Volume 18 Issue 3 -- May/June 2006
Forget “pennies on the
dollar.” With new legislation, effective July 16, 2006, it will no longer be
possible to submit an Offer in Compromise (OIC) based on doubt as to
collectibility without at least a partial payment.
Offers are submitted for two
main reasons — doubt as to collectibility (inability to pay the full amount
within a reasonable period of time) and doubt as to liability (the amount is not
owed). While some aspects of this new law will require guidance before it can be
implemented, it is clear that the basic thrust of the law will be to prevent the
submission of most Offers based on doubt as to collectibility without some
payment in advance.
Under the new law, an OIC based
on doubt as to collectibility will require partial payment at the time it is
submitted. If the payment is to be in a lump sum, defined not as one payment but
five or fewer installments, 20% of the total amount offered must be submitted
with the OIC.
For example, if the Offer was
for a payment of $100,000, it would be necessary to pay $20,000 with the Offer
and then pay the remaining amount, $80,000, in four or fewer installments. The
period of time over which the four payments must be made is not designated in
the legislation and will, presumably, be addressed in Regulations.
If a non-lump sum OIC is
submitted, then it is necessary to submit the first periodic payment with the
OIC. After the OIC has been submitted, it will also be necessary to make each
installment payment while the OIC is being evaluated by the IRS. The term
“periodic payment” is not defined in the statute, but presumably it will be
defined to mean “monthly payments.”
The Statute states that the
payments made under the new OIC regime can be assigned as specified by the
Taxpayer. The general rule which the IRS follows, unless there are specific
directions, is that the payment is usually applied to the principal of the
oldest tax period. In some unusual situations involving 941 taxes, this rule is
not always followed. Also, there could be some situations where it would be
better to have the tax applied to the more recent tax periods.
Financial data is not needed if
an OIC is submitted to the IRS based on doubt as to liability (i.e. the amount
is not owed). Read literally, it is not necessary to submit a sum of money if
you are submitting an OIC based on doubt as to liability. As a practical matter,
however, and as indicated in our prior newsletters, an OIC not accompanied by an
offer to pay a sum of money is quite likely to be rejected by the IRS
processors. See our newsletters of March/April and May/June of 2005.
It is clear that Congress wanted
to raise the hurdle for submitting OICs based on doubt as to collectibility. The
statute specifically states that if the amounts required to be paid with lump
sum payments or periodic payments are not made on a regular basis, then the IRS
is free to return the OIC to the taxpayer as “unprocessable.” This is the
kiss of death in many situations because it usually takes a year or more to get
an OIC processed.
A new subsection of IRC § 7122
entitled “Deemed Acceptance of Offer Not Rejected Within A Certain Period”
has been added to cause the IRS to process an OIC rather than sitting on it
indefinitely. In essence, the law now states that if an OIC is submitted and is
not “rejected” within a two-year period (beginning with the date of
submission) then the OIC is deemed “accepted.”
This restriction of the IRS’s
unlimited period of time to work on OICs is a welcome change. If a rejection is
not received within the 24-month period, then whatever was offered is deemed to
be accepted. One can envision a kind
of poker match where a low offer, if not rejected within the two-year period,
would be deemed accepted.
It has been commonly known by
many professionals that deal with OICs that the IRS is not able to keep up with
the large number of OICs that have been received. The number of OICs submitted
may drop substantially with this new legislation. When and how the system will
evolve is not clear at this point, but evolution is clearly in order.
The practical effect of the new
law will be that, because the official policy of the IRS has been that there
will be no enforced collection while a valid OIC is pending, it will no longer
be possible to submit an OIC as a device to prevent enforced collection without
the payment of some amount to be applied against the outstanding tax debt.
As soon as the IRS provides
guidance for implementing the new rules, we plan to prepare another newsletter
with information concerning how to process OICs.
By Tax and Business Professionals, Inc.
9837 Business Way
Manassas, VA 20110
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