QUESTION:
I was recently divorced and my husband was ordered to pay alimony and child support to me every month. When I filed my tax returns, my tax preparer told me that the alimony was considered income, however the money I received as child support was not taxable. However, when I tried to set up an offer in compromise, the offer examiner included the child support as income and rejected my offer.
ANSWER:
Your tax preparer was correct. Child support is not considered taxable income even though alimony is (because your ex-spouse can deduct alimony payments). However, when negotiating an offer in compromise with the IRS, they are going to count every penny your receive, regardless of the source as income for purposes of the offer in compromise. I have several clients who receive income from the Veterans Administration due to injuries/harm suffered in combat. That money is not taxable income for tax return purposes, however it is included when you are trying to negotiate a settlement with the IRS.
Using Child Support as part of your income should not necessarily cause your offer to be rejected. There may be some things you are not considering such as other allowable expenses you are forgetting about or you may be over-valuing your personal property. There are many different reasons your offer in compromise was rejected, however the good news is you can appeal a rejection. If you would like someone to assist you with your appeal it is not too late to hire a professional who deals with the IRS on a daily basis.
An “offer” is defined by Merriam-Webster’s online dictionary (http://www.m-w.com) as “a presenting of something for acceptance” and “compromise” is defined as “a settlement of differences by arbitration or by consent reached by mutual concessions.” When you put those two definitions together, you do not really get the true meaning of what an IRS Offer in Compromise (OIC) is, but you get pretty close. An IRS OIC is a written agreement between the taxpayer and the Internal Revenue Service (IRS) that allows the taxpayer to pay a reduced amount in full satisfaction of his IRS tax liability, penalties and interest.
The IRS has several types of offers in compromise based on the type of situation you find yourself in, you may qualify for more than one, however, the IRS is only able to grant your OIC based on one of the grounds. The grounds for Offers in Compromise are based on: (1) doubt as to liability, (2) doubt as to collectability, and (3) for effective tax administration. An offer based on doubt as to liability would be filed when the taxpayer believes he does not owe the tax. An offer in compromise based on effective tax administration would be filed when, even though the taxpayer has assets and/or income to full pay their tax liability, but there is a good reason to allow them to settle their tax liability for less than the full amount owed. Finally, we will consider the offer in compromise based on doubt as to collectability in much more detail in this manuscript. The offer in compromise based on doubt as to collectability is filed when there is no contention that the tax is owed, however the taxpayer does not have the assets or future income to full pay the liability.
Recently, we completed a series about the differences between independent contractors and employees and the repercussions on employers who mis-classify their workers as independent contractors rather than employees. Here’s the link to the Independent Contractor vs. Employee series wrap-up.
Today, the Taxgirl, Kelly at www.taxgirl.com has a blog post regarding the FedEx lawsuit and the problems that lie ahead for FedEx.
As the taxgirl says, the IRS taxes, penalties and interest shouldn’t be hard to figure out, but where are the FedEx drivers going to be left?
I have written about this topic a little bit on this blog before and about how important it is to file your tax returns on time every year. Many people believe that since they do not have enough money to pay their taxes they simply do not prepare a return, or they prepare a return and do not submit it.
It is a mistake not to file your tax return. There are a couple of reasons for this:
- Unnecessary Penalties. If your return arrives one second late the IRS is going to file a late-filing penalty against you. Eventually, you are going to have to pay the taxes so this penalty just piles on unnecessary money that you have to pay back. Simply filing the tax return on time eliminates this penalty.
- Statute of Limitations for Collections. The IRS can only enforce collections on an unpaid liability for ten years after the tax has been assessed. In order to have the tax assessed you must file your tax return. If you don’t file a tax return the IRS can come after you for those taxes you owe based on a return they prepare for you (which is never good) for the rest of your life.
Next time you are looking at owing the IRS more than you can afford to pay at tax time, be sure you at least file your return to save yourself some money and get the clock ticking on that statute of limitations.
Here’s the first installment of the Back to the Basics series that I introduced last Tuesday. The question of the week is why should I file my tax returns. Well, the simple answer is that it is against the law not to file your tax returns. Usually preventing someone like the IRS from seeking criminal penalties against you is enough, but there are some reasons related to negotiating with the IRS to file your tax returns.
The IRS cannot collect taxes from you without assessing taxes against you. Therefore, Congress has passed a law that allows the IRS to use the financial information they have on file for you and create a substitute return so they may assess the tax against you and begin collecting. When the IRS creates the substitute for return, they do not add in all of the deductions and exemptions you are entitled to and you almost always owe much more money than had you filed your own return. So if you have not filed your tax returns, and the IRS is claiming that you owe tons of money, often filing your own tax returns will fix most of the problems.
When you want to file an offer in compromise you are required to have the last six years of returns filed (so they can negotiate the tax assessed against you). If there are no substitute for returns on file, you will not be able to file an offer in compromise to attempt to settle your outstanding debt.
We’re starting a new series that should come around every Tuesday called Keep It Simple. We’ve all heard the saying, KISS: Keep It Simple Stupid. I know that some of the posts on this site are technical and you don’t care about everything. You want to know that your lawyer knows the things you don’t know you don’t know. That sounds a little like Donald Rumsfeld. Oh well, with this series, I plan on introducing the basic concepts that it is important for the client to understand when going through the tax resolution process with the IRS no matter what the solution is.
So stay tuned for the "back to the basics" articles coming on Tuesdays.