Compromise (Version 184.108.40.206)
Initial cost: $99, updates: $49.95.
The Tax Institute (www.usataxrelief.com)
Reviewed by Susan B. Anders, PhD, CPA, and Michael D. Kasperski, CPA
A successful Offer in Compromise (OIC) may be the best way out of a bad situation for taxpayers with substantial federal tax liabilities. In 2000, the IRS settled for approximately $0.12 on the dollar, indicating that a successful OIC can be a tremendous economic benefit for financially troubled taxpayers. According to the IRS Data Book, the IRS received approximately 124,000 offers in compromise in 2002, but accepted only 29,000. The 2002 acceptance rate of 23.4% is down from prior years’ acceptance rates of around 30% and appears to indicate a downward trend. A recent AICPA e-newsletter indicated that the IRS has a backlog of about 100,000 cases.
What Is an Offer in Compromise?
An OIC is an agreement between the IRS and the taxpayer that allows the settlement of a tax liability for less than the total assessed amount, and is permitted under IRC section 7122. Treasury Regulations section 301.7122-1, effective July 18, 2002, provides the following three grounds for a compromise:
An OIC becomes pending when the taxpayer submits it for processing. The IRS will return an offer if the IRS determines that it does not contain sufficient information or that the offer was submitted solely to delay collection. The IRS will not accept an offer for processing if the taxpayer is in bankruptcy or has outstanding tax returns or tax deposits. Additionally, if the IRS accepts an OIC, the taxpayer must sign a contract agreeing to pay the amount of the settlement offer. The taxpayer must also agree to, among other items outlined on Form 656, file timely tax returns and make timely payments of future tax liabilities for the next five years. Failure to do so will void the contract, and the IRS will reassess the full tax liability.
The IRS has the discretion to determine the amount of the offer depending on the facts and circumstances in each case. The offer amount is not a negotiation, but rather is computed under a complex series of formulas that use four economic factors:
The minimum offer is usually calculated as the net realizable value of assets plus future income. The IRS uses 80% of fair market value (called the quick-sale value) to calculate the net realizable value of assets. Future income is calculated as projected future income minus necessary living expenses.
A Useful Tool
Given the relatively low acceptance rate and the complex calculations that determine the amount of the offer, tax professionals that do not prepare offers in compromise on a regular basis may find the Tax Institute’s Offer in Comprimise a useful tool in preparing timely, complete offers. In addition to compiling and storing a substantial amount of detailed information and processing the required forms, the software uses IRS standard allowances to compute a minimum acceptable offer amount.
The software allows the user to input the taxpayer’s raw data in bits and pieces and update or change the data as often as desired. The input screens follow the required OIC forms line by line. The help button for each line brings up the related section in the Internal Revenue Manual (IRM). Navigation through the input screens is quite easy, with back, next, and return to main menu buttons at the bottom of the input screens.
The software can be downloaded from the Tax Institute website (www.usataxrelief.com) or installed from a CD-ROM. The system requirements are Windows 98, ME, NT, 2000, or XP. The main screen follows a traditional Windows format. Two horizontal menu bars at the top allow the user to add, change, or input information.
A new client file can be created using two relatively easy approaches, both of which bring up the basic information screen for the taxpayer’s name, Social Security number, and contact information. Once the basic information has been entered, the client’s name will appear on the main menu and the user can begin to create actual OIC forms.
The vendor recommends completing the forms in the following order: Form 433-A, Form 433-B (if applicable), and Form 656. The user can easily navigate forward and backward through a form or jump to a different one.
If the taxpayer’s detail exceeds the space allowed on the IRS forms, the software provides “overflow” schedules to preserve the information. Overflows for a particular form will not print independently unless the overflow sheets selection has been checked on the print options. To print overflows, all overflow boxes for a particular form must be checked, after which only overflow pages with information will print.
Form 433-A. Form 433-A is required for offers submitted by taxpayers as individual wage-earners or as self-employed individuals. The input screens are organized in line-number order and can be accessed through tabs at the top of the screen. In addition to the actual form data entry, worksheets are provided for calculating the quick-sale value of assets and the minimum offer amount. The program allows the user to enter as much detail as desired and to print schedules to be attached to the basic IRS forms.
Detail on monthly income and living expenses is required to complete this form. Monthly income includes wages before taxes, interest, dividends, pensions, Social Security, child support, and alimony. Form 433-A takes an all-inclusive approach to gross monthly income. Gross income information is usually total household income, including both spouses’ income even if only one spouse has a tax liability. Monthly living expenses include items such as food, clothing, housing, utilities, transportation, taxes, and court-ordered payments. The OIC software allows the user to input actual expenses, and will automatically calculate the IRS standard allowances for food, clothing, housing, and transportation costs.
Form 433-B. Form 433-B is required for offers submitted by corporations and other businesses (not Schedule C businesses). The form is an extensive collection of business information, including general business information, officer contacts, accounts receivable, business assets, banking assets, and other financial information. Additionally, monthly income and expenses information must be transferred from the most recent business tax return. The input process is generally similar to Form 433-A.
The software requires that all business entities be linked to an individual taxpayer; therefore, the basic client information must be entered first. Form 433-B can then be initiated. After entering the information, the user can access the business entity on the main menu. The software allows the creation of files for multiple businesses.
Form 656. This is the official compromise agreement. It outlines the OIC and supplies basic taxpayer information, the years affected, the type of tax, the reason for the filing, the amount of the offer, conditions by which the taxpayer agrees to abide, explanation of special circumstances, and sources of funds to make the payments. The OIC software provides four input screens that cover lines 1 through 11 of Form 656, which allows for easy completion of the form. In addition, based on the information entered on Forms 433-A or 433-B, the software automatically calculates the minimum offer the taxpayer can make to the IRS.
Form 2848. This form is required for taxpayers who would like their tax practitioner to be able to communicate directly with the IRS. The OIC is such a complex process that tax practitioners will want to have the ability to discuss the issues directly with the IRS. Completing Form 2848 is a straightforward process; the software guides the user through the questions and prints the form for the client’s and practitioner’s signatures.
Limitations and Overall Evaluation
The software does not appear to provide for the creation of backup files. The only way to back up client files to a diskette or hard drive is to use the import and export functions, which will be cumbersome for most users. In addition, unlike tax return preparation software, the OIC software does not list potential errors in completing the forms.
The software is so user-friendly and easy to follow that practitioners may be lulled into a false complacency that they have fully complied with IRS requirements for complete documentation. Although the screens may appear self-explanatory, users should use the help button link to IRM explanations, which outline IRS minimum disclosure requirements. One area where this can be a particular problem is in the proof required for actual expenses.
This software can assist tax practitioners in preparing complete and timely offers for clients who are unable to pay their federal tax liabilities. The software can save the preparer a substantial amount of time by allowing quick and easy changes and making automatic calculations based on new information. The software also allows for efficient organization of the tax practitioner’s work product by collecting and storing the client’s information in one place.
In addition to the efficiency in compiling and processing the required forms, the OIC software makes finding the applicable IRM section discussions and the IRS cost standards easy through the help button. Although the OIC forms and IRM are available by separate access on the IRS website or a tax research service, having them available a click away is a tremendous time saver. In addition, after each IRM section the software provides helpful practitioner’s comments that are not readily available elsewhere.
Given the reasonable price, the Tax Institute’s Offer in Compromise software is a very useful tool indeed.
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