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Your Offer In Compromise Instruction Kit Learn About This & Prepare for Your Adviser Privacy Statement Warning Question Answer Solution (navigation buttons at the end of the page) |
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Introduction to the IRS Offer In Compromise Program - How to talk with and how to prepare for your adviser
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Prepare for your Adviser - Forms Required to Be Filed, Checklists, Etc. |
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Prepare for Your Adviser (This is also used for preparation to start the job yourself) What debt and what expenses can be included ? The offer is processed and accepted Can anything be excluded from the offer? Must I include my entire net worth? Must I include my future income? Some Internal Revenue Service Acceptance Rates How the Lien Affects the Internal Revenue Service Attitude Internal Revenue Service Bottom Line Internal Revenue Service Objective in the Allowance of a Compromise Pre-Offer Qualification Worksheet Information for you individually – not your business Income & Expense Information – All Amounts Are Monthly Participants, Owners and Investors
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How to Create an OfferTo create the offer one must do the following – submission of these items does not guarantee the government will accept the offer. In fact, the government many times will not even process the offer. 1) Make an inventory list of everything you own – nothing can be exempted on this initial listing 2) Make a cash flow of your current income, spending, saving, investing 3) Be prepared to disclose all banking, financial accounts, life insurance, credit card accounts, etc. What must be disclosed
The list of items to disclose would be too lengthy to include all disclosure items that would apply for all circumstances. The above does assist you to envision the disclosure required will be full and complete. How long will it take?The Internal Revenue Service places everyone on notice, that it will take six months to process the request. If the Internal Revenue Service asks for more information to process the request the time will be longer. If the Internal Revenue Service denies the request and the denial is protested, then the processing will also be lengthened. What is the Compromise?The amount of the Compromise is a mathematical formula. The compromise is that the government will stop all collection efforts and settle for the agreed upon amount. In summary, the government will expect your offer to be the same as or exceed the amount that it believes it can collect over the life of the tax lien notice – usually ten years. If the government believes the taxpayer’s earning capacity will increase, the assets will increase and debt decrease in the ten year period – it will expect a respectable amount to be offered. If on the other hand, earnings capacity is expected to diminish and assets have less of a potential for growth, then the government may be willing to accept a smaller settlement. How to Create a CompromiseRead this booklet – Answer the questions at the end of the booklet – Return the filled in answers to Bob Parrish CPA – Ask Questions of Bob Parrish CPA so that you will fully understand the process. What debt and what expenses can be included ?For the answers to the questions at the end of this booklet:
Do not exclude anything. The government will exclude items as it chooses, using standards and guidelines that are applied in all districts. We will assist you to understand where there are limits and we will assist you with making arguments in your favor for those items the government limits or disallows, but for which the government is required to at least listen to the arguments for larger deductions. What is the final resolution? The resolution can go either way !The offer is processed and acceptedIf the offer is both processed and accepted, then you need to be prepared to pay the amount of the offer as enumerated in the offering. Once the Internal Revenue Service accepts the offer, with limited exceptions the Internal Revenue Service may not collect more than the offer at some future date. The acceptance of an offer by the IRS creates a "fresh start"; therefore, the terms of the offer require future compliance with all tax filing and paying requirements for a period of 5 years. If you do not abide by all the terms of the offer, including the compliance requirement, the IRS may reinstate the entire tax liability.
The offer is not processedIf the offer is not processed, then Bob Parrish CPA and the taxpayer must work togehter to restructure the offer so that it is accepted. If the taxpayer does not want to, or cannot meet the demands of the Internal Revenue Service to revise the offer so that it is “processable”, then be prepared for the Internal Revenue Service to commence enforcement actions – levies, seizures, etc. The offer is rejectedIf the offer is rejected, then Bob Parrish CPA will discuss with you what will be necessary for the government to accept an offer. Usually, the offer is rejected simply because the Internal Revenue Service wants more money. It is then Bob Parrish CPA PC and you will work together to accomplish one of the following – Work on presenting a request for an installment agreement with the Internal Revenue Service Find additional financing or source of money Work on revising the Offer In Compromise so that the Internal Revenue Service will be more likely to accept the Offer and resubmit it Make an Appeal to the initial rejection Am I Eligible for Consideration?
The following is a quotation from the Internal Revenue Service Collections Manual:
[5.8] 4.2 05/26/99 Determination of Adequate Offer The offer should be reviewed to determine if the amount of the offer is equal to the value of the taxpayer's equity in assets that would be legally and practically obtainable through available collection procedures, both administrative and judicial. An accurate determination of lien priority issues must be made. An accurate determination of fraudulent conveyance and/or transferee liability must be made. [5.8] 4.2.1 05/26/99 Negotiating an Acceptable Offer A flexible negotiation position should be taken when trying to secure an acceptable offer. Negotiation is not only limited to the dollar amount but may also involves issues such as: Terms of payments Benefits of earlier payment (i.e. release of lien and reduced interest accrual) Future earning potential Collateral Agreements NOTE: Any special circumstances of the taxpayer that may warrant consideration in determining reasonable collection potential should be evaluated before determining that the amount offered by the taxpayer is inadequate. In the event an offer is not an acceptable resolution, negotiations should be directed toward other case alternatives such as full payment installment agreement adjustment of the tax reporting uncollectible What else might the Internal Revenue Service Consider in this process? The Internal Revenue Service (or “Service” as it is usually referred to) will consider the components of the process and what should be done to “protect the government’s interest”. To add more to that statement is the following quotation from the instructions to the Internal Revenue Service personnel: Components
of Collectibility Component Definition Assets the amount collectible from the taxpayer's net realizable equity Future income the amount collectible from the taxpayer's income minus necessary living expenses. For cash offers, it is the amount that would be collected from the taxpayer's income over a period of 48 months; for short term deferred offers, it is the amount that would be collected over a period of 60 months; and for deferred payment offers, it is the amount that would be collected over the life of the statute Amount collectible from third parties transferee liability, Trust Fund Recovery Penalty etc. Assets or income that are available to the taxpayer but not available to IRS the amount the taxpayer is reasonably expected to raise from assets available to him or her, but which are beyond the reach of the Government. For example, assets outside the country, or property owned as a tenancy by the entirety. [5.8] 4.3 05/26/99 Filing a Notice of Federal Tax Lien During the consideration of an offer in compromise, a determination should be made regarding the need to file a Notice of Federal Tax Lien (NFTL). Generally, the filing of liens on deferred payment offers should be considered when the taxpayer net realizable equity in assets is being paid over the life of the statute, if the value of those assets would ordinarily warrant such a filing. An offer submitted based on doubt as to collectibility must reasonably reflect collection potential. The four components of collectibility are:
It is the taxpayers’ burden to show how acceptance of the offer would be in the best interest of the Government. Generally, the IRS will not accept an offer unless it is clear that the taxpayers have complied with all current filing and paying requirements. The acceptance of an offer by the IRS creates a "fresh start"; therefore, the terms of the offer require future compliance with all tax filing and paying requirements for a period of 5 years. If the taxpayer does not abide by all the terms of the offer, including the compliance requirement, the IRS may reinstate the entire tax liability. Another Quotation from the Government: Do not submit an offer if: The entire amount you owe can be collected through liquidation of your assets or through a monthly installment plan. IRS can collect more from your assets and/or future income than you are offering. IRS will not decide that “something is better than nothing” and accept the offer because you currently have no assets or income. IRS will return
your offer to you and ask for clarification if you do not fill in every
line item on the form. IRS cannot process your offer if it contains any of
these problems:
When am I not eligible?What can I do to make it work?
The taxpayer – you – must show that you intend to file all tax returns and to stay current in the future. The taxpayer must file all past due tax returns. The first step is to make all tax returns current. The next step is to stay current, both in filing and in paying. Furthermore, the offer must be for an amount the government will consider to meet its criteria.
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DISTRICT |
ACCEPTED |
REJECTED |
WITHDRAWN |
TOTAL |
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Laguna Niguel,CA |
220 (15.2%) |
879 (60.7%) |
349 (24.1%) |
1,448 |
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Newark, NJ |
116 (27.8%) |
139 (33.2%) |
163 (39.0%) |
418 |
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Brooklyn, NY |
67 (29.2%) |
73 (31.9%) |
89 (38.9%) |
229 |
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Los Angeles, CA |
145 (30.0%) |
225 (46.5%) |
114 (23.6%) |
484 |
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Pittsburgh, PA |
35 (36.4%) |
24 (25.0%) |
37 (38.5%) |
96 |
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Cheyenne, WY |
23 (36.5%) |
20 (31.7%) |
20 (31.7%) |
63 |
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Dallas, TX |
313 (36.7%) |
277 (32.5%) |
263 (30.8%) |
853 |
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Austin, TX |
137 (38.l%) |
136 (37.7%) |
87 (24.2%) |
360 |
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Manhattan, NY |
179 (36.8%) |
193 (39.6%) |
115 (23.6%) |
487 |
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Richmond, VA |
207 (38.0%) |
94 (17.2%) |
244 (44.8%) |
545 |
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REMEMBER THE DEFINITION OF A "LIEN"? YOU ARE THE ENTITY UNDER THE LIEN. Effectively the IRS already owns everything you have up to the full amount you owe. So it's up to you to prove that everything you have, if you had to LIQUIDATE ALL OF IT tomorrow, would not be enough to pay the outstanding tax bill. But of course anything having to do with money is not that simple.
There will be other considerations; lot's of them as a matter of fact, which will determine if you can settle the tax debt for less then the full amount. You're playing under their rules and as IRS policy states: "The Service (the IRS) will accept an Offer in Compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential."
Now the question becomes, "WHAT IS REASONABLE COLLECTION POTENTIAL"? And this is where it gets complicated.
Under the law, the IRS has designed its OFFER IN COMPROMISE Program to get as much money as possible from you in any settlement. (WHAT DO YOU EXPECT, IT'S THEIR JOB!) And since it's their job, don't think for a second that they'll be nice guys and give you the information which will help you settle for the least amount possible. They have a fiduciary responsibility and the legal right to get as much as they can from you. Therefore they're not going to disclose the details of how you might settle with them for less then you owe.
A KEY TO SUCCESSFUL SETTLEMENTS IS KNOWING HOW THE IRS EVALUATES "REASONABLE COLLECTION POTENTIAL". This takes specific knowledge of the law and the IRS; its policies, procedures, formulas, Standards, etc., etc., etc. It's a long process which requires documentation to support the financial facts of YOUR life.
"The Service will accept an Offer In Compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. The goal is to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the government." [Internal Revenue Service's Internal Revenue Manual-Administration, Special Procedures, page 7327, 57(01)1.1 (2-26-92)]
"(1) To resolve accounts receivable which cannot be collected in full or on which there is a legitimate dispute as to what is owed.
"(2) To effect collection of what could reasonably be collected at the earliest time possible and at the least cost to the government.
"(3) To give taxpayers a fresh start to enable them to voluntarily comply with the tax laws.
"(4) To collect funds which may not be collectible through any other means." [Internal Revenue Service's Internal Revenue Manual-Administration, Special Procedures, page 7327, 57(01)1.2 (2-26-92)]
When must the offer be paid?
How long do I have to find the money?
There
are three categories of payment. The
first category will carry the most weight in your favor, the remaining two
carry less incentive for the government to decide to accept your offer:
Cash
– must be paid in 90 days or less
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The CASH Method is the only method that can be used if you do not want a NOTICE OF FEDERAL TAX LIEN filed. |
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This method will usually be the least costly of settlement. The Internal Revenue Service procedures allow the taxpayer to submit about 4 years of income in place of the 7 years for the deferred payment option. |
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Short
term deferred payment – more than 90 days, but less than 24 months
Obviously this method will be a better choice for your month to month cash flow. However, this choice will be more expensive than the first method.
Deferred payment agreement
The deferred payment agreement will be the most costly and offer you the least amount of bargaining power. The Service will not have an incentive to settle the tax for less than the total amount of the tax bill if it must wait too long for its money. The Internal Revenue Service has ten years to collect the tax and it may setup an installment agreement with you. In addition the Service may seize monetary assets and pay the tax bill. It may seize and auction other property and apply the proceeds to the tax bill. The Service can seize paychecks, rental collections, accounts receivable, retirement accounts, savings and investments.
The answer is that you, by law, may take as long as you need.
THE REALITY IS: IF YOU WANT THE OFFER TO BE RECEIVED IN THE BEST POSITION YOU CAN BE IN,
PAY AS MUCH WITHIN THE 90 DAYS AS YOU CAN!
What are the Bad Things ?
What about enforcement actions and my rights?
The government may take enforcement action at any time during the processing of the Offer.
If the Offer is rejected, then be prepared to receive a Notice to Levy or an actual levy of your bank accounts or any account at a financial institution or brokerage institution.
In
addition, the government has the authority to seize paychecks directly
from your employer. The
government has the authority to seize your accounts receivable directly
from your customers. The
government has the authority to seize rental income directly from your
tenants. Furthermore, the
government has the authority to seize and close IRA and other similar
retirement accounts. The
government has the authority to require all the payers of income to
withhold current income tax (backup withholding).
The government has the authority to visit your home or your
business, take an inventory, to lock the premises and hold the assets in
its control for an auction.
There
are some very strong rights for you, the taxpayer.
First consider only the negative side of the Offer – the
potential rejection. The
taxpayer may appeal any adverse decision.
Also, you the taxpayer, may file another Offer In Compromise and
restructure the Offer to place you in the best position.
Furthermore, the financial circumstances may not only warrant, but
place you in a favorable position for submitting a new Offer.
The
paragraph about the formidable and intimidating powers of the Government
for enforcing collections – its collection powers – may seem so
awesome that you want to “give up”.
DO
NOT GIVE UP! You
have rights and protections. There
are limitations on the government. Some
property is exempt – although the amounts may not be much, there are
exemptions. Your home is
protected within limits. The
Internal Revenue Service must first Petition a Federal Court and convince
a Federal Judge that s/he should write an Order to seize and auction your
homestead. Bankruptcy is NOT
A SOLUTION ! Bankruptcy does
not prevent the unwanted actions – it only delays them.
There are other lawful and affordable methods to protect assets and
income. You should work with Bob Parrish CPA to help you establish a
system of cash flow and asset preservation.
CPA – Client Communication
Is the CPA – Client Discussion Protected from the Government?
Privileged Communications with Tax Advisers
The new law extends the attorney-client privilege to certain communications between a client and a "federally authorized tax practitioner," i.e., any person authorized to practice before the IRS, such as a CPA, enrolled agent, or enrolled actuary. The communications must be in connection with "tax advice" and must be such that they would qualify as privileged if made between a client and an attorney.
In effect, the new rule incorporates the common law of attorney-client privilege. Thus, for example, communications concerning the preparation of a tax return may not be protected. Also, the attorney-privilege can be waived inadvertently, such as by voluntarily disclosing information to a third party other than an agent of the attorney or client.
The privilege applies only to noncriminal tax matters before the IRS and noncriminal tax proceedings brought by or against the government in any federal court. It does not apply to prevent other agencies, such as the SEC, from compelling disclosure. Also excluded from protection are written communications to a corporation’s officers or other representatives (which could include employees) in connection with promoting the corporation’s participation in a "tax shelter."
The main point is this: Don’t assume your statements to a tax adviser are privileged. When in doubt, ask. The new rule applies to communications made on or after the date of enactment.
FLORIDA: The communication between a Florida CPA and a Texas Client should be protected under the laws of Florida, or Texas whichever gives the most protection to the client/taxpayer. The communication under Florida law protects the communication more than in Texas.
TEXAS: The communication in Texas law does not offer the strength of protection that the Florida law does for CPA and Client Communication. The Texas CPA can protect only the communication allowed by the Federal Statutes which is not as protective as the Florida Statute.
Federally
Regulated Aspects
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Tools - Spreadsheets - Documents - Checklists - OrganizersTOOLS
Your Actions
Spreadsheets & ComputationsBack to Start of Spreadsheets & Math OrganizersInformation Required by The Internal Revenue Service - Please furnish the following information Pre-Offer Qualification WorksheetInformation for you individually – not your businessHousehold Information:
Asset Information:Summary
Bank Accounts
Charge Cards
Real Property
Life Insurance
Securities(Stocks, bonds, mutual funds, money market funds, government securities, annuities, etc.)
Other Questions to Answer
Income & Expense Information – All Amounts Are Monthly:
Business Information
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Name and Address – and County |
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Business telephone number |
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Type of entity |
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Employer Identification Number |
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Type of business |
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Name and Title |
Effective Date |
Home Address |
Telephone Number |
Social Security Number |
Total Percentage or Shares |
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Latest tax return filed ________________________
Form number ______________________________
Tax Year ended ____________________________
Net Income before taxes _____________________
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Name |
Address |
Type of Account |
Account # |
Balance |
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Name or Type |
Name and Address of Institution |
Monthly Payment |
Credit Limit |
Amount Owed |
Credit Available |
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Description |
Type of Ownership |
Physical Address |
County |
Amount Owed |
Market Value and Tax Role Value |
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Name of Company |
Policy Number |
Whole or Term? |
Face Amount |
Available Loan Value |
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(Stocks, bonds, mutual funds, money market funds, government securities, annuities, etc.)
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Kind |
Quantity or Denomination |
Current Value |
Where Located |
Owner of record |
Symbol or Cusip |
Cost |
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Any Court Proceedings? |
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Repossessions? |
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Anticipated Increase in income? |
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Bankruptcies? |
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Any recent sales or other transfer of assets at less then full market value? |
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A Participant or Beneficiary to a trust, an estate, Profit Sharing Plan, Retirement Plan, etc.? |
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Name |
Address |
Amount Due |
Date Due |
Status |
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Sample Agreements - Trusts - Etc. |
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| SAMPLES Title 1 Title 2 |
Back to Start of Contracts, Trusts, etc.
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Engagement Status Letter ~ WARNING!
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Bob Parrish
Copyright © 1999,2000,2001 Bob Parrish. All rights reserved.
Revised: March 04, 2007
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