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Offers in compromise.

Offers in compromise are not new. However, as previously noted in the Journal of Accountancy (see "IRS Gets New, More Flexible Guidelines on Offers in Compromise," Aug. 92, page 33), the Internal Revenue Service has placed new emphasis on these offers and is encouraging appropriate taxpayers to compromise their tax liabilities.

COLLECTIBILITY

Offers in compromise will be available only if there is a question on the IRS's part as to the collectibility of the taxes owed (and if the IRS believes it is collecting what is reasonably collectible). Thus, there must be some doubt as to the ability to collect the assessed sums, usually evidenced by some form of insolvency.

COMMENCING THE OFFER

The taxpayer must initiate the first specific proposal for compromise. If the offer is a viable solution to a taxpayees situation, the IRS employee assigned to the case will discuss this alternative with the taxpayer, and may even assist him or her in preparing the required forms.

Offers in compromise are submitted on Form 656, Offer in Compromise. An offer should include all outstanding liabilities for all outstanding years; it cannot be partial or piece-meal. The identification of these liabilities should be specific and complete, with all contingencies disclosed. In addition, a taxpayer submitting an offer in compromise must be in compliance with all filing and payment requirements for periods not included in the offer, including estimated taxes and tax deposits.

Either form 433-A (for individuals) or 433-B (for businesses) also must be completed and submitted. The purpose of these forms is to indicate to the IRS the taxpayer's present and potential sources of income and what the taxpayer owns and owes.

ADMINISTRATIVE REVIEW

Once submitted, an offer will be reviewed to determine whether the offer reflects the collectibility from the taxpayer's 'assets and future income.

Income. There is no fixed percentage of a taxpayer's present or future earned or unearned income that will determine whether an offer is accepted. The issue is basically how much of a taxpayer's income is (or will be) realistically available to pay the delinquent taxes. A taxpayer's education, profession or trade, age and experience, health and past and present income will be considered. Generally, ira taxpayer offers the net realizable equity in his assets and the present value of five years of future income (less necessary living expenses), the IRS will seriously consider accepting the offer.

Assets. When reviewing a taxpayer's assets, the IRS tends to focus on their "quick-sale" value. Generally, this amount is somewhere between the value realized by an IRS sale or auction and fair market value; in practice, it tends to be between 75% and 85% of fair market value. Obviously, the nature of the asset plays a large part in this determination; cash and marketable securities will have a quick-sale value identical to fair market value, while real estate and personal property may have differing values.

The IRS must consider assets owned by relatives when those assets are "reachable." Therefore, an acceptable offer may have to significantly exceed the net realizable equity in the taxpayer's own assets and future income.

ADVANTAGES

* Payment of less than the full assessment.

* The ability to make deferred payments on the balance, without accruing penalty.

* The release of tax liens against the taxpayer's personal and business assets.

* Finality and definiteness of the arrangement.

DISADVANTAGES

* A taxpayer must fully comply with all filing and payment requirements for five years after acceptance of the offer. Failure to do so is a default by the taxpayer.

* If involving a future income agreement (or some other collateral agreement), such an agreement will negate at least part of the taxpayer's reduced tax liability.

* Since a taxpayer must waive the limitations period on collections for the offer period plus one year, taxpayers in severe financial distress might find it too burdensome.

* A default on an accepted offer in compromise by a taxpayer allows the IRS to begin collection activities without notice to the taxpayer.

For a detailed discussion of the offer procedure, see "Offers in Compromise," by Donald Massey, in the October 1992 issue of The Tax Adviser.

Ed. note: The material discussed provides general information. Before you take any action in this area, the appropriate code sections, regulations, cases and rulings should be examined.

Nicholas Fiore, editor

The Tax Adviser
COPYRIGHT 1992 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:from The Tax Adviser
Author:Fiore, Nicholas J.
Publication:Journal of Accountancy
Date:Oct 1, 1992
Words:714
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