In a blog post yesterday about innocent spouse relief, I discussed some of the unwritten differences that exist in the State of Maine Revenue Service collections programs. More commonly called, “Tax Relief Programs.” I noted that many of the programs that the Maine Revenue Service displays as available to Maine taxpayers differ from tax relief programs available at the federal level through the IRS.
Because my practice is in Bangor Maine, one of my jobs is to educate Maine taxpayers about these programs. Usually in central to northern Maine, ranging up and down I-95, from Augusta to Fort Kent. Quite a bit of misinformation perpetuates about these programs. While I often find myself in the position of advising clients interested in OICs about why they can not fix their problem, they still have their place. Usually, when people seek out my firm for an OIC, they do so with inflated expectations of what the process can achieve.
However, after we take the time to understand their situation and goals, we can usually propose a more cost-effective, less damaging, and less time-consuming solution. In many cases, those solutions achieve the exact same effect as an OIC with less risk. Once clients understand the negative aspects of OICs*, that we are trying to help them save time and receive a more cost-effective result they are usually on board with the plan.
Despite all this OICs can be a great tool for clients in certain situations. One of those situations is when people look for innocent spouse relief when they don’t qualify, have their claim rejected by the IRS/MRS, or had a qualifying, poorly prepared past claim rejected. They are now barred from submitting a new one.
Information on Maine OICs is Limited
One of the most misunderstood programs especially for the Maine Revenue Service is their Offer in Compromise program. The IRS offer in compromise program has serious issues being properly understood by the public due to aggressive and misleading T.V. marketing. These misunderstandings compound the public understanding issue with Maine offers in compromise. Even if a person researches the IRS programs, understands them correctly and reads up on the available Maine guidance they are going to be confused by Maine Revenue’s response to their OIC. The reason for this is that there are substantial unpublished differences between there and the IRS program.
Where Does the Maine OIC Program Come From?
The Maine Revenue Code gives the state tax assessor the authority to settle or compromise any tax liability under 36 MRSA § 143. This is a right the state tax assessor is entitled to, not the taxpayer. It is important to remember this fact. The implications are substantial when trying to understand why there is a difference in how the state of Maine and the IRS use OICs.
Why Understanding IRS OICs is Vital for Understanding Maine OICs
To understand Maine OICs properly, it is necessary to understand the IRS program first. The reason for this is that most people’s expectations for state OICs are based on a vague, limited understanding of the IRS process. A firm grip on how the well-defined IRS process works helps.
It assists in understanding the implications of the Maine deviations from that process. Additionally, since Maine Revenue has not published much on their OIC program, it is hard to explain the MRS program without resorting to contrasting it with the IRS program.
What Happens When You Submit an OIC to The IRS
When an Offer in Compromise is submitted to the IRS, the taxpayer proposes a lump sum settlement paid immediately upon acceptance of the offer. This lump sum amount is paid over 5 months or in periodic payments over 24 months towards the tax debt. In most cases, the taxpayer must also put 20% down or make periodic payments during the OIC process. The main exception to this is taxpayers who fall below certain income thresholds.
How Does the IRS Calculate Acceptable Offer in Compromise?
Normally, when the IRS is considering how much a person can pay, they look at the amount they can collect over the next 6-10 years. The reason for considering this collection timeframe is the existence of a Collection Statute Expiration Date. Most collection statute expiration dates are 10 years after the date of assessment. There are some exceptions to this because of tolling events but in general, the CSED is 10 years.
Once the CSED date passes the IRS’s ability to collect, the debt expires. This means the IRS can no longer levy or garnish the taxpayer. While the debt isn’t discharged, it is functionally gone. In the case of debts 5 years or older, the IRS often accepts a lower amount. The CSED approaches the amount of disposable income they can collect goes down with every passing month.
Maine Revenue & IRS Have Different Restrictions on Collecting Back Taxes
Reading the description and explanation of Maine OICs on the Maine Revenue Service website many of the same terms are used and the program appears similar to the IRS’s. However, a different dynamic exists for Maine Revenue when a taxpayer attempts to compromise with them. The different dynamic lacks a default 10-year CSED. Maine Revenue does not have the same 10-year limitation as the IRS to collect on past due amounts.
How the Difference in Collection Laws Affects Maine OICs
Now, remember earlier in the article when discussed that it was the state tax assessors right to compromise on back taxes. In the case of the IRS and the MRS, the secretary or the state assessor has the right to compromise or settle, not the taxpayers. However, in the opinion of the author the presence or lack of a presence, in the case of Maine, of a 10-year CSED drastically effects how of Maine chooses to exercise that right compared with the IRS.
When people fail to understand this difference Maine’s Offer in Compromise program can appear strict or even capricious. The reality though is that the IRS’s decision-making process simply has a different set of rules it is interacting with.
The Maine OIC Process is More Strict
In many cases where the IRS would accept an OIC from a taxpayer the Maine Revenue Service is content to simply put them in “inability to pay status” for decades. Maine Revenue loses nothing by waiting to see if a taxpayer eventually finds better work or perhaps is given, wins, or inherits something of value. When a person submits an Offer in Compromise to Maine Revenue, they could settle and give similar terms to the IRS. They simply are not incentivized to do so in the same way.
At this point, some may ask “What is the point of publishing that OICs are available?” The answer to that question is that they create a bargaining chip. While Maine Revenue is not incentivized by a CSED like the IRS they do want to close past due accounts. Maine often offers to waive penalties and interest if you can fully pay the remaining original assessed balance within 30 days of acceptance.
On more than one occasion a frustrated future client comes in after sailing through the IRS process. Then, subsequently having their Maine offer challenged or denied. The sad part is that most of that frustration could have been avoided with professional assistance. In addition, that early assistance usually secures better offer terms in addition to avoiding the frustration and financial loss associated with a failed offer.
How to Best Time Maine OICs
Knowing that in the current moment Maine generally responds to offers in compromise in this manner provides an important tax planning opportunity. It allows taxpayers who engaged a professional familiar with the process to know exactly when they should submit a Maine Offer in Compromise. If a tax advisor calculates the various penalties, interest, demand penalties and any other added amounts to the Maine tax debt they can determine the exact moment to submit an offer.
Additionally, as part of this kind of planning an advisor must ensure that the payments being sent to the MRS are applied correctly to the principle and that subsequent penalty and interest amounts are calculated correctly. Incorrect penalty and interest calculations have been shown to be a systemic problem in many taxing authorities.
If done correctly with the appropriate timing, attention paid to how payments apply to the past due amounts, a taxpayer can bide their time. Eventually, they find themselves in a position to most effectively use the Maine Offer in Compromise program.
Differences Between IRS & Maine Revenue Asset Calculations
Lastly, Maine calculates available assets differently than the IRS. That is a topic that deserves its own blog post though. For the purposes of this article, note two things. IRS calculations may exclude certain retirement, home, and other assets. The MRS can and does calculate available assets differently.
Better Results from Understanding Asset Calculation Differences
The first fact creates possible planning opportunities if a client intends to submit an Offer in Compromise to both the IRS and MRS. Those planning opportunities center around being intentional about which assets are left after your IRS OIC is accepted. Maine looks at your financial picture from a different perspective than the IRS. You want to ensure that you pay the IRS with assets that Maine would consider available.
Leave assets intact that Maine exempts. If you submit a Maine OIC first, you want to ensure that you did that planning in reverse. Furthermore, given that OICs take time proper planning in some cases allows clients to legally spend down and convert certain assets that previously would not have been exempt. This allows them to retain more assets in the process than they would have been able to otherwise.
Failure to Understand This Information Hurts Maine Taxpayers
Unfortunately, Maine doesn’t publish much guidance. The reality is that many people submit offers that they can never accept the terms of. This means they make nonrefundable down payments which hurt their current finances and hinders their ability to apply when it is most advantageous for them to do so.
If the OIC is poorly prepared, the client does not properly disclose all their assets, they may find their future attempts rejected. The state tax assessor has the authority to do this on the basis that if a taxpayer fails to properly disclose their assets in an earlier offer, they cannot rely on their future submissions to be accurate either.
To return to an earlier point, compromising on a tax liability is the state tax assessor’s right, not the taxpayer’s. This means that once a determination of this kind has been made there is almost nothing a taxpayer can do to override the decision.
What Should I Take Away from This Article?
It is important to understand all the facts, rules, and guidance, both published and unpublished, available for Maine Offers in Compromise. It is especially important when considering a concurrent or subsequent offer in compromise with the IRS. When an option like bankruptcy is a possibility. All these programs interact in often strange, unexpected ways for those unfamiliar with them.
This is especially true when involving a proposed bankruptcy. If you are considering bankruptcy due to tax debt, include a tax advisor in the conversation. In addition to verifying that your debts have been calculated correctly, a tax advisor and a qualified attorney, craft a plan to take advantage of all your legal and administrative options.