The IRS expects documentation to accompany the Collection Information Statement (Form 433A). However some clients do not keep their bank statements and paystubs. I tell them that “I’ll do the best I can for you, based on the documentation you provide.” Typically the IRS wants the backup documentation or else they will disallow the expenses being claimed. However, in some cases the IRS will accept written projections of a client’s income when there’s little documentation to go on. For example, a taxpayer starting a new business may need to estimate his future income and expenses. Such income projections need to be reasonable.
Speaking of new businesses, a problem I see over and over again is small businesses falling behind on their payroll taxes. Can payroll taxes and trust fund recover fees be settled through an Offer in Compromise?
Yes, a business owner can try to settle payroll taxes and penalties through an offer in compromise. If neither the business nor the business owners have the ability to pay the taxes in full, the IRS may accept an offer in compromise.
A taxpayer may request an Offer in Compromise based on doubt as to collectibility, doubt as to liability, and effective tax administration. Very few offers based on effective tax administration have ever been approved. Have you ever seen the IRS approve an effective tax administration offer in compromise?
Yes, I have seen the IRS approve an offer in compromise based on effective tax administration. They are rare, however. Basically, the taxpayer needs to demonstrate that he or she is suffering an extraordinary hardship, such that collecting the tax would be inequitable and not fair. I can think of a case where the taxpayer was suffering a significant medical hardship, and it was uncertain whether he would even live long enough to pay off his tax debts.
In submitting an offer based on effective tax administration, the taxpayer needs to provide extensive narrative of the special and extraordinary circumstances along with the rest of the offer in compromise documentation. Right now, extraordinary circumstances would mean some sort of life and death situation, such as a serious medical condition.
What would be the advantage of submitting an offer in compromise when the taxpayer feels he or she may die soon anyway?
If the taxpayer has any assets, his or her estate will have to pay the tax debts after the taxpayer dies. If there are no assets, the IRS will not be able to collect, and the tax debts will eventually expire. So, if the taxpayer has any assets, it may be advantageous to make an offer in compromise now to pay off the IRS.
When submitting an Offer in Compromise, the taxpayer must indicate how he or she plans to pay the offer amount. Taxpayers can choose between a lump sum cash payment or monthly payments over 24 months. Which payment plan do you generally recommend?
Generally, we recommend that taxpayers make a cash offer to pay within 90 days of notice that the IRS has accepted their offer in compromise. Cash offers get the attention of the IRS, and so the IRS sometimes processes these offers faster. Also, the IRS thinks there is less chance that the taxpayer might default on the payment arrangement.
Also, the offer amount is based on the reasonable collection potential, which includes a calculation for monthly disposable income over the next 48 or 60 months. With a cash offer, the IRS multiplies disposable income over 48 months. With a 24-month payment offer, the IRS multiplies disposable income over 60 months. So taxpayers will usually be better off with the cash offer, if they can pay within the shorter time period. Otherwise, the taxpayer is better with the higher 24-month offer because there would still be a contract that can be counted on, as long as the terms are honored.
Can the taxpayer change his mind about payment arrangements?
Yes, the taxpayer can switch payment plans at any time prior to acceptance or rejection by the IRS. However, typically, it is not changed until the IRS comes back with a counter-offer. Switching payment plans will change the monthly income factor (the multiplier of 48 or 60). Taxpayers should be working closely with their tax professional to make sure they choose whichever payment plan is right for them.
David Bauman's Interview is spread over four pages:
