Congratulations! You settled your IRS tax debt. Or did you? Well, not so quick. Did you get an IRS Offer in Compromise acceptance letter? Before you celebrate, read on to find out if your Offer in Compromise was actually accepted.
Time to relax? Hold on. Don't believe the clouds are gone until you see it in writing.
Stanley Harbaugh (name changed) is one such taxpayer who reached an agreement with an IRS employeeto settle his tax debt. He called the IRS to negotiate his Offer in Compromise, and was told he would pay $225 a month for 36 months. Yet, after this was done and he paid the IRS this amount in full, the IRS still tried to collect more money from him. Why did this happen?
Because of a miscommunication, Mr. Harbaugh thought the IRS employee he spoke with had the authority to settle tax debts. In fact, the employee was a lower-level employee at Automated Collections Services (ACS). This person had the authority to figure out how much Mr. Harbaugh could afford to pay the IRS each month, and had the authority to set up a payment agreement for up to three years. After three years the IRS would revisit what he could afford to pay. But the employee never told him that, so Mr. Harbaugh thought he was settling all his back taxes permanently with this telephone call.
Why your IRS Offer in Compromise Acceptance Letter must be in writing
In technical terms, what Mr. Harbaugh really entered into a was a partial payment installment agreement, not an Offer in Compromise. The IRS employee the taxpayer spoke with was not even authorized to settle debts through an Offer in Compromise! The taxpayer tried to argue this in tax court.
The IRS Offer in Compromise regulations require that all acceptances of an IRS Offer in Compromise be in writing. Since he did not have written proof of (what he thought) was his Offer in Compromise acceptance, he lost his case.
The terms of your IRS Offer in Compromise Acceptance Letter
Here are some of the common terms:
- In the first paragraph, the IRS will explain that they accepted your Offer in Compromise and the acceptance date is the date of the letter. The IRS will also inform you that acceptance is based upon the conditions of Form 656 (the Offer in Compromise form you filed with them).
- In the second paragraph, the IRS will explain why they accepted your offer, Doubt as to Liability, Doubt as to Collectibility (based on allowable expenses) or Effective Tax Administration.
- Typically in the the third paragraph, the IRS will tell you how much they have received from you in the form of a down payment or partial payments from Form 656-PPV.
- Next the IRS will warn you that you must be in compliance with the tax code. You must be sure to file everything on time and make sure that you do not incur new liabilities. If you break this agreement, your offer will later be rescinded and everything that you settled will come roaring back.
- The IRS will then inform you that if you are due a refund, the IRS will take that refund and apply it to those back taxes. For example, if an Offer in Compromise is accepted in 2013, that means when the 2013 1040 is filed in 2014, the IRS will hang on to the refund. Do not be surprised when this happens.
- The IRS will then explain that once you pay your offer in Compromise amount in full, it may take up to 120 day for your federal tax lien, if filed, to be released. Note you may also be able to get the lien withdrawn, which is even better.
- The IRS will explain where to send any additional payments you agreed to.
Pay very close attention to the terms of the IRS Offer in Compromise acceptance letter. Just getting this letter does not mean your job is over. You must abide by the acceptance terms in your letter. And it bears repeating: Do not have another tax problem for at least 5 years. Otherwise, all your tax debts will come back to life (like zombies, but not as pretty). If you have a tax issue you need assistance with, contact us. We can help.