News from your tax attorney Nicole B. Erickson

August 22, 2022 - IRS continues to revamp Offers In Compromise

Clients often ask if they can make an Offer In Compromise to settle their taxes. An Offer In Compromise (OIC) is an agreement between a taxpayer and the IRS that settles the Taxpayer’s tax liabilities for less than the total amount owed. You might think this process was set in stone, and the IRS has long since finalized the application process.

However, the IRS has significantly changed the application process for an OIC. Here’s a summary of the most recent changes in 2022:

• Married Taxpayers – the IRS wants to know if you lived in AZ, CA, ID, LA, NM, NV, TX, WA, or WI within the last ten years. That list of states may look familiar – it’s the list of states with community property laws. If you lived in one of the listed community property states, you should take care when making an offer when there is a nonliable spouse.

• Virtual Currency – The IRS wants your ETH and BTC info. The IRS first added this new request in 2020.

• Real property – You must state whether you are trying to sell or plan to sell your real estate to pay the offer.

• Personal Property Exemption - Good news. The IRS Increased the amount of Section 6334(a)(2) Personal Property Exemption to $10,090.

• Books and Tools of the Trade Exemption - The 2022 increase for the amount of Section 6334(a)(3) Exemption for Businesses for books or tools necessary for the trade business or profession of the Taxpayer rose to $5,050. We only wish this exemption was bigger.

• Low-Income Taxpayers - Improvements to ease of use. Those qualifying don’t have to fill in as much of the form. This makes sense and reduces needless confusion. Requested information regarding the source of funds for making the payment and filing requirements are also revised to clarify that low-income taxpayers do not need to submit payment.

• “Reason for the Offer” – Practical changes with a meaningful impact:

o The two most common reasons for an offer on Form 656b are 1) Doubt as Collectability (not having enough assets or income to pay the full amount) or 2) Effective Tax Administration (OIC offer amount is less for economic or public policy reasons).

o New in 2022, taxpayers can select doubt as to collectability and add special circumstances. Doubt as to collectability with special circumstances exists when the Taxpayer offers less than they owe and can pay, according to the financial analysis. In this circumstance, a taxpayer could not make an ETA offer because it would be less than the tax owed.

o Before this change, there was only a box for “Doubt as to Collectability” or “Effective Tax Administration” but no specific mention of listing special circumstances for doubt as to collectability offer.

o Represents a change to the form consistent with the idea that Hardship Effective Tax Administration OICs and Doubt as to Liability for Special Circumstances OICs are not usually meaningfully distinct, and both deserve a space for explanation.

• Copies of tax returns filed within 12 weeks of the offer must be included, which is new from 2018.

• New language added to the Offer Terms forbids amending your returns after you submit an offer.

o Taxpayers cannot amend the returns at issue after an offer is accepted.

o Taxpayer agrees not to submit an amended return after submitting the offer and while it is being considered.

o Filing an amended return is grounds for rejecting the offer.

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