an Offer in Compromise? Are you Ready?
IRS Offer in Compromise program is designed to compromise federal
tax liabilities for less than what is owed. The policy behind the
Offer program is to afford taxpayers a “fresh start”, while
collecting what is potentially collectible at the earliest time,
and at the least cost to the government.
such, an Offer in Compromise may be a more attractive alternative
than a protracted installment agreement. The Offer may also be a
good alternative to having the IRS place an account in currently
not collectible status (with interest continuing to enlarge the
bill). Another benefit to the Offer in Compromise is the release
of federal tax liens.
A Compromise can be based upon the following:
Doubt as to
Liability (there is doubt that the assessed tax is correct);
as to Collectibility
(there is doubt that the taxpayer could ever pay the full amount
(here, 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.
an Offer in Compromise should not be a knee jerk reaction to levy
and seizure action by the IRS. Rather, submission of an Offer
should be a planned process, and one should have a solid
foundation before submission.
Some Questions and Reasons for Advanced Planning before submitting
the Offer in Compromise follow.
1. Have you
filed all required returns?
IRS has announced that: “Beginning with Offer
applications received on or after March 27, 2017: The IRS will
return any newly filed Offer in Compromise application if you have
not filed all required tax returns. Any application fee included
with the OIC will also be returned. Any initial payment required
with the returned application will be applied to reduce your
balance due. This policy does not apply to current year tax
returns if there is a valid extension on file.”
2. Will you be
compliant in the future?
need to have set in motion your positive plan of action to ensure
that all future taxes will be both timely filed and full paid.
An accepted Offer in Compromise has a 5 year compliance
mandate, and if you fail to timely file and full pay during this 5
year period (and comply with all provisions of the Internal
Revenue Laws), this defaults your accepted Offer in Compromise,
and the tax debt comes back. In reality, there are times that
getting an Offer accepted may not be a realistic long term
resolution because of the volatile situation that a taxpayer is in
(and is projected to remain in for a period of time).
3. Do you
actually owe the taxes?
it is clear that you don’t owe certain taxes, another
consideration may be to seek abatement of the erroneous
assessment. If you merely file an Offer based on Doubt as to Collectibility,
and default during the 5 year compliance period, then all of the
4. Is the
statute of limitations about to run?
the IRS has 10 years to collect back taxes after assessment. If
such time period is about to run out on the IRS, and you submit an
Offer in Compromise you have just extended that 10 year period. Thus,
in certain cases, it may be best to “lay low” and wait for the
statute of limitations to run out on a tax year.
5. Are you a
good candidate for an Offer? Is an Offer realistic, or, are you
merely going to spend a lot of energy and time to receive a
IRS has published “allowable” expenses standards which they
use. If your expenses exceed the allowances, the result is the
creation of Phantom cash flow. This means that the IRS
“calculates” (i.e., pretends") that you are able to pay
more than you actually can. Although the IRS is to take into
account a taxpayer’s particular facts and circumstances, the
fact is that the IRS historically fails and/or refuses to do. This
continues to be a recurring problem.
6. Is there a
better method to resolve your back taxes?
to the amount of time that it takes to process an Offer in
Compromise (typically, a minimum of 6
to 9 months, or more, to process, review, investigate, and obtain
approval by management / IRS Legal Counsel), the question is -
would you be better served by a part payment agreement (partial
payment installment agreement), or other procedure?
For example, a Part Payment agreement may be an alternative
to allow the 10 year statute of limitations to run on an “old”
tax debt, thus, achieving the goal of getting rid of a tax problem
while avoiding the negative factor of extending the collection
statute by merely doing an Offer in Compromise.
7. Are the
taxes dischargeable in bankruptcy?
you file an Offer in Compromise to soon, this may adversely impact
the ability to discharge taxes in bankruptcy. Further, not all
taxes are dischargeable, and there are very strict timing rules.
Bankruptcy counsel should be consulted.
8. Do you have
adequate records which are in good condition to submit an Offer?
of an Offer (IRS form 656) will required a financial statement
with at least 3 months of supporting bank statements, as well as
other verification. This is
not - "lets make a deal". The IRS is going to do a
financial investigation. For illustration, let's assume that you have
a closely held corporation and you have improperly been using
corporate funds to pay your personal expenses (e.g., your housing,
food, etc…)? In such
a case, submission of the required information will most likely
result in questions about the corporation being used by you as
your “personal piggy bank” (Alter ego). Now,
not only have you jeopardized your Offer, but you may have opened
up a can of worms, with audit exposure, and owe more taxes,
penalties and interest. Additionally, you have opened up the
potential risk of IRS seizure of the Corporate income (which is
where your pay check comes from).
9. Are you having sufficient withholding and/or estimated
tax payments to ensure that the current tax year will be filed on
a full paid and timely basis?
you are not in compliance, the IRS may return your “Offer” as
not processable. Thus, will
you owe for the current Year?
Have you had your accountant / CPA run a projection of state and
10. Do you owe
other taxing agencies?
you owe the state, but haven’t worked out an agreement to
maintain stability with that "other" tax agency, this
could result in the default of an IRS accepted Offer in
Compromise. How? Because
all of a sudden, several years into the 5 year compliance period,
funds which you were planning to use to pay federal taxes (on a
federal return coming due) are seized by the state for back taxes
owed to the state. Now, you can’t pay the federal taxes, and
have defaulted your federal Offer in Compromise. Same may be said
for other judgment creditors.
11. Should you
time the submission of the Offer so that it is made within the
context of a timely filed Collection Due Process Hearing Request?
The considerations in this case may include Appeal and the
potential for a Tax Court proceeding in the event of “abuse of
discretion” by the IRS.
above are some of the issues to be considered before submitting an
Offer in Compromise. They are factual and legal issues. The Offer
in Compromise is not a cookie cutter – one size fits all
program. The partial listing clearly shows that you need to take
the necessary steps to form a solid foundation upon which an
accepted Offer is built. In that way you can truly take advantage
of the “fresh start” objective of the IRS Offer in Compromise
over 30 years of experience, TaxSOS.com offers personal attention
to resolving your IRS tax problem. Solutions may involve obtaining
a release of your bank levy or wage garnishment, an installment
agreement, Offer in Compromise, statute of limitations
analysis, abatement, or other relief.
Call to discuss
your situation with an experienced Attorney. The call is
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