OFFERS IN COMPROMISE
Does The IRS Cut Deals?

The authority of the government to compromise a tax liability is de-scribed in Internal Revenue Code Section 7122. In short, the IRS may settle a liability at a reduced level when there is doubt regarding (a) the actual tax liability, (b) the collectibility of the debt, or (c) collection of the debt would create a hardship on the taxpayer. This article addresses offers in compromise based solely on collectibility of a tax liability.

In 1992, the National IRS Office completed a study which resulted in significant changes to its prior offer in compromise policy. These policy revisions make an offer in compromise a much more attractive option to resolve difficult-to-collect liabilities. The new attitude is by no means altruistic on the part of the Service; rather, the policies were envisioned to increase tax collection by maximizing revenue in the short term, and requiring future compliance with tax laws as a condition to offer acceptance.

Offer Requirements An offer to the IRS should be based on an analysis of net equity and future earning power of the taxpayer, taking into consideration the amount of tax that the IRS could otherwise collect through enforced collection procedures. If it can be demonstrated that the amount of tax collectible through an offer is greater than the amount collectible through enforced collection (including liquidation of assets), the offer should be accepted. On the other hand, if such an advantage to the Service cannot be demonstrated, the offer should be rejected.

In addition the taxpayer must be in full compliance, i.e., all tax returns must be filed and up to date. In the case of a business, payroll tax returns must not only be current at the time the offer is submitted but must have been filed on time and paid for at least the two tax quarters preceding the filing of the offer.

The Amount of the Offer This is always a critical question, and involves evaluation of a number of factors. Here are some of them:(1) The net equity of the taxpayer’s assets, plus (2) the monthly income of the taxpayer, less reasonably necessary expenses times 60.

Dealing With the Trust Fund Penalty Assessment If a corporation or LLC is the filer of the offer and the liability includes payroll tax, a personal assessment made against the “willful and responsible” person for the amount of tax withheld and not paid over to the IRS. Such an assessment is termed a “Civil Penalty” and assessed under section 6672 of the Internal Revenue Code. Generally this amount is 30 to 60 percent of the total liability. Again, it is strictly the amount of tax withheld and does not include the employer tax liability nor any penalty or interest. If such an assessment were made, that person or persons may need to file his/her own offer in addition to the company or at a minimum include his/her asset values in the companies offer. There are measures that can be taken, however, to minimize the possibility that a trust fund penalty assessment will be made in the first place.

Due to the complexities and financial analysis and issues involved, consulting an experienced professional is critical when submitting an offer. The future quality of life of the owner or chief executive can depend on the quality of the offer and related negotiations.