In my last blog, I talked about why Uncollectible Status may be a good place for a taxpayer to be. I also explained that it wasn’t a good long-term solution since the IRS would revisit your case at any time. If you don’t see your financial situation changing, and the thought of those annual IRS check-ups doesn’t give you the warm fuzzies, now may be the perfect time to file an Offer-in-Compromise!
The focus of my practice in Severn, MD is to help taxpayers get in compliance with their IRS and state tax filings and to represent them before the IRS and the states with their tax collection issues. I work with individuals as well as business owners to determine the best way to proceed in settling their tax debts.
Remember that Uncollectible, or Currently Not Collectible (CNC), Status is an option when a taxpayer has no available equity in assets and doesn’t have enough income to cover their IRS allowable expenses. Remember, also that the IRS has 10 years to collect a tax amount due. If a taxpayer is getting close to the end of the 10-year collection period, Uncollectible Status would be a great place to be for the short time remaining. If a taxpayer is at the beginning of the 10-year collection period, however, filing an Offer-in-Compromise (OIC) may be the best way to proceed in settling your IRS tax debt.
An OIC is a situation in which the IRS accepts less than the total owed by a taxpayer to settle the taxpayer’s outstanding tax debt. I’m sure you’ve heard the “pennies on the dollar” ads by the national firms who advertise on TV. They’ll collect a large fee upfront from you to file an offer on your behalf before they know if you even qualify for one. The IRS does accept many offers, but there’s a process that must be followed that allows the IRS to determine your Reasonable Collection Potential or RCP. As long as the taxpayer’s offer meets or exceeds the IRS calculated RCP, then the offer should be accepted. So, what’s the game plan for determining what the RCP is?
Working with a tax professional (EA, CPA, Tax Attorney) will give you the best result when filing an offer-in-compromise, just like going to the dentist will give you the best result if you want to get your cavity filled. Your tax pro will want to start by pulling your IRS transcripts so that they can determine your collection statute expiration date (CSED). Once they ensure that you have a significant amount of time remaining on your CSED, they have the green light to proceed. You’re probably wondering, “What’s a significant amount of time?” The exact answer is—it depends. 😊
Just a side note—your tax transcripts will give your tax pro a significant amount of data that will not only help them to determine the best way to proceed in settling your tax debt but will also show them money that you may have “left on the table” in previous tax years. For example, you may have paid penalties and interest on a previous return when you could have obtained a penalty abatement.
Back to our game plan–after pulling your transcripts, your tax pro will work with you so that you’re in filing and payment compliance, both of which are required before submitting an OIC. Your tax returns from the previous 6 years will need to be filed, and you’ll need to be caught up on paying your current year tax payments. Payment compliance for an employee means that taxes are being withheld from their paychecks. Self-employed taxpayers will need to have made all their estimated tax payments. As of Nov 2018, the 1st, 2nd and 3rd quarter estimated taxes should have been paid. If a taxpayer is unable to make these quarterly payments, it may be possible to hold off on making the offer until early Jan 2019 (as long as the threat of an IRS levy can be avoided). It will be much easier to be in payment compliance early in a current year rather than later in the year!
The main document used in determining RCP is the Form 433. There are different versions of the form for individuals and for businesses, as well as different versions preferred by the IRS official requesting (short form vs long form). There is even a Form 433 used specifically for OICs called a 433-A (OIC). The 433 is basically a financial statement that reports your assets, liabilities, income and expenses….and it is NOT an easy form to complete. Tax pros who specialize in representation work can guide you in preparing the form as well as advise you concerning expenses you can add that will not only lower your RCP but improve your financial situation.
I could spend several blog posts going over the intricacies of the Form 433 and in making an OIC. In this one, however, I’ll sum it up quickly—hire a tax pro to represent you in this process, one who can explain to you why you qualify for an OIC and what they see as important changes to make to improve your financial picture as reported on the Form 433. It should be an eye-opening explanation but also one that’s easily understood and easy to implement.
There are many ins and outs and different things to consider when trying to determine the best way for a taxpayer to proceed in settling their tax debt. My goal is to help taxpayers navigate this confusing and overwhelming situation whether it’s with the IRS or a state collection issue. I have clients not only in Severn, MD and Anne Arundel County, MD but all over the world since technology has made our world much smaller and our ability to work remotely much easier. Come see me or just give me a call or send me an e-mail if you need help with your tax compliance issue. You can reach me at:
Lisa D Church, CPA, EA, NTPI Fellow, MBA
7865 Clark Station Rd
Severn, MD 21144