“Using an Offer in Compromise”

TAX PRACTICE & PROCEDURES

Editor: John L. Miller, CPA

In these economic times, more taxpayers are not able to fully pay their federal income taxes when due. There are several methods that may be used to pay tax liabilities in this situation, one of which is an offer in compromise (OIC).

Sec. 7122 permits the IRS to compromise a tax liability on one of the following grounds:

• Doubt as to liability;
• Doubt as to collectability; or
• To promote effective tax administration because either collection of the full amount would cause economic hardship for the taxpayer or compelling public policy or equity considerations provide a sufficient basis for compromising the liability.

This item focuses on offers when there is doubt as to collectability.

Submitting an Offer

A taxpayer makes an offer by filing Form 656, Offer in Compromise. Form 656-B, Collection Information Statement for Businesses, contains detailed instructions for completing the Form 656. In addition to the application, the taxpayer must send a $150 application fee with the offer. This fee can be abated if the monthly household income is not more than the IRS’s low-income guidelines. Moreover, other than for the low-income exceptions, if the taxpayer makes a lump-sum cash offer, 20% of the amount offered must be included with the offer. The payment is not refundable even if the IRS denies the offer. This payment rule has been in effect since 2006 and has resulted in a decline in the number of submitted offers. One of the current administration’s legislative proposals is to repeal this requirement.

If the taxpayer makes an offer to pay the tax liability using installments, the first payment must be paid with the offer, and the installment payments must be made while the offer is being evaluated. The IRS will return the offer without any appeal rights if the taxpayer does not make the payments as outlined.

The IRS has to act on an offer within two years. If it does not accept or reject the offer within two years, the offer is considered to be accepted. The statute of limitation is suspended while an offer is under consideration.

The IRS offers three types of payment plans:

• Lump-sum cash offer: The offer amount is paid in five or fewer installments;
• Short-term periodic payment option: Payment is made within 24 months from the date the offer is submitted; and
• Deferred periodic payment: Payment is made over the remaining statutory period (normally a maximum of 10 years) for collecting the tax.

Observation: To increase the chances of acceptance, a taxpayer should offer to pay all the money at once, if possible, because the IRS usually does not want to wait two years to get full payment. If full payment is not possible, a taxpayer should attempt to pay at least half of the total offer shortly after the IRS has accepted it and pay the remainder in monthly installments.

An individual taxpayer uses Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, to list required financial information. Form 433-B, Collection Information Statement for Businesses, is for use by a partnership, a limited liability company, or a corporation.

Calculation of the Amount to Offer

The minimum offer amount that the IRS will accept, except in certain special circumstances, is based on the taxpayer’s reasonable collection potential (RCP). The RCP is the total net value of the taxpayer’s assets minus allowable exemptions for certain assets, plus the difference between monthly income and expenses multiplied by a factor based on the type of plan and the time period in which payments will be made. Taxpayers calculate this amount on a Form 656-B worksheet using financial information taken from Forms 433-A and 433-B to determine the current fair market value of all assets less any loan balances thereon and the difference between monthly income and monthly living expenses.

Note: As discussed in more detail below, when investigating the offer the IRS is free to adjust the RCP calculated by the taxpayer upward or downward based on the taxpayer’s specific facts and circumstances.

Processable Offers

The IRS will reject an offer immediately if it is not processable. The IRS considers offers to be processable when received unless one or more of the following problems exist:

• The taxpayer or tax liabilities are not properly identified;
• An out-of-date Form 656 is used (or the terms on the printed Form 656 are changed);
• No amount of money is offered;
• Required financial statements are not provided or are otherwise incomplete or missing required signatures;
• The amount offered is less than the value of the taxpayer’s assets;
• A Social Security or employer identification number is missing, incomplete, or incorrect;
• The offer is not properly signed; or
• The offer is submitted to delay or impede IRS collection efforts.

Investigation of an Offer

The IRS recently announced that its employees will be allowed to consider a taxpayer’s current income and potential for future income when investigating an offer in compromise and negotiating an offer amount. The usual practice is to judge an offer amount based on a taxpayer’s earnings in prior years. The agency may require that a taxpayer entering into an offer agree to pay more if his or her financial situation significantly improves.

Section 5.8.4.4.1 of the Internal Revenue Manual provides that IRS investigators may consider assets held by the taxpayer, earning power, amounts collectible from third parties, and assets available to the taxpayer that are beyond the reach of the agency in determining the collection potential.

In a doubtful collectability case, the investigator must consider the taxpayer’s ability to pay in calculating the taxpayer’s reasonable collection potential. The taxpayer’s ability to pay is determined using an estimation of the taxpayer’s allowable expenses (i.e., the taxpayer’s basic living expenses). Unless there are special circumstances, allowable expenses for purposes of the ability to pay calculation are based on national standards for food, clothing, and out-of-pocket health care expenses and on local standards for housing, utilities, and transportation.

The IRS will also consider other factors, including the taxpayer’s age, health, education, and occupation, in determining the taxpayer’s RCP. Here the agency is trying to determine whether future income may increase. Therefore, a taxpayer may want to make a Freedom of Information Act request to see his or her collection administrative file to make sure the file contains accurate information.

If an Offer Is Rejected

If the IRS investigator decides to reject the offer, Sec. 7122(d)(1) requires the IRS to perform an independent administrative review of the rejection before notifying the taxpayer that the offer has been rejected. If the rejection is sustained on review, the IRS will notify the taxpayer by mail that the offer has been rejected. The taxpayer may request an Appeals hearing within 30 days of the date of the rejection letter. An appeal is the last chance to get the offer accepted. A taxpayer cannot contest a rejected offer in the courts; however, if the Appeals officer sustains the rejection of the offer, the taxpayer can submit another offer.

If an Offer Is Accepted

After an offer is accepted, a taxpayer must:

• Promptly pay any unpaid amounts due under the terms of the agreement;
• Notify the IRS if not able to comply with the agreed-upon terms; and
• Timely file all tax returns for the next five years and pay all taxes in full.

The IRS will not refund any overpayments shown on a return during this period and will instead apply them toward any outstanding assessment.

Failure to follow these requirements can result in a previously accepted offer being terminated and a taxpayer being required to pay the remaining balance in full.

This weekend while driving, I decided to listen to “The Dip” by Seth Godin. Godin defines life-paths as two primary curves: the Dip and the Cul-de-sac. The Cul-de-sac curve is a dead end where a person keeps putting energy, effort, time and money into project or goal that simply goes nowhere. Alternatively, the Dip can be described by this graph:

When a person first starts something, it’s usually really exciting along with a high reward. Additionally, other people are usually supportive and dishing out praise (for example, a person tells their extended family that they are attending law school). However, there is a potentially long period in which the effort does not result in a proportional reward. This book explains: (1) how to identify a dip; (2) how to get through it; and (3) how to recognize a dip from a dead end. Essentially, the moment a person realizes that a situation is a dead end, it is not only acceptable to quit, but mandatory and essential to success. Here are some of my favorite quotes from the book:

“The real success goes to those who obsess. The focus that leads you through the Dip to the other side is rewarded by a marketplace in search of the best in the world. A woodpecker can tap twenty times on a thousand trees and get nowhere, but stay busy. Or he can tap twenty-thousand times on one tree and get dinner.”

“It’s human nature to quit when it hurts. But it’s that reflex that creates scarcity. The challenge is simple: Quitting when you hit the Dip is a bad idea. If the journey you started was worth doing, then quitting when you hit the Dip just wastes the time you’ve already invested. Quit in the Dip often enough and you’ll find yourself becoming a serial quitter, starting many things but accomplishing little. Simple: If you can’t make it through the Dip, don’t start.”

“Persistent people are able to visualize the idea of light at the end of the tunnel when other’s can’t see it. At the same time, the smartest people are realistic about not imagining light when there isn’t any.”

“Never quite something with great long-term potential just because you can’t deal with the stress of the moment.”

My mother, sister, and I decided to take a vacation to Wimberly, Texas to enroll in cooking school for a few days. Our experience was outstanding. We worked with an experienced chef that helped to teach us practical ways to make extraordinary dishes. We were even provided individual notebooks with various techniques that allowed us to be particularly creative with every dish that was taught. During our visit, we stayed at the Blair House Inn, which actually coordinates the cooking school as an additional activity for guests. Our room was beautiful, and the food was absolutely fabulous. The house manager was extremely friendly and accommodating throughout our visit. We are already trying to figure out when we can go back! I would highly recommend this vacation spot to anyone interested in learning more about cooking in a relaxed, but informative manner. Visit the Inn’s website at: blairhouseinn.com

The CPA Exam…before I took the exam, I had tons of questions. Even while I was in the process of taking the exams, I had tons of questions. I finished taking and passing all of the exams last year, and since then I have gathered some useful, interesting information. I thought I would share a little of my understanding for anyone who is interested in the exam, taking the exam, or even someone who just wonders if the simulations really are based on your multiple-choice performance. So first I want to dispel some CPA myths and give some fun facts about the exam (if that isn’t too dorky):

• Only one of your written communications count and it is worth 10% of your grade.

• Almost 20% of the questions in the multiple choice are “pre-test” and will not count towards your score.

• The testlets do in fact get harder when you perform well. All of the sections, except for BEC, start out with a medium difficulty level. If you do well on your first testlet, you will progress to hard. Otherwise, you stay on medium.

• The simulations are not adaptive (at least for now). In other words, your performance on the multiple choice will not affect what simulations you get on the test.

• Some of the tabs in a simulation might be pre-test, but both of the simulations count.

One question I constantly asked my friends who had already taken the exam: what is the order of the sections from hardest to easiest? Well first off, all of the sections are hard. I don’t ever remember taking one of the tests and thinking it was “easy.” Remember, there is an 18-month testing window max. If the window passes, you lose your score. Because of this rule, I think it is best to take the hardest test first. The hardest test is going to require more attempts (potentially), thus a person might have to retake it. It will also probably require more time to prepare for the hardest test. So the big question, which test is the hardest? In my personal opinion, FAR was the most difficult, then AUD, then REG, then BEC. I completed my Masters with a focus in Tax so I had already taken a Partnership Taxation class, which is a significant subject on Regulation currently. So I think it might have been easier for me than for the audit people that absolutely hate tax. One reason I thought FAR was the most difficult was because of the length. There really was a ton of material covered. However, I definitely have finance friends that thought FAR was much easier than REG or AUD. It really depends on your own strengths. Good luck!

This is a Thrice cover song that Jeff and I played from the new Beggars album. Thrice is an alternative band that has extremely powerful lyrics that are simply beautiful. Enjoy!

I have always had a love for animals. Currently, I have two long-haired dachshunds that are the loves of my life. Charley (blonde) was born in the Summer of 2005. Annie (double dapple) was born in the Fall of 2008. Both of my pups were purchased from Ammons Kennels in Robeline, Louisiana.

The drug wars taking place in Mexico have been a heated topic for at least a year now. Is there anything Americans can do about this ‘war zone’? Why can’t the Mexican government enforce stricter rules? How will this affect me? My junior year at Texas A&M, I became tired of asking questions. I was ready for an answer.

As a Mays Business Fellow, I was assigned to a leadership experience. I chose to work with a small, all-girls orphanage in Nuevo Laredo, Mexico. Our assignment was to raise a minimum monetary value of $5,000. Being a group primarily made up of accountants, we decided to make the orphanage a 501(c)(3) for tax purposes. Although I had never visited the orphanage, I was told that roughly forty girls travel to school an hour every day in a van without air-conditioning. Immediately, the Texas A&M campus responded to our cause. Our leadership group, which we named Full Hearts, raised well above the specified amount enabling us to purchase a van for the girls. After this success, I had met my goal of receiving an “A” in the class. However, somewhere along the way my perspective had changed. I felt a sense of connection with a group of girls I had never met.

When a group member, who regularly visited the girls, suggested that I take a trip to the orphanage, I was somewhat startled. Despite the fact I had more reasons of why I should not make the trip, I decided to travel to Casa Hogar.  Her name was Claudia. When I had started the project three months ago, the names of the girls was my least concern. However now, all I think of is Claudia. She is twenty-eight years old and still living at the orphanage. When she was a baby, the madres, or nuns, who run Casa Hogar found her eating garbage straight out of a trash can. The bacteria somehow disinfected her brain altering her basic mental functions. When I met Claudia, I did not see any of this. I saw the happiest girl in the world racing towards me, a perfect stranger, for a hug. Suddenly, all my work for school had a new meaning. My time had affected this precious, little girl who desperately needed me.  My goal for a grade had evolved into a purpose and a cause that was rooted deep inside of me. The first day spent at Casa Hogar I experienced the culture shock of a lifetime. The orphanage was run entirely by volunteer nuns or madres who spoke minimal English while my Spanish was anything but polished. For hours, they sat with me struggling to communicate. Never had anyone tried so hard to talk to me just for the sake of talking. Another girl who left a significant impact on me was Grasia, a seven year old diagnosed with fetal alcohol syndrome. She did not want my sympathy; she wanted to know my favorite color.

Grasia (Spanish for Grace) with me

Later that weekend, I traveled to the Colonias, a living site outside the city that also serves as the dump. Nearly 500 people live in this outskirt of Nuevo Laredo with no transportation, running water, or electricity. As I drove through a muddled dirt path, I was overcome with emotion. Despite a lack of money, the population continues to have Catholic services every Saturday afternoon. After attending the service, I met a small child who was very excited to give me a present. She reached over and placed a necklace in my hand that simply read “Hope.” I had a new mission for my life that included providing hope to the children of Nuevo Laredo. Throughout the last couple of years, Full Hearts has expanded into a 150 strong student organization. Through Full Hearts, I have embraced my ability to mobilize others to want to struggle for our shared aspirations involving the orphanage. I believe that when people help others simply for the sake of doing good, amazing things happen.

The Colonias

If you would like to help Full Hearts in any way, please visit: fullhearts.org OR contact Full Hearts at: fullheartsfoundation@gmail.com.

• 4 eggs
• 1 can of pumpkin puree (29 oz.)
• 1/2 cup vegetable oil
• 3 cups sugar
• 4 1/2 cups of all-purpose flour
• 2 tablespoons pumpkin pie spice
• 2 teaspoons baking soda
• 1 teaspoon salt
• 4 cups of fresh cranberries

Preheat oven to 350 degrees. In a bowl, combine eggs, sugar, and oil. In a separate bowl, combine flour, pumpkin pie spice, baking soda, and salt. Add the dry ingredients and the canned pumpkin to the egg/sugar/oil mixture, alternating between dry ingredients and canned pumpkin. Mix until well combined. Add the cranberries to the batter, one cup at a time. Bake in desired pan for 60 minutes.

• Cooking spray
• 2 eggs
• 1.5 cups half-and-half
• 1 cup plain yogurt
• 1/2 cup Swiss cheese
• 1/2 cup Feta cheese
• 1/2 cup Monterey Jack
• 1/3 cup chopped fresh parsley
• 1 teaspoon dried basil
• 1 teaspoon dried oregano
• 1 tablespoon red pepper flakes
• 1 teaspoon cayenne pepper
• 9 ounces angel hair pasta, cooked
• 16 ounces of medium to hot salsa, thick
• 2 pounds of shrimp, cleaned, peeled, and deveined

Preheat the oven to 350 degrees. Grease a 12 by 8-inch pan or glass dish butter. Combine the eggs, half-and-half, yogurt, Swiss and Feta cheeses, parsley, basil, oregano, red pepper flakes, and cayenne in a large bowl until thoroughly mixed. Spread 1/2 of the cooked pasta evenly over the bottom of the prepared pan. Cover the pasta with the salsa. Add 1/2 of the shrimp and then cover it with the Monterey Jack. Add the remaining pasta and shrimp. Spread the egg mixture over the top of the casserole. Sprinkle extra red pepper flakes on top if desired. Bake for 35-40 minutes or until bubbling. Let stand for 10 minutes before serving.

I cooked this dish with fat free half-and-half and fat free yogurt. It still had an amazing flavor, but was a bit soupy. I decided to serve some bread with the dish so this didn’t really bother us. However, if you would prefer a thicker casserole, the fat free option may not be the best. This recipe is based off of a recipe by Paula Deen.