IRS Offer in Compromise Resource Page

The article below has been prepared to act as an IRS Offer in Compromise resource page whereby individuals can obtain necessary information regarding an IRS Offer in Compromise.  Please note, this information is not legal advice and should not supplement the advice of a tax attorney or tax professional.

What is an IRS Offer in Compromise?

An offer in compromise allows a taxpayer to settle their tax debt with the Internal Revenue Service for less than the total amount of tax owed.  Generally, the IRS will accept an offer in compromise if the offered amount by the taxpayer is the most the IRS could collect from the taxpayer within a certain period of time.

Offer In Compromise Pre Qualifier Tool

The IRS has an Offer in Compromise Pre Qualifier tool that can be very useful to taxpayers wondering if they would be eligible for an IRS Offer in Compromise.  The pre qualifier tool initially asks the taxpayer questions related to tax return filings, estimated payments and other tax payment & filing issues as well as bankruptcy (click for initial questions).  These issues could dictated whether or not a taxpayer is even eligible to submit an IRS Offer in Compromise.  Thereafter, the Offer in Compromise Pre Qualifier Tool asks financial questions related to income, expenses, assets, asset values and loans.  These financial questions break down a taxpayer’s equity in assets and disposable income which are the major factors considered by the IRS when accepting or rejecting an offer in compromise.

IRS Offer in Compromise Form

Form 656 is the form submitted to the IRS when submitting your offer in compromise.  Form 656 states the taxpayer’s information, the tax types and periods of which the taxpayer is attempting to settle, and perhaps most importantly, the offer in compromise amount and terms for payment.  In addition to Form 656, the taxpayer must submit the proper financial statement.  An individual taxpayer will submit Form 433A OIC, and a business taxpayer will submit Form 433B OIC.  If an individual has ownership interests in a business, the individual would likely need to file Form 433B for such business.

Where To Submit Your IRS Offer in Compromise

Your offer will initially be submitted to one of two offer in compromise units, which are in Memphis, TN and Holtsville, NY.  Where you live, will determine the office where you will file your offer.  The offer in compromise booklet provides the correct address based upon where you live.

What Decisions can the IRS make regarding my Offer?

The IRS can either accept, reject or return your offer.  Acceptance, of course would be preferred!  If the IRS rejects your offer, they may reject the amount, but agree to a larger amount and thus you may still be able to settle your tax debt.  You can also appeal the rejection by filing Form 13711.  The IRS will return an offer if, for example, the taxpayer is out of compliance.  You do not have appeal rights on a returned offer.

What Information is Public?

The IRS does make certain information regarding offers public.  Click, “information” for addresses of IRS offices with information open to public inspection.

Publication 594

IRS Publication 594 discusses the IRS collection process and may be useful to you as you are considering submitting an offer in compromise to the IRS.  Generally, submitting an offer to the IRS acts as a hold on enforcement.

If you have questions regarding the IRS Offer in Compromise process or your ability to settle a tax debt, you can discuss these issues with a tax attorney at The McGuire Law Firm.  A free consultation is provided to all clients.

IRS Offer in Compromise

Initial Considerations Regarding a Corporate Acquisition

In any corporate acquisition, there are tax and non-tax issues, multiple business considerations and goals of the parties involved with the transaction.  The tax planning that is involved before, during and after the acquisition process may include many options and alternatives to achieve the tax and non-tax wishes and goals of the parties.  Thus, one of the most important steps in the planning process of a corporate acquisition is to discuss and review the party’s intentions and goals, which may include short term matters and long term matters.

First, we need to identify the parties.  In any corporate acquisition you will have the buyer who is looking to acquire one or more businesses that are operated and owned by another business.  The seller, which may be referred to as the “target” or “target-corporation” may wish to be disposing of the business in exchange for some type or form of consideration, or merge in some way with the buyer.  Broadly stated, the buyer may wish to purchase the stock of the target corporation, or acquire the assets of the corporation.  Thus, in general, you can consider the purchase options to be a stock purchase or asset purchase of the target.  Furthermore, there is the possibility that the acquisition could be a hostile acquisition.  A hostile acquisition involves the acquisition of a publicly held company, like Wal Mart.  The acquisition begins without any agreement between the purchaser and the target corporation.  It is possible that through a hostile acquisition, the target may not even wish to be acquired or purchased by the buyer.

It is likely that the single most important factor in an acquisition will be the consideration to be paid or consideration received by target (property, stock and other items could be used as consideration).  Thereafter, an important issue to consider and understand is whether the shareholders of the target corporation plan to or wish to have an equity ownership in the combined entity after the acquisition is completed, or if such shareholders wish to sell their entire ownership interest in exchange for a cash payment or other financial benefit.  This issue will likely dictate the overall consideration involved and will, in many respects, control the overall structure of the transaction as well as the characterization of the transaction for tax purposes (taxable versus tax free).  For example, if the parties wished to have a tax free reorganization, a common theme in a tax free reorganization is continuing ownership interest in the combined business by the previous shareholders of the target business.  The transaction may only be able to qualify as a tax-free reorganization if a substantial portion of the consideration paid is the stock of acquiring corporation, or perhaps the stock of the acquiring corporation’s parent.  Thus, consider whether or not the target shareholders receiving shares of the acquiring corporation would be practical if in fact the some or all of the target shareholders wished to receive cash consideration for their ownership interests.  This example illustrates how the goals and wishes of the parties involved can dictate the transaction structure and thus the tax implications to the parties.

The above article has been prepared by John McGuire of The McGuire Law Firm.  As a tax and business attorney, Mr. McGuire’s practice is focused on tax planning, tax matters before the IRS and business transactions from business start-ups & formation, to business contracts & acquisitions.  You can schedule a free consultation with a business attorney at The McGuire Law Firm by calling 720-833-7705.

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Employee Stock Options

Successful businesses will have successful, driven and strong employees.  Often businesses are faced with questions and issues regarding maintaining employees, hiring the right employees and incentivizing employees.  Incentive compensation arrangements are often used by large and small businesses as a means by which to reward employees, as well as a benefit to individuals the business is hoping to hire and maintain.  An incentive compensation plan can have a number of benefits over cash compensation and qualified plans such as:

  • They can be easy to adopt, with low upkeep and administrative costs
  • Employees can defer taxation
  • The plan can allow a key employee to participate and share in corporate growth through direct equity ownership, or grant equity flavored compensation such as phantom stock
  • Incentive compensation plans do not need to meet discrimination requirements, whereas qualified plans may need to meet such requirements

A small business such as an S corporation can use an incentive plan just like a C corporation, but one must be mindful of the S corporation eligibility rules.  The eligibility rules for an S corporation create matters and issues that must be considered when an S corporation implements an incentive compensation plan.  This article has been prepared by a business attorney and tax attorney to provide information regarding stock options available to small businesses when implementing an incentive compensation plan.

Stock Options

Stock options can be used by corporations to compensate certain key employees.  There are two forms of these stock options: 1) Nonqualified Stock Options (NQSOs) and 2) Incentive Stock Options (ISOs).

A Nonqualified Stock Option is an option granted by the corporation to an employee.  The option provides the employee with the right to purchase corporate stock at a specific and designated price through some date established in the future.  Generally, the option will grant an executive or key employee the ability to purchase stock at a price that is below fair market value.  For example, John, a highly trained & key employee of Do It Right, Inc. may receive an option to buy shares at $15/share, when the fair market value of the share is $30/share through a certain date in the future.   After a specific holding period, the option can be exercised, or it may vest in steps or stages in the future.

Options are not taxed at the date they are granted under Section 83 of the Internal Revenue Code, unless there is a readily ascertainable fair market value.  Generally, the treasury regulations would hold that an option not actively traded on a market does not have an ascertainable fair market value unless the value can be determined with reasonable certainty.  Therefore, generally the regulations presume an untraded option would not have a readily ascertainable fair market value.  It also can be relatively safe to assume that S corporation options would rarely have an ascertainable fair market value and therefore, the option would not be taxed until exercised.  When exercised, the difference between the stock’s fair market value and the amount paid by the employee in exercising the option are taxed to the employee as compensation, and the employer is permitted a deduction for compensation.

 

Incentive Stock Options

An incentive stock option plan is similar to a nonqualified stock option in that it is an option purchase stock in the corporation at a future date.  The difference is, the holder of an incentive stock option can receive preferential tax treatment upon exercising the option that is not available to the holder of a nonqualified stock option.  The incentive stock option plan must meet very specific standards.  Under IRC Section 422(b), the option must: 1) be granted to an employee via a plan approved by the shareholders; 2) have an exercise price not less than the stock’s fair market value as of the date of grant; 3) no longer than a 10 year exercise period, and be granted within 10 years; 4) restrictions on transferability; 5) the holder of the option, at the time the option is granted cannot own more than 10% of the combined total voting power of all corporate stock.  The last issue #5, does not apply if the option price is at least 110% of the fair market value of the applicable stock when granted.  When the requirements are met, the holder of the option can exercise the option free of tax!  Yes, the holder postpones the taxable event until the stock received via the option is disposed, sold or exchanged.

John R. McGuire is a tax attorney and business attorney at The McGuire Law Firm.  In addition to his J.D. Mr. McGuire holds an LL.M. in taxation.  Mr. McGuire advises his clients on matters before the IRS, tax planning & issues and business transactions from formation & sale to contractual issues.

Contact The McGuire Law Firm to schedule a free consultation with a business attorney regarding your business matters and issues.

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Direct Stock Acquisition and Reverse Triangular Merger

There are multiple options to implement the acquisition of a business.  The purchaser or acquirer could purchase the stock of the target corporation, or the assets of the target corporation.  If the stock of the target corporation is to be purchased there are multiple options and variations by which the stock can be acquired.  The article below will discuss some of the common stock acquisitions that are available for a corporation to acquire another.

The Direct Stock Purchase

The direct purchase of stock from the target shareholders may be the simplest structure and means by which to implement a stock acquisition.  Through a direct stock purchase, the acquirer will purchase stock of the target from the shareholders of the target for an agreed upon purchase price or consideration.  When the target is a closely held corporation, the acquirer can work out and negotiate the deal directly with the shareholders of the target corporation.  When the target corporation is a publicly held corporation, the acquirer could purchase stock via the open market, or produce a cash tender offer (or exchange offer) for the purchase of the target corporation’s stock.  A tender offer would be an offer to purchase shares of the corporation for cash, in comparison to an exchange offer, which is an offer to exchange stock, securities or other consideration.  Certain (and different) securities laws must be considered when weighing tender offers versus exchange offers.

Often one or both parties will wish for the transaction to be a tax-free exchange under the Internal Revenue Code.  It is important to note that for the exchange to be considered under Internal Revenue Code Section 368, a tax free exchange of stock would require the consideration paid to the target shareholders consist solely of the voting stock the acquiring corporation, or the parent of the acquiring corporation.  See IRC section 368(a)(1)(B) and related treasury regulations for more information regarding a tax-free exchange.

Reverse Triangular Merger (Indirect Stock Purchase)

 A direct stock purchase may not always be feasible to consummate an acquisition, especially if the target corporation is publicly held.  When publicly held, each shareholder must decide whether to sell their shares via the public market or via the tender or exchange offer.  The odds may be stacked such that one or a few number of shareholders do not wish to sell, or perhaps are even unaware of the offer to dispose of their shares. There is an approach that can legally require the shareholders to sell known as the reverse triangular merger.  The benefit of the reverse triangular merger is that conversion of the shares occurs via operation of law, and is binding on the target corporation’s shareholders.  Thus, the purchaser or acquirer can legally force and guarantee the acquisition of the shares.

The reverse triangular merger would work as follows: Purchasing, Inc. wants to acquire all of the shares of Targeted, Inc., which is publicly held.  Purchasing Inc. and Targeted, Inc. have agreed upon the consideration to be paid and the other terms and conditions.  Purchasing, Inc. would form Subsidiary, Inc. and Subsidiary, Inc. would be merged with Targeted, Inc., with Targeted, Inc. as the survivor.  Via operation of law, the stock of Subsidiary, Inc. is converted to stock of Targeted, Inc. and Purchasing, Inc. as the sole shareholder of Subsidiary, Inc. would receive all of the stock of Targeted, Inc.  The former shareholders of Targeted, Inc. would receive the agreed upon consideration.  Further, Purchasing, Inc. is now the sole shareholder of Targeted, Inc.

The above article has been prepared by John McGuire of The McGuire Law Firm.  John is a tax attorney and business attorney in Denver, Colorado and can be contacted at John@jmtaxlaw.com

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Constructive Ownership Within Foreign Corporations

Under the context of controlled foreign corporations, a U.S. shareholder is defined as a U.S. Person who owns or is considered as owning 10% or more of the total combined voting power of all classes of stock entitled to vote of a foreign corporation.  Does this language mean that constructive ownership is considered when determining whether the applicable person is a 10% owner and thus a U.S. shareholder?  The answer is yes!  Stock that is held directly, indirectly and constructively with the meaning of Internal Revenue Code Section 958 is taken into account when determining ownership.

Because of this rule and the application of attribution rules, a U.S. shareholder of shareholders are unable to avoid U.S. shareholder status by distributing stock of a foreign corporation to related parties.  For example, if Corporation 1 spread ownership equally amongst 20 other U.S. affiliates within an affiliated group, and thus each corporation would own 5% of the stock of Corporation 1, U.S. shareholder status could not be avoided for each shareholder because of the attribution rules, and each corporation would be treated as constructively owning the shares.  It can also be important to remember that the attribution rules, attribute the stock on the value of the shares owned and the not the voting power.  For example, assume stock was held by John in a corporation and the stock held was 10% of the votes but 25% of the value.  The value would be considered as owning 25% of the stock held.

What about ownership in a foreign partnership, foreign trust or even a foreign estate?  Do the controlled foreign corporation rules in Subpart F apply to these foreign “entities?”  The answer would be no because a foreign entity must be a corporation to fall within the definition of a controlled foreign corporation, and therefore, Subpart F would not apply as a result of ownership by a United State person.  Thus, we must ask the question, for purposes of a controlled foreign corporation, how is a corporation defined?  One should reference Internal Revenue Code Section 7701(a)(3) per the regulations when determining whether or not a foreign business or entity is in fact a corporation within the definition of the code.  Prior to 1997 a facts and circumstances test applied reviewing continuity of life, centralized management, limited liability and free transferability of assets whereby now, under 7701(a)(3) regulations, there are elective rules for classifying most foreign entities.  These classification matters could be akin to certain options, often referred to as “check the box” regulations.  For more information regarding check the box regulations, see 910 T.M.

You can contact a tax attorney and business attorney at The McGuire Law Firm to discuss your tax & business related matters.  The McGuire Law Firm has offices in Denver, Colorado and Golden, Colorado for your convenience and offers a free consultation to all potential clients.

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Streamlined OVDP by Denver Tax Attorney

What is the Streamlined Offshore Voluntary Disclosure Program (OVDP)?  Simply put, the Streamlined OVDP is a program established by the IRS that may be considered “shortened” or “simpler” than the normal OVDP, and has a reduced or lesser penalty of 5% in comparison to the OVDP.  Certain criteria must be met to be eligible for the Streamlined OVDP, one of which is that the taxpayer must show the failure to report the assets and income was non-willful.  That being said, the IRS would define non-willful conduct as “conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of good faith misunderstanding of the requirements of the law.”

If an individual is eligible for the Streamlined OVDP the scope and effect of the streamline procedure is as follows:

The taxpayer must file amended tax returns, including all of the required informational tax returns (8938, 3520, 926 etc.) for each of the three most recent years for which the tax return due date has passed. For example, if it is May 20, 2015 and Joe Taxpayer has filed his 2012, 2013 and 2014 1040 tax returns, but failed to report all gross income due to foreign financial assets (and may have failed to file the FBAR), Joe would amend his 2012, 2013 and 2014 1040s to include the necessary income from the foreign financial accounts.  In addition:

  • The taxpayer must also file FBARs for the most recent 6 years the FBAR was due and should have been filed. FBAR is filed by filing FinCEN Form 114 online, which was previously TD F 90-22.1.
  • The taxpayer must pay the necessary offshore penalty, which is currently 5% for the Streamlined OVDP. The total amount of tax due when including the necessary income in gross income, interest and the streamlined offshore penalty should be remitted when filing the amended tax returns.

 

Now that we know the procedure for the streamlined program, how is the 5% penalty calculated?  The offshore penalty of 5% is calculated by taking 5% of the highest aggregate balance (or value) of the taxpayer’s foreign financial assets that would be subject to the offshore penalty for the years covered by the tax return and FBAR period.  The highest aggregate balance is determined by taking the year-end balances and year-end asset value(s) of the foreign financial assets that would be subject to the offshore penalty for the applicable periods of tax return and FBAR filings.  The highest value for a single year, for the applicable years would then be subject to the penalty.

 

What assets are subject to the 5% offshore penalty?  If a foreign financial asset should have been reported on an FBAR, but was not, the asset is subject to the penalty.  An asset can also be subject to the 5% offshore penalty even if the asset was reported, but gross income from the asset or in respect of the asset was not included in the taxpayer’s gross income.

 

If you have failed to report foreign financial assets and/or income, a tax attorney at The McGuire Law Firm can represent you before the IRS and assist you with your obligations.  This article has been drafted by John McGuire, a tax attorney in Denver, Colorado with The McGuire Law Firm.  Mr. McGuire’s practice focuses primarily on tax matters before the IRS, tax planning & related issues and business transactions.  You can schedule a free consultation with a Denver tax attorney by contacting The McGuire Law Firm.

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