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ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – THE IRS OFFER IN COMPROMISE – BOTH A BLESSING AND A CURSE

By Robert S. Schriebman
2020

Introduction

The IRS Offer in Compromise (OIC) has been part of the tax law since 1831.  Historically, it was kept a secret until Congress put pressure on the IRS in the mid-1990s to accept more offers.  Today with all the media advertising, most people know about them.   The OIC can be a blessing because it has many advantages.  It can save you a substantial amount of money as well as time, and the expense of costly tax litigation.  If the IRS accepts your OIC, all tax liens recorded against you are removed, even though you still owe the IRS.

An OIC is a binding contract between a taxpayer and the IRS that settles all related tax debts and disputes, especially the OIC based upon doubt as to liability. It must be arrived at by mutual agreement between the taxpayer and the government.  In this respect, it is like any other written contract.  Once the OIC has been accepted the Notice of Federal Tax Lien (NFTL) recorded against the taxpayer is removed.  In this respect, the OIC differs radically from a regular tax liability situation where the NFTL stays recorded and in effect until all taxes, penalties, and accruing interest are completely paid.  With an OIC in effect, the government feels secure about being paid, so it removes the tax lien even though deficiencies are still owed.

So where is the curse?  Once an OIC has been accepted by the IRS, the case is rarely reopened unless fraud or breach of contract is involved. A breach of contract can sneak up on an unsuspecting taxpayer as illustrated in the recent case of Edward and Cynthia Sadjadi v. Commissioner, T.C. Memo 019-58, May 29, 2019). The Sadjadis thought they had fully paid the OIC when they failed to timely file and pay a post-OIC joint income tax liability.  The failure on their part related back to the prior OIC and caused it to be breached even though it was paid in full.  The IRS forced them to pay the original deficiency plus accruing interest.

The Curse in the Sadjadi Case

Edward and Cynthia filed their 2008 and 2009 joint individual income tax return, Form 1040, and reported they owed a total of $5,000 for both years.  The IRS audited their returns and issued additional assessments of taxes and interest of over $35,000.  They could not pay this amount so they entered into an OIC with the IRS.  They signed Form 656, Offer in Compromise, in April 2013. The standard language in the form said, in substance:

  • I will file tax returns and pay required taxes for the five-year period beginning with the date of acceptance of this offer. (Emphasis added)
  • The IRS will not remove the original amount of my tax debt from its records until I have met all the terms and conditions of this offer.
  • Once the IRS accepts my offer in writing, I have no right to contest, in court or otherwise, the amount of the tax debt.

Edward and Cynthia faithfully made payments on the OIC until October 1, 2016 when the compromised agreement was paid in full.  On October 19, 2016 they filed their 2015 tax return but did not pay the tax for 2015 reported as due.  In other words, the 2015 was filed late and not paid.

The IRS notified Edward and Cynthia that they did not comply with the five-year “keep your nose clean rule.”  This rule required them to file all returns timely, to make all quarterly estimated taxes timely, and to timely pay their taxes.

The IRS defaulted the original 2008/2009 OIC deal and demanded full original payment plus accruing penalties and interest.  A curse if there ever was one!

What the US Tax Court Ruled

US Tax Court Judge Mary Ann Cohen, a long-serving senior judge, ruled in favor of the IRS. A deal is a deal. The terms set forth in Form 656 were clear and unambiguous.  The terms on the form were set forth in bold and detailed.  The form clearly stated what would happen if the taxpayer’s failed to comply with the five-year rule.  “If they failed to read the agreement or forgot the explicit terms, they were still bound to pay required tax for the five-year period beginning with the date of acceptance of this offer.”

Conclusion

The media is full of misleading ads and information about how easy it is to get an OIC.  They never tell you the realities especially what the government expects in return for a deal.  The best advice I can give you, is stay away from those who advertise and find yourself a competent and experienced tax controversy professional.  If you are fortunate enough to have negotiated an OIC, consider framing Form 656 and putting it where you can see it every day; read it regularly.  Regard its terms and conditions as gospel.  The OIC can truly be a blessing, but it can also be a curse.

***

Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

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