The Capital of Texas Enrolled Agents November 2010

1. The Capital of Texas Enrolled AgentsNovember 2010 The Offer-in-Compromise Offer-in-Compromise

2. What is an Offer in Compromise? • Internal Revenue Code (IRC) §7122 provides the legal guidelines establishing the basis and definition of an Offer-in-Compromise • An Offer-in-Compromise (OIC) is an agreement between a taxpayer and the Government that settles the taxpayer’s tax liability (if accepted) for less than the full amount the taxpayer owes. Offer-in-Compromise

3. IRS-OIC Objectives • Implemented to resolve taxpayer/liability disputes • Allows the Government to collect what they can now • Also allows the Government to obtain cash, assets & other cash equivalents through other means, other than levy/seizure • Provides taxpayers a fresh start with tax compliance (to include filing and paying) Offer-in-Compromise

4. Basis of the OIC The OIC program generally has three typical bases upon which the taxpayer is allowed to submit an OIC as follows: • Doubt as to Collectibility (DATC) • Doubt as to Liability (DATL) and • Effective Tax Administration (ETA) Offer-in-Compromise

5. Doubt as to Collectibility • The taxpayer must owe a liability they cannot pay based upon their “Reasonable Collection Potential” (RCP) & additionally requires the following: • Form 656, “Offer in Compromise” • Form 433-A or 433-B “Collection Information Statements” • A $150 Offer fee applies • 20% of OIC amount or 1st Installment Payment • And three months financial support data Offer-in-Compromise

6. Doubt as to Liability • A genuine dispute must exist with respect to the validity, correctness or accuracy of the tax liability, and the following form and information is required: • Form 656-L, “Offer in Compromise-Doubt as to Liability”, with the required legal argument/basis • NO Form 433-A or 433-B • NO $150 Offer fee applies • NO 20% of OIC amount or 1st Installment Pmt • And NO three months financial support data Offer-in-Compromise

7. Effective Tax Administration • When the enforced collection of a tax would in effect create an “economic hardship” or would be detrimental to the “voluntary compliance” of a taxpayer, the Government is authorized to accept an OIC based upon ETA • ETA’s differ in that taxpayers must have or be able to demonstrate the ability to full pay the tax, however extenuating situations must exist, such as medical and/or mental considerations • And three months financial support data Offer-in-Compromise

8. Effective Tax Administration • The following items are yet required: • Form 656, “Offer in Compromise” • Form 433-A or 433-B “Collection Information Statements” • A $150 Offer fee applies A $150 Offer fee applies • 20% of OIC amount or 1st Installment Payment • And three months financial support data Offer-in-Compromise

9. Types of DATC Offers • Cash Offer or “Lump Sum Offer” • Must be paid in five or fewer installments • TP must continue to pay existing installment agreement amount • TP may correct 20% shortfall • See IRC §7122(c)(1)(A) Offer-in-Compromise

10. Types of DATC Offers • “Short Term Deferred Offer” • Allowed to be paid over a “two year period” • TP is not required to continue to pay any existing installment agreement amount • Failure to pay the required payments is considered a “withdrawal” • See IRC §7122(c)(1)(B) Offer-in-Compromise

11. Types of DATC Offers • “Long Term Deferred Offer” • Allowed to be paid over a “five year period” and/or allowed to be paid over the remaining CSED-“Statute of Limitations” • TP is not required to continue to pay any existing installment agreement amount • Failure to pay the required payments is considered a “withdrawal” • See IRC §7122(c)(1)(B) Offer-in-Compromise

12. Other OIC Issues • The taxpayer has the “right” to designate OIC payments • Failure to designate may be considered an “ethical violation” • See IRC §7122(c)(2)(A) for designation rights Offer-in-Compromise

13. Other OIC Issues • The taxpayer has the “right” to Appeal the rejection of an OIC • The taxpayer does not have the “right” to Appeal the return of an OIC • An OIC may be deemed unprocessable if the payment, substantiation, documentation or other requirements are not met Offer-in-Compromise

14. Other OIC Issues • Currently as OIC is deemed accepted if it is not rejected before the date which is 24 months after the date of submission • Note: If the tax liability is pending dispute via any judicial proceeding, the 24 month period noted above is tolled • Under Consideration: Effective July 16, 2011, the 24 month period may possibly be reduced to 12 months Offer-in-Compromise

15. OIC Issues-Q & A • _________________________________________________________________________________________________________ • _________________________________________________________________________________________________________ • _________________________________________________________________________________________________________ Offer-in-Compromise

16. The Capital of Texas Enrolled Agents • The Offer in Compromise LG Brooks, EA 3102 Maple Ave. Suite 450 Dallas, TX 75201 215 Dalton Dr. Suite E, De Soto, TX 75115 (972) 223-4000 voice (972) 223-2636 facsimile website: www.thetaxpractice.net email: lgbrooks@thetaxpractice.net Offer-in-Compromise