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Make the IRS an offer it can’t refuse

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in Small Business Tax,Small Business Tax Deduction Strategies

In a recent posting, the IRS announced several improvements to its offer-in-compromise (OIC) program, including revisions to Form 656 and related documents.

Strategy: When appropriate, weigh the benefits of the OIC program. This could be a convenient way to settle an outstanding tax debt.  

The changes in the OIC program were highlighted in a recent article appearing in Forbes magazine (“Offers in Compromise Made Easier,” July 14, 2104).

Here’s the whole story: The OIC program has been around for many years, but it is only recently that the IRS has taken steps to improve the chances of being accepted (see box).  The taxpayer makes an offer to the IRS by specifying the amount to be paid through a lump sum or installments. To qualify, you must have filed tax returns for the years in question, paid any required estimated tax for the current year and deposited any payroll taxes due for the current quarter if you’re a business owner.

Generally, an offer-in-compromise will be accepted only if the amount offered by the taxpayer is equal to or greater than the “reasonable collection potential” (RCP).

The RCP, which represents the most the IRS can expect to collect, is based on the taxpayer’s assets (such as real estate, vehicles, bank accounts and the like) plus anticipated future income (minus amounts for basic living expenses).

The IRS says an OIC is a legit option if you can’t pay your full tax liability or doing so would create a financial hardship.

The latest changes in the OIC program provide a significant discount on market value of intangible as well as tangible assets. According to the Forbes article, a taxpayer with an investment account of $100,000 previously would have been required to account for the full amount in an offer. Now you can discount the value of the financial account by 20% to $80,000.

A lump-sum offer is any offer that will be paid in fewer than six installments. The IRS says you must include a nonrefundable payment equal to 20% of the offer amount plus a $186 application fee when you submit Form 656.

Tip: If your offer isn’t accepted, the nonrefundable fee is applied to your outstanding tax liability.

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