Monthly Archives: January 2014

Offers In Compromise

An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayer’s tax liabilities for less than the full amount owed. If the liabilities can be fully paid through an installment agreement or other means, the taxpayer will in most cases not be eligible for an OIC.  In order to be eligible for an OIC, the taxpayer must have filed all tax returns, made all required estimated tax payments for the current year, and made all required federal tax deposits for the current quarter if the taxpayer is a business owner with employees

The IRS may accept an OIC based on three grounds.

  • First, acceptance is permitted if there is doubt as to liability. This ground is only met when there is a genuine dispute as to the existence or amount of the correct tax debt under the law. Second, acceptance is permitted if there is doubt that the amount owed is fully collectible. Doubt as to collectibility exists in any case where the taxpayer’s assets and income are less than the full amount of the tax liability.
  • Second, acceptance is permitted if there is doubt that the amount owed is fully collectible. Doubt as to collectibility exists in any case where the taxpayer’s assets and income are less than the full amount of the tax liability.
  • Third, acceptance is permitted based on effective tax administration. An offer may be accepted based on effective tax administration when there is no doubt that the tax is legally owed and that the full amount owed can be collected, but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances.

 

When submitting an OIC based on doubt as to collectibility or based on effective tax administration, taxpayers must use the most current version of Form 656, Offer in Compromise, and also submit Form 433-A (OIC) (PDF), Collection Information Statement for Wage Earners and Self-Employed Individuals, and/or Form 433-B (OIC) (PDF), Collection Information Statement for Businesses. A taxpayer submitting an OIC based on doubt as to liability must file a Form 656-L (PDF), Offer in Compromise (Doubt as to Liability), instead of Form 656 and Form 433-A (OIC) and/or Form 433-B (OIC). Form 656 can be found in the Offer in Compromise Booklet,Form 656-B (PDF).

In general, a taxpayer must submit a $186 application fee with the Form 656. Do not combine this fee with any other tax payments. There are, however, two exceptions to this requirement.

  • First, no application fee is required if the OIC is based on doubt as to liability.
  • Second, the fee is not required if the taxpayer is an individual (not a corporation, partnership, or other entity) who qualifies for the low-income exception. This exception applies if the taxpayer’s total monthly income falls at or below 250 percent of the poverty guidelines published by the Department of Health and Human Services

 

Taxpayers may choose to pay the offer amount in a lump sum or in installment payments. A “lump sum offer” is defined as an offer payable in 5 or fewer installments within 5 or fewer months after the offer is accepted. If a taxpayer submits a lump sum offer, the taxpayer must include with the Form 656 a nonrefundable payment equal to 20 percent of the offer amount. This payment is required in addition to the $186 application fee. The 20 percent payment is “nonrefundable” meaning it will not be returned to the taxpayer even if the offer is rejected or returned to the taxpayer without acceptance. Instead, the 20 percent payment will be applied to the taxpayer’s tax liability. The taxpayer has a right to specify the particular tax liability to which the IRS will apply the 20 percent payment.

An offer is called a “periodic payment offer” under the tax law if it is payable in 6 or more monthly installments and within 24 months after the offer is accepted. When submitting a periodic payment offer, the taxpayer must include the first proposed installment payment along with the Form 656. This payment is required in addition to the $186 application fee. This amount is nonrefundable, just like the 20 percent payment required for a lump sum offer. Also, while the IRS is evaluating a periodic payment offer, the taxpayer must continue to make the installment payments provided for under the terms of the offer. These amounts are also nonrefundable. These amounts are applied to the tax liabilities and the taxpayer has a right to specify the particular tax liabilities to which the periodic payments will be applie

If the IRS accepts the taxpayer’s offer, the IRS expects that the taxpayer will have no further delinquencies and will fully comply with the tax laws. If the taxpayer does not abide by all the terms and conditions of the OIC, the IRS may determine that the OIC is in default. For doubt as to collectibility and effective tax administration OICs, the terms and conditions include a requirement that the taxpayer timely file all tax returns and timely pay all taxes for 5 years from the date of acceptance of the OIC. When an OIC is declared to be in default, the agreement is no longer in effect and the IRS may then collect the amounts originally owed (less payments made), plus interest and penalties. Additionally, any refunds due within the calendar year in which the offer is accepted will be applied to the tax debt.

If the IRS rejects an OIC, the taxpayer will be notified by mail. The letter will explain the reason that the IRS rejected the offer and will provide detailed instructions on how the taxpayer may appeal the decision to the IRS Office of Appeals. The appeal must be made within 30 days from the date of the letter. In some cases, an OIC is returned to the taxpayer, rather than rejected, because the taxpayer has not submitted necessary information, has filed for bankruptcy, has failed to include a required application fee or nonrefundable payment with the offer, or has failed to file tax returns or pay current tax liabilities while the offer is under consideration. A return is different from a rejection because there is no right to appeal the IRS’s decision to return the offer.

Step-by-step instructions and all the forms for submitting an OIC can be found in the Offer in Compromise BookletForm 656-B (PDF). Our video, Completing Form 656, Offer in Compromise, also provides instructions and will help you avoid common errors. You may use the Offer in Compromise Pre-Qualifier to confirm your eligibility and prepare a preliminary proposal. Additional information about the OIC program can be found in Publication 594 (PDF), The IRS Collection Process, or by visiting the Offer in Compromise or Fresh Start Offer in Compromise topics on www.irs.gov. or Robert Burch (773) 7794447.

 

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January 16, 2014 · 9:51 pm

IRS Increases Fees for Installemnt Agreements and Offers in Compromise

Starting in the New Year, the Internal Revenue Service plans to increase the processing fees for installment agreements and offers in compromise, in addition to other payment arrangements.

Effective Jan. 1, 2014, processing fees for standard installment agreements and doubt as to collectability offers will increase, the IRS said in an email to tax professionals last Friday. Fees for direct debit installment agreements, however, will remain unchanged. Low-income fees and fee waivers will also be unchanged.

Starting January 1, the fee for entering into an installment agreement will increase from $105 to $120, according to the Federal Register. The fee for restructuring or reinstating an installment agreement will go up $5 from $45 to $50. The fee for processing an offer in compromise will rise from $150 to $186. For more information contact Robert Burch (773) 779-4447 or irs.gov

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Rules for charitable contributions of clothing and household items

To be tax-deductible, clothing and household items donated to charity generally must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of more than $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return.

Donors must get written acknowledgement from the charity for all gifts worth $250 or more that includes, among other things, a description of the items contributed. Household items include furniture, furnishings, electronics, appliances and linens.

Guidelines for monetary donations
To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date and the amount paid. Credit card statements should show the name of the charity, the date and the transaction posting date.

Donations of money include those made in cash or by check, e-funds transfer, credit card, and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a W-2 or other document from the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity. For more information contact Robert Burch (773) 779-4447 or irs.gov

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Eight Tips for Taxpayers Who Receive an IRS Notice

Every year the Internal Revenue Service sends millions of letters and notices to taxpayers, but that doesn’t mean you need to worry. Here are eight things every taxpayer should know about IRS notices – just in case one shows up in your mailbox.

 

  1. Don’t panic. Many of these letters can be dealt with simply and painlessly.
  2. There are number of reasons the IRS sends notices to taxpayers. The notice may request payment of taxes, notify you of a change to your account or request additional information. The notice you receive normally covers a very specific issue about your account or tax return.
  3. Each letter and notice offers specific instructions on what you need to do to satisfy the inquiry.
  4. If you receive a correction notice, you should review the correspondence and compare it with the information on your return.
  5. If you agree with the correction to your account, usually no reply is necessary unless a payment is due.
  6. If you do not agree with the correction the IRS made, it is important that you respond as requested. Write to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the lower left part of the notice. Allow at least 30 days for a response.
  7. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right corner of the notice. Have a copy of your tax return and the correspondence available when you call.
  8. It’s important that you keep copies of any correspondence with your records.

 

For more information about IRS notices and bills,visit http://www.IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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