Monday, July 4, 2011

IRS Process -- The Offer in Compromise -- Settle with the IRS -- Everything You Wanted to Know

INTRODUCTION TO AN OFFER in COMPROMISE



Confronted with a Federal income tax liability you can’t pay or believe you that you do not owe?  If so, you may be a candidate for an IRS settlement through the Offer in Compromise program.  These Flat Fee Tax Service guidelines and observations are designed to assist you in evaluating your tax situation and pursuing an IRS Offer in Compromise.

In March 1999, the IRS released a then new Offer in Compromise Form 656 and instructions that significantly changed several aspects of the Offer in Compromise program.  In May 2001, with little fanfare, the IRS again changed the way it will process your Offer in Compromise.  Then, in July 2006, Congress changed certain statutory rules relating to Offer in Compromise submissions.

Following these legislative changes, new Offer in Compromise forms have recently been released: Form 656 (revised 2-2007), which is to be used for an Offer in Compromise based on doubt as to collectibility or effective tax administration, and Form 656-L (revised 1-2006), which is to be used exclusively for an Offer ion Compromise based on doubt as to liability.  It is public knowledge that the number of Offers pending has ballooned since 1999. We do not have to tell you what kind of economic turmoil we are living in.

The 1999, 2001, and 2006 changes affect the payment method, the amount some Taxpayers may need to pay, and the filing method.  For example, now, the IRS will allow some Offers in Compromise to be paid in installments and the amount due to be discounted (reduced).  In instances where much of the 10-year statute of limitations on collection (the period within which taxes must be obtained by the IRS) has passed, there can be reductions in the amount offered the IRS.

NEW IRS OFFER in COMPROMISE RULES
as of
2/2011
IRS MAKES AN OFFER EASIER

THAT'S GREAT NEWS

STREAMLINED OFFER in COMPROMISE

“I’ve made a whole set of changes to the Offer in Compromise (OIC) program since I’ve been here to try to increase the participation rate, increase the acceptance rate, because it’s good for the tax system,” Doug Shulman, the IRS Commissioner said.

“These changes to the Offer in Compromise program will help give taxpayers a fresh start,” said Doug Shulman, the IRS commissioner, in a conference call with reporters. These changes “are especially appropriate as the American people and small businesses are climbing out of the worst recession in a generation.”

“There are a variety of things, all aimed at increasing acceptance rates for an Offer in Compromise, making it a user-friendly thing to apply for,” Shulman said. 

More taxpayers will have access to an IRS Settlement via the Offer in Compromise program, which allow taxpayers to pay less than the full amount of their bill. Under the new program, IRS Settlements via the Offer in Compromise program (OIC) will be available to people with a tax debt as high as $50,000, up from the current $25,000, and people with annual income of up to $100,000 will be eligible, up from $50,000 before.


WHAT IS AN OFFER IN COMPROMISE?

Section 7122(a) of the Internal Revenue Code authorizes any tax matter to be settled. It states:
The Secretary may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense; and the Attorney General or his delegate may compromise any such case after reference to the Department of Justice for prosecution or defense.

This longstanding Code Section allows the IRS great latitude to accept an Offer in Compromise and develop regulations concerning any legitimate offer.

Few people understand that, generally, the IRS (and other government agencies) are often not bound by what they say or do because of a legal concept called “sovereign immunity.”  This means they can reverse their decisions after a matter has been settled or can renege on a promise to follow a course of action even if that promise has been made in writing.  There are, however, exceptions to this doctrine.

The Offer in Compromise section, quoted above, is one of the few areas in which the IRS is legally bound by its decision, permanently. In other words, “sovereign immunity” does not apply, providing, of course, your Offer in Compromise is accepted and that you, the taxpayer, complies with the conditions.


You will be on "tax probation" which means you will have to file your tax returns on time for 5 straight years. You will have to pay any moneys owed on time for 5 straight years. If you can do that, without failing, you will be "home free." 

Section V(h) of the Offer Form 656 succinctly states: The IRS cannot collect more than the amount offered.  (If the Offer is accepted by the IRS and paid by the Taxpayer.)

Many believe, or hope, that obtaining tax relief using an Offer in Compromise is merely a matter of “asking for a settlement.”  This is not true.  As with most benefits provided by the Federal Government, there are procedures, instructions, and officials to deal with.  The purpose of the following information is to explore when an Offer in Compromise should be considered and how an Offer can be utilized.


NATIONAL AVERAGES FOR AN OFFER in COMPROMISE


Periodically, tax publications disclose the percentages of Offers in Compromise accepted by the IRS.  For example, in 2002, the IRS accepted 39% of the Offers submitted. In 2004, however, only 16% of the Offers submitted were accepted by the IRS. This decrease in the acceptance of Offers is due, in part, to the more stringent Offer rules adopted by the IRS, as well as a lack of communication with taxpayers.

With the recent changes to the Offer in Compromise program, it is not clear what the national percentage averages for the acceptance of Offers will be in the future. The new Streamlined Offer in Compromise is much to new to have any statistics. In 1997 and 1998 the national average for the amount accepted for Offers as a percentage of the tax debt was about 15 to 16 percent.

Keep in mind that national percentage averages for an Offer in Compromise are no more relevant than the statistics of the average amount of tax paid by the average Taxpayer. While some may eventually settle their case for the national average, the settlement amount is not based on such averages.

Advertisements, used by some alleged tax professionals, stating that your case can be resolved for "pennies on the dollar" are misleading at best. Even worse, lump sum payments made to such professionals often do not result in a resolution of the tax problems.

EVERYONE IS DIFFERENT


THE BASES FOR YOUR OFFER IN COMPROMISE


The acceptance of an Offer must be based upon 1 of these 3 categories:
(1) doubt as to the liability of the Taxpayer; OR
(2) doubt as to the Taxpayer’s ability to pay the full tax due; OR
(3) effective tax administration.

DOUBT AS TO LIABILITY

“DOUBT AS TO LIABILITY” means you don’t owe all or a portion of the tax debt the IRS has on its records and is trying to collect.  The  instructions to the new IRS Form 656-L (January 2006) defines this concept as, “Grounds for compromise may exist when there is a legitimate doubt from the viewpoints of both the taxpayer and the Internal Revenue Service that an assessed tax liability is correct.”
Observation
Improper or incorrect IRS assessments (tax debts) can arise in many ways:
  • Invalid or incorrectly computed IRS determination of the tax;
  • Improperly prepared tax returns;
  • Failure to respond to notices about payroll taxes (usually trust fund penalties [formerly called the “100% Penalty”]);
  • The Dog, Parrot, or ________ ate, destroyed, or otherwise trashed my  records, then I guessed, incorrectly, what the tax should have been; and
  • Other ways too numerous to list here. 
The cornerstone of an Offer based on DOUBT AS TO LIABILITY is to explain to the IRS why a Taxpayer does not owe the amount of assessed tax reflected on the IRS records and offer an amount the IRS will accept. Obtaining the IRS’s acceptance of an offer based on doubt as to liability is difficult, even for a tax professional.  Offers based on doubt as to liability are subject to some special rules and procedures which will not be discussed here.  As a practical matter, the successful submission of an Offer based on doubt as to liability will almost always require the assistance of a knowledgeable tax professional.

DOUBT AS TO COLLECTIBILITY (this is what you most likely be your category)


"Doubt as to Collectibility," as described on Form 656, means, I have insufficient assets and income to pay the full amount.” Does that statement describe you?
Observation - Left to their own devices, probably nearly everyone, except, perhaps, Bill Gates or Warren Buffet, would assert that they have “insufficient assets and income” to pay their taxes.  Determining how much a Taxpayer can pay within a “reasonable period of time” (a criteria not quoted above, but an important factor), and convincing the IRS of the correctness of the position, is the center in the art of getting your Offer in Compromise processed and accepted.
EFFECTIVE TAX ADMINISTRATION (mostly used by the elderly on fixed incomes with assets)

“Effective Tax Administration" as described on Form 656, means, “I owe this amount and have sufficient assets to pay the full amount, but due to my exceptional circumstances requiring full payment would cause an economic hardship or would be unfair and inequitable.”
Observation - Effective Tax Administration (ETA), as mentioned directly above, allows the IRS to take into consideration exceptional circumstances that would make it inequitable for an Offer in Comprise not to be accepted. When submitting an Offer based on Effective Tax Administration (ETA), you, the taxpayer, has to prove that he or she is not eligible to submit an Offer in Compromise under the doubt as to liability or doubt as to collectibility guidelines.
In our experience, it is hard to imagine the circumstances under which the IRS would actually exercise its authority in a manner which would be conducive to accepting an Offer under the criteria of an "Effective Tax Administration" (ETA).

When Congress suggested that ETA be added as an Offer alternative, the intent was to assist taxpayers in resolving longstanding tax issues and possibly abate the penalties and interest which arose out of the IRS’s delinquent assessments. According to the IRS manual, however, a taxpayer is only eligible for "ETA" Offer consideration if the realizable collection potential (net total of a Taxpayer’s assets plus future income) is higher than the tax liability. Because of this, it is very unlikely that the IRS will accept many Offers under the ETA guidelines.

WHO IS INVOLVED IN THE OFFER in COMPROMISE PROCESS


As in all real life situations, there are people with different views and stakes involved in the Offer in Compromise process.  In addition to you, the taxpayer, who is making the Offer, there is often another person, perhaps a relative or friend, who is paying the amount offered on behalf of the taxpayer. Although our friends and relatives who may be helping financially are well intention-ed, they have absolutely no experience with the Collection Division of the IRS as well as the Offer in Compromise process. These people need to sit silently on the sidelines.

On the opposite side of of your Offer in Compromise proposal is the IRS.   Between 1999 and 2001, there were regional or state IRS Supervisors of Offers.  Now, depending upon where you live, every Offer in Compromise is to be sent to one of two IRS Service Centers in Memphis, Tennessee or Holtsville, New York .  As the number of Offer in Compromise proposals submitted has increased, it has become more difficult to get an Offer processed.


THE IRS IS LOOKING TO

KICK OUT YOUR 

OFFER in COMPROMISE

AS

UN-PROCESSABLE / NOT PROCESSABLE 

In 2001, 14% of the Offers submitted were returned to the Taxpayers as “not processable.” In 2004, that number had risen to 31%. In 2001, 12% of Offers were rejected, as compared to 21% in 2004.  Stated differently, Offer returns and rejections have increased under the new system for Offer submission and review.

IF YOU FAIL TO 

DOT THE "i's"

OR

CROSS THE "t's"

YOUR OFFER in COMPROMISE

WILL BE REJECTED

An Offer in Compromise deemed to be “processable” by the IRS is usually assigned to an Offer Specialist called an Offer Examiner. Since the designation of Offer Examiner did not exist until quite recently, many of the Offer Specialists are “recycled” IRS Revenue Officers who work from their home.

These IRS Revenue Officers have or had the unenviable job of collecting unpaid taxes and unfiled returns.  Consequently, quite a few IRS Collection employees, IRS Revenue Officers, have become jaded and are known for their toughness and tenacity in tax collection matters.

Since many of the Offer Examiners are former IRS Revenue Officers, it should be assumed that many of the IRS “retread-employees” are not ideally suited for these new positions.  Providing a “Fresh Start” to you, the taxpayer, (one of the stated goals of the 1999 Offer in Compromise procedures) is not an objective viewed with favor by many of the Offer Examiners; hence your need for a professional’s help.

PROCESSING THE OFFER - STEP ONE - GETTING YOUR OFFER PROCESSED


Before your Offer in Compromise can be accepted, the IRS must decide to process it.  Staff at the two national IRS Offer in Compromise campuses will initially examine Offers in Compromise to determine if they are “processable.”

REMEMBER THAT THE 

JOB OF THE IRS

IS TO COLLECT MONEY

BUT THEY MUST FOLLOW THE RULES

JUST LIKE YOU

The IRS processing units will look diligently for reasons why an Offer in Compromise cannot be processed.  Many an Offer in Compromise is mailed back with rejection forms full of checkmarks, sometimes pointing out why the Offer is unacceptable as submitted.  These reasons may include but are not limited to:
  • The form is outdated – i.e., not the newest version;
  • Insufficient (or no) amount was offered; or
  • Signatures of the Taxpayer(s) are missing.
DOT THE "i's"

CROSS THE "t's"

Two primary reasons for your Offer in Compromise to be sent back to you. the taxpayer, as unprocessable are (1) the filing fee of $150 is not submitted and (2) the required 20% of the Offer amount payment is not submitted with the Offer form. Both the filing fee and the 20% payment are non-refundable.

THE IRS OFFER SPECIALIST / THE OFFER EXAMINER


If your Offer in Compromise is deemed to be “processable,” it is assigned to an Offer Specialist.  Under the system put into effect in May 2001, an IRS Offer Specialist may go to your home or place of business. Under the new rules, as of February 2011, the Offer Examiner is encouraged to call the taxpayer or their representative directly.

In the past, Offer Specialists would visit, but not now.  More likely than not there will be requests for additional data by correspondence or phone.  If a Power of Attorney, IRS Form 2848, has been filed, then the Offer Specialist must deal with the Taxpayer’s Representative (Tax Attorney, CPA or Enrolled Agent).

GET AN YOURSELF EXPERIENCED

TAX PROFESSIONAL

SO THAT YOU FIND YOURSELF

BABBLING


ZIP YOUR LIP

The objectives of the Offer Specialist are to gather information (to use against you) so that you can be rejected, to verify the data and, in general, make a determination of whether the amount offered is adequate.  The job of an Offer Examiner is to make you "tow the line" and your Tax representative's job is to make sure that your Offer in Compromise is "right on the money." As indicated above, finding the correct amount to offer and convincing an Offer Specialist (and Appeals Officer, if there is an appeal) that the Offer should be accepted often require much patience.

Throughout the period that your Offer in Compromise is being considered by the IRS, and as various IRS employees become involved, there will be requests for updated or additional materials. For example, an Offer Specialist or Appeals Officer may ask you for new pay stubs to see if you, the taxpayer, is earning more income now.

IRS APPEALS AND SETTLEMENT OFFICERS


If your Offer in Compromise is rejected by an Offer Specialist, the rejection can be appealed by filing a Written Protest with an IRS Appeals Officer, a type of administrative judge. Appeals Officers are more inclined to reach an accord with the Taxpayer on a disputed Offer in Compromise, since, by definition, if Appeals Officers never varied from the Offer Specialist’s position, there would be no need for Appeals Officers, right?  Do not expect, however, that every appealed Offer will be successfully negotiated at the Appeals level. Some Appeals Officers can be quite dogmatic, but, in many cases, an accord can be reached.

It should always be remembered that the IRS players in the Offer-Tragedy play are employees of the IRS and are inevitably bound by the dictates of the Agency.  For example, if all the Taxpayer’s returns are not filed, an Offer in Compromise will NOT be accepted no matter what the Taxpayer does.

In the past five years or so a new category of appellate type officers, “Settlement Officers,” has been created.  These Settlement Officers are generally not lawyers or CPAs, as most Appeals Officers used to be.  Instead, most Settlement Officers are former Offer Specialists / Revenue Officers and generally lack the expertise, training, and temperament of traditional IRS Appeals Officers.  In general, and with some happy exceptions, dealing with Settlement Officers makes the acceptance process more difficult.

APPEALS TO THE U.S. TAX COURT


In 1998, new Internal Revenue Code Sections 6320 and 6330 were adopted, allowing appeals of rejected Offers to the U.S. Tax Court.  Assuming an IRS Appeals Officer rejects an Offer in Compromise, a petition to the U.S. Tax Court can be filed using an “abuse of discretion” standard.  The petition needs to be filed within 30 days of the Appeals Officer’s decision.  Many rejections are upheld summarily on appeal because the Taxpayer failed to provide requested information, etc.


TIME TO PROCESS


Under the changes made by Congress in 2006, if an Offer is not rejected within 24 months after the date of submission, it will be deemed to be accepted.  It is still true, however, that the appeals process has no such time restrictions. For this reason, it is not expected that the Offer acceptance process will be sped up in any significant way. This is supposed to be changed due to the new Streamlined Offer in Compromise program.

DOUBT AS TO LIABILITY - HOW MUCH TO OFFER?


Even if it appears that a Taxpayer owes nothing, should some amount be offered?  Yes!  Here’s why.  Under the broad grant of authority given the IRS, an Offer in Compromise offering nothing (zero) could be accepted.  The recent creation of the separate Offer form for an Offer in Compromise based on doubt as to liability, Form 656-L, however, specifically states that if you believe you do not owe the liability, the Offer in Compromise process should not be used.

Let’s look at the situation from the IRS’s perspective.  If you offer nothing, what incentive is there for the IRS to process or accept the Offer in Compromise?  For this reason, even if it is relatively clear that the Taxpayer owes nothing, some amount should be offered.

Observation: If the Taxpayer owes nothing and is due a refund, consideration should be given to filing a Claim for Refund or submitting Penalty Abatement (both covered by Form 843) or an amended return (Form 1040X), rather than offering nothing.  Sometimes, the IRS will reject an Offer in Compromise because it insists that, for example, a Claim for Refund is more appropriate.  Legally, the IRS could accept an Offer in Compromise and refund money, but it probably will not.  In the 2006 guidelines, there was no mention of change of policy in this regard.

Other alternatives, such as Claims for Refund, do not, however, prohibit the IRS from later asserting additional tax or filing a suit to retrieve an erroneous refund check, mistakenly mailed.  Using these other methods allows the IRS to still say, “Oops, we made a mistake; please return the refunded amount.”  As previously stated, an Offer in Compromise, if accepted and paid, is not reversible and DOES bind the IRS. The IRS will be looking to "cover their butt."

DOUBT AS TO COLLECTIBILITY - HOW MUCH TO OFFER?


With an Offer in Compromise based on doubt as to the ability to pay, “Collectibility,” you, the taxpayer, must submit a completed IRS “Collection Information Statement” (Financial Statement). There are two forms – Form 433-A for individuals and Form 433-B for businesses.  If the Taxpayer owns or controls a business, usually both IRS forms (A and B) are required.  (If an Offer in Compromise is submitted based solely on doubt as to liability, financial statements are not required.)
Observation - The Forms 433-A and B provide the Offer Specialist / Offer Examiner with massive amounts of data about the Taxpayer.  Due to the length of these forms, complexity and interrelationship of the data, many Taxpayers need professional help in completing them.  For instance, if local real estate taxes are claimed as a deduction in computing available cash flow, the deduction may be disallowed unless the asset portion of the Form 433-A reflects the Taxpayer as the owner of real estate or there is some other reason the Taxpayer is committed to pay real estate taxes (e.g. a lease requiring the tenant to pay real estate taxes).
CALCULATING THE AMOUNT TO OFFER 


The prior IRS regime approached much of the information gathering and computational (the Offer in Compromise formula) approaches in essentially the same manner as the new guidelines.  The major difference is that Offers can now be paid in installments (without interest) and the amount due can be discounted if the 10-year statute of limitations on collection is soon to expire.
Please Note - If there is less than five years left in the ten-year collection period, the amount due may be reduced, even for so called “Cash Offers.”  In other words, you, the taxpayer, may owe less than the combination of the three classes of assets (Liquid Assets, Quick Sale Value, and Future Income) if there are less than five years remaining for the IRS to collect the tax debt.
In order to make the determination of the amount to offer, let’s first look at the basics.  Remember, your Offer in Compromise will be returned as unprocessable if the amount offered is inadequate.  The IRS will want a total combined dollar amount reflecting the following three considerations:
  • Available Liquid Assets;
  • Quick Sale Value of Assets; and
  • Some portion of future income.
AVAILABLE LIQUID ASSETS


AVAILABLE LIQUID ASSETS include bank accounts, securities, and similar assets.  Also included in this category are Individual Retirement Accounts (IRAs), 401(k)s, etc., minus all taxes and penalties due on such withdrawals.
Observation - In the past, several Offer Specialists have stated that 60% of the value of IRAs and 401(k)s was acceptable in computing the amount of cash from such sources. What many Taxpayers forget when filling out the IRS financial statement, Form 433-A, is that usually the Offer Specialist wants to see “pay stubs” which sometimes reflect 401(k) contributions. Taxpayers sometimes overlook these resources as available liquid assets.


QUICK SALE VALUE


If you, the taxpayer, were forced to sell assets hurriedly to get the needed cash to fend off an IRS seizure, for example, he or she would, in theory, sell for less than full market value.  In broad strokes, the QUICK SALE VALUE means 80% of the Fair Market Value in assets, less secured debt, like mortgages.  (Previously this was called the Forced Sale Value.)

For example, if the Taxpayer owns an unencumbered car worth $10,000 (auction value), then the IRS wants at least $8,000.  If the car is subject to a secured loan of $5,000, then the amount required to be offered would be $3,000 ($10,000 Fair Market Value x 80% = $8,000, less the mortgage of $5,000 = $3,000).
Observation - Prior to the 1999 guidelines, the quick sale percentage figure accepted by the IRS was 75% of fair market value.  Why a supposedly kinder and gentler IRS would increase the amount by 5% is interesting and troubling.

FUTURE INCOME (AVAILABLE CASH FLOW)


Assuming no assets, but some income, your Offer in Compromise will require that some of the income be paid to the IRS, either in cash, or, as is now allowed, in installments.  For those Taxpayers who have been battling with the IRS over payment of delinquent taxes for years, it is rather common to find no assets in their name.  Often a spouse (or friend or relative) not liable for a tax debt will be the owner of any property the Taxpayer purchased in recent times.  That way, the only leverage the IRS has to collect such tax delinquencies is to garnish salary or levy on receipts (of independent contractors).
Since 1999, the IRS has taken a major step in the right direction by giving Taxpayers the option to pay the offered amount over time and to reduce the amount due by factoring in the remaining time in the 10-year collection period.

TYPES AND CALCULATION OF PAYMENT PLANS


In the past, assuming no assets but some “available income,” in order to have an Offer accepted, at a minimum a Taxpayer needed to offer 60 months of available cash flow, now called “future income” or “monthly payments.”  In these materials we will continue to use the term “available cash flow” since it seems much more descriptive than other terms.


DIFFERENT WAYS OF PAYING THE OFFER


Superficially, it may seem that the IRS is offering two new ways to pay Offers, the “Cash Offer” and the “Periodic Payment Offer.”  In reality, there is only one new way to pay.  As explained later, there are different ways to compute the amount due.

The new “Cash Offer” is, in essence, the old 60-month cash payment discounted to an amount approaching present value.  Since the instructions regarding Forms 656 and 656-L do not indicate the interest rate the IRS is using for the discounting, it is not known exactly how it came up with a multiple of 48 times one month’s cash flow.

CASH OFFERS


Discounting to present value, described above, is the apparent foundation for what the IRS is now calling a “Lump Sum Cash Offer.”  The IRS will now simply instruct you, the taxpayer, to multiply the amount of available monthly cash flow by 48 without any reference to interest rates.  There was no mention of “present value” calculations or theories in the old Offer instructions, either.  The key difference between the old and new Offer in Compromise instructions (for cash lump sum payments) is that now an unsophisticated Taxpayer will not be offering 60 times one month’s available cash flow.

You, the taxpayer, will have to make an initial lump sum payment of 20% of the total amount offered with the submission of the Offer. The remaining balance of the Offer amount is to be paid in five equal installments.


SHORT TERM PERIODIC PAYMENT OFFERS


If you, the taxpayer, cannot afford to make a cash Offer, it is possible to enter into a “Short Term Periodic Payment Offer" agreement with the IRS that calls for monthly payments. This type of Offer in Compromise must be paid within two years (24 months) of the date of acceptance. An initial 20% payment of the total amount offered has to be submitted with the Offer. If less than two years are left on the statue of limitations on collection, then your Offer amount would be reduced accordingly. To calculate the amount of the Offer, you, the taxpayer, must include the realizable value (the 80% quick sale value) of your assets, plus the amount collectible over 60 months (future income) or the remaining life of the collection period.


DEFERRED PERIODIC PAYMENT OFFERS


In addition to the "Short Term Periodic Payment Offer" described above, there is also a “Deferred Periodic Payment Offer." The Deferred Periodic Payment Offer requires payment of:
 (a)  Cash payment of 20% of the total amount offered, paid with the submission of the Offer, and
(b)  Monthly installment payments of the remainder of realizable value, plus future income over the life of the collection statute.
Observation - Often Taxpayers who get into these tax situations have gotten there by over extending credit opportunities, namely, by borrowing too much.  It could be argued that this type of IRS credit is more of the same and a potential trap for those who can’t manage their monetary affairs very well.  Credit, rather than a wage garnishment, will be a decidedly tempting option to many Taxpayers.  Furthermore, many individuals with IRS liens filed against them cannot borrow from conventional lenders in any event.
While it is true that the monthly payments would most likely be lower for a Deferred Periodic Payment Offer than a Short Term Periodic Offer, the total amount to be offered and paid would typically be higher. This is because in a Short Term Periodic Payment Offer, only 60 months of future income would have to be considered. In a Deferred Periodic Payment Offer, the future income over the life of the statute of limitations on collection has to be calculated into your Offer in Compromise amount.


STATUTE OF LIMITATIONS


Finally (has your head been spinning?), the IRS has addressed the problem of the expiration of the 10-year statute of limitations.  Previously, when the 10-year period was about to expire, the IRS insisted, in many cases, on a waiver to extend the 10-year period for collection.  In some cases, the IRS would give a Taxpayer the option to either sign a waiver of the 10-year period (sometimes extending the collection period beyond the Taxpayer’s life expectancy), or the IRS would garnish (seize) most of the Taxpayer’s salary.  The 1998 IRC amendments to Sec. 6502 address this area by deleting the provision that previously allowed the IRS to extend the 10-year collection period by using a written waiver, IRS Form 900.

Currently, if less than four or five years are left in the 10-year collection period, the IRS has agreed to reduce the outstanding tax liability in consideration of the time remaining.  Perhaps the IRS reached this point because it cannot now present a taxpayer with the Draconian choice of signing a waiver or having his/her salary garnished or assets seized.   Now, the amount due and the period within which to pay the Offer in installments may be significantly reduced if the time remaining to collect the tax debt is less than five years.

WHEN WERE THE TAXES ASSESSED?


Many Taxpayers have only a vague idea when their returns were filed, or even if they have been filed.  In some cases, Taxpayers fail to file and the IRS “files” for them using a statutorily approved “Substitute for Return.”

It is possible to contact a local IRS office to determine the number of years remaining on the collection statute.  Another, and better, way to determine the number of years left is to get an IRS transcript for each year.

DID YOU THINK THE IRS WAS GOING


TO MAKE IT EASY

Unfortunately, many times the transcripts will not specifically state the collection statute expiration date (CSED). The CSED can be approximated by adding 10 years, or 120 months to the date of assessment. If you have filed bankruptcy or an Offer, however, then it will be necessary to add the dates during which such matters were pending, plus  30 days.  Transcripts should be obtained, but it is not always an easy or quick task to get IRS transcripts.

In some cases, IRS assessments may not be made for months after a return is filed.  A transcript will show “when” the assessment occurred (the beginning of the ten-year period), as well as provide information, such as the filing of prior Offers and waivers, which could extend the statute of limitations on collection.  Another reason for obtaining a transcript is to check on the application of prior installment payments.  If payments have been misapplied or penalties or interest incorrectly calculated, such errors can be discerned from transcripts.  Finally, the only way to confirm the time left in the IRS collection period is to check the IRS transcript.  Transcripts are what the IRS employees rely on for that information, so it is good practice to make sure, if possible, that the transcripts are approximately correct.

IF YOU ARE HOPELESSLY INSOLVENT / ON SOCIAL SECURITY


Even if you, the taxpayer, is clearly insolvent, owing a host of debts to state tax collectors, credit card companies and others, the IRS still abides by the guidelines stated above.  This means that if you, the taxpayer, owes a total amount that is many times the IRS debt, but has equity in assets, say, a motorcycle, the equity in that motorcycle has to be offered.  In many bankruptcy cases, creditors of the same class have to share the assets of a debtor and receive, usually, only a small percentage of their claim.  The IRS is not subject to, or bound by, such bankruptcy conventions when considering an Offer in Compromise.  Consequently, if there is equity in an asset, e.g. the motorcycle, then the IRS must be offered that equity.

INSTALLMENT AGREEMENTS


For some time, the IRS has permitted some Taxpayers who can’t pay all their tax debts immediately and who don’t qualify for an Offer to pay their tax liabilities over time in installments.  Such payment arrangements, called “Installment Agreements,” basically constitute the same arrangement one would have with a credit card company, paying off an account over time.  The primary difference is that credit card companies do not have the collection powers of the IRS.  Interest on principal and interest on penalties (if any) continue to accrue under an IRS Installment Agreement until the tax debt is fully satisfied.

NEVER AGREE TO A VERY BAD

INSTALLMENT AGREEMENT

Frequently, a taxpayers, may agree ( while under the pressure of a wage levy), to pay monthly amounts in excess of their means.  In the past, such a situation created problems.  If the monthly payment amount under an Installment Agreement was too rich, the old discounted amount (47 times one month’s cash flow) could have exceeded the total amount due, in which case, an Offer in Compromise based on collectibility, would have  been automatically rejected.

Now, with the new guidelines, even if a Taxpayer has entered into an IRS installment agreement in excess of his or her financial means to keep up the payments, it appears that a Cash Offer, 48 times one month’savailable cash flow, could still be negotiated.  If true, this may be a welcome change from the prior dilemma of having to default on an IRS installment agreement in order to submit an Offer in Compromise.

When there is a default on an IRS Installment Agreement, you, the taxpayer, could become subject to enforced collection procedures, levies and the like, unless a professional coordinates with the IRS in advance.  Usually, the IRS will forgo enforced collection measures if a tax professional becomes involved in the matter and coordinates with appropriate Revenue Officers about the forthcoming Offer in Compromise.


ALLOWABLE EXPENSES - MARRIED TAXPAYERS


What if only one spouse is liable for a tax debt?  More than likely, it is the Husband who is saddled with tax liability from a failed business (single guys sometimes make bad decisions regarding the IRS), and the Wife is current on her tax liabilities.  If the Taxpayer is employed, then the monthly cash flow component of an Offer in Compromise must be computed.  In this situation, how should the allowable expenses be computed?

The IRS usually takes the position that even if the Wife is not technically liable for the tax debts of the Husband, she may be helping with household debts; therefore, the Husband has MORE available income to pay the IRS.  While this is arguably correct in some cases, the IRS position is hard for most Taxpayers to accept.

Explained in different words, the IRS position holds that the Husband cannot deduct all of the expenses he could have deducted if he were single.  In effect, this problem is a type of “marriage penalty.”  It is particularly hard to get an Offer in Compromise approved in such cases because splitting living and housing allowances between spouses can greatly increase the amount the Husband must offer.  Additionally, the computation methods used by the IRS to fractionalize (allocate) expenses between spouses often leads to disagreements between the Offer Specialist and the Taxpayer.
Observation - Because of these problems, in addition to the need to disclose transfer of assets between spouses and reflect the Wife’s income on the financial statements, many “live-ins” wait to get married until an Offer in Compromise has been accepted.  In fact, if the couple is living together and planning a marriage, we, Flat Fee Tax Service, regularly suggest not getting married until the tax problem is resolved.
Another solution to the marriage-collection problem is to have the Wife or Husband quit his or her job for the time being.  It may seem unrealistic, but, in some cases (obviously, not all), having one of the spouses unemployed until after the Offer in Compromise is accepted is a solution.  Clearly, such an approach is permissible since the IRS cannot force a spouse to work.  The other dimension to this problem is economics, people need to continue eating and paying the rent. You will need to do a Cost Benefit analysis to see if this makes sense to you.


WHO WILL PAY YOUR OFFER in COMPROMISE? 


Few think about the importance of who it is who pays the amount offered.  The IRS Manual, IRM § 5.8.1.1.3, addresses the subject as follows:
The Service will accept an offer in compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. An offer in compromise is a legitimate alternative to declaring a case currently not collectible or to a protracted installment agreement. The goal is to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the Government.
The foregoing reasoning adequately explains why, if possible, getting a relative, or friend to pay the offered amount is often vitally important.  If someone other than the Taxpayer will post the amount offered, this is money the IRS cannot otherwise access.  If the Taxpayer’s collection potential is well below that of the amount offered and provided for by a family member or friend, the IRS may be more inclined to accept your Offer in Compromise.

BANKRUPTCY


Many Taxpayers and professionals are not aware that some income tax liabilities (Form 1040 debt) can be discharged in Chapter 7 bankruptcy if the income tax was assessed (billed) more than three years prior to beginning the bankruptcy proceeding.  It is beyond the scope of this Offer in Compromise summary to delve into the complexities of bankruptcy and the many exceptions to general rules stated here.  The purpose of mentioning bankruptcy is to alert readers that, sometimes, if income tax debt has been assessed for three years, or more, it may be possible to have such tax debt discharged in bankruptcy.

Not all taxes are dischargeable.  There are a variety of exceptions to discharge of liabilities in bankruptcy, such as fraud or failure to file a return.   Additionally, certain types of taxes referred to as Trust Fund taxes (941, FICA) cannot be discharged in bankruptcy, but they can be compromised using an Offer in Compromise.

Special tax laws (Sec. 6672)  allow the IRS to convert the Trust Fund debt of corporations into a personal tax debt against “responsible parties,” usually officers of the defunct corporation.  These personal assessments against responsible parties are sometimes referred to as the “Civil Penalty” by the IRS, or by some as the “100% Penalty.  Since the Civil Penalty cannot be discharged in bankruptcy, often the only way to address the burdens of this penalty is through the use of an Offer in Compromise.  Frequently, when a corporation goes “belly-up” or "upside down," the IRS assesses the Trust Fund (Civil) Penalty against everyone who was involved in corporate management, even those individuals who were only tangentially involved and, in fact, were not “responsible parties” as that term has been judicially interpreted.   Out of despair, lack of funds, or apathy, many Trust Fund Civil Penalties go uncontested until the individual(s) have recovered to some degree and need to get their lives back together; hence, the need for an Offer in Compromise.

TEMPORARY RELIEF IN BANKRUPTCY


Occasionally, a Taxpayer may be informed that a bankruptcy proceeding will stop the IRS from proceeding with a threatened levy (seizure) of assets.  While it may be true that the IRS is “stopped,” the “stopping” may only be for the duration of the bankruptcy proceeding or less.  Stated differently, if the taxes in question are not, in fact, dischargeable, filing a bankruptcy proceeding to stop the IRS may only afford temporary relief.  Once the bankruptcy proceeding is over, if the taxes are not dischargeable, the IRS is free to resume collection again. The IRS will be informed of the Bankruptcy dismissal and you can count on a levy shortly thereafter.

OFFER in COMPROMISE CONDITIONS


Section V of the Offer in Compromise Form 656 (Rev. 2-2007) contains a list of 15 conditions, (a) through (o), that the Taxpayer must agree to.  The following are sometimes overlooked – Conditions – pertaining to the conditions in Section V.  Each point is labeled with the letter of the corresponding item on the Form 656.  Not all of the 15 items [(a) through (o)] are discussed in this summary, so some lettered items are not included in the following list.
(a) All payments must be made voluntarily.
(b) The IRS is free to apply your payments as it wants, unless the taxpayer specifies the payment is a deposit.  Only amounts greater than the mandatory payments can be treated as deposits.
(d) Tax returns must be filed with full payment for five years.  Now, the default of one spouse (on a joint Offer) will not automatically default the Offer Agreement if the non-defaulting spouse remains current. This area is still in development it appears.
(e) The statute of limitations on collection is extended while the Offer is pending.
(g) Any refunds and interest due the Taxpayer are defaulted to the IRS while an Offer is pending (being considered).
(iThe IRS will not collect more than the amount offered if an Offer is accepted and completed.  This is very important and is why Offers are important.
(j) Once the IRS accepts the Offer, the amount of the tax liability cannot be contested in any Court.
(l) If the Taxpayer defaults on the Offer in Compromise, then the IRS is free to collect the remaining debt minus credits received.
(m) The IRS will file a lien against the Taxpayer (or leave existing liens in place) while the Offer is being paid.
OFFER in COMPROMISE FEES


As you may have surmised from the preceding discussions and observations, this is a difficult area of law.  Many a taxpayer faced with the dilemma of what to do about an overwhelming tax liability tend to blame others for their present problems.  However, rather than continuing to blame former partners, divorced spouses, the IRS, and others for their predicament, you, the taxpayer will need to take affirmative steps and be pro-active.

YOU CAN AFFORD AN OFFER in COMPROMISE

IRS Wage Garnishment removal services up to $1900Your Offer in Compromise - Full Service Tax Help
If you owe the IRS between $10K and $100K; pay only $2050 for full tax service which includes IRS Levy/IRS Wage Garnishment removal, IRS Offer in Compromise or IRS Penalty Abatement.





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I am Dave Rosa, the V. P. of Client Relations at Flat Fee Tax Service, Inc. I will be conducting your free and confidential consultation regarding your IRS problem. It is my duty to you, as well as Flat Fee Tax Service, Inc., to provide you with an honest and straightforward evaluation of your IRS problem. We do not employ salesmen. We strive to keep our costs as low as possible so that we may pass those savings on to our clients. You will work directly with the Tax Attorney assigned to your Offer in Compromise case.

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1 comment:

  1. Everything that you would want to know about an IRS settlement through the Offer in Compromise program is in this article. If you cannot pay the IRS, you need to seriously look at an Offer in Compromise.

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