Taxation
Federal Offer in Compromise
down payments required as of July 16!
On Thursday, May 17, President Bush signed
the Tax Increase Prevention and Reconciliation Act of 2005 (HR 4297) into
law. Section 509 of this legislation significantly changes the requirements
of a federal Offer in Compromise.
The Bad News
Effective 60 days after enactment of the Act
(Sunday, July 16, 2006), taxpayers submitting “lump sum” Offers will be
required to remit a payment with the Offer equal to 20% of the amount of
such Offer. “Lump sum” Offers are Offers that provide for payment in 5 or
fewer installments.
If a taxpayer submits a “periodic payment” Offer, the taxpayer must submit
the first installment payment with the Offer and continue to make such
installment payments while the Offer is being evaluated by the IRS.
If a taxpayer fails to submit the required payments with the Offer, the IRS
may return (not reject) the Offer as nonprocessable, which does not provide
for appeal rights.
In the case of a periodic payment Offer, if a taxpayer fails to make the
required payments while the Offer is pending, the IRS can treat that failure
as a voluntary withdrawal of the Offer.
The Good News
A taxpayer may designate how payments made
with an Offer are applied and the application user fee will now be applied
to the outstanding tax liability.
The Act provides that the IRS may issue regulations waiving the payment
requirement under certain circumstances.
Finally, if an Offer in Compromise is not rejected by the IRS within 24
months of submission, the Offer will be deemed accepted.
How this affects us…
Practitioners should review their pending files and to determine which
clients may benefit from filing an Offer in Compromise before July 16. This
may include clients that are in “Currently Not Collectible” status, inasmuch
as those clients may be placed back in collections before the limitations
period(s) expire, as well as clients that may only fund an Offer using the
equity in their home, which because of a federal tax lien would not be
available unless and until an Offer is accepted.
