An Offer in Compromise is an agreement between the taxpayer and the government that settles a tax liability for payment of less than the full amount owed. The goal is to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the government. The program is not designed to simply allow taxpayers to get out of paying their tax obligations. In fact it is quiet the opposite...it is designed to allow the government to collect something when it is unlikely that the tax liability can be collected in full. The requirements are largely financial in nature and are more strict than most would think after hearing advertisements flood the marketplace that make it sound easy to settle with the IRS for "pennies on the dollar". While some cases may very well settle for pennies on the dollar a taxpayer's situation has to meet certain criteria for that to be the case. An OIC is a legitimate alternative to declaring a case currently not collectible or to a protracted installment agreement. It is crucial that professional representation be obtained in preparation and submission of an OIC as relatively few are approved.
The IRS will consider an OIC on 3 different bases:
Doubt as to Liability - This means that there is legitimate doubt as to whether the taxpayer owes all or part of the assessed tax liability.Doubt as to Collectability - This means that it is doubtful that the taxpayer could pay the liability in full within the remaining statutory period for collection by liquidating assets or through current installment agreement guidelines.Effective Tax Administration - This means that there is no doubt as to the liability or collectability but that exceptional circumstances exist that will allow the IRS to consider an offer. In this instance the taxpayer must demonstrate that collection of the tax would create an economic hardship or would be unfair and inequitable.An offer must meet certain financial criteria in order to be approved. Simply stated the offer must show that the taxpayer's net assets and future disposable income are not enough to pay the full debt. If that is the case and there are no conditions that will lead the IRS to believe that the situation will change, then the likelihood of an approved offer is greater.
A taxpayer's net assets are equal to what they can earn from the sale of any items that they own such as equity in real estate, automobiles or investments. A taxpayer's future disposable income consists of their current income less expense amounts allowed to support the health and welfare of the taxpayer and their dependents. While this may sound simple it is actually very complex because there are many details to consider. Only professionals who deal with these matters on a regular basis are equipped to understand the total picture and communicate effectively with the IRS. It cannot be emphasized enough to seek professional representation when considering an offer in compromise since the average taxpayer has never prepared anything similar to it or has never faced any process similar to the one that is followed once an offer is submitted.
Upon submission of an offer from the taxpayer the IRS will perform an investigation in order to verify the numbers. They will conduct interviews and review information such as previous tax returns, bank statements, real estate records, motor vehicle records and credit bureau reports just to name a few. Remember an agent's goal is to substantiate the numbers. They are accountable to superiors for the work that they do so they go beyond simply asking a few questions...they conduct an all out financial investigation to ensure that the taxpayer cannot hide any assets or income in order to avoid paying the tax that they owe.
When submitting an offer in compromise the taxpayer is required to submit a $150 application fee plus a 20% down payment if choosing the lump sum cash offer or the first installment if choosing a periodic payment plan offer. A taxpayer can request an exception to these requirements because of their income level but must submit the proper form along with the offer. The amount of time the taxpayer has to pay off the debt depends on the offer plan that is chosen. If the taxpayer is already on an installment agreement they may stop making payments on that if they choose the periodic payment plan offer so they can make payments on that.
Once an offer has been accepted the taxpayer is required to honor the terms of the agreement until the amount is paid in full and is also required to remain in compliance in the filing and payment of all required taxes for a period of five years or until the amount is paid in full, whichever is longer.
An offer in compromise can be the answer to a taxpayer's tax problem if the circumstances are right and it can help avoid collection action that possibly includes a bank account levy or a wage garnishment. However professional representation is crucial since only a relatively small portion of the offers received are approved. If a taxpayer is looking for a solution to a big tax problem this could be the one.
Trace George is a Certified Public Accountant and is the Executive Vice President of Action Tax Relief headquartered in Abilene, TX. Action Tax Relief provides services to individuals who are facing signficant tax problems with the IRS. We partner with consultants and CPAs in order to assist taxpayers through the process of dealing with the IRS to resolve their tax issues, including tax levies and liens.
(c) Copyright Trace George. All Rights Reserved Worldwide
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