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OFFER IN COMPROMISE (PART II ) DOUBT AS TO COLLECTABILITY

 

Our practice focuses on, in addition to tax preparation, IRS Representation of taxpayers before the IRS concerning collection matters.  Asheville Total Tax Solutions, Inc. does tax planning on event driven bases or comprehensively.  More than a few taxpayers who petition the United States Tax Court to settle their dispute with the IRS choose to represent themselves before the Court rather than engage an attorney. Asheville Total Tax Solutions, Inc. assists these taxpayers through Income Tax Research and other guidance.

 

 

 

OFFER IN COMPROMISE  ( PART II )  DOUBT AS TO COLLECTABILITY

 

 

 

The IRS may accept an Offer in Compromise from a taxpayer when it is doubtful that the taxpayer’s income and assets will satisfy the full amount of the tax due.  This is called “ Doubt As To Collectability “ and is the most common reason an Offer In Compromise is accepted by the IRS.

 

 

 

If the taxpayer’s combination of assets and income do not satisfy the full tax liability, the taxpayer may make an offer to pay a lesser amount.  The lesser amount must be valued at a “reasonable collection potential (RCP).”  RCP is based on the combination of the liquidation value of assets and the capitalized expected income.

 

 

 

The IRS determines the taxpayer’s RCP.  The taxpayer must supply the IRS three most recent months of bank statements and all current financial information as reported on IRS forms.  This information will include assets, liabilities, expenses and income.  If the taxpayer is self-employed, business income and business expenses must also be reported.  The IRS will perform an equity calculation for each of the taxpayer’s assets.  These assets will be included in the Offer in Compromise.  Additionally, the IRS will determine the taxpayer’s “collectability” using wages and income versus household and other expenses.

 

 

 

Part of calculating a taxpayer’s RCP includes determining basic living expenses.  Guidelines published by the IRS on a national/local living expense standard as well as an evaluation of the individual facts and circumstances of the taxpayer are considered.

 

 

 

After the Offer in Compromise is created, an IRS settlement officer will thoroughly review the offer and decide whether it is to be accepted.  If the settlement officer rejects the Offer in Compromise, the IRS will conduct an independent administrative review to determine if this rejection is reasonable. If the IRS review determines that the rejection is reasonable, the IRS must issue a written notice to the taxpayer that explains the reason for the rejection and provide the taxpayer with information about the taxpayer’s right to an administrative appeal.

 

 

 

Taxpayers submitting Offers based on Doubt as to Collectability must make a partial payment of the amount owed when submitting their Offer.  There are two payment options for these taxpayers:

 

 

 

Option 1       Requires that 20% of the total Offer amount be paid with the Offer and the remaining balance paid in five or fewer payments; or

 

 

 

Option 2       Requires that a first payment be made with the Offer and the remaining balance paid according to the proposed offer terms.  The taxpayer must continue to make all subsequent payments while the IRS is evaluating the Offer.

 

 

 

An offer in Compromise may be used by most taxpayers, including individuals, trusts, estates and taxpaying corporations.  Fees for submitting an Offer in Compromise vary.  Taxpayers generally must pay a user fee of $ 186 for each Offer submitted, however, offers based solely on doubt as to liability or Offers filed by a low income taxpayer do not require a fee.

 

 

 

An Offer in Compromise that is accepted by the IRS becomes binding and is as enforceable as a contract.  The taxpayer must abide by the terms of the agreement.  Breach of the contract restores the portion of the tax liability which had been compromised.  If the taxpayer does not hold up their end of the agreement then they are in breach of contract and must pay the original amount owed.

 

 

 

A tax professional will help you navigate the maze of the Offer in Compromise process.  Asheville Total Tax Solutions, Inc. has the expertise and experience to guide you through this intricate and confusing process.  Call us today at (828) 253-7231 for a face-to-face meeting. We are ready to help.

 

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INTRODUCTION TO OFFERS IN COMPROMISE

 

PART 1

 

 

 

An offer in compromise is an agreement between the taxpayer and the government that settles a tax liability for payment of less than the full amount owed.  An accepted offer in compromise is a contract.  The terms of the contract must be followed by the taxpayer.  Failure to follow these terms results in the termination of the offer in compromise.  Thus, the amount originally owed is restored and the taxpayer is liable for that amount.

 

 

 

IRC § 7122 gives the IRS the authority to enter into such an agreement with taxpayers who are experiencing financial difficulty.  The offer in compromise has the following objectives:

 

  • To collect what can reasonably be collected at the earliest possible time and at the least cost to the government;

  • To achieve a resolution that is in the best interest of both.  The individual taxpayer and the government;

  • To provide the taxpayer a fresh start toward future voluntary compliance with his/her tax liability;

 

 

 

The IRS will accept an offer in compromise in three situations:

 

  • Doubt as to collectability—If it is unlikely that the IRS can collect the tax liability in full (This situation will be dealt with in detail in Part II of this Part V blog);

  • Doubt as to liability—If there is a dispute as to the amount the taxpayer owes (Part III of the five part blog);

  • Effective tax administration—If collection of the full amount of unpaid tax liability would cause the taxpayer economic hardship, or based on other public policy or equity considerations (e.g., taxpayer’s age, unemployed, sickness, etc.) (Part IV of five parts), the IRS will consider a compromise for less than the full amount owed.  This is so even is the taxpayer is able to pay the full amount owed.

 

 

 

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INTRODUCTION TO OFFERS IN COMPROMISE

 

PART 1

 

 

 

An offer in compromise is an agreement between the taxpayer and the government that settles a tax liability for payment of less than the full amount owed.  An accepted offer in compromise is a contract.  The terms of the contract must be followed by the taxpayer.  Failure to follow these terms results in the termination of the offer in compromise.  Thus, the amount originally owed is restored and the taxpayer is liable for that amount.

 

 

 

IRC § 7122 gives the IRS the authority to enter into such an agreement with taxpayers who are experiencing financial difficulty.  The offer in compromise has the following objectives:

 

  • To collect what can reasonably be collected at the earliest possible time and at the least cost to the government;

  • To achieve a resolution that is in the best interest of both.  The individual taxpayer and the government;

  • To provide the taxpayer a fresh start toward future voluntary compliance with his/her tax liability;

 

 

 

The IRS will accept an offer in compromise in three situations:

 

  • Doubt as to collectability—If it is unlikely that the IRS can collect the tax liability in full (This situation will be dealt with in detail in Part II of this Part V blog);

  • Doubt as to liability—If there is a dispute as to the amount the taxpayer owes (Part III of the five part blog);

  • Effective tax administration—If collection of the full amount of unpaid tax liability would cause the taxpayer economic hardship, or based on other public policy or equity considerations (e.g., taxpayer’s age, unemployed, sickness, etc.) (Part IV of five parts), the IRS will consider a compromise for less than the full amount owed.  This is so even is the taxpayer is able to pay the full amount owed.

 

 

 

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NUTS & BOLTS OF AUDIT RECONSIDERATION

WHAT QUALIFIES A TAXPAYER FOR AN AUDIT RECONSIDERATION?

 

A taxpayer who discovers inaccuracies in their audit may ask the IRS for an audit reconsideration if any of the following factors exist:

     (1)     The taxpayer did not personally appear at the audit.

     (2)     The taxpayer moved and did not receive correspondence from the IRS related to the audit.

     (3)     The taxpayer has new documentation to present to the IRS

     (4)     The taxpayer submitted documentation to the IRS that the IRS did not consider.  (NOTE:  This is a common occurrence during correspondence audits since the taxpayer is not

              actually present to go over documentation in person with the IRS Representative.)

     (5)     The taxpayer did not file an original return and the IRS prepared the return for the taxpayer by using documents received from third parties.  These third party documents might 

               include W-2's,1099s,K-1s,etc.

     (6)     The taxpayer has not paid the tax owed.

     (7)     The taxpayer claimed a credit that the IRS denied.  This often occurs with the first-time homebuyer's credit.

 

WHAT DISQUALIFIES A TAXPAYER FROM AN AUDIT RECONSIDERATION?    

 

There are cases when the taxpayer may not qualify to request an audit reconsideration .  These include:

 

     (1)     If the taxpayer already entered a closing agreement with the IRS after the audit

     (2)     If the taxpayer has filed for an "offer in compromise."  An offer in compromise allows the taxpayer to settle the tax debt for less than the amount owed.  If the taxpayer has filed the offer

              in compromise, the taxpayer is, in effect, admitting to the full tax liability and promising to pay the lesser amount agreed upon to settle the debt.

     (3)     If the taxpayer is a member of a partnership in which the partnership has received a final audit report

    (4)     The court, (including the U.S. Court or another court), has issued a final decision regarding the tax liability.

 

ALTERNATIVES TO AUDIT RECONSIDERATION


There is recourse for taxpayers that do not qualify for audit reconsideration.  Asheville Total Tax Solutions,Inc. will be able to assist the taxpayer with selecting the best alternative for the

taxpayer's particular situation.  Alternatives to audit reconsideration include:

 

     (1)     If the tax liability is in doubt, the taxpayer may present a simplified "offer in compromise" that does not require a filing fee.  This offer in compromise allows the taxpayer to settle

              the debt by paying an agreed upon lesser amount than originally owed.

     (2)     The taxpayer may file an amended Form 1040X .  The taxpayer may use Form 1040X to correct an error on the original tax return.

     (3)     The taxpayer may file Form 843 "Claim for Refund and Request for Abatement."  Form 843 is used to claim a refund or to ask for an abatement of certain types of taxes, penalties,

              fees and interest.

     (4)     The taxpayer may file Form 8857  "Innocent Spouse Relief."  If a taxpayer becomes aware of a tax obligation for which their spouse, (or former spouse), is solely responsible,

              the taxpayer should file Form 8857 to request relief from that tax liability.

Working with the IRS to settle a tax dispute is a complicated process.  Be sure to consult a tax professional to assist you.  Asheville Total Tax Solutions, Inc. has the expertise to guide you through the tedious  process of settling a tax dispute.

 

 

 

    

 

 

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DO TAXPAYERS IN ASHEVILLE QUALIFY FOR AUDIT RECONSIDERATION ? ( PART 1 )

Our practice focuses on, in addition to tax preparations, IRS representation of taxpayer before the IRS concerning collection matters.  We do tax planning either on event driven bases or comprehensively.  More than a few taxpayers who petition the United States Tax Court to settle their dispute with the IRS choose to represent themselves before the court rather than engage an attorney.  We assist these taxpayers through income tax research and other guidance.

 

What is an audit reconsideration ?

 

Many times after an audit has been completed, the taxpayer discovers that the audit results were inaccurate.  These discoveries are common in the case of a so-called correspondence audit.  Office and field audits are generally accurate, but, errors are committed in these audits also.

 

There are three main types of IRS audits: a correspondence audit, an office audit and a field audit.  The correspondence audit involves a letter from the IRS requesting additional information about a particular part of the taxpayer's tax return.  An Office audit involves meeting with the IRS agent at the IRS office.  During a field audit, an IRS agent may visit a home or business to examine financial information.

 

An audit reconsideration exam gives the taxpayer another chance to arrive at the correct tax liability.

 

If you have any questions about audit reconsideration or other IRS examination issues in Asheville, North Carolina or the surrounding area please feel free to contact us at (828) 253-7231 or visit us on the web at creasmanfp.com

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