Filing an OIC? Better make it complete.

California tax practitioners have been lamenting the departure of the "kinder and gentler" IRS and complaining that revenue officers have become more aggressive in seizing property; appeals officers have become more aggressive in sustaining the government's position; and district counsels seem more willing to litigate cases than settle them.

In the midst of all this, tax practitioners are dealing with changes in the Offer in Compromise program. Many practitioners believe these changes reflect a culture change within the IRS--from a service organization to a more aggressive enforcement organization.

But according to William Holmes, the national director of the OIC program, the rules were changed to streamline the OIC procedure and reduce the backlog of cases.

One change, however, has fallen on the shoulders of taxpayers: They must make sure all necessary information is included in their OIC filing. Before the change, it was the job of the revenue officer to collect such information.

If OICs are not complete when filed, the reviewing staff sends one--and only one document request. If the requested information is not provided within 30 days, the case is closed and the relief denied

Once an OIC is reviewed and determined to be complete, it is categorized as either simple or complex. Simple cases are those in which the taxpayer is a W-2 wage earner and has no Schedule C, Schedule E or Schedule F attached to his or her tax return. OICs from all other taxpayers are treated as complex. Simple OICs are worked on at the OIC processing center, while Complex OICs are sent to local field offices for consideration by specially trained revenue officers, called offer specialists.

PENALTY PHASE?

The IRS has a self-imposed 14-day time period to determine whether it will accept an OIC as filed. But are taxpayers shielded from any fines during that 14-day period? According to Fred Schindler, the principal author of the new OIC regulations, the short answer is no. Protections provided by IRS Sec. 6331(k)(1)--which prevent the government from levying fines while an OIC is pending--do not apply until the IRS has accepted an OIC. Until it is accepted, though it has been received, the IRS is free to levy.

During this 14-day period, the IRS also is free to file a federal tax lien, but rarely does because the filing of an OIC is an indication that the taxpayer is cooperating with the IRS.

COLLATERAL AGREEMENTS

Collateral agreements are generally disfavored because of the resources and difficulty required to monitor them. But there are at least two circumstances when the IRS may seek such agreements.

One is where the taxpayer has large net operating losses to be carried into future years. As part of the OIC, the taxpayer might be asked to waive his or her right to carry forward net operating loss deductions.

The other circumstance is where the taxpayer's income is likely to increase dramatically within a few years. If the IRS believes the taxpayer is likely to recover financially, it may request a collateral agreement requiring the taxpayer to pay the government a portion of any income over certain thresholds within a certain period of time.

DENYING OICs

Holmes and Schindler acknowledged that the IRS can reject OICs in cases where its clear the taxpayer can pay the amount owed within the statute of limitations plus five years. However, this policy can create unequal or inconsistent treatment of taxpayers.

Holmes conceded that the IRS is aware of the problems with this rule and said the goal of the program is to offer relief to taxpayer who cannot pay their taxes, while weeding out taxpayers who have the ability to pay, but don't want to.

The result of the changes in OIC regulations is that offer specialists no longer begin working with empty files and then gather information they need to make a determination. Instead, cases never make it to an offer specialist unless the taxpayer provides all necessary information with the original request for relief, or within 30 days of receiving a document request after the original OIC is received.

If the taxpayer provides all the documentation requested on Form 433, including supporting information, the offer should be processed without trouble.

As tax professionals, we need to make sure the offer includes all necessary information. If we do our part, our clients' offers will be properly considered and complaints about summary rejections should end.

Joseph A. Broyles, Esq., is an attorney. You can reach him at [phone].