Sometimes taxpayers find themselves with a crushing tax liability, and no means to pay it. To illustrate, assume that Rev. G filed an application for exemption from self-employment tax (Form 4361) several years ago, and has assumed that he is exempt from the tax. In fact, he never received acknowledgement of his exemption from the IRS, and so he never was legally exempt. The IRS audits Rev. G, and assesses self-employment taxes for the previous three years, amounting to $25,000.
Or consider Rev. K. He has always assumed that the housing allowance is an exclusion in computing both income taxes and self-employment taxes. He is audited by the IRS, and is assessed several thousand dollars in additional taxes because he incorrectly applied the housing allowance exclusion in computing his self-employment taxes.
Both Rev. G and Rev. K have inadequate resources to pay their tax liability. Over the past several years, such taxpayers could apply for relief by making an “offer in compromise” to the IRS on Form 656. This form lists a taxpayer’s sources of income, and net worth, and lets taxpayers make an offer to the IRS to pay a reduced amount of tax. The IRS often makes counterproposals to these offers, and about one-fourth are eventually accepted. For example, in 1998 only 25,052 offers out of 105,255 (23.8 percent) were accepted, leading to the collection of $290 million out of $1.9 billion in outstanding tax bills.
The IRS announced recently that it is liberalizing its offer in compromise program, to ensure that more of these offers are accepted. This is good news for taxpayers with huge tax liabilities. Here are some steps the IRS has taken:
(1) In evaluating a taxpayer’s ability to pay, the IRS will consider the taxpayer’s own expenses, rather than using national “averages”.
(2) Instead of the old, stringent application guidelines that often led to immediate rejections, the IRS will now work with taxpayers to fine tune their compromise offers–a step that will lead to the acceptance of more offers.
(3) Taxpayers will be asked to provide fewer financial documents to qualify for smaller compromise offers.
(4) New deferred payment procedures provide more opportunities for compromise offers to be submitted by taxpayers who may have been excluded under the old guidelines.
(5)A short-term deferred payment option allows taxpayers up to two years to pay the compromise offer.
(6) Specially trained IRS experts will be devoted to handling compromise offers. These new offer specialists will bring more consistency to the offer in compromise program and centralize offer processing.
(7) There will be new independent reviews for each rejected compromise offer. These reviews assess whether rejection is in the best interest of the taxpayer and the government. Many of these changes are reflected in a new version of Form 656. IRS Information release, IR-1999-30.
This article originally appeared in Church Treasurer Alert, May 1999.