After recently finalizing several Offers, I would like to share some important notes that taxpayers need to be aware of when submitting offers. These issues tend to come up often and being aware of them ahead of time will make the process smoother. If you are unaware of how the Offer process works and would like summary, please take a look at my previous post, The IRS Makes Substantial Changes to the Offer In Compromise Process, before reviewing these notes.
- Sole Proprietors: If you are a sole proprietor, it helps if you keep your business and personal finances separate. That entails having a separate business account in which you deposit gross receipts and from which you pay business expenses. If you need to pay personal expenses (mortgage, car payment, etc.) don't pay these expenses directly from your business account. Transfer enough funds to your personal account in order to meet these expenses. Your profit and loss statement needs to match your business bank statements. If something is unclear, the Offer Specialist will ask questions and thereby delay the process. If there are a lot of co-mingling issues, the Offer Specialist may even refuse to deal with a reconciliation and reject your offer. As a result you will have to go through appeals which will delay and complicate the process further.
- Medical Condition: If you have a medical condition which you plan to discuss in your Offer or include as a reason for your Offer (page 2 of 4 of the Offer Application), submit a letter from your doctor explaining your condition with the Offer application. This substantiation will be requested by the Offer Specialist and they will most likely want to know how your medical condition affects your current and future earning ability.
- Retirement Account: Be aware of the terms of your retirement account. The IRS will consider the funds in your retirement account an asset. If you plan to liquidate your retirement in order to fund the offer, the IRS will allow penalties and tax consequence to offset the amount of this asset. If you have little or no vested interest in the retirement account (you neither can liquidate nor borrow against the fund), submit a copy of your retirement plan substantiating this fact with your Offer application. If you cannot touch your retirement, neither can the IRS. For more information, take a look at IRM (Internal Revenue Manual) 184.108.40.206 (Retirement or Profit Sharing Plans) in order to assist you in valuing your retirement account for Offer purposes.
- Deposits: Explain non-income deposits made into your personal bank account. The Offer Specialist will go through your deposits thoroughly and check them against your pay stubs If you have additional deposits which are not income (such as loans or gifts) the Offer Specialist will consider these deposits income unless you can prove otherwise. It may help to submit a letter explaining non-income deposits with the Offer application.
- Estimated Tax Payments: If the last tax return you filed showed a tax liability, the IRS will require that you make estimated tax payments before it will consider your Offer. This step may be avoided if you can prove to the Offer Specialist that you will have no tax liability when your next tax return is due. For example, you can show that your employer is withholding the maximum amount from your wages.
- Offer Terms: Finally, don't let the Offer terms (page 3 of 4 of the Offer Application) catch you by surprise. Review the terms carefully and know what you are agreeing to. Two terms that often catch taxpayers by surprise are
- You are agreeing to stay current: you must "file tax returns and pay the required taxes for the five year period beginning with the date of acceptance" of your offer. If you do not stay current, you will be in default and the IRS will reinstate your liability.
- You are agreeing to give up your refund: "The IRS will keep any refund, including interest, that might be due [to you] for tax periods extending through the calendar year in which the IRS accepts [the offer]". For example, if the IRS accepts your offer on January 1, 2013, and you are due a refund for 2012 and 2013 the IRS will keep both refunds.
This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.