Filing an Offer in Compromise? Are you Ready?
The IRS Offer in Compromise program is designed to compromise federal tax liabilities for less than what is owed. The policy behind the Offer program is to afford taxpayers a “fresh start”, while collecting what is potentially collectible at the earliest time, and at the least cost to the government. As such, an Offer in Compromise may be a more attractive alternative than a protracted installment agreement. The Offer may also be a good alternative to having the IRS place an account in currently not collectible status (with interest continuing to enlarge the bill). Another benefit to the Offer in Compromise is the release of federal tax liens. A Compromise can be based upon the following:
- Doubt as to Liability (there is doubt that the assessed tax is correct);
- Doubt as to Collectibility (there is doubt that the taxpayer could ever pay the full amount owed; and
- Effective Tax Administration (here, there is no doubt that the tax is correct and no doubt that the amount owed could be collected in full, but exceptional circumstances exist such that collection of the full amount would create economic hardship or where compelling public policy or equity considerations provide sufficient basis for compromise.
However, an Offer in Compromise should not be a knee jerk reaction to levy and seizure action by the IRS. Rather, submission of an Offer should be a planned process, and one should have a solid foundation before submission. Some Questions and Reasons for Advanced Planning before submitting the Offer in Compromise follow. Some Questions and Reasons for Advanced Planning before submitting the Offer in Compromise follow. (1) Have you filed all required returns? The IRS has announced that: “Beginning with Offer applications received on or after March 27, 2017: The IRS will return any newly filed Offer in Compromise application if you have not filed all required tax returns. Any application fee included with the OIC will also be returned. Any initial payment required with the returned application will be applied to reduce your balance due. This policy does not apply to current year tax returns if there is a valid extension on file.” (2) Will you be compliant in the future? You need to have set in motion your positive plan of action to ensure that all future taxes will be both timely filed and full paid. An accepted Offer in Compromise has a 5-year compliance mandate, and if you fail to timely file and full pay during this 5-year period (and comply with all provisions of the Internal Revenue Laws), this defaults your accepted Offer in Compromise, and the tax debt comes back. In reality, there are times that getting an Offer accepted may not be a realistic long-term resolution because of the volatile situation that a taxpayer is in (and is projected to remain in for a period of time). (3) Do you actually owe the taxes? If it is clear that you don’t owe certain taxes, another consideration may be to seek abatement of the erroneous assessment. If you merely file an Offer based on Doubt as to Collectibility, and default during the 5-year compliance period, then all of the liability returns. (4) Is the statute of limitations about to run? Generally, the IRS has 10 years to collect back taxes after assessment. If such time period is about to run out on the IRS, and you submit an Offer in Compromise you have just extended that 10-year period. Thus, in certain cases, it may be best to “lay low” and wait for the statute of limitations to run out on a tax year. (5) Are you a good candidate for an Offer? Is an Offer realistic, or, are you merely going to spend a lot of energy and time to receive a rejection? The IRS has published “allowable” expenses standards which they use. If your expenses exceed the allowances, the result is the creation of Phantom cash flow. This means that the IRS “calculates” (i.e., pretends”) that you are able to pay more than you actually can. Although the IRS is to take into account a taxpayer’s particular facts and circumstances, the fact is that the IRS historically fails and/or refuses to do. This continues to be a recurring problem. (6) Is there a better method to resolve your back taxes? Due to the amount of time that it takes to process an Offer in Compromise (typically, a minimum of 6 to 9 months, or more, to process, review, investigate, and obtain approval by management / IRS Legal Counsel), the question is – would you be better served by a part payment agreement (partial payment installment agreement), or other procedure? For example, a Part Payment agreement may be an alternative to allow the 10-year statute of limitations to run on an “old” tax debt, thus, achieving the goal of getting rid of a tax problem while avoiding the negative factor of extending the collection statute by merely doing an Offer in Compromise. (7) Are the taxes dischargeable in bankruptcy? If you file an Offer in Compromise to soon, this may adversely impact the ability to discharge taxes in bankruptcy. Further, not all taxes are dischargeable, and there are very strict timing rules. Bankruptcy counsel should be consulted. (8) Do you have adequate records which are in good condition to submit an Offer? Submission of an Offer (IRS form 656) will required a financial statement with at least 3 months of supporting bank statements, as well as other verification. This is not – “let’s make a deal”. The IRS is going to do a financial investigation. For illustration, let’s assume that you have a closely held corporation and you have improperly been using corporate funds to pay your personal expenses (e.g., your housing, food, etc.…)? In such a case, submission of the required information will most likely result in questions about the corporation being used by you as your “personal piggy bank” (Alter ego). Now, not only have you jeopardized your Offer, but you may have opened up a can of worms, with audit exposure, and owe more taxes, penalties and interest. Additionally, you have opened up the potential risk of IRS seizure of the Corporate income (which is where your pay check comes from). (9) Are you having sufficient withholding and/or estimated tax payments to ensure that the current tax year will be filed on a full paid and timely basis? If you are not in compliance, the IRS may return your “Offer” as not processable. Thus, will you owe for the current Year? Have you had your accountant / CPA run a projection of state and federal taxes? (10) Do you owe other taxing agencies? If you owe the state, but haven’t worked out an agreement to maintain stability with that “other” tax agency, this could result in the default of an IRS accepted Offer in Compromise. How? Because all of a sudden, several years into the 5-year compliance period, funds which you were planning to use to pay federal taxes (on a federal return coming due) are seized by the state for back taxes owed to the state. Now, you can’t pay the federal taxes, and have defaulted your federal Offer in Compromise. Same may be said for other judgment creditors. (11) Should you time the submission of the Offer so that it is made within the context of a timely filed Collection Due Process Hearing Request? The considerations in this case may include Appeal and the potential for a Tax Court proceeding in the event of “abuse of discretion” by the IRS. The above are some of the issues to be considered before submitting an Offer in Compromise. They are factual and legal issues. The Offer in Compromise is not a cookie cutter – one size fits all program. The partial listing clearly shows that you need to take the necessary steps to form a solid foundation upon which an accepted Offer is built. In that way, you can truly take advantage of the “fresh start” objective of the IRS Offer in Compromise program.
Solutions may involve obtaining a release of your bank levy or wage garnishment, an installment agreement, Offer in Compromise, statute of limitations analysis, abatement, or other relief.