Tax & Business Insights

OICs - New Forms 656 

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:

Lump Sum Offers

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.

Short-term Periodic OICs

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 24-month period.

Deferred Periodic Payment Offer

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 If the taxpayer fails to make the payments, then the OIC is withdrawn or rejected and the payments made until the date of withdrawal or rejection are kept by the IRS and applied to the tax liabilities.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 OICs.

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 Professionals.  

An expanded discussion of Offers In Compromise under the New Rules is available by clicking here.

Copyright 2007
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