Many pastors have been audited by the IRS and assessed several thousands of dollars of taxes and penalties but have no prospect for paying their bill. What can be done if you find yourself in this situation? There are two possibilities: offers in compromise and installment agreements.
Offers in compromise
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 full amount owed. Absent special circumstances, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement.
Taxpayers should be wary of promoters' claims "that tax debts can be settled through the offer in compromise program for ‘pennies on the dollar.'" In most cases the IRS will not accept an OIC unless the amount offered by the taxpayer is equal to or greater than the reasonable collection potential (RCP). The RCP is how the IRS measures the taxpayer's ability to pay. It includes the value that can be realized from the taxpayer's assets, such as real property, automobiles, bank accounts, and other property. The RCP also includes anticipated future income, less basic living expenses.
Three types of OIC
The IRS may accept an offer in compromise based on three grounds:
- Doubt as to collectibility. Doubt exists that the taxpayer could ever pay the full amount of tax liability owed within the remainder of the collection period. For instance, a church employee owes $20,000 for unpaid tax liabilities and agrees that the tax she owes is correct. The employee's monthly income does not meet her necessary living expenses. She does not own any real property and does not have the ability to fully pay the liability now or through monthly installment payments.
- Doubt as to liability. A legitimate doubt exists that the assessed tax liability is correct. Possible reasons to submit a doubt as to liability offer include: (1) the IRS made a mistake interpreting the law; (2) the IRS failed to consider the taxpayer's evidence; or (3) the taxpayer has new evidence. For example, Jon served as a church treasurer from 2005 to 2010. In 2012 the church accrued unpaid payroll taxes, and Jon was assessed a trust fund recovery penalty (under section 6672 of the tax code) as a responsible party of the church. Since Jon had resigned prior to the payroll taxes accruing and was not contacted prior to the assessment, there is legitimate doubt that the assessed tax liability is correct.
- Exceptional circumstances (effective tax administration). An exceptional circumstance exists that would allow the IRS to consider an OIC. To be eligible for compromise on this basis, a taxpayer must demonstrate that the collection of the tax would create an economic hardship or would be unfair and inequitable.
- Payment Option 1 The offer amount must be paid in five or fewer nonrefundable installments upon written notice of acceptance. A payment of 20 percent of the offer amount, along with the $150 application fee, is due upon filing the Form 656.
- Payment Option 2 Payable in non-refundable installments and in more than five months. The first payment and the $150 application fee are due upon filing the Form 656. Regular payments must be made during the offer investigation.
- Direct debit from your bank account
- Payroll deduction from your employer
- Regular installment agreement
- Credit card
OIC payment options
In general, a taxpayer must submit a $150 application fee and initial payment along with the Form 656, Offer in Compromise. Taxpayers may choose to pay their OIC in one of two payment options:
The OIC investigator may negotiate a different offer amount and terms when appropriate. The investigator may determine that the proposed offer amount is too low or the payment terms are too protracted to recommend acceptance. They may then advise the taxpayer as to what larger amount or different terms would likely be recommended for acceptance.
Payments and application fees
When filing an offer in compromise, two separate remittance documents should be sent: one for the application fee and the other for the required offer payment. All payments should be made by check or money order payable to the United States Treasury. Failure to submit any required periodic payments, after the initial payment has been submitted, will result in the offer being withdrawn.
Taxpayers submitting an OIC for an individual and meeting the Low Income Certification guidelines (see page 2 of Form 656, Offer in Compromise), will not be required to send the $150 application fee, the initial payment, or make any periodic payments during the evaluation of their offer. The OIC application fee reduces the assessed tax or other amounts due. The application fee will be returned if the OIC is not able to be processed.
A taxpayer wishing to file a doubt as to liability offer will need to complete Form 656-L when claiming that the assessed tax liability is incorrect. Form 656-L must reflect what the taxpayer believes is the correct amount of the tax liability after credits and payments. This amount must be more than zero and cannot include a refund owed or amounts that have already been paid. A taxpayer must also attach a detailed written statement explaining why he or she believes the tax is incorrect and include any documentation or evidence to support the claim. Form 656 should be filed only when there is doubt as to collectability. A taxpayer may no longer file offers concurrently claiming both an incorrect tax liability and an inability to pay it.
You can request a monthly installment plan if you cannot pay the full amount you owe. This request must be approved by the IRS. However, if you owe $10,000 or less in tax and you meet certain other criteria, the IRS must accept your request.
Unless your income is below a certain level, the fee for an approved installment agreement is $105 ($52 if you make your payments by electronic withdrawal). If your income is below a certain level, you may qualify to pay a reduced fee of $43.
For more information about installment agreements, see Form 9465, Installment Agreement Request.
Installment agreements may be set up in various ways:
One final tip: the IRS recommends that before requesting an installment agreement, you should consider other less costly alternatives, such as a bank loan or credit card payment. You will continue to be charged interest and penalties until the amount you owe is paid in full.
This article was adapted from Richard Hammar's Church & Clergy Tax Guide, an invaluable resource for year-round information on taxes pertaining to ministers and their churches.
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