Do you Need to Appeal your OIC?

Once in a while an Offer in Compromise (OIC) is accepted based only on the documents originally submitted, but this is extremely uncommon.  Normally the IRS will at least have some questions, and usually they will have somewhat of a laundry list of questions and document requests.

Once the Offer Examiner has received all the information necessary to put together a complete analysis, she will send a “preliminary analysis letter.”  Most of the time the IRS will determine that the taxpayer is able to pay the tax liability in full and/or that acceptance of the offer is not “in the government’s best interest.”  Some of the language in this letter has a hint of finality to it and taxpayers tend to misjudge/misread it as a rejection letter.  But the offer can often be kept alive at this point by supplying additional information and by making the right arguments.

If taxpayer’s response does not convince the IRS to change its position, then the IRS will (after manager approval and independent review) submit a decision letter.  A decision letter could be any of the following:

  • Acceptance
  • Rejection (with appeal rights)
  • Rejection with option to increase
  • Return (no appeal rights)

But even a rejection letter isn’t always the end of the road.  If there are legitimate issues, a taxpayer may want to file an appeal.  Filing an appeal puts the offer in front of an independent and fresh set of eyes.  The IRS Office of Appeals is “independent” in the sense that it is not connected with the office that decided to reject your OIC.  Don’t think that the Appeals Office is a completely independent government agency because it is not.

An Offer in Compromise must be filed on a specific form and within 30 days from the date of the rejection letter.  Taxpayers may substitute a letter instead of the appeal form, but the letter must contain all the same elements required by the form.  Once your appeal has been filed, be prepared to wait about the same length of time you waited for your OIC to be assigned.  Also, remember that the collection statute is tolled (extended) during the entirety of the appeals process just as it is during the OIC review.

Automated OIC Appeal Review

Did you know that if your Offer in Compromise (OIC) is rejected, there is a “self-help tool” on the IRS website that will walk you through a series of steps to help you determine if you should appeal it or not?

This is yet another example of the IRS’ attempt to automate everything they do.  I guess it does make sense to explore all available options for replacing the best and brightest who will be leaving the IRS when they retire.  And I guess it makes sense to try to find cheaper alternatives, given that the IRS is not going to get the kind of funding they need to hire live bodies.  This just seems to cross the line.

I know how complicated and frustrating the OIC process can be.  When an OIC has been rejected, what the appellant really needs is to speak with a good tax attorney.  Or, at a minimum, he needs to be able to talk with a live body at the IRS who will explain the IRS’ determination and who will really consider a taxpayer’s individual circumstances.

It does have some value, don’t get me wrong.  I have spent a little time with this tool and, from what I can tell, it is perfect for identifying errors and oversights made by offer examiners.

OIC Pre-Qualifier Tool

The IRS is all about automating everything as much as possible, which isn’t always a good thing.  Just ask the National Taxpayer Advocate, Nina Olsen.  She has always been a big critic of this trend.  One of the problems with taking away the “human element” is that cases tend to get handled incorrectly and unfairly.  After all, cases are made up of actual human beings with unique circumstances, and computer programs don’t always have the sophistication to consider unique circumstances.

A case in point is the IRS’ new “Offer in Compromise Pre-Qualifier Tool.”  What it looks like is an attempt to automate the Offer in Compromise (OIC) process.  All you do is plug in your personal financial information and, BOOM! you’re in.  Ok, that’s not fair.  It doesn’t quite work that way.  In fact, the IRS is careful to say that the tool should only be used as a guide and that their final decision is based on the paperwork that is submitted.  But it’s not too much of a stretch to imagine the IRS enhancing this offer in compromise pre qualifier tool and fully automating the OIC process somewhere down the line.

The pre-qualifier tool takes the taxpayer through 5 main steps, each step containing a series of specific questions:

  1. Basic Information – These are the “deal breakers” that normally result in an OIC being automatically returned (such as missing tax returns or an open bankruptcy)
  2. Assets – Questions about equity in bank accounts, real property, cars, etc.
  3. Income – Monthly income from all sources
  4. Expenses – Actual monthly expenses subject to IRS maximum allowances
  5. Proposal – This is the “MSRP” — the magic number that, if offered to the IRS, may result in an accepted offer

I guess we’ll know how hazardous this tool is when people start ordering an OIC from their tax attorney like they order a sandwich: “One OIC please; I know I qualify because I used the OIC Pre-Qualifier Tool.”

Offer in Compromise: Don't File Just Because You Can

A tax attorney hears all kinds of stories about errors committed by tax preparers or injustices perpetrated by the IRS.  People often ask me (sometimes jokingly) “Can I sue them?”  My answer is usually, “No, you don’t have a cause of action;” or “No, you don’t have any real damages;” or “No, they are protected by the contract that you signed.”  But technically my response should be “Yes, you can, however…”

You can always file a lawsuit.  The question is how far is it going to get you?  If you file a frivilous lawsuit, chances are it won’t get you very far.  If an initial assessment is not done to determine the strength of your case and the likelihood of success, there is a higher likelihood that it will be dismissed.  Depending on the circumstances, filing a frivilious lawsuit could also result in you having to cough up money for sanctions and attorneys fees.

Although I have never seen anybody sanctioned or penalized for filing a frivilous Offer in Compromise (OIC), the same principle applies: you have to take a careful look at the strength of your case before you decide to file.  And I cannot overemphasize the value of having a trained set of eyes — preferably a tax attorney or an experienced CPA — to help you with this important step.  These are just some of the negative consequences of filing an OIC that is ultimately rejected:

  • Loss of $150 filing fee
  • Loss of 20% OIC deposit (applied to outstanding balance)
  • Loss of time involved in preparing and negotiating (typically no less than 6 months, and often closer to 12 months from start to finish)
  •  Lengthening of the Collection Statute Expiration Date / Statute of Limitations on collections (the time period is paused when the offer is filed/”pending” and does not start to run again until 30 days after it is returned or rejected)
  • Penalties and interest continue to accrue during the time your OIC is pending, and must be paid if the offer is not accepted

There are many disreputable tax resolution firms that will “sell you” an Offer in Compromise service without doing their due diligence on the front end.  First, they know you want to settle your case for less than what you owe.  Second, they really only care about closing the deal.  And third, they know that anyone can file an OIC by simply filling out the right forms and attaching the right fees.  When considering who you should hire for tax resolution services, look for somebody who offers a free and thorough consultation before any work is done on your case.  Find somebody with enough integrity to help you determine the best way to resolve your case, rather than just tell you what you want to hear.

So, the question should not be “Can I sue?” or “Can I file and OIC?”  The better question is “If I sue, what is the likelihood of success?” or “If I file an OIC, what is the chance the IRS will accept it?”

OIC Comes in Different Flavors

image via icanhasinternets.com

It may surprise you to learn that there is a tax resolution program on the books that permits the IRS to write off a tax liability or settle a tax debt for less than what is owed even though the taxpayer has the ability to pay it in full.

You’ve probably heard of the Offer in Compromise (a.k.a., tax settlement), but you may not be aware that there are several different kinds of offers.  Here is a brief overview:

  1. Doubt as to Liability Offer: Genuine doubt exists that the IRS has correctly determined the amount owed.
  2. Doubt as to Collectibility Offer: Taxpayer cannot fully pay the tax due; therefore, the IRS accepts an amount equal to what it reasonably can expect to collect — “Reasonable Collection Potential” (RCP) — as payment in full.
  3. Doubt as to Collectibility (Special Circumstances): Taxpayer cannot fully pay the tax due but has proven special circumstances that warrant acceptance for less than RCP.
  4. Effective Tax Administration Offer: RCP is greater than the liability (i.e., on paper the taxpayer has the ability to pay in full) but there are economic or public policy/equity circumstances that would justify accepting the offer for an amount less than full payment.

Some additional requirements for ETA Offers:

  • Taxpayer does not qualify for consideration under the other OIC programs
  • The taxes can be paid in full either by lump sum payment or via installment agreement
  • compromise of the liability does not undermine voluntary compliance with the tax laws

 

Filing OIC? Take a Number.

The IRS has done quite a bit to promote the Offer in Compromise program during the economic downturn of the last few years, and the message is coming across loud and clear.  That’s the good news.  The bad news is the IRS can’t seem to handle the onslaught of new offers.

The Offer in Compromise (OIC) is a program whereby the IRS accepts an amount that is less than the tax liability to forever settle what is owed.  The rationale behind the OIC program is this: if the taxpayer can prove that the amount offered is the absolute most he/she can pay and the IRS will most likely never be able to collect the full tax debt, it is better for the government to cut their losses and take it rather than expend any more resources trying to collect some unknown amount at some unknown time in the future.

According to a recent audit report by the Treasury Inspector General for Tax Administration (TIGTA), there are huge OIC backlogs at both the Memphis and the Brookhaven Offer Units, but Memphis is in worse shape than Brookhaven.  The IRS is in the process of transferring cases between sites to even things out, but precious time is lost in the transfer process, so who knows if that will truly reduce delays.

Offers with the following characteristics can expect the longest delays:

  • taxpayer is self-employed
  • taxpayer earns over $100,000 per year
  • taxpayer owes over $50,000 in back taxes
  • taxpayer lives in a state handled by the Memphis OIC Unit (AK, AL, AZ, CA, CO, HI, ID, KY, LA, MS, MT, NV, NM, OR, TN, TX, UT, WA, WI, WY)

Offer in Compromise

The Offer in Compromise (OIC) is often considered the ultimate form of tax relief. If you are considering an OIC to address your outstanding IRS tax debt, there are a few things you should know.

First, not everyone with a tax debt should attempt an OIC. The OIC is a special program generally reserved for low-income taxpayers with few assets. The OIC filing fee is $150 and the IRS also requires that you pay 20% of your offer amount up front when the offer is filed. Unless you are confident that the offer is going to be accepted, you may be better off saving yourself these fees.

Second, not everybody who meets the criteria for the OIC should file an OIC. Basically, it just has to make good sense. For example, the offer amount must be low enough in comparison to the overall tax debt. Also, if the balances you owe are old and about to expire, you may be in a situation where it would make more sense to “wait out” the statute of limitations rather than make an offer to the IRS.

Third, a tax attorney can maximize your chances of filing a successful Offer in Compromise. An experienced tax attorney will help you determine if the OIC is right for you and if it makes sense to file. An experienced tax attorney has the skills needed to present your financial information in a manner that is most advantageous to you.

Offer in Compromise: The 24-month Rule

The IRS has 24 months from the date that anOffer in Compromise is received to make its decision.  If the IRS does not accept, reject, or return the offer within 24 months, then it is deemed accepted  (IRM 5.8.8.6).  According to IRS policy, “The timeliness of case actions in an offer investigation is important not only to ensure the efficiency of the process but also is a key component of taxpayer satisfaction”  (IRM 5.8.1.2).

But lets face it, the Offer in Compromise process can be lengthy and the IRS has never been very good with taxpayer satisfaction.  It routinely takes several months just for the IRS to mark the offer as received and assign it to an Offer Examiner.  And that’s only the beginning of the process.

I have never seen the 24-month mandatory acceptance provision come into play.  Certainly the responsible IRS employee(s) would be disciplined, if not fired, for letting the 24-month period expire.  My problem with the 24-month rule is that it does not have the intended effect.  In fact, it seems like it is quite the opposite.  An astute IRS representative with a caseload he can barely keep up with will probably delay as long as he can, even though the entire process could easily be completed in 30-60 days.