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Paying the IRS - Offers in Compromise
This letter is intended to answer in more detail your 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 judgment 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. 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:
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the National Standard expense;
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housing and utilities;
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transportation;
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health care;
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taxes;
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court ordered payments;
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child/dependent care;
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life insurance;
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secured or legally perfected debt;
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other miscellaneous expenses.
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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.
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