Volume 16 Issue 1 -- January/February
Volume 16 Issue 1 -- January/February 2012
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 Much of what was said about the 2007 rules is now out of date.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.
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