Recent case law held that the IRS properly terminated an offer in compromise where a taxpayer failed to comply with the terms of the agreement by not filing and paying taxes in a timely manner for the five years following acceptance of the offer and by incurring a delinquent tax liability for a subsequent tax year because the taxpayer materially breached the terms of the offer. If the IRS revokes your Offer in Compromise, they will reinstate the full amount of your pre-compromise tax liability including any back penalties and interest previously forgiven, and begin aggressive collection efforts on the revised balance due. Therefore, it is imperative that once your Offer in Compromise has been approved, you need to take the following steps to make sure the IRS does not revoke your Offer:
- You must file your taxes timely for the five tax years following acceptance of your offer.
- If you cannot file your 1040 by April 15th, you must request an automatic extension. If you extend, make sure you file your taxes by the extended individual deadline of October 15th. You must also timely file any related entities that flow into or effect your individual tax return. I.E. S Corporations, Partnerships and LLC's.
- You must pay your taxes on-time. If you owe, your taxes must be paid in full by April 15th. If you are self employed you need to make estimated tax payments that are sufficient to ensure you don't have a balance due at April 15th.
What are the prerequisites to obtaining an Offer in Compromise?
Source of Funds
As a prerequisite to the acceptance of an offer in compromise, the taxpayer must indicate where the money will come from to pay off their compromised liability with the IRS. Additionally, the taxpayer must inform the IRS as to how the taxpayer plans to raise sufficient cash to pay for their Offer. For example, a taxpayer can state that they plan to sell of their house, that they will be drawing on credit cards, receiving gifts from family members, or that they intend to refinance their mortgage.
In Full Compliance
If the taxpayer has not filed all required tax returns, they will be asked to do so before the IRS will begin to evaluate their offer. This includes but is not limited to: All Income Tax, Employment Tax, and Excise Tax returns, along with all returns required to be filed by Partnerships, Limited Liability Companies, or closely held Sub-Chapter S Corporations that impact a taxpayer's personal tax returns.
Taxpayer must be current with estimated taxes and/or income tax withholding for the current year.
Business taxpayers attempting to compromise employment taxes must have timely filed and paid employment taxes for the preceding two quarters prior to filing the offer and must have timely paid all federal tax deposits due in the quarter in which the offer is submitted.
Taxpayer is not currently in a Bankruptcy Proceeding
The IRS has a policy of rejecting an offer in compromise submitted by a taxpayer who is currently in a bankruptcy proceeding. The IRS may proceed with an offer in compromise when the taxpayer is threatening to file for bankruptcy if the tax liability is dischargeable in bankruptcy and the amount of the offer equals or exceed the amount that the IRS reasonably expects to recover from the bankruptcy plus what can be collected from the taxpayer on non-discharged liabilities or from property outside the bankruptcy.
Taxpayer must pay a user fee
Taxpayer's must pay a nonrefundable $150 Offer in Compromise application fee, or request a fee waiver.
Taxpayer must submit the required forms
Taxpayer's must submit IRS Forms 656 or 656-L, 433-A, and/or 433-B, along with the required support documentation.
Taxpayer on occasion may be required to sign a Collateral Agreement
On rare occasions, the IRS may seek a collateral agreement that provides that the taxpayer will pay more if his income rises in the future.
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