Complicated Tax problem resulting from inheritance...

[motaskate]

My brother and I inherited a Condo and a retirement IRA (tax-deferred). My bro doesn't make a lot of money and so he asked for the condo and subsequently bought me out of my half. I'm now finding out he bought me out using his inherited IRA which means he now owes taxes on that amount, roughly $130,000 combined CA FTB and Federal taxes. He doesn't have it. I called the IRS for advice and they recommended an offer in compromise because he only takes home $1800 a month. With that salary he couldn't even afford the mortgage payment, so he went to get the condo refinanced however no bank will touch it because (1) the coa is bankrupt and had no Board, (2) as a result members are suing each other and aren't paying their dues. There is no reserve study either so no bank wants to risk their money as the property is 30 years old and many parts of the property are reaching the end of their service life with no money to replace them. So he was unable to cover the monthly costs and to complicate the matters worse his girlfriend agreed to help with monthly payments in exchange for half of the deed/ownership of the condo, which he did. So now I'm wondering if the irs will frown on this and force the sale of the property to pay the $130K (I doubt they could for the same reasons he couldn't get financing) but assuming they could how would they now that it's half hers? I don't think they will accept an offer in compromise because of the condo but. any advice? He's willing to pay over time but it seems like if it's going to take more than 5 years (which it will) to pay the irs back they aren't interested. Using offer in compromise calculators they say to offer like 10% of what he owes assuming they can't sell the condo, but he's willing to pay more if he's given more time to pay than 2-5 years. If you read the IRS Web page and tax support sites it says they only consider what they can get back within two years and compare that with what assets he has? why won't they let him pay back more money over more time, or will they if and when they deny his offer in compromise?

 

[Zigner]

My brother and I inherited a Condo and a retirement IRA (tax-deferred). My bro doesn't make a lot of money and so he asked for the condo and subsequently bought me out of my half. I'm now finding out he bought me out using his inherited IRA which means he now owes taxes on that amount, roughly $130,000 combined CA FTB and Federal taxes. He doesn't have it. I called the IRS for advice and they recommended an offer in compromise because he only takes home $1800 a month. With that salary he couldn't even afford the mortgage payment, so he went to get the condo refinanced however no bank will touch it because (1) the coa is bankrupt and had no Board, (2) as a result members are suing each other and aren't paying their dues. There is no reserve study either so no bank wants to risk their money as the property is 30 years old and many parts of the property are reaching the end of their service life with no money to replace them. So he was unable to cover the monthly costs and to complicate the matters worse his girlfriend agreed to help with monthly payments in exchange for half of the deed/ownership of the condo, which he did. So now I'm wondering if the irs will frown on this and force the sale of the property to pay the $130K (I doubt they could for the same reasons he couldn't get financing) but assuming they could how would they now that it's half hers? I don't think they will accept an offer in compromise because of the condo but. any advice? He's willing to pay over time but it seems like if it's going to take more than 5 years (which it will) to pay the irs back they aren't interested. Using offer in compromise calculators they say to offer like 10% of what he owes assuming they can't sell the condo, but he's willing to pay more if he's given more time to pay than 2-5 years. If you read the IRS Web page and tax support sites it says they only consider what they can get back within two years and compare that with what assets he has? why won't they let him pay back more money over more time, or will they if and when they deny his offer in compromise?

This really isn't your problem. Your brother should be seeking help, not you. You have no standing to even talk to anyone (who matters) on his behalf.

 

[HRZ]

And you are in position of messenger who brings bad news...shoot the messenger.... out .

For that matter to give a GF a share in return for a promise to help out may well be unwise step... out.w

The IRS knows they cannot get blood out of a stone...but if he makes an offer which they accept and then he defaults ...his stones may be at risk.. out.

 

[LdiJ]

My brother and I inherited a Condo and a retirement IRA (tax-deferred). My bro doesn't make a lot of money and so he asked for the condo and subsequently bought me out of my half. I'm now finding out he bought me out using his inherited IRA which means he now owes taxes on that amount, roughly $130,000 combined CA FTB and Federal taxes. He doesn't have it. I called the IRS for advice and they recommended an offer in compromise because he only takes home $1800 a month. With that salary he couldn't even afford the mortgage payment, so he went to get the condo refinanced however no bank will touch it because (1) the coa is bankrupt and had no Board, (2) as a result members are suing each other and aren't paying their dues. There is no reserve study either so no bank wants to risk their money as the property is 30 years old and many parts of the property are reaching the end of their service life with no money to replace them. So he was unable to cover the monthly costs and to complicate the matters worse his girlfriend agreed to help with monthly payments in exchange for half of the deed/ownership of the condo, which he did. So now I'm wondering if the irs will frown on this and force the sale of the property to pay the $130K (I doubt they could for the same reasons he couldn't get financing) but assuming they could how would they now that it's half hers? I don't think they will accept an offer in compromise because of the condo but. any advice? He's willing to pay over time but it seems like if it's going to take more than 5 years (which it will) to pay the irs back they aren't interested. Using offer in compromise calculators they say to offer like 10% of what he owes assuming they can't sell the condo, but he's willing to pay more if he's given more time to pay than 2-5 years. If you read the IRS Web page and tax support sites it says they only consider what they can get back within two years and compare that with what assets he has? why won't they let him pay back more money over more time, or will they if and when they deny his offer in compromise?

Your brother needs a consult with a tax attorney. This is one situation where he cannot afford not to get a tax attorney involved. If you want to help him, help him with that.

 

[Taxing Matters]

So now I'm wondering if the irs will frown on this and force the sale of the property to pay the $130K (I doubt they could for the same reasons he couldn't get financing) but assuming they could how would they now that it's half hers?

First, it's not $130,000 from what said. If I understand your facts right, $130,000 is the amount that he took out from the inherited IRA. That distribution is subject to tax, but the rate of tax will depend on his filing status and what other income he has. It may also be that some withholding was taken out from the distribution to help pay the taxes on it. You might want to see if there was any withholding taken out.

The IRS has the power to seize his interest in the property and sell it to pay tax that he owes. But that is not something that would be done very quickly. Moreover, if he is living in the place as his principal residence, the IRS will need to get an order from a federal district court prior to seizing it and selling it. Seizure of a home is a last resort for the IRS to collect tax owed. The IRS tries to work out a collection resolution to the problem with the taxpayer first. If that cannot be done, the IRS generally looks to levy/seize other income or assets before resorting to a personal residence. As a result, seizures and sales of homes by the IRS are not all that common as they can usually reach some other resolution to deal with it before that occurs.

I was a revenue officer with the IRS prior to becoming an attorney. Revenue officers are the ones who handle the most complex collection cases and who do the seizures of cars, homes, businesses, etc., to collect tax. During my time as a revenue officer I seized, as I recall, only 8 homes out of the several thousand cases I handled. Out of those, only 1 house actually went to sale. In all the other cases a resolution short of selling the house was reached. There are some circumstances where the IRS might not exhaust everything else first and instead go for the home, the most common being where the IRS officer realizes that (1) the home could fully pay what is owed and (2) everything else the taxpayer has combined wouldn't pay it all off, so that in the end the IRS would have to take the house anyway. In that situation, it is less burdensome to both the IRS and the taxpayer to just get the house sold and pay the tax from that. But even then, there is a lot of notices, phone calls by the IRS and eventually visits to the taxpayer by a revenue officer before that happens. In short, if he cooperates with the IRS it is rather unlikely he will lose the house if it is his residence.

Now, there are a number of possible outcomes to deal with what he owes. Which one is what he will get depends on the details of his case. Among the possibilities are:

1. An installment agreement. It is possible to get an installment agreement that lasts longer than 5 years. Indeed, they could go 10 years or even more in some circumstances. But those kinds of installment agreements are not given automatically nor are they done at the service center. So you won’t see a lot of references to longer agreements on the IRS site. But a revenue officer or even the automated collection system (ACS) can give out agreements that go beyond what the automatic installment agreement program will accept.

2. An offer in compromise (OIC). These can be tricky to get, and a lot of people (including some in the IRS) don't really understand how they work. The key concept here is that the IRS will accept (in most cases, there are some exceptions) an offer for something less than the entire balance due as full payment on the liability if what the taxpayer offers is more than the IRS could get using any other collection method. This usually means the taxpayer is offering an amount that includes some money that either is coming from someone else (like a relative or friend) or from a source that is exempt from levy and thus is property the IRS cannot reach.

3. Reporting the case currently not collectible (CNC). Here, the IRS would file its notice of federal tax lien (ensuring that the IRS gets paid if the home or other property is sold) and then shelve the case for awhile until the taxpayer’s ability to pay improves.

4. Bankruptcy. A lot of people have the mistaken notion that it is not possible to deal with taxes in bankruptcy. The reality is that for most taxes bankruptcy can help. Whether it is the right move for the particular taxpayer depends on his/her individual circumstances. In order to get income tax discharged in Chapter 7 the taxpayer needs to file the bankruptcy more than 3 years after the return was filed and more than 240 days after the tax is assessed. So your brother wouldn't get the tax discharged in Chapter 7 for this right now. But if he qualifies for Chapter 13 he might get to make payments in bankruptcy that might be more favorable than an installment agreement he gets from IRS.

5. Levy/seizure of property. This is a last resort for the IRS if nothing else can be worked out with the taxpayer.

There can be other, less common resolutions too.

A tax attorney with experience in collection matters could certainly help. Not all tax attorneys have collection experience so you’d have to ask. It may be that some other tax professional might be of help, too, notably a enrolled agent (EA) who used to be an IRS revenue officer might be helpful as well. The EA couldn't help much with bankruptcy, but could certainly assist with dealing with IRS collection. I've handled tons of collection matters and what you describe is actually not quite as complicated as I think you fear it is. It just takes understanding what IRS looks for and organizing your information to figure out what options are workable.

 

[LdiJ]

First, it's not $130,000 from what said. If I understand your facts right, $130,000 is the amount that he took out from the inherited IRA. That distribution is subject to tax, but the rate of tax will depend on his filing status and what other income he has. It may also be that some withholding was taken out from the distribution to help pay the taxes on it. You might want to see if there was any withholding taken out.

The IRS has the power to seize his interest in the property and sell it to pay tax that he owes. But that is not something that would be done very quickly. Moreover, if he is living in the place as his principal residence, the IRS will need to get an order from a federal district court prior to seizing it and selling it. Seizure of a home is a last resort for the IRS to collect tax owed. The IRS tries to work out a collection resolution to the problem with the taxpayer first. If that cannot be done, the IRS generally looks to levy/seize other income or assets before resorting to a personal residence. As a result, seizures and sales of homes by the IRS are not all that common as they can usually reach some other resolution to deal with it before that occurs.

I was a revenue officer with the IRS prior to becoming an attorney. Revenue officers are the ones who handle the most complex collection cases and who do the seizures of cars, homes, businesses, etc., to collect tax. During my time as a revenue officer I seized, as I recall, only 8 homes out of the several thousand cases I handled. Out of those, only 1 house actually went to sale. In all the other cases a resolution short of selling the house was reached. There are some circumstances where the IRS might not exhaust everything else first and instead go for the home, the most common being where the IRS officer realizes that (1) the home could fully pay what is owed and (2) everything else the taxpayer has combined wouldn't pay it all off, so that in the end the IRS would have to take the house anyway. In that situation, it is less burdensome to both the IRS and the taxpayer to just get the house sold and pay the tax from that. But even then, there is a lot of notices, phone calls by the IRS and eventually visits to the taxpayer by a revenue officer before that happens. In short, if he cooperates with the IRS it is rather unlikely he will lose the house if it is his residence.

Now, there are a number of possible outcomes to deal with what he owes. Which one is what he will get depends on the details of his case. Among the possibilities are:

1. An installment agreement. It is possible to get an installment agreement that lasts longer than 5 years. Indeed, they could go 10 years or even more in some circumstances. But those kinds of installment agreements are not given automatically nor are they done at the service center. So you won’t see a lot of references to longer agreements on the IRS site. But a revenue officer or even the automated collection system (ACS) can give out agreements that go beyond what the automatic installment agreement program will accept.

2. An offer in compromise (OIC). These can be tricky to get, and a lot of people (including some in the IRS) don't really understand how they work. The key concept here is that the IRS will accept (in most cases, there are some exceptions) an offer for something less than the entire balance due as full payment on the liability if what the taxpayer offers is more than the IRS could get using any other collection method. This usually means the taxpayer is offering an amount that includes some money that either is coming from someone else (like a relative or friend) or from a source that is exempt from levy and thus is property the IRS cannot reach.

3. Reporting the case currently not collectible (CNC). Here, the IRS would file its notice of federal tax lien (ensuring that the IRS gets paid if the home or other property is sold) and then shelve the case for awhile until the taxpayer’s ability to pay improves.

4. Bankruptcy. A lot of people have the mistaken notion that it is not possible to deal with taxes in bankruptcy. The reality is that for most taxes bankruptcy can help. Whether it is the right move for the particular taxpayer depends on his/her individual circumstances. In order to get income tax discharged in Chapter 7 the taxpayer needs to file the bankruptcy more than 3 years after the return was filed and more than 240 days after the tax is assessed. So your brother wouldn't get the tax discharged in Chapter 7 for this right now. But if he qualifies for Chapter 13 he might get to make payments in bankruptcy that might be more favorable than an installment agreement he gets from IRS.

5. Levy/seizure of property. This is a last resort for the IRS if nothing else can be worked out with the taxpayer.

There can be other, less common resolutions too.

A tax attorney with experience in collection matters could certainly help. Not all tax attorneys have collection experience so you’d have to ask. It may be that some other tax professional might be of help, too, notably a enrolled agent (EA) who used to be an IRS revenue officer might be helpful as well. The EA couldn't help much with bankruptcy, but could certainly assist with dealing with IRS collection. I've handled tons of collection matters and what you describe is actually not quite as complicated as I think you fear it is. It just takes understanding what IRS looks for and organizing your information to figure out what options are workable.

I read it again and I think he is saying that the combined federal and CA tax is 130k. I hope he comes back to clarify.

 

[Taxing Matters]

I read it again and I think he is saying that the combined federal and CA tax is 130k. I hope he comes back to clarify.

Yes, I hope he does, too. I could be read either way given how he wrote it. The size of the liability definitely makes a difference. If he took out enough from an inherited IRA to trigger that much in tax he really, really should have consulted a tax lawyer before taking it out to discuss ways to deal with his inheritance and what he wanted to do that would not have put him in such a bind.

 

[motaskate]

$130,000 clarification

Yes indeed the combined amount that is owed in taxes to both the Fed and CA FTB is $132,082. To be clear, he withdrew an amount roughly 2.5X this.

As for taxing matters respnse, I am touched and humbled you would take the time to help my brother by writing this. thank you so so much, especially compared to the initial response. Yes it's my brothers problem but it's because he is family and I care that I WANT to be involved. This is the best information I have received so far so thank you again from botTom of our hearts.

Here is some more info as I hope it will focus things for you taxing matters:

again he owes $132K n change.
his condo is worth approx. $738,000, but he owes approx. $384,000 and now his girlfriend owns half the property/on half the deed recorded with County. He is about to get a new job that pays roughly $5800 a month and his mortgage+2nd mortgage+COA dues are roughly $2100 a month being paid mostly by his gf, but this will likely stop once he gets this job.
So basically the math I was doing was his salary take home a month is roughly $5800X0.67= 3900
then 3900-2100 home costs is $1800. so say he can afford to pay $1000 a month to IRS +/- $200.

now his home is worth to IRS (im guessing) is:738K-384K=354K, aND half of that is $177. using IRS rule they reduce my 20% I believe which is $142,000 they can get from his half of condo which covers the tax due. whaTs the likely hood they will do this? can they if it's only half his? and yes it is both their only and principal residence.

hope this helps clear this up and THANK YOU SO MUCH!

 

[HRZ]

On a bad day one might read you post in context that brother conveyed 1/2 his share as a way to shield it from tax collection....he seems to have made a number of unwise moves and might best benefit from legal counsel.

one of my tax attorney pals recently retired from IRS suggests staffing cuts relative to all the new things we also expect IRS to do have made it a lot harder to work out a compromise to pay ..but whatever he does, I would not think he is his own best advocate ...and I'd not rush to one of the TV miracle resolution firms wo some more homework

 

[LdiJ]

Yes indeed the combined amount that is owed in taxes to both the Fed and CA FTB is $132,082. To be clear, he withdrew an amount roughly 2.5X this.

As for taxing matters respnse, I am touched and humbled you would take the time to help my brother by writing this. thank you so so much, especially compared to the initial response. Yes it's my brothers problem but it's because he is family and I care that I WANT to be involved. This is the best information I have received so far so thank you again from botTom of our hearts.

Here is some more info as I hope it will focus things for you taxing matters:

again he owes $132K n change.
his condo is worth approx. $738,000, but he owes approx. $384,000 and now his girlfriend owns half the property/on half the deed recorded with County. He is about to get a new job that pays roughly $5800 a month and his mortgage+2nd mortgage+COA dues are roughly $2100 a month being paid mostly by his gf, but this will likely stop once he gets this job.
So basically the math I was doing was his salary take home a month is roughly $5800X0.67= 3900
then 3900-2100 home costs is $1800. so say he can afford to pay $1000 a month to IRS +/- $200.

now his home is worth to IRS (im guessing) is:738K-384K=354K, aND half of that is $177. using IRS rule they reduce my 20% I believe which is $142,000 they can get from his half of condo which covers the tax due. whaTs the likely hood they will do this? can they if it's only half his? and yes it is both their only and principal residence.

hope this helps clear this up and THANK YOU SO MUCH!

His girlfriend got a HUGE chunk of equity in exchange for simply paying half of the bills. That was a seriously foolish move on your brother's part. He could have sold the condo, paid off the IRS plus pocketed a nice chunk of change to put towards another house. He basically gave away 177k on a simple verbal promise that his girlfriend would help cover expenses.
With that much tax involved, your brother probably would do better having a tax attorney helping him negotiate with the IRS, or, an EA who used to work for the IRS in collections. However, please realize that you have to negotiate separately with the IRS and the CA FTB. It can be difficult to coordinate the two to make sure that between the two of them, any installment payments can actually be paid.

Once the deals are made, they MUST be honored.

 

[motaskate]

no doubt she is the winner in all this, I said my piece to him and let him do what he did.
I can't change that now so moving forward I'm more concerned with:
(1) Will they accept an OIC, if so what should he offer assuming the numbers I provided are solid?
(2) Are they simply going to go after his home regardless if she now owns half or will they give him possibly 7+ years to pay it back?

 

[LdiJ]

no doubt she is the winner in all this, I said my piece to him and let him do what he did.
I can't change that now so moving forward I'm more concerned with:
(1) Will they accept an OIC, if so what should he offer assuming the numbers I provided are solid?
(2) Are they simply going to go after his home regardless if she now owns half or will they give him possibly 7+ years to pay it back?

I do not see them accepting an OIC because your brother has nothing to offer at this time. He has no lump sum money he can access from another source to make an offer in compromise.

They are likely to put a lien on his home no matter what happens, but there is still a chance that he can get an installment agreement that is actually workable. That is why he needs professional help to negotiate it

He should NOT hire someone that advertises on TV.

 

[motaskate]

Thank you for the response.
He isn't concerned with a lein because he doesn't plan on selling the property... He wants to pay what he owes just without losing the house. Would he like to get a "discount" via OIC? Of course... but more so he would like time to pay it back, regardless of the amount, instead of them taking his home...

 

[LdiJ]

Thank you for the response.
He isn't concerned with a lein because he doesn't plan on selling the property... He wants to pay what he owes just without losing the house. Would he like to get a "discount" via OIC? Of course... but more so he would like time to pay it back, regardless of the amount, instead of them taking his home...

No, he will not get a discount with an OIC unless he can make a lump sum payment...which he clearly cannot do. Its an OIC or an Installment Agreement, it is not both. There can be OIC's that are somewhat of an installment agreement but again, only if big lump sums are involved.

 

[Taxing Matters]

Thank you for the response.
He isn't concerned with a lein because he doesn't plan on selling the property... He wants to pay what he owes just without losing the house. Would he like to get a "discount" via OIC? Of course... but more so he would like time to pay it back, regardless of the amount, instead of them taking his home...

Whether he qualifies to get an OIC will depend on the details of the offer and all the details of his financial condition. I disagree slightly with LdiJ that pure installment agreement offers are not possible. They are, but they are very uncommon as OICs go, and OICs generally are not easy to get. Bear in mind, too, that OICs require that the taxpayer file and pay future taxes timely. If any provision of an OIC is not met, including that requirement to be compliant on future taxes, the IRS may default the OIC, with the result that the entire amount owed (less whatever was actually paid, of course) is reinstated in full. The IRS favors lump sum OICs over installment OICs for the simple reason that lump sum OICs have less chance to default. But if an OIC with some installment component is what will get the IRS the most money it is possible to get one. Bear in mind one other thing that few people focus on: submission of an OIC request will toll the running of the statute of limitations to collect the tax for the time period that the OIC is under consideration, which can be many months.