John R. Bullis: How does IRS treat offers in compromise?

A recent Tax Court case shows how offers in compromise work and don’t work.

Denise Lloyd was the owner of an insurance brokerage business. The employment taxes were not paid for 2.5 years, a total owed of about $100,000.

IRS can compromise (reduce) the tax liability in some instances. Doubt about the collectability that can be a reason to compromise the debt. The question is whether or not the taxpayer’s assets and income are less than the debt.

Denise filled out Form 433-A, the information needed for IRS to decide if a reduction is in order. She also filled out Form 656, an Offer in Compromise, with her detailed supporting financial information.

Her forms indicated her monthly income was $16,621 and the monthly expenses were just a little more than that, $16,847. Her forms showed her total assets (things of value) were $980,000 and she had total debts of $922,854. She offered to pay $3,000 as full and complete payment of the $100,000 owed.

IRS looked at the details and rejected the offer.

Her housing expenses of $6,964 per month and her vehicle expenses of $1,617 per month were much more than the IRS schedules of basic living expenses — the local standards for housing and vehicle expenses.

She said her residence was an “essential business asset” because she sometimes worked from home. IRS found the business had two distinct office locations. She figured her housing expenses on the basis of four people in the house, but her tax returns showed it was a two person household.

The vehicle expense was “justified” because she said she needed a “high-quality vehicle” for her work as an insurance broker. IRS felt the $1,200 per month vehicle lease was not reasonable. The IRS said she failed to show a “special vehicle requirement” for her work and thought a less expensive car would be suitable.

IRS suggested she pay $1,545 per month for six years — a total of $111,240. The case was closed and the levy on her assets was sustained.

The TV ads that claim everyone can settle with IRS for pennies on the dollar owed are not true.

Did you hear? “Learning is not compulsory, neither is survival,” by Peter Zwack, business executive.

John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.