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October 2013 Archives

It's Possible to Pay Less Than What You Owe

It's possible that a taxpayer could make settlement proposals to the IRS and "plead their case" that they could not otherwise pay the debt by making an "Offer-in-Compromise". In a position paper dated May 27, 2005, the American Association of Attorney-Certified Public Accounts revealed that "(Offers-In-Compromise) acceptance rate has dropped from 39.8% to 22.9% from 2001 to 2004, while the number of accepted offers declined from 38,643 to 19,546, a decline of over 50% in just three years." A blockade put up by the IRS like on November 1, 2003, the IRS began charging a $150 processing fee for most Offer-In-Compromise proposals. Also, in February of 2004, they officially issued "a consumer alert advising taxpayers to beware of promoters' claims that tax debts can be settled for "pennies on the dollar" through the Offer in Compromise Program." It seems that "frivolous" proposals - not to mention plenty of complaints by consumers than they had been getting ripped off...had been mounting enough to warrant concern by the IRS. It's still possible to settle for less than you owe with the IRS. An Offer-In-Compromise is one of two methods that make this possible. However, the IRS has shown by its recent history that 84%-85% of Offers-In-Compromise will be rejected. I refuse to "sugar-coat" this fact - and I would highly encourage you to be wary of anyone who makes it sound "easy" to settle with the IRS. It's not my job to "sell" you on a particular method of getting out of debt with the IRS. But I do want to help you understand that you do have options - real options that can help you get out of this IRS mess and get on with your life. If and Offer-In-Compromise is the right choice for you, we can help determine that. However, if it's not, there are other ways. The Partial Payment Installment Agreement option is also a way that a taxpayer may be able to negotiate with the IRS to pay less than the full debt owed.

How Do You Qualify For Innocent Spouse Relief?

Let's say you're married and you file a "married filing jointly" return, to take advantage of the unique tax benefits offered by this particular filing status. You have a regular "day job" where your employer takes out your taxes every pay-check and gives you a W-2 at the end of the year. The two of you decide to take a weekend just to sort through all of the paperwork and get a grip on the tax situation with his business. After muddling through the records as best you can, and deducting expenses, you determine that he owes taxes on $48,500 of taxable income. Therefore you determine that he owes a tax of $7475. That's when he "drops the bomb" that he hasn't been getting enough money aside to pay the taxes. "By requesting innocent spouse relief, you can be relieved of responsibility for paying tax, interest, and penalties if your spouse (or former spouse) improperly reported items or omitted items on your tax return. Generally, the tax, interest, and penalties that qualify for relief can only be collected from your spouse (or former spouse). You must meet all of the following conditions to qualify for innocent spouse relief:

Tax Shelters at Risk With IRS Appeals Court Victory

The subject of tax shelters and financial transactions meant to reduce taxable income has been a perpetual source of contention between taxpayers and the IRS. A recent and prominent case, Superior Trading LLC et al. v Commissioner of Internal Revenue, No. 12-3367, tipped the issue in favor of the IRS. In a hit to taxpayers seeking to reduce taxes through some types of distressed asset/debt ("DAD") transactions, the Seventh Circuit Appeals Court in Chicago, IL sided with the IRS. The court ruled that such transactions are not legitimate tax shelters. Using such financial engineering in an attempt to reduce taxable income will very likely result in the original tax and additional penalties owed to the IRS. This is not the first time that the IRS won such cases. This appeals court decision is likely to influence an up-coming Supreme Court case about a similar question in "United States v. Woods." The Supreme Court is scheduled to hear arguments in October 2013. In both instances, the issue at hand is whether DAD transactions generate "economic value" that can be compared to tax-deductible business losses. Economic value is contrasted with financial operations that have no purpose or no relation personal or business operations. Rather, transactions absent economic value are done for no other purpose than to generate a tax shelter of questionable legality. Critically, Superior Trading LLC's transactions were found to be outside the scope of "economic value," thus taxable. The IRS was judged to be within its bounds of authority to impose additional fines on top of the original tax that Superior Trading LLC unsuccessfully tried to avoid. The Supreme Court issued a statement acknowledging that though the IRS often wins these types of cases, the issue is not black-and-white. Importantly, in 2007 the IRS ruled that DAD transactions could be construed as tax shelters. It is interesting to note that the attorney for Superior Trading et al. was barred from promoting tax shelters after the DOJ found that he promoted over $370M of invalid tax deductions for previous clients.  


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