Point/Counterpoint Standardization of Expenses - The Best Interests of Everyone
The IRS perspective | The Practitioner Perspective
Look for Changes in IRS Offer in Compromise Program
by Domenic J. LaPonzina, Internal Revenue Service
By Kevin Murray, Collection Group Manager
Most taxpayers are law-abiding citizens who timely file and pay their taxes. There is another category, non-taxpayers, who either neglect or refuse to pay their taxes. Is it fair for you as a law-abiding, taxpaying citizen to live within your means, while delinquent taxpayers purchase homes, automobiles, and other assets by not paying their taxes?
Determining the appropriate method to resolve a delinquent taxpayer's account is based on an analysis of financial statement information. The IRS examines each taxpayer's assets, liabilities, income, and expenses to determine the ability to pay, in the shortest possible time frame. Prior to implementation of national standard expenses, revenue officers determined the allowable amounts of the necessary living expenses. This lent itself to discrepancies, perhaps even within the same group. Standardization of Expenses were implemented to more uniformly apply necessary living expense allowances, particularly within the same geographical area.
Standardization of Expenses has been received with mixed reviews. Some love it because it's like going to a Saturn automobile dealership - no haggling, the price is set, and everybody knows what it is. Others are not as pleased, because it has eliminated some of the negotiating room previously allowed and caused some individuals to reassess their financial pictures. This is especially true with the local standards established for housing.
A specific allowance is made for housing by county. If the IRS grants an installment agreement and the mortgage or rent exceeds the allowable amount, the entire payment is allowed for one year. During this period, the taxpayer is expected to adjust or eliminate the expense. On the 13th month, the installment agreement is increased, limiting the housing expense to the local standard allowance. If this isn't feasible, another rule allows all the expenses a taxpayer may have, as long as the entire tax liability can be paid within three years.
Is this unfair? Individuals who have failed to pay their taxes, yet purchased homes with mortgages that exceed the housing allowances think so. But why should large mortgage expenses be allowed for some, when there are taxpaying citizens who may not have been able to afford a more expensive home, because they chose to pay their taxes instead?
While the system may not be perfect, it is a step in the right direction. The District Office Research and Analysis staff is tasked with periodically assessing the local standards and adjusting them as necessary. The National Office Research and Analysis staff does the same with the national standard expenses. The overall goal is to continue to be as fair and equitable in applying allowable expenses across the nation.
By Michael Martin, National Association of Enrolled Agents
It must be set forth from the beginning, that the practitioner and the IRS have different goals when looking at the financial information presented as part of the negotiations to enter into an installment agreement. The IRS wants the tax paid as quickly as possible. The practitioner wants to negotiate the lowest monthly payment possible so that the client has some funds available for other expenses necessary to rehabilitate their financial situation.
Therefore, the implementation of the Standardization of Expenses two years ago was met with mixed reviews by most experienced practitioners. Many felt that the IRS had taken away one of the practitioner's negotiating tools that could be used in determining the amount of an installment agreement or to determine that leg of an Offer-in-Compromise. The experienced practitioner knew how much could be set forth for meals, transportation, and personal expenses. This is what gave rise to the differences between Districts and even within a District in determining the amount to be paid.
The practitioner must now know how to use the Standardized Expenses and when those expenses can be supplemented to arrive at a smaller monthly payment. Sometimes the practitioner can simply accept the Standardized amounts, which could be more than the client could otherwise justify. This has given rise to many cases being classified as currently not collectible that would not have been classified that way three years ago.
Perhaps the most glaring hardship is caused by the implementation of the standard amount for housing. By setting the standards based on county-wide statistics, the Service ignored that there could be wide differences in the cost of housing within that county especially in urban areas.
This was somewhat offset by the provision that allows the taxpayer to make payments based on actual expenses for up to one year (in order to reorganize their finances) and then go to the payment as calculated under the standard amounts. This policy has had limited success from the practitioner's point of view. The taxpayer may be unwilling or perhaps not able to dispose of the house and the large mortgage payments within the one year allowance. Then faced with the impending increase in the installment agreement has chosen the only other option available, bankruptcy. This option does not serve anyone's best interest. The IRS often loses the penalties and interest accrued on the account as well as being faced with a longer payment period. The taxpayer has the blemish on their credit history. In order for the Standardization of Expenses to be effective in more cases, this problem must be addressed.
by Benson S. Goldstein, Attorney at Law
MSA members will read a multitude of articles over the coming weeks about the provisions contained in the IRS restructuring legislation pending before Congress. Contrary to the popular press, this legislation is unlikely "to end the IRS as we know it" nor will it necessarily create a kinder, gentler agency. In fact, your clients are likely to receive the same notices they have always received from the Internal Revenue Service -- albeit the tone of such notices may be a degree more friendly.
Nevertheless, the Congressional bill should have a pronounced impact on the agency and in ways not directly detectable from the text of the legislation itself. One example is the IRS Offer in Compromise program. Throughout the many days of hearings on IRS restructuring, Congress heard a multitude of complaints about the Offer in Compromise program. In all probability, the IRS has taken action to administratively review the Offer program in order to head-off possible legislation on the topic. In this regard, the IRS held an intensive two week session earlier this year in Washington for the purpose of reviewing the Offer in Compromise program. This ongoing internal investigation includes a review of the actual form the agency requires taxpayers to file for purposes of calculation and settlement of the underlying tax deficiency.
The IRS has launched this review of the Offer in Compromise program as a partial response to complaints bypractitioners about the frequency with which IRS Revenue Officers will reject Offers based on a claim an Offer is "unprocessable." Practitioners believe the IRS has not provided clear guidance regarding what constitutes a proper Offer, guidance from which both the public and IRS personnel could readily benefit from.
According to IRS statistics, the agency received about 133,600 Offers in fiscal 1996. Of these the IRS determined that 73,700 were unprocessable -- meaning the IRS rejected 55 percent of all Offers filed in 1996. And the agency did this without providing the taxpayers involved with any real opportunity to negotiate. Further, of the nearly 60,000 Offers which were determined to be processable, the Service decided to accept about 27,700 of these remaining Offers for settlement. Thus, on a more understandable basis, of the roughly 133,600 Offers filed by taxpayers in 1996, the IRS only actually accepted about 20.7 percent of all Offers filed that year (i.e., 27,700/133,600). The actual IRS rate of acceptance of Offers only rose to a level of about 22.1 percent during fiscal 1997.
The IRS began requiring taxpayers in July 1997 to use a new Form 656, Offer in Compromise. Agency internal auditors will review the new form and analyze its impact on why the IRS declares a super-majority of all Offers nonprocessable. Internal Revenue Service personnel have received complaints that the new form relies too heavily on an analysis of the fair market value of the taxpayer's assets and on the net value of the taxpayer's income.
Practitioners have complained that the IRS Revenue Officers would routinely reject Offers as nonprocessable simply because a taxpayer's Offer did not meet some rigid computer formula. These same practitioners maintain IRS personnel should be more willing to negotiate on the Offer. In addition, tax professionals suggest that agency employees should place a greater reliance on an analysis of what constitutes a forced sales value of the taxpayer's assets and on a present value analysis of the taxpayer's income.
On a positive note, the IRS is also reviewing the issue of whether it has enough experienced personnel to handle Offers in Compromise. Ironically, in order to truly make the Offer in Compromise program work for taxpayers, it is this type of review which must be made in order to ultimately make the program successful.
The Internal Revenue Service has released proposed regulations relating to situations when the agency terminates a taxpayer's installment agreement. In general, the IRS has released this regulation in response to the 1996 passage of the Taxpayers Bill of Rights 2 (TBOR2). The proposed regulations provides taxpayers with a procedure for requesting an independent review of the "alteration, modification, or termination of an installment agreement."
TBOR2 amended Section 6159 of the Internal Revenue Code to mandate that the IRS may not alter, modify, or terminate an installment agreement unless the taxpayer is provided with 30 days notice of the agency's intention to alter the agreement. Moreover, the notice should include an explanation for the Service's proposed actions. The IRS is not required to provide the taxpayer with notice, however, to the extent the collection of the tax is considered in jeopardy.
According to the proposed regulation, the request for an independent review of a proposed alteration or termination of an installment agreement works as follows. First, under the regulation, if the taxpayer disagrees with a notice to terminate or alter an installment agreement, the taxpayer should call the telephone number listed on the notice within 30 days of the date of the notice. To the extent the taxpayer is unable to resolve the matter by telephone, the taxpayer should request to speak with a manager. If the dispute is still not resolved through discussion with the manager, then the taxpayer would have the right to request the Office of Appeals to "independently review" the decision. Appeals would then conduct a review of the underlying facts and circumstances of the agency's decision to change the installment agreement.
In a recent U.S. Tax Court case, the estate of a surviving spouse attempted to benefit from a material mistake made by the executor on the (Form 706) federal estate tax return for the husband's estate. The court ruled that there was a duty of consistency. That is, a taxpayer is prohibited from benefitting in a later year from an error made in a prior year, and particularly when the mistake cannot be corrected in that later year due to an expiration of a statute of limitations. The name of the case is the Estate of Letts v. Commissioner.
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