Once you have decided on the agreement that you fit in with, you need to get ready by being current and compliant by submitting all 941 returns (not just some of them) and by making your regular deposits like a good taxpayer.
From there, you can request an installment agreement by mail, fax, and voicemail (I prefer to do it all three ways). You need to specifically request the installment agreement type, include all tax types and periods, and be ready to provide necessary financials.
Option 4 – Currently Not Collectible Status
After doing your financial analysis, you may be reporting to the IRS that you have no assets by which they can liquidate and no income that is above and beyond business expenses that can pay for the debt.
At that point, you could qualify for CNC status.
If you are placed in currently not collectible status, the CSED does not get stopped. The idea with CNC is that the Collection Statute Expiration Date (the last date for the IRS to collect from you) expires while under this status. When that occurs, the liability disappears, and the business will not owe a dime to the IRS.
That sounds amazing, right? Often it is and may even be a better deal than an offer in compromise. However, there are a few tradeoffs, namely that the IRS will file a tax lien against the business, there will be a mandatory financial analysis follow up every 18-24 months, and the Trust Fund Recovery Penalty assessment will be filed against someone (or multiple people). Those are the trade-offs in place here for not needing to pay anything.
To qualify for this status, you must:
- Demonstrate no equity in assets
- Must not have any accounts receivable that can be levied
- Must be current with Federal Tax Deposits
In other words, you are basically broke; hence the not collectible.
After being placed in this status, a failure to maintain Federal Tax Deposits or future filing compliance will result in reactivation.
Option 5 – The Offer in Compromise
Whenever you see advertising with the phrase “pennies on the dollar” on it, it is referring to an Offer in Compromise. It is possible for operation businesses to compromise their tax debts via the Offer in Compromise pathway. However, many firms advertise this resolution option as the number one option, but most of the business will not qualify for it.
The IRS will only accept this option if it is in the IRS’ best interest to collect the outstanding tax liability.
Offer in Compromise Benefits
If you do qualify, there are some amazing benefits, namely:
- Your tax debts are settled for less than what you owe
- Elimination of penalties and interest
- No enforced collections activity
- No limit to the amount that can be settled
- Government cannot later reopen the case unless evidence of fraud is found.
- Liens are removed upon acceptance of the offer
The downsides though are:
- A potentially large amount of cash is due at once (some businesses cannot make this happen)
- There is an application fee
- The business needs to be complying for the entire fiscal quarter in which the offer is being submitted
- Business tax refunds for the year of application is pending and the year of acceptance are seized
- Full financial disclosures are required
- If you make a payment, and it has not accepted, that payment is nonrefundable and is immediately applied to the tax debt
- The CSED is extended
- You will have closer IRS scrutiny for five years after
Your eligibility to settle for less than what you owe is largely due to a few scenarios:
1. Doubt as to Collectability with Special Circumstances
In this scenario, you will have needed to have economic hardship and be unable to keep the business going in a lot of respects. In this case though, there is still an ability to make an offer based on the Reasonable Collection Potential (RCP)
2. Doubt as to Liability
This means that you have a genuine dispute as to the existence or amount of the correct tax debt under the law.
3. Effective Tax Administration
In this scenario, due to exceptional circumstances, collection in full would undermine public confidence that the tax laws are being administered in a fair and equitable manner. There is no doubt that the tax is owed and that the full amount can be collected, but for all intents and purposes, the collection of that tax would put the IRS in a bad eye with the public.
In other words, they are kicking the business while they are down in a grave enough way that people would hear about it and be disgusted with the IRS for doing so.
Requirements of OIC
If you qualify for OIC, you will need to get a bunch of stuff in order:
- All 941 tax returns must be filed
- The company cannot be in bankruptcy
- They must be making current Federal Tax Deposit payments
- Must not be able to pay in full or through an installment agreement
- Trust Fund must be paid or TFRP assessment made against an individual
Yes, for an Offer to be filed, someone needs to be liable and assessed the Trust Fund Recovery Penalty. The IRS will not even process the Offer unless someone has been assessed this penalty.
The business can file the OIC and pay a fraction of the liability, but the Trust Fund still needs to be addressed and someone will still be on the hook for it.
When submitting an OIC, you need to use Form 656, Offer in Compromise, submit an application fee, and then submit Form 433-B (OIC). Before you do all of that, make sure you are current and compliant, you meet the eligibility and requirements I have detailed above.
From there, the IRS will do a full financial review and request documentation. They will also verify, in depth, your asset and income situation using the following types of helps (and this is just the tip of the iceberg):
- DMV records for vehicles
- UCC filings for assets, liens, financing
- County real estate records for real property
- PACER and other court systems for court records
- Credit reports for recent loans and credit applications
- Valuation verification using commercial tools (e.g. KBB, Realtor reports, etc.)
- For an operating business, expect an in-person visit
In addition to an application fee, you are required to put an initial “deposit” down to start your offer. There are two payment options:
1. Lump Sum
Businesses may choose to pay the offer amount in a lump sum or in installment payments. A “lump sum cash 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 cash 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 application fee.
The 20 percent payment is generally 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 tax liability to which the IRS will apply the 20 percent payment.
2. Periodic Payment Offer
The “periodic payment offer” is an offer where the business will make 6 or more monthly installments, but within 24 months of when 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 application fee.
This amount is generally nonrefundable, just like the 20 percent payment required for a lump sum cash 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 applied.
Calculations – Reasonable Collection Potential
When you are putting together your offer, you need to collect your Reasonable Collection Potential (RCP). This is the amount that will help the IRS lean towards going after this deal. They will not get more than this!
This amount cannot be zero, and it will not include amounts that have already been paid.
In short, TCP is the total amount (cannot be zero and will not include amounts that have already been paid towards the liability) that the IRS could collect from you within one to two years. This will include:
- Net equity in assets, including unseizable assets
- Present and future income
- Amounts collectible from third parties
- Transferred assets
The minimum offer amount is the total of everything listed above. If the RCP exceeds the tax liability, you are not an OIC candidate unless exceptional circumstances exist.
After adding up assets, incomes, etc., you’ll take your remaining monthly income and multiply that by either 12 or 24 to get your future remaining income (see Page 5 of Form 433-B (OIC): https://www.irs.gov/pub/irs-pdf/f433boi.pdf).
From there, you will add this amount plus the value of non-income generating assets that have value and you will sell and that becomes your offer amount (which cannot be zero).
If your OIC is rejected, you will be notified by mail. The letter will explain the reason for why the IRS rejected the offer and will also give you a ticket to Appeals. The appeal must be made within 30 days from the date of the letter. Please reference Chapter 5 for information on how to deal with Appeals.
Option 6 – Discharging Taxes in Bankruptcy
Contrary to popular belief, it is possible to discharge tax debts in bankruptcy. You read that correctly. Yes, some federal, state, and local income taxes can be discharged in Chapter 7, Chapter 13, and Chapter 11 bankruptcy.
Better yet, even the penalties and interest that is attached to those income tax debts can also be dischargeable as well. But determining which back taxes are dischargeable is an overly complex process.
I am not a bankruptcy attorney, so I will not be diving deep into this Option. But there are a few core principles that you should be aware of:
- Trust fund taxes (the amounts that your employees had withheld) will not be discharged. You will still be liable for this portion through the Trust Fund Recovery Penalty
- The employer’s portion of the payroll tax (social security and Medicare), however, is dischargeable under certain situations
- Other business income taxes may be dischargeable but seek a bankruptcy attorney for specific help.
Option 7 – Expiration of the Collection Statute
Finally, the last option is the expiration of the collection statute (CSED clock). The IRS only has a limited time during which to collect back taxes from you. This time period starts after an assessment has been made and ends 10 years later.
It should be noted that this CSED clock runs for each period, in this case each quarter. If you want to dive deeper into the CSED clock, please review Chapter 4.
But the expiration of the CSED is an option, because if this clock runs out, then the liability drops off entirely. I have not seen this personally, but other tax professionals have advised certain clients to not do anything with the IRS (sometimes not even bring their tax debt to their attention) because the CSED was about to expire.
If you filed proper returns, an assessment was made, but then collection was never enforced and you are nearing that CSED clock expiring, this is an option for you.