Tax & Business Insights

IRS Offers in Compromise = Frustration (Part II)

Volume 17 Issue 3 --  May/June 2005

For an update on new 2006 Rules for Offers in Compromise, CLICK HERE. This article does not reflect the 2006 Legislation on Offers in Compromise.

In the last newsletter, we began our look at the practicalities of submitting an Offer in Compromise (“OIC” or “Offer) to the IRS. This time we will focus on preparing an Offer and processing problems.

It often seems questionable whether the IRS processing staff gives much weight to OICs based on doubt as to liability.  Doubt as to liability means that the debt is not owed for a reason such as the statute of limitation has expired or the returns were incorrect or that the tax assessment was wrong, for one of many reasons. 

Some question whether IRS staff members have the requisite training in legal issues to review Offers based on doubt as to liability.  Our experience at Newland & Associates has been that, if you submit an OIC solely based on doubt as to liability, it has a high chance of being kicked out. 

Offers based on doubt as to collectibility require extensive documentation. In the case of such an Offer for a hypothetical client first mentioned in the last newsletter, Fred Strated (“F. Strated”), in addition to the OIC Form 656, IRS financial statements are needed.  These IRS financial statements have many attachments such as pay stubs, bank statements for all accounts, life insurance documents, current statements from mortgage lenders, a copy of the last Form 1040 with all Schedules, proof of current household expenses, and on and on.  Get the idea?

Financial Statements

The personal financial statement is Form 433-A and is designed to tell the IRS about F. Strated’s assets and available cash flow to pay the IRS. If F. Strated owns a consulting business, then the gain or loss from the consulting business would be reflected on his business financial statement.

The business financial statement is Form 433-B. It is used for sole proprietorships, limited liability companies and small corporations.  The purpose of the Form 433-B is to determine the status of the business and to see if the income produced from it corresponds with what F. Strated is showing on his tax return and Form 433-A. 

The tracking of funds goes like this.  The small business produces the income which flows to the individual, who shows the profit from the 433-B on Form 433-A.  

Personal living expenses, and other allowances are determined in order to arrive at a figure which represents the amount of funds which the IRS says should be paid with the Offer.  What is in fact available and what the IRS allows are not the same figure.  For example, credit card debt not related to a business is not considered deductible in computing available cash.  Similarly, expensive schooling for children and expenditures of that type will not be allowed by the IRS.

Maddeningly, the IRS has published charts for living expenses, car allowances, housing and matters of that nature.  Even if F. Strated pays rent of $1,000 more than the IRS charts allow, only the “allowable amount” can be shown as a deduction in computing available cash. With some exceptions, the charts have to be followed. For more information about the IRS guidelines, Click Here.

The process of getting an OIC accepted will probably demand the submission of two or three updates of Forms 433-A and B.  Because it takes so long to get the initial processing started, the financial situation of F. Strated can change materially. As a result, each new IRS person dealing with the Offer may require updating the financial information.  While this may make sense from the IRS’s perspective, it is maddening and time consuming for the taxpayer.  

In handling OICs, we have found that most cases end up going to an appeals officer. The time from filing the Offer to resolution of the case can easily cover two or three years.  In one OIC we submitted, it took five years to reach a resolution.

We picked the name, F. Strated, because the OIC process is just that.  The frustration visited upon F. Strated by the IRS is often mirrored in the relationship between the client and the professionals handling the case. The interminable waits, the requests for additional information, the need for dealing with Offer Specialists who seem strongly inclined to reject Offers summarily rather than consider them can often lead clients to frustration with their attorneys and accountants. 

If a reader of this newsletter is considering assisting clients in an OIC, he or she should keep in mind the likelihood of the client relationship deteriorating over time. Without ongoing retainer payments, the tax professional may find that there are thousands of dollars of unpaid fees, at which time F. Strated might refuse to pay any more fees, because the goal hasn’t been obtained. 

If you have need for assistance with an OIC, please contact our firm. 

For an update on new 2006 Rules for Offers in Compromise, CLICK HERE.

Copyright 2005, 2006
By Tax and Business Professionals, Inc.
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