Volume 19 Issue 2 -- March/April 2007
The Internal Revenue Service
(IRS) has recently published new forms to be used for Offers in Compromise (OICs)
to implement legislation passed in July of 2006. Instead of issuing new
regulations first, the IRS has instead come out with instructions for completing
the new forms. This will be the first of two newsletters looking at aspects of
the new forms and new OIC rules.
You may be wondering why the
plural “forms” is being used. In the past, Form 656 could be submitted for all
OICs, but now, an OIC submitted based on doubt as to liability (meaning you
don’t owe the money), must be submitted on the new form, Form 656-L.
The traditional OIC form, Form
656, can now only be used for doubt as to collectibility and effective tax
administration. Within the framework for doubt as to collectibility, there are
still three ways to submit an offer:
Perhaps only in the world of
taxation can language deviate so much from normal usage. The term “lump
sum,” for purposes of Form 656 does not mean one payment. Instead, it means
20% of the amount offered, plus five installment payments. The installments do
not have to be sequential monthly installments, but you have to indicate on Form
656 within how many months after the date of acceptance of the OIC the payments
will be completed.
If a lump sum cash offer cannot
be paid, the next option for a taxpayer is the periodic payment offer over a
24-month period. If there are less than 24-months left before the expiration of
the statute of limitations for collection, then the amount that must be offered
is reduced. However computed, the payments would have to be made within the
This type of OIC requires that
the amount offered be paid off over the remaining time left on the statute of
limitations on collection. The first payment must be made with the submission of
the OIC and monthly payments are required during the OIC investigation period.
If the taxpayer fails to make the payments, then the OIC is withdrawn or
rejected and the payments made until the date of withdrawal or rejection are
kept by the IRS and applied to the tax liabilities.
In a pleasant departure from
prior instructions, now if an OIC is submitted, it is possible to suspend
existing payments on an installment agreement. This ability to stop making
installment payments and begin applying the payments under an OIC is a
refreshing change from prior policies.
For reasons which are not clear,
this ability to suspend payments on an installment agreement does not apply to a
lump sum cash offer. Why this would be the case is mysterious since the payments
under the lump sum cash offer are paid more rapidly than under other types of
As before, determining the
amount that must be offered in the case of an OIC based on doubt as to
collectibility involves computations under IRS formulas and guidelines. Under
the new instructions, the computation of available cash flow and the allowable
deductions will continue as before. It is anticipated that, as before, the IRS
will continue to inflate estimates of available cash flow and eliminate many
would-be OICs from being accepted.
Curiously, the new law, Section
7122(f) states that if an OIC is not rejected within a 24-month period after
submission, it is deemed to be accepted. If a taxpayer is inclined to gamble,
they may try to submit an OIC which is substantially below what might be
expected in the hopes that it will languish for 24-months at the IRS. This would
be a gamble that would not be recommended in most cases.
Next time, we will continue our
look at the new OIC rules.
If you are contemplating
submitting an OIC and need assistance, you may want to contact Tax and Business
An expanded discussion of Offers
In Compromise under the New Rules is available by clicking
By Tax and Business Professionals, Inc.
9837 Business Way
Manassas, VA 20110
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