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Foreign. Welcome to the 42nd episode of How Tax Works. I'm Matt Forman. In this episode, I'll discuss offers and compromise. How Tax Works is meant for informational and entertainment purposes only. This may be attorney advertising and it is not legal advice. Please hire your own attorney. Telling you to hire your own attorney. That's legal advice. You can take that. How Tax Works is intended to help listeners navigate the intricacies and complexities of tax law, regulations, case law, and guidance to demystify how taxes shape the financial and business decisions that we all make. Coming on 2026. This is the last one of the year, so we're moving on. Before we get started, a few administrative things. New episodes every two weeks. Next episode I'm getting out of controversy. This is the fourth one of a sort of quasi series, quasi non series, whatever you want to call it. Excited I think, I think it's been interesting but we're going to move on. We're going to talk about allocations under section 704C of the Internal Revenue Code. We're diving head first into one of the more quirky areas of subchapter K. If you have any questions, comments or constructive criticisms, you can email me at my FRB email address. I don't have any webinars or speaking engagements. For a little bit I'm going to be doing some in probably April, May, June time frame as I often do, you know, right after the filing season ends. If you have topic ideas, feel free to send it. As some of you have noticed, I tend to do webinars and then I put it on my podcast or I do like a multi part podcast and I turn it into a webinar. Obviously a lot of commonalities. If any topic ideas, you know, hit me up email. I'm interested. Nothing too specific. So if you're looking for like, you know, what is tax advice for someone who lives in, you know, Toledo, Ohio and wants to do this and is in the automotive industry and stuff like a little much. But if you want to talk about, you know, situations in which you can depreciate land, I can, I can talk about that. The answer is basically really limited. Maybe in a golf course, right? I know everyone's thinking about that. So. So now let's get started. Let's talk about offers and compromise. I'm going to really call this right again. I tried to make this two episodes total out of the 4, 39, 40, 41, 42 end up being for. I'll eventually have more about some other controversy topics this is all for now. I'm going to generally talk about federal at the end. I'm going to talk about states a bit. Most state. I mean, every state has one. A lot of larger municipalities also have an offering compromise mechanism. New York City does, Miami Dade county does, you know, et cetera, so on and so forth. So states kind of vary a little. They tend to generally follow it. You know, some states even have a rule where they automatically accept it and if the federal accepts it, and some, you know, will do different things, they will all consider whether the state or the federal government accepted it, which I think is really important. So let's talk about a federal offer in compromise. I'm going to use the. The acronym oic. I'm going to repeatedly use the acronym oic. And I'm going to do that because offer in compromise is long, OIC is shorter, not a huge amount, but much enough that I'm going to save a few seconds here. So Internal revenue code section 7122 allows the IRS to compromise on unpaid taxes for less than the full amount it allows. It does not mandate the IRS to do it. It does not mandate a formal process. The OIC process is formal. A compromise that is less than the full amount. They have to be unpaid taxes. And you can also compromise interest and penalties. You cannot do an offer and compromise on paid taxes. You can sue for a refund or you can request penalty abatement. Treasury Regulation 301, 7702, 182. I'm going to try to avoid citations here. I'm going to drop them throughout because I do think this one's helpful. If you're. If you're working on offer and compromise and you're working on the narrative, especially why you qualify for it, these citations help. They really do. These are ones that go through a lot of my memos I have over the years. I've done a lot of OICs. I think I have five out right now. And the memos have a lot of commonalities, a lot of similar facts setting things up, why you qualify. Even if the facts are different, the sort of setup's the same. So I use it again and again. And this is what has created a lot of this. The Goal of an OIC IRM 5.8.1.1, parenthesis 3. To collect as much as possible, as soon as possible, as cheaply as possible. That's for the irs, not the taxpayer. It has to be in the best interest of both the taxpayer and the government. Give the taxpayers a fresh start and enable taxpayers to comply with tax law. If you owe money, you are not compliant. Another goal is to collect funds that would otherwise not be collectible. Low income taxpayer which is based on set criteria. And OIC cannot be rejected simply due to the offer amount. A lot of my pro bono tax clients offer dual OICs and they offer $25. The first OIC I ever had accepted legal aid at the time was $26. It was her lucky number. A lot of factors went into that. Not going to go through them. Probably inappropriate for me to discuss in too much detail. All right. So the IRS has a booklet 656B. They just updated it April or May. I think I'd have to check my notes and it really doesn't matter. And you can pull it. You can either get it from the Internal Revenue Service from their website, you know, Superforms has it, etc. It's a booklet. It includes both the OIC form which is 656 and collection information statements which are 433. There are a lot of different 433s. If you are just doing like a payment plan you still needed to fill out a 433. They may both be dash A or dash B. Make sure you use the OIC one or the other one. They are slightly different and they will reject you if you use the wrong one. You can in about five minutes transpose everything into the new one. But they are told to reject you if you use the wrong one. Which. Fine, whatever. Anyway. 433A collection information statement for wage earners and self employed individuals. This is the one that the bulk of the ones that I do happens to be. Most of my clients do OIC are either wage earners or self employed. There's also a 433 dash B for businesses. Same idea but. But we're going to talk about individuals for 433B. It's really important. This is federal. There are very few federal taxes that are imposed on businesses unless the business is a C corp. My client base, I do a lot of QSBs work but for the most part is pass throughs. Anyone other than the largest law firms pass through, pass through, pass through. And even then there's a lot of pass throughs. So a business is not going to compromise on tax due if it's due by the owner. That's why you use 433A. So we're really only going to talk about 433A. I going to largely ignore everything else. So 433A basically a balance sheet and a statement of cash flows. Okay. The idea is that you list your assets and your income and your expenses to see what the taxpayer can pay. Certain assets get deductions. Right. So bank account less 1000. Total IRA 401k qualified account 20% reduction. Real estate 20% reduction. Automobiles 20% reduction. All assets are less. The liabilities anyway. Right. So if you have a painting, but there's debt on the painting, people do do that, don't. I mean I get why, but don't only get why. Really important, you know, that's what you get. So it's a net number, the decrease. They want you to have a thousand dollars in your bank account. Ira, real estate, automobiles are a reflection of the fact that they're illiquid and they really don't want you to take money out of your IRA and 401k. For a lot of my taxpayers, for my pro bono clients who are, you know, lower income or lower assets and things like that, what we do a lot of times is I just ignore the IRA or 401k when making an offer amount. I'll talk about that later probably. But I always say that's the money they have, that's it. So for wealthier taxpayers, they're going to consider it. For less wealthy taxpayers, they basically ignore its very existence, which I'm fine with from a policy perspective, I think that's, I think that's reasonable anyway. So income, income is you're actually going to subtract out the taxes you pay federal and state and then the, you know, you're going to take out, deduct your expenses. It's capped at ostensibly reasonable amounts based on the taxpayer's location. I should say the expenses are capped based on ostensibly reasonable amounts based on the taxpayer's location and size of their household called collection standards. Some of it's higher than you think. You know, you all get, you know, single individuals living in New York City and they actually, a lot of times do actually pay below the amount. But I'll get married people live in the suburbs and they'll be dropping 20 grand a month. And the reasonable collection amounts about a one bedroom in Manhattan, which in some ways discusses the insanity of living in Manhattan, which I do. But you know, it is what it is. There's pros and cons everywhere. I don't pay for a car, so that's cool too. It is used, the income is used to determine the offer amount based on again the value of the assets and Your overall cash flow and what's reasonable. All right, we're about 10 minutes in, so let's get some music going and I'll be back in just a moment. All right, so let's talk about some OIC some more. We've gone through the 433 part. Let's talk about the 656. The 656 is the actual offer and compromise itself. Some of the information is really, really basic. Okay. Name, address, dependence, things like that. You have to list the offer amount and over what term. You can either do initial payment plus five payments over the next five months, or you can do a payment plan up to 24 months. This is actually a really interesting discussion I have with a lot of clients. Sometimes we don't do offer and compromise, because if you do a payment plan, you can do it over 60 months, five years, I've seen 72 months, six years, depending on the amounts. And sometimes it is worth it to have the extra amount of time because you can't pay. You have income, but it's sort of mitigated. And there's other factors. You have a lot of assets, but the cash flow is not there, et cetera. So that's a discussion I have. Why you have to say why you. Why you're requesting the offer, why they should grant it. Right. There's doubt as to collectibility, which means you don't have enough money. That's just Math. Via the 433 effective tax administration, Economic hardship. You have the money, but due to special circumstances, paying in full would cause economic hardship. I use this a lot. When someone has like a 401k or an IRA or a pension, and the only way they could pay is if they raid that pension or, or IRA or whatever, you know, 400K, whatever. And look, let's be candid here. For a lot of people, you know, I've seen people with like, you know, they're 75 and they have half a million dollars left in their IRA and they're nervous about it, and they're living on Social Security. And, you know, economic hardship's real if they suddenly don't have that half a million dollars. Right. So that's tough. So that. That's something you want to do. The last one that currently exists is effective tax administration. Public policy or equity, you can pay, but it'll be contrary to public policy or it will be inequitable. You must explain why in detail, significant detail. So I'm going to explain each in detail before we do, before we get into detail. There's two points I want to make. One, the IRS is actually vacillated on what is a reasonable one. There's currently three. There's been two. They kind of put the effective tax administration used to be two, now used to be one. Now it's two. They used to have another one. There was a sort of a doubt. It's a liability. We'll get into that in a second. And also, this is an important one. The IRS has two years to reject or it's accepted. IRC 7122F. I have some clients who, who put their offer and compromise in more than a few months ago. And it is languishing. And we're just going to stay quiet and wait for two years. The IRS isn't paying attention. I know someone who had one get missed and it was accepted for that reason. There is litigation on what is two years? How is two years counted? Is there tolling, et cetera, et cetera. That does exist. So just like, be careful, be quiet about it. You don't have to say anything. And then once it's accepted, because they didn't pay attention, you just pay, just start paying. And if they ask you why or do anything, write them a letter. That's it. This is statutory again, IRC 7122F, as in Falcon. So the reasons for the OIC. There is doubt as to liability. I'm not going to go into it. You have to use a different form, 656L. I've never seen one in the wild. You use it in a specific situation where you believe you don't actually owe, but you blew every single statute of limitations and you can't appeal. This is the only option. Okay. I've seen people use public policy or equity instead of the doubt as a liability, but it's similar idea. Again, I've never seen one in the wild. I'm not sure I ever want to see one because it's usually a rough situation if you get there, right, A doubt as to collectability, this is the most common, especially again with my pro bono clients, as I said, sort of discussed. You know, I have a number of pro bono clients, you know, through a number of sources, and they're different. I have a lot of paying clients who do. Offering compromises. There's offers in compromise. There are different ones. Right. This one's really just math. You can vary from the math to lower the amount a bit, especially with illiquid or retirement assets. But there are collection standards. So there's there's a max amount you can do if you have like for example pro client who's spending 20 grand a month in rent and they don't have like 14 dependents for crazy reasons. Might be troublesome, might be a problem. But you know I have a lot of clients who are older. You know I had a client years ago divorce a on a fixed income, couldn't really work because of health issues. You know she got a really a really good deal and it worked out for everyone because the IRS stopped sending letters and there was no lien and she could work and they weren't garnishing wages and they got a bunch, they got some money and they were done and at some point like they were never going to get more from her anyway. Let's just move on right now. Let's go to effective tax administration. Okay. This is a really important one. There are two types economic hardship. I'm going to give you some citations on both these. Economic hardship Treasury Reg. 301.7122 1B3 Roman at one lane versus Commissioner TC Memo 2013121 and the other one is public policy or equity. Treasury Reg. 301.7701 1B3 Romanet 2 and Bogart Bogart, Bogart, Bogart TC Memo 2014 46. That one I'm going to talk about a bunch later. Not too much later. These aren't that long anyway. Right. So the IRS won't compromise if it would compromise compliance with taxpayers by taxpayers with the with tax laws. So if compromising would hurt their ability would decrease taxpayers compliance generally not specific to that taxpayer they will reject it and they're required to reject it. Treasury Reg. 301770113 Factors for Economic Hardship Treasury Reg. 301.7122 dash 1c3 Roman at 1. You know the last one I did 301. 7701 1b3 that's what I wrote but I actually think that's 301. 7722 1b3 I'm not going to check it. We're going to kind of roll with it. This is free so you can't rely on it. Anyway. So factors in economic hardship. Right. Treasury Reg. 3017122 1C 3 Roman at 1. It is a non exhaustive list and it will tell you so factors for economic hardship taxpayers age, employment status and history and the number of dependents and whether the taxpayer themselves is a Status is a dependent, right? So sometimes you have adults that for a variety of factors are dependents themselves. That may be a reason to give one. Whether the taxpayer is able to earn a living due to long term illness, medical condition, disability, or providing care or support. You know, drug and alcohol dependencies actually fall into this. I've had taxpayers who've gone off from compromise penalty abatement based on these factors. It is really fact specific. Okay? Really fact specific. And I would not ever tell a client, oh yeah, no problem. I would say I've had success with them before. If the taxpayer cannot borrow against assets or if the sale of assets will make the taxpayer unable to meet basic living expenses, again, you know, you have an asset you just can't lend against. It's too volatile. Or you have an asset that you know this is the retirement account, right? Economic hardship. That's the idea. If the money is exhausted providing for care of dependents, right? So if you have two kids and you can say, well, you really don't need to provide to those kids. Oh yeah, yeah, you do. Yeah, you do. Taxes are less important than buying food and paying for heat. Anyone who says otherwise is just an awful human being. Talk about economic hardship. Right? I've gotten them. I have some. Now you really need some sort of compelling reason for the economic hardship. You can't just say, oh man, if I do this, you know, I won't be able to retire until I'm 75. They don't care. They don't care. It's a real and significant economic hardship. Senior citizens, illness and dependents are the big factors. And that's where you're successful on this. Okay? Public policy or equity. This is the next one for effective tax administration. So the IRS must consider public policy or equity grounds when evaluating an effective tax administration oic. Even if the factors are not listed among those listed In treasury regulation 301.7 7122 1C1 the IRS can compromise is permitted to compromise when collecting the full liability would undermine the public confidence that tax laws are being administered fairly and equitably. That's Bogart. Similarly situated taxpayers may have paid liability in full. An example I give of this is like pig butchering. Otherwise crypto scams or things like that. You know, look, if someone took the money from you, then paying taxes on it, if they took it out of your like your 401k or IRA, it just strikes me as a little bit goofy and not the best of ideas. Though I did like goofy as a character. Right? There are a number of factors within the OIC that will undermine compliance with tax laws. So they will reject. Right. If the taxpayer has a history of non compliance. If the taxpayer has taken deliberate action to avoid paying taxes and a taxpayer has encouraged others to violate tax laws. That's in treasury regulation 301.71221 C3 Roman at 2 capital A through capital C. It's important to note it says add and in those it actually means, or any of those factors are problematic and will likely lead to the IRS as rejecting. There are six factors for an effective tax administration. So, you know, I'm going to kind of go through them weirdly. It cannot be doubt as to liability. It cannot be the doubt as to collectability, because you have to say the taxpayer does owe and the taxpayer can pay. The taxpayer must establish the exceptional circumstances. Right? Not ordinary, not once ever, but exceptional. The exception to the rule. Further, the taxpayer must establish that payment in full would create economic hardship, or if there's no hardship, but it would be contrary to public policy, or it'd be inequitable to make them pay. And finally, the taxpayer must show that compromising the tax liability would not have an adverse effect on a similarly situated taxpayer who has paid in full. That's really important. I think that's a really important one to talk about, right, people? Because you have to basically show. Look like letting me have this one is not going to be so problematic, such that everyone's gonna be like, well, if Matt's not paying, then I'm not paying. You know, forget that. I want to use another word, but I won't basically submit and wait. There's only two offices. They're very overloaded, and they were absolutely shut down during the. During the shutdown. So that's problematic. We had to wait till the end of January again till they have the next shutdown. Awesome. You can appeal a rejection of offer and compromise to the IRS Independent Office of Appeals. Talked about that a couple episodes ago. And then from there, you can appeal to either to Tax Court. You can go to District Court, theoretically, but you actually can't because you have to appeal to Tax Court. Because you can't appeal an offer in compromise if you paid. So you can't pay. So you can only really go to Tax Court. I'm going to take a quick break. We're going to come back and talk about states. It'll be brief, I promise. All right, I'm back to finish up talking about OICs. I'm going to talk about states now. I have done states like 10 or 12 different states for OICs. I don't enjoy them as much as the federal because each state is quirky. New York State used to be really different. And then maybe five years ago, kind of around when they updated their poas, they also updated their OIC forms and they're really close. For example, New York State doesn't actually have the pure math requirement. IRS basically says, look, if you're going to offer us less than this math comes out with, you got to tell us why. There has to be a really good reason. New York State, just like, here's some math. How much do you want to offer New York State? I'm going to give you some from what some people refer to as scuttlebutt. If you're a fan of south park, you probably snickered a bit there, as I often do. The scuttlebutt on New York State is New York State often accepts the amount that was the original tax amount. They take forever to do it. The shortest one I've ever done in New York State was about 14 months to get a response. I've gone two years, don't have any New York State ones outstanding. Although I think that's going to change the next few months. We'll see. That's what they tend to do. New Jersey, New Jersey doesn't actually have an offer in compromise. It has a way to do it that is extremely similar, follows the same logic, and it's called something totally different. I forget what it's called, but basically it's the same idea. Similarly, takes a while. I've had them in really the recent ones I've done in New Jersey, there's been a lien and they were looking to sell a house post divorce. So in both of those I got them resolved really, really quickly because I basically said, look, this needs to get done immediately because we want to sell a house and then you'll get paid. And they're very motivated to compromise under that situation. Connecticut. I'm going to talk about Connecticut. A couple of states do this. Otherwise just sort of naming New York and states that border it. Right. Not the ones that border it the most. Pennsylvania probably is the largest border with New York and then probably Vermont. If I think about it, I don't think New Jersey's the answer there. Anyway, Connecticut has a rule where if the federal government compromised on substantially similar terms. So they looked at it and said, yeah, you can pay half. Connecticut, you pay half. That's it. That's the deal. A lot of states will ask you, did you do this federally? And what did they do? They'll ask the results, and they'll heavily consider it. Connecticut, it is automatic. They will automatically take it. And they will do that if you. If you did it. So. So I think that's really an interesting one for it. Told you I was bringing quick on this one. So that was the 42nd episode of How Tax Works. Hope you learned something. Hope you enjoyed it. Be back in two years. We'll be in 2026. Even though I'm, I'm actually in November recording this with the 43rd episode, I'll be talking about allocations under 704C. Now let's get some more music and Happy New Year.