John R. Bullis: Unreasonable offers in compromise aren’t accepted
Matthew and Kathleen Feshbach owed IRS a lot of money. In June 2001 they asked IRS to approve their Offer in Compromise to settle their 1999 and 2001 tax debts. They owed almost $2 million for 1999 and another $3.2 million for 2001. They sent IRS a check for $200,000 with their offer to settle for about half of what they owed.
IRS rejected their offer since the possibility of full collection was possible.
In 2002, they proposed another Offer in Compromise. They offered to pay $1.25 million for the almost $6 million owed. They had not sold their vacation house in Florida as IRS suggested and they had not reduced their living expenses as IRS wanted. IRS rejected that offer. IRS explained there was no basis for a compromise because they had the ability to pay their debt in full.
In 2005, the Feshbachs asked IRS for an Installment Payment Agreement for the taxes owed. IRS agreed to the Agreement if they paid their 1999 taxes in full and then the Agreement only was approved for the 2001 debt. They agreed to pay quarterly payments of $200,000 until the 2001 debt was paid in full. They paid about ten quarterly payments, a total of $1.2 million. Then in 2008 they sold the house in Florida.
In September 2008, The Feshbachs offered a third Offer in Compromise when they still owed about $3.6 million. They offered $120,000 as payment in full. IRS rejected that offer.
The Feshbachs had $13 million in income from 2001 to 2010. Their home was worth multiple millions. They paid over $500,000 on the home mortgage, interest, property taxes and utilities. Their household costs for that time period cost more than $574,000. Their personal travel expenses were over $720,000 and the rented house in Aspen cost about $233,000. They spent $500,000 on clothing and paid more than $610,000 for a full time chef and other household employees. They spent $170,000 on two Mercedes, a BMW and a Lexus.
In 2011, they filed for a chapter 7 bankruptcy (full discharge) while still owing over $3.8 million to IRS. They requested their debt to IRS be discharged (marked paid in full). The bankruptcy court found their tax debts were not dischargeable because they intentionally failed to pay their taxes while realizing high income and doing high levels of spending on personal items. The court also found they used the Offer in Compromise process to delay IRS collection efforts.
The Offer in Compromise is not like some TV ads indicate. An experienced tax attorney can help explain what is a reasonable offer and what is not likely to be accepted by IRS.
Did you hear? “True affluence is not needing anything,” by Gary Snyder.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser. He is founder emeritus of Bullis and Company CPAs.