I have had the pleasure of serving my clients by helping resolve their tax problems using various strategies—sufficing to say, I find doing this type of work personally gratifying and self-fulfilling. My passion is fueled by my own share of financial problems over the years. For one, in 2006, I had a tax debt which resulted from an Internal Revenue Service (IRS) examination (or audit). This desk audit required I support several items on my “Schedule A” (itemized deductions); specifically, they had concerns about the unreimbursed employee expenses section of my tax return. I was thorough about providing the documentation they required and when it was all said and done, I only paid $315. The point is, during this COVID-19 time when so many people are suffering and most people don’t know how to deal with the IRS, it’s good to know one has options to settle one's tax debt. These options not only allow taxpayers to get a payment plan but allows them to pay way less than what they owe.
Taxpayers who owe their taxes to the tax office have many ways to manage their debts. While many benefit from payment plans, taxpayers whose tax debts far exceed their income and solvency may not consider such solutions feasible. Taxpayers who are unable to repay their debts to the IRS could benefit from another program known as an Offer-in-Compromise.
Defining an Offer in Compromise?
The IRS program, Offer in Compromise, allows taxpayers to pay their tax debt for less than they owe. Power to accept less than is owed is granted by 26 US statute Code § 7122. Under the law, taxpayers can reach compromises to settle their tax debts through a lump sum payment or periodic payment offers as a compromise to settle their liabilities through many periodic payments. If a taxpayer makes an offer to the IRS for a lump sum, they must make a down payment with the offer. Persons who submit periodic payment offers as a compromise must submit the amount of the first periodic payment together with their offers.
Under IRM 5.8.1, the IRS accepts an offer if it otherwise considers the tax liability to be non-recoverable. It can also accept an Offer In Compromise if there are doubts about the liability due, and it supports effective tax administration. The goal of the OIC program is to negotiate a legal payment arrangement that is in the interest of taxpayers and the IRS.
Doubt as to collectibility
The first reason for agreeing to an Offer in Compromise is when the IRS has doubts about its ability to collect the tax debt, as the taxpayer is unable to pay the full amount owed. Doubts about the recoverability of tax debts can arise if a taxpayer's income and assets are insufficient to satisfy the full tax liability. This is the most common basis for an offer in Compromise. Some taxpayers who elect an Offer in Compromise for tax debts deemed unrecoverable can settle their liabilities for a fraction of the total debt. Pursuant to IRC § 7122 (d) (3) (A), the IRS may not reject an Offer in Compromise if its refusal relates solely to the amount offered.
Under the IRS P-5-100 policy statement, the agency will accept an Offer in Compromise through doubts about recoverability if the IRS determines it is unlikely to recover the tax debt in full. However, the amount that the taxpayer is offering must be what the IRS believes it can recover through judicial and administrative means. The amount the IRS considers collectable is called a reasonable amount. To calculate the RCP, the IRS analyzes basic taxpayer costs of living. In certain circumstances, the agency could accept an offer lower than the RCP, but that is rare.
What should I offer in compromise to the IRS?
The Offer in Compromise program was created to help taxpayers who are unable to pay their tax debts without suffering economic hardship. IRS offers in compromise statistics are instructive. In 2019, the IRS received 54,225 compromise offers and 17,890 were accepted. The total value of accepted offers was $289,422,000. While this shows the compromise offer can be an excellent solution for many taxpayers, it is also important to recognize that the IRS has turned down more offers than it has accepted for a total of 36,335 rejected offers. These IRS Offers in Compromise statistics show how important it is to analyze an offer in Compromise before determining the answer to the question "How much should I offer in Compromise to the IRS?"
If you have a large tax liability, you must prove you are unable to pay the full amount owed, that you do not owe the amount in dispute, or that there are special circumstances that make acceptance of the offer formidable in the interest of the IRS and the taxpayer. In general, the IRS is more likely to accept an offer if it is the largest amount of money that the IRS could reasonably collect within a reasonable period. The first step in assessing whether the OIC program is a satisfactory choice for you to receive tax relief is to consider the eligibility requirements.
Offer in Compromise Eligibility requirements
A taxpayer must fulfill all the following conditions to be eligible for the OIC program:
• Has filed all tax returns
• Assessed for one or more tax liabilities included in the offer
• Requires ongoing estimated tax payments
• Businesses with employees must set up current quarterly tax deposits
The IRS will also take several factors into account when assessing whether a taxpayer would run into financial difficulties if he or she were forced to pay the entire liability, including his or her income, assets, expenses, and lifestyle. When examining a taxpayer's lifestyle, the IRS will critically review all relevant information. It is unlikely that people with assets worth significant amounts will be approved for an Offer in Compromise, for example, due to insufficient income.
When a taxpayer submits a compromise offer to the IRS, he is required to complete and submit IRS Form 656, IRS Form 433-A and / or IRS Form 433-B for businesses. While much of the information about the taxpayer's finances comes from the data on Form 433, the IRS employee examining the application is also conducting an investigation. Special circumstances must justify unusually high living costs. However, the IRS need not force the taxpayer to sell a vehicle or house to satisfy his tax liability. An installment agreement might be a better option than making an Offer in Compromise for any taxpayer with a luxurious lifestyle.
The reasonable collection potential (RCP) calculation
Assuming you to qualify for the OIC program, care should be taken to calculate the appropriate collection potential to determine the offer amount. The IRM 5.8.4.3.1 provides the IRS's approach to calculating the RCP related to an Offer in Compromise.
In calculating the RCP, you will need to figure out how much of the net equity in your assets is realizable, and then add that amount to your future income. One of the first things you should do is determine the fair market value of all your property to arrive at the net realizable equity. The next step is to apply any discounts resulting from a property and then subtract any loans (i.e., mortgages, etc.) against the property. To determine the fair market value (FMV) of your property, you may need to retain an appraiser to receive a formal analysis.
Use form 433-A, form Section 7 to calculate your future income. Enter your income from all sources and your usual cost of living. The IRS may not permit all the expenses you claim because they have different rules on acceptable living costs, as the service relies on national and local standards to calculate the RCP. Remaining income is what is left after applying the standards and subtracting expenses.
Multiply remaining income by 12 to arrive at a lump sum offer. For a periodic payment offer, multiply your remaining income by 24. This number is then added to get your asset number to your minimum offer amount.
OIC process steps
It is important to understand the IRS OIC rules. You must include all your tax liabilities in your Offer in Compromise.
1. Prepare and submit any unfiled returns.
Compliance is King! You may need to prepare at least 3 years of unfiled tax returns and file them to determine the full amount of liability. With regard to trust fund recovery penalties or withholding taxes at issue, you must complete assessments for each quarter for which there is a liability. The IRS will not accept an offer from a non-compliant taxpayer, so all relevant tax returns should be filed before making an offer.
2. Preparing and submitting the proper IRS forms
When submitting an Offer in Compromise, you must use the correct IRS Offer in Compromise form. Individuals need to submit IRS Form 656 together with Form 433-A. Business owners are required to submit Form 433-B. Find out how to complete these forms by reviewing IRS Publication 1854.
3. Lump-sum or deferred payment offer?
The IRS's goal is to ensure they can collect the most amount of money in the shortest span of time, so they prefer the lump-sum option. Failure to establish a lump-sum payment may result in the acceptance of an installment agreement. Per the Revenue Manual section 5.8.2.3, creating a cash offer means paying the offer off in five payments once the IRS accepts the offer. Taxpayers are strongly encouraged to submit a deposit with a lump-sum Offer in Compromise. But, this is not a requirement.
If the taxpayer wishes to get a deferral or a periodic payment offer, include those when any portion of the amount that the taxpayer offers will be paid more than six months after the offer is accepted. Generally, you cannot defer an other-than lump-sum payment offer that will beyond 24 months after it is accepted. For the most part, the IRS will not an offer that can be paid within 2 years unless there are circumstances that establish the need for a shorter repayment period. If you desire a deferred payment offer, that term should be clearly stated.
Offer in Compromise received. Now what?
Initially, IRS in-take staff will perform a review of your Offer in Compromise to ensure it is process-able. Any offers that cannot be processed will be returned which can be frustrating. The following are likely circumstances where an offer may be deemed not process-able:
• Missing or illegible signatures
• Unidentified taxpayer
• Unidentified liabilities
• No offer amount (must be at least $1)
• Financial statements not included
• Net equity is not reasonably reflected in the offer
• Use of an dated Form 656
• Altered or deleted terms
If an Offer in Compromise is returned because it is cannot be processed, DO NOT file an appeal. Instead, there are procedures in place for fixing such deficient or incomplete offer packages.
Process-able offers are forwarded to an Offer Examiner. Such an examiner will carefully review all the documents submitted, paying keen attention to any "red flags". The examiner will also investigate the taxpayer's financial circumstances. For approved offers, a notification is sent. To make the offer effective, the taxpayer must honor it and within the specified time frame requested.
What is the effect of an OIC acceptance?
Acceptance (by both the taxpayer and the IRS) of an Offer in Compromise, creates a contract. This mutually binding contract prevents any further inquiry into the included matters. Unless there's a material mistake or fraud, none of the parties may recover any consideration given. However, fraudulent offers can be set aside.
An accepted Offer in Compromise simply means the IRS agrees to accept the offer as a full settlement of the taxpayer's debt. Simultaneously, the taxpayer will pay the offered amount and the IRS will release any liens filed. The offeror also promises to remain in compliance with the tax laws for the subsequent five years. The IRS will also retain the authority to offset any tax refund the taxpayer may be due for the current or previous years. Any tax refund for the year in which the offer is accepted must return it to the Service. Failure to abide by these terms may result in retroactive denial of the offer and a reinstatement of the tax liability.
Appealing a rejected Offer in Compromise
A request for an independent review of a denied offer may be made which would be conducted by the IRS Appeals Office. The IRS will send the appeal rights procedures along with the denial. Within 30 days, the taxpayer must use the form 13711to file a written protest of the IRS's decision. It is expected you can include new information with the protest for evaluation by the examiner. Most times, the case file and protest are simply forwarded to the Appeals Office without review by the examiner.
Examiners are required to prepare Form 1271, a rejection memorandum which outlines, in detail, the reasons the Offer in Compromise was rejected. If the offer is through doubt as to collectibility, the narrative will include detailed facts about an acceptable amount and the term. The narrative may be used to win the case on appeal.
The form 1271 is not sent automatically, so great care should be taken obtaining it because its value in preparing for an appeal. Request a copy either under the Freedom of Information Act or by asking the offer examiner directly.
Your appeal must be firmly grounded with enough specificity and persuasiveness in evidence to establish your position. Strategically compare your Form 433-A with the income and expense and asset tables. You should include supporting documents for each point of disagreement that you identify.
If your case qualifies, an appeals conference will be scheduled. The Service conducts this informal conference by telephone or face-to-face. Try to avoid belittling the examiner. To avoid litigation, the appeals office focuses on trying to settle tax controversies early. There are many instances when a rejected Offer in Compromise can be renegotiated and settled through the appeals process. Ideally, it is best to negotiate a settlement before it must go to court.
How to negotiate an appeal
If you will be appealing a denial of your Offer in Compromise, you will need to gather evidence and records to support your position. During the appeal process, the appeals officer will communicate with you. To win your appeal, you must rely on your records, IRM, case law and Internal Revenue Code.
Appeals Officers are independent of the examiner who rejected your offer. This allows you to refer your original case to the appeals officer if you believe it has sufficient evidence. You can also make the case stronger by submitting additional evidence before it is sent to appeals.
The Offer in Compromise program offers taxpayers a chance to make a fresh start. But yearly, the IRS rejects more offers than it accepts. Therefore, it is important for you to carefully consider whether it is the best strategy to resolve your outstanding tax debt. If you qualify and are eligible for one of the three categories, careful attention is needed to filling out forms and compiling all the supporting documents can increase the chances that your offer will be accepted. Taxpayers willing to make an offer in compromise will also have to meet their current tax obligations while the offer is pending and five years after receiving the commitment. If you meet all the conditions, you can welcome a fresh start and pay much less than your outstanding tax debt.
When In Doubt, Get Professional Assistance
The Offer in Compromise process can be elementary for many tax debtors, especially if you have no significant assets and are low income. But if you have assets and/or have middle to high income, own a business, you can still qualify for an Offer, but the process becomes much more complicated.
IMPORTANT:
Our firm specializes in tax resolution. We serve clients
virtually so don't hesitate to reach out.
If you want an expert tax resolution specialist who knows how to
navigate the IRS maze, reach out to our firm, so we can schedule a confidential
consultation to explain options to permanently resolve your tax problem. Click here to make an appointment!! Or, call Toll-free 1-855-254-1892.
No comments:
Post a Comment