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Announcements
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Counselor
FALL 2006 • Vol. XLV
- Cy Pres
- Changes in the Rules Governing IRS
Offers in Compromise
- Brooklyn Law School Alumni Reception
- The Firm Highlights
- A Date to Remember
Changes in the Rules Governing IRS Offers in Compromise
by Barry C. Feldman, Esq. and Barry C. Feldman,
Esq.
In general, federal tax liabilities may be compromised,
at the discretion of the IRS, either based upon doubt as
to the liability of the taxpayer for the tax or based upon
doubt as to the collectibility of the tax from the taxpayer.
In order to commence the offer in compromise process, a
taxpayermust complete an IRS form and submit it with a $150
application fee. The fee is waived for (i) offers made by
low-income taxpayers and (ii) offers based solely on doubtas
to liability. (A low-income taxpayer is an individual whose
income falls at or below poverty levels based on guidelines
established by the U.S.Department of Healthand Human Services.)
If the offer is based upon doubt asto collectibility, financial
statements are required.
Recently, the IRS published an information release (IR2006-106)
and a fact sheet (Fact Sheet 2006-22), explaining how recent
changes in the law will affect the way the IRS's offer in
compromise (OIC) program will operate. These changes have
already taken effect. The new rules classify offers as either
"lump-sum offers" or "periodic payment offers."
A periodic payment OIC is any offer made that proposes to
pay the amount offered in settlement of the taxliability
in more than five (5) installments. All other offersare
treated as lump-sum offers.
Under the new rules, certain non-refundable payments must
be submitted with the offer except, as with the $150 application
fee, for (i) offers made by low-income taxpayers and (ii)
offers based solely on doubt as to liability. A lump-sum
OIC must now include simultaneous submission of a non-refundable
payment to the IRS equal to 20% of the offer. For taxpayers
submitting a periodic payment OIC, the offer must be accompanied
by the payment of the amount of the first proposed installment
and any additional installments under the offer must be
made as they become due while the offer is pending before
the IRS. The initial installment payment and any subsequent
installment payments are non-refundable. Any failure to
make a subsequent installment payment while the offer is
being evaluated by IRS will be treated as a withdrawal of
the offer.
Because the payments are non-refundable, the taxpayeris
permitted to specify how the payment(s) are to beapplied
(i.e.,to which tax liability,to interest or to penalties).
If,at the time the offer is submitted, the taxpayer failsto
specify, in writing,how to apply the payments to the tax,
penalty and interest due, the IRS will apply the payments
as it pleases.
One positive change in the rules is that compliance (i.e.,that
you have filed all tax returns due to the date of the sub-mission
of the OIC) will no longer be a criterion for processing
OIC initial submissions. If compliance is the only issue,
the offer may be processed. However, the IRS will contact
the taxpayer by either telephone or correspondence requesting
the delinquent return(s), and/or the required estimated
tax payment(s).
An OIC will be deemed accepted if it isn't withdrawn, returned,
or rejected within 24 months after receipt by theIRS. The
24-month time period does not include any time periods during
which a liability included in the OIC is thesubject of a
dispute in any judicial proceeding.
In light of the recent changes, it is even more important
that a taxpayer take great care in formulating, preparing
and submitting an OIC to the IRS.
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