My office neighbor is a marriage counselor. I used to have lunch with him once a month just so I could hear all the interesting stories he told. One of my favorites – every good deed by a husband is remembered for 3 days, every bad deed is remembered forever.
Today I want to talk about a bad deed, husbands who owe taxes they can’t pay and then hire incompetent tax advisors to help them. A new Tax Court case reflects what not to do.
Many years ago Congress decided that some Taxpayers who owed money to the IRS would likely never be able to repay. So Congress passed a law allowing Taxpayers to settle their tax debts for less than the full amount owed. The law also directed the IRS to act “reasonably” in granting a settlement.
Thereafter the IRS issued a series of rulings establishing what the criteria for approval would be. Those rulings were extremely difficult to satisfy.
– They required the Taxpayer to set up a monthly budget at or near the poverty level and then pay over any excess income to the IRS. Worse, the IRS could require you to pay now, in a lump sum, any “excess” income you might receive over the next several years (present value).
– They also required us to pay any equity in assets. This was often quite impossible as the assets may not be saleable (who can sell a home in this market – and even if we could we may not have a place to live). Few Taxpayers could borrow enough money to pay that equity to the IRS – after all our insolvency was a condition of the settlement.
Perhaps the most difficult obstacle in getting a settlement was the IRS itself. Many of us who dealt with an IRS agent on these cases was astonished by their opposition to granting relief and their narrow interpretation of the rules and requirements of the code and IRS rulings.
Nevertheless, shrewd cable TV advertisers spent enormous amounts of money selling poor and desperate Taxpayers on the idea they could settle tax debts for “pennies on the dollar”, reciting successful cases which without doubt were unique and uncommon – Taxpayers who suffered misfortune and unlikely ever to recover. These cable TV advertisers were enormously successful, convincing millions of people to submit frivolous offers that any competent tax adviser would know were doomed from the start. These advertisers made millions, but many were subsequently disbarred or subjected to successful state lawsuits for dishonest advertising.
As a result of this, the IRS was deluged with frivolous offers, and began dismissing them out of hand. I have seen many new clients whose offer to settle was rejected as frivolous or “not processable” by the clerk in the mail room (an exaggeration).
This created severe hardships. Taxpayers were out the expenses of submitting an offer, the time and money preparing the documents and waiting, and most of all the suspension of the statute of limitations. That’s right, the 10 year period in which the IRS has to collect taxes is tolled during the pendency of a settlement offer.
In spite of all this, Congress passed new directives requiring the IRS to liberalize its approval policies. The IRS responded by misleading Congress and the American public about the number of settlement offers it approved – by citing only the approval rates of those offers that got by its front desk dismissal room.
Congress then passed new laws allowing these IRS rejections to be reviewed by the Courts – who could set aside denials if the IRS abused its discretion. In a recent case the Tax Court did just that, but on appeal was reversed by a higher Court which ruled IRS abuse of discretion is a heavy burden to prove.
So here’s the deal. If you owe money to the IRS and can’t pay, hire an experienced tax advisor to describe the various alternatives available to you. If a compromise is being considered, he should be able to tell you the likelihood of success, what the approximate compromise amount may be, and how long it will take.
If he can’t – go somewhere else.