Small Business Seminar Offer in Compromise. Felicia Branch August 15, 2015

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1 Small Business Seminar Offer in Compromise Felicia Branch August 15, 2015

2 Collection Power of the IRS What can they do? For how long? What alternatives does the taxpayer have? Can the taxpayer appeal a decision made by the collections division?

3 Collection Alternatives Installment Agreement Offer in Compromise Currently Not Collectible Status

4 Collections Alternatives Unless the taxpayer qualifies for a partial installment agreement, the IRS s willingness to enter into an installment agreement deferring payments over time is conditional upon the taxpayer s payment of the entire liability If the taxpayer has fewer assets and little prospect of generating sufficient income to pay the liability in full, the taxpayer may be allowed to strike a settlement for less than 100 cents on the dollar through an Offer in Compromise (OIC) agreement An OIC accepted by the IRS permits the taxpayer a fresh start by eliminating the excess liability over the payment amount agreed upon by the parties

5 Offer In Compromise An agreement between the taxpayer and the Internal Revenue Service (IRS) that settles a tax debt for less than the full amount owed Ultimate goal is a compromise that suits the best interest of both the taxpayer and the IRS Two Types of OIC s TP Can Request Doubt As To Liability (Form 656- L) Doubt As To Collectability (Form 656-B)

6 Offer In Compromise No offers are accepted if there are trust fund taxes owed unless all potentially responsible persons have a determination against them or the taxes have been paid in full. Trust fund taxes are withheld federal income/fica/medicare taxes

7 OIC Doubt As To Liability Doubt as to liability exist where there is a genuine dispute as to the existence or amount of the correct tax debt under the law Doubt as to liability does not exist if the tax debt has been established by a final court decision or judgment concerning the existence or amount of the tax debt or if the tax debt is based on current law Doubt as to liability will only be accepted for the tax period(s) in question If a taxpayer has a legitimate doubt that he/she owes part or all of the tax debt, a Form 656-L Offer in Compromise (Doubt as to Liability)

8 OIC Doubt As To Liability Documentation TP must provide supporting documentation or evidence that will help the IRS identify the reason(s) you doubt the accuracy of the tax debt TP must also include a written statement explaining why the tax debt or portion of the tax debt is incorrect Amount Offered Should be based on what you believe the correct amount of tax debt should be, not what you owe TP must offer more than zero ($0) No deposit or application fee is required

9 OIC Doubt As To Liability Generally, you will send in a Doubt As To Liability offer when you were unable to dispute the amount of tax the IRS claims you owe during the time allowed by the IRC or IRS guidelines Reasons To Submit an OIC-L: Examiner made a mistake interpreting the tax law Examiner failed to consider the evidence presented New evidence is available to support a change to the assessment

10 OIC Doubt As To Liability Example: You were audited by the IRS. When this happened, you moved and did not get the notification or you suffered a disaster (such as books and records were destroyed in a fire or other natural disaster) causing you to miss the meeting with the auditor. The IRS disallowed all expenses and now you have a tax debt. You discover the problem when you try to borrow some money and find that there is a federal tax lien filed. You are able to reconstruct your books and records with the correct expenses that would significantly lower your tax debt.

11 OIC Doubt As To Liability Alternatives: When you disagree with the accuracy of a tax debt, depending on the situation and the type of tax, the Service has other available remedies Generally, the options on the next slide should be explored first before submitting an offer in compromise

12 OIC Doubt As To Liability If you think your tax liability is incorrect because: Of an audit, or IRS created a return for you because you did not file one Items were not reported correctly on your tax return or because IRS made an adjustment on your return Items were not reported properly on a tax return, other than Forms 1040 or 1120, or because IRS made an adjustment on your return You have reasonable cause to remove or reduce penalties IRS charged Then: See Publication 3598, The Audit Reconsideration Process See the instructions for Form 1040X, Amended US Individual Income Tax Return (for sole proprietors only) See the instructions for Form 843, Claim for Refund and Request for Abatement See Notice 746, Information About Your Notice, Penalty and Interest

13 OIC Doubt As To Collectability Attractive for TP with few assets and little prospect of generating sufficient income to pay the liability in full within the remainder of the statute of limitations on collection OIC permits the TP to have to fresh start by eliminating the excess liability over the payment amount agreed upon by the parties IRS conducts a thorough examination of the TP s assets, liabilities, and earnings potential Standard: Whether the amount reflects reasonable collection potential TP has two payment options: Cash, lump sum offer, usually payable within 5 months Short-term periodic payment offer, payable over a 6-24 month period

14 OIC Doubt As To Collectability Cash, lump sum offer, usually payable within 5 months Submit 20% of offer amount (waived if meet low income requirements for sole proprietors) Short-term periodic payment offer, payable over a 6-24 month period Submit first payment with offer and keep making the proposed payment amounts while the IRS is considering the offer. Offer will be rejected if payments stop at any time. Total payments must equal offer amount

15 OIC Doubt As To Collectability Includes completing two forms: Form 433-A for sole proprietorship or 433-B for other businesses Form 656 Charge: $186 processing fee in addition to the offer amount If individual and business liabilities are to be compromised, two offer forms must be completed and there are 2 processing fees Charges and down payment can be waived for lowincome taxpayers IRS will process the application only after the TP remits the required payments and completes the application in full TP must be in compliance (filing tax returns and estimated quarterly tax payments)

16 OIC Doubt As To Collectability Once An Offer Is Accepted Settlement will not be reopened unless the IRS discovers that the TP falsified information, concealed assets, or there was a mutual mistake of fact by the parties TP must agree that he/she will fully comply with all filing and payment requirements for a five-year period from the date the IRS accepts the offer If the TP fails to carry out the obligations under the compromise agreement, the IRS can terminate the agreement and proceed to collect the originally determined liability, reduced by any payments previously made

17 OIC Doubt As To Collectability If An Offer Is Rejected An internal review procedure takes place, after which the TP is informed of the rejection TP is granted the right to Appeal the rejection to the IRS Appeals Division TP has 30 days from the date of the rejection letter to request an appeal Appeals Office may also be asked to consider the availability of an offer in compromise as part of a CDP hearing

18 OIC Doubt As To Collectability Taxpayer s Collection Potential Depends primarily on a combination of the net value of the TP s assets and the TP s future ability to pay The offer amount must exceed the sum of (1) the TP s net realizable equity plus (2) the taxpayer s future income determined over a month period, depending upon the terms of the offer Within 5 months = TP calculates disposable income over a 12 month period More than 5 months = TP typically uses a 24-month period

19 OIC Doubt As To Collectability TP s Realized Equity In Assets Includes cash, amounts in checking and investment accounts, the cash value of any life insurance policies, and accounts receivable Realized value of other real and personal property is normally its quick sale value, generally defined as 80% of the current fair market value of the assets Quick sale value takes into account the hardship caused when the TP must sell an asset in a short period of time Net realized value of the TP s assets is the quick sale value minus any amounts owed to creditors who have priority over the federal tax lien

20 OIC Doubt As To Collectability TP s Future Income IRS uses information set forth on the taxpayer s Collection Information Statement (Form 433), (in combination with estimated national and local living costs, which it refers to as collection financial standards for sole proprietors) IRS relies on these standards unless, based on the facts and circumstances of the TP s case, the resulting amount would not leave the TP with sufficient resources to provide for basic living expenses National Standards are posted on the IRS s website Difference between the TP s monthly income as reported on the Collection Information Statement minus allowable expenses

21 OIC Doubt As To Collectability National Standards (4) Food, clothing, and other items Out-of-pocket health care expenses Housing and utilities Based on standard living cost in the state and county in which the TP resides Transportation Consist of ownership and operating costs associated with an automobile Ownership = National standard Operating = Local standard In addition to the net realized value of the TP s assets and the TP s disposable income, the IRS can also consider the TP s education, earning potential, and likelihood of any increases in future income The IRS cannot reject an offer from a low-income taxpayer based solely on the amount of the offer

22 Bankruptcy As An Alternative Filing a petition in bankruptcy may be an option for a TP who is facing the threat of enforced IRS collection proceedings The Bankruptcy Code provides that certain tax liabilities are dischargeable in bankruptcy The Bankruptcy code lists those tax debts for which personal liability can and cannot be discharged Once the debtor s tax liabilities are discharged in bankruptcy, the IRS can not seeking to collect any further amounts not recovered through the bankruptcy proceedings If the taxes are not discharged, the IRS can seek to collect the amounts as part of the bankruptcy proceedings or wait until the automatic stay is lifted and then collect the amounts directly from the TP

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