OIC Fees: It Matters How you Pay

A question came up recently about whether or not a taxpayer must submit his or her Offer in Compromise fees in the form of a cashier’s check or money order as opposed to a personal check.

Just a little background first.  When filing an Offer in Compromise, you must submit two payments: one is the $186 application fee, and the other is the 20% deposit or initial offer payment.  That’s 20% for “cash offers” or the first of 24 payments for “periodic payment” offers (the difference between these two types is not relevant here and could be the subject of a completely different blog entry).  If either of these payments are missing or insufficient, the offer is almost certainly going to be returned and you’ll have to start all over again.

First of all, the IRS does not require cashier’s checks or money orders.  In fact, the instructions in the Form 656 Booklet specifically state that a taxpayer may send a “personal check, cashier’s check, or money order.”  However, what is required is that the money be available in your personal checking account when the personal check is cashed by the IRS.  Since a cashier’s check or money order is already paid for, there is no risk of insufficient funds.  Therefore, if your tax attorney asks for a cashier’s check or a money order, he is not being a jerk, he is being cautious.

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.

Better to be Employed when Filing OIC

The Offer in Compromise (OIC) is an IRS program whereby some taxpayers are able to settle their tax debts for less than what they owe.  But the OIC is not for everyone.  For instance, if the fair market value of taxpayer’s assets adds up to more than what is owed, then OIC is not an option.  Also, OIC is not a good option if a taxpayer’s income is too high.

So how does the IRS calculate income while reviewing an OIC filed by a taxpayer who is unemployed?  There are many different options:

  1. Unemployment Income – If the Offer Examiner is focused purely on what the taxpayer is earning at the present, then it would make sense to simply use the monthly unemployment benefit amount. However, it is unusual for the IRS to go this route because unemployment benefits tend to be temporary. If the IRS is going to wipe the slate clean then they want to be sure they are getting every last dime they can possibly get from the taxpayer. Unemployment income is normally an understatement of one’s true earning potential.
  2. Income history – Sometimes the IRS compares a taxpayer’s current income with income reported via tax returns going back 1, 2, 3, or even more years. If the present year income appears to be an anomaly, then the IRS may elect to calculate an average income using several years’ tax returns.
  3. Income potential – This is similar to using an income history because it seeks to determine what the taxpayer can theoretically make rather than taking the current income for face value. One example of using income potential would be to increase the income of a taxpayer who is close to finishing school and who will be moving into a high-paying field of work.
  4. Impute income – I have seen the IRS simply impute/assign minimum wage when a taxpayer is unemployed.  However, the IRS is not likely going to do this if the taxpayer has a history of high wages.
  5. Reject the Offer – I put rejection as a final option because, in reality, if the IRS is unable to determine what the taxpayer’s income is, they are more likely to reject the offer than struggle too long figuring it out.

Income is one of the most important factors that the IRS looks at when determining whether to accept or reject an Offer in Compromise. Based on my experience, the IRS simply does not believe it when someone claims their income is $0.  Since the IRS is going to resort to one of the above analyses or simply reject the offer when unemployed, then it is safe to say that an OIC is a more successful form of tax relief for those who have a steady job.

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?”

Interesting IRS Stats

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Let’s look back on some of the statistics compiled by the IRS for Fiscal Year 2011 and try to determine what will be reported for FY 2012.  Will we see any new tax relief trends?  My source is the Statistics of Income tax stats found in the “IRS Data Book.”

  • Number of new deliquent tax accounts in FY 2011: 8,011,000 (17,000 more than 2010)
  • Number of untimely filed returns by end of FY 2011: 3,862,000 (162,000 more than 2010)
  • Number of Offers in Compromise filed: 59,000 (2,000 more than 2010)
  • Number of Offers in Compromise accepted: 20,000 (6,000 more than 2010)
  • Number of Federal Tax Liens filed: 1,042,230 (54,146 less than 2010)
  • Number of levy notices served on 3rd parties: 3,748,884 (142,066 more than 2010)
  • Number of seizures: 776 (171 more than 2010)

The only stat that appears to be on a downward trend is the filing of Federal Tax Liens.  This is good news for taxpayers.  For several years now advocacy groups have been questioning the efficacy of tax liens as a collections tool; maybe the IRS is finally listening.

More and more taxpayers continue to file and pay late, and incur tax debt.  And the IRS tries to keep pace by increasing active collection activities.

What about the Offer in Compromise acceptance rate?  You see a lot of percentages thrown around by tax attorneys and tax resolution firms.  But according to IRS’ figures, they accepted 25% in 2010 and 34% in 2011.  This is probably the most encouraging data of all. Let’s hope this trend continues and the IRS accepts event more offers in compromise when the statistics are available for FY 2012.

Upcoming IRS Webinar

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The IRS has gradually revealed some important changes to its tax collection procedures over the last several months under the “Fresh Start” program.  What began as a patchwork of provisions scattered here and there, has now been organized under its own tab on the homepage of the IRS website.   Most of the changes are now in effect, even though they have not made their way into the Internal Revenue Manual yet (see Interim Guidance Memo on changes to Offer in Compromise process).

In an effort to provide further guidance regarding the IRS Fresh Start program, the IRS is offering a free webinar on September 12th.  The webinar is entitled “Payment Alternatives – When You Owe the IRS,” so it is not 100% focused on Fresh Start.  It is supposed to cover Installment Agreements, Currently Not Collectible Status, and Offers in Compromise, hopefully presented through the lense of the Fresh Start program.  One of the bullet points is “Fresh Start enhancements.”

The presenter for this webinar will be Traci Suiter, Lead Public Affairs Specialist of the Small Business / Self-Employed division of the IRS.  Other IRS representatives will participate in a Q&A segment.

OIC Comes in Different Flavors

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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

 

IRS Makes Potentially Huge Changes to OIC Program

The IRS recently announced some historic modifications to the Offer in Compromise (OIC) program which could result in drastic increases in accepted offers.  I say it “could” have this result because the IRS is notorious for not training its personnel to understand their own rules.  Changes such as these take quite a while to trickle down to the rank-and-file IRS employees who handle most collections case.  And sometimes parts are lost or misinterpreted during the trickling process.

By far the most significant change that was announced has to do with the way the IRS calculates a taxpayer’s reasonable collection potential.  Previously this would have included the combined equity in all assets and the future earning capacity projected over 4-5 years following the offer’s acceptance.  It will still include all the equity in assets but now the future income calculation should be multiplied across only 1-2 years.

Some taxpayers have no available income (after paying allowable expenses), and this change will have no impact at all on them.  However, for everyone else, this change may mean the difference between an accepted or a rejected OIC.  If the IRS is serious about implementing these changes, then I think more people will obtain tax relief because more people will meet the criteria for the Offer in Compromise program.  And if other practitioners think like I do, then we should see a big increase in OIC filings, which will mean a backlog of OIC cases and longer delays.  So we’ll have to take the good with the bad on this one.

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