Charlie Sheen Approved For an Offer in Compromise
There’s a myth going around that if you have any assets whatsoever you can’t get an offer in compromise approved by the IRS.
In our office, we routinely talk to people who believe this when they call in. We just talked to a guy last week who watched a Dave Ramsey clip that I’ll show you here in a second and based on that Dave Ramsey clip was convinced that you couldn’t get an offer in compromise approved unless you had, and I quote, “absolutely no income and no assets.”
And that’s absolutely not true at all; if you’ve read my article on the offer in compromise math, you know the reality is much, much more complicated than that, and in fact, due to the IRS’s quick-sale value calculation, you could have hundreds of thousands of dollars of equity in various assets and possibly still qualify for an offer in compromise.
Anyway, here’s the Dave Ramsey clip.
I may write a dedicated article responding to this Dave Ramsey clip, but get this, Dave: Recently, multimillionaire actor Charlie Sheen got an offer in compromise approved by the IRS to settle his tax debt for less than he owed. So, Dave, Charlie has income, Charlie has assets, and Charlie actually worked with a CPA to get his offer in compromise approved.
So, Dave, the fact of the matter is that you can get an offer in compromise approved with income, with assets, and you can use a tax attorney if you want (many tax attorneys are great), but a CPA or an Enrolled Agent (an EA) can represent you before the IRS as well.
Of course, Charlie’s offer in compromise wasn’t a “pennies-on-the-dollar” offer in compromise, but nevertheless the IRS accepted an offer amount from Charlie for millions of dollars less than he owed the government — despite Charlie at the time owning and later selling an 8,628-square-foot home in Beverly Hills, another home in Ventura County, a property of unknown value in Rosarito, Mexico, and obviously earning some income from his Hollywood career.
And in this article I want to go over Mr. Sheen’s case: how much he owed the IRS and how much he eventually settled for because it illustrates with a real-life example lots of the concepts I talk about on this blog that may not make a lot of sense to some people unless they see it with an example.
So that’s what I’m going to do in this article. Now, I need you at home to understand something. The years-long path it took Charlie Sheen to get his offer in compromise approved is not typical; there were a few Tax Court petitions along the way; this is obviously a high-profile case with millions of dollars on the line.
I’m not saying offers in compromise are a walk in the park; they take time — but generally not as much time as Charlie Sheen’s case did to get resolved.
Table of Contents
Charlie Sheen’s Tax Situation
So let’s go over Charlie Sheen’s tax situation and then I’ll talk about the very lengthy process that Mr. Sheen went through to get his offer in compromise accepted.
So basically Charlie owed almost $7 million to the IRS for tax years 2015, 2017, and 2018. He was not audited for these years; these were returns that Charlie Sheen filed — or his accountant filed — and he just didn’t pay the taxes.
And that’s the smart thing to do because if you file your taxes and don’t pay, you’re only hit with the 0.5%-per-month failure-to-pay penalty; but if you don’t file your tax returns and you don’t pay the tax due, you’re hit with not only the failure-to-pay penalty but also the failure-to-file penalty, though for the first five months the failure-to-pay penalty is subtracted from the failure-to-file penalty.
Anyway, Charlie filed his 2015, 2017, and 2018 1040 tax returns, and his combined liability on those returns, plus penalties and interest, was about $7 million.
And according to Charlie Sheen’s representative who represented him in Tax Court, CPA Steven Jager (yes, some CPAs can be admitted to practice in Tax Court just like a lawyer), Charlie was assigned “a very aggressive revenue officer.”
Charlie Sheen’s Tax Appeal
But to tell the whole story here, let’s go back to early 2018. In early 2018, Charlie had only filed his 2015 tax return, and he owed about $5,700,000 on that return.
So what happens when you owe the IRS money is that they send you a series of notices — and I’ve gone over these notices before in other articles.
These notices start off friendly enough, usually with the Notice CP14 that’s basically just the IRS telling the taxpayer they owe such-and-such amount in taxes, penalties, and interest.
Then if the taxpayer doesn’t respond they’ll get the Notice CP501 and then another notice and then another notice and then eventually they’ll get something called the Final Notice of Intent to Levy on usually either an LT11 or a 1058.
And this Final Notice of Intent to Levy informs the taxpayer that if they don’t pay the IRS within 30 days, the IRS can start taking their stuff — garnishing wages, levying bank accounts, etc. And that gets really ugly, really fast.
The IRS can also file a Notice of Federal Tax Lien against you, which would inform the public, including any other creditors, that the IRS is going to get theirs before they get theirs with some exceptions.
So Charlie presumably received all these notices from the IRS and the IRS did actually file a Notice of Federal Tax Lien against him for the 2015 tax year.
But one thing you can do during that 30-day period after you receive the Final Notice of Intent to Levy is file for something called a Collection Due Process hearing — also called a CDP hearing — with the IRS Office of Appeals using Form 12153 that will prevent the IRS from taking the taxpayer’s stuff at least until a final decision is made by Appeals.
You can also do this in response to the filing of a Notice of Federal Tax Lien.
And if the taxpayer disagrees with Appeals in their CDP hearing, they then would have the right to petition the Tax Court.
So effectively, by filing a Collection Due Process hearing — and then, if Appeals rejects the taxpayer’s argument in the hearing, filing a Tax Court petition — a taxpayer can keep the IRS’s forced collection activities at bay for some time.
And the basis for all these processes is the Fourth Amendment to the Constitution, which protects the people of the United States from “unreasonable searches and seizures,” with IRS forced collection activity obviously being an example of a “seizure,” with the purpose of a CDP hearing to determine if such a seizure is reasonable or unreasonable.
And this is what Charlie did in April 2018. He got all these notices, and the IRS filed a Notice of Federal Tax Lien against him, and his business manager — at this point in early 2018, Charlie wasn’t even represented by a tax professional; his business manager was handling all this — filed Form 12153 to request a CDP hearing in response to this filing of a Notice of Federal Tax Lien.
And at this point in early 2018, all Charlie’s going for with the IRS is to stop forced collection activity and set up an installment agreement with them.
On the Form 12153 you use to request a CDP hearing, in Box 9, you indicate the “proposed collection alternative” that you want to propose to the IRS in lieu of them taking your stuff. And all Charlie put — or all his business manager put — on the 12153 was a proposal for an installment agreement. They’re not even going for an offer in compromise at this point.
So Charlie’s case goes to Appeals for a CDP hearing with the goal of getting Charlie into an installment agreement.
But in Appeals, the IRS Appeals Officer told Charlie — who at this point was just being represented by his business manager; he hadn’t even hired a tax professional to represent him at this point — that he wanted Charlie’s complete and accurate Form 433-A back within 14 days.
The Form 433-A is the IRS’s collection information statement; on this document you list out all of your income, your net equity in assets according to IRS math, and your allowable expenses according to IRS math.
And the IRS and tax representatives like myself and my staff at Choice Tax Relief go back and forth and bicker about these numbers and we submit documentation for these numbers, and the figures on these 433-As, 433-A (OIC)s, 433-Bs, 433-B (OIC)s, and 433-Fs do become a real point of contention sometimes in IRS negotiations. So it’s important that when we submit them on behalf of our clients that they are accurate, and that takes time.
And if you’ve worked with my firm for resolution, we’ve done one of these for you. This is when we’re asking you all these questions about how much you make and what you spend and your assets and documentation for all that.
And this form can take weeks to complete and fill out for average folks that we represent.
You can only imagine how much more complicated Charlie Sheen’s financial situation is.
So Charlie’s business manager asked the appeals officer for more time to complete the Form 433-A, and the appeals officer denied the request.
At this point the business manager decided to get a tax professional involved. He contacted a tax attorney here in the Los Angeles area, Robert Schriebman, who apparently agreed to take the case on a short-term basis because he is nearing retirement.
And at this point, all Sheen is shooting for is an installment agreement — an agreement to pay the amount he owed the government over time.
Well, the IRS appeals officer still denied the request for more time to complete the Form 433-A and therefore did not even entertain the notion of an installment agreement.
He believed that Charlie had the means to pay his tax debt in full immediately unless he could show otherwise on the Form 433-A.
So at this point Charlie’s only recourse was to petition the Tax Court to argue that the IRS appeals officer abused their discretion in denying a request for more time.
Charlie Sheen’s tax attorney Mr. Schriebman filed this Tax Court petition in July 2018.
And eventually Schriebman handed the case over to a CPA, Steven Jager. Mr. Schriebman did that because apparently he’s in the middle of winding down his law practice.
So now it’s early 2020. Charlie Sheen’s Tax Court petition has been filed. The IRS would not file for a motion for summary judgment until later in 2021.
Charlie Sheen’s First Offer in Compromise: $1.2 Million
And in January 2020, Sheen’s CPA, Steven Jager, filed an offer in compromise for Charlie Sheen to settle the actor’s 2015, 2017, and 2018 tax debt, which combined was about $7 million.
The amount of this offer in compromise was only $1.2 million — $1,240,115 to be exact.
Two folks — two offer specialists — at the IRS reviewed this offer: Sheri E. Roy in Monroe, LA and Narie D. Earl in Birmingham, AL. And these offer specialists recommended rejection since they determined that Charlie Sheen could fully pay his tax liability. In fact, according to Tax Notes, they determined that his reasonable collection potential — the amount he could afford to pay the IRS — was something like $9 to $12 million.
Charlie Sheen’s Case in Appeals
So then Charlie’s CPA, Steven Jager, took the case to Appeals in a CDP hearing on November 18, 2020. And in this hearing, Charlie’s CPA and the Appeals Settlement Officer — whose name was Brian St. Germain — basically went through one of the offer specialists who rejected Charlie’s offer for approval — Narie D. Earl’s analysis of the rejection — and went through it point by point.
Apparently Charlie’s CPA “wrote a very comprehensive rebuttal of Miss Earl’s own detailed analysis of her view of [Charlie’s] reasonable collection potential, [and] it was this six-page, comprehensive memorandum that served as the ‘working document’ for the intensive negotiations that followed during the CDP hearing held on November 18, 2020. As each issue was fully discussed and addressed, [Charlie’s CPA] became aware that the appeals settlement officer was annotating and referencing this document to the applicable sections of the Internal Revenue Manual to support each and every concession that was made by the settlement officer — when convinced to make any concession — and conversely, to notate any concession made by [Charlie’s CPA].”
And apparently Charlie’s CPA and the IRS Appeals Officer couldn’t agree particularly on Charlie Sheen’s reasonable collection potential so Charlie’s CPA suggested a future income collateral agreement. (A future income collateral agreement is when an offer in compromise amount is accepted on the condition that if the taxpayer makes more than a certain amount of money the government will get a share of that.)
Charlie Sheen’s Second Offer in Compromise: $3.1 Million
And eventually Charlier’s CPA and the the appeals officer agreed to revise the offer amount to about $3.1 million — $3,130,420 to be exact — as computed by the Appeals Officer.
Now, I don’t have the documents of what they went over in this negotiation, but I do think Charlie’s CPA was very smart.
I think he knew that the IRS was going to reject Charlie Sheen’s original offer in compromise amount apart from some amount that would be very close to his actual debt of approximately $7 million.
So he went low at $1.2 million. I don’t know how; maybe he got some very conservative appraisers or something to appraise the value of Charlie’s properties; I don’t know; that’s private information.
But — and this is frankly our strategy with offers in compromise as well — because he went low, he was able to give concessions to the IRS Appeals Officer to the tune of almost $2 million, which resulted in that amended offer in compromise amount being OK’ed by the Appeals Officer.
And according to Tax Notes, this offer amount of $3.1 million was even approved by the IRS Office of Chief Counsel, which is the IRS’s legal department. Apparently Charlie also at this point had ponied up over $600,000 as his initial 20% payment toward the offer amount.
Because as you know if you’ve read my other articles on offers in compromise, if you’re submitting a lump sum offer in compromise — which generally results in a lower offer in compromise amount — you have to submit 20% of your offer amount as a down payment (unless you qualify for low-income certification) and submit the remaining balance within five months of offer acceptance.
Area Director Rejects Charlie’s Offer
But Charlie’s offer had to go further up the chain. His offer was rejected by the Appeals Director for the Los Angeles Area, who found that the original reviewers of Charlie’s offer in compromise were correct in calculating his reasonable collection potential, or how much he could pay the government.
So the Appeals Director for L.A. determined that Charlie’s offer in compromise was rejected since he could fully pay his liability. And apparently, according to Charlie’s CPA, he didn’t even explain why.
And the director wouldn’t even approve an installment agreement because he believed that Charlie had assets that he could liquidate to fully pay his $7 million tax liability to the government.
And on that installment agreement note, apparently Appeals determined that Charlie’s monthly disposable income was $51,275 per month. So if Charlie paid that in an installment agreement beginning in November 2020 when this Appeals hearing happened and, say, October or November 2029 when his last tax debt for tax year 2018 would drop off — I don’t know exactly when his 2018 tax was assessed, but let’s say it was sometime in October or November 2019 — that means he would be paying $51,275 per month for nine years.
And that math would come out to cumulative payments of $5,537,700, which is less than the $7 million he owed, so that would be a partial-payment installment agreement or a PPIA.
And the Appeals Director didn’t like that option either. The IRS’s conclusion there was:
The amount that was determined by Appeals, $51,275.00 per month, would be a Part Pay Installment Agreement meaning the amount would not fully pay your liability within the collection statutes. You would first have to liquidate assets to pay off your liability. As a result, an Installment Agreement is not a viable alternative in this case at this time.
So that Los Angeles Appeals Area Director really didn’t want to give Charlie a break; he did want want to give him a break of a $3.1 million offer in compromise on his $7 million in tax debt, nor did he want to give him a break of him paying over $5 million on his $7 million in tax debt in a partial-payment installment agreement.
And Charlie’s CPA claims that the Los Angeles Appeals Area Director rejected the offer without even considering Charlie’s Form 433-A.
Charlie’s Case in Tax Court
So Charlie’s CPA took this matter to Tax Court. And here is his petition from November 3, 2021.
Charlie and his CPA argued in this petition that the IRS — and the actual party named in Tax Court cases is the IRS commissioner — abused its discretion in several ways, namely:
- By rejecting Charlie Sheen’s offer in compromise
- By failing to adequately and explicitly detail the basis and reasoning for the rejecting, especially given that the Appeals Officer and the IRS’s Office of Chief Counsel approved the offer
- By failing to consider Charlie Sheen’s flexibility as to the terms of the offer in compromise, including the use of a future income collateral agreement
- By not acting in good faith, especially with respect to the Los Angeles Area Appeals Director failing to communicate with Charlie’s CPA and basically not even giving Charlie and his CPA a chance to respond to the Area Director’s concerns with the offer — the petition states, “This is a clear breach of the duty of good faith and fair dealing, which is implicit in every contract.”
- By depriving Charlie Sheen a further opportunity to administratively appeal the rejection of the offer in compromise
And on this basis, Charlie’s CPA requested that the Tax Court agree with him that the Los Angeles Area Appeals Director abused his discretion and that the IRS refused to consider Charlie Sheen’s willingness to be flexible regarding the terms and design of the offer in compromise and that the Court should remand the case back to Appeals and ideally at an Appeals office outside of the Los Angeles area where the Los Angeles Area Appeals Director would not have any say.
The IRS filed its response in December 2021, and apparently on January 18, 2022, both parties filed a joint motion to have Charlie Sheen’s case go back to IRS Appeals.
And on January 24, 2022, the Tax Court granted the motion to remand Charlie’s case back to Appeals for a hearing to be held no later than April 1. It does not appear that it ordered that the meeting be held outside the Los Angeles Area Director’s jurisdiction.
Charlie Sheen’s Final Offer in Compromise: $3.3 Million
And while we don’t have as much information about how this last leg of the negotiation went, we do know that the IRS and Charlie Sheen and Charlie Sheen’s CPA agreed to an offer of $3.3 million with some form of future income collateral agreement to compromise Charlie Sheen’s 2015, 2017, and 2018 tax liabilities of $7 million.
Lessons From Charlie Sheen’s Offer in Compromise
So what can we learn from Charlie Sheen’s tax ordeal that ultimately ended up with the IRS accepting an offer in compromise that cut what he owed them by more than half?
Well, here are a few things:
1. You don’t need to be dirt broke to qualify for an offer in compromise.
The IRS determined that Charlie Sheen, even after paying all of his necessary living expenses, had disposable income every month of over $50,000.
He also has homes in Beverly Hills, Ventura County, and Rosarito, Mexico.
Nevertheless, he was able to save almost $4 million by submitting an offer in compromise to the government.
2. Be aggressive.
Be aggressive, but not frivolous, with your offer in compromise amounts so that you can offer concessions to the IRS if they ask for them and still be OK.
Remember, Charlie’s first offer in compromise amount was only $1.2 million.
I don’t know exactly how Charlie’s CPA came up with that, but my point is $1.2 million to offer is pretty darn low for someone with the income and assets of a Hollywood type like Charlie Sheen.
And I think his CPA expected full well that the IRS would negotiate up, which he and I imagine Charlie were fine with given how low their initial offer was.
But it wasn’t frivolous; it wasn’t like, “We’re offering $50,000”; it was still a seven-figure offer.
3. Don’t give up.
This offer in compromise process was a multi-year ordeal for Charlie Sheen.
And it was embarrassing too.
In fact, in Charlie’s CPA’s status report to the Tax Court regarding the 2015 tax year, he said that Charlie “expressed concerning regarding the publicity that his case was attracting in the media” and so his CPA requested that the IRS would support a motion to seal the record in this case.
And the IRS declined, citing the Willie Nelson case from 1985.
In that case, Willie Nelson wanted the record sealed because it was embarrassing that he owed the IRS so much money.
And the Tax Court said, “No”; they said, “The possibility that petitioners’ status as nationally-known entertainers may cause these cases to gain some notoriety is not a compelling enough reason to seal these records up to the time of trial.”
But guess what?
Charlie didn’t give up.
And Charlie’s CPA didn’t give up.
They kept fighting and at the end of the day, they won. Winning!
Yes, Charlie had to pay $3.3 million to the IRS and possibly more under the future income collateral agreement, but nearly $4 million of his debt was settled and he did not have to pay that larger amount.
4. Don’t assume the IRS knows more than you do.
Remember how the IRS rejected Charlie’s original offer in compromise and thought that he had the potential to pay the IRS $9 to $12 million?
What did Charlie’s CPA do?
He took that denial letter that one of the offer specialists wrote denying Charlie’s offer in compromise and I imagine tearing apart Charlie’s CPAs calculation of Charlie’s reasonable collection potential amount and he wrote a detailed, six-page memorandum rebutting that denial.
And when he sat down with the Appeals Settlement Officer, they went through that rebuttal, and the Settlement Officer had to make some concessions, and these concessions were tied to the Internal Revenue Manual.
Either you need to know the Internal Revenue Manual or you need to hire somebody who does, and that brings me to my next point.
5. Consider hiring a pro.
Charlie obviously didn’t go up to bat himself against the IRS.
He would have been crazy to do that.
So he — or probably, his manager, rather — hired two competent tax professionals: he first hired a respected tax attorney and then he hired a respected CPA to handle his case.
So obviously when I say, “Consider hiring a pro,” I’m being somewhat self serving since I am a tax professional, and I have a team of tax professionals at Choice Tax Relief, and every day we represent taxpayers before the IRS and submit offers in compromise, installment agreements, and other tax relief options.