The ultimate goal of an Offer in Compromise is a settlement, reduction and/or elimination of the tax liability that is in both the Government’s and the taxpayer’s best interest. The IRS will accept an offer-in-compromise to settle unpaid accounts for less than the amount owed when there is doubt that the liability can be collected in full and the amount you offer reasonably reflects collection potential. Our online accountants file a six to ten page legal memorandum in all OICs that we file with the IRS. The legal memorandum cites section 7122 of the IRS Code that authorizes the IRS to reduce any tax liability. In addition, the memorandum cites the regulations under the statute, the relevant portions of the Internal Revenue Manual, and the Congressional tax policy in OIC cases. It it important to emphasize, for example, the fact that the Congress told the IRS to have a liberal acceptance policy is processing OIC cases. Our legal memorandum also cites the Congressional tax policy to settle your tax liability to give taxpayers a fresh start. TOP
Why is a legal memorandum needed?
We want to make sure that the IRS clerk processing the OIC knows the law, its own Manual, the tax policy and the legislative history. We want the IRS to know that you have strong representation; thus, eliminating any potential abuse of power, abuse of discretion, and/or misapplication of the law and their administrative rules. The IRS takes extreme positions in OIC cases, and strong representation is critically necessary. The IRS will consider exceptions to their normal “reasonable collection potential” standards – those exceptions are “special circumstances” The legal memo is used to articulate and document those “special circumstances.” We know and understand those “special circumstances” from the experience we have in working thousands of OIC cases throughout the United States. Those “special circumstances” depend on the facts and circumstances in individual cases.
The IRS will also consider doubt as to liability and effective tax administration as the basis for abatement. The issue of “liability” is a complex legal issue (e.g., whether a person is a “responsible person” to pay the payroll taxes) requiring sophisticated and well reasoned issues of fact and law.
“Effective tax administration” (“ETA”) is based on “hardship” principles. IRS settlement/reduction/elimination of your tax liability under ETA principles are authorized by law even if you have the income or assets to fully pay your tax liability from your income or assets. Although there are some tax regulations on ETA considerations, our large volume of OIC cases has given us special insight into tax settlements based upon ETA. The IRS is loathe to approve settlements in ETA OIC cases, contrary to the intent of Congress. Extremely strong representation is necessary in these cases.
To submit an offer-in-compromise you must complete Form 656; complete instructions are provided on the form. Also, you must submit Form 433-A, Collection Information Statement for Individuals, or Form 433-B, Collection Information Statement for Businesses, if the basis of the offer is doubt that the liability can be collected in full. These forms provide a statement of your income, expenses, assets, and liabilities.
The IRS will not accept an offer unless it is clear that you have complied with all current filing requirements.
The IRS will not process an OIC for those working as employees unless all unfilled tax returns are filed, although it is not required that you make payment with the tax returns you file. This means that “employees” need to file all unfilled tax returns if you are considering eliminating your tax liability in an OIC. The IRS cannot settle a tax liability for which there is no tax assessment. Filed tax returns are important because they result in an IRS tax assessments. The OIC will function on your aggregate tax liability from the assessments they make against you once those tax returns are filed. For those 1099 persons who are self-employed, the IRS requires that you file quarterly tax returns. Self-employed persons will be considered in compliance (for purposes of filing an OIC) if they file their quarterly tax returns “timely” (e.g. not late in making payment) for the current quarter and the preceding two quarters.