What is an Offer in Compromise anyhow? In simplest terms, an Offer is a contract between a Taxpayer and the IRS to compromise (reduce) a tax debt for an agreed-upon sum of money. If the IRS accepts the Offer and the agreed amount is paid (and other requirements satisfied), then the deal is done and the remaining amounts are forgiven.
Stated differently, the full amount of the tax liability previously due does not have to be paid.
For a long time, the IRS has had very broad authority to compromise all tax matters, but until fairly recently, it seldom did so, even for seemingly valid reasons. On March 29, 1999, the IRS issued revised instructions and a new Form 656 for submitting an Offer. With the advent of these new policies, the IRS will consider factors other than near death and bankruptcy (combined).
As with many benefits from the Government, there are costs. For example, for an Offer to be considered, all current tax returns must be filed (and paid or made a part of the Offer). Also, the Taxpayer must agree to file and pay all taxes due for at least the next five years after the Offer is accepted, or the original debt will be reinstated.
Offers are based on two broad concepts Doubt as to Liability, OR Doubt as to Collectibility.
An Offer based on Doubt as to Liability must substantiate the reasons why the tax is not owed. Such a situation can spring from any number of mistakes or procrastination on the part of Taxpayers and their representatives (other than current readers, of course.)
When submitting an Offer based on Doubt as to Collectibility, the argument must substantiate that the Taxpayer does not have enough income and assets to pay the tax debt in the foreseeable future. For an Offer of this type to be accepted, the IRS requires complete disclosure of the Taxpayer's (and spouse's) earnings and assets.
In addition to liquid assets, like bank accounts, a rough measure of what needs to be offered with an Offer based on Doubt as to Collectibility is: (a) the quick sale value of equity in illiquid assets like a house or motorcycle, plus (b) the value of available monthly cash flow as determined by new formulas too lengthy to include in this newsletter, but discussed on our Web site.
The quick sale value of equity in assets is now 80% of the net equity (Fair Market Value minus perfected debts, like mortgages). This quick sale amount has to be offered even if the Taxpayer is hopelessly insolvent. Previously, the percentage accepted by the IRS was 75% -- so much for the kinder IRS.
Available monthly cash flow is difficult to measure and explain since not all debts are "allowed." Non-business credit card debt incurred for personal expenses, like viewing X-rated Web sites, cannot be included. The IRS adopted a maddening system for determining a standard for personal expenses and rent. In the new guidelines, however, the use of these standards may be waived. A Taxpayer may not have to fit into the IRS cookie cutter mold if the "scheduled allowances" are shown to be "inadequate."
Unlike before, there is now a Deferred Payment Offer Chart that factors in the time remaining in the 10-year collection period. For example, assuming no assets, two years remaining to collect the taxes, and available monthly cash flow of $200, the Taxpayer would owe $2,400 (12 x $200). The longer the remaining collection period, the more payments are required. Factoring in the expiration of the 10-year collection period is a welcome change from the old IRS practice of insisting on waivers extending the 10-year period for unreasonable lengths of time -- sometimes in excess of the Taxpayer's life expectancy -- as a trade-off for not garnishing the Taxpayer's salary.
What if only one of two spouses is on the hook for withholding taxes, say, from a failed business? In such a situation, things get messy because the IRS wants to know about the non-liable spouse's assets, as well as their contribution to payment of family expenses.
Often, these inquiries by the IRS provoke some strong language, like "Gosh, Darn."
Family or friends offering their funds can make a big difference. Because funds from a "Saint" are out of the reach of the IRS, agents are encouraged not to reject such offers unless they are reasonably sure more will, in fact, be collected from the Taxpayer.
Many Offer applicants have been running from their problems for years. The counseling that goes with Offers involves not only crunching numbers but getting the Taxpayer to accept responsibility.
If you need help in preparing a difficult Offer, call us.
For a much more detailed discussion of the new IRS rules, Click here.
By Tax and Business Professionals, Inc.
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