On May 17, 2005, President Bush signed the Tax Increase Prevention and Reconciliation Act of 2005 .
One of the provisions provides for a nonrefundable down payment of 20% on lump sum offers in compromise (OIC). If the offer is based upon monthly installment payments, then the first installment must be included with the OIC application, and the monthly installments will continue during the OIC processing. The effective date for this change was July 16.
Generally, anyone who owes significant tax to the IRS and is unable to pay their liability in installments (over the life of the collection statute – usually 10 years from date of assessment) and/or through liquidation of their property, and who is in filing compliance and current year payment compliance (through withholding or estimated tax payments), is eligible for the IRS OIC program. One of the key requirements of that program is that the taxpayer MUST have filled all delinquent tax returns (at least as far back as six (6) years – that would include 2000 as of the time of this latest update), and be current in 2006 with estimated tax payments (if the taxpayer is self-employed or otherwise required to make estimated payments). The $150 application fee is waived if (1) the 20% payment is required with the submission of the OIC package, (2) the first monthly installment payment is required to be submitted with the application, (3) the OIC is based upon doubt as to liability, or (4) the taxpayer qualifies for the “low income exception” for the application fee.
The taxpayer has the right to specify (in writing) how the lump sum or installment payments are to be applied. If the taxpayer does NOT do so, then the IRS will apply the payments to their best advantage.
There are a number of good tax provisions in this law – such as increasing the AMT exclusion amount that expired at the end of 2005. I will be providing a summary of the most significant aspects of this new legislation on my website in the near future.
Here is a link to a reprint from the IRS website that discusses the new OIC rules in more depth.
Here is a link to the IRS’s frequently asked questions concerning the new program.
NOTE: The information provided in this site is NOT intended to prepare you to file and negotiate your own Offer in Compromise (OIC). There are sites on the web that advertise you can do your own OIC by just using their help with the forms. These sites advertise a fee ranging around $500-$900 for their services.
I discourage taxpayers from trying to negotiate their own OIC. The odds are against your success, especially if your financial situation is the least bit complicated with ownership of real property, self-employment income, pension accounts, community property issues, shared expenses, financial interests in related entities and so forth.
Filing out the forms is the easy part. It is understanding what must be included, or what can be properly excluded in those forms, that is critically important. Further, your representative must understand your financial situation and be well versed in how to prepare the cover letter that provides the IRS with the necessary explanations and support to ensure smooth consideration of your OIC application.
Negotiation of an OIC can be a very challenging process. First, the employees at the IRS are overwhelmed with the vast number OIC applications. Most do not like handling OICs. When they see an OIC submitted by someone without representation, as a means to get the case closed as quickly as possible, they run the risk that the employee may take an aggressive and uncompromising approach. This can be successful because the unrepresented taxpayer is typically unaware of their appeal rights, and the specific rules under the Internal Revenue Manual the IRS employee must follow when considering technical aspects of the OIC financial analysis, such as the proper treatment of “dissipated assets.”
Second, to effectively convince the Revenue Officer, Offer Specialist, Settlement Officer or Appeals Officer that the OIC represents the “best deal for the government,” the representative who understands the process can best present your case in a persuasive manner.
The OIC is not a government “give-away” program. It is designed to give taxpayers who find themselves in dire straits a sort of “fresh start.” However, an OIC will be approved ONLY if it makes sense to the IRS from an economic perspective. A small percentage of the OIC’s filed get approved.
Bottom line – unless you are willing to spend a LOT of time reviewing all of the Internal Revenue Manual provisions relating to OICs and financial analysis, researching the protest procedures (for appealing an adverse determination by the Service Center or a field Revenue Officer or Offer Specialist), and dealing with numerous requests for information and clarification, I do not recommend you go the road alone. You can end up giving the IRS information that they really do not need, but which can make your case very difficult, if not impossible, to resolve.
IMPORTANT: If you are unable to afford full representation costs but still wish to pursue an OIC, then at least you should consider retaining a professional on a consultant engagement to help guide you in your preparation of the required OIC package as well as during the tax agency’s administrative review process. I offer this service and typically have several clients at any one time using me in a consultant capacity as they do battle with the tax agency. Having professional guidance through this technically complex process will significantly improve your chance of success.
|In FY 2011, 59,000 offers-in-compromise were received by IRS (versus 57,000 for FY 2010), and 20,000 were accepted (14,000 for the year before). This is about 1 in 3 were ACCEPTED in 2011!|
The following was issued by the IRS in March, 2010
The IRS Offer in Compromise (abbreviated as OIC) process is a means to potentially satisfy your tax obligations at a discount. Although very rare, the IRS has been known to accept as little as 1% of a tax bill and call it even. There are numerous cases where the taxpayers settled their outstanding obligation for a significantly less amount than what was originally owed.
Is filing an offer in compromise right for you? Would bankruptcy (Chapter 7 where certain Federal taxes can be discharged), or even a Chapter 13 (plan of arrangement) be a better option? The answer to the last question depends upon a number of factors, such as:
Have you previously filed bankruptcy (there are time limits on how often you can file a Chapter 7 bankruptcy)?
Are your taxes dischargeable?
Do you have other debts that can be discharged along with the taxes to give you a “fresh start” ?
I advise all of my clients who need IRS help with a tax debt that they need to discuss with a bankruptcy attorney their options for total or partial discharge of their tax debts. Only by fully understanding what taxes they can – or cannot – discharge can taxpayers make a sound decision about how best to proceed.
The changes to the bankruptcy statutes that went into effect in October 2005 make it more difficult for taxpayers to qualify today for bankruptcy than before that date – primarily because of the new “means” test. Again, you should discuss bankruptcy as an option with a qualified bankruptcy attorney. An attorney who I recommend is Mark Markus, Esq. (http://www.bklaw.com). Mark has helped some of my clients get through the bankruptcy process. For the non-discharged years, I either negotiated an Offer in Compromise or Installment Agreement to satisfy the remaining liability.
At the outset, I caution you to be very leery of any firm that promises that they can get your offer in compromise accepted. All any firm can really do is ensure that your offer in compromise is processable. This means that the paperwork is complete and that your offer will be reviewed by the IRS. There are numerous factors that the IRS considers in determining if it is in the government’s best interest to accept your offer in compromise. The bottom line is that your offer must represent the best deal the IRS can hope to get. The minimum offer required is the result of a mathematical computation I will discuss later.
I’ve often advised clients to put themselves in the place of the IRS. If someone owed you the amount you owe the IRS, and your debtor came to you with the offer amount you are considering making to the IRS, would you be willing to take that amount from your debtor and cancel (compromise) the remaining balance? If so, then perhaps you do have a good basis for an offer in compromise to present to the IRS.
Before going much further in this topic, it is important to realize that the IRS (and most State tax agencies) will NOT entertain an Offer in Compromise if the taxpayer is not in compliance with ALL filing requirements. That means – any unfiled returns MUST BE FILED before you can file an OIC. Payroll returns (for business taxpayers) generally require in addition to filing, that all deposits have been made for the past two quarters.
Chief Counsel has issued its opinion concerning the requirement for FULL COMPLIANCE (filing and payment) of related entities. For instance, a taxpayer (an individual) wants to compromise his personal liabilities. He is the sole shareholder of his corporation. The IRS will check on the compliance of that controlled corporation to ensure that all returns have been filed, that all taxes have been paid, and that all federal tax deposits for employment (or excise) taxes have been made for the prior two quarters. If a problem exists, the IRS can reject the OIC for failure of the related entity to be in compliance. You can read about that Chief Counsel memorandum here.
What about if the taxpayer is an officer with an unrelated entity, and that entity is not in compliance? I have found nothing specific on this. However, the Chief Counsel memorandum appears to leave it up to each IRS office to make its own requirements as to compliance criteria. Remember – the right to receive an Offer in Compromise is DISCRETIONARY. That means – the IRS has latitude to decide whether or not to grant the OIC! The best solution is to ensure that any related entities – as well as those for which the taxpayer has a responsibility for filing/paying returns – is in compliance BEFORE filing an OIC.
You will read above processability of the OIC. Here is an excerpt from the Internal Revenue Manual that discusses this aspect.
All offer receipts other than those based solely upon Doubt as to Liability (DATL) are reviewed to determine if they are processable. No fee is due on Doubt as to Liability (DATL) offers, including Trust Fund Recovery Penalty (TFRP). Processable offers are then “built” (i.e. internal and external information is secured to verify financial information), and perfected, if necessary, before being assigned for investigation. Not processable offers are returned to taxpayers. This chapter defines the procedures to be followed for determining jurisdictional responsibility, processability, and case building.
Centralized Offers in Compromise (COIC) Process Examiners (PE) are responsible for determining processability of all offers received and worked by the Service, except those based solely on Doubt as to Liability (DATL) issues. This determination must be made within 14 calendar days of receipt of an offer in compromise in the appropriate COIC site.
Each new receipt will fall into one of the following categories:
Not processable – the taxpayer does not meet one or more of the minimum established criteria for offer consideration.
Processable – The taxpayer meets the minimum criteria for offer consideration.
An offer in compromise will be deemed not processable if one or more of the following criteria are present:
Taxpayer Not in Compliance — All tax returns for which the taxpayer has a filing requirement must be filed. This rule applies even if a Service employee previously decided not to pursue the filing of the return under the provisions of Policy Statement P-5-133, because it was believed to have “little or no tax due” . In-business taxpayers must have timely deposited, filed, and paid all required employment tax returns for the two (2) preceding quarters prior to filing the offer and must be current with federal tax deposits for the quarter in which the offer was submitted. An individual taxpayer should not be considered an in-business taxpayer because he owns or controls a corporation that is not in compliance. IRM 18.104.22.168(5), Rejection, discusses the criteria for possible rejection of an offer from such an individual if a related entity is not in compliance.
Generally speaking, IRM 22.214.171.124.3(2), Delinquent Return Program, only requires employees to conduct a compliance check to confirm and document all IMF tax returns were filed for the preceding 6-year period. The only exception would be if fraud were discovered during the course of the investigation. Even then it should be extremely rare to go beyond 6 years.
IRM 126.96.36.199, Cases Requiring Special Handling, discusses enforcement criteria, which states that if the taxpayer refuses to file, neglects to file, or indicates an inability to file, then the employees should determine to what extent enforcement should be used (e.g. summons, 6020(b), referral to Exam, or field, etc.). Filing requirements will normally be enforced for a 6-year period, which is calculated by starting with the tax year that is currently due and going back 6 years.
Taxpayer in Bankruptcy — An offer will not be considered during a bankruptcy proceeding. See IRM 188.8.131.52, Bankruptcy.
IRM 184.108.40.206, Offers-in-Compromise and Bankruptcy (09–01–2004) , states that “administrative and legal problems would be created if a tax liability was simultaneously the subject of a court-supervised bankruptcy case and the administrative offer-in-compromise process.” Therefore, it is the policy of IRS that an offer will not be considered if a taxpayer is in bankruptcy. Offer materials including financial information should be forwarded to the Insolvency unit assigned to the bankruptcy.
Taxpayer did not submit the application fee with the offer — The application fee of $186 or the , Income Certification for Offer in Compromise Application Fee, must be submitted with each Form 656. No application fee is required for offers filed solely on the basis of Doubt as to Liability (DATL).
The Form 656-A applies only to individual taxpayers.
No deviations from or additions to processability criteria may be made without written authorization from the Headquarters Office.
An offer cannot be returned for the sole reason that the cost of an investigation may exceed the amount offered.
Recent Policy Change
IMPORTANT: The IRS changed its guidelines in November 2004 to begin allowing installment agreements over the life of the collection statute (generally, the statute for COLLECTION expires 10 years from the date the tax is assessed). Consequently, the IRS will reject offers where the taxpayer is able to pay off their liability (with accruing interest…) over the remaining statutory period for collection.
For example, let’s use a taxpayer who has a liability of $50,000 resulting from delinquent returns he just filed. If the average interest rate was 5% per year, the total liability plus interest (assuming 120 equal payments) would be about $62,500. That would require monthly payments of around $525 for 10 years (ouch). If the taxpayer has sufficient disposable income (discussed later) to make that monthly payment, the IRS will NOT accept an offer.
The net realizable value of any assets will be considered as reducing the amount that has to be satisfied by payments, meaning that the required monthly payment amount would be less. For instance, assume the same liability of $50,000, and net equity in a car of $12,500 (yielding a net realizable value at 80% of $10,000). Subtracting $10,000 from the $50,000 owed would leave $40,000 to be paid over 10 years. Assuming a 5% interest average, that would require payments of about $420 a month. If after applying the national and local standards you are deemed capable of making that payment, you will NOT get an approved OIC.
Previously, the maximum installment payment period the IRS allowed was generally 60 months. The result of this change to permit installment payments for the life of the collection statute is to deny many taxpayers the ability to compromise their liability.
OIC Application Fee – $186
Beginning on January 1, 2014, all taxpayers who file an OIC must include an application fee of $186.00 (previously, $150) with their submission – unless (1) the offer is based solely on doubt as to liability, or (2) the taxpayer’s total monthly income falls at or below income levels based on the Department of Health and Human Services poverty guidelines. The Form 656 has a section for attesting to qualifying for the exception to the filing fee.
Before getting too deep in the mechanics of an offer, you may want to read a response from the Commissioner to Congress regarding the Congressional inquiry into the Offer program. This response provides a very good insight into the offer program, its history, current acceptance figures, and other data that will help you determine if an OIC is right for you. There is also a great discussion regarding the newer form of Offer – “ETA” – effective tax administration. The document is a Word document, so if you do NOT have Word or a reader that can read .DOC files, do not try to down load it.
Click here to read this document.
This is the text of a recently issued Policy Statement by the IRS dealing with Offers in Compromise:
There are a couple of important facets you should understand regarding your offer payment and its eligibility for refund if your offer is NOT accepted.
1. If you file an offer in compromise, but it is NOT processable – meaning:
a. Your are currently in bankruptcy, or
b. You have not filed all required tax returns (including current year estimated taxes), or
c. You have a business with employees AND you are NOT current with deposits for the current quarter or any of the two prior quarters,
then, the $186 fee will be returned with the Offer application.
2. If your offer in compromise is accepted for processing, and the IRS requests documents/information, but you do NOT fully comply with the request, the IRS will most likely reject the offer – and the IRS will KEEP the $186 fee. If you decide to resubmit another Offer in Compromise at a later date, you are required to pay another $186.
The IRS will consider and accept an Offer if you meet just one of the following three conditions:
Doubt as to Liability – Doubt exists that the assessed tax is correct.
Doubt as to Collectibility – Doubt exists that you could ever pay the full amount of tax owed.
Effective Tax Administration – There is no doubt the tax is correct and no doubt the amount owed could be collected, but an exceptional circumstance exists. This could be a serious economic hardship or that full payment would be unfair and inequitable. An Offer based upon Effective Tax Administration is often best used where there are significant medical/health problems for the taxpayer or his/her dependents.
This latter category was added in 1998. Here is a link to the IRS Notice that describes the intent and purpose for this new type of offer. I have also included a Section from the Internal Revenue Manual that discusses this newest category of offer. Please view it here.
Please understand that you have no legal right to have your valid tax bill reduced by the IRS. Whether or not they accept your offer in compromise is entirely a matter of governmental discretion. This is why it is important to have your offer professionally prepared and presented to maximize its potential for acceptance. The IRS must be convinced that acceptance of your offer is in their best interest. A small percentage (less than 20%) of filed offers are being accepted based on the recent statistics of the IRS.
Submitting an offer in compromise to the IRS is a very formal process. You start by completing the most recent version of IRS Form 656. You need to be very careful in completing the form – and to be sure to attach all of the required documents – including any explanations that may be required to clarify any of your responses!
In addition to Form 656, you must submit a Collection Information Statement on Form 433-A(OIC). If you are married and reside in a community property state (like California), the IRS usually requests that your Collection Information Statement include data pertaining to your spouse — even if you alone owe the IRS. The IRS scrutinizes the disclosures you make in this form 433-A much more closely when considering an OIC than when you request to pay your taxes with an installment agreement.
Submitting an offer in compromise will suspend the normal running of the 10-year Statute of Limitation on Collection for the period the Offer is under consideration, and for an additional thirty (30) days if you receive a notice of rejection. If you or your representative files an appeal within the allowed 30 day period following notice of rejection, the collection statute continues to be suspended until conclusion of the appeal – plus another 30 days.
Certainly an option for dealing with old tax liabilities (generally, those over three years old) is bankruptcy – although the new bankruptcy legislation (that went into effect October 17, 2005) will limit or remove that option for many taxpayer. There are pros and cons to filing bankruptcy. If you owe taxes for tax periods that were filed over three years ago, I strongly suggest that you consult with an Attorney who is well versed in bankruptcy law to determine the discharageability of any portion or all of the tax liability you owe. In fact, because of special rules that apply to Chapter 13 bankruptcies, I still recommend that ANYONE who owes back taxes consult with a bankruptcy attorney first.
Before getting into the technical discussion of an offer in compromise, I am sure you are aware that there are many individuals and companies advertising on the Internet that will complete and submit your offer in compromise. Be alert that some of these individuals and firms may not be willing – or lack the authority – to actually represent you before the IRS.
Further, you may be tempted to download the forms from the Internet (www.irs.gov) and complete them yourself. Downloading and studying the forms is a good idea as it will help you understand the OIC process. However, I do NOT recommend you try to do your own offer in compromise. You may create more tax issues for yourself as a result of not fully understanding what should – and should not – be included on the financial statement and how best to present the information.
If your offer is accepted, you MUST remain in full compliance (that means timely filing returns and paying taxes, including estimated tax if you are required to do so) for five (5) years. It is like being on probation. If you miss just one (1) requirement, the IRS can revoke the OIC and reinstate the original liability less payments made pursuant to the offer.
Here is a recent court case on this subject:
IRS’s administrative determination to terminate taxpayer’s OIC, reinstate full amount due less payments made, and proceed with lien filing for same was upheld: although taxpayer had paid compromised amount, his failure to timely pay 1 of ensuing years’ liabilities (“late year”) violated OIC’s plain terms and as such allowed IRS to terminate same and proceed with full collection. Also, although taxpayer had eventually fully paid that late year’s tax, and did so before IRS issued lien notice, IRS’s actions were still justified since taxpayer had paid late in material breach of OIC; and there was no “excuse of condition.” And, fact that IRS failed to consider taxpayer’s intervening request to pay that late year via installments didn’t change result since, although IRS could have entertained installment proposal, it had no obligation to do so in face of taxpayer’s OIC default. (Will K. Ng v. Commissioner, (2007) TC Memo 2007-8
According to the IRS, the amount of an offer in compromise based upon doubt as to collectibility must be equal to the net realizable value of your assets plus the amount of money the IRS could take from your future income. For this example, I will assume there is no way you can pay off your large liability by monthly payment for the length of the collection statute. So, you meet the basic qualification of an OIC. How much do you have to offer in that circumstance?
By illustration, if the net realizable value of your assets (a car, for example) are worth $7,200 (their fair market value TIMES 80%, less what you owe), plus cash and investments at their face value, and the IRS determines that you can pay by way of monthly installments over 12 months (the # of months used in the formula when making a “cash offer” as opposed to an “installment offer”) future income totaling $6000, your minimum offer must be equal to or more than $13,200.
Net Realizable value of your assets. The net realizable value of your assets is the amount the IRS would likely collect if they levied (seized) your assets and sold them today — after paying off any debts associated with the property, such as a mortgage or other secured loan balance. To figure out the value of your assets without actually selling your property, you’re entitled to use the quick sale value, or QSV, generally considered 20% less than the fair market value.
Future income. Your future income is first determined by subtracting your necessary living expenses (NOTE: there are National Standards that specify the maximum amounts that are allowable for the computation of housing and utilities expenses, living expenses, transportation expenses and out-of-pocket medical expenses) from your total monthly income. In specific (and limited) circumstances, the Internal Revenue Manual allows the Service employee to deviate from the standards). This resulting amount (future income) represents the least amount you would be required to pay if you were granted an installment agreement to make monthly payments on your tax bill.
Other expenses. I am often asked about the impact of pre-existing State tax installment agreements. Previously, the IRS has never allowed state installment agreement amounts – or even credit card payments. Now, they have relaxed their position by allowed state tax installment agreements entered into before the IRS OIC application) and minimum credit card payments.
After you determine this monthly payment amount, you then multiply it by a number that is related to the type of payment plan you chose:
Cash Offer — The multiplier is 12 if you propose to pay the amount of your Offer in one cash payment within 90 days of being notified that your offer in compromise has been accepted (this is the IRS’s preferred method of offer payment)
Short-Term Deferred Offer — The multiplier is 24 if you propose to pay the amount of your Offer over two years (the IRS’s second choice), or
If the IRS accepts your offer in compromise and you will make payments over two years, the IRS may record a Notice of Federal Tax Lien showing your tax debt, if it hasn’t already done so. The lien will stay on your records until the offer is fully paid or the statute of limitations for collection has expired, whichever occurs first.
Let me illustrate some important aspects of submitting an offer in compromise:
You need to understand your financial situation
This is critical because to the extent that you have assets in excess of liabilities, the IRS is not likely to accept an offer in compromise that is less than the net realizable value of your assets plus future income. However, how you present your “numbers” can make a big difference.
To illustrate, assume you believe that you have a net equity of $75,000 in your home. If you record that amount on your financial statement, you can expect the IRS to argue that your offer amount must be at least $75,000 (this assumes you have no other assets or liabilities). A skilled representative may be able, through persuasive argument and evidence, to convince the IRS to reduce that equity value by other factors, thereby reducing the offer amount accordingly.
You need a representative with skill and experience in offer preparation
You need advice on how to value your assets and liabilities. As mentioned above, knowing how to calculate and present your net equity in your home – as well as your other assets – can have significant financial consequences.
Your representative must advise you how to calculate your current and future income and expenses, as well as how to properly apply the National Standards.
Your representative can best determine the least amount of an offer that the IRS will likely accept.
Your representative will be able to guide you, based upon your personal situation, in determining if an Offer based upon Effective Tax Administration would have a better chance of success than one based upon Doubt as to Collectibility.
Your representative must be effective in negotiating acceptance of your offer in compromise:
Understanding the tax law and IRS internal procedures, including the Internal Revenue Manual
Knowing how to effectively argue the facts in your case and the law
Having credibility with the IRS is very important:
Having earned the respect of IRS employees
Anticipating how the IRS employees will evaluate your financial situation
Understanding the numerous IRS procedures and policies
Knowing the limits of IRS discretion in Collection and Appeals
Will not be intimidated by an aggressive IRS Offer Specialist, or by an Appeals Officer or Settlement Officer
Your representative must know when the time is right to request a hearing in the Appeal’s Division
Understanding the importance of timing and basis for an appeal
Knowing the Appeals’ procedures
Presenting your case persuasively before the Settlement Officer or Appeals Officer
Being familiar with the discretion that an Appeals Officer/ Settlement Officer has, as well as their Team Manager
For most taxpayers, dealing with the IRS can be an intimidating experience. The IRS employee may take advantage of – or become frustrated with – a taxpayer who represents himself, or of their representative if that person lacks experience.
With my extensive and respected IRS background, I know the rules they must play by. I will ensure that each of my clients get full and appropriate consideration of their offer in compromise.
Hiring any qualified representative to help you develop and process an OIC can be expensive. Why? Because offer in compromise preparation and processing is a very tedious and time consuming process. It takes time to accurately complete the application and financial statements. Further, your representative likely will be required to attend several meetings with IRS employees before it is over. Because of the IRS workload, most offer in compromise applications take over a year to complete their processing. If the offer is rejected by an Offer Specialist, then further time will be required for the appeal.
It is important to understand that retaining an advocate solely on a basis of their lower price could end up costing you thousands of dollars in the end because they were unable to get your offer accepted, or accepted for the lowest possible amount. If your offer in compromise is rejected, you may end up in worse financial shape than before because you are out the money you spent for the OIC process.
Remember the discussion above on how to present the equity in your home? The point I was making is that the competency of your advocate is the key to successful negotiation of an Offer for the least amount required for acceptance.
For your information, there are certain assets that you do NOT have to count in evaluating your financial situation. Here are the rules relating to property exempt from inclusion in an offer in compromise (for preparation of Form 433A). Section 6344 of the Internal Revenue Code lists “Property Exempt from Levy.” This same property is exempt from valuation in an Offer-in-Compromise:
1. Wearing apparel and school books “necessary” for the taxpayer or for members of his family (section 6344(a)(1)). Luxury items such as furs are not necessary and are, therefore, not exempt. Section 301.6334-1 of the regulations.
2. Fuel, provisions, furniture, and personal effects in the taxpayer’s household and of the arms for personal use, livestock, and poultry of the taxpayer, as does not exceed $6,250 in value (section 6334(a)(2)).
3. Books and tools necessary for the trade, business, or profession of the taxpayer as do not exceed in the aggregate $3,125 (section 6334(a)(3).
4. Unemployment compensation (section 6334(a)(4)).
5. Undelivered mail (section 6334(a)(5)).
6. Railroad Retirement Act annuity and pension payments (section 6334(a)(6).
7. Workmen’s compensation (section 6334(a)(7)).
8. Judgments for support of minor children (section 6334(a)(8)).
9. Exempt income (section 6334(a)(9)). Exempt income, as defined in section 6334(d) pertains, in general, to the sum of the standard deduction plus the personal exemptions allowed, divided by the monthly pay period. For details of the computation, see section 301.6334-3 of the regulations.
Finally, an offer in compromise rejected by the Appeals Office can be appealed to the United States Tax Court. However, unless it can be shown that the Appeals Officer or Settlement Officer abused his or her discretion in rejecting the offer, it is unlikely that the decision of Appeals will be overturned. To illustrate this, following is a synopsis of a 2003 Tax Court review of an IRS administrative determination.
The IRS’s administrative determination to proceed with collection of pro se [he represented himself] taxpayer’s unpaid tax liabilities was upheld. The Appeals Officer did not abuse her discretion by rejecting taxpayer’s original offer in compromise where she adopted revenue officer’s conclusion that, based upon financial information provided by taxpayer, the amount the taxpayer offered was insufficient in comparison to amount that he could really afford to pay in compromise.
Further, the proposed levy was necessary to induce payment and wasn’t unreasonable based upon taxpayer’s long history of tax delinquency. Also, no evidence suggested that rejection of taxpayer’s amended offer was abuse of discretion.
(Randall G. Van Vlaenderen v. Commissioner, (2003) TC Memo 2003-346, 2003
Appealing the Decision of Appeals to the Court
A decision by Appeals that is adverse to the taxpayer may be appealed to the Court under the guise that the IRS is guilty of “abuse of discretion.” This is a very difficult case to win. Here is an excerpt from such a case to give you an idea of what the Court considers in these kinds of trials:
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UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT,
Appeal from the United States District Court for the Western District of Texas (3:03-CV-478-FM)
Before WIENER, BENAVIDES, and STEWART, Circuit Judges.
Judge: PER CURIAM: *
Plaintiff-Appellant Alicia Siquieros (“Taxpayer”) appeals the district court’s denial of her motion for summary judgment and grant of the motion for summary judgment of the Defendant-Appellee United States of America (“the government”), dismissing Taxpayer’s lawsuit seeking judicial review of the Notice of Determination issued by the Internal Revenue Service (“I.R.S.”). We affirm.
The gravamen of Taxpayer’s complaint is that the I.R.S. abused its discretion in refusing to accept her $100 offer to compromise her federal tax liability arising from the Trust Fund Recovery Penalty assessed by the I.R.S. against Taxpayer as a “responsible party” for employment taxes withheld from employees of E.C. Trucking, Inc. but not paid over to the government by that corporation (which sought protection in bankruptcy and is no longer in business). Taxpayer is deemed a responsible party by virtue of her position of employment with E.C. Trucking, Inc. at the times in question.
Like the district court, we are bound to apply the highly deferential abuse of discretion standard to the decisions of the I.R.S. complained of by the Taxpayer. In so doing, we have carefully considered the record on appeal (which demonstrates, as confirmed by the parties’ cross-motions for summary judgment, that there are no genuinely disputed issues of material fact) and the issues of law presented and argued in the appellate briefs of the parties, observing the extensive exhaustion of administrative remedies by Taxpayer, through the appellate process, including the offers and counteroffers of settlement by the parties.
It is immaterial whether we or the district court might have exercised our discretion differently and either accepted one of the settlement proposals from Taxpayer or extended counteroffers that Taxpayer might have deemed more lenient. Our review is limited to determining whether, under all the circumstances of the case—including factors favorable to Taxpayer’s position, such as age, health, financial condition, and lack of factual culpability—the I.R.S. abused its discretion in rejecting the compromise offers of Taxpayer or in making its own counteroffers. Our thorough review of the facts and applicable law under this highly deferential standard of review convinces us that, as a matter of law, the I.R.S. cannot be held to have abused its discretion. Consequently, we affirm the district court’s grant of summary judgment dismissing Taxpayer’s action.
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Do I qualify for an OIC?
After reading the above, if you feel that filing an OIC may be the best solution for you, I need to determine if you meet the basic qualifications. Here is a link to the form to complete and submit. Please be sure to answer all questions – and double check the accuracy of your E-mail address to ensure that I can respond back to you.
Does the IRS have to give you an OIC even if your offer is GREATER than what the agency computes is the maximum they can collect? The answer is NO!
You could spend a lot of money on an OIC and still not be granted one. The IRS must make a decision concerning whether or not it is in the best interest of the Government to write-off a portion of your liability in exchange for a payment now (or on payment terms). The IRS will take into consideration your earning potential, time remaining on the statute of limitation, your compliance history, medical history and other factors. Read the following excerpt:
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Code Section 6330—Collection due process—review of administrative determination—offer-in-compromise.
IRS’s administrative collection determination to reject taxpayer’s OIC and place part of her unpaid liabilities in “currently not collectible” status was upheld: although taxpayer’s offer actually exceeded by 10-fold amount IRS had estimated as her collection potential, IRS’s determination to reject same was in accord with Internal Revenue Manual’s best interests of govt. provision and reflected no abuse of discretion.
Factors playing into IRS’s determination included that taxpayer had history of non-compliance; that her circumstances might change in near future, before collection periods expired; and that she had several more years of earning capacity through public relations firm that was run from her home and had relatively low overhead.
Taxpayer’s argument that IRS was required to accept offer just because of amounts involved and fact that her full debt was non-collectible was misguided. (Leslie B. Bennett v. Commissioner, (2008) TC Memo 2008-251)
Here is a 2011 Tax Court case synopsis that addressed an OIC proposal in a Collection Due Process Hearing. It addresses the issue of “dissipated assets” – a scenario where a taxpayer sells or disposes of assets within the proximity of the filing of an Offer In Compromise – and the proceeds/funds are NOT used to pay basic living expenses:
Code Section 6330—Collection due process—review of administrative determination—offer-in-compromise—reasonable collection potential—computations—dissipated assets—hearings.
And while his proposal to pay reduced amount was another offer or collection alternative to be considered at hearing, IRS’s rejection of same was ultimately appropriate because taxpayer was proposing to pay nothing more than proceeds from single asset sale that totalled less than his RCP, as computed by including dissipated assets/liquidated investments.
Argument that liquidated investments shouldn’t be counted because taxpayer was using them to pay his salary and thereby necessary living expenses failed for lack of proof that he actually used funds for such purposes. Moreover, findings that he had additional funds in bank accounts and future disposable income also showed his offer to be unacceptable/below RCP. And fact that his firm went defunct didn’t change result when considering he was still “very employable.”
Also, arguments that settlement officer repeatedly reneged on agreements to accept earlier offers or that protracted 4-year long CDP hearing was unduly intrusive were meritless, particularly when considering that officer had no authority to bind IRS regarding stated offers and that hearing’s protraction was largely of taxpayer’s own making.
(Stephen J. Johnson v. Commissioner, 136 TC No. 23 )
State of California Tax Agencies OIC Update
Continuing their efforts to make more services accessible and convenient for more taxpayers, California’s three tax agencies have simplified the Offer In Compromise application process. A single application for all three tax agencies is now available!
The Board of Equalization (BOE), Employment Development Department (EDD) and Franchise Tax Board (FTB) have developed a single form, the DE 999CA, Multi-Agency Form for Offer in Compromise that individuals can use for any of the state’s tax agencies.
The individual agencies must still negotiate each offer in compromise separately for their respective taxes. For example, only the FTB can negotiate a state income tax liability where the Board of Equalization can only negotiate a sales or use tax liability.
The form is available online at the California Tax Service Center (www.taxes.ca.gov), as well as at each of the three tax departments’ Websites (BOE www.boe.ca.gov, EDD www.edd.ca.gov, FTB www.ftb.ca.gov).
Update: State Board of Equalization
SBE, effective 3/1/2011, revised its OIC procedures as follows:
The State Board of Equalization (SBE) has reissued its guidance on offers in compromise (OIC). The SBE’s OIC program provides a payment alternative for individuals and businesses who cannot pay their tax or fee liability in full. Offers in compromise are considered for liabilities of a transferred or discontinued business, or a taxpayer that no longer is in control or associated with the transferred or discontinued business (or a similar type of business). Effective January 1, 2009 through January 1, 2013, the SBE will also consider an OIC for open and active businesses that have not received reimbursement for taxes, fees, and surcharges; successors of businesses that may have inherited tax liabilities from their predecessors; and consumers, who are not required to hold a seller’s permit, but incurred a use tax liability. ( California SBE Information Publication 56, 03/01/2011 .)
NOTES ON THE IRS COLLECTION FINANCIAL STATEMENT (FORM 433-A)
A key document used in the OIC evaluation (as well as for installment agreements) in the Form 433-A(OIC). This multi-page form asks all sort of questions that are designed to give the IRS a basis for determining the taxpayer’s net worth and future income potential. Often, there are disagreements over what expenses the taxpayer should be allowed to offset their gross income. There are standards (national, regional and local) used for housing, living, out-of-pocket medical and transportation expenses. But, how about for other expenses (such as life insurance, taxes, medical costs, delinquent state and local taxes, etc.)?
The Internal Revenue Manual (IRM for short) provides guidance to Revenue Officers on what to allow and in what amount. In my experience, the Service employees are not aware of this section, have forgotten about it, or are simply ignoring it. Having a representative who understands the rules and who can be persuasive in encouraging a Service employee to follow them is important in the success of getting the least amount of offer (or installment payment) agreement.
To illustrate, below is a reprint from the IRM dealing with allowances for other expenses.
Other expenses may be Necessary or Conditional. Other Necessary expenses meet the necessary expense test and normally are allowed. The amount allowed must be reasonable considering the taxpayer’s individual facts and circumstances. Other Conditional Expenses may not meet the necessary expense test, but may be allowable based on the circumstances of an individual case.
There may be circumstances where expenses may be allowed even if they do not meet the necessary expense test. If the IRS tax liability including accruals can be paid within six years and within the CSED, all expenses may be allowed if they are reasonable. If the taxpayer cannot pay within six years, it may be appropriate to allow the taxpayer up to one year in order to modify or eliminate one or more expenses. See IRM 220.127.116.11, Analyzing Financial Information.
If other conditional expenses are determined to be necessary and, therefore allowable, document the reasons for the decision in your history.
Expense is Necessary:
Accounting and legal fees
The fees are for representation before the Service (i.e., to resolve current balances due, delinquent returns, examinations, etc.), or
The fees meet the necessary expense test.
The amount should not be excessive and must be reasonable given the complexity of the case.
Fees related to business operations (i.e., reported on Schedule C) should not be claimed as personal expenses.
Fees may vary; an accountant will charge less for a wage earner with all returns filed that just needs a CIS completed, than he/she would charge for a self-employed individual that needs several returns prepared along with a CIS. Fees vary across the country so allowable amounts may also differ depending on where the taxpayer lives.
Charitable contributions (Donations to tax exempt organizations)
If it is a condition of employment or meets the necessary expense test. Example: A minister is required to tithe according to his employment contract.
Disallow any other charitable contributions that are not considered necessary. Example: Review the employment contract.
Child Care (Baby-sitting, day care, nursery and preschool)
If it meets the necessary expense test. Only reasonable amounts are allowed.
Cost of child care can vary greatly. Do not allow unusually large child care expense if more reasonable alternatives are available. Consider the age of the child and if both parents work.
Court-Ordered Payments(Alimony, child support, including orders made by the state, and other court ordered payments)
If alimony and child support payments are court ordered, reasonable in amount, and being paid, they are allowable. If payments are not being made, do not allow the expense unless the non-payment was due to temporary job loss or illness. Restitution payments made to other victims pursuant to a court order are allowable expenses.
Review the court order. Payments that are included in a state court order are not necessarily allowable (such as a child’s college tuition that would not otherwise be allowable as a necessary expense.) See Exhibit 5.15.1-1, Question 15.
Dependent Care (For the care of the elderly, invalid, or handicapped.)
If there is no alternative to the taxpayer paying the expense.
If it is required for a physically or mentally challenged child and no public education providing similar services is available. Education expenses are also allowed for the taxpayer if required as a condition of employment.
Example: An attorney must take a certain amount of education credits each year or they will not be accredited and could eventually lose their license to practice before the State Bar. A teacher could lose their position or in some states their pay is commensurate with their education credits.
If it is a requirement of the job; e.g., union dues, uniforms, work shoes.
To determine monthly expenses, the total out of pocket expenses would be divided by 12.
If it is a term policy on the life of the taxpayer only.
If there are whole life policies, these should be reviewed as an asset for borrowing against or liquidating. Life insurance used as an investment is not a necessary expense.
Secured or legally perfected debts
If it meets the necessary expense test.
Taxpayer must substantiate that the payments are being made.
Credit Card Debts
Credit cards are generally considered a method of payment, rather than a specific expense. A taxpayer may be paying for necessary living expenses using cash or a credit card, e.g. food, clothing, gas, etc. Consequently, payments for the portion of the credit card debt reflecting necessary living expenses are provided for as allowable expenses under the national and local standards.
It is important that taxpayers be informed of the above, and be advised that the IRS National Standards for Food, Clothing and Other Items provides an amount for miscellaneous expenses that can be applied to credit card debt.
Generally, minimum payments on credit cards are allowed under the six-year rule.
If a taxpayer is paying for necessary expenses that exceed the standards, and those expenses are justified, a deviation under the expense item on Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, should be allowed.
If a credit card payment is only partially allowed or not allowed at all, the taxpayer should be advised that the IRS allows an amount monthly for miscellaneous expenses that can be used to make credit card payments. See Exhibit 5.15.1-1, Questions 19-21.
Other Unsecured Debts
If the taxpayer substantiates and justifies the expense, the minimum payment may be allowed. The necessary expense test of health and welfare and/or production of income must be met. Except for payments required for the production of income, payments on unsecured debts will not be allowed if the tax liability, including projected accruals, can be paid in full within 90 days.
Examples of unsecured debts which may be necessary expenses include: payments required for the production of income such as payments to suppliers and payments on lines of credit needed for business, and payment of debts incurred in order to pay a federal tax liability.
Current Year Taxes
If it is for current federal, FICA, Medicare, state and local taxes.
Current taxes are allowed regardless of whether the taxpayer made them in the past or not.
Delinquent State and Local Taxes
Payments for delinquent state and local (county or municipal) tax liabilities may be allowed in certain circumstances:
- When a taxpayer does not have the ability to full pay the tax liability.
- When a taxpayer provides complete financial information.
- When a taxpayer provides verification of the state or local tax liability, and agreement if applicable
See IRM 18.104.22.168(4) and Exhibit 5.15.1-1, Question 18 for additional guidance.
Optional Telephones and Telephone Services (pre-paid long distance telephone cards/minutes or pre-paid cellular cards/minutes)
If it meets the necessary expense test.
If it is guaranteed by the federal government and only for the taxpayer’s post-high school education.
Taxpayers must substantiate that the payments are being made.
Taxpayers who have student loan debt, but are unable to make payments on the debt because they are suffering an economic hardship or have medical problems, should be advised to request a deferment or forbearance of the student loan payments.
The Installment Agreement (IA) amount will be established without allowing for a student loan payment.
Taxpayers must be advised that if they later make arrangements to pay the student loan, they can request the installment agreement be revised.
Taxpayers with student loan debt, who have not yet made arrangements to repay the loan, should be allowed 10 days to set up a payment plan for the student loan and provide verification so the loan payment can be allowed.
Additional time may be allowed if a taxpayer has extenuating circumstances.
Taxpayers must be advised that if they do not respond by the due date, the IA amount will be established without allowing for a student loan payment.
Taxpayers must also be advised that if they later make arrangements to pay the student loan, they can request the installment agreement be revised.
Repayment of loans made for payment of Federal Taxes
If the IRS has received the proceeds of the loan and the taxpayer can document the loan, the payment amount should be allowed.
Delinquent State and Local Taxes. Payments for delinquent state and local (county or municipal) tax liabilities may be allowed in certain circumstances:
When a taxpayer owes both delinquent Federal taxes and delinquent state or local taxes, and does not have the ability to full pay.
When a taxpayer is cooperative and provides complete financial information.
When a taxpayer advises the IRS that he/she owes delinquent state or local taxes and provides verification of the state or local tax liability, and agreement, if applicable.
Follow the procedures in this table to determine the allowable payment for delinquent state or local tax debts.
the taxpayer does not have an existing agreement for payment of the delinquent state or local tax debts,
provides a complete Collection Information Statement (CIS) and verification of state or local tax debts,
follow procedures in IRM 22.214.171.124(4)(b) to determine the calculated percentage amount that will be listed as the allowable monthly payment for delinquent state or local taxes on the CIS.
the taxpayer has an existing agreement for delinquent state or local tax debts, and that agreement was established after the earliest IRS date of assessment,
the payment amount on the state or local agreement is less than the calculated percentage amount,
the monthly amount due on the existing state or local agreement will be listed as the allowable delinquent state or local tax payment on the CIS. The payment to IRS will be increased by the amount allowed for the monthly state or local payment one month after the date the state or local liability is scheduled to be fully paid.
the taxpayer has an existing agreement for delinquent state or local tax debts, which was established after the earliest IRS date of assessment,
the payment amount on the agreement, is more than the calculated percentage amount,
the amount listed as the delinquent state or local tax payment on the CIS will be the calculated percentage amount. Advise the taxpayer that he/she can use the amount IRS allows for Miscellaneous expenses under National Standards to pay the additional amount due for the delinquent state or local tax payment. The payment to IRS will be increased by the amount allowed for the monthly state or local payment one month after the date the state or local liability is scheduled to be fully paid.
the taxpayer has an existing agreement for delinquent state or local tax debts, which was established prior to the earliest IRS date of assessment,
allowing the amount on the existing state or local agreement will not result in the case being reported uncollectible,
allow the existing state or local tax payment and increase the IRS payment one month after the date the state or local liability is scheduled to be fully paid. See IRM 126.96.36.199(4)(c) and (d) if allowing the state payment will result in the account being reported Currently Not Collectible (CNC) due to hardship.
Follow these procedures to calculate an allowable payment amount for delinquent state or local tax debts.
1) Determine net disposable income on Form 433-A, Collection Information Statement for Wage Earners or Self-Employed Individuals, or Form 433-F, Collection Information Statement. Do not include any amount that is being paid for outstanding state or local tax liabilities in the calculation. Net disposable income is the difference between gross income and allowable living expenses.
If the taxpayer’s net disposable income is less than $25, the account should be reported Currently Not Collectible due to hardship.
2) Calculate the dollar amounts for the IRS and state or local payments based on the total liability owed to each agency (including penalties and interest to date).
3) Use the net disposable income and a percentage of IRS and state or local liabilities to total liability to calculate the payment amounts.
IRS Tax Liability
State or Local Tax Liability
10,000.00/15,000.00 = .67
State or Local percentage
5,000.00/15,000.00 = .33
Taxpayer’s net disposable income (see Note below)
IRS Payment (400 x .67)
State or Local Payment (400 x .33)
If the Net disposable income is less than $25, the account should be reported CNC – hardship.
IRS Tax Liability
State or Local Tax Liability
1,000.00/1,500.00 = .67
State or Local percentage
500.00/1,500.00 = .33
Taxpayer’s net disposable income
IRS Payment (35 x .67)
$23.45 (Actual IRS IA payment = $25.00)
State or Local Payment (35 x .33)
$11.55 (Actual State or Local IA payment = $10.00)
If allowing even a minimal monthly payment for delinquent state or local taxes will result in an IRS monthly payment amount of less than $25 and the account being reported Currently Not Collectible due to hardship:
the taxpayer does not have an existing agreement for the delinquent state or local tax debts,
a payment for delinquent state or local taxes will not be allowed. Advise the taxpayer that he/she can use the amount the IRS allows for Miscellaneous expenses under National Standards to pay the delinquent state or local tax payment.
the taxpayer has an existing agreement for the delinquent state or local tax debts, which was established after the earliest IRS date of assessment,
a payment for delinquent state or local taxes will not be allowed. Advise the taxpayer that he/she can use the amount the IRS allows for Miscellaneous expenses under National Standards to pay the delinquent state or local tax payment.
the taxpayer has an existing agreement for delinquent state or local tax debts, which was established prior to the earliest IRS date of assessment,
the amount allowed for state or local taxes on the CIS should be reduced to allow for an IRS Installment Agreement payment of $25.00. Advise the taxpayer that he/she can use the amount the IRS allows for Miscellaneous expenses under National Standards to pay the additional amount due for the delinquent state or local tax payment. The payment to the IRS will be increased by the amount allowed for the monthly state or local payment one month after the date that the state or local liability is scheduled to be full paid.
The taxpayer’s net disposable income (not including the state or local payment) is $70. The state or local payment due on an existing agreement that was established prior to the earliest IRS date of assessment is $100. The amount allowed for delinquent state or local taxes on the CIS is $45. The payment for the IRS IA is $25. Advise the taxpayer that he or she can use the Miscellaneous allowance to pay the difference between what the IRS has allowed ($45) and what is owed monthly for the state or local payment agreement ($100), which is $55 ($100 – $45 = $55). One month after the date the state or local agreement will be fully paid at $45 monthly, increase the IRS’ IA amount to $70 monthly ($25 + $45).
Document all calculations in the case history.
Allowing payments for delinquent state or local taxes when establishing an Installment Agreement has no effect on lien or levy priorities. This guidance only impacts determinations of ability to pay. Employees should use existing procedures and lien law to determine the IRS interest in assets. If a taxpayer refuses to establish an Installment Agreement or defaults on an Installment Agreement, IRS employees should follow existing procedures and lien law to determine the appropriate course of action, including pursuing collection.
Minimal payments for delinquent state or local taxes are allowed for Installment Agreements using the six-year rule. If the six-year rule applies, taxpayers are required to provide financial information, but do not have to provide substantiation of reasonable expenses. If the taxpayer meets all other requirements for the six-year rule, the amount claimed for state or local taxes may be allowed. Employees would not be required to obtain verification of the state payment or calculate an amount due based on the percentage basis discussed above.
If a state already has a Federal/State Memorandum of Understanding (MOU) for establishing joint Federal and State agreements, follow the MOU guidelines.
Offers – State of California