Offer in compromise
QI went through a long and expensive divorce a few years ago which decimated me financially. After the divorce, I racked up a large IRS tax bill, basically using tax dollars I owed to finance my life. To make matters worse, I lost my job a few months ago and I have no realistic way of paying back my IRS debt this lifetime. I am tired of the constant harassment from the IRS reminding me of my plight. Is there a way I can make a deal for a lesser amount so I can get on with my life?
AUtilizing Form 656, Offer in Compromise, you may be in a position to negotiate a settlement with the IRS. Here are the IRS basic guidelines for making an offer:
The IRS may legally compromise a tax liability owed based only on:
• Collectibility-doubt that the IRS can collect the full amount owed and/or
• Liability-doubt as to whether you owe the amount.
The IRS cannot legally accept a compromise based solely on hardship.
Are you an offer candidate? Do not submit an offer if:
• The entire amount you owe can be collected through liquidation of your assets or through a monthly installment plan.
• The IRS can collect more from your assets and/or future income than you are offering.
The IRS will not decide that “something is better than nothing” and accept the offer because you currently have no assets or income.
Suspending Collection. Submitting an offer does not automatically suspend collection activity.
• If there is an indication that you filed the offer to delay collection of the tax or if delay of collection would interfere with the Service's ability to collect tax, then the IRS will continue collection efforts.
• If you have an installment agreement prior to submitting the offer, you must continue making those payments while the offer is being considered.
You must file Form 433-A (OIC), Collection Information Statement for individuals, and/ or Form 433-B (OIC) for businesses along with Form 656.
• If you do not submit your financial statements or you submit incomplete financial statements, the IRS will return the entire offer package to you. The information you provide must be current and reflect activity within the six months prior to the date you submit the offer. Obviously, the IRS uses this information to evaluate the offer.
• If you owe personal income tax and you are also self employed you must submit both Forms 433-A and 433-B.
• If only one spouse has a liability but both have income, prepare the form using only the liable spouse's income and expense information unless state community property laws allow collection from a non-liable spouse. Where community property
laws do not apply, the IRS will require disclosure of financial information on the non-liable spouse during the investigation.
• Assets or income that is available to you may not be available to the IRS for direct collection action, should be included in the financial statement. Even if the
IRS may not collect directly from the assets, those assets are available to raise funds and those funds should be included in the offer.
How do you compute the offer amount? To calculate an “acceptable offer amount”, the IRS provides worksheets to be used in conjunction with Forms 433-A and/or Form 433-B. For an individual wage earner, the calculation is as follows >>
Your net equity in assets plus your “present and future income.” Your present and future income is defined as your total income less necessary living expenses multiplied by 60.
You may be asked to provide substantiation for certain living expenses. Necessary living expenses include housing and utilities, transportation, medical expenses, and other expenses. The IRS also uses a chart to determine the “national standard expenses” allowed for a family of your size; these expenses include clothing and clothing services, food, housekeeping supplies, personal care products and services and miscellaneous. If you claim a higher amount, you must substantiate why a higher amount is necessary for each item included in this category.
The IRS may require additional agreements which would require you to:
• Pay a percentage of future earnings.
• Give up certain present or potential tax benefits.
Investigation of the offer. In determining the amount that would be acceptable to compromise your liability, an offer examiner will review your offer package to insure that:
• You accurately included all assets and income available to you.
• You only claimed the necessary expenses allowable for health and welfare of you and your family and/or that provide for the production of income.
• The IRS receives any requested documentation. If the IRS does not receive the requested documentation, they will reject the offer.
The offer examiner may request a visit to your home (or business) to verify your assets and lifestyle. The examiner may also perform review procedures to determine that you are up to date with the payment of the current year's tax liability.
If your offer is accepted
• The IRS will send confirmation of acceptance in the mail.
• You should promptly pay any unpaid offered amounts plus required interest according to the terms of the offer.
• You must comply with all contractual terms and conditions of the offer.
• The IRS will release all Notice of Federal Tax Lien(s) when the offer amount and any additional owed interest is paid in full.
• Failure to adhere to a five-year compliance requirement to file all returns and pay all amounts due may result in default of your offer. If this occurs, the unpaid compromised tax liability will be reinstated, any released Notice of Federal Tax Lien will be reinstated and the collection process will resume.
Public disclosure of your offer. The law requires that all accepted offers on compromise be made available for review by the general public. Therefore, it is possible that the details of the offer in compromise may become publicly known.
Your offer must include the $205 application fee or a completed Form 656A, Income Certification for Offer in Compromise Application Fee and Payment, if you are requesting an exception of the fee because of your income. Offers received without the $205 fee or a completed Form 656-A will not be accepted for processing.
The IRS reviews and assesses each offer on a “facts and circumstances” basis since no two taxpayer situations are the same. Establishing a good working relationship with the IRS agent assigned to your case will go a long way to an approval recommendation of your offer in compromise.
Barry Dolowich is a certified public accountant and owner of a full-service accounting and tax practice with Monterey. He can be reached at 831-3727200. Please address any questions to Barry at PO Box 710 Monterey, CA 93942 or email: email@example.com.