Los Angeles, California Tax Attorney – Most common questions asked by our Los Angeles, Orange County, Riverside and San Francisco area tax payers regarding IRS Tax Settlement – Offer in Compromise to resolve IRS tax problem.
1. What is the Tax Increase Prevention and Reconciliation Act ?
The Tax Increase Prevention and Reconciliation Act of 2005 was signed into tax law on May 17, 2006. Section 509 of this law creates significant changes to the IRS Offer in Compromise (OIC) program by amending Internal Revenue Service Code 7122.
2. When did the IRS Tax Increase Prevention and Reconciliation Act law go into effect?
The law went into effect for all offers that are submitted to the IRS on or after July 16, 2006.
3. How did IRS Tax Increase Prevention and Reconciliation Act , Section 509, impact the OIC program?
IRS Tax Increase Prevention and Reconciliation Act , Section 509, amends Internal Revenue Service Code 7122 by creating a new subsection (c), titled “Rules for Submission of Offers in Compromise.” The new subsection (c) requires that offers submitted on or after July 16, 2006, (and not subject to the waiver with respect to low-income taxpayers or offers filed under doubt as to liability only) must be accompanied by partial payments of the proposed offer amount. The form of these partial payments depends on the taxpayer’s proposed offer and terms of payment. The law also establishes a time period after which an offer would be deemed accepted by the IRS.
4. What are the proposed offer terms that became effective as of July 16, 2006?
Taxpayers filing offers (excluding doubt as to liability offers) will have to specify whether they are filing a lump sum or “periodic payment” offer.
The new Internal Revenue Service Code 7122(c)(1)(A) subsection requires that a taxpayer filing a lump sum offer must pay 20 percent of the offer amount with the application. A lump sum offer means any offer of payments made in five or fewer installments.
The new Internal Revenue Service Code 7122(c)(1)(B) subsection requires that a taxpayer filing a periodic payment offer pay the first proposed installment payment with the offer application and pay additional installments while the IRS is evaluating the offer. A periodic payment offer means any offer of payments made in six or more installments.
5. What time period has been established by IRS Tax Increase Prevention and Reconciliation Act in relation to declaring offers accepted?
Internal Revenue Service Code 7122(f), as amended by the IRS Tax Increase Prevention and Reconciliation Act legislation, will cause the IRS to deem an offer “accepted” if it is not withdrawn, returned or rejected within 24 months after the IRS receipt date. If a liability included in the offer amount is disputed in any judicial proceeding, that time period is omitted from calculating the 24-month time frame.
6. Are all taxpayers required to pay the payments imposed by IRS Tax Increase Prevention and Reconciliation Act in order for the IRS to evaluate their offer in compromise?
No. Taxpayers qualifying as low-income or filing a doubt as to liability offer are not required to pay the $150 application fee, the 20 percent payment on a lump sum offer, or the initial partial payments on a periodic short term or deferred payment offer.
7. What is a low-income taxpayer?
For offer purposes, and as redefined with the release of Form 656 (Revision February 2007), a low income taxpayer is an individual whose income is 250 percent of the 2006 HHS Poverty Guidelines. These new standards are incorporated into the IRS OIC Monthly Low Income Guidelines that went into effect with the release of Form 656 (Revision February 2007).
8. What does a taxpayer need to submit in order to claim to qualify as a low-income taxpayer who is not be required to pay the payments imposed by IRS Tax Increase Prevention and Reconciliation Act ?
As is the case when claiming exemption from payment of the $150 application fee, the taxpayer will need to complete the OIC Application Fee and Payment Worksheet and Form 656-A, Income Certification for Offer in Compromise Application Fee and Payment. Both the worksheet and Form 656-A must be submitted with the Form 656 application.
9. Does a taxpayer need to submit two Form 656-A forms to claim exemption from the application fee and the IRS Tax Increase Prevention and Reconciliation Act payments?
No, only one Form 656-A will be required and it will apply to both the application fee and the required IRS Tax Increase Prevention and Reconciliation Act payments.
10. What happens if the taxpayer submits a Form 656-A claiming to qualify as low-income and the IRS later determines that the taxpayer did not qualify?
If the OIC investigator determines that the taxpayer’s income for the family size exceeds the levels for which a Form 656-A certification is allowed (e.g. the taxpayer should have paid the application fee and the partial offer payments), the offer investigation will immediately cease and the offer will be returned to the taxpayer. The taxpayer will not have appeal rights to this decision.
11. What happens if the taxpayer, who is not filing a doubt as to liability offer, does not submit the payment imposed by IRS Tax Increase Prevention and Reconciliation Act and does not qualify as low-income?
Failure to pay the 20 percent payment on a lump sum offer or the first installment payment on a periodic payment offer will cause the IRS to return the offer back to the taxpayer as not processable. See FAQ #14 if the taxpayer submits only a portion of the 20 percent payment on a lump sum offer.
12. Has the impact of IRS Tax Increase Prevention and Reconciliation Act caused the IRS to change its processability criteria for offer submissions?
Yes. As a result of IRS Tax Increase Prevention and Reconciliation Act , offers will be deemed not processable and will be returned to the taxpayer along with the $150 application fee in the following situations:
Taxpayer is a debtor in an open bankruptcy proceeding
Taxpayer does not submit the $150 application fee or a signed Form 656-A, Income Certification for Offer in Compromise Application Fee and Payment
Taxpayer does not submit the 20 percent payment with the lump sum offer, or a signed Form 656-A
Taxpayer does not submit the initial payment with the periodic payment offer or a signed Form 656-A
13. What happens if a taxpayer only submits the $150 application fee with the offer?
If a taxpayer submits only the application fee and does not submit either the 20 percent payment or the first installment payment, the offer will be deemed not processable and the $150 application fee will be returned to the taxpayer.
15. Is compliance no longer a processability criterion for OIC submissions?
Correct. Compliance is not considered to be a processability criterion for OIC initial submissions. If compliance is the only issue, the offer will be deemed processable. However, IRS will contact the taxpayer by either telephone or correspondence requesting the delinquent return(s), federal tax deposits or required estimated tax payment(s). A reasonable amount of time will be provided to the taxpayer to comply. Failure to comply will cause the IRS to return the offer to the taxpayer and retain the application fee, along with all IRS Tax Increase Prevention and Reconciliation Act payments previously paid. The taxpayer will not have appeal rights to this decision.
16. Does the taxpayer need to submit two separate remittance documents when filing an offer (e.g., one for the application fee and another for the required payments)?
Yes. The taxpayer should remit two checks, one for the application fee and the other one for the required IRS Tax Increase Prevention and Reconciliation Act payment. If only one check is received, the IRS will apply the application fee first and then the remainder as the payment amount.
17. Are the payments imposed by IRS Tax Increase Prevention and Reconciliation Act refundable to the taxpayer if the IRS later returns the offer back to the taxpayer?
No, the IRS Tax Increase Prevention and Reconciliation Act payments are not refundable. Based on Internal Revenue Service Code 7122(c), the 20 percent payment on a lump sum offer and the periodic payments on a short term or deferred payment offer are considered “payments on tax” and are not refundable.
18. Does IRS Tax Increase Prevention and Reconciliation Act allow the taxpayer to designate how these payments should be applied?
Yes. Taxpayers are not required to but may designate the application of the IRS Tax Increase Prevention and Reconciliation Act payments. The designation must be made in writing when the offer is submitted or when the required payment is made
19. What happens if the taxpayer does not submit a written request stating how the payments should be applied?
In the absence of any written request by the taxpayer when the offer is submitted or when the required payment is made, the IRS will apply the partial payment(s) in the best interest of the government.
20. Can a taxpayer designate how the $150 application fee is applied?
No. A taxpayer may not designate how the application fee is applied. The OIC application fee reduces the assessed tax or other amounts due.
21. What happens if a taxpayer who has paid the initial payment on a periodic payment offer fails to submit subsequent payments while the offer is under investigation?
The IRS will contact the taxpayer and provide one opportunity to pay the missing amount. The offer will be declared withdrawn and returned back to the taxpayer if the taxpayer fails to submit the required amount. All payment(s) previously made will be applied to the taxpayer’s account. The IRS will retain the application fee and the taxpayer will not have appeal rights to this decision.
22. Is the IRS bound by the offer amount and terms submitted by the taxpayer in determining an acceptable offer?
No. The IRS is not bound by either the offer amount or the terms. The OIC investigator may negotiate a different offer amount and terms, when appropriate. The investigator may determine that the proposed offer amount is too low or the payment terms too protracted to recommend acceptance. In this situation, the OIC investigator may advise the taxpayer as to what larger amount or different terms would likely be recommended for acceptance.
23. What will happen to payments the taxpayer makes during the offer investigation if the IRS later rejects the offer?
The IRS will credit the taxpayer’s account(s) with any payment(s) submitted with the original offer, as well as any payments that were made during the course of the offer investigation.
24. Will a taxpayer be able to designate any partial payments in excess of the 20 percent paid with a lump sum offer, or in excess of the proposed installments paid under a periodic payment offer?
Yes, if the taxpayer submits the request in writing. All payments will be treated as payments of tax including any overpayments, and applied to the Government’s best interest unless designated by the taxpayer. If the taxpayer requests the overpayment be considered a deposit, the overpayment cannot be designated, but may be refunded if the offer is rejected or returned by the IRS or is withdrawn by the taxpayer. The IRS will not pay interest on the deposit.