Do you need to file an FBAR for a Dematerialized (demat) Account?

Because there is not quite a US domestic analogue, there is  confusion over whether or not a ‘demat account’ needs to be reported on a report of foreign bank account (FBAR) form. 

What is a ‘demat account’?

In a ‘demat account‘ , shares and securities are held electronically instead of the investor taking physical possession of certificates. A demat account is opened by the investor while registering with an investment broker (or sub-broker). The demat account number is quoted for all transactions to enable electronic settlements of trades to take place. Access to the demat account requires an internet password and a transaction password. Transfers or purchases of securities can then be initiated. Purchases and sales of securities on the demat account are automatically made once transactions are confirmed and completed.

A ‘demat account’ is a foreign account for purposes of the FBAR.

Recently, we came across the issue of whether stocks held in a dematerialized account needed to be reported FBAR returns.  There is some confusion as to whether demat accounts need to be reported on FBAR returns. Many taxpayers erroneously believe that since individual stock certificates held by taxpayers need not be reported as financial accounts, thus ‘demat accounts’ need not be reported. This is not correct. 

Though a demat account is essentially electronic storage for stock certificates, enabling investors to own certificates without having to take physical possession of the certificates, the IRS is explicit with its view that a financial account is any account that holds securities, securities derivatives, or other financial instruments. See Internal Revenue Manual (I.R.M.) 4.26.16.3.2.1.B  (07-01-2008).

A ‘demat account’ is a type of securities account

The disadvantage of ‘demat accounts’: Onerous accounting

The problem for individual taxpayers arise when they are required to report account values on their FBAR returns and to report capital gains, and passive income via dividends from these accounts on their income tax returns. Whereas traditional brokerage accounts provide investors with monthly statements that indicate values, interest, and dividends, demats provide no such information and can become a headache for taxpayers to discover and many hours for accountants to compile, especially for those coming clean under the FBAR amnesty, the Offshore Voluntary Disclosure Program (OVDP)

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Internal Audit reveals IRS not following procedure on follow up; agency vows to improve

There is no doubt the an IRS partial payment installment agreement (PPIA) can be  an awesome IRS tax debt settlement tool. For the taxpayer, they can pay to the IRS what they can afford each month after reasonable living expenses. Meanwhile, the each month, the IRS tax debt gets close to extinction, thanks to the statute of limitations on IRS tax debt.

If you are in the an IRS partial payment installment agreement, expect the IRS to want to take a peek inside your financial affairs.
Photo credit: stock.xcng

Partial Payment Installment Agreement Requirements

The downside to a PPIA is that you never really now if you settled your tax debt until that statute of limitations has expired. And as one of the PPIA requirements, the IRS is supposed to follow up with you every two years to see if your financial condition has improved to see if you can afford to pay more.

But a secret known to tax resolutions attorneys like ourselves, is that 2-year review often does not happen. Some taxpayers have been in PPIA and never had the IRS bother them again. Additionally, some people who defaulted on their PPIA have escaped review of their financials, forms 433a, 433b, 433f, as well — even thought the IRS own Internal Revenue Manual requires the IRS to do so.

Well, the Treasury Inspector has found out about this and is now requiring more scrutiny of PPIA monitoring, is particular:

Recommendation 1:  Revise the IRM to require that managers ensure that automated two-year reviews are properly scheduled and that financial analyses are performed prior to reinstating taxpayers that default on their PPIAs.   

[IRS] Management’s Response:  IRS management agreed with this recommendation and will revise the IRM to require managers to ensure that automated two-year reviews are properly scheduled and to specify when financial analysis is required prior to revising or reinstating PPIAs.

Recommendation 2:  Revise the IRM to require that the manual two-year reviews associated with PPIAs are fully documented and reviewed and are approved by the manager.   

[IRS] Management’s Response:  IRS management agreed with this recommendation and will determine the type(s) of manual two-year review that will require management review and full documentation.  They will also revise the IRM to include this information

So for taxpayers in a PPIA, this means more two-year reviews, and a more thorough review of financials and the greater chance that the IRS will attempt to collect more from taxpayers who owe money to the IRS.

So what should a taxpayer in a PPIA do?

If you have a PPIA that was agreed to years ago, no may be a good time to review your other IRS tax debt settlement options.

In particular:

• Enough time may have elapsed on any personal tax debts to discharge with a Chapter 7 bankruptcy. Chapter 7 bankruptcy can completed wipe out your debt. Be sure to talk to a local tax bankruptcy expert in your area.
• Or, it may be time to consider an Offer in Compromise. It is our experience that the Offer in Compromise units have been accepting Offers they would not have back in 2009. Our suspected reason: We don’t think the IRS even believes the economy will rebound any time soon. The IRS is agreeing to settle for less because of practical concerns. The deal you may offer could be more than they expect to ever collect from you. 

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The Helpful Video, which is Posted on YouTube, Explains What the Latest FBAR Update Means for Taxpayers

Anthony Parent, the founder of IRS Medic at Parent and Parent, a firm of tax attorneys who are devoted to helping their clients with tax-related issues, has just created a new video titled “June 2013 FBAR Update.” The in-depth video, which the FBAR attorney has posted on YouTube, explains in great detail what the latest FBAR update means for taxpayers.

The timing for the new video is perfect; thousands of U.S. citizens are currently busy planning their summer vacations to Europe. While they are there, many people will take some of their holiday time to check in with their overseas banker. If their banker is in Switzerland and they have Swiss bank accounts that might be hidden from the IRS, it is especially important that they watch Parent’s video.

As Parent explained, before travelers head out on their European vacations, they need to understand some unsettling facts. The first is that 350 Swiss banks have agreed to share information with the IRS, including the names behind the alter egos of shell companies that people have traditionally used to avoid detection.

“The second thing they should understand is if they have not properly reported their income, and properly filed their FBAR forms, there is only one way to come clean with the IRS,” Parent said.

“That is the Offshore Voluntary Disclosure Program, or OVDP, and if they have not entered into the program yet, they need to retain legal counsel to do so immediately.”

As Parent pointed out, criminal prosecution may not be the biggest issue that people who have hidden accounts from the IRS have to worry about. Civil penalties may be even more of a problem.

“The way the law works, an IRS FBAR auditor can assume that there was a willful failure to file an FBAR and assess penalties of 50 percent of account value for six years. The only way to avoid this threat is with the OVDP,” he explained.

Finally, Parent said, people should realize that if they filed a “soft” or “quiet” disclosure, the IRS probably knows about them. As he explained, a recent government accounting office (GAO) report identified over 10,000 taxpayers who have accounts over $1 million USD who have filed a soft disclosure.

“The IRS will be targeting these people soon,” Parent said.

“It is my belief the auditors will be looking to assess the willful 50 percent penalties against these individual multiple times. If some did make a soft disclosure, and the IRS is not auditing, they can still get into the OVDP and have their penalties capped at a one-time 27.5 percent of account value, or perhaps even argue for a penalty as low as 5 percent.”

Anybody who would like to learn more about the latest FBAR updates is welcome to watch the newly-created and posted video by Parent. They may also visit the IRS Medic website for more information, or call the firm to set up a no-obligation strategy session.

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What are your IRS debt settlement program options for when you can’t afford to pay?

In an earlier post, I gave an overview over how IRS debt settlement works. And in this article, I will go over the IRS debt settlement programs available to you when you agree to what you owe, but still can’t afford to pay the debt in full to the IRS.

Can’t afford to pay the IRS?

Can’t afford to pay the IRS? Well, you are in good company. Something like 1,000,000 taxpayers are in the same situation as you, unable to pay their IRS tax debts in full. Because this represents such a huge amount of taxpayers, the IRS and Congress have developed these IRS debt settlement programs when you agree to what you owe the IRS, but can’t afford to pay them in full.

Installment Agreement (Full pay)

This type of installment agreement will pay back the IRS in full within the remaining collection period (Click here to learn what the IRS collection period is). There is a streamlined Installment Agreement which doesn’t require financial information. And for larger installment agreements, the IRS will require full financial information, so that they can collect as much from you as possible

What to watch out for: Nearly anyone can get into an Installment Agreement. But the question is, will this actually settle your tax debt? Is it an amount you can actually afford? If you pay the IRS your installment agreement, what is the chance of you running up a new debt? The last thing you want to do is agree to the IRS’ numbers even though you have doubts that you will be able to make every payment. Don’t agree to anything just to make the IRS go away.  Because all that will happen is you will increase your tax debt and have to deal with a more aggressive IRS who doesn’t like the fact that you defaulted your Installment Agreement (when you run up a new tax debt, it automatically defaults any agreement you have in place with the IRS, even if you are still paying your installment agreement in full).

Partial Payment Installment Agreement (PPIA)

A partial payment installment agreement is an installment agreement that won’t pay back your entire tax debt over the remaining collection period. These are a bit tougher to negotiate. And the IRS may only give you a limited amount of time to pay the reduced amount.

What to watch out for: The IRS can revisit your financials to see if an increase in your partial payment installment agreement is warranted. So you do not have final resolution until the collection period has expired or you paid the debt in full. Any tax lien filed against you, you can not get withdrawn like you can when you full pay your tax debt.

Currently non-collectible/hardship status

In “CNC” status  you pay the IRS nothing each month! All you need to do is make sure you aren’t running up new tax debts. And like the partial payment installment agreement, once the collection period expires, the tax debt goes away.

What to watch for: As your IRS tax debt gets closer to being wiped out by the passage of time, the IRS knows this as well. So like with the Partial payment installment agreement, the IRS may become much more aggressive near the end. If you qualify for a partial payment installment agreement or non-collectible status, changes are you should really investigate whether or no an Offer in Compromise would be the right IRS tax debt program for you as it settles your tax debts quicker.

Offer in Compromise

With an Offer in Compromise,  you pay the IRS an amount lower than what you owe. Why would the IRS accept less? Because hopefully, you demonstrated that your ability to pay — after taking into account all necessary personal and business expenses — is as low as possible.

What to look out for: Do not low-ball the IRS, you won’t be taken seriously. Do not give the IRS 20% down  payment (there is a better way to do this). And here is a big one: You must be a good taxpayer for then next 5 years after an Offer in Compromise is accepted or all of your tax debts will come back. 

Chapter 7 Bankruptcy

Chapter 7 Bankruptcy can completely discharge old personal tax debts. 100%

What to watch out for: Timing is big. Be sure to calculate the correct time to file bankruptcy. My friend, Attorney Larry Hienkel of Tampa, FL has developed the bankruptcy tax discharge determinator to help bankruptcy attorneys calculate the right time to file bankruptcy.  Chapter 13 is available, but I have yet to see a repayment plan that was more favorable than something we could have negotiated with the IRS. The other thing is tax liens. If there is one area of law more confusing is what happens to a tax lien when Chapter 7 is filed? I have seen cases where they have been released and where they haven’t. It mainly depends on if we are successful in convincing the IRS insolvency unit that there is no equity the liens secure (but not always). You can not get rid of Trust Fund taxes with bankruptcy (although you can lower them with an Offer in Compromise).

For when you dispute the amount you owe

The are other IRS debt settlement programs available for when actually  dispute the amount you owe the IRS, these include penalty abatement, audit reconsideration, amended returns, innocent/injured spouse relief, Claim for Refunds and will be covered in a future article. So just to make it clear, these are your options when you can’t afford to repay the IRS.

Conclusion: “Why can’t I just do this on my own?”

One question we deal with all the time when we speak with someone who wants to know if they can save money and represent themselves in front of the IRS (or gamble on a a low-cost resolution company) is: “Why can’t I just do it on my own?”

Well, you can do it on your own. You can even represent yourself in a trial. But the question is, should you face the IRS unprotected?

To help you answer that question, I’d like to share some facts about the IRS with you.

Did you know that many IRS employees are members of an employee union? And that when an IRS employee is given low marks or faces discipline, union representatives are called in to protect the IRS employee facing punishment by the IRS. (Some feel the union actually doesn’t even represent them well enough, and don’t belong. h/t Martha De la chaussee)  This is all true, I assure you.

So here’s my question for you: If IRS employees need protection from the IRS, shouldn’t you get protection from the IRS?

The post IRS debt settlement programs appeared first on IRS Medic.

Thanks to the internet and late-night TV, confusing messages on the IRS.gov website, and heck — why not blame lawyer television dramas as well — there is huge confusion about what IRS debt settlement negotiations actually are. In this article we won’t give you false promises, but rather, tell you about a little-known secret called “RCP” that determines the deal you can negotiate with the IRS. But first, I want to tell you what IRS debt settlement negotiation isn’t.

What IRS debt settlement negotiation isn’t

IRS debt settlement negotiations are not like negotiating over a business debt.  Let’s suppose Peter owes Paul $10,000 for a stained glass window. Peter can pay Paul in full, in fact he has far more than that in his bank account. But Peter is a sneaky guy and tells Paul he will only pay him $7000. No reason is given except Peter doesn’t want to pay full price. What a jerk!

So what can Peter do? Well, Peter knows he will have to sue Paul. And he knows an attorney will cost him $3000 or he could try suing Peter himself but he simple doesn’t have the time or skills. So what to do? Peter  grudgingly accept $7000 as full payment, simply because Paul is making collecting on what is rightfully owed difficult. 

This sort of “payment leverage” is not available with the IRS. You are given no “bonus points” for agreeing to pay the IRS what you owe in full when you have the ability to pay your tax debt in full. First, the IRS is the most powerful collection agency in the world capable of levying bank accounts, wages, accounts receivables without a court order. Second, the IRS would never want to give to treat someone who runs up tax debts better than someone who pays their taxes on time. So unless you dispute that you owe the debt, IRS debt settlement negotiations will always center around how much of your tax debt you can afford to repay, the IRS calls this your “Realistic Collection Potential” or RCP.

So if you have to ability to pay in full your obligations, don’t think you could have someone waive a magic wand with an Offer in Compromise or Penalty Abatement and automatically get your IRS tax debt lowered. It doesn’t work that way.

What is IRS debt settlement negotiations ?

Because tax bills can become so huge and can snowball so quickly, and current income can drop as dramatically, hundreds of thousands of US taxpayers find themselves with bill they can’t afford to pay. 

The IRS does not want you living on the street. Its policy has been to allow for people to pay for necessary living expenses first, and then whatever is leftover, to pay the IRS. And there are various IRS tax settlement options, that will be best suited for your situation.

If the IRS levies your wages and leaves you with $200 a week to live on, how are you going to pay for gas to drive to your job to make your wages? How can you work is you can’t get rest or have cleans clothes? Or if you can’t get something to eat?

So it is in the IRS’ best interest to negotiate with you. The IRS knows that you can’t get blood from a stone, and the surest way to turn someone into a stone is to take away their humanity and dignity by taking away all the fruit of your labor. The IRS — at least in theory —  wants you to have something to live for! So by giving you a break, the light on the end of the tunnel should motivate you to work harder, which will benefit the IRS more as they will be able to collect more from you.

Yes…Sometimes it doesn’t feel like the IRS wants you to have dignity

So what IRS debt settlements negations boil down to is convincing the IRS your “RCP” is as low as possible.  Yet because the rules, the challenges of proper documentation and case-building, and appeals process getting to that lowest RCP is best handled by tax resolution experts. And because the IRS has a hard time applying its own rules fairly, and because taxpayers don’t know what their rights are and don’t know how to execute them, tax disasters happen. So yes, we understand, sometimes, it may certainly feel like the IRS does not want you to have any dignity.

So it gives us great pleasure to have helped thousands of taxpayers who tried to negotiate their tax debt on their own and failed.  Convincing the IRS to accept the lowest “RCP” give us a sense of satisfaction, and our clients a wonderful feeling that they are even closer to the light at the end of the tunnel. 

The post IRS Debt Settlement Negotiation appeared first on IRS Medic.

5 things you must know about FBAR penalty negotiations

 As you probably know, the IRS has a new focus on FBAR penalty enforcement. Because of the strange history of the form and the Bank Secrecy Act, many people can’t quite figure out what what all of this means. In order to help you understand the most essential facts, here is list of 5 things you must absolutely know about FBAR Penalty negotiations.

1. FBAR penalties are staggering.

FBAR penalties can become  draconian. The penalties are not based on tax avoided, but rather account size. This is completely unique. So one thing you must absolutely understand is that when dealing with FBAR penalties, you have a tremendous risk and you must take this absolutely seriously. These are unlike any other IRS penalties. 

2. There are two types of FBAR penalties. (1) Ugly or  (2) Disastrous

The “ugly” FBAR penalty is $10,000. That penalty is assessed if you made an innocent mistake. And worse, there is nothing to stop the IRS from assessing this innocent mistake penalty multiple times. Say up to six times. So you could have made a completely innocent mistake and the IRS can penalize you $60,000. This is an outrage to us as well, unfortunately, it is the law.

The “disastrous penalty” is 50% of account value and that is assessed if the IRS feels you knew what you were doing. And like the “ugly “FBAR penalty, it too can be assessed multiple times. Meaning the IRS can assess FBAR penalties that wipe out your entire net worth.

3.  The IRS gets to assume the Disastrous FBAR penalty

Thanks to a change in the law in 2004 (sign up for a reply of our FBAR webinar to learn more about the FBAR history), the IRS no longer has the burden of proof to prove willfulness. But rather, it is up to the taxpayer to prove non-willfulness, i.e. reasonable cause!

Will there be a successful challenge to this law? We can’t say, but recent court cases have proven that the Supreme Court is willing to grant the IRS incredibly wide authority to assess penalties.

4. Court is an option if you want to fight FBAR penalty assessments

Yes, you can claim you day in court, but first,  but you must “exhaust your administrative remedies” first. Or conversely, you can pay all assessments, and then filed a suit for refund in US District Court. We much more prefer exhausting administrative remedies with IRS appeals, and and filing suit in tax court as (1) our clients don’t have to pay FBAR penalties until the end, (2) a lot of times we are successful with administrative remedies, making tax court unnecessary (3) typically, if administrative appeals is unsuccessful, as long as a case is properly supporting and documented, and we find a receptive audience with IRS counsel we may be able to negotiate a lower FBAR penalties without having to go to trial.

5.  The IRS is much, much more friendly inside the Offshore Voluntary Disclosure Program (OVDP) than an FBAR audit outside the OVDP

Unlike past Voluntary Disclosure Programs, which the reason why one would enter into the program was to remove the threat of criminal charges, the main purpose of the FBAR Amnesty/OVDP is to remove the threat of the ugly or disastrous FBAR penalties above.

This is why it is important to use the OVDP to negotiate your FBAR penalties.

Within the OVDP, you will get a much more favorable review when negotiating the your “FBAR reasonable cause.” Also, the IRS agrees just to limit negotiations to just one FBAR penalty, which could be a victory in of itself.

Outside the OVDP, FBAR penalties will be determined in an FBAR audit, where the ground is not so friendly. First, as mentioned above, the IRS can assess multiple years, and second, the IRS is determined not to treat people who they catch (whether innocently or those who made an ill-advised “soft” or “quiet” disclosure)  as favorable as those who have come forward.

The IRS civil audit division can do nearly has much harm (or even more) to ones financial well-being than criminal court. While you may not need to worry about prison time, having your entire wealth wiped out can be nearly as devastating.

So the reason you would enter into the OVDP is not because you think you are a threat of criminal prosecution (note: criminal prosecution is a threat of course, but not nearly as likely as horrific FBAR penalties.) The main appeal of the OVDP  is it limits the staggering penalties the IRS can assess.

Under the OVDP, penalties are capped. You will never pay more than one 27.5% FBAR equivalent penalty (smaller penalties based on amount of unreported income also apply, but these are typically de minimus).

The post FBAR penalty negotiation appeared first on IRS Medic.

Tens of thousands of taxpayers, and tax professionals decided to ignore warnings by the IRS and created a reporting scheme often called soft or quiet disclosure, something done by amending his past tax returns and filing delinquent tax FBARs without participating in the Offshore Voluntary Disclosure Program (OVDP). These crafty taxpayers looked at the FBAR-equivalent penalties (5-27.5%o f highest account value)  and thought they were too high and ignored IRS warnings. They hoped when they put all their foreign account information on an IRS form, they could cross their fingers and the IRS might leave them alone.

The IRS said that if a citizen or resident has previously unreported overseas income, they had to participate in the OVDP (sometimes referred to as OVDI), or risk the full brunt of an IRS FBAR auditor (criminal charges a far lesser risk).

The government looked at tax returns for 2003-2008 and matched it against other information available to the IRS. The government flagged 9,884 individuals who amended their tax returns and FBARs in 2009 or 2010 and 711 businesses as potential soft disclosures. The IRS has invested millions of dollars and assigned thousands of agents to audit FBAR returns to identify soft disclosures.

The IRS lost out on collecting revenue and is cracking down on soft disclosures. This problem has the potential to hurt tens of thousands of citizens and new residents who may have accounts overseas and made the mistake of believing a soft disclosure would shield them from further IRS scrutiny. Soft disclosures needlessly put taxpayers at risk for civil and criminal penalties.

The article will illustrate how and why a normal person can get caught up in the IRS’s soft disclosure trap, and what those who have made a soft disclosure need to do.

A true-life soft/quiet disclosure problem of a couple in Hong Kong

John worked in Hong Kong for a number of years. While in Hong Kong, John met Mary. Mary is a citizen of Hong Kong. She has lived in Hong Kong for her entire life and has worked hard to put away a small nest egg in Hong Kong. John realized that Mary is the love of his life and asks her to marry him. She accepts.

John moved back home to Houston to start a family and brought Mary with him. For years John and Mary filed their income tax returns and paid their taxes on income they made in the United States. At some point John and Mary realized that the nest egg account that Mary saved up had generated interest or investment income, or the accounts that Mary set up to send money back to help her aging parents had her name listed on it. In an effort to avoid further IRS FBAR penalties, John and Mary consulted with one IRS FBAR attorney who told them that they must use the OVDP to get this matter behind them. John and Mary thought the cost was too high, so they listened to a CPA a friend referred them. The CPA told them what they wanted to hear. And John and Mary made the mistake of amending their past tax returns and filing their old FBARs. On these returns, they were required to put down account numbers and bank information.

John and Mary fell into the  IRS’s trap. Now the IRS has all the information it needs and if audited, the burden of proof is on John and Mary that they did not commit a willful violation of FBAR. A willful FBAR penalty is 50% of account value. And this can be assessed for multiple years.

What John and Mary must do right now about their soft/quiet disclosure

If John and Mary amended their tax returns and filed delinquent FBARs, they have provided the IRS with all the information they need to identify their tax accounts for a possible soft disclosure. Essentially John and Mary have raised their hands and said “WE ARE TAX EVADERS, HERE IS ALL OUR INFORMATION. PLEASE COME AND PENALIZE US AS MUCH AS YOU CAN.”

Then, it is just a matter of time before they will be faced with the most expensive and lifestyle changing bill of their entire lives.

Get into the OVDP — now!

We’ve been warning taxpayers of the perils of filing soft/quiet disclosures for more than a year now. We have been criticized for being scaremongers. But everything we’ve been saying has turned out to be true.

The new IRS crackdown on soft disclosure threatens thousands of individuals and business. Individuals and businesses have already provided all the information the IRS needs to catch them. When John or Mary get caught, the burden of proof falls on them to show that they did not know that they were in violation of FBAR rules. Again, this means that if they do not participate in the OVDP program they could end up with a 50% penalty of the highest annual value for every year John and Mary did not file an FBAR.

Fortunately, John and Mary still can participate in the OVDP program even if they made a soft disclosure as long as they enter the program before they get caught. And for those who have lost money, not being able to pay the entire fines from the OVDP  is not an excuse — there are ways to negotiate payments.  Get it down before an auditor is assuming the worse about you.

 Thanks to summer Intern Andrew Feng (UConn Law ’14) for his help on this article

The post Avoid an IRS Quiet/Soft Disclosure Audit appeared first on IRS Medic.

With all the FBAR news coming out, I thought it would be a good idea to do a quick video to go over some of the bigger FBAR?OVDP news developments.

In this two-part video series, I :

(1) give a quick overview the FBAR form and its filing requirements
(2) describe the IRS crackdown on so-called soft or quiet disclosures
(3) report on news that the IRS has made no efforts to educate expatriate or recent immigrants, dual citizen, resident aliens, and VISA holders,
(4) mention FBAR education resources for tax payers, tax professionals and estate planning attorneys, and
(5) explain why many CPAs and attorneys have stopped dabbling in OVDI cases, and (6)  advise those who filed under the 2009 that they have a limited amount of time to claim a penalty reduction.

Part 1:

Part 2:

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What is the percentage of Offers in Compromise accepted?

It’s a reasonable question.  There are several reasons that someone might be wondering what percentage of offers in compromise get accepted.  Maybe you submitted an OIC, it’s been a while since you’ve heard anything about it, and you’re wondering if you actually have a real shot at getting your offer in compromise accepted at the IRS.  Or maybe you’re weighing your options.  You don’t know if you should go for it, should you fill out Form 656, cross your fingers, and wait?  If you were going to go strictly by the numbers, I’d say this isn’t a good bet.  According to the 2011 IRS Databook,  about 57,000  OIC submissions were received in 2010, but only around 14,000 were accepted.  So the percentage of Offers in Compromise accepted in 2010 was just under 25%.  In 2011, the numbers got a little bit better.  The percentage of OICs accepted in 2011 rose to just above 33%. So you can submit an offer, wait for what seems like forever, hoping that it gets accepted, and 66% of the time you’ll be disappointed.  Well, not exactly, read on to understand why these numbers shouldn’t discourage you from seeking about path to freedom from IRS Debt.

Our acceptance rate for Offers in Compromise here at IRSMedic is close to 3x the IRS’s overall acceptance rate of offers in compromise in 2011.  Yes, you read that right.  Why is it so high?  Because we only submit OICs that we believe in.  We only submit offers when we know the IRS has to say yes. Sometimes the IRS will say no at first, but we make sure that we hold them accountable. We appeal unreasonable rejections of Offers in Compromise that should be accepted.

So why is the percentage of Offers in Compromise accepted by the IRS so low? Because the IRS isn’t CapitalOne.  You can’t just offer them a 40% lump sum payment and expect them to take it on the grounds that you are currently unemployed.  An Offer in Compromise isn’t your standard Debt Settlement. To understand why, we need to consider the purpose of the program.  The purpose of the OIC program is to give taxpayers a fresh start, but only after they come into compliance.  But I’ve seen so many cases where IRS personnel will send out the paperwork for an OIC (called a Form 656 and 433-A(OIC)) to a taxpayer simply because the person tells the IRS representative that he wants to “settle my tax debt.”  They don’t even bother to mention that he better have filed every single tax return over the past ten years before they’ll take a serious look.

Why does the IRS let taxpayers apply for OICs when they should be telling them it won’t work out?  Because the IRS has nothing to lose.  See, while the offer is being considered, the amount of time the IRS has to collect is suspended. For example, supposed the IRS had 3 years left to collect on a particular 7-year-old tax debt.  Now, the taxpayer submits an Offer in Compromise for that year.  The IRS “considers” the OIC for a year before rejecting it.  The IRS still has 3 years left.  If no Offer had been submitted, they would only have two years left to collect.

Don’t believe anyone who tells you that you are guaranteed to qualify for an Offer in Compromise.  There may be better programs out there.  Look for a tax professional that is going to tell you the truth about your situation, and who will work with you to find the best resolution to your tax debt.  Here’s the thing: the Offer inc Compromise isn’t the only way to get the IRS out of your life forever.

Fill out the form below to get our series of e-mails about the Seven Steps that you need to take to resolve your tax problems:

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To the Editor:

In his article, “The IRS Is in Big Trouble,” Tax Notes (no link, paywall), May 20, 2013, p. 951 , Christopher Bergin stated that the scandal surrounding the treatment of Tea Party applicants for section 501(c)(4) status may be the canary in the coal mine. I would like to highlight one other scandal which was signaled by National Taxpayer Advocate Nina Olson, but was ignored by former IRS Commissioner Douglas Shulman — the “bait and switch” tactics of the IRS under the overseas voluntary disclosure program (OVDP).

Not only did the IRS change the rules in midstream during the initial program, thereby causing unjustified heavy penalties for many Americans abroad who entered the program in good faith, but the IRS also applied a one-size-fits-all approach, thereby unduly penalizing Americans resident overseas who must maintain relationships with financial institutions in the country where they reside for normal living. The sudden shift in IRS policy to enforce foreign bank account report reporting rules through the OVDP following a 30-year period during which the law was dormant and ignored by Treasury with no prior outreach to taxpayers on filing obligations has created bitter resentment among Americans abroad.

IRS current policy of taxing overseas assets makes it very penalizing for Americans abroad to enter into compliance, in sharp contrast with former policy that encouraged quiet disclosure with only back taxes and related interest and late payment penalties to pay. The community overseas feels that the IRS has manipulated the law in an unfair and unreasonable way.

Jackie Bugnion
Director
American Citizens Abroad
May 22, 2013

I would point to differences.

First, as facts can best determine,. the IRS was intentionally targeted the Tea Party group. Similarly filed non-profit applications from groups from the opposite side of the political spectrum were fast-tracked to approval. This is unfair treatment.

The unfair treatment of expats, however, appears to be more as a result of administration bloat.

Second, at least the Tea Party has political surrogates. After all, the Tea Party was inches away from having their prefered candidate win the 2012 presiental election. Expats, dual citizens, very few people go to bat for them.

Too be sure, the IRS’ policies on expats is completely unfair. The US is the only country (besides North Korea) to tax citizens on their worldwide income no matter where hey live. And as Attorney Holbrook commented yesterday, the IRS is not making any out reach efforts to educates expats to their offshore liabilities.

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