Back taxes can be a sore subject – one that never makes anyone smile – except perhaps in the movies. In the first season of the The Kominsky Method, an American comedy-drama on Netflix, an aging but still debonair Michael Douglas plays a once successful actor now Hollywood acting coach named Sandy Kominsky, who finds himself neck-deep in tax debt.
While out and about, his daughter and office manager Mindy intercepts a letter from the IRS. After reading it, she immediately calls her father in a state of panic.
Sandy answered his cell to a shouting Mindy – “Dad! You owe the IRS $275,000 plus interest and penalties! How did you let this happen?!”
How indeed? Sandy mumbled something about the last three years of his life being a blur, his CPA of 30 years having passed away and being distracted and forgetful at tax time. Drama imitates real life, unfortunately. There are many people owing money to the IRS and like Sandy, do not have the means to pay it.
As the penalties and interest pile up, the snowball effect it has can be even more alarming for the taxpayer. Under certain circumstances, however, a taxpayer can work around settling all of the tax liability they owe. One approach to doing this is through an Offer in Compromise ("OIC").
An Offer in Compromise is not like the television commercials and online advertisements claim – settling your tax liability for only pennies on the dollar. But an OIC can help a taxpayer settle their tax debt – sometimes for far less than they owe.
The Offer in Compromise
An offer in compromise is essentially a settlement offer, in which the taxpayer can settle for less than they owe with the IRS. However, if the taxpayer’s liabilities can be paid-in-full by an installment agreement or any other means, then the taxpayer will normally not be eligible to receive an OIC.
A taxpayer who is currently in an open bankruptcy proceeding will also not be eligible for an offer in compromise. Tax liabilities and other financial debts are resolved through the process of bankruptcy only.
To qualify for an OIC, a taxpayer must have already filed all tax returns, made the required estimated tax payments for the current year and if they are business owners with employees, also made all required federal tax deposits for the current quarter.
For taxpayers that qualify under the preceding tests, here are the three reasons that the IRS will accept an OIC:
- First, when there is a genuine dispute as to the existence or amount of the correct tax debt under the law, the IRS can accept an offer in compromise because of a “doubt as to liability.”
- Second, the IRS will accept an OIC if there is a question that the amount owed is fully collectible. This is called “doubt as to collectability,” and it exists in any case where the taxpayer’s assets and income are less than the full amount of the tax liability. Doubt as to collectability is the most common reason for an OIC.
- The third and final reason the IRS will accept an offer in compromise is based on “effective tax administration.” This occurs when, “requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances.”
Once a taxpayer and the IRS have agreed on an offer in compromise, there are a few different payment options for the taxpayer to consider. One such option is the "lump sum cash offer." This “is defined as an offer payable in five or fewer installments within five or fewer months after the offer is accepted.”
If a taxpayer wants to pursue a lump sum cash offer, they must submit a Form 656 and a nonrefundable payment equal to 20% of the offer amount. This 20% will not be returned if the offer is rejected or returned without acceptance.
Another offer is the "periodic payment offer," which means it is “payable in 6 or more monthly installments and within 24 months after the offer is accepted.”
Similar to the lump sum cash offer, the taxpayer must submit a Form 656 and a nonrefundable application fee when requesting the periodic payment offer. Additionally, while the IRS makes a decision on the periodic payment offer, the taxpayer must continue to make payments pursuant to the installment agreement.
Another part of offers in compromise that taxpayers need to be aware of are "collateral agreements." This allows the government to, “collect funds in addition to the amount actually secured by the offer, or to add additional terms not included in the standard Form 656 agreement, thereby recouping part or all of the difference between the amount of the offer or additional terms of the offer and the liability compromised.”
As discussed, offers in compromise are rare, and predominantly reserved for taxpayers who cannot pay their full tax liability. If you are one of these taxpayers, or someone who may owe money to the IRS and was wondering if you could get an offer in compromise agreement, you may also be wondering how COVID-19 has impacted these regulations.
COVID-19 Pre-July 15, 2020
- Pending OICs: IRS will allow taxpayers until July 15, 2020 to provide any requested additional information to support a pending OIC. IRS will not close any pending OIC request before July 15, 2020 without the taxpayer’s consent.
- OIC payments: Taxpayers have the option of suspending all payments on accepted OICs and pending OICs until July 15, 2020, although interest will continue to accrue on any unpaid balances while an OIC is pending.
- Delinquent return filings: IRS will not default an OIC for those taxpayers who are delinquent in filing their tax return for tax year 2018.”
If a taxpayer has the ability to pay, they should continue to make payments, but if due to COVID-19, the taxpayer cannot pay per their agreement, the taxpayer has, or had, the option of skipping payments between March 25 through July 15, 2020. After July 15, 2020, the taxpayer should resume making payments.
It is important to remember that these are only “suspensions” to pay. These missed payments will have to be repaid when the suspension period ends.
COVID-19 Post-July 15, 2020
The July 15 deadline has passed, and we are still in the throes of the coronavirus pandemic. Although the People First Initiative only ran through July 15, the IRS has instituted new relief programs for taxpayers.
Because the COVID-19 pandemic is ongoing, the IRS has decided to offer more flexibility for taxpayers by making it easier to set up payment agreements and offers in compromise as part of a new Taxpayer Relief Initiative.
Save for the privileged few, many people have been hit hard by COVID-19, mentally, physically, emotionally, and fiscally. Thus, it follows that many people are not in the position to pay off their tax liabilities.
In recognition of this, the IRS Deputy Commissioner for Collection and Operations support, Darren Guillot, published a blog outlining the IRS’s new offers.
Perhaps the biggest part of the initiative is the ability for “taxpayers without income or the ability to pay can request a temporary suspension of collection activity through the Currently-Not-Collectible program.”
The stated goal of the IRS is to offer, “flexibility for some taxpayers who are temporarily unable to meet the payment terms of an accepted Offer in Compromise.”
Another important relief program is the penalty relief due to reasonable cause program. While a lack of funds is not a sufficient reason; “fire, casualty, natural disaster or other disturbances;” “death, serious illness, incapacitation, or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family;” as well as, “other reason which establishes that you used all ordinary business care and prudence to meet your Federal tax obligations but were nevertheless unable to do so” are sufficient reasons.
Almost everyone’s coronavirus situation is different, but if you or a family member caught a severe illness from COVID-19, or your business was forced to shut down, you may have some recourse under these new IRS initiatives.
As the Pandemic Continues, so might IRS Relief Initiatives
Although the coronavirus has required most of us to adapt and change our lifestyles, if you owe money to the IRS, you may have already had to alter your financial circumstances.
In the aforementioned television series, Sandy Kominsky was lucky to have a very wealthy, long-time friend and former talent agent, Norman Newlander (played by Alan Arkin). Newlander agreed to pay off Sandy’s debt to the IRS with only a few sarcastic comments and a sigh. Very few of us probably have friends that can write a check for $300K without flinching.
Although the IRS has made some concessions to financial hardships, COVID-19 has not made the situation for taxpayers much easier. You may still have questions about your offer in compromise with the IRS and how COVID-19 is impacting your agreement.
I hope we addressed at least some of your concerns here, but if you still need help with your current OIC, attaining a new OIC or any tax-related matter, please call my office. Our team of tax professionals will do their best help you put together a plan to get out of debt.