We often submit offers in compromise to the IRS on behalf of our clients. In many cases it appears to be the best available option to deal with the large tax debts they face. Or it used to be. I was happy when IRS gave life to the program a number of years ago. Unfortunately, it has deteriorated since then.
It seemed promising at its inception. IRS did a study of the original program and found that most of the offers in compromise were being rejected because IRS thought that it could theoretically collect more than the amount that was being offered. In fact, the study went on to show, that IRS almost never collected more than what was being offered. Many of the taxpayers disappeared from view after the offers were rejected and IRS wrote off the balances due as uncollectible. Eventually the collection statutes expired on those cases and the government collected little or nothing of the tax liability.
Using some common sense (for a change), IRS decided to liberalize the program and accept more offers. For the first time ever, it began to publicize that option and even encouraged offers in compromise from the taxpayers. They started rolling in and IRS began to accept them at an unprecedented rate.
That was then, however. It's a different story now. Once the “organizers” took over, they began to place restrictions and additional hurdles on offers. It wasn't long before the program became fossilized again and started to resemble what it looked like before. These days you have to jump through unreasonable hurdles to get an offer accepted on terms that aren't oppressive.
I have many personal examples. Unfortunately, space and time will not permit a detailed examination of them all. I'll start with one, though. It may be a drop in the pond, but perhaps the ripple will be noticed by someone on the shore.
One of my clients – we'll call him Mr. Smith - is a seventy-one year old man who, from 1992 through 2001, ran up ten consecutive years of income tax liabilities totaling about $40,000.00. With interest and penalties the balance due soon rose to over $70,000.00. While this may seem like callous disregard of tax laws, there's a human story behind this delinquency. (As there are in many such cases) Starting in the early 1990s, Mr. Smith and his wife of many years began to deal with an adult son who'd become a crack cocaine addict. They had to spend tens of thousands of dollars for medical and rehab treatments for him, lawyer fees to keep their son out of prison, compensating victims of their son's thefts, etc. This left them short of cash. They ran up credit card bills and failed to pay their taxes. They understood that it was wrong not to pay the taxes, but given the Hobson's choice of paying their taxes or helping their son, they chose to try to help their son. I'm not sure of what my choice would've been had I been put into that situation, but I would like to think that it would've been on behalf of my own flesh and blood. But that's me.
In addition to the problems with the son, Mr. Smith is diabetic and takes various medications. His 62 year-old wife has a heart condition and also takes medication. Prior to the problems with the son, they had always filed and paid their taxes. After Mr. Smith turned 65, he began to receive social security retirement benefits and had sufficient income to come back into tax compliance. He is still employed and earns income, but would like to retire as soon as his tax problems are resolved. He needs to keep working to pay our attorneys' fees in dealing with the IRS.
We discussed the options available to Mr. & Mrs. Smith, including offer in compromise, payment agreement and bankruptcy. Bankruptcy seemed like the best legal and financial option since most, if not all, the taxes were dischargeable in bankruptcy and the Smiths had no significant equity in any of their modest assets beyond the allowable bankruptcy exemptions. Mr. & Mrs. Smith were reluctant to go that route, however. They had been through bankruptcy once before, about ten years ago, and were reluctant to do it again. The payment agreement seemed unrealistic because of their age and because of Mr. Smith's hopes to retire. We decided to try an offer in compromise, based on special circumstances, including age and health of the taxpayers, as well as the fact that the taxes could be discharged in bankruptcy. The $15,000.00 offered was larger than what IRS would receive in bankruptcy.
The IRS' Appeals office rejected the offer on grounds that the Smith's had sufficient income to pay all the tax liability. Mr. & Mrs. Smith were both employed and Mr. Smith had income from his social security pension. Contrary to their own regulations, IRS ignored the age and health of the taxpayers. Additionally, IRS ignored our arguments that Mr. Smith would soon retire and that the tax was dischargeable in bankruptcy.
We filed a petition in tax court requesting that the IRS take into account the special circumstances raised in the offer. We requested that the case be assigned to another Appeals employee since the original one did not seem to understand IRS' own regulations.
After a delay of more than a year, the case was reassigned to the same Appeals employee who, with the concurrence of her manager, again denied the offer. The brief bankruptcy narrative contained in her decision demonstrated a complete lack of understanding of bankruptcy laws. It appears that this employee made no effort to request a bankruptcy analysis from someone who did.
We are seriously reconsidering the bankruptcy option. If the Smiths agree to go that route, it's likely that IRS will get nothing. Go figure.
©2010 Tony Mankus, Esq.