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Tax Lawyer – Seattle Offer In Compromise And Bellevue Tax Debt Negotiation

At any time during the collection process, a taxpayer can submit an OIC. The practitioner can submit an OIC as early as after the first notice and as late as the CDP hearing. An OIC can be based on doubt as to collectability or on equitable grounds, commonly referred to as “effective tax administration.” An OIC is like a “workout” plan or an administrative bankruptcy between the Service and the taxpayer via tax debts.

The taxpayer initiates an OIC on Form 656, accompanied by Form 433-A (for individuals) or Form 433-B (for businesses), which sets forth the details of the taxpayer’s financial condition. While not required, the taxpayer may submit a deposit with the offer that is refundable, without interest, if the Service rejects the offer. A statement that sets forth the reasons the taxpayer believes he is entitled to the compromise accompanies the offer. The taxpayer should include all outstanding tax liabilities in the offer to maximize the discharge.

If the government concludes that the taxpayer’s finances are never going to get better, it may choose to write off a portion of the balance and accept a reduced amount (OIC based on doubt as to collectability). That is, the Service may be willing to accept less than full payment of the delinquent amount if the taxpayer can “bring money to the table” that the Service could not otherwise reach through its levy powers. The Service determines the adequacy of the offer by computing a minimum offer amount (the “reasonable collection potential,” or RCP). The RCP amount is, roughly, the total of (1) the NRE in assets (i.e., the asset’s QSV, less amounts owed to senior secured lenders), plus (2) a multiple of future income, after allowing certain expenses.

If neither doubt as to collectability nor doubt as to liability provides a basis for compromise, a compromise may be entered to “promote effective tax administration.” This ground for an OIC might be available to the taxpayer if the collection would create economic hardship or would be detrimental to voluntary compliance by taxpayers. However,
the compromise must not undermine compliance with the tax laws. This generally is an option if the taxpayer has the means to pay, but doing so would create a hardship nonetheless. There may be special circumstances that exist that make full payment unfair, unreasonable, and a clear hardship for the taxpayer. Factors supporting a determination of special circumstances under doubt as to collectability are the same as economic hardship factors under effective tax administration. Relief may be available.

The Service suspends collection activity while the offer is pending. I.R.C. § 6331(k)(1); Reg. § 301.7122-1(g). If the sole basis for the offer is doubt as to liability, the Service does not require the taxpayer to make a monetary offer or to complete the CIS-Form 433-A (individuals) or Form 433-B (business). In addition, he need not pay the user fee. The examination function, not the collection function, reviews “doubt as to liability” offers.

If an offer is accepted after all required Service personnel review it, the Service sends the taxpayer a letter specifying the terms of acceptance, including the dates payment is expected. The taxpayer must pay the required amount by the date indicated; if he does not, the offer is invalidated and the Service can then move forward with enforcement action, or the taxpayer could seek to compromise the compromise. Upon payment in full, the Service releases all recorded liens. If an installment payment arrangement is involved, the Service will not release liens until the taxpayer makes the last payment. The offer, if accepted, represents a conclusive settlement of the taxpayer’s liability for taxes, penalty, and interest for all years that he included in the offer. Neither he nor the Service can reopen the case, absent falsification or concealment of assets, or mutual mistake of a material fact.

If after review, the Service rejects the offer, a taxpayer can appeal the rejection and request a hearing or reconsideration with the Appeals Office. The Appeals Office has the authority to overrule the rejection and accept the offer, either as submitted or as modified with the assent of the taxpayer. Appeals Officers review the OIC in all respects.