A client who I will refer to as “Tax Payer” or just “TP” (for short) was referred to me in early 2013. TP had not paid taxes since 2004. TP owed approximately $10,000 in taxes for 2005-2010. TP did not work in 2011 and 2012 and therefore did not file tax returns for those years. TP is married but TP and his wife filed their tax returns as Married Filing Separate.
In February of 2013, on behalf of TP, I mailed to the IRS Offer in Compromise Unit in Holtsville, New York, an “Offer in Compromise” that included a Form 2848 Power of Attorney wherein TP designated me as his attorney-in-fact, the original Form 656 Offer in Compromise completed and executed by TP, an original Form 433-A Collection Information Statement for Wage Earners and Self Employed Individuals completed and executed by TP, a check in the amount of $700 for the initial payment, and a second check for $150 for the application fee.
The Tax Periods encompassed by the Offer in Compromise (“OIC”) were Form 1040 for 2005, 2006, 2007, 2008, 2009, and 2010. The “Reason for Offer” was “Doubt as to Collectability,” i. e., TP did not have the money to pay the taxes in full. TP offered to pay the amount of $3,500 in five or fewer payments of $560 over a period of thirteen months. TP is about 30 years old. The Form 433-A indicated that TP was currently unemployed and had no assets. TP also indicated that his wife was employed and earned about $500 per month. TP lives in an apartment with his mother, father, wife, child, and one or more of his siblings and in-laws. TP indicated on the Form 433-A that his father earned about $1,600 per month, and that his sister-in-law earned about $1,920 per month. The Form 433A indicated that the rent that TP and his relatives paid for their home was $1,400 per month. TP’s other monthly living expense came to about $1,000, including a monthly car payment of about $500.
In late February 2013, the IRS sent TP a letter acknowledging receipt of the OIC, and stating that the IRS would contact TP (or in this case, TP’s representative … me) by late June 2013.
In late March 2013, I sent a letter to IRS indicating that TP had not filed any tax returns for tax years 2011 or 2012 since TP did not work during those years and earned $0.00. Knowing that the IRS would check into such matters as part of their investigation of the OIC, I felt it important to be proactive and educate the IRS as to why they would find no record of ever having received a Form 1040 Individual Tax Return for tax years 2011 or 2012.
In mid-May 2013 the IRS sent a letter to me stating “we cannot continue processing your client’s offer at this time based upon the information you provided. Please call the phone number above to discuss the additional financial information required.” Naturally, I called the IRS representative that sent the letter. Turned out he just wanted some additional financial information. In late May 2013 I sent the IRS representative a letter explaining the following:
- He wanted to know if TP was still unemployed. I told him TP was still unemployed and lived with other family members who help pay his household expenses.
- He wanted copies of two recent paystubs for TP’s wife (no doubt to verify that she indeed made about $500 per month).
- He wanted to know who paid rent. I told him TP’s father covered rent; and
- He wanted to know when the final payment on the car would be made. I told him about March 2014.
When the IRS inquired into TP’s wife’s income, TP and his wife became very concerned. They were worried that the IRS would go after wife’s income to pay TP’s tax debt. However, if you recall, I mentioned that TP and his wife filed their taxes “Married Filing Separately.” This is a crucial fact. Since TP and his wife had always filed “Married Filing Separately” TP’s wife was NOT LIABLE OR RESPONSIBLE for TP’s tax debt! The IRS representative was only trying to assess TP’s wife’s ability to assist TP with payment of TP’s tax debt … not to hold her liable. This is a very important point. In my practice, when spouses file their taxes “Married Filing Jointly,” both spouses may be liable and responsible for either spouse’s tax debt. So, even if one spouse pays all his/her taxes on time, and the other does not timely file and/or pay, the IRS will look to BOTH spouses by virtue of the fact that they file a “Joint Tax Return.” Some clients believe it is in their best interest to file jointly since they often save on taxes as a result. However, if one spouse is having IRS tax problems, these savings can be offset if not completely overwhelmed by the time, trouble and expense of having to deal with the IRS. I am a strong proponent of married couples filing “Married Filing Separately.” For the spouse that does NOT have IRS tax problems, it is a form of insurance.
In July 2013 the IRS verbally notified me that the OIC was going to be approved, but that the IRS wanted to amend the OIC to allow TP to pay the $2800 ($3,500 Offer – $700 initial payment sent with the Offer = $2,800 balance due) at any time within the next thirteen months (rather than making specific monthly payments). Thus, TP can wait and pay the entire $2,800 on the last day if he wants (though I would not recommend waiting to the last minute).
In early September 2013, TP got the good news. The IRS sent a letter that his OIC (as amended) had been approved!
Elapsed time from mailing of OIC to Acceptance: 214 Days
Percentage of Tax Paid: 30 Cents on the Dollar (30%).
Lessoned Learned: “Married Filing Separately” can be a very useful tool for married couples where only one spouse has the IRS tax problem.