Many Los Angeles, Long Beach, Orange, Riverside, San Jose area business owners and taxpayers who have IRS tax problems may not have been aware of the tax settlement program called offer in compromise. Tax attorneys who handle these type of cases should prepare a comprehensive tax and financial analysis in order to prepare the most favorable tax settlement proposal which would result in minimum tax debt being paid to the IRS.
Although the IRS discourages and may create obstacles to have your IRS taxes reduced, a good tax attorney will often be able to prepare legal arguments that would contest and challenges put forth by the IRS concerning the tax settlement proposal.
An IRS Offer in Compromise allows taxpayers to settle their tax liabilities for less than the full amount. The objective of the IRS Offer in Compromise program is to accept a compromise when it is in the best interests of both the taxpayer and the government and promotes voluntary compliance with all future payment and filing requirements.
Major Changes to the IRS Offer in Compromise Program
The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), created major changes to the IRS IRS Offer in Compromise program as it relates to lump sum offers, periodic payment offers, and a determination as to when an offer is accepted. These changes affect all offers received by the IRS on or after July 16, 2006.
TIPRA, section 509, amends Internal Revenue Code section 7122 by adding a new subsection (c) “Rules for Submission of Offers in Compromise” which establishes the following:
A taxpayer filing a lump sum offer must pay 20 percent of the offer amount with the application (IRC 7122(c)(1)(A)). A lump sum offer means any offer of payments made in five or fewer installments.
A taxpayer filing a periodic payment offer must pay the first proposed installment payment with the application and pay additional installments while the IRS is evaluating the offer (IRC section 7122(c)(1)(B)). A periodic payment offer means any offer of payments made in six or more installments.
TIPRA Payments are Non-refundable The IRS considers the 20 percent payment for a lump sum offer, and the installment payment on a periodic payment offer, as “payments on tax” and are not refundable regardless of whether the offer is declared not processable or is later returned, withdrawn, rejected or terminated by the IRS.
Taxpayers May Designate TIPRA Payments Taxpayers may designate the application of the required TIPRA payments. The designation must be made in writing when the offer is submitted and must clearly specify how the partial payments are to be applied to a particular tax period(s) and to specific liabilities (e.g. income taxes, employment taxes, trust fund portions of employment, excise tax, etc.) Taxpayers may not designate how the $150 application fee is applied. The application fee reduces the assessed tax or other amounts due.
TIPRA and Application Fee Payment Exceptions A taxpayer who qualifies for a low-income exception waiver or is filing a doubt as to liability offer is not required to pay the application fee, the 20 percent payment on a lump sum offer, or the initial payments required on a short term or deferred periodic payment offer. To determine low-income eligibility, refer to the section titled Application Fee Required for IRS Offer in Compromise.
Is Your Offer In Compromise “Processable”?
As a result of TIPRA, beginning July 17, 2006 in order to be considered for an IRS Offer in Compromise, a taxpayer must have met all of the following requirements:
The taxpayer is not a debtor in an open bankruptcy proceeding.
The $150 application fee, or a signed Form 656-A, “Income Certification for Offer in Compromise Application Fee and Payment” must be submitted.
The 20 percent payment with the lump sum offer, or a signed Form 656-A, “Income Certification for Offer in Compromise Application Fee and Payment” must be submitted.
The first installment payment on a periodic payment offer, or a signed Form 656-A, “Income Certification for Offer in Compromise Application Fee and Payment” must be submitted.
An offer that is received with a payment that is less than 20 percent payment on a lump sum offer will be deemed processable but the taxpayer will be asked to pay the remaining balance in order to avoid having the offer returned. Failure to submit the remaining balance will cause the IRS to return the offer and retain the $150 application fee.
Taxpayers filing a periodic payment offer (e.g. short term periodic, or deferred periodic offer) are required to submit the full amount of their first installment payment in order to meet the processability criteria. If the full amount of the first installment payment is not provided, the IRS will deem the offer not processable and will return the $150 application fee to the taxpayer.
If during the IRS Offer in Compromise investigation the initial offer amount is determined to be insufficient and not reflective of the taxpayer’s ability to pay, the taxpayer will in most instances, be contacted and asked to increase the offer and submit the corresponding 20 percent payment if the offer was filed as a lump sum cash offer, or the periodic payment if the offer is a short term or deferred payment offer. The IRS may reject the offer if a taxpayer fails to increase the offer and provide the additional payment(s). The IRS will credit the taxpayer’s account(s) with any payment(s) submitted with the original offer.
The IRS will deem an IRS Offer in Compromise “accepted” that is not withdrawn, returned, or rejected within 24 months after IRS receipt. If a liability included in the offer amounts is disputed in any judicial proceeding that time period is omitted from calculating the 24-month timeframe.
Application Fee Required for IRS Offer in Compromise – All taxpayers who submit a Form 656, “Offer in Compromise” must pay a $150 application fee except in two instances:
. The IRS Offer in Compromise is submitted based solely on “doubt as to liability;” or . The taxpayer’s total monthly income falls at or below 250% of the Department of Health and Human Services (DHSS) poverty income levels.
The $150 application fee and the TIPRA payments must be paid using a check or money order made payable to the United States Treasury. Cash payments are not accepted. A taxpayer should submit two payments: one for the application fee and the other for the TIPRA payment.
Individuals Must File All Federal Tax Returns and Pay Required Estimated Tax Payments
The IRS expects a taxpayer requesting an IRS Offer in Compromise to file all delinquent tax returns and pay any required estimated tax payment. IRS will notify taxpayers and provide 30 days to file delinquent returns or make the required estimated tax payments. Failure to comply will cause the IRS to return the offer back to the taxpayer. The $150 application fee along with all TIPRA payments previously paid will be retained by the IRS and applied to the taxpayer’s liability.
Businesses Must File All Federal Tax Returns and Timely Pay all Required Federal Tax Deposits
The IRS is cautious to avoid providing financial advantages to operating businesses through the forgiveness of tax debt. This may create the appearance that the delinquent business has been able to profit from its failure to pay, giving it an advantage over other, fully compliant businesses.
Businesses that have employees are expected to have paid all required federal tax deposits for the current quarter in order for their offer to be evaluated. If the IRS determines that the required deposits have not been paid, the taxpayer will be provided with a reasonable amount of time to pay the deposits before the IRS proceeds with the investigation. In addition, the business will be expected to remain current on all filing and deposit requirements while the offer is being investigated.
Failure to either pay the deposits as requested, remain current with filing or pay all deposits that become due while the offer is under investigation will cause the IRS to return the offer back to the taxpayer. The $150 application fee along with all TIPRA payments previously paid will be retained by the IRS and applied to the taxpayer’s liability.
Statute of Limitations for Assessment and Collection is Suspended – The statute of limitations for assessment and collection of a tax debt is suspended while an IRS Offer in Compromise is “pending,” or being reviewed.
The IRS Offer in Compromise is pending starting with the date an authorized IRS employee determines the Form 656 Offer in Compromise is ready for processing. The IRS Offer in Compromise remains pending until the IRS accepts, rejects, returns or acknowledges withdrawal of the offer in writing. If a taxpayer requests an Appeals hearing for a rejected IRS Offer in Compromise, the IRS will continue to treat the IRS Offer in Compromise as pending.
Once the Appeals office issues a determination in writing to accept or reject the IRS Offer in Compromise then the pending status is removed.
Taxpayers Must File and Pay Taxes – In order to avoid defaulting an IRS Offer in Compromise once accepted by the IRS, taxpayers must remain in compliance in the filing and payment of all required taxes for a period of five years or until the offered amount is paid in full, whichever is longer. Failure to comply with these conditions will result in the default of the IRS Offer in Compromise and the reinstatement of the tax liability.
Federal Tax Liens are Not Released – If there is a Notice of Federal Tax Lien on record prior to filing Form 656, the lien is not released until the IRS Offer in Compromise terms are satisfied, or until the liability is paid, whichever comes first. A Notice of Federal Tax Lien may be filed during the course of an IRS Offer in Compromise investigation regardless of the type of offer being considered.
If you require a tax attorney to review your case, contact Los Angeles tax attorney.