Monday, August 20, 2007

Back Taxes: Latest Information on Offers in Compromise


An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service (IRS) that resolves the taxpayer's tax liability. The IRS has the authority to settle, or compromise, federal tax liabilities by accepting less than full payment under certain circumstances. The IRS may legally compromise for one of the following reasons:
Doubt as to Liability: Doubt exists that the assessed tax is correct.

Doubt as to Collectibility: Doubt exists that the taxpayer could ever pay the full amount of tax owed. The minimum offer amount must generally be equal to (or greater than) the taxpayer's reasonable collection potential (RCP). The RCP is defined as the total of the taxpayer's realizable value in real and personal assets, plus his/her future income.

Note: Unless the taxpayer files an OIC claiming special circumstances, the offered amount must equal or exceed the reasonable collection potential. Realizable value is the asset's quick sale value (amount which could be reasonably expected through the sale of the asset) minus what the taxpayer owes to a secured creditor.

Effective Tax Administration: There is no doubt that the tax is correct and no doubt that the amount owed could be collected in full, but exceptional circumstances exist such that collection of the full amount would create economic hardship or where compelling public policy or equity considerations provide sufficient basis for compromise. The taxpayer bears the burden of proof to show their OIC qualifies for public policy or equity considerations. They must show that their circumstances are compelling enough to justify acceptance of their OIC compared to other taxpayers in similar circumstances.

In order to be considered for an OIC, a taxpayer must meet all of the following requirements:

Use the most current version of Form 656, "Offer in Compromise," and Forms 433-A and 433-B, "Collection Information Statements;

Submit the $150 application fee, or Form 656-A, "Income Certification for Offer in Compromise Application Fee," with the Form 656;

File all required federal tax returns;

File and pay any required employment tax returns on time for the two quarters prior to filing the OIC, and be current with deposits for the quarter in which the offer in compromise is submitted; and

You cannot a debtor in a bankruptcy case.

Taxpayers must comply with all federal tax filing and paying requirements for a period of five years following acceptance of their OIC, or until the OIC is paid in full, whichever is longer. This also includes making required estimated tax payments and federal tax deposits.

Obtain a Form 656, Offer in Compromise package. The package includes information and instructions for completing the form, as well as a worksheet that can be used to calculate an amount to offer. Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and Form 433-B, Collection Information Statement for Businesses
are included in the Form 656 package and may need to be completed as well depending upon each individual situation.

Taxpayers will need to review and include amounts for items such as housing and utilities from the Collection Financial Standards, and Necessary Expenses, to complete their collection information statement(s).

For corporations and partnerships, Form 433-A may be requested from corporate officers and individual partners.

Collection Information Statement(s) are required for doubt as to collectibility and effective tax administration OICs, and doubt as to liability involving Trust Fund Recovery Penalty assessments.

The forms needed to complete an OIC are available on-line at http://www.irs.gov/. Also, forms may be obtained by calling 1-800-829-3676 or by visiting a local IRS office.

A detailed written narrative must be documented on Form 656, Item 9. The narrative must explain the exceptional circumstances and why payment of the tax liability in full would either create an economic hardship or demonstrate why there is compelling public policy or equity considerations sufficient to support an acceptance recommendation. The taxpayer bears the burden of proof to show their OIC qualifies for public policy or equity considerations. They must show that their circumstances are compelling enough to justify acceptance of their OIC compared to other taxpayers in similar circumstances.

If a taxpayer requests consideration on the basis of effective tax administration, the IRS must first establish that no doubt as to liability and no doubt as to collectibility conditions exist.

Hence, an OIC filed under effective tax administration can only be considered once the IRS determines that the tax liability is correct and collectible in full.Once the IRS begins the process of processing the OIC under the effective tax administration guidelines, it will consider such issues as the taxpayer's overall history of filing and paying taxes, as well as the overall impact on voluntary compliance.

If a tax liability can be paid in a lump sum or through an installment agreement, taxpayers will not be considered for an OIC. If an OIC is received, it will be rejected with appeal rights. The only exception is if a taxpayer can demonstrate special circumstances that would show that full payment of the liability would result in economic hardship or be detrimental to voluntary compliance.

The IRS will keep all payments and credits made, received or applied to the total original tax liability before the OIC was submitted. The IRS may also keep any proceeds from a levy that was served prior to the submission of an OIC, but which were not received at the time the OIC was submitted. Refer to OIC Contractual Terms, Item (f).

Installment agreement payments must be continued while the OIC is being considered. Installment agreement payments will not be applied against the amount you offered.

OICs must include an amount equal to or greater than the total value of all assets, plus future income. That total is generally the reasonable collection potential amount, and not simply an offer of ten cents on the dollar, or a percentage of the debt.

An IRS consumer alert has been issued advising taxpayers to beware of promoters' claims that tax debts can be settled for "pennies on the dollar." The IRS cautions that the OIC program is not designated to be a program for everyone with financial problems, and it should not be viewed as an invitation to avoid paying taxes.

If an OIC is submitted "solely to hinder and/or delay collection actions", the IRS will return the OIC without any further consideration. Taxpayers will not be afforded the right to appeal this decision.

Federal agencies are authorized to establish charges for services provided by the agency, called "user fees." The U.S. Office of Management and Budget encourages agencies to implement these fees to recover the cost of providing special services to some recipients that others do not use. Accordingly, the IRS has established a user fee that will recover part of the cost of processing and reviewing offer in compromise requests. The IRS has chosen to call it an "application fee" because the fee is required when an OIC application is submitted for consideration.

The application fee for submitting an OIC is $150 and will be required on all offers that are postmarked November 1, 2003, and thereafter except in two instances:
The OIC is submitted based solely on "doubt as to liability;" or
The taxpayer's total monthly income falls at or below income levels based on the Department of Health and Human Services (DHSS) poverty guidelines. Payment must be made by check or money order made payable to the United States Treasury.

After the IRS accepts the offer, the IRS will notify the taxpayer to promptly pay any unpaid amounts that become due under the terms of the offer agreement.

Checks that combine application fees for several offers will not be accepted, and the offers will be returned. Each Form 656 must have a separate check attached.

If the IRS receives notification of insufficient funds, the IRS will immediately stop processing the Form 656 and the OIC will be returned to the taxpayer without any further consideration.

The application fee is in addition to the amount listed on Form 656, Item 7. However, when the IRS determines the acceptable amount of an OIC based on doubt as to collectibility, it considers the value of all of the taxpayer's assets. Because some of the taxpayer's assets were used to pay the OIC application fee, payment of the fee will reduce the acceptable amount of the OIC. The taxpayer therefore pays no more for an OIC with the fee than the taxpayer would have paid without the fee.

Because payment of the fee reduces the acceptable OIC amount, most taxpayers will not experience any additional financial hardship as a result of the fee. However, for some taxpayers the $150 fee may exceed their ability to pay. The IRS believes that the exception to the fee for taxpayers whose income is at or below poverty will protect such taxpayers.

The IRS first reviews an OIC to see if it is "processable." Processable is the term the IRS applies to those OICs that have met certain criteria. An OIC is processable if the taxpayer:
Used the most current versions of Form 656, “Offer in Compromise” and Forms 433-A and 433-B, “Collection Information Statements;" Filed all required federal tax returns;
Filed and paid any required employment tax returns on time for the two quarters prior to filing the OIC, and is current with deposits for the quarter in which the offer in compromise was submitted; and Is not a debtor in a bankruptcy case.

The application fee will be returned to the taxpayer if the OIC is determined not to be processable.

The filing of an OIC requires a payment of 20% of the amount offered. That 20% will not be refunded if the OIC is not accepted.

A married couple owing the same joint income tax liability may file only one Form 656 listing the joint liability. One fee of $150 should be attached to Form 656. A married couple opting to file separate offers to compromise the same joint liability may do so, but two $150 fees will be required.

A divorced, separated, or married couple living apart may still file one Form 656 listing their joint liability and pay only one $150 fee, as long as all the taxes owed are joint liabilities. Taxpayers in these situations that opt to file separate offers must pay a $150 application fee for each offer that is submitted for consideration.


Two OICs are needed if the liabilties for a married couple are not the same. One for the joint liability and another one for the individual (non-joint) liability. A check or money order for $150 should accompany each Form 656. In keeping with the “one fee per entity” rule:
The husband should file one offer listing the joint income tax, the individual year he owes before the marriage and his business liability, and attach a $150 application fee to the offer.
The wife should file an offer listing the joint income tax and the individual year that she owes with her prior spouse, and attach a $150 application fee to the offer.
It does not matter that the joint liability will appear on both offers.

In the case of a partnership two Forms 656 will be required. One for the individual liability, and the other for the partnership or corporate liability. A check or money order for $150 must be attached to each offer, for a total of $300. The IRS cannot combine individual tax on an offer application with taxes owed by a partnership or corporation.

Taxpayers are required to submit one fee for each Form 656 taken in for processing. Failure to submit additional Form 656 with the corresponding $150 application fee when requested, will cause the IRS to return the offer without any further consideration. The $150 application fee will be retained.


The taxpayer fails to submit additional financial documents to assist in the IRS review. If the taxpayer fails to respond, and/or submit the requested information, the OIC will be returned without further consideration; or the taxpayer chooses to withdraw the Form 656.

The Form 656 and/or Forms 433 "Collection Information Statements" are necessary to conduct an offer investigation. Failure to submit these documents will cause considerable delay in the process. Taxpayers wanting to pursue the OIC as a way to satisfy their tax liability will have to submit the forms in order to have the OIC reconsidered.

The IRS' procedures require that a taxpayer be contacted in writing and provided a one-time opportunity to correct the error(s), and/or update the financial statement. Failure to correct the error(s) and/or respond results in the OIC being returned to the taxpayer without any further actions on the part of the IRS.

The following are key items that require the IRS to request corrections and delay the processing of OICs:

Incorrect address (don't use P.O. Box, must use street address), Form 656, Item 1.

Taxpayer identification numbers missing or incorrect on Form 656, Item 2.

EIN not included for an offer on a sole proprietor liability, From 656, Item 3.

Tax liability periods/years missing on Form 656, Item 5.

Tax periods included where no tax is due, Form 656, Item 5.

Reason for compromise not checked, Form 656, Item 6.

No "offer to pay" amount or an inappropriate amount shown on Form 656, Item 7.

OIC includes joint liabilities without signatures of both parties, Form 656, Item 11.

OIC includes single liabilities, but has signatures of two parties.

OIC submitted by single taxpayer, but includes joint liabilities.

Allowances for food, clothing and other items, known as the National Standards, apply nationwide, except for Alaska and Hawaii, which have their own tables. Taxpayers are allowed the total National Standards amount for their family size and income level, without questioning amounts actually spent.Maximum allowances for housing and utilities and transportation, known as the Local Standards, vary by location. Unlike the National Standards, the taxpayer is allowed the lesser of the amount actually spent or the standard.

If an OIC is accepted, the following will apply:

The taxpayer must pay the OIC amount as quickly as possible in accordance with the acceptance agreement.

The IRS will keep any tax refund, including interest due, as the result of an overpayment of any tax or other liability for the tax period extending through the calendar year the IRS accepts the OIC. A taxpayer may not designate a refund and/or overpayment to be applied to estimated tax payments for the following year. This condition does not apply if the OIC is based on Doubt as to Liability only.

The taxpayer will waive their right to contest in court or otherwise, the amount of the tax liability.

If a Notice of Federal Tax Lien has been filed against a taxpayer, the IRS will release it when the payment terms of the OIC are satisfied.

The taxpayer must remain in compliance with filing and payment of all tax returns for a period of five years from the date the OIC is accepted or until the OIC is paid in full, whichever is longer. Failure to pay the OIC on time, and/or to remain in compliance during the five-year period or until the OIC is paid in full, whichever is longer, will result in the OIC being declared in default..

If the IRS determines it cannot accept an offer, the taxpayer will be advised of the reasons behind the decision. The taxpayer will be afforded another opportunity to submit any other information that might cause the IRS to reconsider it preliminary decision to reject the offer. The exception to this is when the taxpayer has an ability to satisfy the liability in full and has not pointed to special circumstances.

Interest will not accrue on the taxpayer's accepted OIC amount from the date of acceptance until the OIC is paid. Interest and penalties will continue to accrue on the unpaid tax liability while the OIC is under consideration.

As additional consideration beyond the amount of the taxpayer's offer, the IRS will keep any refund, including interest due, because of an overpayment of any tax or other liability, for tax periods extending through the calendar year the IRS accepts an OIC. Exception: This condition does not apply if the offer is based solely on Doubt as to Liability.

Refunds and overpayments may not be designated as estimated tax payments for the following year. This condition does not apply if the OIC was accepted under doubt as to liability only.

Is a tax lien released when an OIC is accepted?The IRS releases a Notice of Federal Tax Lien when all of the OIC payment terms are satisfied. For an immediate release of a lien, a taxpayer can submit payment using a certified check and include a request letter.

IRS may default the OIC and reinstate the entire tax liability, less all payments and credits received if a taxpayer defaults on the OIC terms. The IRS may take the following actions:

Immediately file suit to collect the entire unpaid balance of the offer

Immediately file suit to collect an amount equal to the original amount of the tax liability as liquidating damages, minus any payment already received under the terms of this offer

Disregard the amount of the offer and apply all amounts already paid under the offer against the original amount of the tax liability

File suit or levy to collect the original amount of the tax liability, without further notice of any kind

An OIC requires future compliance for a period of five (5) years from the date of acceptance of the OIC, or until the offered amount is paid in full, whichever is longer. Compliance is the timely filing and paying of all required returns and taxes.

Under a new federal law, taxpayers submitting new offers in compromise must make a 20 percent nonrefundable, up-front payment in many cases.The recently-enacted Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) made major changes to the offer in compromise (OIC) program, tightening the rules for lump-sum offers and periodic-payment offers. These changes became effective for all offers received by the IRS starting July 16, 2006.

An offer in compromise is an agreement between a taxpayer and the IRS that resolves the taxpayer's tax debt. The IRS has the authority to settle, or "compromise," federal tax liabilities by accepting less than full payment in certain circumstances.Under the new law, taxpayers submitting requests for lump-sum OICs must include a payment equal to 20 percent of the offer amount. The payment is nonrefundable, that is, it will not be returned if the OIC request is later rejected. A lump-sum OIC means any offer of payments made in five or fewer installments.Taxpayers submitting requests for periodic-payment OICs must include the first proposed installment payment with their application. A periodic payment OIC is any offer of payments made in six or more installments. The taxpayer is required to pay additional installments while the offer is being evaluated by the IRS. All installment payments are nonrefundable.

Under the new law, taxpayers qualifying as low-income or filing an offer based solely on doubt as to liability qualify for a waiver of the new partial payment requirements.

If the IRS cannot make a determination on an OIC within two years, then the offer will be deemed accepted.

If a liability included in the offer amount is disputed in any court proceeding, that time period is omitted from calculating the two-year timeframe.OIC requests are submitted using Form 656, Offer in Compromise. Further details on the TIPRA changes can be found in Notice 2006-68, available now on the IRS Web site and scheduled to be published in Internal Revenue Bulletin 2006-31, dated July 31, 2006.


Alvin S. Brown, Esq.
Tax attorney
703.425.1400
http://www.irstaxattorney.com/

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6 comments:

Alvin Brown & Associates said...

To make sure that you have not make an offer greater than necessary to settle your tax debt, you can get a free consultation at 703.425.1400 by a tax attorney.

Alvin Brown & Associates said...

The url for the new Form 656 is
http://www.irs.gov/pub/irs-pdf/f656.pdf

Alvin Brown & Associates said...

http://www.irs.gov/pub/irs-pdf/f656.pdf

The URS also includes Form 433A for individuals and Form 433B for businesses

Alvin Brown & Associates said...

Taxpayers are expected to pay the entire amount offered in as short a time as possible. Acceptable offer terms are determined by the offer investigator and are not limited to the proposal of the taxpayer.

The amounts and due dates of payments must be specified on Form 656.

As a result of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), there are three types of payment terms the IRS and the taxpayer may agree to:

Lump sum cash offer – An offer in which the offer amount must be paid in five or fewer installments upon written notice of acceptance. Twenty percent of the total amount of the offer must be paid with the Form 656, Offer in Compromise. If the installments will be paid in five months or less, the taxpayer should offer the realizable value of his assets plus the total that could be collected over 48 months of payments (or the remainder of the statutory period for collection, whichever is less). If the installment payments will be paid in more than five months, the taxpayer should offer the realizable value of his assets plus the total that could be collected over 60 months of payments (or the remainder of the statutory period for collection, whichever is less).
Note: Realizable value is defined as the quick sale value (amount that a taxpayer could reasonably expect from the sale of an asset if sold quickly, typically in 90 days or less) minus what the taxpayer owes to a secured creditor. The creditor must have priority over a filed Notice of Federal Tax Lien before the IRS will allow a subtraction from the asset’s value.

Short Term Periodic Payment Offer – An offer in which the taxpayer must submit the first payment with the offer and must continue to make regular payments during the offer investigation. The offer amount must be paid within 24 months from the date the IRS receives Form 656, Offer in Compromise. The offer amount must reflect the taxpayer’s realizable value of assets plus the amount that could be collected over 60 months of payments (or the remainder of the statutory period of collection, whichever is less). Failure to make the regular payments during the offer investigation would cause the offer to be withdrawn.
Deferred Periodic Payment Offer – An offer in which the amount must be paid over the remaining statutory period for collecting the tax. As with the short term periodic payment offer, the taxpayer must submit the first payment along with Form 656, Offer in Compromise and must continue to make regular payments during the offer investigation. The offer amount must reflect the taxpayer’s realizable value on assets plus the amount that could be collected through monthly payments during the remaining life of the collection statute. Failure to make the regular payments during the offer investigation will cause the offer to be withdrawn.
Taxpayers may designate in writing how the IRS should apply the offer payments (e.g. lump sum cash, short term, deferred periodic) by specifying the type of tax, period or year, penalty, and interest due. Without a written designation request, the IRS will apply the payments in the best interest of the government. The $150 application fee reduces the assessed tax or other amounts due and cannot be designated by the taxpayer.

All offer payments (e.g. lump sum, short term, deferred periodic) are considered “payments on tax” and are not refundable deposits regardless of whether the IRS declares the offer not processable or later returns, rejects, withdraws, or terminates the offer as a result of its investigation. When this happens, the IRS will apply the payment(s) to the taxpayer’s outstanding tax liability.

Alvin Brown & Associates said...

If you received a letter notifying you that your offer was rejected you have 30 days to request an appeal of the decision. You can request an Appeals conference by either preparing Form 13711, Request for Appeal of Offer in Compromise or preparing a separate letter with the following information.

Name, address, SSN, and daytime telephone number
A statement that you want to appeal the IRS findings to the Appeals office
A copy of the letter
Tax period or years involved
A list of the specific items you don't agree with and a statement of why you don't agree with each item
Any additional information you want Appeals to consider
The facts supporting your position on any issue that you do not agree with
The law or authority, if any, on which you are relying
Sign the written protest, stating this it is true under the penalties of perjury
For more information please refer to Form 656, Offer in Compromise.

Alvin Brown & Associates said...

The newest changes to the OIC statute are reflected below and includes the filing of frivolous Offers in Compromise


7122(f) DEEMED ACCEPTANCE OF OFFER NOT REJECTED WITHIN CERTAIN PERIOD. --Any offer-in-compromise submitted under this section shall be deemed to be accepted by the Secretary if such offer is not rejected by the Secretary before the date which is 24 months after the date of the submission of such offer. For purposes of the preceding sentence, any period during which any tax liability which is the subject of such offer-in-compromise is in dispute in any judicial proceeding shall not be taken into account in determining the expiration of the 24-month period.



Caution: Code Sec. 7122(f)[(g)], below, as added by P.L. 109-432, applies to submissions made and issues raised after the date on which the Secretary first prescribes a list under Code Sec. 6702(c).

7122(f)[(g)] FRIVOLOUS SUBMISSIONS, ETC. --Notwithstanding any other provision of this section, if the Secretary determines that any portion of an application for an offer-in-compromise or installment agreement submitted under this section or section 6159 meets the requirement of clause (i) or (ii) of section 6702(b)(2)(A), then the Secretary may treat such portion as if it were never submitted and such portion shall not be subject to any further administrative or judicial review.