Volume 16 Issue 2 -- March/April
Volume 16 Issue 2 -- March/April 2012
An Offer in Compromise (OIC) is the basic way of compromising tax debts. By way of background, there are two broad types of compromises. The first is based on doubt as to liability, meaning “I don’t really owe all or part of the tax that has been assessed against me.” The second and more common type of OIC is based on doubt as to collectibility, meaning that the tax debt cannot be collected within a reasonable period of time.
The previous issue of this newsletter highlighted some of the key recent changes in the OIC program. This issue will address some additional aspects of OICs.
While usually OIC payments must be based on available cash flow over 48 or 60 months, recently the IRS recognized that OICs can sometimes be based on cash flow over shorter periods. For example, suppose that when the OIC is submitted there are only two years left on the 10-year collection statute of limitations within which to collect the tax debt. Since the IRS only has two years to collect the tax debt then the amount of the available cash flow to be paid is calculated over 24 months rather than the full 60-month period. This is referred to by the IRS as a “deferred periodic payment offer.”
In order to determine how much time remains on the 10-year statute of limitations on collections, it is necessary to obtain transcripts from the IRS. Transcripts are IRS statements of what is owed for each tax year or period. Among other things, the transcripts reflect the amount owed, the date of assessment, the type of tax, various credits, the addition of interest and penalties, etc.
Transcripts also show extensions to the 10-year collection period created by various events, such as bankruptcy, prior OIC’s, Collection Due Process Appeals, to name a few, that extend the 10-year statute of limitations. With a transcript, you can calculate how many months or years are left on the collection statute of limitations.
It is strongly recommended that a transcript be obtained as opposed to talking with someone on the phone about the period of time left before the statute of limitations on collections expires.
OICs are often submitted by people who are hopelessly insolvent in terms of income or cash flow. Even if they have little or no income and no likelihood of return to financial success soon, they can have equity in assets. That equity could be in a car, a motorcycle, or piece of real estate.
In order to successfully negotiate an OIC, any amount of equity in such assets must be factored into the offer to determine the overall amount that the IRS will expect to receive. As is stated in the OIC Guidelines on our website, the formula is 80% of the equity in assets plus a certain number of future months of income or cash flow.
One of the disclosures that is bothersome to many people submitting an OIC is having to show the income of a spouse that is not liable for the tax debt. Such situations are common when a business entity fails with unpaid employment tax amounts. The owner of the business (only one spouse) may be hit with the Trust Fund Recovery Penalty (TFRP) for unpaid withholding taxes of the defunct entity.
The IRS asks for the income of the non-liable spouse on Form 433-A (OIC) so that it can make an allocation of household expenses between the spouses. If, for example, the ratio of income between the two spouses is 75:25, then the amount of allowable household and similar types of expenses is adjusted accordingly. In almost all instances, the amount of expenses allowable in determining the available cash flow for the OIC reduces the expenses allowable for the liable spouse and increases the amount of available cash flow for the liable spouse.
The IRS cannot, for example, collect tax debts of a son from his parents. However, if the parents or someone else with the available funds is willing to pay all or part of the OIC amount offered, the third-party’s offer greatly increases the likelihood of acceptance of the OIC, because the IRS cannot lawfully collect the tax from the third-party. Clearly there is a strong argument for the acceptance of an OIC if there is a source of funds that the IRS could not otherwise reach.
Another way of looking at OICs is as a form of administrative bankruptcy relief for certain types of tax debts which cannot be discharged in bankruptcy. A common example of a tax debt that cannot be discharged in bankruptcy is the TFRP mentioned above.
TFRP liabilities, along with a number of other tax obligations, are not dischargeable in bankruptcy despite a belief to the contrary of many individuals (and in some cases their bankruptcy attorneys). Many erroneously believe that if they have been through bankruptcy all of their debts have been discharged in the bankruptcy proceeding.
While it is true that certain “income” tax liabilities which have been assessed for more than three years can be discharged in bankruptcy, this is not common because most people cannot wait three years after the tax assessment to declare bankruptcy. Thus, when bankruptcy procedures have failed to discharge a tax debt, the only way of reducing or compromising a tax debt, such as the TFRP, is to file an OIC.
Another reason for considering an OIC is that no interest is charged on the amount of the installment payments negotiated incident to an OIC. Otherwise, interest on tax debts is compounded daily and doubles in seven to ten years. Not having to pay interest on the agreed-upon OIC amount is a tremendous economic benefit of an OIC.
If you have questions about the OIC program, please contact Newland & Associates, PLC.
To read a more detailed article about the Guidelines for OICs, click here.
Published by the law firm of Newland & Associates, PLC
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Call us at (703) 330-0000 for a full range of business law and tax-related services.
While designed to be accurate, this publication is not intended to constitute the rendering of legal, accounting, or other professional services or to serve as a substitute for such services.
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