Tax & Business Insights

OICs - New Forms 656 (Part II) 

Volume 19 Issue 3 --  May/June 2007

In the last issue, we began to look at the IRS’s new rules for Offers in Compromise (OICs). This time we will look at some other aspects of OIC procedure.

Section 7122 of the Internal Revenue Code is short, succinct, and very broad. It gives the IRS Commissioner authority to compromise any civil or criminal case at any time. These powers are incredibly broad and allow the IRS to supersede the authority of all U.S. Courts. The new OIC rules, however, appear to deviate from the statutory authority in several respects.

For many years, the IRS has taken the position that one cannot receive a refund, if one is possible, in conjunction with an OIC. There is no authority for this IRS position but the IRS continues to state that would-be OIC applicants cannot receive a refund via an OIC.

The new OIC forms also deviate from basic statutory authority in that the IRS has taken the position that you cannot submit an OIC based on doubt as to liability and doubt as to collectibility at the same time. This position is absurd because there are many situations in which taxpayers have issues that relate to doubt as to liability (meaning the tax is not owed) and doubt as to collectibility (the ability to pay).

Moreover, the instructions to the new Form 656-L (Doubt as to Liability) engage in circular reasoning that is akin to Alice in Wonderland. Quite surprisingly, the instructions say not to use Form 656-L “if you believe you do not owe any of the liability!” The IRS is essentially stating that if a taxpayer believes “nothing” is owed, then there is not doubt as to liability?

The instructions then suggest that one look to the “Alternatives.” All of these alternatives, at the bottom of page 1 of the instructions, direct a would-be OIC applicant away from using the new OIC Liability Form 656-L. It seems the IRS is taking the fundamentally flawed position that doubt as to liability exists only if the tax liability is incorrectly computed.

It will be interesting to see if the regulations, whenever they are issued, agree with the positions in the instructions to Form 656-L, although for some time, the IRS has taken the position that doubt as to liability must mean there is doubt as to the “correct” amount of tax, as opposed to whether there is any tax due.

The filing fee for an OIC based on doubt as to collectibility or effective tax administration is $150, plus whatever payments are required by the OIC. In addition, estimated tax payments for current tax liabilities must be maintained and, of course, all tax returns must be filed on a timely basis while the OIC is pending and, if accepted, while it is being paid or for five years, whichever is longer.

Since the OIC gates will be substantially closed by the new requirements that payments be made with the submission of an OIC, it is anticipated that the activity surrounding the OIC program will be substantially reduced.

Undoubtedly, there will be many poor people who will not be able to submit OICs because they cannot afford the initial payment requirements. To facilitate such hard luck cases, there are exceptions to the payment of the $150 filing fee and the 20% down payment on a lump sum OIC, provided the taxpayer qualifies under the IRS OIC Low Income Guidelines.

The new IRS forms have a third-party designee section, in which it is possible to designate the names of one or more third-parties with whom the IRS can discuss the OIC. In the instructions, it states that the IRS may contact third-parties in order to respond to the OIC request, and the taxpayer, by signing the OIC form, authorizes the IRS to make such contacts.

It is unclear from the seemingly conflicting instructions whether the IRS is being authorized to contact all third-parties or only those designated on Form 656 or 656-L. The ambiguous language could be interpreted in several different ways.

“Effective tax administration” allows the IRS to consider exceptional circumstances that would make it unfair or inequitable for an OIC not to be accepted. Based on our experience, it is hard to imagine the circumstances under which the IRS would exercise its authority in a manner which would be conducive to accepting an OIC under the criteria of effective tax administration.

One thing is certain, there will be far fewer OICs submitted, and those submitted will probably require family members or others to chip in to satisfy the financial requirements of the new guidelines.

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
By Tax and Business Professionals, Inc.
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