Question

Please use the link below, which will take to an article, then summarize it. The summary must be three fourths to one page long.

Article name: IRS Offers in Compromise

By: William A. Bottiglieri, JD, CPA

Source:  https://www.cpajournal.com/2018/02/07/irs-offers-compromise/

Answer 1

Tax payer can seek for an arrangement with IRS when the tax payer has greater tax liability than funds. When there is real risk of financial ruination, the tax payer can seek to compromise that debt, resulting in payment of lower amount than the due. This agreement is called making an offer in compromise (OIC) under IRC Section 7122. The following conditions must be met.

Doubt as to liability

Means, the taxpayer is saying that either the debt is not owed or is less than asserted by the IRS, as opposed to that the debt cannot be paid. No need of providing financial statements or personal financial information. Simply, disagreement between Tax payer abd IRS

Doubt as to collectability

The taxpayer claims that personal finances do not provide the ability to pay the liability in full, and seeks to pay a lower amount (or even nothing). Financial position is analysed here. Reasonable collection potential is determined (RCP). RCP comes from stipulations of Internal Revenue Manual (IRM)

Tax payers income will be determined provide for deductions to allowable expenses which are segregated as follows.

1. allowable living expenses (for Tax payer and his family’s health and welfare), which are based on national and local standards (Bureau of Labor Statistics Consumer Expenditure Survey);
2. other necessary expenses(Housing and utilities and Transportation costs) that meet certain criteria regarding their necessity; and
3. Other conditional expenses that may be allowable under the circumstances of the particular taxpayer (IRM 5.15.1.10.1)

RCP provides for quick sale value instead of valuing assets on arm’s length basis. Generally, the QSV is calculated at 80% of the fair market value.

Compromise would provide effective tax administration in two ways as below.

1. collection of the full liability is possible but would cause the taxpayer severe economic hardship

(economic hardship is shown based on tax payer’s age, employment history etc... In determining a reasonable amount for basic living expenses, the IRS will consider an individual taxpayer’s unique circumstances, but not the maintenance of a luxurious standard of living. E.g., Hardship has been found when the taxpayer is retired and only has income from a pension, and the value thereof is sufficient to satisfy the liability, but doing so would leave the taxpayer without adequate means to support basic living expenses)

1. there is a compelling public policy or equity consideration which provides sufficient reason for the government to compromise the claim

(These considerations are highly case-specific and apply only under unusual circumstances where the collection of the full amount owed would undermine public confidence that the tax laws are being administered in a fair and equitable manner.

E.g., In October 1986, the taxpayer developed a serious illness that resulted in almost continuous hospitalizations for a number of years. The taxpayer’s medical condition was such that during this period the taxpayer was unable to manage any of his financial affairs. When the taxpayer discovered the liability, with penalties and interest, the bill was more than three times the original liability. The taxpayer’s overall compliance history does not weigh against compromise)