This question is a terrific example of how complicated the IRS tax debt settlement law is, because any of the answers, "yes," "no," and "maybe" may all be correct.
The correct answer is "No," you can not include this years tax liabilities on an Offer in Compromise
Only taxes that are assessed may be compromised. IRS Form 656 is pretty clear about that, right? So then, the answer must be "no." Well, not so fast….
The correct answer is "Yes," you can include this years' tax liabilities if…
You can include tax liabilities incurred this year if they are filed. Typically, these are payroll taxes (Form 941) that we would include in an offer in compromise. You see, a running business may file an Offer in Compromise of unpaid payroll taxes.
Using an Offer in Compromise on a running business for back payroll taxes is often times a better repayment scheme than an Installment Agreement, and even better, when properly executed, it assures that the Trust Fund penalties will be paid 100% from pre-tax dollars, not from responsible parties so assessed during the Trust Fund Interview (known as the 4180 interview).
The correct answer is more accurately "yes, but not really," so let's just say "maybe".
My suspicion is the questioner was asking about personal 1040 taxes. To answer that, we really need to think of a typical fact pattern.
Suppose, today, I have a new client who calls me up, really worried. His name is Emmett James and he owns a construction business. In 2014, he lost a big contract. In order to keep his business afloat and to go after a lucrative contract, he dipped in to his 401(k). He didn't pay enough in taxes. So he wound up owing $80,000 And in 2015, he stopped making his own estimated taxes so he had the cash to retool until the contract was awarded. He filed this 2015 return in April of 2016 and owes $40,000 for this year. And in August of 2016, he was finally awarded that contract he was gunning for. He spent a lot of that money he got upfront with that contract with vendors who were about to sue him. So for 2016, he only very recently started making estimated payments. Our calculations are that when he files his 2016 1040 he will owe about $40,000. For total tax debt of $180,000, including 2016.
So, can we file an Offer in Compromise now to include that $40,000 from 2016?
The first problem Emmett has is a lack of current compliance. The IRS will not grant an Offer in Compromise to anyone it suspects will run up a new tax debt. An Offer in Compromise is for those who made honest mistakes and won't let it happen again. In this case, Emmett has only paid the IRS a few payments towards 2016. What is the assurance that Emmett will not incur a tax debt for 2017?
His recent track record is not so great. That alone would make me want to wait and go for an interim solution, a partial payments installment agreement or Currently non-collectible status, so we can prove to an IRS Offer in Compromise examiner that Emmett has a decent enough track record of current payments to be the tpye of person who should be granted relief. An Offer in Compromise is not all about the numbers! The IRS must be convinced that you deserve a break.
Well, let just say that for other reasons, we can't wait. We have to file an offer in compromise now. Can I include 2016 on a IRS form 656-OIC?
Well I can. Trust me, I physically can do it. So what will happen?
In about 4-8 weeks, I will get a response from an IRS Offer in Compromise Examiner. She may or may not see that I included 2016 during this initial contact. She will most likely get back to me in four weeks with a request for additional information. So that would be February 2017. Now at this time, I would have Emmett already have filed his 2016 return and I would be waiting for that assessment to hit before the Offer Examiner gets back to me in March.
But what happens if the tax assessment does not get assessed in time for the Offer Examiner is in the middle of her exam? The Offer Examiner should reject the offer because it includes an additional tax liability that when assessed will default the rest of the Offer in Compromise. It will default the rest of the Offer because in order for an Offer in Compromise to be fully and finally accepted as paid in full, the taxpayer must file returns (if returns are due) and not incur any unpaid tax liabilities for the next 5 years. So in this case, because it has yet to be assessed and will default him once it is, it is really in the Emmett's best interest that the offer be rejected, if 2016 is not part of the Offer in Compromise.
If the Offer in Compromise is rejected and we expect the 2016 return to be assessed in a few weeks, I could take an appeal. It will take about 2-3 months for an Appeals Officer to rule on this appeal. Now this is where it gets interesting. I have had experience where the Appeals officer will allow us to amend the Offer in Compromise submitted include what was then the current tax year (in this case 2016) during our appeals hearing (which is now 2017). But there must be a good reason for it. One good reason for it: For example, if the taxpayer will be paying a substantial part of the tax debt and the financing for that tax debt is a small window that happens to be now.
Here's a real-life example.
Suppose in Emmet's case it is now July 2017. And he has a buyer for one of his properties that he has been trying to sell for 10 years and he just received the best offer on this property. Emmett's net profit from the sale is $110,000. He is willing to pledge all proceeds to the IRS as part of this offer. To clarify: The IRS will get $110,000 of the total $180,000 debt, paid. And also figure, that otherwise, Emmett has very few other ways to ever pay back the IRS aside from making $500 payments a month. And the buyer of this property will needs this property now — because of the IRS liens on the property, Emmett will not be able to sell it to him later. The Offer in Compromise must be accepted now in order for the sale to take place.
In this case, if I did my job, I would expect that an Appeals Officer may agree to accept the Offer in Compromise. As it is in the government's best interest to take $110,000 now, or only collect perhaps $40,000 over the remaining collection times (10 years from date of assessment). This agreement would be a win for Emmett — he'd be able to get his IRS problem solved in one shot, a win for the Appeals Officer, she would have used her discretion to find a solution that also helps the buyer of this property maximize resources, and a win for all other US taxpayers, the US Treasury received far more than it would had this Offer in Compromise not been accepted.
WARNING: Recently, however, Appeals officers have told us they aren't being as lenient with taxpayers. Mainly because the new IRS "Fresh Start" initiatives are so favorable to taxpayers anyway. So for personal taxpayer debt, the answer is technically a "no," but in effect, maybe a "yes."
So the safest bet: However, in order to best take advantage of an IRS debt settlement rules, without some compelling reason, I would advise entering into an interim collection alternative, mentioned above, so that the current year can be assessed. Look, we tell our clients that an Offer in Compromise takes 12-18 months to be accepted. So why not wait a few more months? Filing repeated Offers in Compromise is a bad idea — it tolls the collection time and also makes you look a "little flaky" (my words) to the IRS.
Conclusion
Your goal is not just to settle debts, but to end the tax problem and circumstances involving the debt in the first place. If the IRS accepts an offer in Compromise that does not include all taxes owed, the IRS did the taxpayer no favors. The agreement will be near-immediately defaulted, triggering all debt previously settled to become binding again.
This is what you need to know: The IRS does not have to ability to stop you from doing harmful to yourself. The IRS will allow you to agree to pay them money you can't afford, or will agree to a compromise that will place you in jeopardy.
If you have a tax debt and are unsure if an Offer in Compromise is the best option for you, contact us. We can help. Call us at 888-727-8796 or email info@irsmedic.com.
