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Tax Liens |
Tax Levy |
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If taxpayers are unable to pay a
tax debt in full , and an
installment agreement is not an option, then they may be
able to take advantage of the offer in compromise (OIC) program.
Generally, the OIC program should be viewed as a last resort,
after taxpayers have explored all other available payment
options. The IRS resolves less than one percent of all balance
due accounts through the OIC program.
What is an Offer in Compromise?
An offer in compromise is an agreement between a taxpayer and
the IRS that resolves the taxpayer's tax debt. The IRS has the
authority to settle, or "compromise," federal tax liabilities by
accepting less than full payment under certain circumstances. A
tax debt can be legally compromised for one of the following
reasons:
Doubt as to Liability - Doubt exists that the assessed tax is
correct.
Doubt as to Collectibility - Doubt exists that you could ever
pay the full amount of tax owed.
Effective Tax Administration - There is no doubt the tax is
correct, and no doubt that the amount owed could be collected,
but an exceptional circumstance exists that allows the IRS to
consider a taxpayer's OIC. To be eligible for a compromise on
this basis, the taxpayer must demonstrate that collection of the
tax would create an economic hardship or would be unfair and
inequitable.
Taxpayers should beware of promoters' claims that tax debts can
be settled for "pennies on the dollar" through the Offer in
Compromise Program. Check the OIC requirements to see if an
offer in compromise is right for you.
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Filing an Offer in Compromise
An OIC is submitted on Form 656, Offer in Compromise. The Form
656 is a complete information package, also containing Forms
433-A and 433-B, Collection Information Statements, as well as
instructions and a worksheet. Taxpayers should use the July 2004
version of Form 656.
The Form 656 was redesigned in 2004 in order to assist taxpayers
in the correct preparation of an OIC, as well as reduce the
burden associated with the process. The form was last revised in
May 2001. The 2004 revision is the culmination of a partnership
effort among the IRS, National Taxpayer Advocate, as well as a
number of tax professional organizations.
Tax practitioners and the general public should begin using the
2004 revision immediately.
The 2004 revision contains several tax burden reduction
features:
Processability section that allows taxpayers to determine
up-front if they are eligible to have their OIC considered
before investing any preparation time;
Handy table of contents;
Helpful step-by-step outline of the OIC process;
Expanded Terms and Definition section;
Form 656-A, Income Certification for OIC Application Fee, and
Worksheet, is now included in the Form 656 package. The
worksheet helps taxpayers determine whether they meet the income
exception to the $150 fee and lessens the chance that taxpayers
will forget to attach either the fee or the certification;
Designated space on the front page of Form 656 where a check or
money order for $150 should be attached if the income exception
is not met;
Item 8q which allows the IRS to amend the form to include
omitted assessed tax periods and thereby prevent delays in the
initial processing of the offer;
Item 13, paid preparer signature block that asks for the paid
preparer’s name, firm’s name, address, signature, Centralized
Authorization File, and Employer Identification Number;
Item 14, Third Party Designee section, which allows a person
other than the taxpayer to discuss any information that the IRS
needs to process the offer; and
Helpful summary checklist which reduces the change that the
application will be returned by the IRS for omissions.
The paid preparer signature block section (Form 656, Item 13)
was suggested by many tax professional organizations. They were
concerned with unscrupulous promoters who market the OIC program
as a “pennies on the dollar” approach to paying off a tax debt.
The signature block should provide an additional safeguard to
the public in regards to unscrupulous promoters.
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National
Standards - Allowances for
food, clothing and other items, known as the
National Standards,
apply nationwide except for Alaska and Hawaii, which have their
own tables. Taxpayers are allowed the total National Standards
amount for their family size and income level, without
questioning amounts actually spent.  |
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Abate Tax is not a Law Firm |
 Is
it the right time to file an OIC?
-Do you owe the IRS money?
-Do
you think it's an error or an abuse?
If
you answer YES to the questions above, then there is no better time
than NOW to file an Offer in Compromise.
Filing an OIC stops the IRS penalties from growing.
How to file an OIC?
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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.
Filing Unfilled Tax Returns Eliminates the Risk of Imprisonment
Section 7203 of the Internal Revenue Code permits the IRS to charge you with
the "willful failure to file a tax return." The statute subjects you to a
risk of being guilty of a misdemeanor and a $25,000 penalty ($100,000 in the
case of a corporation), and imprisoned for not more than one year. If the
failure to file is "willful" the charge is a "felony" and the imprisonment
is up to five years.
YOU ELIMINATE THE RISK OF IMPRISONMENT IF YOU VOLUNTARILY FILE YOUR TAX
RETURNS, and payment of your tax liability.
The IRS will also not process an
OIC if you are currently in bankruptcy.
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Form 656, Offer in
Compromise
Form 656, Offer in Compromise
(PDF
format)
Form 656, Offer in Compromise
(PDF fill-in format)
To view the form, you need to
download and install Adobe Acrobat Reader.
(free)
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Submitting required documentation with the Form
656 package
If the required documentation is not submitted with Forms 656 and 433-A
or 433-B, the IRS will issue one written request to the taxpayer asking
for the missing information. If the information is not provided within
30 days, the OIC case is closed and returned to the taxpayer without the
opportunity to appeal the decision. It is the taxpayer's responsibility
to ensure the IRS has the required information to make its determination
on an OIC, as well as provide additional information when the IRS
requests it.
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Forms 433, Collection Information Statements
The Forms 433-A and 433-B are included with the Form 656 package.
Taxpayers use these forms to submit financial information that is used
to determine their ability to pay their tax debt. Individual taxpayers
and self-employed individuals must use Form 433-A, while partnerships
and corporations must use Form 433-B. Note: There will be instances
where the IRS may request the 433-A from corporate officers or
individual partners.
Form 433-A, Collection Information Statement for Wage Earners and
Self-Employed Individuals (PDF
format)
Form 433-B, Collection Information Statement for Businesses (PDF
format)
Collection
Financial Standards and Necessary Expenses
Collection Financial Standards
are used to help determine a taxpayer's ability to pay a tax debt. The
allowed amounts are used in the Form 433-A
Local Standards
- Maximum allowances for housing and utilities known as
Local Standards,
vary by location. Unlike the National Standards, taxpayers are allowed
the amount actually spent, or the standard, whichever is less. There
are separate allowance amounts for
transportation expenses.
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 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. We 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.
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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.
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Necessary Expenses -
Necessary Expenses
are the allowable payments taxpayers make to support their own and their
family's health and welfare and/or the production of income. However, this
expense allowance does not apply to business entities. |
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