To be eligible to resolve an outstanding federal tax liability voluntarily (i.e., installment agreement or offer in compromise) with the IRS as opposed to having it forcefully resolved through collection action such as levies, garnishments, and the seizure of assets, the IRS has two basic requirements.  

IRS Requirement #1

The first requirement is that you are in filing compliance.  This means that all outstanding tax returns that are required to be filed have been filed.  Most people do not have a difficult time understanding this requirement once it is determined whether or not there are delinquent returns that need to be filed.

IRS Requirement #2

The second requirement is that the taxpayer is current with all required federal tax deposits and quarterly estimated deposits. Several possible deposits may need to be considered current by the IRS.

Estimated Deposit Requirements For Individuals

One type of deposit is the Estimated Deposit Requirements for Individual Income Taxes. The deposit requirements for individuals tend to be simpler than that of a business because only one deposit may be required. Suppose a federal tax liability has been assessed against you, and you seek a voluntary resolution such as a payment plan or an offer in compromise. In that case, it is a prerequisite that any required quarterly estimated payments be made.

Determining Quarterly Payments

To determine if you are required to make a quarterly estimated payment, the first and best step is to review your prior year’s federal income tax return, Form 1040. 

If the return was filed with a tax liability of over $1,000 (after subtracting federal tax withholding and credits), and you expect the federal withholding and credits to be less than the smaller of 90% of the tax to be shown on your 2015 federal tax return, or 100% of the tax shown on your 2014 federal tax return (only applies if your 2014 tax return covered 12 months – otherwise refer to 90% rule above only), then you are required to make estimated quarterly payments toward your next income tax return as it is presumed that the next income tax return will be similar to the current one.

Determining Each Estimated Quarterly Payment 

The more straightforward way is to divide the tax liability of the last and most recently filed return by four.  For example, if you filed your 2014 1040 income tax return with a tax liability of $5,000, you must make four estimated quarterly payments of $1,250 toward your 2015 1040 income tax return.  If you anticipate your next return to be substantially different than your present return, another means of determining the amount of each estimated quarterly payment is to complete an IRS estimated tax worksheet.

This can be found on the IRS website.  The worksheet is a series of calculations and estimates that will determine the amount of the estimated quarterly payments to eliminate any future liability on the next filed return.

If you are an individual whose income is derived from a W2 wage, one relatively simple method of eliminating the need for an estimated quarterly payment is to increase the income taxes being withheld from your wage.

The required quarterly estimated payments are due on April 15th, June 15th, September 15th, and January 15th. However, you do not have to make the payment on January 15th if you file your tax return by February 1st and pay the entire balance due with your return.

 IRS Deposit Requirements for Businesses

The second type of deposit is IRS deposit requirements for businesses. Like an individual, a business may also have to make quarterly estimated payments toward its future income tax return. The same criteria for individual estimated payments apply to a business.  However, in addition to being current with estimated quarterly payments for income tax, the business also has to be current with its required federal 941 employment tax deposits and possibly with its 940 unemployment tax deposits.  The 941 employment tax deposits are due on a quarterly, monthly, or semi-weekly deposit schedule, depending on the number of wages issued each quarter.

940 Unemployment Deposits

Additionally, the business may be required to make quarterly deposits toward its future 940 unemployment tax return.  The amount is determined by looking at the current quarter’s tax liability.  If the 940 unemployment tax is $500 or less during that quarter, you can carry it over to the next quarter and not make a deposit.  You can continue to carry the tax liability over to the next quarter until the cumulative tax is more than $500. At that point, a tax deposit is required for the current quarter. 

The deposit is due by the last day of the month after the end of the quarter.  If your tax for the next quarter is $500 or less, you are not required to deposit your tax again until the cumulative amount is more than $500.  Suppose the cumulative tax liability never exceeds $500. In that case, it is acceptable to pay the liability with the return at the end of January of the following year when you file the return.

The IRS requires deposit and payment compliance to obtain voluntary resolution for one essential and primary purpose.  The IRS wants to ensure that liability is not incurred on a future return.  It is critical for any voluntary resolution of back tax liability not to accrue any additional tax liability.  The IRS does not want to grant voluntary resolutions such as a payment plan to resolve a back tax liability if the payment plan is likely to default shortly when you file your next return with a liability. Thus, the IRS has established these requirements to ensure that a future liability does not occur, allowing the taxpayer to adhere to the terms of their approved resolution plan.

Greg Johnson has prepared the above article.  Mr. Johnson is a tax attorney and of counsel at The McGuire Law Firm.  Greg has represented many individual and business taxpayers before the IRS regarding many different issues. Call us at (720) 833-7705.

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.

What is an Offer in Compromise?

An offer in compromise is an agreement with the IRS where an individual or business taxpayer offers to pay an amount to the IRS that is less than the total amount of taxes owed to satisfy their liability.  Many people would call this a tax settlement or an accord and satisfaction with the IRS, and it pretty much is.

What is the Offer in Compromise Equation or How Much do I have to Pay the IRS?

I am always asked, “how much do you think it will take to settle my taxes with the IRS?”  Many people have the misconception that there is a percentage that can be offered to the IRS to settle their liability or that the IRS will automatically accept.  The truth is, the amount the IRS will accept to settle the tax debt is based upon each taxpayer’s ability to pay and what the IRS considers to be a taxpayer’s reasonable collection potential (RCP).  A taxpayer’s RCP is determined by their equity in assets and their disposable income, and then general equation for an offer in compromise would look like:  Equity in Assets + Disposable Income X 12 (or 24).  Please note that prior to May of 2012, the IRS would multiply disposable income by 48 or 60, which often created situations whereby the IRS would accept an offer, but the taxpayer without assistance had no way to satisfy the debt within the time period the IRS wanted payment.

Equity in Assets:

Equity in assets would be calculated by taking the fair market value of the taxpayer’s assets from their home, car, bank accounts, retirement accounts, stock, gun collections, jewelry, art and all other assets (including business interests) less any liability associated with the asset such as mortgage or car loan.  It is important to know that the taxpayer is allowed an exemption for certain assets and a reduction in the fair market value of certain assets.  For example, a taxpayer is allowed approximately a $3,450 exemption for each personal vehicle, up to two vehicles.  Thus, if a taxpayer had a 2010 Ford F150 with a fair market value of $20,000 and a car loan of $10,000 the equity in such vehicle that would be included within the taxpayer’s offer would be $6,550.  This would be calculated: $20,000 (Fair Market Value) less $10,000 (car loan) less the $3,450 exemption.  If the car loan exceeded the fair market value of the vehicle, then no equity would be included from such vehicle in the offer amount.  An example of a reduction of the fair market value would be that generally, the IRS will allow a 20% reduction in the fair market value of a taxpayer’s primary residence when calculating the equity in such property.  Thus, if a taxpayer owned a house with a fair market value of $300,000 and a mortgage of $200,000, the amount of equity from such property included in the offer amount would be $40,000.  This would be calculated: $300,000 (fair market value) multiplied by .8 less $200,000 mortgage= $40,000.  You could also multiply $300,000 by 20%= $60,000 and then subtract such amount from the fair market value of the property.

Disposable Income:

Disposable Income is calculated by taking the taxpayer’s total household income less the taxpayer’s allowable expenses.  I state “allowable” expenses because the IRS may not allow all of the taxpayer’s expenses and the IRS has established national standards for allowable expenses that will provide an amount that the IRS will allow the taxpayer to use or claim as an expense.  Items such as food, clothing, housing, utilities and transportation have an allowable standard that is all the taxpayer will be allowed to claim as an expense.  For example, a single taxpayer living in Denver, Colorado may be allowed $1,250 for housing and utilities.  If the taxpayer was actually paying $1,750 for housing and utilities, the taxpayer would only be able to claim $1,250 as an expense when calculating disposable and essentially the excess $500 would be considered disposable income by the IRS.

Now that we know the offer equation and have a better understanding of how the IRS will view equity in assets and disposable income, lets provide an example.  Assume Jeffrey owes the IRS $123,000.  Jeffrey has total equity in assets after exemptions and reductions in fair market value of $12,000.  Jeffrey has monthly disposable income of $1,500 after all allowable expenses are deducted from his monthly income.  Jeffrey’s offer amount would be $30,000 ($12,000 + $1,500 x 12) or $48,000 ($12,000 + $1,500 x 24).

What Terms of Payment Plan Will the IRS Allow for my Offer in Compromise?

When preparing your offer in compromise you must select one of two options for payments to the IRS.  Option one is considered a cash offer whereby you pay 20% of the offer amount when submitting the offer, and the remaining offer amount is paid over five or fewer payments within a certain time period of the IRS accepting the offer.  Generally, the IRS will want the remaining 80% of the offer within 3-6 months of acceptance.  When offering to pay under such terms, the taxpayer’s disposable income is only multiplied by 12 as opposed to 24, which could be a very big advantage to the taxpayer.  If you were offing $20,000 to settle the liability, you would make a payment of $4,000 when submitting the offer and the remaining $16,000 would be payable upon acceptance within a reasonable time frame.  Option two allows the taxpayer to pay their offer amount over 24 months.  The taxpayer’s disposable income is multiplied by 24.  If a taxpayers was proposing an offer amount of $24,000 the taxpayer would make a payment of $1,000 when submitting the offer and would continue to make $1,000 per month payments to the IRS until a determination or final agreement had been reached.  If a taxpayer’s offer in compromise is not accepted, the payments are applied to the total liability.

How do I Prepare and Submit an Offer in Compromise to the IRS?

You must complete the appropriate financial statement(s) and Form 656.  If you are attempting to resolve an individual liability, such as a 1040 debt, you would complete Form 433A OIC.  If the individual attempting to resolve their 1040 debt owns a business, they will likely request that you complete Form 433B, which is a business financial collection statement.  A business attempting to resolve its debt with the IRS would prepare and submit Form 433B OIC.  After completing the necessary financial statements, it is imperative that you include all of the required attachments, which will be dictated by your circumstances, but might include, bank statements, pay stubs, most current statements for retirement accounts and verification of other items as stated on the statement.  Form 656 states the taxpayer’s information, the periods of tax that are included within the offer, the reason for the offer, offer amount and terms.  Once all statements and forms have been compiled, your offer will be submitted to an IRS Offer in Compromise Unit.  There are two main offer units, one in Holtsville, NY and the other in Memphis, TN.  The 656 Instructions will state which unit you should forward your offer too, which is determined by where you live.  Further, these instructions will provide for the current application fee, which must be enclosed when the offer is submitted.

What is the Procedure with the IRS Offer Unit?

Within two to four weeks of submitting your offer, you should receive a notice from the offer unit that the offer has been received and generally this notice will state that you will be contacted within 90 days.  Don’t hold your breath though!  Often the only contact I receive in 90 days is another notice stating that we will be contacted within another 90 days.  Upon receipt, the offer unit will check to make sure the offer can be processed.  Generally, this means they will check for the correct payments and forms, and may check to ensure the taxpayer is current and compliant with all tax obligations.  If the taxpayer is not current & compliant, the offer will likely be returned, and the taxpayer will not have appeal rights.  Thereafter, the offer will be forwarded to an offer examiner who at some point in time will contact the taxpayer or the taxpayer’s Power of Attorney.  The examiner may or may not request additional information and could issue an immediate determination of which must go through their manager for review and final acceptance.  It is fairly typical for the examiner to request additional information, updated information and/or have some questions.

The examiner will eventually issue a determination in writing.  This determination has four potential outcomes.  One, the offer could be returned, which generally only occurs when the taxpayer is not in compliance or has not made one of the appropriate payments.  Two, the offer could be accepted as proposed.  Three, the offer examiner may state that the offer cannot be accepted at the amount proposed (is actually rejected), but if the taxpayer increases their offer amount to a specific figure, they will recommend acceptance.  Four, the offer is rejected because the examiner feels the taxpayer has the ability to satisfy the tax liability in full.

Outcome one is bad as you have no appeal rights with the IRS Appeals Office and your only real option is to resubmit another offer.  Outcome two is wonderful- your offer has been accepted and you can settle your tax debt!  Outcome three may be great or maybe not great as it will depend upon how much the examiner has requested you increase your offer amount too.  Outcome four, may be disappointing but is not the end of the road.  If your offer is rejected under outcomes three or four above, you can still provide additional information to the examiner for reconsideration and often I have seen a successful outcome with the examiner after an initial rejection.  Even if the examiner and offer unit will not change their initial position and rejection determination, you have the right to request an appeal of their decision with the IRS Appeals Office.  Again, I have submitted and negotiated offers that were initially rejected, but later accepted through an appeal.  Thus, if you offer is initially rejected, do not lose hope!

Other Important Issues & Considerations Regarding an Offer

When considering whether or not to submit an offer to the IRS, you should know that although, there is a stay of enforcement while the offer is being reviewed, penalty and interest will continue to accrue, and the collection statute is tolled (is not running).  Thus, I would only recommend submitting an offer of which has at least a realistic possibility of being accepted, if not better.

If your offer is accepted, recently the IRS has been releasing the federal tax liens within 30 days of the offer amount being paid.  However, in addition to paying the offer amount that you have agreed to pay, you must also remain current and compliant for generally a five year period following acceptance of the offer.  Thus, the failure to timely pay taxes or file a return could cause the offer to default.  If the offer defaulted, you would be responsible for the unpaid debt, along with penalty and interest.

If you are questioning your ability to settle your tax liability with an offer in compromise, please consider speaking with a tax attorney at The McGuire Law Firm.  A free consultation is offered to all potential clients, and a reasonable fee may be worth having an experienced tax attorney prepare the documents and negotiate with the IRS.

The McGuire Law Firm has law offices in Denver and Golden Colorado, and offers a free consultation to all potential clients.

Contact The McGuire Law Firm to schedule your free consultation with a tax lawyer in Denver!