LOOKOUT, HERE COMES THE IRS
RICHARD M. COLOMBIK, JD, CPA
RICHARD M. COLOMBIK & ASSOCIATES, P.C.
One Pierce Place, Suite 460E
Itasca, IL 60143
Have you heard about the kinder, gentler Nation? That was a quote from a President many years ago. In fact, the Internal Revenue Service, hereinafter referred to as the IRS, for approximately the last three years, has been instituting a kinder, gentler approach. The IRS had a non-filer program, encouraging people to come back into the tax system. A program designed to help people, with liabilities so large they could never pay the tax, through Offers in Compromise. There was also a program regarding not criminally prosecuting when a taxpayer voluntarily came forward, if he or she was not currently being investigated for non-filing, non-payment or other criminal issues. To combine all of this, the IRS was relatively flexible on negotiations.
Have you waited too long, and not listened to the advice of your tax lawyer or others telling you that it will not last forever? Well, they are right! At the IRS District Director?s Liaison Meeting on June 8th, 1995, I listened in relative shock as we were told about the new IRS turnaround. The kinder, gentler IRS is going away and instead the following policy is being instituted.
The IRS wants to maintain consistency on a national basis regarding installment payments, offers in compromise and reclassification of people into non-collectible status. But, in addition to consistency, they wish to first collect the maximum amount of dollars available and increase the revenue the government collects. How will they do this?
First, the collection procedures will more aggressively seek full payment from a taxpayer. If a taxpayer cannot pay, then the IRS will analyze financial issues. Relative to the financial issues, the government will now break down people?s expenditures into two categories:
A. Necessary expenses
B. Conditional expenses
Necessary expenses will be classified as expenses for a taxpayer and the taxpayer?s family relative to their health, welfare and production of income. These expenses will always be allowed, but only on a ?reasonable? amount. The ?reasonable? amount will utilize as a basis for determination, national as well as local labor statistic standards and statistics regarding such items as food, utilities, personal care products, services, rent, etc. This will mean that many expenses, incurred by taxpayers that exceed the local norms, or the bureau of labor statistic norms will be disallowed in determining how much you have to pay the IRS, even though you are liable for larger expenditures to others, e.g., rent.
Other examples of necessary expenses would be court ordered payments, or job required education. Not optional education, such as paying for college or helping with college education of one?s dependents. Further, all other expenses that do not qualify for the necessary expense test will be classified as conditional expenses.
Conditional expenses will further be broken down relative to a three-year rule. The three-year rule will allow conditional expenses to be deducted, provided a taxpayer can make full payment of taxes due within three years or less. Further, the taxpayer will have to be current in their ongoing taxes and the conditional expenses, will have to be reasonable.
If a taxpayer cannot make full payment within three years, or a taxpayer is attempting to reduce their taxes by an offer in compromise, then conditional expenses will not be allowed (from the government?s standpoint) to determine how much a month you can afford to pay the IRS. This means that the IRS will force you to pay them first, over other creditors. Some of these other creditors that you will be forced not to pay may include rent, food, and transportation.
This alarming change is based upon the government?s position that if you owe the government money for taxes, then you will be forced to change your lifestyle and reduce your style of living until the government is paid in full. The position of the government is that things such as college are not necessary expenses and you should be paying the government before you pay others.
These standards are designed to allegedly establish consistency, but also to limit the negotiations available to work with the IRS. It gives the IRS far more bargaining leverage and the taxpayer far less. To add insult to injury, additional expense substantiation will be required as well as limiting the amount of deductions. The action plan for the government initially called for national implementation of this new policy on June 15th of 1995. Due to the amount of training necessary to get the entire IRS up to speed expect these new harsh rules sometime in Fall.
My advice, if you owe the government money, immediately contact a competent tax lawyer experienced in negotiating with the IRS and get your installment agreements, offers in compromise, or reclassification to non-collectible done today. Do not wait, because the IRS is coming.
P.S. Consider writing State Senators and Congressmen regarding more flexibility and less draconian action for tax payers.
Richard M. Colombik, JD, CPA, is the principal in the law firm of Richard M. Colombik & Associates, P.C., and served as chairman of the Federal Taxation Council. He is an elected representative in the Illinois State Bar Association Assembly, and also serves as liaison to the IRS district director for the Illinois State Bar Association. Additionally, he is an officer of the American Association of Attorney-CPAs and of the Northwest Suburban Bar Association. Richard is also a published author and frequent lecturer at various bar associations, civic groups and professional organizations as well as the host of a weekly radio show, ?The Lawyer Line?, on 92-7 FM. He can be reached at 630-250-5700.