United States: Settling IRS Tax Debts Is Simplified And Expanded

The Internal Revenue Service’s offer-in-compromise program gives taxpayers, both individuals and businesses, the opportunity to settle outstanding tax debts for an amount—often substantially less—than what is owed. In order to qualify, a taxpayer must establish that there is either doubt as to the existence of a tax liability or doubt as to its collectibility. Under a new aspect of the program, discussed below, offers also can be accepted if to do so would promote effective tax enforcement. A recent IRS announcement has now simplified the method of settling these debts under the offer-in-compromise program.

As was true in the past, offers-in-compromise can be used to settle not only unpaid income tax liabilities, but withholding tax liabilities (which are non-dischargeable in bankruptcy), other trust fund taxes, and even tax liabilities which arose from the taxpayer’s own fraud. In this respect, the offer-in-compromise program is broader than the dischargeability of taxes in a bankruptcy proceeding. Therefore, in instances where the taxpayer’s primary creditor is the Internal Revenue Service, an offer-in-compromise offers a better solution to this tax collection problem than would a bankruptcy filing.

The simplified IRS procedures for submitting an offer-in-compromise are incorporated in a new IRS Form 656. The new form and the simplified procedures will help eliminate many of the problems experienced by taxpayers in the past, particularly in stating the values of various assets used in determining the amount of the offer and in determining the duration of the pay-out period.

Under the new procedures, the amount to be paid under the offer will include a deferred payment option. In practice, a modified form of deferred payment option was always available to a taxpayer and we negotiated many such arrangements. Under the new program, however, these deferred payment options are made explicit and presumably will be less burdensome to achieve. The deferred payment option is to be contrasted with two other options for paying an agreed offered amount. The cash payment option requires that all payments be made in 90 days or less; the short-term deferred payment option requires that all payments be made within 91 days to 24 months. With the new simplified long-term deferred payment offer, the amount offered may be paid in smaller increments over the remaining statutory period for collecting the underlying tax.

In all instances, any offer-in-compromise requires the payment of the net realizable value of a taxpayer’s assets plus the amount that the IRS could collect from the taxpayer after the payment of basic living expenses. If the amount offered is less than the total of these two components, it will be rejected by the IRS. The new worksheets contained in Form 656 assist the taxpayer in determining the amount that must be submitted with the offer.

The long-term deferred payment plan announced by the IRS requires that the amount offered in monthly payments over the life of the collections statute (up to 10 years) satisfy the amount offered. The IRS will be able to precisely calculate this amount without any of the uncertainty and imprecision that was involved in using a fluctuating interest rate that was adjusted quarterly. It will calculate the maximum amount that the taxpayer can pay over the life of the collections statute and merely divide it into fixed monthly payments for the period the debt will be outstanding.

In another expansion of the offer-in-compromise program, as mentioned earlier, the IRS will now permit an offer to be accepted even if there is no doubt as to collectibility or as to liability. If the taxpayer is not eligible for an offer-in-compromise on either of these grounds, the taxpayer may still compromise if it would "promote effective tax administration." Considerations in this regard include issues of equity and economic hardship. The claim for "an additional basis for compromise", as it is called, is made on Form 656-A. This form makes it clear that three criteria must exist before such a compromise will be considered:

1. The IRS must have assessed or will assess a tax liability against the taxpayer before acceptance of the offer;
2. The net equity in the taxpayer’s assets plus his or her future income must be greater than the amount that is owed (i.e., there is no doubt as to collectibility); and
3. An exceptional circumstance must exist that would allow consideration of the offer.

Unlike the standard offer-in-compromise presented on Form 656, an additional basis for compromise will not be granted if a business has not timely filed and paid all quarterly federal taxes for the two preceding quarters before requesting the offer. It also must have timely paid all federal tax deposits due within the quarter in which it submits the offer.

This liberalized offer-in-compromise program should encourage more taxpayers with financial problems to consider resolving their tax disputes in this way.

© 2000 Greenberg Traurig