Taxpayers often seek to pay only part of what they owe to the IRS. If the IRS accepts this partial payment, it is known as an Offer in Compromise. MEDOWS CPA, PLLC has helped many clients to prepare Offer in Compromise agreements in New York. Our firm is happy to provide a complimentary consultation to determine if an Offer in Compromise is right for you, given your circumstances. Unlike other firms that over-promise great and under-deliver, we are frank with our advice: If an Offer in Compromise is not suited to you, we will not suggest that you spend your hard-earned money pursuing one.
The IRS is willing to make compromises in the form of installment payments to pay off a tax liability over time. This is particularly useful because it prevents the IRS from liquidating major assets, such as a home or a retirement fund, which can be devastating, both financially and emotionally, to the taxpayer. Terms can be generous, but, if a taxpayer can’t afford an installment deal with the IRS, his or her financial situation may be such that an Offer in Compromise may prove to be an even better alternative.
An Offer in Compromise actually lowers the total amount of liability outstanding, usually in return for a commitment to pay this reduced amount over a period of years. In addition, Offers in Compromise have also become a preferred way for the IRS to avoid litigation expenses when a taxpayer has at least some argument under the tax law as to why a tax liability is not owed, in part or in full. Whether an offer in compromise is based on “doubt as to collectability” or “doubt as to liability,” the rationale behind the IRS’ seemingly generous spirit is that, under the new rules on collection, it may be better off accepting something now than risking getting nothing in the future. Further, the IRS is now under a Congressional mandate to make Offer in Compromise generally more accessible to taxpayers.
If you decide to make an offer through the IRS’s Offers in Compromise program and the IRS accepts, you will pay the lesser amount in full satisfaction of your tax liability. The IRS cannot collect the additional tax from you. It can accept an offer only if there is doubt whether the tax liability exists or doubt whether the tax can be collected. A doubt as to collectability must be supported by a Collection Information Statement (IRS Forms 433-A or B) which requires disclosure of a taxpayer’s assets. It also requires a nonrefundable $150 fee, designed primarily to stop frivolous claims from clogging up the pipeline for taxpayers with legitimate problems. The Offer in Compromise itself is made on a separate form.
A preliminary consideration for someone making an offer is whether to use assets to make estimated tax payments that are due rather than holding the assets to increase an offer. This is because the IRS cannot accept an Offer in Compromise if tax returns are not current or if tax liabilities aren’t being paid as they accrue.
To be fair, there are some disadvantages to making an Offer in Compromise. For example, it makes it easier for the IRS to identify property that it can seize and levy upon (although the legislation prohibits the IRS from levying against property while a compromise offer is pending). Further, the offer usually operates to extend the statute of limitations. Still, in many situations, the Offer in Compromise route may be the only way to go.
Here is a summary of the operative rules as they now exist.
First contact. The first contact that the taxpayer who needs an Offer in Compromise will generally have with the IRS is an audit, during which the IRS examiner will make an assessment of taxes owed and issue a notice of deficiency. Offers in Compromise as to doubt of liability usually take place at an earlier stage than offers based on doubt as to collectability. Offers in Compromise as to doubt of collectibility almost always take place at the collection stage, after a liability has been reduced to judgment or is uncontested by the taxpayer. Some taxpayers combine the two grounds for an offer as a strategic move, on the assumption that the IRS will assume that the odds are greater that the amount will not be collected. Offers based on doubt as to collectability must be accompanied by a nonrefundable $150 fee. This fee has been imposed primarily to keep frivolous claims from clogging up the system for taxpayers with legitimate problems. If the offer is based on doubt as to liability, submission of a personal statement is not required, but the taxpayer must explain why the amount is owed to the IRS.
Financial statement. The financial statement form that a taxpayer is required to file with a formal Offer in Compromise is at the heart of the IRS’ examination of whether an offer is acceptable. Documentation required for the IRS’ financial statement analysis must include a full credit report for liabilities greater than $100,000. Financial statements must reflect information no older than the six-month period prior to submission of the Offer in Compromise.
Quick sale value, which is used to value most assets, generally is an amount less than fair market value (FMV), but greater than forced sale value (generally 75 percent of FMV). Determining FMV for many items turns into a matter of opinion in many situations and it is often a good strategy to document how valuation is determined on the taxpayer’s property so that the IRS is not tempted to call for its own valuation. FMV itself can reasonably vary by 15 or 20 percent depending upon the type of property and market conditions, which in turn can lower the figure set for quick sale value. The IRS cannot use the hindsight of any actual sale after the Offer in Compromise is in place to negate the agreement (aside from proof of fraud). However, taxpayers who wish to renegotiate an Offer in Compromise may introduce evidence of a sale that brought in substantially less than had been anticipated on the financial statement.
Agent’s Worksheets. IRS agents are instructed to use worksheets in evaluating Offers in Compromise. Made available to tax professionals through the Freedom of Information Act, this form requires that an IRS agent weigh nine principal factors included in “total income” compared against ten factors included in necessary living expenses. Necessary living expenses include:
- the National Standard expense
- housing and utilities
- health care
- court ordered payments
- child/dependent care
- life insurance
- secured or legally perfected debt
- other miscellaneous expenses
While the IRS is considering an Offer in Compromise, penalties and interest continue to accrue on unpaid tax liabilities.
Payment requirements. Generally, an individual can offer one of three payment plans: (1) a lump sum cash offer, which must be paid in five or fewer installments; (2) a short-term periodic payment offer, which must be paid within 24 months from the date the IRS receives the offer; or (3) a deferred periodic payment offer, which must be paid over the remaining statutory period for collecting the tax. The offer must be accompanied by a partial payment. For example, the required partial payment for a lump sum offer is 20 percent of the amount of the offer.
Offer rejections. Having an Offer in Compromise rejected should not deter a taxpayer from further action. The taxpayer may ultimately win through an appeals process, through a resubmitted offer, or through alternative terms such as an installment agreement.
The IRS Restructuring and Reform Act of 1998 requires the IRS to implement procedures to review all proposed rejections of taxpayer offers in compromise prior to the rejection being communicated to the taxpayer. This review is not conducted by the front line manager with direct supervisory authority over revenue officers working in compromise cases. The taxpayer’s second chance comes after a rejection letter is sent. Appeal rights are available to the taxpayer when any reasonable offer is rejected. Collection is prohibited during the appeal period.
The IRS has also indicated that it will revisit the payment terms of already negotiated Offer in Compromise for taxpayers experiencing financial hardship. IRS officials have also told Congress that they suggest eliminating the requirement that taxpayers submit a nonrefundable partial payment with their application.
The bottom line is this: You may stand “a fighting chance” to strike a compromise with the IRS on your tax liability through their Offer in Compromise program. The IRS is still not “giving it away,” however. With careful adherence to their new, less stringent guidelines, compromise is certainly more likely now than ever before. Please call one of our NYC CPAs if you have any specific questions concerning how these rules apply to you.