Saving a defaulted offer in compromise with Plan D

This is a success story of ours that is one of my favorites. It shows that if Plan A falls apart and Plan B and C simply won't work, you just might have a Plan D that can save you from the brink. The IRS is complicated and beating a tax problem isn't always going to be clean-cut. Sometimes, you just have to keep going until you find something that works.


In 2003, a year before I started my law firm, "Frank" — a freelance yearbook salesman from West Hartford, Connecticut — owed the IRS $130,000 in unpaid income taxes starting with the tax year 1996 and ending with 2000. He was able to successfully negotiate an offer in compromise to settle everything for $5,000. Not bad, Frank! Frank went on to pay the offer in full in 2004, and then went on his merry way, leaving behind all memories of his nasty tax problem.


Well, that was a nice story, wasn't it? Frank worked with the IRS to reach a reasonable settlement and the IRS was good enough to let him be free. Oh wait, no they didn't. This is the IRS we're talking about after all!


In 2010, Frank received a notice. Actually, strike that. He didn't get a notice — he got a visit from an IRS Revenue Officer in person (!) who informed him that he owed $160,000 in back taxes, penalties, and interest. Frank couldn't believe it — he had settled his tax bill completely. He knew he needed help. That's the short story of how he came to us, very frightened and terribly confused.


I researched the matter and found that Frank's offer in compromise was defaulted because the IRS claimed he did not file his 2005 tax return. One of the requirements of an offer in compromise is that you do not incur any additional tax liabilities and, as in Frank's case, you remain in compliance with the tax code. Compliance, meaning that you file tax returns where and when you are required to do so, is integral to sorting out a tax problem.


Plan B: No requirement to file a return


Frank admitted that in 2005 he did not file a return. Like I just mentioned, compliance is absolutely key. I asked Frank what his reasoning was for not filing, and he said that he didn't think he had to file a return because he had lost money that year. Unfortunately for Frank, and all of the other Americans losing money each year, that's not always the case.


By this time we were in Appeals, and the Appeals Officer (a "Mr. H.S.," who I am still saddened has retired) was going over our research. We both agreed that if one's income falls below a certain threshold, there is no obligation to file a tax return. If Frank did not have to file a tax return in 2005, then the IRS was in error for defaulting the offer in compromise. However, I had to concede that I didn't have much of a leg to stand on when the following fact was added in: if Frank was a W-2 earner, he was right in thinking he didn't need to file a return, but as a self-employed individual — and with Frank's gross income being over $100,000 — he did have a filing requirement.


Plan B wasn't going to work.


On to Plan C: No adequate notice of defaulted offer in compromise


I thought to myself, there must be some sort of notice Frank received from the IRS before defaulting on the offer in compromise. I asked Frank if he had received any such notice, and he swore he never had.


Armed with that knowledge, I informed the Appeals Officer that there had been no mandatory notice, and therefore the default was ineffective. The Appeals Officer researched a database I did not have access to and found some pretty problematic evidence (at least for Frank). He said that the IRS had sent the notice of default, and he was even able to tell me when – 2008. I asked what address the notice had been sent to, and he gave me the number of a P.O. Box. I mentioned this to Frank, who let me know that he had stopped using that P.O. Box sometime in 2005. We then realized that because he hadn't filed a 2005 return (or '06 or '07), the last address the IRS had from him was that P.O. Box. And, because it's a taxpayer's obligation to inform the IRS of a change of address, this argument wasn't going to fly.


So, what to do?


OK… Plan D, can you help us?


So far, our plans weren't going quite as we had hoped. Plan A was to not get into trouble in the first place, and that clearly didn't happen. Plans B and C, both solid strategies, weren't going to work because the IRS had gone by the book. When fighting a tax problem, it can sometimes feel like you've hit a brick wall. But, keep on fighting, and you're sure to find some level of success.With that thought in mind, onward to Plan D!


The good thing was that years had passed between the default occurring and the Revenue Officer being assigned, and we still had appeal rights. During this time, the statute of limitations on collections (CSED) was getting close to expiring, meaning that the IRS would soon lose the ability to collect anything!


When the statute of limitations is close to expiring, it can go one of two ways. The IRS can get super-aggressive, as it knows if it can't get it now, it will never be able to collect anything in the future. Or, the IRS can be "cool" about it and not hold it against someone that the statute of limitations is going to expire.


In this case, I completed a Form 433a for Frank showing that although he was doing better, he still did not have much of an ability to pay. Based on this information, the Appeals Officer saw how the taxpayer had made a good faith mistake, and that it really would be unfair to bring back the entire debt (plus interest). So, the Appeals Officer asked if Currently Not Collectible (CNC) status would be acceptable.


Oh, it certainly would be. We were just about a year away from all the debt expiring, and I knew that while Frank was in CNC, the IRS would not review his ability to pay, leaving him with absolutely no obligation to repay any of the old tax debts to the IRS during that time. Essentially, the Appeals Officer gave us everything we were looking for, and all we had to do was wait 12 months until the debt expired.


Before we knew it, the 12 months were up, the statute expired, and Frank learned a lesson about filing returns. And that is why I say, when in doubt, file your tax returns. Because honestly, I'm not entirely sure what Plan E would have been. Read reviews of Parent & Parent LLP here.

If you need assistance with an offer in compromise, or any tax problem, contact us. We can help.