5 reasons not to file a perfectly good IRS Offer in Compromise

From Point A To Point BThe IRS Offer in Compromise program, the one you hear about on radio and TV…really exists.  It actually works too.  Many people settle tax debts both large and small with the IRS every year.  But…it isn’t for everyone.  In fact, most Offers in Compromise filed with the IRS are rejected for a number of reasons.  You can read more about that here.

Just as important…many who qualify for an Offer in Compromise choose not to file one.

Strange I know… but it happens all the time.

Here are the 5 most common reasons it does.

Tax and other debt

If you have old tax debt and much of it is “dischargeable” in bankruptcy AND you have other debt that needs to be dealt with in bankruptcy, then an Offer in Compromise may be a waste of time and money.

This isn’t true in every case, and there are reasons why people who have tax and other debt can’t use bankruptcy without some negative side-effects, but it is usually the case that bankruptcy makes more sense.

Not a great candidate for an offer in compromise but a good candidate for a bankruptcy

What if a taxpayer had a large tax debt as a result of under-withholding for several years and the total tax debt is $150,000.00.  The IRS is threatening collection.  He can’t pay it in full over the time left in the statute of limitations for collection and his best offer in compromise number would be $25,000.00.  Assume as well that he would qualify for a bankruptcy and that the bankruptcy would discharge his entire tax obligation.

He doesn’t have access to the $25,000.00.

A bankruptcy may make more sense.

Difficulty remaining in “compliance”

In order for an Offer in Compromise to work permanently, the taxpayer has to remain in absolute compliance with the tax code for a 5 year period after acceptance of the Offer. If a tax return is late or if a new debt is incurred, the offer is revoked and the complete amount of debt with it’s new interest becomes collectible once again.

One of the lesser known aspects of an Offer in Compromise is that in order to be ‘permanently’ accepted, the taxpayer must remain in complete compliance with the tax code for a period of 5 years after the offer was accepted. Failure to do so, by not filing returns or by creating a new liability, means that the offer is undone, and the complete amount that was settled comes back into play.

If a taxpayer is going to have a hard time remaining in compliance, then another option may make more sense.

Previously filed and rejected Offers in Compromise

Many people think that filing an offer in compromise is just filling out some paperwork.  In very simple cases, it can be not much more complex than that.  But in most cases, a story has to be told; a factual story that will convince the IRS to agree to the proposed settlement.  The filer has to understand all of the rules and exceptions to the rules as well. Failure to tell the story properly and/or failure to know the rules and their exceptions will usually end up in a rejection.

Most Offers in Compromise are rejected and the belief that filing an offer is just filling out some documents and crossing fingers… is the primary reason why.

A common example we see is the taxpayer that has been filling out a financial statement and sending it with a 656 form over and over again.  Each time the offer is rejected and the statute of limitations on collection is extended.

But also each time an Offer is filed the IRS sees that filing adds to the bad faith the IRS already sees in the taxpayer.  When the newest Offer is filed the IRS won’t take it seriously.

Statute of Limitations on collection isn’t far away  

Imagine that you filed a return on April 15, 2005.  If no tolling of the statute has occurred as a result of a bankruptcy filing, a previous offer in compromise, or certain appeals/litigation, the IRS’ 10 years to collect the debt is about to run out.

Imagine as well that the $150,000.00 dollar debt that has accrued with penalty and interest would likely settle via offer in compromise for $25,000.00.

Sounds great right?

Imagine as well, that the IRS would agree to a $750.00 payment each month toward the debt or that you were already in that payment plan.

Would you file the offer in compromise?  I would advise you not to.

Why?  You have about 8 months before the statute of limitations on collection kills the debt owed to the IRS.  A payment plan at $750.00 for 8 months ends up being a lot less than $25,000.00.  The offer in compromise would extend the collection statute and if it didn’t work out the taxpayer would be at square one, and there won’t be any 5-year look back issue mentioned above.

After the IRS Audit – A Basic Guide

IRS Audit – Some Background

In order to make sure that Arizona taxpayers follow the law, the IRS conducts audits on a certain percentage of us each year.  The IRS has several methods to determine who gets selected.  The most common are:

The Discriminate Information Function – A computerized scoring system

Infection Audits – The practice of auditing returns that are related to another audited return

Issue Related Audits – The incorrect calculation of the Earned Income Tax Credit, is an example of an issue-related cause for an audit.

Despite what you may think, the IRS audit isn’t focused necessarily on the “well to-do”.  The U.S. General Accounting Office has reported over the last few years that as much as forty percent of all audits conducted are done to people who are in the lowest tax bracket.

There are several types of IRS examinations:

  • Correspondence Exams – Examinations done by mail
  • Office Exams – Examinations done at the IRS’ office
  • Field Exams – Examinations done at the Taxpayer’s place of Business or Home
  • Employment Tax Audits – Examinations focused on business employment tax withholdings

By far the most common audit is the Correspondence Exam.  These are conducted via mail and begin with an IRS letter requesting an explanation and/or supporting documents to substantiate certain items on the return.  Many people contact our office after the audit stage is over as they have ignored the IRS notices or they didn’t provide the IRS with enough evidence to resolve the problem.

Audits reach a resolution in only one of three ways:

  • The taxpayer will agree with the IRS’ findings
  • The taxpayer will disagree with the IRS’ finding
  • The taxpayer will ignore the findings

The “30 Day” Letter

When the taxpayer disagrees with or ignores the audit findings the IRS will issue a notice commonly called a 30 day letter.  The 30-day Letter will review the findings made by the IRS examiner and provide an explanation about the taxpayer’s appeal rights.  The taxpayer will have 30 days from the date on this Letter to request a conference with the IRS Appeals Office.  Most taxpayers ignore the 30 day Letter.  This is usually a mistake because the taxpayer loses one of the chances available to challenge an incorrect result.  The 30-day Letter is not a “statutory” letter, so extensions can be granted to request the appeals conference.

If time is short and the statute of limitations deadline for the IRS to finalize the Audit is close to expiration, the IRS will  not always send the 30-day letter.  It will instead skip to the 90 day letter.  (See Below)

Protest

The “protest” is sent with the request for a conference with an IRS Appeals Officer as a result of receiving the 30 Day Letter.  What form the protest must take depends on the circumstances and the amounts involved.  If the total amount of the additional tax, claimed refunds or over-assessment is over $10,000.00 for any one period, than a written protest that lays out the facts, the law, and the arguments the taxpayer is relying on, must be submitted under penalty of perjury.  If the amount is between $2500.00 and $10,000.00, a short written protest that lays out the disputed issues is required.  If the amount is only $2500.00 or less, and it is a field audit case, an office interview or correspondence exam, an oral protest should be enough.  The taxpayer should make a written protest anyway.

The protest should include name, social security number, a copy of the Power of Attorney form if the taxpayer is represented, a copy of the 30-day Letter and the Audit Report that lays out the years involved and the changes that are being proposed.  The protest should also include:

  • A statement that the protest has been timely provided
  • A request for an Appeals conference
  • A detailed list of the changes made by the IRS to the return that the Taxpayer disagrees with and specific reasons
  • A list of the facts supporting the taxpayer’s position
  • The legal basis supporting the position
  • The taxpayer’s signature or a statement by the Representative that he or she prepared the protest and knows the facts alleged to be true (to the best of his or her knowledge)
  • The Attachment of supporting documents

 The “90 Day” Letter

If the 30 day letter is ignored or if it is responded to timely, but Appeals and the taxpayer don’t end up reaching an agreement, the IRS will issue a “90-day Letter” or a Final Notice and Right to CDP Hearing.

This Statutory 90-Day letter shouldn’t be confused with any other letters that may provide for a 90 day response… especially not the letter required when an innocent spouse relief request is denied. See IRC § 6015.

The taxpayer also receives the 90 Day Letter if the Office of Appeals issues a finding after a protest is provided and the taxpayer doesn’t agree with those findings.

The 90-day letter gives the taxpayer 90 days of course… during which a Tax Court Petition can be filed and thereby a request for the US Tax Court to re-determine the liability that is being proposed by the IRS’ Examiner.  If the issue is only one of filing status, the taxpayer should consider whether a joint return should be filed before the petition is filed.  See IRC § 6013(b)(2)(B).  Once a Tax Court petition is filed, a joint return is no longer permitted to be filed.

The 90 day period is statutory.  This means the date the Tax Court petition is due can’t be extended for any reason.  It is very important not to miss the 90-day deadline as a result.

The 90-day period is calculated from the date the Notice of Deficiency is mailed to the taxpayer’s last known address. The IRS is required to include directly on the notice the last day the Tax Court Petition can be filed.  SeeIRC § 6213.

During the 90-day period and until the Tax Court reaches a decision, the IRS can’t make a tax assessment or engage in collection activity.  See IRC § 6503(a)(1)


Failure to file a Tax Court Petition Timely

If the taxpayer files the tax court petition late, the IRS will assess the proposed amount.  The IRS must assess the debt before the collection process can begin.  Again… the date the Tax Court petition is due can’t be extended for any reason, so if the taxpayer files the petition late, the assessment will take place and collection activity will begin.

Collection Action 

IRS Lien

Once the debt is assessed the IRS will begin sending the taxpayer a series of collection notices demanding payment.  An automatic lien under IRC § 6321 in favor of the United States on all property and any rights to property that belong to the taxpayer will exist if after the IRS provides a notice of the assessment and a demand for payment the taxpayer doesn’t pay the tax.

This lien isn’t good against any purchaser, holder of a security interest, judgment lien creditor, or mechanic’s lien until an actual notice of the lien is recorded with the County Recorder’s Office.  That notice of lien is recorded where the taxpayer lives or where he or she owns property. See IRC § 6321

IRS Collection

The final letter in a series of letters that the IRS sends the taxpayer is a “Final Notice” at least 30 days before it issues a a Notice of Levy.  See IRC §6330   This statutorily required notice must provide the amount of the tax and contain language explaining that the taxpayer has a right to request a CDP or Collection Due Process hearing within 30 days.  The notice also provides the administrative appeals rights and the procedures to follow in order to obtain the release of the levy or lien.  Any decision of an Appeals Officer following a CDP hearing is subject to judicial review in Tax Court. If the taxpayer wants to challenge the IRS’s proposed action, a Form 12153 must be used.

The Form and an alternative to the proposed collection of the proposed collection is sent to the IRS office that sent the notice.  A taxpayer has this right to appeal attached to the first collection due process notice for each year. In some cases, the CDP notice is a second or third notice issued over a number of years. If the taxpayer fails to submit a Form 12153 within the 30 day period, the IRS will continue with it’s proposed collection activity which is typically a wage garnishment or a bank levy or both.