Prior to acceptance, the Offer undergoes an investigative process that involves the taxpayer’s history and financial records.  In some cases, the IRS will reject an Offer on the grounds of a dissipated asset, which incurs when a taxpayer liquidates or transfers an asset after the accrual of the initial tax liability.  An asset becomes dissipated if either transferred, gifted, sold, or spent on objects deemed unnecessary, such that the individual with tax liability cannot use it to pay off their tax debt.  Retirement accounts, funds gained from the sale of a home or a refinance, as well as inheritance funds are some of the most common dissipated assets.

In the event that the funds were used to address necessities healthcare being one of these, or a portion of the funds gained from the asset, IRS may agree to reduce or negate the dissipated asset from consideration.

The IRS requires that a business has filed all overdue tax returns in order to gain compliance status.  For corporations, that means filing all overdue or absent 1120 tax returns.  For partnerships, that means 1065s and for businesses with employees, 940s and 941s.

The 940s and 941s are usually considered the most difficult of these to stay up-to-date on.  For each quarter that a business had its first employee to the quarter in which they have their last, they are required to file one 941, and if there are periods during that time period when the business has no employees, it is still required to file a payroll return.  941s allow for a business to communicate to the IRS that the business will no longer have employees, after which point, 941s become unnecessary.  Tax return 940 operates under the same rules; however, they are only filed once per year.

The final stipulation for compliance is that any business remain up-to-date with its current payroll deposit requirement.  In fact, before a business can pursue IRS tax resolution, it usually must stay in compliance two or more quarters.  As a business facing a potential IRS collections action, it is important to either be in compliance status or know how to gain compliance status.

Any person who is called to provide information to the IRS, whether it be via records or oral testimony, is granted certain rights they may employ in their defense.  These rights include the Fifth Amendment Right against self-incrimination.  The Fifth Amendment grants that no one may be forced to give testimony as a witness against themselves.  It is important to note that information given voluntarily by the individual can be used to incriminate them, so the right can only be invoked to protect against an individual sharing testimony, not after the testimony has been given.

Any person who is called to provide information to the IRS is granted the right to an attorney, which includes the opportunity to hire one.  In addition to this right, any person appearing for an IRS Summons is given attorney-client privileges, or those of tax practitioner-client, wife-husband, or penitent-clergy.

Other powers granted the liable party include the right to create an audio recording of the meeting, as well as the right to ask to withhold a 3rd-party IRS Summons.  There are a number of more specific guidelines for the execution of this right, so under most circumstances, it would be advisable to seek the advice of an attorney to determine whether the exercise of this right could potentially aid the taxpayer.

Lastly, any third party summoned to the proceedings retains the right to opt not to comply with any unreasonable Summons and defend themselves from doing so accordingly.  Again, consult an attorney, whether the taxpayer under investigation or a third party, and you believe you may have been Summoned unreasonably.

A number of people can be summoned via an IRS summons, including: 1) the liable party under investigation; 2) an employee of the person liable; 3) a person in care of books of the liable party; 3) a anyone who might have information that may aid the IRS in assessing the party’s liability or collecting that liability.

Additionally, the information that the summons intends to glean may be received by an oral statement or via the submission of the individual’s records, but it must be pertinent to: 1) Determining any return’s validity; 2) Making a new return; 3) Ascertaining tax liability; 4) Collecting an IRS tax debt; 5) Questioning any breech of the law regarding IRS laws.

Historically, the IRS is given a certain degree of freedom as to the information that a summons intends to ascertain, but there are still certain guidelines that an IRS Summons must meet in order to be enforceable, such as: 1) The Summons must be served in accordance with the law; 2) The summons must be authorized by the signature of an IRS officer of proper rank; 3) The Summons must detail the information that it intends to discover; 4) The Summons must stipulate a realistic time and place for the conference.

How does this happen?  When any new employee fills out a W-4 Form, he/she provides a social security number, as well as the number of exemptions he/she would like to claim.  Any employee may claim as many or as few exemptions as they wish, but the number of exemptions claimed does not alter the taxes that individual will owe at the year’s end.  So, if an employee claims more exemptions than he/she can legally claim on his/her tax return, then he/she will withhold less for federal taxes, allowing for flexible spending of those funds throughout the tax year, but possibly accruing back taxes without lump sum payment at the year’s end.

Even if back taxes do not accrue in the previous scenario, the IRS may send a lock-in letter to the individual’s employer, which delineates the maximum number of exemptions the employee may claim on Form W-4 in the future.  The letter will instruct the employer to forward a copy of the letter to the employee, which gives the employee a timeframe for returning a new W-4 with an additional document that supports the exemptions claimed.

After the date given by the lock-in letter passes (no longer than 45 days after the lock-in letter), the employer begins to withhold the necessary funds unless the IRS, in response to the duly supported W-4, adjusts the new maximum number of exemptions the employee may claim on the W-4.  If the employer fails to withhold the appropriate funds for the IRS, the employer could become liable for the back taxes it should have withheld from the employee’s paycheck.

Additionally, missing tax returns within the six-year time frame are excusable if the individual did not accrue sufficient income to warrant filing a tax return.  For years when this was the case, a missing tax return does not have any effect on the taxpayer’s compliance.  More detailed rules concerning the necessity of filing a tax return may be found in IRS Publication 501, 2008, as there are considerable differences for each individual.  For example, a couple comprised of individuals under 65 who, when incomes are conjoined, makes below $17,900, does not need to file a tax return.  That number changes depending on marital status, whether the individual is the head of the household, age, etc.

On the other hand, in the event that a taxpayer is responsible for a missing tax return, he/she may still choose to avoid compliance with the IRS by not filing the missing return.  In this case, the individual runs the risk of a Substitute For Return being filed by the IRS.  A Substitute For Return does not add any exemptions the individual may be entitled to, as well as deductions or credits.  The other major risk the individual runs when they choose not to pursue compliance is collection by the IRS.

Taxpayers are required to file Form 656 or Form 656-L when they feel that the tax liability is inaccurate. In most instances, taxpayers must submit Form 433-A or Form 433-B to provide collection Information. Neither of these forms are required when a taxpayer submits an offer solely based on doubt as to the existence of the tax liability.

An important step in the process is making sure that you are current on all your tax filings. It will not look good to the IRS if you are not filing tax returns or making timely tax payments. It is also important to remember that an individual whose offer of compromise was accepted by the IRS must continue to make all payments on time, no matter the type of installment plan. If he/she does not, the IRS may change the offer of compromise to default status.

Individuals considering the Deferred Periodic Payment option would be advised to also consider an installation agreement. That said, all financial situations are different, and the taxpayer is advised to either research his/her options thoroughly before deciding on a course of action. For example, if tax debt were accrued years previous to the Offer, and the Statute of Limitations had not been extended, it could conceivably benefit the taxpayer to opt for this payment method.

Always make sure that a tax offer of compromise is submitted as a last resort. You must review other payment options to determine if there is a chance that you may be able to pay off the debt either by taking out a loan or from other resources you may have.