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.
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 18.104.22.168(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.”
Improper or incorrect IRS assessments (tax debts) can arise in many ways:
· Invalid or incorrectly computed IRS determination of the tax;
· Improperly prepared tax returns;
· Failure to respond to notices about payroll taxes, often the so-called Trust Fund Recovery Penalty (TFRP);
· The Dog, Parrot, or ________ ate, destroyed, or otherwise trashed my records, then I guessed, incorrectly, what the tax should have been; and
· Other ways too numerous to list here.
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.
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.”
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.
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 22.214.171.124.1 (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. 126.96.36.199.1 (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.
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 188.8.131.52 (October 22, 2010). “Deferred Periodic Payment” Offers are those that are paid over the time remaining on the 10-year statute of limitations.
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.
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.
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.)
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 include bank accounts, securities, real estate, vehicles, and related assets. Also included in this category are Individual Retirement Accounts (IRAs), 401(k)s, etc., minus all taxes and penalties due on such withdrawals.
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.
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).
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.
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 184.108.40.206.3 (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.
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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