Volume 11 Issue 2
An Offer You Can't Refuse -- New IRS Guidance
© by Tax & Business Professionals
What is an Offer in Compromise anyhow? In simplest terms, an Offer is a contract
between a Taxpayer and the IRS to compromise (reduce) a tax debt for an agreed-upon
sum of money. If the IRS accepts the Offer and the agreed amount is paid (and other
requirements satisfied), then the deal is done and the remaining amounts are forgiven.
Stated differently, the full amount of the tax liability previously due does not have to be
For a long time, the IRS has had very broad authority to compromise all tax matters, but
until fairly recently, it seldom did so, even for seemingly valid reasons. On March 29,
1999, the IRS issued revised instructions and a new Form 656 for submitting an Offer.
With the advent of these new policies, the IRS will consider factors other than near
death and bankruptcy (combined).
As with many benefits from the Government, there are costs. For example, for an Offer
to be considered, all current tax returns must be filed (and paid or made a part of the
Offer). Also, the Taxpayer must agree to file and pay all taxes due for at least the next
five years after the Offer is accepted, or the original debt will be reinstated.
Offers are based on two broad concepts Doubt as to Liability, OR Doubt as to
Doubt as to Liability (I don't owe the tax)
An Offer based on Doubt as to Liability must substantiate the reasons why the tax is not
owed. Such a situation can spring from any number of mistakes or procrastination on the
part of Taxpayers and their representatives (other than current readers, of course.)
Doubt as to Collectibility (I can't pay the tax)
When submitting an Offer based on Doubt as to Collectibility, the argument must
substantiate that the Taxpayer does not have enough income and assets to pay the tax
debt in the foreseeable future. For an Offer of this type to be accepted, the IRS requires
complete disclosure of the Taxpayer's (and spouse's) earnings and assets.
In addition to liquid assets, like bank accounts, a rough measure of what needs to be
offered with an Offer based on Doubt as to Collectibility is: (a) the quick sale value of
equity in illiquid assets like a house or motorcycle, plus (b) the value of available
monthly cash flow as determined by new formulas too lengthy to include in this
newsletter, but discussed on our Web site.
The quick sale value of equity in assets is now 80% of the net equity (Fair Market Value
minus perfected debts, like mortgages). This quick sale amount has to be offered even if
the Taxpayer is hopelessly insolvent. Previously, the percentage accepted by the IRS was
75% -- so much for the kinder IRS.
Available monthly cash flow is difficult to measure and explain since not all debts are
"allowed." Non-business credit card debt incurred for personal expenses, like viewing
X-rated Web sites, cannot be included. The IRS adopted a maddening system for
determining a standard for personal expenses and rent. In the new guidelines, however,
the use of these standards may be waived. A Taxpayer may not have to fit into the IRS
cookie cutter mold if the "scheduled allowances" are shown to be "inadequate."
Unlike before, there is now a Deferred Payment Offer Chart that factors in the time
remaining in the 10-year collection period. For example, assuming no assets, two years
remaining to collect the taxes, and available monthly cash flow of $200, the Taxpayer
would owe $2,400 (12 x $200). The longer the remaining collection period, the more
payments are required. Factoring in the expiration of the 10-year collection period is a
welcome change from the old IRS practice of insisting on waivers extending the 10-year
period for unreasonable lengths of time -- sometimes in excess of the Taxpayer's life
expectancy -- as a trade-off for not garnishing the Taxpayer's salary.
What if only one of two spouses is on the hook for withholding taxes, say, from a failed
business? In such a situation, things get messy because the IRS wants to know about the
non-liable spouse's assets, as well as their contribution to payment of family expenses.
Often, these inquiries by the IRS provoke some strong language, like "Gosh, Darn."
Family or friends offering their funds can make a big difference. Because funds from a
"Saint" are out of the reach of the IRS, agents are encouraged not to reject such offers
unless they are reasonably sure more will, in fact, be collected from the Taxpayer.
Many Offer applicants have been running from their problems for years. The counseling
that goes with Offers involves not only crunching numbers but getting the Taxpayer to
If you need help in preparing a difficult Offer, call us.
For a much more detailed discussion of the new IRS rules, Click here.
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