How to Get an Offer in Compromise With IRS

Offer in Compromise With IRS: Part 1

[The matters summarized below are available in depth and detail at Federal Tax Collection Rules and Procedures. At Chapter 12 in the documents at that web site researchers will find a huge number of electronic links to the full text of governing rules and discussion of the details involved in the OIC process.]

This Part 1 provides a general introduction to the things that will occur before an Offer in Compromise becomes the focus of attention. Taxpayers should be aware that an Offer in Compromise will not be accepted where there is any other way to collect more than the Offer proposes. This Part 1 summarizes the processes and considerations that will be followed in a collection case.


When a taxpayer submits an “offer in compromise” (“OIC”) to the IRS the taxpayer is asking the government to accept less than the whole tax debt. It enables taxpayers to close this chapter and start fresh without an impossible tax debt hanging over their heads. It enables IRS to close the matter by collecting what can be prudently expected and to stop applying resources to extract every last farthing. Like all creditors, the government will not easily accept an offer to compromise the liability. Most taxpayers cannot qualify because the financial facts support the conclusion that a greater portion of the debt can be collected. All financial facts must be gathered and analyzed in order to construct an OIC that bears a reasonable possibility of being accepted by the government. This Part 1 summarizes things to be gathered and analyzed before an OIC is ever submitted. 

Think of OIC as a process -

It helps to understand that an OIC is the product of a lengthy, detailed process in most cases. There is no way to establish an OIC by filling out a form, offering to pay a smaller amount, and complaining about the size of the debt as compared to resources. A much more detailed, fact-based and analytic foundation is required. Everything depends upon a complete financial analysis. If a taxpayer has not paid the balance due when the IRS demand letters started arriving, the IRS will move toward taking property from the taxpayer if necessary. IRS begins that process with a financial analysis. Don't wait on the IRS to show up at the front door – do a complete financial analysis and be ready to advocate a taxpayer's position before engaging the IRS agents.

Prerequisites

Like all creditors, the government prefers to collect the entire debt. An offer in compromise asks the government to accept less than the entire amount due to dispose of the matter – a request the government does not favor or prefer. There is a specific sequence of preferences the government will follow. In general, this is the sequence:

• Letters arrive demanding full payment of the entire debt, warning the IRS can file liens and take property through the levy processes.
• If the bill remains unpaid IRS will require a fully supported “Collection Information Statement” ( a “CIS”) from the taxpayer.
• Taxpayers are obligated by law to list absolutely every property or interest in property. Concealing assets can constitute a federal crime. Every asset is to be given a value. IRS does not necessarily accept a taxpayer's CIS without investigation. Usually the IRS will conduct a search for omitted assets (they are very good at that) and will also make determinations of value. Mostly, IRS is looking for cash resources to take by levy.
• Taxpayers must disclose all potential future assets – raises, bonuses, trust distributions, inheritances, judgment recoveries and etc.
  
• All monthly expenses and all debts are to be listed in detail.
  
• Every source of income must be disclosed.
  
• The CIS is to be signed under penalty of perjury. Don't even think about concealing assets or making false statements.
  
• All financial information will be analyzed to determine everything a taxpayer can gather immediately to pay the debt.
  
• IRS will require cash resources to be exhausted. Taxpayers can be required to -
• Completely drain all bank and brokerage accounts
  
• Cash in or borrow against life insurance
  
• Borrow using credit cards or otherwise
  
• Sell assets that have equity and etc.
  

Next step: Installment plans

Where the analysis clearly reveals taxpayers cannot pay the whole debt through exhausting available resources, IRS will extract everything possible immediately and then move to the next preference: an Installment Agreement (“IA”).

• “Expedited Agreements” are often available to taxpayers where the debt is less than $25,000 or where the taxpayer can reduce the balance to less than $25,000. There are two programs: (1) “Guaranteed Installment Agreements” and (2) “Streamlined Installment Agreements.” Where taxpayers qualify for such programs it is best to use them. It avoids lots of work and difficulties. There won't even be a financial analysis required.
  
• Regular Installment Agreements:
  
• Not acceptable unless and until taxpayers exhaust immediately available cash, borrow to make payments and sell equity-assets.
  
• Amount of payment is measured by the “ability to pay.” Simply stated, the ability to pay equals all income a taxpayer receives reduced by “allowances” the government follows. The National Standard limits the amount a taxpayer will be allowed to keep to pay for medical, food and clothing. The Local Standard limits the amount a taxpayer will be allowed to keep to pay for housing (includes taxes, utilities, repairs and etc.) and transportation. These tables establish very low allowances. It does not matter if a mortgage payment exceeds the housing allowance. Taxpayers can find themselves having to sell the house and move to another residence.
  
• If these requirements are met, then the IRS will recommend acceptance of a regular installment agreement.
  

Partial Payment Installment Agreements (“PPIA”):

• Where the financial analysis shows the taxpayer cannot reasonably be expected to pay the entire balance during the 10-year collection period then the IRS will move toward a PPIA.
  
• PPIA's are not accepted where a taxpayer has cash, borrowing power and/or equity-assets that can be applied. Those resources must be applied before any kind of installment agreement will be accepted including a PPIA-type.
  

Offer in Compromise

• This is the last resort. Where the financial analysis shows a taxpayer simply does not show any likelihood of being able to meet the requirements of a meaningful PPIA then the government will accept an OIC.
• No OIC will be accepted until a thorough financial analysis has been done. This will usually (but not always) have been completed by the IRS earlier.
• No OIC will be accepted unless it equals a taxpayers “Reasonable Collection Potential.” Broadly described, a taxpayer's RCP is the same as the taxpayer's “ability to pay” and will also be measured after application of the National and Local standardized allowances. Determining RCP also requires application of all available cash resources, borrowing power, and selling equity-assets. The components will be described in more detail in PART 2 of this series.
• When taxpayers submit an Offer they must also immediately pay 20% of the proposed “lump-sum” amount. If the IRS rejects the proposed offer the 20% will be retained and will not be refunded.
• When taxpayers proposed an installment-type of OIC they must immediately pay the amount of the proposed payment and they must continue to make every single proposed payment during the entire period the IRS considers the proposed OIC. None of the payments will be refunded if the IRS rejects the taxpayer's proposal.
• Taxpayers have two ways to appeal if IRS rejects the proposed OIC. Those are discussed in PART 2 of this series.

Currently Not Collectible (“CNC”):

• Finally, where the evidence shows that there is absolutely no way to extract payment from a taxpayer by any means, the account is to be designated as “CNC.”
  
• HOWEVER, in some cases the IRS will periodically return to collect updated information on CNC accounts to know whether a taxpayer's situation has changed to enable the government to collect some part of the debt.
  

Part 2 of this series will discuss other important considerations including the 4-types of OIC's and the submission requirements.

Trust Fund Recovery Penalty (100% penalty) - Part III - Protest the Proposed Assessment

[The matters mentioned in this article are governed by statutes, regulations, and detailed descriptions published by the U. S. Government in the Internal Revenue Manuals ("IRM's"). The full texts of those resources can be reached by various means on the internet. Also, the governing rules and texts can be researched at Chapter 13, Trust Fund Recovery, at https://IRScollectionlaw.com.]

In Part I of this series of articles the broad reach of the Trust Fund Recovery Statute (i.e., IRC 6672) was summarized. Part II summarized the concepts of "responsible persons" and "willfulness" and listed resources that should be studied to understand how the government determines the identity of individuals who are subject to assessment of the "penalty" under 6672. Identifying appropriate persons to target for the assessment is a process that is wholly dependent upon the evidence, and most of the evidence will tend to be documentary. Part II lists the resources that guide IRS employees through the processes of collecting and analyzing evidence. 

This Part III will summarize considerations involved in constructing a targeted person's ("target") position to contravene IRS' proposal to assert the penalty against the target. When should the process of preparing a "defense" begin? Every potential target should go to "red alert" at the very moment it is learned the employer did not pay the required tax. Though some few weeks might pass before a Revenue Officer appears on the premises to commence the investigative processes, unless the entire amount due is paid immediately all potential targets should be alerted to the fact that something has gone dreadfully wrong. Potential targets should learn answers to questions like these:

• Why wasn't the whole trust fund paid?
• Does the employer have sufficient resources to immediately pay the full amount?
• Does the target have power to apply company resources to pay the full amount? If so, failure to do so will constitute strong evidence of willful failure to fulfill the obligation they owe the government.
• Does the potential target occupy a role that will automatically place them under IRS scrutiny (e.g., officer, director, authority to pay the bills, power to decide who shall be paid and etc.)? If so, what evidence supports the conclusion that the target (1) was not  "responsible" for paying the tax, and/or (2) did not "willfully" fail to fulfill the duty to collect, truthfully account or pay over the required amount?

While it is preferable to commence the process of gathering and analyzing all the evidence that tends to exculpate the target, it is a fact of life that most people don't prepare their own defense and don't seek help in the process until IRS serves Letter 1153 - Notice of Proposed Assessment. It is almost always a very serious error to wait until IRS has concluded its investigation of the matter and served its determinations before a defense is constructed. Be aware that under the law there are only 60 days from the date of that notice to complete the construction of a case sufficient to contravene the proposed assessment. No extension of time is available under the law. Targets who fail to commence preparation of their case long before that stage have placed themselves (and their representatives) in an extremely weakened position. By that stage the government will have gathered all the documents, conducted all the interviews, and deliberated the evidence for an extended period. Conclusions reached through that process are not easily displaced no matter how strong the exculpatory evidence seems. The lesson here is that potential targets are wise to construct their "defense" and to present the details of all the supporting evidence BEFORE the government decides to serve the Letter 1153. Avoiding receipt of Letter 1153 is the most prudent way to handle these situations.

Form 4180 - the IRS' interview form: This Form 4180 is used to interview officers, directors, employees and etc. It is designed for only one purpose: to record an interviewee's statements that tend to identify potential targets. There are several problems with the physical characteristics of the Form. More important, many people are eager to cooperate with the Revenue Officer and too often tend to make statements that are not absolutely complete and accurate. As a result, the Officer may quite easily be induced to form incorrect conclusions about the identity of targeted persons. ALWAYS study Form 4180 before being interviewed by a Revenue Officer. Know the facts and the supporting evidence for answers that will be given before responding to the Officer. Be aware of whether there is sufficient space provided on the form to record the complete and accurate responses that will be given. If there will not be sufficient space, prepare written attachments that will be provided to the Officer and appended to the Form. Targets should not respond to any inquiry if they do not know an answer is absolutely accurate and complete. An analysis of Form 4180 and concerns involved in the interview process are discussed at Chapter 13, Paragraph III at https://IRScollectionlaw.com.

Preparing the Protest: If the case has not been thoroughly prepared prior to the arrival of Letter 1153, there will ensue a wild scramble to prepare a protest to the proposed assessment. Why a "wild" scramble? It becomes "wild" because the Revenue Officer will have gathered and analyzed corporate records, minutes, correspondence, bank records, signature cards, resolutions, intra-company writings of every species and etc. They will have completed interviews and will rely upon the statements provided by interviewees. And where the volume of the documentary evidence is formidable, the Officer will have taken all the time required to carefully scrutinize the evidence. What evidence does the Officer rely upon to support issuing the Letter 1153? There is nothing in the notice that expresses an answer to that question. Did the officer happen to locate exculpatory items in the mountain of evidence? There is no way to know the answer to that question. Representatives will be forced to review that same mountain of evidence in the search for exculpatory evidence, research the law, and construct the entire written brief to support a target's protest in oly 60 days. There can be a massive amount of work to be done, and 60 days creates time-pressures that can be quite severe.

Where does the protest go? The target's protest does not first go to any neutral party for any sort of review. The protest is to be submitted to the Revenue Officer who has been working the case from the beginning. That person has invested a very substantial amount of time in the case and has formed views about conclusions compelled by the evidence. It is difficult to change the thinking of a person who has completed that kind of process. Therefore, being aware that the protest must change the view of such a person, representatives must succeed in assembling every shred of evidence and articulating a persuasive contrary conclusion. Is there strong evidence sufficient to compel the conclusion that the target was not actually a "responsible" person under the law? If so, exhaustively prepare the protest to express the evidence and the case law that compels that conclusion. Is there strong evidence sufficient to compel the conclusion that the "responsible" target did not willfully fail to perform the tax-related obligations? Thoroughly identify and articulate the evidence and the supporting authorities. Serve the protest on the Officer within the 60-day period.

10-day Conference opportunity: If a target will move quickly upon receipt of Letter 1153, there is a 10-day period in which to confer with the Officer. That conference opportunity can be of enormous assistance to representatives. One can learn about the evidence the Officer found particularly persuasive. One can learn much about all of the sources of evidence relied upon and whether the Officer was provided ALL the evidence - especially exculpatory evidence. One can learn whether the Officer may have overlooked the significance of evidence. The conference can sometimes provide an important opportunity to objectively discuss these critical matters.

Know what the IRM's prescribe: Sometimes Officers fail to request (and are not provided) all the important evidence. The 10-day conference will provide the opportunity to identify with particularity the evidence possessed and enable representatives to analyze whether the Officer complied with the guidance provided in the IRM's. Where an Officer for some reason failed to complete the guidelines expressed in the manuals and as a result failed to collect exculpatory evidence, there is a substantially increased likelihood that a protest might result in a withdrawal of the proposed assessment. The requirements expressed in the manuals and the full text of several important provisions can be researched at Chapter 13, https://IRScollectionlaw.com. In that same Chapter 13, researchers will find the provisions of the IRM's that authorize Officers to reverse prior conclusions, and how to process the withdrawal. It is wise to cite that IRM-based authority because TFRP determinations are so rarely reversed that many officers do not know the processes. Provide the basis for reversal in the brief, and supply the exact IRM-provisions that express the processes to be followed.

Strong assertions of evidence coupled with references to "Attorney Fee Cases" is prudent: Another objective in preparing a meticulous reference to exculpatory evidence and the case law is to create a very strong record of the evidence available to the government. In some situations the protest will not persuade the Officer to withdraw the proposed assessment, and Appeals will sustain the proposed assessment. When that happens the target's final resort is refund litigation in federal court. If that becomes the outcome it may be very important to also seek to recover attorney's fees on behalf of the taxpayer. Where the brief clearly articulates exculpatory evidence that was supplied to the government, and the history of the case establishes the government took a position contrary to that evidence, an attempt will likely be made to recover attorney fees. When the taxpayer's meticulous protest is placed in evidence it can become highly persuasive evidence that the government's position was not substantially justified. Lay the groundwork for recovering attorney's fees. Meticulously describe the exculpatory evidence and its significance. Assure that there is a record that expresses such evidence to facilitate the burden to prove the details that were made available to the government and why such evidence exposes the government's position as "not substantially justified." As a place of beginning, a couple of attorney's fee cases are cited in the cases at Chapter 13, Paragraph IV, items C and D at https://IRScollectionlaw.com.

Things to do while working on the protest: The rules and resources governing the following are accessible at the same web site linked above.

• Apply the employer's resources to pay the debt immediately.
• With each payment, it is permissible to "DESIGNATE" the payments to be applied in reduction of the trust-fund-portion of the tax debt. ONCE an INSTALLMENT ARRANGEMENT is made, no payments can be so designated. Therefore, if the company does not have resources sufficient to address the whole debt, immediately apply all available resources to extinguish as much of the trust-fund portion as possible.
• While IRS observes policies that may result in delaying assessment of the TFRP, there is no point to enduring the costly processes of developing the TFRP case when the entire issue could be dissolved by fully paying the trust-fund-portion.

Trust Fund Recovery Penalty (100% penalty) - Part II - Responsible Person and Willfulness

[This Part II continues the discussion of the application of the provisions of IRC section 6672 - the Trust Fund Recovery statute. The matters mentioned in this article can be researched in substantial detail in the materials provided in Chapter 13 at https://IRScollectionlaw.com. This Part II does not discuss the construction and presentation of a protest to a Notice of Proposed Assessment. Those matters will be posted in the article at Part III of this discussion.]

Elements of IRC 6672 - "responsible person" and "willfulness" required: Where the government seeks to collect the unpaid balance of the trust-fund money from individuals, the statute requires that the evidence establish that the targeted individual ("target") was a "responsible person" and that the target "willfully failed to collect, truthfully account for, or pay over (to the government) the withholdings required by law. The Internal Revenue Manuals ("IRM's") provide many expressions about the processes and procedures that Revenue Officers ("RO's") should complete in the course of identifying specific persons who were "responsible" to collect, account for, or pay over the money.

A good place to start when researching how the IRS proceeds in these cases is to study IRM 5.7.3.3.1. It provides -

• lists identifying potentially "responsible persons" according to their roles, 
• lists revealing the kinds of duties, offices (status) and powers indicating a responsibility to assure taxes are paid
• lists of fundamental documentation to be reviewed to reveal the identity of potentially responsible persons

IRM 5.7.3.3.1 and the sub-parts that follow are very instructive and can be located at the IRS' official web site. In addition, the full text of those resources is provided and discussed at Chapter 13, para. II, in the materials at https://IRScollectionlaw.com. In particular, the manuals also correctly express the current state of the law by including these points at 5.7.3.3.1.1:

• The full scope of authority and responsibility is contingent upon whether the person had the ability to exercise independent judgment with respect to the financial affairs of the business.
• If a person is an officer or owns stock in the corporation, this cannot be the sole basis for a responsibility determination.
• If a person has the authority to sign checks, the exercise of that authority does not, in and of itself, establish responsibility.

The key to identifying "responsible persons" is in the first bulleted-item above. It is the person with power to control who shall be paid and who fails to treat the government as the top priority who will be easily identified as a responsible person for purposes of 6672. There are several cases that explore the indicia of responsibility. A good discussion is published by the Fifth Circuit Court of Appeals at Commonwealth National Bank v. U.S., 665 F.2d 743 (5th Cir. 1982). There, persons who were not shareholders, officers or employees of the non-paying employer were determined to be "responsible" because they had power to control who was paid. And where a person possesses such authority but is ordered by a superior to NOT pay the taxes, there is authority that suggests that failure to pay the obligation without regard to the orders of a superior is required. In other words, subordinates with power to pay the taxes can, under certain circumstances, be held liable under 6672 even though they might be fired for paying the government. See Brounstein v. United States, 979 F.2d 952, 956 (3rd Cir. 1992). Links to several other opinions from various courts are provided in Chapter 13, para. IV, at the same web site linked above.

Evidence of willfulness: 6672 is not applicable to any person - even a "responsible person" - unless they WILLFULLY failed to perform any one of the three duties listed in the statute. Willfulness for purposes of IRC 6672 means conduct that is intentional, deliberate, voluntary, reckless, knowing, as opposed to accidental. Though the IRM's state that willfulness can also be established by proof that a person "should have known" taxes were not paid, the courts have rejected that government assertion. For example, study the opinion published in Kalb v. US, 505 F.2d 506 (2d Cir. 1974), cert den., 421 US 979 (1975). It is very useful to study the IRM's at 5.7.3.3.2 and especially at the Legal Reference Guide for RO's at 5.17.7.1.3. The full text of those resources is available both at the IRS' official web site and at Chapter 13, para. V, at https://IRScollectionlaw.com. Where a person having ultimate authority and power to pay the tax has delegated the duty to a subordinate, that delegation does not insulate the person from a finding that such person was a "responsible person." HOWEVER, where the person had absolutely no knowledge that the subordinate had failed to discharge the duty, then it cannot be said that the delegator willfully failed to pay the tax. Notice, however, that where the delegator learns that the taxes were not paid, they must immediately commence to apply the resources subject to their control to pay the tax. Failure to do so usually supports the conclusion that the failure to take immediate action constitutes a will failure to discharge the obligation and 6672 is applicable. Furthermore, where that same subordinate continues to be obligated to make all future payments after the delegator has been previously put on notice that the person has shown themselves to be unreliable, the failure to closely monitor and supervise all activity to assure payments are made as and when required is received as evidence of willful failure to pay. These matters and the resources expressing the applicable principles are provided at Chapter 13 at the web site mentioned above.

After the RO has gathered all the evidence and formed conclusions, responsible persons exhibiting willful failure to pay the tax will be informed in writing that the IRS proposes to assess the trust-fund amounts against the responsible person. That notice commences two important periods. First, there is a ten-day period in which the RO can be contacted and a discussion held to present evidence contravening the proposed assessment. Second, and MOST important, the date upon the notice is served commences the 60-day period in which the taxpayer MUST file any intended protest with the same RO who issued notice of intent to assess the tax. THERE ARE NO EXTENSIONS OF TIME AVAILABLE. The processes and procedures that must be followed to construct and present a proper protest to the proposed notice of assessment are discussed in "Trust Fund Penalty - Part III."