Internal Revenue Manual 5.8.1
In another article we discussed, in a broad overview, the Offer in Compromise (OIC) rules and general procedures. This article will go into more depth, explaining the rules and procedures gathered from the Internal Revenue Manual. Specifically, we will cover policies, OIC objectives (as stated by the IRS), doubt as to liability or collectibility, and Effective Tax Administration policy.
The Internal Revenue Manual defines an OIC in 5.8.1 (read: part 5, chapter 8, section 1) as, “an agreement between a taxpayer and the government that settles a tax liability for payment of less than the full amount owed.” In many cases, an OIC is the best alternative for a taxpayer who cannot pay their tax debt in full and who does not have material assets that can be used to settle the debt in full. In order for your OIC to be accepted by the IRS and settle your tax debt, it must be equal to or more than the IRS’ estimation of their Reasonable Collection Potential (RCP) on your tax debt. The IRS will calculate your RCP as follows:
100% of your cash, investments, and accounts receivable (if any), plus
The "realizable value" of your vehicles, real estate, and personal assets, plus
Your monthly disposable income over a period of 48 months or 60 months.
Notice that the second bullet states that the IRS will consider your "realizable value" when evaluating your RCP. When a taxpayer owes $10,000 or more in back taxes to the IRS, the IRS will file a lien against that taxpayer. The IRS will then step up their collection efforts if the taxpayer does not make any arrangements to pay their tax debt. If no actions are taken by the taxpayer, the usual next step is an IRS levy. When the IRS levies your assets, it will sell them and use any proceeds to pay your tax debt. A “quick sale value” of your personal property and real estate is the proceeds received from the sale without adequate time to sell the asset(s) for the highest possible price. The "realizable value" of your assets is as follows:
Fair market value times 80% equals the Quick Sale Value
Quick Sale Value minus Outstanding Secured Loans equals the Realizable Value
Generally, the IRS has 10 years to collect your unpaid taxes before the Collection Statute Expiration Date applies to your individual case. However, as time passes and your case goes unresolved, the IRS may begin taking more aggressive measures to ensure your tax debt is paid. In general, an OIC will not be accepted two reasons. Before accepting your OIC, the IRS will consider whether your tax debt will be payable through an installment agreement over the remaining time it has to collect. It is important to note that the IRS may continue collection actions beyond the statute of limitations. For example, a protracted installment agreement is one that extends beyond the Collection Statute Expiration Date. Also, when you submit an OIC, the IRS will calculate your RCP. If your RCP is greater than the amount you are offering to settle with, then the IRS will generally reject your offer.
The Internal Revenue Code (IRC) allows for different types of offers. Among them, two of the most common include Doubt as to Liability (DATL) and Doubt as to Collectibility (DATC). You may file a DATL offer if you believe that the charges the IRS is harboring against you are illegitimate. It is important for you to have your Los Angeles tax attorney or Enrolled Agent audit your tax returns for the years that the IRS is claiming you owe. Los Angeles Tax attorneys and Enrolled Agents are experts in taxation and may find credits, deductions, or misrepresentations of expenses or income that your CPA or other tax professional may have missed. If your Los Angeles tax attorney or Enrolled Agent finds that you do indeed owe the full amount of tax debt, you may qualify for a DATC offer. When taxpayers who owe substantial amounts of unpaid taxes to the IRS, the amount can often seem overwhelming and impossible to pay even over a 10 year installment agreement. In these cases, your Los Angeles tax attorney or Enrolled Agent should calculate your RCP to determine the correct offer amount and submit the offer to the IRS using Form 433-A (OIC) and Form 656-A. Filing for a DATC offer should prove to the IRS that your equity in all of your assets is not enough to pay the full tax debt without causing economic hardship.
Under the Effective Tax Administration (ETA) policy, the IRS will accept an OIC even though the taxpayer's RCP is equal to or greater than the tax liability if the collection will cause the taxpayer economic hardship. Examples of economic hardship provided by the IRS include levying a retirement pension of a retired taxpayer with no other income. Another example involves a taxpayer who owns a home and receives a loan denial for equity in the home due to being on a fixed income with limited earning potential. The IRS is unlikely to force the sale of a taxpayer’s home under these circumstances and will generally accept an offer on these grounds.
Settling your tax debt can entail a long and complicated process. For more information on how the Hillhurst Tax Group located right off of Los Feliz and the 5 Freeway can help you with all of your IRS tax problems, email us at email@example.com or call us to set up a free consultation with our Los Feliz IRS tax attorney or Enrolled Agents at (323) 486-3314.
Common Abbreviations Used in the IRM
Below is a list of common abbreviations used throughout this IRM.
AET – Asset Equity Table – A table listing all the taxpayer’s assets, encumbrances, and exemptions. It then calculates the equity which is included in the reasonable collection potential (RCP) calculation.
AOIC – Automated Offer in Compromise – Computer application where offers in compromise are recorded and monitored from receipt to closure. History of the offer investigations conducted by COIC employees and of actions taken by Monitoring OIC (MOIC) units are also maintained on this system.
ARI – Appeals Referral Investigation – A request from Appeals for assistance from the appropriate Collection function on verifying the accuracy of information reported on a CIS or assistance in completing the offers investigation.
ASED – Assessment Statute Expiration Date – The date the statutory period for assessing tax expires.
ATAT – Abusive Tax Avoidance Transactions – Abusive transactions taken by taxpayers to avoid paying, such as creating trusts, using off shore credit cards, etc.
CDP – Collection Due Process - Allows taxpayers a right to a hearing before Appeals regarding proposed collection enforcement actions or filed Notice of Federal Tax Lien.
CIS – Collection Information Statement – A financial statement listing assets, income, liabilities, and expenses submitted by the taxpayer. This financial statement can be submitted on Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B (OIC), Collection Information Statement for Businesses.
COIC – Centralized Offer in Compromise – Units located in Brookhaven and Memphis campus that complete initial processing and work less complicated offers to completion. Do not confuse this with MOIC – COIC units do not monitor or default accepted offers.
CSED – Collection Statute Expiration Date – The date the statutory period for collecting the tax expires.
DATC – Doubt as to Collectibility – Basis for acceptance of an offer where there is doubt that the tax can be paid in full.
DATL – Doubt as to Liability – Basis for acceptance of an offer where there is doubt that the liability is correct.
DCSC – Doubt as to Collectibility with Special Circumstance – Basis for acceptance of an offer where there is doubt that the tax can be paid in full and special circumstances exist that warrants accepting the offer for less than the reasonable collection potential (RCP).
ETA – Effective Tax Administration – Basis for acceptance of an offer where this is no doubt that the liability is correct or can be paid in full. However, requiring the taxpayer to fully pay the tax would either create an economic hardship or be a public policy/equity issue.
FICA – Future Income Collateral Agreement – An agreement secured in connection with an accepted offer that requires a taxpayer to pay a percentage of future income for a set number of years as additional consideration for acceptance of the offer.
FMV – Fair Market Value – The value a taxpayer would receive if an asset was sold to a willing buyer given time to obtain the best and highest possible price.
IA – Installment Agreement – An agreement under IRC § 6159 to pay the liability over an established period of time.
IAR – Independent Administrative Reviewer – An independent third party who reviews a decision to reject an offer prior to that decision being conveyed to a taxpayer. This person is not in the chain of command of the employees responsible for the rejection of the offer.
IBTF – In Business Trust Fund – A taxpayer who is in business and owes trust fund (e.g. – Form 941) taxes.
ICS – Integrated Collection System – Computer application used by Compliance employees to monitor inventory. Histories of OIC investigations conducted by area office employees are maintained on this system.
IET – Income/Expense Table – A table that lists the income and expenses both claimed and allowed for purposes of calculating reasonable collection potential (RCP).
MOIC – Monitoring OIC Unit – Unit in Compliance Services located in a campus that completes end processing and monitoring of accepted offers.
NFTL – Notice of Federal Tax Lien - The notice of the filed Federal Tax Lien
NRE – Net Realizable Equity – Quick sale value less the amount owed on an asset.
OE – Offer Examiner – A tax examiner appointed as an offer investigator and located in COIC.
OI– Other Investigation – Form 2209, Courtesy Investigation, is used for District investigations in locating taxpayers or to gather information in collecting on assigned cases.
OS – Offer Specialist – A revenue officer appointed as an offer investigator, generally located in an area office.
PE – Process Examiner – A tax examiner who completes initial processability determinations on offers and is located in COIC.
PLET — Personal Liability for Excise Tax – Assessments made on individual taxpayers for withheld excise taxes.
POD – Post of Duty – Internal Revenue Service local office(s).
QSV – Quick Sale Value – The amount that could be obtained if an asset is sold quickly, usually less than FMV.
RCP – Reasonable Collection Potential – The amount that could reasonably be collected from the taxpayer.
TFRP – Trust Fund Recovery Penalty – Assessments made on individual taxpayers for the withheld or trust fund portion of delinquent employment taxes.
TIPRA – Tax Increase Prevention and Reconciliation Act of 2005 – Section 509 – Legislation enacted in May, 2006, which made major changes to the OIC program.