Offer in Compromise and Prepayment of Tax
What is TIPRA
The passage of TIPRA of 2005 greatly increased the stakes for taxpayers submitting OICs by requiring…absent hardship…a prepayment that was not refundable. I stopped filing OICs as I regarded the risk of rejection – historically more likely than not – outweighed the potential for success.
In May of this year, the IRS announced the most taxpayer-friendly standards in the history of the program. The standards they are using to analyze reasonable collection potential (RCP) have been loosened to the point of disbelief.
When TIPRA passed, what stood in the way of most taxpayers was the future value income (FVI) component of the OIC. The disposable income factor, after allowable monthly income and expenses, was multiplied by 48 months for a cash offer and 60 months for a deferred payment offer.
The astonishing change in the May IRS Offer standards reduces cash offers down to 12 months if paid within five months; deferred offers look at two years of income. This is quite enticing – do we bite?
We have a problem: IRM 126.96.36.199.3 section 2 specifies – “Unless special circumstances exist, offers will not be accepted if it is believed the liability can be paid in full as a lump sum, or by installment payments extending through the remaining statutory period for collection, or other means of collection.”
The only reading of this IRM provision – bear in mind the submission of an OIC tolls the collection statute itself – is absent “special circumstances”, the FVI is based not on 12 months or two years, but upon the “remaining statutory period for collection.
What are special circumstances?
Do we have any written guidance? Let’s take a case example:
TP, a recovered addict, owes 54 K in tax debt for the tax years 2006 to 2008 – she late filed the returns in November of 2009. TP was in current compliance prior to 2006 and 2009 forward. We have strong medical records from the 30 day in-patient treatment for detox and coping skills counseling and subsequent six months of outpatient treatment along with an Affidavit from her sponsor.
I regard this as a strong case for penalty abatement; are these “special circumstances” that qualify for an OIC based upon doubt as to collectability?
I can pursue penalty abatement either through the Service Center or the CDP process without having the TP risk putting up a nonrefundable prepayment. If she puts up the prepayment and qualifies for special circumstances, we may be able to compromise some of the tax under the new relaxed OIC standards.
Do we risk putting the prepayment up? I know we can designate the periods and type of tax the prepayments are applied to; can we specify that the prepayments go only to tax and under no circumstances to penalties and interest on penalties? Pardon me if I don’t entirely trust these people…will the IRS honor such designation?
This TP has about 50 K in annual income? Under the same facts, would the “special circumstances” standard differ for a TP making 100 K? 300 K?
Dana M. Ronald
Tax Crisis Institute