OIC Rules Change Again -- Part 1
For the second time in about 4 years, the Internal
Revenue Service (IRS) changed the Offer in Compromise (OIC) forms and
guidelines. Much of what was said about the 2007 rules is now out of date.
Many of the basics for an OIC remain the same. The
formula for what might be an acceptable offer is fundamentally the same and can
be described as: 80% of the equity in assets plus 48 or 60 months of available
cash flow. This shorthand version of what might be an acceptable offer is a
rough guideline for approaching an amount that might be acceptable to the
Internal Revenue Service (IRS). The
devil is often in the details of computing and arguing about what is “available”
under IRS guidelines.
As Wikipedia notes under OICs, “Consumer Alert”: “In
2004 the IRS issued a consumer alert warning of promoters’ claims to settle IRS
debts for ‘pennies on the dollar’ . . . .” Anyone contemplating using a company
that is not a member of the Better Business Bureau [Newland & Associates
is] should be very cautious, particularly if the company does not have a local
address. A diligent Internet search will disclose three or more companies that have
been subject to indictments or actions by agencies such as the Attorney
Generals in various states.
The general process for OICs also remains the same.
Processing: The first step is getting the IRS to begin
the process of logging the Offer in administratively. This step is important
because once the Offer is pending (being processed) the IRS will not use
enforced collection actions, such as a levy, to collect taxes while the OIC is
pending.
Processing also affords the IRS an opportunity to
reject Offers for a variety of reasons, too numerous to list. Suffice it to say that the staff in “processing”
seem to look diligently for reasons to send OIC’s back to applicants without
processing.
Evaluation:
The second step is the actual consideration of the OIC by an Offer Specialist,
most often from the Service Centers in Holtsville, New York or Memphis,
Tennessee. Frequently, Offer Specialists seem to be former Revenue Officers
(those in charge of tax collection). Because of their background, it is often difficult
to get a former Revenue Officer to think about reasonable approaches to an OIC.
For those that desire more detailed information on OIC’s
this subject is discussed in greater depth in an article on our Website “Offer
in Compromise Guidelines.”
Rejection?
The third and final step of the OIC process could be described as dealing with
rejection. It is very common for Offer Specialists to reject OICs. The taxpayer
or the practitioner will then receive a rejection notice and it will be
necessary to appeal the rejection of the OIC to an Appeals Officer. Recently,
the IRS has decided that Settlement Officers (as opposed to Offer Specialists)
are the equal of Appeals Officers. Previously, Appeals Officers were lawyers,
CPAs, or accountants with considerable backgrounds in handling a wide variety
of tax issues. Settlement Officers, on the other hand, often have come up
through the ranks as IRS collection officers and are oriented more towards the
tax collection process rather than approaching settlements or appeals on an
objective basis.
It has been estimated by “About.com, tax planning,”
that it takes approximately two years to complete an OIC. Our experience has
been that it actually takes longer than two years in many cases to gain the
relief requested.
Under the latest rules, an OIC on Form 656 must be
accompanied by new forms 433-A (OIC) or 433-B (OIC) (the “B” is for business).
In addition to having different titles, these forms are considerably different
in approach.
Individuals, independent contractors, and sole owners
of limited liability companies, can use Form 433-A (OIC) even though the
applicant may be in business. The form is divided into sections such as
personal assets, business assets, and household income. At the end of each
category are boxes that are used in calculating the amount to be offered. Near
the end of the 433-A (OIC) there is a section entitled “Calculate Your Minimum
Offer Amount.” The minimum offer amount is comprised of 80% of the equity in
assets and the total of the future income payments using a formula for
available cash flow over either 48 months or 60 months in most cases.
If the offeror can pay the amount offered in five
months or less, then the available cash flow requirement is reduced to a sum
equal to the available cash flow times 48 months as reflected in Box 6 of the
433-A (OIC).
The lump sum calculated is not required to be paid at
one time. The amount can be spread out over five installments, provided the
five installments are paid in five months or less. The amounts and dates for these five payments
can be listed on Form 656, Option One.
Box 7 of the 433-A (OIC) is the payment of future
income calculated over a 60 month period. As noted on Form 656, the taxpayer is
allowed to designate the amount, month, and total number of months during which
the payments would occur. The IRS will probably not accept OICs where the
payments will exceed 60 months, but in theory anything is negotiable.
With regard to either the 48-month or 60-month
approach, the taxpayer is required to pay 20% of the amount offered with the
submission of the OIC and then designate on Form 656, (options 1 or 2), when
the remaining payments will be completed and the amount and dates of each
payment.
In our next
newsletter, we will consider other aspects of submitting an OICs. Please call
us if you have questions about an OIC. To read a more detailed article about the Guidelines for OICs, click here.
Copyright 2012
Published by the law firm of Newland &
Associates, PLC
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