REVISED OFFER IN COMPROMISE APPLICATION RULES
I would like to pay particular attention to the president’s recent budget proposals submitted to Congress that directly impact my clients who have IRS tax problems and disputes.
One proposal that would be effective for offers-in-compromise submitted after the date of enactment of the budget by Congress would eliminate the requirements that an initial offer-in-compromise include a nonrefundable payment of any portion of the taxpayer’s offer.
As explained in other blog articles, the offer-in-compromise program is designed to settle cases in which taxpayers have demonstrated an inability to pay the full amount of a tax liability. The program allows the IRS to collect the portion of a tax liability that the taxpayer has the ability to pay.
Current law provides that the IRS may compromise any civil or criminal tax case before a reference to the Department of Justice for prosecution or defense. In 2006, a new provision was enacted to require taxpayers to make nonrefundable payments with any initial offer-in-compromise of a tax case. In the case of an offer-in-compromise involving periodic payments, the initial offer must be accompanied by a nonrefundable payment of the first installment that would be due if the offer were accepted. When the offer involves one lump sum payment, the new provision requires taxpayers to include a nonrefundable payment of 20 percent of the lump-sum with the initial offer.
The president believes that by requiring nonrefundable payments with an offer-in-compromise, access to the offer-in-compromise program may be significantly reduced. Reducing access to the offer-in-compromise program makes it more difficult and costly to obtain the collectable portion of existing tax liabilities.
EXTEND STATUTE OF LIMITATIONS WHERE STATE ADJUSTMENT AFFECTS FEDERAL TAX LIABILITY
In general, additional tax, interest, penalties and additions to tax must be assessed by the IRS within three years after the date a tax return is filed. If an assessment is not made within those three years, the IRS cannot assess or collect additional liabilities at any future time.
Similarly, the statute of limitations with respect to claims for refund expires at the later of three years from the time the return was filed or two years from the time the tax was paid. There are exceptions to the general statute of limitations.
State and local authorities use a variety of statutes of limitations for State and local tax assessments.
Pursuant to an agreement, the IRS and State and local revenue agencies exchange reports of adjustments made through examination so that corresponding adjustments can be made by each taxing authority. In addition, States provide the IRS with reports of potential discrepancies between State returns and Federal returns.
The problem perceived by the current administration is that the general statute of limitations serves as a barrier to the effective use by the IRS of State and local tax adjustment reports when the reports are provided by the State or local revenue agency to the IRS with little time remaining for assessments to be made at the Federal level.
Under the current statute of limitations framework, taxpayers may seek to extend the State statute of limitations or postpone agreement to State proposed adjustments until such time as the Federal statute of limitations expires in order to preclude assessment at the Federal level. In addition, it is not always the case that a taxpayer that files an amended State or local return reporting additional liabilities at the State or local level that also affect Federal tax liability will file an amended return at the Federal level.
The budget proposal would create an additional exception to the general three-year statute of limitations for assessment of Federal tax liability resulting from adjustments to State or local tax liability. The statute of limitations would be extended to the greater of: (1) one year from the date the taxpayer first files an amended tax return with the IRS reflecting adjustments to the State or local tax return; or (2) two years from the date the IRS first receives information from the State or local revenue agency under an information sharing agreement in place between the IRS and a State or local revenue agency.
The statute of limitations would be extended only with respect to the increase in Federal tax attributable to the State or local tax adjustment. The statute of limitations would not be further extended if the taxpayer files additional amended returns for the same tax periods as the initial amended return or if the IRS receives additional information from the State or local revenue agency under an information sharing agreement. The statute of limitations on claims for refund would be extended correspondingly so that any overall increase in tax assessed by the IRS as a result of the State or local examination report would take into account agreed-upon tax decreases or reductions attributable to a refund or credit.
The proposal would be effective for returns required to be filed after December 31, 2011.
Have a tax dispute with the IRS? Call Mitchell A. Port at (310) 559-5259 to speak with a tax attorney for help.