Tax Seminar #3 – December 3 2012

How Taxpayers Can Be
Exempted from 20% Payment
Offers in Compromise
12
The IRS will use current
income “ for purposes of determining
whether there should be
a 20 percent TIPRA payment.
”
IRS
Representation
Advisor
E. Martin Davidoff, CPA, Esq.
L
Last July when Congress enacted changes in the law (IRC §7122)
on Offers in Compromise, the most significant aspect of the
legislation was the requirement of a 20 percent down payment
on lump sum offers and the payment of monthly installments
on deferred periodic payment offers Tax Increase Prevention and
Reconciliation Act (TIPRA payments).
By the time this column is published, the IRS is likely to have
come out with new forms and guidance with respect to these
rules. Based on conversations with the IRS, I believe the guidance
will be along the following lines:
1. Taxpayers whose income falls at or below 250 percent of the
DHS poverty guidelines are exempt from the $150 application
fee and TIPRA payments.
2. Forms used for offers were redesigned and new forms added:
• Form 656 will continue to be used for most offers.
• Form 656-L will be used to process offers as to doubt and
as to liability.
• Forms 656-A will be used to process lump sum payments
and claims for exemption from such payments.
• Form 656-PPV will be used to submit monthly periodic
payments while the offer is pending.
3. Forms 433-A and 433-B also are being redesigned. These
forms will continue to be used to secure financial data from
taxpayers for use in offers and in determining amounts collectible
through levy or installment agreements.
4. If an offer is increased through the filing of an amended form
656, 20 percent of the increased offer amount must be submitted
prior to any further consideration of the offer.
The 250 percent guideline provides a huge opportunity to taxpayers.
When considering whether a taxpayer qualifies for such
consideration, the IRS will look at the taxpayer’s income at the
time the offer is submitted! In my opinion, this is surprising and
may allow taxpayers to eliminate the 20 percent TIPRA payment
by the timing of their offers.
Remember that an offer will be accepted by the IRS if the
amount equals or exceeds the taxpayer’s Reasonable Collection
Potential (RCP), defined by the IRS as the total of the taxpayer’s
realizable value in real and personal assets, and his/her future
net income.
Realizable value is, essentially, gross value less secured debt.
For example, unsecured credit card debt is usually not considered.
In addition, the IRS will discount valuations based on
“Quick Sale Value.” In New Jersey, that generally means a 20
percent discount for residential property from its true fair market
value.
Future net income is based on a forecast of the excess of gross
income over allowable expenses – food, clothing, housing, transportation,
medical and taxes – over a minimum of 48 months.
For the most part, other expenses such as alimony, life and disability
insurance, child care, and the cost of tax representation,
also are allowable. The expenses are defined by guidelines published
by the IRS, although the guidelines provide some certainty
in the determination, there is room for negotiation.
Since future net income is gross income less allowable expenses,
the starting point for computing future net income is gross
income. By policy, the IRS will not merely accept one’s current
income as a predictor of future income. Absent special circumstances,
the IRS’s first attempt at computing gross income will be
to take the higher of the taxpayer’s current income as evidenced
by paycheck stubs or financial statements, and a three-year average
of the taxpayer’s income based on the immediate prior three
years.
As a result, the announcement that the IRS will use the current
income for purposes of determining whether there should
be a 20 percent TIPRA payment, is surprising and refreshing. I
believe that this approach is correct. The unanswered question
is what will happen if the taxpayer’s income level changes while
the offer is pending? Will he or she then be required to pay in
the 20 percent? I suspect this issue will only come up at the time
an amended offer is submitted or the taxpayer is asked to update
his/her financial information.
E. Martin Davidoff, CPA, Esq. is a sole proprietor with more
than 25 years’ experience practicing as a CPA and tax attorney
in Dayton, N.J. He is the founder and current chairman of
the IRS Tax Liaison Committee of the American Association of
Attorney-CPAs and currently serves as its vice president. Further
information about Davidoff’s upcoming speaking engagements can
be found by emailing lisa@copeseminars.com.
10 For Practitioners … By Practitioners April/May 2007