OIC Rules Change Again -- Part 2
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.
Copyright 2012
Published by the law firm of Newland &
Associates, PLC
9835 Business Way
Manassas, VA 20110
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.
Redistribution or other commercial use of the material contained in Newland's Business Notes is expressly prohibited without the written permission of Newland & Associates, PLC.
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