Bar News - October 20, 2006
Tax Law Congress Tightens Rules for Negotiating Federal Tax Disputes
By: Beth Fowler
For more in-depth information on this topic and more, donít miss the 24th Annual Tax Forum on Thursday, Nov. 9, from 8 a.m.-4:15 p.m., at the Grappone Conference Center in Concord.
A taxpayer who owes federal taxes may attempt to settle the liability by filing an offer in compromise (OIC). In an effort to reduce frivolous OIC filings, Congress passed legislation tightening application requirements. The new legislation is effective for any offer received by the Internal Revenue Service (IRS) after July 15, 2006.
An OIC is an offer by a taxpayer to resolve a federal tax dispute by paying an amount that is less than the amount owed. An offer may be made for three reasons: doubt as to collectibility, doubt as to liability, and effective tax administration. Doubt as to collectibility is a claim by a taxpayer that the taxpayer cannot afford to pay the entire amount owed. Doubt as to liability challenges the accuracy of the assessment. An offer based on effective tax administration is for situations in which a taxpayer does not dispute the assessment and can afford to pay, but special circumstances exist such that payment is not appropriate. For example, effective tax administration might apply if a taxpayer needs his or her assets and income to pay for treatment of a chronic medical condition.
Two payment options are available when making an offer. A taxpayer may pay the offer amount in five payments or less, known as a lump-sum offer; or may pay in more than five payments, known as a periodic payment offer. Under the revised law, any offer request that is not based solely on doubt as to liability must be accompanied with a partial payment. For a lump-sum offer, the required partial payment is 20 percent of the amount proposed in the request. When making a periodic payment offer, the taxpayer must submit the first proposed payment. In addition, while the offer is under review, the taxpayer must make all proposed installment payments on time. A taxpayer may designate whether a payment is to be applied to tax, penalties or interest. If the taxpayer does not provide a designation, the IRS may apply the payment in its own best interests. A failure to submit appropriate payment with an offer request or to make all required installment payments may be treated as a withdrawal of the offer request.
The revised law also provides some certainty for taxpayers. Under the revised law, if an offer request is not rejected within 24 months, it will automatically be deemed to be accepted.
In summary, many taxpayers will have to make an immediate financial commitment to be eligible to request an OIC to settle a tax liability. However, they will now never need to wait more than two years to learn whether their offer has been accepted or rejected.
Beth Fowler is an Associate in the Tax Department at the McLane Law Firm. She specializes in federal and state tax issues, pension matters and corporate and individual tax planning. She is the past-Chair of the Tax Section of the New Hampshire Bar Association and the Chair of the Tax Committee of the New Hampshire Society of Certified Public Accountants.