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Offers
in Compromise to settle your debt with the IRS
This
is intended to answer question regarding the use of the IRS's Offers
in Compromise program to settle your tax liability with the IRS
at a possible discount. There are some ground rules that clearly
must be part of any deal that will be made for you with the IRS.
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 on audit.
There, 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 collectibility. Offers in compromise as to doubt
of collectibility almost always take place at the collection stage,
after a liability has been reduced to judgement 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.
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's examination of whether an offer is acceptable.
Documentation required for the IRS's 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% of FMV). Determining fair market
value for many items turns into a matter of opinion in many situations
and it is often 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. Fair market value itself can reasonably vary
by 15 or 20% depending upon the type of property and market conditions,
which in turn can lower the figure set for quick sale value. Also,
they want to know if you have any credit left on your credit cards
that you could borrow against to pay them. If you have IRA's they
will want to the cash them in and pay them the after tax proceeds.
The IRS cannot use the hindsight of any actual sale after the offer
in compromise is in place to negate the agreement (absent a showing
of fraud). However, taxpayers who wish to renegotiate a compromise
offer may introduce evidence of a sale that brought in substantially
less than had been anticipated on the financial statement.
Agent's Worksheets. The IRS agent is instructed to use worksheets
in evaluating an Offer in Compromise. Made available to tax professionals
through the Freedom of Information Act, we know that this form requires
that the 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; transportation;
health care; taxes; court ordered payments; child/dependent care;
life insurance; secured or legally perfected debt; other miscellaneous
expenses.
Offer rejection? 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 bite at the apple comes
after the rejection letter is sent. Appeals rights are available
to the taxpayer when any reasonable offer is rejected. Collection
is prohibited during the appeal period.
So, the upshot of all this information is that you may stand "a
fighting chance" to strike a compromise with the IRS on your tax
liability through their "new and improved" offers in compromise
program. The IRS is still not "giving it away," however, though
with careful adherence to their new, less stringent guidelines,
compromise is certainly more likely now than ever before. Please
call if you have any specific questions concerning how these rules
apply to you.
C.
David Pitzer, CPA, PC
118
Two Mile Pike
Goodlettsville, TN 37072
(615) 851-2727
Fax: (615) 851-8711
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