Posts Tagged Offer
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).
2011 Offshore Voluntary Disclosure Initiative
Posted on May 25, 2011 | Tax Studies.
The 2011 Offshore Voluntary Disclosure Initiative (OVDI) is an initiative by the IRS to provide some form of amnesty to individuals seeking to comply with disclosures for foreign incomes. The IRS is seeking to aggressively pursue incomes made overseas that have not been disclosed and has provided taxpayers with a window to come clean before they can apply the full force of the law. This initiative runs until August 31, 2011 and provides for some level of general pardon for previously unreported accounts.
What Does the Initiative Offer?
The tax amnesty initiative provides a reduced 25% penalty charge on the highest account balance that the account had between 2003 and 2010. This applies for accounts that ran balances over $75,000.00 for the same period. For accounts whose highest aggregate balance remained below $75,000.00 between 2003 and 2010, the penalty will be 12.5% of the highest account balance for the same period.
However, for accounts that are proven to be an inheritance account, the IRS is charging a reduced penalty of 5% of the highest account balance. This is in contrast to the high civil and criminal charges that would apply for non disclosure of foreign incomes and foreign accounts under the Foreign Bank and Financial Accounts (FBAR). These charges include paying all due taxes, any interests, and penalties for incomes that were not disclosed for every tax year. A further accuracy penalty of 20% of taxes due is also charged over and above the taxes, interests, and penalties.
The 2009 Initiative
In 2009, a similar initiative to provide some level of amnesty to people who had not fully complied with the FBAR disclosure requirements was also provided by the IRS. However, the initiative provided an even lower penalty of 20% as opposed to the current 25% charge for the highest account balance for the period between 2003 and 2008. The 2010 initiative also covers a longer period as it includes the period covered by the 2009 initiative plus the disclosure for the 2009 and 2010 tax years.
The Initiative May Seem Unfair to Some
Many who are seeking to take advantage of the initiative are complaining that the initiative does not take into account the different and particular circumstances of the various foreign disclosure cases and instead, provides only a standardized approach. In this way, some taxpayers seem to be more favored over others.
A taxpayer could have had a low account balance for most part of the period with a one-off shoot in balance that would push the account into the 25% penalty bracket. On the other hand, a wealthier taxpayer would have an account whose balance remained pretty constant at about $70,000.00 and therefore, have the lower 12.5% penalty apply.
In this case, the initiative may appear unfair. However, being an amnesty initiative and therefore, a relief to taxpayers, there is nothing much one can say in terms of complaints, especially when facing the alternative, which will be paying the due penalties and taxes under the FBAR (which will end up being much more punitive). Therefore, even if the amnesty initiative seems unfair, there is little recourse that one can pursue and it may be best to simply comply with the initiative and take advantage of this relief program before time runs out.