INTRODUCTION
Confronted with
Federal tax debts you can’t
pay or believe you don’t
owe? If so, you may
be a candidate for
an IRS Offer in Compromise (Offer).
These guidelines and observations are designed to assist
you in
evaluating your tax situation and pursuing an IRS Offer in Compromise.
For many years it
was nearly impossible
to negotiate an Offer successfully with the IRS.
Then, in July 2006, Congress changed certain
statutory rules relating to Offers for the purpose of encouraging more
Offers. Following
these legislative changes, the IRS issued new rules and new forms for
Offers. The
current version, Form 656 (revised 3-2011), is to be used for Offers
based on
doubt as to collectibility
or effective tax administration.
Another form, Form 656-L (revised 1-2006), is to be used exclusively
for offers
based on doubt as to liability (i.e.
“I
don’t owe some or all of the tax”). Late in 2011, the IRS made some
additional
changes to the Offer program.
Now, the IRS will
allow some Offers to
be paid in installments and the amount due to be discounted (reduced). In instances where much of
the 10-year
statute of limitations on collection (the period within which taxes
must be obtained
by the IRS) has passed, there can be reductions in the amount offered
to the
IRS because of the shortened period for collections.
Many of the
details of the IRS handling
of Offers are set forth in Part 4, Chapter 18, and Part 5, Chapter 8,
of the
Internal Revenue Manual (IRM), which is the set of IRS rules governing
its own
actions. The full IRM is available on the IRS website at www.irs.gov.
WHAT
IS AN OFFER IN
COMPROMISE?
Section 7122(a)
of the Internal Revenue
Code authorizes the settlement of any tax matter. It states:
The
Secretary may
compromise any civil or criminal case arising under the internal
revenue laws
prior to reference to the Department of Justice for prosecution or
defense; and
the Attorney General or his delegate may compromise any such case after
reference to the Department of Justice for prosecution or defense.
This
longstanding Code Section allows the IRS great latitude to accept
Offers and
develop regulations concerning them.
Few
understand that, generally, the IRS (like most other government
agencies) is
usually not bound by what it or its personnel say or do because of a
legal
concept called “sovereign immunity.”
This means they can reverse their decisions after a
matter has been
settled or can renege on a promise to follow a course of action even if
that
promise has been made in writing.
There
are, however, exceptions to this doctrine.
The
Offer section, quoted above, is one of the few areas in which the IRS
is
legally bound by its decision, permanently — in other words, “sovereign
immunity” does not apply — provided, of course, the Offer is accepted
and the
Taxpayer complies with the conditions of the Offer (i.e.,
the Taxpayer files tax returns for five years and remits full
payments). The
Offer Form 656 succinctly
states:
The
IRS cannot
collect more than the amount offered.
(If the Offer is accepted by the IRS and paid by the
Taxpayer.)
Many
believe, or hope, (based on over-hyped TV ads) that obtaining relief
using
an Offer in Compromise is merely a matter of “asking.”
Not true.
As with most benefits provided by the Government, there
are procedures,
instructions, and officials to deal with.
The purpose of the following materials is to explore
when an Offer
should be considered and how Offers might be utilized effectively.
NATIONAL
AVERAGES
Periodically,
tax publications disclose the percentages of offers accepted by the IRS. For example, according to
the National
Taxpayer Advocate’s 2011 Report to Congress
(http://www.irs.gov/pub/irs-utl/nta2011objectivesfinal..pdf),
the IRS accepted 38,643 Offers in 2001 and only 10,655 in 2009, despite
both an
increase in the number of Offers submitted and an avowed policy of the
IRS to
encourage more successful Offers. In 2010, however, only 24% of the
Offers
submitted were accepted by the IRS
(http://taxes.about.com/od/offerincompromise/a/oic_essentials.htm).
This decrease in the acceptance of Offers is due, in part, to the more
stringent Offer rules adopted by the IRS.
With
the recent changes to the Offer program, it is not clear what the
national
averages for the acceptance of Offers will be in the future. In 1997
and 1998
the national average for the amount accepted for Offers as a percentage
of the
tax debt was about 15 to 16 percent.
Keep
in mind that national percentage averages for Offers are no more
relevant than
the statistics of the average amount of tax paid by the average
Taxpayer. While
some taxpayers may eventually settle their case for the national
average, the
settlement amount is not based on such averages. Well noted sources of
information, such as Wikipedia, have alerted taxpayers not to use
companies
that advocate “pennies on the dollar”. It should also be noted that any
ads
which appear in local telephone books and do not give an address should
be
suspect, as well as television and radio ads promising spectacular
results. Far
too frequently, this office receives calls from would-be clients whose
funds
have been exhausted by companies that promise the moon, take the
would-be
client’s money, and do not complete the agreed tasks. For information
about
advertisements touting Offers in Compromise for "pennies on the
dollar," Click
here.
BASES
FOR OFFERS IN COMPROMISE
The
acceptance of an Offer must be based upon:
(1)
Doubt as to the
liability of the Taxpayer; OR
(2)
Doubt as to the
Taxpayer’s ability to pay the full tax due; OR
(3)
Effective tax
administration.
The
IRS has taken the position that the 2006 legislation entitled “Tax
Increase
Prevention, and Reconciliation Act of 2005” prohibits the IRS from
accepting
and processing Offers based on both doubts as to collectability and
liability.
Such
a conclusion seems illogical because it could easily be imagined that
someone
would have doubt as to the liability with regard to a tax debt, and
then not be
able to pay within a reasonable period of time the tax debt that was
reduced to
reflect the correct liability. There
is
certainly nothing in IRC Sec. 7122 that precludes consideration of an
OIC based
on both doubt as to collectability and doubt as to liability. In any event, the IRM
4.18.1.2(3)(C) states
that Offers based on doubt as to liability and
collectability submitted
after 2006 will not be accepted.
(1)
DOUBT
AS TO LIABILITY
“DOUBT
AS TO LIABILITY” means you don’t owe all or a portion of the tax debt
the IRS
has on its records and is trying to collect.
The instructions
to the IRS Form
656-L (January 2006) defines this concept as, “Grounds for compromise
may exist
when there is a legitimate doubt from the viewpoints of both the
taxpayer and
the Internal Revenue Service that an assessed tax liability is correct.”
Observation:
Improper
or incorrect
IRS assessments (tax debts) can arise in many ways:
The
cornerstone of an Offer based on DOUBT AS TO LIABILITY is to explain to
the
IRS why a Taxpayer does not owe the amount of assessed tax reflected on
the IRS
records, and offer an amount the IRS will accept.
Obtaining the IRS’s acceptance of an offer
based on doubt as to liability is difficult, even for a tax
professional. Offers
based on doubt as to liability are
subject to some special rules and procedures which will not be
discussed
here. As a
practical matter, the
successful submission of an Offer based on doubt as to liability will
almost
always require the assistance of a knowledgeable tax professional.
(2)
DOUBT
AS TO COLLECTABILITY
"Doubt
as to Collectability," as described on Form 656, means, “I have
insufficient assets and income to pay the full amount” . . . within a
reasonable
period of time.
Observation:
Left
to their own
devices, probably nearly everyone, except, perhaps, Bill Gates, would
assert
that they have “insufficient assets and income” to pay their taxes. Determining how much a
Taxpayer can pay
within a “reasonable period of time” (a criteria not quoted above, but
an
important factor), and convincing the IRS of the correctness of the
position,
is the “nub” of the art of getting a Doubt as to Collectability Offer
processed
and accepted.
(3)
EFFECTIVE
TAX
ADMINISTRATION
“Effective
Tax Administration,” as described on Form 656, means, “I owe this
amount and
have sufficient assets to pay the full amount, but due to my
exceptional
circumstances requiring full payment would cause an economic hardship
or would
be unfair and inequitable.”
Observation:
Effective
Tax
Administration (ETA) allows the IRS to take into consideration
exceptional
circumstances, such as hardship, that would make it inequitable for an
Offer
not to be accepted. When submitting an Offer based on ETA, a Taxpayer
has to
prove that he or she is not eligible to submit an Offer under the doubt
as to
liability or doubt as to collectability guidelines.
In
our experience, it
is hard to imagine the circumstances under which the IRS would actually
exercise its authority in a manner which would be conducive to
accepting an
Offer under the criteria of ETA. When Congress suggested that ETA be
added as
an Offer alternative, the intent was to assist Taxpayers in resolving
longstanding tax issues and possibly abate the penalties and interest
which
arose out of the IRS’s delinquent assessments. The IRM offers a few
examples of
when consideration of an ETA Offer may be appropriate. These examples
usually
involve some sort of serious illness or circumstances in which
liquidating the
Taxpayer’s assets to pay the full tax liability would result in
exceptional
economic hardship. It is doubtful that the IRS will accept many Offers
under
the ETA guidelines.
Except
as noted, the remainder of these Guidelines will focus on Offers based
on Doubt
as to Collectibility.
THE
PLAYERS
As
in all real life tragedies, players are needed.
In addition to the Taxpayer-Offeror, there is often
another person,
perhaps a relative or friend (a/k/a a “Saint”), who is paying some or
all of the
amount offered on behalf of the Taxpayer-Offeror.
On
the opposite side of the stage (and the world, it sometimes seems) is
the
IRS. Between
1999 and 2001, there were
regional or state IRS Supervisors of
Offers. Now,
depending upon where
you live, all Offers are to be sent to one of two IRS Service Centers,
or
“campuses,” Memphis Tennessee or Holtsville New York.
As the number of Offers submitted has
swollen, it has become more difficult to get Offers processed. In 2001, 14% of the Offers
submitted were
returned to the Taxpayers as “not processable.” In 2004, that number
had risen
to 31%. In 2001, 12% of Offers were rejected, as compared to 21% in
2004. Stated
differently, Offer returns and
rejections have increased under the new system for Offer submission and
review.
An
Offer deemed to be “processable” by the IRS is usually assigned to an Offer Specialist. Since the designation
of Offer Specialists did not exist until fairly recently, many of the
Offer
Specialists are “recycled” IRS Revenue
Officers. These
Revenue Officers
have (had) the unenviable job of collecting unpaid taxes and unfiled
returns. Consequently,
quite a few IRS
Collection employees, Revenue Officers, have become known for toughness
and
tenacity in tax collection matters.
Because
many of the Offer Specialists are former Revenue Officers, it might be
concluded
that many of these IRS “retread-employees” are not ideally suited for
evaluating
Offers. Providing a
“Fresh Start” to
Taxpayers (one of the stated goals of the 1999 Offer in Compromise
procedures)
is not an objective viewed with favor by many of the Offer Specialists;
hence
the Taxpayer’s need for a professional’s help.
PROCESSING
THE OFFER
Before
an Offer in Compromise can be accepted, the IRS must decide to process
it. Staff at the
two national IRS Offer in
Compromise campuses will initially examine Offers in Compromise to
determine if
they are “processable.”
These
processing units seem to look diligently for reasons why an Offer in
Compromise
cannot be processed. Stated
differently,
Offers are often mailed back with rejection forms full of checkmarks,
sometimes
pointing out why the Offer is unacceptable as submitted. These reasons may include:
- The
form is outdated – i.e., not the newest version;
- Insufficient
(or no) amount was offered; or
- Signatures
of the Taxpayer(s) are missing.
There
is a filing fee of $150 for Offers filed based on doubt as to
collectability.
That filing fee can be waived in some cases based on the financial
condition of
the applicant. The same is true with regard to the required payment of
the
Offer amount.
Two
primary reasons for an Offer being sent back to the Taxpayer as
unprocessable
are (1) the filing fee of $150 is not submitted and (2) the required
20% of the
Offer amount payment is not submitted with the Offer form. Both the
filing fee
and the 20% payment are non-refundable.
If
an Offer is “returned” then the IRS sends back the entire file, except
for the
$150 application fee and the 20% down payment required for Offers based
on
doubt as to collectability. A
“return”
of an Offer is worse than a “rejection” because rejections have an
automatic
right of appeal if requested.
THE
OFFER SPECIALIST
If
the Offer is deemed to be “processable,” it is assigned to an Offer
Specialist. Under
the system put into
effect in May 2001, Offer Specialists could go to the Taxpayer’s home
or place
of business, but such visits are unlikely.
In the past, Offer Specialists would visit the Taxpayer
or the
Representative of the Taxpayer, but not now.
More likely than not there will be requests for
additional data by
correspondence. If
a Power of Attorney,
IRS Form 2848, has been filed, then the Offer Specialist must deal with
the
Taxpayer’s Representative.
The
role of the Offer Specialist is to verify the data and, in general,
make a
determination of whether the amount offered is adequate. As indicated above,
finding the correct
amount to offer and convincing an Offer Specialist (and an Appeals
Officer, if
there is an appeal) that the Offer should be accepted often requires
much
patience.
Throughout
the period an Offer is being considered by the IRS, and as various IRS
employees become involved, there will usually be requests for updated
or
additional materials. For example, an Offer Specialist or Appeals
Officer may
ask for new pay stubs to see if the Taxpayer is earning more income now.
IRS
APPEALS AND
SETTLEMENT OFFICERS
If
an Offer is rejected by an Offer Specialist, the rejection can be
appealed by
filing a Written Protest with an IRS Appeals Officer, a type of
administrative
judge. Appeals Officers are more inclined to reach an accord with the
Taxpayer
on a disputed Offer, since, by definition, if Appeals Officers never
varied
from the Offer Specialist’s position, there would be no purpose for
Appeals
Officers, right? Do
not expect, however,
that every appealed Offer will be successfully negotiated at the
Appeals level.
Some Appeals Officers can be quite dogmatic, but, in many cases, an
accord can
be reached.
It
should always be remembered that the IRS players in the Offer-Tragedy
play are
employees of the IRS and are inevitably bound by the dictates of that
Agency. For
example, if all the Taxpayer’s
returns are not filed, an Offer will NOT be accepted no matter what the
Taxpayer does.
In
the past ten years or so a new category of appellate-type officers,
“Settlement
Officers,” has been created. These
Settlement Officers who handle appeals of rejected Offers are generally
not
lawyers or CPAs, as most Appeals Officers use to be.
Instead, most Settlement Officers are former
Offer Specialists (or Revenue Officers) and generally lack the
expertise,
training, and temperament of traditional IRS Appeals Officers. Typically, but with some
happy exceptions,
dealing with Settlement Officers makes the acceptance process more
difficult.
APPEALS
TO THE U.S.
TAX COURT
In
1998, new Internal Revenue Code Sections 6320 and 6330 were adopted,
allowing
appeals of rejected Offers to the U.S. Tax Court.
Assuming an IRS Appeals Officer (or
Settlement Officer) rejects an Offer in Compromise, a petition to the
U.S. Tax
Court. The petition needs to be filed within 30 days of the Appeals
Officer’s
decision. Many
rejections are upheld
summarily on appeal because the Taxpayer failed to provide requested
information, etc. The Tax Court’s review of the rejection of the offer
is based
on an “abuse of discretion” standard.
TIME
TO PROCESS
Under
the changes made by Congress in 2006, if an Offer is not rejected
within 24
months after the date of submission, it will be deemed to be accepted. It is still true, however,
that the appeals
process has no such time restrictions. For this reason, it is not
expected that
the Offer acceptance process will be sped up in any significant way.
HOW
THE IRS VIEWS OFFERS AN OFFER
The
heart of a “compromise” is determining the
reduced amount of tax liability that the Offeror will be required to
pay. The
IRS starts from what it calls the “reasonable collection potential”
(RCP),
which is the amount that the IRS could reasonably expect to collect
from the
taxpayer by all legal and administrative means.
From the IRS perspective, this determination
entails looking at what the IRS calls the components of collectibility:
equity
in assets and future income. In some cases, additional assets, such as
amounts
that the IRS could legally collect from third-parties, for example
transferees
of fraudulent conveyances, may also be taken into account.
As
IRM 5.8.5.4.1 (October 22, 2010) indicates, the
IRS assumes that it could normally collect 80% of the net asset value
and
therefore expects an Offeror to pay 80% of the net asset value which is
of the
value of the asset minus liabilities (such as mortgages).
Since
1999, the IRS has taken a major step in the right direction by giving
Taxpayers
the option to pay the offered amount over time and to reduce the amount
due by
factoring in the remaining time in the 10-year collection period.
The
amount of future income that the IRS expects an Offeror to pay is more
complex.
The amount is dependent upon a number of factors, including the amount
of time
over which it is to be paid.
Before
discussing the somewhat convoluted terminology used by the IRS, it may
be
helpful to know some underlying future income concepts.
At one time the IRS usually wanted Offerees
to pay a minimum of up to 60 or more months of available cash flow,
plus of
course the 80% of equity in assets.
If
the Offeree had the ability to pay the entire Offer amount in a lump
sum the
lump sum could be “discounted” to a “present value.”
Although the IRS has never revealed the “discount
to present value interest rate,” it is believed that the ability to pay
an
amount equal to 48 months of cash flow is in essence the discounted
amount for
a “lump sum” payment.
Under
the current rules, there are three basic
options for payment of future income, which can be roughly described as:
(1)
Short
term, five months or less – confusingly
labeled “Lump sum cash offers” by the IRS;
(2)
Longer term – paid in 24 to 48 months at
the
discounted 48 month rate; and
(3)
Longest
term – payable over 60 months.
If the amount of time remaining to collect the tax debt (the remaining
portion
of the 10-year statute of limitation on collections) is less than 48 or
60
months then the 48 or 60 month periods are reduced accordingly. IRM Sec. 5.8.4.3.1 (June
1, 2010)
For
some reason, the IRS calls Offers payable in 5
or fewer installments “Cash Lump Sum” Offers. This is confusing in
several
respects. First, the Offered amount need not be paid in one lump sum,
as the
name suggests, but in 5 or fewer installments. Second, the amount of
time over
which these installments is paid can vary considerably. Here’s how the
IRM
determines how much is to be expected under a Lump Sum Cash Offer:
(1)
if the offer is payable in 5 or fewer installments within 5 months –
project for the next 48 months or the remaining statutory period,
whichever is
less;
(2)
If the offer is payable in 5 or fewer installments in more than 5
months and less than 24 months – project for the next 60 months or the
remaining statutory period, whichever is less;
(3)
If the offer is payable in 5 or fewer installments in more than 24
months – project through the statutory period.
Id.
Offers
payable in more than 5 payments are either
“Short Term Periodic Payment Offers” or “Deferred Periodic Payment
Offers,”
depending upon the time involved. Generally, “Short Term Periodic
Payment
Offers” are payable in more than 5 installments over a period of time
from 6 to
24 months. IRM 5.8.5.26 (October
22, 2010).
“Deferred Periodic Payment” Offers are those that are paid over the
time
remaining on the 10-year statute of limitations.
PAYMENT
FORM
Starting
in 2009, the IRS introduced a new Form 656-PPV, Offer in Compromise –
Periodic
Payment Voucher. This is a form that is used to make the payments of an
Offer
if the payments are to be made in 24 months or during the statutory
periodic
payment period. The form is very short, one page, and is designed to
let the
IRS apply the payment to the Offer. If an Offer has been assigned a
number for
processing or acceptance, then that number should appear on the 656-PPV
marked
“Offer Number.” The amount of the payment and the form and period are
also
supposed to be added.
Observation:
This
form will
probably confuse some taxpayers because many times Offers are for
multiple
years and multiple types of tax are included. Therefore, it might be a
daunting
tax for many taxpayers to assign the correct form number and period.
DOUBT
AS TO LIABILITY - HOW MUCH TO
OFFER?
Even
if it appears that the Taxpayer owes nothing, should some amount be
offered? Yes! Here’s why.
Technically, under the broad grant of authority given
the IRS, an Offer
offering nothing (zero) could (and should) be accepted.
The recent creation of the separate Offer
form for Offers based on doubt as to liability, Form 656-L, however,
specifically states that if you believe you do not owe the liability,
the Offer
process should not be used.
Let’s
look at the situation from the IRS’s perspective.
If you offer nothing, what incentive is there
for the IRS to process or accept the Offer?
For this reason, even if it is relatively clear that the
Taxpayer owes
nothing, some amount should be offered.
Observation:
If
the Taxpayer owes
nothing and is due a refund, consideration should be given to filing a Claim for Refund or Penalty
Abatement (both covered by Form
843) or an amended return (Form 1040X), rather than offering nothing. Sometimes, the IRS rejects
an Offer because
it insists that, for example, a Claim for Refund is more appropriate. Legally, the IRS could
accept an Offer and
refund money, but it will not. Other alternatives, such as Claims for
Refund,
do not, however, prohibit the IRS from later asserting additional tax
or filing
a suit to retrieve an erroneous refund check, mistakenly mailed. Expressed differently,
using methods other
than an OIC allows the IRS to still say, “Oops, we made a mistake;
please
return the refunded amount.” As
previously stated, an Offer in Compromise, if accepted and paid, is not
reversible and DOES bind the IRS.
DOUBT
AS TO COLLECTABILITY – New Forms
433A & B (OIC)
With
an Offer based on doubt as to the ability to pay, a Taxpayer must
submit a completed
IRS “Collection Information Statement” (Financial Statement). The new
Forms
433-A (OIC) (used for individuals) and 433-B (OIC) (used for
businesses) have a
very different approach to determining how much to offer from that
required by
the prior Forms 433-A and 433-B. If the Taxpayer owns or controls a
business,
usually both IRS forms (A and B) are required.
(If an Offer in Compromise is submitted based solely on
doubt as to
liability, financial statements are not required.)
Observation:
The
Forms 433-A and B
provide the Offer Specialist with massive amounts of data about the
Taxpayer. Due to
the length of these
forms, complexity, and interrelationship of the data, many Taxpayers
need
professional help in completing them.
For instance, if local real estate taxes are claimed as
a deduction in
computing available cash flow, the deduction may be disallowed unless
the asset
portion of the Form 433-A reflects the Taxpayer as the owner of real
estate or
there is some other reason the Taxpayer is committed to pay real estate
taxes
(e.g. a lease requiring the tenant to pay real estate taxes).
CALCULATING
THE
AMOUNT TO OFFER - 2011 GUIDELINES
In
order to make the determination of the amount to offer, let’s first
look at the
basics. Remember,
Offers will be
returned as unprocessable if the amount offered is inadequate. The IRS will want a total
combined dollar
amount reflecting the following three considerations:
- Personal
Assets;
- Business
Assets (if any); and
- Monthly
Income and Expenses.
PERSONAL
ASSETS
Observation:
In
the past, several
Offer Specialists have stated that 60% of the value of an IRA or 401(k)
was
acceptable in computing the amount of cash from such sources. The 433-A (OIC) now requires
that all asset
values, excluding retirement accounts, be multiplied by .80 (or 80%). Retirement accounts are to
be multiplied by
.70 (or 70%). The reason for the difference is because these payments
from
qualified plans are subject to income tax when received. What many
Taxpayers
forget when filling out the IRS financial statement, Form 433-A, is
that
usually the Offer Specialist wants to see “pay stubs” which sometimes
reflect
401(k) or Simple IRA contributions.
At
the end of the list of assets is “Box 1” entitled “Total Available
Assets.”
Stated differently, this box is the total of all of the assets, times
the
percentage applied to each asset, minus the liabilities.
QUICK
SALE VALUE
If
a Taxpayer were forced to sell assets hurriedly to get the needed cash
to fend
off an IRS seizure, for example, he or she would, in theory, sell for
less than
full market value. In
broad strokes, the
QUICK SALE VALUE means 80% of the Fair Market Value in assets, less
secured
debt, like mortgages. (Previously
this
was called the Forced Sale Value.)
For
example, if the Taxpayer owns an unencumbered car worth $10,000, then
the IRS expects
at least $8,000. If
the car is subject
to a secured loan of $5,000, then the amount required to be offered
would be
$3,000 ($10,000 Fair Market Value x 80% = $8,000, less the mortgage of
$5,000 =
$3,000).
If
a Taxpayer is self-employed or is the one member
owner of an LLC, then the assets, income and expenses for the business
need to
be reported on the 433-A (OIC) in Section 5.
Observation:
Section
5 of the
433-A (OIC) is Business Income and Expense Information for the
self-employed or
for the one member LLCs. If the business is losing money, and the
liabilities
exceed the monthly income, it is possible that “Box 2,” “Net Business
Income,”
might contain a negative figure.
MONTHLY
HOUSEHOLD INCOME AND EXPENSES
Assuming
no assets, but some income, the Offer requires that some of the income
be paid
to the IRS, either in cash, or, as is now allowed, in installments. For those Taxpayers who
have been battling
with the IRS over payment of delinquent taxes for years, it is rather
common to
find no assets in their name. Often
a
spouse (or friend or relative) not liable for a tax debt will be the
owner of
any property the Taxpayer purchased in recent times.
That way, the only leverage the IRS has to collect
such tax delinquencies is to garnish salary or levy on receipts (of
independent
contractors).
Observation:
The
final section on
the 433-A (OIC) that is used in the calculations for the offer amount
is the
income and expenses for the primary wage earner and spouse, if any.
Even though
a spouse may not be liable for the tax liability, it is necessary to
show his
or her income in order that the IRS can allocate expenses between the
two
spouses. It should be noted that the form currently says “spouse or
other
contributors to household.” This language may include spouses,
unmarried significant
others, and possibly adult children.
TYPES
AND CALCULATION OF PAYMENT PLANS
At
the end of the new Form 433-A (OIC) are a series of boxes. “Box 5” is
available
income times 48, which results in “Future Remaining Income,” in “Box
6.”
Available income is also used again and multiplied by 60 to reach the
figure
for “Box 7” of “Future Remaining Income.” The reason for the two
different
boxes is because of the two different periods of time in which the
payments are
to be made. If it is a “Cash Offer,” then the available income is
multiplied by
48 months, which is a discounted value, and must be paid within a
24-month
period. If the Taxpayer is unable to pay the amount to be offered
within a
24-month period, the available monthly income flow needs to be
multiplied by
60.
Finally,
to calculate the amount to be offered the Taxpayer must enter the
amount from
“Box 1,” which is the value given to the assets plus the amount from
“Box 6” or
“Box 7” (depending on how soon the Offer amount can be paid in full).
The
resulting figure is the “Minimum Offer Amount,” which must be more than
zero
according to Form 656.
A
similar approach is used with regard to Form 433-B (OIC) for
businesses.
THE
NEW
WAYS OF PAYING
Superficially,
it may seem that the IRS is offering two new ways to pay Offers, the
“Cash
Offer” and the “Periodic Payment Offer.”
In reality, there is only one new way to pay. As explained later, there
are different ways
to compute the amount due.
Who
says there is only one new way? The
new
“Cash Offer” is, in essence, the old 60-month cash payment discounted
to an
amount approaching present value (48 months of cash flow). Since the instructions
regarding Forms 656 and
656-L do not indicate the interest rate the IRS is using for the
discounting,
it is not known exactly how it came up with a multiple of 48 times one
month’s
cash flow.
The
instructions to Form 656 say that monthly payments must be continued
even while
the Offer is pending and, of course, continue in the same amount if the
Offer
is accepted.
DEFERRED
PERIODIC
PAYMENT OFFERS
Here
the IRS terminology gets dense. It
appears there is no practical difference between
the “SHORT TERM PERIODIC PAYMENT” and the
“DEFERRED PERIODIC PAYMENT”
if the period of time left on the 10-year statute of
limitations on
collection is factored into either calculation.
Without attempting to distinguish between “SHORT
TERM PERIODIC
PAYMENT” and the “DEFERRED PERIODIC PAYMENT” here
is how the IRS
defines Deferred Periodic Payments:
“The
Deferred Periodic Payment Offer requires payment of:
(a) Cash payment of
20% of the total amount
offered, paid with the submission of the Offer, and
(b)
Monthly
installment payments of the remainder of realizable value, plus future
income
over 60 months or the life of the collection statute,
whichever is shorter.”
STATUTE
OF
LIMITATIONS
Finally,
the IRS has addressed the problem of the expiration of the 10-year
statute of
limitations. Previously,
when the
10-year period was about to expire, the IRS insisted, in many cases, on
a
waiver to extend the 10-year period for collection.
In some cases, the IRS would give a Taxpayer
the option to either sign a waiver of the 10-year period (sometimes
extending
the collection period beyond the Taxpayer’s life expectancy), or the
IRS would
garnish (seize) most of the Taxpayer’s salary.
The 1998 IRC amendments to IRC § 6502 address this area
by deleting the
provision that previously allowed the IRS to extend the 10-year
collection
period by using a written waiver, IRS Form 900.
Now,
if less than four or five years are left in the 10-year collection
period, the
IRS has agreed to reduce the number of monthly payments in
consideration of the
time remaining. Perhaps
the IRS reached
this point because it cannot now present Taxpayers with the Draconian
choice of
signing a waiver or having their salaries garnished or assets seized. Now, the amount
due and the period within
which to pay the Offer in installments may be significantly reduced if
the time
remaining to collect the tax debt is less than 60 months (five years);
particularly if there is only a couple of years or less left on the
10-year
collection period.
WHEN
WERE THE TAXES ASSESSED?
Many
Taxpayers have only a vague idea when their returns were filed, or even
if they
have been filed. In
some cases,
Taxpayers fail to file and the IRS “files” for them using a statutorily
approved “Substitute for Return.”
It
is possible to contact a local IRS office or call the IRS at (800)
829-1040 to
determine the number of years remaining on the collection statute. Another, and far better,
way to determine the
number of years left is to get an IRS transcript for each year. Unfortunately, many times
the transcripts
will not specifically state the collection statute expiration date
(CSED). The
CSED can be approximated by adding 10 years, or 120 months, to the date
of
assessment. If the Offeror has filed for bankruptcy, a prior Offer in
Compromise, or taken other actions, such as being out of country for
six months
(or more) the ten-year period is extended accordingly. Sometimes is can
be
difficult to tell precisely how long these events extend the CSED.
In
some cases, IRS assessments may not be made for months after a return
is filed. A
transcript will show when the assessment
occurred (the beginning of the ten-year period), as well as provide
information, such as the filing of prior Offers and waivers, which
could extend
the statute of limitations on collection.
Another reason for obtaining a transcript is to check on
the application
of prior payments (credits). If
payments
have been misapplied or penalties or interest incorrectly calculated,
such
errors can be discerned from transcripts.
Finally, the only way to confirm the time left in the
IRS collection
period is to check the IRS transcript.
Transcripts
are what the IRS employees rely on for that information, so it is good
practice
to make sure, if possible, that the transcripts are approximately
correct.
HOPELESSLY
INSOLVENT
Even
if the Taxpayer is clearly insolvent, owing a host of debts to state
tax
collectors, credit card companies and others, the IRS still abides by
the
guidelines stated above. This
means that
if the Taxpayer owes a total amount that is many times the IRS debt,
but has
equity in assets, that equity has to be offered.
In many bankruptcy cases, creditors of the
same class have to share the assets of a debtor and receive, usually,
only a
small percentage of their claim. The
IRS
is not subject to, or bound by, such bankruptcy conventions when
considering an
Offer. Consequently,
if there is equity
in an asset, e.g. the motorcycle, then the IRS must be offered 80% that
equity.
WHO
PAYS? - A SAINT
Few
think about the importance of who pays the amount offered. The IRM 5.8.1.1.3 (March
16, 2010) de4sxcribed
the basic IRS policy on Offers:
The
Service will
accept an offer in compromise when it is unlikely that the tax
liability can be
collected in full and the amount offered reasonably reflects collection
potential. An offer in compromise is a legitimate alternative to
declaring a
case currently not collectible or to a protracted installment
agreement. The
goal is to achieve collection of what is potentially collectible at the
earliest
possible time and at the least cost to the Government.
The
foregoing reasoning adequately explains why, if possible, getting a
relative,
or friend to pay the offered amount is often vitally important. If someone other than the
Taxpayer will post
the amount offered, this is money the IRS cannot otherwise access. If the Taxpayer’s
collection potential is
well below that of the amount offered and funds are provided for by a
family
member or friend, the IRS may be more inclined to accept the Offer.
TEMPORARY
RELIEF IN
BANKRUPTCY
Occasionally,
a Taxpayer may be informed that a bankruptcy proceeding will stop the
IRS from
proceeding with a threatened levy (seizure) of assets.
While it may be true that the IRS is
“stopped,” the “stopping” may only be for the duration of the
bankruptcy
proceeding or less. Stated
differently,
if the taxes in question are not, in fact, dischargeable, filing a
bankruptcy
proceeding to stop the IRS may only afford temporary relief. Once the bankruptcy
proceeding is over, if the
taxes are not dischargeable, the IRS is free to resume collection again.
It
is also important to remember that a Tax Lien filed by the IRS is not
discharged in bankruptcy, even if the underlying tax liability is
discharged.
For example, suppose the liabilities were assessed more than 3 years
ago based
on timely filed returns. If the IRS filed a tax lien to collect those
taxes,
the tax liability can be discharge din bankruptcy, but the tax lien
remains so
that it will not be possible to sell, for example, real estate without
paying
the tax liability to discharge the tax lien.
NEW
FORM 656
The
current version of the Offer form (Form 656) has several changes from
prior
versions. One is the listing of the type of tax and the years on the
front page
of the form. There is also a section for low-income certification,
informing
taxpayers that may fit into that category what the income levels are.
There
are two payment options shown on the new Form 656. The first is the
24-months
or less option discussed above. In this section, the Taxpayer is
supposed to
show the 20% submitted with the Offer and the balance remaining on the
Offer
after the 20% is paid. The Taxpayer can then choose the date and the
amounts of
the five additional payments to be received in less than 24 months.
Payment
option two indicates the amount that is being submitted with the form,
the 20%,
and then a dollar amount to be paid on a certain day of each month
thereafter
for a total of months.
Usually, if the statute of limitations is not to
expire in a relatively short period of time, the number of months would
be 60
months. However, if the statute of limitations has less than five years
to go,
then the number of monthly payments would be the number of months
remaining on
the statute of limitations on collections.
Section
7, Source of Funds, which is
new to the Offer form, requires that the person who is providing funds
to pay
the Offer but is not liable for the tax must be shown.
An
additional change to the form is the
requirement that the name of the paid preparer be listed, along with
the preparer
identification number (PTIN or CAF). This new requirement will
presumably
prevent individuals who are not registered with the IRSA and who do not
have a
CAF number (Central Authorization File Number) or PTIN from completing
Offers
for Taxpayers.
LEGAL
FEES
As
the reader may have surmised from the preceding discussions and
observations,
this is a difficult area of law. Many
Taxpayers faced with the dilemma of what to do about an overwhelming
tax
liability tend to blame others for their present problems. However, rather than
continuing to blame
former partners, divorced spouses, the IRS, and others for their
predicament,
the Taxpayer needs to take affirmative steps.
Under
such circumstances, it is necessary for professionals to obtain
retainers and
have the Client/Taxpayer replenish the retainer account as needed. If credit is provided by
the professional and
the IRS seizes the Client/Taxpayer’s assets or bank accounts, there is
no way the
Taxpayer can continue to pay its professional advisors.
The retainer for Newland & Associates for
most IRS collection matters (including Offers in Compromise) is
approximately
$4,000. An
introductory meeting to visit
the office and meet the staff is free, but will not include substantive
discussions about the tax problems or advice about what to do and
possible
alternatives.
Click to see Offer
questionnaire.
For information about advertisements touting Offers in
Compromise for
"pennies on the dollar," Click here.
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