So, it is the top of the hour. So, we officially get to start. And again, I want to welcome
everybody to today's webinar, "Understanding an Offer in Compromise." We are so glad you are
joining us. And my name is Karen Russell. I am a Stakeholder Liaison with the Internal Revenue
Service, and I will be your moderator for today's webinar, which is slated for 60 minutes. Now,
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will take uh, a few breaks to share knowledge based questions with you. And at those times,
what'll happen is you'll get a, there is a polling-style feature that we use that'll pop up on
your screen with a question and multiple-choice answers. Select the response you believe is
correct by clicking in the radio, the radio button next to your selection and, then, click
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we are looking, timely, in the Ask Question feature so that we can track your participation. If
you have a topic-specific question today, please submit it by using the Ask Question feature. You
click the Ask Question button, type it in, click Submit And I, we repeat this over and over in
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before submitting your question because you don't want, it, if it's covered and you're typing in
a question, you might, you might miss the, what you are looking for. So, wait for your topic.
If, if your question isn't answered, then, by all means, please send us the question. OK?OK. So,
moving along with our session. I want to introduce our wonderful speakers today. We have Anna
Falkenstein and Richard Furlong. And they are Stakeholder Liaisons, like I am, and they represent
the IRS at outreach and educational events working with tax professionals, industry and small
business owners. And they've been employed with the IRS for many, many years, which is a way to
say that they don't want to tell you how long they have been here. (Laughing) I'm kidding. And
I'm going to turn it over to Anna. Anna, I, I apologize for mispronouncing your last name again.
You can beat me up later. So, Anna, take it away. ANNA FALKENSTEIN: Thank you, Karen. (Laughing)
I answer to a lot of things, actually. I'd say. Um, let's, let's go ahead and get started. Uh,
today's presentation is the IRS' Offer in Compromise program. And we'll be covering a lot of
information, um, from what is an Offer in Compromise, also known as an OIC, and why it is used
as a Collection tool. We'll also be discussing the Offer in Compromise Pre-Qualifier Tool. We'll
also look at a general overview of the OIC calculation and address some special circumstances,
um, later in the presentation. Uh, we'll also conclude with some helpful hints and also some
resources that will help you navigate the offer process if that's the direction you decide to go
in. Now, before we start, I do want to clarify that there are three possible bases for an offer.
Uh, there is the doubt as to liability, doubt as to collectability and the effective tax
administration. Now, today's presentation will focus mainly on the most common bases for an
offer. And that is doubt as to collectability. Put simply, a doubt as to collectability offer
means that absent special circumstances, which we'll talk about later, the taxpayer cannot pay
the full amount that they owe. Uh, we will briefly touch on those, those special circumstances
and how they may affect and offer investigation and determination later. All right. So, we're
going to review today's objectives very quickly and then get into the meat of the topic. First,
we're going to define an Offer in Compromise. You'll hear us using the acronym OIC during the
rest of today's presentation. Uh, we'll also, describe the objectives or goals of the OIC
program, uh, and why we feel that it's a very, uh, useful tool in collection. We'll also
demonstrate the use of the online Pre-Qualifier Tool. We'll discuss the factors that are
considered by the IRS when they are reviewing an offer submission. And, then, we'll wrap it up
with some helpful hints for taxpayers when preparing an offer submission package. All right.
Definition. Uh, the Offer in Compromise, OIC, is a contract between the taxpayer and the IRS that
settles the tax debt for less than the full amount owed. Now, for reasons we'll get into
shortly, the IRS does recognize that it is both sound business practice and also good tax policy
to settle some cases for less than the total amount owed. Now, we want to show you some recent
offer program results. There's quite a bit here on this slide, so I'll give you a moment to take
that in. Uh, but, there are four main reasons why an offer is determined not to be, or is not
processible. And that's one of the first dispositions you'll see here on this slide, the
applicant may be in an open bankruptcy; the required fee is not paid with the application, the
taxpayer is not compliant with filing, and the initial payment is not included in the
application. So, as you can see on this slide, about 13 percent of offer submissions result in a
"Not processible" determination. So, basically, one of those four items I just mentioned occurred
when they, uh, sent in the offer. Now, all processability determinations are made at a
centralized Offer in Compromise site. Acceptances are pretty self-explanatory. About 39 percent,
uh, of Offer in Compromises that were, um, reviewed and were accepted in 2018. Uh, and, and now,
let's talk just briefly about reject, rejected offers. Now, there are some common reasons for a
rejection of an Offer in Compromise. Some of those include that the reasonable collection
potential can't or won't be paid by the taxpayer Uh, the taxpayer is determined that they can pay
in full. Um, or there may be missing or incorrect information which results in an inaccurate
determination of the reasonable collection potential. Uh, and I, I believe Rich will talk a
little more about that later. Um, and, and that reasonable collection potential, that's the
appropriate offer amount that we believe would, would make an acceptable offer. So, as you can
see here on this chart, about 17 percent of the offers were rejected in 2018. The main reason
offers are returned is that a taxpayer is not in compliance or doesn't respond to a request for
additional information. Remember, if an offer package is returned, there is no appeal right.
Um, taxpayers can withdraw their offers at any time during the process. And, uh, you'll see word,
term, here, termination. Uh, if a taxpayer dies while the IRS is in the process of evaluating an
offer, the service can no longer consider that offer. Uh, the offer has to be considered
terminated as of the, as of the date of the, um, the death. As I mentioned just a moment ago, I,
I said that the OIC is a collection tool. So, so here is why we consider it a collection tool.
One, it achieves a resolution that is in the best interest of both the taxpayer and the
government. It effects collection of what can be reasonably collected. That's, that's what we,
we can expect at the earliest possible time and at the least cost to the government. Uh, it also
can secures, uh, revenue that, that perhaps the IRS could not collect through any other means.
Uh, and what we mean by that is sometimes taxpayers will, um, actually fund their offer either
through loans or gifts from friends or family. Now, before you consider if an Offer in Compromise
is right for you or your client, um, you need to explore all collection option. So, absent
special circumstances, if, if the client can full pay via a lump sum or through an installment
agreement, then they probably are not a candidate for an Offer in Compromise. Now, even in
situations where the taxpayer's ability to make monthly payments may not pay, um, the entire
delinquency, the IRS has, uh, now set up what we call partial payments installment agreements.
And they allow the taxpayer to make payment in accordance to their financial ability even if the
agreement may not completely liquidate the tax debt within the collection statute expiration
period. So, um, just be aware that that is still one of our collection tools. And if that's the
only way we can get the funds, then then that may be an option. Um, so now, I'm going to turn it
over to Rich. And he is going to tell you about the next step in reviewing the Offer in
Compromise application. Rich? RICHARD FURLONG: Thank you, Anna. And good day, everyone. It's
great to be here with you. So, let's take, talk about compliance as it applies to an offer
submission. Now, prior to submitting an offer, the taxpayer, and the taxpayer might be your
client if you have a, have a valid power of attorney on file with the Internal Revenue Service.
The taxpayer must be current with filing all required federal tax returns and also making all
required estimated tax payments for the current tax year. And for the business taxpayers
considering submitting an offer, they must be current with all federal tax deposits. In fact, if
the returns are not filed, then the offer will not be processed by IRS and any required payment
submitted with the offer will be applied to the balance due on the delinquencies and that payment
will not be returned. Now, occasionally, you might see a situation where a tax return is filed
close to the time that an Offer in Compromise is filed with IRS. If the tax return was filed
within 60 days of the offer submission, then we ask that you include a complete copy of the tax
return with the offer submission. Mark it "Copy" though. This will help eliminate offers that
might be returned for non-compliance due to that filing requirement issue if the IRS had not
processed completely that tax return. So, with that, Karen, I think we're ready to test our
audience with our first polling question. RUSSELL: OK. You are absolutely, absolutely correct.
And our first polling question, uh, hopefully, is going to be a give me. So, let me read it to
you. Prior to the offer submission, a taxpayer must have, A, Filed all tax returns; B, Made all
required estimated tax payments; C, Made all required federal tax deposits; D, All of the above;
or, E, None of the above. So, remember, click on the radio button for the correct answer and hit
Submit. And based on the information that was just shared, do you think the correct answer is A,
File all tax returns; B, Make all required estimated tax payments; C, Make all required federal
tax deposits; D, All of the above; or, E, None of the above? If you didn't get the polling
question from the popup, submit your answer using the Ask Question feature. Let me give you a
few more seconds. OK. Let's stop the polling now. And we will share the correct answer on the
next slide and, hopefully, we have 100 percent for this. And the correct response is D, All of
the above. Hopefully, we have 100-percent accuracy. And we have 88-percent accuracy. I'm
completely with that, that is a fabulous accuracy rate. So, um, let me turn it back over to Rich
to discuss the IRS Offer in Compromise Pre-Qualifier Tool. FURLONG: Well, thanks, Karen. And, um,
before we get into the Pre-Qualifier Tool, we'll have, have a chance later on in the
presentation to come back to, uh, the compliance requirements for submitting an offer. But,
before you put in the time and effort to prepare and submit an offer, we recommend that you use
our IRS Pre-Qualifier Tool to see if an Offer, Offer in Compromise is actually a viable option
for the taxpayer or, possibly, your client. So, you or the client, uh, if you have a power of
attorney, can use the Pre-Qualifier Tool on IRS.gov. And that will help you determine if the
taxpayer is a good candidate for an offer. And it will also help determine what a reasonable
offer amount might be. Now, I want to make two key points about our IRS Offer in Compromise
Pre-Qualifier Tool. First, the tool is a simplified version of the offer application and
evaluation process. So, it is only a guide. It does not pro, provide a definite answer to the
questions of whether the taxpayer is a good candidate and what a reasonably acceptable offer
amount might be under the particular set of circumstances because all of those final
determinations on offers are based on the written application and any, and the necessary
supporting requirements, the documents, I should say. And that would include consideration by IRS
of any special or exceptional circumstances that the taxpayer might have. The second point I
want to make about the Pre-Qualifier Tool is that, remember, as Anna indicated earlier, there are
three possible bases for an offer submission. One is doubt as to collectability, the second is
doubt as to liability, and the third is effective tax administration. The Pre-Qualifier Tool,
though, only evaluates offers based on doubt as to collectability. And put simply, that means the
taxpayer is saying that they cannot pay what they owe. Another point I'd like to make about the
tool is that it is completely anonymous. It does not require or use any personally identifiable
information. And the user does not have to specifically identify their income sources, assets and
liabilities. And we'll see how that works when we go through a couple of examples of the
Pre-Qualifier Tool. The information that the user does enter into the Pre-Qualifier Tool is
dumped when they close their session or when they hit the Start Over button in the Pre-Qualifier
Tool. So, we here at the IRS have invested a lot of time and effort into the Pre-Qualifier Tool.
And we look at it, look at it as a burden reduction tool for taxpayers because, again, before
going through that considerable time and effort of preparing and submitting an offer with the
related fees and payments, taxpayers or their representatives can use the Pre-Qualifier Tool to
see if they are an offer candidate and also, importantly, get an idea of an acceptable offer
amount. Now, this tool is very simple to use, as you will see later, and you can go through it
rather quickly. Now, I want to come back to the point we were making earlier. And that was
addressed in the, uh, first question that, that Karen asked you. We can only consider an offer
for taxpayers who are current with all of their filing and payment requirements. Also, keep in
mind that taxpayers in an open bankruptcy proceeding are not eligible to file an offer. The Offer
in Compromise Pre-Qualifier Tool was created to assist taxpayers to confirm their eligibility to
file an offer and, then, prepare a preliminary proposal. The tool only helps the taxpayer
evaluate whether they're qualified to apply, again, for a doubt to collectability offers, that's
one of the three, only doubt to collectability, and what an acceptable offer amount might be. It
does not guarantee acceptance. And the final determination is based on a complete offer, OIC
application investigation. So, now, we'll, we'll start to look at the Pre-Qualifier Tool. But,
first, we have to find out where to find it, of course. And it's very easy to find by going to
IRS.gov, not surprising there. And you can find the link to the offer page, um, by using our
keyword search in the upper right-hand corner of our landing page at IRS.gov. I recommend using
"OIC" or "Offer in Compromise" because when I tested it this morning, it comes , it brings me
directly to the Pre-Qualifier tool as the first tip. So, enter either "OIC" or "Offer in
Compromise" to take you right to the Pre-/Qualifier Tool. And with that, with that, Anna, let me
turn the mic back to you. FALKENSTEIN: OK. Thanks, Richard. Now, once you've clicked on the
link for the OIC Pre-Qualifier Tool, uh, taxpayers are going to be asked a series of questions.
And these will be on five input screens that will help them determine if they are actually
eligible for the Offer in Compromise. So, if you will see here listed on the slide, um, the
questions will include, uh, things like "Are you currently in bankruptcy?", um "Are you current
with your filing?", "Where do you live?", "How many dependents do you have?", um your household
income and expenses and value of assets. This questionnaire format will assist in gathering
enough information so that it can provide the taxpayer with instant feedback as to whether they
are eligible to submit an offer and, if they are qualified, provide a preliminary offer amount, a
suggested amount that they should offer. And that information is confidential and, again, it is
not saved. Now, if the preliminary indication is that the taxpayer does qualify, the tool will
then direct the taxpayer or the power of attorney uh to the Form 656-B. This is the Offer in
Compromise Booklet. And they will need to complete and submit the application using that
booklet. The tool provides uh preliminary determination on their qualification to um file that
offer. But, remember that the final determination is going to be based on the completed Offer
in Compromise application and the subsequent investigation. The tool simply shows information
about your tax debt, asset equity, monthly income, the remaining amount available for a monthly
payment and an estimate for a reasonable offer amount along with your payment option. So, I think
this is a good time to, to walk through a scenario now. So, here is our first scenario. We have a
married couple with a dependent child. They live in Suffolk County, New York, with a zip code of
11738. And that's needed for our national standards. Their tax liability is 12,500 and the most
recent tax year owed is the year 2011. So, Rich, can you take us through the Pre-Qualifier tool
input screens and explain a little bit about what they will be inputting on those screens?
FURLONG: I'd be happy to, Anna. uh, Now, what you are looking at here is the first of six screens
that are part of the Pre-Qualifier Tool. And you see those tabs that turn dark blue as you go
through the screens. So, the first screen, as you can see, is entitled Status. And the initial
questions on the Status screen help determine if the taxpayer is qualified to file an OIC. So, as
Anna just mentioned, to move up, the taxpayer cannot be in an open bankruptcy proceeding. So, if
that question is answered "Yes," then uh the OIC Pre-Qualifier Tool will stop right there and
tell you that the taxpayer is not a candidate for an offer. And, then, coming back to the points
we made earlier about compliance, again, the taxpayer must be in current in filing and payments
compliance including current estimated tax payments that might be required for the year. And you
see two questions, "Have you filed all required federal tax returns?" and "Have you made all
required estimated tax payments?" uh And, also, if you have employees, uh have you made all
federal uh tax deposits? So again, remember, if the taxpayer is either in bankruptcy or not in
compliance with their filing and paying requirements, then the tool will advise the taxpayer that
the taxpayer does not qualify for an OIC and no further information they, may be input into the
tool. Now, we move on to screen two, uh, entitled "Basic Information" . So, here is the basic
information that is being requested. And in, and in our scenario, it mirrors the fact pattern
given you previously by Anna, where the taxpayer lives, so, in this case, you see it's Suffolk
County in New York. And you see the zip code. Um. If you enter the zip code, it populates the
County. Uh. You enter the State. Uh. It asks for the number of taxpayers in the household, uh the
total tax debt, which you can see is $12,500 and, then, the most recent year for which the taxes
are owed. So, in our example, that's 2011. So, all these entries on the screenshot, screenshot
are the same that Anna just provided to us. And, then, we move on to the next screen, which is
entitled "Assets." So, it should come up now. Now, here, there are, are a greater number of
fields to consider and, where appropriate, to populate. So, the data fields, and going right
down in order, would include, Total bank balances. And that is the sum of all of the taxpayer's
checking accounts, savings accounts, uh any money market accounts that the taxpayer might have.
And any CDs, Certificates of Deposit, that the taxpayer might have. Bring them all together
cumulatively and put that into the bank balance account. We ask for the fair market value of the
taxpayer's home and, also, the outstanding loan balance of mortgages, let's say, on that home.
Now, there are two separate fields for equity amounts in vehicles that could possibly be owned by
the taxpayer. So, you want to enter uh up to two vehicles in the equity in those vehicles in
those separate uh data fields. Then, we ask about the equity in all of the taxpayer's retirement
accounts. And that could include a combination of IRAs, 401(k)-type plans. Bring them all
together and the equity in those accounts and put that into that, that data field box. Possibly,
the taxpayer has equity in real estate that is not their home. So, that could be equity, for
example, in rental property, uh business property. It could even be uh equity in a land share
or, conceivably, a timeshare. So, whatever equity in real estate other than the taxpayer's home
is entered into that data field. Now, the taxpayer might uh have assets in, uh equity in assets,
uh that are not identified specifically above. So, you would enter that in that data field. And, then, there is a separate data field for stocks, bonds and other investments that you see there
on the screen. And, finally, we have a Miscellaneous data field for items that could, for
example, be for collectible items, a stamp account, uh a stamp collection or a coin collection.
So, once the taxpayer gathers all of their basic asset information and input it into the
scenario, uh into this screen, you see the scenario that came up. So, in our example that Anna
teed up for us earlier, the taxpayer had only a bank account and equity in two vehicles. So, once
all of the asset information is in, we move on to the Income screen. Now, here, the taxpayer
enters various income types. One point I want to emphasize here. When you look at these data
fields, some of these, uh data fields could be for income that is not taxable, for example,
child support. But, we do want and do need that information as to income, whether it's taxable or
non-taxable, that the taxpayer might be receiving for purposes of the uh of the, for purposes of
using the Pre-Qualifier Tool. So, in our example, we see here that on a monthly basis, this
taxpayer only has gross wages of $5,520. And, then, we move on to the expenses side of the house.
So, here, we are going to be looking at expenses for mortgage rent uh excuse me, uh expenses for
mortgage payments and/or monthly rent; also utility payments all of that would be in the first
data field monthly payments, again, for up to two vehicles; estimated monthly vehicle
operational cost gas oil et cetera the total number of vehicles that the taxpayer owns; and
the monthly public transportation costs that the taxpayer might incur; very importantly, next,
monthly health insurance premiums. There is a data field for that entry. Below that, there is an
entry for the combined amount of federal, state, and local taxes incurred by the taxpayer. Now,
if the taxpayer is making any court order payments that could be things such as child support
or alimony payments, those would go any court order payments would go into that data field.
Any monthly cost for child and dependent care for, for a dependent or a child would go in a data
field. And then, finally, there is a data field for monthly life insurance premiums. So, as you
can see, the taxpayer enters all relevant basic expenses on the screen except for one category.
And you may be wondering now when you are looking at these expense fields, what about things
like food, like clothing and certain miscellaneous expenses as well as out-of-pocket medical
costs. There are no data fields and they do not have to be entered into the Pre-Qualifier Tool.
Now, the reason for that is that these specific costs for food, for clothing, for miscellaneous
expenses and out-of-pocket medical costs these are calculated by IRS using the allowable
living expenses national standards. So, when we get to the end of the Pre-Qualifier Tool, they
are calculated automatically. So, with that, now that we have entered all of this data into our
example, Anna, let me toss the microphone back to you to show the results of these entries.
FALKENSTEIN: All right. Thank you, Richard. um The next screen here is what we call the Proposal
screen. It provides the summary of the result. So, in our scenario, this taxpayer appears to be a
good candidate for an OIC. So, we have the information on their tax debt, asset equity, monthly
income and the remaining amount available for a monthly payment are shown on the screen. And it
also provides an estimate for a reasonable offer amount along with, uh any payment option. So,
you'll see the options here in the middle of the screen. um You can either pay uh 5235 within
five months or pay uh did I say 50, 2335, excuse me, or 2335 over a 6- to 24-month period. So,
in this case, uh the, the figures are the same. But, just be aware that sometimes those options
may not always be the same amount. So, it's important to look at both to make a determination
what's best for you. Um. On that Proposal screen, there'll also be a breakdown of the monthly
expense information. So, if you click on the little orange arrow on the typical month expense
line, uh there'll be a listing of the expenses the taxpayer entered, and the allowable amount is
displayed there. uh This includes expenses for food, clothing and miscellaneous, as well as
out-of-pocket medical costs, which are automatically calculated and entered using the national
standards based on where they live. If the taxpayer does not qualify for an offer, they will get a
"Not qualified" results screen. And this will happen when you as the taxpayer or the client, if,
if you happen to be the power of attorney, has sufficient equity and/or income left over after
paying the living expenses uh to pay the tax in full or through an installment agreement. Now, at
this point, uh, you or, or the client, if you are the power of attorney, is directed to
alternative information to help determine how to resolve the tax liability. So, we do have um
some of that information in the Offer in Compromise booklet. So, there are certain exceptional
circumstances which the tool does not take into account. So, they uh may have what we call the
special circumstance offer. uh. Also, an alternative may be the installment agreement. uh. They
may be directed to make a payment page. uh That page provides the information and links to help
the taxpayers to make payment through either an electronic funds transfer, uh a credit or debit
card or a check or money order. The page will also provide information and links explaining what
can happen if the tax bill is not resolved. So, um that includes things such as filing a Notice
of Federal Tax Lien, uh refund offsets or perhaps levy on one of their account. So, now, we're
going to step through a scenario where the taxpayer is determined to be not qualified. Richard,
can you talk us through that one? FURLONG: I'd be happy to, Anna. So, in our second scenario here,
as Anna said, when we get to the uh results of the Pre-Qualifier Tool, we will see that this
taxpayer, based on the entries, is not eligible for an Offer in Compromise. So, here, we have a
hypothetical married couple with two dependent children. All of them are, the parents are under
age 65. They live in Tarrant County, Texas, and you see the zip code there. The couple have joint
federal tax liability of $35,000. And the most recent year for which they owe federal taxes is
2012. So, with that information in hand, let's move on to the first screen of the Pre-Qualifier
Tool, which you will remember is the Status screen. OK. So, the initial questions, again, on this
screen help determine if the taxpayer is qualified to file that Offer in Compromise. And I'm
going to repeat a couple of very important points that we made earlier because I know in our
large audience today there are many of you who are very new to the Offer in Compromise program.
Taxpayers cannot be in bankruptcy and submit an Offer in Compromise. And they must be current
with all filing and payment compliance because if the taxpayer is in bankruptcy or is not in
compliance with all of their filing and payment requirements, then the OIC Pre-Qualifier Tool
will advise the taxpayer that the taxpayer does not qualify for an Offer in Compromise. So, then,
we move on to the basic information. Here, again, this should start to look familiar to you.
Here, we have uh Texas, Tarrant County in Texas with a zip code. We have a household of four
members, um none of whom are 65 or older. And, again, the total tax debt owed by the couple if
$35,000 with the most recent year of federal taxes owed 2012. So, then, we move on to the Assets
screen. Now, again, this should start to look familiar to you. Now, in this case, the taxpayer
has a bank account. uh The taxpayer has no equity in their home. You can see the large amount of
the, of the mortgage on the home uh in excess of the fair market value. But, they do have some
equity in two vehicles. And you see that the separate amounts one for 3,000 and one for 2500.
Now, in the next screen, we move on to income. Now, here, the taxpayer uh or taxpayers uh if both
are working, are only self-employed. So, you see on this screen the only income amount entered
is that net business income monthly amount of $12,000. And, then, we move on to the expense
screen. Now, here in this example, there are more fields populated. Uh. You can see the rent or
mortgage payments; uh the total number of vehicles; uh the, the uh, uh vehicle loan or lease
payments for each of those vehicles; the vehicle operating cost; uh health insurance premiums on
a monthly basis; federal, state and tax, and local taxes being paid uh monthly; and, then, um any
uh child and dependent care expenses. So, you see all of that on the screen. But, again, I want
to come back to the point I made previously. Expenses for food, clothing and miscellaneous as
any, as well as any out-of-pocket medical cost, none of these have to be input into the
Pre-Qualifier Tool. They are calculated automatically using the allowable living expense national
standards which, which are updated, uh as the name indicates, uh each year. So, with that
information on the expense screen, at this point, Anna, I'm going to turn the microphone back to
you to show the results of all of this to the audience. FALKENSTEIN: OK. Thank you. So, based on
that information that Rich just provided, this taxpayer does not qualify for an Offer in
Compromise. Um. So, if you, if you are the taxpayer or your client, if you are the power of
attorney, does not qualify for uh the offer, the "Not qualified" results screen will be
displayed. Uh. The taxpayer in this situation has sufficient leftover income, about 3869, after
living expenses to, to pay in full through an installment agreement. So, it will be suggested
that that's what they do. At this point, you would be directed to the alternative information to
help you determine which way is best to resolve that liability. So, we have one, third scenario.
And that is the taxpayer in bankruptcy scenario. Um. In, in this case, a single person with a
dependent child living in Suffolk County, New York, again, the zip code 11738. Uh. Their tax
liability was 12,500 and the most recent tax year owed is 2011. Um. The copy out here, the
taxpayer is currently in bankruptcy. So, it's an open bankruptcy. So, when that happens, they are
going to get a screen that basically stops the process. Um. They are not eligible to fall, file
the offer in compromise because of the bankruptcy. The tool will not allow any further information
to be input. No reason to go through all those screens when this actually we, will be a "not
processible" offer. So, with that, I think we are ready for another polling question. Karen, I
think RUSSELL: Another. FALKENSTEIN: you've got two, don't you? RUSSELL: We have two polling
questions. Hopefully, the audience has been paying attention. That was a lot of information that
was covered. So, let's get to our first polling question, and it's about the, it's about the
Offer in Compromise Pre-Qualifier Tool. And, so, the question is, The Offer in Compromise
Pre-Qualifier Tool, A, Works on individual and corporate taxpayers; B, Tracks information for
the taxpayer to electronically submit their offer; C, Provides the individual taxpayer an idea of
an acceptable offer amount; or, D, Allows non-compliant taxpayers to calculate the offer amount.
So, based on what was just shared, what does the Offer in Compromise Pre-Qualifier Tool do? And
make sure that you click the radio button next to the response that you believe is correct. OK.
And, again, what does the Offer in Compromise Pre-Qualifier Tool do? Does it work on individuals
and corporate taxpayers, which is A? B, does it track individual information for the taxpayer to
electronically submit their offer? C, does it provide the individual taxpayer an idea of an
acceptable offer amount? Or, D, does it allow non-compliant taxpayers to calculate the offer
amount? And, again, if you don't get the polling feature, the popup box, use the Ask Question
feature to submit your answer. OK. Take a few more seconds. What does the Offer in Compromise
Pre-Qualifier Tool do, one of its functions? OK. Let's stop the polling, and we will share the
correct answer on the next slide. And, hopefully, we have 100-percent accuracy. The correct
answer is C. It provides the individual taxpayer an idea of what an acceptable offer amount is.
And the accuracy rate is 82 percent. Um. Anna, Rich, are you guys good with that? Do you want to
re-emphasize any information or do you want me to go on to the next polling question? FURLONG:
This is Rich. And the only point I would make here is that the, the questions uh specifically
addresses only the Pre-Qualifier Tool uh and it's only for individuals, uh not for uh business
or corporate clients, uh although one can submit an offer in compromise for business taxes. And
it, it is not an electronic tool to actually submit the offer, Karen. Uh. It's only to
pre-qualify before you prepare the, the paper submission for your offer request. RUSSELL: Right.
So, basically, you know, it saves time. If the taxpayers aren't compliant, there is no reason to
use the Pre-Qualifier Tool. It doesn't track the information. So, if, if everything works out as
the Pre-Qualifier Tool is used, then it gives an idea of an acceptable offer amount. OK, well,
you know, you know what, let's go ahead and go to our next polling question. OK This is uh the
Offer in Compromise Pre-Qualifier Tool again. And it requires which of the following information?
OK. So, what do you have to put in that first screen when you get to it? You have to put in, A,
the zip code and county; B, the number of members in the household; C, the tax debt amount; D,
the most recent year taxes are owed; or, E, all of the above. You saw that screen I think two
times during the examples. So, what information does the Offer in Compromise Pre-Qualifier Tool
require? A, zip code and county; B, the number of members in the household; C, the tax debt
amount; D, the most recent year that taxes are owed, with taxes owed; or, E, all of the above.
Again, click in the radio button for, you know, the answer, the response that you think is, is
correct. And, then, for those of you that do not get the popup feature, use the Ask Question
feature. OK? All right. We are going to do a few more seconds. All right. Let's stop the polling.
Let's go to the next slide and share the correct answer. And the correct answer is E, all of the
above. And our accuracy rate is awesome, 98 percent. That's terrific. OK, Rich, let me turn it
back to you to discuss the calculation of an acceptable offer submission. FURLONG: Thanks, Karen.
So, how is an offer calculated, calculated for a doubt as to collectability offer? That
calculation is done through what is referred to as the reasonable collection potential. In IRS
jargon, reasonable collection potential simply means an acceptable offer amount. Basically,
reasonable collection potential or an acceptable offer amount equals the taxpayer's ability to
make monthly payments over time plus their asset equity. So, the questions we are asking here
are what can the taxpayer afford to pay, how long a period of time should we at the IRS consider
for the offer, and what's their asset equity. Future income is the taxpayer's ability to make
monthly payments. The amount that they can pay per month is gross income minus the necessary or
allowable living expenses. And future income is calculated based on the remaining time on the
collection statute. And that can be up to a maximum of 120 months for a collection statute or
the equivalent of 10 years. Again, if full payment cannot be, can be achieved based on future
income and asset equity within the remaining collection statute, then the taxpayer generally will
not qualify for an offer in compromise. The number of months that we use to determine the future
income component of an acceptable offer depends on the payment terms that taxpayer is proposing.
Now, the taxpayer has two payment options. And these are addressed specifically in the Offer in
Compromise uh booklet, Form 656-B. Uh. Option number one is the lump sum. Here, the taxpayer
pays the offer amount in five or fewer installments within five months or less of acceptance of
the offer. If this is what the taxpayer proposes, we use 12 months of future income or monthly
payments in the calculation of an acceptable offer amount. The second option available to a
taxpayer is the periodic payment option. Here, they offer to pay the offer amount within 6 to 24
months. And, and if this is what the taxpayer is proposing, we use 24 months of future income in
the calculation of the periodic payment amount. Now, let's look at the other half of the offer
equation. And that is asset equity. In order, to, to determine asset equity, we look at the
asset's fair market value and, then, we reduce that value by up to 20 percent to come to what we
refer to as the quick sale value of the asset. This is based on what the taxpayer would get if
they had to sell that asset quickly, how much would they actually receive. Then we consider any
incumbrances or loans against the asset. And interestingly, in our latest revision of the Form
656, we have now included a section of virtual currency, sometimes referred to as cryptocurrency
because some taxpayers now have assets in virtual or cryptocurrency. So, this section has been
added to the financial analyses forms, either 433-B (OIC) or 433-A (OIC), one of which always has
to be submitted with an offer submission. Now, for personal bank accounts and vehicles, we're
going to factor in two additional allowances for assets. We will allow up to one, $1,000. That's
$1,000 from bank balances for individuals. However, that does not apply to any corporate offers.
And, then, we'll, we will allow up to $3,450 per vehicle that's a maximum of two vehicles for a
joint offer. So, that would be up to $7900 allowed for two vehicles on a joint offer. But I want
to make one point about these two allowances I just mentioned. These additional allowances are
not automatic. They are applied only once after it is determined by the IRS that there is no
ability to full pay the entire liability within the amount of time allowed by law. And that,
again, is what, is referred to as the remaining collection statute. Now, let's turn on, look at
those allowable living expenses that we've mentioned previously. As I noted on the last slides,
future income is the difference between gross income and necessary living expenses over a period
of time. So, the taxpayer, or it could be your client if you have a power of attorney, the, the
taxpayer submitting the Offer in Compromise will report and verify their gross income on the
Offer in Compromise application using an applicable financial state, financial information
statement. And, again, that's either the 433-A (OIC) or the 433-B (OIC). The taxpayer will also
report the living expenses. And we saw that on the Pre-Qualifier Tool. And, again, in evaluating
these expenses, then the IRS also starts with a set of standards called allowable living
expenses. Uh. And the standard allowable living expenses, they can vary depending upon the
taxpayer's age, where they live and the number of people in the household. And that's why in the
Pre-Qualifier Tool you input your county, the number of folks in the household and whether
anyone is uh, uh over age, age 65 or older. So, all that information can be found on the OIC
forms. It's also important to keep in mind and you see this on the slide here that we take
into account payments on student loans that are guaranteed by the federal government. We
determine the minimum of payments that may be allowed if the loan was for, for the taxpayer's
post high school education. And if the taxpayer can provide proof that those minimum, minimum
payments are actually being made or that if there are no payments that those lack of payments is
due to a financial hardship of the taxpayer. Next, is, as the slide shows in the final bullet, we,
we, the taxpayer may owe delinquent federal, state and, possibly, local taxes and they may not
have the, the ability to full pay those liabilities. Then, monthly payments to state taxing
authorities may be allowed or partially allowed in certain circumstances. So, depending upon the
circumstance, certain factors will be reviewed when determining if a state or local tax liability
will be allowed. And those factors could include the amount owed to the Internet Revenue Service
and the amount, amount owed to the state or local government and a percentage of the taxpayer's
total tax liability for each of the federal, federal and/or the state and local whether the
taxpayer is on an existing payment agreement with a state or local taxing agency. So, we could
take that into account. And, finally, if that agreement with the state or local taxing agency was
entered into and established before or after the IRS federal tax assessment. So, with all of
that, Anna, let me turn the microphone over to you to talk about some of those special
circumstances that could impact an Offer in Compromise. FALKENSTEIN: OK. Thank you, um. Earlier,
we mentioned special circumstances and how they may affect an offer determination. So, now,
we're going to talk about them. There are basically two types of special circumstances. One is
economic hardship and the other is public policy in equity. The IRS does understand that there
are sometimes unplanned events or special circumstances such as a very serious illness uh where
paying the full amount or the minimum offer amount might impair the taxpayer's ability to provide
for necessarily living expenses, your basic living expenses. Now, these offers are where you are
incapable of earning a living because of a long-term illness, a medical condition or a
disability, and it is reasonably foreseeable that that financial resource that you have will be
exhausted providing for care and support for either you or your family during the course of this
condition. So, perhaps you or your, your client ah, if you are the power of attorney, have some
assets but you're not able to borrow against those, the equity in that asset. Uh. Liquidating,
liquidating those assets to pay the outstanding tax liability would render you with an economic
hardship. So, if that's the case, um you need to just simply provide documentation to provide, to
prove the situation um, things such as um a doctor's letter, copies of medical expenses or proof
that you qualified for supplemental security income. Now, public policy uh special circumstances
would be if funds were embezzled by perhaps a payroll service provider or the taxpayer may have
been incap, incapacitated and they're simply unable to comply with the law. Karen, I think we
have time for one last question. We, go for it. RUSSELL: We sure do, Anna. And I wanted to let
everyone know that we actually are going to probably go over about 15 minutes in order to have a
Q&A session. So, if you want to stay on, uh, that would be great because we've got a lot of
questions that came in. So, now, our polling question. I want everyone to listen carefully to the
responses because they are very similar and, and it could, it could trip you up. OK? So, when you
calculate the asset portion of the offer amount, do you, A, always deduct $1,000 for per,
personal bank account and 3450 per vehicle; or, B, for individual taxpayers who cannot pay in
full, deduct up to $1,000 from bank balance and 3,450 per vehicle, a maximum of two vehicles or
$7900 for a joint offer; or, C, for individual taxpayers, deduct up to $1,000 from bank balances
and 3450 per vehicle, a maximum of two vehicles or $7900 for a joint offer; or, D, for corporate
taxpayers who cannot pay in full, deduct up to $1,000 from bank, bank balances, 3450 per vehicle,
a maximum of two vehicles or $7900 for a joint offer. Those are all very similar answers. So,
take your time. Read them carefully. So, when you are calculating the asset portion of the offer
amount, A, deduct 1,000 per personal bank account and 3450 per vehicle always; B, for individual
taxpayers who cannot pay in full, deduct up to 1,000 from balance and 3450 per vehicle, a
maximum of two vehicles or $7900 for a joint offer; C, for individual taxpayers, deduct up to
1,000 from bank balances and 3450 per vehicle, a maximum of two vehicles or 7,900 for a joint
offer; or, D, for corporate taxpayers who cannot pay in full, deduct up to $1,000 from bank
balances and 3450 per vehicle, a maximum of two vehicles or $7900 for a joint offer? And,
hopefully, everybody has responded to that. I'm going to give you just a few more seconds.
Counting it down. OK. And we are going to go ahead and close out the polling. And let's go to
the next slide for the correct answer. And the correct answer is B, the correct response, you
know. For individual taxpayers who cannot pay in full, you can deduct up to $1,000. All right.
And let's see um what the response rate was, 57, 57 percent. We were a little worried about that,
and we actually have some information for you. So, Rich? FURLONG: Yes, Karen. Let, let me jump
in. This was, first, kudos to the 60, was it 67 percent, Karen, who got this right because this
had a lot of, RUSSELL: Fifty-seven. FURLONG: Fifty-seven. So, kudos to you. But, for those who
didn't, the reason that B is, is the only correct answer is that, first, we are looking at uh
personal bank accounts and vehicles. And when you look at B, that clause that says for individual
taxpayers who cannot pay in full so, when we are looking if you, if you, cannot pay in full
based on the verification of the income and asset and expenses information you submitted with the
offer, uh if you can't pay in full within the remaining collection statute, then we will allow
up to $1,000 for a bank balance and up to $3,450 per vehicle uh double that for a joint offer.
So, it's that "who cannot pay in full" is the key qualifier here for um allowing those two types
of, of expenses, Karen. RUSSELL: OK. Thank you, Rich. And you know what, Anna, um that was our
last polling question. So, let's go ahead and provide those helpful hints and resources so that
we can get to the Q&A. FALKENSTEIN: So, before going on and doing an offer in compromise, make
sure that you explore all your collection options first uh. If another option exists, you should
pursue that first. Uh, use the pre-qualifier tool to determine uh if the offer is the best
resolution and a potential figure um, that it will provide you. Make sure that you complete your
financial statements and forms very carefully. Uh, do remember that a lot of offers are returned
or rejected because of omissions or mistakes on those uh applications or financial statement. The
financial Forms 433-A (OIC) and 433-B (OIC) have checklists at the end of each. Use those
checklists to make sure that you have included everything necessary to process and evaluate the
offer. The more you include in the package up front, the less time it will take to evaluate and,
and investigate that offer and the less uh chance you'll have to have uh additional items
requested later. Um, also, make sure that you are sending the most up to date revision of the
form. Um, ensure that you have all your filing current and your payment requirements are, are
current. If you have to make estimated tax payments, continue doing that. If you have to make
federal tax deposits for a business, continue to do that. Uh, also, make sure any client or
taxpayer is aware that if you get an accepted offer, part of this contract says that you will
agree to stay current with filing and paying for the next five years. Very, very important to
know that. Also, um unless the taxpayer qualifies for the low-income waiver, uh which includes
uh all of the required fees and any payment that need to be made during the offer investigation,
um you need to be making your monthly payments or, or whatever periodic payments you have agreed
to do. You need to be making those during the course of the offer investigation. If you stop
making them, then that offer can be closed out. It would be considered a mandatory withdrawal. It
would um basically be a returned offer with no appeal rights. Remember, returned offers have no
appeal rights. Rejected offers do have appeal rights. Uh, and, also, remember to respond timely
if we ask for additional information. Make sure that you provide us a working voicemail number
that we can call you, and make sure to respond during the employees' work hours so that you can
get your uh offer investigation done as quickly as possible. Um, the next slide shows some, some
key, the keyword search "Offer in Compromise" for resources. Um, one of the most important
resources you can use is that 656-B, the Offer in Compromise booklet. Um, that has um the most
current information. Make sure that when you are submitting an application, I said this before;
I'll say it again, you need to use the most recent revision. If you are not using the most recent
revision, it's not going to go through um because that revision is going to include any updates.
It's also going to provide the low-income waiver threshold. And at this point, Karen, I believe
we're back to you and, hopefully, start some questions. RUSSELL: OK. Thank you, Anna, very much.
So, again, I'm Karen Russell and I will be moderating the Q&A. And I want to thank everyone for
attending today. Anna and Rich are staying with us and will be answering your questions. But, we
also have Nicole Highsmith with us today. And she is a Revenue Officer for Collection Policy in
the Small Business/Self-Employed Division and she specializes in Offer in Compromise. Now, uh,
everybody knows that you need to use the Ask Question feature. If you haven't submitted your
question, please do so now. And, then, before we start, uh we may not have time to answer all
the questions. But we will get to as many as we can. And if you are participating to earn a
certificate and related continuing education credit, you will qualify for one credit by
participating for at least 50 minutes from the official start time of the webinar. And, then, you
guys, Nicole, Anna, Rich, let's, let's get going so we can get to some questions. So, the first
question I am going to throw out to uh Nicole. And um there are some that they said that they
have a client who has a large tax liability and moved to Lebanon full time. Can the CPA or tax
professional use the national standards for some of the living expenses or do they actually have
to use actual expenses? NICOLE HIGHSMITH: That's a great question. So, they would basically have
to use actual expenses. The national standards are only for the United States and Puerto Rico.
RUSSELL: OK. That was an easy one. Good. So, and, then, Anna, there is one that came in for you.
Hold on. Let me find it. There it is. And, and it says that you mentioned if an OIC is rejected,
the appeal rights are no longer available. Is that the same result if an OIC is not processible?
And if it's not processible, is it, by default, rejected? FALKENSTEIN: OK.um I think somebody
may have misheard. If, if there is a rejected offer, they will receive appeal rights. Um, I
mentioned earlier that returned uh tax uh excuse me, Offer in Compromises can be returned for a
variety of reasons. If it is returned um maybe because they didn't file a return, maybe they
weren't making estimated tax payments or maybe they weren't making those um uh periodic payments
for the, the offer itself ah, if it is returned, there is no appeal rights. And if it is
withdrawn, then there isn't appeal rights either. If it's not processible, there is no appeal
rights either. RUSSELL: OK. Thank you for that, Anna. And Nicole, I'm going to toss two in a row
to you. So, the first one is uh the practitioner wants to know are, are you penalized for not using the Pre-Qualifier Tool? HIGHSMITH: No. Not at all. Basically, we put that tool together
just to make it easier um for taxpayers and practitioners to understand how we come up on an
individual person with the reasonable collection potential, what are we looking at for an offer
amount absent special circumstances. And so, basically, it's a taxpayer reduction in burden tool.
And uh they can self-report on the Form 656 offer form that they've used it or not. And we've
just seen um an increase in acceptable offers from people who do use this tool because they have
an idea of the calculation and, and how the process works a little better than someone who would
just not have that information. RUSSELL: OK. And, then, should a taxpayer enter into a payment
plan while the OIC process is going on? HIGHSMITH: So, uh payment plan or an installment agreement
um they are not required to make those while um an Offer in Compromise is going on. If they are
doing a cash offer, of course, that's within the five months. They'll do their 20 percent down.
If they're doing a periodic payment offer and they're paying it you know between the 6- and 24-month period, um those are the monthly payments they need to make. They do not need to make
any installment agreement payments. Um, and if that offer, if they already have an installment
agreement and, and their offer is not accepted and they have not incurred any additional debt,
then we'll go ahead and reinstate that installment agreement with no additional fee. RUSSELL:
OK. All right. And, then, we only have time for one more question, Nicole, and I'm going to toss
it out to you. Does the Pre-Qualifier prepopulate the Form 656 so it can be filed
electronically? HIGHSMITH: That would be fantastic, and that's something we are always looking
at. But, currently, um I think it was, Anna had said that information is put in, once you clear
it, um it doesn't go anywhere. We don't save that information. So, no, you cannot
electronically at this point submit an offer. You have to complete the form and send the required
payment in unless they qualify for the low-income certification and send it either to our
Memphis or our Brookhaven campuses. RUSSELL: OK. Thank you so much, Nicole. And um you guys,
before we close out the webinar, Anna and Rich, I, I want to know what your key points are that
you want the attendees to remember. And, and I need you to do it pretty quickly, if you don't
mind. (Laughing) FALKENSTEIN: No problem. So, speed talking. RUSSELL: Yes. (Laughing)
FALKENSTEIN: OK. So, um basically, the premise is that an Offer in Compromise is a great business
policy and good tax policy under appropriate circumstances. Um, the Offer in Compromise
Pre-Qualifier Tool is a great resource to help taxpayers determine if an offer is a viable
collection option for the taxpayers. Back to you. RUSSELL: Thank you, Anna. Yep. OK. Thanks,
Anna. And Richard, Rich, what about you? What are your closing thoughts here? FURLONG: Thanks,
Karen. Uh, two thoughts. When submitting an Offer in Compromise request, remember, it's critical
that the applicant determine that reasonable collection potential which, again, is based on
future income and equity and assets. And, then, it's very important that the OIC applicants
review the application checklist, which is in the back of the Form 656 booklet, to ensure that
their offer submission is complete for processing by IRS. And with that, Karen, I'll turn it back
to you to take us home. RUSSELL: Thank you so much, Rich. OK. Everyone in the audience, we are
planning additional webinars throughout the year. And to register for any of those, just visit
IRS.gov, keyword "webinars," and select the one that is appropriate for you, Webinars for Tax
Practitioners or Webinars for Small Business. We will be offering CE credit. Uh, you can also
visit the IRS Video Portal for this, this webinar. Uh, just look for it in a couple of weeks.
And you'll also find other interesting information on that, on the portal. And I want to thank
Anna and Rich again. Great big thank you to them for sharing their expertise and knowledge and
Nicole, especially, for sharing your expertise. We really appreciate it. And I want to also
thank our attendees again today for, for uh joining us for this "Understanding an Offer in
Compromise."