Your Money : Making a Deal With the IRS: Taxpayer’s Chances Can Vary With Geography
When the Internal Revenue Service announced last year that it would be more accommodating to taxpayers who wanted to settle old tax bills they couldn’t pay or didn’t believe they owed, Guy McGaughey thought his time had come.
For 20 years he had been battling over a tax judgment he maintains was never owed and was always impossible for him to pay. Last year, he said, after he submitted his sixth “offer in compromise”--by which delinquent taxpayers offer to pay less than what the IRS says they owe--government agents seized his assets, sued his employer and, in effect, put him out of business.
McGaughey, a 69-year-old recovering alcoholic who lives in Lawrenceville, Ill., maintains that one long-time IRS bureaucrat trips him up every time. Even though the IRS is serious about its kinder, gentler image, many of its agents still harbor a “them-versus-us” mind set, some experts say.
McGaughey’s problem, accountants say, is not an unusual one.
Nationwide statistics show that the IRS’s willingness to accept “offers in compromise” varies greatly, depending on your tax district.
According to data compiled by the National Taxpayers Union and Tax Notes, you are far more likely to be able to make a deal in Missouri, where 79% of all processed offers were accepted in fiscal 1993. In Laguna Niguel, on the other hand, just 19% of offers-in-compromise were accepted. Albany, N.Y., at 73%, has a much higher acceptance rate than IRS offices in Manhattan or Brooklyn, N.Y.--at 33% and 32%, respectively. Idaho, at 77%, has a better record than Wyoming, 38%.
California has five IRS district offices, the most of any state. Acceptance rates for offers in compromise were highest in Sacramento during the most recent fiscal year, when 56% of all offers were accepted. The San Francisco office was second, accepting about half of all offers. San Jose accepted 43%; Los Angeles accepted 34%; Laguna Niguel ranked dead last.
“There is no uniformity,” said Bernard Oster, a partner at Cohen, Primiani & Foster in Los Angeles. “The IRS nationally would like to think there is some uniformity in the application of their rules, but the reality is that there is great discretion on the part of the agent.”
David Kaye of Kaye, Kotts & Associates added: “It’s the age-old problem of how the IRS differs in administration of its programs from district to district, branch to branch, even manager to manager. When the offers-in-compromise program came out last year, we would deal with revenue officers who didn’t even realize that the process had changed.”
Overall, the program appears to be a success. The IRS is receiving roughly five times the settlement offers it got in 1991 and is now accepting roughly half of them, compared to 1 in 4 in 1991. Still, the statistics also indicate inconsistency in the program.
The IRS blames the disparities mainly on education and regional differences between tax preparers and taxpayers. Some IRS offices have been aggressive about training local tax preparers as to what is an acceptable offer, for example. Other IRS offices haven’t taken the time.
As a result, some offices get better-prepared offers from taxpayers, insiders say. And in some areas, where there are fewer violators and more agents, taxpayers are intimidated into paying more than is comfortable. That makes it easier to accept their offers.
The IRS makes every effort to assure that taxpayers in all IRS districts are treated fairly and similarly, said Nancy McCurley of the IRS in Los Angeles. And there are criteria for determining whether an offer is within an acceptable range. Once an initial screening process is completed, however, some parts of the process are subjective, she acknowledged.
Taxpayers who want to submit offers in compromise must fill out a form and submit an extensive statement of assets, liabilities and income. If their offer is at least equal to their net assets plus some portion of their future income, it gets processed further. If it is less than the amount of tax owed or the net value of the taxpayer’s assets, it is usually rejected immediately.
“Some people think of an offer in the Hollywood sense, like, ‘I’ll give you 10 cents on the dollar,’ ” accountant Kaye said, but the IRS’s minimum standard requires that the taxpayer give up all net equity and some portion of future earnings to qualify.
Assuming you get past the first hurdle, an IRS agent will make an appointment to meet with you in your home. The idea behind this is simple: If you say on the offer form that you have no salable assets but you have two Rembrandts hanging on your walls, the agent is going to think twice about the honesty of your offer.
However, some preparers believe the process also tends to jade agents who deal with down-on-their-luck rich people who live in opulent surroundings but have borrowed heavily against their property.
The agent is supposed to consider only the taxpayer’s net assets and ability to pay--not the lifestyle--but some IRS insiders acknowledge that it is difficult to separate the two.
What do you do if you think your offer has been unfairly rejected? Appeal. While there’s no assurance that your appeal will be accepted, appeals are handled by different group of agents. If the rejection was based solely on an agent’s bias, the appeal should be successful.
