. Next Roy researches his wife’s pension plan and discovers that she can’t borrow against it or otherwise access the funds, which takes his RCP down to $138,064. 9. “50000” in cell G17 (Exemption—pension plans)

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Roy realizes he’s been looking at their Furniture / Personal Effects from the perspective of their cost, rather than their garage-sale, flea market, eBay, or auction value. This more realistic appraisal puts their Fair Market Value at $5,000 rather than $25,000. 10. 10.“5000” in cell C22 (the Total Fair Market Value of all his Furniture / Personal Effects)


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In fact, he would have to have more than $7,720 in cell C24 before it would start to increase his RCP because the exclusion. So, if he valued this property at five cents on the dollar, $7,720 could represent $154,400 of goods at their original purchase price (or $257,333 at three cents per dollar). The same re-evaluation of his business tools and equipment takes this number down to $3,000—not $50,000 as he originally assumed. Also recall that he could have up to $3,860 in cell C26 without adding to his RCP. As shown in Chapter 3 this could shelter up to $77,200 or $128,667 if valued at five cents or three cents at retail prices, respectively. 11. “3000” in cell C26 (Tools and Equipment); At this point his RCP is $88,624. Roy now pulls cash out of various accounts, trades in his life whole life insurance policy with a cash value for a term life policy at the same monthly fee and makes the adjustments below to his Data Input and Results spreadsheet.

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12. “50” in cell C11 (Cash) 13. “100” in cell C12 (Checking Account) 14. “0” in cell C13 (Savings Account) 15. “200” in cell C14 (Business Bank Account) 16. “0” in cell C16 (Life Insurance Cash Value),”None” in cell D16, “0” in cell E16 (Loan Amount—life insurance), “0” in cell F16 (Loan Term), “0” in I16 (Loan Payment), 17. “0” in G51 (Allowable Loan Payments); as he cashes out the policy and eliminates the debt 18. “500” in cell C25 (Accounts Receivable)

Roy sells his current cars and lease replacement vehicles: 19. “New car #1” in cell B28 (name of Vehicle #1), “0” in cell C28 (Car #1 Fair Market Value) and “Car Lease #1” in cell D28 (Creditor)


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20. “0” in cell E28 (Loan Amount), “0” in cell F28 (Loan Term), “450” in cell H28 (Lease Payment) and “0” in I28 (Loan Payment) 21. “New car #2” in cell B29 (name of Vehicle #2), “0” in cell C29 (Car #2 Fair Market Value) and “Car Lease #2” in cell D29 (Creditor) 22. “0” in cell E29 (Loan Amount), “0” in cell F29 (Loan Term), “300” in cell H29 (Lease Payment) and “0” in I29 (Loan Payment) Selling his cars and leasing new ones also zeros out the $9,584 that his car ownership costs added to his RCP from retiring those obligations ahead of the expiration of his monthly multiplier. Lastly, he sells his gold investments and balances his income and expenditures: 23. “0” in cell C31 (Asset #1) and delete “Gold” in cell B31 24. “1050” in cell G54 (Entertainment, Vacations & Misc.) to re-balance his income and claimed spending so that H59 is zero

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The total of these changes reduces his RCP by $18,538 to $70,086. Income and Expense Strategies

At this stage 99% of his RCP comes from the imbalance of his income and authorized expenditures. To further reduce it, Roy must adjust his income and expenses over the period he is documenting these transactions. Recall from Chapter 5 that there are five basic strategies to bring your monthly cash flows into acceptable IRS guidelines. These are 1) reducing income, 2) increasing allowable expenses that normally don’t have set limits, 3) decreasing allowable expenses that are above the limits, 4) cutting non-allowable expenses and 5) pre-paying expenses and/or buy provisions. Here’s how Roy utilizes these approaches to win his OIC. To begin, Roy reduces his earnings by decreasing sales or increasing his business costs by $1,000 per month so that his income declines by $1,000. 25. “6500” in cell C42 (Net business Income—sole proprietorship)


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Next, he spends more on allowable expenses that aren’t usually capped. 26. “320” in cell G46 (Other Health Care); Roy and his wife seek counseling over the financial stresses in their life 27. “3000” in cell G47 (Taxes); Roy negotiated his back state taxes and included that $500 per month in this category Now, he cuts expenses that are over the IRS allowances. Recall that Food, Clothing & Misc. is the only category of expense that he’s not required to keep records or receipts for amounts up to the IRS exemption, which in his case is $1,564. 28. “1564” in cell G39 (Food, Clothing & Misc.) to equal the IRS allowance for his situation 29. “466” in cell G44 (Car Operating Costs) to bring these costs in line with IRS guidelines

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Lastly, he budgets less for non-allowable expenses. The net difference in cell H59 shows Roy would spend $1,045 more than his income, so he eliminates his entertainment outlays to balance his income with his claimed and allowed living expenditures. 30. “0” in G54 (Entertainment, vacations & misc.), now H59 and I59 are zero The strategies in this Section takes Roy’s RCP to $750 (cell I65). Importantly, the IRS’s recommendation changes and they accept his offer to pay $1,500 (cells A65 and D65).

Testing the Strategy To test his plan Roy utilizes the Implementation spreadsheet of his “After” file, which has his final RCP of $750. The Application automatically entered the ending asset values in cells E7 through E31, as well as the ending liabilities (cells G7 through G31). Now he enters the beginning assets (cells D7 to D31) and liabilities (F7 to F31). 31. “300” in cell D7 (Cash) 32. “500” in cell D8 (Checking Account(s)) 33. “1000” in cell D9 (Savings Account(s)) 34. “2000” in cell D10 (Business Bank Account(s)) 35. “3000” in cell D12 (Life Insurance Cash Value) 36. “50000” in cell D13 (Pensions) 37. “450000” in cell D15 (Real Estate with Allowable Loans) 38. “25000” in cell D18 (Value of all Furniture / Personal Effects) 39. “3500” in cell D21 (Accounts Receivable) 40. “50000” in cell D22 (Tools and/or Equipment) 41. “10000” in cell D24 (Car #1) 42. “15000” in cell D25 (Car #2) 43. “3500” in cell D27 (Asset #1) 44. “1000” in cell F12 (Life Insurance Cash Value) 45. “300000” in cell F15 (Real Estate with Allowable Loans) 46. “5000” in cell F20 (Non-Allowable Personal Loans) 47. “8000” in cell F24 (Car #1) 48. “10000” in cell F25 (Car #2) The Application calculates the change in his cash from each asset and liability transaction. For example, in Roy’s case the Total Change in Cash in cell H32 should be $73,950. Note that


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revaluing his Furniture / Personal Effects from $25,000 (cell D18) down to $5,000 (E18) does not decrease his cash in cell H18, because no transaction has taken place. Similarly, restating the value of his Tools and/or Equipment in row 22 doesn’t impact his cash. Now he enters his projected budget into cells C37 through C53 (don’t type in the IRS exemptions). 49. “2000” in cell C37 (Food, Clothing & Misc.); his prior budget and the level he would like to continue consuming 50. “1564” in cell D37 (Food, Clothing & Misc.); he limits his cash outlays for these items to the IRS’s exemption 51. “2700” in cell C38 (Housing and Utilities); this payment includes his new mortgage obligation 52. “450” and “300” in cells C40 and C41 (Car Ownership Costs); the monthly payments on his new leases 53. “600” in cell C42 (Car Operating Costs); his prior budget and the level he would like to continue consuming 54. “550” in cell C43 (Health Insurance); his prior spending level 55. “320” in cell C44 (Other Health Care); the new budgeted amount 56. “3000” in cell C45 (Taxes); the increased withholding figure 57. “150” in cell C48 (Life Insurance); the prior spending amount 58. “650” in cell C52 (Entertainment, Vacations & Misc.); his prior budget and the level he would like to continue consuming

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Note that the $1,564 per month he now plans to spend for food, clothing is $436 less than what he had been buying. One strategy to fill this gap is to create an inventory of goods (e.g., frozen meat, can goods, toiletries, apparel, and so forth) that can be drawn down over the documentation period. In this way Roy can maintain his standard of living in this important category. Similarly there are $134 and $650 shortfalls per month for Car Operating Costs and Entertainment, respectively. To calculate how much inventory or prepaid expenses his family needs for these purposes, make the following entries: 59. “9” in cell I58 (Months for Documentation Period); Roy enters “9” because he’s self-employed and wants an extra three month cushion to record his spending patterns 60. “10” in cell I60 (Stockpiling Reserves); this sets a 10% reserve on top of the stockpiles and prepayments


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Row 37 shows the results for his food budget: what he wants to consume ($2,000 per month in cell C37) is paid for from current income ($1,564 in cell D37) leaving a shortfall of $436 (cell F37). The amount of reserves he would like is $4,316 ($436 times nine months plus a 10% reserve; see cell H37). Sufficient money is freed up (cell H32) so that he can fully fund this use of cash as well as reserves for his car and entertainment expenses. Actual Stockpiles (cell I54) now equals $12,078. Including reserves for food, car operating and entertainment expenses, his Monthly Expenses and Stockpiles (rows 33 through 54) are specified. Compare the sums shown in Appendix A: Roy’s (after) Implementation spreadsheet printout to verify your entries. The total amount of Actual Stockpiles (I54) is copied into cell E68 to start planning of his sources and uses of funding beginning in row 57. Enter his OIC application fee:

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61. “150” in cell E64 (OIC Application Fee) Cells E70 through E78 offer alternative ways for Roy to allocate his remaining cash. Fill in these amounts according to what Roy chooses (refer to the “After” Implementation spreadsheet) so that his Total Sources of Cash and Total Uses of Cash are equal (cells F61 and F80). 62. “7500” in cell E70 (Purchase of Furniture and Personal Effects) 63. “10000” in cell E71 (Purchase of Tools and/or Equipment) 64. “2722” in cell E72 (Prepayment of Other Bills) 65. “25000” in cell E73 (Expenditures on Home Improvements) 66. “5000” in cell E75 (Payments to “Close” Creditors) 67. “10000” in cell E76 (Gifts to Family Members) Note that the numbers in this section will remain bold red until cells F61 and F80 balance.


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Conclusion and Implementation

Roy started owing $100,000 in taxes and an RCP of $274,588. Clearly, he couldn’t negotiate an OIC but would have to pay in full. We have seen, however, that powerful strategies helped him to qualify and remit what he offered to settle. The resulting savings total $98,500. The test of his plan confirms its feasibility and specifies his cash flows and planned disbursements. All of his desired expenditures can be met during the documentation period by utilizing stockpiles and prepaying expenses. Full disclosure of these transactions is made on his IRS financial applications (see IRS Forms 433-A and 433-B in Appendix A, Example #2: Roy No Canpay).

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For instance, the additions to Roy’s provisions of Food, Clothing & Misc. ($4,316 in cell I37 and $7,500 in cell E70 of the Implementation spreadsheet) total $11,816, but when valued at five cents on the dollar only increase his Furniture / Personal Effects by $591. Therefore, Roy adds this amount to his prior balance of $5,000 and enters $5,591 in line 21a of his financial disclosure form 433-A (see Appendix A). Also, his prepaid expenses ($1,327 in cell I42, $6,435 in cell I52 and $2,722 in cell E72) total $10,484 which, at 5% of purchase price, is $524. This figure goes in line 21d (“Deposits, Prepaid Expenses”) of his Form 433-A. Similarly, the $10,000 purchase of Tools and/or Equipment (cell E71) only boosts line item 22a (“Tools used in Trade/Business”) by $500 to a total of $3,500. In addition, Roy remembers to enter the revised amount for his tools on line 11a of his business financial disclosure form (IRA Form 443-B, see Appendix A). In summary, to implement his OIC strategy, Roy would take these actions: 1. Make the changes to his assets and liabilities as show above. 2. Stay within the “After” budget limits and document these income and expenditure amounts for six months (three month had he been an employee or retired). 3. Submit his OIC application together with the IRS financial disclosure forms demonstrating six months of his “After” income and expenses. 4. Maintain his “After” budget and be prepared to provide an addition three months of income and expense documentation.

Mary N. Trouble’s OIC Mary N. Trouble sold her business in 1999, used the proceeds to pay off her mortgage and other borrowings and retired. Unfortunately she didn’t pay all the taxes due on the sale, so this liability has grown to $230,000. Her dilemma is that she can either a) take out a mortgage on her house to eliminate her tax debt but incur a high monthly payment or b) sell the house and wipe out a high percentage of her net worth with capital gains and back taxes. If she approached the IRS with her present RCP of $879,870, they would demand all her back taxes be paid. This is an instance of having high assets and relatively modest income. Nevertheless, there is a strategy where Mary’s tax debt can be settled for what she’s offering, $3,000. Moreover, the Application could cut her RCP to zero and she could offer just that. In our experience, though, it’s best to let the IRS recover something; otherwise they’ll look for a reason not to accept your offer. For practice with the Application, enter Mary’s starting data and implement the strategy step-by-step. Monthly Multiplier spreadsheet: 1. “11/1/2006” in cell E3 (Date of Analysis) 2. “Mary N. Trouble” in cell M3 (Name)


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3. “S” in cell L26 (the type of settlement offer being made) 4. “1999” in cell E35 (year taxes owed), “200000” in F35 (taxes owed), “80” in I35 (months since first notice received for this year) 5. “2000” in cell E36 (year taxes owed), “30000” in F36 (taxes owed), “50” in I36 (months since first notice received for this year) 6. “1” in cell L64 (the monthly multiplier being selected; in this case, the IRS’s multiplier)

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Data Input and Results spreadsheet: 7. “Santa Clara, CA” in E4 (taxpayer’s county and state of residence) 8. “0” in cell I4 (for now she chooses not to discount future cash flows) 9. “1” in cell F5 (number of people in taxpayer’s household) 10. “3000” in cell I6 (amount offered to settle OIC, which impacts how much her OIC deposit is) 11. “100” in cell C11 (Cash) 12. “500” in cell C12 (Checking Account(s)) 13. “10000” in cell C13 (Savings Account(s)) 14. “800000” in cell C19 (Real Estate with Allowable Loans) 15. “20000” in cell C22 (Value of all Furniture / Personal Effects) 16. “2002 Mercedes” in cell B28, “15000” in cell C28 (Car #1)


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17. “Stock portfolio” in cell B31, “60000” in cell C31 (Asset #1) 18. “2000” in cell C41 (Interest - Dividends) 19. “3500” in cell C45 (Pension / Social Security: TP1) 20. “4500” in cell C55 (Expected wages used from year prior) 21. “Cheap Car Loans” in cell D28 (Car #1 Creditor) 22. “7000” in cell E28 (Car #1 Loan) 23. “30” in cell F28 (Car #1 Loan Term) 24. “7040” in cell G22 (Furniture / Personal Effects Exemption) 25. “1200” in cell G39 (Food, Clothing & Misc. Expenses) 26. “400” in cell G40 ( Housing and Utilities Expenses) 27. “300” in cell G44 (Transportation Operating Costs) 28. “100” in cell G45 (Health Insurance Expense) 29. “25” in cell G46 (Other Health Expenses) 30. “1000” in cell G47 (Taxes) 31. “1975” in cell G54 (Entertainment, Vacation & Misc. Expenses) 32. “500” in cell I28 (Car #1 Loan Payment) 33. “649” in cell I39 (Food, Clothing & Misc. Exemption) 34. “1812” in cell I40 (Housing and Utilities Exemption) 35. “475” in cell I42 (Car #1 Ownership Exemption) 36. “317” in cell I44 (Transportation Operating Exemption) To check that the numbers you inputted are accurate, her RCP should total $985,780 when you’re done. Save this file.

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How Mary Qualifies for Her OIC Monthly Multiplier Strategies

Use Mary’s “Before” file to save a new one: “Mary N. Trouble after.” Amending her Monthly Multiplier to one that averages the two years decreases her RCP by $52,626. 1. “3” in L64 of the Monthly Multiplier spreadsheet


Mary performs a sensitivity analysis to discover the benefit discounting her future cash flows may provide. But, since it only cuts her RCP by $19,056 (using a 10% annual discount rate), she chooses not to do this.

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Perhaps the best solution would be to gift the house to a charity using a charitable remainder trust. There are several advantages for Mary from this strategy: The house is sold and no capital gains taxes are due. All of the proceeds ($800,000) are used to fund a lifetime income stream for her. A gift tax deduction is created for her current tax year, due to the charitable contribution. The amount of the deduction varies according the options she selects for her trust. Caution, Mary needs professional advice to make sure this solution it fits her situation and goals. Let’s assume Mary did receive professional assistance and she picked an option that pays a 6% yield or $48,000 per year ($4,000 a month). Enter these changes in her Data Input and Results spreadsheet: 2. “0” in cell C19 (Real Estate) 3. “4000” in C46 (Pension / Social Security (TP2)).


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Mary then sells her stocks (the capital gains taxes are partially or wholly offset by the above charitable deduction), takes out $9,500 from her savings, puts $70,000 down on a $350,000 home with a mortgage of $1,500 per month and adjusts other assets as follows: 4. 5. 6. 7.

“20” in C11 (Cash) “50” in C12 (Checking Account(s)) “500” in C13 (Savings Account(s)) “350000” in C19 (Real Estate FMV), “New Mortgage Co.” in D19 (Creditor), “280000” in E19 (Real Estate Loan), “360” in F19 (Loan Term) and “1500” in I19 (Monthly Payment Loan) 8. “6000” in C22 (the Total Fair Market Value of all her Furniture / Personal Effects); after reevaluating the true ‘garage-sale’ value of these items 9. “0” in C31 (Assets #1) and delete B31 (“Stock portfolio”) 10. “15” in C41 (Interest – Dividends); due to the sale of her stocks and reduced savings account 11. “1812” in G40 (Housing and Utilities); due to her new mortgage

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Next she sells her car and leases a new one: 12. “2006 Ford” in B28, “0” in C28 (Fair Market Value), “Car Lease Inc.” in B28, “0” in E28 (Loan Amount), F28 (Loan Term), “450” in H28 (Monthly Lease Payment) and “0” in I28 (Monthly Loan Payment) 13. “2628” in G54 (Entertainment, Vacations & Misc. to balances her income and claimed outlays so that H59 is zero) With all the above changes, Mary’s RCP is goes down $691,221 to $136,023.


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Income and Expense Strategies

Some of her reported monthly living expenditures were adjusted above. These additional strategies will aid in cutting her RCP: 14. “649” in G39 (the IRS’s allowance for Food, Clothing & Misc.); remember that $649 is the only amount she doesn’t need to show records of having spent 15. “400” in G45 (Health Insurance); Mary procures a new or supplements her current insurance plan 16. “365” in G46 (Other Health Care); she finds other physical or mental health issues that need attention 17. “3000” in G47 (Taxes); her higher pension income, higher withholding and remittances to the state warrant this increase

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18. “239” in G49 (Child / Dependent Care); she starts providing for some of her mother’s upkeep 19. “300” in G50 (Life Insurance); from a new life insurance policy she takes out 20. “0” in G54 (Entertainment, Vacations & Misc.); since she doesn’t have any income left over The strategies in this Section reduce Mary’s RCP to $570 (cell I65) so the IRS would likely accept her OIC offer to pay $3,000, and thus, save her $227,000 in taxes.

Testing the Strategy

Mary enters the beginning Fair Market Values and Loans Outstanding for each class of asset she owns into the Implementation spreadsheet as follows:


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21. “100” in cell D7 (Cash) 22. “500” in cell D8 (Checking Account(s)) 23. “10000” in cell D9 (Savings Account(s)) 24. “25000” in cell D18 (Value of all Furniture / Personal Effects) 25. “15000” in cell D24 (Car #1) 26. “7000” in cell F24 (Car #1 Loan) 27. “60000” in cell D27 (Asset #1) The result is that she frees up $8,030 in cash (cell I54). Remember that revaluing her Furniture / Personal Effects from $20,000 (cell D18) to $7,000 (E18) doesn’t change her cash in cell H18 since no transaction has occurred. Similarly, gifting her home away through a charitable remainder trust does not generate cash as if she sold it. Now Mary enters her desired payments into cells C37 through C53 as follows: 28. “1200” in cell C37 (Food, Clothing & Misc.); her prior budget and the level she would like to continue consuming 29. “649” in cell D37 (Food, Clothing & Misc.); amount paid from current income 30. “1812” in cell C38 (Housing and Utilities); the payment includes her new mortgage obligation 31. “450” in cell C40; the monthly payment on her new lease 32. “300” in cell C42 (Car Operating Costs); her prior budget and the level she would like to continue consuming 33. “400” in cell C43 (Health Insurance); her new budget 34. “365” in cell C44 (Other Health Care); the new budget 35. “3000” in cell C45 (Taxes); the increased withholding figure 36. “239” in cell C47 (Child / Dependent Care); new budget 37. “300” in cell C48 (Life Insurance); new budget 38. “1975” in cell C52 (Entertainment, Vacations & Misc.); her prior budget, which she would like to maintain

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Her Total Desired Expenses should sum to $10,041. To determine the amount of stockpiles and prepaid expenses she’ll require, enter: 39. “6” in cell I58 (Months for Documentation Period); Mary isn’t working so she should only have to track her financial data for three months plus another three for insurance 40. “10” in cell I60 (Stockpiling Reserves); the percentage of additional funds she wants available)


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To continue enjoying $1,200 per month of Food, Clothing & Misc., she allocates $3,637 of her cash to stockpiling these items (cell I37). She uses the remaining cash to create an Entertainment, Vacations & Misc. reserve of $4,393 (cell I52). All of her spending objectives are met with the exception of Entertainment. During the documentation period she’ll have only $666 per month (cell F52) for this purpose rather than $1,975 she was spending before. Note that, if she decreased her 10% reserve assumption to zero in cell I60, this would free up an additional $121 per month for entertainment activities. The summary of her OIC settlement are shown starting in rows 57 through 76. To balance the sources and uses of funds: 41. “400” in cell E60, indicating the need to borrow or sell assets to pay the OIC monthly payment due upon acceptance 42. ”150” in cell E64 (OIC Application Fee)

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Conclusion and Implementation

The above strategies help Mary substantially cut her RCP and qualify for an OIC. Paying her offer of $3,000 saves $227,000 in taxes. The tradeoff, however, is that she has to shift her portfolio around and reduce her monthly entertainment spending by $1,309 for six months. Appendix A contains Mary’s financial disclosure form (443-A) which reflects the above changes. Valuing her reserves for Food, Clothing & Misc. ($3,637) and Entertainment, Vacations & Misc. ($4,393) at five cents on the dollar yields a combined amount of $402. This figure is added to the $6,000 value given for her Furniture / Personal Effects raising the total to $6,402 (see line item 21a on Form 443-A).


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Thus, Mary’s implementation of her OIC strategy is as follows: 1. Make the changes to her assets and liabilities as show above. 2. Stay within the “After” budget limits, and document these income and expenditure amounts for three months (six months had she been self-employed). 3. Submit her OIC application together with the financial disclosure forms demonstrating three months of her “After” income and expenses. 4. Maintain her “After” budget and be prepared to provide an addition three months of income and expense documentation.

Albert U. R. Broke’s OIC Albert and his wife’s income jumped sharply starting in 2000 and they ratcheted up their discretionary spending rather than remitting all the income taxes that were due. Now they’re facing a $125,000 tax bill with very little in assets to draw upon. Also, their RCP is $498,124 so the IRS would require full payment. Being in this situation presents a challenge but isn’t impossible to resolve. The essence of the problem is to find ways to lower their income and shift disbursements from non-allowed categories to those that are permitted such that little or no RCP is left over. In the end, Albert can document an RCP of only $410 for his OIC application. Note that the starting difference between his claimed and allowed expenses totals $5,471 per month (see cell I59 in the Data Input and Results spreadsheet). This considerable sum must somehow be cut to nearly zero. One possible step would be to argue that his wife will be quitting her job to have a child or adopt, so that her future salary would be zero. In addition, if Albert can justify special circumstances, large expenditures could be lumped into one or more of the authorized categories (Chapter 5 covers this topic). Assuming this in not possible, the approach taken below is to incrementally spread the $5,471 out in order to avoid relying too much on any one strategy. Enter Albert’s personal and financial data in spreadsheets as follows: Monthly Multiplier spreadsheet: 1. “3/15/2007” in cell E3 (Date of Analysis) 2. “Albert U. R. Broke” in cell M3 (Name) 3. “2000” in cell E35 (year taxes owed), “75000” in F35 (taxes owed), “80” in I35 (months since first notice received for this year) 4. “2001” in cell E36 (year taxes owed), “35000” in F36 (taxes owed), “65” in I36 (months since first notice received for this year) 5. “2002” in cell E37 (year taxes owed), “15000” in F37 (taxes owed), “40” in I37 (months since first notice received for this year) 6. “1” in cell L64 (the monthly multiplier being selected; in this case, the IRS’s multiplier)

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Data Input and Results spreadsheet: 7. “Los Angeles, CA” in E4 (taxpayer’s county and state of residence) 8. “0” in cell I4 (for now he chooses not to discount future cash flows) 9. “2” in cell F5 (number of people in taxpayer’s household) 10. “1500” in cell I6 (amount offered to settle OIC) 11. “50” in cell C11 (Cash) 12. “350” in cell C12 (Checking Account(s)) 13. “1500” in cell C13 (Savings Account(s)) 14. “3000” in cell C17 (Pensions) 15. “12000” in cell C22 (Value of all Furniture / Personal Effects) 16. “2001 Ford” in cell B28, “7500” in cell C28 (Car #1) 17. “1988 Buick” in cell B29, “3500” in cell C29 (Car #2) Happy About Tax Relief: The OIC Solution

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18. “7500” in cell C39 (Wages / Salaries: TP1) 19. “5500” in cell C40 (Wages / Salaries: TP2) 20. “Cheap Car Loans” in cell D28 (Car #1 Creditor) 21. “Cheap Car Loans” in cell D29 (Car #2 Creditor) 22. “2500” in cell E28 (Car #1 Loan) 23. “1500” in cell E29 (Car #2 Loan) 24. “24” in cell F28 (Car #1 Loan Term) 25. “12” in cell F29 (Car#2 Loan Term) 26. “7040” in cell G22 (Furniture / Personal Effects Exemption); in 2007 this was increased to $7,720 27. “2000” in cell G39 (Food, Clothing & Misc. Expenses) 28. “1700” in cell G40 ( Housing and Utilities Expenses) 29. “550” in cell G44 (Transportation Operating Costs) 30. “450” in cell G45 (Health Insurance Expense) 31. “3000” in cell G47 (Taxes) 32. “4500” in cell G54 (Entertainment, Vacation & Misc. Expenses) 33. “450” in cell I28 (Car #1 Loan Payment) 34. “350” in cell I29 (Car #2 Loan Payment) 35. “1280” in cell I39 (Food, Clothing & Misc. Exemption) 36. “1563” in cell I40 (Housing and Utilities Exemption) 37. “475” in cell I42 (Car #1 Ownership Exemption) 38. “338” in cell I43 (Car #2 Ownership Exemption) 39. “448” in cell I44 (Transportation Operating Exemption)

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To check that the numbers you inputted are accurate, his RCP should total $498,124 when you’re done. Obviously, IRS’s recommendation would be to deign his OIC application, as illustrated in cells A65 and D65.

How Albert Qualifies for His OIC Monthly Multiplier Strategies

Using a weighted average of the tax years decreases his multiplier from 80 to 49 which cuts $194,029 from his RCP. 1. “3” in L64 (Monthly Multiplier selected) Asset and Liability Strategies

A long-term wealth building strategy would be for Albert to stop renting and acquire a home but that’s beyond the scope of this Application. Similar to the previous examples, he can make these changes to reduce his RCP: 2. “200” in C12 (Checking Accounts) 3. “0” in C13 (Savings Accounts) 4. “3000” in G17 (Exemption for Pension); he found out his wife’s 401(k) didn’t permit borrowing (if it did, she should borrow the maximum over a term longer than their multiplier) 5. “9000” in C22 (the Total Fair Market Value of all his Furniture / Personal Effects); after reevaluating the true, garage-sale value of these items Next they sell their cars, lease new ones, and use the proceeds from these actions to buy food and household provisions to offset expenditures in excess of that allowed by the IRS: 6. Change B28 and B29 to “New car #1” and “New car #2”, respectively, and enter “0” in C 28 and C29 (Fair Market Value) 7. “Car Lease Inc.” in D28 and D29 8. “0” in E28 and E29 (Loan Amount) as well as F28 and F29 (Loan Term) 9. “450” in H28 and “300” in H29 (Monthly Lease Payment) and “0” in I28 and I29 (Monthly Loan Payment) 10. “4550” in G54 (Entertainment, Vacations & Misc. to equalize his income and declared outlays)


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The net impact of the above changes takes his RCP down to $270,351. Income and Expense Strategies

This is where most of the action takes place to successfully prosecute Albert’s OIC. It will require good documentation to justify how he and his wife allocate their relatively high income. Remember, the reasons for allowing high expenses that most resonate with the IRS involve you and your family’s health, welfare and production of income. They reduce food and other purchases to the IRS allowances: 11. “1280” G39 (allowance for Food, Clothing & Misc.); recall that this amount, $1,280, is the only part of their spending that doesn’t have to be documented 12. “1563” in G40 (Housing and Utilities)


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13. “448” in G44 (Car Operating Expenses) To decrease their take home pay, Albert and his wife cut their claimed exemptions to zero and increase their tax withholding. 14. “5000” in G47 (Taxes) Next, spread the remaining surplus over various authorized but not capped necessities (keep in mind that you must provide the IRS with proof of these expenditures): 15. “900” in G45 (Health Insurance); they obtain a new or supplement current insurance plans 16. “1200” in G46 (Other Health Care); they seek counseling and find other physical or mental health issues that need attention 17. “1109” in G49 (Child/Dependent Care); due to dependent care for their parents 18. “750” in G50 (Life Insurance); comes from a new life insurance policy Albert and his wife take out 19. “0” in G54 (Entertainment, vacations & misc.); since they don’t have any income left over These last actions take Albert’s Net Difference between his income and allowed expenditures down to zero (cell I59) so that their RCP is only $410. At this point electing to discount his future cash flows would not decrease his RCP so he doesn’t make this election. Testing the Strategy

On the Implementation spreadsheet, Albert enters his beginning Fair Market Values and Loans Outstanding for each class of asset as follows: 20. “50” in cell D7 (Cash) 21. “350” in cell D8 (Checking Account(s)) 22. “1500” in cell D9 (Savings Account(s)) 23. “3000” in cell D13 (Pensions) 24. “12000” in cell D18 (Value of all Furniture / Personal Effects) 25. “7500” in cell D24 (Car #1) 26. “3500” in cell D25 (Car #2) 27. “2500” in cell F24 (Car #1) 28. “1500” in cell F25 (Car #2) The Implementation spreadsheet reports that $8,650 of cash is freed up. Now he enters his desired spending into cells C37 through C53 so that his Total Desired Expenses sum to $18,476 as follows:

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29. “2000” in cell C37 (Food, Clothing & Misc.); his prior budget 30. “1280” in cell D37 (Food, Clothing & Misc.); amount paid from current income 31. “1700” in cell C38 (Housing and Utilities); his prior budget 32. “450” in cell C40; Ownership Costs, Car #1); new budget 33. “300” in cell C41; Ownership Costs, Car #2); new budget 34. “550” in cell C42 (Car Operating Costs); his prior budget 35. “900” in cell C43 (Health Insurance); new budget 36. “1200” in cell C44 (Other Health Care); his new budget 37. “5000” in cell C45 (Taxes); his new budget 38. “1109” in cell C47 (Child / Dependent Care); his new budget 39. “750” in cell C48 (Life Insurance); his new budget 40. “4500” in cell C52 (Entertainment, Vacations & Misc.); his prior budget To complete the assumptions table, enter: 41. “6” in cell I58 (Months for Documentation Period, since Albert and his wife are not self-employed) 42. “0” in cell I60 (Stockpiling Reserves), Albert decides not to have any reserves His budget falls short in four categories: 1) Food, Clothing & Misc., 2) Housing and Utilities, 3) Operating Costs (for their cars) and 4) Entertainment, Vacations & Misc. However, creating stockpiles and prepaying expenses allow Albert to maintain their desired standard of living in all the areas except number 4, Entertainment. Thus, the total stockpiles (cell I54) equals the Total Change in Cash (H32).


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To finish his plan, make these entries for sources and uses of cash: 43. “150” in cell E64 (his OIC Application Fee) 44. “184” in cell E60 (Sale of Assets or Borrowings) to balance his sources and uses of funds. Conclusion and Implementation

With an ending RCP of $410, the IRS’s recommendation would be to pay the amount offered ($1,500), thereby saving Albert $123,500 in taxes. The downside is he has to limit his entertainment spending to $483 per month over the next six months to get his OIC approved. Most people would feel it’s worth it. Appendix A contains his financial disclosure form 443-A, including the disclosure of the $432 of stockpiles created (i.e., $8,650 times 5%).


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Thus, Albert’s OIC plan is as follows: 1. Make the changes to their assets and liabilities as show above. 2. Stay within the “After” budget limits, and document these income and expenditure amounts for three months (six months had either of them been self-employed). 3. Submit his OIC application together with the financial disclosure forms demonstrating three months of their “After” income and expenses. 4. Maintain the “After” budget and be prepared to provide an addition three months of income and expense documentation (which the IRS will likely request during the application period).

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c h a p t e r

8

Documenting Your OIC

The purpose of this chapter is to demonstrate the type of information often requested by the IRS and save you time in organizing it for presentation. To apply for your OIC, you will have to supply a brief cover letter, the application and disclosure forms along with backup data and documentation. In addition, you will have to answer questions posed by the revenue officer who reviews your offer. You are not advised to give the IRS printouts of this Application as it could expose your application to greater scrutiny. Appendix B has OIC applications that other taxpayers have successfully negotiated with the IRS for you to review. Appendix C directs you to blank IRS forms and sample letters for your use, including IRS Form 656: Offer in Compromise which was update February, 2007.

Documents to Submit with Your OIC Application

Note that the documentation requirements discussed in this chapter don’t apply to you if your OIC application is based on the premise that “You don’t owe the tax (for some very good reason).” Simply complete IRS Form 656 and a letter explaining why the tax doesn’t apply in your situation. Assuming you admit you owe the tax, be prepared to include the following documents along with your application. Send copies only and review other tips in Appendix F, Communicating with the IRS. 1. How to obtain IRS OIC application and related forms is discussed in Appendix C. In summary the government forms that may be used include the following: a) Form 656: Offer in Compromise starts the OIC process, so it must be filed by all applicants. Be sure to use the February, 2007 version of this form.


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b) Form 656-A: Income Certification for Offer in Compromise Application Fee and Payment is used only if applying for wavier of OIC application fee.) c) Form 656-L: Offer in Compromise (Doubt as to Liability) is submitted only if applying under the assumption you don’t owe the tax. d) Form 433-A Collection Information Statement for Wage Earners and Self-Employed Individuals is the financial disclosure statement required from all applicants. e) Form 433-B Collection Information Statement for Businesses is required if the applicant has a business. f) Form 2848 Power of Attorney and Declaration of Representative is only needed if you want to authorize someone to represent you before the IRS (e.g., handle your OIC). g) Form 4506-T Request for Transcript of Tax Return is used to obtain your IRS records. 2. The non-refundable OIC application fee of $150 must be submitted unless waived by applying under either Income Certification for Offer in Compromise Application Fee and Payment (IRS Form 656-A) or Offer in Compromise (Doubt as to Liability) (IRS Form 656-L). 3. Include an OIC application deposit equal to 20% of your settlement offer (if the total amount is to be paid in five or less installments) or the first installment (if paid over more than five months). a) In the latter case, all subsequent installments must be paid as proposed even while your application is under consideration. b) If your offer is rejected, your deposit or installments will be applied to your tax liability. c) One strategy to limit the required deposit would be to submit a low, but not unreasonable, cash settlement offer with your application. 4. A letter explaining your circumstances in detail and why your offer is not frivolous. 5. Tax returns for the last three years. 6. Bank, credit card and brokerage account statements for the last twelve months. 7. Income and expense records (e.g., cancel checks, credit card receipts, paycheck stubs, and so forth) for the documentation period. 8. Supporting materials to document special circumstances (e.g., statements from doctors, medical records, legal proceedings, and the like). 9. Collateral agreement(s) if advantageous to you (refer to this topic in Chapter 9). 10. Additional information requests by the IRS can be for any of the following as well as documentation on other subjects relevant to your situation: a) Title and deeds to assets owned

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Chapter 8: Documenting Your OIC

b) Inventory of personal assets, including collections, art, money receivable from all sources, insurance claims, inheritances c) Inventory of business assets, including inventories, accounts receivable d) Appraisals of real estate and other valuable holdings e) Records regarding pension and profit-sharing plans f) Information on stock, bond, and other security transactions and holdings g) Life insurance policies h) Legal obligations such as divorce and child support agreements, court judgments, bankruptcies and liens

Documentation “Catch-22” There’s a large potential pitfall in the OIC process that you should be aware of and avoid. If the IRS asks for supplemental information or substantiation regarding aspects of your application, do all you can to give them what they want. The “Catch-22” you could fall into otherwise is as follows: 1. If for any reason a Revenue Officer does not want to grant your OIC, all they have to do is declare that you haven’t provided enough information to substantiate your application. This closes your case and there is no way to appeal their decision. You can only appeal if your application was denied or rejected. In this case, it was “closed.” 2. Furthermore, you can’t request help from the Taxpayer Advocate Service because you never come under their jurisdiction. Your OIC application is either a) in process and under consideration, b) closed for lack of substantiation and can’t be re-opened or c) not rejected and in the appeal process. The TAS cannot intervene in any of these situations. 3. Thus, the sole arbitrator(s) of your application could be your Revenue Officer and their immediate supervisor. With no ability to request a review of their decision to “close” your offer, your only recourse is to reapply and start the OIC process over.

Written Responses Think of your written responses as if you were giving a deposition under oath: you want to provide direct, truthful and concise answers and avoid giving more information than is absolutely necessary. Try not to explain too much. Below are examples of real IRS requests. Appendix C provides sample cover letters for other types of responses. Example #1

IRS request: Provide copies of your divorce and settlement agreements This is the cover sheet to which the asked for documents were attached: Item __: Divorce Settlement Agreements


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“Attached are the divorce settlement agreements:” 1. Initial settlement filed (date) 2. Final settlement filed (date)

Example #2

IRS request: Provide information about number of people contributing to household expenses This is the cover sheet (no attachments): Item __: Household Expenses (statement by [taxpayer applicant] dated [date]) “Over the past six years my wife and I have lived alone and no one shares in or contributes any part of our household expenses.”

Example #3

IRS request: Provide copies of bank statements This is the cover sheet (copies of bank statements were attached): Item __: Bank Statements (last six months: January through June [year]) “Attached are bank statements for January through June [year].”

Quantitative Responses The best presentation of quantitative data (and the easiest way to compile numerical information) is with an Excel spreadsheet. For your convenience, six templates are included with this Application and a copy of the printouts for each is attached to this chapter. You can open the spreadsheets and begin filling in your own data as you collect it. Here is a brief introduction to each template:

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Templates #1 (checks) and #2 (credit cards) These formats are suitable for tracking checks as well as credit and debit card transactions. Note that if you create a record of all the items debited from an account, you can use it to make schedules for specific types of expenditures. For example, if you want a record of just your credit card business entertainment outlays, copy the “mother” spreadsheet showing all transactions from that account, change the title on the new spreadsheet and delete all the non-business entertainment charges. Do this for all the separate categories of expenditure you have to report on from that account.


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Templates #3 (business) and #4 (special circumstances)

These templates summarize business income and purchases or documents and justify expenditures for special circumstances. They provide an overview that is supplemented with separate spreadsheets showing the details for each category of income and expense cited. Such professional-looking, quantitative records help convey the reasonableness and necessity of the activity.

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Template #5 (income) and #6 (expense) Here are the backup spreadsheets that can be cloned from a “mother” spreadsheet as discussed above. In a similar fashion, if you create a master spreadsheet of all your bank deposits and need to document just your business income, you can copy it and delete all non-business deposits.

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c h a p t e r

9

If Your OIC Is Accepted or Rejected

Your OIC application will have one of four results: a) an OIC is granted, b) the application is dismissed outright for missing data or too low an offer, c) the application is rejected but you’re told what settlement amount would be approved, and d) the application is closed due to insufficient documentation. The last possibility is covered in the prior chapter under “Documentation Catch-22.” This chapter will examine your courses of action following the first three outcomes.

Your Application Is Accepted

Even if your OIC is accepted, there are things you need to do. Review the IRS’s letter (Form 7249, Offer Acceptance Report) to confirm that all disputed taxes are included, the settlement terms are accurate, and the letter is signed. In addition, think of yourself as on “tax probation” for five years. If you stray from strict compliance with IRS rules, the OIC settlement you fought hard for would likely be revoked, and all the taxes plus interest, and penalties are reinstated (less any money paid). “Strict compliance” means you must: 1. 2. 3. 4.

Make all your OIC settlement installments according to the contract. File all your tax returns for the next five years. Pay your taxes on time. Comply with the terms of any collateral agreement with the IRS (see below). 5. Forfeit any tax refunds due for the prior years in addition to the current year and probably for the next five.

Keep records of your OIC payments, and order a transcript of your tax records 90 to 120 days after you have paid the IRS in full, to verify that all liens have been lifted and all tax balances are zero (Chapter 3 discusses how this is done).


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If you are facing default on your OIC installments, contact the IRS in writing before the default happens. Clearly and truthfully explain your circumstances, document what is preventing you from complying, and request an alternative installment plan that could include reduction, extension or outright abatement of your liability. Your prospects are good if you’re asking for a temporary stay, and less favorable if requesting cancellation of your entire obligation. If you’re planning to file for bankruptcy, let the IRS know. This will likely stop collection efforts immediately, thereby saving everyone time and effort.

Collateral Agreements

Sometimes it’s to your advantage or the IRS’s to propose a collateral agreement to the OIC settlement. These usually bind you with regard to your a) future income and/or b) utilization of tax losses and deductions. For instance, you may make such an offer as an inducement to settle or to convince the IRS of your sincerity. The IRS may want a collateral agreement in the following instances: 1. Your income is volatile from year to year. Here the IRS may want a set certain percentage of your gross income over the next five to ten years (e.g., 10% of the amount over $35,000; 15% of the next $10,000; and so on). 2. You have substantial tax loss carryovers, due to operating and capital losses, or unused tax credits. In such cases the IRS may require you to waive your right to these deductions. Also, if you don’t believe you’ll need them, you can pre-empt the IRS and sweeten your OIC application by offering to give up the carryovers. This is done by submitting IRS Form 2261-C, Collateral Agreement—Waiver of Net Operating Losses and Capital Losses along with your documents. 3. You qualify to deduct “bad debts” or other “losses.” The IRS will normally ask you to waive these for the year you are filing for an OIC. 4. On rare occasions, the IRS will ask for a lower cost basis on certain appreciated assets. Don’t be surprised at what else the IRS might request. In general, you’ll probably want to avoid collateral agreements that put a claim on your future income. This reduces your incentive to earn more money and requires you to file IRS Form 3439, Statement of Annual Income, until the agreement expires.

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Chapter 9: If Your OIC Is Accepted or Rejected

Your OIC Is Rejected

You have a variety of responses available should the IRS deny your application. Keep in mind that nearly all of these actions must be taken within 30 days after your application is turned down. Note that you’re at a critical juncture where experience in dealing with the IRS can make an important difference, so it’s advisable to seek help from a tax professional. Request the IRS Rejection Report:

Immediately request the IRS’s analysis as to why your application was denied. You have a right to this so (politely) ask your Revenue Officer, their supervisor or the Special Procedures Officer for it. Mention that you sincerely want to settle, and only wish to see what is required to achieve that end. If they refuse, you can get it under the Freedom of Information Act but that takes months. Study the rejection report carefully. It will no doubt tell you what you need for approval. Counter their offer:

Even if they don’t make an offer, it doesn’t hurt to ask what would be acceptable and see what they say. Often, however, the IRS tells you what monetary settlement they’d sign off on. With this information, you could write them assenting to their number, amend your offer with a counter proposal, or appeal their decision. In the latter circumstances, a letter explaining why you can’t comply with what they’re proposing and what issues they’re ignoring or not taking into account. Amend your offer

Assuming you have minor changes (e.g., increasing your offer) and your finances haven’t changed appreciably, simply write a letter indicating the amendments. For more significant revisions, complete and submit a new Form 656. Address the issues you discover in the rejection report. In addition, approved OICs are a matter of public record for one year, so you may want to review the terms and situations that won favor at your local IRS office. Let them know ahead of time that you plan to visit. Appeal to TAS

The Taxpayer Advocate Service may not have jurisdiction and, if so, will not be able to help you. However, if you have genuine complaints, such as facts that were not taken into consideration or misused by the Revenue Officer, by all means contact the TAS. For instance, they can raise questions with your Revenue Officer and/or verify that an Independent Administrative Review was conducted at the close of the investigation. If the latter step was overlooked or done only cursorily, request a formal review. The worst result is that the TAS


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will say they can’t come to your aid; the best is a new look at your offer. Again, there is only a 30-day window in which to initiate this process after your application have been turned down. Appeal the rejection

If you owe under $2,500, ask for an appeals conference by calling the number at the top of your rejection letter. For amounts between $2,500 and $10,000, write a brief letter stating what you disagree with and request an appeals conference. If you owe more than $10,000, include a clause in your letter stating, under penalty of perjury, what you’re disputing (Appendix C contains sample response letters). At an appeals conference you may be represented by an attorney, CPA or Enrolled Agent. This is your last chance with the IRS for this OIC application, and most appeals are decided in favor of the IRS, so be prepared to factually present your case, or have a qualified advisor do it for you. In preparation, review the rejection report before the conference, so you can address these points of contention. State the reasons why your OIC should be granted, especially if the Revenue Officer has been unreasonable. Also, you may want to visit the Small Case Tax Court in your area to observe successful and unsuccessful strategies plaintiffs use to argue their tax disputes. Resubmit your OIC

The best circumstances for opening a new OIC is if your financial situation has gotten worse, if you were turned down because of a missed deadline, you’re willing to increase your settlement offer, or you have substantial new evidence or facts to present. If these reasons aren’t applicable, you may wish to wait at least six months or apply in another IRS district where OIC personnel are unfamiliar with your case (either relocate or hire a professional in that jurisdiction to represent you). Again, learn from your rejection report and approved cases on file, so you avoid repeating the same mistakes. Starting over requires you to fill out a new Form 656, pay a new application fee and deposit, provide updated financial statements, be current on all your tax returns and payments, and so forth.

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Other Options

At this point you’re barred from taking the IRS to court since, as part of the OIC filing, you’ve admitted you owe the tax. If you have modest income or assets, you can try for “currently not collectible” or “53” status. Alternatively, with significant income and assets to protect, you may consider filing for bankruptcy. Also see Appendix G which discusses the other possible tax solutions offered by The Tax Co-Op, Inc. via our forthcoming website at www.taxlifeboat.com. Purchasers of this Application will receive a 30% discount on the website services as they become available.


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a p p e n d i x

A

Examples 1 through 5

Example 1: Jeff I. O. Alot


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Jeff I. O. Alot's OIC (Before) A

H I J K L M N 1 Determining What Monthly Multiplier to Use 2 1/15/2007 Name (of taxpayer, "TP"): Jeff I. O. Alot 3 Date of Analysis: Introduction The IRS estimates how much they can collect from you for your back taxes. This calculation is called the Reasonable 4 Collection Potential or RCP. The objective of this Application is to help you understand how your RCP is determined so that, where 5 possible, you can reduce it and successfully negotiate an Offer in Compromise ("OIC"). 6 7 One of the factors that determine your RCP is the number of months the IRS says you have to pay or your “Monthly Multiplier.” What 8 Monthly Multiplier they use depends on how fast you elect to pay the settlement and the time left in your “statutory collection period.” 9 10 The statutory collection period refers to the ten-year statue of limitations the IRS has to collect back taxes. This clock starts when 11 you file your tax return but don’t pay the full amount and, if and when, additional taxes are assessed. For any one tax year the IRS 12 normally uses the statutory clock that applies to the greatest amount due (i.e., what was due upon filing or what was later assessed). 13 Call (800) 829-1040 if you need help calculating the time remaining on your collection statute(s). 14 15 Monthly Multiplier based on settlement offer You have three different OIC settlement options to choose from: Lump Sum Cash 16 Offer, Short Term Periodic Payment Offer and Deferred Periodic Payment Offer. Each of these options has a different Monthly Multiplier. 17 If you are uncertain which type of offer to make, try all three to see what difference this makes to your RCP and then decide. 18 Cash Offer is where you pay the full settlement amount in five months or less of IRS acceptance. In this case, your Monthly 19 Multiplier is 48 or the number of months left for collection, whichever is less. Enter a "C" in cell L26 to elect this option. 20 Short Term Payment Offer is where you pay the settlement within two years of being approved. Here your Monthly Multiplier is 21 the lesser of 60 or whatever is left on the collection stature.* Enter a "S" in cell L26 to choose this option. 22 Deferred Payment Offer has you pay the settlement amount over the remaining months of the collection statute whatever that 23 number may be. In this case, your Multiplier is whatever months are left to collect. To elect this option enter "D" in L26. 24 25 What type of OIC settlement offer are you making? Enter "C", "S" or "D." C 26 27 What if your OIC covers more than one tax year? Which year's "assessment date" and Monthly Multiplier do you use? Your 28 best negotiating position is to take the earliest and most favorable assessment date and be prepared to argue the point with the IRS. 29 If they don't give, your counter argument is to use an "average." Complete the following table, the Application will compute your 30 Monthly Multipliers and let you select which one to use. 31 32 Year(s) Taxes Amount Percent of Number of Months Since Monthly 33 Are Owed Owed Total Owed Filing or Assessment Date Multiplier 34 40 40 35.0 1999 $35,000 88% 80 35 2004 $5,000 13% 30 48 48 6.0 36 $0 0% 0 130 0.0 37 $0 0% 0 130 0.0 38 $0 0% 0 130 0.0 39 $0 0% 0 130 0.0 40 $0 0% 0 130 0.0 41 $0 0% 0 130 0.0 42 $0 0% 0 130 0.0 43 $0 0% 0 130 0.0 44 Total Owed $40,000 100% 45 46 Choosing your Monthly Multiplier Three possible Monthly Multipliers are show in the cells L57, L58 and L62 based on the data 47 entered above. The first Multiplier, in cell L57, is most favorable to the IRS since this Multiplier has the most time remaining to collect. 48 The best Multiplier for you (cell L58) is based on the least time left to collect. Finally, the Multiplier in cell L62 averages the Multipliers 49 for all the tax years and picks the best average for you. To see the worst case scenario, enter "1" in cell L64. This tells the Application 50 to use the IRS's Monthly Multiplier to calculate your RCP. For the best case enter a "2" in L64 which instructs the Application to use 51 the lowest Monthly Multiplier of any of your taxes years. To average all the year's Multipliers and strike a compromise, enter "3" in L64. 52 Chose which Multiplier (1, 2 or 3) you want to use for the scenario you're evaluating now and enter that in L64. 53 54 Monthly Chose 55 Multipliers One 56 48 1 IRS's Monthly Multiplier 57 Your very best Monthly Multiplier 40 2 58 Your best average Monthly Multiplier 59 Based on averaging the assessment dates 44 60 Based on weighted average of amounts owed 41 61 Your best average Monthly Multiplier: 41 3 62 63 Which Monthly Multiplier do you want to use? Enter "1", "2" or "3." 1 64 65 Your estimated Monthly Multiplier Based on the information provided, your Monthly 66 Multiplier is show in the box to the right. Note that this is a best guess and there is no 48 67 guarantee that this is the Multiplier the IRS will actually use in your specific case. 68 69 * Sometimes the IRS will demand you pay the greater of 60 months or the remaining statute when you select this option and they may 70 increase your payments if your finances improve. For these reasons, it's less risky to make a Cash Offer--if you can. 71

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B

C

D

E

F

G

Appendix A: Examples 1 through 5

Jeff I. O. Alot's OIC (Before) A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65

B

Date of Analysis (dd/mm/yy) Name (of taxpayer, "TP") Taxes Owed

C

D

E

Data Input and Results

F

G

H

I

Taxpayer Information

1/15/2007

TP State and County Santa Clara, CA Annual discount rate (if used): Jeff I. O. Alot Number of People in TP Household 2 Monthly Multiplier $40,000 Amount Offered (including deposit)

0.0% 48 $500

Asset / Liability Information Assets

Fair Market Value

Cash

Loan Amount

Creditor

Term*

Exemption

Monthly Payment Lease Loan

$0.00

None

$0.00

0

$0.00

$0.00

$600.00

None

$0.00

0

$0.00

$0.00

Savings Account(s)

$0.00

None

$0.00

0

$0.00

$0.00

Business Bank Account(s)

$0.00

None

$0.00

0

$0.00

$0.00

Unused Sources of Credit

$0.00

None

$0.00

0

$0.00

$0.00

Loan Value on Life Insurance

$0.00

None

$0.00

0

$0.00

$0.00

Pensions

$0.00

None

$0.00

0

$0.00

$0.00

Checking Account(s)

Real Estate Real Estate with Allowable Loans**

$0.00

None

$0.00

0

$0.00

$0.00

Real Estate with Non-Allowable Loans

$0.00

None

$0.00

0

$0.00

$0.00

Furniture / Personal Effects*** Value of all Furniture / Persoanl Effects

$0.00

$0.00

Allowable & Secured Personal Loans

None

$0.00

0

$0.00

$0.00

Non-Allowable Personal Loans

None

$0.00

0

$0.00

$0.00

Accounts Receivable

$0.00

None

$0.00

0

$0.00

$0.00

Tools and/or Equipment***

$0.00

None

$0.00

0

$0.00

$0.00

Car #1

$0.00

None

$0.00

0

$0.00

$0.00

$0.00

Car #2

$0.00

None

$0.00

0

$0.00

$0.00

$0.00

Asset #1

$0.00

None

$0.00

0

$0.00

$0.00

Asset #2

$0.00

None

$0.00

0

$0.00

$0.00

Asset #3

$0.00

None

$0.00

0

$0.00

$0.00

Asset #4

$0.00

None

$0.00

0

$0.00

$0.00

Asset #5

$0.00

None

$0.00

0

$0.00

$0.00

Vehicles

Other Assets

Source

Total Monthly Income

24. Wages / Salaries (TP1) 25. Wages / Salaries (TP2)

Income / Expense Information Gross

Necessary Monthly Living Expenses

Expense

Amount Claimed

$1,000.00 37. Food, Clothing & Misc. $0.00 38. Housing and Utilities

Amount Allowed

$0.00

$0.00

$0.00

$0.00 $0.00

26. Interest / Dividends

$0.00 39. Transportation

27. Net Business Income (Sole Prop.'s)

$0.00

39a. Ownership Costs, Car 1

$0.00

28. Net Business Income (Corp or PTR)

$0.00

39b. Ownership Costs, Car 2

$0.00

29. Net Rental Income (Positive or Zero)

$0.00

39c. Operating Costs

$0.00

$0.00

30. Pension / Social Security (TP1)

$0.00 40a. Health Insurance****

$0.00

$0.00


$0.00 40b. Other Health Care****

$0.00

$0.00

32. Child Support

$0.00 41. Taxes***

$0.00

$0.00

33. Alimony

$0.00 42. Court Ordered Payments****

$0.00

$0.00

$0.00

$0.00

34. Other Income

43. Child / Dependant Care****

34a. Other Income #1

$0.00 44. Life Insurance***

$0.00

$0.00

34b. Other Income #2

$0.00 45. Allowable Loan Payments****

$0.00

$0.00

$0.00

$0.00

34c. Other Income #3 35a. Total Gross Monthly Income

$0.00 46. Other Expenses: (Specify) $1,000.00

Non-Allowed Loan Payments***** Entertainment, Vacations & Misc.*****

35b. Expected wages used from year prior

$0.00

Other Expenses Not Accounted for Above*****

$1,000.00

$0.00

$0.00

$0.00 Net Differences

36. Total Income (greater of 35a or 35b)

$1,000.00 47. Total Claimed Living Expenses

$1,000.00

* "Loan Term" is the months remaining until the loan is paid off. If no loan has no maturity date, enter 120. ** This is usually just your home. *** IRC6334 (a)(2) and (3) exempt $7,040.00 for fuel, provisions, furniture, and personal effects and $3,520.00 for tools of the trade; updated 1/21/04. **** Payments in cells I16, I17, I23, I25 and I26 are usually allowable. ***** Payments in cells I11 to I15, I20, I24 and I31 to I35 are usually not allowable.

Income-

Claimed LE-

Claimed LE

Allowed LE

$0.00

$1,000.00

LE = Living Expenses

Reasonable Collection Potential and Recommendation OIC Deposit (excludes $150 application fee)

$100.00

Due with Acceptance of Offer No OIC Settlement

N/A $100.00

Recommendation: Pay amount of taxes due =


Tax Payments Available from Net Equity in Assets (see "Asset Equity Table" sheet) Tax Payments Available from Retired Debt (see "Retired Debt Calculations" sheet) Tax Payments Available from Income (see "Income Expense Table" sheet)

$40,000

Reasonable Collection Potential (includes deposit) =

$600.00 $0.00 $48,000.00 $48,600.00

Page 141

Jeff I. O. Alot's OIC (After) A B C D E F G H I J K L M N 1 Determining What Monthly Multiplier to Use 2 1/15/2007 Name (of taxpayer, "TP"): Jeff I. O. Alot 3 Date of Analysis: Introduction The IRS estimates how much they can collect from you for your back taxes. This calculation is called the Reasonable 4 Collection Potential or RCP. The objective of this Application is to help you understand how your RCP is determined so that, where 5 possible, you can reduce it and successfully negotiate an Offer in Compromise ("OIC"). 6 7 One of the factors that determine your RCP is the number of months the IRS says you have to pay or your “Monthly Multiplier.” What 8 Monthly Multiplier they use depends on how fast you elect to pay the settlement and the time left in your “statutory collection period.” 9 10 The statutory collection period refers to the ten-year statue of limitations the IRS has to collect back taxes. This clock starts when 11 you file your tax return but don’t pay the full amount and, if and when, additional taxes are assessed. For any one tax year the IRS 12 normally uses the statutory clock that applies to the greatest amount due (i.e., what was due upon filing or what was later assessed). 13 Call (800) 829-1040 if you need help calculating the time remaining on your collection statute(s). 14 15 Monthly Multiplier based on settlement offer You have three different OIC settlement options to choose from: Lump Sum Cash 16 Offer, Short Term Periodic Payment Offer and Deferred Periodic Payment Offer. Each of these options has a different Monthly Multiplier. 17 If you are uncertain which type of offer to make, try all three to see what difference this makes to your RCP and then decide. 18 Cash Offer is where you pay the full settlement amount in five months or less of IRS acceptance. In this case, your Monthly 19 Multiplier is 48 or the number of months left for collection, whichever is less. Enter a "C" in cell L26 to elect this option. 20 Short Term Payment Offer is where you pay the settlement within two years of being approved. Here your Monthly Multiplier is 21 the lesser of 60 or whatever is left on the collection stature.* Enter a "S" in cell L26 to choose this option. 22 Deferred Payment Offer has you pay the settlement amount over the remaining months of the collection statute whatever that 23 number may be. In this case, your Multiplier is whatever months are left to collect. To elect this option enter "D" in L26. 24 25 What type of OIC settlement offer are you making? Enter "C", "S" or "D." C 26 27 What if your OIC covers more than one tax year? Which year's "assessment date" and Monthly Multiplier do you use? Your 28 best negotiating position is to take the earliest and most favorable assessment date and be prepared to argue the point with the IRS. 29 If they don't give, your counter argument is to use an "average." Complete the following table, the Application will compute your 30 Monthly Multipliers and let you select which one to use. 31 32 Year(s) Taxes Amount Percent of Number of Months Since Monthly 33 Are Owed Owed Total Owed Filing or Assessment Date Multiplier 34 40 40 35.0 1999 $35,000 88% 80 35 2004 $5,000 13% 30 48 48 6.0 36 $0 0% 0 130 0.0 37 $0 0% 0 130 0.0 38 $0 0% 0 130 0.0 39 $0 0% 0 130 0.0 40 $0 0% 0 130 0.0 41 $0 0% 0 130 0.0 42 $0 0% 0 130 0.0 43 $0 0% 0 130 0.0 44 Total Owed $40,000 100% 45 46 Choosing your Monthly Multiplier Three possible Monthly Multipliers are show in the cells L57, L58 and L62 based on the data 47 entered above. The first Multiplier, in cell L57, is most favorable to the IRS since this Multiplier has the most time remaining to collect. 48 The best Multiplier for you (cell L58) is based on the least time left to collect. Finally, the Multiplier in cell L62 averages the Multipliers 49 for all the tax years and picks the best average for you. To see the worst case scenario, enter "1" in cell L64. This tells the Application 50 to use the IRS's Monthly Multiplier to calculate your RCP. For the best case enter a "2" in L64 which instructs the Application to use 51 the lowest Monthly Multiplier of any of your taxes years. To average all the year's Multipliers and strike a compromise, enter "3" in L64. 52 Chose which Multiplier (1, 2 or 3) you want to use for the scenario you're evaluating now and enter that in L64. 53 54 Monthly Chose 55 Multipliers One 56 48 1 IRS's Monthly Multiplier 57 Your very best Monthly Multiplier 40 2 58 Your best average Monthly Multiplier 59 Based on averaging the assessment dates 44 60 Based on weighted average of amounts owed 41 61 Your best average Monthly Multiplier: 41 3 62 63 Which Monthly Multiplier do you want to use? Enter "1", "2" or "3." 3 64 65 Your estimated Monthly Multiplier Based on the information provided, your Monthly 66 Multiplier is show in the box to the right. Note that this is a best guess and there is no 41 67 guarantee that this is the Multiplier the IRS will actually use in your specific case. 68 69 * Sometimes the IRS will demand you pay the greater of 60 months or the remaining statute when you select this option and they may 70 increase your payments if your finances improve. For these reasons, it's less risky to make a Cash Offer--if you can. 71

Page 142


Jeff I. O. Alot's OIC (After) A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65

B


C

D

E


1/15/2007

F

G

H

I


TP State and County Santa Clara, CA Annual discount rate (if used): Jeff I. O. Alot Number of People in TP Household 2 Monthly Multiplier $40,000 Amount Offered (including deposit)

0.0% 41 $500


Fair Market Value

Cash

Loan Amount

Creditor

Term*

Exemption


$0.00

None

$0.00

0

$0.00

$0.00

$600.00

None

$0.00

0

$0.00

$0.00

Savings Account(s)

$0.00

None

$0.00

0

$0.00

$0.00


$0.00

None

$0.00

0

$0.00

$0.00


$0.00

None

$0.00

0

$0.00

$0.00


$0.00

None

$0.00

0

$0.00

$0.00

Pensions

$0.00

None

$0.00

0

$0.00

$0.00

Checking Account(s)


$0.00

None

$0.00

0

$0.00

$0.00


$0.00

None

$0.00

0

$0.00

$0.00


None

$0.00

0

$0.00

$0.00


None

$0.00

0

$0.00

$0.00


$0.00

$0.00

Accounts Receivable

$0.00

None

$0.00

0

$0.00

$0.00


$0.00

None

$0.00

0

$0.00

$0.00

Car #1

$0.00

None

$0.00

0

$0.00

$0.00

$0.00

Car #2

$0.00

None

$0.00

0

$0.00

$0.00

$0.00

Asset #1

$0.00

None

$0.00

0

$0.00

$0.00

Asset #2

$0.00

None

$0.00

0

$0.00

$0.00

Asset #3

$0.00

None

$0.00

0

$0.00

$0.00

Asset #4

$0.00

None

$0.00

0

$0.00

$0.00

Asset #5

$0.00

None

$0.00

0

$0.00

$0.00

Vehicles

Other Assets

Source


24. Wages / Salaries (TP1) 25. Wages / Salaries (TP2)



Expense

Amount Claimed


Amount Allowed

$0.00

$0.00

$1,000.00

$1,024.00 $0.00




$0.00


$0.00


$0.00


$0.00


$0.00


$0.00

$0.00



$0.00

$0.00



$0.00

$0.00

32. Child Support

$0.00 41. Taxes***

$0.00

$0.00

33. Alimony


$0.00

$0.00

$0.00

$0.00

34. Other Income




$0.00

$0.00



$0.00

$0.00

Non-Allowed Loan Payments*****

$0.00

$0.00

Entertainment, Vacations & Misc.*****

$0.00

$0.00


$0.00

$0.00

34c. Other Income #3 35a. Total Gross Monthly Income 35b. Expected wages used from year prior

$0.00 46. Other Expenses: (Specify) $1,000.00 $0.00

Net Differences 36. Total Income (greater of 35a or 35b)


$1,000.00


Income-

Claimed LE-

Claimed LE

Allowed LE

$0.00

$0.00



$100.00

Due with Acceptance of Offer

$500.00

Tax Payments Available from Net Equity in Assets (see "Asset Equity Table" sheet) Tax Payments Available from Retired Debt (see "Retired Debt Calculations" sheet)

$600.00

Tax Payments Available from Income (see "Income Expense Table" sheet)

Total OIC Settlement

Recommendation: Pay Reas. Collect. Potential =


$600


$600.00 $0.00 $0.00 $600.00

Page 143

Jeff I. O. Alot's OIC (After) A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80

Page 144

B

C

Name (of taxpayer, "TP")

D

E

F

Implementing Your Offer in Compromise Jeff I. O. Alot

Source Cash Checking Account(s) Savings Account(s) Business Bank Account(s) Unused Sources of Credit Loan Value on Life Insurance Pensions Real Estate Real Estate with Allowable Loans Real Estate with Non-Allowable Loans Furniture / Personal Effects

H

I

1/15/2007

Date of Analysis (dd/mm/yy)

Assets and Liabilities

Fair Market Value Beginning Ending

G

Loans Outstanding Beginning Ending

Change in Cash

$0 $600 $0 $0 $0 $0 $0

$0 $600 $0 $0 $0 $0 $0

$0 $0 $0 $0 $0 $0 $0

$0 $0 $0 $0 $0 $0 $0

$0 $0 $0 $0 $0 $0 $0

$0 $0

$0 $0

$0 $0

$0 $0

$0 $0

$0

$0 $0 $0 $0 $0

$0 $0 $0 $0 $0

Value of all Furniture / Persoanl Effects

$0 $0

$0 $0

$0 $0 $0 $0

$0 $0

$0 $0

$0 $0

$0 $0

$0 $0

$0 $0 $0 $0 $0

$0 $0 $0 $0 $0

$0 $0 $0 $0 $0

$0 $0 $0 $0 $0

$0 $0 $0 $0 $0

Allowable & Secured Personal Loans Non-Allowable Personal Loans

Accounts Receivable Tools and/or Equipment Vehicles Car #1 Car #2 Other Assets Asset #1 Asset #2 Asset #3 Asset #4 Asset #5

Total Change in Cash

$0

Monthly Expenses and Stockpiles Expenses OIC Installment Pay.s (if any) Food, Clothing & Misc. Housing and Utilities Transportation Ownership Costs, Car #1 Ownership Costs, Car #2 Operating Costs Health Insurance Other Health Care Taxes Court Ordered Payments Child / Dependant Care Life Insurance Other Secured Loan Payments Other Expenses: (Specify) Non-Allowed Loan Payments Entertainment, Vacations & Misc. Other Expenses Total

Total Desired

Expenses Paid

Expenses Paid

Expenses Paid

Actual Expenses

Desired

Expenses

from Income

from Food Budget*

from Stockpiles

less Desired Exp.'s

Stockpiles

$0

$0

$0 $1,000

$0 $1,000

$0 $0 $0

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0

$0 $1,000 $0 $2,000

$0 $0 $0 $1,000

$0 $0 $0 $0

$0 $0 $0 $0

Actual Stockpiles

$0 $0 $0

$0 $0 $0

$0 $0 $0

$0 $0 $0

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0

$0 $6,600 $0 $6,600

$0 $0 $0 $0

$0 ($1,000) $0 ($1,000)

* Non-food living expenses can only be paid from the Food, Clothing budget if the amount paid for food from income (cell D35) is less than the IRS exemption (cell I38 on the Data Input and Results spreadsheet). If cell E35 is positive, allocate this amount to non-food expenses (cells E36 through E51).

Sources and Uses of Cash

Sources of Cash Total Change in Cash (from above) Sale of Assets or Borrowing to Pay OIC Settlement

Sub-Totals

Total OIC Payments and Fees (excluding installment payments) Stockpiling and Prepayments (including reserves) Other Uses Purchase of Furniture and Personal Effects Purchase of Tools and/or Equipment Prepayment of Other Bills Expenditures on Home Improvements Purchase of Collectables, Antiques Payments to "Close" Creditors Gifts to Family Members Assets Sheltered by Incorporating Business Assets Sheltered by Protection Methods Total Other Uses Total Uses of Cash

Assumptions

Months for Documentation Period Stockpiling Reserves (percent of amount stockpiled)

6 10.0%

$750

Total Sources of Cash ("Total Change in Cash" above) Uses of Cash OIC Payments and Fees (due with application and acceptance) Application Fee ($150 normally; $0 if qualify as low income) Deposit Settlement Amount Due on Acceptance

Total

$0 $750

$150 $100

$500 $750 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

$750



Page 145

Page 146



Page 147

Page 148



Page 149

Page 150


Example 2: John Taxwise


Page 151

John Taxwise's OIC (Before) A B C D E F G H I J K L M N 1 Determining What Monthly Multiplier to Use 2 2/27/2007 Name (of taxpayer, "TP"): John Taxwise 3 Date of Analysis: Introduction The IRS estimates how much they can collect from you for your back taxes. This calculation is called the Reasonable 4 Collection Potential or RCP. The objective of this Application is to help you understand how your RCP is determined so that, where 5 possible, you can reduce it and successfully negotiate an Offer in Compromise ("OIC"). 6 7 One of the factors that determine your RCP is the number of months the IRS says you have to pay or your “Monthly Multiplier.” What 8 Monthly Multiplier they use depends on how fast you elect to pay the settlement and the time left in your “statutory collection period.” 9 10 The statutory collection period refers to the ten-year statue of limitations the IRS has to collect back taxes. This clock starts when 11 you file your tax return but don’t pay the full amount and, if and when, additional taxes are assessed. For any one tax year the IRS 12 normally uses the statutory clock that applies to the greatest amount due (i.e., what was due upon filing or what was later assessed). 13 Call (800) 829-1040 if you need help calculating the time remaining on your collection statute(s). 14 15 Monthly Multiplier based on settlement offer You have three different OIC settlement options to choose from: Lump Sum Cash 16 Offer, Short Term Periodic Payment Offer and Deferred Periodic Payment Offer. Each of these options has a different Monthly Multiplier. 17 If you are uncertain which type of offer to make, try all three to see what difference this makes to your RCP and then decide. 18 Cash Offer is where you pay the full settlement amount in five months or less of IRS acceptance. In this case, your Monthly 19 Multiplier is 48 or the number of months left for collection, whichever is less. Enter a "C" in cell L26 to elect this option. 20 Short Term Payment Offer is where you pay the settlement within two years of being approved. Here your Monthly Multiplier is 21 the lesser of 60 or whatever is left on the collection stature.* Enter a "S" in cell L26 to choose this option. 22 Deferred Payment Offer has you pay the settlement amount over the remaining months of the collection statute whatever that 23 number may be. In this case, your Multiplier is whatever months are left to collect. To elect this option enter "D" in L26. 24 25 What type of OIC settlement offer are you making? Enter "C", "S" or "D." C 26 27 What if your OIC covers more than one tax year? Which year's "assessment date" and Monthly Multiplier do you use? Your 28 best negotiating position is to take the earliest and most favorable assessment date and be prepared to argue the point with the IRS. 29 If they don't give, your counter argument is to use an "average." Complete the following table, the Application will compute your 30 Monthly Multipliers and let you select which one to use. 31 32 Year(s) Taxes Amount Percent of Number of Months Since Monthly 33 Are Owed Owed Total Owed Filing or Assessment Date Multiplier 34 40 40 11.4 2000 $10,000 29% 80 35 2003 $25,000 71% 40 48 48 34.3 36 $0 0% 0 130 0.0 37 $0 0% 0 130 0.0 38 $0 0% 0 130 0.0 39 $0 0% 0 130 0.0 40 $0 0% 0 130 0.0 41 $0 0% 0 130 0.0 42 $0 0% 0 130 0.0 43 $0 0% 0 130 0.0 44 Total Owed $35,000 100% 45 46 Choosing your Monthly Multiplier Three possible Monthly Multipliers are show in the cells L57, L58 and L62 based on the data 47 entered above. The first Multiplier, in cell L57, is most favorable to the IRS since this Multiplier has the most time remaining to collect. 48 The best Multiplier for you (cell L58) is based on the least time left to collect. Finally, the Multiplier in cell L62 averages the Multipliers 49 for all the tax years and picks the best average for you. To see the worst case scenario, enter "1" in cell L64. This tells the Application 50 to use the IRS's Monthly Multiplier to calculate your RCP. For the best case enter a "2" in L64 which instructs the Application to use 51 the lowest Monthly Multiplier of any of your taxes years. To average all the year's Multipliers and strike a compromise, enter "3" in L64. 52 Chose which Multiplier (1, 2 or 3) you want to use for the scenario you're evaluating now and enter that in L64. 53 54 Monthly Chose 55 Multipliers One 56 48 1 IRS's Monthly Multiplier 57 Your very best Monthly Multiplier 40 2 58 Your best average Monthly Multiplier 59 Based on averaging the assessment dates 44 60 Based on weighted average of amounts owed 46 61 Your best average Monthly Multiplier: 44 3 62 63 Which Monthly Multiplier do you want to use? Enter "1", "2" or "3." 1 64 65 Your estimated Monthly Multiplier Based on the information provided, your Monthly 66 Multiplier is show in the box to the right. Note that this is a best guess and there is no 48 67 guarantee that this is the Multiplier the IRS will actually use in your specific case. 68 69 * Sometimes the IRS will demand you pay the greater of 60 months or the remaining statute when you select this option and they may 70 increase your payments if your finances improve. For these reasons, it's less risky to make a Cash Offer--if you can. 71

Page 152


John Taxwise's OIC (Before) A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65

B


C

D

E


F

G

H

I


2/27/2007

TP State and County Harris, TX Annual discount rate (if used): John Taxwise Number of People in TP Household 1 Monthly Multiplier $35,000 Amount Offered (including deposit)

0.0% 48 $500


Fair Market Value

Cash

Loan Amount

Creditor

Term*

Exemption


$0.00

None

$0.00

0

$0.00

$0.00

Checking Account(s)

$4,000.00

None

$0.00

0

$0.00

$0.00

Savings Account(s)

$1,000.00

None

$0.00

0

$0.00

$0.00


$0.00

None

$0.00

0

$0.00

$0.00


$0.00

None

$0.00

0

$0.00

$0.00


$0.00

None

$0.00

0

$0.00

$0.00

$100,000.00

None

$0.00

0

$0.00

$0.00

$50,000.00

123 Mortgage Company

Pensions Real Estate Real Estate with Allowable Loans**

$50,000.00

120

$0.00

$1,000.00

None

$0.00

0

$0.00

$0.00


None

$0.00

0

$0.00

$0.00


None

$0.00

0

$0.00

$0.00


$0.00


$10,000.00

Accounts Receivable Tools and/or Equipment***

$7,040.00

$0.00

None

$0.00

0

$0.00

$0.00

$2,000.00

None

$0.00

0

$3,520.00

$0.00

$6,000.00

Car Loan Company

Vehicles Car #1

2003 Ford F150

$6,000.00

20

$0.00

$0.00

$450.00

$0.00

None

$0.00

0

$0.00

$0.00

$0.00

Asset #1

$0.00

None

$0.00

0

$0.00

$0.00

Asset #2

$0.00

None

$0.00

0

$0.00

$0.00

Asset #3

$0.00

None

$0.00

0

$0.00

$0.00

Asset #4

$0.00

None

$0.00

0

$0.00

$0.00

Asset #5

$0.00

None

$0.00

0

$0.00

$0.00

Car #2 Other Assets

Source



24. Wages / Salaries (TP1)


Expense

Amount Claimed

$5,000.00 37. Food, Clothing & Misc.


$0.00 38. Housing and Utilities

Amount Allowed

$1,500.00

$916.00

$1,300.00

$1,122.00 $471.00


26. Interest / Dividends 27. Net Business Income (Sole Prop.'s)

$0.00


$450.00


$0.00


$0.00


$0.00


$500.00

$338.00



$0.00

$0.00



$0.00

$0.00

32. Child Support

$0.00 41. Taxes***

$750.00

$750.00

33. Alimony


34. Other Income


$0.00

$0.00

$0.00

$0.00



$0.00

$0.00



$0.00

$0.00

$0.00

$0.00

$0.00 46. Other Expenses: (Specify)


$5,500.00



$0.00

$1,000.00


$0.00

$0.00




$5,500.00


Income-

Claimed LE-

Claimed LE

Allowed LE

$0.00

$1,924.00



$100.00


N/A $100.00




$35,000


$105,960.00 $12,600.00 $92,352.00 $210,912.00

Page 153

John Taxwise's OIC (After) A B C D E F G H I J K L M N 1 Determining What Monthly Multiplier to Use 2 2/27/2007 Name (of taxpayer, "TP"): John Taxwise 3 Date of Analysis: Introduction The IRS estimates how much they can collect from you for your back taxes. This calculation is called the Reasonable 4 Collection Potential or RCP. The objective of this Application is to help you understand how your RCP is determined so that, where 5 possible, you can reduce it and successfully negotiate an Offer in Compromise ("OIC"). 6 7 One of the factors that determine your RCP is the number of months the IRS says you have to pay or your “Monthly Multiplier.” What 8 Monthly Multiplier they use depends on how fast you elect to pay the settlement and the time left in your “statutory collection period.” 9 10 The statutory collection period refers to the ten-year statue of limitations the IRS has to collect back taxes. This clock starts when 11 you file your tax return but don’t pay the full amount and, if and when, additional taxes are assessed. For any one tax year the IRS 12 normally uses the statutory clock that applies to the greatest amount due (i.e., what was due upon filing or what was later assessed). 13 Call (800) 829-1040 if you need help calculating the time remaining on your collection statute(s). 14 15 Monthly Multiplier based on settlement offer You have three different OIC settlement options to choose from: Lump Sum Cash 16 Offer, Short Term Periodic Payment Offer and Deferred Periodic Payment Offer. Each of these options has a different Monthly Multiplier. 17 If you are uncertain which type of offer to make, try all three to see what difference this makes to your RCP and then decide. 18 Cash Offer is where you pay the full settlement amount in five months or less of IRS acceptance. In this case, your Monthly 19 Multiplier is 48 or the number of months left for collection, whichever is less. Enter a "C" in cell L26 to elect this option. 20 Short Term Payment Offer is where you pay the settlement within two years of being approved. Here your Monthly Multiplier is 21 the lesser of 60 or whatever is left on the collection stature.* Enter a "S" in cell L26 to choose this option. 22 Deferred Payment Offer has you pay the settlement amount over the remaining months of the collection statute whatever that 23 number may be. In this case, your Multiplier is whatever months are left to collect. To elect this option enter "D" in L26. 24 25 What type of OIC settlement offer are you making? Enter "C", "S" or "D." C 26 27 What if your OIC covers more than one tax year? Which year's "assessment date" and Monthly Multiplier do you use? Your 28 best negotiating position is to take the earliest and most favorable assessment date and be prepared to argue the point with the IRS. 29 If they don't give, your counter argument is to use an "average." Complete the following table, the Application will compute your 30 Monthly Multipliers and let you select which one to use. 31 32 Year(s) Taxes Amount Percent of Number of Months Since Monthly 33 Are Owed Owed Total Owed Filing or Assessment Date Multiplier 34 40 40 11.4 2000 $10,000 29% 80 35 2003 $25,000 71% 40 48 48 34.3 36 $0 0% 0 130 0.0 37 $0 0% 0 130 0.0 38 $0 0% 0 130 0.0 39 $0 0% 0 130 0.0 40 $0 0% 0 130 0.0 41 $0 0% 0 130 0.0 42 $0 0% 0 130 0.0 43 $0 0% 0 130 0.0 44 Total Owed $35,000 100% 45 46 Choosing your Monthly Multiplier Three possible Monthly Multipliers are show in the cells L57, L58 and L62 based on the data 47 entered above. The first Multiplier, in cell L57, is most favorable to the IRS since this Multiplier has the most time remaining to collect. 48 The best Multiplier for you (cell L58) is based on the least time left to collect. Finally, the Multiplier in cell L62 averages the Multipliers 49 for all the tax years and picks the best average for you. To see the worst case scenario, enter "1" in cell L64. This tells the Application 50 to use the IRS's Monthly Multiplier to calculate your RCP. For the best case enter a "2" in L64 which instructs the Application to use 51 the lowest Monthly Multiplier of any of your taxes years. To average all the year's Multipliers and strike a compromise, enter "3" in L64. 52 Chose which Multiplier (1, 2 or 3) you want to use for the scenario you're evaluating now and enter that in L64. 53 54 Monthly Chose 55 Multipliers One 56 48 1 IRS's Monthly Multiplier 57 Your very best Monthly Multiplier 40 2 58 Your best average Monthly Multiplier 59 Based on averaging the assessment dates 44 60 Based on weighted average of amounts owed 46 61 Your best average Monthly Multiplier: 44 3 62 63 Which Monthly Multiplier do you want to use? Enter "1", "2" or "3." 3 64 65 Your estimated Monthly Multiplier Based on the information provided, your Monthly 66 Multiplier is show in the box to the right. Note that this is a best guess and there is no 44 67 guarantee that this is the Multiplier the IRS will actually use in your specific case. 68 69

Page 154


John Taxwise's OIC (After) A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65

B


C

D

E


2/27/2007

F

G

H

I


TP State and County Harris, TX Annual discount rate (if used): John Taxwise Number of People in TP Household 1 Monthly Multiplier $35,000 Amount Offered (including deposit)

0.0% 44 $500


Fair Market Value

Cash

Loan Amount

Creditor

Term*

Exemption


$0.00

None

$0.00

0

$0.00

$0.00

Checking Account(s)

$100.00

None

$0.00

0

$0.00

$0.00

Savings Account(s)

$0.00

$200.00

None

$0.00

0

$0.00


$0.00

None

$0.00

0

$0.00


$0.00

None

$0.00

0

$0.00

$0.00


$0.00

None

$0.00

0

$0.00

$0.00

Pensions

$0.00

$100,000.00

401 (k) Lender

$50,000.00

72

$50,000.00

$450.00

$50,000.00

123 Mortgage Company


$50,000.00

180

$0.00

$800.00

None

$0.00

0

$0.00

$0.00


None

$0.00

0

$0.00

$0.00


None

$0.00

0

$0.00

$0.00


$0.00


$4,500.00

Accounts Receivable

$7,040.00

$0.00

None

$0.00

0

$0.00

$0.00

$2,000.00

None

$0.00

0

$3,520.00

$0.00

$0.00

Car Lease Company

$0.00

0

$0.00

$470.00

$0.00

$0.00

None

$0.00

0

$0.00

$0.00

$0.00

Asset #1

$0.00

None

$0.00

0

$0.00

$0.00

Asset #2

$0.00

None

$0.00

0

$0.00

$0.00

Asset #3

$0.00

None

$0.00

0

$0.00

$0.00

Asset #4

$0.00

None

$0.00

0

$0.00

$0.00

Asset #5

$0.00

None

$0.00

0

$0.00

$0.00

Tools and/or Equipment*** Vehicles Car #1

2007 Ford Mustang

Car #2 Other Assets

Source


24. Wages / Salaries (TP1) 25. Wages / Salaries (TP2) 26. Interest / Dividends



Expense

Amount Claimed


Amount Allowed

$916.00

$916.00

$1,100.00

$1,122.00 $471.00



$0.00


$470.00


$0.00


$0.00


$0.00


$338.00

$338.00



$300.00

$300.00



32. Child Support

$0.00 41. Taxes***

33. Alimony


34. Other Income


$0.00

$0.00

$1,376.00

$1,376.00

$0.00

$0.00

$0.00

$0.00



$100.00

$100.00



$450.00

$450.00


$0.00

$0.00


$0.00

$0.00


$0.00

$0.00

34c. Other Income #3 35a. Total Gross Monthly Income 35b. Expected wages used from year prior

$0.00 46. Other Expenses: (Specify) $5,050.00 $0.00



$5,050.00


Income-

Claimed LE-

Claimed LE

Allowed LE

$0.00

$0.00



$100.00

Due with Acceptance of Offer

$400.00


$500.00


Total OIC Settlement

Recommendation: Pay amount taxpayer offers =


$500


$300.00 $0.00 $0.00 $300.00

Page 155

John Taxwise's OIC (After) A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80

Page 156

B

C


D

E

F

Implementing Your Offer in Compromise John Taxwise

Source Cash Checking Account(s) Savings Account(s) Business Bank Account(s) Unused Sources of Credit Loan Value on Life Insurance Pensions Real Estate Real Estate with Allowable Loans Real Estate with Non-Allowable Loans Furniture / Personal Effects Value of all Furniture / Persoanl Effects

H


$0 $100 $200 $0 $0 $0 $100,000

$0 $0 $0 $0 $0 $0 $0

$0 $0 $0 $0 $0 $0 $50,000

$0 $3,900 $800 $0 $0 $0 $50,000

$50,000 $0

$50,000 $0

$50,000 $0

$50,000 $0

$0 $0

$10,000

$4,500 $0 $0 $0 $0

$0 $0 $0 $0 $0

$0 $2,000

$0 $2,000

$0 $0 $0 $0

$6,000 $0

$0 $0

$6,000 $0

$0 $0

$0 $0

$0 $0 $0 $0 $0

$0 $0 $0 $0 $0

$0 $0 $0 $0 $0

$0 $0 $0 $0 $0

$0 $0 $0 $0 $0




$54,700

Monthly Expenses and Stockpiles

Food, Clothing & Misc. Housing and Utilities Transportation Ownership Costs, Car #1 Ownership Costs, Car #2 Operating Costs Health Insurance Other Health Care Taxes Court Ordered Payments Child / Dependant Care Life Insurance Other Secured Loan Payments Other Expenses: (Specify) Non-Allowed Loan Payments Entertainment, Vacations & Misc. Other Expenses Total

2/27/2007

Change in Cash

$0 $4,000 $1,000 $0 $0 $0 $100,000


Expenses OIC Installment Pay.s (if any)

I




G

Total Desired

Expenses Paid

Expenses Paid

Expenses Paid

Actual Expenses

Desired

Actual

Expenses

from Income

from Food Budget*

from Stockpiles

less Desired Exp.'s

Stockpiles

Stockpiles

$0

$0

$1,500 $1,100

$916 $1,100

$0 $0 $0

$0 $584 $0

$0 $0 $0

$0 $3,854 $0

$0 $3,854 $0

$470 $0 $500 $300 $0 $1,376 $0 $0 $100 $450

$470 $0 $338 $300 $0 $1,376 $0 $0 $100 $450

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0

$0 $0 $162 $0 $0 $0 $0 $0 $0 $0

$0 $0 ($0) $0 $0 $0 $0 $0 $0 $0

$0 $0 $1,069 $0 $0 $0 $0 $0 $0 $0

$0 $0 $1,069 $0 $0 $0 $0 $0 $0 $0

$0 $0 $0 $5,796

$0 $0 $0 $5,050

$0 $0 $0 $0

$0 $0 $0 $746

$0 $0 $0 ($0)

$0 $0 $0 $4,924

$0 $0 $0 $4,924




Sub-Totals


Assumptions


6 10.0%

$54,700


Total

$54,700 $0

$150 $100

$400 $650 $4,924 $10,000 $5,000 $0 $20,000 $0 $0 $14,126 $0 $0 $49,126

$54,700


Example 3: Roy No Canpay


Page 157

Roy No Canpay's OIC (Before) A B C D E F G H I J K L M N 1 Determining What Monthly Multiplier to Use 2 2/15/2007 Name (of taxpayer, "TP"): Roy No Canpay 3 Date of Analysis: Introduction The IRS estimates how much they can collect from you for your back taxes. This calculation is called the Reasonable 4 Collection Potential or RCP. The objective of this Application is to help you understand how your RCP is determined so that, where 5 possible, you can reduce it and successfully negotiate an Offer in Compromise ("OIC"). 6 7 One of the factors that determine your RCP is the number of months the IRS says you have to pay or your “Monthly Multiplier.” What 8 Monthly Multiplier they use depends on how fast you elect to pay the settlement and the time left in your “statutory collection period.” 9 10 The statutory collection period refers to the ten-year statue of limitations the IRS has to collect back taxes. This clock starts when 11 you file your tax return but don’t pay the full amount and, if and when, additional taxes are assessed. For any one tax year the IRS 12 normally uses the statutory clock that applies to the greatest amount due (i.e., what was due upon filing or what was later assessed). 13 Call (800) 829-1040 if you need help calculating the time remaining on your collection statute(s). 14 15 Monthly Multiplier based on settlement offer You have three different OIC settlement options to choose from: Lump Sum Cash 16 Offer, Short Term Periodic Payment Offer and Deferred Periodic Payment Offer. Each of these options has a different Monthly Multiplier. 17 If you are uncertain which type of offer to make, try all three to see what difference this makes to your RCP and then decide. 18 Cash Offer is where you pay the full settlement amount in five months or less of IRS acceptance. In this case, your Monthly 19 Multiplier is 48 or the number of months left for collection, whichever is less. Enter a "C" in cell L26 to elect this option. 20 Short Term Payment Offer is where you pay the settlement within two years of being approved. Here your Monthly Multiplier is 21 the lesser of 60 or whatever is left on the collection stature.* Enter a "S" in cell L26 to choose this option. 22 Deferred Payment Offer has you pay the settlement amount over the remaining months of the collection statute whatever that 23 number may be. In this case, your Multiplier is whatever months are left to collect. To elect this option enter "D" in L26. 24 25 What type of OIC settlement offer are you making? Enter "C", "S" or "D." C 26 27 What if your OIC covers more than one tax year? Which year's "assessment date" and Monthly Multiplier do you use? Your 28 best negotiating position is to take the earliest and most favorable assessment date and be prepared to argue the point with the IRS. 29 If they don't give, your counter argument is to use an "average." Complete the following table, the Application will compute your 30 Monthly Multipliers and let you select which one to use. 31 32 Year(s) Taxes Amount Percent of Number of Months Since Monthly 33 Are Owed Owed Total Owed Filing or Assessment Date Multiplier 34 35 35 14.0 1998 $40,000 40% 85 35 1999 $30,000 30% 65 48 48 14.4 36 2000 $20,000 20% 40 48 48 9.6 37 2001 $10,000 10% 32 48 48 4.8 38 $0 0% 0 130 0.0 39 $0 0% 0 130 0.0 40 $0 0% 0 130 0.0 41 $0 0% 0 130 0.0 42 $0 0% 0 130 0.0 43 $0 0% 0 130 0.0 44 Total Owed $100,000 100% 45 46 Choosing your Monthly Multiplier Three possible Monthly Multipliers are show in the cells L57, L58 and L62 based on the data 47 entered above. The first Multiplier, in cell L57, is most favorable to the IRS since this Multiplier has the most time remaining to collect. 48 The best Multiplier for you (cell L58) is based on the least time left to collect. Finally, the Multiplier in cell L62 averages the Multipliers 49 for all the tax years and picks the best average for you. To see the worst case scenario, enter "1" in cell L64. This tells the Application 50 to use the IRS's Monthly Multiplier to calculate your RCP. For the best case enter a "2" in L64 which instructs the Application to use 51 the lowest Monthly Multiplier of any of your taxes years. To average all the year's Multipliers and strike a compromise, enter "3" in L64. 52 Chose which Multiplier (1, 2 or 3) you want to use for the scenario you're evaluating now and enter that in L64. 53 54 Monthly Chose 55 Multipliers One 56 48 1 IRS's Monthly Multiplier 57 Your very best Monthly Multiplier 35 2 58 Your best average Monthly Multiplier 59 Based on averaging the assessment dates 45 60 Based on weighted average of amounts owed 43 61 Your best average Monthly Multiplier: 43 3 62 63 Which Monthly Multiplier do you want to use? Enter "1", "2" or "3." 1 64 65 Your estimated Monthly Multiplier Based on the information provided, your Monthly 66 Multiplier is show in the box to the right. Note that this is a best guess and there is no 48 67 guarantee that this is the Multiplier the IRS will actually use in your specific case. 68 69 * Sometimes the IRS will demand you pay the greater of 60 months or the remaining statute when you select this option and they may 70 increase your payments if your finances improve. For these reasons, it's less risky to make a Cash Offer--if you can. 71

Page 158


Roy No Canpay's OIC (Before) A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65

B


C

D

E


F

G

H

I


2/15/2007

TP State and County Santa Clara, CA Annual discount rate (if used): Roy No Canpay Number of People in TP Household 4 Monthly Multiplier $100,000 Amount Offered (including deposit)

0.0% 48 $1,500


Fair Market Value

Loan Amount

Creditor

Term*

Exemption


Cash

$300.00

None

$0.00

0

$0.00

$0.00

Checking Account(s)

$500.00

None

$0.00

0

$0.00

$0.00

Savings Account(s)

$1,000.00

None

$0.00

0

$0.00

$0.00


$2,000.00

None

$0.00

0

$0.00

$0.00

Unused Sources of Credit Loan Value on Life Insurance Pensions

$0.00

None

$3,000.00

US Life

$50,000.00

None

$450,000.00

US Savings

$0.00

0

$0.00

$0.00

$1,000.00

20

$0.00

$50.00

$0.00

0

$0.00

$0.00

$300,000.00

240

$0.00

$1,500.00

$0.00

0

$0.00

$0.00

Real Estate Real Estate with Allowable Loans** Real Estate with Non-Allowable Loans

$0.00

None


$25,000.00

$7,040.00


None

$0.00

0

$0.00

$0.00


VISA

$5,000.00

18

$0.00

$350.00

Accounts Receivable Tools and/or Equipment***

$3,500.00

None

$0.00

0

$0.00

$0.00

$50,000.00

None

$0.00

0

$3,520.00

$0.00

Vehicles Car #1

2003 Dodge truck

$10,000.00

Cheap Car Loans

$8,000.00

36

$0.00

$0.00

$550.00

Car #2

2002 BMW

$15,000.00

Cheap Car Loans

$10,000.00

24

$0.00

$0.00

$600.00

Other Assets Asset #1

$3,500.00

None

$0.00

0

$0.00

$0.00

Asset #2

Gold

$0.00

None

$0.00

0

$0.00

$0.00

Asset #3

$0.00

None

$0.00

0

$0.00

$0.00

Asset #4

$0.00

None

$0.00

0

$0.00

$0.00

Asset #5

$0.00

None

$0.00

0

$0.00

$0.00

Source





Expense

Amount Claimed

$0.00 37. Food, Clothing & Misc. $3,000.00 38. Housing and Utilities

Amount Allowed

$2,000.00

$1,564.00

$2,300.00

$2,771.00



$7,500.00


$550.00

$475.00


$0.00


$600.00

$338.00


$0.00


$600.00

$466.00



$550.00

$550.00



32. Child Support

$0.00 41. Taxes***

33. Alimony


34. Other Income


$0.00

$50.00

$50.00


$350.00

$0.00


$650.00


34c. Other Income #3


$0.00

$0.00 $150.00


$10,500.00

$0.00 $150.00



$200.00 $2,500.00

$0.00


35a. Total Gross Monthly Income

$200.00 $2,500.00


$0.00

$0.00




$10,500.00


Income-

Claimed LE-

Claimed LE

Allowed LE

$0.00

$1,907.00



$300.00


N/A $300.00




$100,000


$167,840.00 $15,212.00 $91,536.00 $274,588.00

Page 159

Roy No Canpay's OIC (After) A B C D E F G H I J K L M N 1 Determining What Monthly Multiplier to Use 2 3 Date of Analysis: 2/15/2007 Name (of taxpayer, "TP"): Roy No Canpay Introduction The IRS estimates how much they can collect from you for your back taxes. This calculation is called the Reasonable 4 Collection Potential or RCP. The objective of this Application is to help you understand how your RCP is determined so that, where 5 possible, you can reduce it and successfully negotiate an Offer in Compromise ("OIC"). 6 7 One of the factors that determine your RCP is the number of months the IRS says you have to pay or your “Monthly Multiplier.” What 8 Monthly Multiplier they use depends on how fast you elect to pay the settlement and the time left in your “statutory collection period.” 9 10 The statutory collection period refers to the ten-year statue of limitations the IRS has to collect back taxes. This clock starts when 11 you file your tax return but don’t pay the full amount and, if and when, additional taxes are assessed. For any one tax year the IRS 12 normally uses the statutory clock that applies to the greatest amount due (i.e., what was due upon filing or what was later assessed). 13 Call (800) 829-1040 if you need help calculating the time remaining on your collection statute(s). 14 15 Monthly Multiplier based on settlement offer You have three different OIC settlement options to choose from: Lump Sum Cash 16 Offer, Short Term Periodic Payment Offer and Deferred Periodic Payment Offer. Each of these options has a different Monthly Multiplier. 17 If you are uncertain which type of offer to make, try all three to see what difference this makes to your RCP and then decide. 18 Cash Offer is where you pay the full settlement amount in five months or less of IRS acceptance. In this case, your Monthly 19 Multiplier is 48 or the number of months left for collection, whichever is less. Enter a "C" in cell L26 to elect this option. 20 Short Term Payment Offer is where you pay the settlement within two years of being approved. Here your Monthly Multiplier is 21 the lesser of 60 or whatever is left on the collection stature.* Enter a "S" in cell L26 to choose this option. 22 Deferred Payment Offer has you pay the settlement amount over the remaining months of the collection statute whatever that 23 number may be. In this case, your Multiplier is whatever months are left to collect. To elect this option enter "D" in L26. 24 25 What type of OIC settlement offer are you making? Enter "C", "S" or "D." C 26 27 What if your OIC covers more than one tax year? Which year's "assessment date" and Monthly Multiplier do you use? Your 28 best negotiating position is to take the earliest and most favorable assessment date and be prepared to argue the point with the IRS. 29 If they don't give, your counter argument is to use an "average." Complete the following table, the Application will compute your 30 Monthly Multipliers and let you select which one to use. 31 32 Year(s) Taxes Amount Percent of Number of Months Since Monthly 33 Are Owed Owed Total Owed Filing or Assessment Date Multiplier 34 35 35 14.0 1998 $40,000 40% 85 35 1999 $30,000 30% 65 48 48 14.4 36 2000 $20,000 20% 40 48 48 9.6 37 2001 $10,000 10% 32 48 48 4.8 38 $0 0% 0 130 0.0 39 $0 0% 0 130 0.0 40 $0 0% 0 130 0.0 41 $0 0% 0 130 0.0 42 $0 0% 0 130 0.0 43 $0 0% 0 130 0.0 44 Total Owed $100,000 100% 45 46 Choosing your Monthly Multiplier Three possible Monthly Multipliers are show in the cells L57, L58 and L62 based on the data 47 entered above. The first Multiplier, in cell L57, is most favorable to the IRS since this Multiplier has the most time remaining to collect. 48 The best Multiplier for you (cell L58) is based on the least time left to collect. Finally, the Multiplier in cell L62 averages the Multipliers 49 for all the tax years and picks the best average for you. To see the worst case scenario, enter "1" in cell L64. This tells the Application 50 to use the IRS's Monthly Multiplier to calculate your RCP. For the best case enter a "2" in L64 which instructs the Application to use 51 the lowest Monthly Multiplier of any of your taxes years. To average all the year's Multipliers and strike a compromise, enter "3" in L64. 52 Chose which Multiplier (1, 2 or 3) you want to use for the scenario you're evaluating now and enter that in L64. 53 54 Monthly Chose 55 Multipliers One 56 48 1 IRS's Monthly Multiplier 57 Your very best Monthly Multiplier 35 2 58 Your best average Monthly Multiplier 59 Based on averaging the assessment dates 45 60 Based on weighted average of amounts owed 43 61 Your best average Monthly Multiplier: 43 3 62 63 Which Monthly Multiplier do you want to use? Enter "1", "2" or "3." 3 64 65 Your estimated Monthly Multiplier Based on the information provided, your Monthly 66 Multiplier is show in the box to the right. Note that this is a best guess and there is no 43 67 guarantee that this is the Multiplier the IRS will actually use in your specific case. 68 69 * Sometimes the IRS will demand you pay the greater of 60 months or the remaining statute when you select this option and they may 70 increase your payments if your finances improve. For these reasons, it's less risky to make a Cash Offer--if you can. 71

Page 160


Roy No Canpay's OIC (After) A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65

B


C

D

E


2/15/2007

F

G

H

I


TP State and County Santa Clara, CA Annual discount rate (if used): Roy No Canpay Number of People in TP Household 4 Monthly Multiplier $100,000 Amount Offered (including deposit)

0.0% 43 $1,500


Fair Market Value

Cash Checking Account(s)

Loan Amount

Creditor

Term*

Exemption


$50.00

None

$0.00

0

$0.00

$0.00

$100.00

None

$0.00

0

$0.00

$0.00

Savings Account(s)

$0.00

None

$0.00

0

$0.00

$0.00


$200.00

None

$0.00

0

$0.00

$0.00


$0.00

None

$0.00

0

$0.00

$0.00


$0.00

None

$0.00

0

$0.00

$0.00

$50,000.00

None

$0.00

0

$50,000.00

$0.00

$450,000.00

US Savings

Pensions Real Estate Real Estate with Allowable Loans** Real Estate with Non-Allowable Loans

$0.00

$360,000.00

240

$0.00

$1,900.00

None

$0.00

0

$0.00

$0.00

None

$0.00

0


$5,000.00

$7,040.00

Allowable & Secured Personal Loans Non-Allowable Personal Loans Accounts Receivable Tools and/or Equipment***

$0.00

$0.00

None

$0.00

0

$0.00

$0.00

$500.00

None

$0.00

0

$0.00

$0.00

$3,000.00

None

$0.00

0

$3,520.00

$0.00

Vehicles Car #1

New car #1

$0.00

Car Lease #1

$0.00

0

$0.00

$450.00

$0.00

Car #2

New car #2

$0.00

Car Lease #2

$0.00

0

$0.00

$300.00

$0.00

Asset #1

$0.00

None

$0.00

0

$0.00

$0.00

Asset #2

$0.00

None

$0.00

0

$0.00

$0.00

Asset #3

$0.00

None

$0.00

0

$0.00

$0.00

Asset #4

$0.00

None

$0.00

0

$0.00

$0.00

Asset #5

$0.00

None

$0.00

0

$0.00

$0.00

Other Assets

Source





Expense

Amount Claimed

$0.00 37. Food, Clothing & Misc. $3,000.00 38. Housing and Utilities

Amount Allowed

$1,564.00

$1,564.00

$2,700.00

$2,771.00



$6,500.00


$450.00

$475.00


$0.00


$300.00

$338.00


$0.00


$466.00

$466.00



$550.00

$550.00



32. Child Support

$0.00 41. Taxes***

33. Alimony


34. Other Income

$0.00 $150.00

$0.00

$0.00


$0.00

$0.00


$0.00

$0.00


$0.00

$0.00






$0.00

$0.00

$0.00 $150.00


$9,500.00

$320.00 $3,000.00

$0.00




$320.00 $3,000.00



$9,500.00


Income-

Claimed LE-

Claimed LE

Allowed LE

$0.00

$0.00


Reasonable Collection Potential and Recommendation OIC Deposit (excludes $150 application fee) Due with Acceptance of Offer Total OIC Settlement

$1,200.00


$1,500.00


$300.00



$1,500


$750.00 $0.00 $0.00 $750.00

Page 161

Roy No Canpay's OIC (After) A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80

Page 162

B

C


D

E

F

Implementing Your Offer in Compromise

Roy No Canpay

Source Cash Checking Account(s) Savings Account(s) Business Bank Account(s) Unused Sources of Credit Loan Value on Life Insurance Pensions Real Estate Real Estate with Allowable Loans Real Estate with Non-Allowable Loans Furniture / Personal Effects Value of all Furniture / Persoanl Effects

Loans Outstanding Beginning Ending $0 $0 $0 $0 $0 $1,000 $0

$0 $0 $0 $0 $0 $0 $0

$250 $400 $1,000 $1,800 $0 $2,000 $0

$450,000 $0

$450,000 $0

$300,000 $0

$360,000 $0

$60,000 $0

$25,000

$5,000 $0 $0 $0 $0

$0 $0 ($5,000) $3,000 $0

$3,500 $50,000

$500 $3,000

$0 $5,000 $0 $0

$10,000 $15,000

$0 $0

$8,000 $10,000

$0 $0

$2,000 $5,000

$3,500 $0 $0 $0 $0

$0 $0 $0 $0 $0

$0 $0 $0 $0 $0

$0 $0 $0 $0 $0

$3,500 $0 $0 $0 $0


$73,950



2/15/2007

Change in Cash

$50 $100 $0 $200 $0 $0 $50,000



I

$300 $500 $1,000 $2,000 $0 $3,000 $50,000



H




G

Total Desired

Expenses Paid

Expenses Paid

Expenses Paid

Actual Expenses

Desired

Actual

Expenses

from Income

from Food Budget*

from Stockpiles

less Desired Exp.'s

Stockpiles

Stockpiles

$0

$0

$2,000 $2,700

$1,564 $2,700

$0 $0 $0

$0 $436 $0

$0 $0 $0

$0 $4,316 $0

$0 $4,316 $0

$450 $300 $600 $550 $320 $3,000 $0 $0 $150 $0

$450 $300 $466 $550 $320 $3,000 $0 $0 $150 $0

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0

$0 $0 $134 $0 $0 $0 $0 $0 $0 $0

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0

$0 $0 $1,327 $0 $0 $0 $0 $0 $0 $0

$0 $0 $1,327 $0 $0 $0 $0 $0 $0 $0

$0 $650 $0 $10,720

$0 $0 $0 $9,500

$0 $0 $0 $0

$0 $650 $0 $1,220

$0 $0 $0 $0

$0 $6,435 $0 $12,078

$0 $6,435 $0 $12,078




Sub-Totals


Assumptions


9 10.0%

$73,950


Total

$73,950 $0

$150 $300

$1,200 $1,650 $12,078 $7,500 $10,000 $2,722 $25,000 $5,000 $10,000 $0 $0 $0 $60,222

$73,950



Page 163

Page 164



Page 165

Page 166



Page 167

Page 168



Page 169

Page 170



Page 171

Page 172



Page 173

Page 174


Example 4: Mary N. Trouble


Page 175

Mary N. Trouble's OIC (Before) A

H I J K L M N 1 Determining What Monthly Multiplier to Use 2 3 Date of Analysis: 11/1/2006 Name (of taxpayer, "TP"): Mary N. Trouble Introduction The IRS estimates how much they can collect from you for your back taxes. This calculation is called the Reasonable 4 Collection Potential or RCP. The objective of this Application is to help you understand how your RCP is determined so that, where 5 possible, you can reduce it and successfully negotiate an Offer in Compromise ("OIC"). 6 7 One of the factors that determine your RCP is the number of months the IRS says you have to pay or your “Monthly Multiplier.” What 8 Monthly Multiplier they use depends on how fast you elect to pay the settlement and the time left in your “statutory collection period.” 9 10 The statutory collection period refers to the ten-year statue of limitations the IRS has to collect back taxes. This clock starts when 11 you file your tax return but don’t pay the full amount and, if and when, additional taxes are assessed. For any one tax year the IRS 12 normally uses the statutory clock that applies to the greatest amount due (i.e., what was due upon filing or what was later assessed). 13 Call (800) 829-1040 if you need help calculating the time remaining on your collection statute(s). 14 15 Monthly Multiplier based on settlement offer You have three different OIC settlement options to choose from: Lump Sum Cash 16 Offer, Short Term Periodic Payment Offer and Deferred Periodic Payment Offer. Each of these options has a different Monthly Multiplier. 17 If you are uncertain which type of offer to make, try all three to see what difference this makes to your RCP and then decide. 18 Cash Offer is where you pay the full settlement amount in five months or less of IRS acceptance. In this case, your Monthly 19 Multiplier is 48 or the number of months left for collection, whichever is less. Enter a "C" in cell L26 to elect this option. 20 Short Term Payment Offer is where you pay the settlement within two years of being approved. Here your Monthly Multiplier is 21 the lesser of 60 or whatever is left on the collection stature.* Enter a "S" in cell L26 to choose this option. 22 Deferred Payment Offer has you pay the settlement amount over the remaining months of the collection statute whatever that 23 number may be. In this case, your Multiplier is whatever months are left to collect. To elect this option enter "D" in L26. 24 25 What type of OIC settlement offer are you making? Enter "C", "S" or "D." S 26 27 What if your OIC covers more than one tax year? Which year's "assessment date" and Monthly Multiplier do you use? Your 28 best negotiating position is to take the earliest and most favorable assessment date and be prepared to argue the point with the IRS. 29 If they don't give, your counter argument is to use an "average." Complete the following table, the Application will compute your 30 Monthly Multipliers and let you select which one to use. 31 32 Year(s) Taxes Amount Percent of Number of Months Since Monthly 33 Are Owed Owed Total Owed Filing or Assessment Date Multiplier 34 40 40 34.8 1999 $200,000 87% 80 35 2000 $30,000 13% 50 60 60 7.8 36 $0 0% 0 130 0.0 37 $0 0% 0 130 0.0 38 $0 0% 0 130 0.0 39 $0 0% 0 130 0.0 40 $0 0% 0 130 0.0 41 $0 0% 0 130 0.0 42 $0 0% 0 130 0.0 43 $0 0% 0 130 0.0 44 Total Owed $230,000 100% 45 46 Choosing your Monthly Multiplier Three possible Monthly Multipliers are show in the cells L57, L58 and L62 based on the data 47 entered above. The first Multiplier, in cell L57, is most favorable to the IRS since this Multiplier has the most time remaining to collect. 48 The best Multiplier for you (cell L58) is based on the least time left to collect. Finally, the Multiplier in cell L62 averages the Multipliers 49 for all the tax years and picks the best average for you. To see the worst case scenario, enter "1" in cell L64. This tells the Application 50 to use the IRS's Monthly Multiplier to calculate your RCP. For the best case enter a "2" in L64 which instructs the Application to use 51 the lowest Monthly Multiplier of any of your taxes years. To average all the year's Multipliers and strike a compromise, enter "3" in L64. 52 Chose which Multiplier (1, 2 or 3) you want to use for the scenario you're evaluating now and enter that in L64. 53 54 Monthly Chose 55 Multipliers One 56 60 1 IRS's Monthly Multiplier 57 Your very best Monthly Multiplier 40 2 58 Your best average Monthly Multiplier 59 Based on averaging the assessment dates 50 60 Based on weighted average of amounts owed 43 61 Your best average Monthly Multiplier: 43 3 62 63 Which Monthly Multiplier do you want to use? Enter "1", "2" or "3." 1 64 65 Your estimated Monthly Multiplier Based on the information provided, your Monthly 66 Multiplier is show in the box to the right. Note that this is a best guess and there is no 60 67 guarantee that this is the Multiplier the IRS will actually use in your specific case. 68 69 * Sometimes the IRS will demand you pay the greater of 60 months or the remaining statute when you select this option and they may 70 increase your payments if your finances improve. For these reasons, it's less risky to make a Cash Offer--if you can. 71

Page 176

B

C

D

E

F

G


Mary N. Trouble's OIC (Before) A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65

B


C

D

E


F

G

H

I


11/1/2006

TP State and County Santa Clara Annual discount rate (if used): Mary N. Trouble Number of People in TP Household 1 Monthly Multiplier $230,000 Amount Offered (including deposit)

0.0% 60 $3,000


Fair Market Value

Cash

Loan Amount

Creditor

Term*

Exemption


$100.00

None

$0.00

0

$0.00

$0.00

$500.00

None

$0.00

0

$0.00

$0.00

$10,000.00

None

$0.00

0

$0.00

$0.00


$0.00

None

$0.00

0

$0.00

$0.00


$0.00

None

$0.00

0

$0.00

$0.00


$0.00

None

$0.00

0

$0.00

$0.00

Pensions

$0.00

None

$0.00

0

$0.00

$0.00

$800,000.00

None

$0.00

0

$0.00

$0.00

$0.00

None

$0.00

0

$0.00

$0.00


None

$0.00

0

$0.00

$0.00


None

$0.00

0

$0.00

$0.00

Checking Account(s) Savings Account(s)

Real Estate Real Estate with Allowable Loans** Real Estate with Non-Allowable Loans Furniture / Personal Effects*** Value of all Furniture / Persoanl Effects

$20,000.00

$7,040.00

Accounts Receivable

$0.00

None

$0.00

0

$0.00

$0.00


$0.00

None

$0.00

0

$0.00

$0.00

Vehicles Car #1

2002 Mercedes

$15,000.00

Car #2

$7,000.00

30

$0.00

$0.00

$500.00

$0.00

Cheap Car Loans None

$0.00

0

$0.00

$0.00

$0.00


$60,000.00

None

$0.00

0

$0.00

$0.00

Asset #2

$0.00

None

$0.00

0

$0.00

$0.00

Asset #3

Stock portfolio

$0.00

None

$0.00

0

$0.00

$0.00

Asset #4

$0.00

None

$0.00

0

$0.00

$0.00

Asset #5

$0.00

None

$0.00

0

$0.00

$0.00

Source




Expense

Amount Claimed


$0.00 37. Food, Clothing & Misc.




Amount Allowed

$1,200.00

$649.00

$400.00

$1,812.00

$500.00

$475.00

$2,000.00 39. Transportation


$0.00



$0.00



$0.00


$300.00

$317.00

$3,500.00 40a. Health Insurance****

$100.00

$100.00

30. Pension / Social Security (TP1) 31. Pension / Social Security (TP2)


32. Child Support

$0.00 41. Taxes***

33. Alimony


34. Other Income

$0.00


$25.00

$25.00

$1,000.00

$1,000.00

$0.00

$0.00

$0.00

$0.00



$0.00

$0.00



$0.00

$0.00


$0.00 46. Other Expenses: (Specify) $0.00

$0.00


$5,500.00



$4,500.00




$1,975.00

$0.00

$0.00


$5,500.00


Income-

Claimed LE-

Claimed LE

Allowed LE

$0.00

$2,551.00



$125.00

Due in Installments No OIC Settlement

N/A $125.00




$712,560.00


$153,060.00

$230,000


$14,250.00 $879,870.00

Page 177

Mary N. Trouble's OIC (After) A B C D E F G H I J K L M N 1 Determining What Monthly Multiplier to Use 2 11/1/2006 Name (of taxpayer, "TP"): Mary N. Trouble 3 Date of Analysis: Introduction The IRS estimates how much they can collect from you for your back taxes. This calculation is called the Reasonable 4 Collection Potential or RCP. The objective of this Application is to help you understand how your RCP is determined so that, where 5 possible, you can reduce it and successfully negotiate an Offer in Compromise ("OIC"). 6 7 One of the factors that determine your RCP is the number of months the IRS says you have to pay or your “Monthly Multiplier.” What 8 Monthly Multiplier they use depends on how fast you elect to pay the settlement and the time left in your “statutory collection period.” 9 10 The statutory collection period refers to the ten-year statue of limitations the IRS has to collect back taxes. This clock starts when 11 you file your tax return but don’t pay the full amount and, if and when, additional taxes are assessed. For any one tax year the IRS 12 normally uses the statutory clock that applies to the greatest amount due (i.e., what was due upon filing or what was later assessed). 13 Call (800) 829-1040 if you need help calculating the time remaining on your collection statute(s). 14 15 Monthly Multiplier based on settlement offer You have three different OIC settlement options to choose from: Lump Sum Cash 16 Offer, Short Term Periodic Payment Offer and Deferred Periodic Payment Offer. Each of these options has a different Monthly Multiplier. 17 If you are uncertain which type of offer to make, try all three to see what difference this makes to your RCP and then decide. 18 Cash Offer is where you pay the full settlement amount in five months or less of IRS acceptance. In this case, your Monthly 19 Multiplier is 48 or the number of months left for collection, whichever is less. Enter a "C" in cell L26 to elect this option. 20 Short Term Payment Offer is where you pay the settlement within two years of being approved. Here your Monthly Multiplier is 21 the lesser of 60 or whatever is left on the collection stature.* Enter a "S" in cell L26 to choose this option. 22 Deferred Payment Offer has you pay the settlement amount over the remaining months of the collection statute whatever that 23 number may be. In this case, your Multiplier is whatever months are left to collect. To elect this option enter "D" in L26. 24 25 What type of OIC settlement offer are you making? Enter "C", "S" or "D." S 26 27 What if your OIC covers more than one tax year? Which year's "assessment date" and Monthly Multiplier do you use? Your 28 best negotiating position is to take the earliest and most favorable assessment date and be prepared to argue the point with the IRS. 29 If they don't give, your counter argument is to use an "average." Complete the following table, the Application will compute your 30 Monthly Multipliers and let you select which one to use. 31 32 Year(s) Taxes Amount Percent of Number of Months Since Monthly 33 Are Owed Owed Total Owed Filing or Assessment Date Multiplier 34 40 40 34.8 1999 $200,000 87% 80 35 2000 $30,000 13% 50 60 60 7.8 36 $0 0% 0 130 0.0 37 $0 0% 0 130 0.0 38 $0 0% 0 130 0.0 39 $0 0% 0 130 0.0 40 $0 0% 0 130 0.0 41 $0 0% 0 130 0.0 42 $0 0% 0 130 0.0 43 $0 0% 0 130 0.0 44 Total Owed $230,000 100% 45 46 Choosing your Monthly Multiplier Three possible Monthly Multipliers are show in the cells L57, L58 and L62 based on the data 47 entered above. The first Multiplier, in cell L57, is most favorable to the IRS since this Multiplier has the most time remaining to collect. 48 The best Multiplier for you (cell L58) is based on the least time left to collect. Finally, the Multiplier in cell L62 averages the Multipliers 49 for all the tax years and picks the best average for you. To see the worst case scenario, enter "1" in cell L64. This tells the Application 50 to use the IRS's Monthly Multiplier to calculate your RCP. For the best case enter a "2" in L64 which instructs the Application to use 51 the lowest Monthly Multiplier of any of your taxes years. To average all the year's Multipliers and strike a compromise, enter "3" in L64. 52 Chose which Multiplier (1, 2 or 3) you want to use for the scenario you're evaluating now and enter that in L64. 53 54 Monthly Chose 55 Multipliers One 56 60 1 IRS's Monthly Multiplier 57 Your very best Monthly Multiplier 40 2 58 Your best average Monthly Multiplier 59 Based on averaging the assessment dates 50 60 Based on weighted average of amounts owed 43 61 Your best average Monthly Multiplier: 43 3 62 63 Which Monthly Multiplier do you want to use? Enter "1", "2" or "3." 3 64 65 Your estimated Monthly Multiplier Based on the information provided, your Monthly 66 Multiplier is show in the box to the right. Note that this is a best guess and there is no 43 67 guarantee that this is the Multiplier the IRS will actually use in your specific case. 68 69

Page 178


Mary N. Trouble's OIC (After) A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65

B


C

D

E


11/1/2006

F

G

H

I


TP State and County Santa Clara Annual discount rate (if used): Mary N. Trouble Number of People in TP Household 1 Monthly Multiplier $230,000 Amount Offered (including deposit)

0.0% 43 $3,000


Fair Market Value

Cash

$20.00

Checking Account(s)

Loan Amount

Creditor None

Term*

$0.00

Exemption

0


$0.00

$0.00

$50.00

None

$0.00

0

$0.00

$0.00

$500.00

None

$0.00

0

$0.00

$0.00


$0.00

None

$0.00

0

$0.00

$0.00


$0.00

None

$0.00

0

$0.00

$0.00


$0.00

None

$0.00

0

$0.00

$0.00

Savings Account(s)

Pensions

$0.00

None

$0.00

0

$0.00

$0.00

$280,000.00

360

$0.00

$1,500.00

None

$0.00

0

$0.00

$0.00


None

$0.00

0

$0.00


None

$0.00

0

$0.00


$350,000.00


New Mortgage Co.

$0.00


$6,000.00

$7,040.00 $0.00 $0.00

Accounts Receivable

$0.00

None

$0.00

0

$0.00

$0.00


$0.00

None

$0.00

0

$0.00

$0.00

$0.00

Car Lease Inc.

$0.00

0

$0.00

$450.00

$0.00

$0.00

None

$0.00

0

$0.00

$0.00

$0.00

Asset #1

$0.00

None

$0.00

0

$0.00

$0.00

Asset #2

$0.00

None

$0.00

0

$0.00

$0.00

Asset #3

$0.00

None

$0.00

0

$0.00

$0.00

Asset #4

$0.00

None

$0.00

0

$0.00

$0.00

Asset #5

$0.00

None

$0.00

0

$0.00

$0.00

Vehicles Car #1

2006 Ford

Car #2 Other Assets

Source




Expense

Amount Claimed


$0.00 37. Food, Clothing & Misc.



Amount Allowed

$649.00

$649.00

$1,812.00

$1,812.00 $475.00


26. Interest / Dividends 27. Net Business Income (Sole Prop.'s)

$0.00


$450.00


$0.00


$0.00

$0.00



$300.00

$317.00


$3,500.00 40a. Health Insurance****

$400.00

$400.00


$4,000.00 40b. Other Health Care****

32. Child Support

$0.00 41. Taxes***

33. Alimony


34. Other Income








$365.00

$365.00

$3,000.00

$3,000.00

$0.00

$0.00

$239.00

$239.00

$300.00

$300.00

$0.00

$0.00


$7,515.00


$0.00

$0.00


$4,500.00


$0.00

$0.00

$0.00

$0.00



$7,515.00


Income-

Claimed LE-

Claimed LE

Allowed LE

$0.00

$0.00


Reasonable Collection Potential and Recommendation OIC Deposit (excludes $150 application fee) Due in Installments Total OIC Settlement

$2,875.00


$3,000.00


$125.00



$3,000


$570.00 $0.00 $0.00 $570.00

Page 179

Mary N. Trouble's OIC (After) A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80

Page 180

B

C


D

E

F


Mary N. Trouble



Change in Cash

$0 $0 $0 $0 $0 $0 $0

$0 $0 $0 $0 $0 $0 $0

$0 $0

$350,000 $0

$0 $0

$280,000 $0

$20,000

$6,000

$80 $450 $9,500 $0 $0 $0 $0

$0 $0 $0 $0

$0 $0 $0 $0 $0

($70,000) $0

$0 $0

$0 $0

$0 $0 $0 $0

$15,000 $0

$0 $0

$7,000 $0

$0 $0

$8,000 $0

$60,000 $0 $0 $0 $0

$0 $0 $0 $0 $0

$0 $0 $0 $0 $0

$0 $0 $0 $0 $0

$60,000 $0 $0 $0 $0


$8,030



11/1/2006

$20 $50 $500 $0 $0 $0 $0



I

$100 $500 $10,000 $0 $0 $0 $0



H





G

Total Desired

Expenses Paid

Expenses Paid

Expenses Paid

Actual Expenses

Desired

Actual

Expenses

from Income

from Food Budget*

from Stockpiles

less Desired Exp.'s

Stockpiles

Stockpiles

$0

$0

$1,200 $1,812

$649 $1,812

$0 $0 $0

$0 $551 $0

$0 $0 $0

$0 $3,637 $0

$0 $3,637 $0

$450 $0 $300 $400 $365 $3,000 $0 $239 $300 $0

$450 $0 $300 $400 $365 $3,000 $0 $239 $300 $0

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0

$0 $1,975 $0 $10,041

$0 $0 $0 $7,515

$0 $0 $0 $0

$0 $666 $0 $1,217

$0 $13,035 $0 $16,672

$0 $4,393 $0 $8,030

$0 ($1,309) $0 ($1,309)




Sub-Totals


Assumptions


$8,030 $400

6 10.0%

$8,430


Total

$150 $125

$125 $400 $8,030 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

$8,430



Page 181

Page 182



Page 183

Page 184



Page 185

Page 186


Example 5: Albert U. R. Broke


Page 187

Albert U. R. Broke's OIC (Before) A

H I J K L M N 1 Determining What Monthly Multiplier to Use 2 3/15/2007 Name (of taxpayer, "TP"): Albert U. R. Broke 3 Date of Analysis: Introduction The IRS estimates how much they can collect from you for your back taxes. This calculation is called the Reasonable 4 Collection Potential or RCP. The objective of this Application is to help you understand how your RCP is determined so that, where 5 possible, you can reduce it and successfully negotiate an Offer in Compromise ("OIC"). 6 7 One of the factors that determine your RCP is the number of months the IRS says you have to pay or your “Monthly Multiplier.” What 8 Monthly Multiplier they use depends on how fast you elect to pay the settlement and the time left in your “statutory collection period.” 9 10 The statutory collection period refers to the ten-year statue of limitations the IRS has to collect back taxes. This clock starts when 11 you file your tax return but don’t pay the full amount and, if and when, additional taxes are assessed. For any one tax year the IRS 12 normally uses the statutory clock that applies to the greatest amount due (i.e., what was due upon filing or what was later assessed). 13 Call (800) 829-1040 if you need help calculating the time remaining on your collection statute(s). 14 15 Monthly Multiplier based on settlement offer You have three different OIC settlement options to choose from: Lump Sum Cash 16 Offer, Short Term Periodic Payment Offer and Deferred Periodic Payment Offer. Each of these options has a different Monthly Multiplier. 17 If you are uncertain which type of offer to make, try all three to see what difference this makes to your RCP and then decide. 18 Cash Offer is where you pay the full settlement amount in five months or less of IRS acceptance. In this case, your Monthly 19 Multiplier is 48 or the number of months left for collection, whichever is less. Enter a "C" in cell L26 to elect this option. 20 Short Term Payment Offer is where you pay the settlement within two years of being approved. Here your Monthly Multiplier is 21 the lesser of 60 or whatever is left on the collection stature.* Enter a "S" in cell L26 to choose this option. 22 Deferred Payment Offer has you pay the settlement amount over the remaining months of the collection statute whatever that 23 number may be. In this case, your Multiplier is whatever months are left to collect. To elect this option enter "D" in L26. 24 25 What type of OIC settlement offer are you making? Enter "C", "S" or "D." D 26 27 What if your OIC covers more than one tax year? Which year's "assessment date" and Monthly Multiplier do you use? Your 28 best negotiating position is to take the earliest and most favorable assessment date and be prepared to argue the point with the IRS. 29 If they don't give, your counter argument is to use an "average." Complete the following table, the Application will compute your 30 Monthly Multipliers and let you select which one to use. 31 32 Year(s) Taxes Amount Percent of Number of Months Since Monthly 33 Are Owed Owed Total Owed Filing or Assessment Date Multiplier 34 40 40 24.0 2000 $75,000 60% 80 35 2001 $35,000 28% 65 55 55 15.4 36 2002 $15,000 12% 40 80 80 9.6 37 $0 0% 0 130 0.0 38 $0 0% 0 130 0.0 39 $0 0% 0 130 0.0 40 $0 0% 0 130 0.0 41 $0 0% 0 130 0.0 42 $0 0% 0 130 0.0 43 $0 0% 0 130 0.0 44 Total Owed $125,000 100% 45 46 Choosing your Monthly Multiplier Three possible Monthly Multipliers are show in the cells L57, L58 and L62 based on the data 47 entered above. The first Multiplier, in cell L57, is most favorable to the IRS since this Multiplier has the most time remaining to collect. 48 The best Multiplier for you (cell L58) is based on the least time left to collect. Finally, the Multiplier in cell L62 averages the Multipliers 49 for all the tax years and picks the best average for you. To see the worst case scenario, enter "1" in cell L64. This tells the Application 50 to use the IRS's Monthly Multiplier to calculate your RCP. For the best case enter a "2" in L64 which instructs the Application to use 51 the lowest Monthly Multiplier of any of your taxes years. To average all the year's Multipliers and strike a compromise, enter "3" in L64. 52 Chose which Multiplier (1, 2 or 3) you want to use for the scenario you're evaluating now and enter that in L64. 53 54 Monthly Chose 55 Multipliers One 56 80 1 IRS's Monthly Multiplier 57 Your very best Monthly Multiplier 40 2 58 Your best average Monthly Multiplier 59 Based on averaging the assessment dates 58 60 Based on weighted average of amounts owed 49 61 Your best average Monthly Multiplier: 49 3 62 63 Which Monthly Multiplier do you want to use? Enter "1", "2" or "3." 1 64 65 Your estimated Monthly Multiplier Based on the information provided, your Monthly 66 Multiplier is show in the box to the right. Note that this is a best guess and there is no 80 67 guarantee that this is the Multiplier the IRS will actually use in your specific case. 68 69 * Sometimes the IRS will demand you pay the greater of 60 months or the remaining statute when you select this option and they may 70 increase your payments if your finances improve. For these reasons, it's less risky to make a Cash Offer--if you can. 71

Page 188

B

C

D

E

F

G


Albert U. R. Broke's OIC (Before) A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65

B


C

D

E


F

G

H

I


3/15/2007

TP State and County Los Angeles, CA Annual discount rate (if used): Albert U. R. Broke Number of People in TP Household 2 Monthly Multiplier $125,000 Amount Offered (including deposit)

0.0% 80 $1,500


Fair Market Value

Cash Checking Account(s) Savings Account(s)

Creditor

Loan Amount

Term*

Exemption

Monthly Payment Loan Lease

$50.00

None

$0.00

0

$0.00

$0.00

$350.00

None

$0.00

0

$0.00

$0.00

$1,500.00

None

$0.00

0

$0.00

$0.00

$0.00

None

$0.00

0

$0.00

$0.00

Business Bank Account(s) Unused Sources of Credit

$0.00

None

$0.00

0

$0.00

$0.00


$0.00

None

$0.00

0

$0.00

$0.00

$3,000.00

None

$0.00

0

$0.00

$0.00

Real Estate with Allowable Loans**

$0.00

None

$0.00

0

$0.00

$0.00


$0.00

None

$0.00

0

$0.00

$0.00


None

$0.00

0

$0.00


None

$0.00

0

$0.00

$0.00

Pensions Real Estate


$12,000.00

$7,040.00 $0.00

Accounts Receivable

$0.00

None

$0.00

0

$0.00

$0.00


$0.00

None

$0.00

0

$0.00

$0.00

Vehicles Car #1

2001 Ford

$7,500.00

Cheaper Loans

$2,500.00

24

$0.00

$0.00

$450.00

Car #2

1998 Buick

$3,500.00

Cheaper Loans

$1,500.00

12

$0.00

$0.00

$350.00


$0.00

None

$0.00

0

$0.00

$0.00

Asset #2

$0.00

None

$0.00

0

$0.00

$0.00

Asset #3

$0.00

None

$0.00

0

$0.00

$0.00

Asset #4

$0.00

None

$0.00

0

$0.00

$0.00

Asset #5

$0.00

None

$0.00

0

$0.00

$0.00

Source




Expense

Amount Claimed

Amount Allowed



$2,000.00

$1,280.00


$5,500.00 38. Housing and Utilities

$1,700.00

$1,563.00




$0.00


$450.00

$475.00


$0.00


$350.00

$338.00


$0.00


$550.00

$448.00



$450.00

$450.00



32. Child Support

$0.00 41. Taxes***

33. Alimony


34. Other Income


$0.00

$0.00

$3,000.00

$3,000.00

$0.00

$0.00

$0.00

$0.00



$0.00

$0.00



$0.00

$0.00

$0.00

$0.00



$13,000.00



$0.00

$4,500.00


$0.00

$0.00




$13,000.00


Income-

Claimed LE-

Claimed LE

Allowed LE

$0.00

$5,471.00



$18.75

Due in Installments No OIC Settlement

N/A $18.75




$125,000


$12,260.00 $48,184.00 $437,680.00 $498,124.00

Page 189

Albert U. R. Broke's OIC (After) A B C D E F G H I J K L M N 1 Determining What Monthly Multiplier to Use 2 3/15/2007 Name (of taxpayer, "TP"): Albert U. R. Broke 3 Date of Analysis: Introduction The IRS estimates how much they can collect from you for your back taxes. This calculation is called the Reasonable 4 Collection Potential or RCP. The objective of this Application is to help you understand how your RCP is determined so that, where 5 possible, you can reduce it and successfully negotiate an Offer in Compromise ("OIC"). 6 7 One of the factors that determine your RCP is the number of months the IRS says you have to pay or your “Monthly Multiplier.” What 8 Monthly Multiplier they use depends on how fast you elect to pay the settlement and the time left in your “statutory collection period.” 9 10 The statutory collection period refers to the ten-year statue of limitations the IRS has to collect back taxes. This clock starts when 11 you file your tax return but don’t pay the full amount and, if and when, additional taxes are assessed. For any one tax year the IRS 12 normally uses the statutory clock that applies to the greatest amount due (i.e., what was due upon filing or what was later assessed). 13 Call (800) 829-1040 if you need help calculating the time remaining on your collection statute(s). 14 15 Monthly Multiplier based on settlement offer You have three different OIC settlement options to choose from: Lump Sum Cash 16 Offer, Short Term Periodic Payment Offer and Deferred Periodic Payment Offer. Each of these options has a different Monthly Multiplier. 17 If you are uncertain which type of offer to make, try all three to see what difference this makes to your RCP and then decide. 18 Cash Offer is where you pay the full settlement amount in five months or less of IRS acceptance. In this case, your Monthly 19 Multiplier is 48 or the number of months left for collection, whichever is less. Enter a "C" in cell L26 to elect this option. 20 Short Term Payment Offer is where you pay the settlement within two years of being approved. Here your Monthly Multiplier is 21 the lesser of 60 or whatever is left on the collection stature.* Enter a "S" in cell L26 to choose this option. 22 Deferred Payment Offer has you pay the settlement amount over the remaining months of the collection statute whatever that 23 number may be. In this case, your Multiplier is whatever months are left to collect. To elect this option enter "D" in L26. 24 25 What type of OIC settlement offer are you making? Enter "C", "S" or "D." D 26 27 What if your OIC covers more than one tax year? Which year's "assessment date" and Monthly Multiplier do you use? Your 28 best negotiating position is to take the earliest and most favorable assessment date and be prepared to argue the point with the IRS. 29 If they don't give, your counter argument is to use an "average." Complete the following table, the Application will compute your 30 Monthly Multipliers and let you select which one to use. 31 32 Year(s) Taxes Amount Percent of Number of Months Since Monthly 33 Are Owed Owed Total Owed Filing or Assessment Date Multiplier 34 40 40 24.0 2000 $75,000 60% 80 35 2001 $35,000 28% 65 55 55 15.4 36 2002 $15,000 12% 40 80 80 9.6 37 $0 0% 0 130 0.0 38 $0 0% 0 130 0.0 39 $0 0% 0 130 0.0 40 $0 0% 0 130 0.0 41 $0 0% 0 130 0.0 42 $0 0% 0 130 0.0 43 $0 0% 0 130 0.0 44 Total Owed $125,000 100% 45 46 Choosing your Monthly Multiplier Three possible Monthly Multipliers are show in the cells L57, L58 and L62 based on the data 47 entered above. The first Multiplier, in cell L57, is most favorable to the IRS since this Multiplier has the most time remaining to collect. 48 The best Multiplier for you (cell L58) is based on the least time left to collect. Finally, the Multiplier in cell L62 averages the Multipliers 49 for all the tax years and picks the best average for you. To see the worst case scenario, enter "1" in cell L64. This tells the Application 50 to use the IRS's Monthly Multiplier to calculate your RCP. For the best case enter a "2" in L64 which instructs the Application to use 51 the lowest Monthly Multiplier of any of your taxes years. To average all the year's Multipliers and strike a compromise, enter "3" in L64. 52 Chose which Multiplier (1, 2 or 3) you want to use for the scenario you're evaluating now and enter that in L64. 53 54 Monthly Chose 55 Multipliers One 56 80 1 IRS's Monthly Multiplier 57 Your very best Monthly Multiplier 40 2 58 Your best average Monthly Multiplier 59 Based on averaging the assessment dates 58 60 Based on weighted average of amounts owed 49 61 Your best average Monthly Multiplier: 49 3 62 63 Which Monthly Multiplier do you want to use? Enter "1", "2" or "3." 3 64 65 Your estimated Monthly Multiplier Based on the information provided, your Monthly 66 Multiplier is show in the box to the right. Note that this is a best guess and there is no 49 67 guarantee that this is the Multiplier the IRS will actually use in your specific case. 68 69 * Sometimes the IRS will demand you pay the greater of 60 months or the remaining statute when you select this option and they may 70 increase your payments if your finances improve. For these reasons, it's less risky to make a Cash Offer--if you can. 71

Page 190


Albert U. R. Broke's OIC (After) A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65

B


C

D

E


3/15/2007

F

G

H

I


TP State and County Los Angeles, CA Annual discount rate (if used): Albert U. R. Broke Number of People in TP Household 2 Monthly Multiplier $125,000 Amount Offered (including deposit)

0.0% 49 $1,500


Fair Market Value

Cash

Creditor

$50.00

Loan Amount

Term*

Monthly Payment Loan Lease

$0.00

0

$0.00

$0.00

$200.00

None

$0.00

0

$0.00

$0.00

Savings Account(s)

$0.00

None

$0.00

0

$0.00

$0.00


$0.00

None

$0.00

0

$0.00

$0.00


$0.00

None

$0.00

0

$0.00

$0.00


$0.00

None

$0.00

0

$0.00

$0.00

$3,000.00

None

$0.00

0

$3,000.00

$0.00

Real Estate with Allowable Loans**

$0.00

None

$0.00

0

$0.00

$0.00


$0.00

None

$0.00

0

$0.00

$0.00


None

$0.00

0

$0.00

$0.00


None

$0.00

0

$0.00

$0.00

Checking Account(s)

Pensions

None

Exemption

Real Estate


$9,000.00

$7,040.00

Accounts Receivable

$0.00

None

$0.00

0

$0.00

$0.00


$0.00

None

$0.00

0

$0.00

$0.00

Vehicles Car #1

New Car #1

$0.00

Car Lease Inc.

$0.00

0

$0.00

$450.00

$0.00

Car #2

New Car #2

$0.00

Car Lease Inc.

$0.00

0

$0.00

$300.00

$0.00

Asset #1

$0.00

None

$0.00

0

$0.00

$0.00

Asset #2

$0.00

None

$0.00

0

$0.00

$0.00

Asset #3

$0.00

None

$0.00

0

$0.00

$0.00

Asset #4

$0.00

None

$0.00

0

$0.00

$0.00

Asset #5

$0.00

None

$0.00

0

$0.00

$0.00

Other Assets

Source




Expense

Amount Claimed

Amount Allowed



$1,280.00

$1,280.00


$5,500.00 38. Housing and Utilities

$1,563.00

$1,563.00




$0.00


$450.00

$475.00


$0.00


$300.00

$338.00


$0.00


$448.00

$448.00



$900.00

$900.00



$1,200.00

$1,200.00

32. Child Support

$0.00 41. Taxes***

$5,000.00

33. Alimony


34. Other Income

$0.00

$1,109.00

$1,109.00

$750.00

$750.00

$0.00

$0.00


$0.00

$0.00


$0.00


$0.00









$13,000.00


$0.00

$5,000.00

$0.00

$0.00 $0.00 Net Differences



$13,000.00


Income-

Claimed LE-

Claimed LE

Allowed LE

$0.00

$0.00


Reasonable Collection Potential and Recommendation OIC Deposit (excludes $150 application fee) Due in Installments Total OIC Settlement

$1,469.39


$1,500.00


$30.61



$1,500


$410.00 $0.00 $0.00 $410.00

Page 191

Albert U. R. Broke's OIC (After) A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80

Page 192

B

C


D

E

F


Albert U. R. Broke


H


Change in Cash

$50 $200 $0 $0 $0 $0 $3,000

$0 $0 $0 $0 $0 $0 $0

$0 $0 $0 $0 $0 $0 $0

$0 $150 $1,500 $0 $0 $0 $0

$0 $0

$0 $0

$0 $0

$0 $0

$0 $0

$12,000

$9,000 $0 $0 $0 $0

$0 $0 $0 $0 $0

$0 $0

$0 $0

$0 $0 $0 $0

$7,500 $3,500

$0 $0

$2,500 $1,500

$0 $0

$5,000 $2,000

$0 $0 $0 $0 $0

$0 $0 $0 $0 $0

$0 $0 $0 $0 $0

$0 $0 $0 $0 $0

$0 $0 $0 $0 $0




$8,650



3/15/2007

$50 $350 $1,500 $0 $0 $0 $3,000



I





G

Total Desired

Expenses Paid

Expenses Paid

Expenses Paid

Actual Expenses

Desired

Actual

Expenses

from Income

from Food Budget*

from Stockpiles

less Desired Exp.'s

Stockpiles

Stockpiles

$31

$31

$2,000 $1,700

$1,280 $1,563

$0 $0 $0

$0 $720 $137

$0 $0 $0

$0 $4,320 $822

$0 $4,320 $822

$450 $300 $550 $900 $1,200 $5,000 $0 $1,109 $750 $0

$450 $300 $448 $900 $1,200 $5,000 $0 $1,109 $750 $0

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0

$0 $0 $102 $0 $0 $0 $0 $0 $0 $0

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0

$0 $0 $612 $0 $0 $0 $0 $0 $0 $0

$0 $0 $612 $0 $0 $0 $0 $0 $0 $0

$0 $4,500 $0 $18,490

$0 $0 $0 $13,031

$0 $0 $0 $0

$0 $483 $0 $1,442

$0 $27,000 $0 $32,754

$0 $2,896 $0 $8,650

$0 ($4,017) $0 ($4,017)




Sub-Totals


Assumptions


6 0.0%

$8,862


Total

$8,650 $212

$150 $31

$31 $212 $8,650 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

$8,862



Page 193

Page 194



Page 195

Page 196



Page 197

Page 198


a p p e n d i x

B

Successful OIC Applications

Case 1


Page 199

Page 200

Appendix B: Successful OIC Applications


Page 201

Page 202



Page 203

Page 204



Page 205

Page 206



Page 207

Page 208



Page 209

Page 210



Page 211

Page 212



Page 213

Page 214


Case 2


Page 215

Page 216



Page 217

Page 218



Page 219

Page 220



Page 221

Page 222



Page 223

Page 224



Page 225

Case 3

Page 226



Page 227

Page 228



Page 229

Page 230



Page 231

Page 232



Page 233

Page 234



Page 235

Page 236



Page 237

Page 238



Page 239

Page 240



Page 241

Page 242


a p p e n d i x

C

OIC Forms and Sample Letters

Blank IRS OIC application forms are posted on the IRS website at www.irs.gov/formspubs/lists/0,,id=97817,00.html. On the IRS site you can fill in the required information and download or print the completed forms. Below are listed the primary IRS forms you may need for your OIC application. Also, sample letters for corresponding to the IRS are provided for your convenience in this appendix. 1. Form 656, Offer in Compromise, is at http://www.irs.gov/pub/irs-pdf/f656.pdf. This form starts the OIC process. Note that this form was updated February, 2007, so be sure to use the latest version or your application will be rejected. 2. Form 656-A, Income Certification for Offer in Compromise Application Fee and Payment, is at http://www.irs.gov/pub/irs-pdf/f656a.pdf. This form is used only if applying for wavier of OIC application fee). 3. Form 656-L, Offer in Compromise (Doubt as to Liability), is at http://www.irs.gov/pub/irs-pdf/f656l.pdf. Use this form only if applying under the assumption you don’t owe the tax. 4. Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals (financial disclosure form for individuals), is at http://www.irs.gov/pub/irs-pdf/f433a.pdf. This financial disclosure statement is required from all applicants, as well. 5. Form 433-B, Collection Information Statement for Businesses (financial disclosure form for companies), is at http://www.irs.gov/pub/irs-pdf/f433b.pdf. This form is included if the applicant has a business. 6. Form 2261-C, Collateral Agreement—Waiver of Net Operating Losses and Capital Losses, must be asked for from the IRS. If included in your OIC settlement, this form waivers your right to use substantial tax loss carryovers or unused tax credits on future tax returns.


Page 243

7. Form 2848, Power of Attorney and Declaration of Representative, is at http://www.irs.gov/pub/irs-pdf/f2848.pdf. You only need to fill this out and submit it if you want to authorize someone to represent you before the IRS (e.g., handle your OIC). 8. Form 4506-T, Request for Transcript of Tax Return, is at http://www.irs.gov/pub/irs-pdf/f4506t.pdf. Use this form if you want to obtain your IRS records.

Page 244

Appendix C: OIC Forms and Sample Letters

[taxpayer’s name] [taxpayer’s address] [taxpayer’s telephone number(s)] [date of letter]

[name and address of IRS agent]

Dear [IRS agent]: I reviewed the analysis upon which my offer in compromise has been deigned and respectfully disagree with that conclusion. As the attached documents demonstrate, I believe the amount available to pay back taxes is overstated. My Net Business Income The IRS calculates my Net Business Income at $26,622 per year (equal to $2,218 per month). However, I have documented to the IRS that my monthly Net Business Income has been averaging $1,324 in 2005. The enclosed “Business Income & Expense” tables summarize the extensive records that were given to the IRS in July and in November 2005 that support this amount. My Schedule C forms for 2003 and 2004 also show earnings much less than $2,218 per month (see attached documents). Even averaging my Net Profit for the periods 2002 to 2004 and 2002 to 2005 does not come close to $2,218 per month (see Table 1). Equally important, my Gross Receipts and Net Profit have been continuously declining since 2001. Thus, averaging these years does not take into account the impact my age and health are having on my earning ability. Lastly, my Necessary Living Expenses on the IET Table needs to be amended to increase the amount allocated for Taxes (on current income) to $200 per month. I have been cutting back on my business and personal expenses to allow for this obligation. In summary, my current level of earnings and expenses are more appropriately used to estimate my ability to pay back taxes. Doing this shows that I have no extra funds after subtracting my allowed Necessary Living Expenses from my current income. Value of My Car


Page 245

The Kelly Blue Book website states that, if I sold my car today to a private party, the Fair Market Value is $4,950—not $7,475 as estimated by the IRS. The tradein value is even lower at $3,200. See attached printouts from www.kbb.com. According to KBB, if the car was 1) in “excellent” condition and 2) being sold by a dealership, their “asking price” would be $7,400. In reality, the car has been in two accidents and has 151,636 miles on it (versus the average of 96,000 miles according to KBB, see attached printout). So, at best, it’s in “good” condition. Reducing KBB’s Fair Market Value by 20% yields $3,960 which is less than the amount owed on the vehicle. Thus, there is no Net Realizable Equity with which to pay back taxes. This issue is very stressful and I would be grateful if you would take the above facts into consideration and change your recommendation. Thank you.

Sincerely,

[taxpayer’s name] [taxpayer’s Social Security number]

Page 246




Dear [IRS agent]: Enclosed are the items you requested in your letter dated November 15: 1. Updated bank statements: you have the statements through August. The latest statement I have received is for September (see attached). 2. Letter withdrawing [advisor’s name] Power of Attorney (attached). 3. Statement regarding the art collateral (attached). 4. Statement regarding LLC’s: I have not nor have I ever been involved in any way with any company named [name of company]. I was a principal in two LLC’s: [names of companies]. Both of these companies have been closed (see attached documents). 5. Registration on all vehicles titled in my name: there is only one (see attached). 6. Copy of rent receipts for past year (see attached accounting record from my landlord, [name of company]. 7. I do not have a separate office but do work out of my home. 8. Statement of proceeds from the sale of my home in 1992 (see attached). 9. Assets remaining after my bankruptcy was discharged in 2004 are detailed in the attached schedules. Under penalties of perjury, I declare that I have examined the accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct and complete. Sincerely,



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Dear [IRS agent]: I am writing in response to your letter dated November 18, 2004. There are four issues that you raise that I am responding to regarding my OIC application. Hopefully, this will clarify and resolve those items. The quotes beginning each section are from you letter so as to clearly identify the subject I am referring to. 1. “Please provide the missing trust information as requested.” I am not and never have been the recipient of on-going income from any trust. I did receive an inheritance from [name] but this was a one-time event. As part of my previous OIC response I included the “Final K-1” from her estate and a letter I wrote to the accountant who administered it requesting her to confirm that the estate is closed and no more distributions would be forthcoming. I still have not heard back from the accountant but you can also verify that it is closed by checking the estate’s EIN number [number] in the IRS files. Also, for your convenience I have attached copies of the Final K-1 and other related documents. 2. “You have failed to verify the outstanding debts…for [name of company]” I believe I qualify for an OIC without regard to my other outstanding liabilities— including the [name of company] promissory notes. I referenced these notes in my application to show the additional financial pressures I am under but, if you wish to exclude them, it should have no impact on my OIC eligibility. Regarding the collateral for those notes, the paintings are in the possession of the note holders and the prints have been in storage for seven years and are in unknown condition as of this date. Since 1997 we have made several attempts to market the prints but have yet to sell any—not one. All indications are that they are worthless. You are welcome to contact the note holders to verify all of this. The two note holders who have the collateral paintings in their possession are [names and telephone numbers]. 3. “…The taxpayer has the ability to earn in excess of $40,000.00 annually.”

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I am [age and occupation] who intermittently secures work to make money. Also, since 2001 my declining health has substantially hurt my ability to work (see attached “Personal Health History as of 11/30/04”). Thus, over the last five years, my Schedule C income exceeded $40,000 only once and averaged $23,032 or $1,919 per month (1999 through 2003). 4. “…This offer does not exceed the total of all assets…” Your calculations and conclusion assumes I have the ability to earn $40,000 annually or $3,333 per month. However, as shown above, this amount is much higher than my actual average Schedule C income over the past five years of $1,919 per month. It is also significantly above what I earned over the past three years (an average of $2,552 per month) which includes my peak earnings in 2001. Lastly, in your letter you increase my last three year monthly income from $2,552 to $2,902 by adding in the inheritance I received as if this would be an on-going source of income. The verifiable facts are that [name] estate is closed and I will not get any more money from this source. If you would please take these considerations into account, I am hopeful you will see that I am doing the best I can under trying circumstances and believe that an OIC agreement is warranted in this case.

Sincerely,



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Dear [IRS agent]: I again am grateful for all your help. I sorry to have to reapply for an Offer in Compromise but I have completed all the related applications and documentation (see enclosed). As I noted in my last communication to you, the continued downward trend in my income will make it impossible to repay the remaining debt:

Gross Receipts Net Profit Adjusted Gross Income

2003 $47,150 20,265 18,833

2004 $39,751 12,966 9,050

Percent Change (16%) (36%) (52%)

The documents included in this application are as follows: 1. Form 656 Offer in Compromise 2. Form 433-A Collection Information Statement for Wage Earners and Self-Employed Individuals 3. Form 433-B Collection Information Statement for Businesses 4. Item 1: Business Income & Expenses (last 6 months) 5. Item 2: Bank Statements (last 6 months) 6. Item 3: Check Register (last 6 months) 7. Item 4: Stock, Bond and Other Securities 8. Item 5: Divorce Settlement Agreements 9. Item 6: Household Expenses 10. Item 7: Inheritance from [name] 11. Item 8: [name of company] 12. Item 9: Car Loan 13. Item 10: Personal Health 14. Item 11: 2004 Federal Tax Return Please process my offer and contact me if you have any questions. Also, my $150 OIC fee was never refunded to me from my first application so would you please apply that to this case? Thank you.

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Under penalties of perjury, I declare that I have examined this offer, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct and complete.

Sincerely,



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a p p e n d i x

D

Frequently Asked Questions

1. Who can file an OIC? Any person or other entity that pays taxes can apply for an Offer in Compromise. This includes individuals, married couples, trusts, partnerships, corporations, and nonprofit organizations. It’s more difficult for a person with a recent criminal conviction to secure an OIC. In such cases the IRS looks to several factors including the seriousness of the infraction, the person’s reputation and their compliance with tax laws. Also, businesses do not account for large numbers of OIC applications. Since they typically have other liabilities as well as taxes, businesses utilize bankruptcy protections to reorganize or execute an orderly shutdown.

2. What are the three grounds for applying for an OIC? The three grounds for granting an OIC are: a) “Doubt as to Collectibility” (the tax is owed but the taxpayer doesn’t have the resources to pay it), b) “Econimic Hardship” (the tax is owed but paying it would impose an economic hardship or be unfair or inequitable) and c) “Doubt as to Liability” (the tax is not owed for some good reason). Most OIC applications are based on an inability to pay (“Doubt as to Collectibility”).

3. How long does the OIC process take and what does it cost? Under the Tax Increase Prevention and Reconciliation Act of 2005, the IRS has up to two years to accept or decline an OIC. The agency promptly reviews new OIC applications and returns any that are incomplete. Once accepted for processing, however, there begins a lengthy exchange of IRS requests for supporting documentation and taxpayer responses. Depending on the number of such inquiries, this stage can take anywhere from six to eighteen months. Note that, if the taxpayer doesn’t supply the information asked for and do so


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within 30 days, their OIC application is closed. On the other hand, the IRS has 24 months to respond to an OIC application and, after that, it’s deemed to be accepted. The costs include a filing fee of $150, a non-returnable deposit on the final settlement amount. The fee can be waived by low-income taxpayers who file IRS Form 656-A. The deposit depends on the amount offered in settlement and the terms (see “Documents to Submit with Your OIC Application” in Chapter 8). Lastly, the settlement will not be less than what the IRS calculates can be collected from the taxpayer (see “Reasonable Collection Potential”). The good news is that the average settlement is about 15% of the total amount owed.

4. How likely is it that the IRS will accept my OIC? About one out of four OIC applications is accepted. This statistic is misleading, however. Very few (if any) applicants analyze their situation from the IRS’s perspective prior to filing. Just calculating their Reasonable Collection Potential allows taxpayers to quickly determine what, if any, benefit could result from an OIC. Also, using the tools in this Application, they can make appropriate adjustments to their finances to further increase the likelihood of being approved. Plan ahead and achieve a quick, fair compromise with the IRS.

5. What recent changes have been made to the OIC program? The biggest change in the Tax Increase Prevention and Reconciliation Act of 2005 was to require a non-refundable deposit in addition to the OIC application fee. For filings offering a lump-sum settlement, the deposit is 20% of the amount proffered. For offers of payments over time, the deposit is the first installment. Possible ways to mitigate this added burden could be to submit a 656-A form to have the OIC application fee waved due to one’s income being below the poverty level. If a person qualifies for no fee, the deposit might possibly be waved, as well. Another potential solution would be to submit a reasonable but reduced offer, since the deposit is applied to the amount proffered, not the eventual settlement.

6. Can penalties and interest be included with taxes in an OIC? Yes, all outstanding amounts can be negotiated at once and be sure to include all disputed tax years in your application (see “Does it make a difference when I apply for an OIC?” below).

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Appendix D: Frequently Asked Questions

7. What should I offer to settle my OIC? Don’t offer less than the amount indicated by the Reasonable Collection Potential calculation. This figure is critical because that’s what the IRS assumes they can collect based on a taxpayer’s financial circumstances. They will not accept less from someone applying under a presumption of “Doubt as to Collectibility.” However, if the grounds for filing are “Economic Hardship” or “Doubt as to Liability”, the settlement could be much less or even zero.

8. What rights do I give up by applying for an OIC? OIC submissions based on “Doubt as to Collectibility” prohibit a taxpayer from contesting in tax court since they acknowledge owing the debt—even if the OIC is turned down. This applies to all the tax years listed in the application. Applying for an OIC also extends the time the IRS has to collect by the months the OIC is under consideration plus one year to whatever remains on the 10-year collection statute. If approved, the taxpayer is on ‘tax probation’ for five years. Also, any tax refunds are forfeited for the next three to five years. If rejected, the interest and penalties accumulated while the OIC was under consideration are added to the outstanding amount owed. If the OIC is revoked, all past taxes and interest become due. 9. Does it make a difference when I apply for an OIC? Definitely. Parts of the requirements to apply for an OIC are: 1) be current with quarterly income tax payments and withholding and 2) have filed all past tax returns. Therefore, the optimum time to apply is between January 1 and April 15 because any taxes due for the prior year can be included in the OIC. Conversely, the worst time to apply is in the fourth quarter because 1) the quarterly payments for that year have to be paid to be in compliance to file and 2) the current year’s tax liability (if any) can’t be included in the OIC negotiations. 10. What types of questions does the IRS ask after I apply? It’s very common for the agency to require an additional three months of detailed financial transactions to document your income and expenses. Supplemental information and materials can cover a very wide range of subjects such as bank statements, check registers, stock and bond trades, divorce settlement agreements, inheritances, loan and debt records, business records and agreements, accounts receivable, tools used in the trade or business, market value of assets, personal health, education and work experience, earning ability, the support requirements of family members and


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other dependents’ requirements and the like. Remember that all responses must be returned to the IRS within 30 days or the application is closed and the taxpayer must reapply.

11. Does the IRS remove my tax liens and levies when the OIC is approved? Unless removal of the lien or levy facilitates payment of the settlement, it will remain in place until all agreed upon amounts are paid. This is one of the advantages of a cash or lump-sum settlement since the tax liens are released within 30 to 60 days. Also, signing a collateral agreement can induce the IRS to release tax liens.

12. Are OIC applications open to public inspection? All OICs that are approved are open to the public for one year. The good news is that you can review accepted applications and learn from what others have done.

13. What options are available to me if my application is rejected? Within 30 days of being turned down an applicant can request the IRS’s rejection report, counter the IRS’s offer or amend the one submitted, appeal to Taxpayer Advocate Service, request an appeals conference or wait at least six months and resubmit the OIC. At this point the taxpayer is barred from taking the IRS to court since, as part of the OIC filing, they admitted owing the tax. Other options are try for “currently not collectible” or “53” status, consider filing for bankruptcy and/or consult with an asset protection advisor.

14. What property can the IRS seize and what is exempt from seizure? The IRS has the authority to take just about everything a taxpayer owns including their home, car, bank accounts, life insurance cash values, business assets, accounts receivable, retirement plans (see exception below), social security, wages, rental income, dividends and other sources of income. Exempt from seizure are 1) $7,720 allowance for “Fuel, Provisions, Furniture and Personal Effects”, 2) $3,860 exemption for “Tools and/or Equipment” used in a trade or business, 3) retirement plan assets that can’t be borrowed or distributed to the taxpayer and 4) irrevocable trusts.

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15. Will I get a warning before the IRS seizes my property? In most cases, yes. There are three actions required by law for the IRS to take prior to seizing a taxpayer’s property: 1) assess the taxes owed, 2) send a “Notice and Demand for Payment” and 3) send a “Final Notice of Intent to Levy” along with “Notice of Right to Hearing.” Thirty days after the last step, the IRS can place liens and levies on your assets and sources of income as well as take possession of them. Under a “Jeopardy Assessment”, however, the IRS uses an accelerated procedure without notice to assess and collect taxes from taxpayers judged to be flight risks and/or attempting to hide assets.


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a p p e n d i x

E

Glossary

Abatement

The IRS partially or completely cancels a taxpayer’s outstanding taxes, interest and penalties. Accounts Receivable

Amounts that are due from customers for products and/or services that have been delivered or provided. Allowable Loans

For the purposes of an Offer in Compromise, fully allowable loans are home mortgages, car loans, judgments, other “secured debts” as well as loans on business property and business purposes (accounts receivable finances and equipment purchaeses) and medical debts. Unsecured liabilities, such as credit cards and personal loans, may be allowed if the excess income (after expenses) is insufficient to repay them within 90 days, and making minimum payments leaves more than “a small amount” for the IRS. Payments on allowable loans are permitted as a deductible expense (up to set limits for home mortgages) when calculating the Reasonable Collection Potential. Also, see Reasonable Collection Potential and Non-Allowable Loans. Appeal

IRS processes whereby a taxpayer can contest the agency’s decisions. Within the IRS, the IRS Appeals Office is responsible for most appeals. Outside the IRS, a taxpayer may be eligible to seek redress in a court of law (see Tax Court, United States Court of Federal Claims, and United States District Court).


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Assessment

An amount that the IRS determines is payable over and above that which a taxpayer calculates is due. The IRS must send a Statutory Notice of Deficiency to initiate collection of an assessment. To challenge the assessment, a taxpayer must respond within 90 days (150 days if the notice was mailed overseas). Asset Protection

Any effort made to limit the ability of tax and legal authorities to seize or levy one’s property. Asset Equity Table

This part of the Reasonable Collection Potential calculation analyzes the net equity of all one’s assets (see Net Equity). With some exceptions, the total net equity from all property owned is included in the Reasonable Collection Potential (see Reasonable Collection Potential). Assets

Assets are all property, investments, and personal possessions that are owned by a taxpayer and have monetary value. Audit

The IRS’s review of a taxpayer’s return for accuracy, documentation, and compliance is termed an audit, but this process is referred to as an “examination” by the IRS. Automated Collection System (ACS)

After notices from an IRS service center go unanswered, the case is turned over to the ACS. This is a computerized system to contact taxpayers by mail and telephone to collect amounts owed. Bankruptcy

Bankruptcy is a court action that allows debtors to eliminate or reduce their liabilities and/or be granted more favorable terms for repaying debts. Certain restrictions apply as to which taxes and other obligations can be discharged or adjusted in bankruptcy. A Chapter 7 bankruptcy can eliminate all or most of a debtor’s liabilities. In Chapters 11, 12 or 13 bankruptcies, the debts can be reduced and the remaining amount paid over an extended time.

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Appendix E: Glossary

Capitalized Value

The current worth of a stream of money expected to be received over time. The common stock of a publicly traded company, for instance, could be capitalized or valued at 20 times current earnings, to account for the future monetary benefits anticipated from holding the security. Cash Offer

An offer to settle the outstanding taxes under an Offer in Compromise agreement with the IRS. With a cash offer, the total settlement amount must be paid within 90 days of IRS acceptance. Certified Public Accountant (CPA)

A tax and accounting professional who is qualified by education and training to perform sophisticated financial tasks, such as preparation of tax returns and financial statements. CPAs are authorized to represent clients before the IRS. Child and Dependent Care

Amounts taxpayers spend on dependent children and parents for their health and welfare. Depending on the perceived importance, and with proper documentation, such expenditures may be allowed by the IRS in calculating the Reasonable Collection Potential. Collateral Agreement

An agreement sometimes requested by the IRS as part of an Offer in Compromise settlement. Such agreements typically cover future events such as an increase in income. Criminal Investigation Division (CID)

An IRS branch that investigates individuals and businesses suspected of serious violations of tax law, such as fraud. Current Market Value

The monetary worth of an asset if sold in the present-day market. Currently Not Collectible Status

A status assigned by the IRS to taxpayers judged not to have the financial resources to pay their past tax liabilities. Also referred to as “53” status.


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Date of First Tax Assessment

The IRS has three years from when a tax return is filed to make an assessment for additional taxes. The initial date of an assessment is very important because it starts another statute of limitations: the ten years the IRS has to collect on the assessment. Lastly, this date is critical in calculating the Monthly Multiplier (see below) used in the Reasonable Collection calculation. If a taxpayer does not know the date of first tax assessment, they can request their tax records (see “Taxpayer Account Return”) or call 1-800-829-1040. Deferred Offer

An offer to settle the outstanding taxes under an Offer in Compromise agreement with the IRS. In a deferred offer, installment payments are made over the remaining months in the 10-year statue of limitations (see Statute of Limitations). Delinquent Return

A tax return that has not been filed when due and is beyond the extension periods allowed by the IRS. Discount Rate

An interest rate used to determine the present value of future cash flows. In this Application, the user has the option of applying a discount rate to future cash flows and thereby calculating the present value of his/her OIC settlement offer. (See cells I6 and I7 of the “Data Input and Results” spreadsheet.) Documentation

Supplemental material providing tangible proof to justify certain claims, deductions, expenses, valuations and the like made by the taxpayer to the IRS on their tax return, or in conjunction with other IRS forms, applications and proceedings. Documentation Period

Typically a three- to six-month period during which taxpayers monitor and record their detailed financial transactions for the IRS. For example, in an OIC application, such monthly income and expenditure figures are used to estimate the taxpayer’s Reasonable Collection Potential. The IRS usually requests an additional three months’ of detailed financial records in their follow-up questions to OIC applicants.

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Economic Hardship

“Economic hardship” is one of three grounds for petitioning the IRS for an Offer in Compromise settlement. To be successful a taxpayer must prove to the IRS’s satisfaction that paying back taxes will impose an undue hardship on them (and their family, if applicable). Very unusual events are needed to prevail in this defense, involving personal challenges, external problems, and/or bad advice from otherwise reliable sources. Enrolled Agent (EA)

A tax advisor and preparer who is allowed to practice and represent clients before the IRS. EAs must pass a difficult test or have five years’ experience working for the IRS, and maintain their professional designation through continuing education. Exemption

The IRS uses the term “exemption” in several ways: a) the deduction taxpayers can take from their income based on the number of persons (including themselves) who are dependent on them, b) the dollar amounts of certain expenditures that can be excluded from taxable income for specific reasons, and c) the types of property and amounts that the IRS cannot levy or seize for payment of taxes. Extension

Additional time in which to file a tax return. An automatic extension is available to delay filing an individual return until October 15. Further extensions and requests to delay payment of taxes, however, are rarely approved. Fair Market Value (FMV)

The transaction price negotiated between a willing buyer and seller for a given asset. Both parties are assumed to possess reasonable knowledge of the relevant facts and to not be under pressure to do the transaction. FMV may also be estimated by an objective, knowledgeable appraiser. Food, Clothing, and Miscellaneous Allowance

This allowance or exemption is permitted by the IRS in determining how much income is available to pay back taxes. As part of the Reasonable Collection Potential calculation, an allowance for these items is set according to the income level and number of dependents. With that said, additional amounts may be allowed depending on if special circumstances exist.


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Freedom of Information Act (FOIA)

A federal law whereby citizens can see their government records—including IRS files (see Taxpayer Account.). Fuel, Provisions, Furniture and Personal Effects Exemption

This allowance is for a taxpayer’s personal property that is exempted from paying taxes. Since January 21, 2004, IRC section 6334 (a) (2) set this exemption at $7,040. However, valuing such assets at garage sale prices of, say, 5% on the dollar of their original purchase prices indicates that $140,800 could be covered by this allowance. The net, realizable value of personal property above the allowance is included in the Reasonable Collection Potential calculation. Gift

The transfer of ownership in an asset without monetary payment or other consideration. A gift does not generate taxable consequences to the recipient but may do so for the giver, depending on the amount given. Housing and Utilities Allowance

This IRS allowance exempts up to a set amount, based on where you live and the number of dependents in your household. Excess expenditures are assumed to be available to pay taxes, and thus are included in the Reasonable Collection Potential calculation. Again, if special circumstances can be justified, additional amounts may be allowed. Individual Taxpayer Identification Number (ITIN)

The unique tracking number assigned by the IRS to each taxpayer. For most individuals this is a Social Security number, and for businesses it is an Employer Identification Number (EIN). Income Expense Table

That part of the Reasonable Collection Potential calculation that analyzes a taxpayer’s monthly income and expenses. Certain allowances are made for food and clothing, housing and transportation. Additional leeway is permitted for health and dependent care costs, as well as other outlays that can be proven to be necessary for the well-being and income generating capability of a taxpayer and their family.

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Information Return

Reports filed with the IRS showing amounts paid to or by a taxpayer. Common examples include notices, known as Forms 1099, that institutions send the IRS regarding stock dividends, interest income, royalties and other transactions. Installment Plan or Agreement

A settlement with the IRS that requires taxpayers to make monthly payments on their past tax liabilities until paid in full. Insurance Policy Cash Value

Life insurance policies frequently accumulate cash surrender values as a benefit. This equity that is not encumbered by loans is counted in the Reasonable Collection Potential. Interest and Penalties

Taxes that are not reported and paid when due begin to accumulate interest and penalties for non-filing and non-payment, where appropriate. For instance, as of the date of a tax assessment, interest begins to accrue. The interest rate charged by the IRS changes quarterly, compounds daily, and is not tax-deductible. In recent years it has averaged around 8% to 9% per year. Internal Revenue Code (IRC or the “Tax Code”)

Part of the tax laws of the United States as enacted by Congress. Internal Revenue Service (IRS)

The federal government agency of the United States Department of the Treasury that enforces the Tax Code. Jeopardy Assessment

An accelerated procedure used by the IRS without notice to assess and collect taxes from taxpayers judged to be flight risks and/or attempting to hide assets. Joint Tax Return

An income tax return filed by a legally married couple. Levy

The seizure or claim by the IRS on a taxpayer’s property and/or wages to satisfy unpaid tax liabilities.


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Lien

See Tax Lien. Liabilities

Money owed on taxes and other obligations. Liabilities such as loans are subtracted to determine the net equity in an asset when estimating the Reasonable Collection Potential. Payments on liabilities are handled differently, however, depending on the amount and the underlying asset that is encumbered (see Chapter 4: Asset and Liability Strategies). Liquid Assets

Assets that are or can be quickly converted to cash. Examples include bank accounts, certificates of deposit, publicly traded stocks and bonds, mutual funds, and the like. Liquidation or Quick Sale Value

The worth of an asset assuming its quick or forced sale, such as when a company is going out of business. Monthly Multiplier

The monthly multiplier is 120 (the number of months in the 10-year statute limit; see Statute of Limitations) minus the number of months that have passed since the IRS first assessed a tax deficiency (see Date of First Tax Assessment). For example, if the IRS assessment was received 30 months ago, the multiplier would be 90 (i.e., 120 minus 30). The monthly multiplier is used in calculating the Reasonable Collection Potential. Net Equity

The estimated monetary worth of an asset, after deducting any loans and liabilities against the asset and the costs of selling it. Non-Allowable Loans

Non-allowable loans in the context of an Offer in Compromise are loans on boats, recreational vehicles (RVs), vacation homes, and liabilities not permitted under Allowable Loans (see above). Special circumstances would have to apply for payments on non-allowable loans to be deductible expenses in the RCP calculation (see Reasonable Collection Potential).

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Non-Liquid Assets

Assets that are difficult and costly to convert into cash such as a home or business. Notice of Intent to Levy

The IRS notice sent to taxpayers prior to placing a lien or levy on their assets and/or income. This letter (“CP 504”) indicates that the Service Center has exhausted their collection processes and is passing on the case to the Automated Collection System (see Automated Collection System) for more aggressive action. Offer in Compromise (OIC)

An IRS program that permits taxpayers to apply for an elimination or substantial reduction of their outstanding tax liabilities. There are three grounds for granting an OIC: a) “Doubt as to Collectibility” (the tax is owed, but the taxpayer does not have the resources to pay it), b) “Economic Hardship” (the tax is owed, but paying it would impose an economic hardship or be unfair or inequitable) and c) “Doubt as to Liability” (the tax is not owed for some good reason). Most OIC applications are based on an inability to pay (“Doubt as to Collectibility”). To effectively demonstrate such a lack of funds, a taxpayer must prove that their Reasonable Collection Potential is far below their outstanding tax liability. In addition, they must submit documentation to satisfy the IRS that this is the case. Offer in Compromise Forms

An OIC application often requires the following IRS forms: a) Form 656: Offer in Compromise, which starts the OIC process, must be filed by all applicants; b) Form 433-A: Collection Information Statement for Wage Earners and Self-Employed Individuals, which is a financial disclosure statement, is also required from all applicants; c) Form 433-B: Collection Information Statement for Businesses, which is included with the two above if the applicant has a business; d) Form 656-A: Income Certification for Offer in Compromise Application Fee and Payment, which is a statement that the applicant doesn’t have to pay the OIC application fee due to low income (relative to family size and earnings); e) Form 656-L: Offer in Compromise (Doubt as to Liability), which is used if the OIC application is under the assumption that the tax is not owed; f) Form 2848: Power of Attorney and Declaration of Representative, which is needed to authorize someone to represent a taxpayer before the IRS (e.g., handle the OIC), and g) Form 4506-T: Request for Transcript of Tax Return, which is submitted to request a copy of a taxpayer’s IRS tax records. See Appendix C for directions to obtain any of these forms.


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Payroll Taxes

Taxes that employers must deposit and report for the benefit of their employees. These taxes include federal income taxes and FICA contributions to Social Security and Medicare. Petition

A form submitted by a taxpayer to the United States Tax Court to contest an IRS assessment or proceeding. Power of Attorney

IRS Form 2848, which taxpayers sign to authorize tax professionals to represent them in matters before the agency. Qualified Retirement Plans

Government-approved programs that permit tax favorable treatment of money set aside for retirement. Examples are IRAs (including Roth IRAs), 401(k) plans, company pension and stock purchase plans, and the like. Real Property

Land, and whatever is built or growing on it. Reasonable Collection Potential (RCP)

The IRS’s measure of the capacity of a taxpayer to pay current and past due taxes. The RCP is the sum of three separate calculations: a) the net equity in one’s assets, b) income available to pay taxes after allowing for certain expenditures, and c) income that will become available as existing loans, such as a car loan, are paid off (see Retired Debt Calculations). If the RCP is equal to or greater than the total taxes owed (including interest and penalties), the IRS will demand full payment. If the RCP is less than the taxes due, then the IRS will be more open to negotiating an OIC settlement. Retired Debt Calculations

That part of the Reasonable Collection Potential calculation that analyzes the amount of income that becomes available to pay taxes once installment loans are paid off. Also included in this figure is the amount, if any, by which car loan payments exceed the IRS’s allowance for this expenditure. Revenue Agent

An IRS employee with the Examination Division who audits tax returns.

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Revenue Officer

An IRS employee with the Collection Division who works out of a local agency office on taxpayer collection matters. Revenue Procedure

The IRS’s interpretation of how taxpayers must comply with the Internal Revenue Code. Revenue Ruling

The IRS’s official interpretation of how specific tax laws will be enforced. Seizure

See “Levy” and “Tax Lien.” Short-Term Deferred Offer

An offer to settle the outstanding taxes under an Offer in Compromise agreement with the IRS. In a short-term deferred offer, the total settlement amount must be paid within two years of IRS acceptance. Special Agent

An IRS employee with the Criminal Investigation Division who investigates serious tax law violations (see Criminal Investigation Division). Statute of Limitations

The time limits the IRS has to collect unpaid taxes. Two common limitations are: a) the three years the government has to assess additional taxes after a tax return is filed, and b) the ten years the IRS has to collect on a tax assessment. Statutes of Limitations may be waived or extended by actions taken by the taxpayer. For instance, the 10-year statute is extended by the months the OIC is under consideration plus one year. Tax Attorney

A lawyer who specializes in tax matters and is approved to represent clients before the IRS.


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Tax Court

A federal court in which taxpayers appeal IRS assessments and rulings. This is the only court that does not require payment of the tax before it is litigated. In addition, the court rules and procedures are relaxed so that taxpayers can represent themselves. Tax cases involving less than $50,000 (excluding interest and penalties) per tax year are tried in the Small Case Tax Court. If the contested amount is more than $50,000, the case is litigated in the Regular Tax Court. Tax Liability

The amount of taxes owed to the IRS based on the Internal Revenue Code. Tax Lien

A claim made by the IRS against a taxpayer’s property to secure the payment of taxes. A tax lien allows the government to seize the property or be paid out of the proceeds when it is sold. Liens are filed with the county recorder or Secretary of State where the taxpayer lives and/or owns property. Tax Return

A form required to be filed annually with the IRS by individuals, companies, trusts, and other legal entities, showing their income, tax-deductible expenses and resulting tax liability during a tax year. Taxpayer

Anyone or legal entity subject to the Internal Revenue Code, and therefore required to file an annual tax return. Taxpayer Account

IRS records on a taxpayer containing their history of tax payments, assessments, reported income (see Information Returns) and similar data. Also referred to as a taxpayer’s Master File Transcript (for individuals) or Business Master File (for companies), these records can be requested using IRS Form 4506-T: Request for Transcript of Tax Return or through a Freedom of Information Act (FOIA) request. Taxpayer Advocate Service (also, Taxpayer Advocate Office)

A division of the IRS, in which Taxpayer Advocates work out of local IRS offices and Service Centers to help taxpayers with unresolved problems. These IRS troubleshooters assist in the prompt and fair handling of complaints.

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Taxpayer Assistance Order

An order that a Taxpayer Advocate can issue to override actions taken by other divisions within the IRS. Taxpayer Bill of Rights

A law passed by Congress in 1988 to specify protections taxpayers have against the IRS. This legislation lays out what actions the agency is permitted and prohibited from taking in dealing with taxpayers. Tools and/or Equipment Exemption

This allowance is for the tools of a taxpayer’s business or trade that are exempted from paying taxes. In 2007 IRC6334 (a)(3) was amended to increase this exemption to $3,860. However, valuing such assets at liquidation-sale prices rather than their original purchase prices indicates that much larger sums can be covered by this allowance. The net, realizable value of tools and equipment above the allowance is included in the Reasonable Collection Potential calculation. Transcript of Tax Return

See “Taxpayer Account.” Transportation Allowances

This exemption is permitted by the IRS in determining how much income is available to pay back taxes. As part of the Reasonable Collection Potential calculation, auto exemptions are divided into “ownership” costs and “operating” expenses. Ownership allowances depend on the number of cars owned, and operating costs vary with where you live and the number of cars you have. If you do not own any cars, then a public transportation allowance is permitted. United States Court of Federal Claims

A court that hears tax cases but requires litigants to pay their tax liability first. Also, this court only allows lawyers to represent taxpayers—not CPAs or enrolled agents. United States District Court

Another court where tax cases can be contested. Similar to the Court of Federal Claims, only an attorney can represent taxpayers and the outstanding tax must be paid in advance.


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Waiver

Voluntarily giving up a legal right. For example, when an OIC application is submitted, the taxpayer temporally agrees to extend the 10-year Statue of Limitations, and thereby waives the right to have it continue to run during the negotiations period plus one year thereafter.

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a p p e n d i x

F

Communicating with the IRS

The IRS bureaucracy spans many very specialized departments; so many, in fact, that communication with the agency is challenging and requires special precautions. These guidelines may help you. 1. General tips: A. Always be polite, to the point, and professional in your written and oral communications. – i. Organize your presentation before talking or meeting with IRS personnel. – ii. Specifically, don’t anger them by complaining, misleading and treating them rudely. – iii. Don’t lie or intentionally deceive the IRS. B. Convey your good faith and sincere desire to resolve your tax problem. Always appear cooperative. Avoid any hint that you’re stalling or being frivolous. – i. Good behavior can possibly stop IRS collection efforts and, most importantly, get the Revenue Officer on your side. C. Promptly respond to IRS correspondence—especially within stated deadlines. Don’t ignore IRS letters and notices. D. Be patient and work through the system. E. Don’t over promise what you will do and when it will happen. F. Don’t volunteer information to the IRS. G. Don’t trust the IRS or its employees. H. Don’t discuss your confidential tax information and strategies with anyone. I. Keep records of your communications with the IRS and any payments.


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2. Oral communications A. It’s always best to call the number of the person you’re dealing with at the IRS. As a fallback, try the general number: 1-800-829-1040. B. Keep a telephone log of IRS personnel to whom you speak (including their name and employee number), date and time and a summary of your conversation (see template at end of this appendix). – i. Note the things you agreed to do and by when. They usually make entries in your computer file to track such things. C. Telephone conversations are limited, in that there’s no hard record and complex information can’t be exchanged. Therefore, it’s best to communicate in writing. 3. Written communications A. The IRS is highly computerized and their preferred communication mode is forms, because these are routed to (hopefully) the right place and easily processed. – i. Some IRS form can be found for just about any purpose. Simply download it from their website, fill out on your computer, print the form, and mail or fax it to the appropriate person or department. – ii. Forms can be ordered by calling 800-829-1040 or on the IRS website at www.irs.gov/formspubs/lists/0,,id=97817,00.html. B. If you send a letter or information package to the IRS, always give your full name, social security or employer identification number (EIN), and daytime telephone numbers, plus times when you are available during the day. Date and sign the letter. – i. Mail to IRS using certified mail, return receipt requested (or by a shipping service such as FedEx or UPS), so they have to sign for it and you have proof it was sent—especially if you’re up against a deadline. Be sure to retain these shipping records. – ii. Keep a record of when and what forms and documents you’ve sent to the IRS. – iii. Call or write the IRS if you haven’t heard from them within 60 days with copies of prior correspondence.

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Appendix F: Communicating with the IRS

– iv. If they still don’t respond, consider contacting the Taxpayer Advocate Service. – v, See Appendix C for sample letters to send the IRS. C. Never send original documents to the IRS. Forward copies of your prior correspondence, IRS notices, canceled checks (if applicable), or other materials when you need to document your case.

Table F-1:

IRS Telephone Log

IRS Employee Spoke with

Date


Name

Badge Number

Subject Matter and Agreements

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Appendix F: Communicating with the IRS

a p p e n d i x

G

Other Choices in Dealing with the IRS

You have many alternatives available to you in dealing with the IRS besides an Offer in Compromise. In general, these options are contained in numerous ”macro strategies” that range from filing bankruptcy and protecting your assets to suing the IRS. ”Micro strategies” fall into three categories: 1) pay the tax (as advantageously as possible), 2) negotiate the tax (using various methods), or 3) avoid the tax altogether (if you can legally do so). The Tax Co-Op, Inc.’s new website, www.taxlifeboat.com, will assist taxpayers to determine which of these solutions best fits their situation and provide them with the resources to implement the strategy or strategies they select. Purchasers of this Application will receive a 30% discount on the fees charged by the website.


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Appendix G: Other Choices in Dealing with the IRS

a p p e n d i x

H Bibliography

Bibliography and Resources

Aczel, Amir D. How to Beat the IRS at Its Own Game. New York: Four Walls Eight Windows, 1995. Botkin, Sandy. Lower Your Taxes—Big Time! Wealth-Building, Tax Reduction Secrets from an IRS Insider. New York: The McGraw-Hill Companies, Inc., 2003. Covic, Bobby. Everything’s Negotiable! How to Bargain Better to Get What You Want. Pendulum Publishing, 2003 Crouch, Holmes F., Contesting IRS Penalties. Chicago: Allyear Tax Guides, 2002. Daily, Frederick W. Stand Up to the IRS, 7th ed. Berkeley, CA: Nolo Press, 2003. Estill, Scott M. Tax This! An Insider’s Guide to Standing Up to the IRS. Bellingham, WA: Self-Counsel Press, 2002. Epstein, Lita. The Complete Idiot’s Guide to Tax Breaks and Deductions. Indianapolis: Alpha Books, 2003. Goldstein, Arnold S. Solving IRS Problems. Chicago: Socrates Media, LLC, 2004. Goldstein, Arnold S. How to Settle with the IRS…For Pennies on the Dollar. Deerfield Beach, FL: Garrett Publishing, 1997. Kaplan, Martin S. What the IRS Doesn’t Want You to Know, 9th ed. Hoboken, NJ: John Wiley & Sons, Inc., 2004.


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Melvin, Sean P. Settle Your Tax Debt.: How to Save Thousands Using the IRS Offer in Compromise Program. Chicago: Dearborn Financial Publishing, 1998. Pilla, Daniel J. How Anyone Can Negotiate with the IRS—And Win! White Bear Lake, MN: WINNING Publications, 1988. Pilla, Daniel J. The IRS Problem Solver, from Audits to Assessments—How to Solve Your Tax Problems and Keep the IRS Off Your Back Forever. New York: ReganBooks, 2004. Schnepper, Jeff A. How to Pay Zero Taxes, 21st Edition, New York: The McGraw-Hill Companies, Inc., 2004. Tyson, Eric, David J. Silverman, and Margaret Atkins Munro. Taxes for Dummies 2005. Hoboken, NJ: John Wiley & Sons, Inc., 2005. Yancey, Richard. Confessions of a Tax Collector, New York: HarperCollins Inc., 2004.

On-Line Resources

All Law www.alllaw.com American Bankruptcy Institute, The www.abiworld.org American Law Sources On Line www.lawsource.com Bankruptcy Lawfinder, The www.agin.com/lawfind Commercial Law League of America www.clla.org Estate and Charitable Laws and Tools www.charitableplanning.com e-bankruptcy.com www.e-bankruptcy.com Federal Trade Commission—Consumer Protection www.ftc.gov/ftc/consumer.html

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Appendix H: Bibliography and Resources

InterNet Bankruptcy Library www.bankrupt.com InternetOracle www.internetoracle.com/legal.html LawAid www.lawaid.com LawCrawler www.lawcrawler.com LawRunner www.lawrunner.com Legal Information Institute www.4law.cornell.edu/uscode/11 Negotiate with the IRS www.bobbycovic.com Tele-Tax Topics www.irs.ustreas.gov/tax_edu/teletax/index.html USALaw www.usalaw.com/linksrch.cfm


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Appendix H: Bibliography and Resources

i n d e x

Index Allowable Loan, 33-34, 259 Allowances. See Exemptions Appeal, 8, 125, 135-136, 256, 259, 270 Application Forms Also see Documentation and Internal Revenue Service Assessment, 7, 27-30, 32, 257, 260, 262, 265-270 Asset Protection, 5, 52, 54, 256, 260 Asset Equity Table, 3, 34, 47, 80, 260 Entering data, 33-35 Food, clothing & misc., 58, 59, 61, 69-71, 88, 95, 108-109, 119, 263 Furniture, personal property, 33-35, 38, 42, 47, 52-53, 58, 65, 71, 82, 90, 95, 109, 256, 264 Housing and utilities, 20, 39, 53, 59, 264 Ill-liquid assets, 33-35, 41-43, 46-49, 52, 266 Income and life style, 40, 52 Liquid or near-cash assets, 34, 41-42 Pensions, 34, 38, 42, 43 Semi-liquid assets, 40, 43 Tools and equipment, 34, 39, 65, 84, 95, 256, 271 Transportation, 39, 58-59, 62, 69, 265, 271 Valuing, 33-34, 263-265, 271, 280 Bankruptcy, 28, 57, 134, 137, 247, 253, 256, 260, 277 Bibliography and Resources, 279-282 Cash Offer, See Offer in Compromise Child and Dependent Care, 58-59, 261 Charitable Remainder Trust, 47, 53, 101, 105 Collateral Agreement, 7, 124, 133-134, 243, 256, 261 Communication with IRS, 243-252, 273-275 Also see Documentation Telephone log Date of First Tax Assessment, 27-28, 262, 265-266 Deferred Offer, See Offer in Compromise Discount Rate, 57-58, 80, 262 Documentation,3, 10-11, 23-24, 49, 55-61, 65, 68-70, 95,124, 133, 250, 253, 262 Also see Communication with IRS and Tax Records Documents with OIC application, 65, 123-124, 250 Documentation "Catch 22", 125, 133 Response templates, 125-132 Telephone log, 272, 274-275 Documentation Period, 23-24, 49, 55-56, 59-60, 65-69, 124, 262 Doubt as to Collectibility, 4, 253, 255, 267 Doubt as to Liability, 3, 123, 242, 253-254, 266-267


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Effective Tax Administration, 12, 253-254, 266 Evans, Thomas Author's background, 5, 289 Examples, Jeff I. O. Alot, 13-26 Before and after analysis, 139-144 IRS application forms, 145-150 OIC solution, 20-26 John Taxwise, 27-72 Assets and liabilities, 35-36 Before and after analys2s, 151-156 Budget strategies, 68-78 Cash flow strategies, 66-67 Expense strategies, 61-64 Ill-liquid assets, 46-48 Income and expense, 37-38 Installment loans, 46-51 Multiplier and asset strategies, 30, 44-46 Roy No Canpay, 73-95 Before and after analysis, 157-162 Beginning RCP, 73-80 IRS application forms, 163-174 OIC solution, 79-88 Testing and implementation, 89-95 Mary N. Trouble, 95-110 Before and after analysis, 175-180 Beginning RCP, 95-100 IRS application forms, 180-186 OIC solution, 100-108 Testing and implementation, 105-110 Albert U. R. Broke, 110-122 Before and after analysis, 187-192 Beginning RCP, 110-115 IRS application forms, 193-198 OIC solution,115-121 Testing and implementation, 118-122 Accepted OIC Application Forms, 199-242 Case 1, 199-214 Case 2, 215-225 Case 3, 226-242 Exemptions, 32-33, 38-39, 56, 68, 271 Also see Assets Determining IRS exemptions, 32-33, 38 Fair Market Value (FMV), 33-34, 47, 53, 65, 105, 115, 118, 246, 263 FOIA. See Freedom of Information Act

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index

index

Food, Clothing, and Misc., see Assets Forms, see Documentation, Internal Revenue Service Freedom of Information Act, 28, 135, 264, 270 Frequently Asked Questions, 253-258 Fuel, Provisions, Furniture and Personal Effects, 38, 53, 256, 264 Also see Assets Gifting, 47, 53, 65, 101, 106, 263 Also see Charitable Remainder Trust Glossary, 258-272 Hardship (economic), 4, 10, 52, 57, 253, 255, 263, 267 Housing and Utilities, see Assets Illiquid Assets, see Assets Income and Expense Also see Strategies Entering data, 27, 33, 73 Income Expense Table, 3, 57, 264 Also see Income Expense Table spreadsheet in Application Installment Agreement, 8, 265 Interest and Penalties, 8-9, 133, 255, 259, 265, 268-269 Internal Revenue Code, 3, 38-39, 265, 269, 270 Internal Revenue Service (IRS), 265 Also see Communication with IRS Exemptions and allowances, see Assets (different types), 32-34 Forms, 3, 5, 8, 10, 23, 28, 49, 70, 94, 110, 124, 243-252, 262, 265, 267, 274 Getting tax records see Tax Records Perspective on OIC case, see Reasonable Collection Potential Levy, 7-8, 256-257, 260, 263, 265, 267, 269 Liabilities, 11, 32-33, 35, 48-49, 65, 68, 89, 95, 110, 122, 248, 253, 259, 260, 261, 265-267 Life Insurance, 34, 43, 58, 60, 256, 265 Lien, 7, 10, 41-43, 46, 52, 80, 125, 133, 256-257, 261, 263, 266-267, 269, 270 Liquid Assets, see Assets Loans Also see Strategies and Retired Debt Calculations spreadsheet in Application Allowable loans, 33, 258, 259 Installment loans, 42, 46, 268 Non-allowable loans, 33, 259, 266 Monthly Multiplier, 3, 13, 20, 27-30, 33, 41-45, 47-49, 55, 60-61, 73, 79-80, 95, 110, 115, 262, 266 Also see Monthly Multiplier spreadsheet in Application Calculating, 29-30 Net Equity, 3, 32, 34-35, 40, 43, 47, 260, 266-267 Offer in Compromise (OIC), 3, 4, 5


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Also see Documentation, Examples, Forms and Strategies Advantages and disadvantages, 7-8 Application fee and deposit, 10, 124, 136, 242, 254, 267 Approval rates, 4, 7 Best and worst scenarios, 9-10 Reasons why rejected, 10-12 Three reasons for granting, 4, 267 Types of settlement offers, 29 Cash, 29, 30, 124, 256, 261 Deferred, 29, 30, 262, 269 Short-term, 29, 52-53, 269 OIC Calculator i, 3, 13-26, 73 Power of Attorney, 124, 243, 247, 267-268 Quick Sale Value. See Liquidation Value Real Property, 268 Reasonable Collection Potential (RCP), 3, 11, 13, 27-40, 254-255, 259, 260-268, 271 Also see Examples and Data Input and Results spreadsheet in Application Use by IRS, 35-37, 42-43, 47, 49 Retired Debt Calculations, 3, 49, 57-58, 96, 268 Also see Retired Debt Calculations spreadsheet in Application Seizure. see Lien, See Levy Short-term offer, see Offer in Compromise Social Security, 10, 57, 246, 248, 251, 256, 264, 268, 274 Strategies, Acceptance of application, 133-134 Asset protection, 5, 52, 54, 256, 260 Budgeting, 56, 59, 68-70 Business, 52-60 Cars, 42, 47, 58, 271 Cash, 41-46, 52-54, 65, 68-115 Cash flow, 66, 80, 87, 94, 261-262 Charitable remainder trust, 47, 53, 101, 104 Discount rate, 57-58, 262 Documentation period, 49, 55-56, 59-60, 64, 68-69, 262 Gifting, 53 Implementation, 59, 65, 94, 109 Also see Implementation spreadsheet in Application Income and expense, 53-64, 87, 104, 117, 264 Income and life style assets, 42, 52-53 Installment loan strategies, 42, 46-50 Liquid or near-cash assets, 41-43 Monthly Multiplier, see Monthly Multiplier Rejection of application, 10-12, 135-136, 256

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index

index

Semi-liquid assets, 40, 43 Spouse's income, 47, 57 Stockpiles and prepaid expenses, 23, 49, 54, 59, 69-70 Type of offer to make, 29 Statute of Limitations, 27-28, 262, 272 Tax Code, see Internal Revenue Code Tax Court, 9, 136, 255, 259, 266, 270 Tax Lien or Levy, see Lien, Levy Tax Return, 8, 11, 28, 47, 124, 133, 136, 243, 244, 255, 260, 262-263, 265, 267-271 Tax Records, 28, 133, 262, 267 Obtaining your IRS records, 27-28 Taxpayer Account, 262, 264, 270-271 Taxpayer Advocate Office. See Taxpayer Advocate Service Taxpayer Advocate Service, 10, 57, 125, 135, 256, 270, 274 Taxpayer Assistance Order, 28, 271 Taxpayer Bill of Rights, 271 The Tax Co-Op Company background, 5 Founders, 5-6 Tools and/or Equipment, see Assets Transportation, see Assets United States Court of Federal Claims, 259, 271 United States District Court, 259, 271


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index

a u t h o r

About the Author Thomas M. Evans, Executive Editor of the upcoming Happy About Tax Remedies Series, is President of The Tax Co-Op Inc. and has spent the last 30 years formulating and implementing business strategies for companies as a senior executive. Over the past ten years, he developed proprietary computer programs for negotiating with the IRS, business simulation and debt funding for companies. Mr. Evans has lectured at Stanford Business School, University of San Francisco, Golden Gate University and Menlo College on topics related to business strategy. He has an M.S. in systems analysis and decision theory from Stanford University; an MBA from the University of Southern California; graduate studies in mathematics and economics at the University of Minnesota; and a B.A. in economics from Cal State Northridge. Mr. Evans is a past Dean of Financial Planning Programs, has served on the Board of Governors for the Los Angeles Society of Financial Analysts and as director of the Small Business Development Center in Chicago.


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This book delivers enjoyment, motivation and permission. It discusses the serious business of money through a humorous memoir with a positive message. The reader, particularly women, are empowered to handle their own finances. They are also given permission not to have to know everything about finances, job or career to succeed. Evelyn Preston's initiation into the financial field began after receiving a family legacy and meeting a persuasive broker. Snowing her with his sales skills and treating her as his “special” client, Mr. Enthusiasm and Charm helped evaporate her money before cajoling her into earning a securities license to make up her personal investment losses. Paperback: $19.95 323pgs eBook: $11.95 323pgs

Create the Joint-Venture that will change your ability to succeed!. Each chapter gives you clear instructions, concise knowledge and easy to implement instructions to make your next joint-venture the last one you will ever need to start! Paperback:$19.95 147pgs eBook:$ 11.95 112pgs

Purchase these books at Happy About http://happyabout.info or at other online and physical bookstores.

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author

B o o k s

Other Happy About Books

Moving From Vision to Reality This book combines both the biblical and business principles with practical experience to allow you to fulfill your 'true' purpose in life. Many people have dreams but they do not do anything to fulfill them for the fear of failure as well as insecurity about how they will survive as they attempt to execute them. After reading this book, you will be: Paperback: $19.95 116pgs eBook: $11.95 116pgs

Live the life you were meant to live! The 30day Bootcamp: Your Ultimate Life Makeover is a step-by-step program that will teach you all of the tips, tricks, and techniques you need to get back in the driver’s seat of your life. Paperback: $19.95 248pgs eBook: $11.95 248pgs


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Additional Praise for ‘Happy About Tax Relief’

“A step-by-step ‘cookbook’ that takes you through the Offer in Compromise process. Even if you use an accountant, this is a great resource for analyzing and resolving your tax liability problem.” Michael Park, CPA, Dunham Associates CPAs, San Jose, CA

"Higher IRS rejection rates of OIC’s require a winning strategy to secure approval. This software program gives you an edge in planning. Plus, the extensive examples show how to overcome real-life tax problems.” Shawn R. Perez, Tax Attorney, Las Vegas

"The software that comes with this excellent book is a welcome bonus. It’s well thought out, easy to use and gives great insight into how to get an OIC accepted." R. R. “Bobby” Covic, Enrolled Agent, Author of "Everything's Negotiable"

"Having done tax preparation and dealt with the Internal Revenue Service since 1982 I can appreciate all the extra help that I can get when it comes to the complicated procedure of 'offer in compromise.' Mr. Evans has written a step-by-step 'how to' book on this precise issue in a practical way. He has provided ample illustrations in his book and the accompanying Excel worksheets to guide you through the maze that is offer-in-compromise." Steven C. Lam, CPA, Sunnyvale, CA

"Sound advice and a very practical approach to an Offer in Compromise. Useful to both tax practitioners and sophisticated individuals. I plan to use the book and software in my practice in the future." Jeffrey K. Kolsin CPA, Fountain Valley, CA

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Books

Books

Obtaining the OIC Calculator™ The book includes the OIC Calculator™, a Excel workbook that helps you strategize and qualify for an Offer in Compromise. NOTE: To install and run the Application, you must have Microsoft Word and Excel software programs on your computer. If you did not receive the OIC Calculator™ with your purchase, you can obtain your copy by sending e-mail to [email protected]. In your e-mail, please use the subject line “OIC Calculator” and include the date, place of purchase (store name and location), purchase price, computer type, and operating system in the body of your message.


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Happy About Tax Relief: The Offer in Compromise Solution

A Happy Solution

The Offer

The Offer

Conditional Offer

Terminal Compromise

Carnal Compromise

Terminal Compromise

Terminal compromise

terminal compromise

Carnal Compromise

Terminal compromise

Terminal compromise

Carnal Compromise

Terminal Compromise

Forced Offer

Stress Relief

Stress Relief

Forced Offer

J.K. Lasser's New Tax Law Simplified 2011: Tax Relief from the American Recovery and Reinvestment Act, and More

The Offer She Couldn't Refuse

Conditional Offer

Intellectual compromise: the bottom line

Alternative Minimum Tax: What You Need To Know About the ''Other'' Tax

Stress Relief

The Compromise of Liberal Environmentalism

J.K. Lasser's New Tax Law Simplified 2010: Tax Relief from the American Recovery and Reinvestment Act, and More

Crisis in Tax Administration

The Compromise of Liberal Environmentalism

Het Bacchus offer

Miss Darling's Indecent Offer

Happy About Tax Relief: The Offer in Compromise Solution

A Happy Solution

The Offer

The Offer

Conditional Offer

Terminal Compromise

Carnal Compromise

Terminal Compromise

Terminal compromise

terminal compromise

Carnal Compromise

Terminal compromise

Terminal compromise

Carnal Compromise

Terminal Compromise

Forced Offer

Stress Relief

Stress Relief

Forced Offer

J.K. Lasser's New Tax Law Simplified 2011: Tax Relief from the American Recovery and Reinvestment Act, and More

The Offer She Couldn't Refuse

Conditional Offer

Intellectual compromise: the bottom line

Alternative Minimum Tax: What You Need To Know About the ''Other'' Tax

Stress Relief

The Compromise of Liberal Environmentalism

J.K. Lasser's New Tax Law Simplified 2010: Tax Relief from the American Recovery and Reinvestment Act, and More

Crisis in Tax Administration

The Compromise of Liberal Environmentalism

Het Bacchus offer

Miss Darling's Indecent Offer

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