Today we welcome first time guest blogger E. Martin Davidoff, CPA, Esq. I have to appreciate someone else saddled with a first name they do not use. Martin practices in New Jersey but I associate the practice of giving male children first names they do not use more to the South where I grew up. In an age that relies on computers, attempts to avoid using your first name are fruitless. So, I receive a lot of correspondence for Temple. I do not know what the E. stands for in Martin’s first name but I assume he too receives correspondence from computers addressing him with that name. I met Martin at the recent International Taxpayer Bill of Rights conference where I learned he was a paperboy from 1964 to 1969 after I incorporated a story from my days as a paperboy (1965-1970) into my presentation. I received enough comments from past paperboys to consider writing a post connecting it to tax procedure.
Martin writes today about a change to the form used for offers in compromise. Responding correctly to the questions on the form is important but difficult if the form does not give you the choice you think best fits the situation. Les posted recently about a different issue that comes up in offer cases that also puzzles practitioners as they prepare the Offer form. He wrote about figuring out what income is income for purposes of calculating taxpayer’s ability to pay focusing on a case involving Railroad retirement benefits being included in income for offer computation purposes. Just recently, the Tax Court in Matthews v. Commissioner issued a similar opinion related to veteran’s benefits. These two cases make it clear that the IRS draws a distinction between the first three sections of IRC 6334 directed at exempt assets and subsequent provisions of 6334 which exempt certain income streams from levy but the IRS has not provided instructions setting out its position on the issue and giving guidance to those seeking to prepare the offer form. The IRS uses the levy exemption from assets in calculating assets taxpayers may exempt in the offer calculation. It ignores income streams exempt from levy in calculating a taxpayer’s ability to pay on the income side. If you read cases, you can figure this out but you do not want to have to research case law on such a basic issue. Guidance is needed to direct the taxpayer or the representative to the correct result.
Understanding the offer process, the calculation and the Form are important components to a successful offer. The issue Martin discusses is especially important because of the bankruptcy holdings denying discharge to late filers. In circuits denying discharge to those who file late (See here, here and here), offer in compromise represents perhaps the only path to getting rid of the liability. We thank Martin for his insight on the offer form. He invites comments from others on their experience or expertise on the issues discussed in this post. Keith
Filing Requirements Section
We all have experienced clients who had been long-time non-filers and come into our offices to do an offer in compromise (“OIC”). They have satisfied their tax obligations by accepting IRS Substitute for Return (SFR) filings or by filing the last six to eight years of tax returns. So, the filings are done and the Taxpayer wants to file an offer in compromise.
read more...The 656 form revised last January posed what I had thought to be a potential problem for such clients. A new question was added on the top of page 4 (Section 7) which simply states “Filing Requirements” and lists below two alternatives:
- I certify that I have filed all required tax returns; or
- I certify that I was not required to file a tax return for the following years: _____________.
The question is what if neither statement was true? That is certainly the case with long-term non-filers. Such individuals often have some unfiled returns in their past. And, those with SFR filings have definitively not filed all required tax returns.
Yet, I know that the IRS does approve offers in compromise for those with SFR balances due. So, what is a practitioner to do? For these individuals, we cannot have our client check either box truthfully in such circumstances. So, is our only alternative to not check either box and submit the form 656 with the required financial disclosure package? Would that work? Well, after speaking with a Senior Policy Analyst who deals with the OIC program, I learned:
- The failure to check either box in the Filing Requirements section will NOT cause the offer to be returned or rejected; and
- The Filing Requirements section was added to form 656 in the 2015 as a reminder to taxpayers that, generally, they need to be compliant. Such compliance at this point in time might mean: Have you filed your 2014 return? Are your 2015 tax payments paid in at the appropriate level?
So, if our client has filed the past six years returns and has unfiled returns prior to six years, we can leave the Filing Requirements section 656 blank and the IRS will process and fully evaluate my client’s offer.
A review of the IRM does not appear to contradict this conclusion. The failure to choose either of alternatives a. or b. above does not appear in IRM 5.8.2.3.1 (07-28-2015) when determining processibility. Furthermore, 5.8.7.2.2.1 (03-07-2014) makes clear that a return of an offer for a taxpayer who has “not remained in filing compliance” will not exceed a 6-year lookback without managerial approval. And, prior to an offer being returned under this provision, the IRS must make a reasonable attempt to secure the delinquent filings. Accordingly, any denial for noncompliance will not be a surprise.
Section 8 Offer Terms
Section 8 of form 656 sets for various terms and conditions regarding offers in compromise. Essentially, this is the contractual “small print”. Specifically, I bring your attention to the first portion of the offer terms, part a). That language, provides, in part:
“I also authorize the IRS to amend Section 2 on page 1 by removing any tax years on which there is currently no outstanding liability.”
In effect, the IRS can simply cross out a year and that becomes the complete contract with my Taxpayer. And, they do not even have to give notice that they are doing so! Well, what happens if one is submitting an offer in compromise for a year in which there has been identify theft? The client has filed the correct return with the IRS showing a balance due. But, the IRS computers show no outstanding tax liability. They might cross out the year.
So, what can we do? Can we cross out the objectionable Section 8 language? In speaking with the Senior Policy Analyst, the answer is a definitive NO! The “small print” cannot be changed under any circumstances. However, if I am aware of the situation in advance, I should bring it to the attention of the IRS up front and they will help us work through the issue. That does not solve unknown identity thefts. The better alternative, in my opinion, is to rewrite the provision to read:
“I also authorize the IRS to amend Section 2 on page 1 by removing any tax years on which there is currently no outstanding liability, so long as I am advised of such change prior to such change becoming effective.”
E. Martin: Thank you for your excellent input for the six year filing rule. Does that only apply when the taxes you are trying to compromise are 6 or less years old? What if the taxes are 8, 9 (or more) years old but are still “in play” because of prior bankruptcies that could not discharge the taxes, prior collection due process requests, etc. I would think under those circumstances the IRS would want tax filing compliance from the date of the oldest return to the present. Your thoughts?
Thank you for a great article written with clarity and cites. Recently had great success with an OIC that involved prior year bankruptcies and old SFR’s. Bankruptcies had extended statute and SFR’s were included in compromised amount. Your sharing is much appreciated.
Thanks Judy
Back in the early years attending Notre Dame Law School, I became friends with an exchange student from Guyana. His name was “Balyram.” The computer world could neither function nor compute an individual with only one name, the most important of which was the ND cafeteria which served absolutely marvelous food. So Balyram and I devised a solution. He would henceforth be known as “A. Balyram.” The “A” stood for Anonymous. So the ethereal computer world now had what it needed, a 2 named person forever enshrined as “Anonymous Balyram.” Larry