Posts Tagged internal revenue manual

How Does One Qualify for An Offer in Compromise?

Posted on June 12, 2011 | Tax Studies.

Misinterpretation of the Tax Law and erroneous information causes many taxpayers to owe taxes way beyond their ability to pay. Every year, the IRS conducts thousands of tax audits to both individuals and businesses. In most cases, they audit taxpayers who either have red flag items in their tax returns or for whatever reason, if they suspect that a tax return was filed with erroneous information. Given the complexities of the Tax Law, after an audit, one can easily find that they have not been paying for a certain tax element for years. The outstanding taxes, interest, and penalties charged on the tax debts will, in many cases, go beyond one’s ability to pay. However, to protect taxpayers from going into bankruptcy or serious financial hardships, the IRS provides various tax payment options that can enable such a taxpayer to suitably meet their tax obligations. One of these payment options is an Offer in Compromise (OIC).

An Offer in Compromise is an offer that the IRS gives to taxpayers who lack the ability to meet their tax obligation. Depending on your ability to pay, the IRS can write off up to 99% of the tax debt, leaving you with a tax liability that you can manage to pay. Taxpayers who may find themselves owing a huge lump-sum amount of taxes, especially after a tax audit, can apply for an Offer in Compromise. The IRS will require you to provide them with all information about your finances, assets, and debt portfolio. Based on the information forwarded to the IRS, they make a decision about how much you can afford to pay them and write off the difference. According to the Internal Revenue Manual, there are three situations that can qualify a taxpayer to be awarded an Offer in Compromise:

Doubts on Ability to Pay

The first reason that can cause the IRS to write off part of a tax liability under the OIC is if there are doubts on the taxpayer’s ability to repay the tax debt. To determine a taxpayer’s ability to pay, the IRS reviews the assets, the income level, and the financial situation of the taxpayer. If a business makes turnovers of $2,000.00 and owes taxes, interest, and penalties of $250,000.00, most likely, the business cannot raise the funds to pay for its taxes, even in installments over 5 years. Therefore, as opposed to pushing the owner out of business, the IRS can require the business to pay a reduced tax amount that will keep the business running. This way, the IRS will not lose out on the whole outstanding amount.

Doubts as to Existence of Tax Liability

The other reason that the IRS can consider for an Offer in Compromise is if the taxpayer was unaware about the erroneous information in the tax return and did not know that they owed the taxes. Though ignorance is no defense, the IRS does consider that taxes are at times, a complex subject, and one can genuinely be unaware of a tax liability. For example, an innocent spouse may find themselves owing taxes they were not aware of when they filed a joint return with their spouse. However, due to time limitations or other rules of limitations, they may be disqualified for an Offer in Compromise. The IRS can consider writing off the debt under an OIC since the taxpayer was not aware that the tax liability even existed.

Payment Would Lead to Financial Hardship

Even if a taxpayer can afford to pay off their taxes and therefore not qualify for an OIC (under the first reason), the IRS can still consider a taxpayer for an OIC if making such payment would leave the taxpayer in economic hardship. The IRS considers reasonable expenses, other financial obligations, and the current financial situation of the taxpayer. For example, if a taxpayer has dependents, the IRS would consider an OIC to keep the taxpayer from being unable to pay for necessary expenses such as school fees or refrain from selling the taxpayer’s house (which would leave the family of the taxpayer homeless).

Offer in Compromise and Dissipation of Funds

Posted on June 7, 2011 | Tax Studies.

The IRS, a government organization, extends various opportunities to protect taxpayers who find themselves unable to pay off a tax liability for whatever reason. As part of its policies, the IRS does not collect taxes to the extent of leaving the taxpayer in financial hardship.

If the taxpayer cannot pay off the tax debt in a lump-sum payment, the IRS provides Tax Installment Plans to enable the taxpayer pay off the debt in installments over several months or even years. On the other hand, if the taxpayer is entirely unable to pay his or her tax debt without getting into financial hardship because of their difficult financial position, the IRS can consider an Offer in Compromise.

In such an offer, the IRS may forgive a portion of the taxpayer’s debt and write off up to 99% of the tax liability. However, before approaching the IRS to seek for such tax repayment options, one needs to be careful as to how one handles one’s finances within the period in which the tax liability remains outstanding.

According to the Internal Revenue Manual, the IRS reviews all the taxpayer’s assets, income, and future potential earnings to determine how much the taxpayer can afford before extending the leniency options of payment. However, if the IRS notices that some funds were misused while the tax liability remained outstanding, the IRS may consider the taxpayer to still be in possession of such funds. This may significantly reduce the chances for the taxpayer to be awarded leniency from Uncle Sam.

There are many taxpayers who consider paying off their other debts or involving themselves in other financial ventures all the while having an outstanding tax debt. Yet, they may still seek these leniency options towards paying off their tax liability. The IRS may consider transactions such as paying off debts, paying off credit cards, personal expenses, and other expenditures done before attempting to pay off a tax liability as a dissipation of funds.

In a recent court case, a taxpayer had requested for an Offer in Compromise from the IRS but was denied on grounds of having misused funds that would have otherwise been used for paying taxes. The taxpayer had put a chunk of his funds in day-trading with the hope of making money to pay of his taxes, among other debts. However, he had lost his cash in the dealings and then applied for an Offer in Compromise with the pretext that he no longer had finances. However, the IRS denied the offer by considering the amount of funds that have been lost in the day-trading deals.

The taxpayer decided to take the matter to Tax Court. However, in the ruling, the judge agreed with the IRS that indeed, the funds were dissipated and the IRS was correct to have considered the lost funds as such. In the ruling, the judge noted that day-trading was a high-risk enterprise, especially so for a person who lacked any experience, as was the taxpayer in question. The taxpayer therefore, willfully involved himself in the day-trading business, knowing the risks at hand, and is therefore liable for the losses and cannot appeal the loss to the IRS.

Besides the aforementioned case, there are many other taxpayers who have found themselves denied an opportunity for an Offer in Compromise or an Installment Plan because of some other payments made prior to paying their tax liability. Therefore, before applying for payment opportunities from the IRS, it may be advisable to seek professional help or get more detailed information to plan your finances prior to contacting the IRS, so as to be more prepared and increase your chances of getting a good offer.