Happy Gilmore is a delightful coming-of-age story of a young aspiring hockey player, who possesses a great slap shot, but not much else, aside from his uncontrollable rage, as he struggles with a forced career change due to his grandmother’s impending seizure of her home and belongings due to $270,000 in unpaid taxes to IRS.
As a tax attorney, the question I’m always asked is “is the tax premise to Happy Gilmore at all plausible?”
I am happy to report that the answer is yes. My joy comes from the fact that most Hollywood writers get tax issues all wrong. Yet, I do want to show it is possible for grandma to keep her house and get the IRS to leave her alone through little known strategies.
The IRS used to be aggressive on collections. Real aggressive.
Happy Gilmore was released in 1996. And the way the IRS worked back then was much MORE aggressive. So aggressive that a couple years later the Reform and Restructuring Act of 1998 was passed to reign in the IRS’s abusive collections practices. How bad did the IRS get? IRS revenue officers would seize someone’s home not for $270,000 but sometimes when the taxpayers owed less than $5000!
The Reform and Restructuring Act changed the way IRS collections worked. It absolutely did address many deficiencies. Yet, there is still work to do. For instance, I still can't for the life of me figure out how it is possible to grant a Collection Due Process hearing only after a Notice of Federal Tax Lien is filed. Liens can do great damage. Wouldn't it make sense to give Due Process rights prior to the filing of a Notice of Federal Tax Lien? Doesn't the Constitution require it?
So with these facts, could we make the IRS go away?
Here’s some things we know or will assume:
- Grandma owes $270,000
- She owns her house outright.
- The home is worth $450,000
- Grandma only gets social security and not much else.
- Grandma is 80 years old.
Perhaps. Although when dealing with the IRS, there are no guarantees of anything.
One key to a successful resolution is the old part. Grandma is old. Remember that? That means whatever she has is all she will have. She’s not getting a lucrative job tomorrow. While a $450,000 house is nice, it represents the entirety of grandma’s wealth. And additionally, with age, unfortunately medical expenses typically rise. Sometimes dramatically so.
So one solution that could have grandma stay in her house is to seek a hardship status with the IRS stating these relevent facts and documenting Grandma's precarious situation. Another key to this case is to prove that a severe hardship would be created if the IRS forced Grandma out of her house. We would submit financials proving a limited ability to pay, along with any medical documentation showing that she is quite frail. If granted, the IRS will simply not do anything, aside from intercept refunds, if any.
Now what will happen is the IRS will file a Notice of Federal Tax Lien on the property. Meaning that once grandma dies, the lien attaches and the IRS will come in between Happy and his grandma’s estate. Happy is only entitled to proceeds after the IRS is satisfied in full.
Which is why I don’t like this solution as much. I want an Offer in Compromise. And this an additional key to the case: how to legally eliminate grandma’s equity in her house. Why? The IRS will want to start Offer in Compromise negotiations as-is with 80% of Fair market value of her house — so let's expect $360,000 opening unless we can do something about Grandma's equity. Other things we must avoid is a fraudulent conveyance or something that would deemed dissipated asset, which would happen if she signed the house over to Happy or anyone else.
There are two ways to do get rid of her equity in her house that I can think of. One is through a reverse mortgage, the other is to sell the house for fair market value, take back a life estate along with an annuity.
With either the reverse mortgage or annuity, Grandma would have more income each month (remember she got into tax trouble because she ran out of money.) But these additional proceeds aren’t enough to make her rich, or increase her tax burden in any substantial way. Her increased income would still likely be below the threshold in which the IRS finds any Realistic Collection Potential, thus the IRS could be very interested in accepting less than the full amount owed with a carefully constructed Offer in Compromise.
Yet either one of these strategies might be a little too late. Waiting until the IRS has begun seizing your home — the IRS could be out of patience and/or understanding. For us, the sooner we are able to get to a tax problem, we usually find the better the solution will be.
