Business Offer In Compromise: IRS Business Debts Can Be Settled Too
A business offer in compromise (“OIC”) with the IRS is basically a tax debt settlement for business tax debts. You can see our video explanation here or keep reading for the written version.
The IRS agrees to accept less than the total amount of tax owed as a settlement. These business tax debts could include the following types of taxes: income, payroll, and unemployment. Most businesses that apply for an Offer in Compromise have payroll tax debts. Here we will go through the initial requirements for a business Offer In Compromise. This applies to businesses that are still in business and are Corporations, Partnerships, multi-partner/owner LLCs, and single-member LLCs. For a sole proprietorship business, a disregarded single-member LLC taxed as a sole proprietorship, or for personally assessed payroll debts for a company out of business, then an individual Offer In Compromise would be appropriate.
See our video explanation below, then keep reading for more information:
Initial Requirements for Business OIC
First of all, the business must be compliant. The IRS has eased the compliance rules for business OICs. Previously a company must be in compliance for six months with their payroll obligations to submit and now compliance is only required for the current fiscal quarter. We strongly recommend to all our clients to use an automated payroll service going forward, such as Gusto. The IRS agents like to hear that the payroll is no longer in the client’s hands. These services are automatic and prevent further payroll issues. Cases, where accountants are still doing manual payroll and mailing it, are much more prone to errors.
Satisfaction of Personal Assessment on Responsible Individuals or Full Payment of Trust Fund Recovery Penalty
, The following must have happened first for a business offer in compromise to get accepted:
- The IRS must have also personally assessed the trust fund recovery penalty (TFRP) to all liable individuals.
- The TFRP amount has been settled in a personal OIC (or OIC’s if more than one is liable) or paid in full.
What is the trust fund recovery penalty? The base amount of payroll tax due is assigned to individuals responsible for depositing payroll. Usually, it is about 60% of the total tax debt. Officers and managers in charge of payroll are likely to get assessed this. Anyone that signs checks might get tagged too. Many business owners are surprised that they can owe taxes for a corporation or LLC. But this does not shield liability from the TFRP.
This is a way for the IRS to collect on people personally for payroll tax debts. They called it trust fund taxes because the IRS sees it as you hold the money “in trust” for the government. The IRS wants the TFRP cleared up before accepting a business offer in compromise.
Business Offer In Compromise Forms
There are two forms used for an IRS business offer in compromise: Form 433-B (OIC) and Form 656. Form 433-B (OIC) is a comprehensive financial statement that takes a look at the financial health of the business and Forms 656 lists basic information about the company, liabilities, and the amount offered.
Qualifying for a Business Offer In Compromise
In order to qualify for a business OIC, the financials also have to make sense. This means the business could not pay back the amounts due based on their income and expenses within the Collection Statute Expiration Date. Here are some things the IRS will look at regarding the business income and expenses:
- How much money does the business have leftover at the end of every month after expenses? If nothing or the business is losing money, this helps. They will also see if the expenses are reasonable.
- If company officers receive large sums for compensation while they are responsible for the tax debt, the IRS is less likely to accept a business offer in compromise.
- If the business can sell assets to satisfy the debt an offer in compromise acceptance is unlikely. Exceptions can apply to this rule. The IRS would probably not require a mechanic to sell their tools or a gardener to sell their truck.
- If the business is in a bad financial situation, is it temporary or long-term? The IRS will look at prior income to see if the business is just in a temporary slump. If so, they may not accept an offer in compromise. In recent years the IRS has been much more lenient on this rule.
Reasonable Collection Potential of the Business
The IRS is looking for a reasonable amount to collect based on the financial health and assets of the business. They are looking for what they call Reasonable Collection Potential (“RCP”). If the RCP is equal to or higher than the balance due business offer in compromise acceptance is unlikely and if RCP is more than the offer amount, but less than the balance due, a settlement might be reached for a higher amount than the original offer. There is a good chance of acceptance when RCP is equal to or less than the offer amount.
Business OICs are Possible but Difficult
Business offer in compromise acceptance is possible, although more difficult than a personal OIC. The requirements are stricter and the IRS is tougher on acceptance. In order to get your best chance at acceptance hire a professional to do it for you.
If you would like a free, no-obligation consultation with one of our tax attorneys, fill out the form here or call us at (888) 515-4829. You get a free expert analysis of your case and feel more informed about your choices.