Offer in Compromise

Posted on March 7, 2009 
Filed Under Federal Income Tax, Tax Procedure | 1 Comment



Overview
An offer in compromise (OIC) is a written agreement between a taxpayer and the Internal Revenue Service to satisfy her tax liability (including interest, penalties, and additional tax) for less than the full amount owed. Be aware, however, that the IRS will reject without consideration an OIC if a taxpayer has a history of noncompliance with federal income tax law or has attempted–or encouraged others–to evade payment of taxes.

An OIC is appropriate if there is (1) doubt as to the amount or even the existence of a tax liability, (2) a question of whether the full amount of tax actually owed can be collected, or (3) a strong likelihood that a taxpayer will experience hardship or unfair treatment in the absence of such agreement. The odds of reaching an OIC with the IRS are higher if criminal proceedings against the taxpayer are not pending or likely.

Generally speaking, the IRS will stop collection efforts while it considers an OIC provided the government’s interests in the account are not jeopardized. In any event, the usual 10-year statute of limitations for assessment and collection of income tax is suspended–stops running–while the IRS reviews taxpayer’s offer.

An OIC is documented on Form 656–Offer in Compromise and requires a $150 application fee and a nonrefundable 20% down payment on a lump sum cash offer (for the IRS, a lump sum cash offer is taxpayer’s proposal to pay the tax in five or fewer installments). However, the application fee and down payment are waived if taxpayer’s offer is based on doubt as to tax liability or taxpayer’s monthly income falls at or below federal poverty guidelines. (Visit my Tax Forms page on the navigation menu above for a copy of Form 656. The link outlines important changes to the form, effective February 2007.) In any case, the payments a taxpayer proposes in her offer are required to be made during the time the IRS investigates such offer.

If the IRS rejects taxpayer’s offer, it will keep the application fee and any payments made during the time the offer is being considered. But a rejected OIC can be appealed; click on for full information.

Reasons and Supporting Documentation for an OIC
Keeping in mind that a key IRS policy is the economical administration of tax collection efforts, an OIC will be considered in the following situations:

  1. Full collection of the tax is doubtful. If a taxpayer cannot pay her tax liability in full even if she were to liquidate assets or make installment payments, then the IRS will consider a doubt-as-to-collectibility offer. In order assess its reasonable collection potential on this type of OIC, the IRS requires that the taxpayer document current financial standing and basic living expenses on Form 433-A–Collection Information Statement for Wage Earners and Self-Employed Individuals (see my Tax Forms page for a copy of Form 433-A).
  2. There is genuine doubt as to the amount, or even the existence, of a tax liability. The IRS will also consider an OIC based on doubt as to liability if there is a genuine dispute over the amount owed and the taxpayer clearly states her position on Form 656-L–Offer in Compromise (Doubt as to Liability). (Note: A copy of Form 656-L is also available on my Tax Forms page.)
  3. Full collection of the tax would be inconsistent with effective tax administration. IRS policy is to collect taxes fairly and equitably without creating economic hardship for taxpayers. If there is potential for full collection and no doubt as to the amount owed–facts which would normally render an OIC unprocessable–a taxpayer can still qualify for an OIC by reason of exceptional circumstances provided she can demonstrate in a written narrative why paying the tax in full would create an economic hardship or be unfair and inequitable. A taxpayer suffers economic hardship when she is not able to meet basic (and reasonable) living expenses; those experiencing mere inconvenience or the inability to maintain an affluent or luxurious standard of living are not considered hardship cases by the IRS. Exceptional circumstances are present where collection of the full amount due would undermine public confidence in the Service’s ability to administer tax laws fairly and equitably. In sum, the IRS will consider this type of OIC on grounds of effective tax administration and requires, as it does for doubt-as-to-collectibility offers, documentation of current financial standing on Form 433-A.

Circumstances in Which an OIC Will be Rejected Without Consideration
Except for an offer based on doubt as to tax liability, the IRS will not process an applicant’s offer in the following circumstances:

What to Expect After an OIC is Accepted
After the IRS accepts an OIC agreement, a taxpayer must comply with federal income tax law while the agreement is in effect. During such time, the IRS has the right to reinstate and demand full payment of the original tax liability in the event of taxpayer’s noncompliance with either the terms and conditions of the OIC or federal income tax law. Finally, the IRS will keep any refunds due to overpayment of taxes, including interest due taxpayer, for tax periods covered by the OIC.

Additional relevant articles on the topic of offer in compromise are listed below:

Many happy returns, Roger

Homebuyer Credit

Posted on February 28, 2009 
Filed Under Credits, Federal Income Tax | Leave a Comment

Overview
If a first-time homebuyer purchases a principal residence (main home) after April 8, 2008 but before December 1, 2009, then he can claim a refundable tax credit in the amount of the lesser of $7,500 ($3,750 if married and filing separately) if the home is purchased in 2008, $8,000 ($4,000 if MFS) if the home is purchased in 2009, or 10% of the purchase price of the home. For purposes of the credit, the purchase date is the date of closing. If the taxpayer builds the house, then the date the taxpayer first occupies the home is the purchase date. The first-time homebuyer credit can be claimed on taxpayer’s 2008 or 2009 Form 1040 and is calculated on Form 5405. Click on and for full information on enhancements to the credit for 2009. (Note: Visit my Tax Forms page on the navigation menu above to see a copy of Form 5405–First-Time Homebuyer Credit.)

The unit modifier first-time of the noun homebuyer requires explanation: the category of first-time homebuyer can also include a homebuyer with a previous ownership interest in a principal residence. However, this liberal interpretation of the category applies only if such buyer hasn’t owned a principal residence in the U.S. in the 3-year period ending on the day the new credit-eligible home is purchased.

The first-time homebuyer credit will be phased out for high-income taxpayers: the phaseout applies to taxpayers with adjusted gross income between $150,000 and $170,000 ($75,000 to $95,000 if MFS). Taxpayers with AGI over $170,000 ($95,000 if MFS) are not eligible for the credit.

Even more, high-income taxpayers don’t exhaust the category of taxpayers not eligible for the credit:

Recapture of the Credit for a Home Purchased in 2008
A taxpayer claiming the first-time homebuyer credit for a home purchased in 2008 must pay it back–recapture the credit–starting in 2010, free of interest, over a 15-year period in 15 equal installments of $500. In short, the 2008 first-time homebuyer credit is an interest-free loan.

The reader should be aware of rules governing, and several important restrictions on, the homebuyer credit:



Recapture of the Credit for a Home Purchased in 2009
The liberalization of the credit for homes purchased in 2009 is a prime example of Congress using the Internal Revenue Code as an instrument of policy, in this case, the policy vehicle for its desire to revive the U.S. housing market. Unlike the 2008 credit, the 2009 credit doesn’t require repayment: it is a subsidy not a loan. In particular, a taxpayer who purchases a home in 2009 and makes the home his principal residence for a 36-month period starting on the purchase date is not required to repay (recapture) any of the credit. But a transaction in which the home is sold, converted to business or rental property, or disposed of by involuntary conversion before the end of the 36-month holding period will void the credit and the homebuyer must repay as additional tax the full amount of the credit in the year such transaction takes place.

However, there are exceptions to restrictions on the credit for a home purchased in 2009; in fact, these exceptions for a 2009 purchase are similar to those for a 2008 purchase:

Additional relevant articles on the first-time homebuyer credit are listed below:

Many happy returns, Roger

Taxpayer Advocate Service

Posted on February 12, 2009 
Filed Under Federal Income Tax, Tax Procedure | Leave a Comment

Overview
The Taxpayer Advocate Service is an independent organization within the Internal Revenue Service that can help a taxpayer resolve a tax-related problem after one or more unsuccessful attempts to resolve such problem with another IRS department. Assistance from the Taxpayer Advocate Service is also available if a taxpayer believes that normal administrative processes within the IRS are not working as they should.

At present, Nina Olson, National Taxpayer Advocate, heads the Taxpayer Advocate Service program; she is independent of the IRS and reports directly to Congress. Each state and local IRS office (”campus”) has at least one local Taxpayer Advocate who is also independent of the IRS and reports directly to the National Taxpayer Advocate. Click on to read Nina Olson’s biography and for a high-spot review of her organization.

In brief, the mission of the Taxpayer Advocate Service is to:

  1. Make sure that taxpayer problems which have not been resolved through normal administrative procedures are fairly and promptly resolved
  2. Identify issues that increase burdens or create problems for taxpayers and bring these issues to the attention of IRS management; notify Congress if the IRS is unwilling or unable to resolve such issues

When and How to Contact the Taxpayer Advocate Service
A taxpayer should ask the Taxpayer Advocate Service for help in the following situations:

If you need to contact the Taxpayer Advocate Service, click on .

Additional relevant articles on the Taxpayer Advocate Service are listed below:

Many happy returns, Roger



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