By: The Attorneys of Tenenbaum Law, P.C.
The Offer in Compromise program at the IRS may be heading for a sharp decline after the Tax Increase Prevention and Reconciliation Act of 2005 was signed into law on May 17, 2006. New rules require significant payments with the submission of Offers in Compromise, commencing for Offers submitted on or after July 16, 2006.
A full description of the Offer in Compromise process is beyond the scope of this article. Briefly, an accepted Offer in Compromise permits a taxpayer to pay less than the full amount of tax, interest and penalties owed, based on various formulas and negotiations regarding the taxpayer=s excess income over allowable expenses, and equity in assets. The Offer amount fully resolves the outstanding liabilities of the taxpayer, for a reduced amount.
The Senate added the Offer provision to the proposed law, anticipating increased revenue of $699 million over five years, and $1.911 billion over ten years. Whether anywhere near these numbers will be received, however, remains to be seen. Offer submissions decreased significantly when the IRS began requiring the $150 filing fee, instituted a few years ago, and it is difficult to imagine that Offers will not decline even more so with the new rules.
The law prior to May, 2006, provided that Offers could be paid with a lump sum up to ninety days following acceptance, or with periodic payments over time. The new law groups together Offers which will be fully paid in five payments or less, designating these as Alump sum Offers@ for the purposes of the law. Pursuant to the new law, a down payment of 20% of the offered amount must be made upon submission of this lump sum Offer, or the Offer will be returned as not processable.
In the past, the IRS has permitted a deposit to be sent in with an Offer. This deposit was refundable if the Offer was not accepted. The new rules, however, are not clear as to whether the required payment is returnable.
The new law will be especially hard on taxpayers who are expecting to pay the lump sum with monies obtained through the sale or refinancing of real property. These taxpayers may not have the funds available to put up 20% of the Offer amount. There may also be issues regarding the release of IRS liens and subordinations. Similarly, friends and relatives of the taxpayer may be reluctant to provide gifts or loans, knowing that IRS liabilities may still be outstanding despite significant monies paid.
As an alternative to a lump sum Offer, regulations in effect prior to May, 2006, permitted Offers to be paid in periodic installments, up to the amount of time allowed by the statute of limitations, with payments beginning after the Offer is accepted. The new law requires submission of an initial periodic payment with the Offer; again, failure to do so will render the Offer not processable. As an even more drastic measure, while the Offer is being considered the taxpayer must continue to send in periodic payments under the terms proposed by the taxpayer, or the Offer will be deemed withdrawn.
In effect, for example, if the taxpayer has requested an Offer to be paid with six periodic payments, and the IRS takes more than five months to consider it, the taxpayer will have paid the Offer amount in full. This is without any assurance that the Offer will be accepted. The new law, therefore, may encourage taxpayers who wish to pay an Offer over time, to request the smallest periodic payment, and the longest possible payment plan.
The law provides that the IRS may issue regulations providing for exceptions to these rules, such as where an individual taxpayer has a low income, or the Offer is based on doubt as to liability. These exceptions are already in place with respect to the $150 filing fee.
One part of the new law is favorable to the taxpayer. At present, it is not unheard of for an Offer in Compromise to take several years to work its way through the system. The new law discourages this, by providing that any Offer not rejected 24 months after the Offer is submitted, will be deemed accepted.
A small consolation for the taxpayer is that he may direct the application of funds submitted with the Offer, and of any periodic payments sent in while the Offer is being considered.
The IRS has been streamlining its Offer departments for the past few years, and the number of Offer specialists has been reduced tremendously. At present, tax professionals in the New York area enter into Offer negotiations with revenue officers from Oklahoma to Alabama. It will be interesting to see what changes are coming next, and to see what the Offer program will look like a few years from now, in light of the new law. One also wonders whether the New York State Department of Taxation and Finance will take any tips from the Federal example, and reevaluate its Offer in Compromise program.