The IRS Softens Its Requirements for In-Business Offers in Compromise
The IRS Softens Its Requirements for
In-Business Offers in Compromise (OIC)
In hard economic times, business owners are often forced to decide on whether to pay necessary operational expenses or the IRS. Unfortunately, most do not realize that they are one and the same. While many entrepreneurs fully intend to repay the IRS as soon as their business picks back up, with penalty and interest accruals they often find themselves unable to do so. Then comes the proverbial knock on the door.
There is no doubt that the consequences of choosing not to timely file or make federal tax deposits can be rather harsh. This is because the IRS will assess a liability that includes penalties and interest which is exponentially more than the original tax amount due. In an effort to assist, the Service recently relaxed its rules for in-business offers in compromise to get these companies back on the right and profitable track. As everyone knows, it is better for our government and our economy to keep people employed.
An in-business offer in compromise is exactly what it sounds like. It is an agreement between an operating business and the IRS whereby the latter agrees to accept less than the total amount of tax liability owed. The IRS is generally only willing to enter such an agreement if it determines that it is in its best interest as it represents the best way to collect the outstanding tax liabilities. The Service is further protected by applying some rather onerous requirements on the responsible parties.
Hence, the IRS no longer requires six-months of continuous compliance before considering an in-business offer in compromise. Today the standard is compliance for the fiscal quarter in which the offer is submitted. Additionally, the responsible parties must have been assessed the trust fund recovery penalty (“TFRP”).
In the past, the IRS required that an ongoing business remain compliant with all of its tax obligations for at least 2 quarters before being eligible for an in-business OIC. See former I.R.M. § 22.214.171.124(4) (11-15-2004). This provision also required the business to be current with its federal tax deposits in the current quarter. See Form 656, Offer in Compromise, (Rev. 7-2004), eligibility question number 3. The IRS has since relaxed the first requirement.
Today, I.R.M. § 126.96.36.199 is the provision that discusses “Offers from Operating Businesses.” In addition to providing general information about offers in compromise, it requires one of two things before an in-business OIC will be considered. First, the trust fund portion of the taxes must be paid. If it has not been satisfied, then either the TFRP must have been assessed against all responsible persons, or the TFRP package must be forwarded for assessment. See, I.R.M. § 188.8.131.52(2)(B) and I.R.M. 184.108.40.206.1(1). This means that even though the business may be able to compromise the liability, the trust fund portion of the taxes; or roughly 60% of what is owed is to be assessed against the responsible parties for possible collection by the Service. Remember, any such assessments are joint and several. So if one party makes payment, the liability of the other is correspondingly reduced.
Absent from the regulations is a time-period restriction for compliance beyond “while the offer is pending.” This further suggests that historical compliance is not as determinative a factor for in-business OIC eligibility. See Form 656, Offer in Compromise (noting the policy change in the instruction book). Therefore, it is incumbent upon a business that desires to resolve its tax liabilities via an offer in compromise to first obtain, and then maintain absolute compliance while the offer is pending.
If you are a business owner that believes that your company could thrive once again if it could just resolve the outstanding tax issues, give us a call to help you maneuver through the Offer in Compromise maze. In light of the IRS’ recent policy shift regarding in-business OIC’s, there is no better time to address these issues once and for all. Our attorneys are well versed in the procedures and pitfalls related to in-business offers in compromise with a proven track record of success. We look forward to being of service.
Chaya Kundra, Esq.
The trust fund recovery penalty can also be resolved via a personal offer-in-compromise, installment agreement, or any other resolution options offered by the IRS.