Similar to an Offer in Compromise for an individual, the offer for a business is computed based upon the business’s current assets and financial disclosure statement. The IRS uses the company’s reasonable collection potential to determine the Offer amount. The reasonable collection potential for a business is computed in a manner similar to that of an individual. However, unlike individual expenses, the IRS does not have “national standards” for business expenses. In most circumstances the IRS will allow all ordinary and necessary expenses of the business.
The IRS’s recent revisions to its Internal Revenue Manual make these types of Offers more difficult.
Offers submitted by an in-business taxpayer with payroll/trust fund recovery penalty liabilities will not be investigated unless the trust fund portion of the taxes are paid, the trust fund recovery penalties are assessed against all responsible persons, or the trust fund package has been forwarded for assessment.
To submit an Offer for an ongoing business, all of the responsible persons must either agree to be assessed with the trust fund recovery penalties, or pay the underlying trust fund amount.
Offers submitted by active businesses with trust fund liabilities no longer require that the Offer amount include the reasonable collection potential of both the entity and all responsible persons. Instead, the ongoing business is only required to offer an amount reflective of its reasonable collection potential.
This policy is likely due to the IRS’s renewed focus on the collection of the trust fund liabilities from all responsible persons, despite an Offer at the entity level.
The IRS will continue to collect the trust fund portion of the liability from the responsible persons despite the entity’s successful Offer; most responsible persons would not be motivated to file an Offer on behalf of the company due to their continued liability. The IRS’s interest in collecting from all responsible persons diminishes some of the benefits of an Offer for an ongoing business taxpayer.
These policies leave most responsible persons in a precarious situation because the Offer for the business will not alleviate their personal liabilities. Unless all of the responsible persons independently qualify for a personal Offer in Compromise, this might not be the best solution for the business. However, it may be the only solution available for the entity to remain in business.
For tax help on your unpaid payroll or income tax, call Mitchell A. Port at (310) 559-5259.