No doubt that the last six years have been challenging, to say the least, for most businesses. For many small businesses, cash flow is a constant struggle, and when sales dropped due to the recession, many businesses struggled to cover their costs associated with running the business. Unfortunately, sometimes a business owner is forced to make a decision as to whether to keep the lights on and pay the utility bill or whether to pay the IRS payroll taxes.
Lights are essential, but a few missed payments to the IRS can snowball pretty quickly into a nightmare. Huge penalties and interest accrue on missed payments to the IRS, and it only takes a few missed payroll tax periods to dig a fairly deep hole and feel there is no way out.
Since a majority of Americans are employed by small businesses, it would make sense that the IRS would not want to drive these employers out of business during tough economical times when unemployment rates are in the double digit percentages. Well, for the IRS it was “better late than never” — the IRS did respond to these needs last summer by changing its settlement program to allow businesses that have fallen behind on taxes during these tough economical times an opportunity to settle with the IRS on their back taxes.
The Fresh Start Initiative was launched in May 2012 to give taxpayers who have fallen behind in a bad economy a “Fresh Start.” Specifically, as it relates to settlements with the IRS on back taxes, the IRS made significant changes to the guidelines set forth in the Internal Revenue Manual (IRM) relating to Offer in Compromise settlements with the IRS based on Doubt As to Collectiblity.
A taxpayer may settle with the IRS under the Offer in Compromise process based on Doubt as to Collectability when a taxpayer can demonstrate eligibility due to insufficient assets and income. Once a taxpayer can demonstrate this to the IRS, then the taxpayer may settle a tax liability for less than the full amount owed, and oftentimes can settle for a small fraction of the total tax debt. So, how does a taxpayer demonstrate eligibility for an Offer In Compromise? The IRS analyzes a taxpayer’s net equity in assets and future income potential to determine whether the taxpayer can pay back the IRS its tax liability within 10 years.
The Fresh Start Initiative made major changes to the specific guidelines set forth in the IRM that govern how the IRS should calculate the net equity in the assets. For example, one major change was that Section 5.8.5.5.1. of the IRM was amended to provide that income producing assets shall not be included in calculating the net equity of an on-going business. Prior to this amendment, the net equity of all assets were included in determining whether a business would qualify for a settlement.
For example, under the old laws, if a landscape maintenance business owed the IRS $20,000 in back taxes had over $100,000 in equity in its trucks and equipment that were necessary for it to provide its services, this business would not have qualified for a settlement because the IRS would have stated that the equity in the trucks and equipment exceeded the amount owed to the IRS. Under the Fresh Start Initiative, since the trucks and the equipment are used for the production of income, the taxpayer may still qualify for a settlement with the IRS, assuming there is insufficient income to repay the liability in full within the prescribed timeframe.
In addition to analyzing equity in assets, the IRS also analyzes the taxpayer’s future income potential in determining whether the taxpayer would qualify for a settlement. The IRS does this by basically looking at the taxpayer’s net monthly profit and multiplying that by the time the IRS has to collect the money from the taxpayer (10 years = 120 months). For example, if the taxpayer has a monthly net profit of $1,000, the IRS would multiply $1,000 by 120 months to equal the amount of money the IRS could potentially collect from the taxpayer over the life of the statute, which in this case would be $120,000.
It follows, that if the taxpayer owed the IRS $121,000 or more, the taxpayer may qualify for the settlement (assuming that it does not have equity in assets); however, if the taxpayer owed the IRS less than $120,000, then the taxpayer would not qualify for the settlement since the IRS would potentially be able to collect the whole debt owed within the ten year period. Once it is determined that the taxpayer can qualify for a settlement, the settlement amount is based on taxpayers net income multiplied by either (1) a multiple of 12 if the taxpayer can pay it off in a lump sum or five equal installments after acceptance of the settlement, or (2) a multiple of 24 if the taxpayer plans to pay the settlement by monthly installments over a period of 24 months.
Another major change is that the IRS can settle with in business taxpayers for less than the trust fund taxes when past due payroll tax is owed. Trust fund taxes are the employee taxes that are withheld by the company to be paid over to the government on behalf of the employee. It used to be that the IRS would not settle for an amount less than the trust taxes. This is no longer the case.
As many of us are reading in the news today, the IRS is not very consistent in applying the tax laws and guidelines equally among all taxpayers. In fact, many of the employees of the IRS have a very different interpretation of the guidelines – therefore, no results can be guaranteed. However, working with a tax attorney with expertise in this field will help increase the chances of getting a settlement that could be the break that the business needs to be able to stay in business and, in fact, get a “fresh start.”
Jennifer Clifton, Esq. has been employed with Oregon’s only major national tax resolution firm, Fortress Financial Services, Inc. since 2008. Fortress represents individual and business taxpayers all over the
