Offers in compromise: "doubt as to collectibility".
In the second situation, an offer submitted because of effective tax administration is a compromise in which there is no doubt the tax is correct and the amount owed can be collected, but the collection would create an economic hardship or would be unfair and inequitable. Internal Revenue Manual (IRM) 22.214.171.124.1 provides examples of situations in which such exceptional circumstances exist.
Finally, an offer can be submitted for doubt as to liability, when the correctness of the assessed tax is in question. The Service's Examination Division handles these types of offers. Financial information is not required.
Offers for Doubt as to Collectibility
The IRS liberalized its Offer-in-Compromise Program in 1995 by agreeing to accept most offers for processing. There are only two reasons why the Service will not process an offer: a taxpayer is (1) in bankruptcy or (2) not currently in compliance. The system is now overwhelmed by offers and there is a backlog in the processing pipeline. The Service has stepped up efforts for training employees as offer specialists and has made enormous strides in improving the program. It is continually implementing changes.
Currently, the IRS has two programs:
1. Online Offer-in-Compromise Program for tax, penalties and interest of $50,000 or less; and
2. Offers for penalties and interest of more than $50,000.
Online Offer-in-Compromise Program or "streamlined" offer. Taxpayers can use the Online Offer-in-Compromise (i.e., streamlined offer) by accessing the Service's Website at www.irs.gov/ind_info/index.html. A five-step program is available for eligible taxpayers with information necessary to complete the online forms. To be eligible, an individual must (1) agree with the tax liability, (2) have no unfiled past-due tax returns and (3) not be in bankruptcy. The liability can be for individual income taxes, penalties (e.g., trust fund recovery penalties) or employment taxes for an out-of-business sole proprietor. The online forms include 656-R Offer In Compromise; 433-OIC, Financial Statement for Wage Earners and Self-Employed; and supplemental information (a complete list of items to be submitted is found in the directions).
One convenient section on this Website is the "Optional Interactive Worksheet." The worksheet assists in determining a monthly income and expense analysis based on Local and National Standards, used on the Form 433-OIC. The questions on this worksheet are easy to follow (e.g., state of residence, county of residence, family size, number of cars).
Taxpayers can download and complete the forms and submit them (along with the supplemental information) to a local IRS collection office. To try to reduce the backlog from the increased number of offers, the IRS will soon route all offers in which the total liability (including tax, interest and penalties) is $50,000 or less through one Service Center.
Specially trained individuals will screen the Forms 656 and supplemental forms for missing information, and contact taxpayers (or their representatives) by telephone, letter or both for this information. The Service Center will process simple cases; the Service hopes that the streamlined process will lessen the burden of the number of offers revenue officers in the Collection Division must currently handle.
Offers of more than $50,000 or complex issues. Revenue officers in the Collection Division will continue to handle offers of $50,000 or more and complex issues. For these offers, taxpayers must complete Forms 656, Offer in Compromise; 433-A, Financial Information for Individuals; 433-B, Financial Information for Businesses; and supplemental information. IRS Publication 1854,"How to Prepare a Collection Information Statement (Form 433-A)" and IRM 5.8, "Offer in Compromise," provide guidance for properly completing these forms.
Form 656-A, An Explanation of Circumstances, should accompany Form 656 when there is an additional basis for compromise involving effective tax administration.
Cash or Deferred-Payment Offers
The IRS now has provision for three payment arrangements (see Form 656):
1. Cash offer: the offered amount to be paid within 90 days after the IRS accepts the offer.
2. Short-term deferred-payment offer: the offered amount to be paid in more than 90 days but within 24 months.
3. Deferred-payment offer: the offered amount to be paid over the life of the collection statute.
Amount to offer. The minimum offer is generally equal to the realizable value of assets plus future income. For a cash offer, the future income calculation is projected future income less necessary living expenses over four years. Five years of income is required when computing an offer using one of the deferred-payment arrangements. Necessary living expenses vary, depending on the taxpayer's state of residence and locality. The IRS publishes the following "necessary living expense" standards on its Website:
* National standards (e.g., clothing, food, housekeeping supplies, personal care products and services);
* Local standards (e.g., housing); and
Other allowable expenses used in the calculation of future income include childcare, court-ordered payments, term life insurance, medical expenses and other expenses that might fall within the category of health and welfare or the production of income or both. The standards are based on an individual's income and family size.
When calculating the net realizable value of assets, the Service uses "quick sale value" (QSV) (80% of fair market value). Secured liabilities reduce the QSV to determine the net realizable value in more assets; the IRS does not consider unsecured liabilities. There are exceptions for accounts receivable and other assets. IRM 5.8 includes information on asset valuations, secured and unsecured debt, collateral agreements and other complex issues.
Compromising employment taxes. Before the Service will even consider discussing an offer, a taxpayer must be current with payroll taxes for at least two quarters. Normally, the IRS does not accept less than the tax due, unless the taxpayer can convince the Service that the offer is in the government's best interest. An offer for less might be accepted, as long as it reasonably reflects collection potential.
IRS Appeals Division
In rejecting offers, the IRS issues a written notice to taxpayers. The notice includes the reason(s) for the rejection and informs the taxpayer about rights to an appeal. If the Collection Division rejects an offer in compromise, the taxpayer has the right to an independent review by the IRS Appeals Division. The taxpayer must submit a written protest to the Service within 30 days of the rejection.
Effect of Acceptance
An offer is a contract that a taxpayer agrees to stay in full compliance with all tax obligations for five years. The taxpayer also agrees to the offset of any refunds due for prior years and the tax year during which he accepts the offer. If the taxpayer fails to comply with any of these terms, the IRS can retroactively terminate the offer and resurrect the tax liabilities.
Policy Statement P-5-100 states "[a]n Offer in Compromise is a legitimate alternative to declaring a case as 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." This policy statement provides a frame of reference by which the Service's procedures and standards for evaluating offers can be more readily understood.
FROM MARY LOU GERVIE, CPA, CFE, WATKINS, MEEGAN, DRURY & COMPANY, L.L.C., BETHESDA, MD
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|Title Annotation:||IRS policy on tax compromises|
|Author:||Elly, Mark H.|
|Publication:||The Tax Adviser|
|Date:||Apr 1, 2001|
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