TIME SENSITIVE: 941 Case – Appeals Conference Tomorrow (4/3)

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  • #13596

    Hey everyone,

    I have an Appeals conference tomorrow on a crazy payroll tax case. The Appeals conference is on a combination EDP/CDP basis. The EDP portion, based on the activity before I was hired, is substantial enough, that if I cannot reach an agreement with Appeals tomorrow, they will probably begin seizing assets. In fact, the RO, who I have managed to have a good relationship with, informed me as such.

    Therefore, I wanted to post here to make sure I was on the right track strategy wise.

    Background:

    Business Payroll tax debt (an LLC) with total tax and penalties of 700,000. Business was a series of franchise shops.

    Trust Fund portion: 330,000.

    Trust fund individual already filed bankruptcy before hiring me due to assessment of TFRP (he was only responsible party) and personal guaranty on most of the business equipment and accounts.

    Of that 700,000 total remaining liability, taxpayer had already made around 150k in payments (before seeking help) towards the debt before it got out of control and got help. Unfortunately, all payments I am referring to have a 670 code (Payment, non Trust Fund) on the transcript.

    This is the weird part: Taxpayer had entered into an agreement to sell off the assets and franchise licenses of the business, however, the franchisor and buyer put it as a condition of the purchase to keep the locations open, which extended the payroll bleed for almost three other quarters.

    There had been liens placed by the IRS on the taxpayer by this point, so taxpayer had to do the whole lien release process as well. The IRS in reliance on the Purchase Agreement, grants a conditional release.

    However, once taxpayer got the lien release, the Buyer refuses to complete the deal and tries to weasel a lower price – that whole issue is now in the beginnings of litigation, but important point is that taxpayer did not get the money, which would have covered about 80% of the liability. I came on the tail end of this, and assisted the taxpayer in getting the conditional release. Once the buyer started getting stupid, I advised the taxpayer to stop the bleeding and close the business, which he did. He filed his last 941 for 3Q 2018.

    Business owns two parcels of real estate (both parcels are together worth around 900k) that it has put on the market and one of the parcels just received a signed letter of intent to sell for 290k.

    In a nutshell, the taxpayer’s closed business looks like this:

    Assets:
    Remaining Cash in Biz Bank 5k
    Land total FMV 900k;
    Depreciated Equipment 50k
    Contingent Litigation Claim 450k (?) (assuming we get full agreement claim price – highly unlikely)

    Liabilities

    IRS: 700k (tax penalties interest) (liens filed against property)
    Mortgages on Land (secured) : 250k
    Franchisor (secured): 100k
    Other providers (secured and unsecured) : 100k
    Other Loans (from family): 100k

    My proposed strategy:

    1. Since business closed, propose an OIC for the Trust Fund portion to close the case, without having to file Business Bankruptcy, and use the proceeds from the sale of the first property as the down payment. This would stave off seizure and allow the seller time to sell off the other parcel, at much better terms than an IRS fire sale, to pay off the OIC.

    2. Is there any argument that can be made as to the issue of improper application of the amounts already paid?

    All payments were made through the EFTPS and he designated the Quarter and year that payment corresponded to when made, (for ex. “941 4th Qtr., 2016), but the IRS just applied everything toward penalties and interest first.

    It is an issue I raised in the CDP request, but haven’t found anything super on point, so I was hoping someone here had some magic citation or technique that I could use? If we could get some of those payments reclassified toward the TFRP, that would be rather helpful, to say the least.

    3. Argue for abatement of penalties during the Agreement Due Diligence / Lien Release period?

    I think there is a basis here, as the Taxpayer detrimentally relied on the Buyer and the franchisor put it as a condition of the sale that it should have been kept open, despite the taxpayer’s difficulties. This is an element of the damages in the lawsuit, but wanted to bring that up anyway.

    Related to the abatement issue – is it even relevant if the business closed and we have the bankruptcy option on the table? Those penalties can theoretically be wiped out in bankruptcy, and you’d be left with TFRP.

    4. Finally, (personally, I think it’s a longshot “probably not”, but I will ask it anyway) – since the business does have enough assets to cover the TFRP portion – can the taxpayer individually try for an OIC?

    5. If I cannot get an acceptable resolution through Appeals, only other option is Bankruptcy?

    Since the hearing is tomorrow afternoon, just shooting this out there to make sure I was on the right track or if I was missing anything. Any comments or suggested tweaks to the strategy are greatly appreciated.

    Thanks in advance,
    -s

    #13597
    Eric Green
    Keymaster

    Here are my thoughts:
    1. I would not do an OIC on the taxpayer until the business is wound down and the assets disposed of. Otherwise it will become a fight over valuation and collectability. File a 433 to make him CNC while you wind down the company.

    2. Is there any argument that can be made as to the issue of improper application of the amounts already paid? Not if it was made from the company’s accounts. If he made them personally (ie. voluntarily) and designated how they should be applied then yes, under Rev Proc 2002-26.

    3. Argue for abatement of penalties during the Agreement Due Diligence / Lien Release period? Not sure there is reasonable cause here but you can try

    4. Finally, (personally, I think it’s a longshot “probably not”, but I will ask it anyway) – since the business does have enough assets to cover the TFRP portion – can the taxpayer individually try for an OIC? Yes, see my answer to #1. Once the business and assets are gone then an OIC is on the table. Until then the IRS will insist on including the business, and the valuations of the assets will become an issue.

    5. If I cannot get an acceptable resolution through Appeals, only other option is Bankruptcy? Bankruptcy does nothing. The taxes and the TFRP are non-dischargeable. Wind down the business, get rid of the assets, then do an OIC on him. All the bankruptcy does is invite in a Trustee to analyze what happened and perhaps chase him for any irregularities they disagree with. We generally never file a business bankruptcy, and an individual does nothing for him.

    Hope that helps

    #13598

    Hey Eric,

    Thank you so much for the quick response.

    To recap, and I hope I am understanding this correctly:

    1. File 433-B and request CNC for the business tomorrow at Appeals hearing as collection alternative, and give the penalty abatement a shot (and hope for the best).

    My question about Business CNC: I was a bit confused between the whole “in-business” vs “defunct corp” (IRM 5.16.1.2.6 vs. IRM 5.16.1.2.7).

    Taxpayer (the LLC) is kind of in this grey area – not in business, but not quite defunct (the assets have not been dispersed – yet) – rather, it is getting ready to wind down. So I assume I can still do it under the “defunct” criteria.

    It should work since all IRS liens have been filed, and the TFRP assessment is pretty straightforward. Also, remember, the taxpayer owner already filed bankruptcy protection due to the agressive action of the other creditors. My guess is that they didn’t even bother with the business bc the IRS liens appearing in the public records scared them off.

    2. Sell off business assets, designate payments to IRS toward TFRP.

    I am assuming we would still have to do a 14135 to sell the assets under those circumstances, correct?

    In any case, the proceeds from that sale would clear up all of the TFRP, but what happens then with the rest of the penalties, interest, etc.?

    3. What alternatives if they don’t give us the CNC status? (shudder)

    Thanks again!
    -s

    • This reply was modified 8 months, 2 weeks ago by Sandi Leyva.
    #13600

    Eric,

    Thank you so much for the quick response.

    To recap, and I hope I am understanding this correctly:

    1. File 433-B and request CNC for the business tomorrow at Appeals hearing as collection alternative, and give the penalty abatement a shot (and hope for the best).

    My question about Business CNC: I was a bit confused between the whole “in-business” vs “defunct corp” (IRM 5.16.1.2.6 vs. IRM 5.16.1.2.7) (subject to 5.16.1.3.4)

    Taxpayer (the LLC) is kind of in this grey area – not in business, but not quite defunct (the assets have not been dispersed – yet) – rather, it is getting ready to wind down. So I assume I can still do it under the “defunct” criteria.

    It should work since all IRS liens have been filed, and the TFRP assessment is pretty straightforward. Also, remember, the taxpayer owner already filed bankruptcy protection due to the agressive action of the other creditors. My guess is that they didn’t even bother with the business bc the IRS liens appearing in the public records scared them off.

    2. Sell off business assets, designate payments to IRS toward TFRP.

    I am assuming we would still have to do a 14135 to sell the assets under those circumstances, correct?

    In any case, the proceeds from that sale would clear up all of the TFRP, but what happens then with the rest of the penalties, interest, etc.?

    3. What alternatives if they don’t give us the CNC status? (shudder)

    Thanks again!
    -s

    #13601
    Eric Green
    Keymaster

    1. File 433-B and request CNC for the business tomorrow at Appeals hearing as collection alternative, and give the penalty abatement a shot (and hope for the best). I though the business was closed based on your fact pattern. If it closed file a final 433-B indicating it is closed and CNC status should be a n o brainer.

    2. Sell off business assets, designate payments to IRS toward TFRP. You cannot designate the payments from the company – because of the liens they are not considered voluntary. The money will be taken at the closing by the IRS and applied in its own best interest.

    I am assuming we would still have to do a 14135 to sell the assets under those circumstances, correct? Yes

    In any case, the proceeds from that sale would clear up all of the TFRP, but what happens then with the rest of the penalties, interest, etc.? It will not clear the TFRP but pay off all penalties, interest and some of the underlying tax. The balance remaining will be TFRP and the taxpayer can then do an OIC.

    3. What alternatives if they don’t give us the CNC status? (shudder) They will if it is no longer operating. Will want to confirm the bank accounts are closed and the game plan for the assets (listing of the properties, auction for the equipment, etc)

    #13602

    Hey Eric,

    Thank you for clearing that up.

    -s

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